Choiceone Financial Services Inc: Form 10-Q for the period ended Mar 31, 2024

The following discussion is designed to provide a review of the consolidated financial condition and results of operations of ChoiceOne Financial Services, Inc. (“ChoiceOne”) and its wholly-owned subsidiaries. This discussion should be read in conjunction with the interim consolidated financial statements and related notes.

FORWARD-LOOKING STATEMENTS

This discussion and other sections of this quarterly report contain forward-looking statements that are based on management’s beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and ChoiceOne. Words such as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “intends,” “is likely,” “plans,” “predicts,” “projects,” “may,” “could,” “look forward,” “continue,” “future,” “will” and variations of such words and similar expressions are intended to identify such forward-looking statements. Management’s determination of the provision and allowance for credit losses, the carrying value of goodwill, loan servicing rights, other real estate owned, and the fair value of investment securities (including whether any impairment on any investment security is temporary or other-than-temporary and the amount of any impairment) and management’s assumptions concerning pension and other post-retirement benefit plans involve judgments that are inherently forward-looking. All of the information concerning interest rate sensitivity is forward-looking. All statements with references to future time periods are forward-looking. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions (“risk factors”) that are difficult to predict with regard to timing, extent, likelihood, and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed, implied or forecasted in such forward-looking statements. Furthermore, ChoiceOne undertakes no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events, or otherwise.

Additional risk factors include, but are not limited to, the risk factors discussed in Item 1A of ChoiceOne’s Annual Report on Form 10-K for the year ended December 31, 2023 and in Part II, Item 1A of this Quarterly Report on Form 10-Q. These are representative of the risk factors that could cause a difference between an ultimate actual outcome and a preceding forward-looking statement.

RESULTS OF OPERATIONS

ChoiceOne reported net income of $5,634,000 for the three months ended March 31, 2024, compared to $5,633,000 for the same period in 2023. Diluted earnings per share were $0.74 in the three months ended March 31, 2024, compared to $0.75 per share in the same period in the prior year. During 2023 and 2024, earnings were negatively affected by increased deposit costs, and partially offset by organic loan growth and higher interest income on loans due to higher interest rates.

As of March 31, 2024, total assets were $2.7 billion, an increase of $260.8 million compared to March 31, 2023. The growth is primarily attributed to an increase in gross loans, which includes a $178.0 million increase in core loans (total loans held for investment less loans to other financial institutions), an increase in cash of $94.9 million, and a $30.0 million increase in loans to other financial institutions over the twelve month period ending March 31, 2024. However, this growth was tempered by a $57.5 million reduction in securities during the same time period. ChoiceOne has actively managed its liquidity to support organic loan growth, strategically shifting from lower-yielding assets to higher-yielding loans. This is reflected in the loan growth observed since March 31, 2023.

Deposits, excluding brokered deposits, increased by $45.3 million or an annualized 8.6% in the first quarter of 2024 and $75.8 million or 3.7% compared to March 31, 2023. Deposits grew in the first quarter of 2024 due to new business, recapture of deposit losses, and some seasonality in municipal balances. ChoiceOne continues to be proactive in managing its liquidity position by using brokered deposits, the Bank Term Funding Program (“BTFP”), and FHLB advances to ensure ample liquidity. At March 31, 2024, total available borrowing capacity from all sources was $960.7 million. Uninsured deposits totaled $792.3 million or 37.0% of deposits at March 31, 2024.

The increase in short term interest rates led to higher deposit costs, which rose to an annualized 1.65% in the first quarter of 2024, compared to an annualized 1.57% in the previous quarter and an annualized 0.62% in the first quarter of 2023. As deposits reprice and customers shift to certificate of deposits and other interest bearing products; this trend is likely to persist. ChoiceOne is taking active measures to control these costs and expects to pay lower rates on deposits than the federal funds rate. Interest expense on borrowings for the three months ended March 31, 2024 increased $1.8 million compared to the same period in the prior year, due to increases in borrowing amounts and interest rates. Borrowings include $170 million from the BTFP and $40 million of FHLB borrowings at a weighted average fixed rate of 4.7%, with the earliest maturity in January 2025. Total cost of funds increased to an annualized 2.0% in the first quarter of 2024 compared to an annualized 1.91% in the fourth quarter of 2023 and an annualized 0.79% in the first quarter of 2023.

