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Section 1: 10-Q (FORM 10-Q)

cofs20200630_10q.htm
0000803164 ChoiceOne Financial Services, Inc. false --12-31 Q2 2020 100,000 100,000 0 0 0 0 12,000,000 12,000,000 7,261,605 7,245,088 1,272 549 1,730 872 281 0 282 1 0.20 0.20 0.40 0.40 0 0 The amount shown represents the number of shares issued in cashless transactions where some taxes are netted on a portion of the exercises. 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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

 

FORM 10-Q

 

Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

 

 

For the quarterly period ended June 30, 2020

 

 

Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

 

 

For the transition period from                 to                

 

Commission File Number: 000-19202

 

ChoiceOne Financial Services, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

Michigan
(State or Other Jurisdiction of
Incorporation or Organization)

38-2659066
(I.R.S. Employer Identification No.)

 

 

109 East Division
Sparta, Michigan

(Address of Principal Executive Offices)


49345
(Zip Code)

 

 

(616) 887-7366
(Registrant’s Telephone Number, including Area Code)

 

Indicate by checkmark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  

Yes ☒        No ☐

 

Indicate by check mark whether the registrant has submitted electronically , every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). 

Yes ☒        No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐

Accelerated filer ☒

 

 

Non-accelerated filer ☐

Smaller reporting company 

 

 

Emerging growth company 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes         No ☒

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Common stock

COFS

NASDAQ Capital Market

 

As of July 31, 2020, the Registrant had outstanding 7,787,332 shares of common stock.

 



 

 

 

 

PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements.

 

ChoiceOne Financial Services, Inc.
CONSOLIDATED BALANCE SHEETS

 

  

June 30,

  

December 31,

 

(Dollars in thousands)

 

2020

  

2019

 
  

(Unaudited)

  

(Audited)

 

Assets

        

Cash and due from banks

 $66,541  $59,308 

Time deposits in other financial institutions

  250   250 

Cash and cash equivalents

  66,791   59,558 
         

Equity securities at fair value (Note 2)

  2,905   2,851 

Securities available for sale (Note 2)

  372,525   339,579 

Federal Home Loan Bank stock

  3,524   3,524 

Federal Reserve Bank stock

  2,947   2,934 

Loans held for sale

  10,860   3,095 

Loans to other financial institutions

  49,895   51,048 

Loans (Note 3)

  907,993   802,048 

Allowance for loan losses (Note 3)

  (5,750)  (4,057)

Loans, net

  902,243   797,991 
         

Premises and equipment, net

  23,779   24,265 

Other real estate owned, net

  854   929 

Cash value of life insurance policies

  32,363   31,979 

Goodwill

  52,593   52,870 

Core deposit intangible

  5,299   6,006 

Other assets

  18,501   9,499 

Total assets

 $1,545,079  $1,386,128 
         

Liabilities

        

Deposits – noninterest-bearing

 $392,086  $287,460 

Deposits – interest-bearing

  932,222   867,142 

Total deposits

  1,324,308   1,154,602 
         

Borrowings

  10,179   33,198 

Other liabilities

  7,969   6,189 

Total liabilities

  1,342,456   1,193,989 
         

Shareholders' Equity

        

Preferred stock; shares authorized: 100,000; shares outstanding: none

  -   - 

Common stock and paid-in capital, no par value; shares authorized: 12,000,000; shares outstanding: 7,261,605 at June 30, 2020 and 7,245,088 at December 31, 2019

  162,862   162,610 

Retained earnings

  32,835   28,051 

Accumulated other comprehensive income, net

  6,926   1,478 

Total shareholders’ equity

  202,623   192,139 

Total liabilities and shareholders’ equity

 $1,545,079  $1,386,128 

 

 

See accompanying notes to interim consolidated financial statements. 

