CHOICEONE FINANCIAL SERVICES, INC. The following discussion is designed to provide a review of the consolidated financial condition and results of operations ofChoiceOne Financial Services, Inc. ("ChoiceOne"), its wholly-owned subsidiaryChoiceOne Bank , andChoiceOne Bank's wholly-owned subsidiary,ChoiceOne Insurance Agencies, Inc. This discussion should be read in conjunction with the interim consolidated financial statements and related notes. FORWARD-LOOKING STATEMENTS This discussion and other sections of this quarterly report contain forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and ChoiceOne. 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. Management's determination of the provision and allowance for loan losses, the carrying value of goodwill, loan servicing rights, other real estate owned, and the fair value of investment securities (including whether any impairment on any investment security is temporary or other-than-temporary and the amount of any impairment) and management's assumptions that are inherently forward-looking. Examples of forward-looking statements also include, but are not limited to, statements related to risks and uncertainties related to, and the impact of, the COVID-19 pandemic on the businesses, financial condition and results of operations of ChoiceOne and its customers and statements regarding the outlook and expectations of ChoiceOne and its customers. All of the information concerning interest rate sensitivity is forward-looking. All statements with references to future time periods are forward-looking. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions ("risk factors") that are difficult to predict with regard to timing, extent, likelihood, and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed, implied or forecasted in such forward-looking statements. Furthermore, ChoiceOne undertakes no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events, or otherwise. Additional risk factors include, but are not limited to, the risk factors discussed in Item 1A of ChoiceOne's Annual Report on Form 10-K for the year endedDecember 31, 2021 and in Part II, Item 1A of this Quarterly Report on Form 10-Q. These are representative of the risk factors that could cause a difference between an ultimate actual outcome and a preceding forward-looking statement. 23
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RESULTS OF OPERATIONS
Net income for the first quarter of 2022 was $5,528,000 , which represented
a decline of $710,000 or 11% compared to the first quarter of 2021. Basic and
diluted earnings per common share were $0.74 for the first quarter of 2022
compared to $0.80 for the first quarter of the prior year. The decline in net
income in the first quarter of 2022 compared to the same period in the prior
year resulted in part from a decline of refinancing activity within ChoiceOne's
mortgage portfolio due to a rise in mortgage rates since the first quarter of
the prior year. Net income also declined as noninterest expense increased
related to salaries and wages of new commercial loan production staff and wealth
management staff. These factors were offset by an increase of $1.8 million in
interest income as the balance of both core loans and securities continued to
grow. Core loans (defined as loans excluding loans held for sale, loans to
other financial institutions, and Paycheck Protection Program ("PPP")
loans) increased $121.3 million from March 31, 2021 to March 31, 2022 .
The return on average assets and return on average shareholders' equity were
0.93% and 10.72%, respectively, for the first quarter of 2022, compared to 1.25%
and 11.13%, respectively, for the same period in 2021.
Paycheck Protection Program ("PPP")
ChoiceOne processed over$126 million in PPP loans in 2020, acquired an additional$37 million in PPP loans in the merger with Community Shores, and originated$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 beforeJune 5, 2020 ) or five years (loans made on or afterJune 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 three months endedMarch 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 ofMarch 31, 2022 . Management expects the remaining PPP loans to be forgiven in the second quarter of 2022.
Dividends
Cash dividends of$1,872,000 or$0.25 per share were declared in the first quarter of 2022, compared to$1,716,000 or$0.22 per share declared in the first quarter of 2021. The cash dividend payout percentage was 33.9% for the first quarter of 2022, compared to 27.5% in the same period in the prior year.
