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What changed in CHOICEONE FINANCIAL SERVICES INC's 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of CHOICEONE FINANCIAL SERVICES INC's 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+231 added−183 removedSource: 10-K (2024-03-13) vs 10-K (2023-03-23)

Top changes in CHOICEONE FINANCIAL SERVICES INC's 2023 10-K

231 paragraphs added · 183 removed · 112 edited across 6 sections

Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

26 edited+9 added−7 removed81 unchanged
Biggest changeIf we misinterpret or make inaccurate assumptions under the new guidance, we may need to make significant and unanticipated changes in our allowance for loan losses in the future, and our results of operations or financial condition could be adversely affected. 13 Table of Contents General economic conditions in the state of Michigan could have a material adverse effect on the Company ’ s results of operations or financial condition.
Biggest changeAdditions to the allowance for credit losses for our investment securities may need to be taken in the future, which could have a material adverse effect on our results of operations and financial condition. The Company has significant exposure to risks associated with commercial and residential real estate.
Although we employ comprehensive measures to prevent, detect, address and mitigate these threats (including access controls, employee training, data encryption, vulnerability assessments, continuous monitoring of our IT networks and systems and maintenance of backup and protective systems), cybersecurity incidents, depending on their nature and scope, could potentially result in the misappropriation, destruction, corruption or unavailability of critical data and confidential or proprietary information (our own or that of third parties) and the disruption of business operations.
Although we employ comprehensive measures to prevent, detect, address and mitigate these threats (including access controls, employee training, data encryption, vulnerability assessments, continuous monitoring of our IT networks and systems and maintenance of backup and protective systems), cybersecurity incidents, depending on their nature and scope, could 13 potentially result in the misappropriation, destruction, corruption or unavailability of critical data and confidential or proprietary information (our own or that of third parties) and the disruption of business operations.
These regulatory agencies may require the Company to increase its provision for loan losses or to recognize further loan charge-offs based upon their judgments, which may be different from the Company’s judgments. Any increase in the allowance for loan losses could have a negative effect on the Company’s regulatory capital ratios, net income, financial condition and results of operations.
These regulatory agencies may require the Company to increase its provision for credit losses or to recognize further loan charge-offs based upon their judgments, which may be different from the Company’s judgments. Any increase in the allowance for credit losses could have a negative effect on the Company’s regulatory capital ratios, net income, financial condition and results of operations.
The Company is affected by general economic conditions in the United States, although most directly within Michigan. An economic downturn within Michigan caused by inflation, recession or a recessionary environment, unemployment, changes in financial or capital markets or other factors, could negatively impact household and corporate incomes.
The Company is affected by general economic conditions in the United States, although most directly within Michigan. An economic downturn within Michigan caused by inflation, recession or a recessionary environment, unemployment, changes in financial or capital 10 markets or other factors, could negatively impact household and corporate incomes.
The limited market for the Company's common stock may affect a shareholder's ability to sell their shares at any given time, and the sale of a large number of shares at one time could temporarily adversely affect the market price of our common stock. The Company's common stock is not insured by any government entity.
The limited market for the Company’s common stock may affect a shareholder’s ability to sell their shares at any given time, and the sale of a large number of shares at one time could temporarily adversely affect the market price of our common stock. 15 The Company's common stock is not insured by any government entity.
Losing the services of one or more key members of the Company’s management team could adversely affect its operations. The Company ’ s controls and procedures may fail or be circumvented. Management regularly reviews and updates the Company’s internal controls, disclosure controls and procedures, and corporate governance policies and procedures.
Losing the services of one or more key members of the Company’s management team could adversely affect its operations. 12 The Company ’ s controls and procedures may fail or be circumvented. Management regularly reviews and updates the Company’s internal controls, disclosure controls and procedures, and corporate governance policies and procedures.
The market price of the Company’s common stock may fluctuate significantly in response to a number of factors, including: ● Variations in quarterly or annual operating results ● Changes in dividends per share ● Changes in interest rates ● New developments, laws or regulations in the banking industry ● Acquisitions or business combinations involving the Company or its competition ● Regulatory actions, including changes to regulatory capital levels, the components of regulatory capital and how regulatory capital is calculated ● Volatility of stock market prices and volumes ● Changes in market valuations of similar companies ● New litigation or contingencies or changes in existing litigation or contingencies ● Changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or other regulatory agencies ● Rumors or erroneous information ● Credit and capital availability ● Issuance of additional shares of common stock or other debt or equity securities of the Company ● Market conditions ● General economic conditions The Company's common stock, while publicly traded, has less liquidity than the average liquidity of stocks listed on the Nasdaq Stock Market.
The market price of the Company’s common stock may fluctuate significantly in response to a number of factors, including: • Variations in quarterly or annual operating results • Changes in dividends per share • Changes in interest rates • New developments, laws or regulations in the banking industry • Acquisitions or business combinations involving the Company or its competition • Regulatory actions, including changes to regulatory capital levels, the components of regulatory capital and how regulatory capital is calculated • Volatility of stock market prices and volumes • Changes in market valuations of similar companies • New litigation or contingencies or changes in existing litigation or contingencies • Changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or other regulatory agencies • Rumors or erroneous information • Credit and capital availability • Issuance of additional shares of common stock or other debt or equity securities of the Company • Market conditions • General economic conditions • Turbulence, uncertainty or a lack of confidence within the banking industry The Company’s common stock, while publicly traded, has less liquidity than the average liquidity of stocks listed on the Nasdaq Stock Market.
The Company’s allowance for loan losses may not be adequate to cover actual loan losses. The risk of nonpayment of loans is inherent in all lending activities and nonpayment of loans may have a material adverse effect on the Company’s earnings and overall financial condition, and the value of its common stock.
The Company’s allowance for credit losses may not be adequate to cover actual credit losses. The risk of nonpayment of loans is inherent in all lending activities and nonpayment of loans may have a material adverse effect on the Company’s earnings and overall financial condition, and the value of its common stock.
If its assumptions are wrong, the allowance for loan losses may not be sufficient to cover losses, which could have an adverse effect on the Company’s operating results and may cause it to increase the allowance in the future.
If its assumptions are wrong, the allowance for credit losses may not be sufficient to cover losses, which could have an adverse effect on the Company’s operating results and may cause it to increase the allowance in the future.
The actual amount of future provisions for loan losses cannot now be determined and may exceed the amounts of past provisions for loan losses. Federal and state banking regulators, as an integral part of their supervisory function, periodically review the allowance for loan losses.
The actual amount of future provisions for credit losses cannot now be determined and may exceed the amounts of past provisions for credit losses. Federal and state banking regulators, as an integral part of their supervisory function, periodically review the allowance for credit losses.
Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of an institution, the classification of assets by the institution and the adequacy of an institution's allowance for loan losses.
Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of an institution, the classification of assets by the institution and the adequacy of an institution’s allowance for credit losses.
Due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services than the Company can. 16 Table of Contents Severe weather, natural disasters, acts of war or terrorism, public health crisis, and other external events could significantly impact the Company's business.
Due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services than the Company can. 14 Severe weather, natural disasters, acts of war or terrorism, a public health crisis, and other external events could significantly impact the Company’s business.
The Company relies heavily on communications and information systems to conduct its business and deliver its products. Any failure, interruption or breach in security of these systems could result in failures or disruptions in the Company's customer relationship management, general ledger, deposit, loan and other systems.
The Company's information systems may experience an interruption or breach in security. The Company relies heavily on communications and information systems to conduct its business and deliver its products. Any failure, interruption or breach in security of these systems could result in failures or disruptions in the Company’s customer relationship management, general ledger, deposit, loan and other systems.
In addition, federal law requires the Federal Reserve Board's prior approval for acquisition of "control" of a bank holding company such as the Company, including acquisition of 10% or more of the Company's outstanding securities by any person not defined as a company under the Bank Holding Company Act of 1956, as amended (the "BHC Act").
In addition, federal law requires the Federal Reserve Board’s prior approval for acquisition of “control” of a bank holding company such as the Company, including acquisition of 10% or more of the Company’s outstanding securities by any person not defined as a company under the Bank Holding Company Act of 1956, as amended (the “BHC Act”).
An entity that is subject to regulation as a bank holding company would be subject to regulatory and statutory obligations and restrictions, and could be required to divest all or a portion of the entity's investment in the Company's securities or in other investments that are not permitted for a bank holding company.
An entity that is subject to regulation as a bank holding company would be subject to regulatory and statutory obligations and restrictions, and could be required to divest all or a portion of the entity’s investment in the Company’s securities or in other investments that are not permitted for a bank holding company. Item 1B. Unreso lved Staff Comments None.
As of that same date, the Company had approximately $229.9 million in residential real estate loans outstanding, or approximately 19.3% of its loan portfolio. Consequently, real estate-related credit risks are a significant concern for the Company.
As of that same date, the Company had approximately $267.7 million in residential real estate loans outstanding, or approximately 19.0% of its loan portfolio. Consequently, real estate-related credit risks are a significant concern for the Company.
Any security breach involving the misappropriation, loss or other unauthorized disclosure of confidential customer information, whether by the Company or by its vendors, could severely damage the Company's reputation, expose it to the risks of litigation and liability, disrupt the Company's operations and have a material adverse effect on the Company's business. 15 Table of Contents The Company's information systems may experience an interruption or breach in security.
Any security breach involving the misappropriation, loss or other unauthorized disclosure of confidential customer information, whether by the Company or by its vendors, could severely damage the Company’s reputation, expose it to the risks of litigation and liability, disrupt the Company’s operations and have a material adverse effect on the Company’s business.
CECL changes the allowance for loan losses methodology from an incurred loss impairment methodology to an expected loss methodology, which is more dependent on future economic forecasts and models than previous accounting standards and could result in increases in, and add volatility to, our allowance for loan losses and future provisions for loan losses.
CECL changed the allowance for credit losses methodology from an incurred loss impairment methodology to an expected loss methodology, which is more dependent on future economic forecasts, assumptions and models than the incurred loss accounting standard and could result in increases in, and add volatility to, our allowance for credit losses and future provisions for credit losses.
A substantial portion of the Company’s loan portfolio consists of commercial and residential real estate-related loans, including real estate development, construction and residential and commercial mortgage loans. As of December 31, 2022, the Company had approximately $645.7 million of commercial and construction real estate loans outstanding, which represented approximately 54.3% of its loan portfolio.
A substantial portion of the Company’s loan portfolio consists of commercial and residential real estate-related loans, including real estate development, construction and residential and commercial mortgage loans. As of December 31, 2023, the Company had approximately $807.9 million of commercial and construction real estate loans outstanding, which represented approximately 57.3% of its loan portfolio.
