CHOICEONE FINANCIAL SERVICES INC (COFS) FY 2021 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
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 2020 results where it would be redundant to the discussion previously included in Part II, Item 7 of our 2020 Annual Report on Form 10-K.
Selected Financial Data
| (Dollars in thousands, except per share data) | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | ||||||||||
| For the year | ||||||||||||
| Net interest income | $ | 60,641 | $ | 51,071 | $ | 27,773 | ||||||
| Provision for loan losses | 416 | 4,000 | - | |||||||||
| Noninterest income | 19,194 | 22,698 | 9,168 | |||||||||
| Noninterest expense | 52,921 | 50,884 | 28,476 | |||||||||
| Income before income taxes | 26,498 | 18,885 | 8,465 | |||||||||
| Income tax expense | 4,456 | 3,272 | 1,294 | |||||||||
| Net income | 22,042 | 15,613 | 7,171 | |||||||||
| Cash dividends declared | 7,200 | 6,174 | 5,806 | |||||||||
| Per share * | ||||||||||||
| Basic earnings | $ | 2.87 | $ | 2.08 | $ | 1.58 | ||||||
| Diluted earnings | 2.86 | 2.07 | 1.58 | |||||||||
| Cash dividends declared | 0.94 | 0.82 | 1.40 | |||||||||
| Shareholders' equity (at year end) | 29.52 | 29.15 | 26.52 | |||||||||
| Average for the year | ||||||||||||
| Securities | $ | 869,788 | $ | 388,797 | $ | 210,492 | ||||||
| Gross loans | 1,040,430 | 1,014,959 | 534,646 | |||||||||
| Deposits | 1,905,629 | 1,421,168 | 710,419 | |||||||||
| Borrowings | 5,465 | 16,712 | 21,270 | |||||||||
| Subordinated debt | 12,841 | 1,532 | - | |||||||||
| Shareholders' equity | 225,120 | 214,591 | 110,610 | |||||||||
| Assets | 2,156,774 | 1,654,873 | 845,851 | |||||||||
| At year end | ||||||||||||
| Securities | $ | 1,116,265 | $ | 585,687 | $ | 348,888 | ||||||
| Gross loans | 1,068,831 | 1,117,798 | 856,191 | |||||||||
| Deposits | 2,052,294 | 1,674,578 | 1,154,602 | |||||||||
| Borrowings | 50,000 | 9,327 | 33,198 | |||||||||
| Subordinated debt | 35,017 | 3,089 | - | |||||||||
| Shareholders' equity | 221,669 | 227,268 | 192,139 | |||||||||
| Assets | 2,366,682 | 1,919,342 | 1,386,128 | |||||||||
| Selected financial ratios | ||||||||||||
| Return on average assets | 1.02 | % | 0.94 | % | 0.85 | % | ||||||
| Return on average shareholders' equity | 9.79 | 7.28 | 6.48 | |||||||||
| Cash dividend payout as a percentage of net income | 32.67 | 39.54 | 80.97 | |||||||||
| Shareholders' equity to assets (at year end) | 9.37 | 11.84 | 13.86 |
Note - 2019 financial data includes the impact of the merger with County, which was effective as of October 1, 2019, and 2020 financial data includes the impact of the merger with Community Shores, which was effective July 1, 2020.
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Explanatory Note
On July 1, 2020, ChoiceOne completed the merger of Community Shores Bank Corporation ("Community Shores") with and into ChoiceOne with ChoiceOne surviving the merger. Accordingly, the reported consolidated financial condition and operating results as of and for the years ended December 31, 2020 and December 31, 2021 include the impact of the merger, which was effective as of July 1, 2020.
On October 1, 2019, ChoiceOne completed the merger of County Bank Corp. ("County") with and into ChoiceOne with ChoiceOne surviving the merger. Accordingly, the reported consolidated financial condition and operating results as of and for the years ended December 31, 2019, December 31, 2020, and December 31, 2021 include the impact of the merger, which was effective as of October 1, 2019.
For additional details regarding the mergers with Community Shores and County, see Note 21 (Business Combinations) of the Notes to the Consolidated Financial Statements included in Item 8 of this report.
RESULTS OF OPERATIONS
Summary
ChoiceOne's net income for 2021 was $22.0 million, compared to $15.6 million in 2020. Diluted earnings per share was $2.86 during in the twelve months ended December 31, 2021, compared to $2.07 per share in the twelve months ended December 31, 2020. Net income for the year ended December 31, 2020, excluding $2.7 million of tax-effected merger expenses, was $18.3 million or $2.43 per diluted share.
Total assets grew to $2.4 billion as of December 31, 2021 compared to $1.9 billion as of December 31, 2020. The increase was related to organic deposit growth of $ 377.7 million in the twelve months ended December 31, 2021. This growth was partly due to how individuals and businesses have managed funds received under the Coronavirus Aid, Relief and Economic Security ("CARES") Act. In an effort to deploy deposit growth, ChoiceOne grew its securities portfolio $530.6 million in the year ended December 31, 2021. During the twelve months ended December 31, 2021, $192.5 million of loans under the Paycheck Protection Program ("PPP") were forgiven resulting in $5.2 million of fee income. This growth in the securities portfolio coupled with PPP fees helped total interest income for 2021 to grow $8.9 million compared to 2020. 2021 interest income on loans included accretion income related to loans acquired from the mergers with County Bank Corp. and Community Shores Bank Corporation in the amount of $1.1 million. The remaining credit mark on these acquired loans totaled $6.8 million as of December 31, 2021. Despite the large increase in deposit balances, interest cost of deposits decreased by $873,000 in 2021 compared to 2020.
