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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q


[ X ]

Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

 

 

For the quarterly period ended June 30, 2002

 

 

[   ]

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 of
Incorporation or Organization)

 

38-2659066
(I.R.S. Employer Identification No.)

 

 

 

109 East Division
Sparta, 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        

As of July 31, 2002, the Registrant had 1,547,857 shares of common stock outstanding.













CHOICEONE FINANCIAL SERVICES, INC.
INDEX TO FORM 10-Q

 

 

 

Page
Number

PART I. FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Financial Statements:

 

 

 

 

 

 

 

   Consolidated Balance Sheets at June 30, 2002 (unaudited) and December 31, 2001

3

 

 

 

 

 

 

   Consolidated Statements of Income for the three and six months ended
      June 30, 2002 and 2001 (Unaudited)


4

 

 

 

 

 

 

   Consolidated Statements of Changes in Shareholders' Equity for the six months
      ended June 30, 2002 and 2001 (Unaudited)


5

 

 

 

 

 

 

   Consolidated Statements of Cash Flows for the six months ended June 30, 2002
      and 2001 (Unaudited)


6

 

 

 

 

 

 

   Notes to Consolidated Financial Statements

7-9

 

 

 

 

 

Item 2.

Management's Discussion and Analysis of Financial

 

 

 

Condition and Results of Operations

9-16

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

16

 

 

 

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

16

 

 

 

 

 

Item 2.

Changes in Securities and Use of Proceeds

16

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

16

 

 

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

17

 

 

 

 

 

Item 5.

Other Information

17

 

 

 

 

 

Item 6.

Exhibits and Reports on Form 8-K

17

 

 

 

 

 

 

 

 

SIGNATURES

18







2


PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements.

ChoiceOne Financial Services, Inc.

CONSOLIDATED BALANCE SHEETS

 

 

June 30,
2002


 

December 31,
2001


 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

   Cash and due from banks

$

4,038,000

$

4,931,000

 

   Securities available for sale

 

19,468,000

 

18,265,000

 

   Federal Home Loan Bank and Federal Reserve Bank stock

 

2,620,000

 

2,620,000

 

   Loans held for sale

 

651,000

 

656,000

 

   Loans, net

 

170,611,000

 

163,154,000

 

   Premises and equipment, net

 

4,582,000

 

5,061,000

 

   Other real estate owned, net

 

1,076,000

 

710,000

 

   Other assets

 

2,336,000


 

2,394,000


 

      Total assets

$

205,382,000


$

197,791,000


 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

   Deposits - noninterest bearing

$

15,924,000

$

16,011,000

 

   Deposits - interest bearing

 

124,231,000

 

119,964,000

 

   Repurchase agreements

 

5,977,000

 

4,002,000

 

   Federal funds purchased

 

2,500,000

 

2,900,000

 

   Advances from Federal Home Loan Bank

 

36,612,000

 

35,125,000

 

   Mandatory redeemable shares under Employee Stock
      Ownership Plan, at fair value

 


27,000

 


20,000

 

   Other liabilities

 

1,374,000


 

1,496,000


 

      Total liabilities

 

186,645,000

 

179,518,000

 

 

 

 

 

 

 

Shareholders' Equity

 

 

 

 

 

   Preferred stock; shares authorized: 100,000;
      shares outstanding: none

 


0

 


0

 

   Common stock; shares authorized: 4,000,000;
      shares outstanding: 1,547,857 at June 30, 2002
      and 1,541,091 at December 31, 2001

 



15,598,000

 



14,475,000

 

   Unallocated shares held by 401(k) and Employee Stock
      Ownership Plan

 


(54,000


)


(64,000


)

   Retained earnings

 

2,846,000

 

3,680,000

 

   Accumulated other comprehensive income

 

347,000


 

182,000


 

      Total shareholders' equity

 

18,737,000


 

18,273,000


 

      Total liabilities and shareholders' equity

$

205,382,000


$

197,791,000


 


See accompanying notes to consolidated financial statements.





3


ChoiceOne Financial Services, Inc.

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

 

 

Three Months Ended
June 30,


 

Six Months Ended
June 30,


 

 

 

2002


 

2001


 

2002


 

2001


 

Interest income

 

 

 

 

 

 

 

 

 

   Loans, including fees

$

3,355,000

$

3,859,000

$

6,732,000

$

7,856,000

 

   Securities:

 

 

 

 

 

 

 

 

 

      Taxable

 

152,000

 

96,000

 

293,000

 

202,000

 

      Nontaxable

 

107,000

 

97,000

 

217,000

 

198,000

 

   Other

 

0


 

21,000


 

1,000


 

32,000


 

         Total interest income

 

3,614,000


 

4,073,000


 

7,243,000


 

8,288,000


 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 

 

 

