CHOICEONE FINANCIAL SERVICES INC
For the period ended Jun 30, 2024. Filed Aug 14, 2024.
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A company's report for each of its first three quarters. The financial statements are not audited. It shows how the business has moved since the last annual report, and what management says changed.
Jun 30, 2024 · Filed Aug 14, 2024
COFS$36.69-0.2%Stored close · as of Nov 6, 2026
What changed in Management’s Discussion and Analysis?
Read the current filingPrevious report: 10-Q
Period ended 2024-03-31; filed 2024-05-07.
0000950170-24-054451
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of OperationsCurrent report: 10-Q
Period ended 2024-06-30; filed 2024-08-14.
0001140361-24-037183
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of OperationsThe baseline is this issuer’s latest earlier reporting period of the same form that was filed before the current report. A previous 10-Q is a different quarter, not a year-over-year comparison. Amendments are excluded.
Compared 86 previous paragraphs and 79 current paragraphs.
37 unchanged; 38 reworded; 4 added; 10 removed; 1 previous and 0 current paragraphs rearranged.
Tables are not compared: 7 previous and 22 current tables excluded. Dates, whitespace, punctuation and numbering changes are ignored; changes to financial figures remain significant.
A changed paragraph is not evidence that risk increased or decreased. An unchanged paragraph does not establish that risk stayed the same.
Added paragraphs (4)
Current report
RECENT EVENTS
Current report
On July 26, 2024, ChoiceOne completed an underwritten public offering of 1,380,000 shares of its common stock at a price to the public of $25.00 per share, including 180,000 shares of common stock sold pursuant to the underwriter’s option to purchase additional shares to cover over-allotments, which was exercised in full. The aggregate gross proceeds of the offering were approximately $34.5 million before deducting underwriting discounts and estimated offering expenses. The proceeds from the offering will qualify as tangible common equity and Tier 1 common equity. The Company intends to use the net proceeds of this offering for general corporate purposes including supplementing regulatory capital ratios and in conjunction with its announced merger with Fentura Financial, Inc.
Current report
On July 25, 2024, ChoiceOne and Fentura Financial, Inc. (“Fentura”), the parent company of The State Bank, announced the signing of a definitive merger agreement (the “Merger Agreement”) pursuant to which ChoiceOne and Fentura will merge in an all-stock transaction. The agreement was unanimously approved by the boards of directors of both companies. Under the terms of the merger agreement, each share of Fentura common stock outstanding immediately prior to completion of the merger will be converted into the right to receive 1.35 shares of ChoiceOne common stock. Once completed, the combination will create the third largest publicly traded bank in Michigan with approximately $4.3 billion in consolidated total assets and 56 offices in Western, Central and Southeastern Michigan. The proposed transaction is expected to close in the first quarter of 2025, subject to the satisfaction of customary closing conditions, including receipt of approval from Fentura and ChoiceOne shareholders and receipt of all necessary regulatory approvals.
Current report
Management performed the last annual assessment in November 2023 based on a qualitative assessment and determined that no further quantitative assessment was necessary. No material changes and no triggering events have occurred that indicated impairment from the valuation date through June 30, 2024.
Removed paragraphs (10)
Previous report
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Previous report
Adjusted to a fully tax-equivalent basis to facilitate comparison to the taxable interest-earning assets. The adjustment uses an incremental tax rate of 21%. The presentation of these measures on a tax-equivalent basis is not in accordance with GAAP, but is customary in the banking industry. These non-GAAP measures ensure comparability with respect to both taxable and tax-exempt loans and securities.
Previous report
Taxable securities include dividend income from Federal Home Loan Bank and Federal Reserve Bank stock.
Previous report
Loans include both loans to other financial institutions and loans held for sale.
Previous report
Non-accruing loan balances are included in the balances of average loans. Non-accruing loan average balances were $1.7 million and $1.4 million in the first quarter of 2024 and 2023, respectively.
Previous report
Interest on loans included net origination fees and accretion income related to acquired loans. Accretion income related to acquired loans was $390,000 and $471,000 in the first quarter of 2024 and 2023, respectively.
Previous report
The volume variance is computed as the change in volume (average balance) multiplied by the previous year’s interest rate. The rate variance is computed as the change in interest rate multiplied by the previous year’s volume (average balance). The change in interest due to both volume and rate has been allocated to the volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.
Previous report
Interest on nontaxable investment securities and loans has been adjusted to a fully tax-equivalent basis using an incremental tax rate of 21%.
Previous report
Loan growth was concentrated in non-owner occupied commercial real estate loans which grew $21.7 million in the first three months of 2024 and 1-4 family loans which grew $10.1 million. The growth in non-owner occupied CRE loans came from our loan production offices in Holland, Oakland, Wyoming, and Macomb, MI, as experienced lenders were hired there in the past 18 months. CRE growth consisted of increases in seasoned hospitality groups, apartment buildings in the Grand Rapids, Michigan market, and professional office space in suburban areas with long-term leases and low loan to value ratios. Growth in 1-4 family loans was due to the growth in our warehouse line of credit or loans to other financial institutions. This growth was partially offset by a $27.6 million decline in construction and development loans which experienced an acceleration in our funding cycle toward the close of 2023.