The annualized return on average assets and annualized return on average shareholders’ equity were 0.86% and 11.26%, respectively, for the first quarter of 2024, compared to an annualized 0.94% and an annualized 13.42%, respectively, for the same period in 2023. The decrease in the return on average assets and return on average shareholders' equity in the three months ended March 31, 2024, was caused by an increase in both average assets of $229.7 million and shareholders’ equity of $32.2 million, respectively.

Dividends

Cash dividends of $2.0 million or $0.27 per share were declared in the first quarter of 2024, compared to $2.0 million or $0.26 per share in the first quarter of 2023. The cash dividend payout percentage was 36.2% for the first three months of 2024, compared to 34.7% in the same period in the prior year.

Interest Income and Expense

Tables 1 and 2 on the following pages provide information regarding interest income and expense for the three months ended March 31, 2024 and 2023. Table 1 documents ChoiceOne’s average balances and interest income and expense, as well as the average rates earned or paid on assets and liabilities. Table 2 documents the effect on interest income and expense of changes in volume (average balance) and interest rates. These tables are referred to in the discussion of interest income, interest expense and net interest income.

Table 1 – Average Balances and Tax-Equivalent Interest Rates

(Dollars in thousands)

(1) Adjusted to a fully tax-equivalent basis to facilitate comparison to the taxable interest-earning assets. The adjustment uses an incremental tax rate of 21%. The presentation of these measures on a tax-equivalent basis is not in accordance with GAAP, but is customary in the banking industry. These non-GAAP measures ensure comparability with respect to both taxable and tax-exempt loans and securities.

(2) Taxable securities include dividend income from Federal Home Loan Bank and Federal Reserve Bank stock.

(3) Loans include both loans to other financial institutions and loans held for sale.

(4) Non-accruing loan balances are included in the balances of average loans. Non-accruing loan average balances were $1.7 million and $1.4 million in the first quarter of 2024 and 2023, respectively.

(5) Interest on loans included net origination fees and accretion income related to acquired loans. Accretion income related to acquired loans was $390,000 and $471,000 in the first quarter of 2024 and 2023, respectively.

Table 2 – Changes in Tax-Equivalent Net Interest Income

(Dollars in thousands)

(1) The volume variance is computed as the change in volume (average balance) multiplied by the previous year’s interest rate. The rate variance is computed as the change in interest rate multiplied by the previous year’s volume (average balance). The change in interest due to both volume and rate has been allocated to the volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.

(2) Interest on nontaxable investment securities and loans has been adjusted to a fully tax-equivalent basis using an incremental tax rate of 21%.

Net Interest Income

Tax-equivalent net interest income decreased $539,000 in the first quarter of 2024, compared to the same period in 2023. The primary factor contributing to the reduction in interest income is the increase in deposit costs, as customers transfer their funds to accounts and products that offer higher interest rates. This was partially offset by higher interest rates on new loans. Tax equivalent net interest margin decreased 35 basis points in the first quarter of 2024 to 2.74%, compared to the same period in 2023. GAAP based net interest margin decreased 35 basis points in the first quarter of 2024 to 2.67%, compared to the same period in 2023. Tax-equivalent net interest margin has increased 2 basis points in the first quarter of 2024 compared to the fourth quarter of 2023

The following table presents the annualized cost of deposits and the annualized cost of funds for the three months ended March 31, 2024 and March 31, 2023.

