EDGAR 10-K Filing

Company CIK: 803164
Filing Year: 2025
Filename: 803164_10-K_2025_0000950170-25-036839.json

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ITEM 1. BUSINESS
Item 1. Business
General
ChoiceOne Financial Services, Inc. (the “Company”) 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, Valley Ridge Financial Corp., a one-bank holding company for Valley Ridge Bank (“VRB”), merged with and into the Company. In December 2006, VRB was consolidated into ChoiceOne Bank. Effective October 1, 2019, County Bank Corp. ("County"), a one-bank holding company for Lakestone Bank & Trust (“Lakestone”), merged with and into the Company. Lakestone was consolidated into ChoiceOne Bank in May 2020. On July 1, 2020, Community Shores Bank Corporation ("Community Shores"), a one bank holding company for Community Shores Bank, merged with and into the Company. Community Shores Bank was consolidated into ChoiceOne Bank in October 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"). On July 18, 2023, the Company organized 109 Technologies, LLC as a wholly owned subsidiary of the Company with the intent to own intellectual property for a fintech product licensed to third party banks and bank holding companies. Effective March 1, 2025, Fentura Financial, Inc., a one bank holding company for The State Bank, merged with and into the Company.
The Company's business is primarily concentrated in a single industry segment, banking. ChoiceOne Bank (referred to as the “Bank”) is a full-service banking institution that offers 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 commercial enterprises and individuals. Commercial lending covers such categories as business, industry, agricultural, construction, inventory, and real estate. The Bank’s consumer loan departments make direct and indirect loans to consumers and purchasers of residential and real property. In addition, the Bank offers trust and wealth management services. No material part of the business of the Company or the Bank is dependent upon a single customer or very few customers, the loss of which would have a materially adverse effect on the Company.
The Bank’s primary market areas lie within Kent, Muskegon, Newaygo, and Ottawa counties in western Michigan, and Lapeer, Macomb, and St. Clair counties in southeastern Michigan in the communities where the Bank's respective offices are located. The Bank serves these markets through 29 full-service offices and five loan production offices. The Company and the Bank have no foreign assets or income.
At December 31, 2024, the Company had consolidated total assets of $2.7 billion, net loans of $1.5 billion, total deposits excluding brokered deposits of $2.2 billion and total shareholders' equity of $260.4 million. For the year ended December 31, 2024, the Company recognized consolidated net income of $26.7 million. The principal source of revenue for the Company and the Bank is interest and fees on loans. On a consolidated basis, interest and fees on loans accounted for 64%, 60%, and 59% of total revenues in 2024, 2023, and 2022, respectively. Interest on securities accounted for 19%, 24%, and 24% of total revenues in 2024, 2023, and 2022, respectively. For more information about the Company's financial condition and results of operations, see the consolidated financial statements and related notes included in Item 8 of this report.
Competition
The Bank’s 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 Bank’s primary market areas. The Bank also competes 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 Bank. Many of these competitors have substantially greater resources than the Bank. 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.
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 Bank and to commit resources to support it.
The Bank is chartered under state law and is 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 Bank is a member of the Federal Reserve System and is also subject to regulation by the Federal Reserve Board. The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (the “FDIC”) to the maximum extent provided by law. The Bank is a member of the Federal Home Loan Bank system, which provides certain advantages to the Bank, including favorable borrowing rates for certain funds.
The Company is a legal entity separate and distinct from the Bank. The Company's primary source of funds available to pay dividends to shareholders is dividends paid to it by the Bank. There are legal limitations on the extent to which the Bank can lend or otherwise supply funds to the Company. In addition, payment of dividends to the Company by the Bank is subject to various state and federal regulatory limitations.
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 Bank are subject to regulatory “risk-based” capital guidelines. Failure to meet these capital guidelines could subject the Company or the Bank 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 Bank 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 Bank and to commit resources to support the Bank. In addition, if DIFS deems the Bank's capital to be impaired, DIFS may require the Bank to restore its capital by a special assessment on the Company as the Bank's 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 Bank's 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 Bank's capital.
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 a common equity Tier I risk-based capital ratio, Tier 1 risk-based and total risk-based capital ratio measures and a leverage capital ratio measure. In addition, a capital conservation buffer is required. 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.
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. The Company has elected to be a financial holding company.
In order for the Company to maintain financial holding company status, the Bank must be categorized as "well-capitalized" and "well-managed" under applicable regulatory guidelines. If the Company or the Bank 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 Bank. The Bank was categorized as "well-capitalized" and "well-managed" as of December 31, 2024.
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.
Michigan banking laws do not significantly restrict interstate banking. The Michigan Banking Code permits, in appropriate circumstances and with the approval of DIFS, (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 the Bank was "Satisfactory" as of its most recent examination.
Effects of Compliance With Environmental Regulations
The nature of the business of the Bank is such that it holds 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 Bank, 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, 2025, the Company, on a consolidated basis, employed 392 employees, of which 336 were full-time employees. Our employees are not represented by any collective bargaining group. Management considers its employee relations to be good.
Available Information
Our internet address is www.choiceone.bank. We make available free of charge through this website our annual report on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K and amendments to those reports as soon as reasonably practicable after filing or furnishing such reports with the Securities and Exchange Commission. The information on our website address is not incorporated by reference into this report, and the information on the website is not part of this report.
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 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. Average balances used in statistical information are calculated using daily averages, unless otherwise specified.
The Company did not hold investment securities from any one issuer at December 31, 2024, 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 available for sale and amortized cost for held to maturity securities as of December 31, 2024, a schedule of maturities of securities as of December 31, 2024, and the weighted average yields of securities as of December 31, 2024. Callable securities in the money are presumed called and matured at the callable date.
Available for Sale Securities maturing within:
Fair Value
Less than
1 Year -
5 Years -
More than
at December 31,
(Dollars in thousands)
1 Year
5 Years
10 Years
10 Years
U.S. Government and federal agency
$
-
$
-
$
-
$
-
$
-
U.S. Treasury notes and bonds
-
80,502
-
-
80,502
State and municipal
1,248
16,732
74,306
135,950
228,236
Corporate
-
-
-
Asset-backed securities
-
6,702
2,495
-
9,197
Total debt securities
1,248
103,936
77,013
135,950
318,147
Mortgage-backed securities
3,420
81,629
63,212
12,709
160,970
Total Available for Sale
$
4,668
$
185,565
$
140,225
$
148,659
$
479,117
Available for Sale 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
-
%
-
%
-
%
-
%
-
%
U.S. Treasury notes and bonds
-
1.16
-
-
1.16
State and municipal
2.68
2.63
2.46
2.51
2.51
Corporate
-
-
3.75
-
3.75
Asset-backed securities
-
5.31
5.42
-
5.34
Mortgage-backed securities
3.60
3.30
2.46
2.03
2.87
Security yields are shown before the impact of interest rate swaps. ChoiceOne holds pay fixed, receive variable swaps with a notional value of $201.0 million which effect the interest earned on securities. Further details can be found in Note 8 - Derivatives and Hedging Activities.
Held to Maturity Securities maturing within:
Amortized Cost
Less than
1 Year -
5 Years -
More than
at December 31,
(Dollars in thousands)
1 Year
5 Years
10 Years
10 Years
U.S. Government and federal agency
$
-
$
2,978
$
-
$
-
$
2,978
U.S. Treasury notes and bonds
-
-
-
-
-
State and municipal
2,517
19,999
102,635
71,359
196,510
Corporate
-
-
20,495
-
20,495
Asset-backed securities
-
-
-
Total debt securities
2,745
22,977
123,130
71,359
220,211
Mortgage-backed securities
5,300
72,804
96,219
-
174,323
Total Held to Maturity
$
8,045
$
95,781
$
219,349
$
71,359
$
394,534
Held to Maturity 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
-
%
1.61
%
-
%
-
%
1.61
%
U.S. Treasury notes and bonds
-
-
-
-
-
State and municipal
3.53
1.99
2.09
2.48
2.24
Corporate
-
-
4.09
-
4.09
Asset-backed securities
1.10
-
-
-
1.10
Mortgage-backed securities
5.03
3.21
2.24
-
2.73
Weighted average yields are calculated based on the fair value of securities available for sale and amortized cost of securities held to maturity which are denoted in the table above. Weighted average yields for tax-exempt securities is computed on a fully tax-equivalent basis at an incremental tax rate of 21% for 2024.
Maturities and Sensitivities of Loans to Changes in Interest Rates
The following schedule presents the maturities of loans as of December 31, 2024. Loans are also classified according to the sensitivity to changes in interest rates as of December 31, 2024. Note maturity dates are different than repricing dates used on call report.
(Dollars in thousands)
In one year
After one year
After five years
After fifteen
or less
through five years
through fifteen years
years
Total
Agricultural
$
13,774
$
16,839
$
14,617
$
2,991
$
48,221
Commercial and industrial
67,117
100,873
59,173
1,093
228,256
Commercial real estate
104,382
579,873
207,700
9,175
901,130
Construction real estate
16,156
-
17,042
Consumer
1,354
16,971
8,980
2,107
29,412
Residential real estate
1,325
12,939
117,188
150,249
281,701
Loans to other financial institutions
39,878
-
-
-
39,878
Totals
$
243,986
$
727,858
$
407,658
$
166,138
$
1,545,640
(Dollars in thousands)
Fixed or
Floating or
predetermined rates
variable rates
Total
Loans maturing after one year:
Agricultural
$
33,260
$
1,187
$
34,447
Commercial and industrial
122,686
38,453
161,139
Commercial real estate
593,322
203,426
796,748
Construction real estate
-
Consumer
27,591
28,058
Residential real estate
134,340
146,036
280,376
Loans to other financial institutions
-
-
-
Totals
$
912,085
$
389,569
$
1,301,654
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.
The following table reflects the composition of our allowance for credit losses, non-accrual loans, and nonperforming loans as a percentage of total loans represented by each class of loans as of the dates indicated:
(Dollars in thousands)
Agricultural
Commercial and industrial
Consumer
Commercial real estate
Construction real estate
Residential real estate
Loans to other financial institutions
Totals
Loans
December 31, 2024
$
48,221
$
228,256
$
29,412
$
901,130
$
17,042
$
281,701
$
39,878
$
1,545,640
Allowance for credit losses year ended December 31, 2024
$
$
2,260
$
$
9,460
$
$
3,890
$
$
16,552
Allowance as a percentage of loan category
0.19
%
0.99
%
2.49
%
1.05
%
0.35
%
1.38
%
0.15
%
1.07
%
Nonaccrual loans year ended December 31, 2024
$
-
$
-
$
$
-
$
$
3,467
$
-
$
3,704
Nonaccrual as a percentage of loan category
0.00
%
0.00
%
0.03
%
0.00
%
1.34
%
1.23
%
0.00
%
0.24
%
Allowance as a percentage of nonaccrual loans
NA
NA
9162.50
%
NA
25.76
%
112.20
%
NA
446.87
%
Nonperforming loans year ended December 31, 2024
$
-
$
-
$
$
-
$
$
3,467
$
-
$
3,704
Nonperforming loans as a percentage of loan category
0.00
%
0.00
%
0.03
%
0.00
%
1.34
%
1.23
%
0.00
%
0.24
%
Net deposit charge-offs during the year ended December 31, 2024
$
-
$
-
$
(237
)
$
-
$
-
$
-
$
-
$
(237
)
Net loan charge-offs during the year ended December 31, 2024
$
-
$
$
(189
)
$
-
$
-
$
(15
)
$
-
$
(196
)
Net charge-offs during the year ended December 31, 2024
$
-
$
$
(426
)
$
-
$
-
$
(15
)
$
-
$
(433
)
Net charge-offs during the year to average loans outstanding
0.00
%
0.00
%
-0.03
%
0.00
%
0.00
%
0.00
%
0.00
%
-0.03
%
(Dollars in thousands)
Agricultural
Commercial and industrial
Consumer
Commercial real estate
Construction real estate
Residential real estate
Loans to other financial institutions
Totals
Loans
December 31, 2023
$
49,210
$
229,915
$
36,541
$
786,921
$
20,936
$
267,730
$
19,400
$
1,410,653
Allowance for loan losses year ended December 31, 2023
$
$
2,216
$
$
8,820
$
$
3,644
$
$
15,685
Allowance as a percentage of loan category
0.19
%
0.96
%
2.25
%
1.12
%
0.28
%
1.36
%
0.15
%
1.11
%
Nonaccrual loans year ended December 31, 2023
$
-
$
$
-
$
-
$
-
$
1,722
$
-
$
1,723
Nonaccrual as a percentage of loan category
0.00
%
0.00
%
0.00
%
0.00
%
0.00
%
0.64
%
0.00
%
0.12
%
Allowance as a percentage of nonaccrual loans
NA
NA
NA
NA
NA
211.61
%
NA
910.33
%
Nonperforming loans year ended December 31, 2023
$
$
-
$
-
$
-
$
1,851
$
-
$
1,912
Nonperforming loans as a percentage of loan category
0.00
%
0.03
%
0.00
%
0.00
%
0.00
%
0.69
%
0.00
%
0.14
%
Net deposit charge-offs during the year ended December 31, 2023
$
-
$
-
$
(226
)
$
-
$
-
$
-
$
-
$
(226
)
Net loan charge-offs during the year ended December 31, 2023
$
-
$
(92
)
$
(45
)
$
$
-
$
(14
)
$
-
$
(138
)
Net charge-offs during the year ended December 31, 2023
$
-
$
(92
)
$
(271
)
$
$
-
$
(14
)
$
-
$
(364
)
Net charge-offs during the year to average loans outstanding
0.00
%
-0.01
%
-0.02
%
0.00
%
0.00
%
0.00
%
0.00
%
-0.03
%
NA - No non-accrual loans in the loan category.
Additions to the allowance for credit losses charged to operations during the periods shown were based on management’s judgment after considering the factors laid out in Note 1 “Allowance for Credit Losses” to the consolidated financial statements. ChoiceOne
adopted the Financial Accounting Standards Board (the "FASB") Account Standards Update 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, commonly referred to as "CECL" effective January 1, 2023 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts are reported in accordance with the incurred loss accounting standard. The transition adjustment of the CECL adoption included an increase in the ACL of $7.2 million. The evaluation of the loan portfolio is based upon various risk factors such as the financial condition of the borrower, the value of collateral, reasonable and supportable forecasts, and other considerations, which, in the opinion of management, deserve current recognition in estimating credit losses.
The following schedule presents an allocation of the allowance for credit losses to the various loan categories as of the years ended December 31:
Agricultural
$
$
$
Commercial and industrial
2,260
2,216
1,361
Commercial real estate
9,460
8,820
4,822
Construction real estate
Residential real estate
3,890
3,644
Consumer
Loans to other financial institutions
-
Unallocated
-
-
Total allowance for loan losses
$
16,552
$
15,685
$
7,619
Deposits
The following schedule presents the average deposit balances by category and the average rates paid thereon for the respective years:
(Dollars in thousands)
Average Balance
Average Rate
Average Balance
Average Rate
Average Balance
Average Rate
Noninterest-bearing demand
$
519,709
-
%
$
546,926
-
%
$
582,992
-
%
Interest-bearing demand and money market deposits
896,060
1.45
852,927
1.18
902,090
0.39
Savings
334,310
0.85
370,074
0.43
452,542
0.16
Certificates of deposit
415,626
4.38
342,043
3.46
196,166
0.83
Total
$
2,165,705
1.57
%
$
2,111,970
1.11
%
$
2,133,790
0.27
%
Amount of time deposits in uninsured accounts as of December 31, 2024 (Dollars in thousands)
Maturing in less than 3 months
$
66,016
Maturing in 3 to 6 months
65,320
Maturing in 6 to 12 months
74,396
Maturing in more than 12 months
4,791
Total uninsured time deposits
$
210,523
At December 31, 2024, the aggregate balance of all deposits exceeding the FDIC insured limit of $250,000 for individual and $500,000 for joint accounts totaled $833.2 million, or 37.6% of total deposits, compared to $769.7 million, or 36.3% of total deposits and $823.2 million, or 38.9% of total deposits at December 31, 2023 and 2022, respectively. Certificate of Deposit Account Registry Service ("CDARs") and Insured Cash Sweep ("ICS") deposits are excluded from the above table as these deposits are 100% guaranteed.
Core deposits, which we define as insured branch deposits less certificates of deposit, totaled $1.1 billion or 51.2% of total deposits at December 31, 2024.
At December 31, 2024, the Bank had no material foreign deposits.
Return on Equity and Assets
The following schedule presents certain financial ratios of the Company for the years ended December 31:
Return on assets (net income divided by average total assets)
1.00
%
0.85
%
1.00
%
Return on equity (net income divided by average equity)
11.80
%
12.00
%
13.25
%
Dividend payout ratio (dividends declared per share divided by net income per share)
33.72
%
37.21
%
32.06
%
Equity to assets ratio (average equity divided by average total assets)
8.49
%
7.11
%
7.52
%

---

ITEM 1A. RISK FACTORS
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.
Risks Related to the Company’s Business
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, public health crisis, and other external events.
The Company’s allowance for credit losses may not be adequate to cover actual credit 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 credit losses based on a number of factors. If its assumptions are wrong, the allowance for credit 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 credit losses cannot now be determined and may exceed the amounts of past provisions for credit losses. Federal and state banking regulators, as an integral part of their supervisory function, periodically review the allowance for credit losses. These regulatory agencies may require the Company to increase its allowance for credit 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 credit losses could have a negative effect on the Company’s regulatory capital ratios, net income, financial condition and results of operations.
General economic conditions in the state of Michigan could have a material adverse effect on the Company’s results of operations or financial condition.
The Company is affected by general economic conditions in the United States, although most directly within Michigan. An economic downturn within Michigan caused by inflation, recession or a recessionary environment, trade tariffs, unemployment, changes in financial or capital markets or other factors, 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.
We may be adversely affected by risks associated with future mergers and acquisitions, including execution risk, which could disrupt our business and dilute shareholder value.
We plan to grow our business both organically and through mergers and acquisitions. We periodically evaluate merger and acquisition opportunities and conduct due diligence activities related to possible transactions with other financial institutions and financial services companies. As a result, we may engage in discussions or negotiations that, if they were to result in a transaction, could have a material
effect on our operating results and financial condition. Our merger and acquisition activities could be material and could require us to use a substantial amount of common stock, preferred stock, cash, other liquid assets, and/or incur debt. Furthermore, failure to realize the expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits from our merger and acquisition activities could have a material adverse effect on our financial condition and results of operations.
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.
We are subject to significant government regulation, and any regulatory changes may adversely affect us.
We are subject to extensive government regulation under both federal and state law. We are subject to regulation by the Federal Reserve, the FDIC and the DIFS, in addition to other regulatory and self-regulatory organizations. Current laws and applicable regulations are subject to change and any new regulatory change could make compliance more expensive, difficult, or otherwise adversely affect our business. Specifically, regulation changes to overdraft fees could adversely affect our business. We cannot predict the ultimate effect of any changes to regulations affecting us, but such changes could have a material adverse effect on our results of operation or financial condition.
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.
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.
If the Company were required to sell investment securities in an unrealized loss position to meet liquidity needs and realize losses, that could have a material adverse impact on its results of operation and financial condition.
At December 31, 2024, the Company had $116.6 million in unrealized losses on its investment securities, including $61.1 million in unrealized losses on available for sale securities and $55.5 in unrealized losses on held to maturity securities. If the Company were required to sell investment securities in an unrealized loss position to meet liquidity needs and realize losses, that could have a material adverse impact on its results of operations and financial condition, including a negative impact on net income and a permanent reduction in equity capital. The issuers continue to make timely principal and interest payments on the bonds. The fair value is expected to recover as the bonds approach maturity.
Evaluation of investment securities for an allowance for credit losses involves subjective determinations and could have a material adverse impact on our results of operations and financial condition.
The fair value evaluation of investment securities is a quantitative and qualitative process, which is subject to risks and uncertainties and is intended to determine whether declines in the fair value of investments require the establishment of an allowance for credit losses. The risks and uncertainties include changes in general economic conditions, the issuer’s financial condition or future recovery prospects and the effects of changes in interest rates or credit spreads. Estimating future cash flows involves incorporating information received from third-party sources and making internal assumptions and judgments regarding the future performance of the underlying collateral and assessing the probability that an adverse change in future cash flows has occurred. The determination of an allowance for credit losses is based upon our periodic evaluation and assessment of known and inherent risks associated with the respective asset class. Such evaluations and assessments are revised as conditions change and new information becomes available. Our management considers a wide range of factors about the security issuer and uses reasonable judgment in evaluating the cause of the decline in the estimated fair value of the security and in assessing the prospects for recovery. Inherent in management’s evaluation of the security are assumptions and estimates about the operations of the issuer and its future earnings potential. Additions to the allowance for credit losses for our investment securities may need to be taken in the future, which could have a material adverse effect on our results of operations and financial condition.
The Company has significant exposure to risks associated with commercial and residential real estate.
A substantial portion of the Company’s loan portfolio consists of commercial and residential real estate-related loans, including real estate development, construction and residential and commercial mortgage loans. As of December 31, 2024, the Company had approximately $918.2 million of commercial and construction real estate loans outstanding, which represented approximately 59.4% of its loan portfolio. As of that same date, the Company had approximately $281.7 million in residential real estate loans outstanding, or approximately 18.2% of its loan portfolio. Consequently, real estate-related credit risks are a significant concern for the Company. The adverse consequences from real estate-related credit risks tend to be cyclical and are often driven by national economic developments that are not controllable or entirely foreseeable by the Company or its borrowers.
Commercial loans may expose the Company to greater financial and credit risk than other loans.
The Company’s commercial and industrial loan portfolio, including commercial mortgages, was approximately $228.3 million at December 31, 2024, comprising approximately 14.8% of its total loan portfolio. Commercial loans generally carry larger loan balances and can involve a greater degree of financial and credit risk than other loans. Any significant failure to pay on time by the Company’s customers would hurt the Company’s earnings. The increased financial and credit risk associated with these types of loans are a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the size of loan balances, the effects of general economic conditions on income-producing properties and the increased difficulty of evaluating and monitoring these types of loans.
Legislative or regulatory changes or actions could adversely impact the Company or the businesses in which it is engaged.
The Company and the Bank 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 credit 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 Bank 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’s controls and procedures may fail or be circumvented.
Management regularly reviews and updates the Company’s internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. If the Company fails to identify and remediate control deficiencies, it is possible that a material misstatement of interim or annual financial statements will not be prevented or detected on a timely basis. In addition, any failure or circumvention of the Company’s other controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on the Company’s business, results of operations and financial condition.
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 Bank 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.
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 reasonably 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.
Employee misconduct could adversely impact our reputation and results of operations.
Our reputation is crucial to maintaining and developing relationships with our customers. There is a risk our employees could engage in misconduct that adversely affects our business. For example, if an employee were to engage (or be accused of engaging) in fraudulent, illegal, or suspicious activities, including fraud or theft, we could be subject to regulatory sanctions or penalties, or litigation, and suffer significant harm to our reputation, financial position, and customer relationships as a result. Additionally, our business often requires that we deal with sensitive customer information. If our employees were to improperly use or disclose this information, even inadvertently, we could suffer significant harm to our reputation, financial position and current and future business relationships. We may not be able to deter all employee misconduct, and the precautions we take to detect and prevent this misconduct may not be effective in all circumstances. Misconduct or harassment by our employees (or unsubstantiated allegations of the same), or improper use or disclosure of confidential information by our employees, even inadvertently, could result in a material adverse effect on our business, reputation, or 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 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.
Our reliance on third party vendors could cause operational losses or business interruptions.
We rely on third party service providers for certain components of our business activity. If these third party service providers experience difficulties or terminate their services and we are unable to replace them with other service providers, our operations could be interrupted. Even if we are able to replace them with another service provider, the replacement may be more expensive or offer an inferior service. Any of these outcomes could have a material adverse effect on our business, financial condition or results of operations.
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, a public health crisis, 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) or other public health crisis, 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 Company relies on dividends from the Bank for most of its revenue.
The Company is a separate and distinct legal entity from the Bank. It receives substantially all of its revenue from dividends from the Bank. 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 Bank may pay to the Company. If the Bank is 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 Bank 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 Bank.
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.
Risks Related to the Company’s Common Stock
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:
•Variations in quarterly or annual operating results
•Changes in dividends per share
•Changes in interest rates
•Changes in inflation levels
•Trade tariffs
•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
•Market conditions
•General economic conditions
•Turbulence, uncertainty or a lack of confidence within the banking industry
The Company’s common stock, while publicly traded, has less liquidity than the average liquidity of stocks listed on the Nasdaq Stock Market.
The Company’s common stock is listed for trading on the Nasdaq Capital Market. However, the Company’s common stock has less liquidity than the average liquidity for companies listed in the Nasdaq Stock Market. The public trading market for the Company’s common stock depends on a marketplace of willing buyers and sellers at any given time, which in turn depends on factors outside of the Company’s control, including general economic and market conditions and the decisions of individual investors. The limited market for the Company’s common stock may affect a shareholder’s ability to sell their shares at any given time, and the sale of a large number of shares at one time could temporarily adversely affect the market price of our common stock.
The Company's common stock is not insured by any government entity.
The Company’s common stock is not insured by the FDIC or any other government entity. Investment in the Company’s common stock is subject to risk and potential loss.
A shareholder’s ownership of common stock may be diluted if the Company issues additional shares of common stock in the future.
