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ChoiceOne Financial Reports Fourth Quarter and Year End 2022 Results

PRNewswire 25-Jan-2023 4:01 PM

SPARTA, Mich., Jan. 25, 2023 /PRNewswire/ -- ChoiceOne Financial Services, Inc. ((", ChoiceOne", , NASDAQ:COFS), the parent company for ChoiceOne Bank, reported financial results for the quarter ended December 31, 2022.

Financial Highlights

  • ChoiceOne reported net income of $6,684,000 and $23,640,000 for the three and twelve months ended December 31, 2022, compared to $5,012,000 and $22,042,000 for the same periods in 2021.
  • Diluted earnings per share were $0.89 and $3.15 in the three and twelve months ended December 31, 2022, compared to $0.66 and $2.86 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 $57.4 million or 20.3% on an annualized basis during the fourth quarter of 2022 and $206.1 million or 21.0% during the full year 2022.
  • Deposits increased by $65.7 million or 3.2% for the full year 2022 with related deposit interest expense increasing $2.5 million. Deposits declined $38.7 million in the fourth quarter of 2022 due to some seasonality in municipal deposits and increased competition.
  • ChoiceOne opened a loan production office in Oakland County, Michigan during the fourth quarter 2022. It is intended that this location will host both commercial and mortgage lenders and is ChoiceOne's fourth loan production office opened in recent years.
  • ChoiceOne plans to launch an enhanced treasury services online platform for business clients in 2023. This new platform targets mid-sized businesses and municipalities who require enhanced reporting, security, and payment capabilities.

"Our investment in growing an experienced commercial lending team continues to drive strong organic core loan growth, with core loans growing organically over 20% during 2022," said Kelly Potes, Chief Executive Officer. "Our focus on customer relationships is reflected in our deposit balances which increased $65.7 million compared to the end of 2021 despite increased pressure from competition.  With higher interest rates, our local low-cost core deposit franchise provides significant value, and we expect to continue to fund our growth with local deposits and other on-balance sheet liquidity."

ChoiceOne reported net income of $6,684,000 and $23,640,000 for the three and twelve months ended December 31, 2022, compared to $5,012,000 and $22,042,000 for the same periods in 2021. Diluted earnings per share were $0.89 and $3.15 in the three and twelve months ended December 31, 2022, compared to $0.66 and $2.86 per share in the same periods in the prior year.

Total assets as of December 31, 2022, increased $19.2 million as compared to December 31, 2021.  ChoiceOne saw deposits decline $38.7 million in the fourth quarter of 2022 due to some seasonality in municipal deposits and increased competition. The cost of these deposits also increased by $940,000 in the fourth quarter of 2022 compared to the third quarter of 2022 and $1.8 million compared to the fourth quarter of 2021. Deposits have increased by $65.7 million in the twelve months ended December 31, 2022; however, during that time deposit expense has increased $2.5 million. Cost of interest-bearing deposits increased to 0.66% in the fourth quarter of 2022 primarily due to the increases in rates offered to retain clients and an increased interest in certificates of deposit. ChoiceOne is actively managing these costs while still retaining funds, and anticipates that deposit expense will continue to lag the expected additional increases in the federal funds rate. Borrowing interest expense for the twelve months ended December 31, 2022, increased $1.2 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 and the increase in rates on borrowings. 

Core loans grew organically by $57.4 million or 20.3% on an annualized basis during the fourth quarter of 2022 and $206.1 million or 21.0% during the full year 2022. Loans to other financial institutions, consisting of a warehouse line of credit, were suspended at the end of the third quarter 2022 to preserve liquidity for loan growth. ChoiceOne continues to have ample on balance sheet liquidity to fund future loan growth, including an estimated $168 million of cash flow from securities over the next two years.  Interest income increased $10.4 million in the twelve months ended December 31, 2022, compared to the same period in the prior year. The increase was driven by a $6.3 million increase in securities interest income despite the average balance of securities decreasing $7.0 million during the year.  In 2022, ChoiceOne liquidated a total of $46.8 million in securities resulting in an $809,000 realized loss, in order to redeploy funds into higher yielding loans and securities, and to reduce the risk of extension on certain fixed income securities which include a call option.  $4.2 million of the increase in interest income is from loan interest income and was primarily a result of higher loan balances and $2.0 million of accretion income from acquired loans partially offset by a decrease in PPP fee income of $3.9 million