 

2

 

 

ChoiceOne Financial Services, Inc.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

 

   

Three Months Ended

   

Six Months Ended

 

(Dollars in thousands, except per share data)

 

June 30,

   

June 30,

 
   

2020

   

2019

   

2020

   

2019

 

Interest income

                               

Loans, including fees

  $ 10,821     $ 5,390     $ 21,063     $ 10,670  

Securities:

                               

Taxable

    1,557       767       3,414       1,527  

Tax exempt

    478       358       846       727  

Other

    7       39       201       107  

Total interest income

    12,863       6,554       25,524       13,031  
                                 

Interest expense

                               

Deposits

    898       924       2,283       1,775  

Advances from Federal Home Loan Bank

    81       115       217       230  

Other

    5       14       7       29  

Total interest expense

    984       1,053       2,507       2,034  
                                 

Net interest income

    11,879       5,501       23,017       10,997  

Provision for loan losses

    1,000       -       1,775       -  

Net interest income after provision for loan losses

    10,879       5,501       21,242       10,997  
                                 

Noninterest income

                               

Customer service charges

    1,402       1,148       3,247       2,181  

Insurance and investment commissions

    153       74       279       137  

Gains on sales of loans

    2,996       489       4,739       735  

Net gains on sales of securities

    1,341       2       1,343       3  

Net gains on sales and write-downs of other assets

    3       2       5       15  

Earnings on life insurance policies

    192       95       384       191  

Trust income

    202       -       372       -  

Change in market value of equity securities

    443       80       54       266  

Other

    19       139       260       258  

Total noninterest income

    6,751       2,029       10,683       3,786  
                                 

Noninterest expense

                               

Salaries and benefits

    6,359       2,870       11,487       5,647  

Occupancy and equipment

    1,359       741       2,629       1,512  

Data processing

    1,568       582       3,052       1,138  

Professional fees

    914       678       1,676       1,195  

Supplies and postage

    282       75       507       175  

Advertising and promotional

    144       108       292       152  

Intangible amortization

    354       -       707       -  

FDIC insurance

    69       45       137       88  

Other

    1,101       663       2,079       1,189  

Total noninterest expense

    12,150       5,762       22,566       11,096  
                                 

Income before income tax

    5,480       1,768       9,359       3,687  

Income tax expense

    1,050       281       1,675       564  
                                 

Net income

  $ 4,430     $ 1,487     $ 7,684     $ 3,123  
                                 

Basic earnings per share (Note 4)

  $ 0.61     $ 0.41     $ 1.06     $ 0.86  

Diluted earnings per share (Note 4)

  $ 0.61     $ 0.41     $ 1.06     $ 0.86  

Dividends declared per share

  $ 0.20     $ 0.20     $ 0.40     $ 0.40  

 

See accompanying notes to interim consolidated financial statements. 

 

3

 

 

ChoiceOne Financial Services, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)

 

  

Three Months Ended

  

Six Months Ended

 

(Dollars in thousands)

 

June 30,

  

June 30,

 
  

2020

  

2019

  

2020

  

2019

 

Net income

 $4,430  $1,487  $7,684  $3,123 
                 

Other comprehensive income:

                

Changes in net unrealized gains on investment securities available for sale, net of tax expense of $1,272 and $549 for the three months ended June 30, 2020 and June 30, 2019, respectively. Changes in net unrealized gains (losses) on investment securities available for sale, net of tax expense of $1,730 and $872 for the six months ended June 30, 2020 and June 30, 2019, respectively

  4,785   2,067   6,509   3,282 
                 

Reclassification adjustment for realized gain on sale of investment securities available for sale included in net income, net of tax expense of $281 and $0 for the three months ended June 30, 2020 and June 30, 2019, respectively. Reclassification adjustment for realized gain on sale of investment securities available for sale included in net income, net of tax expense of $282 and $1 for the six months ended June 30, 2020 and June 30, 2019, respectively

  (1,060)  (1)  (1,061)  (2)
                 

Other comprehensive income, net of tax

  3,725   2,066   5,448   3,280 
                 

Comprehensive income

 $8,155  $3,553  $13,132  $6,403 

 

See accompanying notes to interim consolidated financial statements. 