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.
Total noninterest income declined $3.5 million in the twelve months ended December 31, 2021, compared to the twelve months ended December 31, 2020. Total noninterest income in 2020 was bolstered by heightened levels of refinancing activity within ChoiceOne's mortgage portfolio, with gains on sales of loans $3.7 million higher than in 2021. Customer service charges increased $1.4 million in the twelve months ended December 31, 2021, compared to the twelve months ended December 31, 2020. 2020 service charges were depressed by stay-at-home orders during the COVID 19 pandemic. 2021 service charges also included the effect from the merger with Community Shores, which closed on July 1, 2020.
Total noninterest expense increased $2.0 million in the year ended December 31, 2021, compared to the year ended December 31, 2020. Much of the increase in 2021 was caused by the increase in scale related to the merger with Community Shores.
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The Coronavirus (COVID-19) Outbreak
Consistent with federal banking agencies' “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus,” ChoiceOne is working with its borrowers affected by the COVID-19 pandemic. ChoiceOne granted deferrals on numerous loans to borrowers affected by the pandemic; however, as of June 30, 2021, all deferments had resumed payments in accordance with loan terms.
In addition, ChoiceOne processed over $126 million in PPP loans in 2020 and acquired an additional $37 million in PPP loans in the merger with Community Shores. ChoiceOne originated an additional $89.1 million in PPP loans in 2021. PPP loans are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP. PPP loans carry a fixed rate of 1.00% and a term of two years (loans made before June 5, 2020) or five years (loans made on or after June 5, 2020), if not forgiven in whole or in part. Payments are deferred until either the date on which the Small Business Administration ("SBA") remits the amount of forgiveness proceeds to the lender or the date that is ten months after the last day of the covered period if the borrower does not apply for forgiveness within that ten-month period. The loans are 100% guaranteed by the SBA. The SBA pays the originating bank a processing fee ranging from 1% to 5%, based on the size of the loan. Upon SBA forgiveness, unrecognized fees are recognized into interest income. During the year ended December 31, 2021, $192.5 million of PPP loans were forgiven resulting in $5.2 million of fee income compared to $23.4 million of PPP loans forgiven resulting in $3.0 million of fee income in 2020. $33.1 million in PPP loans and $1.2 million in deferred PPP fee income remains outstanding as of December 31, 2021. Management expects the remaining PPP loans to be forgiven in the first half of 2022.
Dividends
Cash dividends of $7.2 million or $0.94 per common share were declared in 2021 compared to $6.2 million or $0.82 per common share were declared in 2020. The dividend yield for ChoiceOne’s common stock was 3.55% as of the end of 2021, compared to 2.66% as of the end of 2020. The cash dividend payout as a percentage of net income was 33% as of December 31, 2021, compared to 40% as of December 31, 2020.
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Table 1 – Average Balances and Tax-Equivalent Interest Rates
| Year Ended December 31, | ||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Average | Average | Average | |||||||||||||||||||||||||||||||||
| Balance | Interest | Rate | Balance | Interest | Rate | Balance | Interest | Rate | ||||||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||||||||||||
| Loans (1) (3)(4)(5) | $ | 1,040,430 | $ | 48,672 | 4.68 | % | $ | 1,014,959 | $ | 46,893 | 4.62 | % | $ | 534,646 | $ | 26,791 | 5.01 | % | ||||||||||||||||||
| Taxable securities (2) | 599,902 | 10,260 | 1.71 | 276,085 | 5,891 | 2.13 | 152,094 | 3,955 | 2.60 | |||||||||||||||||||||||||||
| Nontaxable securities (1) | 269,886 | 7,098 | 2.63 | 112,712 | 3,402 | 3.02 | 58,398 | 1,867 | 3.20 | |||||||||||||||||||||||||||
| Other | 68,879 | 84 | 0.12 | 71,417 | 266 | 0.37 | 14,992 | 268 | 1.79 | |||||||||||||||||||||||||||
| Interest-earning assets | 1,979,097 | 66,114 | 3.34 | 1,475,173 | 56,452 | 3.83 | 760,130 | 32,881 | 4.33 | |||||||||||||||||||||||||||
| Noninterest-earning assets | 177,677 | 179,699 | 85,721 | |||||||||||||||||||||||||||||||||
| Total assets | $ | 2,156,774 | $ | 1,654,873 | $ | 845,851 | ||||||||||||||||||||||||||||||
| Liabilities and Shareholders' Equity: | ||||||||||||||||||||||||||||||||||||
| Interest-bearing demand deposits | $ | 791,886 | $ | 1,797 | 0.23 | % | $ | 571,693 | $ | 1,832 | 0.32 | % | $ | 278,444 | $ | 1,559 | 0.56 | % | ||||||||||||||||||
| Savings deposits | 398,969 | 551 | 0.14 | 267,217 | 300 | 0.11 | 109,028 | 79 | 0.07 | |||||||||||||||||||||||||||
| Certificates of deposit | 186,898 | 957 | 0.51 | 183,836 | 2,046 | 1.11 | 136,537 | 2,550 | 1.87 | |||||||||||||||||||||||||||
