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Section 1: 10-K (ANNUAL REPORT)

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC  20549

 

FORM 10-K

 

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

 

 

For the fiscal year ended December 31, 2019

 

 

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 Street, Sparta, Michigan
(Address of Principal Executive Offices)

 

49345
(Zip Code)

 

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

 

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

 

Securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934: None.

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  ☐   No ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  ☐   No ☒

 

Indicate by check mark 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, smaller reporting company, or an emerging growth company.  See 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 ☐

 

Emerging growth company ☐

Smaller reporting 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 ☒

 

As of June 30, 2019, the aggregate market value of common stock held by non-affiliates of the Registrant was $99.7 million.  This amount is based on an average bid price of $26.25 per share for the Registrant’s stock as of such date.

 

As of February 28, 2020, the Registrant had 7,248,492 shares of common stock outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the definitive Proxy Statement of ChoiceOne Financial Services, Inc. for the Annual Meeting of Shareholders to be held on May 27, 2020 are incorporated by reference into Part III of this Form 10-K.

 

 

 

 
 

ChoiceOne Financial Services, Inc.

Form 10-K ANNUAL REPORT

 

Contents

 

 

 

 

Page

PART 1

 

 

Item 1:

Business

3

Item 1A:

Risk Factors

15

Item 1B:

Unresolved Staff Comments

19

Item 2:

Properties

19

Item 3:

Legal Proceedings

20

Item 4:

Mine Safety Disclosures

20

 

 

 

PART II

 

 

Item 5:

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

20

Item 6:

Selected Financial Data

22

Item 7:

Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

Item 7A:

Quantitative and Qualitative Disclosures About Market Risk

34

Item 8:

Financial Statements and Supplementary Data

37

Item 9:

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

75

Item 9A:

Controls and Procedures

75

Item 9B:

Other Information

77

 

 

 

PART III

 

 

Item 10:

Directors, Executive Officers and Corporate Governance

78

Item 11:

Executive Compensation

78

Item 12:

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

78

Item 13:

Certain Relationships and Related Transactions, and Director Independence

79

Item 14:

Principal Accountant Fees and Services

79

 

 

 

PART IV

 

 

Item 15:

Exhibits and Financial Statement Schedules

79

 

 

 

SIGNATURES

 

81

 

Page | 2

 

FORWARD-LOOKING STATEMENTS

 

This report and the documents incorporated into this report contain forward-looking statements that are based on management’s beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and ChoiceOne Financial Services, Inc.  Words such as “anticipates,” “believes,” “expects,” “forecasts,” “intends,” “is likely,” “plans,” “predicts,” “projects,” “may,” “could,” “estimates,” “look forward,” “continue,” “future,” and variations of such words and similar expressions are intended to identify such forward-looking statements.  Management’s determination of the provision and allowance for loan losses, the carrying value of goodwill, loan servicing rights, other real estate owned, and the fair value of investment securities (including whether any impairment on any investment security is temporary or other-than-temporary and the amount of any impairment) and management’s assumptions concerning pension and other postretirement benefit plans involve judgments that are inherently forward-looking.  Examples of forward-looking statements also include, but are not limited to, statements regarding the outlook and expectations of ChoiceOne and Community Shores Bank Corporation (“Community Shores”) with respect to their planned merger, the strategic benefits and financial benefits of the merger, including the expected impact of the transaction on the combined company’s future financial performance (including anticipated accretion to earnings per share, cost savings, the tangible book value earn-back period and other operating and return metrics), and the timing of the closing of the transaction.  All of the information concerning interest rate sensitivity is forward-looking.  All statements with references to future time periods are forward-looking.  These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions (“risk factors”) that are difficult to predict with regard to timing, extent, likelihood, and degree of occurrence.  Therefore, actual results and outcomes may materially differ from what may be expressed, implied or forecasted in such forward-looking statements.  Furthermore, ChoiceOne Financial Services, Inc. undertakes no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events, or otherwise.  Such risks, uncertainties, and assumptions with respect to the pending acquisition of Community Shores include, among others, the following:

 

the failure to obtain necessary regulatory approvals when expected or at all (and the risk that such approvals may result in the imposition of conditions that could adversely affect the combined company or the expected benefits of the transaction);

the failure of Community Shores to obtain shareholder approval, or to satisfy any of the other closing conditions to the transaction, on a timely basis or at all;

the occurrence of any event, change or other circumstances that could give rise to the right of one or both of the parties to terminate the merger agreement;

the possibility that the anticipated benefits of the transaction, including anticipated cost savings and strategic gains, are not realized when expected or at all, including as a result of the impact of, or problems arising from, the integration of the two companies or as a result of the strength of the economy, competitive factors in the areas where ChoiceOne and Community Shores do business, or as a result of other unexpected factors or events;

the impact of purchase accounting with respect to the transaction, or any change in the assumptions used regarding the assets purchased and liabilities assumed to determine their fair value;

diversion of management’s attention from ongoing business operations and opportunities;

potential adverse reactions or changes to business or employee relationships, including those resulting from the announcement or completion of the transaction; and

the outcome of any legal proceedings that may be instituted against ChoiceOne or Community Shores.

 

Risk factors include, but are not limited to, the risk factors disclosed in Item 1A of this report.  These are representative of the risk factors that could cause a difference between an ultimate actual outcome and a preceding forward-looking statement.

 

PART I

 

Explanatory Note

 

On October 1, 2019, ChoiceOne Financial Services, Inc. (“ChoiceOne” or the “Company”) completed the merger of County Bank Corp. (“County”) with and into ChoiceOne with ChoiceOne surviving the merger.  Accordingly, the reported consolidated financial condition and operating results as of and for the year ended December 31, 2019 include the impact of the merger, which was effective as of October 1, 2019.  For additional details regarding the merger with County, see Note 21 (Business Combination) of the Notes to the Consolidated Financial Statements included in Item 8 of this report.

 

Item 1.

Business

 

General

ChoiceOne is a financial holding company registered under the Bank Holding Company Act of 1956, as amended (“BHC Act”).  The Company was incorporated on February 24, 1986, as a Michigan corporation.  The Company was formed to create a bank holding company for the purpose of acquiring all of the capital stock of ChoiceOne Bank, which became a wholly owned subsidiary of the Company on April 6, 1987.  Effective November 1, 2006, the Company merged with Valley Ridge Financial Corp. (“VRFC”), a one-bank holding company for Valley Ridge Bank (“VRB”).  In December 2006, VRB was consolidated into ChoiceOne Bank.  Effective October 1, 2019, County, a one-bank holding company for Lakestone Bank & Trust (“Lakestone”), merged with and into the Company.  It is expected that Lakestone will be consolidated into ChoiceOne Bank in May 2020.  ChoiceOne Bank owns all of the outstanding common stock of ChoiceOne Insurance Agencies, Inc., an independent insurance agency headquartered in Sparta, Michigan (the “Insurance Agency”), and Lakestone owns all of the outstanding capital stock of Lakestone Financial Services, Inc. (“Lakestone Financial”).

 

Page | 3

 

The Company’s business is primarily concentrated in a single industry segment banking.  ChoiceOne Bank and Lakestone (together referred to as the “Banks”) are full-service banking institutions that offer a variety of deposit, payment, credit and other financial services to all types of customers.  These services include time, savings, and demand deposits, safe deposit services, and automated transaction machine services.  Loans, both commercial and consumer, are extended primarily on a secured basis to corporations, partnerships and individuals.  Commercial lending covers such categories as business, industry, agricultural, construction, inventory and real estate.  The Banks’ consumer loan departments make direct and indirect loans to consumers and purchasers of residential and real property.  In addition, Lakestone provides trust and wealth management services.  No material part of the business of the Company or the Banks is dependent upon a single customer or very few customers, the loss of which would have a materially adverse effect on the Company.

 

ChoiceOne Bank’s primary market areas lie within Kent, Muskegon, Newaygo, and Ottawa counties in western Michigan, and Lakestone Bank’s in Lapeer, Macomb, and St. Clair counties in southeastern Michigan in the communities where the Banks’ respective offices are located.  The Banks serve these markets through 27 full-service offices.  The Company and the Banks have no foreign assets or income.

 

At December 31, 2019, the Company had consolidated total assets of $1.4 billion, net loans of $798.0 million, total deposits of $1.2 billion and total shareholders’ equity of $192.1 million. For the year ended December 31, 2019, the Company recognized consolidated net income of $7.2 million.  The principal source of revenue for the Company and the Banks is interest and fees on loans.  On a consolidated basis, interest and fees on loans accounted for 64%, 64%, and 60% of total revenues in 2019, 2018, and 2017, respectively.  Interest on securities accounted for 13%, 14%, and 13% of total revenues in 2019, 2018, and 2017, respectively.  For more information about the Company’s financial condition and results of operations, see the consolidated financial statements and related notes included in Part II, Item 8 of this report.

 

Pending Acquisition

On January 3, 2020, ChoiceOne and Community Shores Bank Corporation (“Community Shores”) entered into an Agreement and Plan of Merger providing for the merger of Community Shores with and into ChoiceOne, with ChoiceOne as the surviving corporation.  Subject to the terms and conditions of the merger agreement, upon completion of the merger, each share of Community Shores common stock outstanding immediately prior to the merger will be converted into the right to receive, at the election of each Community Shores shareholder, an amount of cash equal to $5.00 or 0.17162 shares of ChoiceOne common stock, in each case subject to the limitation that the total number of shares of Community Shores common stock to be converted into shares of ChoiceOne common stock will equal not less than 50% and not more than 75% of the total outstanding shares of Community Shores common stock as of the effective time of the merger.

