ChoiceOne Financial Services(COFS) - 2024 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements The company's financial statements reflect asset growth, increased net income driven by higher net interest income, and an improved shareholders' equity position as of June 30, 2024 Consolidated Balance Sheets Total assets grew to $2.62 billion, supported by increases in net loans and cash, while shareholders' equity rose to $214.5 million due to retained earnings Consolidated Balance Sheet Highlights (Unaudited) | (Dollars in thousands) | June 30, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Total Assets | $2,623,067 | $2,576,706 | | Cash and cash equivalents | $101,002 | $55,433 | | Loans, net | $1,421,375 | $1,394,968 | | Total Deposits | $2,126,679 | $2,122,055 | | Total Liabilities | $2,408,548 | $2,381,072 | | Total Shareholders' Equity | $214,519 | $195,634 | Consolidated Statements Of Income Net income for Q2 2024 rose to $6.6 million, driven by a 14.2% increase in net interest income, resulting in diluted earnings per share of $0.87 Key Income Statement Data (Unaudited) | (Dollars in thousands, except per share data) | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :--- | :--- | :--- | :--- | :--- | | Total Interest Income | $29,944 | $23,316 | $58,376 | $44,714 | | Total Interest Expense | $11,573 | $7,225 | $23,531 | $11,611 | | Net Interest Income | $18,371 | $16,091 | $34,845 | $33,103 | | Net Income | $6,586 | $5,213 | $12,220 | $10,846 | | Diluted Earnings Per Share | $0.87 | $0.69 | $1.61 | $1.44 | | Dividends Declared Per Share | $0.27 | $0.26 | $0.54 | $0.52 | Consolidated Statements Of Comprehensive Income (Loss) Comprehensive income for Q2 2024 was $9.6 million, a decrease from the prior year, influenced by smaller other comprehensive income related to securities and hedges Comprehensive Income (Loss) Summary (Unaudited) | (Dollars in thousands) | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :--- | :--- | :--- | :--- | :--- | | Net Income | $6,586 | $5,213 | $12,220 | $10,846 | | Other comprehensive income (loss), net of tax | $3,023 | $6,957 | $10,277 | $10,876 | | Comprehensive income (loss) | $9,609 | $12,170 | $22,497 | $21,722 | Consolidated Statements Of Changes In Shareholders' Equity Shareholders' equity increased to $214.5 million by June 30, 2024, bolstered by net income and other comprehensive income, net of dividends declared Shareholders' Equity Reconciliation (Six Months Ended June 30, 2024) | (Dollars in thousands) | Amount | | :--- | :--- | | Balance, January 1, 2024 | $195,634 | | Net income | $12,220 | | Other comprehensive income (loss) | $10,277 | | Cash dividends declared ($0.54 per share) | ($4,083) | | Stock-based compensation & other | $471 | | Balance, June 30, 2024 | $214,519 | Consolidated Statements Of Cash Flows Cash and cash equivalents increased by $45.6 million in the first half of 2024, driven by operating cash flows and a significant positive shift in investing activities Cash Flow Summary (Six Months Ended June 30) | (Dollars in thousands) | 2024 | 2023 | | :--- | :--- | :--- | | Net cash provided by operating activities | $31,050 | $25,163 | | Net cash provided by (used in) investing activities | $4,010 | ($66,884) | | Net cash provided by financing activities | $10,509 | $74,588 | | Net change in cash and cash equivalents | $45,569 | $32,867 | Notes To Interim Consolidated Financial Statements The notes detail accounting policies, portfolio compositions, and significant subsequent events, including a merger agreement and a public stock offering - The Allowance for Credit Losses (ACL) is estimated using benchmark peer loss history data due to the company's limited historical loss experience since 2011[22][24] - Subsequent to the quarter end, the company announced two major strategic actions: - Public Offering: On July 26, 2024, completed an underwritten public offering of 1,380,000 shares, raising gross proceeds of approximately $34.5 million[111] - Merger Agreement: On July 25, 2024, signed a definitive merger agreement with Fentura Financial, Inc in an all-stock transaction, expected to close in Q1 2025[112] Securities Portfolio Composition (June 30, 2024) | (Dollars in thousands) | Amortized Cost | Fair Value | Gross Unrealized Losses | | :--- | :--- | :--- | :--- | | Available