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ChoiceOne Reports Fourth Quarter 2023 Results

ChoiceOne Financial Services, Inc. ("ChoiceOne", NASDAQ:COFS), the parent company for ChoiceOne Bank, reported financial results for the quarter ended December 31, 2023.

 Financial Highlights

  • Founded in 1898, ChoiceOne Bank celebrated its 125th anniversary serving local Michigan communities.  ChoiceOne celebrated this accomplishment by ringing the opening bell on the NASDAQ trading floor on October 30th, 2023.
  • ChoiceOne reported net income of $5,293,000 and $21,261,000 for the three and twelve months ended December 31, 2023, compared to $6,684,000 and $23,640,000 for the same periods in 2022.
  • Diluted earnings per share were $0.70 and $2.82 in the three and twelve months ended December 31, 2023, compared to $0.89 and $3.15 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 $105.2 million or an annualized 32.7% during the fourth quarter of 2023 and $201.5 million or 16.9% since December 31, 2022.  This represents the largest core loan growth by dollar amount in a single quarter in ChoiceOne's 125 years in business (excludes loan acquisitions due to mergers and PPP loans).
  • Deposits, excluding brokered deposits, increased by $14.7 million or an annualized 2.8% in the fourth quarter of 2023.  The increase in deposits in the fourth quarter is a combination of new business, recapture of deposit losses from earlier in the year, and some seasonality of municipal balances.  Deposits as of December 31, 2023, excluding brokered deposits, decreased $19.4 million or 0.9%, compared to deposits as of December 31, 2022.
  • Fully tax-equivalent net interest income increased to $16.9 million in the fourth quarter of 2023 compared to $16.6 million in the third quarter of 2023.  Net interest margin (fully tax-equivalent) in the fourth quarter was 2.72% an increase from 2.70% in the third quarter of 2023.
  • Asset quality remains strong with only 0.1% of nonperforming loans to total loans (excluding held for sale) as of December 31, 2023.

"This quarter was a momentous occasion for ChoiceOne Bank as we marked 125 years of empowering our customers and communities. I am thrilled to share that we achieved the largest core loan growth by dollar amount in a single quarter in our entire history (excludes loan acquisitions due to mergers and PPP loans). This is proof of our entire team’s commitment to supporting our local communities. I am also very pleased with our full year 2023 results which showcase loan growth in a tough environment. Our results demonstrate the strong management of both credit and interest rate risk as we continue to prioritize mitigation of these risks. We appreciate our customers' trust and loyalty, and we look forward to many more years of success together." said Kelly Potes, Chief Executive Officer. 

ChoiceOne reported net income of $5,293,000 and $21,261,000 for the three and twelve months ended December 31, 2023, compared to $6,684,000 and $23,640,000 for the same periods in 2022. Diluted earnings per share were $0.70 and $2.82 in the three and twelve months ended December 31, 2023, compared to $0.89 and $3.15 per share in the same periods in the prior year. During 2023, earnings were negatively affected by increased deposit costs, but this was partially offset by higher interest income from loans with higher interest rates and organic loan growth. 

As of December 31, 2023, total assets remained stable compared to September 30, 2023. ChoiceOne used cash balances to fund loans and reduced the net balance of borrowings and brokered deposits by $5.8 million in the fourth quarter of 2023. In addition, core loans increased $105.2 million during the fourth quarter of 2023. Total assets increased by $190.8 million in the twelve months ended December 31, 2023. This increase was driven by core loan growth of $201.5 million or 16.9%, which was partially offset by a decrease in securities of $33.2 million. ChoiceOne management increased liquidity to fund organic loan growth and shifted lower yield assets into higher yield loans, as shown by the loan growth in the fourth quarter of 2023.

Deposits, excluding brokered deposits, increased by $14.7 million or an annualized 2.8% in the fourth quarter of 2023 and decreased $19.4 million or 0.9% as of December 31, 2023, compared to December 31, 2022. The decrease in deposits since December 31, 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 and fourth quarters 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. As of December 31, 2023, total available borrowing capacity from all sources was $933.3 million. Uninsured deposits total $769.7 million or 36.7% of deposits as of December 31, 2023. 