| Borrowings | 5,465 | 101 | 1.86 | 16,712 | 327 | 1.96 | 21,269 | 512 | 2.41 | |||||||||||||||||||||||||||
| Subordinated debentures | 12,841 | 571 | 4.45 | 1,532 | 139 | 9.07 | - | - | 0.00 | |||||||||||||||||||||||||||
| Interest-bearing liabilities | 1,396,059 | 3,977 | 0.28 | 1,040,990 | 4,644 | 0.45 | 545,278 | 4,700 | 0.86 | |||||||||||||||||||||||||||
| Demand deposits | 527,876 | 398,422 | 186,411 | |||||||||||||||||||||||||||||||||
| Other noninterest-bearing liabilities | 7,719 | 870 | 3,552 | |||||||||||||||||||||||||||||||||
| Total liabilities | 1,931,654 | 1,440,282 | 735,241 | |||||||||||||||||||||||||||||||||
| Shareholders' equity | 225,120 | 214,591 | 110,610 | |||||||||||||||||||||||||||||||||
| Total liabilities and shareholders' equity | $ | 2,156,774 | $ | 1,654,873 | $ | 845,851 | ||||||||||||||||||||||||||||||
| Net interest income (tax-equivalent basis) (Non-GAAP) (1) | $ | 62,137 | $ | 51,808 | $ | 28,181 | ||||||||||||||||||||||||||||||
| Net interest margin (tax-equivalent basis) (Non-GAAP) (1) | 3.14 | % | 3.51 | % | 3.71 | % | ||||||||||||||||||||||||||||||
| Reconciliation to Reported Net Interest Income | ||||||||||||||||||||||||||||||||||||
| Net interest income (tax-equivalent basis) (Non-GAAP) (1) | $ | 62,137 | $ | 51,808 | $ | 28,181 | ||||||||||||||||||||||||||||||
| Adjustment for taxable equivalent interest | (1,513 | ) | (737 | ) | (408 | ) | ||||||||||||||||||||||||||||||
| Net interest income (GAAP) | $ | 60,624 | $ | 51,071 | $ | 27,773 | ||||||||||||||||||||||||||||||
| Net interest margin (GAAP) | 3.08 | % | 3.38 | % | 3.47 | % |
| Column 1 | Column 2 |
|---|---|
| (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. |
| Column 1 | Column 2 |
|---|---|
| (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 balance of average loans. |
| (5) | Interest on loans included net origination fees and PPP fees of approximately $7,232,000, $5,236,000, and $866,000 in 2021, 2020, and 2019, respectively. |
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Table 2 – Changes in Tax-Equivalent Net Interest Income
| Year Ended December 31, | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | 2021 Over 2020 | 2020 Over 2019 | ||||||||||||||||||||||
| Total | Volume | Rate | Total | Volume | Rate | |||||||||||||||||||
| Increase (decrease) in interest income (1) | ||||||||||||||||||||||||
| Loans (2) | $ | 1,779 | $ | 1,187 | $ | 592 | $ | 20,102 | $ | 22,336 | $ | (2,234 | ) | |||||||||||
| Taxable securities | 4,369 | 5,737 | (1,368 | ) | 1,936 | 2,749 | (813 | ) | ||||||||||||||||
| Nontaxable securities (2) | 3,696 | 4,185 | (489 | ) | 1,535 | 1,647 | (112 | ) | ||||||||||||||||
| Other | (182 | ) | (9 | ) | (173 | ) | (2 | ) | 349 | (351 | ) | |||||||||||||
| Net change in interest income | 9,662 | 11,099 | (1,437 | ) | 23,571 | 27,081 | (3,510 | ) | ||||||||||||||||
| Increase (decrease) in interest expense (1) | ||||||||||||||||||||||||
| Interest-bearing demand deposits | (35 | ) | 588 | (623 | ) | 273 | 1,143 | (870 | ) | |||||||||||||||
| Savings deposits | 251 | 171 | 80 | 221 | 156 | 65 | ||||||||||||||||||
| Certificates of deposit | (1,089 | ) | 34 | (1,123 | ) | (504 | ) | 721 | (1,225 | ) | ||||||||||||||
| Borrowings | (226 | ) | (210 | ) | (16 | ) | (235 | ) | (230 | ) | (5 | ) | ||||||||||||
| Subordinated debentures | 432 | 1,516 | (37 | ) | 189 | 183 | 6 | |||||||||||||||||
| Net change in interest expense | (667 | ) | 2,099 | (1,719 | ) | (56 | ) | 1,973 | (2,029 | ) | ||||||||||||||
| Net change in tax-equivalent net interest income | $ | 10,329 | $ | 9,001 | $ | 282 | $ | 23,627 | $ | 25,108 | $ | (1,481 | ) |
| Column 1 | Column 2 |
|---|---|
| (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. |
| Column 1 | Column 2 |
|---|---|
| (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 2021, 2020, and 2019. |
Net Interest Income
The presentation of net interest income on a tax-equivalent basis is not in accordance with generally accepted accounting principles (“GAAP”), but is customary in the banking industry. This non-GAAP measure ensures comparability of net interest income arising from both taxable and tax-exempt loans and investment securities. The adjustments to determine net interest income on a tax-equivalent basis were $1.5 million and $737,000 for the years ended 2021 and 2020, respectively. These adjustments were computed using a 21% federal income tax rate.
On March 3, 2020 the Federal Reserve Open Market Committee lowered the federal funds rate by 50 basis points which was followed by a reduction of 100 basis points on March 15, 2020. Operating in an environment with lower interest rates has had a negative effect on both ChoiceOne’s interest income and interest spread. ChoiceOne management continues to monitor rates and their effect on income as part of the Asset/Liability Risk Committee to determine what strategic decisions will need to be made in both higher and lower rate environments. No changes were made to the federal funds rate during 2021.
