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Previous: SECOND BANCORP INC, 10-Q, 1999-11-15 |
Next: FIRST ENTERTAINMENT HOLDING CORP, 10QSB, 1999-11-15 |
| [X] | Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 |
| For the quarterly period ended September 30, 1999 | |
| [ ] | Transition Report Under 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 Small Business Issuer as Specified in its Charter)
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109 East Division
Sparta, Michigan 49345
(Address of Principal Executive Offices)
(616) 887-7366
(Issuer's Telephone Number, Including Area Code)
Check whether the Registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 October 31, 1999, the Registrant had outstanding 1,109,966 shares of common stock.
Transitional Small Business Disclosure Format (check one):
Yes _____ No
X
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
ChoiceOne Financial Services, Inc.
CONSOLIDATED BALANCE SHEETS
|
|
1999 |
1998 |
Assets
| Cash and due from banks |
$ 4,316,000
|
$ 5,055,000
|
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| Securities available for sale |
17,523,000
|
20,282,000
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| Loans, net |
156,375,000
|
138,924,000
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| Premises and equipment, net |
4,599,000
|
4,086,000
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| Other assets |
2,622,000 |
2,255,000 |
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| Total assets |
$ 185,435,000 |
$ 170,602,000 |
ChoiceOne Financial Services, Inc.
CONSOLIDATED BALANCE SHEETS - Continued
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1999 |
1998 |
Liabilities
| Deposits - noninterest bearing |
$ 15,326,000
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$ 15,661,000
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| Deposits - interest bearing |
111,097,000
|
106,671,000
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| Federal funds purchased and repurchase agreements |
11,757,000
|
3,310,000
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| Other liabilities |
1,641,000
|
1,588,000
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| Federal Home Loan Bank advances |
28,626,000
|
25,969,000
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| Long-term debt |
235,000 |
581,000 |
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| Total liabilities |
168,682,000
|
154,461,000
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Shareholders' Equity
| Preferred stock; shares authorized: 100,000; shares | |||
| outstanding: none |
0
|
0
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| Common stock; shares authorized: 2,000,000; shares | |||
| outstanding: 1,109,966 at September 30, 1999 and | |||
| 1,053,285 at December 31, 1998 |
13,363,000
|
11,824,000
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| Retained earnings |
3,400,000
|
4,070,000
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| Accumulated other comprehensive income |
(10,000) |
247,000 |
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| Total shareholders' equity |
16,753,000 |
16,141,000 |
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| Total liabilities and shareholders' equity |
$ 185,435,000 |
$ 170,602,000 |
See accompanying notes to consolidated financial statements.
ChoiceOne Financial Services, Inc.
CONSOLIDATED STATEMENTS OF INCOME
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| Interest income | |||||||
| Loans, including fees |
$ 3,491,000
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$ 3,294,000
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$ 9,979,000
|
$ 9,488,000
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| Securities | |||||||
| Taxable |
155,000
|
178,000
|
467,000
|
563,000
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|||
| Nontaxable |
93,000
|
117,000
|
292,000
|
318,000
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|||
| Other |
0 |
1,000 |
1,000 |
17,000 |
|||
| Total interest income |
3,739,000
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3,590,000
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10,739,000
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10,386,000
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| Interest expense | |||||||
| Deposits |
1,207,000
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1,244,000
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3,571,000
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3,620,000
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| Short-term borrowings |
116,000
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73,000
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233,000
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147,000
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| Federal Home Loan Bank | |||||||
| advances |
421,000
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418,000
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1,227,000
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1,253,000
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| Long-term debt |
5,000 |
16,000 |
27,000 |
50,000 |
|||
| Total interest expense |
1,749,000
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1,751,000
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5,058,000
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5,070,000
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| Net interest income |
1,990,000
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1,839,000
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5,681,000
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5,316,000
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| Provision for loan losses |
130,000 |
150,000 |
350,000 |
605,000 |
|||
| Net interest income after | |||||||
| provision for loan losses |
1,860,000
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1,689,000
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5,331,000
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4,711,000
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| Noninterest income | |||||||
| Customer service fees |
191,000
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125,000
|
447,000
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376,000
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| Net gains on sales | |||||||
| of securities |
4,000
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0
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4,000
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0
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| Insurance commission income |
241,000
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212,000
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696,000
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650,000
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| Mortgage loan sales | |||||||
| and servicing |
25,000
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80,000
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163,000
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266,000
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| Other income |
12,000 |
21,000 |
130,000 |
167,000 |
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| Total noninterest income |
473,000
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438,000
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1,440,000
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1,459,000
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| Noninterest expense | |||||||
| Salaries and benefits |
800,000
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747,000
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2,322,000
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2,241,000
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| Occupancy expense |
338,000
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240,000
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907,000
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683,000
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| Other expense |
484,000 |
480,000 |
1,444,000 |
1,311,000 |
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| Total noninterest expense |
1,622,000 |
1,467,000 |
4,673,000 |
4,235,000 |
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| Income before income tax |
711,000
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660,000
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2,098,000
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1,935,000
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| Income tax expense |
224,000 |
186,000 |
655,000 |
560,000 |
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| Net income |
$ 487,000 |
$ 474,000 |
$ 1,443,000 |
$ 1,375,000 |
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| Basic earnings per share and | |||||||
| earnings per share assuming | |||||||
| dilution |
$
.44 |
$
.42 |
$
1.30 |
$
1.22 |
See accompanying notes to consolidated financial statements.