Interest Income and Expense
Tables 1 and 2 on the following pages provide information regarding interest income and expense for the three months endedMarch 31, 2022 and 2021. 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. These tables are referred to in the discussion of interest income, interest expense and net interest income. 24 --------------------------------------------------------------------------------
Table 1 - Average Balances and Tax-Equivalent Interest Rates
Three Months Ended March 31,
2022 2021
(Dollars in thousands) Average Average
Balance Interest Rate Balance Interest Rate
Assets:
Loans (1)(3)(4)(5) $ 1,037,646 $ 12,304 4.74 % $ 1,080,181 $ 12,687 4.70 %
Taxable securities (2) 795,888 3,507 1.76 438,575 1,856 1.69
Nontaxable securities (1) 334,793 2,097 2.50 201,228 1,390 2.76
Other 36,460 14 0.15 84,822 20 0.09
Interest-earning assets 2,204,787 17,921 3.25 1,804,806 15,953 3.54
Noninterest-earning assets 171,077 184,954
Total assets $ 2,375,864 $ 1,989,760
Liabilities and Shareholders'
Equity:
Interest-bearing demand deposits $ 928,437 $ 435 0.19 % $ 715,868 $ 429 0.24 %
Savings deposits 440,873 146 0.13 355,395 114 0.13
Certificates of deposit 179,375 202 0.45 195,093 337 0.69
Borrowings 10,239 6 0.22 8,462 35 1.70
Subordinated debentures 35,342 364 4.12 3,099 52 6.65
Interest-bearing liabilities 1,594,266 1,153 0.29 1,277,917 967 0.30
Demand deposits 553,267 479,649
Other noninterest-bearing
liabilities 22,051 7,937
Total liabilities 2,169,584 1,765,503
Shareholders' equity 206,280 224,257
Total liabilities and
shareholders' equity $ 2,375,864 $ 1,989,760
Net interest income
(tax-equivalent basis)
(Non-GAAP) (1) $ 16,768 $ 14,986
Net interest margin
(tax-equivalent basis)
(Non-GAAP) (1) 3.04 % 3.32 %
Reconciliation to Reported Net
Interest Income
Net interest income
(tax-equivalent basis)
(Non-GAAP) (1) $ 16,768 $ 14,986
Adjustment for taxable
equivalent interest (447 ) (297 )
Net interest income (GAAP) $ 16,321 $ 14,689
Net interest margin (GAAP) 2.96 % 3.26 %
(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) Taxable securities include dividend income from
and
(3) Loans include both loans to other financial institutions and loans held
for sale.
(4) Non-accruing loan and PPP loan balances are included in the balances of
average loans. Non-accruing loan average balances were
$5.9 million in the first quarter of 2022 and 2021, respectively. PPP loan average balances were$22.8 million and$137.7 million in the first quarter of 2022 and 2021, respectively. (5) Interest on loans included net origination fees, accretion income, and PPP fees. Accretion income was$818,000 and$351,000 in the first quarter of 2022 and 2021, respectively. PPP fees were approximately$869,000 and$1.4 million in the first quarter of 2022 and 2021, respectively. 25
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Table 2 - Changes in Tax-Equivalent Net Interest Income
Three Months Ended March 31,
(Dollars in thousands) 2022 Over 2021
Total Volume Rate
Increase (decrease) in interest income (1)
Loans (2) $ (383 ) $ (1,063 ) $ 680
Taxable securities 1,651 1,568 83
Nontaxable securities (2) 707 1,521 (814 )
Other (6 ) (50 ) 43
Net change in interest income 1,969 1,976 (8 )
Increase (decrease) in interest expense (1)
Interest-bearing demand deposits 6 436 (430 )
Savings deposits 32 30 2
Certificates of deposit (135 ) (25 ) (110 )
Borrowings (30 ) 43 (73 )
Subordinated debentures 312 452 (139 )
Net change in interest expense 185
936 (750 )
Net change in tax-equivalent net interest income
(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 nontaxable investment securities and loans has been adjusted
to a fully tax-equivalent basis using an incremental tax rate of 21%.
Net Interest Income
Tax-equivalent net interest income increased $1.8 million in the first three
months of 2022 compared to the same period in 2021. This was partially due to a
$490.9 million increase in the securities portfolio balance compared to 2021.
Net interest margin on a tax-equivalent basis declined by 28 basis points to
3.04% in the first quarter of 2022 from 3.32% in the same period of 2021. The
decline was due to lower PPP fees and a higher percentage of securities to total
assets.
The average balance of loans decreased $42.5 million in the first quarter
of 2022 compared to the same period in 2021. The decline in average loan
balance is due to average PPP loans declining $116.9 million from March 31, 2021
to March 31, 2022 . This decline in balance was offset by an increase in average
core loans (defined as loans excluding PPP loans, loans to other financial
institutions, and loans held for sale) of $86.7 million from March 31, 2021 to
March 31, 2022 . The decrease in PPP loan balance and fees caused tax-equivalent
interest income from loans to decrease $383,000 in the first quarter of 2022
compared to the same period in the prior year. The average balance of total
securities increased $490.9 million in the first quarter of 2022 compared to the
same period in 2021. The securities portfolio has grown as ChoiceOne has
deployed excess deposit dollars into securities with the intent to transition to
loans as good credits become available. The effect of the average balance
growth, partially offset by a combined 5 basis point reduction in the average
rate earned on securities, caused tax-equivalent securities income to increase
$2.4 million in the first quarter of 2022 compared to the same period in 2021.
