ChoiceOne Financial Services, Inc. ("ChoiceOne", NASDAQ:COFS), the parent company for ChoiceOne Bank, reported financial results for the quarter ended June 30, 2024.

Financial Highlights

• ChoiceOne reported net income of $6,586,000 and $12,220,000 for the three and six months ended June 30, 2024, compared to $5,213,000 and $10,846,000 for the same periods in 2023, representing annualized growth of 26.3% and 12.7%, respectively.
• Diluted earnings per share were $0.87 and $1.61 in the three and six months ended June 30, 2024, compared to $0.69 and $1.44 per share in the same periods in the prior year.
• GAAP Net interest margin in the second quarter of 2024 increased to 2.95%, compared to 2.67% in the first quarter of 2024, and 2.79% in the second quarter of 2023. GAAP net interest income was $18.4 million in the second quarter of 2024 compared to $16.1 million in the second quarter of 2023. Net interest income was aided by cash settlements from pay-fixed interest rate swaps which started paying in April 2024.
• Core loans, which exclude held for sale loans and loans to other financial institutions, grew organically by $12.4 million or 3.6% on an annualized basis during the second quarter of 2024 and $175.6 million or 14.3% since June 30, 2023. Loan interest income increased $6.0 million in the second quarter of 2024 compared to the same period in 2023.
• Deposits, excluding brokered deposits, decreased $44.4 million or an annualized 8.3% in the second quarter of 2024 and increased $64.5 million or 3.2% during the twelve months since June 30, 2023. The decrease in deposits in the second quarter was largely public funds including schools and townships which historically fluctuate with summer tax bill collection in July. The increase in deposits in the trailing twelve months is a combination of new business and recapture of deposit losses from the prior year.
• Asset quality remains strong with only 0.16% of nonperforming loans to total loans (excluding held for sale) as of June 30, 2024.

“As we navigate through the evolving economic landscape, our bank has achieved consistent growth due to our strong team, technology, and relationships we have with our customers. Our strategic efforts have improved our net interest margin, bolstered by the use of derivative instruments which contribute positive cashflow. These steps have strengthened our financial base, so that ChoiceOne is well positioned to handle the market’s fluctuations in different rate environments,” said Kelly Potes, Chief Executive Officer.

ChoiceOne reported net income of $6,586,000 and $12,220,000 for the three and six months ended June 30, 2024, compared to $5,213,000 and $10,846,000 for the same periods in 2023. Diluted earnings per share were $0.87 and $1.61 in the three and six months ended June 30, 2024, compared to $0.69 and $1.44 per share in the same periods in the prior year. ChoiceOne experienced modest growth in our loan portfolio and a slight reduction in deposit balances. Despite these fluctuations, both net income and net interest margin have increased largely due to the commencement of cash flows from our pay-fixed interest rate swaps.

As of June 30, 2024, total assets were $2.6 billion, an increase of $139.3 million compared to June 30, 2023. The growth is primarily attributed to an increase in core loans of $175.6 million, and an increase in cash of $24.2 million. This growth was offset by a $62.1 million reduction in securities during the same time period. ChoiceOne has actively managed its liquidity to support organic loan growth, strategically shifting from lower-yielding assets to higher-yielding loans. This is reflected in the loan growth observed since June 30, 2023.

Deposits, excluding brokered deposits, decreased $44.4 million or an annualized 8.3% in the second quarter of 2024 and increased $64.5 million or 3.2% during the twelve months since June 30, 2023. The decrease in deposits in the second quarter was largely public funds including schools and townships which historically fluctuate with summer tax bill collection in July. The increase in deposits in the trailing twelve months is a combination of new business and recapture of deposit losses from the prior year. 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. At June 30, 2024, total available borrowing capacity from all sources was $759.5 million. Uninsured deposits totaled $754.4 million or 35.5% of deposits at June 30, 2024.

Increases to short term interest rates have led to higher deposit costs, which rose to an annualized 1.56% in the second quarter of 2024, compared to an annualized 0.98% in the second quarter of 2023. As deposits reprice and customers shift to certificates of deposits and other interest-bearing products, this trend is likely to persist. Deposit costs have declined since the first quarter of 2024 due to positive cash flow from pay-fixed interest rate swaps, hedged against deposits, decreasing deposit expenses. 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 six months ended June 30, 2024 increased $1.1 million and $3.2 million compared to the same period in the prior year, due to increases in borrowing amounts and interest rates. Borrowings include $170 million from the BTFP and $40 million of FHLB borrowings at a weighted average fixed rate of 4.7%, with the earliest maturity in January 2025. Total cost of funds increased to an annualized 1.92% in the second quarter of 2024 compared to an annualized 2.0% in the first quarter of 2024 and an annualized 1.29% in the second quarter of 2023.

The provision for credit losses expense on loans was $272,000 in the second quarter of 2024, due in part to loan growth during the quarter. This was offset by a reversal of the provision for unfunded commitments leading to net provision for credit losses expense for the second quarter 2024 of $0. The ratio of the allowance for credit losses to total loans (excluding loans held for sale) was 1.12% on June 30, 2024 compared to 1.15% on June 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 0.16% as of June 30, 2024.

ChoiceOne uses interest rate swaps to manage interest rate exposure to certain fixed assets and variable rate liabilities. On June 30, 2024, 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 $23.6 million and an average remaining contract length of 7 to 8 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 pay a fixed coupon of 2.75% while receiving SOFR. Settlements from these swaps amounted to $974,000 for the second quarter of 2024 and were a contributing factor to the increase in net interest margin during the second quarter of 2024. Fully tax equivalent net interest margin excluding the swaps was 28 basis points lower than tax equivalent net interest margin reported for the second quarter of 2024.

Shareholders’ equity totaled $214.5 million as of June 30, 2024, up from $179.2 million as of June 30, 2023. This increase is due to increased retained earnings and an improvement in accumulated other compressive loss (AOCI) of $19.6 million compared to June 30, 2023. 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 increase in unrealized gain of the pay-fixed swap derivatives. ChoiceOne Bank remains “well-capitalized” with a total risk-based capital ratio of 13.2% as of June 30, 2024, compared to 12.7% on June 30, 2023.

Noninterest income increased $598,000 and $978,000 in the three and six months ended June 30, 2024, compared to the same periods in the prior year. The increase was largely due to an increase in customer service charges of $391,000 and $529,000 in the three and six months ended June 30, 2024 compared to the same period in 2023 and changes in the market value of equity securities in the three and six months ended June 30, 2024, compared to the same period in the prior year. In addition, ChoiceOne recognized earnings on a bank owned life insurance death benefit claim in the amount of $196,000 during the first quarter of 2024.

Noninterest expense increased by $705,000 or 5.2% and $394,000 or 1.4% in the three and six months ended June 30, 2024 compared to the same period in 2023. The increase in total noninterest expense was due to an increase in employee health insurance benefits and an increase to FDIC insurance and other costs related to inflationary pressures. This was offset by a decline in occupancy and equipment related to two branch closures during the first quarter of 2024. 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.

“I am very pleased with the results of the second quarter of 2024, showing an improving net interest margin and excellent credit metrics. Our experienced team has positioned ChoiceOne to grow our franchise, improve our technology, and offer a high level of service to customers. We remain committed to our communities, customers, and stakeholders and sincerely appreciate the trust they put in us as their local financial partner.” said Kelly Potes, Chief Executive Officer.

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.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, 2023.