 

4

 

 

ChoiceOne Financial Services, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

For the three months ended June 30

 

              

Accumulated

     
      

Common

      

Other

     
      

Stock and

      

Comprehensive

     
  

Number of

  

Paid in

  

Retained

  

Income/(Loss),

     

(Dollars in thousands, except per share data)

 

Shares

  

Capital

  

Earnings

  

Net

  

Total

 
                     

Balance, April 1, 2019

  3,619,510  $54,621  $27,598  $482  $82,701 
                     

Net income

          1,487       1,487 

Other comprehensive income

              2,066   2,066 

Shares issued

  3,253   12           12 

Effect of employee stock purchases

      3           3 
Stock options exercised and issued (1)  3,390   46           46 

Stock-based compensation expense

      64           64 

Restricted stock units issued

  6,764   10           10 

Cash dividends declared ($0.20 per share)

          (726)      (726)
                     

Balance, June 30, 2019

  3,632,917  $54,756  $28,359  $2,548  $85,663 
                     
                     

Balance, April 1, 2020

  7,249,533  $162,745  $29,856  $3,201  $195,802 
                     

Net income

          4,430       4,430 

Other comprehensive income

              3,725   3,725 

Shares issued

  5,466   55           55 

Effect of employee stock purchases

      3           3 
Stock options exercised and issued (1)  6,241   9           9 

Stock-based compensation expense

      50           50 

Restricted stock units issued

  365               - 

Cash dividends declared ($0.20 per share)

          (1,451)      (1,451)
                     

Balance, June 30, 2020

  7,261,605  $162,862  $32,835  $6,926  $202,623 

 

 

ChoiceOne Financial Services, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

For the six months ended June 30

 

              

Accumulated

     
      

Common

      

Other

     
      

Stock and

      

Comprehensive

     
  

Number of

  

Paid in

  

Retained

  

Income/(Loss),

     

(Dollars in thousands, except per share data)

 

Shares

  

Capital

  

Earnings

  

Net

  

Total

 
                     

Balance, January 1, 2019

  3,616,483  $54,523  $26,686  $(732) $80,477 
                     

Net income

          3,123       3,123 

Other comprehensive income

              3,280   3,280 

Shares issued

  5,257   59           59 

Effect of employee stock purchases

      7           7 

Stock options exercised and issued (1)

  3,390   46           46 
Stock-based compensation expense      121           121 
Restricted stock units issued  7,787               - 

Cash dividends declared ($0.40 per share)

          (1,450)      (1,450)
                     

Balance, June 30, 2019

  3,632,917  $54,756  $28,359  $2,548  $85,663 
                     
                     

Balance, January 1, 2020

  7,245,088  $162,610  $28,051  $1,478  $192,139 
                     

Net income

          7,684       7,684 

Other comprehensive income

              5,448   5,448 

Shares issued

  9,122   161           161 

Effect of employee stock purchases

      7           7 
Stock options exercised and issued (1)  7,030   9           9 

Stock-based compensation expense

      75           75 
Restricted stock units issued  365               - 

Cash dividends declared ($0.40 per share)

          (2,900)      (2,900)
                     

Balance, June 30, 2020

  7,261,605  $162,862  $32,835  $6,926  $202,623 

 

(1) The amount shown represents the number of shares issued in cashless transactions where some taxes are netted on a portion of the exercises. 

 

See accompanying notes to interim consolidated financial statements. 

 

5

 

 

ChoiceOne Financial Services, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

   

Six Months Ended

 

(Dollars in thousands)

 

June 30,

 
   

2020

   

2019

 

Cash flows from operating activities:

               

Net income

  $ 7,684     $ 3,123  

Adjustments to reconcile net income to net cash from operating activities:

               

Provision for loan losses

    1,775       -  

Depreciation

    1,386       700  

Amortization

    2,021       445  

Compensation expense on employee and director stock purchases, stock options, and restricted stock units

    183       145  

Net gains on sales of securities

    (1,343 )     (3 )

Net change in market value of equity securities

    (54 )     (266 )

Gains on sales of loans

    (4,739 )     (735 )

Loans originated for sale

    (101,844 )     (11,166 )

Proceeds from loan sales

    97,601       10,110  

Earnings on bank-owned life insurance

    (384 )     (191 )

(Gains)/losses on sales of other real estate owned

    (3 )     (15 )

Proceeds from sales of other real estate owned

    139       104  
Costs capitalized to other real estate     (19 )     -  

Deferred federal income tax (benefit)/expense

    (307 )     94  

Net change in:

               

Other assets

    (8,564 )     160  

Other liabilities

    1,169       (49 )

Net cash (used in)/provided by operating activities

    (5,299 )     2,456  
                 

Cash flows from investing activities:

               

Sales of securities available for sale

    92,979       -  

Maturities, prepayments and calls of securities available for sale

    26,635       17,581  

Purchases of securities available for sale

    (144,856 )     (9,755 )