Further, if any entity (including a "group" comprised of individual persons) owns or controls the power to vote 25% or more of the Company's outstanding securities, or 5% or more of the outstanding securities if the entity otherwise exercises a "controlling influence" over the Company, the entity may become subject to regulation as a "bank holding company" under the BHC Act.
Further, if any entity (including a “group” comprised of individual persons) owns or controls the power to vote 25% or more of the Company’s outstanding securities, or 5% or more of the outstanding securities if the entity otherwise exercises a “controlling influence” over the Company, the entity may become subject to regulation as a “bank holding company” under the BHC Act.
The Company’s commercial and industrial loan portfolio, including commercial mortgages, was approximately $210.2 million at December 31, 2022, comprising approximately 17.7% of its total loan portfolio. Commercial loans generally carry larger loan balances and can involve a greater degree of financial and credit risk than other loans.
The Company’s commercial and industrial loan portfolio, including commercial mortgages, was approximately $229.9 million at December 31, 2023, comprising approximately 16.3% of its total loan portfolio. Commercial loans generally carry larger loan balances and can involve a greater degree of financial and credit risk than other loans.
If the Company were required to sell investment securities in an unrealized loss position to meet liquidity needs and realize losses, that could have a material adverse impact on its results of operations and financial condition, including a negative impact on net income and a permanent reduction in equity capital. 14 Table of Contents The Company has significant exposure to risks associated with commercial and residential real estate.
If the Company were required to sell investment securities in an unrealized loss position to meet liquidity needs and realize losses, that could have a material 11 adverse impact on its results of operations and financial condition, including a negative impact on net income and a permanent reduction in equity capital.
At December 31, 2022, the Company had $161.0 million in unrealized losses on its investment securities, including $89.0 million in unrealized losses on available for sale securities and $72.0 in unrealized losses on held to maturity securities.
At December 31, 2023, the Company had $128.9 million in unrealized losses on its investment securities, including $69.7 million in unrealized losses on available for sale securities and $59.2 in unrealized losses on held to maturity securities.
Holders of the Company's common stock do not have any preemptive or similar rights to purchase a pro rata share of any additional shares offered or issued by the Company. 17 Table of Contents The value of the Company's common stock may be adversely affected if the Company issues debt and equity securities that are senior to the Company's common stock in liquidation or as to distributions.
Holders of the Company’s common stock do not have any preemptive or similar rights to purchase a pro rata share of any additional shares offered or issued by the Company.
The Company may increase its capital by issuing debt or equity securities or by entering into debt or debt-like financing. This may include the issuance of common stock, preferred stock, senior notes, or subordinated notes.
This may include the issuance of common stock, preferred stock, senior notes, or subordinated notes.
We could become subject to litigation and other types of disputes as a consequence of the transition from LIBOR to SOFR or another alternative reference rate, which could subject us to increased legal expenses, monetary damages and reputational harm. The Company is subject to liquidity risk in its operations, which could adversely affect its ability to fund various obligations.
The Company is subject to liquidity risk in its operations, which could adversely affect its ability to fund various obligations.
Removed
In addition, a large portion of the loan portfolio was marked to fair value as part of the mergers with County and Community Shores and does not carry an allowance as management determined no credit deterioration had occurred since the effective date of the merger. ChoiceOne adopted ASU 2016-13 current expected credit loss ("CECL") on January 1, 2023.
Added
The Current Expected Credit Loss ( " CECL " ) accounting standard could add volatility to our allowance for credit losses and may have an adverse effect on our financial condition and results of operations. Effective January 1, 2023, we adopted CECL.
Removed
These forecasts and models are inherently uncertain and are based upon management's reasonable judgment in light of information currently available. We believe the adoption of CECL as of January 1, 2023 will result in an estimated increase in our current allowance for loan losses of between $6.5 million and $7.0 million.
Added
These forecasts, assumptions and models are by their nature uncertain and are based upon management’s reasonable judgment in light of information currently available. General economic conditions in the state of Michigan could have a material adverse effect on the Company ’ s results of operations or financial condition.
Removed
Interest rates on our outstanding financial instruments might be subject to change based on regulatory developments, which could adversely affect our revenue, expenses, and the value of those financial instruments .
Added
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. Evaluation of investment securities for an allowance for credit losses involves subjective determinations and could have a material adverse impact on our results of operations and financial condition.
Removed
On July 27, 2017, the United Kingdom’s Financial Conduct Authority (“FCA”), which regulates LIBOR, publicly announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. In November 2020, the FCA announced that it would continue to publish LIBOR rates through June 30, 2023.
Added
The fair value evaluation of investment securities is a quantitative and qualitative process, which is subject to risks and uncertainties and is intended to determine whether declines in the fair value of investments require the establishment of an allowance for credit losses.
Removed
It is unclear whether, or in what form, LIBOR will continue to exist after that date.
Added
The risks and uncertainties include changes in general economic conditions, the issuer’s financial condition or future recovery prospects and the effects of changes in interest rates or credit spreads.
Removed
Any uncertainty regarding the continued use and reliability of LIBOR as a benchmark interest rate could adversely affect the value of our floating rate obligations, loans, deposits, and other financial instruments tied to LIBOR rates, as well as the revenue and expenses associated with those financial instruments.
Added
Estimating future cash flows involves incorporating information received from third-party sources and making internal assumptions and judgments regarding the future performance of the underlying collateral and assessing the probability that an adverse change in future cash flows has occurred.
Removed
While, at this time, it appears that consensus is growing around using the Secured Overnight Financing Rate (“SOFR”) as an alternative to LIBOR, it remains to be determined whether this will ultimately be the case and what the impact of a possible transition to SOFR or other alternative reference rates may have on our business, financial results and results of operations.
Added
The determination of an allowance for credit losses is based upon our periodic evaluation and assessment of known and inherent risks associated with the respective asset class. Such evaluations and assessments are revised as conditions change and new information becomes available.
Added
Our management considers a wide range of factors about the security issuer and uses reasonable judgment in evaluating the cause of the decline in the estimated fair value of the security and in assessing the prospects for recovery. Inherent in management’s evaluation of the security are assumptions and estimates about the operations of the issuer and its future earnings potential.
Added
The value of the Company's common stock may be adversely affected if the Company issues debt and equity securities that are senior to the Company's common stock in liquidation or as to distributions. The Company may increase its capital by issuing debt or equity securities or by entering into debt or debt-like financing.

Item 2. Properties

Properties — owned and leased real estate

2 edited+0 added−0 removed1 unchanged
Biggest changeThe remaining five locations are comprised of loan production offices. Banking offices generally range in size from 1,200 to 3,200 square feet, based on the location and number of employees located at the facility. All of our banking offices are owned by the Bank excep t for six that are le ased under various operating lease agreements.
Biggest changeThe remaining six locations are comprised of loan production offices and wealth management. Offices generally range in size from 1,200 to 3,200 square feet, based on the location and number of employees located at the facility. All of our offices are owned by the Bank except for six that are leased under various operating lease agreements.
Item 2. Properties The Company’s headquarters are located at 109 East Division, Sparta, Michigan 49345. The headquarters location is owned by the Company and is not subject to any mortgage. 31 of the Company’s 36 locations are designed for use and operation as a bank, are well maintained, and are suitable for current operations.
Item 2. Prope rties The Company’s headquarters are located at 109 East Division, Sparta, Michigan 49345. The headquarters location is owned by the Company and is not subject to any mortgage. 29 of the Company’s 35 locations are designed for use and operation as a bank, are well maintained, and are suitable for current operations.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

2 edited+0 added−0 removed0 unchanged
Biggest changeIn the opinion of management, pending legal proceedings will not have a material adverse effect on the consolidated financial condition of the Company.
Biggest changeIn the opinion of management, pending legal proceedings will not have a material adverse effect on the consolidated financial condition of the Company. Item 4. M ine Safety Disclosures Not applicable. 17 PART II
Item 3. Legal Proceedings As of December 31, 2022, there were no significant pending legal proceedings to which the Company or the Bank is a party or to which any of their properties were subject, except for legal proceedings arising in the ordinary course of business.
Item 3. Legal P roceedings As of December 31, 2023, there were no significant pending legal proceedings to which the Company or the Bank is a party or to which any of their properties were subject, except for legal proceedings arising in the ordinary course of business.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

7 edited+1 added−2 removed0 unchanged
Biggest changeTotal Number Maximum of Shares Number of Total Purchased as Shares that Number Average Part of a May Yet be of Shares Price Paid Publicly Purchased Period Purchased per Share Announced Plan Under the Plan October 1 - October 31, 2022 Employee Transactions - $ - - Repurchase Plan - $ - - 375,388 November 1 - November 30, 2022 Employee Transactions - $ - - Repurchase Plan - $ - - 375,388 December 1 - December 31, 2022 - Employee Transactions - $ - - Repurchase Plan - $ - - 375,388 As of December 31, 2022, there are 375,388 shares remaining that may yet be purchased under approved plans.
Biggest changeTotal Number Maximum of Shares Number of Total Purchased as Shares that Number Average Part of a May Yet be of Shares Price Paid Publicly Purchased Period Purchased per Share Announced Plan Under the Plan October 1 - October 31, 2023 Employee Transactions — $ — — Repurchase Plan — $ — — 375,388 November 1 - November 30, 2023 Employee Transactions — $ — — Repurchase Plan — $ — — 375,388 December 1 - December 31, 2023 — Employee Transactions (1) 6,853 $ 31.07 6,853 Repurchase Plan — $ — — 375,388 (1) Shares submitted for the purchase of stock options.
Based on information presently available, management expects ChoiceOne to declare and pay regular quarterly cash dividends in 2023, although the amount of the quarterly dividends will be dependent on market conditions and ChoiceOne’s requirements for cash and capital, among other things.
Based on information presently available, management expects ChoiceOne to declare and pay regular quarterly cash dividends in 2024, although the amount of the quarterly dividends will be dependent on market conditions and ChoiceOne’s requirements for cash and capital, among other things.
The Bank is restricted in its ability to pay cash dividends under current banking regulations. See Note 21 to the consolidated financial statements for a description of these restrictions.
The Bank is restricted in its ability to pay cash dividends under current banking regulations. See Note 21 – Regulatory Capital to the consolidated financial statements for a description of these restrictions.
The following table summarizes the quarterly cash dividends declared per share of common stock during 2022 and 2021: 2022 2021 First Quarter $ 0.25 $ 0.22 Second Quarter 0.25 0.22 Third Quarter 0.25 0.25 Fourth Quarter 0.26 0.25 Total $ 1.01 $ 0.94 ChoiceOne’s principal source of funds to pay cash dividends is the earnings and dividends paid by the Bank.