ChoiceOne Financial Services, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
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| Net income |
$ 487,000
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$ 474,000
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$ 1,443,000
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$ 1,375,000
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| Other comprehensive income | ||||||||
| Change in unrealized gains | ||||||||
| and losses on securities | ||||||||
| Unrealized gains/(losses) | ||||||||
| arising during the period |
(52,000
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) |
161,000
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(390,000
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) |
171,000
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| Reclassification | ||||||||
| adjustments for gains | ||||||||
| included in net income |
(4,000 |
) |
0 |
(4,000 |
) |
0 |
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| Net change in unrealized | ||||||||
| gains and losses on | ||||||||
| securities |
(56,000
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) |
161,000
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(394,000
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) |
171,000
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| Tax effect |
19,000 |
(55,000 |
) |
(134,000 |
) |
(58,000 |
) | |
| Total other | ||||||||
| comprehensive income |
(37,000 |
) |
106,000 |
(260,000 |
) |
113,000 |
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| Comprehensive income |
$ 450,000 |
$ 580,000 |
$ 1,183,000 |
$ 1,488,000 |
See accompanying notes to consolidated financial statements.
ChoiceOne Financial Services, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
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September 30, |
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| Cash flows from operating activities | ||||
| Net income |
$ 1,443,000
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$ 1,375,000
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| Reconciling items: | ||||
| Gains on sales of securities |
(4,000
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) |
0
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| Net amortization on securities |
105,000
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112,000
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| Net gain on sales of loans |
(88,000
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(166,000
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| Loans originated for sale |
(5,850,000
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(13,817,000
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| Proceeds from loan sales |
7,262,000
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14,988,000
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| Provision for loan losses |
350,000
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605,000
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| Depreciation |
481,000
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297,000
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| Other non-cash charges and credits |
(23,000
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) |
(40,000
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) |
| Deferred income tax expense/(benefit) |
(23,000
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) |
(50,000
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) |
| Changes in assets and liabilities: | ||||
| Interest receivable and other assets |
(176,000
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) |
287,000
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| Interest payable and other liabilities |
53,000 |
(2,737,000 |
) | |
| Net cash provided by operating activities |
3,530,000
|
854,000
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| Cash flows from investing activities | ||||
| Securities available for sale: | ||||
| Purchases |
(1,405,000
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) |
(4,923,000
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) |
| Sales proceeds |
270,000
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0
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| Principal payments |
3,400,000
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4,130,000
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| Net change in loans |
(19,952,000
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) |
(14,937,000
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) |
| Loans sold |
892,000
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2,885,000
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| Loans purchased |
0
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(1,395,000
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) | |
| Purchase of insurance agency |
(74,000
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) |
0
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| Premises and equipment expenditures, net |
(994,000 |
) |
(477,000 |
) |
| Net cash used in investing activities |
(17,863,000
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) |
(14,714,000
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| Cash flows from financing activities | ||||
| Net change in deposits |
4,091,000
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12,004,000
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| Net change in short-term borrowings |
8,447,000
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2,842,000
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| Proceeds from Federal Home Loan Bank advances |
3,000,000
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7,500,000
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| Payments on Federal Home Loan Bank advances |
(1,024,000
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) |
(7,853,000
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) |
| Payments on long-term debt |
(346,000
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) |
(145,000
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) |
| Issuance of common stock |
125,000
|
80,000
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| Repurchase of common stock |
(16,000
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) |
(173,000
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) |
| Cash dividends and fractional shares from stock dividends |
(683,000 |
) |
(646,000 |
) |
| Net cash provided by financing activities |
13,594,000 |
13,609,000 |
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| Net change in cash and cash equivalents |
(739,000)
|
(251,000)
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| Beginning cash and cash equivalents |
5,055,000 |
3,769,000 |
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| Ending cash and cash equivalents |
$ 4,316,000 |
$ 3,518,000 |
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| Cash paid for interest |
$ 5,015,000
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$ 5,019,000
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| Cash paid for income taxes |
$ 650,000
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$ 690,000
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See accompanying notes to consolidated financial statements.
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 Insurance Agencies, Inc. (the "Insurance Agency") and ChoiceOne Travel, Inc. (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-QSB and Item 310 of Regulation S-B. 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 September 30, 1999 and December 31, 1998, the Consolidated Statements of Income for the three- and nine-month periods ended September 30, 1999 and September 30, 1998, the Consolidated Statements of Comprehensive Income for the three- and nine-month periods ended September 30, 1999 and September 30, 1998, and the Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 1999 and September 30, 1998. Operating results for the nine months ended September 30, 1999 are not necessarily indicative of the results that may be expected for the year ending December 31, 1999.
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-KSB for the year ended December 31, 1998.
Stock Transactions, Earnings and Cash Dividends Per Share
The Registrant's Board of Directors declared a 5% stock dividend on
April 14, 1999. The stock dividend was payable to shareholders of record
as of May 10, 1999 and was paid on June 1, 1999. A 5% stock dividend was
declared on February 11, 1998. The stock dividend was paid on
A total of 1,147 shares of common stock were issued to the Registrant's Board of Directors under the terms of the Directors' Stock Purchase Plan in the first three quarters of 1999. A total of 607 shares of the Registrant's common stock were repurchased from shareholders in the first nine months of 1999. Approximately 3,660 shares of common stock were sold by the Registrant to the Bank's 401(k) savings and retirement plan in the second quarter of 1999.
Earnings per share are based on the weighted average number of shares outstanding during the period. The weighted average number of shares has been adjusted for the 5% stock dividend paid in June 1999, the 5% stock dividend paid in March 1998 and the two-for-one stock split paid in May 1998.
Cash dividends per share are based on the number of shares outstanding
at the time the dividend was paid and have also been adjusted for the 5%
stock dividend paid in June 1999, the 5% stock dividend paid in March 1998
and the two-for-one stock split paid in May 1998.