 

Completion of the merger with Community Shores is subject to certain customary closing conditions, including, among others, receipt of the requisite approval by the Community Shores shareholders, receipt of required regulatory approvals, the absence of any law or order prohibiting completion of the merger, the effectiveness of the registration statement to be filed by ChoiceOne with respect to the shares of ChoiceOne common stock to be issued in the merger and the absence of a material adverse effect (as defined in the merger agreement).

 

The foregoing description of the merger and merger agreement with Community Shores is qualified in its entirety by reference to the merger agreement, which was filed as Exhibit 2.1 to ChoiceOne’s Form 8-K filed January 6, 2020.

 

Competition

The Banks’ competition primarily comes from other financial institutions located within Kent, Muskegon, Newaygo, and Ottawa counties in western Michigan and Lapeer, Macomb, and St. Clair counties in southeastern Michigan.  There are a number of larger commercial banks within the Banks’ primary market areas.  The Banks also compete with a large number of other financial institutions, such as savings and loan associations, insurance companies, consumer finance companies, credit unions, internet banks and other financial technology companies, and commercial finance and leasing companies for deposits, loans and service business.  Money market mutual funds, brokerage houses and nonfinancial institutions provide many of the financial services offered by the Banks.  Many of these competitors have substantially greater resources than the Banks.  The principal methods of competition for financial services are price (the rates of interest charged for loans, the rates of interest paid for deposits and the fees charged for services) and the convenience and quality of services rendered to customers.

 

Page | 4

 

Supervision and Regulation

Banks and bank holding companies are extensively regulated.  The Company is subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”).  The Company’s activities are generally limited to owning or controlling banks and engaging in such other activities as the Federal Reserve Board may determine to be closely related to banking.  Prior approval of the Federal Reserve Board, and in some cases various other government agencies, is required for the Company to acquire control of any additional bank holding companies, banks or other operating subsidiaries. Under Federal Reserve Board policy, the Company is expected to act as a source of financial strength to the Banks and to commit resources to support them.

 

The Banks are chartered under state law and are subject to regulation by the Michigan Department of Insurance and Financial Services (“DIFS”).  State banking laws place restrictions on various aspects of banking, including permitted activities, loan interest rates, branching, payment of dividends and capital and surplus requirements.  The Banks are members of the Federal Reserve System and are also subject to regulation by the Federal Reserve Board.  The Banks’ deposits are insured by the Federal Deposit Insurance Corporation (the “FDIC”) to the maximum extent provided by law.  The Banks are members of the Federal Home Loan Bank system, which provides certain advantages to the Banks, including favorable borrowing rates for certain funds.

 

The Company is a legal entity separate and distinct from the Banks.  The Company’s primary source of funds available to pay dividends to shareholders is dividends paid to it by the Banks.  There are legal limitations on the extent to which the Banks can lend or otherwise supply funds to the Company.  In addition, payment of dividends to the Company by the Banks is subject to various state and federal regulatory limitations.

 

The FDIC formed the Deposit Insurance Fund (“DIF”) in accordance with the Federal Deposit Insurance Reform Act of 2005 (“Reform Act”) to create a stronger and more stable insurance system.  The FDIC maintains the insurance reserves of the DIF by assessing depository institutions an insurance premium. The DIF insures deposit accounts of the Banks up to a maximum amount of $250,000 per separately insured depositor. FDIC insured depository institutions are required to pay deposit insurance premiums based on the risk an institution poses to the DIF. In February 2011, the FDIC finalized rules, effective for assessments occurring after April 1, 2011, which redefined an institution’s assessment base as average consolidated total assets minus average Tier 1 capital. The new rules also established the initial base assessment rate for Risk Category 1 institutions, such as the Banks, at 5 to 9 basis points (annualized).  Effective July 1, 2016, the FDIC amended its rules to eliminate Risk Categories for small banks, replacing them with a method based on a bank’s CAMELS composite rating and several financial ratios.  On that date, the Banks’ initial base assessment rate was reduced to 3 basis points, since the Federal Deposit Insurance Reserve Ratio reached 1.15% as of June 30, 2016.

 

The Deposit Insurance Funds Act of 1996 authorized the Financing Corporation (“FICO”) to impose periodic assessments on all depository institutions.  The purpose of these periodic assessments is to spread the cost of the interest payments on the outstanding FICO bonds issued to recapitalize the Savings Association Insurance Fund (“SAIF”) over a larger number of institutions.

 

The federal banking agencies have adopted guidelines to promote the safety and soundness of federally-insured depository institutions. These guidelines establish standards for, among other things, internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings.

 

The Company and the Banks are subject to regulatory “risk-based” capital guidelines. Failure to meet these capital guidelines could subject the Company or the Banks to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on accepting brokered deposits, and other restrictions on its business. In addition, the Banks would generally not receive regulatory approval of any application that requires the consideration of capital adequacy, such as a branch or merger application, unless it could demonstrate a reasonable plan to meet the capital requirement within a reasonable period of time.

 

Under Federal Reserve Board policy, the Company is expected to act as a source of financial strength to the Banks and to commit resources to support the Banks. In addition, if DIFS deems the Banks’ capital to be impaired, DIFS may require the Banks to restore their capital by a special assessment on the Company as the Banks’ sole shareholder. If the Company fails to pay any assessment, the Company’s directors will be required, under Michigan law, to sell the shares of the Banks’ stock owned by the Company to the highest bidder at either a public or private auction and use the proceeds of the sale to restore the Banks’ capital.

 

Page | 5

 

The Federal Deposit Insurance Corporation Improvement Act (“FDICIA”) requires, among other things, federal banking agencies to take “prompt corrective action” in respect of depository institutions that do not meet minimum capital requirements. FDICIA sets forth the following five capital categories: “well-capitalized,” “adequately-capitalized,” “undercapitalized,” “significantly-undercapitalized” and “critically-undercapitalized.” A depository institution’s capital category will depend upon how its capital levels compare with various relevant capital measures as established by regulation, which include Tier 1 and total risk-based capital ratio measures and a leverage capital ratio measure.  Under certain circumstances, the appropriate banking agency may treat a well-capitalized, adequately-capitalized, or undercapitalized institution as if the institution were in the next lower capital category.

 

Federal banking regulators are required to take specified mandatory supervisory actions and are authorized to take other discretionary actions with respect to institutions in the three undercapitalized categories.  The severity of the action depends upon the capital category in which the institution is placed.  Subject to a narrow exception, the banking regulator must generally appoint a receiver or conservator for an institution that is critically undercapitalized.  An institution in any of the undercapitalized categories is required to submit an acceptable capital restoration plan to its appropriate federal banking agency.  An undercapitalized institution is also generally prohibited from paying any dividends, increasing its average total assets, making acquisitions, establishing any branches, accepting or renewing any brokered deposits or engaging in any new line of business, except under an accepted capital restoration plan or with FDIC approval.

 

On July 3, 2013, the FDIC Board of Directors approved the Regulatory Capital Interim Final Rule, implementing Basel III.  This rule redefines Tier 1 capital as two components (Common Equity Tier 1 and Additional Tier 1), creates a new capital ratio (Common Equity Tier 1 Risk-based Capital Ratio) and implements a capital conservation buffer.  It also revises the prompt corrective action thresholds and makes changes to risk weights for certain assets and off-balance-sheet exposures.  The Banks were required to transition into the new rule beginning on January 1, 2015.

 

Banks are subject to a number of federal and state laws and regulations, which have a material impact on their business.  These include, among others, minimum capital requirements, state usury laws, state laws relating to fiduciaries, the Truth in Lending Act, the Truth in Savings Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Fair Credit Reporting Act, the Expedited Funds Availability Act, the Community Reinvestment Act, the Real Estate Settlement Procedures Act, the Service Members Civil Relief Act, the USA PATRIOT Act, the Bank Secrecy Act, regulations of the Office of Foreign Assets Controls, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, electronic funds transfer laws, redlining laws, predatory lending laws, antitrust laws, environmental laws, money laundering laws and privacy laws.  The monetary policy of the Federal Reserve Board may influence the growth and distribution of bank loans, investments and deposits, and may also affect interest rates on loans and deposits.  These policies may have a significant effect on the operating results of banks.

 

In general, the BHC Act limits the business of bank holding companies to banking, managing or controlling banks and other activities that the Federal Reserve Board has determined to be closely related to the business of banking.  In addition, bank holding companies that qualify and elect to be financial holding companies may engage in any activities that are financial in nature or complementary to a financial activity and do not pose a substantial risk to the safety and soundness of depository institutions or the financial system without prior approval of the Federal Reserve Board.  Activities that are financial in nature include securities underwriting and dealing, insurance underwriting and making merchant banking investments.

 

In order for the Company to maintain financial holding company status, both the Company and the Banks must be categorized as “well-capitalized” and “well-managed” under applicable regulatory guidelines.  If the Company or either of the Banks ceases to meet these requirements, the Federal Reserve Board may impose corrective capital and/or managerial requirements and place limitations on the Company’s ability to conduct the broader financial activities permissible for financial holding companies.  In addition, if the deficiencies persist, the Federal Reserve Board may require the Company to divest of the Banks.  The Company and the Banks were each categorized as “well-capitalized” and “well-managed” as of December 31, 2019.

