<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(X) ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1998
( ) 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.
(Name of Small Business Issuer in its Charter)
MICHIGAN 38-2659066
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
109 EAST DIVISION STREET, SPARTA, MICHIGAN 49345
(Address of Principal Executive Offices) (Zip Code)
(616) 887-7366
(Issuer's Telephone Number, Including Area Code)
Securities Registered under Section 12(g) of the Exchange Act:
COMMON STOCK, NO PAR VALUE
(Title of Class)
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 _____
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. ( )
The issuer's revenues for the year ended December 31, 1998 were $16,003,000.
<PAGE>
As of February 28, 1999, the aggregate market value of the common stock
held by non-affiliates of the issuer was approximately $28,272,000. This
amount is based on the average of the bid and asked price of $26.83 per
share for the registrant's stock as of such date.
As of February 28, 1999, the issuer had outstanding 1,053,601 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Part I, Item 1, and Part II, Items 5, 6 and 7, incorporate by reference
portions of the Registrant's Annual Report to Shareholders for the year
ended December 31, 1998.
Part III, Items 9, 10, 11 and 12, incorporate by reference portions of the
Registrant's Definitive Proxy Statement for the Registrant's Annual Meeting
of Shareholders to be held April 29, 1999.
Transitional Small Business Disclosure Format (check one) Yes ___ No _X_
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
ChoiceOne Financial Services, Inc. (the "Registrant") is a one-bank holding
company registered under the Bank Holding Company Act of 1956, as amended.
The Registrant was incorporated on February 24, 1986. The Registrant was
formed to create a bank holding company for the purpose of acquiring all of
the capital stock of ChoiceOne Bank (formerly Sparta State Bank), which
became a wholly owned subsidiary of the Registrant on April 6, 1987. The
Registrant's only subsidiary and significant asset as of December 31, 1998,
was ChoiceOne Bank (the "Bank"). Effective January 1, 1996, the Bank
acquired all of the outstanding common stock of ChoiceOne Insurance
Agencies, Inc. (formerly Bradford Insurance Centre, Ltd.), an independent
insurance agency headquartered in Sparta, Michigan. Effective August 1,
1997, the Bank acquired all of the outstanding common stock of ChoiceOne
Travel, Inc. (formerly Alpine Travel, Inc.), a travel agency with one
location in Walker, Michigan.
The Registrant's business is primarily concentrated in a single industry
segment - commercial banking. The Bank is a full-service banking
institution that offers a variety of deposit, payment, credit and other
financial services to all types of customers. These services include time,
savings, and demand deposits, safe deposit services, and automated
transaction machine services. Loans, both commercial and consumer, are
extended primarily on a secured basis to corporations, partnerships and
individuals. Commercial lending covers such categories as business,
industry, agricultural, construction, inventory and real estate. The
Bank's consumer loan and residential mortgage loan departments make direct
loans to consumers and purchasers of residential property. No material
part of the business of the Registrant or the Bank is dependent upon a
single customer or very few customers, the loss of which would have a
materially adverse effect on the Registrant.
The Bank's primary market area consists of portions of Kent, Muskegon,
Newaygo and Ottawa counties in Michigan in the communities where the Bank's
offices are located and the areas immediately surrounding these
communities. Currently the Bank serves these markets through four full-
service offices and one off-premises automated transaction machine. The
Registrant and the Bank have no foreign assets or income.
The principal source of revenue for the Registrant and the Bank is interest
and fees on loans. On a consolidated basis, interest and fees on loans
accounted for 80% of total revenues in 1998, 78% in 1997 and 76% in 1996.
Interest on investment securities accounted for 7% of total revenues in
1998, 9% in 1997 and 11% in 1996.
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COMPETITION
The business of banking is highly competitive. The Bank's competition
primarily comes from other financial institutions located within Sparta,
Michigan, and the Kent County, Michigan area. There are a number of larger
commercial banks in the Bank's primary market area.