NOTE 2 - SECURITIES
The amortized cost and fair value of securities as of September 30,
1999 and December 31, 1998 follows:
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| Securities Available for Sale | ||||||||
| September 30, 1999 | ||||||||
| U.S. Treasuries and | ||||||||
| U.S. Government agencies |
$ 2,751,000
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$ 0
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$ (2,000
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) |
$ 2,749,000
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| States and municipalities |
7,820,000
|
91,000
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(102,000
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) |
7,809,000
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| Mortgage-backed securities |
4,251,000
|
23,000
|
(27,000
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) |
4,247,000
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| Other securities |
2,718,000 |
0 |
0 |
2,718,000 |
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| Total |
$ 17,540,000 |
$ 114,000 |
$ (131,000 |
) |
$ 17,523,000 |
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| December 31, 1998 | ||||||||
| U.S. Treasuries and | ||||||||
| U.S. Government agencies |
$ 4,264,000
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$ 18,000
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$ (1,000
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) |
$ 4,281,000
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| States and municipalities |
8,324,000
|
341,000
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0
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8,665,000
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| Mortgage-backed securities |
4,350,000
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31,000
|
(16,000
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) |
4,365,000
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| Other securities |
2,970,000 |
1,000 |
0 |
2,971,000 |
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| Total |
$ 19,908,000 |
$ 391,000 |
$ (17,000 |
) |
$ 20,282,000 |
Securities totaling $270,000 were sold in the third quarter of 1999 for a gain of $4,000. There were no sales of securities in the first two quarters of 1999 or in the first three quarters of 1998.
For the nine months ended September 30, 1999, the net unrealized holding gain on securities available for sale decreased by $390,000 resulting in a net unrealized loss of $17,000 on securities available for sale as of September 30, 1999, before any deferred tax effect.
The fair values of securities pledged as collateral at September 30,
1999 and December 31, 1998 were as follows:
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| Securities sold under agreements to repurchase |
$ 4,200,000
|
$ 3,034,000
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| Public deposits |
500,000 |
503,000 |
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| Total |
$ 4,700,000 |
$ 3,537,000 |
NOTE 3 - LOANS
Loans at September 30, 1999 and December 31, 1998 were classified as
follows:
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| Commercial |
$ 58,444,000
|
$ 52,062,000
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| Agricultural |
8,033,000
|
9,236,000
|
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| Real estate mortgage - construction |
4,780,000
|
3,122,000
|
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| Real estate mortgage - residential |
52,496,000
|
45,611,000
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| Consumer |
34,534,000 |
30,744,000 |
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| Total loans before allowance for loan losses |
158,287,000
|
140,775,000
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| Less allowance for loan losses |
1,912,000 |
1,851,000 |
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| Loans, net |
$ 156,375,000 |
$ 138,924,000 |
The cost of loans pledged for borrowings at September 30, 1999 and December
31, 1998 was as follows:
| Residential real estate mortgages pledged for | |||
| Federal Home Loan Bank advances |
$ 46,942,000
|
$ 37,915,000
|
|
| Commercial loans pledged for secured loan borrowings |
266,000 |
536,000 |
|
| Total |
$ 47,208,000 |
$ 38,451,000 |
Loans held for sale included $1,291,000 of commercial loans at September
30, 1999. Loans held for sale were accounted for at the lower of aggregate
cost or market value.
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
An analysis of changes in the allowance for loan losses follows:
|
September 30, |
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| Balance at beginning of period |
$ 1,851,000
|
$ 1,567,000
|
||
| Provision charged to expense |
350,000
|
605,000
|
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| Recoveries credited to the allowance |
62,000
|
56,000
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| Loans charged-off |
(351,000 |
) |
(421,000 |
) |
| Balance at end of period |
$ 1,912,000 |
$ 1,807,000 |
||
Information regarding impaired loans as of September 30, 1999 and December
31, 1998 follows:
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|
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| Loans with no allowance allocated |
$ 498,000
|
$ 2,194,000
|
|
| Loans with allowance allocated |
363,000
|
559,000
|
|
| Amount of allowance for loan losses allocated |
284,000
|
244,000
|
Information regarding impaired loans for the nine-month periods ended
September 30, 1999 and September 30, 1998 follows:
|
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|
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| Average balance during the period |
$ 1,323,000
|
$ 2,264,000
|
|
| Interest income recognized thereon |
56,000
|
213,000
|
|
| Cash basis interest income recognized |
44,000
|
210,000
|
NOTE 5 - CERTIFICATES OF DEPOSIT
As of September 30, 1999, certificates of deposit included $12,711,000
obtained through a national time deposit rate service. The weighted average
interest rate on these deposits was 5.75%. Approximately $6,544,000 of
the deposits had maturities of one year or less.
NOTE 6 - NONINTEREST EXPENSE
Noninterest expense for the nine months ended September 30, 1999 and
September 30, 1998 was as follows:
|
|
|
||
| Supplies and postage |
$ 203,000
|
$ 193,000
|
|
| Legal and professional |
185,000
|
143,000
|
|
| Computer processing |
140,000
|
114,000
|
|
| State single business tax expense |
106,000
|
95,000
|
|
| Telephone |
93,000
|
73,000
|
|
| Advertising and marketing |
81,000
|
117,000
|
|
| Other |
636,000 |
576,000 |
|
| Total |
$ 1,444,000 |
$ 1,311,000 |
NOTE 7 - INCOME TAX EXPENSE
The components of income tax expense for the nine months ended September
30, 1999 and September 30, 1998 were as follows:
|
|
|
|||
| Current income tax expense |
$678,000
|
$610,000
|
||
| Deferred income tax expense (benefit) |
(23,000 |
) |
(50,000 |
) |
| Income tax expense |
$655,000 |
$560,000 |
The difference between the financial statement tax provision and amounts computed by applying the federal income tax rate to pre-tax income is principally attributable to tax-exempt interest income.
