ChoiceOne Financial Reports Third Quarter 2022 Results

SPARTA, Mich., Oct. 26, 2022 /PRNewswire/ -- 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.

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, 2021.

 

Condensed Balance Sheets (Unaudited)
(In thousands)		9/30/2022				6/30/2022				9/30/2021
Cash and Cash Equivalents		$	51,494			$	40,296			$	59,780
Securities Available for Sale			546,627				582,987				1,044,538
Securities Held to Maturity			428,205				429,675				-
Loans Held For Sale			8,848				10,628				7,505
Loans to Other Financial Institutions			70				37,422				38,728
Loans, Net of Allowance For Loan Losses			1,124,944				1,073,973				980,602
Premises and Equipment			28,947				29,122				30,014
Cash Surrender Value of Life Insurance Policies			44,033				43,774				33,322
Goodwill			59,946				59,946				59,946
Core Deposit Intangible			3,062				3,358				4,264
Other Assets			67,353				49,024				18,481
Total Assets		$	2,363,529			$	2,360,205			$	2,277,180
Noninterest-bearing Deposits		$	599,360			$	578,927			$	543,165
Interest-bearing Deposits			1,557,294				1,559,577				1,468,985
Borrowings			-				7,000				-
Subordinated Debt			35,201				35,140				34,956
Other Liabilities			15,017				13,101				5,019
Total Liabilities			2,206,872				2,193,745				2,052,125
Common stock and paid-in capital, no par value; shares authorized: 12,000,000; shares outstanding: 7,510,036 at September 30, 2022, 7,503,072 at June 30, 2022, and 7,591,221 at September 30, 2021.			171,975				171,804				173,888
Retained earnings			63,664				59,728				49,198
Accumulated other comprehensive income (loss), net			(78,982)				(65,072)				1,969
Shareholders' Equity			156,657				166,460				225,055
Total Liabilities and Shareholders' Equity		$	2,363,529			$	2,360,205			$	2,277,180

 

Condensed Statements of Income (Unaudited)
		Three Months Ended								Nine Months Ended
(In Thousands, Except Per Share Data)		9/30/2022				9/30/2021				9/30/2022				9/30/2021
Interest Income
Loans, including fees		$	13,611			$	12,408			$	38,432			$	36,655
Securities and other			5,674				4,318				15,993				11,145
Total Interest Income			19,285				16,726				54,425				47,800
Interest Expense
Deposits			1,563				837				3,342				2,556
Borrowings			384				189				1,135				348
Total Interest Expense			1,947				1,026				4,477				2,904
Net Interest Income			17,338				15,700				49,948				44,896
Provision for Loan Losses			100				-				100				416
Net Interest Income After Provision for Loan Losses			17,238				15,700				49,848				44,480
Noninterest Income
Customer service charges			2,458				2,255				7,000				6,309
Insurance and investment commissions			158				153				596				624
Gains on sales of loans			432				1,798				2,123				5,715
Gains (losses) on sales of securities			(378)				-				(805)				3
Gains on sales of other assets			-				-				172				-
Trust income			174				187				528				612
Earnings on life insurance policies			259				194				793				570
Change in market value of equity securities			(323)				(28)				(1,006)				461
Other income			267				159				922				756
Total Noninterest Income			3,047				4,718				10,323				15,050
Noninterest Expense
Salaries and benefits			7,668				7,552				22,811				21,719
Occupancy and equipment			1,545				1,538				4,688				4,591
Data processing			1,734				1,471				5,056				4,573
Professional fees			559				754				1,628				2,426
Core deposit intangible amortization			297				346				901				1,005
Other expenses			1,613				1,845				5,179				4,849
Total Noninterest Expense			13,416				13,506				40,263				39,163
Income Before Income Tax			6,869				6,912				19,908				20,367
Income Tax Expense			1,056				1,163				2,952				3,337
Net Income		$	5,813			$	5,749			$	16,956			$	17,029
Basic Earnings Per Share		$	0.77			$	0.75			$	2.26			$	2.20
Diluted Earnings Per Share		$	0.77			$	0.75			$	2.26			$	2.20

 

Other Selected Financial Highlights (Unaudited)
		Quarterly
Earnings		2022 3rd Qtr.				2022 2nd Qtr.				2022 1st Qtr.				2021 4th Qtr.				2021 3rd Qtr.
(in thousands except per share data)
Net interest income		$	17,338			$	16,289			$	16,321			$	15,745			$	15,700
Provision for loan losses			100				-				-				-				-
Noninterest income			3,047				3,430				3,845				4,144				4,718
Noninterest expense			13,416				13,157				13,690				13,758				13,506
Net income before federal income tax expense			6,869				6,562				6,476				6,131				6,912
Income tax expense			1,056				947				948				1,119				1,163
Net income			5,813				5,615				5,528				5,012				5,749
Basic earnings per share			0.77				0.75				0.74				0.67				0.75
Diluted earnings per share			0.77				0.75				0.74				0.66				0.75

 