for Sale | $557,310 | $491,670 | ($65,666) | | U.S. Treasury & bonds | $90,112 | $79,311 | ($10,801) | | State and municipal | $260,866 | $229,255 | ($31,611) | | Mortgage-backed | $196,032 | $173,058 | ($23,000) | | Held to Maturity | $392,699 | $332,583 | ($60,141) | | State and municipal | $195,460 | $163,048 | ($32,418) | | Mortgage-backed | $173,860 | $149,145 | ($24,715) | Management's Discussion and Analysis of Financial Condition and Results of Operations Management reports strong earnings growth from higher net interest income, stable asset quality, and strategic actions including a capital raise and a planned merger Results of Operations Net income grew 26.3% in Q2 2024 year-over-year, driven by asset growth and higher loan yields, though partially offset by rising deposit costs - The company is proactively managing its liquidity by utilizing brokered deposits, the Bank Term Funding Program (BTFP), and FHLB advances, with total available borrowing capacity of $759.5 million exceeding uninsured deposits[122] - Net provision for credit losses was $0 for the second quarter and first six months of 2024, as a provision for loan growth was fully offset by a reversal of provision for unfunded commitments[144] Key Performance Metrics | Metric | Q2 2024 (Annualized) | Q2 2023 (Annualized) | H1 2024 (Annualized) | H1 2023 (Annualized) | | :--- | :--- | :--- | :--- | :--- | | Return on Average Assets (ROAA) | 0.99% | 0.86% | 0.93% | 0.90% | | Return on Average Equity (ROAE) | 12.50% | 12.13% | 11.91% | 12.75% | Financial Condition The company maintained a solid financial position with modest loan growth, strong asset quality, stable deposits, and a well-capitalized balance sheet - The company holds pay-fixed, receive-variable interest rate swaps with a total notional value of $401.0 million to hedge against rising interest rates, which partially offsets unrealized losses on securities[150][163] - Core loans grew organically by $9.7 million (1.4% annualized) in the first six months of 2024, concentrated in 1-4 Family and Non-Owner Occupied Commercial Real Estate loans[152] Capital Ratios (ChoiceOne Bank) | Ratio | June 30, 2024 | Minimum to be Well-Capitalized | | :--- | :--- | :--- | | Total capital (to risk weighted assets) | 13.2% | 10.0% | | Common equity Tier 1 capital | 12.5% | 6.5% | | Tier 1 capital (to risk weighted assets) | 12.5% | 8.0% | | Tier 1 capital (to average assets) | 8.8% | 5.0% | Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2024, with no material changes to internal controls - Management concluded that the company's disclosure controls and procedures were effective as of the end of the period to ensure that material information is recorded, processed, summarized, and reported in a timely manner[174] PART II. OTHER INFORMATION Legal Proceedings The company is not a party to any material pending legal proceedings outside of the ordinary course of business - There are no material pending legal proceedings against ChoiceOne or its subsidiaries, except for ordinary course of business matters[177] Risk Factors The company identified new risks related to its pending merger, including potential failure to close, regulatory hurdles, and challenges in integration and synergy realization - Key risks associated with the pending Fentura acquisition include: - The merger may not be completed if closing conditions, such as shareholder and regulatory approvals, are not met[177][179] - Regulatory approvals could be delayed or impose burdensome conditions[180] - Potential difficulties in integrating operations, retaining key employees, and maintaining customer relationships[185] - Failure to realize anticipated cost savings and synergies[186] - Significant transaction and integration costs are expected[177] Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or issuer share repurchases occurred during the second quarter of 2024 - No unregistered sales of equity securities or share repurchases occurred in the second quarter of 2024[187] Exhibits The report includes the Agreement and Plan of Merger with Fentura Financial, Inc, which is incorporated by reference from a previous SEC filing - The Agreement and Plan of Merger with Fentura Financial, Inc is listed as Exhibit 2.1 and incorporated by reference from a prior Form 8-K filing[190]