ChoiceOne Reports Fourth Quarter and Year End 2024 Results

SPARTA, Mich., Jan. 22, 2025 /PRNewswire/ -- ChoiceOne Financial Services, Inc. ("ChoiceOne", NASDAQ:COFS), the parent company for ChoiceOne Bank, reported financial results for the quarter ended December 31, 2024.

Highlights

• ChoiceOne reported net income of $7,159,000 and $26,727,000 for the three and twelve months ended December 31, 2024, compared to $5,293,000 and $21,261,000 for the same periods in 2023, representing growth of 35.3% and 25.7%, respectively. Net income adjusted for merger related expenses was $7,532,000 and $27,733,000 for the three and twelve months ended December 31, 2024.
• Diluted earnings per share were $0.79 and $3.25 in the three and twelve months ended December 31, 2024, compared to $0.70 and $2.82 per share in the same periods in the prior year. The sale of 1,380,000 shares of common stock during the third quarter of 2024 negatively impacted diluted earnings per share for 2024. Diluted earnings per share adjusted for merger expenses were $0.83 and $3.37 in the three and twelve months ended December 31, 2024.
• GAAP Net interest margin in the fourth quarter of 2024 decreased to 2.98%, compared to 3.17% in the third quarter of 2024, and increased compared to 2.66% in the fourth quarter of 2023. GAAP net interest income was $19.3 million in the fourth quarter of 2024 compared to $16.6 million in the fourth 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 $40.3 million or 11.0% on an annualized basis during the fourth quarter of 2024 and $114.5 million or 8.2% for the year ended December 31, 2024. Loan interest income increased $3.8 million in the fourth quarter of 2024 and $21.2 million in the year ended December 31, 2024 compared to the same periods in 2023, respectively.
• Deposits, excluding brokered deposits, declined by $24.0 million or an annualized 4.4% in the fourth quarter of 2024 and increased $79.0 million or 3.8% during 2024. The decrease in deposits in the fourth quarter of 2024 was due to seasonal outflow of public funds, which includes taxes received by schools and townships during the third quarter of 2024. The increase in deposits in the twelve months ended December 31, 2024 is a combination of new business and recapture of deposit losses from the prior year.
• Asset quality remains strong with only 0.27% of nonperforming loans to total loans (excluding held for sale) as of December 31, 2024.

"ChoiceOne had an outstanding fourth quarter and full year 2024, which underscore the growth in our core loans and deposits, thanks to the dedication and expertise of our team. Our proactive balance sheet management has led to improvements in our net interest margin, positioning us well to navigate changing market conditions. We are also excited about the upcoming anticipated close of our pending merger with Fentura Financial, Inc. and The State Bank expected to occur in the first quarter of 2025, which will further enhance our markets and capabilities," said Kelly Potes, Chief Executive Officer. 

ChoiceOne reported net income of $7,159,000 and $26,727,000 for the three and twelve months ended December 31, 2024, compared to $5,293,000 and $21,261,000 for the same periods in 2023, representing growth of 35.3% and 25.7%, respectively.  Net income adjusted for merger related expenses was $7,532,000 and $27,733,000 for the three and twelve months ended December 31, 2024.  Diluted earnings per share were $0.79 and $3.25 in the three and twelve months ended December 31, 2024, compared to $0.70 and $2.82 per share in the same periods in the prior year.  The sale of 1,380,000 shares of common stock during the third quarter of 2024 negatively impacted diluted earnings per share for 2024.  Diluted earnings per share adjusted for merger expenses were $0.83 and $3.37 in the three and twelve months ended December 31, 2024.

As of December 31, 2024, total assets were $2.7 billion, an increase of $146.5 million compared to December 31, 2023.  The growth is primarily attributed to an increase in core loans of $114.5 million and loans to other financial institutions of $20.5 million.  This growth was offset by a $48.9 million reduction in securities during the same time period.  ChoiceOne has actively managed its balance sheet to support organic loan growth, strategically shifting from lower-yielding assets to higher-yielding loans. This is reflected in the loan growth observed.

