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By Nathan Peck | MiBiz
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SPARTA — There’s a light at the end of the tunnel. How far away it is remains to be seen.

As Michigan’s economy continues to strain businesses, the beginning of a recovery is starting to take hold as unemployment starts to tick downward ever so slightly. Michigan is coming out of a large hole and will take some time to recover.

Founded in 1898, ChoiceOne Bank has remained profitable throughout the course of the downturn and recovery. With $461 million in assets and $366 million in deposits, ChoiceOne operates 13 branches in Kent, Muskegon, Newaygo and Ottawa counties. In the first quarter of 2010, ChoiceOne reported first quarter net income of $644,000 compared to $741,000 in the same period last year. At the same time charge-offs are up, $685,000 in Q1 of 2010, compared with $141,000 in 2009. Concerns over continued weakness in the Michigan economy has led the bank to make provisions for loan losses of $1 million for Q1 in 2010, compared to $600,000 a year ago.

Tom Lampen, ChoiceOne CFO, recently spoke with MiBiz about the economic downturn, the recovery and how Michigan’s economy will affect the bank’s bottom line.

MiBiz: How is ChoiceOne dealing with the uncertainty in the economic outlook for the rest of 2010?

Lampen: We’ve been making the best of a bad economic situation is the way we’ve looked at it. We’ve remained profitable. Are we at the levels we would like to be at? No. We continue to be faced with economic headwinds and challenges in loan performance.

We are working harder today to get a lower level of net income than if you were to look back three or four years. A lot of the earnings in the first part of this year and in next year will be dominated by credit concerns, as jobs continue to be sluggish in Michigan. The Michigan unemployment rate is down a little, but not a lot. Until we see employment come back, we will continue to see difficulties. Businesses will continue to be stretched on a cash flow basis, and that is not going to change any time soon.

MiBiz: Banks seem to be pinched. People are saving more, which is a good thing, while there is reduced demand for loans, your key source of income. How is ChoiceOne responding?

Lampen: It’s both a success story and a challenge. We are having great success with our local deposit growth. A number of depositors are scared of the stock market, so it is a flight to quality. (We’re seeing) some deposit growth with customers coming to us from other institutions that have struggled more and more. Depositors, despite (FDIC) insurance coverage, will bring their deposits over to another bank they see as more stable. It is a good thing to have all this funding for us. The challenge has been what do we do with it? Loans have shrunk in the first couple months of this quarter. It is the economy again — a combination of both individuals and businesses being less willing to borrow because of uncertainty. Banks are reacting to the charge-off levels we have had in the last couple of years and so the credit criteria are more stringent. We are requiring more of a down payment, and it takes a bit more to get a business loan than it used to. It’s affecting all borrowers.

MiBiz: What do you see in Michigan’s economy for the rest of 2010?

Lampen: I really believe you will see a lot of the same. We may see a little bit of economic relief. There are certain signs in the national economy that are showing that we may have hit bottom and that we might be turning a corner. It is going to be a while before that starts to impact our clients.We don’t have many client stories where they’re doing a lot of business or hiring back workers. In our local markets, we don’t foresee it getting necessarily worse, (but) it’s more of a steady as she goes. We are waiting until the waves we’ve been experiencing will begin calming down. Like a lot of banks, we built our allowance for loan charge-offs. Eventually looking ahead to the future, if loan charge-offs start to moderate, we reduce those allowances. Allowances going down means less provision for bad debt and benefits to the bottom line.

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