CHOICEONE FINANCIAL SERVICES INC Management’s report and analysis of financial condition and operating results. (Form 10-Q)

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The following discussion is designed to provide a review of the consolidated
financial condition and results of operations of ChoiceOne Financial Services,
Inc. ("ChoiceOne"), its wholly-owned subsidiary ChoiceOne Bank, and ChoiceOne
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
ended December 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.



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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 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 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.



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 expenses

Tables 1 and 2 on the following pages provide information regarding interest
income and expense for the three months ended March 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.



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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 in tax equivalent to facilitate comparison with the

taxable interest-bearing assets. Adjustment uses additional tax

rate of 21%. The presentation of these measures on a fiscal equivalent

is not in accordance with GAAP, but is customary in the banking sector

industry. These non-GAAP measures provide comparability with respect to

taxable and tax-exempt loans and securities.

(2) Taxable securities include dividend income Federal mortgage bank

and Federal Reserve Bank Stock.

(3) Loans include both loans to other financial institutions and loans held

for sale.

(4) Balances of unmatured loans and PPP loans are included in balances

average loans. Average unearned loan balances were $1.4 million and

        $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.




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Table 2 – Evolution of 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 $1,784 $1,040 $742

(1) The volume deviation is calculated as the variation in volume (average balance)

multiplied by the interest rate of the previous year. The rate difference is

corresponds to the change in the interest rate multiplied by the rate of the previous year

volume (average balance). The shift in interest due to both volume and

rate was allocated to volume and rate changes on a pro rata basis of

the relationship between the absolute dollar amounts of the change in each.

(2) Interest on non-taxable 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.



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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.  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.
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.


Allowance and provision 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
ended March 31, 2022.  The specific allowance for loan losses for impaired loans
increased by $44,000 during the three months ended March 31, 2022 as the loans
being evaluated had a higher risk of loss based on management's judgement than
impaired loans at  December 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 of March 31, 2022, compared to $5.5
million as of December 31, 2021.  The allowance for loan losses was 0.74% of
total loans at March 31, 2022, compared to 0.76% at December 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 at March 31, 2022.



Write-offs and recoveries for the respective loan categories for the three months ended March 31, 2022 and 2021 were as follows:


(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 allocated approximately $545,000 of its allowance for loan losses to borrowers under industry classification codes that management believes to be significantly or moderately impacted 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 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.



Non-interest expenses

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.



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                              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 during the first three months of 2022; however,
$3.8 million securities were called or matured during this same period. Repayments of capital on securities totaled $10.4 million in the first three months of 2022.



Loans

Core loans, which exclude PPP loans, held for sale loans, and loans to other
financial institutions, grew organically by $121.3 million from March 31, 2021
to March 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 from March 31, 2021 to 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.  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 of March 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 with County Bank Corp. and Community Shores totaled $4.5 million
as of March 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 at March 31, 2022, compared to $5.4
million as of December 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 non-performing loans were as follows:


(Dollars in thousands)                                   March 31,         December 31,
                                                            2022               2021
Loans accounted for on a nonaccrual basis              $        1,167     $ 

1,727

Accrued loans that are contractually 90 days or more in arrears with respect to payment of principal or interest

                   -                  -
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.



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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 acquired Valley 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 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 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 from November 30, 2020 to June 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 of June 30, 2021 and
impairment of goodwill was not necessary.



ChoiceOne's stock price per share was less than its book value as of March 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 of March 31, 2022.



Deposits and borrowings

Total deposits increased $93.3 million in the first quarter of 2022 and 305.6
million since March 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 of March 31, 2022.



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 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 use Federal 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.



Equity

Total shareholders' equity declined $30.6 million in the first three months of
2022. During the first quarter of 2022, the Federal 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 at December 31, 2021 to $42.8 million at
March 31, 2022.  Additionally, meeting minutes from the Federal 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.  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).  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 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.  This program replaced and superseded
all prior repurchase programs for ChoiceOne.



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Regulatory capital requirements

Below you will find information regarding the compliance of ChoiceOne and
ChoiceOne Bank with regulatory capital requirements:


                                                                                               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
ended March 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 meet
ChoiceOne 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 the Federal Home Loan Bank,
and secured lines of credit available from the Federal Reserve Bank.



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