Deposits, excluding brokered deposits, declined by $24.0 million or an annualized 4.4% in the fourth quarter of 2024 and increased $79.0 million or 3.8% during 2024.  The decrease in deposits in the fourth quarter of 2024 was due to seasonal outflow of public funds, which includes taxes received by schools and townships during the third quarter of 2024.  The increase in deposits in the twelve months ended December 31, 2024 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 and FHLB advances to ensure ample liquidity.  At December 31, 2024, total available borrowing capacity secured by pledged assets was $837.2 million. ChoiceOne can increase its capacity by utilizing unsecured federal fund lines and pledging additional assets.  Uninsured deposits totaled $833.2 million or 37.6% of deposits at December 31, 2024.

ChoiceOne's cost of deposits to average total deposits has declined since peaking in the first quarter of 2024 due to positive cash flow from pay-fixed interest rate swaps, hedged against deposits, and decreasing deposit expenses. In addition, the Federal Reserve has decreased the federal funds rate by 50 basis points since September 2024.  These factors led to a cost of deposits to average total deposits of an annualized 1.58% in the fourth quarter of 2024 compared to an annualized 1.57% in the fourth quarter of 2023.  Cost of deposits to average total deposits peaked in the first quarter of 2024 at an annualized 1.65%.  If rates continue to decline, we expect to see slight declines in deposit costs; however, these declines will be muted by the decrease in cash flows from pay-fixed interest rate swaps collected. Interest expense on borrowings for the three and twelve months ended December 31, 2024, increased $153,000 and $3.1 million compared to the same periods in the prior year, due to increases in the average balances borrowed.  During the fourth quarter of 2024, ChoiceOne paid down its advance from the Bank Term Funding Program and replaced it with $135.0 million of FHLB borrowings.  This increased our total borrowed balance at the FHLB to $175.0 million at a weighted average fixed rate of 4.5%, with the earliest maturity in January 2025.  Total cost of funds ended flat in the fourth quarter of 2024 with an annualized 1.90% compared to an annualized 1.91% in the fourth quarter of 2023.

The provision for credit losses expense on loans was $200,000 in the fourth quarter of 2024, due in part to loan growth during the quarter.  The ratio of the allowance for credit losses to total loans (excluding loans held for sale) was 1.07% on December 31, 2024 compared to 1.11% on December 31, 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 0.27% as of December 31, 2024.     

ChoiceOne uses interest rate swaps to manage interest rate exposure to certain fixed rate assets and variable rate liabilities.  On December 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 $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.  Settlements from swaps amounted to $1.5 million for the fourth quarter of 2024 compared to $2.5 million for the third quarter of 2024 and were a contributing factor to the decrease in net interest margin during the fourth quarter of 2024 compared to the third quarter of 2024.  Fully tax equivalent net interest margin excluding the swaps was 23 basis points lower than tax equivalent net interest margin reported for the fourth quarter of 2024.  Due in part to pay fixed interest rate swaps we have in place, our balance sheet is asset sensitive.   In addition to the pay-fixed interest rate swaps, ChoiceOne also employs back-to-back swaps on select commercial loans, with the impact reflected in interest income.

Shareholders' equity totaled $260.4 million as of December 31, 2024, up from $195.6 million as of December 31, 2023, due in large part to the $34.5 million in aggregate gross proceeds (before deducting discounts and estimated offering expenses) received from the sale of 1,380,000 shares of common stock during the third quarter of 2024.  The additional increase is due to retained earnings and an improvement in accumulated other compressive loss (AOCI) of $13.8 million compared to December 31, 2023.  The improvement in AOCI is due to both the shortening duration and maturing (paydowns) of the securities portfolio, offset by the change in unrealized gain of the pay-fixed swap derivatives.  The pay-fixed swap derivatives are designed to offset swings in AOCI due to changes in interest rates.  ChoiceOne Bank remains "well-capitalized" with a total risk-based capital ratio of 12.7% as of December 31, 2024, compared to 12.4% on December 31, 2023.

Noninterest income increased $948,000 and $3.1 million in the three and twelve months ended December 31, 2024, compared to the same periods in the prior year.  The increase was largely due to an increase in customer service charges of $304,000 and $1.2 million in the three and twelve months ended December 31, 2024 compared to the same periods in 2023 and earnings on life insurance policies in the three and twelve months ended December 31, 2024, compared to the same periods in the prior year.  ChoiceOne recognized earnings on a bank owned life insurance death benefit claim in the amount of $504,000 during the fourth quarter of 2024.  ChoiceOne also saw an uptick in gains on sales of loans during the fourth quarter of 2024 due in part to participation in the FHLB Rate Advantage program which provided incentives to home buyers in the low to moderate income bracket.  In addition, there were a number of construction loans which were finalized and written into salable market loans during the fourth quarter of 2024.