ChoiceOne has experienced substantial loan growth from March 31, 2023 to March 31, 2024, leading to an increase in interest income from loans of $5.9 million in the three months ended March 31, 2024, compared to the same period in the prior year. Average loans grew $210.3 million in the three ended March 31, 2024, compared to the same period in the prior year. In addition, the average rate earned on loans increased 90 basis points in the three months ended March 31, 2024, compared to the same period in the prior year. Interest income on loans for the first three months of 2024 was reduced by $665,000 due to amortization expense related to the March 2023 sale of the pay floating swap derivative and a decline in accretion income related to acquired loans of $81,000, compared to the same period in 2023.

The average balance of total securities decreased $57.6 million in the three months ended March 31, 2024, compared to the same period in the prior year. The decrease is due to paydowns and a decline in the fair value of available for sale securities. The average rate earned on securities increased 31 basis points in the three months ended March 31, 2024, compared to the same period in the prior year. Interest income on securities for the first three months of 2024 was reduced by $222,000 due to amortization expense related to the March 2023 sale of the pay floating swap derivative.

Interest expense increased $7.6 million in the first three months of 2024, compared to the same period in the prior year. The average rate paid on interest bearing-demand deposits and savings deposits increased 81 basis points in the three months ended March 31, 2024, compared to the same period in the prior year. This was offset by the decline in the average balance of interest bearing-demand deposits and savings deposits, of $60.6 million during the first three months of 2024. The increase in the average balance of certificates of deposits, excluding brokered deposits, of $129.8 million during the first three months of 2024, combined with a 229 basis point increase in the rate paid on certificates of deposits, excluding brokered deposits, during the first three months of 2024, compared to the same period in the prior year, led to an increase in interest expense of $2.8 million during the first three months of 2024.

In order to bolster liquidity, ChoiceOne borrowed a total of $170.0 million from the Bank Term Funding Program ("BTFP") during the second and fourth quarters of 2023 and held $42.0 million in brokered deposits and $40.0 million in FHLB advances on March 31, 2024. The net effect of these additional borrowed funds and brokered deposits was an increase in interest expense of $2.1 million for the first three months of 2024, compared to the same period in 2023.

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. The average balance of subordinated debentures was relatively flat in the first quarter of 2024 compared to the same period in the prior year.

Provision and Allowance for Credit Losses

On January 1, 2023, ChoiceOne adopted ASU 2016-13 CECL which caused an increase in the allowance for credit losses ("ACL") of $7.2 million. The large increase was partially due to the economic environment and the nature of the CECL calculation. Approximately 20% of this increase was related to the migration of purchased loans into the portfolio assessed by the CECL calculation. ChoiceOne also booked a liability for expected credit losses on unfunded loans and other commitments of $3.3 million related to the adoption of CECL. These unfunded loans are open credit lines with current customers and loans approved by ChoiceOne but not funded. The increase in the ACL and the cost of the liability resulted in a decrease in the retained earnings account on our Consolidated Balance Sheet equal to the after-tax impact, with the tax impact portion being recorded in deferred taxes in our Consolidated Balance Sheet in accordance with FASB guidance.

The ACL consists of general and specific components. The general component covers loans collectively evaluated for credit loss and is based on peer historical loss experience adjusted for current and forecasted factors. Management's adjustment for current and forecasted factors is based on trends in delinquencies, trends in charge-offs and recoveries, trends in the volume of loans, changes in underwriting standards, trends in loan review findings, the experience and ability of lending staff, and a reasonable and supportable economic forecast described further below.

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.

Loans individually evaluated for credit losses increased by $400,000 to $2.5 million during the first quarter of 2024, and the ACL related to these individually evaluated loans increased by $202,000 during the same period largely due to two recently classified collateral dependent retail and consumer loan relationships.

Nonperforming loans, which includes Other Real Estate Owned ("OREO") but excludes performing troubled loan modifications ("TLM"), remained historically low at $1.7 million on March 31, 2024 compared to $1.7 million as of December 31, 2023, and $1.7 million as of March 31, 2023. The ACL was 1.13% of total loans, excluding loans held for sale, at March 31, 2024, compared to 1.11% on December 31, 2023, and 1.24% on March 31, 2023. The liability for expected credit losses on unfunded loans and other commitments was $1.8 million on March 31, 2024, compared to $2.2 million on December 31, 2023, and $3.0 million on March 31, 2023.

