ChoiceOne Reports Third Quarter 2023 Results

The cost of deposits has increased to 1.36% during the three months ended September 30, 2023, compared to 0.98% and 0.29% for the three months ended June 30, 2023 and September 30, 2022, respectively, due to rising short term interest rates and is expected to continue to increase as deposits reprice and customers migrate to CD products. ChoiceOne is actively managing these costs and expects rates paid on deposits to continue to lag the federal funds rate. Interest expense on borrowings for the three and nine months ended September 30, 2023, increased $2.5 million and $5.0 million, respectively, compared to the same periods in the prior year, due to increase in borrowing amounts and interest rates.  Borrowings include $160 million from the BTFP with a fixed rate of 4.71% through May 2024 and $20 million of FHLB borrowings with a fixed rate of 4.88% through July of 2025.  This funding structure has helped moderate interest expense increases in the third quarter as rates have risen.   Total cost of funds increased to 1.70% in the third quarter of 2023 compared to 1.29% in the second quarter of 2023 and 0.35% in the second quarter of 2022.

No provision for credit losses expense was incurred in the third quarter of 2023.  Core loan growth was offset by improvements in the Federal Open Market Committee ("FOMC") forecast for unemployment and GDP growth and a decrease in the unfunded loans and other commitments liability.  The ratio of the allowance for credit losses to total loans (excluding loans held for sale) was 1.14% compared to 1.15% on June 30, 2023.  Asset quality continues to remain strong, with annualized net loan charge-offs to average loans of 0.05% and nonperforming loans to total loans (excluding loans held for sale) of 0.14%.

With recent news of a strike of United Auto Workers, ChoiceOne performed a review of loans in the automotive sector.  ChoiceOne has total outstanding loans to businesses in the automotive sector of $50.2 million or 3.9% of core loans.  These are primarily Tier 2 and 3 suppliers, many of which serve multiple industries and manufacturers.  The average balance of the loans was $518,000, with no individual loan larger than $3 million.  All automotive loans were performing as of September 30, 2023.      

ChoiceOne uses interest rate swaps to manage interest rate exposure to certain fixed assets and variable rate liabilities.  On September 30, 2023, ChoiceOne had pay-fixed interest rate swaps with a total notional value of $401.0 million, a weighted average coupon of 3.07%, and a fair value of $29.9 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 5.31%, these forward starting swaps would contribute approximately $427,000 monthly starting in May 2024 which will 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 $285,000 monthly through April 2024, which was the remaining period of the agreements.

Shareholders' equity totaled $181.2 million as of September 30, 2023, up from $156.7 million as of September 30, 2022.  This increase is due to retained earnings increasing $6.8 million due to earnings and a reduction in accumulated other compressive loss (AOCI) of $16.5 million.  AOCI has improved compared to September 30, 2022, despite the rise in interest rates, due to the passage of time, the maturity of our securities portfolio, and an offsetting increase in unrealized gain of our pay-fixed swap derivatives.  ChoiceOne Bank remains "well-capitalized" with a total risk-based capital ratio of 12.7% as of September 30, 2023, compared to 12.8% on September 30, 2022.

Total noninterest income increased by $657,000 and $537,000 in the three and nine months ended September 30, 2023, compared to the same periods in the prior year.  The increase was largely due to losses in the securities markets which occurred during the prior year.  Gains on sales of loans was slightly better in the third quarter of 2023 compared to the third quarter of 2022; however, overall volume remains somewhat depressed due to a competitive housing market and higher mortgage rates. ChoiceOne has also seen steady increases in wealth management income after recent investments in the operation, including the opening of a dedicated wealth management office in Sparta, Michigan during the third quarter of 2023.

Total noninterest expense increased $1.0 million or 2.6%, in the nine months ended September 30, 2023 compared to the same period in 2022.  The modest increase in total noninterest expense was largely related to inflationary pressures on employee wages and benefits.  ChoiceOne continues to monitor expenses and looks to improve our efficiency through automation and use of digital tools.  Management continues to seek out ways to manage costs; however, staying ahead of technological advances and retaining top talent continue to be important in maintaining our competitive advantage.

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, 2022.

Condensed Balance Sheets (Unaudited)
(In thousands)		September 30, 2023				June 30, 2023				September 30, 2022
Cash and cash equivalents		$	144,673			$	76,810			$	51,494
Securities Held to Maturity			414,743				420,549				428,205
Securities Available for Sale			507,580				542,932				546,627
Loans held for sale			5,222				8,924				8,848
Loans to other financial institutions			23,763				38,838				70
Loans, net of allowance for loan losses			1,271,165				1,210,808				1,124,944
Premises and equipment			29,628				29,085				28,947
Cash surrender value of life insurance policies			44,788				44,510				44,033
Goodwill			59,946				59,946				59,946
Core deposit intangible			2,057				2,304				3,062
Other assets			70,631				49,020				67,353
Total Assets		$	2,574,196			$	2,483,726			$	2,363,529
Noninterest-bearing deposits		$	531,962			$	544,925			$	599,360
Interest-bearing deposits			1,551,995				1,490,093				1,557,294
Brokered deposits			49,238				51,370				-
Borrowings			180,000				160,000				-
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