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ChoiceOne Financial Reports First Quarter 2023 Results

SPARTA, Mich., April 26, 2023 /PRNewswire/ -- ChoiceOne Financial Services, Inc. ("ChoiceOne", NASDAQ:COFS), the parent company for ChoiceOne Bank, reported financial results for the quarter ended March 31, 2023.

(PRNewsfoto/ChoiceOne Financial Services, I)
(PRNewsfoto/ChoiceOne Financial Services, I)

Financial Highlights

  • ChoiceOne reported net income of $5,633,000 for the three months ended March 31, 2023, compared to $6,684,000 and $5,528,000 for the three months ended December 31, 2022 and March 31, 2022, respectively.

  • Diluted earnings per share were $0.75 in the three months ended March 31, 2023, compared to $0.89 and $0.74 for the three months ended December 31, 2022 and March 31, 2022, respectively.

  • Core loans, which exclude held for sale loans and Paycheck Protection Program loans ("PPP"), grew organically by $20.8 million or 7.0% on an annualized basis during the first quarter of 2023 and $191.7 million or 18.8% since March 31, 2022. Loan interest income increased $2.6 million in the first quarter of 2023 compared to the same period in 2022, despite the first quarter of 2022 being aided by $869,000 in PPP fees and an additional $347,000 in accretion income.

  • Deposits, excluding brokered deposits, decreased by $77.5 million or 3.6% as of March 31, 2023 compared to March 31, 2022. This decrease was attributed to a combination of customers using cash on hand for debt payoffs, seasonal tax and municipal bond payments, and customers seeking higher rates via money market securities with transfers to the ChoiceOne Wealth department or outside firms. In the last 12 months over $33.6 million or 43.4% of the trailing 12 month deposit runoff has been transferred from bank deposits to the ChoiceOne Wealth department.

  • ChoiceOne continues to be proactive in managing its liquidity position by using brokered deposits and FHLB advances to ensure ample liquidity to account for deposit fluctuations. At March 31, 2023, total available borrowing capacity from all sources was $405.7 million. ChoiceOne estimates that if additional collateral is pledged to the FHLB, the Federal Reserve Discount Window, or the new Bank Term Funding Program, we would increase available borrowing capacity from all sources to $819.2 million.

"Growth in our loan portfolio is the result of us acquiring new relationships and reflects a strong local economy in Michigan.  While deposits have drifted in this quarter, the ChoiceOne Wealth team has benefited and is expanding our services to key client relationships.  Being proactive with our best customers has allowed us to deepen relationships and provide more value than just a higher interest rate," said Kelly Potes, Chief Executive Officer.

ChoiceOne reported net income of $5,633,000 for the three months ended March 31, 2023, compared to $6,684,000 and $5,528,000 for the three months ended December 31, 2022 and March 31, 2022, respectively.  Diluted earnings per share were $0.75 in the three months ended March 31, 2023, compared to $0.89 and $0.74 for the three months ended December 31, 2022 and March 31, 2022, respectively.  The increase in deposit costs during the first quarter of 2023 has negatively impacted earnings, offset by higher interest income from organic loan growth.

Total assets as of March 31, 2023, increased $24.0 million as compared to December 31, 2022 and $33.1 million compared to March 31, 2022.  This increase is due to core loan growth of $20.8 million or 7.0% annualized during the first quarter of 2023.  At the same time ChoiceOne saw deposits, excluding brokered deposits, decline $49.9 million in the first quarter of 2023 and $77.5 million compared to March 31, 2022. This decrease was attributed to a combination of customers using cash on hand for debt payoffs, seasonal tax and municipal bond payments, and customers seeking higher rates via money market securities with transfers to the ChoiceOne Wealth department or outside firms. In the last twelve months, over $33.6 million or 43.4% of the trailing twelve-month deposit runoff has been transferred from bank deposits to the ChoiceOne Wealth department.

The cost of deposits has increased to 0.62% during the three months ended March 31, 2023 compared to 0.47% and 0.15% for the three months ended December 31, 2022 and March 31, 2022, respectively, due to rising short term interest rates and is expected to continue to increase as deposits reprice.  ChoiceOne is actively managing these costs and expects rates paid on deposits to continue to lag the federal fund rate.  Uninsured deposits total $751,000 or 36% of deposits at March 31, 2023.