Tax-equivalent net interest income increased $10.3 million in 2021 compared to 2020. The increase was attributed to an increase of $503.9 million in average interest-earning assets. The average balance of loans increased $25.5 million in 2021 compared to 2020. This is due to loan growth excluding loans held for sale, loans to other financial institutions, and PPP loans during that period of $52.1 million offset by a decline in the average balance of PPP loans held during 2021 compared to 2020. The average rate earned on loans also increased by 6 basis points in 2021 compared to 2020 as a result of the recognition of $5.2 million in PPP fees earned. Tax-equivalent interest income on loans increased $1.8 million in 2021 compared to the prior year. The average balance of total securities grew $481.0 million in 2021 compared to the prior year as ChoiceOne made efforts to deploy deposit growth into earning assets. The average balance growth offset by a 39 basis point decline in the average rate earned on securities caused interest income from securities to grow $8.1 million in 2021 compared to the prior year. A decline of $2.5 million in average balance in other interest-earning assets in 2021 compared to 2020, coupled with a 25 basis point decline in the rate earned, caused interest income to decline by $182,000.
Despite large increases in deposit balances, a significant decline in overall market interest rates in 2021 compared to 2020 caused the interest paid on interest-bearing liabilities to decline by $667,000. The average balance of interest-bearing demand deposits and savings deposits increased $351.9 million in 2021 compared to 2020. The effect of this increase, offset by a 6 basis point decline in the average rate paid, caused interest expense to be $216,000 higher in 2021 than in the prior year. The average balance of certificates of deposit was $3.1 million higher in 2021 than in 2020. Growth in the average balance was more than offset by a decline in average rate paid of 60 basis points which caused interest expense to decline by $1.1 million.
ChoiceOne’s tax-equivalent net interest income margin was 3.14% in 2021 and 3.51% in 2020. The decrease in the net interest income margin resulted from a lower rate environment and an asset mix with a higher percentage of securities to total assets.
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Provision and Allowance For Loan Losses
Table 3 – Provision and Allowance For Loan Losses
| (Dollars in thousands) | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | ||||||||||
| Allowance for loan losses at beginning of year | $ | 7,593 | $ | 4,057 | $ | 4,673 | ||||||
| Charge-offs: | ||||||||||||
| Agricultural | - | 15 | - | |||||||||
| Commercial and industrial | 195 | 148 | 83 | |||||||||
| Real estate - commercial | 111 | 254 | - | |||||||||
| Real estate - construction | - | - | 25 | |||||||||
| Real estate - residential | - | 8 | 292 | |||||||||
| Consumer | 370 | 329 | 589 | |||||||||
| Total | 676 | 754 | 989 | |||||||||
| Recoveries: | ||||||||||||
| Agricultural | - | - | 65 | |||||||||
| Commercial and industrial | 86 | 57 | 22 | |||||||||
| Real estate - commercial | 48 | 10 | - | |||||||||
| Real estate - construction | - | - | 124 | |||||||||
| Real estate - residential | 7 | 19 | 136 | |||||||||
| Consumer | 214 | 204 | 26 | |||||||||
| Total | 355 | 290 | 373 | |||||||||
| Net charge-offs (recoveries) | 321 | 464 | 616 | |||||||||
| Provision for loan losses | 416 | 4,000 | - | |||||||||
| Allowance for loan losses at end of year | $ | 7,688 | $ | 7,593 | $ | 4,057 | ||||||
| Allowance for loan losses as a percentage of: | ||||||||||||
| Total loans as of year end | 0.76 | % | 0.71 | % | 0.51 | % | ||||||
| Nonaccrual loans, accrual loans past due 90 days or more and troubled debt restructurings | 139 | % | 92 | % | 63 | % | ||||||
| Ratio of net charge-offs during the period to average loans outstanding during the period | 0.03 | % | 0.05 | % | 0.12 | % | ||||||
| Loan recoveries as a percentage of prior year's charge-offs | 47 | % | 29 | % | 102 | % |
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The provision for loan losses was $416,000 in 2021, compared to $4.0 million in the prior year. The provision in 2020 was impacted by the economic impact of the COVID-19 pandemic on ChoiceOne's local market areas and the national economy. The provision in 2021 was deemed prudent based on our assessment of the probable estimated losses inherent in the loan portfolio. Our methodology for measuring the appropriate level of allowance for loan losses and related provision for loan losses involves specific allocations for loans considered impaired, and general allocations for homogeneous loans based on historical loss experience.
Loans classified as impaired loans declined by $2.4 million during 2021. The specific allowance for loan losses for impaired loans increased $72,000 during 2021 as the loans being evaluated had a higher risk of loss based on management's judgement than impaired loans at December 31, 2020.
Loans that were collectively analyzed for impairment decreased by $45.5 million in 2021 as a result of forgiveness of PPP loans of $192.5 million offset by loans excluding PPP, loans to other financial institutions, and loans held for sale, increasing by $52.1 million and PPP originations of $89.1 million. As PPP loans are 100% government guaranteed and carry no allowance, the net decrease in PPP loans had no impact on the allowance for loan losses. The general allocation for loan losses not considered impaired increased by $23,000 during 2021.
The determination of our loss factors is based, in part, upon our actual loss history adjusted for significant qualitative factors that, in management's judgment, affect the collectability of the portfolio as of the analysis date. ChoiceOne uses a rolling 20 quarter actual net charge-off history as the base for the computation.
Nonperforming loans were $5.5 million as of December 31, 2021 compared to $8.2 million as of December 31, 2020. The allowance for loan losses was 0.76% of total loans at December 31, 2021, compared to 0.71% at December 31, 2020. Loans acquired in the mergers with County and Community Shores were recorded at fair value and as a result do not have an allowance for loan losses allocated to them unless credit deteriorates subsequent to acquisition. ChoiceOne has $6.8 million in credit mark remaining on loans acquired in the mergers. If the credit mark associated with the loans acquired in the mergers were added to the allowance for loan losses, the total allowance for loan losses would have represented 1.37% of total loans excluding loans held for sale at December 31, 2021 and 1.55% at December 31, 2020.
