SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549FORM 10-Q
[ X ]
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2003
[ ]
Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to
Commission File Number: 1-9202
ChoiceOne Financial Services, Inc.(Exact Name of Registrant as Specified in its Charter)
Michigan(State or Other Jurisdiction ofIncorporation or Organization)
38-2659066(I.R.S. Employer Identification No.)
109 East DivisionSparta, Michigan(Address of Principal Executive Offices)
49345(Zip Code)
(616) 887-7366(Registrant's Telephone Number, including Area Code)
Indicate by checkmark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No
Indicate by checkmark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).Yes No X
As of April 30, 2003, the Registrant had outstanding 1,554,856 shares of common stock.
CHOICEONE FINANCIAL SERVICES, INC.INDEX TO FORM 10-Q
PageNumber
PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements:
Consolidated Balance Sheets at March 31, 2003 and December 31, 2002
3
Consolidated Statements of Income for the three months ended March 31, 2003 and 2002
4
Consolidated Statements of Changes in Shareholders' Equity for the three months ended March 31, 2003 and 2002
5
Consolidated Statements of Cash Flows for the three months ended March 31, 2003 and 2002
6
Notes to Interim Consolidated Financial Statements
7-9
Item 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
9-15
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
15-16
Item 4.
Controls and Procedures
16
PART II. OTHER INFORMATION
Legal Proceedings
17
Changes in Securities and Use of Proceeds
Defaults Upon Senior Securities
Submission of Matters to a Vote of Security Holders
Item 5.
Other Information
Item 6.
Exhibits and Reports on Form 8-K
SIGNATURES AND CERTIFICATIONS
18
Item 1. Financial Statements.
ChoiceOne Financial Services, Inc.CONSOLIDATED BALANCE SHEETS
March 31,2003
December 31,2002
(Unaudited)
Assets
Cash and due from banks
$
4,709,000
5,621,000
Federal funds sold
0
850,000
Cash and cash equivalents
6,471,000
Short-term investments
100,000
Securities available for sale
25,134,000
21,491,000
Loans, net
161,580,000
171,636,000
Loans held for sale
3,251,000
1,214,000
Premises and equipment, net
4,316,000
4,449,000
Other real estate owned, net
1,960,000
1,867,000
Federal Home Loan Bank and Federal Reserve Bank stock
2,620,000
Loan servicing rights, net
353,000
363,000
Intangible assets, net
37,000
226,000
Other assets
2,111,000
1,887,000
Total assets
206,171,000
212,324,000
Liabilities
Deposits - noninterest bearing
16,446,000
17,391,000
Deposits - interest bearing
131,431,000
135,388,000
Total deposits
147,877,000
152,779,000
Repurchase agreements
5,692,000
5,876,000
Federal funds purchased
2,050,000
Advances from Federal Home Loan Bank
29,277,000
32,791,000
Other liabilities
1,580,000
1,519,000
Total liabilities
186,476,000
192,965,000
Shareholders' Equity
Preferred stock; shares authorized: 100,000; shares outstanding: none
Common stock; shares authorized: 4,000,000; shares outstanding: 1,554,784 at March 31, 2003 and 1,551,228 at December 31, 2002
15,695,000
15,645,000
Unallocated shares held by Employee Stock Ownership Plan
(45,000
)
Retained earnings
3,464,000
3,222,000
Accumulated other comprehensive income
581,000
537,000
Total shareholders' equity
19,695,000
19,359,000
Total liabilities and shareholders' equity
See accompanying notes to consolidated financial statements.