In order to ensure ample liquidity ChoiceOne increased borrowed funds from the FHLB to $85.0 million and also obtained $37.8 million in short term brokered deposits at March 31, 2023.  Brokered deposits were locked in at below market rates prior to the latest increase by the Federal Reserve.  Brokered deposits allow us to preserve borrowing capacity at more accessible funding options.  Interest expense on borrowings for the three months ended March 31, 2023, increased $344,000 as compared to the fourth quarter of 2022 and $740,000 as compared to the same period in 2022 primarily due to the increase in rates on borrowings.   Total cost of funds increased to 0.79% in the first quarter of 2023 compared to 0.59% in the fourth quarter of 2022 and 0.21% in the first quarter of 2022. This increase is the result of higher deposit costs and increased borrowings.  ChoiceOne continues to be proactive in managing its liquidity position by using brokered deposits and FHLB advances to ensure ample liquidity to account for deposit fluctuations.  At March 31, 2023, total available borrowing capacity from all sources was $405.7 million.  ChoiceOne estimates that if additional collateral is pledged to the FHLB, the Federal Reserve Discount Window, or the new Bank Term Funding Program, we would increase available borrowing capacity from all sources to $819.2 million.

Interest income increased $763,000 in the three months ended March 31, 2023, compared to December 31, 2022, and $3.9 million compared to the same period in the prior year.  Core loans grew organically by $20.8 million or 7.0% on an annualized basis during the first quarter of 2023 and $191.7 million or 18.8% since March 31, 2022.  This led to an increase in loan interest income of $2.6 million in the first quarter of 2023 compared to the same period in 2022, despite the first quarter of 2022 being aided by $869,000 in PPP fees and an additional $347,000 in accretion income.  Interest income from securities increased $1.3 million in the first three months of 2023 compared to the first three months of 2022, as a result of higher yield on securities offset by a $70.9 million decline in the average balance of securities.  The decrease in average balance is due to the liquidation of $47.2 million in securities during 2022, with the remainder attributed to paydowns and a decline in the fair value of available for sale securities. Fully tax equivalent net interest margin decreased to 3.09% in the first quarter of 2023 from 3.15% in the fourth quarter in 2022 as the increase in cost of funds exceeded the increase in income.

On March 31, 2023, the ratio of the allowance for credit losses to total loans was 1.24% compared to 0.64% on December 31, 2022.  The liability for expected credit losses on unfunded loans and other commitments was $3.0 million and did not exist on December 31, 2022. Both of these increases were attributable to ChoiceOne's adoption of ASU 2016-13 current expected credit loss ("CECL").  On January 1, 2023, ChoiceOne adopted ASU 2016-13 CECL which caused an increase in the allowance for credit losses of $7.2 million.  The large increase is partially due to the current economic environment and the nature of the CECL calculation. Approximately 20% of this increase is related to the migration of purchased loans into the portfolio assessed by the CECL calculation. ChoiceOne also booked a liability for expected credit losses on unfunded loans and other commitments of $3.3 million related to the adoption of CECL guidance. These unfunded loans are open credit lines with current customers and loans approved by ChoiceOne but not funded. The increase in the allowance and the cost of the liability resulted in a decrease in the retained earnings account on our Consolidated Balance Sheet equal to the after-tax impact, with the tax impact portion being recorded in deferred taxes in our Consolidated balance Sheet in accordance with FASB guidance.

Shareholders' equity totaled $168.7 million as of March 31, 2023, down from $191.1 million as of March 31, 2022, primarily due to an increase in the after-tax net unrealized loss on securities available for sale resulting from higher market interest rates.  ChoiceOne uses interest rate swaps to manage interest rate exposure to certain fixed assets and variable rate liabilities.  On March 31, 2022 ChoiceOne has pay-fixed interest rate swaps with a total notional value of $401.0 million. 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.   ChoiceOne Bank remains "well-capitalized" with a total risk-based capital ratio of 13.0% as of March 31, 2023, compared to 13.3% on March 31, 2022.