The components of deferred tax assets and liabilities at September 30,
1999 and December 31, 1998 were as follows:
|
|
|
||
|
|
|
||
| Deferred tax assets: | |||
| Allowance for loan losses |
$ 545,000
|
$ 525,000
|
|
| Deferred loan fees |
90,000
|
95,000
|
|
| Postretirement benefits obligation |
52,000
|
51,000
|
|
| Deferred compensation |
49,000
|
54,000
|
|
| Unrealized depreciation on securities available | |||
| for sale |
6,000
|
0
|
|
| Other |
11,000 |
17,000 |
|
| Total deferred tax assets |
753,000
|
742,000
|
|
| Deferred tax liabilities: | |||
| Depreciation |
242,000
|
239,000
|
|
| Loan servicing rights |
56,000
|
57,000
|
|
| Unrealized appreciation on securities available | |||
| for sale |
0
|
127,000
|
|
| Other |
10,000 |
30,000 |
|
| Total deferred tax liabilities |
308,000 |
453,000 |
|
| Net deferred tax asset |
$ 445,000 |
$ 289,000 |
A valuation allowance related to a deferred tax asset is recognized
when it is considered more likely than not that part or all of the deferred
tax benefits will not be realized. Management has determined that no such
allowance was required at September 30, 1999 or December 31, 1998.
| NOTE 8 - | COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF CREDIT RISK |
Noninterest-bearing deposits totaling approximately $3,008,000 were held at NBD Bank, N.A. at September 30, 1999.
As of September 30, 1999, the Registrant had outstanding commitments
to make loans totaling $27,573,000, the majority of which have variable
interest rates. The Registrant had issued approximately $4,871,000 in unused
lines of credit and $242,000 in letters of credit at September 30, 1999.
Item 2. Management's Discussion and Analysis or Plan of Operation.
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 ATravel Agency@). 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. Year
2000 related remediation, cost and risk assessments are necessarily statements
of belief as to the outcome of future events, based in part on information
provided by vendors and others that the Registrant has not independently
verified. These statements are not guarantees of future performance and
involve certain risks, uncertainties, and assumptions ("future 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.
Future 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; the ability of companies on which the Registrant relies to make their computer systems Year 2000 compliant; and changes in the national economy. These are representative of the future factors that could cause a difference between an ultimate actual outcome and a preceding forward-looking statement.
Net Income and Return on Average Assets and Shareholders' Equity
The Registrant's net income increased $13,000 or 3% in the third quarter of 1999 compared to the same period in 1998 and has risen $68,000 or 5% in the first nine months of 1999 compared to the first nine months of the prior year. The increase in net income was due to higher net interest income and a lower provision for loan losses, the effect of which was offset by growth in noninterest expense.
Growth in average interest-earning assets contributed all of the increase in net interest income in the first three quarters of 1999. Approximately 30% of the effect of asset growth was partially offset by a smaller spread in 1999 between interest rates earned on interest-earning assets and interest rates paid on interest-bearing liabilities than was experienced in the first nine months of 1998. The decline in the interest rate spread resulted from decreases in market rates that occurred in the last quarter of 1998, a rising cost of funds in the third quarter of 1999, and lower loan fees due to less volume. The decrease in the provision for loan losses was partly due to the lower level of loan chargeoffs in the first three quarters of 1999 than in the prior year. The growth in noninterest expense was primarily due to expenses of the Bank's new branches, expenses related to remodeling of the Bank's main office, and general growth in expenses.
The return on average assets was 1.12% for the first nine months of 1999, compared to 1.14% for the same period in 1998. The return on average shareholders' equity was 11.70% for the first three quarters of 1999, compared to 11.52% for the comparable period of the prior year.
Cash and Stock Dividends
Cash dividends declared in the third quarter of 1999 were $233,000,
or $.21 per common share, which represented a $.02 per share or 11% increase
compared to the dividend paid in the same period of the prior year. The
cash dividends paid in the first nine months of 1999 were $677,000
Interest Income and Expense
Tables 1 and 2 on the following pages provide information regarding
interest income and expense for the nine-month periods ended September
30, 1999 and September 30, 1998. 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.