ChoiceOne Financial Services, Inc.CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months EndedMarch 31,
2003
2002
Interest income
Loans, including fees
2,965,000
3,319,000
Securities:
Taxable
164,000
142,000
Tax exempt
109,000
110,000
Other
1,000
Total interest income
3,239,000
3,572,000
Interest expense
Deposits
881,000
1,088,000
355,000
517,000
23,000
47,000
Total interest expense
1,259,000
1,652,000
Net interest income
1,980,000
1,920,000
Provision for loan losses
170,000
160,000
Net interest income after
provision for loan losses
1,810,000
1,760,000
Noninterest income
Customer service fees
241,000
244,000
Insurance and brokerage commissions
299,000
313,000
Gain on sales of loans
169,000
94,000
Gain on sales of securities
54,000
Loan servicing fees, net
14,000
55,000
Other income
97,000
16,000
Total noninterest income
820,000
776,000
Noninterest expense
Salaries and benefits
1,012,000
1,030,000
Occupancy
323,000
380,000
Professional services
128,000
102,000
Printing, postage and supplies
67,000
Data processing
68,000
Advertising and promotional
28,000
32,000
Other expense
294,000
261,000
Total noninterest expense
1,940,000
Income before income tax
710,000
596,000
Income tax expense
204,000
165,000
Net income
506,000
431,000
Comprehensive income
550,000
Basic and diluted earnings per share
0.33
0.28
ChoiceOne Financial Services, Inc.CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
Number ofShares
CommonStock andPaid inCapital
UnallocatedShares
RetainedEarnings
AccumulatedOtherComprehensiveIncome (Loss)
Total
Balance, January 1, 2002
1,541,091
14,475,000
(64,000
3,680,000
182,000
18,273,000
Net change in unrealized gain
(78,000
Total comprehensive income
Shares issued
2,438
33,000
Cash dividends
(249,000
Balance, March 31, 2002
1,543,529
14,508,000
3,862,000
104,000
18,410,000
Balance, January 1, 2003
1,551,228
44,000
3,868
Shares repurchased
(312
(5,000
(264,000
Balance, March 31, 2003
1,544,784
ChoiceOne Financial Services, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Cash flows from operating activities:
Adjustments to reconcile net income to net cash from operating activities:
Depreciation
151,000
207,000
Amortization
118,000
69,000
(54,000
(169,000
(93,000
Loans originated for sale
(7,477,000
(7,627,000
Proceeds from loan sales
5,545,000
7,720,000
Net changes in:
Accrued interest receivable and other assets
246,000
196,000
Accrued interest payable and other liabilities
38,000
98,000
Net cash provided by/(used in) operating activities
(872,000
1,107,000
Cash flows from investing activities:
Purchases of securities available for sale
(4,347,000
(1,293,000
Proceeds from sales of securities available for sale
1,830,000
Principal payments on securities available for sale
712,000
452,000
Loan originations, net of repayments
9,341,000
(6,631,000
Premises and equipment expenditures, net
(18,000
Sale of insurance agency book of business
186,000
Net cash provided by/(used in) investing activities
5,874,000
(5,687,000
Cash flows from financing activities:
Net change in deposits
(4,902,000
708,000
Net change in repurchase agreements
(184,000
1,877,000
Net change in federal funds purchased
1,350,000
Proceeds from Federal Home Loan Bank advances
4,500,000
6,000,000
Payments on Federal Home Loan Bank advances
(8,014,000
(5,513,000
Issuance of common stock
Repurchase of common stock
Cash dividends and fractional shares from stock dividends
Net cash provided by/(used in) financing activities
(6,764,000
4,206,000
Net change in cash and cash equivalents
(1,762,000
(374,000
Beginning cash and cash equivalents
4,931,000
Ending cash and cash equivalents
4,557,000
Supplemental disclosures of cash flow information:
Cash paid for interest
1,236,000
1,624,000
Cash paid for income taxes
Loans transferred to other real estate
545,000
703,000
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of ConsolidationThe consolidated financial statements include ChoiceOne Financial Services, Inc. (the "Registrant") and its direct and indirect wholly owned subsidiaries, ChoiceOne Bank (the "Bank"), ChoiceOne Insurance Agencies, Inc. (the "Insurance Agency"), and ChoiceOne Mortgage Company of Michigan (the "Mortgage Company"). Intercompany transactions and balances have been eliminated in consolidation.
The consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information, prevailing practices within the banking industry and the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
The accompanying consolidated financial statements reflect all adjustments ordinary in nature which are, in the opinion of management, necessary for a fair presentation of the Consolidated Balance Sheets as of March 31, 2003 and December 31, 2002, and the Consolidated Statements of Income, Consolidated Statements of Changes in Shareholders' Equity, and Consolidated Statements of Cash Flows for the three-month periods ended March 31, 2003 and March 31, 2002. Operating results for the three months ended March 31, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003.
The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Registrant's Annual Report on Form 10-K for the year ended December 31, 2002.
Stock Based CompensationEmployee compensation expense under the Registrant's stock option plan is reported if options are granted below market price at the grant date. Pro forma disclosures of net income and earnings per share are shown using the fair value method to measure expense for options granted using an option pricing model to estimate the fair value.