 

Bank holding companies may acquire banks and other bank holding companies located in any state in the United States without regard to geographic restrictions or reciprocity requirements imposed by state banking law.  Banks may also establish interstate branch networks through acquisitions of and mergers with other banks.  The establishment of de novo interstate branches or the acquisition of individual branches of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) is allowed only if specifically authorized by state law.

 

Page | 6

 

Michigan banking laws do not significantly restrict interstate banking.  The Michigan Banking Code permits, in appropriate circumstances and with the approval of the Department of Insurance and Financial Services, (1) acquisition of Michigan banks by FDIC-insured banks, savings banks or savings and loan associations located in other states, (2) sale by a Michigan bank of branches to an FDIC-insured bank, savings bank or savings and loan association located in a state in which a Michigan bank could purchase branches of the purchasing entity, (3) consolidation of Michigan banks and FDIC-insured banks, savings banks or savings and loan associations located in other states having laws permitting such consolidation, (4) establishment of branches in Michigan by FDIC-insured banks located in other states, the District of Columbia or U.S. territories or protectorates having laws permitting a Michigan bank to establish a branch in such jurisdiction, and (5) establishment by foreign banks of branches located in Michigan.

 

Banks are subject to the provisions of the Community Reinvestment Act (“CRA”). Under the terms of the CRA, the appropriate federal bank regulatory agency is required, in connection with its examination of a bank, to assess the bank’s record in meeting the credit needs of the community served by that bank, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of the institution.  Under the CRA, institutions are assigned a rating of “outstanding,” “satisfactory,” “needs to improve,” or “substantial non-compliance.”  The regulatory agency’s assessment of the bank’s record is made available to the public.  Further, a bank’s federal regulatory agency is required to assess the CRA compliance record of any bank that has applied to establish a new branch office that will accept deposits, relocate an office, or merge or consolidate with, or acquire the assets or assume the liabilities of, a federally regulated financial institution.  In the case of a bank holding company applying for approval to acquire a bank or another bank holding company, the Federal Reserve Board will assess the CRA compliance record of each subsidiary bank of the applicant bank holding company, and such compliance records may be the basis for denying the application.  Upon receiving notice that a subsidiary bank is rated less than “satisfactory,” a financial holding company will be prohibited from additional activities that are permitted to be conducted by a financial holding company and from acquiring any company engaged in such activities.  The CRA rating of each of the Banks was “Satisfactory” as of its most recent examination.

 

Effects of Compliance With Environmental Regulations

The nature of the business of the Banks is such that they hold title, on a temporary or permanent basis, to a number of parcels of real property.  These include properties owned for branch offices and other business purposes as well as properties taken in or in lieu of foreclosure to satisfy loans in default.  Under current state and federal laws, present and past owners of real property may be exposed to liability for the cost of cleanup of environmental contamination on or originating from those properties, even if they are wholly innocent of the actions that caused the contamination.  These liabilities can be material and can exceed the value of the contaminated property.  Management is not presently aware of any instances where compliance with these provisions will have a material effect on the capital expenditures, earnings or competitive position of the Company or the Banks, or where compliance with these provisions will adversely affect a borrower’s ability to comply with the terms of loan contracts.

 

Employees

As of February 28, 2020, the Company, the Banks and the Insurance Agency employed 339 employees, of which 270 were full-time employees.  The Company, the Banks, and the Insurance Agency believe their overall relations with their employees are good.

 

Statistical Information

Additional statistical information describing the business of the Company appears on the following pages and in Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Item 7 of this report and in the Consolidated Financial Statements and the notes thereto in Item 8 of this report.  The following statistical information should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and notes in this report.

 

Page | 7

 

Securities Portfolio

The carrying value of securities categorized by type as of December 31 was as follows:

 

(Dollars in thousands)

 

2019

 

 

2018

 

 

2017

 

Equity securities

 

$

     2,851

 

 

$

     2,847

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and federal agency

 

$

   17,215

 

 

$

   33,529

 

 

$

   35,126

 

U.S. Treasury notes and bonds

 

 

2,008

 

 

 

1,947

 

 

 

1,960

 

State and municipal

 

 

173,924

 

 

 

103,928

 

 

 

100,048

 

Mortgage-backed securities

 

 

142,760

 

 

 

21,575

 

 

 

9,820

 

Corporate

 

 

2,672

 

 

 

5,102

 

 

 

5,151

 

Equity securities

 

 

 

 

 

 

 

 

2,892

 

Trust preferred securities

 

 

1,000

 

 

 

500

 

 

 

500

 

Asset-backed securities

 

 

 

 

 

21

 

 

 

94

 

Total

 

$

339,579

 

 

$

166,602

 

 

$

155,591

 

 

The Company did not hold investment securities from any one issuer at December 31, 2019, that were greater than 10% of the Company’s shareholders’ equity, exclusive of U.S. Government and U.S. Government agency securities.

 

Presented below is the fair value of securities as of December 31, 2019 and 2018, a schedule of maturities of securities as of December 31, 2019, and the weighted average yields of securities as of December 31, 2019:

 

 

 

Securities maturing within:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value

 

 

Fair Value

 

 

 

Less than

 

 

1 Year -

 

 

5 Years -

 

 

More than

 

 

at Dec. 31,

 

 

at Dec. 31,

 

(Dollars in thousands)

 

1 Year

 

 

5 Years

 

 

10 Years

 

 

10 Years

 

 

2019

 

 

2018

 

U.S. Government and federal agency

 

$

     9,099

 

 

$

     2,026

 

 

$

     6,090

 

 

$

 

 

$

     17,215

 

 

$

     33,529

 

U.S. Treasury notes and bonds

 

 

 

 

 

2,008

 

 

 

 

 

 

 

 

 

2,008

 

 

 

1,947

 

State and municipal (1)

 

 

16,450

 

 

 

50,121

 

 

 

64,436

 

 

 

42,917

 

 

 

173,924

 

 

 

103,928

 

Corporate

 

 

300

 

 

 

2,372

 

 

 

 

 

 

 

 

 

2,672

 

 

 

5,102

 

Trust preferred securities

 

 

1,000

 

 

 

 

 

 

 

 

 

 

 

 

1,000

 

 

 

500

 

Asset-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

21

 

Total debt securities

 

 

26,849

 

 

 

56,527

 

 

 

70,526

 

 

 

42,917

 

 

 

196,819

 

 

 

145,027

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

 

8

 

 

 

77,251

 

 

 

60,607

 

 

 

4,894

 

 

 

142,760

 

 

 

21,575

 

Equity securities (2)

 

 

 

 

 

 

 

 

1,000

 

 

 

1,851

 

 

 

2,851

 

 

 

2,847

 

Total

 

$

   26,857

 

 

$

133,778

 

 

$

132,133

 

 

$

49,662

 

 

$

   342,430

 

 

$

   169,449

 

 

 

 

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

 

 

1.88

%

 

 

1.98

%

 

 

2.43

%

 

 

%

 

 

2.09

%

 

U.S. Treasury notes and bonds

 

 

 

 

 

1.85

 

 

 

 

 

 

 

 

 

1.85

 

 

State and municipal (1)

 

 

2.89

 

 

 

2.88

 

 

 

2.94

 

 

 

1.23

 

 

 

2.50

 

 

Corporate

 

 

2.03

 

 

 

2.74

 

 

 

 

 

 

 

 

 

2.66

 

 

Trust preferred securities

 

 

5.25

 

 

 

 

 

 

 

 

 

 

 

 

5.25

 

 

Mortgage-backed securities

 

 

3.67

 

 

 

2.51

 

 

 

2.26

 

 

 

3.03

 

 

 

2.42

 

 

Equity securities (2)

 

 

 

 

 

 

 

 

4.56

 

 

 

 

 

 

0.92

 

 

 

(1)  The yield is computed for tax-exempt securities on a fully tax-equivalent basis at an incremental tax rate of 21% for 2019.

(2)  Equity securities are preferred and common stock that may or may not have a stated maturity.

 

Page | 8

 

Loan Portfolio

The Company’s loan portfolio categorized by loan type (excluding loans held for sale and loans to other financial institutions) is presented below for the respective years ended December 31:

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

Agricultural

 

$

     57,339

 

 

$

     49,109

 

 

$

     48,464

 

 

$

     44,614

 

 

$

     40,232

 

Commercial and industrial

 

 

148,083

 

 

 

91,406

 

 

 

104,386

 

 

 

96,088

 

 

 

94,347

 

Consumer

 

 

38,854

 

 

 

24,382

 

 

 

24,513

 

 

 

21,596

 

 

 

20,090

 

Real estate - commercial

 

 

326,379

 

 

 

139,453

 

 

 

123,487

 

 

 

110,762

 

 

 

97,736

 

Real estate - construction

 

 

13,411

 

 

 

8,843

 

 

 

6,613

 

 

 

6,153

 

 

 

5,390

 

Real estate - residential

 

 

217,982

 

 

 

95,880

 

 

 

91,322

 

 

 

89,787

 

 

 

91,509

 

Total loans, gross

 

$

   802,048

 

 

$

   409,073

 

 

$

   398,785

 

 

$

   369,000

 

 

$

   349,304

 

 

Maturities and Sensitivities of Loans to Changes in Interest Rates 

The following schedule presents the maturities of loans (excluding residential real estate and consumer loans) as of December 31, 2019.  All loans over one year in maturity (excluding residential real estate and consumer loans) are also presented classified according to the sensitivity to changes in interest rates as of December 31, 2019.