The Company’s articles of incorporation authorize the Company’s Board of Directors to issue additional shares of common stock or preferred stock without shareholder approval. To the extent the Company issues additional shares of common stock or preferred stock, or issues options or warrants permitting the holder to purchase or acquire common stock in the future and such warrants or options are exercised, the Company’s shareholders may experience dilution in their ownership of the Company’s common stock. Holders of the Company’s common stock do not have any preemptive or similar rights to purchase a pro rata share of any additional shares offered or issued by the Company.
The value of the Company's common stock may be adversely affected if the Company issues debt and equity securities that are senior to the Company's common stock in liquidation or as to distributions.
The Company may increase its capital by issuing debt or equity securities or by entering into debt or debt-like financing. This may include the issuance of common stock, preferred stock, senior notes, or subordinated notes. Upon any liquidation of the Company, the Company’s lenders and holders of its debt securities would be entitled to distribution of the Company’s available assets before distributions to the holders of the Company’s common stock, and holders of preferred stock may be granted rights to similarly receive a distribution upon liquidation prior to distribution to holders of the Company’s common stock. The Company cannot predict the amount, timing or nature of any future debt financings or stock offerings, and the decision of whether to incur debt or issue securities will depend on market conditions and other factors beyond the Company’s control. Future offerings could dilute a shareholder’s interests in the Company or reduce the per-share value of the Company’s common stock.
The Company's articles of incorporation and bylaws, and certain provisions of Michigan law, contain provisions that could make a takeover effort more difficult.
The Michigan Business Corporation Act, and the Company’s articles of incorporation and bylaws, include provisions intended to protect shareholders and prohibit, discourage, or delay certain types of hostile takeover activities. In addition, federal law requires the Federal Reserve Board’s prior approval for acquisition of “control” of a bank holding company such as the Company, including acquisition of 10% or more of the Company’s outstanding securities by any person not defined as a company under the Bank Holding Company Act of 1956, as amended (the “BHC Act”). These provisions and requirements could discourage potential acquisition proposals, delay or prevent a change in control, diminish the opportunities for a shareholder to participate in tender offers, prevent transactions in which our shareholders might otherwise receive a premium for their shares, or limit the ability for our shareholders to approve transactions that they may believe to be in their best interests.
An entity or group holding a certain percentage of the Company's outstanding securities could become subject to regulation as a "bank holding company" or may be required to obtain prior approval of the Federal Reserve Board.
Any bank holding company or foreign bank with a presence in the United States may be required to obtain approval of the Federal Reserve Board under the BHC Act to acquire or retain 5% or more of the Company’s outstanding securities. Further, if any entity (including a “group” comprised of individual persons) owns or controls the power to vote 25% or more of the Company’s outstanding securities, or 5% or more of the outstanding securities if the entity otherwise exercises a “controlling influence” over the Company, the entity may become subject to regulation as a “bank holding company” under the BHC Act. An entity that is subject to regulation as a bank holding company would be subject to regulatory and statutory obligations and restrictions, and could be required to divest all or a portion of the entity’s investment in the Company’s securities or in other investments that are not permitted for a bank holding company.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments
None.

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ITEM 2. PROPERTIES
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.
29 of the Company’s 35 locations are designed for use and operation as a bank branch office, are well maintained, and are suitable for current operations. The remaining six locations are comprised of loan production and wealth management offices. Offices generally range in size from 1,200 to 3,200 square feet, based on the location and number of employees located at the facility. All of our offices are owned by the Bank except for seven that are leased under various operating lease agreements. The Company’s management believes all offices are adequately covered by property insurance.

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ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings
As of December 31, 2024, there were no significant pending legal proceedings to which the Company or the Bank 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.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
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.
As of February 28, 2025, there were approximately 1,095 owners of record and approximately 2,200 beneficial owners of our common stock.
The following table summarizes the quarterly cash dividends declared per share of common stock during 2024 and 2023:
First Quarter
$
0.27
$
0.26
Second Quarter
0.27
0.26
Third Quarter
0.27
0.26
Fourth Quarter
0.28
0.27
Total
$
1.09
$
1.05
ChoiceOne’s principal source of funds to pay cash dividends is the earnings and dividends paid by the Bank. The Bank is restricted in its ability to pay cash dividends under current banking regulations. See Note 21 - Regulatory Capital 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 2025, although the amount of the quarterly dividends will be dependent on market conditions and ChoiceOne’s requirements for cash and capital, among other things.
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
ChoiceOne’s common stock repurchase plan announced in April 2021 and amended in 2022, authorizes the repurchase of up to 375,388 shares, representing 5% of the total outstanding shares of common stock as of the date the plan was adopted. No shares were repurchased under this plan in 2024.
As of December 31, 2024, there were 375,388 shares remaining that may yet be repurchased under the plan. There was no stated expiration date.

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. Reserved

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
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 Financial Services, Inc. (“ChoiceOne” or the “Company”), and its wholly-owned subsidiaries. This discussion should be read in conjunction with the consolidated financial statements and related footnotes.
We have omitted discussion of 2023 results where it would be redundant to the discussion previously included in Part II, Item 7 of our 2023 Annual Report on Form 10-K.
Selected Financial Data
(Dollars in thousands, except per share data)
For the year
Net interest income
$
74,442
$
65,885
$
67,314
Provision for credit losses, net
Noninterest income
17,995
14,906
14,072
Noninterest expense
58,723
55,074
53,478
Income before income taxes
33,089
25,567
27,658
Income tax expense
6,362
4,306
4,018
Net income
26,727
21,261
23,640
Cash dividends declared
9,012
7,910
7,578
Per share
Basic earnings
$
3.27
$
2.82
$
3.15
Diluted earnings
3.25
2.82
3.15
Cash dividends declared
1.09
1.05
1.01
Shareholders' equity (at year end)
29.05
25.92
22.47
Average for the year
Securities
$
981,454
$
1,042,559
$
1,094,559
Gross loans
1,456,434
1,265,261
1,104,030
Deposits
2,165,705
2,111,970
2,133,790
Borrowings
208,142
141,507
13,537
Subordinated debt
35,627
35,382
35,211
Shareholders' equity
226,547
177,201
178,415
Assets
2,668,556
2,493,840
2,373,374
At year end
Securities
$
896,123
$
939,576
$
972,802
Gross loans
1,552,928
1,415,363
1,194,616
Deposits
2,214,103
2,122,055
2,118,003
Borrowings
175,000
200,000
50,000
Subordinated debt
35,752
35,507
35,262
Shareholders' equity
260,415
195,634
168,874
Assets
2,723,243
2,576,706
2,385,915
Selected financial ratios
Return on average assets
1.00
%
0.85
%
1.00
%
Return on average shareholders' equity
11.80
12.00
13.25
Cash dividend payout as a percentage of net income
33.72
37.21
32.06
Shareholders' equity to assets (at year end)
9.56
7.59
7.08
RECENT EVENTS
ChoiceOne and Fentura Financial, Inc., the parent company of The State Bank, entered into a definitive merger agreement on July 25, 2024 pursuant to which ChoiceOne and Fentura would merge in an all-stock transaction (the “Merger”). The Merger was effective on March 1, 2025.
On July 26, 2024, ChoiceOne completed an underwritten public offering of 1,380,000 shares of its common stock at a price to the public of $25.00 per share.
RESULTS OF OPERATIONS
Summary
ChoiceOne's net income for 2024 was $26.7 million, compared to $21.3 million in 2023. Diluted earnings per share were $3.25 in the twelve months ended December 31, 2024, compared to $2.82 per share in the twelve months ended December 31, 2023. Net income adjusted for merger related expenses (non-GAAP) was $27.7 million for the twelve months ended December 31, 2024 with adjusted diluted earnings per share of $3.37.
ChoiceOne's asset mix has shifted from loans held for investment of 66.5% of deposits at December 31, 2023 to 69.8% of deposits at December 31, 2024. As of December 31, 2024, total assets were $2.7 billion, an increase of $146.5 million compared to December 31, 2023. The growth is primarily attributed to an increase in core loans of $114.5 million and loans to other financial institutions of $20.5 million. This growth was offset by a $48.9 million reduction in securities during the same time period. ChoiceOne has actively managed its balance sheet to support organic loan growth, strategically shifting from lower-yielding assets to higher-yielding loans. This is reflected in the loan growth experienced.
Deposits, excluding brokered deposits increased $79.0 million or 3.8% during 2024. The increase in deposits in the twelve months ended December 31, 2024 is a combination of new business and recapture of deposit losses from the prior year. ChoiceOne continues to be proactive in managing its liquidity position by using brokered deposits and FHLB advances to ensure ample liquidity. At December 31, 2024, total available borrowing capacity secured by pledged assets was $837.2 million. ChoiceOne can increase its capacity by utilizing unsecured federal fund lines and pledging additional assets. Uninsured deposits totaled $833.2 million or 37.6% of deposits at December 31, 2024.
ChoiceOne's cost of deposits to average total deposits has increased from 1.14% in 2023 to 1.58% in 2024. During 2023 ChoiceOne was able to lag many of the increases to the federal funds rate which increased 425 basis points in 2022 and another 100 basis points in 2023. ChoiceOne's cost of deposits to average total deposits peaked in the first quarter of 2024, and declined slightly in subsequent quarters due to the Federal Reserve decreasing the federal funds rate by 100 basis points in the last four months of 2024. If rates continue to decline, we expect to see further reductions in deposit costs; however, these reductions will be muted by the decrease in cash flows from pay-fixed interest rate swaps collected. Interest expense on borrowings for the twelve months ended December 31, 2024, increased $3.1 million compared to the same period in the prior year, due to increases in the average balance borrowed. During the fourth quarter of 2024, ChoiceOne paid down its advance from the Bank Term Funding Program and replaced it with $135.0 million of FHLB borrowings. This increased ChoiceOne's total borrowed balance at the FHLB to $175.0 million at a weighted average fixed rate of 4.5%, with the earliest maturity in January 2025.
The provision for credit losses expense on loans was $1.3 million in the full year 2024, due to the significant growth of core loans. Core loan growth was offset by slight improvements in the Federal Open Market Committee ("FOMC") forecast during the full year 2024. The ratio of the allowance for credit losses to total loans (excluding loans held for sale) was 1.07% on December 31, 2024 compared to 1.11% on December 31, 2023. Asset quality continues to remain strong, with net loan charge-offs to average loans of 0.03% and nonperforming loans to total loans (excluding loans held for sale) of 0.24% as of December 31, 2024. Nonperforming loans have increased since the historic lows in 2023, but still remain at low levels and consist entirely of residential loans with strong collateral positions.
Noninterest Income
Noninterest income increased $3.1 million in the twelve months ended December 31, 2024, compared to the same period in the prior year. The increase was largely due to an increase in credit and debit card fees of $1.1 million in the full year 2024 compared to the full year 2023 and earnings on life insurance policies in the twelve months ended December 31, 2024, compared to the same period in the prior year. ChoiceOne recognized earnings on two bank owned life insurance death benefit claims for a total of $700,000 during 2024. ChoiceOne also saw an increase in the market value of equity securities in the full year 2024, compared to the prior year. Equity securities include community bank stocks and CRA focused bond mutual funds. ChoiceOne additionally saw an uptick in gains on sales of loans during the fourth quarter of 2024 due in part to participation in the FHLB Rate Advantage program which provides incentives to home buyers in the low to moderate income bracket.
Noninterest Expense
Noninterest expense increased by $3.6 million or 6.6% in the twelve months ended December 31, 2024 compared to the same period in 2023. The increase in total noninterest expense was due in part to merger related expenses of $1.0 million during the twelve months ended December 31, 2024, compared to $0 in the same period in the prior year. Additionally, there was an increase to employee health insurance and other benefit costs, and an increase to FDIC insurance and other costs related to the inflationary environment. The increase in costs was offset by a decline in occupancy and equipment cost related to two branch closures during the first quarter of 2024. ChoiceOne seeks to strategically manage costs while still making thoughtful investments in order to maintain our competitive edge and deliver exceptional value to our customers, shareholders, and communities.
Dividends
Cash dividends of $9.0 million or $1.09 per common share were declared in 2024 compared to $7.9 million or $1.05 per common share in 2023. The dividend yield for ChoiceOne’s common stock was 3.06% as of the end of 2024, compared to 3.58% as of the end of 2023. The cash dividend payout as a percentage of net income was 33.7% as of December 31, 2024, compared to 37.2% as of December 31, 2023.
Income Taxes
Income tax expense was $2.1 million higher in 2024 than in 2023. The effective tax rate was 19.2% for the year ended December 31, 2024 compared to 16.8% for the same period in 2023. For 2024, income before income tax, disallowed interest expense (TEFRA) and nondeductible merger expenses increased compared to 2023. For further details, refer to Note 12 - Income Taxes of the Notes to the Consolidated Financial Statements included in Item 8 of this report.
Table 1 - Average Balances and Tax-Equivalent Interest Rates
Tables 1 and 2 on the following pages provide information regarding interest income and expense for the years ended December 31, 2024, 2023, and 2022. Table 1 documents ChoiceOne’s average balances and interest income and expense, as well as the average rates earned or paid on assets and liabilities. Table 2 documents the effect on interest income and expense of changes in volume (average balance) and interest rates.
Year Ended December 31,
(Dollars in thousands)
Average
Average
Average
Balance
Interest
Rate
Balance
Interest
Rate
Balance
Interest
Rate
Assets:
Loans (1) (3)(4)(5)(6)
$
1,456,434
$
89,645
6.16
%
$
1,265,261
$
68,437
5.41
%
$
1,104,030
$
52,861
4.79
%
Taxable securities (2)(6)
691,562
21,228
3.07
747,006
21,169
2.83
779,915
15,583
2.00
Nontaxable securities (1)
289,892
7,089
2.45
295,553
7,106
2.40
314,644
7,790
2.48
Other
88,576
4,681
5.29
70,826
3,797
5.36
34,255
1.43
Interest-earning assets
2,526,464
122,643
4.85
2,378,646
100,509
4.23
2,232,844
76,725
3.44
Noninterest-earning assets
142,092
115,194
140,530
Total assets
$
2,668,556
$
2,493,840
$
2,373,374
Liabilities and Shareholders' Equity:
Interest-bearing demand deposits
$
896,060
$
12,997
1.45
%
$
852,927
$
10,028
1.18
%
$
902,090
$
3,514
0.39
%
Savings deposits
334,310
2,828
0.85
370,074
1,609
0.43
452,542
0.16
Certificates of deposit
388,724
17,033
4.38
306,999
10,621
3.46
196,063
1,618
0.83
Brokered deposit
26,902
1,315
4.89
35,044
1,732
4.94
2.48
Borrowings
208,142
9,885
4.75
141,507
6,818
4.82
13,537
3.02
Subordinated debentures
35,627
1,642
4.61
35,382
1,636
4.62
35,211
1,491
4.23
Other
18,355
5.23
12,258
5.31
-
-
0.00
Interest-bearing liabilities
1,908,120
46,661
2.45
1,754,191
33,095
1.89
1,599,546
7,746
0.48
Demand deposits
519,709
546,926
582,992
Other noninterest-bearing liabilities
14,180
15,522
12,421
Total liabilities
2,442,009
2,316,639
2,194,959
Shareholders' equity
226,547
177,201
178,415
Total liabilities and shareholders' equity
$
2,668,556
$
2,493,840
$
2,373,374
Net interest income (tax-equivalent basis) (Non-GAAP) (1)
$
75,981
$
67,415
$
68,979
Net interest margin (tax-equivalent basis) (Non-GAAP) (1)
3.01
%
2.83
%
3.09
%
Reconciliation to Reported Net Interest Income
Net interest income (tax-equivalent basis) (Non-GAAP) (1)
$
75,981
$
67,415
$
68,979
Adjustment for taxable equivalent interest
(1,539
)
(1,530
)
(1665
)
Net interest income (GAAP)
$
74,442
$
65,885
$
67,314
Net interest margin (GAAP)
2.95
%
2.77
%
3.01
%
(1)Adjusted to a fully tax-equivalent basis to facilitate comparison to the taxable interest-earning assets. The adjustment uses an incremental tax rate of 21%. The presentation of these measures on a tax-equivalent basis is not in accordance with GAAP, but is customary in the banking industry. These non-GAAP measures ensure comparability with respect to both taxable and tax-exempt loans and securities.
(2)Interest on taxable securities includes dividends on Federal Home Loan Bank and Federal Reserve Bank stock.
(3)Loans include both loans to other financial institutions and loans held for sale.
(4)Non-accruing loan balances are included in the balances of average loans. Non-accruing loan average balances were $2.3 million, $1.6 million, and $1.3 million for the year ended 2024, 2023, and 2022, respectively.
(5)Interest on loans included net origination fees and accretion income. Accretion income was $1.2 million, $1.7 million, and $2.0 million for the full year 2024, 2023, and 2022, respectively.
(6)Interest income for 2024 and 2023 was reduced by $1.1 million and $2.8 million, respectively, due to amortization expense related to the March 2023 sale of the pay floating swap derivative.
Table 2 - Changes in Tax-Equivalent Net Interest Income
Year Ended December 31,
(Dollars in thousands)
2024 Over 2023
2023 Over 2022
Total
Volume
Rate
Total
Volume
Rate
Increase (decrease) in interest income (1)
Loans (2)
$
21,208
$
11,095
$
10,113
$
15,576
$
8,264
$
7,312
Taxable securities
(1,645
)
1,704
5,586
(682
)
6,268
Nontaxable securities (2)
(17
)
(144
)
(684
)
(455
)
(229
)
Other
(54
)
3,306
2,381
Net change in interest income
$
22,134
$
10,244
$
11,890
$
23,784
$
8,052
$
15,732
Increase (decrease) in interest expense (1)
Interest-bearing demand deposits
$
2,969
$
$
2,432
$
6,514
$
(202
)
$
6,716
Savings deposits
1,219
(169
)
1,388
(152
)
1,050
Certificates of deposit
6,412
3,205
3,207
9,003
1,364
7,639
Brokered deposit
(417
)
(399
)
(18
)
1,730
1,725
Borrowings
3,067
3,169
(102
)
6,408
6,029
Subordinated debentures
(4
)
Other
(9
)
-
Net change in interest expense
$
13,566
$
6,672
$
6,894
$
25,349
$
9,422
$
15,927
Net change in tax-equivalent net interest income
$
8,568
$
3,572
$
4,996
$
(1,565
)
$
(1,370
)
$
(195
)
(1)The volume variance is computed as the change in volume (average balance) multiplied by the previous year’s interest rate. The rate variance is computed as the change in interest rate multiplied by the previous year’s volume (average balance). The change in interest due to both volume and rate has been allocated to the volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.
(2)Interest on tax-exempt securities and loans has been adjusted to a fully tax-equivalent basis using an incremental tax rate of 21% for 2024, 2023, and 2022.
Net Interest Income
GAAP based net interest income increased $8.6 million, and tax-equivalent net interest income increased $8.6 million, respectively, for the full year 2024, compared to the same period in 2023. GAAP based net interest margin increased 18 basis points, and tax equivalent net interest margin increased 18 basis points, respectively, in 2024 compared to 2023.
ChoiceOne has experienced substantial core loan growth from December 31, 2023 to December 31, 2024, leading to an increase in interest income from loans of $21.2 million in the twelve months ended December 31, 2024, compared to the same period in the prior year. Average core loans grew $191.2 million for the twelve months ended December 31, 2024, compared to the same period in the prior year. In addition, the average rate earned on loans increased 75 basis points for the twelve months ended December 31, 2024, compared to the same period in the prior year.
The average balance of total securities decreased $61.1 million in 2024, compared to the same period in 2023. The decrease was due to the paydowns, maturities, and redemptions during 2024. Interest income on securities remained flat in 2024 compared to 2023 despite the decline in average balance as the average rate earned on securities increased 17 basis points for the full year 2024, compared to the same period in the prior year.
Interest expense increased $13.6 million for the full year 2024, compared to the same period in the prior year. The average rate paid on interest bearing-demand deposits and savings deposits increased 33 basis points in the twelve months ended December 31, 2024, compared to the same period in the prior year. This was compounded by the increase in the average balance of interest bearing-demand deposits and savings deposits, of $7.4 million during 2024. The increase in the average balance of certificates of deposit of $81.7 million during 2024, combined with a 92 basis point increase in the rate paid on certificates of deposits during 2024, compared to the same period in the prior year, led to an increase in interest expense of $6.4 million during 2024.
During 2023, ChoiceOne was able to lag many of the increases to the federal funds rate which increased 425 basis points in 2022 and another 100 basis points in 2023. ChoiceOne's cost of deposits to average total deposits peaked in the first quarter of 2024, and has slightly declined in subsequent quarters due to the Federal Reserve decreasing the federal funds rate by 100 basis points in the last four months of 2024. If rates continue to decline, we expect to see further reductions in deposit costs; however, these reductions will be
muted by the decrease in cash flows from pay-fixed interest rate swaps collected. ChoiceOne has been able to outpace the increased cost of deposits by increased loan originations at higher average interest rates.
ChoiceOne held $170.0 million in borrowings from the Bank Term Funding Program ("BTFP") during the first three quarters of 2024 and during the fourth quarter of 2024, ChoiceOne paid down its advance from the Bank Term Funding Program and replaced it with $135.0 million of FHLB borrowings. This increased the total borrowed balance at the FHLB to $175.0 million at a weighted average fixed rate of 4.5%. The net effect of these additional borrowed funds was an increase in interest expense of $3.1 million for the year ended December 31, 2024, compared to the same period in 2023.
In September 2021, ChoiceOne completed a private placement of $32.5 million in aggregate principal amount of 3.25% fixed-to-floating rate subordinated notes due 2031. In addition, ChoiceOne holds certain subordinated debentures issued in connection with a trust preferred securities offering that were obtained as part of the merger with Community Shores. The average balance of subordinated debentures was relatively flat in 2024 compared to the same period in the prior year.
The following table presents the cost of deposits and the cost of funds for the years ended December 31, 2024, December 31, 2023, and December 31, 2022.
Year Ended December 31,
Cost of deposits
1.58
%
1.14
%
0.27
%
Cost of funds
1.92
%
1.44
%
0.35
%
Provision and Allowance For Credit Losses
Table 3 - Provision and Allowance For Credit Losses
(Dollars in thousands)
Allowance for credit losses at beginning of year
$
15,685
$
7,619
$
7,688
Cumulative effect of change in accounting principle
-
7,165
-
Charge-offs:
Agricultural
-
-
-
Commercial and industrial
Consumer
Commercial real estate
-
-
Construction real estate
-
-
-
Residential real estate
-
Total
Recoveries:
Agricultural
-
-
-
Commercial and industrial
Consumer
Commercial real estate
-
Construction real estate
-
-
-
Residential real estate
Total
Net charge-offs (recoveries)
Provision for credit losses
1,300
1,265
Allowance for credit losses at end of year
$
16,552
$
15,685
$
7,619
Allowance for credit losses as a percentage of:
Total loans as of year end
1.07
%
1.11
%
0.64
%
Nonaccrual loans, accrual loans past due 90 days or more and troubled debt restructurings
%
%
%
Ratio of net charge-offs during the period to average loans outstanding during the period
0.03
%
0.03
%
0.03
%
Loan recoveries as a percentage of prior year's charge-offs
%
%
%
Note: In the table above, "consumer" includes deposit account charge-offs and recoveries.
The ACL consists of general and specific components. The general component covers loans collectively evaluated for credit loss and is based on peer historical loss experience adjusted for current and forecasted factors. Management's adjustment for current and forecasted factors is based on trends in delinquencies, trends in charge-offs and recoveries, trends in the volume of loans, changes in underwriting standards, trends in loan review findings, the experience and ability of lending staff, and a reasonable and supportable economic forecast described further below.
The determination of our loss factors is based, in part, upon benchmark peer loss history adjusted for qualitative factors that, in management's judgment, affect the collectability of the portfolio as of the analysis date. ChoiceOne's lookback period of benchmark peer net charge-off history was from January 1, 2004 through December 31, 2019 for this analysis.
Loans individually evaluated for credit losses increased by $2.0 million to $4.1 million during the year ended December 31, 2024, and the ACL related to these individually evaluated loans increased by $108,000 during the same period largely due to the balance increase.
Nonperforming loans, which includes Other Real Estate Owned ("OREO") but excludes performing troubled loan modifications ("TLM"), increased by $1.9 million to $3.8 million at December 31, 2024, compared to a historically low balance on December 31, 2023. All non-performing loans are retail in nature. The ACL was 1.07% of total loans, excluding loans held for sale, at December 31, 2024, compared to 1.11% as of December 31, 2023. The liability for expected credit losses on unfunded loans and other commitments was $1.5 million on December 31, 2024, compared to $2.2 million as of December 31, 2023.
Net charge-offs were $433,000 during the full year 2024, compared to net charge-offs of $364,000 during the same period in 2023. Net charge-offs for checking accounts during the full year 2024 were $237,000 compared to $226,000 for the same period in the prior year. Net charge-offs as a percentage of average loans were 0.03% during the full year 2024 and 2023.
The provision for credit losses on loans was $1.3 million during the full year 2024 and 2023, due to core loan growth, which was partially offset by slight improvements in the Federal Open Market Committee ("FOMC") forecast during the full year 2024. The loan provision expense was offset by the decrease in unfunded commitments provision expense of $675,000 in the full year 2024 due to changes in mix and expected funding rates during the year. Total unfunded commitments decreased $15.9 million in the full year 2024 compared to December 31, 2023.
Net provision for credit losses was $625,000 for the full year 2024.