Purchase of Federal Reserve Bank stock

    -       (1 )

Loan originations and payments, net

    (105,154 )     3,457  

Additions to premises and equipment

    (928 )     (323 )

Net cash (used in)/provided by investing activities

    (131,324 )     10,959  
                 

Cash flows from financing activities:

               

Net change in deposits

    169,706       (15,239 )

Net change in fed funds purchased

    -       (2,800 )

Proceeds from borrowings

    10,000       75,000  

Payments on borrowings

    (33,019 )     (75,017 )

Issuance of common stock

    69       88  

Cash dividends

    (2,900 )     (1,450 )

Net cash provided by/(used in) financing activities

    143,856       (19,418 )
                 

Net change in cash and cash equivalents

    7,233       (6,003 )

Beginning cash and cash equivalents

    59,558       19,690  
                 

Ending cash and cash equivalents

  $ 66,791     $ 13,687  
                 

Supplemental disclosures of cash flow information:

               

Cash paid for interest

  $ 2,672     $ 2,043  

Cash paid for income taxes

    1,351       185  

Loans transferred to other real estate owned

    42       347  

 

See accompanying notes to interim consolidated financial statements.

 

6

 

ChoiceOne Financial Services, Inc.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

 

The consolidated financial statements include ChoiceOne Financial Services, Inc. ("ChoiceOne"), its wholly-owned subsidiary, ChoiceOne Bank (the "Bank"), and ChoiceOne Bank’s wholly-owned subsidiary, ChoiceOne Insurance Agencies, Inc. For periods after September 30, 2019, the consolidated financial statements also included ChoiceOne's wholly owned subsidiary, Lakestone Bank & Trust and Lakestone Bank & Trust's wholly-owned subsidiary, Lakestone Financial Services, Inc., as a result of the merger of County Bank Corp. with and into ChoiceOne. Lakestone Bank & Trust was consolidated with and into ChoiceOne Bank on May 15, 2020. Intercompany transactions and balances have been eliminated in consolidation.

 

The consolidated unaudited financial statements and notes thereto have been prepared in accordance with generally accepted accounting principles for interim financial information, prevailing practices within the banking industry and the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

 

The accompanying unaudited consolidated financial statements and notes thereto reflect all adjustments ordinary in nature which are, in the opinion of management, necessary for a fair presentation of the Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019, the Consolidated Statements of Income for the three- and six-month periods ended June 30, 2020 and June 30, 2019, the Consolidated Statements of Comprehensive Income for the three- and six-month periods ended June 30, 2020 and June 30, 2019, the Consolidated Statements of Changes in Shareholders’ Equity for the three- and six-month periods ended June 30, 2020 and June 30, 2019, and the Consolidated Statements of Cash Flows for the six month periods ended June 30, 2020 and June 30, 2019. Operating results for the six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

 

The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in ChoiceOne’s Annual Report on Form 10-K for the year ended December 31, 2019.

 

Use of Estimates

To prepare financial statements in conformity with GAAP, management makes estimates and assumptions based on available information.  These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided; therefore, future results could differ. These estimates and assumptions are subject to many risks and uncertainties, including changes in interest rates and other general economic, business and political conditions, including the effects of the COVID-19 pandemic, including its potential effects on the economic environment, our customers and our operations, as well as any changes to federal, state and local government laws, regulations and orders in connection with the pandemic. The Coronavirus Aid, Relief and Economic Security Act ("CARES Act") was signed into law on March 27, 2020, which provides a variety of provisions, including, among other things, a small business lending program to originate paycheck protection loans, temporary relief for the community bank leverage ratio, and temporary relief for financial institutions related to troubled debt restructurings. Actual results may differ from those estimates.

 

Loans to Other Financial Institutions 

The Bank entered into an agreement with another financial institution to fund mortgage loans. Loans to other financial institutions are purchased participating interests in individual advances made to mortgage bankers nation-wide from an unaffiliated originating bank. The originating bank services these loans and cash flows on the individual advances (principal, interest, and fees) which are allocated pro-rata based on ownership in the participating interest, less fees paid for the servicing activity. The underlying collateral is generally made up of 1-4 family first residential mortgages owned by the mortgage banker and held for sale in the secondary market and have been underwritten using secondary market underwriting standards prior to purchasing the participating interest. Once the mortgage banker delivers the loan to the secondary market, the advance is required to be paid off, including the Bank’s participating interest. If the advance (in which the Bank has a participating interest) is outstanding over 90 days, the originating bank has the right to request the participating interest be paid off by the mortgage banker. The participating interests are subject to concentration risk to 15 different mortgage bankers, with the largest creditor outstanding representing 12% of the total at June 30, 2020.