Noninterest expense increased by $1.6 million or 11.4% and $3.6 million or 6.6% in the three and twelve months ended December 31, 2024 compared to the same periods in 2023. The increase in total noninterest expense was due in part to merger related expenses of $394,000 and $1.0 million during the three and twelve months ended December 31, 2024, compared to $0 in the same periods in the prior year.  Additionally, there was an increase to employee health insurance and other benefit costs, and an increase to FDIC insurance and other costs related to the inflationary environment.  The increase in costs were offset by a decline in occupancy and equipment related to two branch closures during the first quarter of 2024.  ChoiceOne seeks to strategically manage costs while still making thoughtful investments in order to maintain our competitive edge and deliver exceptional value to our customers, shareholders, and communities.

"I am very pleased with the results of the fourth quarter of 2024, showing core loan growth, solid deposit balances and excellent credit metrics as we get closer to completing the pending merger with Fentura Financial, Inc. and the State Bank, a highly respected community bank in Michigan. We are excited to welcome their customers, communities, and employees to the ChoiceOne team," 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 news release contains forward-looking statements.  Words such as "anticipates," "believes," "estimates," "expects," "forecasts," "intends," "is likely," "plans," "predicts," "projects," "may," "could," "look forward," "continue", "future" and variations of such words and similar expressions are intended to identify such forward-looking statements. Examples of forward-looking statements include, but are not limited to, statements regarding the outlook and expectations of ChoiceOne or Fentura with respect to the planned merger, the strategic benefits and financial benefits of the merger, including the expected impact of the proposed transaction on the combined company's future financial performance and the timing of the closing of the proposed transaction.  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 does not undertake any obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events, or otherwise. Such risks, uncertainties and assumptions, include, among others, the following:

• the failure to obtain necessary regulatory approvals when expected or at all (and the risk that such approvals may result in a materially burdensome regulatory condition (as defined in the merger agreement));
• the occurrence of any event, change or other circumstances that could give rise to the right of one or both of the parties to terminate the merger agreement;
• the possibility that the anticipated benefits of the proposed transaction are not realized when expected or at all, including as a result of the impact of, or problems arising from, the integration of the two companies or as a result of the strength of the economy, competitive factors in the areas where ChoiceOne and Fentura do business, or as a result of other unexpected factors or events;
• the impact of purchase accounting with respect to the proposed transaction, or any change in the assumptions used regarding the assets purchased and liabilities assumed to determine their fair value;
• diversion of management's attention from ongoing business operations and opportunities;
• potential adverse reactions or changes to business or employee relationships, including those resulting from the announcement or completion of the proposed transaction; or
• the outcome of any legal proceedings that may be instituted against ChoiceOne or Fentura.

Additional risk factors include, but are not limited to, the risk factors described in Item 1A in ChoiceOne's Annual Report on Form 10-K for the year ended December 31, 2023 and in any of ChoiceOne's subsequent SEC filings, which are available on the SEC's website, www.sec.gov.

Non-GAAP Financial Measures

In addition to results presented in accordance with GAAP, this presentation includes certain non-GAAP financial measures. ChoiceOne believes these non-GAAP financial measures provide additional information that is useful to investors in helping to understand underlying financial performance and condition and trends of ChoiceOne.

Non-GAAP financial measures have inherent limitations. Readers should be aware of these limitations and should be cautious with respect to the use of such measures. To compensate for these limitations, non-GAAP measures are used as comparative tools, together with GAAP measures, to assist in the evaluation of operating performance or financial condition. These measures are also calculated using the appropriate GAAP or regulatory components in their entirety and are computed in a manner intended to facilitate consistent period-to-period comparisons. ChoiceOne's method of calculating these non-GAAP measures may differ from methods used by other companies. These non-GAAP measures should not be considered in isolation or as a substitute for those financial measures prepared in accordance with GAAP or in-effect regulatory requirements.

Where non-GAAP financial measures are used, the most directly comparable GAAP or regulatory financial measure, as well as the reconciliation to the most directly comparable GAAP or regulatory financial measure, can be found in the tables to this news release under the heading non-GAAP reconciliation.