Total noninterest income declined $174,000 in the first three months of 2023 compared to the same period in the prior year.  $401,000 of this decline is due to the change in the mortgage sales environment from the prior year.  With the rapid rise in interest rates, refinancing activity has slowed, and demand has shifted towards adjustable-rate products.  This decline was offset by the change in market value of equity securities, which saw an increase in the first quarter of 2023 compared to a large decline during the same period of the prior year.  Equity investments include local community bank stocks and Community Reinvestment Act bond mutual funds.  Customer service charges also increased by $78,000 in the first quarter of 2023 compared to the same period of 2022, as consumer and business activity improved.

Total noninterest expense increased $305,000, or 2.2%, in the first quarter of 2023 compared to the same period of 2022.  The increase in total noninterest expense was related to an increase in FDIC insurance costs and inflationary pressures on employee wages and benefits.  This increase was offset by decreases in other categories including data processing and fraud losses.  ChoiceOne continues to monitor expenses and looks to improve our efficiency through automation and use of digital tools. ChoiceOne launched an enhanced treasury services online platform for business clients during the first quarter of 2023.  This new platform targets mid-sized businesses and municipalities who require enhanced reporting, security, and payment capabilities. Management believes that continuing to invest in our technology and people is the right way to maintain sustainable growth.

Potes further commented, "We have continued to grow our core loan portfolio and maintain excellent asset quality in the first quarter.  The recent increase in short term interest rates has put pressure on our deposits, but we have taken this as an opportunity to reengage with our customer base and expand the reach of our Wealth Department.  In addition, our yield on earning assets will continue to improve as our assets reprice over time which will help offset increased funding costs. Our experienced team and strong customer relationships are tremendous assets and will continue to pay dividends throughout 2023."

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)


March 31,
2023



December 31,
2022



March 31,
2022


Cash and cash equivalents


$

55,189



$

43,943



$

89,976


Securities Held to Maturity



422,876




425,906




429,918


Securities Available for Sale



554,306




546,896




657,887


Loans held for sale



3,603




4,834




13,450


Loans to other financial institutions



-




-




-


Loans, net of allowance for loan losses



1,195,518




1,182,163




1,019,805


Premises and equipment



28,633




28,232




29,678


Cash surrender value of life insurance policies



44,241




43,978




43,520


Goodwill



59,946




59,946




59,946


Core deposit intangible



2,557




2,809




3,660


Other assets



43,017




47,208




28,938












Total Assets


$

2,409,886



$

2,385,915



$

2,376,778












Noninterest-bearing deposits


$

554,699



$

599,579



$

565,657


Interest-bearing deposits



1,513,429




1,518,424




1,579,944


Brokered deposits



37,773




-




-


Borrowings



85,000




50,000




-


Subordinated debentures



35,323




35,262




35,078


Other liabilities



14,950




13,776




4,981












Total Liabilities



2,241,174




2,217,041




2,185,660












Common stock and paid-in capital, no par value; shares authorized:
15,000,000; shares outstanding: 7,521,749 at March 31, 2023, 7,516,098 at
December 31, 2022 and 7,489,812 at March 31, 2022



172,564




172,277




171,492


Retained earnings



64,026




68,394




55,988


Accumulated other comprehensive income (loss), net



(67,878)




(71,797)




(36,362)


Shareholders' Equity



168,712




168,874




191,118












Total Liabilities and Shareholders' Equity


$

2,409,886



$

2,385,915



$

2,376,778


 

Condensed Statements of Income
(Unaudited)




Three Months Ended



(In thousands, except per share data)


March 31,
2023



December 31,
2022



March 31,
2022



Interest income











Loans, including fees


$

14,873



$

14,391



$

12,298



Securities and other



6,525




6,244




5,176



Total Interest Income



21,398




20,635




17,474














Interest expense











Deposits



3,276




2,503




783



Borrowings



1,110




766




370



Total Interest Expense



4,386




3,269




1,153














Net interest income



17,012




17,366




16,321



Provision for loan losses



25




150




-














Net Interest Income After Provision for Loan Losses



16,987




17,216




16,321














Noninterest income











Customer service charges



2,267




2,350




2,189



Insurance and investment commissions



196




183




205



Gains on sales of loans



403




220




804



Gains (loss) on sales of securities



-




(4)




-



Gains (loss) on sales of other assets



3




(73)




171



Trust income



184




206




178



Earnings on life insurance policies



263




519




280



Change in market value of equity securities



63




51




(356)