 

Credit risk associated with the participating interest is measured as an allowance for loan losses when necessary. Losses are charged off against the allowance when incurred and recoveries of loan charge-offs are recorded when received. At least quarterly, the Bank reviews the portfolios of participating interests for potential losses including any participating interest that is outstanding over 90 days (even if the advance and participating interest is current). At June 30, 2020, 17 of the 340 participating interests with principal balances totaling $4.6 million had balances outstanding over 30 days. At December 31, 2019, 26 of the 222 participating interests with principal balances totaling $6.4 million had balances outstanding over 30 days.  During the first six months of 2020, there were no losses or charge-offs of participating interests.

 

Allowance for Loan Losses

The allowance for loan losses is maintained at a level believed adequate by management to absorb probable incurred losses inherent in the consolidated loan portfolio. Management’s evaluation of the adequacy of the allowance is an estimate based on reviews of individual loans, assessments of the impact of current economic conditions on the portfolio and historical loss experience of seasoned loan portfolios. See Note 3 to the interim consolidated financial statements for additional information.

 

Management believes the accounting estimate related to the allowance for loan losses is a “critical accounting estimate” because (1) the estimate is highly susceptible to change from period to period because of assumptions concerning the changes in the types and volumes of the portfolios and economic conditions and (2) the impact of recognizing an impairment or loan loss could have a material effect on ChoiceOne’s assets reported on the balance sheets as well as its net income.

 

7

 

Stock Transactions

A total of 6,658 shares of common stock were issued to ChoiceOne’s Board of Directors for a cash price of $186,000 under the terms of the Directors’ Stock Purchase Plan in the first half of 2020. A total of 2,464 shares for a cash price of $60,000 were issued under the Employee Stock Purchase Plan in the first six months of 2020. Shares issued upon the exercise of stock options, net of shares withheld for payment for the options, totaled 7,030 in the first half of 2020. A total of 365 restricted stock units were vested in the first six months of 2020.

 

Stock-Based Compensation

ChoiceOne grants restricted stock units to a select group of employees under the Stock Incentive Plan of 2012. All of the restricted stock units are initially unvested and vest three years after the grant date. Certain additional vesting provisions apply. Each unit, once vested, is settled by delivery of one share of ChoiceOne common stock.

 

Reclassifications 

Certain amounts presented in prior periods have been reclassified to conform to the current presentation.

 

Recent Accounting Pronouncements

The Financial Accounting Standards Board ("FASB") issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU provides financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date by replacing the incurred loss impairment methodology in current generally accepted accounting principles (GAAP) with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The new guidance attempts to reflect an entity’s current estimate of all expected credit losses and broadens the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually to include forecasted information, as well as past events and current conditions. There is no specified method for measuring expected credit losses, and an entity may apply methods that reasonably reflect its expectations of the credit loss estimate. Although an entity may still use its current systems and methods for recording the allowance for credit losses, under the new rules, the inputs used to record the allowance for credit losses generally will need to change to appropriately reflect an estimate of all expected credit losses and the use of reasonable and supportable forecasts. Additionally, credit losses on available-for-sale debt securities will have to be presented as an allowance rather than as a write-down. This ASU is effective for fiscal years beginning after December 15, 2022, and for interim periods within those years for companies considered a smaller reporting company with the Securities and Exchange Commission. ChoiceOne was classified as a smaller reporting company as of December 31, 2019. Management is currently evaluating the impact of this new ASU on its consolidated financial statements which may be significant.

 

FASB pronouncement ASU 2017-04 (topic 350) is effective for fiscal years beginning after December 15, 2019. To simplify the subsequent measurement of goodwill, the FASB eliminated Step 2 from the goodwill impairment test. Previously, in computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. FASB also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets. ChoiceOne performed a step zero during the current quarter and determined no impairment was necessary. Refer to testing performed in the Goodwill section below.