Table 1 - Average Balances and Tax Equivalent Interest Rates
|
|
||||||||||||
|
|
|
|||||||||||
|
Balance |
|
|
Balance |
|
|
|||||||
|
|
||||||||||||
| Assets | ||||||||||||
| Loans (1) |
$145,206
|
$9,990
|
9.17%
|
$130,413
|
$9,504
|
9.72
|
% | |||||
| Taxable securities (2) |
10,689
|
467
|
5.84
|
12,486
|
563
|
6.01
|
||||||
| Nontaxable securities (1)(2) |
8,075
|
443
|
7.49
|
8,574
|
481
|
7.48
|
||||||
| Other |
92 |
1 |
1.45
|
464 |
17 |
4.89
|
||||||
| Interest-earning assets |
164,062
|
10,901 |
8.86
|
151,937
|
10,565 |
9.27
|
||||||
| Noninterest-earning assets |
9,386 |
9,241 |
||||||||||
| Total assets |
$173,448 |
$161,178 |
||||||||||
| Liabilities and shareholders' equity | ||||||||||||
| Interest-bearing transaction | ||||||||||||
| accounts |
$ 25,742
|
576
|
2.98
|
$ 23,745
|
605
|
3.40
|
||||||
| Savings deposits |
8,598
|
75
|
1.16
|
8,283
|
111
|
1.79
|
||||||
| Time deposits |
72,345
|
2,920
|
5.38
|
66,456
|
2,904
|
5.83
|
||||||
| Federal Home Loan Bank advances |
26,501
|
1,227
|
6.17
|
26,362
|
1,253
|
6.34
|
||||||
| Other |
7,271 |
260 |
4.77
|
4,543 |
197 |
5.78
|
||||||
| Interest-bearing liabilities |
140,457
|
5,058 |
4.80 |
129,389
|
5,070 |
5.22 |
||||||
| Demand deposits |
15,127
|
13,336
|
||||||||||
| Other noninterest-bearing liabilities |
1,382
|
2,496
|
||||||||||
| Shareholders' equity |
16,482 |
15,957 |
||||||||||
| Total liabilities and | ||||||||||||
| shareholders' equity |
$173,448 |
$161,178 |
||||||||||
| Net interest income (tax-equivalent | ||||||||||||
| basis) - interest spread |
5,843
|
4.06 |
% |
5,495
|
4.05 |
% | ||||||
| Tax equivalent adjustment (1) |
(162 |
) |
(179 |
) | ||||||||
| Net interest income |
$5,681 |
$5,316 |
||||||||||
| Net interest income as a percentage | ||||||||||||
| of earning assets (tax-equivalent | ||||||||||||
| basis) |
4.75 |
% |
4.82 |
% | ||||||||
(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.
Table 2 - Changes in Tax Equivalent Net Interest Income
|
1999 Over 1998 |
||||||
|
|
|
|
||||
|
|
||||||
| Increase (decrease) in interest income (1) | ||||||
| Loans (2) |
$ 486
|
$ 1,040
|
$ (554
|
) | ||
| Taxable securities |
(96
|
) |
(80
|
) |
(16
|
) |
| Nontaxable securities (2) |
(38
|
) |
(39
|
) |
1
|
|
| Other |
(16 |
) |
(9 |
) |
(7 |
) |
| Net change in tax-equivalent income |
336
|
912
|
(576
|
) | ||
| Increase (decrease) in interest expense (1) | ||||||
| Interest-bearing transaction accounts |
(29
|
) |
49
|
(78
|
) | |
| Savings deposits |
(36
|
) |
4
|
(40
|
) | |
| Time deposits |
16
|
248
|
(232
|
) | ||
| Federal Home Loan Bank advances |
(26
|
) |
7
|
(33
|
) | |
| Other |
63 |
102 |
(39 |
) | ||
| Net change in interest expense |
(12 |
) |
410 |
(422 |
) | |
| Net change in tax-equivalent | ||||||
| net interest income |
$ 348 |
$ 502 |
$ (154 |
) | ||
(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 $348,000 in the first nine months of 1999 compared to the same period of 1998. This is slightly more than one-half of the growth of $661,000 that occurred between 1998 and 1997. The lower level of increase in 1999 was caused by changes in interest rates. The change in net interest income due to changes in interest rates was a positive $119,000 in 1998, in contrast to a negative impact of $154,000 in 1999. The increase in net interest income in 1999 was caused by growth in the Registrant's loan portfolio. As was mentioned above, part of the growth effect in 1999 was offset by a decline in the Registrant's interest rate spread.
The average balance of loans increased $14,793,000 from the first nine months of 1998 to the same period in 1999. This growth caused interest income from loans to be $1,040,000 higher in 1999 than in 1998. The decrease in the average balance in the other interest-earning categories offset approximately $128,000 of the effect of loan growth. The average balance in time deposits rose $5,889,000 in the first three quarters of 1999 compared to the prior year which caused an increase of $248,000 in interest expense on this deposit type. The average balance in interest-bearing transaction accounts and other interest-bearing liabilities increased to a lesser extent in 1999.
Table 1 shows that the net interest income spread was 4.06% for the first nine months of 1999, which was almost the same as the spread of 4.05% experienced in the first three quarters of 1998. The average rate earned on interest-earning assets fell 41 basis points from 1998 to 1999. This was principally due to a 55 basis point decrease in the average rate earned on loans. Much of the loan decline was due to a prime lending rate that was lower in the first nine months of 1999 than in 1998. The effect of the decrease in the rate earned on assets was almost matched by a 42 basis point drop in the average rate paid on interest-bearing liabilities. Although the net interest income spread percentage was virtually unchanged from 1998 to 1999, the decrease in tax-equivalent net interest income due to interest rates was $154,000 in the first nine months of 1999. The significant dollar amount was due to the fact that the average balance of rate sensitive assets was approximately $23,600,000 more than rate sensitive liabilities. This caused the rate decrease to have a larger impact on interest income than on interest expense.
Both rate sensitive assets and liabilities were affected by a decline
in general market interest rates that occurred in the fourth quarter of
1998. Overnight funding rates fell 75 basis points while other terms decreased
between 50 and 100 basis points. Due to concerns over potential inflation
in the national economy, the Federal Reserve Bank's Open Market Committee
raised the federal funds interest rate 25 basis points in June 1999 and
August 1999. The Registrant raised its prime lending rate by an equal amount
at both times. This began to increase the Registrant's net interest margin
in the second quarter of 1999. However, upward pressures on deposit and
other funding
The Registrant plans to emphasize loan growth in the remainder of 1999 in an attempt to offset the effect of the declining net interest margin due to interest rates. Commercial loans and subprime residential mortgage loans are planned to be two of the loan areas where this growth may occur. The Registrant also plans to strive for more growth in local deposits. Local deposits bear a lower interest rate than national market time certificates and Federal Home Loan Bank advances.
