SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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[ X ] |
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
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For the quarterly period ended March 31, 2003 |
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[ ] |
Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
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For the transition period from to |
Commission File Number: 1-9202
ChoiceOne Financial Services, Inc.
(Exact Name of Registrant as Specified in its Charter)
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Michigan |
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38-2659066 |
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109 East Division |
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(616) 887-7366 |
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Indicate by checkmark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No
Indicate by checkmark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes No X
As of April 30, 2003, the Registrant had outstanding 1,554,856 shares of common stock.
CHOICEONE FINANCIAL SERVICES, INC.
INDEX TO FORM 10-Q
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Page |
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PART I. FINANCIAL INFORMATION |
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Item 1. |
Financial Statements: |
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Consolidated Balance Sheets at March 31, 2003 and December 31, 2002 |
3 |
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Consolidated Statements of Income for the three months ended |
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Consolidated Statements of Changes in Shareholders' Equity for the three |
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Consolidated Statements of Cash Flows for the three months ended |
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Notes to Interim Consolidated Financial Statements |
7-9 |
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Item 2. |
Management's Discussion and Analysis of Financial |
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Condition and Results of Operations |
9-15 |
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Item 3. |
Quantitative and Qualitative Disclosures About Market Risk |
15-16 |
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Item 4. |
Controls and Procedures |
16 |
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PART II. OTHER INFORMATION |
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Item 1. |
Legal Proceedings |
17 |
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Item 2. |
Changes in Securities and Use of Proceeds |
17 |
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Item 3. |
Defaults Upon Senior Securities |
17 |
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Item 4. |
Submission of Matters to a Vote of Security Holders |
17 |
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Item 5. |
Other Information |
17 |
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Item 6. |
Exhibits and Reports on Form 8-K |
17 |
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SIGNATURES AND CERTIFICATIONS |
18 |
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
ChoiceOne Financial Services, Inc.
CONSOLIDATED BALANCE SHEETS
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March 31, |
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December 31, |
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(Unaudited) |
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Assets |
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Cash and due from banks |
$ |
4,709,000 |
$ |
5,621,000 |
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Federal funds sold |
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0 |
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850,000 |
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Cash and cash equivalents |
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4,709,000 |
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6,471,000 |
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Short-term investments |
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100,000 |
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100,000 |
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Securities available for sale |
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25,134,000 |
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21,491,000 |
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Loans, net |
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161,580,000 |
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171,636,000 |
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Loans held for sale |
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3,251,000 |
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1,214,000 |
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Premises and equipment, net |
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4,316,000 |
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4,449,000 |
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Other real estate owned, net |
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1,960,000 |
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1,867,000 |
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Federal Home Loan Bank and Federal Reserve Bank stock |
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2,620,000 |
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2,620,000 |
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Loan servicing rights, net |
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353,000 |
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363,000 |
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Intangible assets, net |
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37,000 |
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226,000 |
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Other assets |
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2,111,000 |
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1,887,000 |
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Total assets |
$ |
206,171,000 |
$ |
212,324,000 |
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Liabilities |
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Deposits - noninterest bearing |
$ |
16,446,000 |
$ |
17,391,000 |
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Deposits - interest bearing |
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131,431,000 |
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135,388,000 |
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Total deposits |
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147,877,000 |
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152,779,000 |
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Repurchase agreements |
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5,692,000 |
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5,876,000 |
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Federal funds purchased |
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2,050,000 |
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0 |
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Advances from Federal Home Loan Bank |
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29,277,000 |
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32,791,000 |
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Other liabilities |
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1,580,000 |
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1,519,000 |
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Total liabilities |
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186,476,000 |
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192,965,000 |
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Shareholders' Equity |
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Preferred stock; shares authorized: 100,000; |
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0 |
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0 |
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Common stock; shares authorized: 4,000,000; |
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15,695,000 |
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15,645,000 |
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Unallocated shares held by Employee Stock Ownership Plan |
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(45,000 |
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(45,000 |
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Retained earnings |
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3,464,000 |
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3,222,000 |
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Accumulated other comprehensive income |
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581,000 |
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537,000 |
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Total shareholders' equity |
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19,695,000 |
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19,359,000 |
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Total liabilities and shareholders' equity |
$ |
206,171,000 |
$ |
212,324,000 |
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See accompanying notes to consolidated financial statements.