The following pro forma information presents net income and earnings per share for the three months ended March 31, 2003 and 2002 had the fair value method been used to measure compensation cost for stock option plans. No compensation cost was recognized for stock options in 2003 and 2002.
Net income as reported
Deduct: Stock-based compensation expense determined under fair value based method
6,000
3,000
Pro forma net income
500,000
428,000
Basic earnings per common share and diluted earnings per common share as reported
Pro forma basic earnings per common share and diluted earnings per common share
0.32
The pro forma effects are computed using an option pricing model and the following weighted average assumptions as of grant date:
Risk-free interest rate
4.01
%
4.71
Expected option life (in years)
7
Expected stock price volatility
20.90
Dividend yield
4.67
4.80
In future periods, the pro forma effect of not applying the fair value method may increase if additional options are granted.
Stock TransactionsA total of 1,191 shares of common stock were issued to the Registrant's Board of Directors for a cash price of $17,000 under the terms of the Directors' Stock Purchase Plan in the first quarter of 2003. A total of 1,931 shares of common stock were issued to shareholders for a cash price of $28,000 under the Dividend Reinvestment and Supplemental Purchase Plan in the quarter ended March 31, 2003. A total of 746 shares were issued to employees for a cash price of $10,000 under the Employee Stock Purchase Plan for the quarter ended March 31, 2003. A total of 312 shares were repurchased from shareholders at a cash price of $5,000 in the first quarter of 2003.
ReclassificationsCertain amounts presented in prior periods have been reclassified to conform to the current presentation.
NOTE 2 - ALLOWANCE FOR LOAN LOSSES
An analysis of changes in the allowance for loan losses follows:
Three Months endedMarch 31,
Balance, beginning of period
2,211,000
2,013,000
Provision charged to expense
Recoveries credited to the allowance
48,000
Loans charged off
(384,000
(139,000
Balance, end of period
2,094,000
2,082,000
Information regarding impaired loans follows:
Loans with no allowance allocated
2,087,000
1,041,000
Loans with allowance allocated
758,000
1,128,000
Amount of allowance for loan losses allocated
408,000
697,000
Average balance during the period
2,507,000
1,290,000
Interest income recognized thereon
12,000
18,000
Cash basis interest income recognized
46,000
NOTE 3 - EARNINGS PER SHARE
Earnings per share are based on the weighted average number of shares outstanding during the period. The weighted average number of shares outstanding has been adjusted for the 5% stock dividend paid in 2002. A computation of basic earnings per share and diluted earnings per share follows:
Basic Earnings Per Share:
Net income available to common
Shareholders
Weighted average common
shares outstanding for basic
earnings per share
1,549,314
1,529,522
Basic earnings per share
Diluted Earnings Per Share:
shareholders
Plus dilutive effect of assumed
exercise of stock options
520
46
Weighted average common and
potentially dilutive common
shares outstanding
1,549,834
1,529,568
Diluted earnings per share
Item 2. 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. (the "Registrant") and its direct and indirect wholly owned subsidiaries, ChoiceOne Bank (the "Bank"), ChoiceOne Insurance Agencies, Inc. (the "Insurance Agency"), and ChoiceOne Mortgage Company of Michigan (the "Mortgage Company").
FORWARD-LOOKING STATEMENTS
This discussion and other sections of this 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 about the Registrant itself. Words such as "anticipates," "believes," "estimates," "expects," "forecasts," "intends," "is likely," "plans," "predicts," "projects," and variations of such words and similar expressions are intended to identify such forward-looking statements. 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, the Registrant undertakes no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events, or otherwise.
Risk factors include, but are not limited to, changes in interest rates and interest rate relationships; demand for products and services; the degree of competition by traditional and non-traditional competitors; changes in banking regulations; changes in tax laws; changes in prices, levies, and assessments; the impact of technological advances; governmental and regulatory policy changes; the outcomes of pending and future litigation and contingencies; trends in customer behavior as well as their ability to repay loans; and changes in the national and local economies. In addition, events relating to the ongoing war on terrorism, other potential terrorist acts, and military actions including the war in Iraq have created significant global economic and political uncertainties that may have material and adverse effects on financial markets, the economy, and demand for financial services and products. 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
SummaryNet income increased $75,000 or 17% in the first quarter of 2003 compared to the same period in 2002. The increase in net income was due to increased net interest income, increased noninterest income, and decreased noninterest expenses, offset by a slightly higher provision for loan losses.