26-------------------------------------------------------------------------------- Growth of$298.0 million in the average balance of interest-bearing demand deposits and savings deposits, partially offset by a combined 3 basis point decrease in the average rate paid, caused interest expense to be$38,000 higher in the first three months of 2022 compared to the first three months of the prior year. The average balance of certificates of deposit decreased$15.7 million in the first three months of 2022 compared to the same period in 2021. The decreased balance and a reduction of 24 basis points in the average rate paid on certificates caused interest expense to decrease$135,000 in the first three months of 2022 compared to the same period in 2021. InSeptember 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. These increased the average balance of subordinated debentures by$32.2 million in the first three months of 2022 compared to the same period in the prior year and caused interest expense to increase by$312,000 .
Provision and Allowance for Loan Losses
The provision for loan losses was$0 in the first quarter of 2022, compared to$250,000 in the same period in the prior year. No provision in the first quarter of 2022 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$494,000 during the three months endedMarch 31, 2022 . The specific allowance for loan losses for impaired loans increased by$44,000 during the three months endedMarch 31, 2022 as the loans being evaluated had a higher risk of loss based on management's judgement than impaired loans atDecember 31, 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$4.7 million as ofMarch 31, 2022 , compared to$5.5 million as ofDecember 31, 2021 . The allowance for loan losses was 0.74% of total loans atMarch 31, 2022 , compared to 0.76% atDecember 31, 2021 . 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$4.5 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 1.18% of total loans atMarch 31, 2022 .
Charge-offs and recoveries for respective loan categories for the three months
ended
(Dollars in thousands) 2022 2021
Charge-offs Recoveries Charge-offs Recoveries
Agricultural $ - $ - $ - $ -
Commercial and industrial 31 2 74 9
Consumer 112 52 71 79
Commercial real estate - 1 48 -
Residential real estate - 1 - 2
$ 143 $ 56 $ 193 $ 90
Net charge-offs were $87,000 in the first quarter of 2022, compared to net
charge-offs of $103,000 during the same period in 2021. Net charge-offs on an
annualized basis as a percentage of average loans were 0.03% in the first three
months of 2022 compared to annualized net charge-offs of 0.04% of average loans
in the same period in the prior year. Management is aware that the economic
climate in Michigan will continue to affect business and individual borrowers.
Management believes that the COVID-19 pandemic will 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
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 andSound 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 10 basis points and 5 basis points, respectively. ChoiceOne has also allocated 5 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 continued to decline, 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. Noninterest Income Total noninterest income declined$1.8 million in the first quarter of 2022 compared to the same period in 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 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 the first quarter of 2021 consistent with general market conditions. Equity securities include local community bank stocks and Community Reinvestment Act bond mutual funds.
Noninterest Expense
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. Data processing and other expenses have also increased in the first quarter of 2022 compared to the same quarter in the prior year as ChoiceOne looks to improve its efficiency through automation and use of digital tools. Income Tax Expense Income tax expense was$948,000 in the first quarter of 2022 compared to$1,272,000 for the same period in 2021. The decrease was due to a higher level of income before income tax in 2021. The effective tax rate was 14.6% for the first quarter of 2022 compared to 16.9% for the first quarter of 2021. The decline in the effective tax rate resulted from increased interest income from tax-exempt securities in 2022 compared to 2021. 27 --------------------------------------------------------------------------------
FINANCIAL CONDITION
Securities
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. During the three months ended March 31, 2022 , ChoiceOne
elected to move $428.4 million of the portfolio into a held to maturity status.
Management believes the $641.0 million in available for sale securities at March
31, 2022 to be sufficient for any future liquidity needs.