 

(Dollars in thousands)

 

Less than

 

 

1 Year -

 

 

More than

 

 

 

 

 

 

1 Year

 

 

5 Years

 

 

5 Years

 

 

Total

 

Loan Type

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agricultural

 

$

           15,610

 

 

$

          17,779

 

 

$

          23,950

 

 

$

          57,339

 

Commercial and industrial

 

 

47,846

 

 

 

52,336

 

 

 

47,901

 

 

 

148,083

 

Real estate - commercial

 

 

24,727

 

 

 

130,333

 

 

 

171,319

 

 

 

326,379

 

Real estate - construction

 

 

12,126

 

 

 

1,285

 

 

 

 

 

 

13,411

 

Totals

 

$

         100,309

 

 

$

        201,733

 

 

$

        243,170

 

 

$

        545,212

 

 

(Dollars in thousands)

 

Less than

 

 

1 Year -

 

 

More than

 

 

 

 

 

 

1 Year

 

 

5 Years

 

 

5 Years

 

 

Total

 

Loan Sensitivity to Changes in Interest Rates

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans with fixed interest rates

 

$

           39,463

 

 

$

        174,100

 

 

$

        132,544

 

 

$

        346,107

 

Loans with floating or adjustable interest rates

 

 

60,846

 

 

 

27,633

 

 

 

110,626

 

 

 

199,105

 

Totals

 

$

         100,309

 

 

$

        201,733

 

 

$

        243,170

 

 

$

        545,212

 

 

Loan maturities are classified according to the contractual maturity date or the anticipated amortization period, whichever is appropriate.  The anticipated amortization period is used in the case of loans where a balloon payment is due before the end of the loan’s normal amortization period.  At the time the balloon payment is due, the loan can either be rewritten or payment in full can be requested.  The decision regarding whether the loan will be rewritten or a payment in full will be requested will be based upon the loan’s payment history, the borrower’s current financial condition, and other relevant factors.

 

Risk Elements

The following loans were classified as nonperforming as of December 31:

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

Loans accounted for on a nonaccrual basis

 

$

4,687

 

 

$

1,532

 

 

$

1,096

 

 

$

1,983

 

 

$

2,198

 

Accruing loans which are contractually past due 90 days
or more as to principal or interest payments

 

 

 

 

 

 

 

 

258

 

 

 

229

 

 

 

29

 

Loans defined as “troubled debt restructurings”

 

 

1,726

 

 

 

2,254

 

 

 

2,896

 

 

 

2,853

 

 

 

3,271

 

Totals

 

$

6,413

 

 

$

3,786

 

 

$

4,250

 

 

$

5,065

 

 

$

5,498

 

 

A loan is placed on nonaccrual status at the point in time at which the collectability of principal or interest is considered doubtful.

 

Page | 9

 

The table below illustrates interest forgone and interest recorded on nonperforming loans for the years presented:

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

2018

 

 

2017

 

Interest on non-performing loans that would have been earned had the loans been in an accrual or performing status

 

$

    474

 

 

$

    224

 

 

$

    218

 

Interest on non-performing loans that was actually recorded when received

 

$

    104

 

 

$

    122

 

 

$

    145

 

 

Potential Problem Loans

At December 31, 2019, there were no loans not disclosed above where known information about possible credit problems of borrowers caused management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms.  Specific loss allocations totaling $355,000 from the allowance for loan losses had been allocated for all nonperforming and potential problem loans as of December 31, 2019.  However, the entire allowance for loan losses is also available for any potential problem loans.

 

Loan Concentrations

As of December 31, 2019, there was no concentration of loans exceeding 10% of total loans that is not otherwise disclosed as a category of loans pursuant to Item III.A. of Industry Guide 3.

 

Other Interest-Bearing Assets

As of December 31, 2019, there were no other interest-bearing assets requiring disclosure under Item III.C.1. or 2. of Industry Guide 3 if such assets were loans.

 

Summary of Loan Loss Experience

The following schedule presents a summary of activity in the allowance for loan losses for the periods shown and the percentage of net charge-offs during each period to average gross loans outstanding during the period:

 

Page | 10

 

 

 

(Dollars in thousands)

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

Allowance for loan losses at beginning of year

 

$

 4,673

 

 

$

   4,577

 

 

$

 4,277

 

 

$

 4,194

 

 

$

 4,173

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Charge-offs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agricultural

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

83

 

 

 

58

 

 

 

439

 

 

 

37

 

 

 

30

 

Consumer

 

 

292

 

 

 

282

 

 

 

253

 

 

 

218

 

 

 

291

 

Real estate - commercial

 

 

589

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate - construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate - residential

 

 

25

 

 

 

25

 

 

 

43

 

 

 

102

 

 

 

140

 

Total charge-offs

 

 

989

 

 

 

365

 

 

 

735

 

 

 

357

 

 

 

461

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recoveries:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agricultural

 

 

65

 

 

 

33

 

 

 

 

 

 

 

 

 

1

 

Commercial and industrial

 

 

22

 

 

 

107

 

 

 

21

 

 

 

31

 

 

 

64

 

Consumer

 

 

136

 

 

 

112

 

 

 

169

 

 

 

149

 

 

 

121

 

Real estate - commercial

 

 

26

 

 

 

61

 

 

 

258

 

 

 

89

 

 

 

47

 

Real estate - construction

 

 

 

 

 

 

 

 

40

 

 

 

 

 

 

 

Real estate - residential

 

 

124

 

 

 

113

 

 

 

62

 

 

 

171

 

 

 

149

 

Total recoveries

 

 

373

 

 

 

426

 

 

 

550

 

 

 

440

 

 

 

382

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net charge-offs (recoveries)

 

 

616

 

 

 

(61

)

 

 

185

 

 

 

(83

)

 

 

79

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for loan losses

 

 

 

 

 

35

 

 

 

485

 

 

 

 

 

 

100

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses at end of year

 

$

 4,057

 

 

$

   4,673

 

 

$

 4,577

 

 

$

 4,277

 

 

$

 4,194

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses as a percentage of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans as of year end

 

 

0.51

%

 

 

1.14

%

 

 

1.15

%

 

 

1.16

%

 

 

1.21

%

Nonaccrual loans, accrual loans past due 90 days or more and troubled debt restructurings

 

 

63

%

 

 

123

%

 

 

108

%

 

 

84

%

 

 

76

%

Ratio of net charge-offs during the period to average loans outstanding during the period

 

 

0.12

%

 

 

(0.02

)%

 

 

0.05

%

 

 

(0.02

)%

 

 

0.02

%

Loan recoveries as a percentage of prior year’s charge-offs

 

 

102

%

 

 

58

%

 

 

154

%

 

 

95

%

 

 

36

%

 

(1)

Additions to the allowance for loan losses charged to operations during the periods shown were based on management’s judgment after considering factors such as loan loss experience, evaluation of the loan portfolio, and prevailing and anticipated economic conditions. The evaluation of the loan portfolio is based upon various risk factors such as the financial condition of the borrower, the value of collateral and other considerations, which, in the opinion of management, deserve current recognition in estimating loan losses.

 

Page | 11

 

 

The following schedule presents an allocation of the allowance for loan losses to the various loan categories as of the years ended December 31:

 

(Dollars in thousands)

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

Agricultural

 

$

    471

 

 

$

      481

 

 

$

    506

 

 

$

    433

 

 

$

    420

 

Commercial and industrial

 

 

655

 

 

 

892

 

 

 

1,001

 

 

 

688

 

 

 

586

 

Consumer

 

 

270

 

 

 

254

 

 

 

262

 

 

 

305

 

 

 

297

 

Real estate - commercial

 

 

1,663

 

 

 

1,926

 

 

 

1,761

 

 

 

1,438

 

 

 

1,030

 

Real estate - construction

 

 

76

 

 

 

38

 

 

 

35

 

 

 

62

 

 

 

46

 

Real estate - residential

 

 

640

 

 

 

537

 

 

 

726

 

 

 

1,013

 

 

 

1,388

 

Unallocated

 

 

282

 

 

 

545

 

 

 

286

 

 

 

338

 

 

 

427

 

Total allowance

 

$

 4,057

 

 

$

   4,673

 

 

$

 4,577

 

 

$

 4,277

 

 

$

 4,194

 

 

The lower level in the allowance allocation to commercial and industrial loans was due to lower historical charge-off levels. The decline in the allocation to commercial real estate loans was caused by net charge-offs in 2019 which were not completely replaced by a provision allocation. The reduction in both the unallocated and total allowance for loan losses balances in 2019 resulted from net charge-offs during the year with a provision of $0.

 

Management periodically reviews the assumptions, loss ratios and delinquency trends in estimating the appropriate level of its allowance for loan losses and believes the unallocated portion of the total allowance was sufficient at December 31, 2019.

 

The following schedule presents the stratification of the loan portfolio by category, based on the amount of loans outstanding as a percentage of total loans for the respective years ended December 31.