The following table summarizes the quarterly cash dividends declared per share of common stock during 2023 and 2022: 2023 2022 First Quarter $ 0.26 $ 0.25 Second Quarter 0.26 0.25 Third Quarter 0.26 0.25 Fourth Quarter 0.27 0.26 Total $ 1.05 $ 1.01 ChoiceOne’s principal source of funds to pay cash dividends is the earnings and dividends paid by the Bank.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Stock Information The Company’s common stock is traded on the NASDAQ Capital Market under the symbol COFS. As of February 28, 2023, there were approximately 1,137 owners of record and approximately 1,195 beneficial owners of our common sto ck.
Item 5. Mar ket for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Stock Information The Company’s common stock is traded on the NASDAQ Capital Market under the symbol COFS. As of February 29, 2024, there were approximately 1,122 owners of record and approximately 1,093 beneficial owners of our common stock.
This was part of the common stock repurchase program announced in April 2021 which authorized repurchases of up to 390,114 shares, representing 5% of the total outstanding shares of common stock as of the date the program was adopted. No shares were repurchased under this program in the second quarter.
ISSUER PURCHASES OF EQUITY SECURITIES ChoiceOne’s common stock repurchase plan announced in April 2021 and amended in 2022, authorizes the repurchase of up to 375,388 shares, representing 5% of the total outstanding shares of common stock as of the date the plan was adopted. No shares were repurchased under this plan in 2023.
Information regarding the Company’s equity compensation plans may be found in Item 12 of this report and is here incorporated by reference. ISSUER PURCHASES OF EQUITY SECURITIES ChoiceOne repurchased 25,899 shares for $682,000, or a weighted average all-in cost per share of $26.35, during the first quarter of 2022.
Information regarding the Company’s equity compensation plans may be found in Item 12 of this report and is here incorporated by reference.
Removed
In the third quarter of 2022, management amended the stock repurchase program to authorize the repurchase of up to 375,388 shares representing 5% of the total outstanding shares of common stock as of the date the amendment was approved. There were no additional stock purchases in the third or fourth quarter of 2022.
Added
Stock options were issued out of the ChoiceOne Financial Services, Inc. Stock Incentive Plan of 2012. As of December 31, 2023, there were 375,388 shares remaining that may yet be repurchased under the plan. There was no stated expiration date. Item 6. Res erved 18
Removed
ChoiceOne repurchased approximately 309,000 shares for $7.8 million, or a weighted average cost per share of $25.17 during the year ended December 31, 2021.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

64 edited+107 added−61 removed18 unchanged
Biggest changeThe rise in interest rates has led to ChoiceOne's cost of funds increasing 15 basis points from 0.21% in 2021 to 0.35% in 2022. 10 basis points of this increase is due to the rising cost of deposits, while the remainder is due to the increased cost of borrowing and a full year's expense of the subordinated notes completed in September of 2021. 24 Table of Contents Provision and Allowance For Loan Losses Table 3 – Provision and Allowance For Loan Losses (Dollars in thousands) 2022 2021 2020 Allowance for loan losses at beginning of year $ 7,688 $ 7,593 $ 4,057 Charge-offs: Agricultural - - 15 Commercial and industrial 177 195 148 Consumer 496 370 329 Real estate - commercial - 111 254 Real estate - construction - - - Real estate - residential - - 8 Total 673 676 754 Recoveries: Agricultural - - - Commercial and industrial 143 86 57 Consumer 206 214 204 Real estate - commercial 3 48 10 Real estate - construction - - - Real estate - residential 2 7 19 Total 354 355 290 Net charge-offs (recoveries) 319 321 464 Provision for loan losses 250 416 4,000 Allowance for loan losses at end of year $ 7,619 $ 7,688 $ 7,593 Allowance for loan losses as a percentage of: Total loans as of year end 0.64 % 0.76 % 0.71 % Nonaccrual loans, accrual loans past due 90 days or more and troubled debt restructurings 286 % 139 % 92 % Ratio of net charge-offs during the period to average loans outstanding during the period 0.03 % 0.03 % 0.05 % Loan recoveries as a percentage of prior year's charge-offs 52 % 47 % 29 % 25 Table of Contents The provision for loan losses was $250,000 in 2022, compared to $416,000 in the prior year.
Biggest changeProvision and Allowance For Credit Losses Table 3 – Provision and Allowance For Credit Losses 24 (Dollars in thousands) 2023 2022 2021 Allowance for credit losses at beginning of year $ 7,619 $ 7,688 $ 7,593 Cumulative effect of change in accounting principle 7,165 - - Charge-offs: Agricultural - - - Commercial and industrial 158 177 195 Consumer 554 496 370 Real estate - commercial - - 111 Real estate - construction - - - Real estate - residential 27 - - Total 739 673 676 Recoveries: Agricultural - - - Commercial and industrial 66 143 86 Consumer 283 206 214 Real estate - commercial 13 3 48 Real estate - construction - - - Real estate - residential 13 2 7 Total 375 354 355 Net charge-offs (recoveries) 364 319 321 Provision for credit losses 1,265 250 416 Allowance for credit losses at end of year $ 15,685 $ 7,619 $ 7,688 Allowance for credit losses as a percentage of: Total loans as of year end 1.11 % 0.64 % 0.76 % Nonaccrual loans, accrual loans past due 90 days or more and troubled debt restructurings 820 % 286 % 139 % Ratio of net charge-offs during the period to average loans outstanding during the period 0.03 % 0.03 % 0.03 % Loan recoveries as a percentage of prior year's charge-offs 56 % 52 % 47 % 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.
Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the market value of securities, the amount of the allowance for loan losses, loan servicing rights, carrying value of goodwill, and income taxes. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the market value of securities, the amount of the allowance for credit losses, loan servicing rights, carrying value of goodwill, and income taxes. Actual results could differ from those estimates.
The assessment of tax assets and liabilities involves the use of estimates, assumptions, interpretations, and judgments concerning certain accounting pronouncements and the federal tax code.
The assessment of tax assets and liabilities involves the use of estimates, assumptions, interpretations, and judgments concerning certain accounting pronouncements and the federal tax code. 36
Based on its review of ChoiceOne’s deferred tax assets as of December 31, 2022, management determined that no valuation allowance was necessary. The valuation of current and deferred income tax assets and liabilities is considered critical, as it requires management to make estimates based on provisions of the enacted tax laws.
Based on its review of ChoiceOne’s deferred tax assets as of December 31, 2023, management determined that no valuation allowance was necessary. The valuation of current and deferred income tax assets and liabilities is considered critical, as it requires management to make estimates based on provisions of the enacted tax laws.
These non-GAAP financial 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. 31 Table of Contents Critical Accounting Policies And Estimates Management’s discussion and analysis of financial condition and results of operations as well as disclosures found elsewhere in this report are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.
These non-GAAP financial 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. 32 Critical Accounting Policies And Estimates Management’s discussion and analysis of financial condition and results of operations as well as disclosures found elsewhere in this report are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.
Unrealized losses on corporate and municipal bonds have not been recognized into income because the issuers’ bonds 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.
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.
We have omitted discussion of 2021 results where it would be redundant to the discussion previously included in Part II, Item 7 of our 2021 Annual Report on Form 10-K.
We have omitted discussion of 2022 results where it would be redundant to the discussion previously included in Part II, Item 7 of our 2022 Annual Report on Form 10-K.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion is designed to provide a review of the consolidated financial condition and results of operations of ChoiceOne Financial Services, Inc. (“ChoiceOne” or the “Company”), and its wholly-owned subsidiaries. This discussion should be read in conjunction with the consolidated financial statements and related footnotes.
Item 7. Manag ement's Discussion and Analysis of Financial Condition and Results of Operations The following discussion is designed to provide a review of the consolidated financial condition and results of operations of ChoiceOne Financial Services, Inc. (“ChoiceOne” or the “Company”), and its wholly-owned subsidiaries. This discussion should be read in conjunction with the consolidated financial statements and related footnotes.
For further details, refer to Note 12 (Income Taxes) of the Notes to the Consolidated Financial Statements included in Item 8 of this report. 22 Table of Contents Table 1 – Average Balances and Tax-Equivalent Interest Rates Tables 1 and 2 on the following pages provide information regarding interest income and expense for the years ended December 31, 2022, 2021, and 2020.
For further details, refer to Note 12 - Income Taxes of the Notes to the Consolidated Financial Statements included in Item 8 of this report. 21 Table 1 – Average Balances and Tax-Equivalent Interest Rates Tables 1 and 2 on the following pages provide information regarding interest income and expense for the years ended December 31, 2023, 2022, and 2021.
Longer-term liquidity needs may be met through core deposit growth, maturities of and cash flows from securities, normal loan repayments, advances from the FHLB, brokered certificates of deposit, and income retention.
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.
GAAP based net interest margin declined 7 basis points in 2022 compared to 2021. The following table presents the cost of deposits and the cost of funds for the years ended December 31, 2022, December 31, 2021, and December 31, 2020.
GAAP based net interest margin declined 24 basis points in 2023 compared to 2022. The following table presents the cost of deposits and the cost of funds for the years ended December 31, 2023, December 31, 2022, and December 31, 2021.
The increase in the reserve and the cost of the liability will result in a decrease in 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.
The increase in the ACL and the cost of the liability resulted in a decrease in retained earnings 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.
(2) Interest on tax-exempt securities and loans has been adjusted to a fully tax-equivalent basis using an incremental tax rate of 21% for 2022, 2021, and 2020. Net I nterest Income Tax-equivalent net interest income increased $6.8 million for the full year 2022, compared to the same period in 2021.
(2) Interest on tax-exempt securities and loans has been adjusted to a fully tax-equivalent basis using an incremental tax rate of 21% for 2023, 2022, and 2021. Net Interest Income Tax-equivalent net interest income declined $1.6 million for the full year 2023, compared to the same period in 2022.
ChoiceOne will also record a liability for expected credit losses on unfunded loans and other commitments of between $2.5 million to $3.0 million related to the adoption of CECL. These unfunded loans and other commitments are open credit lines with current customers and loans approved by ChoiceOne but not yet funded.
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.
Loans considered troubled debt restructurings which were not on a nonaccrual basis and were not 90 days or more past due as to principal or interest payments consisted of $3,000 in agricultural loans, $58,000 in commercial and industrial loans, $131,000 in commercial real estate loans and $1.2 million in residential real estate loans at December 31, 2022, compared to $1.8 million in agricultural loans, $73,000 in commercial and industrial loans, $601,000 in commercial real estate loans and $1.3 million in residential real estate loans at December 31, 2021.
Loans considered troubled loan modifications which were not on a nonaccrual basis and were not 90 days or more past due as to principal or interest payments consisted of $60,000 in commercial and industrial loans and $129,000 in residential real estate loans at December 31, 2023, compared to troubled debt restructured loans which were not performing were $3,000 in agricultural loans, $58,000 in commercial and industrial loans, $131,000 in commercial real estate loans and $1.2 million in residential real estate loans at December 31, 2022.
