ChoiceOne Margin Narrows as Core Loan Growth Reaccelerates
Core loans grew $87.1 million during the second quarter, an 11.9% annualized pace.
ChoiceOne Financial Services (COFS), the Michigan community-bank holding company, held second-quarter net interest income nearly steady at $36.7 million as net interest margin compressed 4 bps from the prior quarter to 3.59%. Higher earning-asset yields were offset by rising funding costs and lower purchased-loan accretion, which fell to $2.4 million and contributed 24 bps to margin, down from 36 bps a year earlier.
Loan growth provided the quarter’s clearest operating lift. Core loans increased $87.1 million, or 11.9% on an annualized basis, after contracting at a 4.2% pace in the first quarter. About $40 million of the increase came from purchased adjustable-rate residential mortgages. Average loans rose about 2.1% YoY and 0.6% QoQ to $2.998 billion.
The mix shifted toward C&I and residential lending. End-period C&I balances increased $41.8 million QoQ to $411.2 million, and residential real-estate loans rose $51.5 million to $776.8 million. Commercial real-estate loans declined $15.2 million to $1.730 billion.
Funding became more expensive as seasonal municipal outflows reduced deposits excluding brokered funds by $55.4 million. The annualized cost of deposits rose 4 bps QoQ to 1.58%, and the cost of funds increased 4 bps to 1.77%, reflecting higher pricing on interest-bearing demand and savings accounts. Both measures remained 7 bps below their year-earlier levels.
Fee revenue weakened after a $1.9 million securities-sale loss. Noninterest income fell $876,000 QoQ to $4.9 million, with gains in service charges, interchange revenue and insurance and investment commissions providing a partial offset. Noninterest expense increased to $26.1 million, driven mainly by salaries and benefits and sequentially higher data-processing costs. The efficiency ratio improved 13 bps QoQ to 55.86%.
Capital ratios strengthened alongside a smaller repurchase pace. Holding-company CET1 increased 10 bps QoQ and 90 bps YoY to 10.7%, while total risk-based capital reached 13.3%. ChoiceOne repurchased 35,000 shares for $1.1 million during the quarter, leaving 265,272 shares authorized.
Credit costs rose with the renewed loan growth. ChoiceOne recorded a $550,000 loan-loss provision after no provision in the first quarter, and net charge-offs increased to $309,000, or an annualized 0.04% of average loans. Nonperforming loans climbed 6 bps QoQ to 1.07% of loans, while the allowance edged up to $35.7 million and coverage declined 3 bps to 1.16%.
Newly originated and repriced deposits could place slight upward pressure on deposit costs. Continued loan growth therefore enters the coming quarters against a funding backdrop that could keep net interest margin under pressure.