 

 

   Deposits

 

1,044,000

 

1,522,000

 

2,131,000

 

3,150,000

 

   Advances from Federal Home Loan Bank

 

502,000

 

632,000

 

1,019,000

 

1,261,000

 

   Federal funds purchased and repurchase agreements

 

42,000

 

40,000

 

86,000

 

93,000

 

   Other

 

3,000


 

3,000


 

6,000


 

6,000


 

         Total interest expense

 

1,591,000


 

2,197,000


 

3,242,000


 

4,510,000


 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

2,023,000

 

1,876,000

 

4,001,000

 

3,778,000

 

Provision for loan losses

 

225,000


 

300,000


 

385,000


 

450,000


 

 

 

 

 

 

 

 

 

 

 

Net interest income after

 

 

 

 

 

 

 

 

 

   provision for loan losses

 

1,798,000

 

1,576,000

 

3,616,000

 

3,328,000

 

 

 

 

 

 

 

 

 

 

 

Noninterest income

 

 

 

 

 

 

 

 

 

   Customer service fees

 

280,000

 

179,000

 

521,000

 

334,000

 

   Insurance commissions

 

315,000

 

333,000

 

628,000

 

625,000

 

   Gain on sales of securities

 

0

 

8,000

 

54,000

 

8,000

 

   Gain on sales of loans

 

93,000

 

78,000

 

186,000

 

128,000

 

   Loan servicing fees, net

 

13,000

 

13,000

 

40,000

 

30,000

 

   Other income

 

50,000


 

29,000


 

77,000


 

102,000


 

         Total noninterest income

 

751,000

 

640,000

 

1,506,000

 

1,227,000

 

 

 

 

 

 

 

 

 

 

 

Noninterest expense

 

 

 

 

 

 

 

 

 

   Salaries and benefits

 

987,000

 

850,000

 

2,037,000

 

1,686,000

 

   Occupancy

 

472,000

 

341,000

 

831,000

 

703,000

 

   Professional services

 

142,000

 

96,000

 

239,000

 

196,000

 

   Printing, postage and supplies

 

73,000

 

76,000

 

140,000

 

149,000

 

   Data processing

 

71,000

 

45,000

 

139,000

 

91,000

 

   Advertising and promotional

 

50,000

 

69,000

 

82,000

 

95,000

 

   Other expense

 

317,000


 

349,000


 

621,000


 

639,000


 

         Total noninterest expense

 

2,112,000


 

1,826,000


 

4,089,000


 

3,559,000


 

 

 

 

 

 

 

 

 

 

 

Income before income tax

 

437,000

 

390,000

 

1,033,000

 

996,000

 

Income tax expense

 

127,000


 

109,000


 

292,000


 

290,000


 

 

 

 

 

 

 

 

 

 

 

Net income

$

310,000


$

281,000


$

741,000


$

706,000


 

 

 

 

 

 

 

 

 

 

 

Basic and diluted earnings per share

$

0.20


$

0.18


$

0.48


$

0.46


 


See accompanying notes to consolidated financial statements.



4


ChoiceOne Financial Services, Inc.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)

 



Number of
Shares


 

Common
Stock and
Paid in
Capital


 



Unallocated
Shares


 

 



Retained
Earnings


 

Accumulated
Other
Comprehensive
Income (Loss)


 

 




Total


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2001

1,527,633

$

13,317,000

$

(82,000

)

$

4,222,000

$

132,000

 

$

17,589,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Net income

 

 

 

 

 

 

 

706,000

 

 

 

 

706,000

 

   Net change in unrealized gain

 

 

 

 

 

 

 

 

 

82,000

 

 

82,000


 

     Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

788,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares issued to employee
  benefit plans and other


8,523

 


113,000

 

 

 

 

 

 

 

 

 


113,000

 

Shares committed to be released
  under Employee Stock
  Ownership Plan



510

 



(9,000



)



9,000

 

 

 

 

 

 

 



0

 

Shares repurchased

349

 

(5,000

)

 

 

 

 

 

 

 

 

(5,000

)

Stock dividend

 

 

1,002,000

 

 

 

 

(1,005,000

)

 

 

 

(3,000

)

Cash dividends

 


 

 


 

 


 

 

(498,000


)

 


 

 

(498,000


)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2001

1,537,015


$

14,418,000


$

(73,000


)

$

3,425,000


$

214,000


$

17,984,000


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2002

1,541,091

$

14,475,000

$

(64,000

)

$

3,680,000

$

182,000

 

$

18,273,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Net income

 

 

 

 

 

 

 

741,000

 

 

 

 

741,000

 

   Net change in unrealized gain

 

 

 

 

 

 

 

 

 

165,000

 

 

165,000


 

     Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

906,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares issued to employee
  benefit plans and other


6,256

 


72,000

 

 

 

 

 

 

 

 

 


72,000

 

Shares committed to be released
  under Employee Stock
  Ownership Plan



510

 



(10,000



)



10,000

 

 

 

 

 

 

 



0

 

Stock dividend

 

 

1,061,000

 

 

 

 

(1,064,000

)

 

 

 

(3,000

)

Cash dividends

 


 

 


 

 


 

 

(511,000


)

 


 

 

(511,000


)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2002

1,547,857


$

15,598,000


$

(54,000


)

$

2,846,000


$

347,000


 

$

18,737,000


 



See accompanying notes to consolidated financial statements.






