ChoiceOne Financial Services, Inc. — Q3 2023 Form 10-Q
Business context and reporting period
ChoiceOne Financial Services is a Michigan-based bank holding company. This unaudited quarterly filing covers the three and nine months ended September 30, 2023; balance-sheet comparisons are primarily with December 31, 2022. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
- Earnings: Q3 net income was $5.1 million, down from $5.8 million a year earlier; diluted EPS was $0.68 versus $0.77. Nine-month net income was $16.0 million versus $17.0 million, and diluted EPS was $2.12 versus $2.26.
- Interest income and margins: Q3 interest income increased to $26.3 million from $19.3 million, but interest expense rose to $10.1 million from $1.9 million. Net interest income declined to $16.2 million from $17.3 million. GAAP net interest margin was 2.64% for Q3 and 2.80% for the first nine months, down 44 and 19 basis points, respectively, from comparable 2022 periods.
- Other income and expenses: Q3 noninterest income was $3.7 million, up from $3.0 million; noninterest expense was $13.7 million versus $13.4 million. Nine-month noninterest expense rose 2.6% to $41.3 million. Management cited wage and benefit inflation.
- Loans and credit: Total loans were $1.310 billion, up from $1.190 billion at year-end; core loans grew $153.6 million year over year. Commercial real estate represented 54.2% of loans. The allowance for credit losses was $14.9 million, or 1.14% of loans, compared with $7.6 million and 0.64% at year-end; adoption of CECL contributed to the increase. Nine-month net charge-offs were $244,000, and nonperforming loans, including other real estate owned and specified modified loans, totaled $1.8 million versus $1.3 million at year-end.
- Deposits, debt and liquidity: Deposits totaled $2.133 billion, including $49.2 million of brokered deposits. Noninterest-bearing deposits were $532.0 million, down from $599.6 million at year-end. Borrowings rose to $180.0 million from $50.0 million, including $160 million from the Federal Reserve’s Bank Term Funding Program and $20 million of FHLB advances. Cash and cash equivalents were $144.7 million versus $43.9 million at year-end. Management reported $796.1 million of available borrowing capacity and $724.1 million of uninsured deposits (34.7% of deposits).
- Cash flow and capital: For the first nine months, operating cash flow was $57.3 million, investing cash outflow was $96.1 million, and financing cash inflow was $139.5 million. Shareholders’ equity was $181.2 million, up from $168.9 million at year-end. ChoiceOne Bank’s total risk-based capital ratio was 12.7%; management described the bank as well-capitalized.
Material changes versus comparable periods
- Higher rates and loan growth lifted interest income, but deposit and borrowing costs increased more sharply, compressing net interest income and margins. Management said deposit costs are expected to continue rising as deposits reprice.
- Loans grew while securities balances declined. The company reported $172.3 million of unrealized losses on investment securities at quarter-end, including $92.2 million on available-for-sale securities and $80.1 million on held-to-maturity securities. Management attributed the losses primarily to interest rates and market conditions, reported no related available-for-sale credit-loss allowance, and said it did not intend to sell the securities before recovery.
- CECL adoption on January 1, 2023 increased the loan allowance by $7.2 million and established a $3.3 million allowance for unfunded commitments, with an after-tax reduction to retained earnings. The unfunded-commitment allowance was $2.7 million at September 30.
- Accumulated other comprehensive loss improved by $9.3 million from year-end, partly reflecting derivative gains. The company had four pay-fixed swaps with $401 million notional value; it also terminated $200 million of receive-fixed/pay-floating swaps in March and is amortizing the $4.2 million termination loss through April 2024.
Outlook, risks and unusual items
- No numerical earnings or operating guidance was provided. Management said it is managing liquidity proactively, expects deposit rates to continue increasing but to lag the federal funds rate, and noted that securities are projected to generate about $173 million of cash flows over the next two years.
- Key exposures include rising funding costs, interest-rate sensitivity, liquidity and deposit competition, unrealized securities losses, credit quality, and concentration in commercial real estate. Management’s credit-loss estimates depend on forecasts and other assumptions that may change.
- Management reported no material pending legal proceedings other than matters arising in the ordinary course of business. Disclosure controls were assessed as effective, with no material change to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether deposit costs, deposit mix, and reliance on brokered deposits or wholesale borrowings continue to change, and how these affect net interest margin.
- Trends in commercial real estate exposure, nonperforming loans, charge-offs, and the adequacy of the CECL allowance and unfunded-commitment reserve.
- The scale and duration of securities’ unrealized losses, the company’s ability and intent to hold securities, and the effect of hedges and swap-related costs on earnings and equity.
- Whether reported borrowing capacity remains available under applicable collateral and funding conditions, and how uninsured deposits evolve.
- Future earnings, dividend capacity, and regulatory capital; the filing provides no quantitative forward earnings guidance.