ChoiceOne Financial Services, Inc.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
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Three Months Ended |
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2003 |
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2002 |
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Interest income |
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Loans, including fees |
$ |
2,965,000 |
$ |
3,319,000 |
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Securities: |
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Taxable |
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164,000 |
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142,000 |
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Tax exempt |
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109,000 |
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110,000 |
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Other |
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1,000 |
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1,000 |
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Total interest income |
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3,239,000 |
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3,572,000 |
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Interest expense |
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Deposits |
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881,000 |
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1,088,000 |
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Advances from Federal Home Loan Bank |
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355,000 |
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517,000 |
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Other |
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23,000 |
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47,000 |
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Total interest expense |
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1,259,000 |
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1,652,000 |
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Net interest income |
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1,980,000 |
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1,920,000 |
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Provision for loan losses |
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170,000 |
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160,000 |
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Net interest income after |
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provision for loan losses |
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1,810,000 |
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1,760,000 |
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Noninterest income |
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Customer service fees |
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241,000 |
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244,000 |
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Insurance and brokerage commissions |
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299,000 |
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313,000 |
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Gain on sales of loans |
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169,000 |
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94,000 |
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Gain on sales of securities |
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0 |
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54,000 |
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Loan servicing fees, net |
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14,000 |
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55,000 |
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Other income |
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97,000 |
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16,000 |
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Total noninterest income |
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820,000 |
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776,000 |
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Noninterest expense |
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Salaries and benefits |
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1,012,000 |
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1,030,000 |
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Occupancy |
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323,000 |
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380,000 |
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Professional services |
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128,000 |
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102,000 |
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Printing, postage and supplies |
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67,000 |
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67,000 |
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Data processing |
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68,000 |
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68,000 |
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Advertising and promotional |
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28,000 |
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32,000 |
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Other expense |
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294,000 |
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261,000 |
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Total noninterest expense |
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1,920,000 |
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1,940,000 |
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Income before income tax |
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710,000 |
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596,000 |
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Income tax expense |
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204,000 |
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165,000 |
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Net income |
$ |
506,000 |
$ |
431,000 |
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Comprehensive income |
$ |
550,000 |
$ |
353,000 |
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Basic and diluted earnings per share |
$ |
0.33 |
$ |
0.28 |
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See accompanying notes to consolidated financial statements.
ChoiceOne Financial Services, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
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Number of |
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Common |
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Accumulated |
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Balance, January 1, 2002 |
1,541,091 |
$ |
14,475,000 |
$ |
(64,000 |
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$ |
3,680,000 |
$ |
182,000 |
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$ |
18,273,000 |
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Comprehensive income |
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Net income |
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431,000 |
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431,000 |
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Net change in unrealized gain |
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(78,000 |
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(78,000 |
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Total comprehensive income |
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353,000 |
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Shares issued |
2,438 |
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33,000 |
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33,000 |
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Cash dividends |
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(249,000 |
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(249,000 |
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Balance, March 31, 2002 |
1,543,529 |
$ |
14,508,000 |
$ |
(64,000 |
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$ |
3,862,000 |
$ |
104,000 |
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$ |
18,410,000 |
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Balance, January 1, 2003 |
1,551,228 |
$ |
15,645,000 |
$ |
(45,000 |
) |
$ |
3,222,000 |
$ |
537,000 |
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$ |
19,359,000 |
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Comprehensive income |
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Net income |
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506,000 |
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506,000 |
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Net change in unrealized gain |
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44,000 |
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44,000 |
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Total comprehensive income |
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550,000 |
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Shares issued |
3,868 |
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55,000 |
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55,000 |
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Shares repurchased |
(312 |
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(5,000 |
) |
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(5,000 |
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Cash dividends |
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(264,000 |
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(264,000 |
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Balance, March 31, 2003 |
1,544,784 |
$ |
15,695,000 |
$ |
(45,000 |
) |
$ |
3,464,000 |
$ |
581,000 |
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$ |
19,695,000 |
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See accompanying notes to consolidated financial statements.