5


ChoiceOne Financial Services, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

 

Six Months Ended
June 30,


 

 

 

2002


 

 

2001


 

Cash flows from operating activities:

 

 

 

 

 

 

   Net income

$

741,000

 

$

706,000

 

   Adjustments to reconcile net income to net cash from
   operating activities:

 

 

 

 

 

 

      Depreciation

 

531,000

 

 

389,000

 

      Amortization

 

165,000

 

 

69,000

 

      Provision for loan losses

 

385,000

 

 

450,000

 

      Gain on sales of securities

 

(54,000

)

 

(8,000

)

      Gain on sales of loans

 

(186,000

)

 

(112,000

)

      Loans originated for sale

 

(12,218,000

)

 

(7,920,000

)

      Proceeds from loan sales

 

12,404,000

 

 

8,490,000

 

      Net changes in:

 

 

 

 

 

 

         Accrued interest receivable and other assets

 

621,000

 

 

(108,000

)

         Accrued interest payable and other liabilities

 

(150,000


)

 

925,000


 

            Net cash provided by operating activities

 

2,239,000

 

 

2,881,000

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

   Purchases of securities available for sale

 

(4,742,000

)

 

(1,874,000

)

   Proceeds from sales of securities available for sale

 

3,005,000

 

 

1,788,000

 

   Principal paydowns on securities available for sale

 

766,000

 

 

427,000

 

   Net change in loans

 

(8,859,000

)

 

2,307,000

 

   Premises and equipment expenditures, net

 

(102,000


)

 

(111,000


)

            Net cash provided by/(used in) investing activities

 

(9,932,000

)

 

2,537,000

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

   Net change in deposits

 

4,180,000

 

 

(5,104,000

)

   Net change in repurchase agreements

 

1,975,000

 

 

751,000

 

   Net change in federal funds purchased

 

(400,000

)

 

(3,350,000

)

   Proceeds from Federal Home Loan Bank advances

 

11,000,000

 

 

9,250,000

 

   Payments on Federal Home Loan Bank advances

 

(9,513,000

)

 

(2,425,000

)

   Issuance of common stock

 

72,000

 

 

113,000

 

   Repurchase of common stock

 

0

 

 

(5,000

)

   Cash dividends and fractional shares from stock dividends

 

(514,000


)

 

(501,000


)

            Net cash provided by/(used in) financing activities

 

6,800,000


 

 

(1,271,000


)

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

(893,000

)

 

4,147,000

 

Beginning cash and cash equivalents

 

4,931,000


 

 

4,896,000


 

 

 

 

 

 

 

 

Ending cash and cash equivalents

$

4,038,000


 

$

9,043,000


 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

Cash paid for interest

$

3,256,000

 

$

4,596,000

 

Cash paid for income taxes

$

290,000

 

$

210,000

 

Loans transferred to other real estate

$

1,022,000

 

$

622,000

 



See accompanying notes to consolidated financial statements.




6


ChoiceOne Financial Services, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include ChoiceOne Financial Services, Inc. (the "Registrant") and its direct and indirect wholly owned subsidiaries, ChoiceOne Bank (the "Bank"), ChoiceOne Mortgage Company of Michigan (the "Mortgage Company"), ChoiceOne Insurance Agencies, Inc. (the "Insurance Agency") and ChoiceOne Travel, Inc. (the "Travel Agency"). Effective April 1, 2001, the Registrant's management closed the Travel Agency. 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 June 30, 2002 and December 31, 2001, the Consolidated Statements of Income for the three- and six-month periods ended June 30, 2002 and June 30, 2001, the Consolidated Statements of Changes in Shareholders' Equity for the six-month periods ended June 30, 2002 and June 30, 2001, and the Consolidated Statements of Cash Flows for the six-month periods ended June 30, 2002 and June 30, 2001. Operating results for the six months ended June 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002.

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, 2001.

Stock Transactions

A total of 1,996 shares of common stock were issued to the Registrant's Board of Directors for a cash price of $29,000 under the terms of the Directors' Stock Purchase Plan in the first two quarters of 2002. A total of 4,479 shares of common stock were issued to shareholders for a cash price of $46,000 under the Dividend Reinvestment and Supplemental Purchase Plan. Approximately 510 shares of common stock were released under the Employee Stock Ownership Plan.