Provision and Allowance for Loan Losses
The allowance for loan losses increased $61,000 from December 31, 1998 to September 30, 1999. The allowance was 1.21% of total loans at September 30, 1999, compared to 1.29% at June 30, 1999, and 1.31% at December 31, 1998. The allowance for loan losses as a percentage of nonperforming loans was 86% as of September 30, 1999, compared to 119% as of June 30, 1999, and 184% as of the end of 1998. The change in the allowance coverage of nonperforming loans was caused by an increase of $1,217,000 in nonperforming loans from December 31, 1998 to September 30, 1999. The increase occurred in commercial, consumer, and residential real estate mortgage loans. The provision for loan losses was $255,000 lower in the first nine months of 1999 than in the same period of 1998. The decrease was due in part to lower net chargeoffs in the first three quarters of 1999 than in the same period in 1998.
Chargeoffs and recoveries for those loan categories with activity in
the periods ended September 30, 1999 and 1998 were as follows:
|
|
|
||||||
|
|
|
|
|
||||
| Commercial |
$ 98,000
|
$ 13,000
|
$ 172,000
|
$ 1,000
|
|||
| Consumer |
253,000 |
49,000 |
249,000 |
55,000 |
|||
|
$ 351,000 |
$ 62,000 |
$ 421,000 |
$ 56,000 |
||||
The decrease in commercial loan chargeoffs in the first nine months
of 1999 compared to the same period in 1998 was due to a chargeoff on one
commercial loan in the first quarter of 1998. The Bank's management expects
that the amount of chargeoffs that the Bank will experience in the remainder
of 1999 will be dependent on the extent to which business and consumer
borrowers are affected by the local economy and on many other economic
factors. As growth in the loan portfolio occurs, management believes chargeoffs
may increase as a result of the higher total balance of loans. The adequacy
of the allowance for loan losses may also be affected by sub-
Noninterest Expense
Total noninterest expense increased $155,000 in the third quarter of
1999 compared to the same quarter of 1998 and has grown $438,000 in the
first nine months of 1999 compared to the same period in 1998. This was
approximately 20% less than the $541,000 increase experienced in the first
three quarters of 1998. Approximately one-half of the increase in expense
in 1999 resulted from higher occupancy expense. The growth in occupancy
expense was due primarily to the Bank's two new branches and to costs related
to the remodeling of the Bank's main office. Management anticipates that
the increased expenses related to the new branches will continue somewhat
through the end of 1999. One of the branches was opened in September 1998
and the other in December 1998. The remodeling of the Bank's main office
began in the second quarter of 1999. The first phase of the project was
completed in August 1999 with the estimated completion date of the second
phase in early 2000. Salaries and benefits increased $53,000 in the third
quarter of 1999 compared to the same quarter in 1998. Part of this increase
was due to the purchase of InsuranceSource by the Insurance Agency effective
September 1, 1999. InsuranceSource was an independent insurance agency
in Grand Rapids, Michigan. Expenses related to former personnel of InsuranceSource
will continue to affect the Registrant's salaries and benefits in the rest
of 1999. Other noninterest expense increased very little in the third quarter
of 1999 compared to 1998 and has increased $133,000 in the first nine months
of 1999 compared to 1998. Other noninterest expense has been affected in
the first nine months of 1999 by higher levels of data processing expense,
consulting expense, state single business tax expense, and by general growth
in the Registrant's operating expenses. As a result of the new branches
and anticipated continued growth in assets, the Bank's management believes
that noninterest expense in the last quarter of 1999 will continue to exceed
the amounts in the comparable period in 1998.
Year 2000 Readiness Disclosure
The Year 2000 ("Y2K") is significant to ChoiceOne since its computers and computer-based applications and like items in other businesses may be affected upon the arrival of January 1, 2000. Some computers and computer-based applications store the year as a two digit number. This may cause Y2K to be interpreted as the year 1900 and could cause computers to work improperly or cease to function.
ChoiceOne began its preparation for Y2K in 1997. ChoiceOne's management implemented a strategic plan for Y2K readiness. The strategic plan contains five phases: awareness, assessment, renovation, validation and implementation. A Y2K committee (the "Committee") was formed with representatives from each major area of the Bank. The Committee was given the responsibility for development and implementation of the strategic plan. The awareness, assessment and renovation phases were completed as of September 30, 1998. The validation and implementation phases were completed as of February 28, 1999. The Committee provides monthly updates to ChoiceOne's Board of Directors on its progress.
The Bank's primary application processing is provided by a data center. The data center has performed Y2K readiness testing and had completed its testing as of March 31, 1999. The data center will continue to perform Y2K testing on new releases of software as necessary. The Committee has identified what it considers to be critical internal systems. Testing of internal systems was completed as of March 31, 1999. External resources and systems, such as heating and air conditioning, electrical, telephone, and other systems considered to be of major importance to ChoiceOne's operations, have been reviewed. These resources as well as major vendors have been surveyed regarding their Y2K readiness. Monitoring and testing will continue through the end of 1999.
Letters were mailed to all business customers informing them of the Y2K issue. Surveys were done of all significant commercial loan borrowers as to their Y2K knowledge and preparation. A discussion of the Y2K issue was contained in a newsletter mailed by ChoiceOne to all customers. Education of ChoiceOne's employees has occurred and will continue to occur in the form of training meetings and seminars.
Approximately $80,000 has been spent through September 30, 1999 on new
hardware, new software and software changes to ready ChoiceOne's systems
for Y2K. ChoiceOne's management estimates that approximately $20,000 in
staff time has been spent to prepare for Y2K. Management anticipates that
an additional $10,000 in hardware and software costs and $5,000 in staff
time may be necessary in the remainder of 1999. In addition, there may
be costs that arise that are not anticipated at this time. However, these
unanticipated costs are not expected to be significant.
