ChoiceOne Reports Third Quarter 2023 Results

Rhea-AI Summary

ChoiceOne Financial Services, Inc. reports Q3 2023 financial results, celebrates 125th anniversary

Positive

• ChoiceOne reported net income of $5,122,000 and $15,968,000 for Q3 and 9M 2023, compared to $5,813,000 and $16,956,000 for the same periods in 2022. Core loans grew organically by $60.6 million or 19.8% in Q3 2023. Loan interest income increased $4.2 million in Q3 2023. Asset quality remains strong with only 0.01% of nonperforming loans to total loans as of September 30, 2023.

Negative

• The increase in deposit costs during the first nine months of 2023 has negatively impacted earnings. Deposits decreased $72.7 million or 3.4% compared to September 30, 2022. The cost of deposits has increased to 1.36% in Q3 2023. Interest expense on borrowings increased $2.5 million and $5.0 million for Q3 and 9M 2023, respectively. Total cost of funds increased to 1.70% in Q3 2023.

SPARTA, Mich., Oct. 25, 2023 /PRNewswire/ -- ChoiceOne Financial Services, Inc. ("ChoiceOne", NASDAQ:COFS), the parent company for ChoiceOne Bank, reported financial results for the quarter ended September 30, 2023.

 Financial Highlights

• Founded in 1898, ChoiceOne Bank celebrates its 125^th anniversary serving local Michigan communities. ChoiceOne celebrates this accomplishment by ringing the opening bell on the NASDAQ trading floor on October 30^th, 2023.
• ChoiceOne reported net income of $5,122,000 and $15,968,000 for the three and nine months ended September 30, 2023, compared to $5,813,000 and $16,956,000 for the same periods in 2022.
• Diluted earnings per share were $0.68 and $2.12 in the three and nine months ended September 30, 2023, compared to $0.77 and $2.26 per share in the same periods in the prior year.
• Core loans, which exclude held for sale loans, loans to other financial institutions, and Paycheck Protection Program ("PPP") loans, grew organically by $60.6 million or an annualized 19.8% during the third quarter of 2023 and $153.6 million or 13.6% since September 30, 2022. Loan interest income increased $4.2 million and $10.2 million in the third quarter of 2023 and first nine months of 2023, compared to the same periods in 2022, respectively.
• Deposits, excluding brokered deposits, increased by $48.9 million or an annualized 9.6% in the third quarter of 2023. The increase in deposits in the third quarter is a combination of new business, recapture of deposit losses from earlier in the year, and some seasonality of municipal balances.
• The increase in earning assets, largely fixed borrowing costs, and moderate deposit increases have helped stabilize net interest income at $16.2 million in the third quarter of 2023 compared to $16.1 million in the second quarter of 2023. Net interest margin (fully tax-equivalent) in the third quarter was 2.70% a decrease from 2.86% in the second quarter of 2023. Net interest margin (fully tax-equivalent) in the month of September 2023 was 2.70% and was steady throughout the third quarter.
• Asset quality remains strong with only 0.01% of nonperforming loans to total loans as of September 30, 2023.

"Our focus has always been on building quality local relationships while delivering top-notch service. The growth in our core loans and local deposits in the third quarter 2023 is a testament to this strategy and the hard work of our experienced team.  Asset quality continues to be excellent, and our net interest income has stabilized through the organic growth of earning assets while controlling funding costs.  ChoiceOne bank celebrated our 125^thanniversary this quarter and we thank our loyal customers and employees for their support and contribution." said Kelly Potes, Chief Executive Officer.

ChoiceOne reported net income of $5,122,000 and $15,968,000 for the three and nine months ended September 30, 2023, compared to $5,813,000 and $16,956,000 for the same periods in 2022.  Diluted earnings per share were $0.68 and $2.12 in the three and nine months ended September 30, 2023, compared to $0.77 and $2.26 per share in the same periods in the prior year.  The increase in deposit costs during the first nine months of 2023 has negatively impacted earnings, offset by higher interest income from higher interest rates on loans and organic loan growth. 