Charge-offs and recoveries for respective loan categories for the three months ended March 31, 2024 and 2023 were as follows:

(Dollars in thousands)

Net charge-offs were $51,000 during the first three months of 2024, compared to net charge-offs of $27,000 during the same period in 2023. Net charge-offs for checking accounts during the first three months of 2024 were $31,000 compared to $56,000 for the same period in the prior year. Annualized net charge-offs as a percentage of average loans were 0.01% for both the first quarter of 2024 and 2023.

The provision for credit losses on loans was $403,000 during the first three months of 2024, compared to $309,000 in the same period in the prior year. The provision expense was deemed necessary due to the increase in reserve for collateral dependent loans and an increase in qualitative factors related to the value of underlying collateral for collateral dependent non owner occupied loans and consumer loans.

The loan provision expense was offset by the decrease in unfunded commitments provision expense of $403,000 in first three months of 2024, due to changes in mix and a decline in balance. Total unfunded commitments decreased $59.3 million in the first quarter of 2024 compared to December 31, 2023.

Net provision for credit losses was $0 for the first quarter of 2024.

Noninterest Income

Noninterest income increased $380,000 in the three months ended March 31, 2024, compared to the same period in the prior year. The increase was largely due to earnings on a bank owned life insurance death benefit claim in the amount of $196,000 and an increase in customer service charges of $138,000 in the first quarter of 2024 compared to the same period in 2023. These increases were offset by changes in the market value of equity securities in the three months ended March 31, 2024, compared to the same period in the prior year.

Noninterest Expense

Noninterest expense declined by $311,000 in the three months ended March 31, 2024 compared to the same period in 2023. The decline in total noninterest expense was due to a decline in employee health insurance benefits and a decline in occupancy and equipment related to two branch closures during the quarter. ChoiceOne anticipates a low impact on customer retention related to the branch closures and expects to save around $700,000 annually from this decision. This was offset by increases to FDIC insurance and other costs related to inflationary pressures. Management continues to seek out ways to manage costs, but also recognizes the value of investing in innovation and attracting the best talent in our industry to compete effectively in our markets.

Income Tax Expense

Income tax expense was $1.2 million in the first three months of 2024 compared to $1.0 million for the same period in 2023. The effective tax rate was 17.6% for the first three months of 2024 compared to 15.5% for the same period in 2023. In the three months ended March 31, 2024, non taxable municipal interest decreased and disallowed interest expense increased compared to the first three months of 2023.

FINANCIAL CONDITION

Securities

Total available for sale securities on March 31, 2024, were $504.6 million compared to $514.6 million on December 31, 2023, with the decrease caused by $5.9 million of principal repayments, calls and maturities. The unrealized loss on securities available for sale declined by $2.2 million in the first three months of 2024. Total held to maturity securities on March 31, 2024, were $398.0 million compared to $408.0 million on December 31, 2023. ChoiceOne's held to maturity securities declined during the first three months of 2024, due to $9.5 million of principal repayments, calls and maturities.

At March 31, 2024, ChoiceOne had $126.3 million in unrealized losses on its investment securities, including $67.5 million in unrealized losses on available for sale securities and $58.8 in unrealized losses on held to maturity securities. Unrealized losses on corporate and municipal bonds have not been recognized into income because management believes the issuers are of high credit quality, and management does not intend to sell prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions. The issuers continue to make timely principal and interest payments on the bonds. The fair value is expected to recover as the bonds approach maturity.

ChoiceOne utilizes interest rate derivatives as part of its asset liability management strategy to help manage its interest rate risk position. 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. These derivative instruments increase in value as long-term interest rates rise, which partially offsets the reduction in shareholders' equity due to unrealized losses on securities available for sale. Refer to Note 8 - Derivatives and Hedging Activities of the consolidated financial statements for more discussion on ChoiceOne’s derivative position.

Equity securities included a money market preferred security ("MMP") of $1.0 million and common stock of $6.6 million as of March 31, 2024. As of December 31, 2023, equity securities included a MMP of $1.0 million and common stock of $6.5 million.

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.

Loans

The company's loan portfolio by call report code was as follows:

(Dollars in thousands)

Average loan balances increased to $1.41 billion in the first quarter of 2024 compared to $1.36 billion in the fourth quarter of 2023 and $1.20 billion in the first quarter of 2023. Core loans decreased by $2.7 million or 0.8% on an annualized basis during the first quarter of 2024 and grew $178.0 million or 14.7% since March 31, 2023. Loans to other financial institutions were $30.0 million as of March 31, 2024, compared to $19.4 million and $0 as of December 31, 2023 and March 31, 2023, respectively. Loans to other financial institutions is comprised of a warehouse line of credit to facilitate mortgage loan originations and the interest rate fluctuates with the national mortgage market. This balance is short term in nature with an average life of under 30 days. Management believes the short-term structure and low credit risk of this asset is advantageous in the current rate environment. Loan interest, including fee income increased $5.9 million in the first quarter of 2024 compared to the same period in 2023.

Loan growth was concentrated in non-owner occupied commercial real estate loans which grew $21.7 million in the first three months of 2024 and 1-4 family loans which grew $10.1 million. The growth in non-owner occupied CRE loans came from our loan production offices in Holland, Oakland, Wyoming, and Macomb, MI, as experienced lenders were hired there in the past 18 months. CRE growth consisted of increases in seasoned hospitality groups, apartment buildings in the Grand Rapids, Michigan market, and professional office space in suburban areas with long-term leases and low loan to value ratios. Growth in 1-4 family loans was due to the growth in our warehouse line of credit or loans to other financial institutions. This growth was partially offset by a $27.6 million decline in construction and development loans which experienced an acceleration in our funding cycle toward the close of 2023.

During the first three months of 2024 and 2023, ChoiceOne recorded accretion income related to acquired loans in the amount of $390,000 and $471,000, respectively. Remaining credit and yield mark on acquired loans from the mergers with County Bank Corp. and Community Shores will accrete into income as the acquired loans mature. The remaining yield mark on acquired loans from the mergers with County Bank Corp. and Community Shores totaled $2.1 million as of March 31, 2024.

Asset Quality

As part of its review of the loan portfolio, management also monitors the various nonperforming loans. 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.

The balances of these nonperforming loans were as follows:

(Dollars in thousands)

The balance of nonaccrual loans in the first three months of 2024 is primarily made up of residential mortgage loans. Management believes the ACL allocated to its nonperforming loans was sufficient at March 31, 2024.

Goodwill

Goodwill is not amortized but is evaluated annually for impairment and on an interim basis if events or changes in circumstances indicate that goodwill might be impaired. The goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount, and an impairment charge would be recognized for any amount by which the carrying amount exceeds the reporting unit’s fair value. Accounting pronouncements allow a company to first perform a qualitative assessment for goodwill prior to a quantitative assessment (Step 1 assessment). If the results of the qualitative assessment indicate that it is more likely than not that goodwill is impaired, then a quantitative assessment must be performed. If not, there is no further assessment required. 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.

ChoiceOne engaged a third party valuation firm to assist in performing a quantitative analysis of goodwill as of November 30, 2022 ("the valuation date"). In deriving the fair value of the reporting unit (the Bank), the third-party firm assessed general economic conditions and outlook; industry and market considerations and outlook; the impact of recent events to financial performance; the market price of ChoiceOne’s common stock and other relevant events. In addition, the valuation relied on financial projections through 2027 and growth rates prepared by management. Based on the valuation prepared, it was determined that ChoiceOne's estimated fair value of the reporting unit at the valuation date was greater than its book value and impairment of goodwill was not required.

Management concurred with the conclusion derived from the quantitative goodwill analysis as of the valuation date and determined that there were no material changes and that no triggering events had occurred that indicated impairment from the valuation date through March 31, 2024, and as a result that it is more likely than not that there was no goodwill impairment as of March 31, 2024.

Deposits and Borrowings

Deposits, excluding brokered deposits, increased by $45.3 million or an annualized 8.6% in the first quarter of 2024 and $75.8 million or 3.7% compared to March 31, 2023. Deposits grew in the first quarter of 2024 due to new business, recapture of deposit losses, and some seasonality in municipal balances. The increase in short term interest rates led to higher deposit costs, which rose to an annualized 1.65% in the first quarter of 2024, compared to an annualized 1.57% in the fourth quarter of 2023, and an annualized 0.62% in the first quarter of 2023. As deposits reprice and customers shift to certificate of deposits and other interest bearing products; this trend is likely to persist. ChoiceOne is taking active measures to control these costs and expects to pay lower rates on deposits than the federal funds rate.

Uninsured deposits totaled $792.3 million or 37.0% of deposits on March 31, 2024 compared to $769.7 million, or 36.3% of total deposits at December 31, 2023. At March 31, 2024, total available borrowing capacity from all sources was $960.7 million, which exceeds uninsured deposits.

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. ChoiceOne also holds $3.4 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 merger mark-to-market adjustment.

At March 31, 2024, ChoiceOne has borrowed $170 million from the Federal Reserve’s Bank Term Funding Program (BTFP). This program provides a 1-year term at a fixed rate with the ability to prepay at any time without penalty. The interest rate on the BTFP borrowings as of March 31, 2024 was 4.76% and fixed through January of 2025. Collateral pledged is U.S. Treasuries, agency debt and mortgage-backed securities valued at par. At March 31, 2024 ChoiceOne had $40 million of borrowings from the FHLB with a weighted average rate of 4.58% with maturities through 2026. Total cost of funds increased to an annualized 2.0% in the first quarter of 2024 compared to an annualized 1.91% in the fourth quarter of 2023 and an annualized 0.79% in the first quarter of 2023.

Shareholders' Equity

Shareholders’ equity totaled $206.8 million as of March 31, 2024, up from $168.7 million as of March 31, 2023. This increase is due to increased retained earnings and an improvement in accumulated other compressive loss (AOCI) of $23.6 million compared to March 31, 2023. The improvement in AOCI, despite the rise in interest rates, is due to both the shortening duration and maturing (paydowns) of the securities portfolio, as well as an increase in unrealized gain on the pay-fixed swap derivatives. ChoiceOne Bank remains “well-capitalized” with a total risk-based capital ratio of 12.6% as of March 31, 2024, compared to 13.0% on March 31, 2023.

ChoiceOne uses interest rate swaps to manage interest rate exposure to certain fixed assets and variable rate liabilities. On March 31, 2024, ChoiceOne had pay-fixed interest rate swaps with a total notional value of $401.0 million, a weighted average coupon of 3.07%, a fair value of $20.2 million and an average remaining contract length of 7 to 8 years. These derivative instruments increase in value as long-term interest rates rise, which offsets the reduction in equity due to unrealized losses on securities available for sale. Included in the total is $200.0 million of forward starting pay-fixed, receive floating interest rate swaps used to hedge interest bearing liabilities. These forward starting swaps will pay a fixed coupon of 2.75% while receiving SOFR starting in late April 2024. At the SOFR rate on March 31, 2024 of 5.34%, these forward starting swaps would contribute approximately $432,000 monthly, which will partially offset interest expense. In addition, in March 2023, ChoiceOne eliminated all receive-fix, pay floating swap agreements for a cash payment of $4.2 million. The loss is being amortized in interest income with an expense of approximately $300,000 monthly through April 2024, which was the remaining period of the agreements. The effect of these two items will increase net interest income by approximately $732,000 monthly starting in May 2024.

