ChoiceOne Financial Services, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Dollar amounts are in millions unless stated otherwise. ChoiceOne is a Michigan-based bank holding company. Results include Community Shores from its July 1, 2020 merger date, which affects year-over-year comparability.
Financial results and condition
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Interest income | $16.73 | $15.15 | $47.80 | $40.68 |
| Net interest income | $15.70 | $14.06 | $44.90 | $37.08 |
| Provision for loan losses | $0 | $1.23 | $0.42 | $3.00 |
| Noninterest income | $4.72 | $6.33 | $15.05 | $17.01 |
| Noninterest expense | $13.51 | $14.55 | $39.16 | $37.12 |
| Net income | $5.75 | $3.83 | $17.03 | $11.51 |
| Diluted EPS | $0.75 | $0.49 | $2.20 | $1.55 |
- Third-quarter net income rose 50% year over year; nine-month net income rose 48%. Nine-month return on average assets was 1.08%, versus 0.87%, and return on average equity was 10.01%, versus 7.50%.
- Net interest margin declined: on a tax-equivalent basis, 3.06% for Q3 and 3.10% for the nine months, each 32 basis points below the comparable 2020 period. GAAP margins were 3.14% and 3.18%, respectively, also lower year over year.
- At September 30, total assets were $2,277.2, up from $1,919.3 at December 31, 2020. Available-for-sale securities increased to $1,028.1 from $574.8; loans were $988.4, down from $1,069.7. Total deposits rose to $2,012.2 from $1,674.6.
- Cash and cash equivalents were $59.8, down from $79.5 at year-end. The cash flow statement reports nine-month operating cash provided of $29.6, investing cash used of $398.6, financing cash provided of $349.3, and a $19.7 decrease in cash.
- Allowance for loan losses was $7.8, or 0.78% of loans, versus $7.6, or 0.71%, at year-end. Nonperforming loans totaled $6.34, including $1.73 nonaccrual and $4.61 troubled debt restructurings (TDRs); management said 97% of TDRs were performing under restructured terms.
- Subordinated debentures were $35.0, versus $3.1 at year-end; borrowings were zero, versus $9.3. At the holding company, total capital to risk-weighted assets was 15.4%; the bank’s ratio was 13.4% and its common equity Tier 1 ratio was 12.8%.
Material changes and drivers
- Interest income and net interest income increased, supported by a larger securities portfolio, deposit growth, the Community Shores merger, and recognition of PPP loan fees. Nine-month tax-equivalent net interest income increased $8.4, while lower market rates and a higher securities share of assets pressured margin.
- Noninterest income fell year over year, chiefly because mortgage loan-sale gains were lower amid reduced refinancing activity and the prior-year comparison included a $1.3 securities restructuring gain. Customer service charges improved as pandemic-related restrictions eased.
- Provision expense declined substantially from 2020. Net charge-offs were $0.25 for the first nine months, compared with $0.37 in 2020. Nonaccrual loans declined from $6.71 at year-end; TDR balances increased, principally from agricultural loans.
- Deposits funded significant securities purchases: $514.2 of securities were purchased during the first nine months, with no securities sales. The company said investments were selected with loan growth and liquidity needs in mind.
- Shareholders’ equity declined $2.2 from year-end. Accumulated other comprehensive income fell $9.1, reflecting market-value declines in available-for-sale securities as interest rates rose. The company repurchased approximately 223,000 shares for $5.6 at an average all-in price of $24.94; 167,173 authorized shares remained available at quarter-end.
Outlook, commentary, risks, and unusual items
- The filing provides no specific earnings or growth guidance. Management described liquidity and capital as adequate for foreseeable needs and cited organic loan growth plans; future dividends remain subject to market conditions and capital requirements.
- PPP activity remained material: $89.1 of PPP loans originated in the first nine months of 2021; $164.5 was forgiven, generating $4.0 of fee income. At September 30, $61.2 of PPP loans and $2.4 of deferred fees remained outstanding. All pandemic-related payment deferments had resumed payments under loan terms.
- In September, ChoiceOne issued $32.5 of 3.25% fixed-to-floating subordinated notes due 2031, intended for general corporate purposes, including growth, potential debt redemption, repurchases, and bank capital support. The rate is fixed through September 2026 and then floats at the specified benchmark plus 255 basis points. The notes qualify as Tier 2 capital.
- Management cited COVID-19 effects, economic conditions, interest rates, borrower performance, mortgage-market conditions, and securities valuations as risks. It retained a COVID-related allowance allocation of approximately $1.4, down from $2.2 at year-end, while continuing to monitor affected industries and credit quality.
- The stock price was below book value at quarter-end, prompting another qualitative goodwill review. Management concluded that reporting-unit fair value likely exceeded carrying value and recorded no impairment. No material pending legal proceedings were reported; ordinary-course matters were excluded.
- The filing notes that the expected-credit-loss standard (CECL) is effective for the company beginning in 2023 and that management was evaluating its potential impact, which may be significant. Disclosure controls were reported effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether securities growth, deposit inflows, and continued loan growth can support earnings without further margin compression or material unrealized-value effects.
- How much future earnings depend on remaining PPP fees, acquired-loan accretion, mortgage activity, and other potentially nonrecurring sources.
- Whether credit quality and the allowance remain adequate as pandemic-related support fades, particularly given TDRs, industry concentrations, and acquired-loan credit marks.
- The terms, use of proceeds, future floating-rate exposure, and capital effects of the $32.5 subordinated-note issuance, alongside planned repurchases and dividends.
- Reconcile the MD&A liquidity narrative with the cash flow statement: the statement reports operating cash provided of $29.6 and financing cash provided of $349.3, while MD&A cites $28.9 and $350.0, respectively.