ChoiceOne Financial Services, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
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Three Months Ended |
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2003 |
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2002 |
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Cash flows from operating activities: |
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Net income |
$ |
506,000 |
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$ |
431,000 |
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Adjustments to reconcile net income to net cash from |
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Depreciation |
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151,000 |
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207,000 |
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Amortization |
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118,000 |
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69,000 |
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Provision for loan losses |
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170,000 |
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160,000 |
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Gain on sales of securities |
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0 |
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(54,000 |
) |
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Gain on sales of loans |
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(169,000 |
) |
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(93,000 |
) |
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Loans originated for sale |
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(7,477,000 |
) |
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(7,627,000 |
) |
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Proceeds from loan sales |
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5,545,000 |
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7,720,000 |
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Net changes in: |
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Accrued interest receivable and other assets |
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246,000 |
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196,000 |
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Accrued interest payable and other liabilities |
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38,000 |
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98,000 |
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Net cash provided by/(used in) operating activities |
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(872,000 |
) |
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1,107,000 |
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Cash flows from investing activities: |
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Purchases of securities available for sale |
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(4,347,000 |
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(1,293,000 |
) |
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Proceeds from sales of securities available for sale |
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0 |
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1,830,000 |
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Principal payments on securities available for sale |
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712,000 |
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452,000 |
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Loan originations, net of repayments |
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9,341,000 |
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(6,631,000 |
) |
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Premises and equipment expenditures, net |
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(18,000 |
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(45,000 |
) |
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Sale of insurance agency book of business |
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186,000 |
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0 |
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Net cash provided by/(used in) investing activities |
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5,874,000 |
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(5,687,000 |
) |
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Cash flows from financing activities: |
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Net change in deposits |
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(4,902,000 |
) |
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708,000 |
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Net change in repurchase agreements |
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(184,000 |
) |
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1,877,000 |
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Net change in federal funds purchased |
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2,050,000 |
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1,350,000 |
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Proceeds from Federal Home Loan Bank advances |
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4,500,000 |
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6,000,000 |
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Payments on Federal Home Loan Bank advances |
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(8,014,000 |
) |
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(5,513,000 |
) |
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Issuance of common stock |
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55,000 |
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33,000 |
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Repurchase of common stock |
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(5,000 |
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0 |
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Cash dividends and fractional shares from stock dividends |
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(264,000 |
) |
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(249,000 |
) |
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Net cash provided by/(used in) financing activities |
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(6,764,000 |
) |
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4,206,000 |
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Net change in cash and cash equivalents |
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(1,762,000 |
) |
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(374,000 |
) |
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Beginning cash and cash equivalents |
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6,471,000 |
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4,931,000 |
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Ending cash and cash equivalents |
$ |
4,709,000 |
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$ |
4,557,000 |
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Supplemental disclosures of cash flow information: |
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Cash paid for interest |
$ |
1,236,000 |
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$ |
1,624,000 |
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Cash paid for income taxes |
$ |
0 |
|
$ |
0 |
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|
Loans transferred to other real estate |
$ |
545,000 |
|
$ |
703,000 |
|
See accompanying notes to consolidated financial statements.
ChoiceOne Financial Services, Inc.
NOTES TO INTERIM 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 Mortgage Company of Michigan (the "Mortgage Company"). Intercompany transactions and balances have been eliminated in consolidation.
The consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information, prevailing practices within the banking industry and the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
The accompanying consolidated financial statements reflect all adjustments ordinary in nature which are, in the opinion of management, necessary for a fair presentation of the Consolidated Balance Sheets as of March 31, 2003 and December 31, 2002, and the Consolidated Statements of Income, Consolidated Statements of Changes in Shareholders' Equity, and Consolidated Statements of Cash Flows for the three-month periods ended March 31, 2003 and March 31, 2002. Operating results for the three months ended March 31, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003.
The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Registrant's Annual Report on Form 10-K for the year ended December 31, 2002.
Stock Based Compensation
Employee compensation expense under the Registrant's stock option plan is reported if options are granted below market price at the grant date. Pro forma disclosures of net income and earnings per share are shown using the fair value method to measure expense for options granted using an option pricing model to estimate the fair value.