ChoiceOne had $250,000 of provision for loan losses expense for the year ended December 31, 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 December 31, 2022, the allowance for loan losses represented 0.64% of total loans.  ChoiceOne will adopt ASU 2016-13 current expected credit loss ("CECL") on January 1, 2023. Due to the current economic environment, the nature of the new calculation, and purchase accounting with our recent mergers, we anticipate an increase in our current reserve of between $6.5 million and $7.0 million which results in a reserve to total loan coverage ratio between 1.15% and 1.20% on January 1, 2023. Approximately 20% to 25% of this increase is related to the migration of purchased loans into the portfolio assessed by the CECL calculation.  Purchased loans carry approximately $4 million of accretable yield which will be recognized into income over the remaining life of the loans. ChoiceOne will also book a liability for expected credit losses on unfunded loans and other commitments of between $2.5 million to $3.0 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 reserve and the cost of the liability will be funded through equity, net of tax, in accordance with FASB guidance. 

Shareholders' equity totaled $168.9 million as of December 31, 2022, down from $221.7 million as of December 31, 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's derivative strategy implemented during the second quarter of 2022 and repositioned during the fourth quarter of 2022, is expected to better prepare the bank should rates continue to rise.  The net impact on equity of the derivative strategy as of December 31, 2022, was $957,000 net of tax. ChoiceOne Bank remains "well-capitalized" with a total risk-based capital ratio of 13.0% as of December 31, 2022, compared to 12.9% on December 31, 2021. No shares of common stock were repurchased during the fourth 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 $5.1 million during the year ended 2022 compared to the year ended 2021. $4.1 million 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. Customer service charges increased $722,000 during 2022 compared to 2021 as prior year service charges were depressed by the effects of the COVID-19 pandemic. The change in market value of equity securities declined $1.4 million during 2022 compared to 2021 consistent with general market conditions. Equity investments include local community bank stocks and Community Reinvestment Act bond mutual funds. 

Total noninterest expense increased $557,000, or 1.1%, in 2022 compared to 2021. Overall expense management was a focus in 2022 and will continue to be in 2023 given inflationary pressures. The increase in total noninterest expense was 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 increase was offset by decreases in other categories including professional fees. ChoiceOne continues to monitor expenses and looks to improve our efficiency through automation and use of digital tools. ChoiceOne plans to launch an enhanced treasury services online platform for business clients in 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, "Our growth and well managed expenses in 2022 are a result of the hard work of our employees and the client relationships that they foster. ChoiceOne's mission is to provide superior service, quality advice, and treat all we meet with utmost respect.  Our value is not measured in the interest rate we pay, but the interest we take in our client's success. I am very pleased with our 2022 results and believe we have the right pieces in place to have a successful 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, 2021.

 

Condensed Balance Sheets
(Unaudited)


(In thousands)


12/31/2022



12/31/2021


Cash and cash equivalents


$

43,943



$

31,887


Securities Held to Maturity



425,906




-


Securities Available for Sale



546,897




1,116,265


Loans held for sale



4,834




9,351


Loans to other financial institutions



-




42,632


Loans, net of allowance for loan losses



1,182,163




1,009,160


Premises and equipment



28,232




29,880


Cash surrender value of life insurance policies



43,978




43,356


Goodwill



59,946




59,946


Core deposit intangible



2,809




3,962


Other assets



47,206




20,243











Total Assets


$

2,385,914



$

2,366,682











Noninterest-bearing deposits


$

599,579



$

560,931


Interest-bearing deposits



1,518,424




1,491,363


Borrowings



50,000




50,000


Subordinated debentures



35,262




35,017


Other liabilities



13,775




7,702











Total Liabilities



2,217,040




2,145,013











Common stock and paid-in capital, no par value; shares authorized: 12,000,000; shares outstanding: 7,516,098 at December 31, 2022 and 7,510,379 at December 31, 2021



172,277




171,913


Retained earnings



68,394




52,332


Accumulated other comprehensive income (loss), net



(71,797)




(2,576)


Shareholders' Equity



168,874




221,669











Total Liabilities and Shareholders' Equity


$

2,385,914



$

2,366,682


 

Condensed Statements of Income
(Unaudited)



Three Months Ended



Twelve Months Ended


(In thousands, except per share data)


