ChoiceOne Financial Services, Inc. — Q1 2024 Form 10-Q
Business context and reporting period
ChoiceOne is a Michigan-based bank holding company. This unaudited report covers the three months ended March 31, 2024; income and cash-flow comparisons are with Q1 2023, while balance-sheet comparisons are primarily with December 31, 2023. Dollar amounts below are in millions unless stated otherwise.
Financial results and position
| Metric | Q1 2024 / March 31, 2024 | Comparable period / prior date |
|---|---|---|
| Net interest income | $16.47 | $17.01 in Q1 2023 |
| Net interest margin | 2.67% GAAP; 2.74% tax-equivalent | 3.02% GAAP; 3.09% tax-equivalent in Q1 2023 |
| Net income | $5.63 | $5.63 in Q1 2023 |
| Diluted EPS | $0.74 | $0.75 in Q1 2023 |
| Noninterest income / expense | $4.05 / $13.68 | $3.67 / $14.00 in Q1 2023 |
| Net cash from operating activities | $15.31 | $9.17 in Q1 2023 |
| Total assets | $2,670.7 | $2,576.7 at December 31, 2023; $260.8 higher year over year |
| Loans held for investment | $1,418.6 gross; $1,402.6 net | $1,410.7 gross at December 31, 2023 |
| Deposits | $2,185.8, including $42.0 brokered | $2,122.1 at December 31, 2023 |
| Borrowings / subordinated debentures | $210.0 / $35.6 | $200.0 / $35.5 at December 31, 2023 |
| Shareholders’ equity | $206.8 | $195.6 at December 31, 2023 |
Interest income rose to $28.43 from $21.40 million, but interest expense increased faster, to $11.96 from $4.39 million. The annualized cost of deposits was 1.65% (0.62% in Q1 2023), and total cost of funds was 2.00% (0.79%). Annualized return on average assets was 0.86% and return on average equity was 11.26%, versus 0.94% and 13.42%, respectively, a year earlier.
Cash and cash equivalents were $150.1 million, up from $55.4 million at year-end. The quarter’s cash increase was $94.7 million: operating activities provided $15.3 million, investing activities provided $7.6 million, and financing activities provided $71.8 million. The allowance for credit losses was $16.0 million, or 1.13% of loans. The Bank’s total risk-based capital ratio was 12.6%; management reported the Bank remained well capitalized. The quarterly dividend was $0.27 per share.
Material changes versus comparable periods
- Net interest income fell $0.54 million year over year, and GAAP net interest margin contracted 35 basis points. Loan interest income increased by about $5.9 million, supported by higher average loan balances and yields, but higher deposit and borrowing costs more than offset the increase.
- Average loans increased $210.3 million year over year. Core loans grew $178.0 million over the year, although they declined $2.7 million during Q1. Gross loans were up $7.9 million from year-end; growth in non-owner-occupied CRE and 1–4 family lending was partly offset by a $27.6 million decline in construction and development loans.
- Deposits excluding brokered deposits increased $45.3 million in Q1. Total deposits rose $63.8 million from year-end, while brokered deposits increased to $42.0 million from $23.4 million.
- Noninterest income increased $0.38 million, including $0.20 million of bank-owned life insurance death-benefit earnings and higher customer service charges. Noninterest expense declined $0.31 million; management cited lower employee health costs and branch-related occupancy savings.
- Net charge-offs were $51,000 versus $27,000 in Q1 2023; annualized net charge-offs were 0.01% of average loans in both periods. Nonperforming loans were $1.72 million, broadly unchanged from year-end. Past-due loans totaled $2.07 million, compared with $2.38 million at year-end.
- Available-for-sale securities were $504.6 million and held-to-maturity securities were $398.0 million at quarter-end. Their reported unrealized losses totaled $126.3 million; the filing says these were principally rate- and market-related and that management did not intend to sell the securities before anticipated recovery. AFS unrealized losses declined $2.2 million during Q1.
Outlook, commentary, risks, and unusual items
- No specific full-year earnings or revenue guidance is provided. Management expects deposit-cost pressure to persist as deposits reprice and customers move to higher-rate products, while stating it is taking steps to control funding costs.
- Management says the $200 million forward-starting pay-fixed swaps began in April 2024 and, together with the remaining amortization of the loss on terminated swaps through April, are expected to increase net interest income by approximately $732,000 per month starting in May. This is management’s estimate, not formal earnings guidance.
- At March 31, available borrowing capacity from all sources was $960.7 million. Uninsured deposits were $792.3 million, or 37.0% of deposits. Funding included $170 million of BTFP borrowing, fixed at 4.76% through January 2025, and $40 million of FHLB advances at a weighted-average 4.58%, with maturities through 2026.
- Interest-rate risk remains significant: the securities portfolio had substantial unrealized losses, while interest-rate swaps were used to partly offset their effect on equity. Management attributes the losses to market conditions, reports no AFS securities credit-loss allowance, and says HTM securities’ allowance was insignificant.
- The loan portfolio is concentrated in commercial real estate: commercial real estate represented 56.0% of gross loans. The $403,000 loan-loss provision reflected increased reserves for collateral-dependent loans and collateral-related qualitative factors; an offsetting $403,000 reversal for unfunded commitments left net provision expense at zero.
- Two branches closed during the quarter. Management expects about $700,000 of annual savings and low customer-retention impact. A $196,000 life-insurance death benefit contributed to noninterest income. Management reported no material pending legal proceedings and no material change in internal control over financial reporting.
- Actual results may differ from forward-looking statements. The filing identifies estimates of credit losses and securities values, interest-rate and liquidity exposure, and economic conditions among areas involving judgment and risk.
Important facts for investors to verify
- Whether deposit pricing and mix continue to pressure net interest margin, and whether the projected swap-related benefit begins and is realized as management expects.
- Available liquidity and borrowing capacity, uninsured-deposit levels, and the timing and cost of BTFP and FHLB funding.
- Commercial real-estate concentration, collateral-dependent credits, delinquency trends, and changes in the allowance for credit losses.
- The size and duration of unrealized securities losses, the assumptions supporting management’s recovery expectations, and the effect of interest-rate changes on AOCI and capital.
- The financial and customer effects of branch closures, and whether the anticipated annual cost savings are achieved.
- The cash-flow statement reports $15.3 million of operating cash flow, while the MD&A narrative states $15.8 million; verify the discrepancy against the filed statements or XBRL data.