Previous report
Management concurred with the conclusion derived from the quantitative goodwill analysis as of the valuation date and determined that there were no material changes and that no triggering events had occurred that indicated impairment from the valuation date through March 31, 2024, and as a result that it is more likely than not that there was no goodwill impairment as of March 31, 2024.
Reworded paragraphs (38)
Previous wording
ChoiceOne reported net income of $5,634,000 for the three months ended March 31, 2024, compared to $5,633,000 for the same period in 2023. Diluted earnings per share were $0.74 in the three months ended March 31, 2024, compared to $0.75 per share in the same period in the prior year. During 2023 and 2024, earnings were negatively affected by increased deposit costs, and partially offset by organic loan growth and higher interest income on loans due to higher interest rates.
Current wording
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.
Previous wording
As of March 31, 2024, total assets were $2.7 billion, an increase of $260.8 million compared to March 31, 2023. The growth is primarily attributed to an increase in gross loans, which includes a $178.0 million increase in core loans (total loans held for investment less loans to other financial institutions), an increase in cash of $94.9 million, and a $30.0 million increase in loans to other financial institutions over the twelve month period ending March 31, 2024. However, this growth was tempered by a $57.5 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 March 31, 2023.
Current wording
As of June 30, 2024, total assets were $2.6 billion, an increase of $46.4 million compared to December 31, 2023. The growth was due to an increase in cash of $45.6 million, modest growth in core loans (total loans held for investment less loans to other financial institutions) of $9.7 million and an increase in loans to other financial institutions of $17.2 million over the six month period ending June 30, 2024. However, this growth was partialy offset by a $38.2 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.
Previous wording
Deposits, excluding brokered deposits, increased by $45.3 million or an annualized 8.6% in the first quarter of 2024 and $75.8 million or 3.7% compared to March 31, 2023. Deposits grew in the first quarter of 2024 due to new business, recapture of deposit losses, and some seasonality in municipal balances. 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 March 31, 2024, total available borrowing capacity from all sources was $960.7 million. Uninsured deposits totaled $792.3 million or 37.0% of deposits at March 31, 2024.
Current wording
Deposits, excluding brokered deposits, decreased $44.4 million or an annualized 8.3% in the second quarter of 2024 and remained flat during the first half of 2024. 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. 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.
Previous wording
The increase in short term interest rates led to higher deposit costs, which rose to an annualized 1.65% in the first quarter of 2024, compared to an annualized 1.57% in the previous quarter and an annualized 0.62% in the first quarter of 2023. As deposits reprice and customers shift to certificate of deposits and other interest bearing products; this trend is likely to persist. 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 months ended March 31, 2024 increased $1.8 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 2.0% in the first quarter of 2024 compared to an annualized 1.91% in the fourth quarter of 2023 and an annualized 0.79% in the first quarter of 2023.
Current wording
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 periods 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 decreased to an annualized 1.92% in the second quarter of 2024 compared to an annualized 2.0% in the first quarter of 2024, due to the aforementioned swap settlements, and increased compared to an annualized 1.29% in the second quarter of 2023.
Previous wording
The annualized return on average assets and annualized return on average shareholders’ equity were 0.86% and 11.26%, respectively, for the first quarter of 2024, compared to an annualized 0.94% and an annualized 13.42%, respectively, for the same period in 2023. The decrease in the return on average assets and return on average shareholders' equity in the three months ended March 31, 2024, was caused by an increase in both average assets of $229.7 million and shareholders’ equity of $32.2 million, respectively.
Current wording
The annualized return on average assets and annualized return on average shareholders’ equity were 0.99% and 12.50%, respectively, for the second quarter of 2024, compared to an annualized 0.86% and an annualized 12.13%, respectively, for the same period in 2023. The annualized return on average assets and annualized return on average shareholders’ equity were 0.93% and 11.91%, respectively, for the first six months of 2024, compared to 0.90% and 12.75%, respectively, for the same period in 2023.
Previous wording
Cash dividends of $2.0 million or $0.27 per share were declared in the first quarter of 2024, compared to $2.0 million or $0.26 per share in thefirst quarter of 2023. The cash dividend payout percentage was 36.2% for the first three months of 2024, compared to 34.7% in the same period in the prior year.
Current wording
Cash dividends of $2.0 million or $0.27 per share were declared in the second quarter of 2024, compared to $2.0 million or $0.26 per share in the second quarter of 2023. Cash dividends declared in the first six months of 2024 were $4.1 million or $0.54 per share, compared to $3.9 million or $0.52 per share in the same period during the prior year. The cash dividend payout percentage was 33.4% for the first half of 2024, compared to 36.1% in the same period in the prior year.
Previous wording
Tables 1 and 2 on the following pages provide information regarding interest income and expense for the three months ended March 31, 2024 and 2023. Table 1 documents ChoiceOne’s average balances and interest income and expense, as well as the average rates earned or paid on assets and liabilities. Table 2 documents the effect on interest income and expense of changes in volume (average balance) and interest rates. These tables are referred to in the discussion of interest income, interest expense and net interest income.