Financial Condition
Summary
Total assets grew $146.5 million in the twelve months ended December 31, 2024. Core loans grew $114.5 million or 8.2% and were offset by a decline in investment securities of $48.9 million. Deposits, excluding brokered deposits, increased by $79.0 million during 2024, while borrowings declined by $25.0 million. Deposit costs rose steadily in the first half of the year followed by a decline in the second half of the year which coincided with the decreases to the federal funds rate starting in September of 2024.
Securities
The Company’s securities balances as of December 31 were as follows:
(Dollars in thousands)
Equity securities
$
7,782
$
7,505
Available for Sale Securities at fair value
U.S. Government and federal agency
$
-
$
-
U.S. Treasury notes and bonds
80,502
80,194
State and municipal
228,236
234,682
Mortgage-backed
160,970
188,501
Corporate
Asset-backed securities
9,197
11,017
Total
$
479,117
$
514,598
Held to Maturity Securities at amortized cost
U.S. Government and federal agency
$
2,978
$
2,972
U.S. Treasury notes and bonds
-
State and municipal
196,510
196,098
Mortgage-backed
174,323
188,329
Corporate
20,495
20,013
Asset-backed securities
Total
$
394,534
$
407,959
Total investment securities declined $48.9 million from December 31, 2023 to December 31, 2024. ChoiceOne purchased $16.8 million of securities in 2024. Securities totaling $11.8 million were called or matured in 2024. ChoiceOne received principal payments for municipal and mortgage-backed securities totaling $48.0 million during 2024.
At December 31, 2024, the Company had $116.6 million in unrealized losses on its investment securities, including $61.1 million in unrealized losses on available for sale securities and $55.5 million in unrealized losses on held to maturity securities. Unrealized losses on corporate and municipal bonds have not been recognized into income because management believes the issuers are of high credit quality, and management does not intend to sell prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions. The issuers continue to make timely principal and interest payments on the bonds. The fair value is expected to recover as the bonds approach maturity.
ChoiceOne utilizes interest rate derivatives as part of its asset liability management strategy to help manage its interest rate risk position. In order to hedge the risk of rising rates and unrealized losses on securities resulting from the rising rates, ChoiceOne currently holds pay fixed, receive variable interest rate swaps with a total notional value of $401.0 million. These derivative instruments increase in value as long-term interest rates rise, which partially offsets the reduction in shareholders' equity due to unrealized losses on securities available for sale. Refer to Note 8 - Derivatives and Hedging Activities of the consolidated financial statements for more discussion on ChoiceOne’s derivative position.
Equity securities included a money market preferred security ("MMP") of $1.0 million and common stock of $6.8 million as of December 31, 2024. As of December 31, 2023, equity securities included a MMP of $1.0 million and common stock of $6.5 million.
Per U.S. generally accepted accounting principles, unrealized gains or losses on securities available for sale are reflected on the balance sheet in accumulated other comprehensive income (loss), while unrealized gains or losses on securities held to maturity are not reflected on the balance sheet in accumulated other comprehensive income (loss).
Loans
The Company’s loan portfolio by call report code was as follows:
December 31, 2024
December 31, 2023
(Dollars in thousands)
Call Report Codes
Balance
%
Balance
%
Construction & Development Loans
1A2
61,740
4.0
%
112,877
8.0
%
1-4 Family Loans
1A1, 1C1, 1C2A, 1C2B
380,139
24.6
%
347,036
24.6
%
Multifamily Loans
1D
83,766
5.4
%
56,563
4.0
%
Owner Occupied CRE Loans
1E1
325,966
21.1
%
281,515
20.0
%
Non-Owner Occupied CRE Loans
1E2
387,102
25.0
%
298,265
21.1
%
Commercial & Industrial Loans
2A2, 4A
216,376
14.0
%
219,849
15.6
%
Farm & Agriculture Loans
1B, 3
48,246
3.1
%
46,515
3.3
%
Consumer & Other Loans
6B, 6C, 6D, 8, 9b2,10B
42,305
2.7
%
48,033
3.4
%
Total Loans
1,545,640
1,410,653
Average loan balances increased $191.2 million in the full year 2024 compared to the same period in 2023. Core loans grew organically by $114.5 million or 8.2% during 2024, with growth concentrated in Non-Owner Occupied CRE loans, which grew by $88.8 million, Owner Occupied CRE loans, which grew by $44.5 million, and 1-4 Family Loans, which grew by $33.1 million. The growth in 1-4 Family loans was largely related to growth in loans to other financial institutions which were $39.9 million as of December 31, 2024, compared to $19.4 million as of December 31, 2023. Loans to other financial institutions is comprised of a warehouse line of credit to facilitate mortgage loan originations and the interest rate fluctuates with the national mortgage market. This balance is short term in nature with an average life of under 30 days. Management believes the short-term structure and low credit risk of this asset is advantageous in the current rate environment; however, this balance is volatile and could change based on the third party origination volume or discretion. Loan interest including fee income increased $21.2 million in the full year 2024, compared to the same period in the prior year.
ChoiceOne recorded accretion income related to acquired loans in the amount of $1.2 million in 2024 and $1.7 million during 2023. Remaining credit and yield mark on acquired loans from the mergers with County Bank Corp. and Community Shores will accrete into income as the acquired loans mature. ChoiceOne estimates that roughly $1.3 million will accrete into income over the next one to three years.
As part of its review of the loan portfolio, management also monitors the various nonperforming loans. Nonperforming loans are comprised of loans accounted for on a nonaccrual basis, loans not included in nonaccrual loans, which are contractually past due 90 days or more as to interest or principal payments, and troubled loan modifications which are accruing and initiated in the past year.
The balances of these nonperforming loans as of December 31 were as follows:
(Dollars in thousands)
Loans accounted for on a nonaccrual basis
$
3,704
$
1,723
Loans contractually past due 90 days or more as to principal or interest payments
-
-
Loans modified to borrowers experiencing financial difficulty at December 31, 2024 and December 31, 2023.
-
Total
$
3,704
$
1,912
Nonaccrual loans included $3.5 million in residential real estate loans, $229,000 in construction real estate loans, and $8,000 in consumer loans as of December 31, 2024, compared to $1.7 million in residential real estate loans as of December 31, 2023. There were no troubled loan modifications ("TLM") at December 31, 2024, compared to $60,000 of commercial and industrial TLM loans and $129,000 of residential real estate TLM loans at December 31, 2023.
Management also maintains a list of loans that are not classified as nonperforming loans but where some concern exists as to the borrowers’ abilities to comply with the original loan terms. There were 19 loans totaling $375,000 fitting this description as of December 31, 2024, and 22 loans totaling $357,000 fitting this description as of December 31, 2023.
Deposits and Other Funding Sources
The Company’s deposit balances as of December 31 were as follows:
(Dollars in thousands)
Noninterest-bearing demand deposits
$
524,945
$
547,625
Interest-bearing demand deposits
630,155
599,681
Money market deposits
290,012
247,602
Savings deposits
338,109
336,851
Local certificates of deposit
394,371
366,851
Brokered certificates of deposit
36,511
23,445
Total deposits
$
2,214,103
$
2,122,055
Deposits, excluding brokered deposits increased $79.0 million or 3.8% during 2024. The increase in deposits in the twelve months ended December 31, 2024 is a combination of new business and recapture of deposit losses from the prior year. ChoiceOne continues to be proactive in managing its liquidity position by using brokered deposits and FHLB advances to ensure ample liquidity.
At December 31, 2024, total available borrowing capacity secured by pledged assets was $837.2 million. ChoiceOne can increase its capacity by utilizing unsecured federal fund lines and pledging additional assets. Uninsured deposits totaled $833.2 million or 37.6% of deposits at December 31, 2024. Core deposits, which we define as insured branch deposits less certificates of deposit, totaled $1.1 billion or 51.2% of total deposits at December 31, 2024.
ChoiceOne's cost of deposits to average total deposits has increased from 1.14% in 2023 to 1.58% in 2024. During 2023 ChoiceOne was able to lag many of the increases to the federal funds rate which increased 425 basis points in 2022 and another 100 basis points in 2023. ChoiceOne's cost of deposits to average total deposits peaked in the first quarter of 2024, and has slightly declined in subsequent quarters due to the Federal Reserve decreasing the federal funds rate by 100 basis points in the last four months of 2024. If rates continue to decline, we expect to see further reductions in deposit costs; however, these reductions will be muted by the decrease in cash flows from pay-fixed interest rate swaps collected. Interest expense on borrowings for the twelve months ended December 31, 2024, increased $3.1 million compared to the same period in the prior year, due to increases in the average balance borrowed. During the fourth quarter of 2024, ChoiceOne paid down its advance from the Bank Term Funding Program and replaced it with $135.0 million of FHLB borrowings. This increased ChoiceOne's total borrowed balance at the FHLB to $175.0 million at a weighted average fixed rate of 4.5%, with the earliest maturity in January 2025.
In September 2021, ChoiceOne completed a private placement of $32.5 million in aggregate principal amount of 3.25% fixed-to-floating rate subordinated notes due 2031. ChoiceOne used a portion of net proceeds from the private placement to redeem senior debt, fund common stock repurchases, and support bank-level capital ratios. ChoiceOne also holds $3.5 million in subordinated debentures issued in connection with a $4.5 million trust preferred securities offering, which were obtained in the merger with Community Shores, offset by the mark-to-market adjustment.
Shareholders’ Equity
Shareholders’ equity totaled $260.4 million as of December 31, 2024, up from $195.6 million as of December 31, 2023, due in large part to the $34.5 million in aggregate gross proceeds (before deducting discounts and estimated offering expenses) received from the sale of 1,380,000 shares of common at a price to the public of $25.00 per share on July 26, 2024. The additional increase is due to retained earnings and an improvement in accumulated other compressive loss (AOCI) of $13.8 million compared to December 31, 2023. The improvement in AOCI is due to both the shortening duration and maturing (paydowns) of the securities portfolio, offset by the change in unrealized gain of the pay-fixed swap derivatives. The pay-fixed swap derivatives are designed to offset swings in AOCI due to changes in interest rates. ChoiceOne Bank remains “well-capitalized” with a total risk-based capital ratio of 12.7% as of December 31, 2024, compared to 12.4% on December 31, 2023.
ChoiceOne uses interest rate swaps to manage interest rate exposure to certain fixed rate assets and variable rate liabilities. On December 31, 2024, ChoiceOne had pay-fixed interest rate swaps with a total notional value of $401.0 million, a weighted average coupon of 3.07%, a fair value of $23.6 million and an average remaining contract length of 7 to 8 years. These derivative instruments increase in value as long-term interest rates rise, which offsets the reduction in equity due to unrealized losses on securities available for sale.
Note 21 to the consolidated financial statements presents regulatory capital information for ChoiceOne and the Bank at the end of 2024 and 2023. Management will monitor these capital ratios during 2025 as they relate to asset growth and earnings retention. ChoiceOne’s Board of Directors and management do not plan to allow capital to decrease below those levels necessary to be considered "well capitalized" by regulatory guidelines.
Table 4 - Contractual Obligations
The following table discloses information regarding the maturity of ChoiceOne’s contractual obligations at December 31, 2024:
Payment Due by Period
Less
More
than
1 - 3
3 - 5
than
(Dollars in thousands)
Total
1 year
Years
Years
5 Years
Time deposits
$
430,882
$
413,786
$
13,110
$
3,719
$
Borrowings
175,000
155,000
20,000
-
-
ChoiceOne Capital Trust (1)
4,500
-
-
-
4,500
ChoiceOne Subordinated Debenture (2)
32,500
-
-
-
32,500
Operating leases
Other obligations
-
Total
$
643,684
$
569,107
$
33,408
$
3,783
$
37,386
(1)Cumulative preferred securities on the balance sheet include $1.0 million of discount due to a mark to market adjustment which is not reflected in the table above.
(2)ChoiceOne subordinated debenture on the balance sheet includes $240,000 of capitalized issuance cost which is not reflected in the table above.
Liquidity and Interest Rate Risk
Net cash provided by operating activities was $48.5 million in 2024 compared to $46.5 million in 2023. The change was due to higher net proceeds from loan sales and an increase in other liabilities in 2024 compared to 2023. Net cash used in investing activities was $97.9 million in 2024 compared to $181.4 million in 2023. ChoiceOne had loan originations and payments of $136.1 million in the full year 2024, compared to $221.2 million in the full year 2023. Net cash provided by financing activities was $90.7 million in 2024, compared to $146.4 million in 2023. The change was largely due to $150.0 million of higher borrowings in 2023, offset by $32.1 million in net proceeds received from our common stock offering completed on July 26, 2024.
ChoiceOne's market risk exposure occurs in the form of interest rate risk and liquidity risk. ChoiceOne's business is transacted in U.S. dollars with no foreign exchange risk exposure. Agricultural loans comprise a relatively small portion of ChoiceOne's total assets. Management believes that ChoiceOne's exposure to changes in commodity prices is insignificant.
Liquidity risk deals with ChoiceOne's ability to meet its cash flow requirements. These requirements include depositors desiring to withdraw funds and borrowers seeking credit. Longer-term liquidity needs may be met through core deposit growth, maturities of and cash flows from investment securities, normal loan repayments, advances from the FHLB and the Federal Reserve Bank, brokered certificates of deposit, and income retention. ChoiceOne had $175.0 million in outstanding borrowings from the FHLB as of December 31, 2024. The acceptance of brokered certificates of deposit is not limited as long as the Bank is categorized as “well capitalized” under regulatory guidelines. At December 31, 2024, total available borrowing capacity from the FHLB and the Federal Reserve Bank was $837.2 million.
ChoiceOne continues to review its liquidity management and has taken steps in an effort to ensure adequacy. These steps include limiting bond purchases in 2024, pledging securities to FHLB and the Federal Reserve Bank in order to increase borrowing capacity and using alternative funding sources such as brokered deposits.
NON-GAAP FINANCIAL MEASURES
This report contains financial measures that are not defined in U.S. generally accepted accounting principles ("GAAP"). Management believes these non-GAAP financial measures provide additional information that is useful to investors in helping to understand the underlying financial performance of ChoiceOne.
Non-GAAP financial measures have inherent limitations. Readers should be aware of these limitations and should be cautious with respect to the use of such measures. To compensate for these limitations, we use non-GAAP financial measures as comparative tools, together with GAAP financial measures, to assist in the evaluation of our operating performance or financial condition. Also, we ensure that these measures are calculated using the appropriate GAAP or regulatory components in their entirety and that they are computed in a manner intended to facilitate consistent period-to-period comparisons. ChoiceOne’s method of calculating these non-GAAP financial measures may differ from methods used by other companies. These non-GAAP financial measures should not be considered in isolation or as a substitute for those financial measures prepared in accordance with GAAP or in-effect regulatory requirements.
Income Adjusted for Merger Expenses - Non-GAAP Reconciliation
(In Thousands, Except Per Share Data)
Net income
$
26,727
Merger related expenses net of tax
1,006
Adjusted net income (Non-GAAP)
$
27,733
Weighted average number of shares
8,166,472
Diluted average shares outstanding
8,221,065
Basic earnings per share
$
3.27
Diluted earnings per share
$
3.25
Adjusted basic earnings per share (Non-GAAP)
$
3.40
Adjusted diluted earnings per share (Non-GAAP)
$
3.37
Critical Accounting Policies And Estimates
Management’s discussion and analysis of financial condition and results of operations as well as disclosures found elsewhere in this report are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the market value of securities, the amount of the allowance for credit losses, loan servicing rights, carrying value of goodwill, and income taxes. Actual results could differ from those estimates.
Allowance for Credit Losses ("ACL")
The ACL is a valuation allowance for expected credit losses. The ACL is increased by the provision for credit losses and decreased by loans charged off less any recoveries of charged off loans. As ChoiceOne has had very limited loss experience since 2011, management elected to utilize benchmark peer loss history data to estimate historical loss rates. ChoiceOne identified an appropriate peer group for each loan cohort which shared similar characteristics. Management estimates the ACL required based on the selected peer group loan loss experience, the nature and volume of the loan portfolio, information about specific borrower situations and estimated collateral values, a reasonable and supportable economic forecast, and other factors. Allocations of the ACL may be made for specific loans, but the entire ACL is available for any loan that, in management’s judgment, should be charged off. Loan losses are charged against the ACL when management believes that collection of a loan balance is not possible.
The ACL consists of general and specific components. The general component covers loans collectively evaluated for credit losses and is based on peer historical loss experience adjusted for current and forecasted factors. Management's adjustment for current and forecasted factors is based on trends in delinquencies, trends in charge-offs and recoveries, trends in the volume of loans, changes in underwriting standards, trends in loan review findings, the experience and ability of lending staff, and a reasonable and supportable economic forecast described further below.
The discounted cash flow methodology is utilized for all loan pools. This methodology is supported by our CECL software provider and allows management to automatically calculate contractual life by factoring in all cash flows and adjusting them for behavioral and credit-related aspects.
Reasonable and supportable economic forecasts have to be incorporated in determining expected credit losses. The forecast period represents the time frame from the current period end through the point in time that we can reasonably forecast and support entity and environmental factors that are expected to impact the performance of our loan portfolio. Ideally, the economic forecast period would encompass the contractual terms of all loans; however, the ability to produce a forecast that is considered reasonable and supportable becomes more difficult or may not be possible in later periods. Subsequent to the end of the forecast period, we revert to historical loan data based on an ongoing evaluation of each economic forecast in relation to then current economic conditions as well as any developing loan loss activity and resulting historical data. As of December 31, 2024, we used a one-year reasonable and supportable economic forecast period, with a two year straight-line reversion period.
We are not required to develop and use our own economic forecast model, and we elected to utilize economic forecasts from third-party providers that analyze and develop forecasts of the economy for the entire United States at least quarterly.
Other inputs to the calculation are also updated or reviewed quarterly. Prepayment speeds are updated on a one quarter lag based on the asset liability model from the previous quarter. This model is performed at the loan level. Curtailment is updated quarterly within the ACL model based on our peer group average. The reversion period is reviewed by management quarterly with consideration of the current economic climate. Prepayment speeds and curtailment were updated during the fourth quarter of 2024; however, the effect was insignificant.
We are also required to consider expected credit losses associated with loan commitments over the contractual period in which we are exposed to credit risk on the underlying commitments unless the obligation is unconditionally cancellable by us. Any allowance for off-balance sheet credit exposures is reported as an other liability on our Consolidated Balance Sheet and is increased or decreased via the provision for credit losses account on our Consolidated Statement of Income. The calculation includes consideration of the likelihood that funding will occur and forecasted credit losses on commitments expected to be funded over their estimated lives. The allowance is calculated using the same aggregate reserve rates calculated for the funded portion of loans at the portfolio level applied to the amount of commitments expected to be funded.
Loans that do not share risk characteristics are evaluated on an individual basis and are excluded from the collective evaluation. ChoiceOne has determined that any loans which have been placed on non-performing status, loans with a risk rating of 6 or higher, and loans past due more than 60 days will be assessed individually for evaluation. Management's judgment will be used to determine if the
loan should be migrated back to pool on an individual basis. Individual analysis will establish a specific reserve for loans in scope. Specific reserves on non-performing loans are typically based on management’s best estimate of the fair value of collateral securing these loans, adjusted for selling costs as appropriate or based on the present value of the expected cash flows from that loan.
ACL for Securities
Securities Available for Sale - For securities AFS in an unrealized loss position, management determines whether they intend to sell or if it is more likely than not that ChoiceOne will be required to sell the security before recovery of the amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For securities AFS with unrealized losses not meeting these criteria, management evaluates whether any decline in fair value is due to credit loss factors. In making this assessment, management considers any changes to the rating of the security by rating agencies and adverse conditions specifically related to the issuer of the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses (“ACL”) is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Changes in the ACL under ASC 326-30 are recorded as provisions for (or reversal of) credit loss expense. Losses are charged against the allowance when the collectability of a debt security AFS is confirmed or when either of the criteria regarding intent or requirement to sell is met. Any impairment that has not been recorded through an ACL is recognized in other comprehensive income, net of income taxes. At December 31, 2024, there was no ACL related to debt securities AFS.
Securities Held to Maturity - Since the adoption of CECL, ChoiceOne measures credit losses on HTM securities on a collective basis by major security type with each type sharing similar risk characteristics, and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. The ACL on securities HTM is a contra asset valuation account that is deducted from the carrying amount of HTM securities to present the net amount expected to be collected. HTM securities are charged off against the ACL when deemed uncollectible. Adjustments to the ACL are reported in ChoiceOne’s Consolidated Statements of Income in the provision for credit losses. Accrued interest receivable totaled $2.0 million and $2.1 million at December 31, 2024, and 2023, respectively, and was reported in other assets on the consolidated balance sheets and is excluded from the estimate of credit losses. With regard to US Treasury securities, these have an explicit government guarantee; therefore, no ACL is recorded for these securities. With regard to obligations of states and political subdivisions and other HTM securities, management considers (1) issuer bond ratings, (2) historical loss rates for given bond ratings, (3) the financial condition of the issuer, and (4) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities. At December 31, 2024, the ACL related to securities HTM is insignificant.
Troubled Loan Modifications
FASB also issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. This standard eliminated the previous accounting guidance for troubled debt restructurings and added additional disclosure requirements for gross chargeoffs by year of origination. It also prescribes guidance for reporting modifications of loans to borrowers experiencing financial difficulty.
Loan Servicing Rights
Loan servicing rights represent the estimated value of servicing loans that are sold with servicing retained by ChoiceOne and are initially recorded at estimated fair value. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues. Management’s accounting treatment of loan servicing rights is estimated based on current prepayment speeds that are typically market driven.
Management believes the accounting estimate related to loan servicing rights is a “critical accounting estimate” because (1) the estimate is highly susceptible to change from period to period because of significant changes within long-term interest rates affecting the prepayment speeds for current loans being serviced and (2) the impact of recognizing an impairment loss could have a material effect on ChoiceOne’s net income. Management has obtained a third-party valuation of its loan servicing rights to corroborate its current carrying value at the end of each reporting period.
Goodwill
Goodwill is not amortized but is evaluated annually for impairment and on an interim basis if events or changes in circumstances indicate that goodwill might be impaired. The goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount, and an impairment charge would be recognized for any amount by which the carrying amount exceeds the reporting unit’s fair value. The Company acquired Valley Ridge Financial Corp. in 2006, County Bank Corp in 2019, and Community Shores in 2020, which resulted in the recognition of goodwill of $13.7 million, $38.9 million and $7.3 million, respectively.
ChoiceOne engaged a third party valuation firm to assist in performing a quantitative analysis of goodwill as of June 30, 2024 ("the measurement date"). In deriving the fair value of the reporting unit (the Bank), the third-party firm assessed general economic conditions and outlook; industry and market considerations and outlook; the impact of recent events to financial performance; the market price of ChoiceOne’s common stock and other relevant events. In addition, the valuation relied on financial projections through 2029 and growth rates prepared by management. Based on the valuation prepared, it was determined that ChoiceOne's estimated fair value of the reporting unit at the measurement date was greater than its book value and impairment of goodwill was not required. As of the measurement date and December 31, 2024 the stock price was greater than the book value. No material changes and no triggering events have occurred that indicated impairment from the measurement date through December 31, 2024.
Deferred Tax Assets and Liabilities
Income taxes include both a current and deferred portion. Deferred tax assets and liabilities are recorded to account for differences in the timing of the recognition of revenues and expenses for financial reporting and tax purposes. Generally accepted accounting principles require that deferred tax assets be reviewed to determine whether a valuation allowance should be established using a “more likely than not” standard. Based on its review of ChoiceOne’s deferred tax assets as of December 31, 2024, management determined that no valuation allowance was necessary. The valuation of current and deferred income tax assets and liabilities is considered critical, as it requires management to make estimates based on provisions of the enacted tax laws. The assessment of tax assets and liabilities involves the use of estimates, assumptions, interpretations, and judgments concerning certain accounting pronouncements and the federal tax code.
Identification and Classification of Merger-Related Expenses
Merger-related expenses are costs incurred directly in connection with the company's merger and acquisition activities. These expenses include legal fees for negotiation and drafting of merger agreements, accounting and auditing fees related to due diligence and financial statement preparation, consulting fees for strategic advisory services specific to the merger, costs related to regulatory filings and compliance, expenses for integration planning and execution (including IT and systems integration), severance and retention bonuses for employees affected by the merger, and travel and accommodation expenses directly related to merger activities.
To ensure accurate classification and segregation of these expenses, detailed documentation supporting the nature and purpose of each expense is maintained, including invoices, contracts, and internal memos. All merger-related expenses must be reviewed and approved by the CFO or an authorized delegate to ensure they meet the criteria for classification as merger-related. The Accounting Department conducts periodic reviews of these expenses to ensure proper classification and segregation, promptly addressing and correcting any discrepancies. Merger-related expenses are disclosed separately in the financial statements and accompanying notes to provide transparency to investors and stakeholders.

---

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest rate risk is related to liquidity because each is affected by maturing assets and sources of funds. ChoiceOne’s Risk Committee attempts to stabilize the interest rate spread and avoid possible adverse effects when unusual or rapid changes in interest rates occur. The Risk Committee uses a simulation model to measure the Bank’s interest rate risk. The model incorporates changes in interest rates on rate-sensitive assets and liabilities. The degree of rate sensitivity is affected by prepayment assumptions that exist in the assets and liabilities. One method the Risk Committee uses of measuring interest rate sensitivity is the ratio of rate-sensitive assets to rate-sensitive liabilities. An asset or liability is considered to be rate-sensitive if it matures or otherwise reprices within a given time frame.
