ChoiceOne Financial Services, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. ChoiceOne is a Michigan bank holding company whose consolidated operations include ChoiceOne Bank and ChoiceOne Insurance Agencies. Amounts below are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q2 2016 / June 30, 2016 | Comparable period / prior balance-sheet date |
|---|---|---|
| Net income | $1.445; diluted EPS $0.43 | Q2 2015: $1.431; $0.43 per share |
| Six-month net income / diluted EPS | $2.719 / $0.82 | Six months 2015: $3.073 / $0.93 |
| Net interest income | Q2: $4.790; six months: $9.470 | Q2 2015: $4.579; six months 2015: $9.069 |
| Total interest income | Q2: $5.037; six months: $9.958 | Q2 2015: $4.832; six months 2015: $9.578 |
| Total noninterest income | Q2: $2.051; six months: $3.893 | Q2 2015: $1.851; six months 2015: $4.144 |
| Noninterest expense | Q2: $4.901; six months: $9.698 | Q2 2015: $4.485; six months 2015: $9.044 |
| Total assets | $590.423 | December 31, 2015: $567.746 |
| Total loans, gross | $357.242; allowance $4.296 | December 31, 2015: $349.304; allowance $4.194 |
| Total deposits | $463.821 | December 31, 2015: $474.696 |
| FHLB advances | $45.317 | December 31, 2015: $11.332 |
| Shareholders’ equity | $72.397 | December 31, 2015: $69.842 |
Six-month return on average assets was 0.94%, versus 1.13% in 2015; return on average equity was 7.62%, versus 9.11%. Tax-equivalent net interest margin was 3.73%, compared with 3.81%; net interest spread was 3.67%, versus 3.73%.
Six-month operating cash flow was $6.441, investing cash flow was negative $21.520, and financing cash flow was positive $17.358. Cash and due from banks ended June at $13.466, up from $11.187 at year-end. Management said liquidity was sufficient for normal operating needs; available sources include deposits, security maturities, loan repayments, FHLB advances, correspondent-bank funding, and a secured Federal Reserve line.
The Bank reported June 30 capital ratios of 13.1% total capital to risk-weighted assets, 12.1% Tier 1 and Common Equity Tier 1, and 9.3% Tier 1 capital to average assets. Each exceeded the stated “well-capitalized” thresholds.
Changes and operating drivers
- Q2 net income rose $14,000, or 1%, year over year; first-half net income fell $354,000, or 12%. First-half net interest income grew $401,000, but noninterest expense rose $654,000 and noninterest income declined $251,000.
- Management attributed much of the year-over-year first-half noninterest-income decline to a $308,000 nontaxable bank-owned life insurance death benefit received in Q1 2015. Excluding this unusual prior-year item, comparisons remain affected by revenue mix and expense growth.
- Average loans increased $11.7 million and average securities increased $20.2 million in the first half versus 2015. Volume growth supported net interest income, partly offset by lower asset yields and a narrower spread. Management cited low market rates and competitive loan pricing.
- First-half salary and benefit expense increased $463,000, partly reflecting salaries and stock compensation. Occupancy and equipment expense increased $145,000, partly due to a new loan production office and repairs and maintenance.
- Gross loans increased $7.9 million in the first half: commercial real estate rose $8.5 million, commercial and industrial rose $3.4 million, and agricultural loans declined $5.6 million, partly due to seasonal paydowns.
- Deposits declined $10.9 million from year-end, which management described as normal seasonal fluctuation. FHLB advances increased $34.0 million to fund earning-asset growth and offset deposit decline; repurchase agreements fell $4.1 million.
Credit quality, outlook, risks, and unusual items
- Nonperforming loans were $6.028 million at June 30, up from $5.498 million at year-end; this included $2.636 million of nonaccrual loans, $102,000 of accruing loans 90 days or more past due, and $3.290 million of troubled debt restructurings. Impaired loans were separately reported at $6.033 million.
- The allowance was 1.20% of gross loans, unchanged from year-end. No loan-loss provision was recorded in the first half of 2016, versus $100,000 in the first half of 2015. First-half net recoveries were $102,000; management said the allowance allocated to nonperforming loans was sufficient.
- Management cited continuing economic effects on Michigan borrowers and increasingly competitive loan originations. It said it would continue working with delinquent borrowers and review the allowance as portfolio conditions change.
- No specific earnings or financial guidance was provided. Management stated that 2016 first-half results are not necessarily indicative of full-year results and that capital was adequate for the foreseeable future.
- The securities portfolio rose to $175.172 million from $160.136 million at year-end. The filing reported no other-than-temporary impairment charges in the first half; management considered unrealized losses temporary and related to interest rates and liquidity, not credit quality.
- Management reported no material change in the nature or categories of previously disclosed risk factors, no material pending legal proceedings beyond ordinary-course matters, and effective disclosure controls. Forward-looking statements remain subject to risks and uncertainties.
Key facts for investors to verify
- Whether loan growth, lower deposit balances, and the increased reliance on FHLB advances continue in subsequent quarters.
- Trends in nonperforming and impaired loans, troubled debt restructurings, and the adequacy of the allowance given zero first-half provision expense.
- Whether net interest margin stabilizes amid low rates and competitive loan pricing.
- Whether expense growth moderates and whether noninterest income comparisons normalize after the prior-year $308,000 life-insurance benefit.
- The sustainability of dividends: first-half dividends were $0.34 per share and the payout ratio was 41%, versus 34% a year earlier; the company also repurchased 30,000 shares for $678,000.
- Valuation exposure in available-for-sale securities, including $11.999 million classified as Level 3 fair value assets.