ChoiceOne Financial Services, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Business context
ChoiceOne is a Michigan-based bank holding company. Results include Community Shores from its July 1, 2020 acquisition date, making year-over-year comparisons affected by the acquisition. The filing reports no merger expenses in the first half of 2021.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income | $14.508 | $11.879 | $29.196 | $23.017 |
| Provision for loan losses | $0.166 | $1.000 | $0.416 | $1.775 |
| Noninterest income | $4.732 | $6.751 | $10.332 | $10.683 |
| Noninterest expense | $13.129 | $12.150 | $25.657 | $22.566 |
| Net income | $5.043 | $4.430 | $11.281 | $7.684 |
| Diluted EPS | $0.65 | $0.61 | $1.45 | $1.06 |
- Q2 net income rose 14%; first-half net income rose 47%. First-half return on average assets was 1.10% and return on average equity was 10.01%.
- GAAP net interest margin was 3.10% in Q2 and 3.21% for the first half, down from 3.59% and 3.62%, respectively. Tax-equivalent margins were 3.02% and 3.12%, versus 3.46% and 3.47%.
- At June 30, total assets were $2,120.9, including cash and cash equivalents of $95.3, available-for-sale securities of $855.6, and net loans of $996.6. Total deposits were $1,880.7; borrowings were $2.6 and subordinated debentures $3.1. Shareholders’ equity was $228.5.
- First-half operating cash flow was $17.1, investing cash outflow $194.6, and financing cash inflow $193.2. Cash and cash equivalents increased $15.8 to $95.3.
- Bank regulatory capital ratios at June 30 included total capital of 13.7%, Common Equity Tier 1 of 13.1%, and Tier 1 leverage of 7.8%. Management considered capital adequate and liquidity sufficient for normal operating needs.
Material changes and notable items
- Deposits increased $206.2 from year-end 2020, while total loans declined $65.1. Management attributed deposit growth partly to stimulus-related funds, PPP proceeds, and seasonal deposit patterns. It deployed deposit growth into securities: the portfolio grew $286.3, with $322.0 of purchases and no sales in the first half.
- Interest income growth reflected larger loan and securities balances, PPP fees, and the Community Shores acquisition. Lower rates and low-rate PPP loans compressed margins. First-half PPP forgiveness generated $2.4 of recognized fee income; $3.9 remained deferred at June 30.
- Noninterest income declined year over year, particularly because Q2 2020 included $1.3 of securities-sale gains and 2021 had lower mortgage sale gains. Customer service charges increased. Noninterest expense rose, including added compensation and other costs associated with the acquired business.
- The allowance for loan losses was $8.0, or 0.79% of loans, versus 0.71% at year-end 2020. Nonperforming loans were $6.9, down from $8.2 at year-end; nonaccrual loans were $1.9. All pandemic-related payment deferments had resumed contractual payments by June 30. TDR balances increased, principally from agricultural loans; approximately 93% were performing under modified terms.
- ChoiceOne repurchased 115,701 shares in Q2 for approximately $2.9 million. It declared first-half dividends of $0.44 per share. AOCI declined $4.2 in the first half, principally due to market-value changes in available-for-sale securities; gross unrealized losses on those securities were $5.8 at June 30.
Outlook, risks and contingencies
The filing provides no numerical earnings or growth guidance. Management said it would continue monitoring credit quality, COVID-19 effects, charge-offs, and the allowance, and noted that higher past-due loans, nonperforming loans, and losses could occur. It also cited low interest rates and mortgage refinancing activity as factors affecting margins and loan-sale income. Management expects to pursue organic loan growth and said available funding sources include deposits, securities maturities, repayments, correspondent-bank funds, Federal Home Loan Bank advances, and Federal Reserve credit lines.
Management’s June 2021 qualitative goodwill review concluded that fair value likely exceeded carrying value; no impairment was recorded. The company is evaluating the expected-credit-loss accounting standard, effective for it in 2023, and said the impact may be significant. Management identified estimates involving credit losses, goodwill, servicing rights, and securities valuation as judgment-sensitive. It reported no material pending legal proceedings and no material change in internal control over financial reporting.
Important facts for investors to verify
- How much future net interest income depends on PPP fee recognition and acquired-loan accretion, and whether loan growth can offset margin compression.
- Whether credit quality and the allowance remain adequate as pandemic effects develop, especially in exposed industries and agricultural lending.
- How deposit balances and liquidity evolve as stimulus funds and PPP proceeds are used or leave the bank, and how securities growth affects interest-rate risk.
- The full impact of the Community Shores acquisition on comparable operating costs, loan trends, and ongoing synergies.
- The filing’s non-GAAP reconciliation lists Q2 2021 net income as $5.044 million, while the audited-format income statement and MD&A report $5.043 million; investors should confirm the intended figure.