ChoiceOne Financial Services, Inc. — Q1 2023 Form 10-Q
Business context and period. ChoiceOne is a Michigan-based bank holding company. This unaudited report covers the three months ended March 31, 2023; balance-sheet comparisons are to December 31, 2022 unless noted. Amounts below are in millions of dollars except per-share data and ratios.
Financial performance and condition
| Metric | Q1 2023 | Comparable / prior period |
|---|---|---|
| Interest income | $21.4 | $17.5 in Q1 2022 |
| Net interest income | $17.0 | $16.3 in Q1 2022 |
| Net interest margin | 3.02% GAAP; 3.09% tax-equivalent | 2.96% GAAP; 3.04% tax-equivalent in Q1 2022 |
| Net income / diluted EPS | $5.6 / $0.75 | $5.5 / $0.74 in Q1 2022 |
| Noninterest income / expense | $3.7 / $14.0 | $3.8 / $13.7 in Q1 2022 |
| Return on average assets / equity | 0.94% / 13.42% | 0.93% / 10.72% in Q1 2022 |
| Cash and cash equivalents | $55.2 | $43.9 at year-end 2022 |
| Total assets / shareholders’ equity | $2,409.9 / $168.7 | $2,385.9 / $168.9 at year-end 2022 |
- Revenue and earnings: Net income rose 1.9% year over year. Higher loan and securities income was partly offset by sharply higher deposit and borrowing costs. Interest expense increased to $4.4 million from $1.2 million.
- Loans and credit: Gross loans were $1,210.6 million, up $20.8 million from year-end; core loan growth was 7.0% annualized in the quarter and 18.8% over the year. Commercial real estate represented 53.5% of loans. The allowance for credit losses was $15.1 million, or 1.24% of loans; net provision expense was $25,000. Nonperforming loans were $1.6 million, versus $1.3 million at year-end.
- Deposits and debt: Total deposits were $2,105.9 million, down $12.1 million from year-end, and included $37.8 million of brokered deposits. FHLB borrowings increased $35.0 million to $85.0 million. Subordinated debentures were $35.3 million. Total available borrowing capacity was $405.7 million; management said pledged additional collateral could raise capacity above $800 million.
- Cash flow: Operating activities provided $9.2 million, investing activities used $18.9 million, and financing activities provided $21.0 million. Cash and cash equivalents increased $11.2 million during the quarter.
- Capital: At March 31, the Bank reported total capital of 13.0% of risk-weighted assets, common equity Tier 1 of 12.5%, and Tier 1 leverage of 8.7%. These exceeded the stated well-capitalized thresholds.
Material changes and notable items
- Loan interest income increased $2.6 million year over year, supported by loan growth and higher yields. Deposit and borrowing costs rose as rates repriced; total cost of funds increased to 0.79% from 0.21% in Q1 2022.
- Noninterest income declined $174,000, mainly reflecting lower mortgage loan sale gains as refinancing slowed. Noninterest expense increased $305,000, including higher wages and FDIC insurance costs.
- ChoiceOne adopted CECL on January 1, 2023. The adoption increased the loan allowance by about $7.2 million and established a $3.3 million allowance for unfunded commitments; the filing reports an approximately $8.0 million after-tax retained-earnings adjustment overall. The quarterly allowance for unfunded commitments declined to $3.0 million.
- Available-for-sale and held-to-maturity securities had $145.9 million of aggregate unrealized losses at March 31. The company attributed these mainly to interest rates, credit spreads, and liquidity conditions, reported no securities ACL, and said it did not intend or expect to be required to sell before recovery. The AFS unrealized loss declined by $7.6 million during the quarter.
- ChoiceOne terminated $200.0 million of pay-floating/receive-fixed swaps in March for a $4.2 million cash payment; the loss is to be amortized into interest income over the remaining 13-month term. The company also reported $401.0 million notional value of other interest-rate swaps.
Outlook, risks, and contingencies
No quantified earnings or revenue guidance is provided. Management expects deposit rates and related funding costs to continue rising as deposits reprice, while expecting rates paid to lag the federal funds rate. It plans to use funding sources including brokered deposits and FHLB and Federal Reserve advances to meet short-term needs. Management stated that current liquidity and additional sources are sufficient, while identifying interest-rate and liquidity risk as material exposures.
- Uninsured deposits were $751.4 million, or 36% of deposits, at quarter-end. Deposit outflows included transfers to ChoiceOne’s wealth department and outside firms.
- Interest-rate movements affect securities values, funding costs, and net interest income. The securities portfolio carried substantial unrealized losses, though management described them as rate- and market-related rather than credit-related.
- Loan growth was concentrated in commercial real estate; management cited a land-development loan as 12% of recent CRE growth, with homes under construction reported as 85% pre-sold.
- Management said the Michigan economic climate could affect borrowers and that it would continue working with delinquent borrowers. The filing reports no material pending legal proceedings outside ordinary-course matters.
- Management reported disclosure controls and procedures were effective at March 31, 2023, with no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Deposit trends, uninsured-deposit concentration, and the availability and cost of contingent funding.
- Commercial real estate exposures, credit-quality migration, nonperforming loans, and the assumptions underlying the CECL allowance.
- The size, duration, and potential realization of securities losses, and the accounting and cash-flow effects of interest-rate swaps.
- The reconciliation of CECL adoption impacts to retained earnings and the unfunded-commitment allowance.
- Whether rising deposit and borrowing costs continue to offset loan growth and higher asset yields.