Table 5 documents the maturity or repricing schedule for ChoiceOne’s rate-sensitive assets and liabilities for selected time periods:
Table 5 - Maturities and Repricing Schedule
As of December 31, 2024
(Dollars in thousands)
0 - 3
3 - 12
1 - 5
Over
Months
Months
Years
5 Years
Total
Assets
Equity securities at fair value
$
7,782
$
-
$
-
$
-
$
7,782
Securities available for sale
63,054
5,948
141,844
268,271
479,117
Securities held to maturity
16,887
3,163
97,906
276,578
394,534
Federal Home Loan Bank stock
9,383
-
-
-
9,383
Federal Reserve Bank stock
-
-
-
5,307
5,307
Loans held for sale
7,288
-
-
-
7,288
Loans to other financial institutions
39,878
-
-
-
39,878
Core Loans
371,533
208,690
763,592
161,947
1,505,762
Cash surrender value of life insurance policies
-
-
-
44,896
44,896
Interest rate derivative contracts
23,649
-
-
-
23,649
Rate-sensitive assets
$
539,454
$
217,801
$
1,003,342
$
756,999
$
2,517,596
Liabilities
Interest-bearing demand deposits
$
630,155
$
-
$
-
$
-
$
630,155
Money market deposits
290,012
-
-
-
$
290,012
Savings deposits
338,109
-
-
-
$
338,109
Certificates of deposit
118,393
260,376
15,335
$
394,371
Brokered deposits
29,884
5,133
1,494
-
36,511
Borrowings
135,000
20,000
20,000
-
175,000
Subordinated debentures
3,492
-
32,260
-
35,752
Interest rate derivative contracts
-
-
-
-
-
Rate-sensitive liabilities
$
1,545,045
$
285,509
$
69,089
$
$
1,899,910
Rate-sensitive assets less rate-sensitive liabilities:
Asset (liability) gap for the period
$
(1,005,591
)
$
(67,708
)
$
934,253
$
756,732
$
617,686
Cumulative asset (liability) gap
$
(1,005,591
)
$
(1,073,299
)
$
(139,046
)
$
617,686
(1) Interest rate derivative contracts include pay fixed, receive variable swaps with a notional value of $401.0 million. Further details can be found in Note 8 - Derivatives and Hedging Activities.
Under this method, the Risk Committee measures interest rate sensitivity by focusing on the one-year repricing gap. ChoiceOne’s ratio of rate-sensitive assets to rate-sensitive liabilities that matured or repriced within a one-year time frame was 41% at December 31, 2024, compared to 38% at December 31, 2023. Table 5 above shows the entire balance of interest-bearing demand deposits, savings deposits, and money market deposits in the shortest repricing term. Although these categories have the ability to reprice immediately, management has some control over the actual timing or extent of the changes in interest rates on these liabilities. The Risk Committee plans to continue to monitor the ratio of rate-sensitive assets to rate-sensitive liabilities on a quarterly basis in 2025. As interest rates change, the Risk Committee will attempt to match its maturing assets with corresponding liabilities to maximize ChoiceOne’s net interest income.
Another method the Risk Committee uses to monitor its interest rate sensitivity is to subject rate-sensitive assets and liabilities to interest rate shocks. At December 31, 2024, management used a simulation model to subject its assets and liabilities up to an immediate 200 basis point increase and decline. The maturities of loans and mortgage-backed securities were affected by certain prepayment assumptions. Maturities for interest-bearing core deposits were based on an estimate of the period over which they would be outstanding. The maturities of advances from the borrowings were based on their contractual maturity dates. In the case of variable rate assets and
liabilities, repricing dates were used to determine their values. The simulation model measures the effect of immediate interest rate changes on both net interest income and shareholders’ equity.
Table 6 provides an illustration of hypothetical interest rate changes as of December 31, 2024 and 2023:
Table 6 - Sensitivity to Changes in Interest Rates
Net
Market
(Dollars in thousands)
Interest
Percent
Value of
Percent
Income
Change
Equity
Change
Change in Interest Rate
200 basis point rise
76,250
-
%
415,500
%
100 basis point rise
76,320
-
%
408,000
%
Base rate scenario
75,950
-
%
391,800
-
%
100 basis point decline
75,230
%
368,200
%
200 basis point decline
73,080
%
330,800
%
Net
Market
(Dollars in thousands)
Interest
Percent
Value of
Percent
Income
Change
Equity
Change
Change in Interest Rate
200 basis point rise
67,650
%
480,950
%
100 basis point rise
68,430
%
469,920
%
Base rate scenario
69,100
-
%
446,210
-
%
100 basis point decline
66,660
%
407,940
%
200 basis point decline
66,120
%
350,800
%
As of December 31, 2024, the Bank was within its guidelines for immediate rate shocks of 100 and 200 basis points up and down for net interest income and market value of shareholders’ equity scenarios. As of December 31, 2023, the Bank was within its guidelines for immediate rate shocks of 100 and 200 basis points up and down for net interest income scenarios and was within its guidelines for immediate rate shocks of 100 and 200 basis points up and 100 basis points down for market value of shareholders’ equity scenarios. The immediate rate shock of 200 basis points down for market value of shareholders’ equity scenarios was higher than the policy guidelines. The Risk Committee plans to continue to monitor the effect of changes in interest rates on both net interest income and shareholders’ equity and will make changes in the duration of its rate-sensitive assets and rate-sensitive liabilities where necessary.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of ChoiceOne Financial Services, Inc.
Opinions on the Consolidated Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of ChoiceOne Financial Services, Inc. (the “Company”) as of December 31, 2024 and 2023, the related consolidated statements of income, comprehensive income, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2024, and the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2024, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO framework”).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2024 and 2023, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2024, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2024, based on criteria established in the COSO framework.
Basis for Opinion
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements
that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Credit Losses - Qualitative Adjustment
As described in Notes 1 and 3 to the consolidated financial statements, management’s estimate of the allowance for credit losses (ACL) at December 31, 2024, includes a reserve on collectively evaluated loans. The reserve on collectively evaluated loans is based on an historical average loss rates of peer banks, adjusted for current and forecasted factors, applied over the remaining life of loans. Management applies an adjustment for qualitative factors based on internal and external qualitative and credit market risk factors, as described in Notes 1 and 3 to the financial statements.
Significant judgment was required by management in the selection and measurement of qualitative factor adjustments. Accordingly, performing audit procedures to evaluate the Company’s estimated ACL involved a high degree of auditor judgment and required significant effort, including the involvement of professionals with specialized skill and knowledge.
How the Critical Audit Matter was Addressed in the Audit
Our audit procedures related to the Company’s estimate of the ACL included, but were not limited to, the following:
•We evaluated the design of management’s controls over the determination of the qualitative factor adjustments.
•We obtained an understanding of management’s process for determining the need for qualitative factor adjustments, identifying appropriate factors, and measuring the direction and magnitude of the adjustment.
•We evaluated management's rationale for determining qualitative adjustments were relevant and warranted for each loan segment and assessed the measurement of qualitative factor adjustments applied by management.
•We assessed qualitative factors and overall reserves on collectively evaluated loans against trends in Company specific loss history.
/s/ Plante & Moran, PLLC
We have served as the Company’s auditor since 2006.
Grand Rapids, Michigan
March 11, 2025
ChoiceOne Financial Services, Inc.
Consolidated Balance Sheets
December 31,
(Dollars in thousands)
Assets
Cash and due from banks
$
96,401
$
55,083
Time deposits in other financial institutions
Cash and cash equivalents
96,751
55,433
Equity securities, at fair value (Note 2)
7,782
7,505
Securities available for sale, at fair value (Note 2)
479,117
514,598
Securities held to maturity, at amortized cost (Note 2)
394,534
407,959
Federal Home Loan Bank stock
9,383
4,449
Federal Reserve Bank stock
5,307
5,065
Loans held for sale
7,288
4,710
Loans to other financial institutions
39,878
19,400
Core Loans
1,505,762
1,391,253
Total loans held for investment (Note 3)
1,545,640
1,410,653
Allowance for loan losses (Note 3)
(16,552
)
(15,685
)
Loans, net
1,529,088
1,394,968
Premises and equipment, net (Note 5)
27,099
29,750
Other real estate owned, net (Note 7)
Cash value of life insurance policies
44,896
45,074
Goodwill (Note 6)
59,946
59,946
Core deposit intangible, net (Note 6)
1,096
1,854
Other assets
60,483
45,273
Total assets
$
2,723,243
$
2,576,706
Liabilities
Deposits - noninterest-bearing (Note 9)
$
524,945
$
547,625
Deposits - interest-bearing (Note 9)
1,652,647
1,550,985
Brokered deposits (Note 9)
36,511
23,445
Total deposits
2,214,103
2,122,055
Borrowings (Note 10)
175,000
200,000
Subordinated debentures (Note 11)
35,752
35,507
Other liabilities (Notes 12)
37,973
23,510
Total liabilities
2,462,828
2,381,072
Shareholders’ Equity
Preferred stock; shares authorized: 100,000; shares outstanding: none
-
-
Common stock and paid-in capital, no par value; shares authorized: 30,000,000; shares outstanding: 8,965,483 at December 31, 2024 and 7,548,217 at December 31, 2023 (Note 16)
206,780
173,513
Retained earnings
91,414
73,699
Accumulated other comprehensive income, net
(37,779
)
(51,578
)
Total shareholders’ equity
260,415
195,634
Total liabilities and shareholders’ equity
$
2,723,243
$
2,576,706
See accompanying notes to consolidated financial statements.
ChoiceOne Financial Services, Inc.
Consolidated Statements of Income
Year Ended
(Dollars in thousands, except per share data)
December 31,
Interest income
Loans, including fees
$
89,580
$
68,384
$
52,823
Securities:
Taxable
21,228
21,169
15,583
Tax exempt
5,614
5,629
6,163
Other
4,682
3,798
Total interest income
121,104
98,980
75,060
Interest expense
Deposits
34,174
23,990
5,845
Advances from Federal Home Loan Bank
2,041
1,771
Other
10,447
7,334
1,784
Total interest expense
46,662
33,095
7,746
Net interest income
74,442
65,885
67,314
Provision for (reversal of) credit losses on loans (Note 3)
1,300
1,265
Provision for (reversal of) credit losses on unfunded commitments (Note 3)
(675
)
(1,115
)
-
Net Provision for (reversal of) credit losses expense (Note 3)
Net interest income after provision for credit losses
73,817
65,735
67,064
Noninterest income
Customer service charges
4,774
4,601
4,561
Credit and debit card fees
5,797
4,746
4,789
Insurance and investment commissions
Gains on sales of loans (Note 4)
2,439
1,954
2,343
Net (losses) gains on sales of securities (Note 2)
-
(71
)
(809
)
Net (losses) gains on sales and write-downs of other assets (Note 7)
Earnings on life insurance policies
1,934
1,096
1,312
Trust income
Change in market value of equity securities
(246
)
(955
)
Other
1,010
1,210
1,219
Total noninterest income
17,995
14,906
14,072
Noninterest expense
Salaries and benefits (Note 14 and 15)
33,408
31,963
30,391
Occupancy and equipment (Note 5)
5,797
6,048
6,189
Data processing
5,905
5,350
5,488
Communication
1,317
1,268
1,241
Professional fees
2,471
2,198
2,175
Supplies and postage
Advertising and promotional
Intangible amortization (Note 6)
1,153
FDIC insurance
1,335
1,184
Merger related expenses
1,039
-
-
Other
5,207
4,607
4,636
Total noninterest expense
58,723
55,074
53,478
Income before income tax expense
33,089
25,567
27,658
Income tax expense
6,362
4,306
4,018
Net income
$
26,727
$
21,261
$
23,640
Basic earnings per share (Note 16)
$
3.27
$
2.82
$
3.15
Diluted earnings per share (Note 16)
$
3.25
$
2.82
$
3.15
Dividends declared per share
$
1.09
$
1.05
$
1.01
See accompanying notes to consolidated financial statements.
ChoiceOne Financial Services, Inc.
Consolidated Statements of Comprehensive Income
Year Ended
(Dollars in thousands)
December 31,
Net income
$
26,727
$
21,261
$
23,640
Other comprehensive income:
Change in net unrealized gain (loss) on AFS securities
1,362
20,934
(91,923
)
Income tax benefit (expense)
(286
)
(4,396
)
19,304
Reclassification adjustment for net (gain) loss included in net income
-
-
Income tax benefit (expense)
-
-
(170
)
Reclassification adjustment for net gain (loss) for fair value hedge
7,205
(1,534
)
1,930
Income tax benefit (expense)
(1,513
)
(405
)
Net unrealized (gains) losses on securities transferred from AFS to HTM
-
-
3,404
Income tax benefit (expense)
-
-
(715
)
Unrealized gain (loss) on AFS securities, net of tax
6,768
15,326
(67,766
)
Reclassification of unrealized gain (loss) upon transfer of securities from AFS to HTM
-
-
(3,404
)
Income tax benefit (expense)
-
-
Amortization of net unrealized (gains) losses on securities transferred from AFS to HTM
Income tax benefit (expense)
(51
)
(70
)
(74
)
Unrealized gain (loss) on held to maturity securities, net of tax
(2,412
)
Change in net unrealized gain (loss) on cash flow hedge
7,566
3,024
(558
)
Income tax benefit (expense)
(1,589
)
(635
)
Reclassification adjustment for net (gain) loss on cash flow hedge
-
-
Income tax benefit (expense)
-
-
(162
)
Amortization of net unrealized (gains) losses included in net income
1,092
2,837
Income tax benefit (expense)
(229
)
(596
)
(210
)
Unrealized gain (loss) on cash flow hedge instruments, net of tax
6,840
4,630
Other comprehensive income (loss), net of tax
13,799
20,219
(69,221
)
Comprehensive income (loss)
$
40,526
$
41,480
$
(45,581
)
See accompanying notes to consolidated financial statements.
ChoiceOne Financial Services, Inc.
Consolidated Statements of Changes in Shareholders’ Equity
Accumulated
Common
Other
Stock and
Comprehensive
Number of
Paid in
Retained
Income/(Loss),
(Dollars in thousands, except per share data)
Shares
Capital
Earnings
Net
Total
Balance, January 1, 2022
7,510,379
$
171,913
$
52,332
$
(2,576
)
$
221,669
Net income
23,640
23,640
Other comprehensive income (loss)
(69,221
)
(69,221
)
Shares issued for directors and employee stock plans
31,618
Compensation expense for employee stock purchases
Stock-based compensation expense
Shares repurchased
(25,899
)
(682
)
(682
)
Cash dividends declared ($1.01 per share)
(7,578
)
(7,578
)
Balance, December 31, 2022
7,516,098
$
172,277
$
68,394
$
(71,797
)
$
168,874
Adoption of ASU 2016-13 (CECL) on January 1, 2023
(8,046
)
(8,046
)
Balance January 1, 2023
7,516,098
$
172,277
$
60,348
$
(71,797
)
$
160,828
Net income
21,261
21,261
Other comprehensive income (loss)
20,219
20,219
Shares issued for directors and employee stock plans
31,472
Compensation expense for employee stock purchases
Stock-based compensation expense
Stock options exercised and issued (1)
-
Cash dividends declared ($1.05 per share)
(7,910
)
(7,910
)
Balance, December 31, 2023
7,548,217
$
173,513
$
73,699
$
(51,578
)
$
195,634
Net income
26,727
26,727
Other comprehensive income (loss)
13,799
13,799
Shares issued for directors and employee stock plans
36,101
Compensation expense for employee stock purchases
Stock options exercised and issued (1)
1,165
-
Stock-based compensation expense
Common stock offering net of costs
1,380,000
32,093
32,093
Cash dividends declared ($1.09 per share)
(9,012
)
(9,012
)
Balance, December 31, 2024
8,965,483
$
206,780
$
91,414
$
(37,779
)
$
260,415
(1)The amount shown represents the number of shares issued in cashless transactions where some taxes are netted on a portion of the exercises.
See accompanying notes to consolidated financial statements.
ChoiceOne Financial Services, Inc.
Consolidated Statements of Cash Flows
Year Ended
(Dollars in thousands)
December 31,
Cash flows from operating activities:
Net income
$
26,727
$
21,261
$
23,640
Adjustments to reconcile net income to net cash from operating activities:
Provision for (reversal of provision) credit losses
Depreciation
2,463
2,477
2,658
Amortization
9,870
9,953
10,684
Compensation expense on employee and director stock purchases, stock options, and restricted stock units
1,005
Net (gains) losses on sales of securities
-
Net change in market value of equity securities
(195
)
Gains on sales of loans and capitalized servicing rights
(2,439
)
(1,954
)
(2,343
)
Loans originated for sale
(74,299
)
(56,085
)
(71,829
)
Proceeds from loan sales
73,107
57,342
77,681
Earnings on bank-owned life insurance
(1,234
)
(1,096
)
(1,038
)
Earnings on death benefit from bank-owned life insurance
(700
)
-
(274
)
(Gains) on sales of other real estate owned
(46
)
(12
)
(41
)
Proceeds from sales of other real estate owned
Deferred federal income tax (expense) benefit
(271
)
(24
)
(15
)
Net change in:
Other assets
(817
)
5,395
(4,208
)
Other liabilities
14,790
7,596
6,205
Net cash provided by operating activities
48,646
46,482
44,327
Cash flows from investing activities:
Sales of securities available for sale
-
-
47,167
Sales of equity securities
-
-
Proceeds from Federal Home Loan Bank stock redemption
-
3,917
-
Maturities, prepayments and calls of securities available for sale
33,782
32,289
51,570
Maturities, prepayments and calls of securities held to maturity
25,988
16,572
8,091
Purchases of securities available for sale
(2,479
)
(1,646
)
(55,053
)
Purchases of securities held to maturity
(14,279
)
(597
)
(7,505
)
Purchases of equity securities
(82
)
-
(1,029
)
Purchases of Federal Home Loan Bank stock
(4,934
)
(4,849
)
-
Purchase of Federal Reserve Bank stock
(242
)
-
-
Loan originations and payments, net
(136,070
)
(221,245
)
(130,620
)
Proceeds from bank owned life insurance death benefits claim
2,112
Additions to premises and equipment
(1,706
)
(4,234
)
(1,164
)
Proceeds from (payments for) derivative contracts, net
-
1,732
(1,953
)
Payments for derivative contracts settlements
-
(4,191
)
-
Net cash (used in)/provided by investing activities
(97,910
)
(181,365
)
(89,806
)
Cash flows from financing activities:
Net change in deposits
92,047
4,052
65,709
Proceeds from borrowings
315,000
420,000
726,000
Payments on borrowings
(340,000
)
(270,000
)
(726,000
)
Issuance of common stock
Repurchase of common stock
-
-
(682
)
Share based compensation withholding obligation
(220
)
-
(85
)
Cash dividends
(9,012
)
(7,910
)
(7,578
)
Cash proceeds from common stock offering
32,093
-
-
Net cash provided by/(used in) financing activities
90,582
146,373
57,536
Net change in cash and cash equivalents
41,318
11,490
12,057
Beginning cash and cash equivalents
55,433
43,943
31,886
Ending cash and cash equivalents
$
96,751
$
55,433
$
43,943
Supplemental disclosures of cash flow information:
Cash paid for interest
$
49,902
$
27,481
$
7,577
Cash paid for income taxes
6,350
4,450
1,989
Loans transferred to other real estate owned
-
See accompanying notes to consolidated financial statements.
Note 1 - Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include ChoiceOne Financial Services, Inc. (“ChoiceOne”), its wholly-owned subsidiaries, ChoiceOne Bank (the “Bank”) and 109 Technologies, LLC, and ChoiceOne Bank’s wholly-owned subsidiary, ChoiceOne Insurance Agencies, Inc. (the “Insurance Agency”). Intercompany transactions and balances have been eliminated in consolidation.
ChoiceOne owns all of the common securities of Community Shores Capital Trust I (the “Capital Trust”). Under U.S. generally accepted accounting principles (“GAAP”), the Capital Trust is not consolidated because it is a variable interest entity and ChoiceOne is not the primary beneficiary.
Nature of Operations
The Bank is a full-service community bank that offers commercial, consumer, and real estate loans as well as traditional demand, savings and time deposits to both commercial and consumer clients within the Bank’s primary market areas in Kent, Muskegon, Newaygo, and Ottawa counties in western Michigan and Lapeer, Macomb, and St. Clair counties in southeastern Michigan. Substantially all loans are secured by specific items of collateral including business assets, consumer assets, and real estate. Commercial loans are expected to be repaid from the cash flows from operations of businesses. Real estate loans are collateralized by either residential or commercial real estate.
109 Technologies, LLC is a wholly owned subsidiary of ChoiceOne Financial Services Inc. and owns intellectual property for a fintech product licensed to third party banks and bank holding companies.
The Insurance Agency is a wholly-owned subsidiary of the Bank. The Insurance Agency sells insurance policies such as life and health for both commercial and consumer clients. The Insurance Agency also offers alternative investment products such as annuities and mutual funds through a registered broker.
Together, the Bank and ChoiceOne’s other direct and indirect subsidiaries account for substantially all of ChoiceOne’s assets, revenues and operating income.
Use of Estimates
To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, ChoiceOne’s management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided. These estimates and assumptions are subject to many risks and uncertainties. Actual results may differ from these estimates. Estimates associated with the allowance for credit losses are particularly susceptible to change.
Cash and Cash Equivalents
Cash and cash equivalents are defined to include cash on hand, demand deposits with other banks, and federal funds sold. Cash flows are reported on a net basis for customer loan and deposit transactions, deposits with other financial institutions, and short-term borrowings with original terms of 90 days or less.
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of unearned interest, deferred loan fees and costs, remaining purchase accounting adjustments, and an allowance for credit losses. Loans held for sale are reported at the lower of cost or market, on an aggregate basis.
Interest income on loans is reported on the interest method and includes amortization of net deferred loan fees and costs over the estimated loan term. Interest on loans is accrued based upon the principal balance outstanding. The accrual of interest is discontinued at the time at which loans are 90 days past due unless the loan is secured by sufficient collateral and is in the process of collection. Past due status is based on the contractual terms of the loan. Loans are placed into nonaccrual status or charged off at an earlier date if collection of principal or interest is considered doubtful. Interest accrued but not received is reversed against interest income when the loans are placed into nonaccrual status. Interest received on such loans is applied to principal until qualifying for return to accrual. Loans are returned to accrual basis when all the principal and interest amounts contractually due are brought current and future payment is reasonably assured. Accrued interest receivable totaled $5.1 million and $4.8 million at December 31, 2024, and 2023, respectively, and was reported in other assets on the consolidated balance sheets and is excluded in the estimate of credit losses.
Purchased financial assets without credit deterioration have been recorded at the acquisition date fair value. Additionally, an allowance is recorded with a corresponding charge to credit loss expense in the reporting period in which the acquisition occurs. For assets purchased with credit deterioration, an allowance is recorded with a corresponding increase to the amortized cost basis of the financial asset as of the acquisition date. No financial assets were purchased since the initiation of CECL on January 1, 2023.
Loans to Other Financial Institutions
Loans to other financial institutions are made up of purchased participating interests in individual advances under a warehouse line of credit used to facilitate funding of residential mortgage loan originations at other financial institutions. The loans are short-term in nature and are designed to provide funding for the time period between the loan origination and its subsequent sale in the secondary market by the originating financial institution at which time our advances are paid off. These advances earn interest based on the warehouse line of credit terms from the time the advance is funded to when the advance is paid off.
Allowance for Credit Losses (“ACL”)
The ACL is a valuation allowance for expected credit losses. The ACL is increased by the provision for credit losses and decreased by loans charged off less any recoveries of charged off loans. As ChoiceOne has had very limited loss experience since 2011, management elected to utilize benchmark peer loss history data to estimate historical loss rates. ChoiceOne identified an appropriate peer group for each loan cohort which shared similar characteristics. Management estimates the ACL required based on the selected peer group loan loss experience, the nature and volume of the loan portfolio, information about specific borrower situations and estimated collateral values, a reasonable and supportable economic forecast, and other factors. Allocations of the ACL may be made for specific loans, but the entire ACL is available for any loan that, in management’s judgment, should be charged off. Loan losses are charged against the ACL when management believes that collection of a loan balance is not possible.
The ACL consists of general and specific components. The general component covers loans collectively evaluated for credit losses and is based on peer historical loss experience adjusted for current and forecasted factors. Management’s adjustment for current and forecasted factors is based on trends in delinquencies, trends in charge-offs and recoveries, trends in the volume of loans, changes in underwriting standards, trends in loan review findings, the experience and ability of lending staff, and a reasonable and supportable economic forecast described further below.
The discounted cash flow methodology is utilized for all loan pools. This methodology is supported by our CECL software provider and allows management to automatically calculate contractual life by factoring in all cash flows and adjusting them for behavioral and credit-related aspects.
Reasonable and supportable economic forecasts have to be incorporated in determining expected credit losses. The forecast period represents the time frame from the current period end through the point in time that we can reasonably forecast and support entity and environmental factors that are expected to impact the performance of our loan portfolio. Ideally, the economic forecast period would encompass the contractual terms of all loans; however, the ability to produce a forecast that is considered reasonable and supportable becomes more difficult or may not be possible in later periods. Subsequent to the end of the forecast period, we revert to historical loan data based on an ongoing evaluation of each economic forecast in relation to then current economic conditions as well as any developing loan loss activity and resulting historical data. As of December 31, 2024, we used a one-year reasonable and supportable economic forecast period, with a two year straight-line reversion period.
We are not required to develop and use our own economic forecast model, and we elected to utilize economic forecasts from third-party providers that analyze and develop forecasts of the economy for the entire United States at least quarterly.