Current wording
Tables 1 and 2 on the following pages provide information regarding interest income and expense for the three and six months ended June 30, 2024 and 2023. Table 1 documents ChoiceOne’s average balances and interest income and expense, as well as the average rates earned or paid on assets and liabilities. Table 2 documents the effect on interest income and expense of changes in volume (average balance) and interest rates. These tables are referred to in the discussion of interest income, interest expense and net interest income.
Previous wording
Tax-equivalent net interest income decreased $539,000 in the first quarter of 2024, compared to the same period in 2023. The primary factor contributing to the reduction in interest income is the increase in deposit costs, as customers transfer their funds to accounts and products that offer higher interest rates. This was partially offset by higher interest rates on new loans. Tax equivalent net interest margin decreased 35 basis points in the first quarter of 2024 to 2.74%, compared to the same period in 2023. GAAP based net interest margin decreased 35 basis points in the first quarter of 2024 to 2.67%, compared to the same period in 2023. Tax-equivalent net interest margin has increased 2 basis points in the first quarter of 2024 compared to the fourth quarter of 2023
Current wording
Tax-equivalent net interest income increased $2.3 million and $1.7 million in the three and six months ended June 30, 2024, compared to the same periods in 2023. The primary factor contributing to the increase in interest income is the higher interest rates on new loans and the impact of fixed rate swaps (see note 8). Tax equivalent net interest margin increased 15 basis points in the three months ended June 30, 2024 to 3.01%, compared to the same period in 2023. GAAP based net interest margin increased 16 basis points in the three months ended June 30, 2024 to 2.95%, compared to the same period in 2023. Tax equivalent net interest margin decreased 7 basis points in the first six months of 2024 to 2.88%, compared to the same period in 2023. GAAP based net interest margin decreased 7 basis points in the first six months of 2024 to 2.81%, compared to the same period in 2023.
Previous wording
The following table presents the annualized cost of deposits and the annualized cost of funds for the three months ended March 31, 2024 and March 31, 2023.
Current wording
The following table presents the annualized cost of deposits and the annualized cost of funds for the three and six months ended June 30, 2024 and 2023.
Previous wording
ChoiceOne has experienced substantial loan growth from March 31, 2023 to March 31, 2024, leading to an increase in interest income from loans of $5.9 million in the three months ended March 31, 2024, compared to the same period in the prior year. Average loans grew $210.3 million in the three ended March 31, 2024, compared to the same period in the prior year. In addition, the average rate earned on loans increased 90 basis points in the three months ended March 31, 2024, compared to the same period in the prior year. Interest income on loans for the first three months of 2024 was reduced by $665,000 due to amortization expense related to the March 2023 sale of the pay floating swap derivative and a decline in accretion income related to acquired loans of $81,000, compared to the same period in 2023.
Current wording
ChoiceOne has experienced loan growth, leading to an increase in interest income from loans of $6.0 million and $11.9 million in the three and six months ended June 30, 2024, respectively, compared to the same periods in the prior year. Average loans grew $217.1 million and $213.7 million in the three and six months ended June 30, 2024, respectively, compared to the same periods in the prior year. In addition, the average rate earned on loans increased 90 basis points and 94 basis points in the three and six months ended June 30, 2024, respectively, compared to the same period in the prior year. Interest income on loans for the three and six months of 2024 was increased by $512,000 and $591,000, respectively, compared to the same periods in 2023 due to amortization expense related to the March 2023 sale of the pay floating swap derivative and a decline in accretion income related to acquired loans of $165,000 and $246,000, respectively, compared to the same periods in 2023.
Previous wording
The average balance of total securities decreased $57.6 million in the three months ended March 31, 2024, compared to the same period in the prior year. The decrease is due to paydowns and a decline in the fair value of available for sale securities. The average rate earned on securities increased 31 basis points in the three months ended March 31, 2024, compared to the same period in the prior year. Interest income on securities for the first three months of 2024 was reduced by $222,000 due to amortization expense related to the March 2023 sale of the pay floating swap derivative.
Current wording
The average balance of total securities decreased $66.9 million and $59.7 million for the three and six months ended June 30, 2024, respectively, compared to the same periods in the prior year. The decrease is due to paydowns and a decline in the fair value of available for sale securities. The average rate earned on securities increased 23 basis points and 26 basis points for the three and six months ended June 30, 2024, respectively, compared to the same periods in the prior year. Interest income on securities increased by $171,000 for the three months ended June 30, 2024 compared to three months ended June 30, 2023 due to amortization expense related to the March 2023 sale of the pay floating swap derivative ending in April 2024.
Previous wording
Interest expense increased $7.6 million in the first three months of 2024, compared to the same period in the prior year. The average rate paid on interest bearing-demand deposits and savings deposits increased 81 basis points in the three months ended March 31, 2024, compared to the same period in the prior year. This was offset by the decline in the average balance of interest bearing-demand deposits and savings deposits, of $60.6 million during the first three months of 2024. The increase in the average balance of certificates of deposits, excluding brokered deposits, of $129.8 million during the first three months of 2024, combined with a 229 basis point increase in the rate paid on certificates of deposits, excluding brokered deposits, during the first three months of 2024, compared to the same period in the prior year, led to an increase in interest expense of $2.8 million during the first three months of 2024.