The Bank, Insurance Agency and Travel Agency are very dependent on technology and are aware that problems could arise if this technology does not function properly. These problems could potentially include operational issues, lost income and loan losses from borrowers which could materially and adversely affect ChoiceOne's financial condition and results of operations. The Committee has followed its strategic plan to attempt to assure readiness of computers and related items in ChoiceOne's offices. However, ChoiceOne will also be dependent on the readiness of third parties. ChoiceOne has identified as most important its data center and telephone and electric services. The Committee has contacted these parties and will continue to monitor their progress with Y2K compliance. In anticipation of the possibility that certain internal or external systems may not function properly in January 2000, the Committee has established contingency plans for all critical areas. The Committee has in place backup plans for these areas. The Committee developed a business resumption contingency plan and tested the plan during the second quarter of 1999. A time line has been developed to monitor the accumulation of materials necessary to operate within the contingency environment.
Securities
The balance of total securities decreased $652,000 in the third quarter of 1999 and has declined $2,759,000 since the end of 1998. The decrease was caused by both principal paydowns of mortgage-backed securities and securities maturities. The Bank purchased $1,405,000 of securities in the third quarter of 1999 after purchasing no securities in the first two quarters of 1999. The Bank's investment committee plans to continue its monitoring of the securities portfolio and plans to purchase securities when believed prudent. The Bank used certain of its securities as collateral for public funds and repurchase agreements in the first three quarters of 1999 and plans to continue this practice in the remainder of the year. The securities portfolio may also serve as a source of liquidity for deposit needs.
Loans
Total loans grew $10,671,000 in the third quarter of 1999 after increasing $6,841,000 in the first two quarters of 1999. Residential and construction real estate mortgages comprised just over one-half of the growth in the third quarter and commercial loans made up approximately one-third of the increase. All of the other loan categories experienced growth during the third quarter.
Commercial loans grew $3,318,000 in the third quarter of 1999 and has
increased $6,382,000 in the first nine months of 1999. The Registrant's
management believes that this growth was caused by business development
activities by the Bank's commercial lending officers. The agricultural
loans balance increased $347,000 in the third quarter of 1999 after decreasing
$1,550,000 in the first two quarters of 1999. This change in the trend
reflected the normal fluctuations in funding needs of the Bank's agricultural
borrowers. Agricultural loan originations have also been lower than normal
in the first three quarters of 1999. Both commercial and agricultural loans
have been
Information regarding impaired loans can be found in Note 4 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 loan categories for 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 the three
nonperforming categories as of September 30, 1999 and December 31, 1998
were as follows:
|
|
|
||
|
|
|
||
| Loans accounted for on a nonaccrual basis |
$ 1,288,000
|
$ 489,000
|
|
| Loans, not included in nonaccrual loans, which are | |||
| contractually past due 90 days or more as to | |||
| interest or principal payments |
876,000
|
419,000
|
|
| Loans, not included in nonaccrual or loans past due | |||
| 90 days or more, which are considered troubled | |||
| debt restructurings |
59,000 |
62,000 |
|
| Total |
$ 2,223,000 |
$ 970,000 |
|
| Nonperforming other real estate |
$
0 |
$ 36,000 |
Management 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 $3,980,000 as of September 30, 1999, compared to $6,440,000 as of December 31, 1998. The decrease in the balance since the end of 1998 was caused by commercial borrowers that experienced improvement in their financial condition. Approximately $90,000 of the allowance for loan losses had been specifically allocated to these loans at September 30, 1999.
Deposits and Other Funding Sources
Total deposits increased $5,780,000 in the third quarter of 1999 after
decreasing $1,689,000 in the first two quarters of 1999. Most of the third
quarter growth resulted from an increase of $3,689,000 in the balance of
national market time deposits. The remainder of the third quarter growth
was caused by an increase in local market time deposits. The local market
time deposit growth was due to an interest rate promotion by the Bank.
Although some core deposit (deposits obtained from the Bank's local market
areas) growth occurred in the third quarter of 1999, core deposits have
still decreased $1,393,000 in the first nine months of 1999. This continues
to be an area of concern for the Registrant. The Registrant's management
is considering internal and external promotions in an attempt to generate
core deposit growth. However, the Registrant's management is aware that
deposits may be affected in the fourth quarter of 1999 by the approaching
year 2000. Management believes that some depositors may withdraw funds
to have money on hand in case they need it in early January 2000. However,
management does not anticipate that the amount of funds withdrawn will
be significant.
The balance of national market time deposits has increased $5,484,000 since the end of 1998 and Federal Home Loan Bank advances have grown $2,657,000 over the same time period. These increases have helped to fund loan growth in 1999. If core deposit growth is insufficient to support loan growth in the remainder of 1999, management anticipates that it will continue to use national market time deposits and Federal Home Loan Bank advances to supplement the core deposit growth.
Shareholders' Equity
Total shareholders' equity increased $230,000 in the third quarter of 1999 and has increased $612,000 since the end of 1998. Equity growth resulted primarily from retained earnings. The effect of a $257,000 decrease in the balance of accumulated other comprehensive income and $16,000 paid for the repurchase of common stock was offset by proceeds of $125,000 from the sale of stock to the Registrant's Board of Directors and the ChoiceOne Bank 401(k) Savings and Retirement Plan.