Other inputs to the calculation are also updated or reviewed quarterly. Prepayment speeds are updated on a one quarter lag based on the asset liability model from the previous quarter. This model is performed at the loan level. Curtailment is updated quarterly within the ACL model based on our peer group average. The reversion period is reviewed by management quarterly with consideration of the current economic climate. Prepayment speeds and curtailment were updated during the fourth quarter of 2024; however, the effect was insignificant.
We are also required to consider expected credit losses associated with loan commitments over the contractual period in which we are exposed to credit risk on the underlying commitments unless the obligation is unconditionally cancellable by us. Any allowance for off-balance sheet credit exposures is reported as an other liability on our Consolidated Balance Sheet and is increased or decreased via the provision for credit losses account on our Consolidated Statement of Income. The calculation includes consideration of the likelihood that funding will occur and forecasted credit losses on commitments expected to be funded over their estimated lives. The allowance is calculated using the same aggregate reserve rates calculated for the funded portion of loans at the portfolio level applied to the amount of commitments expected to be funded. The liability for expected credit losses on unfunded loans and other commitments was $1.5 million on December 31, 2024, compared to $2.2 million as of December 31, 2023.
Loans that do not share risk characteristics are evaluated on an individual basis and are excluded from the collective evaluation. ChoiceOne has determined that any loans which have been placed on non-performing status, loans with a risk rating of 6 or higher, and loans past due more than 60 days will be assessed individually for evaluation. Management’s judgment will be used to determine if the loan should be migrated back to pool on an individual basis. Individual analysis will establish a specific reserve for loans in scope. Specific reserves on non-performing loans are typically based on management’s best estimate of the fair value of collateral securing these loans, adjusted for selling costs as appropriate or based on the present value of the expected cash flows from that loan.
Securities
Debt securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Debt securities are classified as available for sale because they might be sold before maturity. Debt securities classified as available for sale are carried at fair value, with unrealized holding gains and losses reported separately in the accumulated other comprehensive income or loss section of shareholders’ equity, net of tax effect. Restricted investments in Federal Reserve Bank stock and Federal Home Loan Bank stock are carried at cost. Equity securities consist of investments in preferred stock and investments in common stock of other financial institutions. Equity securities are reported at their fair value with changes in market value reported through current earnings.
Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized using the level-yield method without anticipating prepayments. Gains or losses on sales are recorded on the trade date based on the amortized cost of the security sold.
Securities Available for Sale - For securities AFS in an unrealized loss position, management determines whether they intend to sell or if it is more likely than not that ChoiceOne will be required to sell the security before recovery of the amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For securities AFS with unrealized losses not meeting these criteria, management evaluates whether any decline in fair value is due to credit loss factors. In making this assessment, management considers any changes to the rating of the security by rating agencies and adverse conditions specifically related to the issuer of the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses (“ACL”) is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Changes in the ACL under ASC 326-30 are recorded as provisions for (or reversal of) credit loss expense. Losses are charged against the allowance when the collectability of a debt security AFS is confirmed or when either of the criteria regarding intent or requirement to sell is met. Any impairment that has not been recorded through an ACL is recognized in other comprehensive income, net of income taxes. At December 31, 2024 and December 31, 2023, there was no ACL related to debt securities AFS.
Securities Held to Maturity - Since the adoption of CECL, ChoiceOne measures credit losses on HTM securities on a collective basis by major security type with each type sharing similar risk characteristics, and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. The ACL on securities HTM is a contra asset valuation account that is deducted from the carrying amount of HTM securities to present the net amount expected to be collected. HTM securities are charged off against the ACL when deemed uncollectible. Adjustments to the ACL are reported in ChoiceOne’s Consolidated Statements of Income in the provision for credit losses. Accrued interest receivable totaled $2.0 million and $2.1 million at December 31, 2024, and 2023, respectively, and was reported in other assets on the consolidated balance sheets and is excluded from the estimate of credit losses. With regard to US Treasury securities, these have an explicit government guarantee; therefore, no ACL is recorded for these securities. With regard to obligations of states and political subdivisions and other HTM securities, management considers (1) issuer bond ratings, (2) historical loss rates for given bond ratings, (3) the financial condition of the issuer, and (4) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities. A discounted cash flow method will be used to determine the reserve required for any credit losses on HTM securities. At December 31, 2024 and December 31, 2023, the ACL related to securities HTM is insignificant.
Troubled Loan Modifications
Occasionally, the Company modifies loans to borrowers in financial distress by providing term extension, an other-than-insignificant payment delay or interest rate reduction. In some cases, the Company provides multiple types of concessions on one loan. Typically, one type of concession, such as a term extension, is granted initially. Additional concessions may be granted if the borrower continues to experience financial distress.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation. Land is carried at cost. Land improvements are depreciated using the straight-line method with useful lives ranging from 7 to 15 years. Building and related components are depreciated using the straight-line method with useful lives ranging from 5 to 39 years. Leasehold improvements are depreciated over the shorter of the estimated life or the lease term. Furniture and equipment are depreciated using the straight-line method with useful lives ranging from 3 to 7 years. Fixed assets are periodically reviewed for impairment. If impaired, the assets are recorded at fair value.
Other Real Estate Owned
Real estate properties acquired in the collection of a loan are initially recorded at the lower of the Bank’s basis in the loans or fair value at acquisition establishing a new cost basis. Any reduction to fair value from the carrying value of the related loan is accounted for as a credit loss. After acquisition, a valuation allowance reduces the reported amount to the lower of the initial amount or fair value less costs to sell. Expenses to repair or maintain properties are included within other noninterest expenses. Gains and losses upon disposition and changes in the valuation allowance are reported net within noninterest income.
Bank Owned Life Insurance
Bank owned life insurance policies are stated at the current cash surrender value of the policy, or the policy death proceeds less any obligation to provide a death benefit to an insured’s beneficiaries if that value is less than the cash surrender value. Increases in the asset value are recorded as earnings in other income.
Loan Servicing Rights
Loan servicing rights represent the allocated value of servicing rights on loans sold with servicing retained. Servicing rights are initially recorded at estimated fair value and fair value is determined using prices for similar assets with similar characteristics when available or based upon discounted cash flows using market-based assumptions. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the rights, using groupings of the underlying loans as to interest rates and then, secondarily, as to geographic and prepayment characteristics. Any impairment of a grouping is reported as a valuation allowance.
Goodwill and Intangible Assets
Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of the acquired tangible assets and liabilities and identifiable intangible assets. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually or more frequently if events and circumstances exist that indicate that a goodwill impairment test should be performed.
Core Deposit Intangible
Core deposit intangible represents the value of the acquired customer core deposit bases and is included as an asset on the consolidated balance sheets. The core deposit intangible has an estimated finite life, is amortized on an accelerated basis over a 120 month period and is subject to periodic impairment evaluation.
Loan Commitments and Related Financial Instruments
Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit issued to meet financing needs of customers. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.
Employee Benefit Plans
ChoiceOne’s 401(k) plan allows participants to make contributions to their individual accounts under the plan in amounts up to the IRS maximum. Employer matching contributions from ChoiceOne to its 401(k) plan are discretionary.
Income Taxes
Income tax expense is the sum of the current year income tax due and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax
benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Company recognizes interest and/or penalties related to income tax matters in income tax expense.
Earnings Per Share
Basic earnings per common share (“EPS”) is based on weighted-average common shares outstanding. Diluted EPS assumes issuance of any dilutive potential common shares issuable under stock options or restricted stock units granted.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income or loss. Other comprehensive income or loss includes unrealized gains and losses on securities available for sale and changes in the funded status of derivative instruments, net of tax, which are also recognized as a separate component of shareholders’ equity.
Accumulated other comprehensive income was as follows:
(Dollars in thousands)
As of December 31,
Unrealized gain (loss) on available-for-sale securities
$
(61,074
)
$
(69,641
)
Unrealized gain (loss) on held to maturity securities
(2,478
)
(2,720
)
Unrealized gain (loss) on derivative instruments designated as cash flow hedges
15,730
7,072
Tax effect
10,043
13,711
Accumulated other comprehensive income (loss)
$
(37,779
)
$
(51,578
)
Loss Contingencies
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe that there are any such matters that may have a material effect on the financial statements as of December 31, 2024.
Cash Restrictions
Cash on hand or on deposit with the Federal Reserve Bank was $0 at both December 31, 2024 and 2023, as the Federal Reserve revoked the reserve requirement.
Leases
Leases are classified as operating or finance leases at the lease commencement date. Lease expense for operating leases and short-term leases is recognized on a straight-line basis over the lease term. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term.
Stock-Based Compensation
Share based restricted stock units are valued at fair value as of the grant date. The Company values share-based stock option awards granted using the Black-Scholes option-pricing model. The Company recognizes compensation expense for its awards on a straight-line basis over the requisite service period for the entire award (straight-line attribution method), ensuring that the amount of compensation cost recognized at any date at least equals the portion of the grant-date fair value of the award that is vested at that time. Compensation costs related to stock options granted are disclosed in Note 15.
Dividend Restrictions
Banking regulations require the maintenance of certain capital levels and may limit the amount of dividends that may be paid by the Bank to ChoiceOne (see Note 21).
Fair Value of Financial Instruments
Fair values of financial instruments are estimated using relevant market information and other assumptions, which are more fully documented in Note 18 to the consolidated financial statements. Fair value estimates involve uncertainties and matters of significant
judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.
Derivatives
At the inception of a derivative contract to be designated as a hedge, ChoiceOne designates the derivative as one of two types based on our intention and belief as to the likely effectiveness of the hedge. These two types are (1) a hedge of changes in fair value of a recognized asset or liability or of an unrecognized firm commitment (“fair value hedge”), and (2) a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”). For a fair value hedge, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item, are recognized in current earnings as fair values change. For a cash flow hedge, the gain or loss on the derivative is reported in other comprehensive income and is reclassified into earnings in the same period during which the hedged transaction affects the earnings. The changes in fair value of derivatives that do not qualify for hedge accounting are reported in current earnings, as noninterest income.
Net cash settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense, based on the item being hedged. Cash flows on hedges are classified in the cash flow statement in the same line item as the cash flows of the item being hedged.
The initial fair value of hedge components excluded from the assessment of effectiveness are recognized in the statement of financial condition under a systematic and rational method over the life of the hedging relationship and are presented in the same income statement line item as the earnings effect of the hedged item. Any difference between the change in the fair value of the hedge components excluded from the assessment of effectiveness and the amounts recognized in earnings are recorded as a component of other comprehensive income.
ChoiceOne discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting changes in fair values or cash flows of the hedged item, the derivative is settled or terminates, a hedged forecasted transaction is no longer probable, a hedged firm commitment is no longer firm, or the treatment of the derivative as a hedge is no longer appropriate or intended. When hedge accounting is discontinued, subsequent changes in fair value of the derivative are recorded as noninterest income. When a fair value hedge is discontinued, the hedged asset or liability is no longer adjusted for changes in fair value and the existing basis adjustment is amortized or accreted over the remaining life of the asset or liability. When a cash flow hedge is discontinued but the hedged cash flows or forecasted transactions are still expected to occur, gains or losses that were accumulated in other comprehensive income are amortized into earnings over the same periods in which the hedged transactions will affect earnings.
In 2024, ChoiceOne began a program to execute interest rate swaps with commercial banking customers desiring longer-term fixed rate loans, while simultaneously entering into interest rate swaps with a correspondent bank to offset the impact of the interest rate swaps with the commercial banking customers. This is known as a back to back loan swap agreement. The net result is the desired floating rate loan and a minimization of the risk exposure of the interest rate swap transactions.
ChoiceOne is exposed to losses if a counterparty fails to make its payments under a contract in which the Company is in the net receiving position. ChoiceOne anticipates that the counterparties will be able to fully satisfy their obligation under the agreements. All the contracts to which we are a party have cash flows that settle monthly or semiannually.
Identification and Classification of Merger-Related Expenses
Merger-related expenses are costs incurred directly in connection with the company's merger and acquisition activities. These expenses include legal fees for negotiation and drafting of merger agreements, accounting and auditing fees related to due diligence and financial statement preparation, consulting fees for strategic advisory services specific to the merger, costs related to regulatory filings and compliance, expenses for integration planning and execution (including IT and systems integration), severance and retention bonuses for employees affected by the merger, and travel and accommodation expenses directly related to merger activities.
Recent Accounting Pronouncements
Adoption of ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires enhanced disclosures about the Company's operating segments. This adoption was aimed at providing more transparent and comprehensive information regarding the Company's financial performance and position. The Company operates in one reportable segment. The Company adopted this guidance as of December 31, 2024, on a retrospective basis. The adoption did not have a material impact on the Company's financial statements but resulted in additional entity-wide disclosures about products and services, geographic
areas, and major customers. These disclosures are intended to provide users of the financial statements with a better understanding of the Company's operations and the economic environments in which it operates.
While ChoiceOne’s management monitors the revenue streams of various products and services for the Bank and the Insurance Agency, operations and financial performance are evaluated on a company-wide basis. Accordingly, all of the financial service operations are considered by management to be aggregated into one reportable operating segment.
ASU 2023-09 Improvements to Income Tax Disclosures
In 2023, the FASB issued ASU 2023-09, Income Taxes: Improvements to Income Tax Disclosures. The amendments in this update enhance transparency and decision usefulness of income tax disclosures. This ASU requires consistent categorization, greater disaggregation, and detailed disclosures related to income taxes paid. These changes aim to help users of financial statements understand factors contributing to differences between effective and statutory tax rates. The disclosure is effective for annual reporting periods beginning after December 15, 2024. The Company is evaluating the impact this will have on the Company's income tax disclosures.
Note 2 - Securities
On January 1, 2022, ChoiceOne reassessed and transferred, at fair value, $428.4 million of securities classified as available for sale to the held to maturity classification. The net unrealized after-tax loss of $2.7 million as of the transfer date remained in accumulated other comprehensive income to be amortized over the remaining life of the securities, offsetting the related amortization of discount or premium on the transferred securities. No gains or losses were recognized at the time of the transfer. The remaining net unamortized unrealized loss on transferred securities included in accumulated other comprehensive income was $2.0 million after tax as of December 31, 2024.
The fair value of equity securities and the related gross unrealized gains and (losses) recognized in noninterest income at December 31 were as follows:
December 31, 2024
Gross
Gross
(Dollars in thousands)
Amortized
Unrealized
Unrealized
Fair
Cost
Gains
Losses
Value
Equity securities
$
8,043
$
$
(658
)
$
7,782
December 31, 2023
Gross
Gross
(Dollars in thousands)
Amortized
Unrealized
Unrealized
Fair
Cost
Gains
Losses
Value
Equity securities
$
7,960
$
$
(667
)
$
7,505
The fair value of securities available for sale and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows:
December 31, 2024
Gross
Gross
(Dollars in thousands)
Amortized
Unrealized
Unrealized
Fair
Available for Sale:
Cost
Gains
Losses
Value
U.S. Treasury notes and bonds
$
89,875
$
-
$
(9,373
)
$
80,502
State and municipal
258,815
-
(30,579
)
228,236
Mortgage-backed
181,863
(20,955
)
160,970
Corporate
-
(38
)
Asset-backed securities
9,387
-
(190
)
9,197
Total
$
540,190
$
$
(61,135
)
$
479,117
December 31, 2023
Gross
Gross
(Dollars in thousands)
Amortized
Unrealized
Unrealized
Fair
Available for Sale:
Cost
Gains
Losses
Value
U.S. Treasury notes and bonds
$
90,345
$
-
$
(10,151
)
$
80,194
State and municipal
269,918
-
(35,236
)
234,682
Mortgage-backed
212,392
(23,905
)
188,501
Corporate
-
(46
)
Asset-backed securities
11,334
-
(317
)
11,017
Total
$
584,239
$
$
(69,655
)
$
514,598
The amortized cost and fair value of securities held to maturity and the related gross unrealized gains and losses were as follows:
December 31, 2024
Gross
Gross
(Dollars in thousands)
Amortized
Unrealized
Unrealized
Fair
Held to Maturity:
Cost
Gains
Losses
Value
U.S. Government and federal agency
$
2,978
$
-
$
(279
)
$
2,699
State and municipal
196,510
(31,477
)
165,038
Mortgage-backed
174,323
(21,963
)
152,367
Corporate
20,495
(1,803
)
18,721
Asset-backed securities
-
(5
)
Total
$
394,534
$
$
(55,527
)
$
339,048
December 31, 2023
Gross
Gross
(Dollars in thousands)
Amortized
Unrealized
Unrealized
Fair
Held to Maturity:
Cost
Gains
Losses
Value
U.S. Government and federal agency
$
2,972
$
-
$
(293
)
$
2,679
State and municipal
196,098
(30,220
)
165,892
Mortgage-backed
188,329
-
(25,796
)
162,533
Corporate
20,013
(2,864
)
17,170
Asset-backed securities
-
(30
)
Total
$
407,959
$
$
(59,203
)
$
348,791
Information regarding sales of equity and debt securities available for sale for the year ended December 31 follows:
(Dollars in thousands)
Proceeds from sales of securities
$
-
$
$
47,167
Gross realized gains
-
-
-
Gross realized losses
-
(71
)
(809
)
Contractual maturities of securities available for sale at December 31, 2024 were as follows:
(Dollars in thousands)
Amortized
Fair
Cost
Value
Due within one year
$
1,260
$
1,248
Due after one year through five years
114,506
103,936
Due after five years through ten years
85,429
77,013
Due after ten years
157,132
135,950
Total debt securities
358,327
318,147
Mortgage-backed securities
181,863
160,970
Total
$
540,190
$
479,117
Contractual maturities of securities held to maturity at December 31, 2024 were as follows:
(Dollars in thousands)
Amortized
Fair
Cost
Value
Due within one year
$
2,745
$
2,726
Due after one year through five years
22,977
20,916
Due after five years through ten years
123,130
106,777
Due after ten years
71,359
56,262
Total debt securities
220,211
186,681
Mortgage-backed securities
174,323
152,367
Total
$
394,534
$
339,048
Certain securities were pledged as collateral for participation in a program that provided Community Reinvestment Act credits and for other purposes, as required or permitted by law. ChoiceOne also pledges securities to the FHLB and the FRB. The purpose of this
pledging strategy is to enhance the availability of cash and other liquid assets that can be used to meet the operational needs of the organization. This strategy also allows the organization to optimize its asset allocation and diversify its funding sources. The carrying amount of the securities pledged as collateral at December 31 was as follows:
(Dollars in thousands)
Securities pledged to Federal Reserve Bank
$
349,861
$
526,413
Securities pledged to Federal Home Loan Bank
265,537
278,503
Securities pledged for Community Reinvestment Act credits
Total Securities pledged
$
615,644
$
805,166
Securities with unrealized losses at year-end 2024 and 2023, aggregated by investment category and length of time the individual securities have been in an unrealized loss position, were as follows:
Less than 12 months
More than 12 months
Total
(Dollars in thousands)
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
Available for Sale:
Value
Losses
Value
Losses
Value
Losses
U.S. Treasury notes and bonds
$
-
$
-
$
80,502
$
9,373
$
80,502
$
9,373
State and municipal
-
-
228,236
30,579
228,236
30,579
Mortgage-backed
142,170
20,954
143,133
20,955
Corporate
-
-
Asset-backed securities
-
-
9,197
9,197
Total temporarily impaired
$
$
$
460,317
$
61,134
$
461,280
$
61,135
Less than 12 months
More than 12 months
Total
(Dollars in thousands)
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
Available for Sale:
Value
Losses
Value
Losses
Value
Losses
U.S. Treasury notes and bonds
$
-
$
-
$
80,194
$
10,151
$
80,194
$
10,151
State and municipal
234,125
35,230
234,682
35,236
Mortgage-backed
1,255
176,400
23,882
177,655
23,905
Corporate
-
-
Asset-backed securities
-
-
11,017
11,017
Total temporarily impaired
$
1,812
$
$
501,940
$
69,626
$
503,752
$
69,655
Less than 12 months
More than 12 months
Total
(Dollars in thousands)
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
Held to Maturity:
Value
Losses
Value
Losses
Value
Losses
U.S. Government and federal agency
$
-
$
-
$
2,699
$
$
2,699
$
State and municipal
5,262
159,558
30,847
164,820
31,477
Mortgage-backed
2,350
141,970
21,952
144,320
21,963
Corporate
-
-
16,591
1,803
16,591
1,803
Asset-backed securities
-
-
Total temporarily impaired
$
7,612
$
$
321,041
$
54,886
$
328,653
$
55,527
Less than 12 months
More than 12 months
Total
(Dollars in thousands)
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
Held to Maturity:
Value
Losses
Value
Losses
Value
Losses
U.S. Government and federal agency
$
-
$
-
$
2,679
$
$
2,679
$
State and municipal
-
165,526
30,220
165,549
30,220
Mortgage-backed
-
-
162,533
25,796
162,533
25,796
Corporate
-
-
15,509
2,864
15,509
2,864
Asset-backed securities
-
-
Total temporarily impaired
$
$
-
$
346,764
$
59,203
$
346,787
$
59,203
ChoiceOne evaluates all securities on a quarterly basis to determine if an ACL and corresponding impairment charge should be recorded. Consideration is given to the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of ChoiceOne to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value of amortized cost basis. ChoiceOne believes that unrealized losses on securities were temporary in nature and were caused primarily by changes in interest rates, increased credit spreads, and reduced market liquidity and were not caused by the credit status of the issuer. No ACL was recorded in the year ended December 31, 2024 and December 31, 2023 on AFS securities.
The majority of unrealized losses at December 31, 2024, are related to U.S. Treasury notes and bonds, state and municipal bonds and mortgage backed securities. The U.S. Treasury notes are guaranteed by the U.S. government and 100% of the notes are rated AA or better. State and municipal bonds are backed by the taxing authority of the bond issuer or the revenues from the bond. On December 31, 2024, 85% of state and municipal bonds held are rated AA or better, 10% are A rated and 4% are not rated. Of the mortgage-backed securities held on December 31, 2024, 42% were issued by US government sponsored entities and agencies, and rated AA, 44% are AAA rated private issue and collateralized mortgage obligation, and 14% are unrated privately issued mortgage-backed securities with structured credit enhancement and collateralized mortgage obligation.
Unrealized losses have not been recognized into income because the issuers’ bonds are of high credit quality, and management does not intend to sell prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions. The issuers continue to make timely principal and interest payments on the bonds. The fair value is expected to recover as the bonds approach maturity.
Following is information regarding unrealized gains and losses on equity securities for the years ending December 31:
Net gains and losses recognized during the period
$
$
(317
)
$
(955
)
Less: Net gains and losses recognized during the period on securities sold
-
(71
)
-
Unrealized gains and losses recognized during the reporting period on securities still held at the reporting date
$
$
(246
)
$
(955
)
Note 3 - Loans and Allowance for Credit Losses
The Bank’s loan portfolio as of December 31 was as follows:
December 31, 2024
December 31, 2023
(Dollars in thousands)
Balance
%
Balance
%
Agricultural
$
48,221
3.12
%
$
49,210
5.39
%
Commercial and Industrial
228,256
14.77
%
229,915
17.67
%
Commercial Real Estate
901,130
58.30
%
786,921
53.03
%
Consumer
29,412
1.90
%
36,541
3.35
%
Construction Real Estate
17,042
1.10
%
20,936
1.24
%
Residential Real Estate
281,701
18.23
%
267,730
19.32
%
Loans to Other Financial Institutions
39,878
2.58
%
19,400
0.00
%
Gross Loans
$
1,545,640
$
1,410,653
Allowance for credit losses
16,552
1.07
%
15,685
1.11
%
Net loans
$
1,529,088
$
1,394,968
ChoiceOne manages its credit risk through the use of its loan policy and its loan approval process and by monitoring of loan credit performance. The loan approval process for commercial loans involves individual and group approval authorities. Individual authority levels are based on the experience of the lender. Group authority approval levels can consist of an internal loan committee that includes the Bank’s President or Senior Lender and other loan officers for loans that exceed individual approval levels, or a loan committee of
the Board of Directors for larger commercial loans. Most consumer loans are approved by individual loan officers based on standardized underwriting criteria, with larger consumer loans subject to approval by the internal loan committee.
Ongoing credit review of commercial loans is the responsibility of the loan officers. ChoiceOne’s internal credit committee meets at least monthly and reviews loans with payment issues and loans with a risk rating of 6, 7, or 8. Risk ratings of commercial loans are reviewed periodically and adjusted if needed. ChoiceOne’s consumer loan portfolio is primarily monitored on an exception basis. Loans where payments are past due are turned over to the applicable Bank’s collection department, which works with the borrower to bring payments current or take other actions when necessary. In addition to internal reviews of credit performance, ChoiceOne contracts with a third party for independent loan review that monitors the loan approval process and the credit quality of the loan portfolio.