The increase in the reserve and the cost of the liability will result in a decrease in 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.
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. The ACL consists of general and specific components.
Diluted earnings per share was $3.15 in the twelve months ended December 31, 2022, compared to $2.86 per share in the twelve months ended December 31, 2021. ChoiceOne's asset mix has shifted from loans held for investment of 51.6% at December 31, 2021 to 56.2% at December 31, 2022.
Diluted earnings per share were $2.82 in the twelve months ended December 31, 2023, compared to $3.15 per share in the twelve months ended December 31, 2022. ChoiceOne's asset mix has shifted from loans held for investment of 56.2% of deposits at December 31, 2022 to 66.5% of deposits at December 31, 2023.
The Federal Reserve increased the federal funds rate by 4.0% during 2022 in response to published inflation rates. This both increased rates on newly originated loans and increased the rates paid on deposits and led to a net decline in tax equivalent net interest margin of 5 basis points in 2022 compared to 2021.
The Federal Reserve increased the federal funds rate by 5.25% from March 31, 2022 to September 30, 2023 in response to published inflation rates. This increased rates on newly originated loans and rates paid on deposits and led to a net decline in tax equivalent net interest margin of 26 basis points in 2023 compared to 2022.
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 December 31, 2022, and as a result that it is more likely than not that there was no goodwill impairment as of December 31, 2022. 32 Table of Contents Deferred Tax Assets and Liabilities Income taxes include both a current and deferred portion.
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 December 31, 2023, and as a result that it is more likely than not that there was no goodwill impairment as of December 31, 2023.
Loan Servicing Rights Loan servicing rights represent the estimated value of servicing loans that are sold with servicing retained by ChoiceOne and are initially recorded at estimated fair value. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues.
It also prescribes guidance for reporting modifications of loans to borrowers experiencing financial difficulty. Loan Servicing Rights Loan servicing rights represent the estimated value of servicing loans that are sold with servicing retained by ChoiceOne and are initially recorded at estimated fair value. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues.
Nonperforming loans are comprised of (1) loans accounted for on a nonaccrual basis; (2) loans, not included in nonaccrual loans, which are contractually past due 90 days or more as to interest or principal payments; and (3) loans, not included in nonaccrual or past due 90 days or more, which are considered troubled debt restructurings.
Nonperforming loans are comprised of loans accounted for on a nonaccrual basis, loans not included in nonaccrual loans, which are contractually past due 90 days or more as to interest or principal payments, and troubled loan modifications which are accruing and initiated in the past year.
ChoiceOne also holds $3.2 million in subordinated debentures issued in connection with a $4.5 million trust preferred securities offering, which were obtained in the merger with Community Shores, offset by the mark-to-market adjustment.
ChoiceOne also holds $3.2 million in subordinated debentures issued in connection with a $4.5 million trust preferred securities offering, which were obtained in the merger with Community Shores, offset by the mark-to-market adjustment. Shareholders’ Equity Shareholders’ equity totaled $195.6 million as of December 31, 2023, up from $168.9 million as of December 31, 2022.
Management will monitor these capital ratios during 2023 as they relate to asset growth and earnings retention. ChoiceOne’s Board of Directors and management do not plan to allow capital to decrease below those levels necessary to be considered "well capitalized" by regulatory guidelines.
ChoiceOne’s Board of Directors and management do not plan to allow capital to decrease below those levels necessary to be considered "well capitalized" by regulatory guidelines.
Management also maintains a list of loans that are not classified as nonperforming loans but where some concern exists as to the borrowers’ abilities to comply with the original loan terms.
Management also maintains a list of loans that are not classified as nonperforming loans but where some concern exists as to the borrowers’ abilities to comply with the original loan terms. There were 22 loans totaling $357,000 fitting this description as of December 31, 2023, and 10 loans totaling $180,000 fitting this description as of December 31, 2022.
The increase in the average balance of certificates of deposit of $9.3 million, combined with a 31 basis point increase in the rate paid on certificates of deposits in 2022 compared to 2021, led to an increase in interest expense of $664,000.
The increase in the average balance of certificates of deposit of $110.9 million during 2023, combined with a 263 basis point increase in the rate paid on certificates of deposits during 2023, compared to the same period in the prior year, led to an increase in interest expense of $9.0 million during 2023.
Selected Financial Data (Dollars in thousands, except per share data) 2022 2021 2020 For the year Net interest income $ 67,314 $ 60,641 $ 51,071 Provision for loan losses 250 416 4,000 Noninterest income 14,072 19,194 22,698 Noninterest expense 53,478 52,921 50,884 Income before income taxes 27,658 26,498 18,885 Income tax expense 4,018 4,456 3,272 Net income 23,640 22,042 15,613 Cash dividends declared 7,578 7,200 6,174 Per share Basic earnings $ 3.15 $ 2.87 $ 2.08 Diluted earnings 3.15 2.86 2.07 Cash dividends declared 1.01 0.94 0.82 Shareholders' equity (at year end) 22.47 29.52 29.15 Average for the year Securities $ 1,094,559 $ 869,788 $ 388,797 Gross loans 1,104,030 1,040,430 1,014,959 Deposits 2,133,790 1,905,629 1,421,168 Borrowings 13,537 5,465 16,712 Subordinated debt 35,211 12,841 1,532 Shareholders' equity 178,415 225,120 214,591 Assets 2,373,374 2,156,774 1,654,873 At year end Securities $ 972,802 $ 1,116,265 $ 585,687 Gross loans 1,194,616 1,068,831 1,117,798 Deposits 2,118,003 2,052,294 1,674,578 Borrowings 50,000 50,000 9,327 Subordinated debt 35,262 35,017 3,089 Shareholders' equity 168,874 221,669 227,268 Assets 2,385,915 2,366,682 1,919,342 Selected financial ratios Return on average assets 1.00 % 1.02 % 0.94 % Return on average shareholders' equity 13.25 9.79 7.28 Cash dividend payout as a percentage of net income 32.06 32.67 39.54 Shareholders' equity to assets (at year end) 7.08 9.37 11.84 Note - 2020 financial data includes the impact of the merger with Community Shores, which was effective July 1, 2020. 20 Table of Contents Explanatory Note On July 1, 2020, ChoiceOne completed the merger of Community Shores Bank Corporation ("Community Shores") with and into ChoiceOne with ChoiceOne surviving the merger.
Selected Financial Data (Dollars in thousands, except per share data) 2023 2022 2021 For the year Net interest income $ 65,885 $ 67,314 $ 60,641 Provision for credit losses, net 150 250 416 Noninterest income 14,906 14,072 19,194 Noninterest expense 55,074 53,478 52,921 Income before income taxes 25,567 27,658 26,498 Income tax expense 4,306 4,018 4,456 Net income 21,261 23,640 22,042 Cash dividends declared 7,910 7,578 7,200 Per share Basic earnings $ 2.82 $ 3.15 $ 2.87 Diluted earnings 2.82 3.15 2.86 Cash dividends declared 1.05 1.01 0.94 Shareholders' equity (at year end) 25.92 22.47 29.52 Average for the year Securities $ 1,042,559 $ 1,094,559 $ 869,788 Gross loans 1,265,261 1,104,030 1,040,430 Deposits 2,111,970 2,133,790 1,905,629 Borrowings 141,507 13,537 5,465 Subordinated debt 35,382 35,211 12,841 Shareholders' equity 177,201 178,415 225,120 Assets 2,493,840 2,373,374 2,156,774 At year end Securities $ 939,576 $ 972,802 $ 1,116,265 Gross loans 1,415,363 1,194,616 1,068,831 Deposits 2,122,055 2,118,003 2,052,294 Borrowings 200,000 50,000 50,000 Subordinated debt 35,507 35,262 35,017 Shareholders' equity 195,634 168,874 221,669 Assets 2,576,706 2,385,915 2,366,682 Selected financial ratios Return on average assets 0.85 % 1.00 % 1.02 % Return on average shareholders' equity 12.00 13.25 9.79 Cash dividend payout as a percentage of net income 37.21 32.06 32.67 Shareholders' equity to assets (at year end) 7.59 7.08 9.37 19 RESULTS OF OPERATIONS Summary ChoiceOne's net income for 2023 was $21.3 million, compared to $23.6 million in 2022.
Year Ended December 31, 2022 2021 2020 (Dollars in thousands) Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate Assets: Loans (1) (3)(4)(5) $ 1,104,030 $ 52,861 4.79 % $ 1,040,430 $ 48,672 4.68 % $ 1,014,959 $ 46,893 4.62 % Taxable securities (2) 779,915 15,583 2.00 599,902 10,260 1.71 276,085 5,891 2.13 Nontaxable securities (1) 314,644 7,790 2.48 269,886 7,098 2.63 112,712 3,402 3.02 Other 34,255 491 1.43 68,879 84 0.12 71,417 266 0.37 Interest-earning assets 2,232,844 76,725 3.44 1,979,097 66,114 3.34 1,475,173 56,452 3.83 Noninterest-earning assets 140,530 177,677 179,699 Total assets $ 2,373,374 $ 2,156,774 $ 1,654,872 Liabilities and Shareholders' Equity: Interest-bearing demand deposits $ 902,090 $ 3,514 0.39 % $ 791,886 $ 1,797 0.23 % $ 571,693 $ 1,832 0.32 % Savings deposits 452,542 711 0.16 398,969 551 0.14 267,217 300 0.11 Certificates of deposit 196,166 1,620 0.83 186,898 957 0.51 183,836 2,046 1.11 Borrowings 13,537 410 3.02 5,465 101 1.86 16,712 327 1.96 Subordinated debentures 35,211 1,491 4.23 12,841 571 4.45 1,532 139 9.07 Interest-bearing liabilities 1,599,546 7,746 0.48 1,396,059 3,977 0.28 1,040,990 4,644 0.45 Demand deposits 582,992 527,876 398,422 Other noninterest-bearing liabilities 12,421 7,719 870 Total liabilities 2,194,959 1,931,654 1,440,282 Shareholders' equity 178,415 225,120 214,591 Total liabilities and shareholders' equity $ 2,373,374 $ 2,156,774 $ 1,654,873 Net interest income (tax-equivalent basis) (Non-GAAP) (1) $ 68,979 $ 62,137 $ 51,808 Net interest margin (tax-equivalent basis) (Non-GAAP) (1) 3.09 % 3.14 % 3.51 % Reconciliation to Reported Net Interest Income Net interest income (tax-equivalent basis) (Non-GAAP) (1) $ 68,979 $ 62,137 $ 51,808 Adjustment for taxable equivalent interest (1,665 ) (1,513 ) (737 ) Net interest income (GAAP) $ 67,314 $ 60,624 $ 51,071 Net interest margin (GAAP) 3.01 % 3.08 % 3.38 % (1) Adjusted to a fully tax-equivalent basis to facilitate comparison to the taxable interest-earning assets.