Reclassifications

Certain amounts presented in prior periods have been reclassified to conform to the 2002 presentation.









7


NOTE 2 - ALLOWANCE FOR LOAN LOSSES

An analysis of changes in the allowance for loan losses follows:

 

For the three months ended
June 30,


 

 

For the six months ended
June 30,


 

 

 

2002


 

 

2001


 

 

2002


 

 

2001


 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

$

2,082,000

 

$

2,177,000

 

$

2,013,000

 

$

2,101,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision charged to expense

 

225,000

 

 

300,000

 

 

385,000

 

 

450,000

 

Loans charged-off

 

(335,000

)

 

(520,000

)

 

(474,000

)

 

(640,000

)

Recoveries of charged-off loans

 

58,000


 

 

53,000


 

 

106,000


 

 

99,000


 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at end of period

$

2,030,000


 

$

2,010,000


 

$

2,030,000


 

$

2,010,000


 


Information regarding impaired loans follows:

 

 

June 30,
2002


 

December 31,
2001


 

 

 

 

 

 

 

Loans with no allowance allocated

$

1,855,000

$

718,000

 

Loans with allowance allocated

 

508,000

 

153,000

 

Amount of allowance for loan losses allocated

 

290,000

 

53,000

 


Information regarding impaired loans follows:

 

 

Six Months ended June 30,


 

 

 

2002


 

2001


 

 

 

 

 

 

 

Average balance during the period

$

1,665,000

$

711,000

 

Interest income recognized thereon

 

8,000

 

9,000

 

Cash basis interest income recognized

 

23,000

 

9,000

 
















8


NOTE 3 - EARNINGS PER SHARE

A computation of the basic earnings per share and diluted earnings per share computations follows:

 

 

Three Months Ended
June 30,


 

Six Months Ended
June 30,


 

 

 

2002


 

2001


 

2002


 

2001


 

Basic Earnings Per Share

 

 

 

 

 

 

 

 

 

   Net income available to common

 

 

 

 

 

 

 

 

 

     shareholders

$

310,000


$

281,000


$

741,000


$

706,000


 

 

 

 

 

 

 

 

 

 

 

   Weighted average common shares outstanding

 

1,542,448


 

1,530,992


 

1,544,214


 

1,528,074


 

 

 

 

 

 

 

 

 

 

 

   Basic earnings per share

$

0.20


$

0.18


$

0.48


$

0.46


 

 

 

 

 

 

 

 

 

 

 

Diluted Earnings Per Share

 

 

 

 

 

 

 

 

 

   Net income available to common

 

 

 

 

 

 

 

 

 

     Shareholders

$

310,000


$

281,000


$

741,000


$

706,000


 

 

 

 

 

 

 

 

 

 

 

   Weighted average common shares outstanding

 

1,542,448

 

1,530,992

 

1,544,214

 

1,528,074

 

   Plus dilutive stock options

 

235


 

104


 

971


 

0


 

 

 

 

 

 

 

 

 

 

 

   Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

    and potentially dilutive shares

 

1,542,683


 

1,531,096


 

1,545,185


 

1,528,074


 

 

 

 

 

 

 

 

 

 

 

   Diluted earnings per share

$

0.20


$

0.18


$

0.48


$

0.46


 



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" or "ChoiceOne") and its direct and indirect wholly owned subsidiaries, ChoiceOne Bank (the "Bank"), ChoiceOne Insurance Agencies, Inc. (the "Insurance Agency") and ChoiceOne Travel, Inc. (the "Travel Agency"). On April 1, 2001, the Registrant's management closed the Travel Agency. The effect of closing the Travel Agency has had an immaterial impact on the consolidated financial statements. This discussion should be read in conjunction with the consolidated financial statements and related footnotes.


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

9


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 economy. In addition, events relating to the terrorist attacks on September 11, 2001 and other terrorist activities 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

Summary

Net income increased $29,000 or 10% in the second quarter of 2002 compared to the same period in 2001. Net income for the first six months of 2002 increased $35,000, or 5% from the same period in the prior year. The increase in net income was due to increased net interest income, a lower provision to the allowance for loan losses and increased noninterest income, offset by additional noninterest expense.

The increase in net interest income was primarily due to a change in the Bank's mix of interest bearing deposits for 2002 compared to the same period a year ago. Higher customer service fees, gains from the sale of loans and investment securities fueled growth in noninterest income. The lower provision to the allowance for loan losses was primarily due to the reduced level of net charge-offs in 2002 versus 2001. Noninterest expense rose due to the salaries and benefits for several new employees as well as higher commissions to mortgage originators based on increased loan production for the six months ended June 30, 2002. Higher occupancy expenses and professional services also boosted noninterest expense in 2002 over the prior year.