Net charge-offs were $321,000 in 2021 compared to net charge-offs of $464,000 during the same period in 2020. Net charge-offs on an annualized basis as a percentage of average loans were 0.03% in 2021 compared to 0.05% and 0.12% in 2020. Management is aware that the economic climate in Michigan will continue to affect business and individual borrowers. Management believes that the COVID-19 pandemic continue to have an impact in 2022 and, accordingly, has maintained a qualitative allocation related to the COVID-19 pandemic in evaluating its allowance for loan losses. Management has worked and intends to continue to work with delinquent borrowers in an attempt to lessen the impact of the COVID-19 pandemic on ChoiceOne.
ChoiceOne has allocated approximately $1.1 million of its allowance for loan losses at December 31, 2021 compared to $2.2 million at December 31, 2020, to borrowers falling into industry classification codes that management believes to be highly or moderately affected by the pandemic, as follows:
| Highly Affected | Moderately Affected |
|---|---|
| Accommodation | Ambulatory Health Care Services |
| Amusement, Gambling, and Recreation Industries | Educational Services |
| Food Services and Drinking Places | Merchant Wholesalers, Durable Goods |
| Performing Arts, Spectator Sports, and Related Industries | Merchant Wholesalers, Nondurable Goods |
| Rental and Leasing Services | Miscellaneous Store Retailers |
| Scenic and Sightseeing Transportation | Motion Picture and Sound Recording Industries |
| Transit and Ground Passenger Transportation | Real Estate |
Loans highly affected and moderately affected based on their commercial industry category have been allocated an additional 20 basis points and 10 basis points, respectively. ChoiceOne has also allocated 10 basis points to all retail loan categories. It is noted that this allowance amount is in addition to the regularly calculated allowance based on risk rating and qualitative factors. These allocations have declined from their highest levels at December 31, 2020, as ChoiceOne has seen improvements in customer, industry, and economic conditions related to the effects of the pandemic. ChoiceOne will continue to monitor concentrations as part of its analysis on an ongoing basis. Management will continue to monitor charge-offs, changes in the level of nonperforming loans, changes within the composition of the loan portfolio and the impact of the COVID-19 pandemic, and it will adjust the provision and allowance for loan losses as determined to be necessary.
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Noninterest Income
Total noninterest income declined $3.5 million in 2021 compared to 2020. Total noninterest income in 2020 was bolstered by heightened levels of refinancing activity within ChoiceOne's mortgage portfolio, with gains on sales of loans $3.7 million higher than in 2021. Customer service charges increased $1.4 million in 2021 compared to the prior year. Prior year service charges were depressed by stay-at-home orders during the COVID-19 pandemic. Current year service charges also included the effect from the merger with Community Shores, which closed on July 1, 2020. The stock market dipped sharply in March 2020 related to the COVID-19 pandemic, which affected securities held by ChoiceOne. Since that time ChoiceOne has seen the value of equity investments held climb to pre-pandemic levels. The change in the market value of equity securities was $634,000 higher in 2021, when compared to the prior year. It is also noted that ChoiceOne performed a restructuring of its security portfolio in the second quarter of 2020, which provided $1.3 million of additional noninterest income in 2020 compared to 2021.
Noninterest Expense
Total noninterest expense increased $2.0 million in the year ended December 31, 2021, compared to the year ended December 31, 2020. Much of the increase in 2021 was caused by the increase in scale related to the merger with Community Shores. During 2021, ChoiceOne hired six experienced commercial lenders, opened a loan production office in Wyoming, Michigan, and added four experienced members to the wealth management team. These increases were offset by declines in professional fees of $707,000, data processing of $576,000, and supplies and postage of $230,000. These reductions in expenses in 2021 are related to synergies from the merger with Community Shores and fees incurred in 2020 related to the merger with Community Shores.
Income Taxes
Income tax expense was $1.2 million higher in 2021 than in 2020. The increase is related to additional pre-tax income offset by the effect of merger-related expenses in 2020. The effective tax rate was 17% in 2021 and 2020.
Financial Condition
Summary
Total assets grew $447.3 million in the twelve months ended December 31, 2021, while deposit growth during the twelve months ended December 31, 2021 was $377.7 million. Despite the large increase in deposits, ChoiceOne has been able to maintain low deposit costs; interest expense from deposits decreased $873,000 during the year ended December 31, 2021 compared to the year ended December 31, 2020. Excluding PPP loans, loans held for sale, and loans held at other financial institutions, ChoiceOne grew loans by $52.1 million during 2021. Management expects the remaining PPP loans to be forgiven in the first half of 2022.
Securities
The Company’s securities balances as of December 31 were as follows:
| (Dollars in thousands) | |||||||
|---|---|---|---|---|---|---|---|
| 2021 | 2020 | ||||||
| Equity securities | $ | 8,492 | $ | 2,896 | |||
| Available for Sale Securities | |||||||
| U.S. Government and federal agency | $ | 2,008 | $ | 2,051 | |||
| U.S. Treasury notes and bonds | 91,979 | 2,056 | |||||
| State and municipal | 534,847 | 320,368 | |||||
| Mortgage-backed | 433,115 | 246,723 | |||||
| Corporate | 20,642 | 3,589 | |||||
| Asset-backed securities | 16,294 | - | |||||
| Total | $ | 1,098,885 | $ | 574,787 |
Total investment securities increased $530.6 million from December 31, 2020 to December 31, 2021. Approximately $637.9 million of securities were purchased in 2021. Securities totaling $14.6 million were called or matured in 2021. Principal payments for municipal and mortgage-backed securities totaling $39.6 million were received during 2021. Approximately $29.7 million of securities were sold during 2021 for a net loss of $40,000. The Bank’s Investment Committee continues to monitor the portfolio and purchases securities as it considers prudent.