 

Goodwill

Goodwill is not amortized but is evaluated annually for impairment and on an interim basis if events or changes in circumstances indicate that goodwill might be impaired.  ChoiceOne evaluates goodwill annually for impairment. Accounting pronouncements allow a company to first perform a qualitative assessment for goodwill prior to a quantitative assessment (Step 1 assessment). If the results of the qualitative assessment indicate that it is more likely than not that goodwill is impaired, then a quantitative assessment must be performed. If not, there is no further assessment required.

 

Management performed its annual qualitative assessment of goodwill as of June 30, 2020.  In evaluating whether it is more likely than not that the fair value of ChoiceOne's operations was less than the carrying amount, management assessed the relevant events and circumstances such as the ones noted in ASC 350-20-35-3c. The analysis consisted of a review of ChoiceOne’s current and expected future financial performance, the potential impact of COVID-19 on the ability of ChoiceOne’s borrowers to comply with loan terms, and the impact that reductions in both short-term and long-term interest rates have had and may continue to have on net interest margin and mortgage sales activity. The share price and book value of ChoiceOne’s stock were also compared to the prior year. Management also compared average deal values for recent closed bank transactions to ChoiceOne transactions.  Despite ChoiceOne's market capitalization declining slightly from December 2019 to June 2020, ChoiceOne's financial performance has remained positive. This is evidenced by the strong financial indicators, solid credit quality ratios, as well as the strong capital position of ChoiceOne. In addition, second quarter revenue reflected significant and continuing growth in ChoiceOne's residential mortgage banking business, as well as net SBA fees related to Payroll Protection Program ("PPP") loans funded during the second quarter of 2020. In assessing the totality of the events and circumstances, management determined that it is more likely than not that the fair value of the Bank’s operations, from a qualitative perspective, exceeded the carrying value as of June 30, 2020 and there was no further quantitative assessment necessary.  Due to the potential impact of COVID-19 and any long term economic fallout that might occur, ChoiceOne has contracted a third party assessment of goodwill which will take place in the next year.  

 

8

 
 

NOTE 2 – SECURITIES

 

The fair value of equity securities and the related gross unrealized gains(losses) recognized in noninterest income were as follows:

 

  

June 30, 2020

 
      

Gross

  

Gross

     

(Dollars in thousands)

 

Amortized

  

Unrealized

  

Unrealized

  

Fair

 
  

Cost

  

Gains

  

Losses

  

Value

 

Equity securities

 $2,636  $269  $-  $2,905 

 

  

December 31, 2019

 
      

Gross

  

Gross

     

(Dollars in thousands)

 

Amortized

  

Unrealized

  

Unrealized

  

Fair

 
  

Cost

  

Gains

  

Losses

  

Value

 

Equity securities

 $2,636  $215  $-  $2,851 

 

The fair value of securities available for sale and the related unrealized gains and losses recognized in accumulated other comprehensive income were as follows:

 

  

June 30, 2020

 
      

Gross

  

Gross

     

(Dollars in thousands)

 

Amortized

  

Unrealized

  

Unrealized

  

Fair

 
  

Cost

  

Gains

  

Losses

  

Value

 

U.S. Government and federal agency

 $2,009  $56  $-  $2,065 

U.S. Treasury notes and bonds

  1,995   75   -   2,070 

State and municipal

  256,930   7,132   (132)  263,930 

Mortgage-backed

  99,145   1,437   (7)  100,575 

Corporate

  2,837   48   -   2,885 

Trust preferred securities

  1,000   -   -   1,000 

Total

 $363,916  $8,748  $(139) $372,525 

 

  

December 31, 2019

 
      

Gross

  

Gross

     

(Dollars in thousands)

 

Amortized

  

Unrealized

  

Unrealized

  

Fair

 
  

Cost

  

Gains

  

Losses

  

Value

 

U.S. Government and federal agency

 $17,231  $23  $(39) $17,215 

U.S. Treasury notes and bonds

  1,994   14   -   2,008 

State and municipal

  172,487   2,694   (1,257)  173,924 

Mortgage-backed

  142,504   585   (329)  142,760 

Corporate

  2,649   24   (1)  2,672 

Trust preferred securities

  1,000   -   -   1,000 

Total

 $337,865  $3,340  $(1,626) $339,579 

 

ChoiceOne reviews its securities portfolio on a quarterly basis to determine whether unrealized losses are considered to be temporary or other-than-temporary. No other-than-temporary impairment charges were recorded in the three and six months ended June 30, 2020 or in the same periods in 2019. ChoiceOne believes that unrealized losses on securities were temporary in nature and were due to changes in interest rates and reduced market liquidity and not as a result of credit quality issues.