Return on average assets was 0.73% for the first six months of 2002, compared to 0.71% for the same period in 2001. Return on average shareholders' equity was 8.05% for the first half of 2002, compared to 7.97% for the comparable period of 2001.

Dividends

Cash dividends of $263,000, or $0.17 per common share were declared in the second quarter of 2002, which is $0.01 more than the per share amount declared in the second quarter of 2001. The cash dividends paid in the first six months of 2002 were $511,000 or $0.33 per common share, compared to $0.32 per common share in 2001. The cash dividend payout percentage was 69% for the first six months of 2002, compared to 71% in the same period a year ago.

The Registrant's Board of Directors declared a 5% stock dividend payable on the Registrant's common stock on April 17, 2002. The dividend was paid May 31, 2002 to shareholders of record as of May 9, 2002. Earnings per share data for all periods presented have been adjusted for this stock dividend and the 5% stock dividend paid in 2001.


Interest Income and Expense

Tables 1 and 2 on the following pages provide information regarding interest income and expense for the six-month periods ended June 30, 2002 and 2001, 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 below.



10


Table 1 - Average Balances and Tax Equivalent Interest Rates (Dollars in Thousands)

 

 

For the Six Months Ended June 30,


 

 

 

2002


 

 

2001


 

 

 

Average
Balance


 


Interest


 

Average
Rate


 

 

Average
Balance


 


Interest


 

Average
Rate


 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Loans (1)

$

170,434

$

6,743

 

7.91

%

$

171,589

$

7,864

 

9.17

%

   Taxable securities (2)

 

11,221

 

293

 

5.22

 

 

5,775

 

202

 

7.00

 

   Nontaxable securities (1)(2)

 

9,166

 

329

 

7.17

 

 

8,259

 

300

 

7.26

 

   Other

 

208


 

1


 

0.96

 

 

1,687


 

32


 

3.79

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      Interest-earning assets

 

191,029

 

7,366


 

7.71

 

 

187,310

 

8,398


 

8.97

 

   Noninterest-earning assets

 

11,362


 

 

 

 

 

 

12,566


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      Total assets

$

202,391


 

 

 

 

 

$

199,876


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and shareholders' equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Interest-bearing demand deposits

$

34,890

 

316

 

1.81

%

$

26,444

 

424

 

3.21

%

   Savings deposits

 

8,478

 

41

 

0.97

 

 

7,743

 

46

 

1.19

 

   Time deposits

 

78,662

 

1,774

 

4.51

 

 

86,643

 

2,680

 

6.19

 

   Federal Home Loan Bank advances

 

35,883

 

1,019

 

5.68

 

 

39,720

 

1,260

 

6.34

 

   Other

 

7,975


 

92


 

2.31

 

 

4,980


 

99


 

3.98

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      Interest-bearing liabilities

 

165,888

 

3,242


 

3.91


 

 

165,530

 

4,509


 

5.45


 

   Demand deposits

 

15,605

 

 

 

 

 

 

14,512

 

 

 

 

 

   Other noninterest-bearing liabilities

 

2,494

 

 

 

 

 

 

2,282

 

 

 

 

 

   Shareholders' equity

 

18,404


 

 

 

 

 

 

17,552


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      Total liabilities and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

         shareholders' equity

$

202,391


 

 

 

 

 

$

199,876


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income (tax-equivalent

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   basis) - interest spread

 

 

 

4,123

 

3.80


%

 

 

 

3,889

 

3.52


%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax equivalent adjustment (1)

 

 

 

(122


)

 

 

 

 

 

(111


)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

$

4,001


 

 

 

 

 

$

3,778


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income as a percentage of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   earning assets (tax-equivalent basis)

 

 

 

 

 

4.32


%

 

 

 

 

 

4.15


%

______________________

(1)

Interest on nontaxable securities and loans has been 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)

The average balance includes the effect of unrealized appreciation/depreciation on securities, while the average rate was computed on the average amortized cost of the securities.