The Bank also competes with a large number of other financial institutions,
such as savings and loan associations, insurance companies, consumer finance
companies, credit unions and commercial finance and leasing companies for
deposits, loans and service business. Money market mutual funds, brokerage
houses and nonfinancial institutions provide many of the financial services
offered by the Bank. Many of these competitors have substantially greater
resources than the Bank. The principal methods of competition for financial
services are price (the rates of interest charged for loans, the rates of
interest paid for deposits and the fees charged for services) and the
convenience and quality of services rendered to customers.
SUPERVISION AND REGULATION
Banks and bank holding companies are extensively regulated. The Registrant
is subject to supervision and regulation by the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board"). The Registrant's
activities are generally limited to owning or controlling banks and
engaging in such other activities as the Federal Reserve Board may
determine to be closely related to banking. Prior approval of the Federal
Reserve Board, and in some cases various other government agencies, is
required for the Registrant to acquire control of any additional banks or
other operating subsidiaries.
The Bank is chartered under state law and is subject to regulation by the
Financial Institutions Bureau of the Michigan Department of Consumer and
Industry Services. State banking laws place restrictions on various
aspects of banking, including permitted activities, loan interest rates,
branching, payment of dividends and capital and surplus requirements. The
Bank is a member of the Federal Reserve System and is also subject to
regulation by the Federal Reserve Board. The Bank's deposits are insured
by the Federal Deposit Insurance Corporation (the "FDIC") to the extent
provided by law. The Bank became a member of the Federal Home Loan Bank
system in March 1993. This provides certain advantages to the Bank,
including favorable borrowing rates for certain funds.
The Registrant is a legal entity separate and distinct from the Bank.
There are legal limitations on the extent to which the Bank can lend or
otherwise supply funds to the Registrant. In addition, payment of
dividends to the Registrant by the Bank is subject to various state and
federal regulatory limitations.
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Under Federal Reserve Board policy, the Registrant is expected to act as a
source of financial strength to the Bank and to commit resources to support
it. Under federal law, the FDIC also has authority to impose special
assessments on insured depository institutions to repay FDIC borrowings
from the United States Treasury or other sources and to establish
semiannual assessment rates on Bank Insurance Fund ("BIF") member banks to
maintain the BIF at the designated reserve ratio required by law.
Banks are subject to a number of federal and state laws and regulations
which have a material impact on their business. These include, among
others, state usury laws, state laws relating to fiduciaries, the Truth in
Lending Act, the Truth in Savings Act, the Equal Credit Opportunity Act,
the Fair Credit Reporting Act, the Expedited Funds Availability Act, the
Community Reinvestment Act, electronic funds transfer laws, redlining laws,
antitrust laws, environmental laws and privacy laws. The instruments of
monetary policy of authorities such as the Federal Reserve Board may
influence the growth and distribution of bank loans, investments and
deposits, and may also affect interest rates on loans and deposits. These
policies may have a significant effect on the operating results of banks.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Riegle-Neal Act") substantially changed the geographic constraints
applicable to the banking industry. The Riegle-Neal Act allows bank
holding companies to acquire banks located in any state in the United
States without regard to geographic restrictions or reciprocity
requirements imposed by state law. The Riegle-Neal Act also allows banks
to establish interstate branch networks through acquisitions of other
banks. The establishment of DE NOVO interstate branches or the acquisition
of individual branches of a bank in another state (rather than the
acquisition of an out-of-state bank in its entirety) is allowed by the
Riegle-Neal Act only if specifically authorized by state law. The
legislation allowed individual states to "opt-out" of certain provisions of
the Riegle-Neal Act by enacting appropriate legislation prior to June 1,
1997.