  

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

Agricultural

 

 

7

%

 

 

12

%

 

 

12

%

 

 

12

%

 

 

12

%

Commercial and industrial

 

 

18

 

 

 

22

 

 

 

26

 

 

 

26

 

 

 

26

 

Consumer

 

 

5

 

 

 

6

 

 

 

6

 

 

 

6

 

 

 

6

 

Real estate - commercial

 

 

40

 

 

 

34

 

 

 

31

 

 

 

30

 

 

 

28

 

Real estate - construction

 

 

2

 

 

 

2

 

 

 

2

 

 

 

2

 

 

 

2

 

Real estate - residential

 

 

28

 

 

 

24

 

 

 

23

 

 

 

24

 

 

 

26

 

Total loans

 

 

100

%

 

 

100

%

 

 

100

%

 

 

100

%

 

 

100

%

 

Deposits

The following schedule presents the average deposit balances by category and the average rates paid thereon for the respective years:

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

2018

 

 

2017

 

Noninterest-bearing demand

 

$

    186,411

 

 

 

%

 

$

    148,495

 

 

 

%

 

$

    136,353

 

 

 

%

Interest-bearing demand and money market deposits

 

 

278,444

 

 

 

0.56

 

 

 

209,542

 

 

 

0.33

 

 

 

208,049

 

 

 

0.18

 

Savings

 

 

109,028

 

 

 

0.07

 

 

 

76,102

 

 

 

0.02

 

 

 

76,107

 

 

 

0.02

 

Certificates of deposit

 

 

136,537

 

 

 

1.87

 

 

 

109,834

 

 

 

1.34

 

 

 

104,936

 

 

 

0.75

 

Total

 

$

    710,420

 

 

 

0.63

%

 

$

    543,973

 

 

 

0.40

%

 

$

    525,445

 

 

 

0.22

%

 

The following table illustrates the maturities of certificates of deposits issued in denominations of $100,000 or more as of December 31, 2019:

 

(Dollars in thousands)

 

 

 

Maturing in less than 3 months

 

$

      25,279

 

Maturing in 3 to 6 months

 

 

27,958

 

Maturing in 6 to 12 months

 

 

21,400

 

Maturing in more than 12 months

 

 

10,771

 

Total

 

$

      85,408

 

 

At December 31, 2019, the Banks had no material foreign deposits.

 

Page | 12

 

 

Short-Term Borrowings

Federal funds purchased by the Company are unsecured overnight borrowings from correspondent banks. Federal funds purchased are due the next business day. The table below provides additional information regarding these short-term borrowings:

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

2018

 

 

2017

 

Outstanding balance at December 31

 

$

 

 

$

    4,800

 

 

$

 

Average interest rate at December 31

 

 

%

 

 

2.80

%

 

 

%

Average balance during the year

 

$

      2,289

 

 

$

    2,174

 

 

$

       703

 

Average interest rate during the year

 

 

2.48

%

 

 

2.31

%

 

 

1.47

%

Maximum month end balance during the year

 

$

    15,000

 

 

$

  13,000

 

 

$

    5,470

 

 

Repurchase agreements include advances by the Banks’ customers that are not covered by federal deposit insurance. These agreements are direct obligations of the Company and are secured by securities held in safekeeping at a correspondent bank. The table below provides additional information regarding these short-term borrowings:

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

2018

 

 

2017

 

Outstanding balance at December 31

 

$

 

 

$

 

 

$

    7,148

 

Average interest rate at December 31

 

 

%

 

 

%

 

 

0.05

%

Average balance during the year

 

$

 

 

$

    1,412

 

 

$

    4,958

 

Average interest rate during the year

 

 

%

 

 

0.05

%

 

 

0.05

%

Maximum month end balance during the year

 

$

 

 

$

    7,148

 

 

$

    8,440

 

 

Advances from the Federal Home Loan Bank (“FHLB”) with original repayment terms less than one year are considered short-term borrowings for the Company. These advances are secured by residential real estate mortgage loans and U.S. government agency securities. The advances have maturities ranging from 1 month to 12 months from the date of issue.

 

The table below provides additional information regarding these short-term borrowings:

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

2018

 

 

2017

 

Outstanding balance at December 31

 

$

    33,000

 

 

$

    5,000

 

 

$

  20,268

 

Average interest rate at December 31

 

 

2.12

%

 

 

2.57

%

 

 

1.36

%

Average balance during the year

 

$

    18,765

 

 

$

  11,752

 

 

$

  22,830

 

Average interest rate during the year

 

 

2.38

%

 

 

1.92

%

 

 

1.21

%

Maximum month end balance during the year

 

$

    53,000

 

 

$

  25,000

 

 

$

  40,273

 

 

There were no other categories of short-term borrowings whose average balance outstanding exceeded 30% of shareholders’ equity in 2019, 2018 or 2017.

 

Page | 13

 

 

Return on Equity and Assets

The following schedule presents certain financial ratios of the Company for the years ended December 31:

 

 

 

2019

 

 

2018

 

 

2017

 

Return on assets (net income divided by average total assets)

 

 

0.85

%

 

 

1.15

%

 

 

0.98

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on equity (net income dividend by average equity)

 

 

6.48

%

 

 

9.55

%

 

 

8.22

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividend payout ratio (dividends declared per share divided by net income per share)

 

 

80.97

%

 

 

35.08

%

 

 

37.57

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity to assets ratio (average equity divided by average total assets)

 

 

13.08

%

 

 

12.04

%

 

 

11.91

%

 

Page | 14

 

 

Item 1A. Risk Factors

 

The Company is subject to many risks and uncertainties. Although the Company seeks ways to manage these risks and develop programs to control risks to the extent that management can control them, the Company cannot predict the future. Actual results may differ materially from management’s expectations. Some of these significant risks and uncertainties are discussed below. The risks and uncertainties described below are not the only ones that the Company faces. Additional risks and uncertainties of which the Company is unaware, or that it currently does not consider to be material, also may become important factors that affect the Company and its business. If any of these risks were to occur, the Company’s business, financial condition or results of operations could be materially and adversely affected.

 

Investments in the Company’s common stock involve risk.

 

The market price of the Company’s common stock may fluctuate significantly in response to a number of factors, including:

 

The impact associated with the novel coronavirus outbreak, COVID-19

Variations in quarterly or annual operating results

Changes in dividends per share

Changes in interest rates

New developments, laws or regulations in the banking industry

Acquisitions or business combinations involving the Company or its competition

Regulatory actions, including changes to regulatory capital levels, the components of regulatory capital and how regulatory capital is calculated

Volatility of stock market prices and volumes

Changes in market valuations of similar companies

New litigation or contingencies or changes in existing litigation or contingencies

Changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or other regulatory agencies

Rumors or erroneous information

Credit and capital availability

Issuance of additional shares of common stock or other debt or equity securities of the Company

 

Asset quality could be less favorable than expected.

 

A significant source of risk for the Company arises from the possibility that losses will be sustained because borrowers, guarantors and related parties may fail to perform in accordance with the terms of their loan agreements. Most loans originated by the Company are secured, but some loans are unsecured depending on the nature of the loan. With respect to secured loans, the collateral securing the repayment of these loans includes a wide variety of real and personal property that may be insufficient to cover the obligations owed under such loans. Collateral values may be adversely affected by changes in prevailing economic, environmental and other conditions, including declines in the value of real estate, changes in interest rates, changes in monetary and fiscal policies of the federal government, terrorist activity, environmental contamination and other external events.

 

The Company’s allowance for loan losses may not be adequate to cover actual loan losses.

 

The risk of nonpayment of loans is inherent in all lending activities and nonpayment of loans may have a material adverse effect on the Company’s earnings and overall financial condition, and the value of its common stock. The Company makes various assumptions and judgments about the collectability of its loan portfolio and provides an allowance for potential losses based on a number of factors. If its assumptions are wrong, the allowance for loan losses may not be sufficient to cover losses, which could have an adverse effect on the Company’s operating results, and may cause it to increase the allowance in the future. The actual amount of future provisions for loan losses cannot now be determined and may exceed the amounts of past provisions for loan losses. Federal and state banking regulators, as an integral part of their supervisory function, periodically review the allowance for loan losses. These regulatory agencies may require the Company to increase its provision for loan losses or to recognize further loan charge-offs based upon their judgments, which may be different from the Company’s judgments. Any increase in the allowance for loan losses could have a negative effect on the Company’s regulatory capital ratios, net income, financial condition and results of operations. In addition, a large portion of the loan portfolio was marked to fair value as part of the merger with County and does not carry an allowance as management determined no credit deterioration had occurred since the effective date of the merger. 

 

Page | 15

 

 

General economic conditions in the state of Michigan could be less favorable than expected.

 

The Company is affected by general economic conditions in the United States, although most directly within Michigan. An economic downturn within Michigan could negatively impact household and corporate incomes. This impact may lead to decreased demand for both loan and deposit products and increase the number of customers who fail to pay interest or principal on their loans.

 

The Company could be adversely affected by the soundness of other financial institutions, including defaults by larger financial institutions.

 

The Company’s ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of credit, trading, clearing, counterparty or other relationships between financial institutions. The Company has exposure to multiple counterparties, and it routinely executes transactions with counterparties in the financial industry. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, could lead to market-wide liquidity problems and losses or defaults by the Company or by other institutions. This is sometimes referred to as “systemic risk” and may adversely affect financial intermediaries, such as clearing agencies, clearing houses, banks, securities firms and exchanges, with which the Company interacts on a daily basis, and therefore could adversely affect the Company.

 

If the Company does not adjust to changes in the financial services industry, its financial performance may suffer.