Total assets as of September 30, 2023, increased $90.5 million as compared to June 30, 2023.  The asset growth during the third quarter is due to an increase in cash of $67.9 million and an increase in core loans of $60.6 million offset by a decrease in securities of $41.2 million.  Asset growth from September 30, 2022 to September 30, 2023 of $210.7 million is due to an increase in cash of $93.2 million and an increase in core loans of $153.6 million or 13.6% offset by a decrease in securities of $52.5 million.  ChoiceOne management has intentionally increased liquidity to fund organic loan growth while shifting earning assets into loans as demonstrated by the growth during the three and nine months ended September 30, 2023.

Deposits, excluding brokered deposits, increased by $48.9 million or an annualized 9.6% in the third quarter of 2023 and decreased $72.7 million or 3.4% as of September 30, 2023 compared to September 30, 2022.  The decrease in deposits since September 30, 2022 was largely concentrated in the first quarter of 2023 as a result of a combination of customers using cash on hand for debt payoffs, seasonal tax and municipal bond payments, and customers seeking higher rates in money market securities or other investments.  Deposits grew in the third quarter of 2023 due to new business, recapture of deposit losses, and some seasonality in municipal balances.  ChoiceOne continues to be proactive in managing its liquidity position by using brokered deposits, the  Bank Term Funding Program ("BTFP") and FHLB advances to ensure ample liquidity.  At September 30, 2023, total available borrowing capacity from all sources was $796.1 million.   Uninsured deposits total $724.1 million or 34.7% of deposits at September 30, 2023. 

The cost of deposits has increased to 1.36% during the three months ended September 30, 2023, compared to 0.98% and 0.29% for the three months ended June 30, 2023 and September 30, 2022, respectively, due to rising short term interest rates and is expected to continue to increase as deposits reprice and customers migrate to CD products. ChoiceOne is actively managing these costs and expects rates paid on deposits to continue to lag the federal funds rate. Interest expense on borrowings for the three and nine months ended September 30, 2023, increased $2.5 million and $5.0 million, respectively, compared to the same periods in the prior year, due to increase in borrowing amounts and interest rates.  Borrowings include $160 million from the BTFP with a fixed rate of 4.71% through May 2024 and $20 million of FHLB borrowings with a fixed rate of 4.88% through July of 2025.  This funding structure has helped moderate interest expense increases in the third quarter as rates have risen.   Total cost of funds increased to 1.70% in the third quarter of 2023 compared to 1.29% in the second quarter of 2023 and 0.35% in the second quarter of 2022.

No provision for credit losses expense was incurred in the third quarter of 2023.  Core loan growth was offset by improvements in the Federal Open Market Committee ("FOMC") forecast for unemployment and GDP growth and a decrease in the unfunded loans and other commitments liability.  The ratio of the allowance for credit losses to total loans (excluding loans held for sale) was 1.14% compared to 1.15% on June 30, 2023.  Asset quality continues to remain strong, with annualized net loan charge-offs to average loans of 0.05% and nonperforming loans to total loans (excluding loans held for sale) of 0.14%.

With recent news of a strike of United Auto Workers, ChoiceOne performed a review of loans in the automotive sector.  ChoiceOne has total outstanding loans to businesses in the automotive sector of $50.2 million or 3.9% of core loans.  These are primarily Tier 2 and 3 suppliers, many of which serve multiple industries and manufacturers.  The average balance of the loans was $518,000, with no individual loan larger than $3 million.  All automotive loans were performing as of September 30, 2023.      

ChoiceOne uses interest rate swaps to manage interest rate exposure to certain fixed assets and variable rate liabilities.  On September 30, 2023, ChoiceOne had pay-fixed interest rate swaps with a total notional value of $401.0 million, a weighted average coupon of 3.07%, and a fair value of $29.9 million and an average contract length of 8 to 9 years.  These derivative instruments increase in value as long-term interest rates rise, which offsets the reduction in equity due to unrealized losses on securities available for sale.  Included in the total is $200.0 million of forward starting pay-fixed, receive floating interest rate swaps used to hedge interest bearing liabilities.  These forward starting swaps will pay a fixed coupon of 2.75% while receiving SOFR starting in late April 2024.  At the current SOFR rate of 5.31%, these forward starting swaps would contribute approximately $427,000 monthly starting in May 2024 which will offset interest expense. In addition, in March 2023, ChoiceOne eliminated all receive-fix, pay floating swap agreements for a cash payment of $4.2 million.  The loss is being amortized in interest income with an expense of approximately $285,000 monthly through April 2024, which was the remaining period of the agreements.