Current wording
Interest expense increased $4.3 million and $11.9 million in the three and six months ended June 30, 2024, respectively, compared to the same periods in the prior year. The average rate paid on interest bearing-demand deposits and savings deposits increased 42 basis points and 62 basis points in the three and six months ended June 30, 2024, respectively, compared to the same periods in the prior year. This was aided by the increase in the average balance of interest bearing-demand deposits and savings deposits, of $21.6 million for the three months ended June 30, 2024 and offset by the decline in the average balance of interest bearing-demand deposits and savings deposits, of $19.2 million for the six months ended June 30, 2024, compared to the same time periods in the prior year. The increase in the average balance of certificates of deposit of $106.5 million and $118.0 million in the three and six months ended June 30, 2024, respectively, combined with a 132 basis point and 179 basis point increase in the rate paid on certificates of deposits in the three and six months ended June 30, 2024, respectively, compared to the same periods in the prior year, led to an increase in interest expense of $2.1 million and $4.9 million during the respective time periods.
Previous wording
In order to bolster liquidity, ChoiceOne borrowed a total of $170.0 million from the Bank Term Funding Program ("BTFP") during the second and fourth quarters of 2023 and held $42.0 million in brokered deposits and $40.0 million in FHLB advances on March 31, 2024. The net effect of these additional borrowed funds and brokered deposits was an increase in interest expense of $2.1 million for the first three months of 2024, compared to the same period in 2023.
Current wording
In order to bolster liquidity, ChoiceOne borrowed a total of $170.0 million from the Bank Term Funding Program (“BTFP”) during the second and fourth quarters of 2023 and held $27.2 million in brokered deposits and $40.0 million in FHLB advances on June 30, 2024. The net effect of these additional borrowed funds and brokered deposits was an increase in interest expense of $606,000 and $2.7 million, respectively, for the three and six months ended June 30, 2024, compared to the same periods in 2023.
Previous wording
The ACL consists of general and specific components. The general component covers loans collectively evaluated for credit loss and is based on peer historical loss experience adjusted for current and forecasted factors. Management's adjustment for current and forecasted factors is based on trends in delinquencies, trends in charge-offs and recoveries, trends in the volume of loans, changes in underwriting standards, trends in loan review findings, the experience and ability of lending staff, and a reasonable and supportable economic forecast described further below.
Current wording
The allowance for credit losses (“ACL”) consists of general and specific components. The general component covers loans collectively evaluated for credit loss and is based on peer historical loss experience adjusted for current and forecasted factors. Management’s adjustment for current and forecasted factors is based on trends in delinquencies, trends in charge-offs and recoveries, trends in the volume of loans, changes in underwriting standards, trends in loan review findings, the experience and ability of lending staff, and a reasonable and supportable economic forecast described further below.
Previous wording
Loans individually evaluated for credit losses increased by $400,000 to $2.5 million during the first quarter of 2024, and the ACL related to these individually evaluated loans increased by $202,000 during the same period largely due to two recently classified collateral dependent retail and consumer loan relationships.
Current wording
Loans individually evaluated for credit losses increased by $413,000 to $2.5 million during the first half of 2024, and the ACL related to these individually evaluated loans increased by $27,000 during the same period.
Previous wording
Nonperforming loans, which includes Other Real Estate Owned ("OREO") but excludes performing troubled loan modifications ("TLM"), remained historically low at $1.7 million on March 31, 2024 compared to $1.7 million as of December 31, 2023, and $1.7 million as of March 31, 2023. The ACL was 1.13% of total loans, excluding loans held for sale, at March 31, 2024, compared to 1.11% on December 31, 2023, and 1.24% on March 31, 2023. The liability for expected credit losses on unfunded loans and other commitments was $1.8 million on March 31, 2024, compared to $2.2 million on December 31, 2023, and $3.0 million on March 31, 2023.
Current wording
Nonperforming loans, which includes Other Real Estate Owned (“OREO”) but excludes performing troubled loan modifications (“TLM”), remained low at $2.4 million on June 30, 2024, compared to $1.8 million as of December 31, 2023, and $1.8 million as of June 30, 2023. The ACL was 1.12% of total loans, excluding loans held for sale, at June 30, 2024, compared to 1.11% on December 31, 2023, and 1.15% on June 30, 2023. The liability for expected credit losses on unfunded loans and other commitments was $1.5 million on June 30, 2024, compared to $2.2 million on December 31, 2023, and $3.2 million on June 30, 2023.
Previous wording
Charge-offs and recoveries for respective loan categories for the three months ended March 31, 2024 and 2023 were as follows:
Current wording
Charge-offs and recoveries for respective loan categories for the six months ended June 30, 2024 and 2023 were as follows:
Previous wording
Net charge-offs were $51,000 during the first three months of 2024, compared to net charge-offs of $27,000 during the same period in 2023. Net charge-offs for checking accounts during the first three months of 2024 were $31,000 compared to $56,000 for the same period in the prior year. Annualized net charge-offs as a percentage of average loans were 0.01% for both the first quarter of 2024 and 2023.