 

The Company’s ability to maintain its financial performance and return on investment to shareholders will depend in part on its ability to maintain and grow its core deposit customer base and expand its financial services to its existing customers. In addition to other banks, competitors include credit unions, securities dealers, brokers, mortgage bankers, investment advisors, internet banks and other financial technology companies, and finance and insurance companies. The increasingly competitive environment is, in part, a result of changes in the economic environment within the state of Michigan, regulation, changes in technology and product delivery systems and consolidation among financial service providers. New competitors may emerge to increase the degree of competition for the Company’s customers and services. Financial services and products are also constantly changing. The Company’s financial performance will also depend in part upon customer demand for the Company’s products and services and the Company’s ability to develop and offer competitive financial products and services.

 

Changes in interest rates could reduce the Company‘s income and cash flow.

 

The Company’s income and cash flow depends, to a great extent, on the difference between the interest earned on loans and securities, and the interest paid on deposits and other borrowings. Market interest rates are beyond the Company’s control, and they fluctuate in response to general economic conditions and the policies of various governmental and regulatory agencies including, in particular, the Federal Reserve Board. Changes in monetary policy, including changes in interest rates and interest rate relationships, will influence the origination of loans, the purchase of investments, the generation of deposits and the rate received on loans and securities and paid on deposits and other borrowings.

 

Interest rates on our outstanding financial instruments might be subject to change based on regulatory developments, which could adversely affect our revenue, expenses, and the value of those financial instruments.

 

LIBOR and certain other “benchmarks” are the subject of recent national, international, and other regulatory guidance and proposals for reform. These reforms may cause such benchmarks to perform differently than in the past or have other consequences which cannot be predicted. On July 27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, publicly announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. It is unclear whether, at that time, LIBOR will cease to exist or if new methods of calculating LIBOR will be established. If LIBOR ceases to exist or if the methods of calculating LIBOR change from current methods for any reason, interest rates on our floating rate obligations, loans, deposits, and other financial instruments tied to LIBOR rates, as well as the revenue and expenses associated with those financial instruments, may be adversely affected. Further, any uncertainty regarding the continued use and reliability of LIBOR as a benchmark interest rate could adversely affect the value of our floating rate obligations, loans, deposits, and other financial instruments tied to LIBOR rates.

 

The Company is subject to liquidity risk in its operations, which could adversely affect its ability to fund various obligations.

 

Liquidity risk is the possibility of being unable to meet obligations as they come due or capitalize on growth opportunities as they arise because of an inability to liquidate assets or obtain adequate funding on a timely basis, at a reasonable cost and within acceptable risk tolerances. Liquidity is required to fund various obligations, including credit obligations to borrowers, loan originations, withdrawals by depositors, repayment of debt, dividends to shareholders, operating expenses and capital expenditures. Liquidity is derived primarily from retail deposit growth and earnings retention, principal and interest payments on loans and investment securities, net cash provided from operations and access to other funding. If the Company is unable to maintain adequate liquidity, then its business, financial condition and results of operations would be negatively affected.

 

Page | 16

 

 

Legislative or regulatory changes or actions could adversely impact the Company or the businesses in which it is engaged.

 

The Company and the Banks are subject to extensive state and federal regulation, supervision and legislation that govern almost all aspects of their operations. Laws and regulations may change from time to time and are primarily intended for the protection of consumers, depositors and the deposit insurance fund, and not to benefit the Company’s shareholders. The impact of any changes to laws and regulations or other actions by regulatory agencies may negatively impact the Company or its ability to increase the value of its business. Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of an institution, the classification of assets by the institution and the adequacy of an institution’s allowance for loan losses. Future regulatory changes or accounting pronouncements may increase the Company’s regulatory capital requirements or adversely affect its regulatory capital levels. Additionally, actions by regulatory agencies against the Company or the Banks could require the Company to devote significant time and resources to defending its business and may lead to penalties that materially affect the Company.

 

The Company relies heavily on its management and other key personnel, and the loss of any of them may adversely affect its operations.

 

The Company is and will continue to be dependent upon the services of its management team and other key personnel. Losing the services of one or more key members of the Company’s management team could adversely affect its operations.

 

The Company may be a defendant in a variety of litigation and other actions, which may have a material adverse effect on the Company’s financial condition and results of operations.

 

The Company and the Banks are regularly involved in a variety of litigation arising out of the normal course of business. The Company’s insurance may not cover all claims that may be asserted against it, and any claims asserted against it, regardless of merit or eventual outcome, may harm its reputation or cause the Company to incur unexpected expenses, which could be material in amount. Should the ultimate expenses, judgments or settlements in any litigation exceed the Company’s insurance coverage, they could have a material adverse effect on the Company’s financial condition and results of operations. In addition, the Company may not be able to obtain appropriate types or levels of insurance in the future, nor may it be able to obtain adequate replacement policies with acceptable terms, if at all.

 

If the Company cannot raise additional capital when needed, its ability to further expand its operations through organic growth or acquisitions could be materially impaired.

 

The Company is required by federal and state regulatory authorities to maintain specified levels of capital to support its operations. The Company may need to raise additional capital to support its current level of assets or its growth. The Company’s ability to raise additional capital will depend on conditions in the capital markets at that time, which are outside its control, and on its financial performance. The Company cannot assure that it will be able to raise additional capital in the future on terms acceptable to it or at all. If the Company cannot raise additional capital when needed, its ability to maintain its current level of assets or to expand its operations through organic growth or acquisitions could be materially limited.

 

Unauthorized disclosure of sensitive or confidential client or customer information, whether through a breach of computer systems or otherwise, could severely harm the Company’s business.

 

As part of its business, the Company collects, processes and retains sensitive and confidential client and customer information on behalf of itself and other third parties. Despite the security measures the Company has in place for its facilities and systems, and the security measures of its third party service providers, the Company may be vulnerable to security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming and/or human errors or other similar events. Any security breach involving the misappropriation, loss or other unauthorized disclosure of confidential customer information, whether by the Company or by its vendors, could severely damage the Company’s reputation, expose it to the risks of litigation and liability, disrupt the Company’s operations and have a material adverse effect on the Company’s business.

 

The Company’s information systems may experience an interruption or breach in security.

 

The Company relies heavily on communications and information systems to conduct its business and deliver its products. Any failure, interruption or breach in security of these systems could result in failures or disruptions in the Company’s customer relationship management, general ledger, deposit, loan and other systems. While the Company has policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of its information systems, there can be no assurance that any such failures, interruptions or security breaches of the Company’s information systems or its customers’ information or computer systems would not damage the Company’s reputation, result in a loss of customer business, subject the Company to additional regulatory scrutiny, or expose the Company to civil litigation and financial liability, any of which could have a material adverse effect on the Company’s financial condition and results of operations.

 

Page | 17

 

 

Cybersecurity incidents could disrupt business operations, result in the loss of critical and confidential information, and adversely impact our reputation and results of operations.

 

Global cybersecurity threats and incidents can range from uncoordinated individual attempts to gain unauthorized access to information technology (IT) systems to sophisticated and targeted measures known as advanced persistent threats, directed at the Company and/or its third party service providers. Although we employ comprehensive measures to prevent, detect, address and mitigate these threats (including access controls, employee training, data encryption, vulnerability assessments, continuous monitoring of our IT networks and systems and maintenance of backup and protective systems), cybersecurity incidents, depending on their nature and scope, could potentially result in the misappropriation, destruction, corruption or unavailability of critical data and confidential or proprietary information (our own or that of third parties) and the disruption of business operations. The potential consequences of a material cybersecurity incident include reputational damage, litigation with third parties and increased cybersecurity protection and remediation costs, which in turn could materially adversely affect our results of operations.

 

Environmental liability associated with commercial lending could result in losses.

 

In the course of its business, the Company may acquire, through foreclosure, properties securing loans it has originated or purchased that are in default. Particularly in commercial real estate lending, there is a risk that hazardous substances could be discovered on these properties. In this event, the Company might be required to remove these substances from the affected properties at the Company’s sole cost and expense. The cost of this removal could substantially exceed the value of affected properties. The Company may not have adequate remedies against the prior owner or other responsible parties and could find it difficult or impossible to sell the affected properties. These events could have an adverse effect on the Company’s business, results of operations and financial condition.

 

The Company depends upon the accuracy and completeness of information about customers.

 

In deciding whether to extend credit to customers, the Company relies on information provided to it by its customers, including financial statements and other financial information. The Company may also rely on representations of customers as to the accuracy and completeness of that information and on reports of independent auditors on financial statements. The Company’s financial condition and results of operations could be negatively impacted to the extent that the Company extends credit in reliance on financial statements that do not comply with generally accepted accounting principles or that are misleading or other information provided by customers that is false or misleading.

 

The Company operates in a highly competitive industry and market area.

 

The Company faces substantial competition in all areas of its operations from a variety of different competitors, many of which are larger and may have more financial resources. Such competitors primarily include national and regional banks within the various markets where the Company operates, as well as internet banks and other financial technology companies. The Company also faces competition from many other types of financial institutions, including savings and loan associations, credit unions, finance companies, brokerage firms, insurance companies and other financial intermediaries. The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. The Company competes with these institutions both in attracting deposits and in making new loans. Technology has lowered barriers to entry into the market and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Many of the Company’s competitors have fewer regulatory constraints and may have lower cost structures, such as credit unions that are not subject to federal income tax. Due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services than the Company can.

 

Severe weather, natural disasters, acts of war or terrorism and other external events could significantly impact the Company’s business.