Equity securities included a money market preferred security ("MMP") of $1.0 million and common stock of $7.5 million as of December 31, 2021. As of December 31, 2020, equity securities included an MMP of $1.0 million and common stock of $1.9 million.
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Loans
The Company’s loan portfolio as of December 31 was as follows:
| (Dollars in thousands) | |||||||
|---|---|---|---|---|---|---|---|
| 2021 | 2020 | ||||||
| Agricultural | $ | 64,819 | $ | 53,735 | |||
| Commercial and industrial | 203,024 | 303,527 | |||||
| Consumer | 35,174 | 34,014 | |||||
| Real estate - commercial | 525,884 | 469,247 | |||||
| Real estate - construction | 19,066 | 16,639 | |||||
| Real estate - residential | 168,881 | 192,506 | |||||
| Loans, gross | $ | 1,016,848 | $ | 1,069,668 |
The loan portfolio (excluding loans held for sale and loans to other financial institutions) decreased $52.8 million from December 31, 2020 to December 31, 2021. If PPP loans are also excluded the portfolio grew by $52.1 million during the same time period.
The Bank entered into an agreement during 2018 to provide a line of credit 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. The balance of the lines of credit held by the Bank was $42.6 million as of December 31, 2021 compared to $35.2 million as of December 31, 2020.
Information regarding impaired loans can be found in Note 3 to the consolidated financial statements included in this report. In addition to its review of the loan portfolio for impaired loans, management also monitors various nonperforming loans. Nonperforming loans are comprised of (1) loans accounted for on a nonaccrual basis; (2) loans, not included in nonaccrual loans, which are contractually past due 90 days or more as to interest or principal payments; and (3) loans, not included in nonaccrual or past due 90 days or more, which are considered troubled debt restructurings. Troubled debt restructurings consist of loans where the terms have been modified to assist the borrowers in making their payments. The modifications can include capitalization of interest onto the principal balance, reduction in interest rate, and extension of the loan term.
The balances of these nonperforming loans as of December 31 were as follows:
| (Dollars in thousands) | |||||||
|---|---|---|---|---|---|---|---|
| 2021 | 2020 | ||||||
| Loans accounted for on a nonaccrual basis | $ | 1,727 | $ | 6,707 | |||
| Loans contractually past due 90 days or more as to principal or interest payments | - | - | |||||
| Loans considered troubled debt restructurings which are not included above | 3,816 | 1,537 | |||||
| Total | $ | 5,543 | $ | 8,244 |
Nonaccrual loans included $313,000 in agricultural loans, $285,000 in commercial and industrial loans, $279,000 in commercial real estate loans, and $850,000 in residential real estate loans as of December 31, 2021. Nonaccrual loans included $348,000 in agricultural loans, $1.8 million in commercial and industrial loans, $8,000 in consumer loans, $3.1 million in commercial real estate loans, $80,000 in construction real estate loans, and $1.4 million in residential real estate loans as of December 31, 2020. Loans considered troubled debt restructurings which were not on a nonaccrual basis and were not 90 days or more past due as to principal or interest payments consisted of $1.8 million in agricultural loans, $73,000 in commercial and industrial loans, 601,000 in commercial real estate loans and $1.3 million in residential real estate loans at December 31, 2021, compared to $196,000 in commercial real estate loans and $1.3 million in residential real estate loans at December 31, 2020.
The federal banking agencies issued an “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” on March 22, 2020 and subsequently issued a revised statement on April 7, 2020. These statements encourage financial institutions to work constructively with borrowers affected by COVID-19, and provide that short-term modifications to loans made on a good faith basis to borrowers who were current as of the implementation date of the statements are not considered TDRs. Further, Section 4013 of the CARES Act states that COVID-19 related modifications on loans that were current as of December 31, 2019 are not TDRs. As of December 31, 2020, ChoiceOne had granted deferments on approximately 750 loans with loan balances totaling $148 million which, in reliance on the statements of federal banking agencies and the CARES Act, are not reflected as TDRs in this report. All deferments had resumed payments in accordance with loan terms as of June 30, 2021.
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 no loans fitting this description as of December 31, 2021, compared to $26.1 million as of December 31, 2020.
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Deposits and Other Funding Sources
The Company’s deposit balances as of December 31 were as follows:
| (Dollars in thousands) | |||||||
|---|---|---|---|---|---|---|---|
| 2021 | 2020 | ||||||
| Noninterest-bearing demand deposits | $ | 560,931 | $ | 477,654 | |||
| Interest-bearing demand deposits | 665,482 | 471,346 | |||||
| Money market deposits | 218,211 | 191,681 | |||||
| Savings deposits | 425,626 | 337,332 | |||||
| Local certificates of deposit | 182,044 | 196,565 | |||||
| Brokered certificates of deposit | - | - | |||||
| Total deposits | $ | 2,052,294 | $ | 1,674,578 |
Total deposits increased $377.7 million from December 31, 2020 to December 31, 2021. Much of the growth was due to the various stimulus programs offered as a result of the COVID-19 pandemic.