Total shareholders' equity as a percentage of assets was 9.03% as of September 30, 1999, compared to 9.49% as of June 30, 1999, and 9.46% as of December 31, 1998. The decrease in the equity to assets ratio in the third quarter of 1999 resulted from a higher level of asset growth than equity growth during the period. This corresponds with management's plans to decrease the equity to assets ratio to more effectively use shareholders' equity by leveraging it through asset growth. Based on risk-based capital guidelines established by the Bank's regulators, the Registrant's risk-based capital was categorized as well capitalized at September 30, 1999.
Capital Resources
The Bank began remodeling its main office in the second quarter of 1999. The remodeling will include the interior and exterior of the Bank as well as the construction of new drive-up facilities. The remodeling is scheduled to be completed in January 2000. Management estimates the cost of the remodeling will range from $1,250,000 to $1,500,000. It is anticipated that most of the remodeling cost will be allocated to the building. However, some equipment purchases may be necessary.
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 increased $580,000 in the third quarter of
1999 after decreasing $1,319,000 in the first two quarters of the year.
The Registrant's 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
Table 3 presents the maturity and repricing schedule for the Registrant's
rate-sensitive assets and liabilities for selected time periods. The Registrant's
cumulative rate-sensitive liabilities exceeded its cumulative rate-sensitive
assets by $39,146,000 at the one-year repricing point as of September,
1999. This placed the ratio of rate-sensitive assets to rate-sensitive
liabilities at such repricing point at 62% as of September 30, 1999, compared
to 61% as of June 30, 1999, and 66% as of December 31, 1998. The decrease
in the ratio in the first two quarters of 1999 was caused by the funding
of longer-term assets with shorter-term liabilities. A more equal matching
of maturities of asset growth and funding caused the ratio to change little
in the third quarter. Based on the Registrant's current relationship of
rate-sensitive assets to rate-sensitive liabilities, the Registrant's management
believes that it may be prudent to lengthen some of the maturities of its
rate-sensitive liabilities to increase the ratio mentioned above. The Registrant
began to lengthen maturities in the third quarter of 1999 and plans to
continue to do so in the fourth quarter.
Table 3 - Maturities and Repricing Schedule
|
|
|||||||||
|
Months |
Months |
Years |
5 Years |
|
|||||
|
|
|||||||||
| Assets | |||||||||
| Loans |
$ 39,638
|
$ 17,699
|
$ 87,306
|
$ 13,644
|
$158,287
|
||||
| Interest-bearing deposits | |||||||||
| with banks |
5
|
0
|
0
|
0
|
5
|
||||
| Taxable securities |
5,410
|
1,213
|
2,885
|
354
|
9,862
|
||||
| Nontaxable securities |
505 |
364 |
2,215 |
4,577 |
7,661 |
||||
| Rate-sensitive assets |
45,558
|
19,276
|
92,406
|
18,575
|
175,815
|
||||
| Liabilities | |||||||||
| Interest-bearing transaction | |||||||||
| accounts |
25,163
|
0
|
0
|
0
|
25,163
|
||||
| Savings deposits |
8,218
|
0
|
0
|
0
|
8,218
|
||||
| Time deposits |
18,103
|
30,890
|
28,722
|
0
|
77,715
|
||||
| Federal funds purchased and | |||||||||
| repurchase agreements |
11,757
|
0
|
0
|
0
|
11,757
|
||||
| Federal Home Loan Bank | |||||||||
| advances |
8,627
|
1,157
|
18,842
|
0
|
28,626
|
||||
| Long-term debt |
17 |
48 |
170 |
0 |
235 |
||||
| Rate-sensitive liabilities |
71,885 |
32,095 |
47,734 |
0 |
151,714 |
||||
| Rate-sensitive assets less | |||||||||
| rate-sensitive liabilities: | |||||||||
| Asset (liability) gap | |||||||||
| for the period |
$ (26,327 |
) |
$ (12,819 |
) |
$ 44,672 |
$ 18,575 |
$ 24,101 |
||
| Cumulative asset | |||||||||
| (liability) gap |
$ (26,327 |
) |
$ (39,146 |
) |
$ 5,526 |
$ 24,101 |
|||
| Cumulative rate-sensitive | |||||||||
| assets as a percentage | |||||||||
| of cumulative rate- | |||||||||
| sensitive liabilities |
66.38 |
% |
62.35 |
% |
103.64 |
% |
115.89 |
% | |
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
On July 14, 1999, the Registrant issued 426 shares of common stock, without par value, to the directors of the Registrant pursuant to the ChoiceOne Financial Services, Inc. Directors' Stock Purchase Plan for an aggregate cash price of $12,000. The Registrant relied on the exemption contained in Section 4(6) of the Securities Act of 1933 in connection with this sale.
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:
|
Number |
Documents | |
|
|
Amended and Restated Articles of Incorporation of the Registrant. Previously filed as an exhibit to the Registrant=s Form 10-QSB Quarterly Report for the quarter ended June 30, 1998. Here incorporated by reference. | |
|
|
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. | |
|
|
Financial Data Schedule. |
2.
Reports on Form 8-K. No reports on Form 8-K were filed during
the three months ended September 30, 1999.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
Date November 12, 1999 |
CHOICEONE FINANCIAL SERVICES, INC.
/s/ Jae M. Maxfield Jae M. Maxfield President and Chief Executive Officer |
|
|
|
| Date November 12, 1999 | /s/ Thomas L. Lampen Thomas L. Lampen Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) |
INDEX TO EXHIBITS
The following exhibits are filed or incorporated by reference as part
of this report:
|
Number |
Documents | |
|
|
Amended and Restated Articles of Incorporation of the Registrant. Previously filed as an exhibit to the Registrant=s Form 10-QSB Quarterly Report for the quarter ended June 30, 1998. Here incorporated by reference. | |
|
|
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. | |
|
|
Financial Data Schedule. |
|
|