Activity in the allowance for credit losses and balances in the loan portfolio was as follows:
Commercial
Loans to Other
(Dollars in thousands)
and
Commercial
Construction
Residential
Financial
Agricultural
Industrial
Consumer
Real Estate
Real Estate
Real Estate
Institutions
Unallocated
Total
Allowance for Credit Losses Year Ended December 31, 2024
Beginning balance
$
$
2,216
$
$
8,820
$
$
3,644
$
$
-
$
15,685
Charge-offs
-
(7
)
(800
)
-
-
(30
)
-
-
(837
)
Recoveries
-
-
-
-
-
Provision
(4
)
-
1,300
Ending balance
$
$
2,260
$
$
9,460
$
$
3,890
$
$
-
$
16,552
Individually evaluated loan reserves
$
-
$
$
$
-
$
$
$
-
$
-
$
Collectively evaluated loan reserves
$
$
2,256
$
$
9,460
$
$
3,743
$
$
-
$
16,384
Loans
December 31, 2024
Individually evaluated loans
$
$
$
$
-
$
$
3,691
$
-
$
4,079
Collectively evaluated loans
48,212
228,137
29,381
901,130
16,813
278,010
39,878
1,541,561
Ending balance
$
48,221
$
228,256
$
29,412
$
901,130
$
17,042
$
281,701
$
39,878
$
1,545,640
Commercial
Loans to Other
(Dollars in thousands)
and
Commercial
Construction
Residential
Financial
Agricultural
Industrial
Consumer
Real Estate
Real Estate
Real Estate
Institutions
Unallocated
Total
Allowance for Credit Losses Year Ended December 31, 2023
Beginning balance
$
$
1,361
$
$
4,822
$
$
$
-
$
$
7,619
Cumulative effect of change in accounting principle
1,587
3,006
2,010
-
(13
)
7,165
Charge-offs
-
(158
)
(554
)
-
-
(27
)
-
-
(739
)
Recoveries
-
-
-
-
Provision
(64
)
(640
)
(25
)
-
1,265
Ending balance
$
$
2,216
$
$
8,820
$
$
3,644
$
$
-
$
15,685
Individually evaluated for impairment
$
$
$
-
$
-
$
$
-
-
$
Collectively evaluated for impairment
$
$
2,210
$
$
8,819
$
$
3,593
$
$
-
$
15,625
Loans
December 31, 2023
Individually evaluated for impairment
$
$
$
$
$
-
$
1,858
$
-
$
2,079
Collectively evaluated for impairment
49,156
229,779
36,539
786,892
20,936
265,872
19,400
1,408,574
Ending balance
$
49,210
$
229,915
$
36,541
$
786,921
$
20,936
$
267,730
$
19,400
$
1,410,653
Commercial
Loans to Other
(Dollars in thousands)
and
Commercial
Construction
Residential
Financial
Agricultural
Industrial
Consumer
Real Estate
Real Estate
Real Estate
Institutions
Unallocated
Total
Allowance for Credit Losses Year Ended December 31, 2022
Beginning balance
$
$
1,454
$
$
3,705
$
$
$
-
$
1,010
$
7,688
Charge-offs
-
(177
)
(496
)
-
-
-
-
-
(673
)
Recoveries
-
-
-
-
Provision
(304
)
(59
)
1,114
(47
)
-
(997
)
Ending balance
$
$
1,361
$
$
4,822
$
$
$
-
$
$
7,619
Individually evaluated for impairment
$
$
$
$
$
-
$
$
-
$
-
$
Collectively evaluated for impairment
$
$
1,347
$
$
4,817
$
$
$
-
$
$
7,466
Loans
December 31, 2022
Individually evaluated for impairment
$
$
$
$
$
-
$
2,474
$
-
$
2,846
Collectively evaluated for impairment
64,136
206,074
39,793
622,131
14,736
225,792
-
1,172,662
Acquired with deteriorated credit quality
-
3,959
8,657
-
1,650
-
14,274
Ending balance
$
64,159
$
210,210
$
39,808
$
630,953
$
14,736
$
229,916
$
-
$
1,189,782
The process to monitor the credit quality of ChoiceOne’s loan portfolio includes tracking (1) the risk ratings of business loans and (2) delinquent and nonperforming consumer loans. Business loans are risk rated on a scale of 1 to 9. A description of the characteristics of the ratings follows:
Risk Rating 1 through 5 or pass: These loans are considered pass credits. They exhibit acceptable credit risk and demonstrate the ability to repay the loan from normal business operations.
Risk rating 6 or special mention: Loans and other credit extensions bearing this grade are considered to be inadequately protected by the current sound worth and debt service capacity of the borrower or of any pledged collateral. These obligations, even if apparently protected by collateral value, have well-defined weaknesses related to adverse financial, managerial, economic, market, or political conditions that have clearly jeopardized repayment of principal and interest as originally intended. Furthermore, there is the possibility that ChoiceOne Bank will sustain some future loss if such weaknesses are not corrected. Clear loss potential, however, does not have to exist in any individual assets classified as substandard. Loans falling into this category should have clear action plans and timelines with benchmarks to determine which direction the relationship will move.
Risk rating 7 or substandard: Loans and other credit extensions graded “7” have all the weaknesses inherent in those graded “6”, with the added characteristic that the severity of the weaknesses makes collection or liquidation in full highly questionable or improbable based upon currently existing facts, conditions, and values. Loans in this classification should be evaluated for non-accrual status. All nonaccrual commercial and Retail loans must be at a minimum graded a risk code “7”.
Risk rating 8 or doubtful: Loans and other credit extensions bearing this grade have been determined to have the extreme probability of some loss, but because of certain important and reasonably specific factors, the amount of loss cannot be determined. Such pending factors could include merger or liquidation, additional capital injection, refinancing plans, or perfection of liens on additional collateral.
Risk rating 9 or loss: Loans in this classification are considered uncollectible and cannot be justified as a viable asset of ChoiceOne Bank. This classification does not mean the loan has absolutely no recovery value, but that it is neither practical nor desirable to defer writing off this loan even though partial recovery may be obtained in the future.
The following table reflects the amortized cost basis of loans as of December 31, 2024 based on year of origination (dollars in thousands):
Commercial:
Prior
Term Loans Total
Revolving Loans
Grand Total
Agricultural
Pass
$
7,669
$
1,729
$
2,998
$
2,867
$
1,545
$
18,573
$
35,381
$
12,666
$
48,047
Special mention
-
-
-
-
-
-
Substandard
-
-
-
-
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
-
Loss
-
-
-
-
-
-
-
-
-
Total
$
7,669
$
1,729
$
2,998
$
2,867
$
1,545
$
18,747
$
35,555
$
12,666
$
48,221
Current year-to-date gross write-offs
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Commercial and Industrial
Pass
$
40,184
$
17,481
$
30,769
$
14,659
$
6,100
$
10,110
$
119,303
$
108,656
$
227,959
Special mention
-
-
Substandard
-
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
-
Loss
-
-
-
-
-
-
-
-
-
Total
$
40,184
$
17,481
$
30,853
$
14,673
$
6,124
$
10,285
$
119,600
$
108,656
$
228,256
Current year-to-date gross write-offs
$
-
$
-
$
-
$
-
$
-
$
$
$
-
$
Commercial Real Estate
Pass
$
150,126
$
140,105
$
120,517
$
99,381
$
69,773
$
151,908
$
731,810
$
165,046
$
896,856
Special mention
-
-
-
-
-
4,274
4,274
-
4,274
Substandard
-
-
-
-
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
-
Loss
-
-
-
-
-
-
-
-
-
Total
$
150,126
$
140,105
$
120,517
$
99,381
$
69,773
$
156,182
$
736,084
$
165,046
$
901,130
Current year-to-date gross write-offs
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Total Commercial Loans
$
197,979
$
159,315
$
154,368
$
116,921
$
77,442
$
185,214
$
891,239
$
286,368
$
1,177,607
Retail:
Prior
Term Loans Total
Revolving Loans
Grand Total
Consumer
Performing
$
6,489
$
6,636
$
8,427
$
4,240
$
1,632
$
1,283
$
28,707
$
$
29,404
Nonperforming
-
-
-
-
-
-
-
-
-
Nonaccrual
-
-
-
-
-
Total
$
6,489
$
6,643
$
8,428
$
4,240
$
1,632
$
1,283
$
28,715
$
$
29,412
Current year-to-date gross write-offs (1)
$
-
$
$
$
$
-
$
$
$
-
$
Construction real estate
Performing
$
1,436
$
$
-
$
$
-
$
-
$
2,409
$
14,404
$
16,813
Nonperforming
-
-
-
-
-
-
-
-
-
Nonaccrual
-
-
-
-
-
-
-
Total
$
1,436
$
$
-
$
$
-
$
-
$
2,409
$
14,633
$
17,042
Current year-to-date gross write-offs
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Residential real estate
Performing
$
40,095
$
43,531
$
54,379
$
25,350
$
13,717
$
45,051
$
222,123
$
56,111
$
278,234
Nonperforming
-
-
-
-
-
-
-
-
-
Nonaccrual
1,864
3,416
3,467
Total
$
40,158
$
43,823
$
56,243
$
26,086
$
13,995
$
45,234
$
225,539
$
56,162
$
281,701
Current year-to-date gross write-offs
$
-
$
$
-
$
$
-
$
$
$
-
$
Loans to Other Financial Institutions
Performing
$
39,878
$
-
$
-
$
-
$
-
$
-
$
39,878
$
-
$
39,878
Nonperforming
-
-
-
-
-
-
-
-
-
Nonaccrual
-
-
-
-
-
-
-
-
-
Total
$
39,878
$
-
$
-
$
-
$
-
$
-
$
39,878
$
-
$
39,878
Current year-to-date gross write-offs
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Total Retail Loans
$
87,961
$
50,917
$
64,671
$
30,848
$
15,627
$
46,517
$
296,541
$
71,492
$
368,033
(1) It is noted that write-offs in the tables above do not include checking account write-offs. Checking account write-offs during the full year 2024 were $607,000 compared to $480,000 during the full year 2023.
The following table reflects the amortized cost basis of loans as of December 31, 2023 based on year of origination (dollars in thousands):
Commercial:
Prior
Term Loans Total
Revolving Loans
Grand Total
Agricultural
Pass
$
5,015
$
4,088
$
3,078
$
1,788
$
7,028
$
18,476
$
39,473
$
9,507
$
48,980
Special mention
-
-
-
-
-
Substandard
-
-
-
-
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
-
Loss
-
-
-
-
-
-
-
-
-
Total
$
5,015
$
4,088
$
3,078
$
1,788
$
7,204
$
18,530
$
39,703
$
9,507
$
49,210
Current year-to-date gross write-offs
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Commercial and Industrial
Pass
$
23,600
$
45,489
$
23,462
$
10,502
$
9,214
$
11,882
$
124,149
$
105,559
$
229,708
Special mention
-
Substandard
-
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
-
Loss
-
-
-
-
-
-
-
-
-
Total
$
23,600
$
45,489
$
23,490
$
10,537
$
9,287
$
11,950
$
124,353
$
105,562
$
229,915
Current year-to-date gross write-offs
$
-
$
$
$
$
-
$
$
$
-
$
Commercial Real Estate
Pass
$
149,181
$
134,289
$
107,033
$
71,754
$
43,846
$
136,361
$
642,464
$
143,120
$
785,584
Special mention
-
-
-
-
-
1,337
1,337
-
1,337
Substandard
-
-
-
-
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
-
Loss
-
-
-
-
-
-
-
-
-
Total
$
149,181
$
134,289
$
107,033
$
71,754
$
43,846
$
137,698
$
643,801
$
143,120
$
786,921
Current year-to-date gross write-offs
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Total Commercial Loans
$
177,796
$
183,866
$
133,601
$
84,079
$
60,337
$
168,178
$
807,857
$
258,189
$
1,066,046
Retail:
Prior
Term Loans Total
Revolving Loans
Grand Total
Consumer
Performing
$
9,775
$
13,876
$
6,771
$
2,849
$
1,260
$
1,202
$
35,733
$
$
36,541
Nonperforming
-
-
-
-
-
-
-
-
-
Nonaccrual
-
-
-
-
-
-
-
-
-
Total
$
9,775
$
13,876
$
6,771
$
2,849
$
1,260
$
1,202
$
35,733
$
$
36,541
Current year-to-date gross write-offs (1)
$
$
$
$
$
-
$
$
$
-
$
Construction real estate
Performing
$
2,507
$
2,719
$
$
-
$
-
$
-
$
5,778
$
15,158
$
20,936
Nonperforming
-
-
-
-
-
-
-
-
-
Nonaccrual
-
-
-
-
-
-
-
-
-
Total
$
2,507
$
2,719
$
$
-
$
-
$
-
$
5,778
$
15,158
$
20,936
Current year-to-date gross write-offs
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Residential real estate
Performing
$
54,231
$
64,768
$
28,301
$
16,391
$
12,556
$
40,270
$
216,517
$
49,491
$
266,008
Nonperforming
-
-
-
-
-
-
-
-
-
Nonaccrual
-
-
-
1,692
1,722
Total
$
54,231
$
65,148
$
29,127
$
16,391
$
12,556
$
40,756
$
218,209
$
49,521
$
267,730
Current year-to-date gross write-offs
$
-
$
$
-
$
-
$
-
$
$
$
-
$
Loans to Other Financial Institutions
Performing
$
19,400
$
-
$
-
$
-
$
-
$
-
$
19,400
$
-
$
19,400
Nonperforming
-
-
-
-
-
-
-
-
-
Nonaccrual
-
-
-
-
-
-
-
-
-
Total
$
19,400
$
-
$
-
$
-
$
-
$
-
$
19,400
$
-
$
19,400
Current year-to-date gross write-offs
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Total Retail Loans
$
85,913
$
81,743
$
36,450
$
19,240
$
13,816
$
41,958
$
279,120
$
65,487
$
344,607
(1) It is noted that write-offs in the tables above do not include checking account write-offs. Checking account write-offs during the full year 2024 were $607,000 compared to $480,000 during the full year 2023.
Included within the loan categories above were loans in the process of foreclosure. As of December 31, 2024 and 2023, loans in the process of foreclosure totaled $1.5 million and $846,000, respectively.
During the year ended December 31, 2024, the amortized cost basis of a loan modified for a borrower facing financial difficulties was $121,000. This loan was classified as single-family residential, and a term extension was granted. However, after the modification, the
loan became over 90 days past due and experienced payment defaults, leading to its transfer into Other Real Estate Owned before the year-end.
The following tables present the amortized cost basis of the loans modified to borrowers experiencing financial difficulty disaggregated by class of financing receivable and type of concession granted during the full year 2024 and 2023.
For the period ended:
December 31, 2024
Term Extension
% of Total
Class of
(Dollars in thousands)
Amortized
Financing
Cost Basis
Receivable
Residential real estate
$
%
Total
$
For the period ended:
December 31, 2023
Term Extension
% of Total
Class of
(Dollars in thousands)
Amortized
Financing
Cost Basis
Receivable
Commercial and industrial
$
%
Residential real estate
%
Total
$
The following table presents the financial effect by type of modification made to borrowers experiencing financial difficulty and class of financing receivable during the full year 2024 and 2023.
For the period ended:
December 31, 2024
Term Extension
Residential real estate
Provided with new five year payment plan based on bankruptcy.
For the period ended:
December 31, 2023
Term Extension
Commercial and industrial
Termed out line of credit and termed out draw note.
Residential real estate
Provided with new twelve month payment plan to catch up on past due balance.
The following table presents the period-end amortized cost basis of financing receivables that had a payment default during the period and were modified in the 12 months before default to borrowers experiencing financial difficulty.
For the period ended:
December 31, 2024
(Dollars in thousands)
Term extension
Residential real estate
$
Total
$
For the period ended:
December 31, 2023
(Dollars in thousands)
Term extension
Commercial and industrial
$
Residential real estate
Total
$
The following table presents the period-end amortized cost basis of loans that have been modified in the past 12 months to borrowers experiencing financial difficulty by payment status and class of financing receivable.
For the period ended:
December 31, 2024
(Dollars in thousands)
Current
30-89 days
Greater than 90 days
Total
Residential real estate
$
-
$
-
$
$
Total
$
-
$
-
$
$
For the period ended:
December 31, 2023
(Dollars in thousands)
Current
30-89 days
Greater than 90 days
Total
Commercial and industrial
$
$
-
$
-
$
Residential real estate
-
-
Total
$
$
-
$
$
An aging analysis of loans by loan category as of December 31 follows:
Loans
Loans
Loans
Past Due
Loans
Past Due
Past Due
Greater
90 Days Past
(Dollars in thousands)
30 to 59
60 to 89
Than 90
Loans Not
Total
Due and
Days (1)
Days (1)
Days (1)
Total (1)
Past Due
Loans
Accruing
December 31, 2024
Agricultural
$
-
$
-
$
-
$
-
$
48,221
$
48,221
$
-
Commercial and industrial
-
-
228,207
228,256
-
Consumer
29,266
29,412
-
Commercial real estate
-
-
901,107
901,130
-
Construction real estate
-
16,119
17,042
-
Residential real estate
4,866
1,850
7,481
274,220
281,701
-
Loans to other financial institutions
-
-
-
-
39,878
39,878
-
$
5,635
$
$
2,086
$
8,622
$
1,537,018
$
1,545,640
$
-
December 31, 2023
Agricultural
$
-
$
-
$
-
$
-
$
49,210
$
49,210
$
-
Commercial and industrial
-
-
229,914
229,915
-
Consumer
-
36,508
36,541
-
Commercial real estate
-
-
786,748
786,921
-
Construction real estate
-
-
-
-
20,936
20,936
-
Residential real estate
2,174
265,556
267,730
-
Loans to other financial institutions
-
-
-
-
19,400
19,400
-
$
$
$
$
2,381
$
1,408,272
$
1,410,653
$
-
(1)Includes nonaccrual loans
The amortized cost basis of nonaccrual loans by loan category as of December 31:
(Dollars in thousands)
Commercial and industrial
$
-
$
$
-
Consumer
-
-
Construction real estate
-
-
Residential real estate
3,467
1,722
1,263
Total nonaccrual loans
$
3,704
$
1,723
$
1,263
Nonaccrual loans with and without ACL as of December 31, 2024.
(Dollars in thousands)
Nonaccrual loans with no ACL
Interest income recognized during the period on nonaccrual loans
Consumer
$
-
$
Construction real estate
-
Residential real estate
Total nonaccrual loans
$
$
Nonaccrual loans with and without ACL as of December 31, 2023.
As of December 31, 2023
(Dollars in thousands)
Nonaccrual loans with no ACL
Interest income recognized during the period on nonaccrual loans
Commercial and industrial
$ -
$ -
Residential real estate
Total nonaccrual loans
$
$
Interest income recognized on nonaccrual loans during the period ended December 31, 2022 was $123,000. Interest was recognized prior to the nonaccrual classification.
The following tables present the collateral dependent loans and the related ACL allocated by segment of loans:
December 31, 2024
December 31, 2023
(Dollars in thousands)
Real Estate
Total
ACL Allocation
Real Estate
Total
ACL Allocation
Residential Real Estate
$
1,887
$
1,887
$
$
$
$
-
Total
$
1,887
$
1,887
$
$
$
$
-
Note 4 - Mortgage Banking
Activity in secondary market loans during the year was as follows:
(Dollars in thousands)
Loans originated for resale, net of principal payments
$
74,299
$
56,085
$
71,829
Proceeds from loan sales
$
73,107
$
57,342
$
77,681
Net gains on sales of loans held for sale
$
2,439
$
1,954
$
2,343
Loan servicing fees, net of amortization
$
$
$
Net gains on sales of loans held for sale include capitalization of loan servicing rights. Loans serviced for others are not reported as assets in the accompanying consolidated balance sheets. The unpaid principal balances of these loans were $502.0 million and $495.7 million at December 31, 2024 and 2023, respectively. The Bank maintains custodial escrow balances in connection with these serviced loans; however, such escrows were immaterial at December 31, 2024 and 2023.
Activity for loan servicing rights (included in other assets) was as follows:
(Dollars in thousands)
Balance, beginning of year
$
3,834
$
4,322
$
4,667
Capitalized
1,053
1,007
Amortization
(1,509
)
(1,308
)
(1,352
)
Balance, end of year
$
3,378
$
3,834
$
4,322
The fair value of loan servicing rights was $5.7 million, $5.6 million and $5.9 million as of December 31, 2024, 2023 and 2022, respectively. Valuation allowances of $0 were recorded at December 31, 2024, 2023 and 2022. The fair value of the Bank’s servicing rights at December 31, 2024 was determined using a discount rate of 9.5% to 11.5% and prepayment speeds ranging from 5.1% to 6.7%. The fair value of the Bank’s servicing rights at December 31, 2023 was determined using a discount rate of 9.5% to 10.5% and prepayment speeds ranging from 5.7% to 7.5%. The fair value of the Bank’s servicing rights at December 31, 2022 was determined using a discount rate of 8.00% and prepayment speeds ranging from 5.2% to 6.7%.
Note 5 - Premises and Equipment
As of December 31, premises and equipment consisted of the following:
(Dollars in thousands)
Land and land improvements
$
7,932
$
8,415
Leasehold improvements
Buildings
28,525
29,635
Furniture and equipment
12,751
12,558
Total cost
49,324
50,689
Accumulated depreciation
(22,225
)
(20,939
)
Premises and equipment, net
$
27,099
$
29,750
Depreciation expense was $2.5 million, $2.5 million, and $2.7 million in 2024, 2023 and 2022, respectively.
The Bank leases certain branch properties and automated-teller machine locations in its normal course of business. Rent expense totaled $322,000, $327,000, and $211,000 for 2024, 2023 and 2022, respectively. The associated right of use assets are included in the applicable categories of fixed assets in the above table and the net book value of such assets approximates the operating lease liability. Rent commitments under non-cancelable operating leases were as follows, before considering renewal options that generally are present (dollars in thousands):
$
Thereafter
Total undiscounted cash flows
Less imputed interest
Total operating lease liabilities
$
Note 6 - Goodwill and Acquired Intangible Assets
Goodwill
The change in the balance for goodwill was as follows:
(Dollars in thousands)
Balance, beginning of year
$
59,946
$
59,946
Adjustments
-
-
Balance, end of year
$
59,946
$
59,946
The Company acquired Valley Ridge Financial Corp. in 2006, County in 2019, and Community Shores in 2020, which resulted in the recognition of goodwill of $13.7 million, $38.9 million and $7.3 million, respectively.
ChoiceOne engaged a third party valuation firm to assist in performing a quantitative analysis of goodwill as of June 30, 2024 ("the measurement date"). In deriving the fair value of the reporting unit (the Bank), the third-party firm assessed general economic conditions and outlook; industry and market considerations and outlook; the impact of recent events to financial performance; the market price of ChoiceOne’s common stock and other relevant events. In addition, the valuation relied on financial projections through 2029 and growth rates prepared by management. Based on the valuation prepared, it was determined that ChoiceOne's estimated fair value of the reporting unit at the measurement date was greater than its book value and impairment of goodwill was not required. As of the measurement date and December 31, 2024 ChoiceOne's stock price was greater than the book value. No material changes and no triggering events have occurred that indicated impairment from the measurement date through December 31, 2024.
Acquired Intangible Assets
Information for acquired intangible assets at December 31 is as follows:
Gross
Gross
Carrying
Accumulated
Carrying
Accumulated
(Dollars in thousands)
Amount
Amortization
Amount
Amortization
Core deposit intangible
$
7,120
$
6,024
$
7,120
$
5,266
The core deposit intangible from the County and Community Shores mergers is being amortized on a sum-of-the-years digits basis over ten years and eight years, respectively. Amortization expense was $757,000 in 2024, $955,000 in 2023, and $1,153,000 in 2022. The estimated amortization expense for the next five years ending December 31 is as follows (dollars in thousands):
Thereafter
-
Total
$
1,096
Note 7 - Other Real Estate Owned
Other real estate owned represents residential and commercial properties primarily owned as a result of loan collection activities and is reported net of a valuation allowance. Activity within other real estate owned was as follows:
(Dollars in thousands)
Balance, beginning of year
$
$
-
$
Transfers from loans
-
Proceeds from sales
(345
)
(157
)
(235
)
Write-downs
-
-
-
Gains on sales
Balance, end of year
$
$
$
-
Included in the balances above were residential real estate mortgage loans of $234,000, $122,000, and $0 as of December 31, 2024, 2023, and 2022, respectively, and $239,000, $0, and $0 of commercial real estate loans as of December 31, 2024, 2023, and 2022, respectively.
Note 8 - Derivatives and Hedging Activities
ChoiceOne is exposed to certain risks relating to its ongoing business operations. ChoiceOne utilizes interest rate derivatives as part of its asset liability management strategy to help manage its interest rate risk position. Derivative instruments represent contracts between parties that result in one party delivering cash to the other party based on a notional amount and an underlying term (such as a rate, security price or price index) as specified in the contract. The amount of cash delivered from one party to the other is determined based on the interaction of the notional amount of the contract with the underlying term. Derivatives are also implicit in certain contracts and commitments.
ChoiceOne recognizes derivative financial instruments in the consolidated financial statements at fair value regardless of the purpose or intent for holding the instrument. ChoiceOne records derivative assets and derivative liabilities on the balance sheet within other assets and other liabilities, respectively. Changes in the fair value of derivative financial instruments are either recognized in income or in shareholders’ equity as a component of accumulated other comprehensive income or loss depending on whether the derivative financial instrument qualifies for hedge accounting and, if so, whether it qualifies as a fair value hedge or cash flow hedge.
Interest rate swaps
ChoiceOne uses interest rate swaps as part of its interest rate risk management strategy to add stability to net interest income and to manage its exposure to interest rate movements. Interest rate swaps designated as hedges involve the receipt of variable-rate amounts from a counterparty in exchange for ChoiceOne making fixed-rate payments or the receipt of fixed-rate amounts from a counterparty in
exchange for ChoiceOne making variable rate payments, over the life of the agreements without the exchange of the underlying notional amount.
