ChoiceOne Financial Services, Inc. — FY2021 Form 10-K
Business context and reporting period. Michigan-based community bank holding company (NASDAQ: COFS), with operations concentrated in western and southeastern Michigan. This summary covers the fiscal year ended December 31, 2021, compared primarily with 2020. Results include the Community Shores merger from July 2020 and the County merger from October 2019, which affects comparability. The company reported one operating segment.
Financial performance and condition
| Metric | 2021 | 2020 | Change / context |
|---|---|---|---|
| Net interest income | $60.6 million | $51.1 million | Up 18.7% |
| Net income | $22.0 million | $15.6 million | Up 41.2%; 2020 adjusted net income excluding after-tax merger expenses was $18.3 million |
| Diluted EPS | $2.86 | $2.07 | Up from $2.43 on a merger-adjusted basis in 2020 |
| Net interest margin | 3.08% GAAP; 3.14% tax-equivalent | 3.38% GAAP; 3.51% tax-equivalent | Down 30 basis points GAAP; 37 basis points tax-equivalent |
| Return on average assets / equity | 1.02% / 9.79% | 0.94% / 7.28% | Both improved |
| Total assets, year-end | $2.37 billion | $1.92 billion | Up $447.3 million |
| Deposits, year-end | $2.05 billion | $1.67 billion | Up $377.7 million |
| Gross loans, year-end | $1.02 billion | $1.07 billion | Down overall; excluding PPP, loans held for sale and loans to financial institutions, loans grew $52.1 million |
| Shareholders’ equity, year-end | $221.7 million | $227.3 million | Down $5.6 million, mainly from a $13.6 million decline in accumulated other comprehensive income |
Interest income rose $8.9 million, supported by securities growth and PPP fee recognition; interest expense fell $667,000. Noninterest income fell $3.5 million, mainly because 2020 mortgage refinancing gains were $3.7 million higher. Noninterest expense rose $2.0 million, partly reflecting the larger scale after the Community Shores merger and additions to lending and wealth-management teams.
The 2021 provision for loan losses was $416,000, versus $4.0 million in 2020. Net charge-offs were $321,000, or 0.03% of average loans, compared with $464,000, or 0.05%. The allowance was $7.7 million, 0.76% of gross loans, and 139% of nonperforming loans. Nonperforming loans declined to $5.5 million from $8.2 million. Acquired loans carry a remaining $6.8 million credit mark and generally do not receive an allowance absent subsequent credit deterioration.
Operating cash flow was $37.7 million, compared with $8.5 million in 2020. Investing activities used $521.4 million, principally reflecting securities purchases; financing activities provided $436.0 million, largely from deposit growth and debt proceeds. Cash and cash equivalents ended at $31.9 million, down from $79.5 million. The filing states management considered liquidity adequate, citing deposit funding, loan and securities cash flows, $134.5 million of correspondent federal-funds capacity, a $196.5 million Federal Reserve line, and approximately $69.3 million of additional FHLB capacity.
Available-for-sale securities grew to $1.10 billion from $574.8 million. Rising market rates contributed to a $13.6 million after-tax decline in other comprehensive income and pushed year-end accumulated other comprehensive income to a $2.6 million loss. Management considered securities losses temporary and recorded no other-than-temporary impairment.
Year-end borrowings were $50.0 million of FHLB advances, contractually maturing in January 2022, and $35.0 million of subordinated debentures. The latter included $32.5 million of notes issued in September 2021, bearing 3.25% fixed interest through September 2026 and then floating to maturity in 2031. The Bank was categorized as well-capitalized; its total risk-based capital ratio was 12.9% and Tier 1 leverage ratio was 7.8%.
Material changes, outlook, and risks
- Growth and deployment of deposits: Deposit growth, partly attributed to pandemic-related stimulus funds, drove a $530.6 million increase in the securities portfolio. Management said it would prioritize local deposit growth in 2022 and could use FHLB advances or brokered CDs if needed to support asset growth.
- PPP: $192.5 million of PPP loans were forgiven in 2021, generating $5.2 million of fee income. At year-end, $33.1 million of PPP loans and $1.2 million of deferred fees remained; management expected forgiveness in the first half of 2022. All COVID-related loan deferrals had resumed payments by June 30, 2021.
- Capital and shareholder returns: The company issued $32.5 million of subordinated notes, repurchased about 309,000 shares for $7.8 million, and declared $0.94 per share in dividends, versus $0.82 in 2020. The dividend payout ratio was 32.7%. Bank dividends to the parent are subject to regulatory limits.
- Credit and concentration risks: Commercial and construction real estate loans totaled approximately $545 million, about 54% of the loan portfolio; residential real estate loans were about $168.9 million, or 17%. Management retained a pandemic-related qualitative allowance, while noting improving customer and industry conditions. Future losses could exceed the allowance.
- Funding and market risks: Deposits above the FDIC insurance limit totaled $889.2 million; uninsured time deposits were $87.3 million, with 93% scheduled to mature within one year. The company is exposed to interest-rate changes. Its year-end model showed a 400-basis-point rate rise could reduce modeled market value of equity by 21%; the 100- and 200-basis-point decline scenarios for that measure were slightly outside policy guidelines.
- Other risks and contingencies: COVID-19 and economic conditions, competition, cybersecurity and data security, liquidity, real-estate collateral values, regulatory change, and the LIBOR transition are identified risks. Management reported no significant pending legal proceedings expected to materially affect consolidated financial condition. The filing provides no formal earnings or revenue guidance.
- Audit and controls: The independent auditor issued an unqualified opinion on the financial statements. The allowance for loan losses’ current-factor adjustments were identified as a critical audit matter. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not provide an opinion on internal-control effectiveness.
Important facts for investors to verify
- Whether the $50.0 million FHLB advance due in January 2022 was repaid or refinanced, and the resulting funding cost and liquidity position.
- Actual PPP forgiveness timing and the extent to which PPP-related fees contributed to ongoing earnings.
- Trends in commercial real-estate credit quality, troubled debt restructurings, nonperforming loans, and the adequacy of the allowance and acquired-loan credit marks.
- Changes in deposit mix, uninsured balances and maturities, and available borrowing capacity as stimulus-related deposit growth normalizes.
- Changes in unrealized securities losses, accumulated other comprehensive income, and the effect of interest-rate movements on net interest income and capital.
- The impact of adopting the expected-credit-loss standard (ASC 326), which management said it was evaluating and could be significant.
- Reconcile the filing’s figures when using them in detailed analysis: the MD&A selected-data table reports 2021 net interest income of $60.641 million, while a later reconciliation contains a $60.624 million figure; the audited income statement reports $60.641 million.