Year Ended December 31, 2023 2022 2021 (Dollars in thousands) Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate Assets: Loans (1) (3)(4)(5)(6) $ 1,265,261 $ 68,437 5.41 % $ 1,104,030 $ 52,861 4.79 % $ 1,040,430 $ 48,672 4.62 % Taxable securities (2)(6) 747,006 21,169 2.83 779,915 15,583 2.00 599,902 10,260 2.13 Nontaxable securities (1) 295,553 7,106 2.40 314,644 7,790 2.48 269,886 7,098 3.02 Other 70,826 3,797 5.36 34,255 491 1.43 68,879 84 0.37 Interest-earning assets 2,378,646 100,509 4.23 2,232,844 76,725 3.44 1,979,097 66,114 3.83 Noninterest-earning assets 115,194 140,530 177,677 Total assets $ 2,493,840 $ 2,373,374 $ 2,156,774 Liabilities and Shareholders' Equity: Interest-bearing demand deposits $ 852,927 $ 10,028 1.18 % $ 902,090 $ 3,514 0.39 % $ 791,886 $ 1,797 0.23 % Savings deposits 370,074 1,609 0.43 452,542 711 0.16 398,969 551 0.14 Certificates of deposit 306,999 10,621 3.46 196,063 1,618 0.83 186,898 957 0.51 Brokered deposit 35,044 1,732 4.94 103 2 2.48 - - 0.00 Borrowings 141,507 6,818 4.82 13,537 410 3.02 5,465 101 1.86 Subordinated debentures 35,382 1,636 4.62 35,211 1,491 4.23 12,841 571 4.45 Other 12,258 651 5.31 - - 0.00 - - 0.00 Interest-bearing liabilities 1,754,191 33,095 1.89 1,599,546 7,746 0.48 1,396,059 3,977 0.28 Demand deposits 546,926 582,992 527,876 Other noninterest-bearing liabilities 15,522 12,421 7,719 Total liabilities 2,316,639 2,194,959 1,931,654 Shareholders' equity 177,201 178,415 225,120 Total liabilities and shareholders' equity $ 2,493,840 $ 2,373,374 $ 2,156,774 Net interest income (tax-equivalent basis) (Non-GAAP) (1) $ 67,415 $ 68,979 $ 62,137 Net interest margin (tax-equivalent basis) (Non-GAAP) (1) 2.83 % 3.09 % 3.14 % Reconciliation to Reported Net Interest Income Net interest income (tax-equivalent basis) (Non-GAAP) (1) $ 67,415 $ 68,979 $ 62,137 Adjustment for taxable equivalent interest (1,530 ) (1,665 ) (1513 ) Net interest income (GAAP) $ 65,885 $ 67,314 $ 60,624 Net interest margin (GAAP) 2.77 % 3.01 % 3.08 % (1) Adjusted to a fully tax-equivalent basis to facilitate comparison to the taxable interest-earning assets.
Government and federal agency $ - $ 2,008 U.S. Treasury notes and bonds 78,204 91,979 State and municipal 229,938 534,847 Mortgage-backed 208,563 433,115 Corporate 711 20,642 Asset-backed securities 12,333 16,294 Total $ 529,749 $ 1,098,885 Held to Maturity Securities at amortized cost U.S. Government and federal agency $ 2,966 $ - U.S.
Treasury notes and bonds 80,194 78,204 State and municipal 234,682 229,938 Mortgage-backed 188,501 208,563 Corporate 204 711 Asset-backed securities 11,017 12,333 Total $ 514,598 $ 529,749 Held to Maturity Securities at amortized cost U.S. Government and federal agency $ 2,972 $ 2,966 U.S.
(5) Interest on loans included net origination fees, accretion income, and PPP fees. Accretion income was $2.0 million, $1.1 million, and $420,000 for the full year 2022, 2021 and 2020, respectively.
Accretion income was $1.7 million, $2.0 million, and $1.1 million for the full year 2023, 2022, and 2021, respectively. PPP fees were approximately $0, $1.2 million, and $5.2 million for the full year 2023, 2022, and 2021, respectively.
The balances of these nonperforming loans as of December 31 were as follows: (Dollars in thousands) 2022 2021 Loans accounted for on a nonaccrual basis $ 1,263 $ 1,727 Loans contractually past due 90 days or more as to principal or interest payments - - Loans considered troubled debt restructurings which are not included above 1,404 3,816 Total $ 2,667 $ 5,543 Nonaccrual loans included $1.3 million in residential real estate loans as of December 31, 2022, compared to $313,000 in agricultural loans, $285,000 in commercial and industrial loans, $279,000 in commercial real estate loans, and $850,000 in residential real estate loans as of December 31, 2021.
It is noted that prior to January 1, 2023, loans classified as troubled debt restructurings that were not performing as of December 31, 2022 are included in the table below. 28 The balances of these nonperforming loans as of December 31 were as follows: (Dollars in thousands) 2023 2022 Loans accounted for on a nonaccrual basis $ 1,723 $ 1,263 Loans contractually past due 90 days or more as to principal or interest payments - - Loans modified to borrowers experiencing financial difficulty at December 31, 2023 and troubled debt restructurings as of December 31, 2022. 189 1,404 Total $ 1,912 $ 2,667 Nonaccrual loans included $1.7 million in residential real estate loans as of December 31, 2023, compared to $1.3 million in residential real estate loans as of December 31, 2022.
Remaining credit and yield mark on acquired loans from the recent mergers with County Bank Corp. and Community Shores will accrete into income as the acquired loans mature. ChoiceOne estimates that roughly $4.0 million will accrete into income over the next two to four years.
ChoiceOne recorded accretion income related to acquired loans in the amount of $1.7 million in 2023 and $2.0 million during 2022. 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.
Non-accruing loan average balances were $1.3 million, $3.3 million, and $5.0 million for the year ended 2022, 2021, and 2020, respectively. PPP loan average balances were $8.7 million, $95.9 million, and $84.2 million for the year ended 2022, 2021, and 2020, respectively. At December 31, 2022 no PPP loans remain in ChoiceOne’s loan portfolio.
Non-accruing loan average balances were $1.6 million, $1.3 million, and $3.3 million for the year ended 2023, 2022, and 2021, respectively. PPP loan average balances were $0, $8.7 million, $95.9 million for the year ended 2023, 2022, and 2021, respectively. (5) Interest on loans included net origination fees, accretion income, and PPP fees.
In order to hedge the risk of rising rates and unrealized losses on securities resulting from the rising rates, ChoiceOne currently holds four interest rate swaps with a total notional value of $400.1 million. 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.
In order to hedge the risk of rising rates and unrealized losses on securities resulting from the rising rates, ChoiceOne currently holds pay fixed, receive variable interest rate swaps with a total notional value of $401.0 million.
The determination of our loss factors is based, in part, upon our actual loss history adjusted for significant qualitative factors that, in management's judgment, affect the collectability of the portfolio as of the analysis date. ChoiceOne uses a rolling 20 quarter actual net charge-off history as the basis for the computation.
The determination of our loss factors is based, in part, upon benchmark peer loss history adjusted for qualitative factors that, in management's judgment, affect the collectability of the portfolio as of the analysis date. ChoiceOne's lookback period of benchmark peer net charge-off history was from January 1, 2004 through December 31, 2019 for this analysis.
The change was due to lower net proceeds from loan sales in 2022 compared to 2021, which was offset by the change in other assets and liabilities. Net cash used in investing activities was $90.5 million in 2022 compared to $521.4 million in 2021.
Liquidity and Interest Rate Risk Net cash provided by operating activities was $46.5 million in 2023 compared to $45.0 million in 2022. The change was due to lower net proceeds from loan sales and an increase in other assets in 2023 compared to 2022.
Deposit costs rose steadily during the year with larger increases coming in the fourth quarter as competition and rate awareness has amplified. Securities The Company’s securities balances as of December 31 were as follows: (Dollars in thousands) 2022 2021 Equity securities $ 8,566 $ 8,492 Available for Sale Securities at fair value U.S.
Securities The Company’s securities balances as of December 31 were as follows: (Dollars in thousands) 2023 2022 Equity securities $ 7,505 $ 8,566 Available for Sale Securities at fair value U.S. Government and federal agency $ - $ - U.S.
The Company acquired Valley Ridge Financial Corp. in 2006, County in 2019, and Community Shores in 2020, which resulted in the recognition of goodwill of $13.7 million, $38.9 million and $7.3 million, respectively. We conducted an annual assessment of goodwill as of June 30, 2022 and no impairment was identified.
The Company acquired Valley Ridge Financial Corp. in 2006, County Bank Corp in 2019, and Community Shores in 2020, which resulted in the recognition of goodwill of $13.7 million, $38.9 million and $7.3 million, respectively. 35 During the prior year, ChoiceOne engaged a third party valuation firm to assist in performing a quantitative analysis of goodwill as of November 30, 2022 ("the valuation date").
PPP fees were approximately $1.2 million, $5.2 million, and $3.0 million for the full year 2022, 2021, and 2020, respectively. 23 Table of Contents Table 2 – Changes in Tax-Equivalent Net Interest Income Year Ended December 31, (Dollars in thousands) 2022 Over 2021 2021 Over 2020 Total Volume Rate Total Volume Rate Increase (decrease) in interest income (1) Loans (2) $ 4,189 $ 3,026 $ 1,163 $ 1,779 $ 1,187 $ 592 Taxable securities 5,323 3,410 1,913 4,369 5,737 (1,368 ) Nontaxable securities (2) 692 1,126 (434 ) 3,696 4,185 (489 ) Other 407 (62 ) 469 (182 ) (9 ) (173 ) Net change in interest income $ 10,611 $ 7,500 $ 3,111 $ 9,662 $ 11,099 $ (1,437 ) Increase (decrease) in interest expense (1) Interest-bearing demand deposits $ 1,717 $ 279 $ 1,438 $ (35 ) $ 588 $ (623 ) Savings deposits 159 79 80 251 171 80 Certificates of deposit 664 50 614 (1,089 ) 34 (1,123 ) Borrowings 309 217 92 (226 ) (210 ) (16 ) Subordinated debentures 920 948 (28 ) 432 1,516 (37 ) Net change in interest expense $ 3,769 $ 1,573 $ 2,196 $ (667 ) $ 2,099 $ (1,719 ) Net change in tax-equivalent net interest income $ 6,841 $ 5,927 $ 915 $ 10,329 $ 9,001 $ 282 (1) The volume variance is computed as the change in volume (average balance) multiplied by the previous year’s interest rate.
(6) Interest income for 2023 was reduced by $2.8 million due to amortization expense related to the March 2023 sale of the pay floating swap derivative. 22 Table 2 – Changes in Tax-Equivalent Net Interest Income Year Ended December 31, (Dollars in thousands) 2023 Over 2022 2022 Over 2021 Total Volume Rate Total Volume Rate Increase (decrease) in interest income (1) Loans (2) $ 15,576 $ 8,264 $ 7,312 $ 4,189 $ 3,026 $ 1,163 Taxable securities 5,586 (682 ) 6,268 5,323 3,410 1,913 Nontaxable securities (2) (684 ) (455 ) (229 ) 692 1,126 (434 ) Other 3,306 925 2,381 407 (62 ) 469 Net change in interest income $ 23,784 $ 8,052 $ 15,732 $ 10,611 $ 7,500 $ 3,111 Increase (decrease) in interest expense (1) Interest-bearing demand deposits $ 6,514 $ (202 ) $ 6,716 $ 1,717 $ 279 $ 1,438 Savings deposits 898 (152 ) 1,050 159 79 80 Certificates of deposit 9,003 1,364 7,639 664 50 614 Brokered deposit 1,730 1,725 5 - - - Borrowings 6,408 6,029 379 309 217 92 Subordinated debentures 145 7 138 920 948 (28 ) Other 651 651 - - - - Net change in interest expense $ 25,349 $ 9,422 $ 15,927 $ 3,769 $ 1,573 $ 2,196 Net change in tax-equivalent net interest income $ (1,565 ) $ (1,370 ) $ (195 ) $ 6,841 $ 5,927 $ 915 (1) The volume variance is computed as the change in volume (average balance) multiplied by the previous year’s interest rate.
ChoiceOne received principal payments for municipal and mortgage-backed securities totaling $40.1 million during 2022 . At December 31, 2022, the Company had $161.0 million in unrealized losses on its investment securities, including $89.0 million in unrealized losses on available for sale securities and $72.0 in unrealized losses on held to maturity securities.
At December 31, 2023, the Company had $128.9 million in unrealized losses on its investment securities, including $69.7 million in unrealized losses on available for sale securities and $59.2 million in unrealized losses on held to maturity securities.
Management’s evaluation of the adequacy of the allowance for loan losses is an estimate based on reviews of individual loans, assessments of the impact of current economic conditions on the portfolio and historical loss experience of seasoned loan portfolios.
The general component of management's estimate of the allowance for loan losses covers non-impaired loans and is based on historical loss experience adjusted for current factors.
At December 31, 2022, the Bank was categorized as "well-capitalized" under regulatory guidelines. 29 Table of Contents Table 4 – Contractual Obligations The following table discloses information regarding the maturity of ChoiceOne’s contractual obligations at December 31, 2022: Payment Due by Period Less More than 1 - 3 3 - 5 than (Dollars in thousands) Total 1 year Years Years 5 Years Time deposits $ 238,174 $ 210,989 $ 22,113 $ 5,072 $ - Borrowings 50,000 50,000 - - - Cumulative Preferred Securities (1) 3,795 - - - 3,795 ChoiceOne Subordinated Debenture (2) 32,500 - - - 32,500 Operating leases 1,012 322 459 231 - Other obligations 164 70 62 18 14 Total $ 325,645 $ 261,381 $ 22,634 $ 5,321 $ 36,309 (1) Cumulative preferred securities on the balance sheet include $504,000 of discount due to a mark to market adjustment which is not reflected in the table above.
Table 4 – Contractual Obligations The following table discloses information regarding the maturity of ChoiceOne’s contractual obligations at December 31, 2023: Payment Due by Period Less More than 1 - 3 3 - 5 than (Dollars in thousands) Total 1 year Years Years 5 Years Time deposits $ 390,296 $ 351,516 $ 33,659 $ 4,855 $ 266 Borrowings 200,000 170,000 30,000 - - ChoiceOne Capital Trust (1) 4,500 - - - 4,500 ChoiceOne Subordinated Debenture (2) 32,500 - - - 32,500 Operating leases 777 314 398 65 - Other obligations 94 51 20 18 5 Total $ 628,167 $ 521,881 $ 64,077 $ 4,938 $ 37,271 (1) Cumulative preferred securities on the balance sheet include $1.1 million of discount due to a mark to market adjustment which is not reflected in the table above. 30 (2) ChoiceOne subordinated debenture on the balance sheet includes $385,000 of capitalized issuance cost which is not reflected in the table above.
Refer to footnote 8 and 23 for more discussion on ChoiceOne’s derivative position. The Bank’s Investment Committee continues to monitor the portfolio and purchases securities as it considers prudent. Equity securities included a money market preferred security ("MMP") of $1.0 million and common stock of $7.6 million as of December 31, 2022 .
Equity securities included a money market preferred security ("MMP") of $1.0 million and common stock of $6.5 million as of December 31, 2023. As of December 31, 2022, equity securities included a MMP of $1.0 million and common stock of $7.6 million.
In September 2021, ChoiceOne completed a private placement of $32.5 million in aggregate principal amount of 3.25% fixed-to-floating rate subordinated notes due 2031. In addition, ChoiceOne holds certain subordinated debentures issued in connection with a trust preferred securities offering that were obtained as part of the merger with Community Shores.
In addition, ChoiceOne holds certain subordinated debentures issued in connection with a trust preferred securities offering that were obtained as part of the merger with Community Shores. The average balance of subordinated debentures was relatively flat in 2023 compared to the same period in the prior year.
There were 10 loans totaling $180,000 fitting this description as of December 31, 2022 , and no loans fitting that description on December 31, 2021 . 28 Table of Contents Deposits and Other Funding Sources The Company’s deposit balances as of December 31 were as follows: (Dollars in thousands) 2022 2021 Noninterest-bearing demand deposits $ 599,579 $ 560,931 Interest-bearing demand deposits 638,641 665,482 Money market deposits 214,026 218,211 Savings deposits 427,583 425,626 Local certificates of deposit 236,431 182,044 Brokered certificates of deposit 1,743 - Total deposits $ 2,118,003 $ 2,052,294 Total deposits increased $65.7 million from December 31, 2021 to December 31, 2022 ; however, most of this was in the first half of 2022.
Deposits and Other Funding Sources The Company’s deposit balances as of December 31 were as follows: (Dollars in thousands) 2023 2022 Noninterest-bearing demand deposits $ 547,625 $ 599,579 Interest-bearing demand deposits 599,681 638,641 Money market deposits 247,602 214,026 Savings deposits 336,851 427,583 Local certificates of deposit 366,851 236,431 Brokered certificates of deposit 23,445 1,743 Total deposits $ 2,122,055 $ 2,118,003 Deposits, excluding brokered deposits, increased by $14.7 million or an annualized 2.8% in the fourth quarter of 2023 and decreased $17.7 million or 0.8% as of December 31, 2023 compared to December 31, 2022.
ChoiceOne had $50.0 million in outstanding borrowings at FHLB as of December 31, 2022, and $39.6 million of additional borrowing capacity was available based on residential real estate loans pledged as collateral at the end of 2022. The acceptance of brokered certificates of deposit is not limited as long as the Bank is categorized as “well capitalized” under regulatory guidelines.
The acceptance of brokered certificates of deposit is not limited as long as the Bank is categorized as “well capitalized” under regulatory guidelines. At December 31, 2023, total available borrowing capacity from the FHLB and the Federal Reserve Bank was $933.3 million. ChoiceOne continues to review its liquidity management and has taken steps in an effort to ensure adequacy.
Interest income increased $10.4 million in the twelve months ended December 31, 2022, compared to the same period in 2021. The increase was driven by a $6.3 million increase in securities interest income largely due to an increase in the average balance of securities of $190.1 million during 2022.
Total assets increased by $190.8 million in the twelve months ended December 31, 2023. As a result of the change in asset mix and increase in total assets, interest income increased $23.9 million in the twelve months ended December 31, 2023, compared to the same period in 2022.
At December 31, 2022, the aggregate balance of all deposits exceeding the FDIC insured limit of $250,000 totaled $823.2 million, or 39% of total deposits, compared to $889.2 million, or 43% of total deposits and $583.7 million, or 35% of total deposits at December 31, 2021 and 2020, respectively.
At December 31, 2023, total available borrowing capacity from all sources was $933.3 million. Total deposits exceeding the FDIC insured limit of $250,000 for individual and $500,000 for joint accounts were $769.7 million or 36.3% of deposits at December 31, 2023, compared to $823.2 million, or 38.9% of total deposits at December 31, 2022.
Core deposits, which we define as insured branch deposits less certificates of deposit, totaled $1.2 billion or 55.0% of total deposits at December 31, 2022. Shareholders’ Equity Total shareholders' equity declined $52.8 million in 2022. Accumulated other comprehensive income declined $69.2 million in 2022 as a result of market value declines in ChoiceOne’s available for sale securities.
Core deposits, which we define as insured branch deposits less certificates of deposit, totaled $823.2 million or 38.8% of total deposits at December 31, 2023.
The cash dividend payout as a percentage of net income was 32% as of December 31, 2022, compared to 33% as of December 31, 2021. Inco me Taxes Income tax expense was $438,000 lower in 2022 than in 2021.
The dividend yield for ChoiceOne’s common stock was 3.58% as of the end of 2023, compared to 3.48% as of the end of 2022. The cash dividend payout as a percentage of net income was 37% as of December 31, 2023, compared to 32% as of December 31, 2022.
In addition, the average rate earned on loans increased 11 basis points in 2022 compared to 2021. The increase in interest income from loans and the average rate increase on loans is muted by a $3.9 million decline in PPP fee income in the full year 2022 compared to 2021.
The increase in interest income from loans and the average rate increase on loans was muted by a decline in PPP fees and an increase in expense related to derivatives in the twelve months ended December 31, 2023, compared to the same period in 2022. PPP fee income in 2023 was $0 compared to $1.2 million in 2022.
Approximately 20% to 25% of this increase is related to the migration of purchased loans into the portfolio assessed by the CECL calculation. Purchased loans carry approximately $4.0 million of accretable yield, which will be recognized into income over the remaining life of the loans.
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.
Treasury notes and bonds - - State and municipal 201,890 - Mortgage-backed 200,473 - Corporate 19,603 - Asset-backed securities 974 - Total $ 425,906 $ - In the last two years ChoiceOne has grown its securities portfolio substantially.
Treasury notes and bonds - - State and municipal 196,098 201,890 Mortgage-backed 188,329 200,473 Corporate 20,013 19,603 Asset-backed securities 547 974 Total $ 407,959 $ 425,906 Total investment securities declined $34.2 million from December 31, 2022 to December 31, 2023. ChoiceOne purchased $7.1 million of securities in 2023.
ChoiceOne's primary market risk exposure occurs in the form of interest rate risk. Liquidity risk also can have an impact but to a lesser extent. ChoiceOne's business is transacted in U.S. dollars with no foreign exchange risk exposure. Agricultural loans comprise a relatively small portion of ChoiceOne's total assets.
ChoiceOne had net cash from borrowings of $150.0 million in the full year 2023, compared to $0 in the full year 2022. ChoiceOne's market risk exposure occurs in the form of interest rate risk and liquidity risk. ChoiceOne's business is transacted in U.S. dollars with no foreign exchange risk exposure.
This was offset by the liquidation of $47.2 million in securities during 2022, resulting in an $809,000 realized loss and reduced the risk of extension on certain fixed income securities which included a call option. Securities totaling $19.6 million were called or matured in 2022 .
This was offset by the liquidation of $4.8 million in securities during 2023, resulting in a $71,000 realized loss. Securities totaling $11.5 million were called or matured in 2023. ChoiceOne received principal payments for municipal and mortgage-backed securities totaling $37.4 million during 2023.
Borrowing interest expense for the twelve months ended December 31, 2022, increased $1.2 million as compared to the same period in 2021 primarily due to the issuance of $32.5 million in subordinated debt that was completed in the third quarter of 2021 and the increase in rates on short-term borrowings.
Interest expense on borrowings for the twelve months ended December 31, 2023, increased $7.2 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 $30 million of FHLB borrowings at a weighted average fixed rate of 4.7% at December 31, 2023.
Nonperforming loans were $2.7 million as of December 31, 2022 compared to $5.5 million as of December 31, 2021. The allowance for loan losses was 0.64% of total loans at December 31, 2022, compared to 0.76% at December 31, 2021.
The ACL was 1.11% of total loans, excluding loans held for sale, at December 31, 2023, compared to 1.24% as of January 1, 2023 (the CECL adoption date) and 0.64% at December 31, 2022.
ChoiceOne Bank remains “well-capitalized” with a total risk-based capital ratio of 13.0% as of December 31, 2022, compared to 12.9% on December 31, 2021. ChoiceOne repurchased 25,899 shares for $683,000, or a weighted average all-in cost per share of $26.35, during the first quarter of 2022.
ChoiceOne Bank remains “well-capitalized” with a total risk-based capital ratio of 12.4% as of December 31, 2023, compared to 13.0% on December 31, 2022. ChoiceOne uses interest rate swaps to manage interest rate exposure to certain fixed assets and variable rate liabilities.
ChoiceOne purchased $63.6 million of securities and had maturities or sales of securities of $106.4 million in 2022 compared to $637.9 million in purchases and $83.9 million in maturities or sales in 2021, respectively. An increase in net loan originations led to cash used of $130.6 million in 2022 compared to cash provided of $45.4 million in the prior year.
Net cash used in investing activities was $181.4 million in 2023 compared to $90.5 million in 2022. ChoiceOne had loan originations and payments of $221.2 million in the full year 2023, compared to $130.6 million in the same period in the prior year. Net cash provided by financing activities was $146.4 million in 2023, compared to $57.5 million in 2022.
As of February 28, 2023 ChoiceOne estimates that it has total borrowing capacity of $398.3 million, and if additional securities are pledged with the FHLB, will have the ability to borrow up to $716.3 million. 30 Table of Contents NON-GAAP FINANCIAL MEASURES This report contains financial measures that are not defined in U.S. generally accepted accounting principles ("GAAP").
These steps include limiting bond purchases in 2023, pledging securities to FHLB and the Federal Reserve Bank in order to increase borrowing capacity and using alternative funding sources such as brokered deposits. 31 NON-GAAP FINANCIAL MEASURES This report contains financial measures that are not defined in U.S. generally accepted accounting principles ("GAAP").
ChoiceOne has also experienced core loan growth during 2022 leading to an increase in interest income from loans of $4.2 million in the full year 2022, compared to the same period in the prior year. Average core loans, which exclude PPP loans, loans held for sale, and loans to other financial institutions, grew $153.9 million during the full year 2022.
Year Ended December 31, 2023 2022 2021 Cost of deposits 1.14 % 0.27 % 0.17 % Cost of funds 1.44 % 0.35 % 0.21 % ChoiceOne has experienced substantial core loan growth from December 31, 2022 to December 31, 2023, leading to an increase in interest income from loans of $15.6 million in the twelve months ended December 31, 2023, compared to the same period in the prior year.
Growth of $163.8 million in the average balance of interest-bearing demand deposits and savings deposits and a combined 11 basis point increase in the average rate paid, caused interest expense to increase $1.9 million in 2022 compared to the prior year.
Interest expense increased $25.3 million for the full year 2023, compared to the same period in the prior year. The average rate paid on interest bearing-demand deposits and savings deposits increased 64 basis points in the twelve months ended December 31, 2023, compared to the same period in the prior year.
Approximately 20% to 25% of this increase is related to the migration of purchased loans into the portfolio assessed by the CECL calculation. ChoiceOne will also record a liability for expected credit losses on unfunded loans and other commitments of between $2.5 million to $3.0 million related to the adoption of CECL.
On January 1, 2023, ChoiceOne adopted ASU 2016-13 CECL which caused an increase in the ACL of $7.2 million and booked a liability for expected credit losses on unfunded loans and other commitments of $3.3 million.
No shares of common stock were repurchased for the remainder of 2022; however, ChoiceOne may strategically repurchase shares of common stock in the future depending on market and other conditions. Note 21 to the consolidated financial statements presents regulatory capital information for ChoiceOne and the Bank at the end of 2022 and 2021.
Note 21 to the consolidated financial statements presents regulatory capital information for ChoiceOne and the Bank at the end of 2023 and 2022. Management will monitor these capital ratios during 2024 as they relate to asset growth and earnings retention.
As permitted by U.S. generally accepted accounting principles, unrecognized losses on securities held to maturity do not reduce other comprehensive income and, as a result, are not reflected as a reduction to shareholders’ equity on our balance sheet.
The decline compared to December 31, 2022 was due to the sale of an equity position during the third quarter. 27 Per U.S. generally accepted accounting principles, unrealized gains or losses on securities available for sale are reflected on the balance sheet in accumulated other comprehensive income (loss), while unrealized gains or losses on securities held to maturity are not reflected on the balance sheet in accumulated other comprehensive income (loss).
Removed
Accordingly, the reported consolidated financial condition and operating results as of and for the years ended December 31, 2020, December 31, 2021, and December 31, 2022 include the impact of the merger, which was effective as of July 1, 2020. On October 1, 2019, ChoiceOne completed the merger of County Bank Corp.
Added
This increase was driven by core loan growth of $201.5 million or 16.9%, which was partially offset by a decrease in investment securities of $33.2 million. Loans to other financial institutions, consisting of a warehouse line of credit, increased $19.4 million during the full year 2023.
Removed
("County") with and into ChoiceOne with ChoiceOne surviving the merger. Accordingly, the reported consolidated financial condition and operating results as of and for the years ended December 31, 2020, December 31, 2021, and December 31, 2022 include the impact of the merger, which was effective as of October 1, 2019.
Added
Deposits, excluding brokered deposits, decreased $17.7 million or 0.8% as of December 31, 2023 compared to December 31, 2022.
Removed
For additional details regarding the mergers with Community Shores and County, see Note 22 (Business Combinations) of the Notes to the Consolidated Financial Statements included in Item 8 of this report. RESULTS OF OPERATIONS Summary ChoiceOne's net income for 2022 was $23.6 million, compared to $22.0 million in 2021 .
Added
The decrease in deposits since December 31, 2022 was largely concentrated in the first quarter of 2023 as a result of a combination of customers using cash on hand for debt payoffs, seasonal tax and municipal bond payments, and customers seeking higher rates in money market securities or other investments.
Removed
Core loans, which exclude PPP loans, loans held for sale, and loans to other financial institutions, grew organically by $206.1 million or 21.0% during the full year 2022. Loans to other financial institutions, consisting of a warehouse line of credit, were suspended at the end of the third quarter 2022 to preserve liquidity for loan growth.
Added
Deposits grew in the third and fourth quarters of 2023 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.
Removed
ChoiceOne continues to have ample on balance sheet liquidity to fund future loan growth, including an estimated $178.7 million of cash flow from securities over the next two years. Overall, t otal assets grew less than 1% or $19.2 million in 2022.
Added
At December 31, 2023, total available borrowing capacity from all sources was $933.3 million. The increase in short term interest rates has led to higher deposit costs, which rose to 1.14% in 2023 compared to 0.27% in 2022 as deposits reprice and customers shift to CD and other interest bearing products. This trend is likely to persist.
Removed
ChoiceOne saw deposits decline $38.7 million in the fourth quarter of 2022 due to some seasonality in municipal deposits and increased competition. The cost of these deposits also increased by $940,000 in the fourth quarter of 2022 compared to the third quarter of 2022 and $1.8 million compared to the fourth quarter of 2021.
Added
ChoiceOne is taking active measures to control these costs and expects to continue to pay lower rates on deposits than the federal funds rate. Interest expense on borrowings for the twelve months ended December 31, 2023, increased $7.2 million, compared to the same period in the prior year, due to increases in borrowing amounts and interest rates.
Removed
Deposits have increased by $65.7 million in the twelve months ended December 31, 2022; however, during that time deposit expense has increased $2.5 million. Cost of interest-bearing deposits increased to 0.66% in the fourth quarter of 2022 primarily due to the increases in rates offered to retain clients and an increased customer interest in certificates of deposit.
Added
Borrowings include $170 million from the BTFP and $30 million of FHLB borrowings at a weighted average fixed rate of 4.7%. Total cost of funds increased to 1.44% in 2023 compared to 0.35% in 2022. ChoiceOne adopted CECL effective January 1, 2023 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures.
Removed
ChoiceOne is actively managing these costs while still retaining funds, and anticipates that deposit expense will continue to lag the cumulative increases in the federal funds rate.
Added
Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts are reported in accordance with the incurred loss accounting standard.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

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Biggest changeThe simulation model measures the effect of immediate interest rate changes on both net interest income and shareholders' equity. 33 Table of Contents Table 6 provides an illustration of hypothetical interest rate changes as of December 31, 2022 and 2021: Table 6 – Sensitivity to Changes in Interest Rates 2022 Net Market (Dollars in thousands) Interest Percent Value of Percent Income Change Equity Change Change in Interest Rate 200 basis point rise 61,826 -11 % 355,701 15 % 100 basis point rise 66,025 -5 % 338,913 9 % Base rate scenario 69,734 0 % 309,801 0 % 100 basis point decline 71,788 3 % 260,889 -16 % 200 basis point decline 71,276 2 % 181,078 -42 % 2021 Net Market (Dollars in thousands) Interest Percent Value of Percent Income Change Equity Change Change in Interest Rate 200 basis point rise 60,058 -1 % 416,435 -5 % 100 basis point rise 60,482 -1 % 437,975 - % Base rate scenario 60,970 - % 439,144 - % 100 basis point decline 59,132 -3 % 390,180 -11 % 200 basis point decline 57,503 -6 % 326,201 -26 % As of December 31, 2022, the Bank was within its guidelines for immediate rate shocks up and down for all net interest income scenarios and for the up rate scenarios for the market value of shareholders’ equity.