Shareholders' equity totaled $181.2 million as of September 30, 2023, up from $156.7 million as of September 30, 2022.  This increase is due to retained earnings increasing $6.8 million due to earnings and a reduction in accumulated other compressive loss (AOCI) of $16.5 million.  AOCI has improved compared to September 30, 2022, despite the rise in interest rates, due to the passage of time, the maturity of our securities portfolio, and an offsetting increase in unrealized gain of our pay-fixed swap derivatives.  ChoiceOne Bank remains "well-capitalized" with a total risk-based capital ratio of 12.7% as of September 30, 2023, compared to 12.8% on September 30, 2022.

Total noninterest income increased by $657,000 and $537,000 in the three and nine months ended September 30, 2023, compared to the same periods in the prior year.  The increase was largely due to losses in the securities markets which occurred during the prior year.  Gains on sales of loans was slightly better in the third quarter of 2023 compared to the third quarter of 2022; however, overall volume remains somewhat depressed due to a competitive housing market and higher mortgage rates. ChoiceOne has also seen steady increases in wealth management income after recent investments in the operation, including the opening of a dedicated wealth management office in Sparta, Michigan during the third quarter of 2023.

Total noninterest expense increased $1.0 million or 2.6%, in the nine months ended September 30, 2023 compared to the same period in 2022.  The modest increase in total noninterest expense was largely related to inflationary pressures on employee wages and benefits.  ChoiceOne continues to monitor expenses and looks to improve our efficiency through automation and use of digital tools.  Management continues to seek out ways to manage costs; however, staying ahead of technological advances and retaining top talent continue to be important in maintaining our competitive advantage.

About ChoiceOne

ChoiceOne Financial Services, Inc. is a financial holding company headquartered in Sparta, Michigan and the parent corporation of ChoiceOne Bank, Member FDIC. ChoiceOne Bank operates 36 offices in parts of Kent, Lapeer, Macomb, Muskegon, Newaygo, Ottawa, and St. Clair counties. ChoiceOne Bank offers insurance and investment products through its subsidiary, ChoiceOne Insurance Agencies, Inc. For more information, please visit Investor Relations at ChoiceOne's website at choiceone.com.

Forward-Looking Statements

This release may contain forward-looking statements. Words such as "anticipates," "believes," "estimates," "expects," "forecasts," "intends," "is likely," "plans," "predicts," "projects," "may," "could," "look forward," "continue", "future", "will" and variations of such words and similar expressions are intended to identify such forward looking statements. These statements reflect current beliefs as to the expected outcomes of future events and are not guarantees of future performance. These statements involve certain risks, uncertainties and assumptions ("risk factors") that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed, implied or forecasted in such forward-looking statements. Furthermore, ChoiceOne undertakes no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events, or otherwise. Risk factors include, but are not limited to, the risk factors described in Item 1A in ChoiceOne Financial Services, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2022.

 

Condensed Balance Sheets (Unaudited)
(In thousands)		September 30, 2023				June 30, 2023				September 30, 2022
Cash and cash equivalents		$	144,673			$	76,810			$	51,494
Securities Held to Maturity			414,743				420,549				428,205
Securities Available for Sale			507,580				542,932				546,627
Loans held for sale			5,222				8,924				8,848
Loans to other financial institutions			23,763				38,838				70
Loans, net of allowance for loan losses			1,271,165				1,210,808				1,124,944
Premises and equipment			29,628				29,085				28,947
Cash surrender value of life insurance policies			44,788				44,510				44,033
Goodwill			59,946				59,946				59,946
Core deposit intangible			2,057				2,304				3,062
Other assets			70,631				49,020				67,353
Total Assets		$	2,574,196			$	2,483,726			$	2,363,529
Noninterest-bearing deposits		$	531,962			$	544,925			$	599,360
Interest-bearing deposits			1,551,995				1,490,093				1,557,294
Brokered deposits			49,238				51,370				-
Borrowings			180,000				160,000				-
Subordinated debentures			35,446				35,385				35,201
Other liabilities			44,394				22,713				15,017
Total Liabilities			2,393,035				2,304,486				2,206,872
Common stock and paid-in capital, no par value; shares authorized: 15,000,000; shares outstanding: 7,541,187 at September 30, 2023, 7,534,658 at June 30, 2023, and 7,510,036 at September 30, 2022			173,187				172,880				171,975
Retained earnings			70,444				67,281				63,664
Accumulated other comprehensive income (loss), net			(62,470)				(60,921)				(78,982)
Shareholders' Equity			181,161				179,240				156,657
Total Liabilities and Shareholders' Equity		$	2,574,196			$	2,483,726			$	2,363,529