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. 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. This reduction in retained earnings was offset by first quarter 2023 earnings and recovery of accumulated other comprehensive loss.

Regulatory Capital Requirements

Following is information regarding compliance of ChoiceOne and ChoiceOne Bank with regulatory capital requirements:

(Dollars in thousands)

Management reviews the capital levels of ChoiceOne and ChoiceOne Bank on a regular basis. The Board of Directors and management believe that the capital levels as of March 31, 2024 are adequate for the foreseeable future. The Board of Directors’ determination of appropriate cash dividends for future periods will be based on, among other things, market conditions and ChoiceOne’s requirements for cash and capital.

Liquidity

Net cash provided by operating activities was $15.8 million for the three months ended March 31, 2024 compared to $9.2 million in the same period in 2023. The change was due to the change in other liabilities, partially offset by lower net proceeds from loan sales in 2024 compared to 2023. Net cash provided by investing activities was $7.1 million for the three months ended March 31, 2024 compared to $18.9 million used in the same period in 2023. The change was due in part to a decrease in net loan originations that led to cash used of $8.0 million in the first three months of 2024 compared to $20.7 million used in the same period during the prior year. Net maturities, payments and calls of securities was $15.4 million for the three months ended March 31, 2024 compared to $10.0 million used in the same period in 2023. Net cash provided by financing activities was $71.8 million for the three months ended March 31, 2024, compared to $21.0 million in the same period in the prior year. ChoiceOne had $63.8 million in deposit growth in the first three months of 2024 compared to a decrease of $12.1 million in the same period in 2023. ChoiceOne also increased borrowing by $10.0 million in the first three months of 2024 compared to an increase of $35.0 million in the same period during the prior year.

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. Agricultural loans comprise a relatively small portion of ChoiceOne's total assets. Management believes that ChoiceOne's exposure to changes in commodity prices is insignificant.

Liquidity risk deals with ChoiceOne's ability to meet its cash flow requirements. These requirements include depositors desiring to withdraw funds and borrowers seeking credit. Longer-term liquidity needs may be met through core deposit growth, maturities of and cash flows from investment securities, normal loan repayments, advances from the FHLB and the Federal Reserve Bank, brokered certificates of deposit, and income retention. ChoiceOne had $170.0 million in outstanding borrowings from the BTFP as of March 31, 2024. ChoiceOne had $40.0 million in outstanding borrowings at the FHLB as of March 31, 2024. The acceptance of brokered certificates of deposit is not limited as long as the Bank is categorized as “well capitalized” under regulatory guidelines. At March 31, 2024, total available borrowing capacity from the FHLB and the Federal Reserve Bank was $960.7 million.

ChoiceOne continues to review its liquidity management and has taken steps in an effort to ensure adequacy. These steps include limiting bond purchases in the first three months of 2024, pledging securities to FHLB and the Federal Reserve Bank in order to increase borrowing capacity and using alternative funding sources such as brokered deposits.

An evaluation was performed under the supervision and with the participation of ChoiceOne’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of ChoiceOne’s disclosure controls and procedures as of March 31, 2024. Based on and as of the time of that evaluation, ChoiceOne’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that ChoiceOne’s disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that material information required to be disclosed in the reports that ChoiceOne files or submits under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that ChoiceOne files or submits under the Exchange Act is accumulated and communicated to management, including ChoiceOne’s principal executive and principal financial officers, as appropriate to allow for timely decisions regarding required disclosure.

There was no change in ChoiceOne’s internal control over financial reporting that occurred during the three months ended March 31, 2024 that has materially affected, or that is reasonably likely to materially affect, ChoiceOne’s internal control over financial reporting.

Information concerning risk factors is contained in the discussion in Item 1A, “Risk Factors,” in ChoiceOne’s Annual Report on Form 10-K for the year ended December 31, 2023.