In the second quarter of 2022, ChoiceOne entered into two pay-floating/receive-fixed interest rate swaps (the “Pay Floating Swap Agreements”) for a total notional amount of $200.0 million that were designated as cash flow hedges. These derivatives hedge the variable cash flows of specifically identified available-for-sale securities, cash and loans. The Pay Floating Swap Agreements were determined to be highly effective during the periods presented and therefore no amount of ineffectiveness has been included in net income. The Pay Floating Swap Agreements pay a coupon rate equal to SOFR while receiving a fixed coupon rate of 2.41%. In March 2023, ChoiceOne terminated all Pay Floating Swap Agreements for a cash payment of $4.2 million. The loss will be amortized into interest income over 13 months, which was the remaining period of the swap agreements. As of April 2024, the loss was fully amortized.
In the second quarter of 2022, ChoiceOne entered into one forward starting pay-fixed/receive-floating interest rate swap (the “Pay Fixed Swap Agreement”) for a notional amount of $200.0 million that was designated as a cash flow hedge. This derivative hedges the risk of variability in cash flows attributable to forecasted payments on future deposits or floating rate borrowings indexed to the SOFR Rate. The Pay Fixed Swap Agreement is two years forward starting with an eight-year term set to expire in 2032. The Pay Fixed Swap Agreements will pay a fixed coupon rate of 2.75% while receiving the SOFR Rate. Net settlements on the Pay Fixed Swap Agreement were $3.3 million for the year ended December 31, 2024, which reduced interest expense.
In the fourth quarter of 2022, ChoiceOne entered into four pay-fixed/receive-floating interest rate swaps for a total notional amount of $201.0 million that were designated as fair value hedges. These derivatives hedge the risk of changes in fair value of certain available for sale securities for changes in the SOFR benchmark interest rate component of the fixed rate bonds. All four of these hedges were effective immediately on December 22, 2022. Of the total notional value, $101.9 million has a ten-year term set to expire in 2032, with the benchmark SOFR interest rate risk component of the fixed rate bonds equal to 3.390%. Of the total notional value, $50.0 million has a nine-year term set to expire in 2031, with the benchmark SOFR interest rate risk component of the fixed rate bonds equal to 3.4015%. The remaining notional value of $49.1 million has a nine-year term set to expire in 2031, with the benchmark SOFR interest rate risk component of the fixed rate bond equal to 3.4030%. ChoiceOne adopted ASC2022-01, as of December 20, 2022, to use the portfolio layer method. The fair value basis adjustment associated with available-for-sale fixed rate bonds initially results in an adjustment to AOCI. For available-for-sale securities subject to fair value hedge accounting, the changes in the fair value of the fixed rate bonds related to the hedged risk (the benchmark interest rate component and the partial term) are then reclassified from AOCI to current earnings offsetting the fair value measurement change of the interest rate swap, which is also recorded in current earnings. Net cash settlements are received/paid semi-annually, with the first starting in March 2023, and are included in interest income.
Net settlements received on these four pay-fixed/receive-floating swaps were $3.7 million and $3.3 million for the years ended December 31, 2024 and December 31, 2023, respectively, which increased interest income.
The table below presents the fair value of derivative financial instruments as well as the classification within the consolidated statements of financial condition:
December 31, 2024
December 31, 2023
(Dollars in thousands)
Balance Sheet
Location
Fair Value
Balance Sheet
Location
Fair Value
Derivatives designated as hedging instruments
Interest rate contracts
Other Assets
$
23,649
Other Assets
$
8,880
Interest rate contracts
Other Liabilities
$
-
Other Liabilities
$
-
The table below presents the effect of fair value and cash flow hedge accounting on the consolidated statements of operations for the periods presented:
Location and Amount of Gain or (Loss)
Location and Amount of Gain or (Loss)
Recognized in Income on Fair Value and Cash Flow Hedging Relationships
Recognized in Income on Fair Value and Cash Flow Hedging Relationships
Year Ended December 31, 2024
Year Ended December 31, 2023
Interest Income
Interest Expense
Interest Income
Interest Expense
Total amounts of income and expense line items presented in the consolidated statements of income in which the effects of fair value or cash flow hedges are recorded
$
2,581
$
(3,288
)
$
(284
)
$
-
Gain or (loss) on fair value hedging relationships:
Interest rate contracts:
Hedged items
$
(7,205
)
$
-
$
1,534
$
-
Derivatives designated as hedging instruments
$
7,203
$
-
$
(1,454
)
$
-
Amount excluded from effectiveness testing recognized in earnings based on amortization approach
$
-
$
-
$
-
$
-
Gain or (loss) on cash flow hedging relationships:
Interest rate contracts:
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income
$
(1,092
)
$
-
$
(2,837
)
$
-
Amount excluded from effectiveness testing recognized in earnings based on amortization approach
$
-
$
-
$
-
$
-
The table below presents the cumulative basis adjustments on hedged items designated as fair value hedges and the related amortized cost of those items as of the periods presented:
December 31, 2024
Cumulative amount of Fair
Value Hedging Adjustment
Line Item in the Statement of
included in the carrying
Financial Position in which the
Amortized cost of the
amount of the Hedged
Hedged Item is included
Hedged Assets/(Liabilities)
Assets/(Liabilities)
Securities available for sale
$
219,957
$
(7,602
)
Back to Back Loan Swaps
Derivatives not designated as hedges are not speculative and result from a service provided to certain commercial loan borrowers. ChoiceOne executes interest rate swaps with commercial banking customers desiring longer-term fixed rate loans, while simultaneously entering into interest rate swaps with a correspondent bank to offset the impact of the interest rate swaps with the commercial banking customers. This is known as a back to back loan swap agreement. The net result is the desired floating rate loan and a minimization of the risk exposure of the interest rate swap transactions. Under this arrangement the Bank has three freestanding interest rate swaps, each of which is carried at fair value. As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the commercial banking customer interest rate swaps and the offsetting interest rate swaps with the correspondent bank are recognized directly to earnings.
The table below presents the notional and fair value of these derivative instruments as of December 31, 2024 and December 31, 2023:
December 31, 2024
(Dollars in thousands)
Notional Amount
Balance Sheet Location
Fair Value
Derivative assets
Interest rate swaps
$
56,526
Other Assets
$
Derivative liabilities
Interest rate swaps
$
56,526
Other Liabilities
$
December 31, 2023
(Dollars in thousands)
Notional Amount
Balance Sheet Location
Fair Value
Derivative assets
Interest rate swaps
$
-
Other Assets
$
-
Derivative liabilities
Interest rate swaps
$
-
Other Liabilities
$
-
The fair value of interest rate swaps in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk related to these agreements was $686,000 and $0 as of December 31, 2024 and December 31, 2023, respectively. ChoiceOne has a master netting agreement with the correspondent bank and has the right to offset, however, ChoiceOne has elected to present the assets and liabilities gross. ChoiceOne is required to pledge collateral to the correspondent bank equal to or in excess of the net liability position. ChoiceOne's derivative liability with the correspondent bank was $686,000 and $0 at December 31, 2024 and December 31, 2023, respectively. Cash pledged as collateral to the correspondent bank was $0 and $0 at December 31, 2024 and December 31, 2023, respectively.
Interest rate swaps entered into with commercial loan customers had notional amounts aggregating $56.5 million as of December 31, 2024 and $0 at December 31, 2023. Associated credit exposure is generally mitigated by securing the interest rate swaps with the underlying collateral of the loan instrument that has been hedged.
Note 9 - Deposits
Deposit balances as of December 31 consisted of the following:
(Dollars in thousands)
Noninterest-bearing demand deposits
$
524,945
$
547,625
Interest-bearing demand deposits
630,155
599,681
Money market deposits
290,012
247,602
Savings deposits
338,109
336,851
Local certificates of deposit
394,371
366,851
Brokered certificates of deposit
36,511
23,445
Total deposits
$
2,214,103
$
2,122,055
Scheduled maturities of certificates of deposit as of December 31, 2024 were as follows:
(Dollars in thousands)
$
413,786
10,077
3,033
2,342
1,377
Thereafter
Total
$
430,882
The Bank had certificates of deposit issued in denominations of $250,000 or greater totaling $210.5 million and $199.7 million at December 31, 2024 and 2023, respectively. The Bank held $36.5 million and $23.4 million in brokered certificates of deposit at December 31, 2024 and 2023, respectively. In addition, the Bank had $41.0 million and $36.2 million of certificates of deposit as of December 31, 2024, and December 31, 2023, respectively, that had been issued through the Certificate of Deposit Account Registry Service (“CDARS”).
Note 10 - Borrowings
Bank Term Funding Program (“BTFP”)
At December 31, loans from the BTFP were as follows:
(Dollars in thousands)
Maturity of May 2024 with fixed interest rate of 4.71%
$
-
$
160,000
Maturity of December 2024 with fixed interest rate of 4.83%
-
10,000
Total advances outstanding at year-end
$
-
$
170,000
Federal Home Loan Bank Advances
At December 31, advances from the FHLB were as follows:
(Dollars in thousands)
Maturity of January 2025 with fixed interest rate of 4.48%
$
135,000
$
-
Maturity of July 2025 with fixed interest rate of 4.88%
20,000
20,000
Maturity of January 2026 with fixed interest rate of 4.35%
10,000
-
Maturity of December 2026 with fixed interest rate of 4.20%
10,000
10,000
Total advances outstanding at year-end
$
175,000
$
30,000
As of December 31, 2024, ChoiceOne had no borrowings from the Federal Reserve Bank, and had securities pledged with a carrying value of approximately $349.9 million and loans pledged with a carrying value of approximately $460.6 million. At December 31, 2023 ChoiceOne had securities pledged with a carrying value of approximately $526.4 million and loans pledged with a carrying value of approximately $433.2 million. Based on this collateral, the Bank was eligible to borrow an additional $674.1 million at year end 2024 compared to $649.0 million at year end 2023.
Advances from the FHLB were secured by residential real estate loans with a carrying value of approximately $204.4 million and securities with a carrying value of approximately $265.5 million at December 31, 2024 and by residential real estate loans with a carrying value of approximately $191.1 million and securities with a carrying value of approximately $278.5 million at December 31, 2023 . Based on this collateral, the Bank was eligible to borrow an additional $163.1 million at year end 2024, compared to an additional $284.3 million at year-end 2023.
In June 2021, ChoiceOne obtained a $20 million line of credit with an annual renewal. The line carries a floating rate of prime rate with a floor of 3.25% and current rate of 7.5% at December 31, 2024 compared to a rate of 8.5% at December 31, 2023. The credit agreement includes certain financial covenants, including minimum capital ratios, asset quality ratios, and the requirements of achieving certain profitability thresholds.
ChoiceOne was in compliance with all covenants as of December 31, 2024 and December 31, 2023. The line of credit balance was $0 at December 31, 2024 and December 31, 2023.
Note 11 - Subordinated Debentures
ChoiceOne acquired trust preferred securities in the acquisition of Community Shores. The Capital Trust sold 4,500 Cumulative Preferred Securities (“trust preferred securities”) at $1,000 per security in a December 2004 offering. The proceeds from the sale of the trust preferred securities were used by the Capital Trust to purchase an equivalent amount of subordinated debentures from Community Shores. The trust preferred securities and subordinated debentures carry a floating rate of 2.05% over the 3-month LIBOR and the rate was 6.9% at December 31, 2024 and 7.6% at December 31, 2023. The stated maturity is December 30, 2034. Total trust preferred securities at December 31, 2024 were $3.5 million consisting of $4.5 million in trust preferred securities less $1.0 million in merger fair value adjustments, which is being amortized over the next 10 years. Total trust preferred securities at December 31, 2023 were $3.4 million consisting of $4.5 million in trust preferred securities less $1.1 million in merger fair value adjustments. The trust preferred securities are redeemable at par value on any interest payment date and are, in effect, guaranteed by ChoiceOne. Interest on the subordinated debentures is payable quarterly on March 30, June 30, September 30 and December 30. ChoiceOne is not considered the primary beneficiary of the Capital Trust (under the variable interest entity rules), therefore the Capital Trust is not consolidated in the
consolidated financial statements, rather the subordinated debentures are shown as a liability, and the interest expense is recorded in the consolidated statement of income.
The terms of the subordinated debentures, the trust preferred securities and the agreements under which they were issued give ChoiceOne the right, from time to time, to defer payment of interest for up to 20 consecutive quarters, unless certain specified events of default have occurred and are continuing. The deferral of interest payments on the subordinated debentures results in the deferral of distributions on the trust preferred securities.
In September 2021, ChoiceOne completed a private placement of $32.5 million in aggregate principal amount of 3.25% fixed-to-floating rate subordinated notes due 2031. The notes will initially bear interest at a fixed interest rate of 3.25% per annum until September 3, 2026, after which time the interest rate will reset quarterly to a floating rate equal to a benchmark rate, which is expected to be the then current three-month term Secured Overnight Financing Rate (“SOFR”) plus 255 basis points until the notes’ maturity on September 3, 2031. The notes are redeemable by ChoiceOne, in whole or in part, on or after September 3, 2026, and at any time upon the occurrence of certain events. The notes have been structured to qualify as Tier 2 capital for ChoiceOne for regulatory capital purposes. ChoiceOne used a portion of net proceeds from the private placement to redeem senior debt, fund common stock repurchases, and support bank-level capital ratios.
Note 12 - Income Taxes
Information as of December 31 and for the year follows:
(Dollars in thousands)
Provision for Income Taxes
Current federal income tax expense
$
6,633
$
4,330
$
4,033
Deferred federal income tax expense/(benefit)
(271
)
(24
)
(15
)
Income tax expense
$
6,362
$
4,306
$
4,018
Reconciliation of Income Tax Provision to Statutory Rate
Income tax computed at statutory federal rate of 21%
$
6,949
$
5,369
$
5,808
Tax exempt interest income
(1,214
)
(1,206
)
(1,323
)
Tax exempt earnings on bank-owned life insurance
(406
)
(230
)
(276
)
Tax credits
(264
)
(282
)
(289
)
Disallowed interest expense
1,061
Nondeductible merger expenses
-
-
Other items
(97
)
(81
)
Income tax expense
$
6,362
$
4,306
$
4,018
Effective income tax rate
%
%
%
(Dollars in thousands)
Components of Deferred Tax Assets and Liabilities
Deferred tax assets:
Purchase accounting adjustments from mergers with County and Community Shores
$
$
Allowance for credit losses
3,476
3,294
Unrealized losses on securities available for sale
14,942
15,279
Net operating loss carryforward
Unfunded commitment reserve
Compensation
Other
Total deferred tax assets
20,904
21,130
Deferred tax liabilities:
Purchase accounting adjustments from mergers with County and Community Shores
Loan servicing rights
Depreciation
Interest rate derivative contracts
4,900
1,568
Deferred loan fees and costs, net
Other
Total deferred tax liabilities
7,139
3,967
Net deferred tax asset (liability)
$
13,765
$
17,163
As of December 31, 2024, deferred tax assets included federal net operating loss carryforwards of approximately $2.0 million which were acquired through the merger with Community Shores. The loss carryforwards expire at various dates from 2031 to 2035. Deferred tax assets are recognized for net operating losses because the benefit is more likely than not to be realized. Under Internal Revenue Code Section 382, ChoiceOne is limited to applying approximately $185,000 of net operating losses per year.
The Company and its subsidiaries file federal income tax returns in the United States. The Company is generally no longer subject to U. S. federal income tax examinations by tax authorities for tax years before 2021.
Note 13 - Related Party Transactions
Loans to executive officers, directors and their affiliates were as follows at December 31:
(Dollars in thousands)
Balance, beginning of year
$
30,316
$
24,036
New loans
10,782
16,881
Repayments
(4,918
)
(10,601
)
Effect of changes in related parties
-
-
Balance, end of year
$
36,180
$
30,316
Deposits from executive officers, directors and their affiliates were $25.5 million, $21.1 million and $30.0 million at December 31, 2024, 2023 and 2022, respectively.
Note 14 - Employee Benefit Plans
401(k) Plan:
The 401(k) plan allows employees to contribute to their individual accounts under the plan amounts up to the IRS maximum. Matching company contributions to the plan are discretionary. Expense for matching company contributions under the plan was $649,000, $594,000, and $650,000 in 2024, 2023, and 2022, respectively.
Note 15 - Stock Based Compensation
Options to buy stock have been granted to key employees to provide them with additional equity interests in ChoiceOne under the Stock Incentive Plan of 2012, which is expired. Compensation expense in connection with stock options granted was $0 in 2024 and 2023 and
$4,000 in 2022. The Equity Incentive Plan of 2022 was approved by the Company’s shareholders at the Annual Meeting held on May 25, 2022. The Equity Incentive Plan of 2022 provides for the issuance of up to 200,000 shares of common stock. At December 31, 2024, there were 141,996 shares available for future grants.
A summary of stock options activity during the year ended December 31, 2024 was as follows:
Weighted
Weighted
average
average
exercise
Grant Date
Shares
price
Fair Value
Options outstanding at January 1, 2024
13,131
$
24.19
$
3.36
Options granted
-
-
-
Options exercised
(6,858
)
23.39
3.36
Options forfeited or expired
-
-
-
Options outstanding, end of year
6,273
$
25.07
$
3.37
Options exercisable at December 31, 2024
6,273
$
25.07
$
3.37
The exercise prices for options outstanding and exercisable at the end of 2024 ranged from $20.86 to $27.25 per share. The weighted average remaining contractual life of options outstanding and exercisable at the end of 2024 was approximately 3.56 years.
The intrinsic value of all outstanding and exercisable stock options was $66,000, $67,000, and $76,000 respectively, at December 31, 2024, December 31, 2023 and December 31, 2022. The aggregate intrinsic values of outstanding and exercisable options at December 31, 2024 were calculated based on the closing market price of the Company’s common stock on December 31, 2024 of $35.64 per share less the exercise price.
Information pertaining to options outstanding at December 31, 2024 was as follows:
Exercise price of stock options:
Number of options outstanding at year-end
Number of options exercisable at year-end
Average remaining contractual life (in years)
$27.25
3,000
3,000
4.39
$25.65
1,500
1,500
3.47
$20.86
1,653
1,653
2.32
$21.13
0.97
The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model. ChoiceOne uses historical data to estimate the volatility of the market price of ChoiceOne stock and employee terminations within the valuation model. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. As of December 31, 2024, there was no unrecognized compensation expense related to stock options.
ChoiceOne has granted restricted stock units to a select group of employees under the Stock Incentive Plan of 2012 and the Equity Incentive Plan of 2022. Restricted stock units outstanding as of December 31, 2024 vest on roughly the three year anniversary of the grant date. Certain additional vesting provisions apply. Each restricted stock unit, once vested, is settled by delivery of one share of ChoiceOne common stock. ChoiceOne recognized compensation expense of $596,000, $548,000, and $503,000 in 2024, 2023, and 2022, respectively, in connection with restricted stock units for current participants during these years.
A summary of the activity for restricted stock units outstanding during the year ended December 31, 2024 is presented below:
Weighted
Average Grant
Date Fair Value
Outstanding Restricted Stock Units
Shares
Per Share
Outstanding at January 1, 2024
68,183
$
26.16
Granted
24,724
24.86
Vested
(18,131
)
28.37
Forfeited
(192
)
24.86
Outstanding at December 31, 2024
74,584
$
25.20
At December 31, 2024, there were 74,584 restricted stock units outstanding with an approximate stock value of $2.7 million based on ChoiceOne’s December 31, 2024 stock price of $35.64 per share. At December 31, 2023, there were 68,183 restricted stock units outstanding with an approximate stock value of $2.0 million based on ChoiceOne’s December 31, 2023 stock price of $29.30 per share. The grant date fair value of restricted stock units granted was $615,000 and $574,000 in 2024 and 2023, respectively. The cost is expected to be recognized over a weighted average period of 1.31 years. As of December 31, 2024, there was $784,000 of unrecognized compensation cost related to unvested shares granted.
ChoiceOne has granted performance stock units to a select group of employees under the Stock Incentive Plan of 2012 and the Equity Incentive Plan of 2022. Performance stock units outstanding as of December 31, 2024 vest on the five year anniversary of the grant date based on earnings per share growth rate from the date of the grant. Shares can vest at a rate of 125%, 100%, 75%, or 0% based on the growth rate achieved over the five year time frame. Certain additional vesting provisions apply. Each performance stock unit, once vested, is settled by delivery of one share of ChoiceOne common stock. ChoiceOne recognized compensation expense of $84,000, $81,000, and $47,000 in 2024, 2023, and 2022, respectively, in connection with performance stock units for current participants during these years.
A summary of the activity for performance stock units outstanding during the year ended December 31, 2024 is presented below:
Weighted
Average Grant
Date Fair Value
Outstanding Stock Awards
Shares
Per Share
Outstanding at January 1, 2024
11,521
$
25.40
Granted
5,031
24.86
Vested
-
-
Forfeited
-
-
Outstanding at December 31, 2024
16,552
$
25.24
At December 31, 2024, there were 16,552 performance stock units outstanding assuming 100% vesting with an approximate stock value of $590,000 based on ChoiceOne’s December 31, 2024 stock price of $35.64 per share. At December 31, 2023, there were 11,521 performance stock units outstanding assuming 100% vesting with an approximate stock value of $338,000 based on ChoiceOne’s December 31, 2023 stock price of $29.30 per share. The grant date fair value of restricted stock units granted was $125,000 and $124,000 in 2024 and 2023, respectively. The cost is expected to be recognized over a weighted average period of 3.3 years. As of December 31, 2024, there was $208,000 of unrecognized compensation cost related to unvested shares granted.
Note 16 - Earnings Per Share
(Dollars in thousands, except share data)
Basic
Net income
$
26,727
$
21,261
$
23,640
Weighted average common shares outstanding
8,166,472
7,532,998
7,504,173
Basic earnings per common shares
$
3.27
$
2.82
$
3.15
Diluted
Net income
$
26,727
$
21,261
$
23,640
Weighted average common shares outstanding
8,166,472
7,532,998
7,504,173
Plus dilutive stock options and restricted stock units
54,593
39,292
23,198
Weighted average common shares outstanding and potentially dilutive shares
8,221,065
7,572,290
7,527,371
Diluted earnings per common share
$
3.25
$
2.82
$
3.15
There were no shares considered anti-dilutive to earnings per share as of December 31, 2024 and there were 4,500 and 15,000 shares considered anti-dilutive to earnings per share as of December 31, 2023 and December 31, 2022, respectively. This calculation is based on the average stock price during the year.
Note 17 - Condensed Financial Statements of Parent Company
Condensed Balance Sheets
(Dollars in thousands)
December 31,
Assets
Cash
$
37,791
$
12,031
Equity securities at fair value
2,397
2,077
Other assets
Investment in subsidiaries
256,165
216,975
Total assets
$
296,840
$
231,557
Liabilities
Subordinated debentures
$
32,260
$
32,115
Trust preferred securities
3,492
3,392
Other liabilities
Total liabilities
36,425
35,923
Shareholders' equity
260,415
195,634
Total liabilities and shareholders’ equity
$
296,840
$
231,557
Condensed Statements of Income
(Dollars in thousands)
Years Ended December 31,
Interest income
Interest and dividends from ChoiceOne Bank
$
11,615
$
10,813
$
-
Interest and dividends from other securities
Total interest income
11,661
10,845
Interest expense
Borrowings
1,642
1,635
1,491
Net interest income
10,019
9,210
(1,464
)
Noninterest income
Gains (losses) on sales of securities
-
(71
)
-
Change in market value of equity securities
(307
)
(385
)
Other
-
-
Total noninterest income
(378
)
(383
)
Noninterest expense
Professional fees
Other
1,201
Total noninterest expense
1,253
Income before income tax and equity in undistributed net income of subsidiary
9,003
8,568
(2,061
)
Income tax (expense)/benefit
Income before equity in undistributed net income of subsidiary
9,377
9,040
(1,628
)
Equity in undistributed net income of subsidiary
17,350
12,221
25,268
Net income
$
26,727
$
21,261
$
23,640
Condensed Statements of Cash Flows
(Dollars in thousands)
Years Ended December 31,
Cash flows from operating activities:
Net income
$
26,727
$
21,261
$
23,640
Adjustments to reconcile net income to net cash from operating activities:
Equity in undistributed net income of subsidiary
(17,350
)
(12,221
)
(25,268
)
Amortization
Compensation expense on employee and director stock purchases, stock options, and restricted stock units
Net loss on sale of securities
-
-
Change in market value of equity securities
(237
)
Changes in other assets
(15
)
(33
)
Changes in other liabilities
(84
)
(7
)
Net cash from operating activities
10,307
10,656
(110
)
Cash flows from investing activities:
Sales of securities
-
-
Purchases of securities
(82
)
(143
)
(1,029
)
Investment in Subsidiary
(8,000
)
-
-
Net cash from investing activities
(8,082
)
(1,029
)
Cash flows from financing activities:
Issuance of common stock
Cash proceeds from common stock offering
32,093
-
-
Repurchase of common stock
-
-
(682
)
Share based compensation withholding obligation
(220
)
-
(85
)
Cash dividends
(9,012
)
(7,910
)
(7,578
)
Net cash from financing activities
23,535
(7,679
)
(8,173
)
Net change in cash
25,760
3,721
(9,312
)
Beginning cash
12,031
8,310
17,622
Ending cash
$
37,791
$
12,031
$
8,310
Note 18 - Financial Instruments
Financial instruments as of the dates indicated were as follows:
Quoted Prices
In Active
Significant
Markets for
Other
Significant
Identical
Observable
Unobservable
(Dollars in thousands)
Carrying
Estimated
Assets
Inputs
Inputs
Amount
Fair Value
(Level 1)
(Level 2)
(Level 3)
December 31, 2024
Assets
Cash and cash equivalents
$
96,751
$
96,751
$
96,751
$
-
$
-
Equity securities at fair value
7,782
7,782
4,838
-
2,944
Securities available for sale
479,117
479,117
80,502
398,615
-
Securities held to maturity
394,534
339,048
-
324,591
14,457
Federal Home Loan Bank and Federal Reserve Bank stock
14,690
14,690
-
14,690
-
Loans held for sale
7,288
7,507
-
7,507
-
Loans, net
1,529,088
1,496,704
-
-
1,496,704
Accrued interest receivable
10,376
10,376
-
10,376
-
Interest rate lock commitments
-
-
Interest rate derivative contracts
23,649
23,649
-
23,649
-
Loan swaps
-
-
Liabilities
Noninterest-bearing deposits
524,945
524,945
524,945
-
-
Interest-bearing deposits
1,652,647
1,652,169
-
1,652,169
-
Brokered deposits
36,511
36,508
-
36,508
-
Borrowings
175,000
175,139
-
175,139
-
Subordinated debentures
35,752
32,895
-
32,895
-
Accrued interest payable
1,694
1,694
-
1,694
-
Loan swaps
-
-
December 31, 2023
Assets
Cash and cash equivalents
$
55,433
$
55,433
$
55,433
$
-
$
-
Equity securities at fair value
7,505
7,505
4,749
-
2,756
Securities available for sale
514,598
514,598
80,194
434,404
-
Securities held to maturity
407,959
348,791
-
335,493
13,298
Federal Home Loan Bank and Federal Reserve Bank stock
9,514
9,514
-
9,514
-
Loans held for sale
4,710
4,851
-
4,851
-
Loans, net
1,394,968
1,362,920
-
-
1,362,920
Accrued interest receivable
10,066
10,066
-
10,066
-
Interest rate lock commitments
-
-
Interest rate derivative contracts
8,880
8,880
-
8,880
-
Liabilities
Noninterest-bearing deposits
547,625
547,625
547,625
-
-
Interest-bearing deposits
1,550,985
1,549,386
-
1,549,386
-
Brokered deposits
23,445
23,435
-
23,435
-
Borrowings
200,000
199,743
-
199,743
-
Subordinated debentures
35,507
31,748
-
31,748
-
Accrued interest payable
6,223
6,223
-
6,223
-
The estimated fair values approximate the carrying amounts for all financial instruments except those described later in this paragraph. The methodology for determining the estimated fair value for securities available for sale is described in Note 19. The estimated fair value of loans involves discounting forecasted cash flows. The discounting is executed using the Treasury curve, incorporating a spread adjustment to account for factors such as liquidity, marketability, and related risks. The allowance for credit losses is considered to be a reasonable estimate of discount for credit quality concerns. The estimated fair value of loans also included the mark to market adjustments related to the Company’s mergers.