The increase in net interest income was primarily due to a change in the Bank's mix of interest bearing deposits for 2003 compared to the same period a year ago. Also, the rates paid on deposits and other funding sources fell faster than the yields earned on loans and securities. Gains from the sale of loans and additional profit-sharing income at the Insurance Agency fueled the growth in noninterest income. The higher provision for loan losses was primarily due to a higher level of nonperforming and substandard loans as of March 31, 2003. Noninterest expense decreased slightly due to the sale of the Grand Rapids division of the Insurance Agency and the closure of the Bank's Plainfield office. Lower occupancy expenses were offset by higher professional fees in 2003 over the prior year.
The return on average assets was 0.97% for the first three months of 2003, compared to 0.86% for the period a year ago. The return on average shareholders' equity was 10.37% for the first quarter of 2003, compared to 9.41% for the first quarter of 2002.
DividendsCash dividends of $264,000, or $0.17 per common share were declared in the first quarter of 2003, which is $0.01 higher than the per share amount in first quarter of 2002. The cash dividend payout percentage was 52% for the first three months of 2003, compared to 58% in the same period a year ago.
The Registrant paid a 5% stock dividend on May 31, 2002. Earnings per share data for all periods presented have been adjusted for this dividend.
Interest Income and ExpenseTables 1 and 2 on the following pages provide information regarding interest income and expense for the three-month periods ended March 31, 2003 and 2002, respectively. Table 1 documents 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)
Three Months Ended March 31,
AverageBalance
Interest
Rate
Assets:
Loans (1)
$ 171,973
$ 2,968
6.90%
$ 168,384
$ 3,325
7.90%
Taxable securities (2)
15,304
164
4.29
10,842
142
5.24
Nontaxable securities (1) (2)
9,756
165
6.77
9,299
167
7.17
464
1
0.86
387
1.03
Interest-earning assets
197,497
3,298
6.68
188,912
3,635
7.70
Noninterest-earning assets
10,766
11,698
$ 208,263
$ 200,610
Liabilities and Shareholders' Equity:
Interest-bearing demand deposits
$ 37,309
138
1.48%
$ 35,318
161
1.82%
Savings deposits
8,186
15
0.73
8,206
20
0.97
Time deposits
88,670
728
3.28
76,945
907
4.72
FHLB advances
29,247
355
4.86
35,656
517
5.80
7,397
23
1.24
8,447
47
2.23
Interest-bearing liabilities
170,809
1,259
2.95
164,572
1,652
4.02
Noninterest-bearing demand deposits
16,078
15,110
Other noninterest-bearing liabilities
1,861
2,616
Shareholders' equity
19,515
18,312
Net interest income (tax-equivalent basis) - interest spread
2,039
3.73%
1,983
3.68%
Tax-equivalent adjustment (1)
(59
(63
$ 1,980
$ 1,920
Net interest income as a percentage of earning assets (tax-equivalent basis)
4.13%
4.20%
_______________
(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 34% for the periods presented.
(2)
Includes the effect of unrealized gains or losses on securities.
Table 2 - Changes in Tax-Equivalent Net Interest Income (Dollars in Thousands)
Three Months ended March 31,2003 Over 2002
Volume
Increase (decrease) in interest income (1)
Loans (2)
(357
70
(427
Taxable securities
22
51
(29
Nontaxable securities (2)
(2
8
(10
Net change in tax-equivalent income
(337
129
(466
Increase (decrease) in interest expense (1)
(23
13
(36
(5
(179
185
(364
(162
(58
(104
(24
(3
(21
Net change in interest expense
(393
137
(530
Net change in tax-equivalent net interest income
56
(8
64
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.
Interest on nontaxable investment securities and loans has been adjusted to a fully tax-equivalent basis using an incremental tax rate of 34% for the periods presented.
Net Interest IncomeAs shown in Tables 1 and 2, tax equivalent net interest income increased $56,000 in the first three months of 2003 compared to the same period in 2002. This is primarily because the Bank's interest-bearing deposits and other funding sources repriced downward slightly more than the Bank's interest-earning assets.
The average balance of loans increased $3.6 million in the three months ended March 31, 2003 compared to 2002. Loan refinancing and repricing more than offset the portfolio growth causing interest income on loans to fall $357,000 for the quarter ended March 31, 2003, compared to the period a year ago. The average balance of investment securities grew $4.9 million which offset slightly lower yields thereby causing interest income to increase $20,000 over 2002.