Current wording
Net charge-offs were $208,000 during the first six months of 2024, compared to net charge-offs of $95,000 during the same period in 2023. Net charge-offs for checking accounts during the first six months of 2024 were $91,000 or an annualized $182,000 compared to $100,000 or an annualized $200,000 for the same period in the prior year. Annualized net loan charge-offs as a percentage of average loans were 0.04% for the second quarter of 2024 compared to 0.02% for the same period in the prior year.
Previous wording
The provision for credit losses on loans was $403,000 during the first three months of 2024, compared to $309,000 in the same period in the prior year. The provision expense was deemed necessary due to the increase in reserve for collateral dependent loans and an increase in qualitative factors related to the value of underlying collateral for collateral dependent non owner occupied loans and consumer loans.
Current wording
The provision for credit losses on loans was $675,000 during the first six months of 2024, compared to release of provision of $106,000 in the same period in the prior year. The provision expense was deemed necessary due to loan growth.
Previous wording
The loan provision expense was offset by the decrease in unfunded commitments provision expense of $403,000 in first three months of 2024, due to changes in mix and a decline in balance. Total unfunded commitments decreased $59.3 million in the first quarter of 2024 compared to December 31, 2023.
Current wording
The loan provision expense was offset by the decrease in unfunded commitments provision expense of $675,000 in the first six months of 2024, due to changes in mix, historical average funding rate declines, and a decline in balance. Total unfunded commitments decreased $15.9 million in the first six months of 2024 compared to December 31, 2023.
Previous wording
Net provision for credit losses was $0 for the first quarter of 2024.
Current wording
Net provision for credit losses was $0 for the second quarter and first six months of 2024.
Previous wording
Noninterest income increased $380,000 in the three months ended March 31, 2024, compared to the same period in the prior year. The increase was largely due to earnings on a bank owned life insurance death benefit claim in the amount of $196,000 and an increase in customer service charges of $138,000 in the first quarter of 2024 compared to the same period in 2023. These increases were offset by changes in the market value of equity securities in the three months ended March 31, 2024, compared to the same period in the prior year.
Current wording
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, respectively, compared to the same periods in 2023, and a decline in the change in market value of equity securities in the three and six months ended June 30, 2024, compared to the same periods 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.
Previous wording
Noninterest expense declined by $311,000 in the three months ended March 31, 2024 compared to the same period in 2023. The decline in total noninterest expense was due to a decline in employee health insurance benefits and a decline in occupancy and equipment related to two branch closures during the quarter. ChoiceOne anticipates a low impact on customer retention related to the branch closures and expects to save around $700,000 annually from this decision. This was offset by increases to FDIC insurance and other costs related to inflationary pressures. 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.
Current wording
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, respectively, compared to the same periods in 2023. The increase in total noninterest expense was due to an increase in employee health insurance benefits, an increase to FDIC insurance, and other costs related to inflationary pressures. This was partially offset by a decline in occupancy and equipment expense related to two branch closures which occurred 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.
Previous wording
Income tax expense was $1.2 million in thefirst three months of 2024 compared to $1.0 million for the same period in 2023. The effective tax rate was 17.6% for the first three months of 2024 compared to 15.5% for the same period in 2023. In the three months ended March 31, 2024, non taxable municipal interest decreased and disallowed interest expense increased compared to the first three months of 2023.
Current wording
Income tax expense was $1.6 million and $2.8 million in the three and six months ended June 30, 2024, respectively, compared to $1.0 million and $2.1 million for the same periods in 2023. The effective tax rate was 19.4% and 18.6% for the three and six months ended June 30, 2024, respectively, compared to 16.6% and 16.0% for the same periods in 2023. During the first six months of 2024, disallowed interest expense increased compared to the same period in 2023.
Previous wording
Total available for sale securities on March 31, 2024, were $504.6 million compared to $514.6 million on December 31, 2023, with the decrease caused by $5.9 million of principal repayments, calls and maturities. The unrealized loss on securities available for sale declined by $2.2 million in the first three months of 2024. Total held to maturity securities on March 31, 2024, were $398.0 million compared to $408.0 million on December 31, 2023. ChoiceOne's held to maturity securities declined during the first three months of 2024, due to $9.5 million of principal repayments, calls and maturities.
Current wording
Total available for sale securities on June 30, 2024 were $491.7 million compared to $514.6 million on December 31, 2023, with the decrease caused by $18.0 million of principal repayments, calls and maturities. The unrealized loss on securities available for sale declined by $4.0 million in the first six months of 2024. Total held to maturity securities on June 30, 2024 were $392.7 million compared to $408.0 million on December 31, 2023. ChoiceOne’s held to maturity securities declined during the first six months of 2024 due to $15.1 million of principal repayments, calls and maturities.
