ChoiceOne Financial Reports Third Quarter 2022 Results

ChoiceOne Financial Services, Inc. (“ChoiceOne”, NASDAQ:COFS), the parent company for ChoiceOne Bank, reported financial results for the quarter ended September 30, 2022.

Financial Highlights

  • ChoiceOne reported net income of $5,813,000 and $16,956,000 for the three and nine months ended September 30, 2022, compared to $5,749,000 and $17,029,000 for the same periods in 2021.
  • Diluted earnings per share were $0.77 and $2.26 in the three and nine months ended September 30, 2022, compared to $0.75 and $2.20 per share in the same periods in the prior year.
  • Core loans, which exclude Paycheck Protection Program (“PPP”) loans, held for sale loans, and loans to other financial institutions, grew organically by $52.8 million or 19.6% on an annualized basis during the third quarter of 2022 and $205.2 million or 22.1% since the end of the third quarter in 2021.
  • ChoiceOne continues to grow deposits, which grew $18.2 million or 3.4% on an annualized basis in the third quarter of 2022 and $144.5 million or 7.2% since the end of the third quarter in 2021. Deposit expense has increased $786,000 for the first nine months of 2022 as compared to the same period in 2021.
  • ChoiceOne plans for a fourth quarter 2022 opening of its Oakland County, Michigan loan production office. It is intended that this location will host both commercial and mortgage lenders.
  • ChoiceOne will be launching an enhanced treasury services online platform for business clients in 2023. This new platform includes enhanced reporting, security, and payment capabilities.

“ChoiceOne continues to see strong organic core loan growth, as core loans grew organically by $52.8 million or 19.6% on an annualized basis during the third quarter of 2022 and $205.2 million or 22.1% since the end of the third quarter in 2021,” said Kelly Potes, Chief Executive Officer.  “We have funded this increase in core loans using on balance sheet liquidity, deployed excess funds into higher earning assets, and increased earnings from our core business.  Our investment in customer relationships is our greatest asset in this uncertain economic environment.”

Total assets as of September 30, 2022, increased $3.3 million as compared to June 30, 2022, and increased $86.3 million compared to September 30, 2021.  Deposits in the third quarter 2022 showed modest growth of 3.4%, which is attributed to organic growth of new relationships and some seasonal fluctuations in our municipal clients.  Despite the rapidly rising rate environment resulting from the federal funds rate increases, deposit costs have only increased 12 basis points since the third quarter of 2021, as ChoiceOne is actively managing these costs and intends to continue to lag the expected additional increases in the federal funds rate.  Total interest expense for the nine months ended September 30, 2022, has increased $1.6 million as compared to the same period in 2021 primarily due to the issuance of $32.5 million in subordinated debt that was completed in the third quarter of 2021.  In addition to a focus on managing interest rate expense, ChoiceOne’s derivative strategy implemented during the second quarter of 2022, better positions the bank should rates continue to rise.  The net impact on equity of the derivative strategy as of September 30, 2022 was $4.8 million net of tax.

Core loans grew organically by $52.8 million during the third quarter of 2022, driven by commercial loan growth of $33.8 million and retail home loan growth of $19.0 million. The majority of growth in retail home loans are five-year adjustable-rate mortgage loans targeting high quality borrowers in our market area.  This loan product has helped ChoiceOne stay competitive in a challenging mortgage market.  Loans to other financial institutions, which is a warehouse line of credit, declined to $70,000, and management chose to suspend the program at the end of the third quarter. ChoiceOne has ample on balance sheet liquidity to fund future loan growth, including $183.1 million of cash flow from securities over the next two years.  During the three months ended September 30, 2022, the remaining $1.8 million of PPP loans were forgiven resulting in $68,000 of fee income.  All PPP loans were fully forgiven, and the associated fee income has been recognized at September 30, 2022.  Interest income increased $6.6 million in the nine months ended September 30, 2022, compared to the same period in the prior year.  The increase was driven by a $4.8 million increase in securities interest income as the average balance of securities at September 30, 2022 has increased $306.1 million from September 30, 2021.  $1.8 million of the increase in interest income is from loan interest income and was primarily a result of higher loan balances and $1.7 million of accretion income from acquired loans partially offset by a decrease in PPP fee income.

ChoiceOne had $100,000 of provision for loan losses expense for the nine months ended September 30, 2022.  Management has seen declining deferrals and very few past due loans; however, the additional provision was deemed necessary due to consistent loan growth.  On September 30, 2022, the allowance for loan losses represented 0.66% of total loans.  The remaining credit mark on acquired loans from the mergers with County Bank Corp. and Community Shores Bank Corporation totaled $1.8 million as of September 30, 2022.  If the credit mark associated with the loans acquired in the mergers were added to the allowance for loan losses, the allowance for loan losses would have represented 0.82% of total loans excluding loans held for sale on September 30, 2022.

Shareholders’ equity totaled $156.7 million as of September 30, 2022, down from $225.1 million as of September 30, 2021, primarily due to an increase in the after-tax net unrealized loss on securities available for sale resulting from higher market interest rates. ChoiceOne Bank remains “well-capitalized” with a total risk-based capital ratio of 12.8% as of September 30, 2022, compared to 13.4% at September 30, 2021.  No shares of common stock were repurchased during the third quarter of 2022; however, ChoiceOne may strategically repurchase shares of common stock in the future depending on market and other conditions.

Total noninterest income declined $4.7 million in the first nine months of 2022 compared to the first nine months of 2021.  Total noninterest income in 2021 was bolstered by heightened levels of refinancing activity within ChoiceOne’s mortgage portfolio, with gains on sales of loans $3.6 million larger than in the first nine months of 2022.  Customer service charges increased $691,000 in the first nine months of 2022 compared to the first nine months of 2021 as prior year service charges were depressed by the effects of the COVID-19 pandemic.  The market value of equity securities declined $1.5 million during the first nine months of 2022 compared to the first nine months of 2021 consistent with general market conditions.  Equity investments include local community bank stocks and Community Reinvestment Act bond mutual funds.  During the first nine months of 2022, ChoiceOne has liquidated a total of $47.2 million in securities resulting in an $805,000 realized loss, in order to redeploy the funds into higher yielding loans and reduce the risk of extension on certain fixed income securities which include a call option.

Total noninterest expense increased $1.1 million in the first nine months of 2022 compared to the first nine months of 2021.  The increase is related to an increase in salaries and wages due to annual wage increases and the addition of new commercial loan production and wealth management staff.  This investment in people will increase expenses in the short term but is expected to drive long term value to ChoiceOne through the building of new relationships.  Other expenses have also increased in the first nine months of 2022 compared to the same period in the prior year due to an increase to our FDIC insurance related expenses, business travel expenses which were still being affected by the pandemic last year, and other expenses.  ChoiceOne continues to monitor expenses and looks to improve our efficiency through automation and use of digital tools.

Potes further commented, “We are looking forward to offering enhanced treasury capabilities with our upgraded platform in 2023 and the upcoming opening of our Oakland County loan production office.  I believe that continuing to invest in our technology and people is the right way to maintain sustainable growth as we continue to build quality customer relationships.”

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 35 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.

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