ChoiceOne Financial Services, Inc. — 2023 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2023, with comparisons primarily to 2022. ChoiceOne is a Michigan-based financial holding company operating a community bank, insurance agency, and newly formed fintech subsidiary. Its banking markets are in western and southeastern Michigan.
Financial performance and condition
| Metric | 2023 | 2022 |
|---|---|---|
| Total assets, year-end | $2.577 billion | $2.386 billion |
| Total deposits, year-end | $2.122 billion | $2.118 billion |
| Gross loans, year-end | $1.415 billion | $1.195 billion |
| Net interest income | $65.9 million | $67.3 million |
| Net interest margin, GAAP | 2.77% | 3.01% |
| Net income | $21.3 million | $23.6 million |
| Diluted earnings per share | $2.82 | $3.15 |
| Operating cash flow | $46.5 million | $45.0 million |
| Shareholders’ equity, year-end | $195.6 million | $168.9 million |
- Total interest income rose to $99.0 million from $75.1 million, but interest expense climbed to $33.1 million from $7.7 million. Noninterest income was $14.9 million and noninterest expense was $55.1 million. The filing does not present a single total-revenue line.
- Core loan growth was $201.5 million, or 16.9%, and drove higher loan interest income. However, sharply higher deposit and borrowing costs more than offset income growth; net interest income fell 2.1% and net income fell about 10% year over year. Return on average assets was 0.85%, down from 1.00%; return on average equity was 12.00%, down from 13.25%.
- Cash and cash equivalents were $55.4 million at year-end. Net cash used in investing was $181.4 million, largely reflecting loan growth; financing activities provided $146.4 million, including $150 million in net borrowing proceeds.
- Year-end borrowings were $200 million: $170 million under the Federal Reserve Bank Term Funding Program (BTFP) and $30 million in Federal Home Loan Bank advances. Subordinated debentures totaled $35.5 million. The Bank reported $933.3 million of available borrowing capacity from stated sources.
- The Bank’s total risk-based capital ratio was 12.4%, versus 13.0% in 2022, and it remained categorized as well-capitalized. Consolidated year-end equity was 7.59% of assets.
Material changes versus the prior year
- Gross loans grew 18.5% overall; commercial real estate and construction/development lending expanded, while investment securities declined $34.2 million. Deposits were nearly flat overall, but deposits excluding brokered balances fell $17.7 million for the year.
- Average deposit cost rose to 1.14% from 0.27%, and average total cost of funds rose to 1.44% from 0.35%. Fourth-quarter deposit cost was 1.57% and total cost of funds was 1.91%.
- ChoiceOne adopted CECL on January 1, 2023. The adoption increased the loan allowance by approximately $7.2 million and added a $3.3 million liability for expected losses on unfunded commitments; the combined after-tax transition adjustment reduced retained earnings by approximately $8.0 million. Prior-year figures remain under the prior incurred-loss method.
- Shareholders’ equity increased from 2022, aided by a $20.2 million improvement in accumulated other comprehensive loss, reflecting securities and derivative valuation changes.
Outlook, commentary, risks and unusual items
- Management said higher deposit costs are likely to persist, while the Bank is taking steps to manage them and expects to continue paying deposit rates below the federal funds rate. The filing provides no quantified earnings or margin guidance.
- Management expected regular quarterly cash dividends in 2024, subject to market conditions, cash needs, capital requirements, and regulatory limits. The 2023 dividend was $1.05 per share, compared with $1.01 in 2022.
- The Company planned to consolidate two branches by March 2024, forecasting annual savings of about $700,000 and low customer-retention impact. It also organized 109 Technologies, LLC in 2023 to develop and sell a fintech product to other financial institutions.
- Investment securities had $128.9 million of unrealized losses at year-end ($69.7 million available-for-sale and $59.2 million held-to-maturity). Management attributed the declines mainly to interest rates and market conditions, said issuers were making timely payments, and did not intend to sell before anticipated recovery. A forced sale to meet liquidity needs could crystallize losses and reduce earnings and capital.
- Liquidity depends partly on borrowings and noncore funding. The Bank used BTFP funding, FHLB advances, and brokered deposits; $769.7 million, or 36.3% of deposits, exceeded stated FDIC insurance limits. The filing says the $170 million BTFP balance was restructured in January 2024 to obtain lower rates and extend maturity.
- Real estate is a significant credit exposure: commercial and construction real estate loans were approximately 57.3% of the loan portfolio, and residential real estate was 19.0%. Nonperforming loans were $1.9 million, or 0.14% of loans; net charge-offs were 0.03% of average loans.
- Interest-rate swaps totaled $401 million notional at year-end. The Company terminated $200 million of pay-floating swaps in March 2023 for a $4.2 million cash payment; the remaining loss was being amortized into interest income through 2024. The filing estimated the forward-starting $200 million pay-fixed swaps could offset interest expense by about $438,000 monthly beginning May 2024 at the then-current SOFR rate.
- Other principal risks include interest-rate and liquidity sensitivity, Michigan economic conditions, credit losses, competition, cybersecurity and third-party service disruptions, regulatory change, and dependence on Bank dividends. No material cybersecurity incident was reported in the three years ended December 31, 2023. Management reported effective disclosure controls and internal control over financial reporting; the auditor issued an unqualified opinion and identified the CECL qualitative adjustment as a critical audit matter. No significant pending litigation was reported.
Important facts for investors to verify
- Reconcile the filing’s differing core-deposit disclosures: one passage reports $1.1 billion, or 53.2% of deposits, while another reports $823.2 million, or 38.8%, and the year-end deposit table separately identifies deposit categories.
- Confirm the January 2024 BTFP refinancing terms, subsequent funding levels, and available liquidity after year-end.
- Monitor deposit pricing, the movement of uninsured balances, loan growth, and credit quality—particularly commercial real estate exposures and the CECL allowance assumptions.
- Assess the timing and realization of securities recovery, derivative cash flows, and the remaining swap-termination amortization, including effects on earnings, AOCI, and capital.
- Track whether the planned branch consolidations occurred and whether the projected $700,000 annual savings and low customer impact were achieved.