 










11


Table 2 - Changes in Tax Equivalent Net Interest Income (Dollars in Thousands)

 

 

Six Months Ended June 30,


 

 

 

2002 Over 2001


 

 

 

Total


 

 

Volume


 

 

Rate


 

Increase (decrease) in interest income (1)

 

 

 

 

 

 

 

 

 

   Loans (2)

$

(1,121

)

$

(53

)

$

(1,068

)

   Taxable securities

 

91

 

 

112

 

 

(21

)

   Nontaxable securities (2)

 

29

 

 

29

 

 

0

 

   Other

 

(31


)

 

(17


)

 

(14


)

 

 

 

 

 

 

 

 

 

 

      Net change in tax-equivalent income

 

(1,032

)

 

71

 

 

(1,103

)

 

 

 

 

 

 

 

 

 

 

Increase (decrease) in interest expense (1)

 

 

 

 

 

 

 

 

 

   Interest-bearing transaction accounts

 

(108

)

 

70

 

 

(178

)

   Savings deposits

 

(5

)

 

2

 

 

(7

)

   Time deposits

 

(906

)

 

(132

)

 

(774

)

   Federal Home Loan Bank advances

 

(241

)

 

(76

)

 

(165

)

   Other

 

(6


)

 

33


 

 

(39


)

 

 

 

 

 

 

 

 

 

 

      Net change in interest expense

 

(1,266


)

 

(103


)

 

(1,163


)

 

 

 

 

 

 

 

 

 

 

      Net change in tax-equivalent net interest income

$

234


 

$

174


 

$

60


 

_________________

(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 34% for the periods presented.


Net Interest Income

As shown in Tables 1 and 2, tax equivalent net interest income increased $234,000 in the first six months of 2002 compared to the same period in 2001. This is primarily because the Bank has increased the volume of checking accounts and investment securities. The Bank has also experienced a change in the deposit mix as more customers are shifting from high rate time deposits to demand deposits. The overall reduced rate earned on interest-earning assets has more than been offset by overall lower rates paid on deposits and other funding sources.

The average balance of loans has decreased $1.2 million in the six months ended June 30, 2002 compared to 2001. Additionally, the recent interest rate cuts have greatly reduced the yield earned on all loans originated in 2002 and existing variable rate loans indexed to prime or the U.S. Treasury note rates. This has caused interest income from loans to fall approximately $1.1 million for the six months ended June 30, 2002, compared to the period a year ago. The average balance of investment securities grew $6.4 million since June 2001, offset by lower earning yields thereby causing interest income to increase $120,000 from the period a year ago. The Bank was primarily a purchaser of federal funds in the first six months of 2002 as compared to 2001, when the Bank was selling federal funds. This caused a decrease of $31,000 in income from other interest bearing assets in 2002 versus 2001.

The mix of deposits has changed from June 2001 to June 2002 as interest-bearing demand deposits have increased $8.4 million, savings deposits increased $0.7 million, and time deposits have dropped $8.0 million. This change

12


in the mix allowed the Bank to reduce interest expense by $60,000. In addition, the lower rates paid on all deposit types have caused interest expense to decrease approximately $1 million from the period a year ago. A $3.8 million decrease in average advances from the Federal Home Loan Bank coupled with lower rates paid on new advances caused the Bank's interest expense to decrease $241,000 in 2002.

Net interest income spread (from Table 1) was 3.80% for the first six months of 2002, compared to 3.52% for the first six months of 2001. The net interest income spread was 3.48% for the twelve months ended December 31, 2001, and 3.74% for the three months ended March 31, 2002. The average yield on interest-earning assets was 7.71% at June 30, 2002, compared to 8.97% at June 30, 2001. The average rate on interest-bearing liabilities was 3.91% at June 30, 2002, compared to 5.45% at June 30, 2001. The improvement over 2001 was primarily due to reduced rates paid on interest-bearing liabilities offset by the reduced yields earned on interest-bearing assets. Also, a change in the mix of deposits allowed management to be less dependent on wholesale funds. Management expects the trend of lower-cost funding to continue until possibly the end of 2002.

The Federal Reserve Bank's Open Market Committee (the "FOMC") has cut the federal funds interest rate 475 basis points since December 2000. Many banks, including ChoiceOne Bank, have dropped their prime lending rate each time that the federal funds rate has been cut. The Registrant cannot determine if and when the FOMC may boost the federal funds interest rate, but it intends to grow its demand deposits as well as its commercial loan and investment security portfolios in an attempt to improve its net interest margin. The Bank also intends to pursue more fees from the Mortgage Company and the Insurance Agency to offset potential drops in net interest margin.

Provision and Allowance for Loan Losses

The provision for loan losses was $65,000 lower in the first six months of 2002 than in the same period of 2001. This was lower due to a significant provision made in the second quarter of 2001 caused by higher net charge-offs a year ago. The allowance for loan losses decreased $52,000 from March 31, 2002 to June 30, 2002, but has increased $17,000 since the end of 2001. The allowance was 1.17% of total loans as of June 30, 2002, compared to 1.21% at March 31, 2002, and 1.21% at December 31, 2001. Charge-offs and recoveries of charged off loans for the six months ended June 30 were as follows:

 

 

2002


 

 

2001


 

 

 

Charge-offs


 

 

Recoveries


 

 

Charge-offs


 

 

Recoveries


 

Commercial

$

132,000

 

$

13,000

 

$

285,000

 