Previous wording
At March 31, 2024, ChoiceOne had $126.3 million in unrealized losses on its investment securities, including $67.5 million in unrealized losses on available for sale securities and $58.8 in unrealized losses on held to maturity securities. Unrealized losses on corporate and municipal bonds have not been recognized into income because management believes the issuers are of high credit quality, and management does not intend to sell prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions. The issuers continue to make timely principal and interest payments on the bonds. The fair value is expected to recover as the bonds approach maturity.
Current wording
At June 30, 2024, ChoiceOne had $126.6 million in unrealized losses on its investment securities, including $65.7 million in unrealized losses on available for sale securities, $60.1 million in unrealized losses on held to maturity securities, and $757,000 in unrealized losses on equity securities. Unrealized losses on corporate and municipal bonds have not been recognized into income because management believes the issuers are of high credit quality, and management does not intend to sell prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions. The issuers continue to make timely principal and interest payments on the bonds. The fair value is expected to recover as the bonds approach maturity.
Previous wording
Equity securities included a money market preferred security ("MMP") of $1.0 million and common stock of $6.6 million as of March 31, 2024. As of December 31, 2023, equity securities included a MMP of $1.0 million and common stock of $6.5 million.
Current wording
Equity securities included a money market preferred security (“MMP”) of $1.0 million and common stock of $6.5 million as of June 30, 2024. As of December 31, 2023, equity securities included a MMP of $1.0 million and common stock of $6.5 million.
Previous wording
Average loan balances increased to $1.41 billion in the first quarter of 2024 compared to $1.36 billion in the fourth quarter of 2023 and $1.20 billion in the first quarter of 2023. Core loans decreased by $2.7 million or 0.8% on an annualized basis during the first quarter of 2024 and grew $178.0 million or 14.7% since March 31, 2023. Loans to other financial institutions were $30.0 million as of March 31, 2024, compared to $19.4 million and $0 as of December 31, 2023 and March 31, 2023, respectively. Loans to other financial institutions is comprised of a warehouse line of credit to facilitate mortgage loan originations and the interest rate fluctuates with the national mortgage market. This balance is short term in nature with an average life of under 30 days. Management believes the short-term structure and low credit risk of this asset is advantageous in the current rate environment. Loan interest, including fee income increased $5.9 million in the first quarter of 2024 compared to the same period in 2023.
Current wording
Average loan balances increased to $1.44 billion in the second quarter of 2024 compared to $1.36 billion in the fourth quarter of 2023 and $1.22 billion in the second quarter of 2023. Core loans grew organically by $12.4 million or 3.6% on an annualized basis during the second quarter of 2024 and $9.7 million or 1.4% on an annualized basis since December 31, 2023. Loan growth during the first six months of 2024 was concentrated in 1-4 Family loans which grew $23.5 million and Non-Owner Occupied CRE loans, which grew by $20.4 million. The growth in 1-4 Family loans was largely related to growth in loans to other financial institutions which were $36.6 million as of June 30, 2024, compared to $19.4 million as of December 31, 2023. Loans to other financial institutions is comprised of a warehouse line of credit to facilitate mortgage loan originations and the interest rate fluctuates with the national mortgage market. This balance is short term in nature with an average life of under 30 days. Management believes the short-term structure and low credit risk of this asset is advantageous in the current rate environment. Loan interest including fee income increased $2.2 million and $6.0 million in the three months ended June 30, 2024 compared to the three months ended December 31, 2023 and the three months ended June 30, 2023, respectively.
Previous wording
During the first three months of 2024 and 2023, ChoiceOne recorded accretion income related to acquired loans in the amount of $390,000 and $471,000, respectively. Remaining credit and yield mark on acquired loans from the mergers with County Bank Corp. and Community Shores will accrete into income as the acquired loans mature. The remaining yield mark on acquired loans from the mergers with County Bank Corp. and Community Shores totaled $2.1 million as of March 31, 2024.
Current wording
During the first six months of 2024 and 2023, ChoiceOne recorded accretion income related to acquired loans in the amount of $669,000 and $916,000, respectively. Remaining credit and yield mark on acquired loans from the mergers with County Bank Corp. and Community Shores will accrete into income as the acquired loans mature. The remaining yield mark on acquired loans from the mergers with County Bank Corp. and Community Shores totaled $1.8 million as of June 30, 2024.
Previous wording
The balance of nonaccrual loans in the first three months of 2024 is primarily made up of residential mortgage loans. Management believes the ACL allocated to its nonperforming loans was sufficient at March 31, 2024.
Current wording
The balance of nonaccrual loans in the first six months of 2024 is primarily made up of residential mortgage loans. Management believes the ACL allocated to its nonperforming loans was sufficient at June 30, 2024.
Previous wording
Deposits, excluding brokered deposits, increased by $45.3 million or an annualized 8.6% in the first quarter of 2024 and $75.8 million or 3.7% compared to March 31, 2023. Deposits grew in the first quarter of 2024 due to new business, recapture of deposit losses, and some seasonality in municipal balances. The increase in short term interest rates led to higher deposit costs, which rose to an annualized 1.65% in the first quarter of 2024, compared to an annualized 1.57% in the fourth quarter of 2023, and an annualized 0.62% in the first quarter of 2023. As deposits reprice and customers shift to certificate of deposits and other interest bearing products; this trend is likely to persist. ChoiceOne is taking active measures to control these costs and expects to pay lower rates on deposits than the federal funds rate.