Michigan permits both U.S. and non-U.S. banks to establish branch offices
in Michigan. The Michigan Banking Code permits, in appropriate
circumstances and with the approval of the Commissioner of the Financial
Institutions Bureau, (1) acquisition of Michigan banks by FDIC-insured
banks, savings banks or savings and loan associations located in other
states, (2) sale by a Michigan bank of branches to an FDIC-insured bank,
savings bank or savings and loan association located in a state in which a
Michigan bank could purchase branches of the purchasing entity, (3)
consolidation of Michigan banks and FDIC-insured banks, savings banks or
savings and loan associations located in other states having laws
permitting such consolidation, (4) establishment of branches in Michigan by
FDIC-insured banks located in other states, the District of Columbia or
U.S. territories or protectorates having laws permitting a Michigan bank to
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establish a branch in such jurisdiction, and (5) establishment by foreign
banks of branches located in Michigan.
EFFECTS OF COMPLIANCE WITH ENVIRONMENTAL REGULATIONS
The nature of the business of the Bank is such that it holds title, on a
temporary or permanent basis, to a number of parcels of real property.
These include properties owned for branch offices and other business
purposes as well as properties taken in or in lieu of foreclosure to
satisfy loans in default. Under current state and federal laws, present
and past owners of real property may be exposed to liability for the cost
of clean up of environmental contamination on or originating from those
properties, even if they are wholly innocent of the actions that caused the
contamination. These liabilities can be material and can exceed the value
of the contaminated property. Management is not presently aware of any
instances where compliance with these provisions will have a material
effect on the capital expenditures, earnings or competitive position of the
Registrant or the Bank, or where compliance with these provisions will
adversely affect a borrower's ability to comply with the terms of loan
contracts.
EMPLOYEES
As of February 28, 1999, the Bank employed fifty-five persons on a full-
time basis and seventeen persons on a part-time basis. The Insurance
Agency employed thirteen persons on a full-time basis and three persons on
a part-time basis. The Travel Agency employed two persons on a full-time
basis and four persons on a part-time basis. The Registrant's only
employees as of the same date were its four executive officers. The
Registrant, Bank, Insurance Agency, and Travel Agency believe their
relations with their employees are good.
STATISTICAL INFORMATION
Additional statistical information describing the business of the
Registrant appears on the following pages and in Management's Discussion
and Analysis or Plan of Operation incorporated by reference in Item 6 of
this report and in the Consolidated Financial Statements and the notes
thereto incorporated by reference in Item 7 of this report.
The following statistical information should be read in conjunction with
Management's Discussion and Analysis or Plan of Operation and the
Consolidated Financial Statements and notes thereto incorporated by
reference in this report.
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INVESTMENT PORTFOLIO
Presented below is the fair value of investment securities as of December
31, 1998 and 1997, a schedule of maturities of investment securities as of
December 31, 1998, and the weighted average yield of investment securities
as of December 31, 1998.
<TABLE>
<CAPTION>
1 YEAR 1 YEAR- 5 YEARS- AFTER TOTAL FAIR VALUE
OR LESS 5 YEARS 10 YEARS 10 YEARS <F1> AT
------- ------- -------- -------- ----- DEC. 31,
MATURITY DISTRIBUTION AS OF DECEMBER 31, 1998 1997
------------------------------------------------------------------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
U.S. Treasuries and U.S.
Government agencies <F2> $ 6,110 $ 2,536 $ -- $ -- $ 8,646 $ 9,289
Obligations of states and
political subdivisions 1,171 2,579 2,111 2,804 8,665 7,686
Other securities <F3> -- 255 -- -- 2,971 2,967
------- ------- -------- -------- ------- ---------
Totals $ 7,281 $ 5,370 $ 2,111 $ 2,804 $20,282 $ 19,942
======= ======= ======== ======== ======= =========
</TABLE>
<TABLE>
WEIGHTED AVERAGE INTEREST RATES AS OF DECEMBER 31, 1998
<CAPTION>
<S> <C> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
U.S. Treasuries and U.S.