 

Condensed Statements of Income (Unaudited)
		Three Months Ended								Nine Months Ended
(Dollars in thousands, except per share data)		September 30,								September 30,
		2023				2022				2023			2022
Interest income
Loans, including fees		$	17,774			$	13,611			$	48,625		$	38,432
Securities:
Taxable			5,346				3,972				15,637			11,001
Tax exempt			1,420				1,464				4,244			4,678
Other			1,764				238				2,512			314
Total interest income			26,304				19,285				71,018			54,425
Interest expense
Deposits			7,237				1,563				15,569			3,342
Advances from Federal Home Loan Bank			272				5				1,498			8
Other			2,569				379				4,622			1,127
Total interest expense			10,078				1,947				21,689			4,477
Net interest income			16,226				17,338				49,329			49,948
Provision for credit losses on loans			438				100				332			100
Provision for credit losses on unfunded commitments			(438)				-				(557)			-
Net Provision for credit losses expense			-				100				(225)			100
Net interest income after provision			16,226				17,238				49,554			49,848
Noninterest income
Customer service charges			2,382				2,458				6,920			7,000
Insurance and investment commissions			173				158				541			596
Gains on sales of loans			536				432				1,479			2,123
Net gains (losses) on sales of securities			(71)				(378)				(71)			(805)
Net gains on sales and write downs of other assets			13				-				149			172
Earnings on life insurance policies			278				259				810			793
Trust income			197				174				577			528
Change in market value of equity securities			(134)				(323)				(456)			(1,006)
Other			330				267				911			922
Total noninterest income			3,704				3,047				10,860			10,323
Noninterest expense
Salaries and benefits			8,038				7,668				23,958			22,811
Occupancy and equipment			1,427				1,545				4,577			4,688
Data processing			1,724				1,734				5,087			5,056
Professional fees			435				559				1,675			1,628
Supplies and postage			192				184				580			541
Advertising and promotional			269				199				573			478
Intangible amortization			247				297				752			901
FDIC insurance			270				195				790			645
Other			1,126				1,035				3,304			3,515
Total noninterest expense			13,728				13,416				41,296			40,263
Income before income tax			6,202				6,869				19,118			19,908
Income tax expense			1,080				1,056				3,150			2,952
Net income		$	5,122			$	5,813			$	15,968		$	16,956
Basic earnings per share		$	0.68			$	0.77			$	2.12		$	2.26
Diluted earnings per share		$	0.68			$	0.77			$	2.12		$	2.26
Dividends declared per share		$	0.26			$	0.25			$	0.78		$	0.75

 

Other Selected Financial Highlights (Unaudited)
		Quarterly
Earnings		2023 3rd Qtr.				2023 2nd Qtr.				2023 1st Qtr.				2022 4th Qtr.				2022 3rd Qtr.
(in thousands except per share data)
Net interest income		$	16,226			$	16,091			$	17,012			$	17,366			$	17,338
Net provision expense			-				(250)				25				150				100
Noninterest income			3,704				3,485				3,671				3,749				3,047
Noninterest expense			13,728				13,573				13,995				13,215				13,416
Net income before federal income tax expense			6,202				6,253				6,663				7,750				6,869
Income tax expense			1,080				1,040				1,030				1,066				1,056
Net income			5,122				5,213				5,633				6,684				5,813
Basic earnings per share			0.68				0.69				0.75				0.89				0.77
Diluted earnings per share			0.68				0.69				0.75				0.89				0.77