 

9

 

Presented below is a schedule of maturities of securities as of June 30, 2020, the fair value of securities as of June 30, 2020 and December 31, 2019, and the weighted average yields of securities as of June 30, 2020:

 

  

Securities maturing within:

         
                  

Fair Value

  

Fair Value

 
  

Less than

  

1 Year -

  

5 Years -

  

More than

  

at June 30,

  

at Dec. 31,

 

(Dollars in thousands)

 

1 Year

  

5 Years

  

10 Years

  

10 Years

  

2020

  

2019

 
                         

U.S. Government and federal agency

 $-  $2,065  $-  $-  $2,065  $17,215 

U.S. Treasury notes and bonds

  -   2,070   -   -   2,070   2,008 

State and municipal

  18,688   53,718   179,348   12,176   263,930   173,924 

Corporate

  891   1,994   -   -   2,885   2,672 

Trust preferred securities

  -   -   1,000   -   1,000   1,000 

Total debt securities

  19,579   59,847   180,348   12,176   271,950   196,819 
                         

Mortgage-backed securities

  1,833   46,892   49,842   2,008   100,575   142,760 

Equity securities

  -   -   1,000   1,905   2,905   2,851 

Total

 $21,412  $106,739  $231,190  $16,089  $375,430  $342,430 

 

  

Weighted average yields:

 
  

Less than

  

1 Year -

  

5 Years -

  

More than

     
  

1 Year

  

5 Years

  

10 Years

  

10 Years

  

Total

 

U.S. Government and federal agency

  -

%

  1.98

%

  -

%

  -

%

  1.98

%

U.S. Treasury notes and bonds

  -   1.85   -   -   1.85 

State and municipal

  2.55   2.89   2.72   2.99   2.76 

Corporate

  3.80   2.75   -   -   3.07 

Trust preferred securities

  -   -   3.75   -   3.75 

Mortgage-backed securities

  4.93   2.13   0.78   2.98   1.53 

Equity securities

  -   -   4.61   -   0.96 

 

Following is information regarding unrealized gains and losses on equity securities for the three- and six-month periods ended June 30, 2020 and 2019:

 

  

Three Months Ended

  

Six Months Ended

 
  

June 30,

  

June 30,

 
  

2020

  

2019

  

2020

  

2019

 
                 

Net gains and losses recognized during the period

 $443  $80  $54  $266 

Less: Net gains and losses recognized during the period on securities sold

            
                 

Unrealized gains and losses recognized during the reporting period on securities still held at the reporting date

 $443  $80  $54  $266 

 

10

 
 

NOTE 3 – LOANS AND ALLOWANCE FOR LOAN LOSSES

 

Activity in the allowance for loan losses and balances in the loan portfolio were as follows:

 

<
           

Commercial

                                                 

(Dollars in thousands)

         

and

           

Commercial

   

Construction

   

Residential

                 
   

Agricultural

   

Industrial

   

Consumer

   

Real Estate

   

Real Estate

   

Real Estate

   

Unallocated

   

Total

 

Allowance for Loan Losses Three Months Ended June 30, 2020

                                                               

Beginning balance

  $ 347     $ 853     $ 220     $ 1,960     $ 124     $ 1,061     $ 225     $ 4,790  

Charge-offs

    -       (17 )     (95 )     -       -       (7 )     -       (119 )

Recoveries

    -       -       66       -       -       13       -       79  

Provision

    (95 )     562       52       873       (45 )     (122 )     (225 )     1,000  

Ending balance

  $ 252     $ 1,398     $ 243     $ 2,833     $ 79     $ 945     $ -     $ 5,750  
                                                                 
                                                                 

Six Months Ended

                                                               

June 30, 2020

                                                               

Beginning balance

  $ 471     $ 655     $ 270     $ 1,663     $ 76     $ 640     $ 282     $ 4,057  

Charge-offs

          (17 )     (184 )                 (7 )           (208 )

Recoveries