ChoiceOne Financial Services, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are with December 31, 2019. The quarter includes Lakestone Bank & Trust results following the October 1, 2019 County Bank Corp. merger, making year-over-year comparisons materially affected by the acquisition.
Financial results and condition
| Metric | Q1 2020 | Comparable / change |
|---|---|---|
| Total interest income | $12.494 million | $6.477 million in Q1 2019 |
| Net interest income | $10.971 million | $5.496 million in Q1 2019 |
| Tax-equivalent net interest margin | 3.58% | 3.68% in Q1 2019 |
| Provision for loan losses | $775,000 | None in Q1 2019 |
| Noninterest income / expense | $4.099 million / $10.416 million | $1.758 million / $5.334 million in Q1 2019 |
| Net income | $3.254 million | $1.637 million in Q1 2019 |
| Basic and diluted EPS | $0.45 | $0.45 in Q1 2019 |
| Return on average assets / equity | 0.93% / 6.60% | 0.98% / 8.03% in Q1 2019 |
- Management reported adjusted net income, excluding after-tax merger expenses, of $3.536 million versus $1.860 million. Adjusted EPS was $0.49 versus $0.51; these are non-GAAP measures.
- At March 31, total assets were $1.398 billion, loans $811.6 million before allowance, deposits $1.173 billion, and shareholders’ equity $195.8 million. The allowance was $4.790 million, or 0.59% of loans; including the acquired-loan credit mark, coverage was 1.16%.
- Nonperforming loans were $6.055 million, down from $6.413 million at year-end 2019. Net charge-offs were $42,000; annualized net charge-offs were 0.02% of average loans.
- Cash and cash equivalents were $45.5 million, down from $59.6 million at year-end. Operating cash flow was negative $2.5 million; investing cash flow was negative $19.0 million and financing cash flow was positive $7.4 million.
- Deposits increased $18.8 million during the quarter. Federal Home Loan Bank advances fell $10.0 million to $23.2 million. Management said liquidity was sufficient for normal operating needs and identified additional funding sources, including Federal Reserve facilities.
- Bank capital ratios exceeded the stated “well-capitalized” thresholds. ChoiceOne Bank reported total risk-based capital of 12.8% and Lakestone Bank & Trust 16.2% at March 31.
Material changes and management commentary
- Net income nearly doubled year over year, but management attributed much of the increase in scale to the County acquisition. Average loans rose $405 million and average securities rose $179.5 million versus Q1 2019; the margin declined 10 basis points.
- Noninterest income rose $2.341 million, helped by acquisition-related business, higher mortgage refinancing and loan-sale gains, and trust income. Noninterest expense rose $5.082 million, principally reflecting the acquired operations, merger costs, systems-consolidation costs, and acquired-intangible amortization.
- The company recorded $302,000 of merger expenses in Q1 2020. County purchase-accounting estimates were updated, including measurement-period adjustments for deferred taxes and loan fair values.
- COVID-19 had disrupted operations and customers. Branch lobbies were closed, with services continuing through drive-up, appointments, and mobile banking. As of April 30, the company had granted modifications on approximately 600 loans; these were not reported as TDRs under applicable agency guidance and the CARES Act.
- By April 30, ChoiceOne had processed more than $100 million of Paycheck Protection Program loans and continued processing them in Q2. Management noted that lower rates may pressure future net interest income, while PPP income and mortgage activity could partly offset the impact.
- Management expected higher past-due loans, nonperforming loans, and loan losses as COVID-19 effects developed. It reported no material Q1 increase in delinquencies or net charge-offs and recorded the $775,000 provision as a prudent response to portfolio growth and uncertainty.
- A pending merger with Community Shores Bank Corporation, announced January 6, 2020, was expected to become effective in the second half of 2020, subject to shareholder and regulatory approvals and other closing conditions. Community Shores reported approximately $202 million in assets, $154 million in loans, and $181 million in deposits at December 31, 2019.
- Management’s March 31 qualitative goodwill assessment found no need for quantitative impairment testing. A prolonged downturn could prompt further assessments. The filing provides no earnings guidance or quantified full-year outlook.
Key facts for investors to verify
- How COVID-19-related deferrals perform, including subsequent delinquencies, charge-offs, and allowance adequacy; the reported 600 modifications were as of April 30.
- Whether PPP lending and mortgage-sale activity offset lower interest rates and margin pressure, and the effect of PPP fees and loan forgiveness.
- The sustainability of reported earnings after separating County acquisition effects, merger costs, purchase-accounting impacts, and other unusual items.
- Progress, approvals, timing, integration costs, and expected benefits of the proposed Community Shores merger.
- Deposit composition and funding costs, securities valuation and liquidity, and capital and liquidity trends in subsequent quarters.