 

End of period balances		2023 3rd Qtr.				2023 2nd Qtr.				2023 1st Qtr.				2022 4th Qtr.				2022 3rd Qtr.
(in thousands)
Gross loans		$	1,315,022			$	1,273,152			$	1,214,186			$	1,194,616			$	1,141,319
Loans held for sale (1)			5,222				8,924				3,603				4,834				8,848
Loans to other financial institutions (2)			23,763				38,838				-				-				70
PPP loans (3)			-				-				-				-				-
Core loans (gross loans excluding 1, 2, and 3 above)			1,286,037				1,225,390				1,210,583				1,189,782				1,132,401
Allowance for loan losses			14,872				14,582				15,065				7,619				7,457
Securities available for sale			507,580				542,932				554,306				546,896				546,627
Securities held to maturity			414,743				420,549				422,876				425,906				428,205
Other interest-earning assets			113,402				41,032				30,999				15,447				21,744
Total earning assets (before allowance)			2,350,747				2,277,665				2,222,367				2,182,866				2,137,895
Total assets			2,574,196				2,483,726				2,409,886				2,385,915				2,363,529
Noninterest-bearing deposits			531,962				544,925				554,699				599,579				599,360
Interest-bearing deposits			1,551,995				1,490,093				1,513,429				1,518,424				1,557,294
Brokered deposits			49,238				51,370				37,773				-				-
Total deposits			2,133,195				2,086,388				2,105,901				2,118,003				2,156,654
Deposits excluding brokered			2,083,957				2,035,018				2,068,128				2,118,003				2,156,654
Total subordinated debt			35,446				35,385				35,323				35,262				35,201
Total borrowed funds			180,000				160,000				85,000				50,000				-
Other interest-bearing liabilities			32,204				11,985				-				-				-
Total interest-bearing liabilities			1,848,883				1,748,833				1,671,525				1,603,686				1,592,495
Shareholders' equity			181,161				179,240				168,712				168,874				156,657

 

Average Balances		2023 3rd Qtr.				2023 2nd Qtr.				2023 1st Qtr.				2022 4th Qtr.				2022 3rd Qtr.
(in thousands)
Loans		$	1,278,421			$	1,218,860			$	1,202,268			$	1,169,605			$	1,128,679
Securities			1,035,785				1,053,191				1,059,747				1,072,594				1,079,584
Other interest-earning assets			128,704				41,075				19,452				14,809				45,210
Total earning assets (before allowance)			2,442,910				2,313,126				2,281,467				2,257,008				2,253,473
Total assets			2,568,240				2,422,567				2,391,344				2,373,851				2,389,550
Noninterest-bearing deposits			534,106				534,106				566,628				605,318				593,793
Interest-bearing deposits			1,550,591				1,472,990				1,530,313				1,522,510				1,576,240
Brokered deposits			44,868				49,679				12,762				-				-
Total deposits			2,129,565				2,056,775				2,109,703				2,127,828				2,170,033
Total subordinated debt			35,413				35,352				35,290				35,230				35,168
Total borrowed funds			181,739				144,231				63,122				36,773				2,414
Other interest-bearing liabilities			20,480				3,763				-				-				-
Total interest-bearing liabilities			1,833,091				1,706,015				1,641,487				1,594,513				1,613,822
Shareholders' equity			181,219				171,912				167,952				160,284				164,758

 

Performance Ratios		2023 3rd Qtr.				2023 2nd Qtr.				2023 1st Qtr.				2022 4th Qtr.				2022 3rd Qtr.
Return on average assets			0.80	%			0.86	%			0.94	%			1.13	%			0.97	%
Return on average equity			11.31	%			12.13	%			13.42	%			16.68	%			14.11	%
Return on average tangible common equity			16.55	%			18.31	%			20.64	%			26.63	%			21.96	%
Net interest margin (fully tax-equivalent)			2.70	%			2.86	%			3.09	%			3.15	%			3.15	%
Efficiency ratio			65.74	%			65.92	%			65.40	%			60.15	%			61.06	%
Cost of funds			1.70	%			1.29	%			0.79	%			0.59	%			0.35	%
Cost of deposits			1.36	%			0.98	%			0.62	%			0.47	%			0.29	%
Cost of interest bearing liabilities			2.20	%			1.69	%			1.08	%			0.82	%			0.48	%
Shareholders' equity to total assets			7.04	%			7.22	%			7.00	%			7.08	%			6.63	%
Tangible common equity to tangible assets			4.74	%			4.83	%			4.52	%			4.57	%			4.07	%
Full-time equivalent employees			376				380				376				376				383

