ChoiceOne Financial Reports First Quarter 2022 Results

Posted by Adom Greenland on May 6, 2022 12:40:44 PM

ChoiceOne Financial Services, Inc. ("ChoiceOne", NASDAQ: COFS) reported net income of $5,528,000 or $0.74 per diluted share in the first quarter of 2022 compared to $6,238,000 or $0.80 per diluted share in the same period in 2021.


"We continue to see strong organic growth in both core deposits, which grew $93.3 million in the first quarter of 2022 or 18.2% on an annualized basis, and core loans, which grew $35.2 million in the first quarter of 2022 or 14.3% on an annualized basis” said Kelly Potes, Chief Executive Officer.  "Growing our core loan portfolio is key to our strategy as we look to deploy our low-cost funding into higher earning assets.  Our investments in building strong customer relationships are paying off and I am hopeful to continue this trend while still providing the service level our customers expect".


Total assets as of March 31, 2022 grew $10.1 million as compared to December 31, 2021 and $306.7 million compared to March 31, 2021, driven by core deposit growth.  Growth in the first quarter was offset by a paydown of FHLB borrowings.  Deposits grew $93.3 million in the first quarter of 2022 and $305.6 million since March 31, 2021.  Despite the large increase in deposit balances, ChoiceOne has been able to maintain low deposit costs with interest expense from deposits up $34,000 in the first quarter of 2022 compared to the fourth quarter of 2021 and down $97,000 compared to the first quarter of 2021.  Core loans, which exclude Paycheck Protection Program (“PPP”) loans, held for sale loans, and loans to other financial institutions, grew organically by $35.2 million during the first quarter of 2022. Additions to our commercial lending staff in 2021 and investments in the automation of our commercial loan process, have helped drive our pipeline of commercial loans and corresponding growth.  Loans to other financial institutions decreased $42.6 million during the three months ended March 31, 2022. Loans to other financial institutions is comprised of a warehouse line of credit to facilitate mortgage loan originations and fluctuates with the national mortgage market.  This balance is expected to remain minimal for the remainder of the year. During the three months ended March 31, 2022, $24.7 million of PPP loans were forgiven resulting in $869,000 of fee income.  $8.5 million in PPP loans and $351,000 in deferred PPP fee income remains outstanding as of March 31,2022.  Management expects the remaining PPP loans to be forgiven in the second quarter of 2022.  Interest income increased $656,000 in the first quarter of 2022 compared to the fourth quarter of 2021.  Securities interest income increased $360,000 due to a higher average balance while the increase in loan interest income was primarily due to accretion income from acquired loans of $818,000 and a larger core loan average balance.


ChoiceOne had no provision for loan losses expense for the three months ended March 31, 2022, as management has seen declining deferrals and very few past due loans as the economy recovers from the COVID-19 pandemic.  At March 31, 2022, the allowance for loan losses represented 0.74% of total loans.  The remaining credit mark on acquired loans from the recent mergers with County Bank Corp. and Community Shores Bank Corporation totaled $4.5 million as of March 31, 2022.  If the credit mark associated with the loans acquired in the mergers were added to the allowance for loan losses, the allowance for loan losses would have represented 1.18% of total loans excluding loans held for sale at March 31, 2022.  


In the last two years ChoiceOne has grown its securities portfolio substantially.  Total available for sale securities on December 31, 2020, amounted to $577.7 million and grew steadily to an available for sale balance on December 31, 2021, of $1.1 billion.  Many of the securities making up this balance include local municipals and other securities ChoiceOne has no intent to sell prior to maturity.  As such, on January 1, 2022, ChoiceOne elected to move $428.4 million of the portfolio into a held to maturity status.  Management believes the $657.9 million in available for sale securities at March 31, 2022 to be sufficient for any future liquidity needs. 