End of period balances		2022 3rd Qtr.				2022 2nd Qtr.				2022 1st Qtr.				2021 4th Qtr.				2021 3rd Qtr.
(in thousands)
Gross loans		$	1,141,319			$	1,129,439			$	1,040,856			$	1,068,832			$	1,034,590
Loans held for sale (1)			8,848				10,628				13,450				9,351				7,505
Loans to other financial institutions (2)			70				37,422				-				42,632				38,728
PPP loans (3)			-				1,758				8,476				33,129				61,192
Core loans (gross loans excluding 1, 2, and 3 above)			1,132,401				1,079,631				1,018,930				983,720				927,165
Allowance for loan losses			7,457				7,416				7,601				7,688				7,755
Securities available for sale			546,627				582,987				657,887				1,116,264				1,044,538
Securities held to maturity			428,205				429,675				429,918				-				-
Other interest-earning assets			21,744				9,532				62,945				9,751				30,383
Total earning assets (before allowance)			2,137,895				2,151,633				2,191,606				2,194,847				2,109,511
Total assets			2,363,529				2,360,205				2,376,778				2,366,682				2,277,180
Noninterest-bearing deposits			599,360				578,927				565,657				560,931				543,165
Interest-bearing deposits			1,557,294				1,559,577				1,579,944				1,491,363				1,468,985
Total deposits			2,156,654				2,138,504				2,145,601				2,052,294				2,012,150
Total subordinated debt			35,201				35,140				35,078				35,017				34,956
Total borrowed funds			-				7,000				-				50,000				-
Total interest-bearing liabilities			1,592,495				1,601,717				1,615,022				1,576,380				1,503,941
Shareholders' equity			156,657				166,460				191,118				221,669				225,055

 

Average Balances		2022 3rd Qtr.				2022 2nd Qtr.				2022 1st Qtr.				2021 4th Qtr.				2021 3rd Qtr.
(in thousands)
Loans		$	1,128,679			$	1,076,934			$	1,037,646			$	1,019,966			$	1,021,326
Securities			1,079,584				1,098,419				1,130,681				1,079,616				922,653
Other interest-earning assets			45,210				40,728				36,460				29,999				106,831
Total earning assets (before allowance)			2,253,473				2,216,081				2,204,787				2,129,581				2,050,810
Total assets			2,389,550				2,361,479				2,375,864				2,298,579				2,234,228
Noninterest-bearing deposits			593,793				578,943				553,267				556,214				545,251
Interest-bearing deposits			1,576,240				1,555,721				1,548,685				1,472,022				1,441,831
Total deposits			2,170,033				2,134,664				2,101,952				2,028,236				1,987,082
Total subordinated debt			35,168				35,095				35,342				35,674				9,154
Total borrowed funds			2,414				5,765				10,239				8,010				2,667
Total interest-bearing liabilities			1,613,822				1,596,581				1,594,266				1,515,706				1,453,652
Shareholders' equity			164,758				177,085				206,280				221,076				229,369

 

Performance Ratios		2022 3rd Qtr.				2022 2nd Qtr.				2022 1st Qtr.				2021 4th Qtr.				2021 3rd Qtr.
Return on average assets			0.97	%			0.95	%			0.93	%			0.87	%			1.03	%
Return on average equity			14.11	%			12.68	%			10.72	%			9.07	%			10.03	%
Return on average tangible common equity			21.96	%			18.87	%			14.85	%			12.16	%			13.28	%
Net interest margin (fully tax-equivalent)			3.15	%			3.02	%			3.04	%			3.04	%			3.06	%
Efficiency ratio			61.06	%			61.43	%			64.37	%			66.15	%			63.16	%
Cost of funds			0.35	%			0.25	%			0.21	%			0.21	%			0.21	%
Cost of deposits			0.29	%			0.19	%			0.15	%			0.15	%			0.17	%
Full-time equivalent employees			383				380				376				374				358

 

Capital Ratios ChoiceOne Financial Services Inc.		2022 3rd Qtr.				2022 2nd Qtr.				2022 1st Qtr.				2021 4th Qtr.				2021 3rd Qtr.
Total capital (to risk weighted assets)			13.7	%			13.8	%			14.6	%			14.4	%			15.4	%
Common equity Tier 1 capital (to risk weighted assets)			10.9	%			11.0	%			11.5	%			11.3	%			12.0	%
Tier 1 capital (to risk weighted assets)			11.2	%			11.3	%			11.9	%			11.6	%			12.3	%
Tier 1 capital (to average assets)			7.6	%			7.5	%			7.3	%			7.4	%			7.5	%

 

Capital Ratios ChoiceOne Bank		2022 3rd Qtr.				2022 2nd Qtr.				2022 1st Qtr.				2021 4th Qtr.				2021 3rd Qtr.
Total capital (to risk weighted assets)			12.8	%			12.7	%			13.3	%			12.9	%			13.4	%
Common equity Tier 1 capital (to risk weighted assets)			12.3	%			12.2	%			12.8	%			12.3	%			12.8	%
Tier 1 capital (to risk weighted assets)			12.3	%			12.2	%			12.8	%			12.3	%			12.8	%
Tier 1 capital (to average assets)			8.3	%			8.1	%			7.9	%			7.8	%			7.8	%

 

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