$

5,000

 

Consumer

 

336,000

 

 

87,000

 

 

242,000

 

 

94,000

 

Mortgage

 

6,000


 

 

6,000


 

 

113,000


 

 

0


 

 

$

474,000


 

$

106,000


 

$

640,000


 

$

99,000


 


The decrease in total charge-offs from 2001 to 2002 was primarily attributable to fewer commercial and mortgage loan charge-offs, offset by higher consumer loan charge-offs. In 2001, several commercial loans and one significant construction mortgage loan were written off as uncollectible. Indirect and credit card loans comprised the bulk of the charge-offs within consumer loans. As charge-offs, changes in the level of nonperforming loans, and changes within the composition of the loan portfolio occur throughout 2002, the provision and allowance for loan losses will be reviewed by the Bank's management and adjusted as necessary.

Noninterest Income

Total noninterest income increased $111,000 or 17% in the second quarter and $279,000 or 23% in the first six months of 2002 compared to the same periods in the prior year. Customer service fees increased due to a new program introduced to target customers who routinely have checks returned for non-sufficient funds. Gains on sales of mortgage loans increased in 2002 due to additional volume originated and sold in the current year compared to the prior year. The sale of one equity investment resulted in a non-recurring portfolio gain of $49,000 for the six months ended June 30, 2002.



13


Noninterest Expense

Total noninterest expense increased $286,000 or 16% in the second quarter of 2002 and $530,000 or 15% in the first six months of 2002 compared to 2001. Salaries and benefits rose due to the addition of several new employees as well as higher commissions paid to mortgage producers based on increased production. Approximately $110,000 of additional occupancy expense was incurred due to the write-off of fixed assets related to closing the Bank's Plainfield office. Bank management declined to renew its current lease agreement as the office (opened in 1996) has not grown to a level sufficient enough to be profitable. Professional services increased over the prior year due to collection efforts towards delinquent or bankrupt borrowers as well as higher legal fees resulting from litigation with two former employees of the Insurance Agency. Data processing increased in 2002 due to a new check imaging system installed in third quarter of 2001 as well as the implementation of internet banking in late 2001.

FINANCIAL CONDITION

Investment Securities

The investment securities portfolio increased approximately $1.2 million from December 31, 2001 to June 30, 2002. A mix of government agencies, municipals and mortgage-backed securities were purchased to replace called agency bonds, maturing municipal bonds, and sold corporate equities. 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.

Loans

The loan portfolio has increased approximately $7.4 million from December 31, 2001 to June 30, 2002. Commercial and mortgage loans increased $6.3 million and $2.1 million, respectively, while consumer loans have dropped $1.0 million since December 31, 2001. Commercial loans have increased due to increased demand from local businesses and the addition of a new Senior Lender and another commercial loan officer to the Bank. Mortgage loans have increased due to construction loans and management's decision to retain some loans to offset current payoffs caused by heavy customer refinancing activity. Demand for consumer loans has been sluggish due to many uncertainties regarding the local and national economy. Bank management has also reduced its penchant for funding indirect installment loans. While management believes that future loan growth will be a challenge for the remainder of 2002, it is attempting to further penetrate its existing markets in hopes of growing its 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 as of the dates indicated were as follows:

 

June 30,
2002

December 31,
2001

 

 

 

 

 

Loans accounted for on a nonaccrual basis

$   2,914,000    

$       855,000    

 

Loans contractually past due 90 days

 

 

 

   or more as to principal or interest payments

361,000    

1,316,000    

 

Loans considered troubled debt restructurings

82,000    


120,000    


 

   Total

$   3,357,000    


$   2,291,000    


 



14


Since December 31, 2001, nonaccrual loans have increased largely due to two commercial loans totaling $1,285,000 in which management believes the Bank holds sufficient collateral and does not anticipate a loss. Management is diligently monitoring these and other delinquent borrowers in an attempt to offset future possible charge-offs. 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 $5,413,000 as of June 30, 2002, compared to $5,237,000 as of March 31, 2002, and $5,424,000 as of December 31, 2001. The allowance for loan losses as a percentage of nonperforming loans was 60% as of June 30, 2002, compared to 55% as of March 31, 2002, and 88% as of December 31, 2001.

Deposits and Other Funding Sources

Total deposits have increased approximately $4.2 million since the end of 2001. The increase was primarily due to $8.0 million in new brokered time deposits offset by $4.3 million in maturing local time deposits. Money market and savings accounts also increased slightly, offset by a reduction in interest-bearing checking accounts. Noninterest-bearing checking accounts have remained steady since December 2001. The balance of federal funds purchased decreased $0.4 million and repurchase agreements increased approximately $2.0 million since December 31, 2001 to fund new loan growth. Advances from the Federal Home Loan Bank ("FHLB") increased approximately $1.5 million for the six months ended June 30, 2002. The Bank obtained $11 million in new borrowings in 2002 which replaced approximately $9.5 million in maturing advances. The new advances are shorter in duration and carry a lower interest rate.