 

Capital Ratios ChoiceOne Financial Services Inc.		2023 3rd Qtr.				2023 2nd Qtr.				2023 1st Qtr.				2022 4th Qtr.				2022 3rd Qtr.
Total capital (to risk weighted assets)			13.2	%			13.2	%			13.5	%			13.8	%			13.7	%
Common equity Tier 1 capital (to risk weighted assets)			10.4	%			10.5	%			10.7	%			11.1	%			10.9	%
Tier 1 capital (to risk weighted assets)			10.7	%			10.8	%			11.0	%			11.4	%			11.2	%
Tier 1 capital (to average assets)			7.4	%			7.7	%			7.7	%			7.9	%			7.6	%

 

Capital Ratios ChoiceOne Bank		2023 3rd Qtr.				2023 2nd Qtr.				2023 1st Qtr.				2022 4th Qtr.				2022 3rd Qtr.
Total capital (to risk weighted assets)			12.7	%			12.7	%			13.0	%			13.0	%			12.8	%
Common equity Tier 1 capital (to risk weighted assets)			12.0	%			12.2	%			12.5	%			12.5	%			12.3	%
Tier 1 capital (to risk weighted assets)			12.0	%			12.2	%			12.5	%			12.5	%			12.3	%
Tier 1 capital (to average assets)			8.3	%			8.7	%			8.7	%			8.7	%			8.3	%

 

Asset Quality		2023 3rd Qtr.				2023 2nd Qtr.				2023 1st Qtr.				2022 4th Qtr.				2022 3rd Qtr.
(in thousands)
Net loan charge-offs (recoveries)		$	148			$	67			$	28			$	(12)			$	59
Annualized net loan charge-offs (recoveries) to average loans			0.05	%			0.02	%			0.01	%			0.00	%			0.02	%
Allowance for loan losses		$	14,872			$	14,582			$	15,065			$	7,619			$	7,457
Unfunded commitment liability		$	2,718			$	3,156			$	2,991			$	-			$	-
Allowance to loans (excludes held for sale)			1.14	%			1.15	%			1.24	%			0.64	%			0.66	%
Non-Accruing loans		$	1,670			$	1,581			$	1,596			$	1,263			$	1,197
Nonperforming loans (includes OREO)		$	1,792			$	1,847			$	1,726			$	2,666			$	2,628
Nonperforming loans to total loans (excludes held for sale)			0.14	%			0.15	%			0.14	%			0.22	%			0.23	%
Nonperforming assets to total assets			0.07	%			0.07	%			0.07	%			0.11	%			0.11	%

 

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SOURCE ChoiceOne Financial Services, Inc.

FAQ

What were ChoiceOne's net income for Q3 and 9M 2023 compared to the same periods in 2022?

ChoiceOne reported net income of $5,122,000 and $15,968,000 for Q3 and 9M 2023, compared to $5,813,000 and $16,956,000 for the same periods in 2022.

How much did core loans grow organically in Q3 2023?

Core loans grew organically by $60.6 million or 19.8% in Q3 2023.

What is the asset quality of ChoiceOne as of September 30, 2023?

Asset quality remains strong with only 0.01% of nonperforming loans to total loans as of September 30, 2023.

How much did deposits decrease compared to September 30, 2022?

Deposits decreased $72.7 million or 3.4% compared to September 30, 2022.

What is the cost of deposits in Q3 2023?

The cost of deposits has increased to 1.36% in Q3 2023.

How much did interest expense on borrowings increase for Q3 and 9M 2023 compared to the prior year?

Interest expense on borrowings increased $2.5 million and $5.0 million for Q3 and 9M 2023, respectively.

What is the total cost of funds in Q3 2023?

Total cost of funds increased to 1.70% in Q3 2023.