12/31/2022



12/31/2021



12/31/2022



12/31/2021


Interest income

















Loans, including fees


$

14,391



$

12,002



$

52,823



$

48,657


Securities and other



6,244




4,816




22,237




15,961


Total Interest Income



20,635




16,818




75,060




64,618



















Interest expense

















Deposits



2,503




749




5,845




3,305


Borrowings



766




324




1,901




672


Total Interest Expense



3,269




1,073




7,746




3,977



















Net interest income



17,366




15,745




67,314




60,641


Provision for loan losses



150




-




250




416



















Net Interest Income After Provision for Loan Losses



17,216




15,745




67,064




60,225



















Noninterest income

















Customer service charges



2,350




2,319




9,350




8,628


Insurance and investment commissions



183




141




779




765


Gains on sales of loans



220




1,061




2,343




6,402


Gains (loss) on sales of securities



(4)




(43)




(809)




(40)


Gains (loss) on sales of other assets



(73)




3




99




6


Trust income



206




178




734




790


Earnings on life insurance policies



519




239




1,312




809


Change in market value of equity securities



51




18




(955)




479


Other income



297




228




1,219




1,355


Total Noninterest Income



3,749




4,144




14,072




19,194



















Noninterest expense

















Salaries and benefits



7,580




7,581




30,391




29,300


Occupancy and equipment



1,501




1,577




6,189




6,168


Data processing



1,673




1,616




6,729




6,189


Professional fees



547




583




2,175




3,009


Core deposit intangible amortization



252




302




1,153




1,307


Other expenses



1,662




2,099




6,841




6,948


Total Noninterest Expense



13,215




13,758




53,478




52,921



















Income Before Income Tax



7,750




6,131




27,658




26,498


Income Tax Expense



1,066




1,119




4,018




4,456



















Net Income


$

6,684



$

5,012



$

23,640



$

22,042



















Basic Earnings Per Share


$

0.89



$

0.67



$

3.15



$

2.87


Diluted Earnings Per Share


$

0.89



$

0.66



$

3.15



$

2.86


 

Other Selected Financial Highlights
(Unaudited)



Quarterly


Earnings


2022 4th Qtr.



2022 3rd Qtr.



2022 2nd Qtr.



2022 1st Qtr.



2021 4th Qtr.


(in thousands except per share data)





















Net interest income


$

17,366



$

17,338



$

16,289



$

16,321



$

15,745


Provision for loan losses



150




100




-




-




-


Noninterest income



3,749




3,047




3,430




3,845




4,144


Noninterest expense



13,215




13,416




13,157




13,690




13,758


Net income before federal income tax expense



7,750




6,869




6,562




6,476




6,131


Income tax expense



1,066




1,056




947




948




1,119


Net income



6,684




5,813




5,615




5,528




5,012


Basic earnings per share



0.89




0.77




0.75




0.74




0.67


Diluted earnings per share



0.89




0.77




0.75




0.74




0.66


 

End of period balances


2022 4th Qtr.



2022 3rd Qtr.



2022 2nd Qtr.



2022 1st Qtr.



2021 4th Qtr.


(in thousands)





















Gross loans


$

1,194,616



$

1,141,319



$

1,129,439



$

1,040,856



$

1,068,832


Loans held for sale (1)



4,834




8,848




10,628




13,450




9,351


Loans to other financial institutions (2)



-




70




37,422




-




42,632


PPP loans (3)



-




-




1,758




8,476




33,129


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



1,189,782




1,132,401




1,079,631




1,018,930




983,720


Allowance for loan losses



7,619




7,457




7,416




7,601




7,688


Securities available for sale



546,897




546,627




582,987




657,887




1,116,264


Securities held to maturity



425,906




428,205




429,675




429,918




-


Other interest-earning assets



15,447




21,744




9,532




62,945




9,751


Total earning assets (before allowance)



2,182,866




2,137,895




2,151,633




2,191,606




2,194,847


Total assets



2,385,914




2,363,529




2,360,205




2,376,778




2,366,682


Noninterest-bearing deposits



599,579




599,360




578,927




565,657




560,931


Interest-bearing deposits



1,518,424




1,557,294




1,559,577




1,579,944




1,491,363


Total deposits



2,118,003




2,156,654




2,138,504




2,145,601




2,052,294


Total subordinated debt



35,262




35,201




35,140




35,078




35,017


Total borrowed funds



50,000




-




7,000




-




50,000


Total interest-bearing liabilities



1,603,686




1,592,495




1,601,717




1,615,022




1,576,380


Shareholders' equity



168,874




156,657




166,460




191,118




221,669


 

Average Balances


2022 4th Qtr.



2022 3rd Qtr.



2022 2nd Qtr.



2022 1st Qtr.



2021 4th Qtr.


