ChoiceOne Financial Services, Inc. — Q1 2022 Form 10-Q
Business context and period: Regional bank holding company reporting for the three months ended March 31, 2022; financial comparisons are generally with Q1 2021, while balance-sheet comparisons are with December 31, 2021. Amounts below are in U.S. dollars; financial-statement figures are in millions unless otherwise noted.
Financial results and condition
| Metric | Q1 2022 / March 31, 2022 | Comparable period / prior year-end |
|---|---|---|
| Interest income | $17.47 million | $15.66 million in Q1 2021 |
| Net interest income | $16.32 million | $14.69 million in Q1 2021 |
| Noninterest income | $3.85 million | $5.60 million in Q1 2021 |
| Noninterest expense | $13.69 million | $12.53 million in Q1 2021 |
| Net income / diluted EPS | $5.53 million / $0.74 | $6.24 million / $0.80 in Q1 2021 |
| Net interest margin | 2.96% GAAP; 3.04% tax-equivalent | 3.26% GAAP; 3.32% tax-equivalent in Q1 2021 |
| Operating cash flow | $2.80 million | $2.21 million in Q1 2021 |
| Cash and cash equivalents | $89.98 million | $31.89 million at December 31, 2021 |
| Total assets | $2.38 billion | $2.37 billion at December 31, 2021 |
| Total deposits | $2.15 billion | $2.05 billion at December 31, 2021 |
| Gross loans / allowance | $1.03 billion / $7.60 million | $1.02 billion / $7.69 million at December 31, 2021 |
| Borrowings / subordinated debentures | None / $35.08 million | $50.00 million / $35.02 million at December 31, 2021 |
| Shareholders’ equity | $191.12 million | $221.67 million at December 31, 2021 |
Material changes and management commentary
- Net income fell 11% year over year. Management cited lower mortgage refinancing and loan-sale gains, higher staffing and operating expenses, and partly offsetting growth in interest income as loans and securities expanded.
- Core loans grew $121.3 million year over year. Average securities balances rose $490.9 million year over year as excess deposits were invested; management said it intends to transition funds toward lending as suitable credits become available.
- Noninterest income declined $1.8 million year over year, principally reflecting lower mortgage-related gains on loan sales and a negative change in the market value of equity securities. Noninterest expense rose $1.2 million, including increased compensation, data-processing and other costs.
- Q1 provision for loan losses was zero, versus $250,000 in Q1 2021. The allowance was 0.74% of loans; net charge-offs were $87,000. Nonperforming loans were $4.68 million, down from $5.54 million at year-end. Management noted $4.5 million of remaining credit marks on acquired loans; including those marks, it estimated coverage at 1.18% of loans.
- Interest-rate increases drove the pretax unrealized loss on available-for-sale securities from $3.3 million at year-end to $42.8 million at March 31. Accumulated other comprehensive loss reached $36.36 million, contributing to a $30.55 million quarterly decline in shareholders’ equity. Management attributed securities losses to rate and liquidity conditions, not credit quality, and recorded no other-than-temporary impairment.
- During Q1, the company transferred $428.4 million of securities from available-for-sale to held-to-maturity classification. The filing reports $641.0 million of available-for-sale securities and $429.9 million of held-to-maturity securities at quarter-end.
- Deposits increased $93.3 million during Q1. The company repaid $50 million of short-term borrowings and held no borrowings at quarter-end. Management considers liquidity sufficient for normal operating needs and cited deposit access, security maturities, loan repayments and available borrowing facilities.
- Both the company and bank exceeded applicable regulatory capital minimums; the bank’s total risk-based capital ratio was 13.3% and its common equity Tier 1 ratio was 12.8%.
Outlook, risks and unusual items
- No numerical earnings or revenue guidance is provided. Management expected remaining PPP loans—$8.5 million at quarter-end—to be forgiven in Q2 2022; $24.7 million was forgiven in Q1, generating $869,000 of fee income.
- After quarter-end, on April 21, ChoiceOne entered into interest-rate caps and swaps, each with $200 million notional amounts. Management said the combined strategy is intended to protect tangible capital if rates rise further and is expected to be modestly accretive to 2022 net income.
- Management identified economic conditions, interest-rate changes, mortgage activity, borrower credit quality, and continuing COVID-19 effects as areas of uncertainty. It maintained a qualitative allowance allocation related to pandemic-affected borrowers.
- The filing reports no material pending legal proceedings outside the ordinary course. Management’s Q1 qualitative goodwill review found impairment was not more likely than not; no quantitative test was performed.
Investor verification points
- Verify how the securities transfer, subsequent unrealized losses and new derivatives affect reported equity, tangible capital, earnings and hedge accounting.
- Track deposit trends, liquidity sources and the company’s ability to grow loans while managing interest-rate sensitivity and margins.
- Review credit quality, allowance adequacy and acquired-loan credit marks, especially if economic conditions weaken.
- Monitor mortgage production, loan-sale gains, staffing and technology costs, and the expected timing of remaining PPP forgiveness fees.
- Confirm capital and dividend capacity. The company declared $0.25 per share in Q1 and said it did not expect further share repurchases for the remainder of 2022.