Current wording
Deposits, excluding brokered deposits, were flat as of June 30, 2024 compared to December 31, 2023 and increased $64.5 million or 3.2% compared to June 30, 2023. Increases to short term interest rates have led to higher annualized deposit costs of 1.56% in the second quarter of 2024. The second quarter of 2024 deposit costs were flat compared to an annualized 1.57% in the fourth quarter of 2023, but rose 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. The apparent leveling off of deposit costs since the end of the fourth quarter of 2023 is due to positive cash flow from pay-fixed interest rate swaps, hedged against deposits, decreasing deposit expenses. ChoiceOne had an annualized cost of funds of 1.92% in the second quarter of 2024 compared to an annualized 1.91% in the fourth quarter of 2023 and an annualized 1.29% in the second quarter of 2023. ChoiceOne is taking active measures to control these costs and expects to pay lower rates on deposits than the federal funds rate.
Previous wording
Uninsured deposits totaled $792.3 million or 37.0% of deposits on March 31, 2024 compared to $769.7 million, or 36.3% of total deposits at December 31, 2023. At March 31, 2024, total available borrowing capacity from all sources was $960.7 million, which exceeds uninsured deposits.
Current wording
Uninsured deposits totaled $754.4 million or 35.5% of deposits on June 30, 2024 compared to $769.7 million, or 36.3% of total deposits at December 31, 2023. At June 30, 2024, total available borrowing capacity from all sources was $759.5 million, which exceeds uninsured deposits.
Previous wording
At March 31, 2024, ChoiceOne has borrowed $170 million from the Federal Reserve’s Bank Term Funding Program (BTFP). This program provides a 1-year term at a fixed rate with the ability to prepay at any time without penalty. The interest rate on the BTFP borrowings as of March 31, 2024 was 4.76% and fixed through January of 2025. Collateral pledged is U.S. Treasuries, agency debt and mortgage-backed securities valued at par. At March 31, 2024 ChoiceOne had $40 million of borrowings from the FHLB with a weighted average rate of 4.58% with maturities through 2026. Total cost of funds increased to an annualized 2.0% in the first quarter of 2024 compared to an annualized 1.91% in the fourth quarter of 2023 and an annualized 0.79% in the first quarter of 2023.
Current wording
At June 30, 2024, ChoiceOne has borrowed $170 million from the Federal Reserve’s Bank Term Funding Program (BTFP). This program provides a 1-year term at a fixed rate with the ability to prepay at any time without penalty. The interest rate on the BTFP borrowings as of June 30, 2024 was 4.76% and fixed through January of 2025. Collateral pledged is U.S. Treasuries, agency debt and mortgage-backed securities valued at par. At June 30, 2024 ChoiceOne had $40 million of borrowings from the FHLB with a weighted average rate of 4.58% with maturities through 2026. Total cost of funds decreased to an annualized 1.92% in the second quarter of 2024 compared to an annualized 2.0% in the first quarter of 2024 and increased compared to an annualized 1.29% in the second quarter of 2023.
Previous wording
Shareholders’ equity totaled $206.8 million as of March 31, 2024, up from $168.7 million as of March 31, 2023. This increase is due to increased retained earnings and an improvement in accumulated other compressive loss (AOCI) of $23.6 million compared to March 31, 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 on the pay-fixed swap derivatives. ChoiceOne Bank remains “well-capitalized” with a total risk-based capital ratio of 12.6% as of March 31, 2024, compared to 13.0% on March 31, 2023.
Current wording
Shareholders’ equity totaled $214.5 million as of June 30, 2024, up from $195.6 million and $179.2 million as of December 31, 2023 and June 30, 2023, respectively. This increase is due to increased retained earnings and an improvement in accumulated other compressive loss (AOCI) of $10.3 million and $19.6 million compared to December 31, 2023 and June 30, 2023, respectively. 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 12.4% and 12.7% on December 31, 2023 and June 30, 2023, respectively.
Previous wording
ChoiceOne uses interest rate swaps to manage interest rate exposure to certain fixed assets and variable rate liabilities. On March 31, 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 $20.2 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 will pay a fixed coupon of 2.75% while receiving SOFR starting in late April 2024. At the SOFR rate on March 31, 2024 of 5.34%, these forward starting swaps would contribute approximately $432,000 monthly, which will partially 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 $300,000 monthly through April 2024, which was the remaining period of the agreements. The effect of these two items will increase net interest income by approximately $732,000 monthly starting in May 2024.
Current wording
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. Fair value was $18.4 million shown net of tax in AOCI at June 30, 2024. Included in the total is $200.0 million of pay-fixed, receive floating interest rate swaps used to hedge interest bearing liabilities. These swaps pay a fixed coupon of 2.75% while receiving SOFR. Settlements from these swaps amounted to $974,000 for the three and six months ended June 30, 2024, and were a contributing factor to the increase in net interest margin during the second quarter of 2024.