Lower rates paid on time deposits more than offset an $11.7 million increase in average time deposit balances which reduced interest expense $179,000 in 2003 versus 2002. A $6.4 million decrease in average advances from the Federal Home Loan Bank coupled with lower rates paid on existing advances caused the Bank's interest expense to drop $162,000 in the first quarter of 2003. Lower rates offset by a $2 million increase in the average balance of interest-bearing demand deposits lowered interest expense by $23,000. Interest expense on other borrowed funds decreased largely due to lower rates on federal funds purchased and repurchase agreements entered into during 2003.
Net interest income spread was 3.73% (shown in Table 1) for the first three months of 2003, compared to 3.68% for the first three months of 2002. This is a slight decrease from the net interest income spread of 3.79% for the twelve months ended December 31, 2002. The average yield received on interest-earning assets was down 102 basis points
Provision and Allowance for Loan LossesThe allowance for loan losses decreased $117,000 from December 31, 2002 to March 31, 2003. The provision for loan losses was $10,000 higher in the first three months of 2003 compared to 2002 due to an increase in nonaccrual loans during the quarter. Management believes that these nonaccrual loan balances were temporarily higher at March 31, 2003 and several have been returned to accrual status subsequent to the quarter ended. The allowance was 1.25% of total loans at March 31, 2003 compared to 1.27% at December 31, 2002. Charge-offs and recoveries for respective loan categories for the three months ended March 31 were as follows:
Loan Category
Charge-offs
Recoveries
Commercial
192,000
13,000
Consumer
177,000
84,000
139,000
43,000
Mortgage
15,000
4,000
384,000
The increase in total charge-offs from 2002 to 2003 was primarily attributable to one large commercial substandard credit for $150,000 that was completely charged off due to insolvency. This loan was 100% reserved for at the end of 2002. Consumer loan charge-offs increased slightly in 2003 versus 2002 reflecting continued local and national economic woes plaguing individual borrowers. Total recoveries in 2003 exceeded 2002 due in part to enhanced collection activities being utilized. As charge-offs, changes in the level of nonperforming loans, and changes within the composition of the loan portfolio occur throughout 2003, the provision and allowance for loan losses will be reviewed by the Bank's management and adjusted as necessary.
Noninterest IncomeTotal noninterest income increased $44,000 or 6% in the first quarter of 2003 compared to the same period in 2002. Gains on sales of loans provided $75,000 of the increase due to heavy mortgage refinancing activity at the Mortgage Company. Offsetting this increase was a decline in loan servicing fees caused by accelerated amortization of mortgage servicing rights driven by the heavy mortgage refinancing environment. Other noninterest income included additional profit sharing income for the Insurance Agency and the reimbursement of certain legal fees incurred in 2002. No securities were sold during the first quarter of 2003. In 2002, the Registrant sold several securities for a non-recurring portfolio gain of $54,000.
Noninterest ExpenseTotal noninterest expense decreased $20,000 or 1% in the first quarter of 2003 compared to the first quarter of 2002. Fewer salaries, commissions and employee benefits due to the sale of the Grand Rapids division of the Insurance Agency in January 2003 accounted for part of the decrease from 2002. Occupancy expense was also lower due to the closure of the Bank's Plainfield office as well as the sale of the Grand Rapids division of the Insurance Agency. Professional fees were higher during the first quarter of 2003 due to increased legal fees related to collection matters caused by delinquent and substandard loans. Other noninterest expense increased $33,000 due to higher expenses on other real estate owned, additional mortgage banking fees, and some impairment loss realized on the Mortgage Company's mortgage servicing rights.
FINANCIAL CONDITION
SecuritiesThe security portfolio increased $3.6 million from December 31, 2002 to March 31, 2003. A mix of agency bonds, mortgage-backed securities, and municipal bonds were purchased to use up excess liquidity created from significant loan payoffs received in the first quarter of 2003. The Bank's Investment Committee continues to monitor the portfolio and purchase securities when deemed prudent. Certain securities are also sold under agreements to repurchase and management plans to continue this practice as a low-cost source of funding. Investment securities also serve as a source of liquidity for deposit needs.
LoansThe loan portfolio (excluding loans held for sale) dropped $10.1 million during the first quarter of 2003. Commercial, consumer, and mortgage loans decreased $4.6 million, $2.7 million and $2.8 million, respectively. Commercial loans decreased due to reduced demand from local businesses and tightened credit standards for commercial borrowers. Consumer and mortgage loans decreased due to significant refinancing activity spurred by record low interest rates. Credit standards have also been tightened for consumer borrowers and the number of dealers providing indirect automobile and recreational vehicle loans to the Bank has been scaled back. Mortgage loans have decreased as a result of management's decision not to retain long-term fixed rate conforming loans. Conforming loans are sold to secondary market investors with servicing retained by the Mortgage Company.