There were no sales of securities in the first three months of 2022; however,
Loans Core loans, which exclude PPP loans, held for sale loans, and loans to other financial institutions, grew organically by$121.3 million fromMarch 31, 2021 toMarch 31, 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$7.3 million fromMarch 31, 2021 toMarch 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. In the first quarter of 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 ofMarch 31, 2022 . During the first quarter of 2022, ChoiceOne recorded accretion income in the amount of$818,000 , while the remaining credit mark on acquired loans from the recent mergers withCounty Bank Corp. and Community Shores totaled$4.5 million as ofMarch 31, 2022 . Excluding PPP loans, ChoiceOne saw an increase to commercial and industrial loans of$20.0 million and commercial real estate loans of$10.3 million during the first three months of 2022. Excluding PPP loans, ChoiceOne saw declines of$3.3 million in agricultural loans and$3.4 million in construction real estate loans in the first three months of 2022. The other changes resulted from normal fluctuations in borrower activity.
Asset Quality
Information regarding impaired loans can be found in Note 3 to the consolidated financial statements included in this report. The total balance of loans classified as impaired was$4.9 million atMarch 31, 2022 , compared to$5.4 million as ofDecember 31, 2021 . The change in the first three months of 2022 was primarily comprised of a decrease of$338,000 in impaired residential real estate loans. As part of its review of the loan portfolio, management also monitors the 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 loans past due 90 days or more, which are considered troubled debt restructurings ("TDRs").
The balances of these nonperforming loans were as follows:
(Dollars in thousands) March 31, December 31,
2022 2021
Loans accounted for on a nonaccrual basis $ 1,167 $ 1,727
Accruing loans which are contractually past due 90 days or more as to principal or interest payments
- -
Loans defined as "troubled debt restructurings "
which are not included above 3,513 3,816
Total $ 4,680 $ 5,543
The reduction in the balance of nonaccrual loans in the first three months of
2022 was primarily due to loans that were paid off. It is also noted that 90%
of loans considered TDRs were performing according to their restructured terms
as of March 31, 2022 . Management believes the allowance for loan losses
allocated to its nonperforming loans is sufficient at March 31, 2022 .
28
--------------------------------------------------------------------------------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. Accounting pronouncements allow a company to first perform a qualitative assessment for goodwill prior to a quantitative assessment (Step 1 assessment). If the results of the qualitative assessment indicate that it is more likely than not that goodwill is impaired, then a quantitative assessment must be performed. If not, there is no further assessment required. ChoiceOne acquiredValley 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. Management performed its annual qualitative assessment of goodwill as ofJune 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 both short-term and long-term interest rates have had and may continue to have on net interest margin and mortgage sales activity. The share price and book value of ChoiceOne's stock were also compared to the prior year. Management also compared average deal values for recent closed bank transactions to ChoiceOne transactions. Despite ChoiceOne's market capitalization declining slightly fromNovember 30, 2020 toJune 30, 2021 , ChoiceOne's financial performance remained positive. In assessing the totality of the events and circumstances, management determined that it was more likely than not that the fair value of ChoiceOne's operations, from a qualitative perspective, exceeded the carrying value as ofJune 30, 2021 and impairment of goodwill was not necessary. ChoiceOne's stock price per share was less than its book value as ofMarch 31, 2022 . This indicated that goodwill may be impaired and resulted in management performing another qualitative goodwill impairment assessment as of the end of the first quarter of 2022. 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 in the first three months of 2022 reflected significant and continuing growth in ChoiceOne's interest income. Based on the results of the qualitative analysis, management believed that a quantitative analysis was not necessary as ofMarch 31, 2022 .
Deposits and Borrowings
Total deposits increased$93.3 million in the first quarter of 2022 and 305.6 million sinceMarch 31, 2021 . The change in deposits was due in part to funds related to the increased savings from the pandemic as well as funds on deposit from the PPP loans that were not fully utilized as ofMarch 31, 2022 . InSeptember 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 also holds$3.2 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. ChoiceOne may useFederal Home Loan Bank advances and advances from the Federal Reserve Bank Discount Window to meet short-term funding needs if needed in the remainder of 2022.