Previous wording
Net cash provided by operating activities was $15.8 million for the three months ended March 31, 2024 compared to $9.2 million in the same period in 2023. The change was due to the change in other liabilities, partially offset by lower net proceeds from loan sales in 2024 compared to 2023. Net cash provided by investing activities was $7.1 million for the three months ended March 31, 2024 compared to $18.9 million used in the same period in 2023. The change was due in part to a decrease in net loan originations that led to cash used of $8.0 million in the first three months of 2024 compared to $20.7 million used in the same period during the prior year. Net maturities, payments and calls of securities was $15.4 million for the three months ended March 31, 2024 compared to $10.0 million used in the same period in 2023. Net cash provided by financing activities was $71.8 million for the three months ended March 31, 2024, compared to $21.0 million in the same period in the prior year. ChoiceOne had $63.8 million in deposit growth in the first three months of 2024 compared to a decrease of $12.1 million in the same period in 2023. ChoiceOne also increased borrowing by $10.0 million in the first three months of 2024 compared to an increase of $35.0 million in the same period during the prior year.
Current wording
Net cash provided by operating activities was $31.1 million for the six months ended June 30, 2024 compared to $25.2 million in the same period in 2023. The change was due to the change in net income, proceeds from loan sales and other liabilities, partially offset by other assets in 2024 compared to 2023. Net cash provided by investing activities was $4.0 million for the six months ended June 30, 2024 compared to $66.9 million used in the same period in 2023. The change was due to a decrease in net loan originations that led to cash used of $27.2 million in the first six months of 2024 compared to $74.6 million used in the same period during the prior year. Net maturities, payments and calls of available for sale and held to maturity securities was $33.0 million for the six months ended June 30, 2024 compared to $20.3 million in the same period in 2023. Net cash provided by financing activities was $10.5 million for the six months ended June 30, 2024, compared to $74.6 million in the same period in the prior year. ChoiceOne had $4.6 million in deposit growth in the first six months of 2024 compared to a decrease of $31.6 million in the same period in 2023. ChoiceOne also increased borrowing by $10.0 million in the first six months of 2024 compared to an increase of $110.0 million in the same period during the prior year.
Previous wording
Liquidity risk deals with ChoiceOne's ability to meet its cash flow requirements. These requirements include depositors desiring to withdraw funds and borrowers seeking credit. Longer-term liquidity needs may be met through core deposit growth, maturities of and cash flows from investment securities, normal loan repayments, advances from the FHLB and the Federal Reserve Bank, brokered certificates of deposit, and income retention. ChoiceOne had $170.0 million in outstanding borrowings from the BTFP as of March 31, 2024. ChoiceOne had $40.0 million in outstanding borrowings at the FHLB as of March 31, 2024. The acceptance of brokered certificates of deposit is not limited as long as the Bank is categorized as “well capitalized” under regulatory guidelines. At March 31, 2024, total available borrowing capacity from the FHLB and the Federal Reserve Bank was $960.7 million.
Current wording
Liquidity risk deals with ChoiceOne’s ability to meet its cash flow requirements. These requirements include depositors desiring to withdraw funds and borrowers seeking credit. Longer-term liquidity needs may be met through core deposit growth, maturities of and cash flows from investment securities, normal loan repayments, advances from the FHLB and the Federal Reserve Bank, brokered certificates of deposit, and income retention. ChoiceOne had $170.0 million in outstanding borrowings from the BTFP as of June 30, 2024. ChoiceOne had $40.0 million in outstanding borrowings at the FHLB as of June 30, 2024. The acceptance of brokered certificates of deposit is not limited as long as the Bank is categorized as “well capitalized” under regulatory guidelines. At June 30, 2024, total available borrowing capacity from the FHLB and the Federal Reserve Bank was $759.5 million.
Previous wording
ChoiceOne continues to review its liquidity management and has taken steps in an effort to ensure adequacy. These steps include limiting bond purchases in the first three months of 2024, pledging securities to FHLB and the Federal Reserve Bank in order to increase borrowing capacity and using alternative funding sources such as brokered deposits.
Current wording
ChoiceOne continues to review its liquidity management and has taken steps in an effort to ensure adequacy. These steps include limiting bond purchases in the first six months of 2024, pledging securities to FHLB and the Federal Reserve Bank in order to increase borrowing capacity and using alternative funding sources such as brokered deposits.
Rearranged previous paragraphs (1)
Previous report — wording carried elsewhere
On January 1, 2023, ChoiceOne adopted ASU 2016-13 CECL which caused an increase in the allowance for credit losses ("ACL") of $7.2 million. The large increase was partially due to the economic environment and the nature of the CECL calculation. Approximately 20% of this increase was related to the migration of purchased loans into the portfolio assessed by the CECL calculation. ChoiceOne also booked a liability for expected credit losses on unfunded loans and other commitments of $3.3 million related to the adoption of CECL. These unfunded loans are open credit lines with current customers and loans approved by ChoiceOne but not funded. The increase in the ACL and the cost of the liability resulted in a decrease in the retained earnings account on our Consolidated Balance Sheet equal to the after-tax impact, with the tax impact portion being recorded in deferred taxes in our Consolidated Balance Sheet in accordance with FASB guidance.