Management anticipates that loan demand may increase when the local and national economies stabilize and begin to show signs of improvement. Management has also added two new loan officers and is attempting to penetrate various new markets in hopes of growing the loan portfolio.
Information regarding impaired loans can be found in Note 2 to the consolidated financial statements included in this report. In addition to its review of the loan portfolio for impaired loans, management also monitors the various nonperforming loans. 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 loans past due 90 days or more, which are considered troubled debt restructurings. The balances of these nonperforming loans were as follows:
March 31,
December 31,
Loans accounted for on a nonaccrual basis
$ 4,266,000
$ 2,522,000
Loans contractually past due 90 days
or more as to principal or interest payments
42,000
210,000
Loans considered troubled debt restructurings
199,000
$ 4,507,000
$ 2,780,000
The allowance for loan losses as a percentage of nonperforming loans was 46% at March 31, 2003, compared to 80% at December 31, 2002. Since December 31, 2002, nonaccrual loans have increased largely due to approximately $1.8 million of various commercial credits. Several of these loans were placed into nonaccrual status because the loans were not renewed by the borrower and payments were more than 90 days past due. Subsequent to March 31, 2003, several of these borrowers paid delinquent interest and principal and the loans were restored to an accrual basis. Nonaccrual loans are comprised of $2.6 million of commercial loans, $1.3 million of residential mortgages, and $0.4 million of consumer loans. Most of the commercial loans are secured by real estate or other equipment and management does not foresee any unexpected losses. Impaired loans are evaluated on an individual basis and specific allocations are made for loans whereby collateral is insufficient to support the outstanding principal balances of the se loans. Management further believes that the general allocation within the allowance for loan losses is sufficient based on the Bank's loan grading system, past due trends and historical charge-off percentages.
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. The total balance of these loans was
Deposits and Other Funding SourcesTotal deposits have decreased approximately $4.9 million since December 31, 2002. The decrease was primarily due to non-renewed time deposits. Money market accounts have grown approximately $1.6 million in the three months since year-end. Other demand and savings deposits dipped slightly for the quarter due to normal customer transactional activity. Federal funds purchased increased $2 million since December 31, 2002. Advances from the Federal Home Loan Bank were paid down approximately $3.5 million from excess liquidity provided by significant loan payoffs received in the quarter ended March 31, 2003.
Shareholders' EquityTotal shareholders' equity increased slightly in the first quarter of 2003. Growth resulted from current year income and proceeds from the sale of the Registrant's stock, offset by cash dividends paid to shareholders. Total shareholders' equity as a percentage of assets was 9.55% as of March 31, 2003, compared to 9.12% as of December 31, 2002. The increase in this ratio resulted from growth in shareholders' equity and a reduction in total assets during the quarter. Based on risk-based capital guidelines established by the Bank's regulators, the Registrant's risk-based capital was categorized as "well capitalized" at March 31, 2003.
The Registrant's management does not currently have any plans that will utilize significant amounts of the Registrant's capital. Management believes that the current level of capital is adequate to take advantage of potential opportunities that may arise for the Registrant or the Bank.
Liquidity and Rate SensitivityManagement believes that the current level of liquidity is sufficient to meet the Bank's normal operating needs. This belief is based upon the availability of deposits from both the local and national markets, maturities of securities, normal loan repayments, income retention, federal funds which can be purchased from correspondent banks, and advances available from the Federal Home Loan Bank. The Bank also has a secured line of credit available from the Federal Reserve Bank. The Bank does not anticipate that the secured line of credit will be used for normal operating needs, but could be used for liquidity purposes in special circumstances.