The increase in short term interest rates has led to higher deposit costs, which rose to 1.57% in the last quarter of 2023, compared to 1.36% in the previous quarter and 0.47% in the fourth quarter of 2022. As deposits reprice and customers shift to CD and other interest-bearing products, this trend is likely to persist. ChoiceOne is taking active measures to control these costs and expects to pay lower rates on deposits than the federal funds rate.  Interest expense on borrowings for the three and twelve months ended December 31, 2023, increased $2.2 million and $7.2 million, respectively, compared to the same periods in the prior year, due to increases in borrowing amounts and interest rates. Borrowings include $170 million from the BTFP and $30 million of FHLB borrowings at a weighted average fixed rate of 4.7%. Total cost of funds increased to 1.91% in the fourth quarter of 2023 compared to 1.70% in the third quarter of 2023 and 0.59% in the fourth quarter of 2022.

The provision for credit losses expense on loans increased by $933,000 in the last quarter of 2023, due to the significant growth of core loans. Core loan growth was offset by certain payoffs of watch loans, which declined by $425,000 during the fourth quarter of 2023. Net provision for credit losses expense for the fourth quarter 2023 was $375,000. The ratio of the allowance for credit losses to total loans (excluding loans held for sale) was 1.11% on December 31, 2023 compared to 1.14% on September 30, 2023. Asset quality continues to remain strong, with annualized net loan charge-offs to average loans of 0.04% and nonperforming loans to total loans (excluding loans held for sale) of 0.13% as of December 31, 2023.     

ChoiceOne uses interest rate swaps to manage interest rate exposure to certain fixed assets and variable rate liabilities. On December 31, 2023, ChoiceOne had pay-fixed interest rate swaps with a total notional value of $401.0 million, a weighted average coupon of 3.07%, a fair value of $8.9 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 5.38%, these forward starting swaps would contribute approximately $438,000 monthly starting in May 2024 which will partially 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 $273,000 monthly through April 2024, which was the remaining period of the agreements.

Shareholders’ equity totaled $195.6 million as of December 31, 2023, up from $168.9 million as of December 31, 2022. This increase is due to increased retained earnings and an improvement in accumulated other compressive loss (AOCI) of $20.2 million compared to December 31, 2022. The improvement in AOCI despite the rise in interest rates is due to both the shortening duration and maturing (paydowns) of the securities portfolio, as well as an offsetting increase in unrealized gain of the pay-fixed swap derivatives. ChoiceOne Bank remains “well-capitalized” with a total risk-based capital ratio of 12.4% as of December 31, 2023, compared to 13.0% on December 31, 2022.

Noninterest income rose by $297,000 and $834,000 in the three and twelve months ended December 31, 2023, compared to the same periods in the prior year. The increase was largely due to gains in our securities portfolio during 2023 compared to losses in 2022. Gains on sales of loans increased by $255,000 in the fourth quarter of 2023 compared to the fourth quarter of 2022; however, overall volume remains somewhat depressed due to a competitive housing market and higher mortgage rates.

Noninterest expense increased $563,000 or 4.3% and $1.6 million or 3.0% in the three and twelve months ended December 31, 2023, compared to the same periods in 2022. The increase in total noninterest expense was largely related to inflationary pressures on employee wages and benefits and increases to FDIC insurance partially offset by lower occupancy and data processing costs. As part of its ongoing optimization strategy, ChoiceOne intends to consolidate two of its branches by March 2025. Customers who currently use these branches will be able to access nearby ChoiceOne locations that offer the same level of service and convenience. ChoiceOne anticipates a low impact on customer retention and expects to save around $700,000 annually from this decision. Management continues to seek out ways to manage costs, but also recognizes the value of investing in innovation and attracting the best talent in our industry to compete effectively in our markets.

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 37 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.bank.

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.

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