The following pro forma information presents net income and earnings per share for the three months ended March 31, 2003 and 2002 had the fair value method been used to measure compensation cost for stock option plans. No compensation cost was recognized for stock options in 2003 and 2002.
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Three Months Ended |
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|
2003 |
2002 |
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Net income as reported |
$ |
506,000 |
|
$ |
431,000 |
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|
Deduct: Stock-based compensation expense determined under |
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Pro forma net income |
|
500,000 |
|
|
428,000 |
|
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Basic earnings per common share and diluted earnings per common share |
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Pro forma basic earnings per common share and diluted earnings per |
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|
The pro forma effects are computed using an option pricing model and the following weighted average assumptions as of grant date:
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|
2003 |
|
|
2002 |
|
|
|
Risk-free interest rate |
|
4.01 |
% |
|
4.71 |
% |
|
|
Expected option life (in years) |
|
7 |
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|
7 |
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|
Expected stock price volatility |
|
20.90 |
% |
|
20.90 |
% |
|
|
Dividend yield |
|
4.67 |
% |
|
4.80 |
% |
In future periods, the pro forma effect of not applying the fair value method may increase if additional options are granted.
Stock Transactions
A total of 1,191 shares of common stock were issued to the Registrant's Board of Directors for a cash price of $17,000 under the terms of the Directors' Stock Purchase Plan in the first quarter of 2003. A total of 1,931 shares of common stock were issued to shareholders for a cash price of $28,000 under the Dividend Reinvestment and Supplemental Purchase Plan in the quarter ended March 31, 2003. A total of 746 shares were issued to employees for a cash price of $10,000 under the Employee Stock Purchase Plan for the quarter ended March 31, 2003. A total of 312 shares were repurchased from shareholders at a cash price of $5,000 in the first quarter of 2003.
Reclassifications
Certain amounts presented in prior periods have been reclassified to conform to the current presentation.
NOTE 2 - ALLOWANCE FOR LOAN LOSSES
An analysis of changes in the allowance for loan losses follows:
|
|
|
Three Months ended |
|
|||
|
|
|
2003 |
|
|
2002 |
|
|
Balance, beginning of period |
$ |
2,211,000 |
|
$ |
2,013,000 |
|
|
Provision charged to expense |
|
170,000 |
|
|
160,000 |
|
|
Recoveries credited to the allowance |
|
97,000 |
|
|
48,000 |
|
|
Loans charged off |
|
(384,000 |
) |
|
(139,000 |
) |
|
Balance, end of period |
$ |
2,094,000 |
|
$ |
2,082,000 |
|
Information regarding impaired loans follows:
|
|
|
March 31, |
|
December 31, |
|
|
|
Loans with no allowance allocated |
$ |
2,087,000 |
$ |
1,041,000 |
|
|
|
Loans with allowance allocated |
|
758,000 |
|
1,128,000 |
|
|
|
Amount of allowance for loan losses allocated |
|
408,000 |
|
697,000 |
|
|
|
|
|
Three Months ended |
|
||
|
|
|
2003 |
|
2002 |
|
|
Average balance during the period |
$ |
2,507,000 |
$ |
1,290,000 |
|
|
Interest income recognized thereon |
|
12,000 |
|
18,000 |
|
|
Cash basis interest income recognized |
|
46,000 |
|
33,000 |
|
NOTE 3 - EARNINGS PER SHARE
Earnings per share are based on the weighted average number of shares outstanding during the period. The weighted average number of shares outstanding has been adjusted for the 5% stock dividend paid in 2002. A computation of basic earnings per share and diluted earnings per share follows:
|
|
|
Three Months Ended |
|
||
|
|
|
2003 |
|
2002 |
|
|
Basic Earnings Per Share: |
|
|
|
|
|
|
Net income available to common |
|
|
|
|
|
|
Shareholders |
$ |
506,000 |
$ |
431,000 |
|
|
|
|
|
|
|
|
|
Weighted average common |
|
|
|
|
|
|
shares outstanding for basic |
|
|
|
|
|
|
earnings per share |
|
1,549,314 |
|
1,529,522 |
|
|
|
|
|
|
|
|
|
Basic earnings per share |
$ |
0.33 |
$ |
0.28 |
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Share: |
|
|
|
|
|
|
Net income available to common |
|
|
|
|
|
|
shareholders |
$ |
506,000 |
$ |
431,000 |
|
|
|
|
|
|
|
|
|
Weighted average common |
|
|
|
|
|
|
shares outstanding for basic |
|
|
|
|
|
|
earnings per share |
|
1,549,314 |
|
1,529,522 |
|
|
Plus dilutive effect of assumed |
|
|
|
|
|
|
exercise of stock options |
|
520 |
|
46 |
|
|
|
|
|
|
|
|
|
Weighted average common and |
|
|
|
|
|
|
potentially dilutive common |
|
|
|
|
|
|
shares outstanding |
|
1,549,834 |
|
1,529,568 |
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
$ |
0.33 |
$ |
0.28 |
|
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion is designed to provide a review of the consolidated financial condition and results of operations of ChoiceOne Financial Services, Inc. (the "Registrant") and its direct and indirect wholly owned subsidiaries, ChoiceOne Bank (the "Bank"), ChoiceOne Insurance Agencies, Inc. (the "Insurance Agency"), and ChoiceOne Mortgage Company of Michigan (the "Mortgage Company").
