ChoiceOne Financial Services, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; balance-sheet comparisons are to December 31, 2020. Amounts are in U.S. dollars; financial statement figures below are in millions unless otherwise noted.
Business context
ChoiceOne is a Michigan-based bank holding company. Results include Community Shores, acquired July 1, 2020, but the year-ago quarter does not; year-over-year comparisons therefore include a change in scale as well as operating changes. ChoiceOne also completed the County Bank merger in 2019. Management says results for this quarter are not necessarily indicative of full-year results.
Financial performance and condition
- Earnings: Net income was $6.24 million, up 92% from $3.25 million. Basic and diluted EPS were $0.80 versus $0.45; prior-year EPS excluding after-tax merger expenses was $0.49. Return on average assets was 1.25% and return on average equity was 11.13%.
- Interest income and margin: Net interest income was $14.69 million versus $10.97 million. Tax-equivalent net interest margin declined to 3.23% from 3.42%. Management attributes much of the income growth to larger average earning-asset balances and PPP fees, partly offset by lower yields.
- Noninterest income and costs: Noninterest income increased to $5.60 million from $4.10 million, including $2.15 million of loan-sale gains and a $0.61 million gain from changes in equity-security market value (versus a $0.39 million loss in Q1 2020). Noninterest expense rose to $12.53 million from $10.42 million, including higher salaries and merger-related scale effects. No merger expenses were recorded in Q1 2021; Q1 2020 included $0.30 million pre-tax ($0.28 million after tax) of merger expenses.
- Assets, loans, and deposits: Total assets were $2.07 billion, up from $1.92 billion at year-end. Deposits rose $165.4 million to $1.84 billion. Total loans were $1.04 billion, down from $1.07 billion at year-end; this figure excludes loans held for sale and loans to other financial institutions. Available-for-sale securities increased to $722.6 million from $574.8 million.
- Credit and allowance: The allowance for loan losses was $7.74 million, or 0.75% of total loans, versus 0.71% at year-end. Q1 provision was $0.25 million versus $0.78 million; net charge-offs were $0.10 million. Nonperforming loans were approximately $9.98 million, up from $8.24 million at year-end. The filing separately reports $10.39 million of impaired loans.
- Cash flow and liquidity: Operating activities provided $2.21 million, compared with $2.49 million used in Q1 2020. Investing activities used $104.3 million, principally reflecting $179.2 million of securities purchases, partly offset by net loan cash inflows. Financing activities provided $157.9 million, mainly from deposit growth. Cash and cash equivalents ended at $135.3 million, up from $79.5 million at year-end. Management says liquidity is sufficient for normal operating needs and cites deposits, securities maturities, loan repayments, and available borrowing facilities.
- Debt and capital: Borrowings were $3.48 million, down from $9.33 million; subordinated debentures were $3.12 million. At March 31, the holding company’s total capital and common equity Tier 1 ratios were 13.5% and 12.5%; the bank’s corresponding ratios were 13.1% and 12.5%. The bank’s leverage ratio was 8.1%. Management considers capital adequate.
- Equity and dividends: Shareholders’ equity decreased to $218.6 million from $227.3 million, principally as accumulated other comprehensive income fell by $13.4 million due to market-rate-related declines in available-for-sale securities. The declared dividend increased to $0.22 per share from $0.20.
Material changes and notable items
- Q1 2021 included $1.4 million of fees recognized as $56.4 million of PPP loans were forgiven. ChoiceOne originated 718 additional PPP loans totaling $76.7 million and reported $3.7 million of associated fees, of which $0.21 million was recognized in the quarter.
- ChoiceOne says it processed more than $126 million of PPP loans in 2020 and acquired another $37 million in the Community Shores merger. PPP balances, forgiveness, and fee recognition are significant contributors to reported interest income and earnings.
- Management reported approximately 17 pandemic-related loan deferrals totaling $1.2 million still active at quarter-end. These modifications were not reported as troubled debt restructurings under applicable pandemic-related guidance.
- Goodwill was reduced by $0.56 million through Community Shores acquisition measurement-period adjustments. Management concluded there was no goodwill impairment trigger through March 31, 2021.
- There were no material pending legal proceedings disclosed, no issuer share repurchases in the quarter, and no material change in internal control over financial reporting was reported.
Outlook, commentary, and risks
No quantified earnings or revenue guidance is provided. Management expects the pandemic to continue affecting borrowers and says it anticipates increased past-due loans, nonperforming loans, and loan losses, while noting that the timing and extent are difficult to predict. Management identified industries it views as particularly exposed and allocated approximately $2.1 million of the allowance to borrowers in highly or moderately affected categories. It reported no material increase in delinquencies or net charge-offs in Q1.
Key risks include COVID-19-related borrower stress, the judgment involved in estimating loan-loss reserves, interest-rate changes affecting net interest margin and securities values, and uncertain effects on mortgage activity and the broader economy. The filing notes that unrealized securities losses were considered temporary, not credit-related, and no other-than-temporary impairment charges were recorded. ChoiceOne is evaluating the expected-credit-loss accounting standard (CECL), which it says may have a significant impact; its stated effective date for the company is fiscal years beginning after December 15, 2022.
Important facts for investors to verify
- How much of earnings growth is recurring versus PPP fee recognition, mortgage gains, and equity-security valuation changes.
- PPP forgiveness pace, remaining deferred fees, new originations, and the outlook for mortgage refinancing as rates change.
- Trends in nonperforming, impaired, and restructured loans, particularly agricultural exposures, and whether the allowance remains adequate as pandemic effects evolve.
- Potential effects of interest-rate movements on net interest margin, available-for-sale securities, accumulated other comprehensive income, and capital.
- Community Shores integration, remaining purchase-accounting adjustments, and future goodwill impairment assessments.
- CECL implementation plans and the eventual impact on reserves, earnings, and capital.