The Bank's sensitivity to changes in interest rates is monitored by the Asset & Liability Management Committee (the "ALCO Committee"). The ALCO Committee uses a simulation model to subject rate-sensitive assets and liabilities to interest rate shocks. Assets and liabilities are subjected to an immediate 200 basis point shock and the effect on net income and shareholders' equity is measured. The rate shock computation as of March 31, 2003 increased net income 8% if rates increased 200 basis points and decreased net income 8% if rates decreased 100 basis points. The market value of shareholders' equity decreased 2% when rates were shocked 200 points upward and remained flat if rates were shocked 100 points downward. The ALCO Committee continues to monitor the effect of changes in interest rates upon the Registrant's financial condition.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The information concerning quantitative and qualitative disclosures about market risk contained under the caption "Liquidity and Interest Rate Risk" on pages 30 and 31 of the Registrant's Annual Report to Shareholders for the year ended December 31, 2002 is here incorporated by reference. Such Annual Report was previously filed as Exhibit 13 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2002.
Management does not believe that there has been a material change in the nature or categories of the primary market risk exposures, or the particular markets that present the primary risk of loss to the Bank. As of the date of this report, management does not know of or expect there to be any material change in the general nature of its primary market risk exposure in the near term. The methods by which the Bank manages its primary market risk exposures, as described in the sections of its Annual Report to Shareholders incorporated by reference in response to this item, have not changed materially since the end of 2002. As of the date of this report, management does not expect to
The Bank's market risk exposure is mainly comprised of its vulnerability to interest rate risk. Prevailing interest rates and interest rate relationships are primarily determined by market factors that are beyond the Bank's control. All information provided in response to this item consists of forward-looking statements. Reference is made to the section captioned "Forward-Looking Statements" in Item 2 of this report for a discussion of the limitations on the Registrant's responsibility for such statements. In this discussion, "near term" means a period of one year following the date of the most recent balance sheet contained in this report.
Item 4. Controls and Procedures.
Within 90 days prior to the date of filing this report, an evaluation was performed under the supervision and with the participation of the Registrant's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Registrant's disclosure controls and procedures. Based on that evaluation, the Registrant's management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Registrant's disclosure controls and procedures were effective as of the time of such evaluation. There have been no significant changes in the Registrant's internal controls or in other factors that could significantly affect internal controls subsequent to the time of such evaluation.
Item 1. Legal Proceedings.
There are no material pending legal proceedings to which the Registrant or the Bank is a party to or to which any of their property is subject, except for proceedings which arose in the ordinary course of business. In the opinion of management, pending or current legal proceedings will not have a material effect on the consolidated financial condition of the Registrant.
Item 2. Changes in Securities and Use of Proceeds.
On January 28, 2003, the Registrant issued 1,191 shares of common stock, without par value, to the directors of the Registrant pursuant to the Directors' Stock Purchase Plan for an aggregate cash price of $17,000. The Registrant relied on the exemption contained in Section 4(6) of the Securities Act of 1933 in connection with this sale.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
Item 5. Other Information.
Item 6. Exhibits and Reports on Form 8-K.
  1.   Exhibits. The following exhibits are filed or incorporated by reference as part of this report:
ExhibitNumber
Document
3.1
Amended and Restated Articles of Incorporation of the Registrant. Previously filed as an exhibit to the Registrant's Form 10-Q Quarterly Report for the quarter ended June 30, 2000. Here incorporated by reference.
3.2
Bylaws of the Registrant as currently in effect and any amendments thereto. Previously filed as an exhibit to the Registrant's Form 10-QSB Quarterly Report for the quarter ended September 30, 1998. Here incorporated by reference.
99.1
Certification pursuant to 18 U.S.C. § 1350. This exhibit is furnished, not filed, in accordance with SEC Release No. 34-47551.
  2.   Reports on Form 8-K. No reports on Form 8-K were filed during the period covered by this report.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CHOICEONE FINANCIAL SERVICES, INC.
Date May 15, 2003
/s/ James A. Bosserd
James A. BosserdPresident and Chief Executive Officer (Principal Executive Officer)
/s/ Thomas L. Lampen
Thomas L. LampenChief Financial Officer and Treasurer(Principal Financial and Accounting Officer)
CERTIFICATIONS
I, James A. Bosserd, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of ChoiceOne Financial Services, Inc.;
2.
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report;
4.
The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a)
designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b)
evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
c)
presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.
The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent function):
all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and
any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and
6.
The Registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003/s/ James A. BosserdJames A. BosserdPresident and Chief Executive OfficerChoiceOne Financial Services, Inc.
I, Thomas L. Lampen, certify that:
Date: May 15, 2003/s/ Thomas L. LampenThomas L. LampenChief Financial Officer and Treasurer ChoiceOne Financial Services, Inc.
INDEX TO EXHIBITS
The following exhibits are filed or incorporated by reference as part of this report: