425: ChoiceOne Financial Services Reports Strong Third Quarter 2024 Results, Fueled by Loan and Deposit Growth

ChoiceOne Financial Services announced a significant increase in net income for Q3 2024, driven by core loan and deposit growth, and highlighted its pending merger with Fentura Financial, Inc.

Summary

• ChoiceOne Financial Services reported a net income of $7.348 million for the third quarter of 2024, a 43.5% increase compared to $5.122 million in the same period of 2023.
• For the nine months ended September 30, 2024, net income was $19.568 million, up 22.6% from $15.968 million in 2023.
• Adjusted for merger-related expenses, net income was $7.981 million and $20.201 million for the three and nine months ended September 30, 2024, respectively.
• Diluted earnings per share were $0.85 for Q3 2024, compared to $0.68 in Q3 2023, and $2.46 for the nine months ended September 30, 2024, compared to $2.12 in the same period last year.
• The Capital Raise of 1,380,000 shares of common stock at $25.00 per share, completed on July 26, 2024, negatively impacted diluted earnings per share.
• GAAP net interest margin increased to 3.17% in Q3 2024, compared to 2.95% in Q2 2024 and 2.64% in Q3 2023.
• Net interest income was $20.2 million in Q3 2024, compared to $16.2 million in Q3 2023, aided by cash settlements from pay-fixed interest rate swaps.
• Core loans grew organically by $64.5 million, or 18.4% annualized, during Q3 2024, and $179.4 million, or 14.0%, since September 30, 2023.
• Deposits, excluding brokered deposits, increased by $102.1 million, or 19.5% annualized, in Q3 2024, and $117.6 million, or 5.7%, since September 30, 2023.
• Asset quality remains strong, with nonperforming loans to total loans (excluding held for sale) at 0.19% as of September 30, 2024.
• Total assets were $2.7 billion as of September 30, 2024, an increase of $151.8 million compared to September 30, 2023.
• ChoiceOne entered into a definitive merger agreement with Fentura Financial, Inc. on July 25, 2024.
• Total available borrowing capacity secured by pledged assets was $780.6 million as of September 30, 2024.
• Shareholders equity totaled $247.7 million as of September 30, 2024, up from $181.2 million as of September 30, 2023, due to the Capital Raise and retained earnings.

Sentiment

Score: 8

Explanation: The document presents a positive outlook with strong financial results, strategic growth initiatives, and a well-managed balance sheet. The merger with Fentura adds to the positive sentiment, although risks associated with the merger and economic conditions are acknowledged.

Positives

• Significant growth in net income, with a 43.5% increase in Q3 2024 compared to the same period in 2023.
• Strong organic growth in core loans, increasing by $64.5 million, or 18.4% annualized, in Q3 2024.
• Substantial increase in deposits, excluding brokered deposits, by $102.1 million, or 19.5% annualized, in Q3 2024.
• Improvement in net interest margin to 3.17% in Q3 2024, indicating better profitability from lending activities.
• Strong asset quality, with a low level of nonperforming loans at 0.19% of total loans (excluding held for sale).
• Successful Capital Raise, generating approximately $34.5 million in gross proceeds to supplement regulatory capital ratios.
• Increase in shareholders' equity to $247.7 million, reflecting the positive impact of the Capital Raise and retained earnings.
• Strategic merger agreement with Fentura Financial, Inc., potentially expanding ChoiceOne's market presence and capabilities.

Negatives

• Diluted earnings per share were negatively impacted by the sale of 1,380,000 shares of common stock in the Capital Raise.
• Noninterest expense increased by $1.7 million or 12.3% in the three months ended September 30, 2024 compared to the same period in 2023, due in part to merger related expenses of $645,000 during the quarter compared to $0 in the prior year.
• Uninsured deposits totaled $863.3 million or 39.1% of deposits at September 30, 2024.

Risks

• The forward-looking statements are subject to risks and uncertainties, including the failure to obtain necessary regulatory approvals for the merger with Fentura Financial, Inc.
• There is a risk that the anticipated benefits of the proposed merger may not be realized or may take longer to materialize.
• The integration of ChoiceOne and Fentura could present challenges and potential adverse reactions or changes to business or employee relationships.
• Changes in interest rates could impact ChoiceOne's financial performance, particularly given its asset-sensitive balance sheet.
• The inflationary environment could continue to put pressure on noninterest expenses, affecting profitability.
• The company faces risks related to the outcome of any legal proceedings that may be instituted against ChoiceOne or Fentura.

Future Outlook

The company anticipates benefits from the pending merger with Fentura Financial, Inc., and expects to manage changing market conditions effectively. They also signaled potential further rate drops in the future.

Management Comments

• 'I am very pleased with the results of the third quarter of 2024, which highlight the growth in core loans and deposits driven by the success of our experienced team,' said Kelly Potes, Chief Executive Officer.
• Kelly Potes also stated that 'The proactive management of our balance sheet has also resulted in improvements in our net interest margin in the third quarter and positions us to manage changing market conditions.'
• Kelly Potes also stated that 'We remain committed to our communities, customers, and stakeholders, and sincerely appreciate the trust they place in us as their local financial partner.'
• Kelly Potes also stated that 'We are excited to welcome their customers, communities, and employees to the ChoiceOne team.'

Industry Context

The announcement reflects a trend of community banks focusing on organic growth in core lending and deposits, as well as strategic mergers to enhance market presence and efficiency. The improved net interest margin suggests effective balance sheet management in a challenging interest rate environment. The merger with Fentura is in line with industry consolidation trends.

Comparison to Industry Standards

• Comparing ChoiceOne's net interest margin of 3.17% to peers like Independent Bank Corporation (IBCP) and Macatawa Bank Corporation (MCBC), which have reported NIMs in the range of 2.8-3.3% recently, ChoiceOne is performing competitively.
• The nonperforming loan ratio of 0.19% is significantly better than the industry average, which has been trending around 0.5-1.0% for community banks.
• ChoiceOne's capital ratios, with a total risk-based capital ratio of 13.1%, are above the regulatory requirements and in line with well-capitalized peers.
• The organic loan growth of 18.4% annualized is higher than many regional peers, which are experiencing loan growth in the single-digit range.

Stakeholder Impact

• Shareholders will benefit from increased profitability and potential synergies from the merger.
• Employees may experience changes due to the integration of the two companies.
• Customers will have access to a broader range of services and locations.
• Communities served by ChoiceOne and Fentura will benefit from the combined company's commitment to local partnerships.
• Suppliers and creditors can expect continued business relationships with a larger, more financially stable institution.

Next Steps

• Complete the proposed merger with Fentura Financial, Inc.
• Integrate the operations of ChoiceOne and Fentura.
• Continue to manage costs and invest in innovation.
• Monitor and manage interest rate exposure.
• Seek regulatory approvals for the merger.

Key Dates