As of December 31, 2021, borrowings consisted of Federal Home Loan Bank ("FHLB") advances of $50.0 million. Total borrowings increased in 2021 as management invested in earning assets. FHLB advances were secured by agricultural loans and residential real estate loans with a carrying value of approximately $127.5 million at December 31, 2021. Approximately $69.3 million of additional FHLB advances were available as of December 31, 2021 based on the collateral pledged by the Bank.
In 2022, management will continue to focus its marketing efforts toward growth in local deposits. If local deposit growth is insufficient to support asset growth, management believes that advances from the FHLB and brokered certificates of deposit can address corresponding funding needs.
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 $3.1 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 merger mark-to-market adjustment.
Shareholders’ Equity
Total shareholders' equity declined $5.6 million in 2021. Accumulated other comprehensive income declined $13.6 million in 2021 as a result of market value declines in ChoiceOne’s available for sale securities. The change was caused by increases in certain general market interest rates since the beginning of 2021. The reduction in common stock and paid in capital resulted from ChoiceOne's repurchase of approximately 309,000 shares for $7.8 million, or a weighted average all-in cost per share of $25.17, during 2021. This was part of the common stock repurchase program announced in April 2021 which authorized repurchases of up to 390,114 shares, representing 5% of the total outstanding shares of common stock as of the date the plan was adopted. This program replaced and superseded all prior repurchase programs for ChoiceOne.
Note 20 to the consolidated financial statements presents regulatory capital information for ChoiceOne and the Bank at the end of 2021 and 2020. Management will monitor these capital ratios during 2022 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. At December 31, 2021, the Bank was categorized as "well-capitalized" under the Basel III framework.
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Table 4 – Contractual Obligations
The following table discloses information regarding the maturity of ChoiceOne’s contractual obligations at December 31, 2021:
| Payment Due by Period | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Less | More | ||||||||||||||||||
| than | 1 - 3 | 3 - 5 | than | ||||||||||||||||
| (Dollars in thousands) | Total | 1 year | Years | Years | 5 Years | ||||||||||||||
| Time deposits | $ | 182,044 | $ | 149,991 | $ | 25,170 | $ | 6,491 | $ | 392 | |||||||||
| Borrowings | 50,000 | 50,000 | - | - | - | ||||||||||||||
| Cumulative Preferred Securities | 3,190 | (101 | ) | (202 | ) | (202 | ) | 3,695 | |||||||||||
| ChoiceOne Subordinated Debenture | 31,827 | (144 | ) | (288 | ) | (241 | ) | 32,500 | |||||||||||
| Operating leases | 657 | 221 | 284 | 152 | - | ||||||||||||||
| Other obligations | 227 | 68 | 118 | 19 | 22 | ||||||||||||||
| Total | $ | 267,945 | $ | 200,035 | $ | 25,082 | $ | 6,219 | $ | 36,609 |
Liquidity and Interest Rate Risk
Net cash from operating activities was $37.7 million in 2021 compared to $8.5 million in 2020. Net cash used in investing activities was $521.4 million in 2021 compared to cash used of $250.8 million in 2020. The change was caused by higher net purchases of securities in 2021 compared to 2020 offset by higher loan payments due to PPP loan forgiveness than loan originations in 2021. Net cash flows from financing activities were a positive $436.0 million in 2021 compared to a positive $262.2 million in 2020. The change was caused by more growth in deposits in 2021 and higher proceeds from borrowings and subordinated debt in 2021 compared to 2020.
ChoiceOne's primary market risk exposure occurs in the form of interest rate risk. Liquidity risk also can have an impact but to a lesser extent. 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.
Management believes that the current level of liquidity is sufficient to meet the Bank's normal operating needs. This belief is based upon the availability of deposits from both the local and national markets, maturities of securities, normal loan repayments, income retention, federal funds purchased, lines of credit from correspondent banks, and advances available from the FHLB. 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. Relatively short-term liquid funds exist in the form of lines of credit to purchase federal funds at correspondent banks. As of December 31, 2021, the amount of federal funds available for purchase from the Bank's correspondent banks totaled approximately $134.5 million. ChoiceOne’s federal funds purchased balance was $0 as of December 31, 2021 and December 31, 2020. The Bank also has a line of credit secured by ChoiceOne’s commercial loans with the Federal Reserve Bank of Chicago for $196.5 million, which is designated for nonrecurring short-term liquidity needs. Longer-term liquidity needs may be met through local deposit growth, maturities of securities, normal loan repayments, advances from the FHLB, brokered certificates of deposit, and income retention. Approximately $69.4 million of additional borrowing capacity was available from the FHLB based on agricultural real estate loans and residential real estate loans pledged as collateral at the end of 2021. The acceptance of brokered certificates of deposit is not limited as long as the Bank is categorized as “well capitalized” under regulatory guidelines.
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NON-GAAP FINANCIAL MEASURES
This report contains references to net income excluding tax-effected merger-related expenses, which is a financial measure that is not defined in U.S. generally accepted accounting principles ("GAAP"). Management believes this non-GAAP financial measure provides 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 measures as comparative tools, together with GAAP 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.