(in thousands)





















Loans


$

1,169,605



$

1,128,679



$

1,076,934



$

1,037,646



$

1,019,966


Securities



1,072,594




1,079,584




1,098,419




1,130,681




1,079,616


Other interest-earning assets



14,809




45,210




40,728




36,460




29,999


Total earning assets (before allowance)



2,257,008




2,253,473




2,216,081




2,204,787




2,129,581


Total assets



2,373,851




2,389,550




2,361,479




2,375,864




2,298,579


Noninterest-bearing deposits



605,318




593,793




578,943




553,267




556,214


Interest-bearing deposits



1,522,510




1,576,240




1,555,721




1,548,685




1,472,022


Total deposits



2,127,828




2,170,033




2,134,664




2,101,952




2,028,236


Total subordinated debt



35,230




35,168




35,095




35,342




35,674


Total borrowed funds



36,773




2,414




5,765




10,239




8,010


Total interest-bearing liabilities



1,594,513




1,613,822




1,596,581




1,594,266




1,515,706


Shareholders' equity



160,284




164,758




177,085




206,280




221,076


 

Performance Ratios


2022 4th Qtr.



2022 3rd Qtr.



2022 2nd Qtr.



2022 1st Qtr.



2021 4th Qtr.























Return on average assets



1.13

%



0.97

%



0.95

%



0.93

%



0.87

%

Return on average equity



16.68

%



14.11

%



12.68

%



10.72

%



9.07

%

Return on average tangible common equity



26.63

%



21.96

%



18.87

%



14.85

%



12.16

%

Net interest margin (fully tax-equivalent)



3.15

%



3.15

%



3.02

%



3.04

%



3.04

%

Efficiency ratio



60.15

%



61.06

%



61.43

%



64.37

%



66.15

%

Cost of funds



0.59

%



0.35

%



0.25

%



0.21

%



0.21

%

Cost of deposits



0.47

%



0.29

%



0.19

%



0.15

%



0.15

%

Shareholders' equity to total assets



7.08

%



6.63

%



7.05

%



8.04

%



9.37

%

Tangible common equity to tangible assets



4.57

%



4.07

%



4.49

%



5.51

%



6.85

%

Full-time equivalent employees



376




383




380




376




374


 

Capital Ratios ChoiceOne Financial Services Inc.


2022 4th Qtr.



2022 3rd Qtr.



2022 2nd Qtr.



2022 1st Qtr.



2021 4th Qtr.























Total capital (to risk weighted assets)



13.8

%



13.7

%



13.8

%



14.6

%



14.4

%

Common equity Tier 1 capital (to risk weighted assets)



11.1

%



10.9

%



11.0

%



11.5

%



11.3

%

Tier 1 capital (to risk weighted assets)



11.4

%



11.2

%



11.3

%



11.9

%



11.6

%

Tier 1 capital (to average assets)



7.9

%



7.6

%



7.5

%



7.3

%



7.4

%






















Capital Ratios ChoiceOne Bank


2022 4th Qtr.



2022 3rd Qtr.



2022 2nd Qtr.



2022 1st Qtr.



2021 4th Qtr.























Total capital (to risk weighted assets)



13.0

%



12.8

%



12.7

%



13.3

%



12.9

%

Common equity Tier 1 capital (to risk weighted assets)



12.5

%



12.3

%



12.2

%



12.8

%



12.3

%

Tier 1 capital (to risk weighted assets)



12.5

%



12.3

%



12.2

%



12.8

%



12.3

%

Tier 1 capital (to average assets)



8.7

%



8.3

%



8.1

%



7.9

%



7.8

%

 

Asset Quality

2022 4th Qtr.


2022 3rd Qtr.


2022 2nd Qtr.


2022 1st Qtr.


2021 4th Qtr.


(in thousands)
















Net loan charge-offs (recoveries)

$

(12)


$

59


$

185


$

87


$

67


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


0.00

%


0.02

%


0.07

%


0.03

%


0.03

%

Allowance for loan losses

$

7,619


$

7,457


$

7,416


$

7,601


$

7,688


Allowance to loans (excludes held for sale)


0.64

%


0.66

%


0.66

%


0.74

%


0.73

%

Non-Accruing loans

$

1,263


$

1,197


$

1,242


$

1,167


$

1,727


Non performing loans (includes OREO)


2,666



2,628



2,714



4,852



5,737


Nonperforming loans to total loans (excludes held for sale)


0.22

%


0.23

%


0.24

%


0.47

%


0.54

%

Nonperforming assets to total assets


0.11

%


0.11

%


0.11

%


0.20

%


0.24

%

 

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SOURCE ChoiceOne Financial Services, Inc.