FORWARD-LOOKING STATEMENTS
This discussion and other sections of this report contain forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates, and projections about the financial services industry, the economy, and about the Registrant itself. Words such as "anticipates," "believes," "estimates," "expects," "forecasts," "intends," "is likely," "plans," "predicts," "projects," and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions ("risk factors") that are difficult to predict with regard to timing, extent, likelihood, and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed, implied or forecasted in such forward-looking statements. Furthermore, the Registrant undertakes no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events, or otherwise.
Risk factors include, but are not limited to, changes in interest rates and interest rate relationships; demand for products and services; the degree of competition by traditional and non-traditional competitors; changes in banking regulations; changes in tax laws; changes in prices, levies, and assessments; the impact of technological advances; governmental and regulatory policy changes; the outcomes of pending and future litigation and contingencies; trends in customer behavior as well as their ability to repay loans; and changes in the national and local economies. In addition, events relating to the ongoing war on terrorism, other potential terrorist acts, and military actions including the war in Iraq have created significant global economic and political uncertainties that may have material and adverse effects on financial markets, the economy, and demand for financial services and products. These are representative of the risk factors that could cause a difference between an ultimate actual outcome and a preceding forward-looking statement.
RESULTS OF OPERATIONS
Summary
Net income increased $75,000 or 17% in the first quarter of 2003 compared to the same period in 2002. The increase in net income was due to increased net interest income, increased noninterest income, and decreased noninterest expenses, offset by a slightly higher provision for loan losses.
The increase in net interest income was primarily due to a change in the Bank's mix of interest bearing deposits for 2003 compared to the same period a year ago. Also, the rates paid on deposits and other funding sources fell faster than the yields earned on loans and securities. Gains from the sale of loans and additional profit-sharing income at the Insurance Agency fueled the growth in noninterest income. The higher provision for loan losses was primarily due to a higher level of nonperforming and substandard loans as of March 31, 2003. Noninterest expense decreased slightly due to the sale of the Grand Rapids division of the Insurance Agency and the closure of the Bank's Plainfield office. Lower occupancy expenses were offset by higher professional fees in 2003 over the prior year.
The return on average assets was 0.97% for the first three months of 2003, compared to 0.86% for the period a year ago. The return on average shareholders' equity was 10.37% for the first quarter of 2003, compared to 9.41% for the first quarter of 2002.
Dividends
Cash dividends of $264,000, or $0.17 per common share were declared in the first quarter of 2003, which is $0.01 higher than the per share amount in first quarter of 2002. The cash dividend payout percentage was 52% for the first three months of 2003, compared to 58% in the same period a year ago.
The Registrant paid a 5% stock dividend on May 31, 2002. Earnings per share data for all periods presented have been adjusted for this dividend.
Interest Income and Expense
Tables 1 and 2 on the following pages provide information regarding interest income and expense for the three-month periods ended March 31, 2003 and 2002, respectively. Table 1 documents average balances and interest income and expense, as well as the average rates earned or paid on assets and liabilities. Table 2 documents the effect on interest income and expense of changes in volume (average balance) and