Shareholders' Equity
Total shareholders' equity declined$30.6 million in the first three months of 2022. During the first quarter of 2022, theFederal Reserve increased the federal funds rate by 25 basis points in response to published inflation rates, causing interest rates generally to sharply increase. This change in interest rates increased ChoiceOne's unrealized pre-tax loss on the available for sale securities portfolio from$3.3 million atDecember 31, 2021 to$42.8 million atMarch 31, 2022 . Additionally, meeting minutes from theFederal Open Market Committee indicated that additional increases in the federal funds rate are expected 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. OnApril 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 positionChoiceOne 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). Refer to further details in subsequent event footnote 8. The reduction in common stock and paid in capital resulted from ChoiceOne's repurchase of 25,899 shares for$683,000 , or a weighted average all-in cost per share of$26.35 , during the first quarter of 2022. We do not expect further buybacks for the remainder of the year. This was part of the common stock repurchase program announced inApril 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. This program replaced and superseded all prior repurchase programs for ChoiceOne. 29 --------------------------------------------------------------------------------
Regulatory Capital Requirements
Following is information regarding compliance of
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
March 31, 2022
ChoiceOne Financial Services
Inc.
Total capital (to risk weighted
assets) $ 207,839 14.6 % $ 113,648 8.0 % N/A N/A
Common equity Tier 1 capital (to
risk weighted assets) weighted
assets) 163,875 11.5 63,927 4.5 N/A N/A
Tier 1 capital (to risk weighted
assets) 168,375 11.9 85,236 6.0 N/A N/A
Tier 1 capital (to average
assets) 168,375 7.3 92,225 4.0 N/A N/A
ChoiceOne Bank
Total capital (to risk weighted
assets) $ 188,451 13.3 % $ 113,464 8.0 % $ 141,830 10.0 %
Common equity Tier 1 capital (to
risk weighted assets) weighted
assets) 180,850 12.8 63,824 4.5 92,190 6.5
Tier 1 capital (to risk weighted
assets) 180,850 12.8 85,098 6.0 113,464 8.0
Tier 1 capital (to average
assets) 180,850 7.9 92,130 4.0 115,163 5.0
December 31, 2021
ChoiceOne Financial Services
Inc.
Total capital (to risk weighted
assets) $ 204,353 14.4 % $ 113,604 8.0 % N/A N/A
Common equity Tier 1 capital (to
risk weighted assets) weighted
assets) 160,338 11.3 63,902 4.5 N/A N/A
Tier 1 capital (to risk weighted
assets) 164,838 11.6 85,203 6.0 N/A N/A
Tier 1 capital (to average
assets) 164,838 7.4 89,415 4.0 N/A N/A
ChoiceOne Bank
Total capital (to risk weighted
assets) $ 182,275 12.9 % $ 113,444 8.0 % $ 141,806 10.0 %
Common equity Tier 1 capital (to
risk weighted assets) weighted
assets) 174,587 12.3 63,813 4.5 92,174 6.5
Tier 1 capital (to risk weighted
assets) 174,587 12.3 85,083 6.0 113,444 8.0
Tier 1 capital (to average
assets) 174,587 7.8 89,289 4.0 111,611 5.0
Management reviews the capital levels of ChoiceOne and ChoiceOne Bank on a
regular basis. The Board of Directors and management believe that the capital
levels as of March 31, 2022 are adequate for the foreseeable future. The Board
of Directors' determination of appropriate cash dividends for future periods
will be based on, among other things, market conditions and ChoiceOne's
requirements for cash and capital.
Liquidity
Net cash provided by operating activities was$2.8 million for the three months endedMarch 31, 2022 compared to$2.2 million in the same period a year ago. The change was due to$1.3 million lower net proceeds from loan sales in 2022 compared to 2021, which was offset by the change in other assets and liabilities. Net cash provided by investing activities was$14.5 million for the first three months of 2022 compared to net cash used of$104.3 million in the same period in 2021. ChoiceOne had$31.4 million of securities purchases and sold$0 of securities in the first three months of 2022 compared to$179.2 million and$0 in the same period in 2021, respectively. A decline in net loan originations and payments led to cash provided of$31.8 million in the first three months of 2022 compared to$63.1 million in the same period during the prior year. Net cash provided by financing activities was$40.8 million for the first three months ended 2022, compared to$157.9 million in the same period in the prior year. ChoiceOne experienced growth of$93.3 million in deposits in the first three months of 2022 compared to$165.4 million in 2021, with a$44.2 million decrease in borrowings contributing to the change. ChoiceOne believes that the current level of liquidity is sufficient to meetChoiceOne 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 from correspondent banks, advances available from theFederal Home Loan Bank , and secured lines of credit available from theFederal Reserve Bank . 30
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