During the first quarter of 2022, the Federal Reserve sharply increased interest rates in response to published inflation rates.  This change in interest rates increased ChoiceOne's unrealized pre-tax loss on the available for sale securities portfolio from $3.3 million at December 31, 2021 to $42.8 million at March 31, 2022.  Additionally, meeting minutes from the Federal Open Market Committee indicated that interest rates are expected to continue to rise in order to combat inflation in the coming quarters.  As such, ChoiceOne has elected to utilize interest rate derivatives in order to better manage its interest rate risk position.  On April 21, 2022, ChoiceOne purchased five forward-starting interest rate caps with a total notional amount of $200 million and entered into a $200 million forward-starting pay-fixed interest rate swap.  These strategies create accounting symmetry between available-for-sale securities and other comprehensive income (equity), thus protecting tangible capital from further increases in interest rates.  ChoiceOne also entered into a $200 million receive-fixed interest rate swap, which, in the current environment, offsets the cost of the rising rate protection. These three strategies, in the aggregate, are expected to be modestly accretive to net income in 2022 and better position ChoiceOne Bank should rates continue to rise.  Importantly, the transactions were structured to qualify for hedge accounting, which means that changes in the fair value of the instruments flow through other comprehensive income (equity).


Shareholders’ equity totaled $191.1 million as of March 31, 2022, down from $221.7 million at year-end 2021 primarily due to an increase in the after-tax net unrealized holding loss on securities available for sale resulting from higher market interest rates. ChoiceOne Bank’s capital position remains “well-capitalized” with a total risk-based capital ratio of 13.3% as of March 31, 2022, compared to 12.9% at December 31, 2021.


ChoiceOne repurchased 25,899 shares for $683,000, or a weighted average all-in cost per share of $26.35, during the first quarter of 2022. 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 program was adopted.  Since adoption of the program, ChoiceOne has repurchased 335,173 shares for $8.5 million, or a weighted average all-in cost per share of $25.26.  The total shares repurchased as part of the program as of March 31, 2022, represented roughly 4.5% of outstanding shares of ChoiceOne common stock as of March 31, 2022.


Total noninterest income declined $299,000 in the first quarter of 2022 compared to the prior quarter and $1.8 million compared to the quarter ended March 31, 2021.  Total noninterest income in the first quarter of 2021 was bolstered by heightened levels of refinancing activity within ChoiceOne's mortgage portfolio, with gains on sales of loans $1.3 million larger than in the first quarter of 2022.  Customer service charges declined $130,000 in the first quarter of 2022 compared to the fourth quarter of 2021 and increased $269,000 compared to the same period in the prior year.  Prior year service charges were depressed by stay-at-home orders during the COVID 19 pandemic.  The market value of equity securities declined during the current quarter compared to both the fourth quarter of 2021 and the first quarter of 2021 consistent with general market conditions.  Equity investments include local small bank stocks and CRA bond mutual funds.


Total noninterest expense declined $68,000 in the first quarter of 2022 compared to the fourth quarter of 2021 and increased $1.2 million compared to the first quarter of 2021.  The increase since the first quarter of 2021 is related to an increase in salaries and wages due to new commercial loan production staff and wealth management staff.  Other expenses have also increased in the first quarter of 2022 compared to the same quarter in the prior year due to an increase to our FDIC insurance related and other expenses.  ChoiceOne continues to monitor expenses and looks to improve our efficiency through automation and use of digital tools.


Kelly Potes, Chief Executive Officer commented. “As the interest rates continues to evolve, we remain focused on our strategy in growing strong customer relationships, which we expect will provide sustainable earnings in any rate environment."


About ChoiceOne

ChoiceOne Financial Services, Inc. is a financial holding company headquartered in Sparta, Michigan and the parent corporation of ChoiceOne Bank. Member FDIC. ChoiceOne Bank operates 35 offices in parts of Kent, Lapeer, Macomb, Muskegon, Newaygo, Ottawa, and St. Clair counties. ChoiceOne Bank offers insurance and investment products through its subsidiary, ChoiceOne Insurance Agencies, Inc. For more information, please visit Investor Relations at ChoiceOne’s website at


Forward-Looking Statements

This release may contain forward-looking statements. Words such as "anticipates," "believes," "estimates," "expects," "forecasts," "intends," "is likely," "plans," "predicts," "projects," "may," "could," "look forward," "continue", "future" and variations of such words and similar expressions are intended to identify such forward looking statements. These statements reflect current beliefs as to the expected outcomes of future events and are not guarantees of future performance. These statements involve certain risks, uncertainties and assumptions ("risk factors") that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed, implied or forecasted in such forward-looking statements. Furthermore, ChoiceOne undertakes no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events, or otherwise. Risk factors include, but are not limited to, the risk factors described in Item 1A in ChoiceOne Financial Services, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2021.

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