 

Severe weather, natural disasters, acts of war or terrorism, risks posed by an outbreak of a widespread epidemic or pandemic of disease (or widespread fear thereof), including the impact of the novel coronavirus outbreak, COVID-19, and other adverse external events could have a significant impact on the Company’s ability to conduct business. Such events could affect the stability of the Company’s deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause the Company to incur additional expenses.

 

The effects of the novel coronavirus outbreak, COVID-19, on the financial condition of the Banks' borrowers are currently not completely known. As a result of the outbreak, it is possible that certain of the Banks' borrowers may be negatively impacted. The Banks may begin to experience requests for payment extensions and, ultimately, some borrowers may be unable to make payments in accordance with the terms of their loan agreements, which in turn may have a negative effect on the Company's financial condition and results of operations.

 

Page | 18

 

 

The Company relies on dividends from the Banks for most of its revenue.

 

The Company is a separate and distinct legal entity from the Banks. It receives substantially all of its revenue from dividends from the Banks. These dividends are the principal source of funds to pay cash dividends on the Company’s common stock. Various federal and/or state laws and regulations limit the amount of dividends that the Banks may pay to the Company. If the Banks are unable to pay dividends to the Company, the Company may not be able to pay cash dividends on its common stock. The earnings of the Banks have been the principal source of funds to pay cash dividends to shareholders. Over the long-term, cash dividends to shareholders are dependent upon earnings, as well as capital requirements, regulatory restraints and other factors affecting the Company and the Banks.

 

Additional risks and uncertainties could have a negative effect on financial performance.

 

Additional factors could have a negative effect on the financial performance of the Company and the Company’s common stock. Some of these factors are financial market conditions, changes in financial accounting and reporting standards, new litigation or changes in existing litigation, regulatory actions and losses.

 

Item 1B.

Unresolved Staff Comments

 

None.

 

Item 2.

Properties

 

The Company’s headquarters are located at 109 East Division, Sparta, Michigan 49345. The headquarters location is owned by the Company and is not subject to any mortgage.

 

28 of the Company’s 29 branch locations are designed for use and operation as a bank, are well maintained, and are suitable for current operations. One location is a leased loan production office. The Company’s management believes all offices are adequately covered by property insurance. Of the 29 branch locations, 27 are owned and 2 are leased. Below is a comprehensive listing of the Company’s branch locations:

 

Almont

5515 Van Dyke Road

Almont, Michigan

Owned

Armada

72890 North Avenue

Armada, Michigan

Owned

Attica

4515 Imlay City Road

Attica, Michigan

Owned

Capac

206 North Main Street

Capac, Michigan

Owned

Cedar Springs

4170 17 Mile Road

Cedar Springs, Michigan

Owned

Comstock Park

5050 Alpine Avenue NW

Comstock Park, Michigan

Owned

Coopersville

661 West Randall

Coopersville, Michigan

Owned

Deerfield

30 West Burnside Road

Fostoria, Michigan

Owned

Elba

5508 Davison Road

Lapeer, Michigan

Owned

Emmett

3177 Main Street

Emmett, Michigan

Owned

Fremont

1423 West Main Street

Fremont, Michigan

Owned

Grand Rapids

330 Market Avenue SW

Grand Rapids, Michigan

Owned

Grant

10 West Main Street

Grant, Michigan

Owned

Imlay City

1875 South Cedar Street

Imlay City, Michigan

Owned

Kent City

450 West Muskegon

Kent City, Michigan

Owned

Lapeer – Main

83 West Nepessing Street

Lapeer, Michigan

Owned

Lapeer – South

637 South Main Street

Lapeer, Michigan

Owned

Loan Production Office

609 A, Huron Avenue

Port Huron, Michigan

Leased

Memphis

81111 Main Street

Memphis, Michigan

Owned

Metamora

3414 South Lapeer Street

Metamora, Michigan

Owned

Muskegon

5475 East Apple Avenue

Muskegon, Michigan

Owned

Newaygo

246 West River Valley Drive

Newaygo, Michigan

Owned

Ravenna

3069 Slocum Road

Ravenna, Michigan

Owned

Rockford – Downtown

890 East Division Street NE

Rockford, Michigan

Owned

Rockford – Belding Road

6795 Courtland Drive

Rockford, Michigan

Owned

Sparta – Appletree

440 West Division

Sparta, Michigan

Leased

Sparta – Main

109 East Division

Sparta, Michigan

Owned

Wealth Management Center

1175 South Lapeer Road

Lapeer, Michigan

Owned

Yale

3 North Main Street

Yale, Michigan

Owned

 

Page | 19

 

 

Item 3.

Legal Proceedings

As of December 31, 2019, there were no significant pending legal proceedings to which the Company or the Banks is a party or to which any of their properties were subject, except for legal proceedings arising in the ordinary course of business. In the opinion of management, pending legal proceedings will not have a material adverse effect on the consolidated financial condition of the Company.

 

Item 4.

Mine Safety Disclosures

Not applicable.

 

PART II

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

STOCK INFORMATION

 

The Company’s common stock is traded on the NASDAQ Capital Market under the symbol COFS. The range of high and low bid prices for shares of common stock for each quarterly period during the past two years is as follows:

 

 

 

2019

 

 

2018

 

 

 

Low

 

 

High

 

 

Low

 

 

High

 

First Quarter

 

$

24.50

 

 

$

26.05

 

 

$

20.41

 

 

$

23.14

 

Second Quarter

 

 

24.85

 

 

 

30.00

 

 

 

22.81

 

 

 

26.50

 

Third Quarter

 

 

28.65

 

 

 

31.75

 

 

 

26.15

 

 

 

29.99

 

Fourth Quarter

 

 

28.55

 

 

 

32.99

 

 

 

24.75

 

 

 

27.95

 

 

The prices listed above are over-the-counter market quotations reported to ChoiceOne by its market makers. The over-the-counter market quotations reflect inter-dealer prices without retail markup, markdown or commission and may not necessarily represent actual transactions. As of February 28, 2020, the closing price for shares of ChoiceOne common stock was $33.00.

 

As of February 28, 2020, there were 1,119 shareholders of record of ChoiceOne common stock.

 

The following table summarizes the quarterly cash dividends declared per share of common stock during 2019 and 2018:

 

 

 

2019

 

 

2018

 

First Quarter

 

$

0.20

 

 

$

0.17

 

Second Quarter

 

 

0.20

 

 

 

0.18

 

Third Quarter

 

 

0.80

 

 

 

0.18

 

Fourth Quarter

 

 

0.20

 

 

 

0.18

 

Total

 

$

1.40

 

 

$

0.71

 

 

ChoiceOne’s principal source of funds to pay cash dividends is the earnings and dividends paid by the Banks. The Banks are restricted in their ability to pay cash dividends under current banking regulations. See Note 20 to the consolidated financial statements for a description of these restrictions. Based on information presently available, management expects ChoiceOne to declare and pay regular quarterly cash dividends in 2020, although the amount of the quarterly dividends will be dependent on market conditions and ChoiceOne’s requirements for cash and capital, among other things.

 

On October 23, 2019, the Company issued 665 shares of common stock to its directors pursuant to the Directors’ Stock Purchase Plan for an aggregate cash price of $19,000. The Company relied on the exemption contained in Section 4(6) of the Securities Act of 1933 in connection with these sales.

 

Information regarding the Company’s equity compensation plans may be found in Item 12 of this report and is here incorporated by reference.

 

ISSUER PURCHASES OF EQUITY SECURITIES

 

The following table provides information regarding ChoiceOne’s purchases of its common stock during the quarter ended December 31, 2019.

 

Page | 20

 

 

Period

 

Total
Number
of Shares
Purchased

 

 

Average
Price Paid
per Share

 

 

Total Number
of Shares
Purchased as
Part of a
Publicly
Announced Plan

 

 

Maximum
Number of
Shares that
May Yet be
Purchased
Under the Plan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

October 1 - October 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee Transactions

 

 

 

 

$

 

 

 

 

 

 

 

 

Repurchase Plan

 

 

 

 

$

 

 

 

 

 

 

68,650

 

November 1 - November 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee Transactions (1)

 

 

2,432

 

 

$

30.00

 

 

 

2,432

 

 

 

 

 

Repurchase Plan

 

 

 

 

$

 

 

 

 

 

 

66,218

 

December 1 - December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee Transactions

 

 

 

 

$

 

 

 

 

 

 

 

 

Repurchase Plan

 

 

 

 

$

 

 

 

 

 

 

66,218

 

 

(1) Shares submitted for the purchase of stock options.  

Page | 21

 

 

Item 6.

Selected Financial Data

 

ChoiceOne Financial Services, Inc. 