The Registrant's management plans to continue to emphasize growth of deposits obtained from the Bank's local market areas. If local market deposit growth is insufficient to support loan growth and other operating needs in 2002, management anticipates that it will continue to use brokered time deposits and advances from the FHLB to supplement the core deposit growth.

Shareholders' Equity

Total shareholders' equity increased $464,000 since the end of 2001. Equity growth resulted from retained earnings and proceeds from the sale of the Registrant's stock, plus an increase in accumulated other comprehensive income, offset by cash and stock dividends paid to shareholders. Total shareholders' equity as a percentage of assets was 9.12% as of June 30, 2002, compared to 9.24% as of December 31, 2001. The decrease in this ratio resulted from growth in shareholders' equity at a lower rate than growth in total assets. Based on risk-based capital guidelines established by the Bank's regulators, the Registrant's risk-based capital was categorized as "well capitalized" at June 30, 2002.

Capital Resources

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 Sensitivity

Cash and cash equivalents decreased $0.9 million since the end of 2001. Management 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 deposit growth 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 FHLB. 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.



15


The Bank's sensitivity to changes in interest rates is monitored by the Asset & Liability Management Committee (the "Committee"). The Committee uses a simulation model to subject rate-sensitive assets and liabilities to interest rate shocks. Assets and liabilities are subject to an immediate 200 basis point shock and the effect on net income and shareholders' equity is measured. The rate shock computation as of June 30, 2002 caused an insignificant change to net income if rates increased 200 basis points and decreased net income 15% if rates decreased 175 basis points. As of June 30, 2002, the federal funds rate was 1.75% and the Committee believes the likelihood of this rate being reduced 175 basis points to zero is distinctly remote. The market value of shareholders' equity decreased between 2% and 3% of total equity in both the upward and downward rate shock scenarios. The 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, 2001 is here incorporated by reference. Such Annual Report was previously filed as Exhibit 13 to the Corporation's Annual Report on Form 10-K for the year ended December 31, 2001.

The Registrant's management does not believe that there has been a material change in the nature or categories of the Registrant's primary market risk exposures, or the particular markets that present the primary risk of loss to the Registrant. As of the date of this report, the Registrant's 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 Registrant 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 2001. As of the date of this report, the Registrant's management does not expect to make material changes in those methods in the near term. The Registrant may change those methods in the future to adapt to changes in circumstances or to implement new techniques.

The Registrant'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 Registrant'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.

PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings

None.

Item 2.  Changes in Securities and Use of Proceeds

On April 25, 2002, the Registrant issued 991 shares of common stock to the directors of the Registrant pursuant to the Directors' Stock Purchase Plan for an aggregate cash price of $14,000. 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.



16


Item 4.  Submission of Matters to a Vote of Security Holders

On April 29, 2002, the Annual Meeting of Shareholders of the Registrant was held. The following directors were elected by the shareholders to serve until the Annual Meeting for the respective term indicated:

 


Term Expiring


 


Votes For


 


Votes Withheld


 

Broker
Non-Votes


James A. Bosserd

2003

 

1,177,895

 

12,202

 

0

Bruce A. Johnson

2005

 

1,169,127

 

20,970

 

0

Jon E. Pike

2005

 

1,169,127

 

20,970

 

0

Linda R. Pitsch

2005

 

1,177,895

 

12,202

 

0


Directors William F. Cutler, Jr., Paul L. Johnson, and Andrew W. Zamiara continue their term through the 2003 Annual Meeting. Directors Frank G. Berris, Lawrence D. Bradford, Lewis G. Emmons, and Stuart Goodfellow continue their term until the 2004 Annual Meeting.

At the 2002 Annual Meeting, the shareholders also approved the Employee Stock Purchase Plan. A total of 1,159,218 shares were voted for the proposal; 28,097 shares were voted against the proposal; and 2,782 shares abstained from voting. No broker non-votes were received on this proposal.

Item 5.  Other Information

None.

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:

 

 

 

 

 

Exhibit
Number

 


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.

 

 

 

 

 

 

 

 

 

2.

Reports on Form 8-K. No reports on Form 8-K were filed during the three months ended June 30, 2002.







17


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 August 14, 2002

 

/s/ James A. Bosserd


James A. Bosserd
President and Chief Executive Officer
(Principal Executive Officer)

 

 

 

Date August 14, 2002

 

/s/ Thomas L. Lampen


Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)



















18


INDEX TO EXHIBITS


The following exhibits are filed or incorporated by reference as part of this report:

 

Exhibit
Number

 


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.