The valuation of liabilities, encompassing deposits, borrowings, and others, is derived by aligning forecasted cash flows with relevant points on the SOFR Swap curve. The estimated fair values for time deposits and FHLB advances are based on the rates paid at December 31 for new deposits or FHLB advances, applied until maturity. The estimated fair values for other financial instruments and off-balance sheet loan commitments are considered nominal.
Note 19 - Fair Value Measurements
The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis at December 31, 2024 and December 31, 2023, and the valuation techniques used by the Company to determine those fair values.
In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.
Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset or liability.
In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Company’s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability.
Disclosures concerning assets and liabilities measured at fair value as of December 31, 2024 or December 31, 2023 are as follows:
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Quoted Prices
In Active
Significant
Markets for
Other
Significant
Identical
Observable
Unobservable
(Dollars in thousands)
Assets
Inputs
Inputs
Balance at
(Level 1)
(Level 2)
(Level 3)
Date Indicated
Equity Securities Held at Fair Value - December 31, 2024
Equity securities
$
4,838
$
-
$
2,944
$
7,782
Investment Securities, Available for Sale -December 31, 2024
U. S. Government and federal agency
$
-
$
-
$
-
$
-
U. S. Treasury notes and bonds
80,502
-
-
80,502
State and municipal
-
228,236
-
228,236
Mortgage-backed
-
160,970
-
160,970
Corporate
-
-
Asset-backed Securities
-
9,197
-
9,197
Total
$
80,502
$
398,615
$
-
$
479,117
Derivative Instruments -December 31, 2024
Interest rate derivative contracts - assets
$
-
$
23,649
$
-
$
23,649
Interest rate derivative contracts - liabilities
$
-
$
-
$
-
$
-
Loan Swaps - December 31, 2024
Loan swaps - assets
$
-
$
$
-
$
Loan swaps - liabilities
$
-
$
$
-
$
Equity Securities Held at Fair Value -December 31, 2023
Equity securities
$
4,749
$
-
$
2,756
$
7,505
Investment Securities, Available for Sale -December 31, 2023
U. S. Government and federal agency
$
-
$
-
$
-
$
-
U. S. Treasury notes and bonds
80,194
-
-
80,194
State and municipal
-
234,682
-
234,682
Mortgage-backed
-
188,501
-
188,501
Corporate
-
-
Asset-backed Securities
-
11,017
-
11,017
Total
$
80,194
$
434,404
$
-
$
514,598
Derivative Instruments -December 31, 2023
Interest rate derivative contracts - assets
$
-
$
8,880
$
-
$
8,880
Interest rate derivative contracts - liabilities
$
-
$
-
$
-
$
-
Securities classified as available for sale are generally reported at fair value utilizing Level 2 inputs. ChoiceOne’s external investment advisor obtained fair value measurements from an independent pricing service that uses matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities' relationship to other benchmark quoted securities (Level 2 inputs). The fair value measurements considered observable data that may include dealer quotes, market spreads, cash flows and the bonds' terms and conditions, among other things. Securities classified in Level 2 included U.S. Government and federal agency securities, state and municipal securities, mortgage-backed securities, corporate bonds, and asset backed securities. The Company classified certain state and municipal securities and
corporate bonds, and equity securities as Level 3. Based on the lack of observable market data, estimated fair values were based on the observable data available and reasonable unobservable market data.
Changes in Level 3 Assets Measured at Fair Value on a Recurring Basis
(Dollars in thousands)
Equity Securities Held at Fair Value
Balance, January 1
$
2,756
$
2,542
Total realized and unrealized net gains included in noninterest income
Net purchases, sales, calls, and maturities
Balance, December 31
$
2,944
$
2,756
Amount of total losses for the period included in earning attributable to the change in
unrealized gains (losses) relating to assets and liabilities still held at December 31,
$
$
Of the Level 3 assets that were held by the Company at December 31, 2024, the net unrealized gain as of December 31, 2024 was $317,000, compared to $212,000 as of December 31, 2023. The change in the net unrealized gain or loss is recognized in noninterest income or other comprehensive income in the consolidated balance sheets and income statements. Amounts recognized in noninterest income relate to changes in equity securities. A total of $83,000 and $143,000 of Level 3 securities were purchased in 2024 and 2023, respectively.
Both observable and unobservable inputs may be used to determine the fair value of positions classified as Level 3 assets and liabilities. As a result, the unrealized gains and losses for these assets and liabilities presented in the tables above may include changes in fair value that were attributable to both observable and unobservable inputs.
The Company also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis. These assets are not normally measured at fair value, but can be subject to fair value adjustments in certain circumstances, such as impairment. Disclosures concerning assets measured at fair value on a non-recurring basis are as follows:
Assets Measured at Fair Value on a Non-recurring Basis
Quoted Prices
In Active
Significant
Markets for
Other
Significant
Balances at
Identical
Observable
Unobservable
(Dollars in thousands)
Dates
Assets
Inputs
Inputs
Indicated
(Level 1)
(Level 2)
(Level 3)
Collateral Dependent Loans
December 31, 2024
$
1,887
$
-
$
-
$
1,887
December 31, 2023
$
$
-
$
-
$
Other Real Estate
December 31, 2024
$
$
-
$
-
$
December 31, 2023
$
$
-
$
-
$
Collateral dependent loans classified as Level 3 are loans for which the repayment is expected to be provided substantially through the sale or operation of the collateral when the borrower is experiencing financial difficulty. The fair value of the collateral should be adjusted for estimated costs to sell if the repayment depends on the sale of the collateral. The net carrying amount of the loan should not exceed the fair value of the collateral (less costs to sell, if applicable). The fair value of other real estate owned was based on appraisals or other reviews of property values, adjusted for estimated costs to sell.
Note 20 - Off-Balance Sheet Activities
Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customers’ financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.
The contractual amount of financial instruments with off-balance sheet risk was as follows at December 31:
Fixed
Variable
Fixed
Variable
(Dollars in thousands)
Rate
Rate
Rate
Rate
Unused lines of credit and letters of credit
$
29,394
$
369,200
$
63,031
$
326,317
Commitments to fund loans (at market rates)
46,932
11,129
90,178
27,939
Commitments to fund loans are generally made for periods of 180 days or less. The fixed rate loan commitments have interest rates ranging from 4.63% to 10.00% and maturities ranging from 1 year to 30 years.
Note 21 - Regulatory Capital
ChoiceOne and the Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. Depending upon the capital category to which an institution is assigned, the regulators' corrective powers include: prohibiting the acceptance of brokered deposits; requiring the submission of a capital restoration plan; placing limits on asset growth and restrictions on activities; requiring the institution to issue additional capital stock (including additional voting stock) or be acquired; restricting transactions with affiliates; restricting the interest rate the institution may pay on deposits; ordering a new election of directors of the institution; requiring that senior executive officers or directors be dismissed; prohibiting the institution from accepting deposits from correspondent banks; requiring the institution to divest certain subsidiaries; prohibiting the payment of principal or interest on subordinated debt; and ultimately, appointing a receiver for the institution. At year-end 2024 and 2023, the Bank was categorized as well capitalized under the regulatory framework for prompt corrective action.
Actual capital levels and minimum required levels for ChoiceOne and the Bank were as follows:
Minimum Required
to be Well
Minimum Required
Capitalized Under
for Capital
Prompt Corrective
(Dollars in thousands)
Actual
Adequacy Purposes
Action Regulations
Amount
Ratio
Amount
Ratio
Amount
Ratio
December 31, 2024
ChoiceOne Financial Services Inc.
Total capital (to risk weighted assets)
$
287,927
14.5
%
$
158,391
8.0
%
N/A
N/A
Common equity Tier 1 capital (to risk weighted assets)
237,152
12.0
89,095
4.5
N/A
N/A
Tier 1 capital (to risk weighted assets)
241,652
12.2
118,793
6.0
N/A
N/A
Tier 1 capital (to average assets)
241,652
9.1
106,485
4.0
N/A
N/A
ChoiceOne Bank
Total capital (to risk weighted assets)
$
250,494
12.7
%
$
158,197
8.0
%
$
197,746
10.0
%
Common equity Tier 1 capital (to risk weighted assets)
236,479
12.0
88,986
4.5
128,535
6.5
Tier 1 capital (to risk weighted assets)
236,479
12.0
118,647
6.0
158,197
8.0
Tier 1 capital (to average assets)
236,479
8.9
106,422
4.0
133,028
5.0
December 31, 2023
ChoiceOne Financial Services Inc.
Total capital (to risk weighted assets)
$
233,840
13.0
%
$
144,441
8.0
%
N/A
N/A
Common equity Tier 1 capital (to risk weighted assets)
185,412
10.3
81,248
4.5
N/A
N/A
Tier 1 capital (to risk weighted assets)
189,912
10.5
108,331
6.0
N/A
N/A
Tier 1 capital (to average assets)
189,912
7.5
101,337
4.0
N/A
N/A
ChoiceOne Bank
Total capital (to risk weighted assets)
$
224,095
12.4
%
$
144,274
8.0
%
$
180,342
10.0
%
Common equity Tier 1 capital (to risk weighted assets)
212,283
11.8
81,154
4.5
117,223
6.5
Tier 1 capital (to risk weighted assets)
212,283
11.8
108,205
6.0
144,274
8.0
Tier 1 capital (to average assets)
212,283
8.4
101,244
4.0
126,555
5.0
Banking laws and regulations limit capital distributions by state-chartered banks. Generally, capital distributions are limited to undistributed net income for the current and prior two years. At December 31, 2024, approximately $48.7 million was available for the Bank to pay dividends to ChoiceOne assuming regulatory approval of any amount in excess of the applicable capital conservation buffer. ChoiceOne’s ability to pay dividends to shareholders is dependent on the payment of dividends from the Bank, which is restricted by state law and regulations.
Note 22 - Segment Reporting
Segment Reporting
ChoiceOne Financial Services Inc. (the "Company") operates in one reportable segment, which is community banking. The Company provides a full range of financial services to individual and business customers through its network of branches and ATMs. The Company's products and services include deposit accounts, loans, mortgage banking, and other financial services.
At ChoiceOne Bank, the Chief Operating Decision Maker (CODM) is the Chairman and Chief Executive Officer. The CODM evaluates key metrics, such as consolidated net income and its major components, to develop strategies and allocate resources effectively. This analysis involves receiving comprehensive financial information on a consolidated basis, which includes actual and budgeted data, credit quality metrics, net income, earnings per share, loan originations, deposit growth, total non-interest income, and non-interest expense.
Entity-Wide Disclosures
Products and Services: The Company's revenues are derived from a variety of financial products and services, including interest income from loans and investments, fees from deposit accounts, and income from mortgage banking activities.
Geographic Areas: The Company operates primarily in the state of Michigan, with a significant portion of its revenues generated from customers located in this region. The Company does not have any significant operations outside of the United States.
Major Customers: The Company does not have any single customer that accounts for 10% or more of its total revenues.
Reconciliations: The following table reconciles the Company's total revenues, profit or loss, and assets to the consolidated financial statements:
Years Ended December 31,
(Dollars in thousands)
Total Revenues
$
139,099
$
113,886
$
89,132
Net Income
$
26,727
$
21,261
$
23,640
Total Assets
$
2,723,243
$
2,576,706
$
2,385,915
Note 23 - Subsequent Events:
Completion of Merger
On March 1, 2025, ChoiceOne Financial Services, Inc. ("ChoiceOne") completed its merger with Fentura Financial, Inc. ("Fentura"), with ChoiceOne continuing as the surviving corporation. The combined organization will be headquartered in Sparta, Michigan, and will operate under the ChoiceOne name and brand.
The consolidation of The State Bank, a wholly-owned subsidiary of Fentura, with and into ChoiceOne Bank, a wholly-owned subsidiary of ChoiceOne, is expected to be completed on March 14, 2025.
Under the terms of the merger agreement, each share of Fentura common stock outstanding immediately prior to the completion of the merger was converted into the right to receive 1.35 shares of ChoiceOne common stock. At the time of completion of the merger, Fentura had approximately 4,497,069 shares of common stock outstanding. Based on ChoiceOne's closing stock price of $31.79 as of February 28, 2025, the transaction is valued at approximately $193.0 million. As the initial accounting for the business combination is incomplete at the time of issuance of this 10-K, we will not be disclosing an opening balance sheet in accordance with ASC 805-10-50-4.
Sale of Interest Rate Swaps
On February 6, 2025, ChoiceOne sold $50 million of pay fixed receive floating interest rate swaps. The swaps have a fixed rate of 2.75% and a floating rate that will be determined periodically over the life of the swaps. This transaction resulted in a gain of approximately $3.6 million, which will be recognized over the 7 years remaining on the life of the swap. The sale of these swaps is part of ChoiceOne's ongoing strategy to manage interest rate risk and optimize its balance sheet.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures
(a) Evaluation of Controls and Procedures
An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and principal financial officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on and as of the time of that evaluation, the Company’s management, including the Chief Executive Officer and principal financial officer, concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the required time periods.
(b) Changes in Internal Controls
There was no change in the Company’s internal control over financial reporting that occurred during the three months ended December 31, 2024 that has materially affected, or that is reasonably likely to materially affect, the Company’s internal control over financial reporting.
(c) Management’s Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting that is designed to produce reliable financial statements in conformity with United States generally accepted accounting principles. The system of internal control over financial reporting as it relates to the financial statements is evaluated for effectiveness by management and tested for reliability through a program of internal audits. Actions are taken to correct potential deficiencies as they are identified. Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected. Also, because of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial statement preparation.
Management assessed the effectiveness of the Company’s system of internal control over financial reporting as of December 31, 2024, as required by Section 404 of the Sarbanes-Oxley Act of 2002. Management’s assessment is based on the criteria for effective internal control over financial reporting as described in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, management has concluded that, as of December 31, 2024, its system of internal control over financial reporting was effective and meets the criteria of the “Internal Control - Integrated Framework."
(d) Report of Independent Registered Public Accounting Firm
Plante & Moran, PLLC, an independent registered public accounting firm that audited the consolidated financial statements included herein, has issued an audit report on our internal control over financial reporting as of December 31, 2024, as stated in their report above under Part II, Item 8 of this report.

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ITEM 9B. OTHER INFORMATION
Item 9B. Other Information
None.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance
The information under the captions “ChoiceOne's Board of Directors and Executive Officers and “Corporate Governance” in the Company's Definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 21, 2025, is incorporated herein by reference.
The Company has adopted a Code of Ethics for Executive Officers and Senior Financial Officers, which applies to the Chief Executive Officer and the Chief Financial Officer, as well as all other senior financial and accounting officers. The Code of Ethics is posted on the Company’s website at “www.choiceone.bank.” The Company intends to satisfy the disclosure requirements under Item 5.05 of Form 8-K regarding an amendment to, or a waiver from, a provision of the Code of Ethics by posting such information on its website at “www.choiceone.bank.”

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ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation
The information under the captions “Executive Compensation” in the Company's Definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 21, 2025, is incorporated herein by reference.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information under the caption "Ownership of ChoiceOne Common Stock" in the Company's Definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 21, 2025, is incorporated herein by reference.
The following table presents information regarding the equity compensation plans both approved and not approved by shareholders at December 31, 2024:
Number of securities
remaining available for
Number of securities to
Weighted-average
future issuance under
be issued upon exercise
exercise price of
equity compensation plans
of outstanding options,
outstanding options,
(excluding securities
warrants and rights
warrants and rights
reflected in column (a))
(a)
(b)
(c)
Equity compensation plans approved by security holders
80,857
$
1.94
314,713
Equity compensation plans not approved by security holders
-
-
137,792
Total
80,857
$
1.94
452,505
Equity compensation plans approved by security holders include the Stock Incentive Plan of 2012, the Equity Incentive Plan of 2022, and the 2022 Employee Stock Purchase Plan. As of December 31, 2024, 141,996 shares remained available for future issuance under the Equity Incentive Plan of 2022 and 172,717 shares remained available for future issuance under the 2022 Employee Stock Purchase Plan, in each case other than upon the exercise of outstanding stock options. The Stock Incentive Plan of 2012 has expired and no further issuance of shares is permitted under the plan other than upon the exercise or vesting of outstanding awards.
The Directors’ Stock Purchase Plan and the Directors’ Equity Compensation Plan are the only equity compensation plans not approved by security holders. The Directors’ Stock Purchase Plan is designed to provide directors of the Company the option of receiving their fees in the Company’s common stock. Directors who elect to participate in the plan may elect to contribute to the plan twenty-five, fifty, seventy-five or one hundred percent of their board of director fees and one hundred percent of their director committee fees earned as directors of the Company. Contributions to the plan are made by the Company on behalf of each electing participant. Plan participants may terminate their participation in the plan at any time by written notice of withdrawal to the Company. The Directors’ Equity Compensation Plan provides for the grant and award of stock options, restricted stock, restricted stock units, stock awards, and other stock-based and stock-related awards as part of director compensation. Participants will cease to be eligible to participate in both plans when they cease to serve as directors of the Company. Shares are distributed to participants on a quarterly basis. The Directors' Equity Compensation Plan provides for the issuance of a maximum of 100,000 shares of the Company's common stock thereunder and the Directors' Stock Purchase Plan provides for issuance of a maximum of 100,000 shares thereunder, in each case subject to adjustments for certain changes in the capital structure of the Company. As of December 31, 2024, 72,341 shares remained available for issuance
under the Directors' Equity Compensation Plan and 65,451 shares remained available for issuance under the Directors' Stock Purchase Plan.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information under the captions “Related Matters - Transactions with Related Persons” and “Corporate Governance” in the Company's Definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 21, 2025, is incorporated herein by reference.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accountant Fees and Services
The information under the caption "Related Matters - Independent Certified Public Accountants" in the Company's Definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 21, 2025, is incorporated herein by reference.
Independent Registered Public Accounting Firm:
Name: Plante & Moran, PLLC
Location: Southfield, Michigan
PCAOB ID: 166
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits and Financial Statement Schedules
(a)
(1)
Financial Statements. The following financial statements and independent auditors' reports are filed as part of this report:
Consolidated Balance Sheets at December 31, 2024 and 2023.
Consolidated Statements of Income for the years ended December 31, 2024, 2023, and 2022.
Consolidated Statement of Comprehensive Income for the years ended December 31, 2024, 2023, and 2022.
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2024, 2023, and 2022.
Consolidated Statements of Cash Flows for the years ended December 31, 2024, 2023, and 2022.
Notes to Consolidated Financial Statements.
Report of Independent Registered Public Accounting Firm dated March 11, 2025.
(2)
Financial Statement Schedules. None.
Exhibit
Document
3.1
Restated Articles of Incorporation of ChoiceOne Financial Services, Inc.
3.2
Bylaws of ChoiceOne Financial Services, Inc., as currently in effect and any amendments thereto. Previously filed as an exhibit to ChoiceOne Financial Services, Inc.'s Form 8-K filed April 21, 2021. Here incorporated by reference.
4.1
Advances, Pledge and Security Agreement between ChoiceOne Bank and the Federal Home Loan Bank of Indianapolis. Previously filed as an exhibit to ChoiceOne Financial Services, Inc.’s Form 10-K Annual Report for the year ended December 31, 2013. Here incorporated by reference.
4.2
Form of 3.25% Fixed-to-Floating Rate Subordinated Note due September 3, 2031. Previously filed as an exhibit to ChoiceOne Financial Services, Inc.'s Form 8-K filed September 7, 2021. Here incorporated by reference.
4.3
Form of 3.25% Fixed-to-Floating Rate Global Subordinated Note due September 3, 2031. Previously filed as an exhibit to ChoiceOne Financial Services, Inc.'s Form 8-K filed September 7, 2021. Here incorporated by reference.
4.4
Description of Rights of Shareholders. Previously filed as an exhibit to ChoiceOne’s Form 10-K Annual Report for the year ended December 31, 2022. Here incorporated by reference.
10.1
Employment Agreement between ChoiceOne Financial Services, Inc. and Kelly J. Potes, dated as of September 30, 2019. (1) Previously filed as an exhibit to ChoiceOne’s Form 8-K filed October 1, 2019. Here incorporated by reference.
10.2
Employment Agreement between ChoiceOne Financial Services, Inc. and Michael J. Burke, Jr., dated as of March 22, 2019. (1) Previously filed as exhibit to ChoiceOne’s Pre-Effective Amendment No. 2 to Form S-4 filed August 5, 2019. Here incorporated by reference.
10.3
Stock Incentive Plan of 2012. (1) Previously filed as Appendix A to ChoiceOne’s definitive proxy statement for ChoiceOne’s 2018 Annual Meeting of Shareholders, filed on April 19, 2018. Here incorporated by reference.
10.4
2022 Employee Stock Purchase Plan. (1) Previously filed as an exhibit to ChoiceOne’s Form S-8 filed May 27, 2022. Here incorporated by reference.
10.5
Equity Incentive Plan of 2022. (1) Previously filed as an exhibit to ChoiceOne’s Form S-8 filed May 27, 2022. Here incorporated by reference.
10.6
Directors' Stock Purchase Plan, as amended. (1) Previously filed as an exhibit to ChoiceOne Financial Services, Inc.'s Form 10-K Annual Report for the year ended December 31, 2019. Here incorporated by reference.
10.7
Director Equity Compensation Plan of 2019. (1) Previously filed as an exhibit to ChoiceOne Financial Services, Inc.'s Form 10-K Annual Report for the year ended December 31, 2019. Here incorporated by reference.
10.8
Former Valley Ridge Executive Employee Salary Continuation Agreements, as amended. (1) Previously filed as an exhibit to ChoiceOne Financial Services, Inc.’s Form 10-K Annual Report for the year ended December 31, 2013. Here incorporated by reference.
10.9
Former Valley Ridge Directors’ Deferred Compensation Plan and Agreement. (1) Previously filed as an exhibit to the ChoiceOne Financial Services, Inc.’s Form 10-K Annual Report for the year ended December 31, 2013. Here incorporated by reference.
Insider Trading Policy. Previously filed as an exhibit to the ChoiceOne Financial Services, Inc.’s Form 10-K Annual Report for the year ended December 31, 2023. Here incorporated by reference.
Subsidiaries of ChoiceOne Financial Services, Inc.
Consent of Independent Registered Public Accounting Firm.
Powers of Attorney.
31.1
Certification of Chief Executive Officer.
31.2
Certification of Chief Financial Officer
Certification pursuant to 18 U.S.C. § 1350.
Incentive-Based Compensation Recoupment Policy. Previously filed as an exhibit to the ChoiceOne Financial Services, Inc.’s Form 10-K Annual Report for the year ended December 31, 2023. Here incorporated by reference.
101.INS
Inline XBRL Instance Document (the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
(1)This agreement is a management contract or compensation plan or arrangement to be filed as an exhibit to this Form 10-K.
Copies of any exhibits will be furnished to shareholders upon written request. Requests should be directed to: Adom J. Greenland, Secretary, Chief Financial Officer and Treasurer, ChoiceOne Financial Services, Inc., 109 East Division, Sparta, Michigan, 49345.