 

SELECTED FINANCIAL DATA

 

(Dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

For the year

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

27,773

 

 

$

22,064

 

 

$

20,563

 

 

$

19,343

 

 

$

18,362

 

Provision for loan losses

 

 

 

 

 

35

 

 

 

485

 

 

 

 

 

 

100

 

Noninterest income

 

 

9,168

 

 

 

6,920

 

 

 

7,811

 

 

 

7,881

 

 

 

7,702

 

Noninterest expense

 

 

28,476

 

 

 

20,461

 

 

 

19,334

 

 

 

18,972

 

 

 

18,276

 

Income before income taxes

 

 

8,465

 

 

 

8,488

 

 

 

8,555

 

 

 

8,252

 

 

 

7,688

 

Income tax expense

 

 

1,295

 

 

 

1,155

 

 

 

2,387

 

 

 

2,162

 

 

 

1,945

 

Net income

 

 

7,171

 

 

 

7,333

 

 

 

6,168

 

 

 

6,090

 

 

 

5,743

 

Cash dividends declared

 

 

5,806

 

 

 

2,572

 

 

 

2,317

 

 

 

2,231

 

 

 

2,170

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per share *

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings

 

$

1.58

 

 

$

2.03

 

 

$

1.70

 

 

$

1.68

 

 

$

1.59

 

Diluted earnings

 

 

1.58

 

 

 

2.02

 

 

 

1.70

 

 

 

1.68

 

 

 

1.58

 

Cash dividends declared

 

 

1.40

 

 

 

0.71

 

 

 

0.64

 

 

 

0.62

 

 

 

0.60

 

Shareholders’ equity (at year end)

 

 

26.52

 

 

 

22.25

 

 

 

21.14

 

 

 

19.73

 

 

 

19.22

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average for the year

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities

 

$

210,492

 

 

$

170,461

 

 

$

177,125

 

 

$

173,119

 

 

$

152,361

 

Gross loans

 

 

534,646

 

 

 

404,494

 

 

 

388,609

 

 

 

357,880

 

 

 

342,382

 

Deposits

 

 

710,419

 

 

 

543,973

 

 

 

525,445

 

 

 

479,670

 

 

 

443,972

 

Federal Home Loan Bank advances

 

 

18,980

 

 

 

12,002

 

 

 

22,830

 

 

 

26,049

 

 

 

19,989

 

Shareholders’ equity

 

 

110,610

 

 

 

76,801

 

 

 

75,026

 

 

 

72,134

 

 

 

68,439

 

Assets

 

 

845,851

 

 

 

637,790

 

 

 

629,748

 

 

 

586,299

 

 

 

551,762

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At year end

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities

 

$

348,888

 

 

$

173,016

 

 

$

159,158

 

 

$

177,955

 

 

$

163,323

 

Gross loans

 

 

802,048

 

 

 

409,073

 

 

 

398,785

 

 

 

369,000

 

 

 

349,304

 

Deposits

 

 

1,154,602

 

 

 

577,015

 

 

 

539,853

 

 

 

512,386

 

 

 

474,696

 

Federal Home Loan Bank advances

 

 

33,198

 

 

 

5,233

 

 

 

20,268

 

 

 

12,301

 

 

 

11,332

 

Shareholders’ equity

 

 

192,139

 

 

 

80,477

 

 

 

76,550

 

 

 

71,698

 

 

 

69,842

 

Assets

 

 

1,386,128

 

 

 

670,544

 

 

 

646,544

 

 

 

607,371

 

 

 

567,746

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selected financial ratios

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on average assets

 

 

0.85

%

 

 

1.15

%

 

 

0.98

%

 

 

1.04

%

 

 

1.04

%

Return on average shareholders’ equity

 

 

6.48

 

 

 

9.55

 

 

 

8.22

 

 

 

8.44

 

 

 

8.39

 

Cash dividend payout as a percentage of net income

 

 

80.97

 

 

 

35.08

 

 

 

37.57

 

 

 

36.63

 

 

 

37.79

 

Shareholders’ equity to assets (at year end)

 

 

13.86

 

 

 

12.00

 

 

 

11.84

 

 

 

11.80

 

 

 

12.30

 

 

* Per share amounts have been adjusted for the 5% stock dividends paid in 2017 and 2018.

 

Note - All 2019 financial data includes the impact of the merger with County, which was effective as of October 1, 2019.

 

Page | 22

 

 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion is designed to provide a review of the consolidated financial condition and results of operations of ChoiceOne, and its wholly-owned subsidiaries. This discussion should be read in conjunction with the consolidated financial statements and related footnotes.

 

Explanatory Note

 

On October 1, 2019, ChoiceOne completed the merger of County Bank Corp (“County”) with and into ChoiceOne with ChoiceOne surviving the merger. Accordingly, the reported consolidated financial condition and operating results as of and for the year ended December 31, 2019 include the impact of the merger, which was effective as of October 1, 2019. For additional details regarding the merger with County, see Note 21 (Business Combination) of the Notes to the Consolidated Financial Statements included in Item 8 of this report.

 

RESULTS OF OPERATIONS

 

Summary

ChoiceOne’s net income for 2019 was $7,171,000, compared to $7,333,000 in 2018. Excluding $1,769,000 in merger-related expenses, after tax, net income for 2019 amounted to $8,940,000. In this report, the term merger-related expenses includes expenses related to the merger with County and the pending merger with Community Shores Bank Corporation.

 

Total assets have grown to $1.4 billion as of December 31, 2019 compared to $671 million as of December 31, 2018; the increase was primarily related to the merger with County. Net loans grew $394 million from December 31, 2018 to December 31, 2019. This loan growth coupled with a larger securities portfolio helped total interest income for 2019 to grow $7,948,000 compared to the prior year. All loan growth was attributed to the merger with County. Full year and fourth quarter 2019 interest income on loans included $75,000 of accretion of the discount recorded on the Lakestone loans acquired in the merger with County. ChoiceOne also saw deposit growth during 2019 of $578 million. ChoiceOne Bank experienced $33 million of growth in local deposits which was offset by a reduction of $32 million of brokered deposits, while the remainder was attributed to the merger with County. The interest cost of deposits and other funding increased by $2,239,000 in 2019 compared to 2018; $1,119,000 of the increase was related to ChoiceOne Bank funds while the remainder was attributed to Lakestone.

 

Total noninterest income increased $2,248,000 in 2019 compared to the prior year. Gains on sales of loans increased due to lower interest rates encouraging refinance activity and a favorable housing market in ChoiceOne’s market areas. Customer service charges increased largely due to the impact of the merger with County in the fourth quarter of 2019.

 

Total noninterest expense increased $8,015,000 in 2019 compared to 2018. Much of the increase was caused by merger related expenses and Lakestone Bank’s expenses included in the fourth quarter of 2019. The increase in salaries and benefits expense was related to annual wage increases and the addition of Lakestone in the fourth quarter of 2019. Other noninterest expenses were also higher in the fourth quarter and twelve months ended December 31, 2019 compared to the same periods in the prior year due to growth in the related costs and the addition of Lakestone in the fourth quarter of 2019.

 

Net income for 2018 was $7,333,000, which represented an increase of $1,165,000 or 19% from 2017. Growth in net income resulted primarily from an increase in net interest income in 2018 compared to 2017, a reduction of tax expense related to the Tax Cut and Jobs Act and a decline in the provision for loan losses. This impact was partially offset by a reduction in noninterest income and growth in noninterest expense in 2018 compared to the prior year. The benefit of $7.3 million of growth in average earning assets in 2018 compared to 2017 was aided by an 11 basis point increase in ChoiceOne’s net interest spread. Net loan recoveries of $61,000 in 2018 allowed ChoiceOne to take a minimal provision for loan losses, compared to net charge-offs of $185,000 in 2017 which necessitated a provision expense of $485,000. A decline in noninterest income of $891,000 in 2018 compared to 2017 was primarily due to a nonrecurring gain of $908,000 on the sale of a portion of ChoiceOne’s investment book of business that occurred in the fourth quarter of 2017. The increase of $1,127,000 in noninterest expense in 2018 compared to the prior year was primarily caused by higher salaries and benefits expense and other noninterest expense.

 

Dividends
Cash dividends of $5,806,000 or $1.40 per common share were declared in 2019, compared to $2,572,000 or $0.71 per common share in 2018 and $2,317,000 or $0.64 per common share in 2017. Dividends in 2019 included a special dividend of $0.60 per share paid on September 30, 2019 in connection with the merger with County. The dividend yield on ChoiceOne’s common stock was 4.38% as of the end of 2019, compared to 2.84% in 2018, and 2.86% in 2017. The cash dividend payout as a percentage of net income was 81% in 2019, compared to 35% in 2018 and 38% in 2017. In addition, a 5% stock dividend was paid on May 31, 2018, which caused $4,335,000 to be transferred from retained earnings to paid-in capital. A 5% stock dividend was also paid on May 31, 2017 and produced a transfer of $3,779,000 from retained earnings to paid-in capital. 

 

Page | 23

 

 

Table 1 – Average Balances and Tax-Equivalent Interest Rates

 

 

 

Year ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

(Dollars in thousands)

 

Average

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

 

 

Balance

 

 

 

Interest

 

 

 

Rate

 

 

 

Balance

 

 

 

Interest

 

 

 

Rate

 

 

 

Balance

 

 

 

Interest

 

 

 

Rate

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans (1) (2)

 

$

534,646

 

 

$

26,791

 

 

 

5.01

%

 

$

404,494

 

 

$

20,038

 

 

 

4.95

%

 

$

388,609

 

 

$

17,974

 

 

 

4.63

%

Taxable securities (3)

 

 

152,094

 

 

 

3,955

 

 

 

2.60

 

 

 

114,570

 

 

 

2,896

 

 

 

2.53

 

 

 

122,150

 

 

 

2,371

 

 

 

1.94

 

Nontaxable securities (1)

 

 

58,398

 

 

 

1,867

 

 

 

3.20

 

 

 

55,891

 

 

 

1,858

 

 

 

3.32

 

 

 

54,975

 

 

 

2,142

 

 

 

3.90

 

Other

 

 

14,992

 

 

 

268

 

 

 

1.79

 

 

 

7,504

 

 

 

131

 

 

 

1.74

 

 

 

9,465

 

 

 

102

 

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