NON-GAAP Reconciliation
(Unaudited)
The non-GAAP measures presented in the table below reflect the adjustments of the reported U.S. GAAP results for significant items that management does not believe are reflective of the Company's current and ongoing operations.
| Year Ended December 31, | |||||||
|---|---|---|---|---|---|---|---|
| (In Thousands, Except Per Share Data) | 2021 | 2020 | |||||
| Income before income tax | $ | 26,498 | $ | 18,885 | |||
| Adjustment for pre-tax merger expenses | - | 3,219 | |||||
| Adjusted income before income tax | 26,498 | 22,104 | |||||
| Income tax expense | 4,456 | 3,272 | |||||
| Tax impact of adjustment for pre-tax merger expenses | - | 505 | |||||
| Adjusted income tax expense | 4,456 | 3,777 | |||||
| Net income | 22,042 | 15,613 | |||||
| Adjustment for pre-tax merger expenses, net of tax impact | - | 2,714 | |||||
| Adjusted net income | $ | 22,042 | $ | 18,327 | |||
| Basic earnings per share | $ | 2.87 | $ | 2.08 | |||
| Effect of merger expenses, net of tax impact | - | 0.36 | |||||
| Adjusted basic earnings per share | $ | 2.87 | $ | 2.44 | |||
| Diluted earnings per share | $ | 2.86 | $ | 2.07 | |||
| Effect of merger expenses, net of tax impact | - | 0.36 | |||||
| Adjusted diluted earnings per share | $ | 2.86 | $ | 2.43 |
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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 loan losses, loan servicing rights, carrying value of goodwill, and income taxes. Actual results could differ from those estimates.
Securities
Debt securities available for sale may be sold prior to maturity due to changes in interest rates, prepayment risks, yield, availability of alternative investments, liquidity needs, credit rating changes, or other factors. Debt securities classified as available for sale are reported at their fair value with changes flowing through other comprehensive income. Declines in the fair value of securities below their cost that are considered to be “other than temporary” are recorded as losses in the income statement. In estimating whether a fair value decline is considered to be “other than temporary,” management considers the length of time and extent that the security’s fair value has been less than its carrying value, the financial condition and near-term prospects of the issuer, and the Bank’s ability and intent to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value.
Market values for securities available for sale are obtained from outside sources and applied to individual securities within the portfolio. The difference between the amortized cost and the fair value of securities is recorded as a valuation adjustment and reported net of tax effect in other comprehensive income.
Equity securities are reported at their fair value with changes in market value flowing through net income. Prior to 2018, equity securities were accounted for in a manner similar to available for sale debt securities.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level believed adequate by management to absorb probable incurred losses inherent in the consolidated loan portfolio. Management’s evaluation of the adequacy of the allowance for loan losses is an estimate based on reviews of individual loans, assessments of the impact of current economic conditions on the portfolio and historical loss experience of seasoned loan portfolios.
Management believes the accounting estimate related to the allowance for loan losses is a “critical accounting estimate” because (1) the estimate is highly susceptible to change from period to period because of assumptions concerning the changes in the types and volumes of the portfolios and current economic conditions and (2) the impact of recognizing an impairment or loan loss could have a material effect on the Company’s assets reported on the balance sheet as well as its net income.
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
Generally accepted accounting principles require that the fair values of the assets and liabilities of an acquired entity be recorded at their fair value on the date of acquisition. The fair values are determined using both internal computations and information obtained from outside parties when deemed necessary. The net difference between the price paid for the acquired company and the net value of its balance sheet is recorded as goodwill. Accounting principles also require that goodwill be evaluated for impairment on an annual basis or more frequently whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Under recently issued accounting pronouncements, ChoiceOne is permitted to first perform a qualitative assessment to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of equity is less than its carrying value. If the conclusion is that it is more likely than not that the fair value of equity is more than its carrying value, no further testing in the form of a quantitative assessment is necessary. If the conclusion is that it is more likely than not that the fair value of equity is less than its carrying value, then a two-step quantitative assessment test is performed to identify any potential goodwill impairment.
Management hired a third party to perform a quantitative assessment of goodwill as of November 30, 2020. The third party used an income approach to calculate cash flow based on excess capital above a required tangible equity to tangible assets ratio selected with consideration given to regulatory guidelines and the risk profile of ChoiceOne. As a result of the income approach, no indication of goodwill impairment was noted. The third party analysis also assessed the share price, book value, and financial results of ChoiceOne as compared to the previous year. Additionally, industry and market conditions were evaluated and compared, including the potential impact of COVID-19 on the ability of ChoiceOne’s borrowers to comply with loan terms. The third party also compared average values for recently closed bank merger and acquisition transactions to ChoiceOne's recently completed merger and acquisition transactions. In assessing the totality of the events and circumstances, management determined that it is more likely than not that the fair value of the Bank’s operations, from a qualitative perspective, exceeded the carrying value as of November 30, 2020 and there was no further quantitative assessment necessary.
Management performed its annual qualitative assessment of goodwill as of June 30, 2021. In evaluating whether it is more likely than not that the fair value of ChoiceOne's operations was less than the carrying amount, management assessed the relevant events and circumstances such as the ones noted in ASC 350-20-35-3c. The analysis consisted of a review of ChoiceOne’s current and expected future financial performance, the potential impact of the COVID-19 pandemic on the ability of ChoiceOne’s borrowers to comply with loan terms, and the impact that reductions in both short-term and long-term interest rates have had and may continue to have on net interest margin and mortgage sales activity. ChoiceOne’s stock price per share was less than its book value as of December 31, 2021. This indicated that goodwill may be impaired and resulted in management performing another qualitative goodwill impairment assessment as of the year ended December 31, 2021. As a result of the analysis, management concluded that it was more-likely-than-not that the fair value of the reporting unit was greater than the carrying value. This was evidenced by the strong financial indicators, solid credit quality ratios, as well as the strong capital position of ChoiceOne. In addition, revenue for the year ended December 31, 2021 reflected significant and continuing growth in ChoiceOne's interest income, as well as net Small Business Administration fees related to Paycheck Protection Program loans. Based on the results of the qualitative analysis, management believed that a quantitative analysis was not necessary as of December 31, 2021.
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Taxes
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, 2021, management determined that no valuation allowance was necessary.