Other income



292




297




374



Total Noninterest Income



3,671




3,749




3,845














Noninterest expense











Salaries and benefits



8,083




7,580




7,606



Occupancy and equipment



1,643




1,501




1,625



Data processing



1,682




1,673




1,744



Professional fees



621




547




510



Core deposit intangible amortization



252




252




282



Other expenses



1,714




1,662




1,923



Total Noninterest Expense



13,995




13,215




13,690














Income Before Income Tax



6,663




7,750




6,476



Income Tax Expense



1,030




1,066




948














Net Income


$

5,633



$

6,684



$

5,528














Basic Earnings Per Share


$

0.75



$

0.89



$

0.74



Diluted Earnings Per Share


$

0.75



$

0.89



$

0.74



 

Other Selected Financial Highlights

(Unaudited)




Quarterly


Earnings


2023 1st
Qtr.



2022 4th
Qtr.



2022 3rd
Qtr.



2022 2nd
Qtr.



2022 1st
Qtr.


(in thousands except per share data)
















Net interest income


$

17,012



$

17,366



$

17,338



$

16,289



$

16,321


Provision for loan losses



25




150




100




-




-


Noninterest income



3,671




3,749




3,047




3,430




3,845


Noninterest expense



13,995




13,215




13,416




13,157




13,690


Net income before federal income tax expense



6,663




7,750




6,869




6,562




6,476


Income tax expense



1,030




1,066




1,056




947




948


Net income



5,633




6,684




5,813




5,615




5,528


Basic earnings per share



0.75




0.89




0.77




0.75




0.74


Diluted earnings per share



0.75




0.89




0.77




0.75




0.74


 

End of period balances


2023 1st
Qtr.



2022 4th
Qtr.



2022 3rd
Qtr.



2022 2nd
Qtr.



2022 1st
Qtr.


(in thousands)
















Gross loans


$

1,214,186



$

1,194,616



$

1,141,319



$

1,129,439



$

1,040,856


Loans held for sale (1)



3,603




4,834




8,848




10,628




13,450


Loans to other financial institutions (2)



-




-




70




37,422




-


PPP loans (3)



-




-




-




...1,758




8,476


Core loans (gross loans excluding 1, 2, and 3 above)



1,210,583




1,189,782




1,132,401




1,079,631




1,018,930


Allowance for loan losses



15,065




7,619




7,457




7,416




7,601


Securities available for sale



554,306




546,896




546,627




582,987




657,887


Securities held to maturity



422,876




425,906




428,205




429,675




429,918


Other interest-earning assets



30,999




15,447




21,744




9,532




62,945


Total earning assets (before allowance)



2,222,367




2,182,866




2,137,895




2,151,633




2,191,606


Total assets



2,409,886




2,385,915




2,363,529




2,360,205




2,376,778


Noninterest-bearing deposits



554,699




599,579




599,360




578,927




565,657


Interest-bearing deposits



1,513,429




1,518,424




1,557,294




1,559,577




1,579,944


Brokered deposits



37,773




-




-




-




-


Total deposits



2,105,901




2,118,003




2,156,654




2,138,504




2,145,601


Total subordinated debt



35,323




35,262




35,201




35,140




35,078


Total borrowed funds



85,000




50,000




-




7,000




-


Total interest-bearing liabilities



1,671,525




1,603,686




1,592,495




1,601,717




1,615,022


Shareholders' equity



168,712




168,874




156,657




166,460




191,118


 

Average Balances


2023 1st
Qtr.



2022 4th
Qtr.



2022 3rd
Qtr.



2022 2nd
Qtr.



2022 1st
Qtr.


(in thousands)
















Loans


$

1,202,268



$

1,169,605



$

1,128,679



$

1,076,934



$

1,037,646


Securities



1,059,747




1,072,594




1,079,584




1,098,419




1,130,681


Other interest-earning assets



19,452




14,809




45,210




40,728




36,460


Total earning assets (before allowance)



2,281,467




2,257,008




2,253,473




2,216,081




2,204,787


Total assets



2,391,344




2,373,851




2,389,550




2,361,479




2,375,864


Noninterest-bearing deposits



566,628




605,318




593,793




578,943




553,267


Interest-bearing deposits



1,530,313




1,522,510




1,576,240




1,555,721




1,548,685


Brokered deposits



12,762




-




-




-




-


Total deposits



2,109,703




2,127,828




2,170,033




2,134,664




2,101,952


Total subordinated debt



35,290




35,230




35,168




35,095




35,342


Total borrowed funds



63,122




36,773




2,414




5,765




10,239


Total interest-bearing liabilities



1,641,487




1,594,513




1,613,822




1,596,581




1,594,266


Shareholders' equity



167,952




160,284




164,758




177,085




206,280


 

Performance Ratios


2023 1st
Qtr.