Biggest changeTable 6 provides an illustration of hypothetical interest rate changes as of December 31, 2023 and 2022: Table 6 – Sensitivity to Changes in Interest Rates 2023 Net Market (Dollars in thousands) Interest Percent Value of Percent Income Change Equity Change Change in Interest Rate 200 basis point rise 67,650 -2 % 480,950 8 % 100 basis point rise 68,430 -1 % 469,920 5 % Base rate scenario 69,100 - % 446,210 - % 100 basis point decline 66,660 -4 % 407,940 -9 % 200 basis point decline 66,120 -4 % 350,800 -21 % 2022 Net Market (Dollars in thousands) Interest Percent Value of Percent Income Change Equity Change Change in Interest Rate 200 basis point rise 61,826 -11 % 355,701 15 % 100 basis point rise 66,025 -5 % 338,913 9 % Base rate scenario 69,734 - % 309,801 - % 100 basis point decline 71,788 3 % 260,889 -16 % 200 basis point decline 71,276 2 % 181,078 -42 % As of December 31, 2023, the Bank was within its guidelines for immediate rate shocks up and down for all net interest income scenarios and for the up rate scenarios for the market value of shareholders’ equity.
The ALCO uses a simulation model to measure the Bank's interest rate risk. The model incorporates changes in interest rates on rate-sensitive assets and liabilities. The degree of rate sensitivity is affected by prepayment assumptions that exist in the assets and liabilities.
The Risk Committee uses a simulation model to measure the Bank’s interest rate risk. The model incorporates changes in interest rates on rate-sensitive assets and liabilities. The degree of rate sensitivity is affected by prepayment assumptions that exist in the assets and liabilities.
As of December 31, 2021, the Bank was within its guidelines for immediate rate shocks up and down for all net interest income scenarios and for the up rate scenarios and the down 100 and down 200 basis points scenarios for the market value of shareholders’ equity.
As of December 31, 2022, the Bank was within its guidelines for immediate rate shocks up and down for all net interest income scenarios and for the up rate scenarios and the down 100 and down 200 basis points scenarios for the market value of shareholders’ equity.
One method the ALCO uses of measuring interest rate sensitivity is the ratio of rate-sensitive assets to rate-sensitive liabilities. An asset or liability is considered to be rate-sensitive if it matures or otherwise reprices within a given time frame.
One method the Risk Committee uses of measuring interest rate sensitivity is the ratio of rate-sensitive assets to rate-sensitive liabilities. An asset or liability is considered to be rate-sensitive if it matures or otherwise reprices within a given time frame.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk Interest rate risk is related to liquidity because each is affected by maturing assets and sources of funds. ChoiceOne’s Asset/Liability Management Committee (the "ALCO") attempts to stabilize the interest rate spread and avoid possible adverse effects when unusual or rapid changes in interest rates occur.
Item 7A. Qu antitative and Qualitative Disclosures About Market Risk Interest rate risk is related to liquidity because each is affected by maturing assets and sources of funds. ChoiceOne’s Risk Committee attempts to stabilize the interest rate spread and avoid possible adverse effects when unusual or rapid changes in interest rates occur.
The ALCO plans to continue to monitor the effect of changes in interest rates on both net interest income and shareholders’ equity and will make changes in the duration of its rate-sensitive assets and rate-sensitive liabilities where necessary. 34 Table of Contents
The Risk Committee plans to continue to monitor the effect of changes in interest rates on both net interest income and shareholders’ equity and will make changes in the duration of its rate-sensitive assets and rate-sensitive liabilities where necessary.
At December 31, 2022 , management used a simulation model to subject its assets and liabilities up to an immediate 200 basis point increase and decline. The maturities of loans and mortgage-backed securities were affected by certain prepayment assumptions. Maturities for interest-bearing core deposits were based on an estimate of the period over which they would be outstanding.
The maturities of loans and mortgage-backed securities were affected by certain prepayment assumptions. Maturities for interest-bearing core deposits were based on an estimate of the period over which they would be outstanding. The maturities of advances from the borrowings were based on their contractual maturity dates.
As interest rates change, the ALCO will attempt to match its maturing assets with corresponding liabilities to maximize ChoiceOne’s net interest income. Another method the ALCO uses to monitor its interest rate sensitivity is to subject rate-sensitive assets and liabilities to interest rate shocks.
The Risk Committee plans to continue to monitor the ratio of rate-sensitive assets to rate-sensitive liabilities on a quarterly basis in 2024. As interest rates change, the Risk Committee will attempt to match its maturing assets with corresponding liabilities to maximize ChoiceOne’s net interest income.
The maturities of advances from the FHLB were based on their contractual maturity dates. In the case of variable rate assets and liabilities, repricing dates were used to determine their values.
In the case of variable rate assets and 37 liabilities, repricing dates were used to determine their values. The simulation model measures the effect of immediate interest rate changes on both net interest income and shareholders’ equity.
Although these categories have the ability to reprice immediately, management has some control over the actual timing or extent of the changes in interest rates on these liabilities. The ALCO plans to continue to monitor the ratio of rate-sensitive assets to rate-sensitive liabilities on a quarterly basis in 2023.
Table 5 above shows the entire balance of interest-bearing demand deposits, savings deposits, and money market deposits in the shortest repricing term. Although these categories have the ability to reprice immediately, management has some control over the actual timing or extent of the changes in interest rates on these liabilities.
ChoiceOne’s ratio of rate-sensitive assets to rate-sensitive liabilities that matured or repriced within a one-year time frame was 36% at December 31, 2022, compared to 43% at December 31, 2021. Table 5 above shows the entire balance of interest-bearing demand deposits, savings deposits, and money market deposits in the shortest repricing term.
Further details can be found in Note 8 – Derivatives and Hedging Activities. Under this method, the Risk Committee measures interest rate sensitivity by focusing on the one-year repricing gap. ChoiceOne’s ratio of rate-sensitive assets to rate-sensitive liabilities that matured or repriced within a one-year time frame was 38% at December 31, 2023, compared to 36% at December 31, 2022.
Removed
Table 5 documents the maturity or repricing schedule for ChoiceOne’s rate-sensitive assets and liabilities for selected time periods: Table 5 – Maturities and Repricing Schedule As of December 31, 2022 (Dollars in thousands) 0 - 3 3 - 12 1 - 5 Over Months Months Years 5 Years Total Assets Equity securities at fair value $ 8,566 $ - $ - $ - $ 8,566 Securities available for sale 101,285 15,385 36,210 376,869 529,749 Securities held to maturity 34,815 9,690 21,685 359,716 425,906 Federal Home Loan Bank stock 3,517 - - - 3,517 Federal Reserve Bank stock - - - 5,064 5,064 Loans held for sale 4,834 - - - 4,834 Loans 226,530 158,176 577,920 227,156 1,189,782 Cash surrender value of life insurance policies - - - 43,978 43,978 Interest rate derivative contracts 2,171 - 7,033 - 9,204 Rate-sensitive assets $ 381,718 $ 183,251 $ 642,848 $ 1,012,783 $ 2,220,600 Liabilities Interest-bearing demand deposits $ 638,641 $ - $ - $ - $ 638,641 Money market deposits 214,026 - - - 214,026 Savings deposits 427,583 - - - 427,583 Certificates of deposit 55,701 155,288 27,184 - 238,173 Borrowings 50,000 - - - 50,000 Subordinated debentures 3,795 - 32,500 - 36,295 Interest rate derivative contracts 5,823 - - - 5,823 Rate-sensitive liabilities $ 1,395,569 $ 155,288 $ 59,684 $ - $ 1,610,541 Rate-sensitive assets less rate-sensitive liabilities: Asset (liability) gap for the period $ (1,013,851 ) $ 27,963 $ 583,164 $ 1,012,783 $ 610,059 Cumulative asset (liability) gap $ (1,013,851 ) $ (985,888 ) $ (402,724 ) $ 610,059 Under this method, the ALCO measures interest rate sensitivity by focusing on the one-year repricing gap.
Added
Table 5 documents the maturity or repricing schedule for ChoiceOne’s rate-sensitive assets and liabilities for selected time periods: Table 5 – Maturities and Repricing Schedule As of December 31, 2023 (Dollars in thousands) 0 - 3 3 - 12 1 - 5 Over Months Months Years 5 Years Total Assets Equity securities at fair value $ 7,505 $ - $ - $ - $ 7,505 Securities available for sale 72,671 16,262 116,948 308,717 514,598 Securities held to maturity 23,863 7,932 28,282 347,882 407,959 Federal Home Loan Bank stock 4,449 - - - 4,449 Federal Reserve Bank stock - - - 5,065 5,065 Loans held for sale 4,710 - - - 4,710 Loans to other financial institutions 19,400 - - - 19,400 Core Loans 311,184 170,790 719,686 189,593 1,391,253 Cash surrender value of life insurance policies - - - 45,074 45,074 Interest rate derivative contracts 716 8,164 - - 8,880 Rate-sensitive assets $ 444,498 $ 203,148 $ 864,916 $ 896,331 $ 2,408,893 Liabilities Interest-bearing demand deposits $ 599,681 $ - $ - $ - $ 599,681 Money market deposits 247,602 - - - 247,602 Savings deposits 336,851 - - - 336,851 Certificates of deposit 71,688 261,019 33,878 266 366,851 Brokered deposits 12,056 6,754 4,635 - 23,445 Borrowings - 170,000 30,000 - 200,000 Subordinated debentures 3,392 - 32,115 - 35,507 Interest rate derivative contracts - - - - - Rate-sensitive liabilities $ 1,271,270 $ 437,773 $ 100,628 $ 266 $ 1,809,937 Rate-sensitive assets less rate-sensitive liabilities: Asset (liability) gap for the period $ (826,772 ) $ (234,625 ) $ 764,288 $ 896,065 $ 598,956 Cumulative asset (liability) gap $ (826,772 ) $ (1,061,397 ) $ (297,109 ) $ 598,956 (1) Interest rate derivative contracts include pay fixed, receive variable swaps with a notional value of $401.0 million.
Added
Another method the Risk Committee uses to monitor its interest rate sensitivity is to subject rate-sensitive assets and liabilities to interest rate shocks. At December 31, 2023, management used a simulation model to subject its assets and liabilities up to an immediate 200 basis point increase and decline.

Other COFS 10-K year-over-year comparisons