2022 4th
Qtr.



2022 3rd
Qtr.



2022 2nd
Qtr.



2022 1st
Qtr.


Return on average assets



0.94

%



1.13

%



0.97

%



0.95

%



0.93

%

Return on average equity



13.42

%



16.68

%



14.11

%



12.68

%



10.72

%

Return on average tangible common equity



20.64

%



26.63

%



21.96

%



18.87

%



14.85

%

Net interest margin (fully tax-equivalent)



3.09

%



3.15

%



3.15

%



3.02

%



3.04

%

Efficiency ratio



65.40

%



60.15

%



61.06

%



61.43

%



64.37

%

Cost of funds



0.79

%



0.59

%



0.35

%



0.25

%



0.21

%

Cost of deposits



0.62

%



0.47

%



0.29

%



0.19

%



0.15

%

Shareholders' equity to total assets



7.00

%



7.08

%



6.63

%



7.05

%



8.04

%

Tangible common equity to tangible assets



4.52

%



4.57

%



4.07

%



4.49

%



5.51

%

Full-time equivalent employees



376




376




383




380




376


 

Capital Ratios ChoiceOne Financial Services Inc.


2023 1st
Qtr.



2022 4th
Qtr.



2022 3rd
Qtr.



2022 2nd
Qtr.



2022 1st
Qtr.


Total capital (to risk weighted assets)



13.5

%



13.8

%



13.7

%



13.8

%



14.6

%

Common equity Tier 1 capital (to risk weighted assets)



10.7

%



11.1

%



10.9

%



11.0

%



11.5

%

Tier 1 capital (to risk weighted assets)



11.0

%



11.4

%



11.2

%



11.3

%



11.9

%

Tier 1 capital (to average assets)



7.7

%



7.9

%



7.6

%



7.5

%



7.3

%

 

Capital Ratios ChoiceOne Bank


2023 1st
Qtr.



2022 4th
Qtr.



2022 3rd
Qtr.



2022 2nd
Qtr.



2022 1st
Qtr.


Total capital (to risk weighted assets)



13.0

%



13.0

%



12.8

%



12.7

%



13.3

%

Common equity Tier 1 capital (to risk weighted assets)



12.5

%



12.5

%



12.3

%



12.2

%



12.8

%

Tier 1 capital (to risk weighted assets)



12.5

%



12.5

%



12.3

%



12.2

%



12.8

%

Tier 1 capital (to average assets)



8.7

%



8.7

%



8.3

%



8.1

%



7.9

%

 

Asset Quality


2023 1st
Qtr.



2022 4th
Qtr.



2022 3rd
Qtr.



2022 2nd
Qtr.



2022 1st
Qtr.


(in thousands)
















Net loan charge-offs (recoveries)


$

28



$

(12)



$

59



$

185



$

87


Annualized net loan charge-offs (recoveries) to average loans



0.01

%



0.00

%



0.02

%



0.07

%



0.03

%

Allowance for loan losses


$

15,065



$

7,619



$

7,457



$

7,416



$

7,601


Unfunded commitment liability



2,991




-




-




-




-


Allowance to loans (excludes held for sale)



1.24

%



0.64

%



0.66

%



0.66

%



0.74

%

Non-Accruing loans


$

1,596



$

1,263



$

1,197



$

1,242



$

1,167


Non performing loans (includes OREO)



1,726




2,666




2,628




2,714




4,852


Nonperforming loans to total loans (excludes held for sale)



0.14

%



0.22

%



0.23

%



0.24

%



0.47

%

Nonperforming assets to total assets



0.07

%



0.11

%



0.11

%



0.11

%



0.20

%

 

Cision
Cision

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SOURCE ChoiceOne Financial Services, Inc.

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