Government agencies 3.94% 6.45% -% - % 4.68%
Obligations of states and
political subdivisions <F4> 8.35 7.91 7.11 7.65 7.70
Other securities -- 6.10 -- -- 7.38
<FN>
<F1> This column represents the total of the maturity distribution and
the fair value at December 31, 1998.
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<F2> Maturities of mortgage-backed securities are classified according
to their estimated average maturity. Approximately 60% of
mortgage backed securities were classified in the 1 year or less
maturity category.
<F3> The total column includes securities which have no stated maturity.
<F4> The interest rate is computed on a fully tax-equivalent basis at
an incremental tax rate of 34%.
</FN>
</TABLE>
The Bank had no holdings of investment securities from any one issuer at
December 31, 1998, which were greater than 10% of the Registrant's
shareholders' equity, exclusive of U.S. Treasury securities and U.S.
Government agency securities.
LOAN PORTFOLIO
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
The following schedule presents the maturities of loans (excluding real estate
mortgage loans and installment loans). Also presented are loans over one year
in maturity, classified according to the sensitivity to changes in interest
rates.
<TABLE>
<CAPTION>
1 YEAR 1 YEAR- AFTER
OR LESS 5 YEARS 5 YEARS TOTAL
------- ------- ------- -----
(Dollars in thousands)
LOAN MATURITIES AS OF DECEMBER 31, 1998 <F1>
---------------------------------------------
<S> <C> <C> <C> <C>
Commercial $ 15,245 $ 30,115 $ 6,702 $ 52,062
Agricultural 4,191 3,486 1,559 9,236
Real estate - construction 3,122 -- -- 3,122
---------- --------- --------- ----------
Totals $ 22,558 $ 33,601 $ 8,261 $ 64,420
========== ========= ========= ==========
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<PAGE>
LOAN SENSITIVITY TO CHANGES IN INTEREST RATES AS OF DECEMBER 31, 1998
Loans which have predetermined interest
rates $ 22,863 $ 6,504 $ 29,367
Loans which have floating or adjustable
interest rates 10,738 1,757 12,495
--------- --------- ----------
Totals $ 33,601 $ 8,261 $ 41,862
========= ========= ==========
<FN>
<F1> Loan maturities are classified according to the contractual maturity
date or the anticipated amortization period, whichever is appropriate.
The anticipated amortization period is used in the case of loans where
a balloon payment is due before the end of the loan's normal
amortization period. At the time the balloon payment is due, the loan
can either be rewritten or payment in full can be requested. The
decision as to whether the loan will be rewritten or a payment in
full will be requested will be based upon the loan's payment history,
the borrower's current financial condition, and other relevant factors.
</FN>
</TABLE>
RISK ELEMENTS
The following loans were classified as nonperforming as of December 31:
<TABLE>
<CAPTION>
1998 1997
------------- ------------
<S> <C> <C>
Loans accounted for on a non-accrual basis $ 489,000 $ 753,000
Accruing loans which are contractually past due 90
days or more as to principal or interest payments 419,000 195,000
Loans not included above which are "troubled debt
restructurings" 62,000 27,000
------------- ------------
Totals $ 970,000 $ 975,000
============= ============
</TABLE>
Interest on the above loans which would have been earned had the loans been
in an accrual or performing status was approximately $103,000 and
$101,000 for 1998 and 1997, respectively. The interest that was actually
recorded when received was approximately $87,000 and $65,000 for 1998
and 1997, respectively. In addition to the above loans, holdings of other
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<PAGE>
real estate of $37,000 and $229,000 were considered to be nonperforming as
of December 31, 1998 and December 31, 1997, respectively.
A loan is placed on nonaccrual status at the point in time at which the
collectibility of principal or interest is considered doubtful.
POTENTIAL PROBLEM LOANS
At December 31, 1998, there were $6,440,000 of loans not disclosed above
where some concern existed as to the borrowers' ability to comply with
original loan terms. Approximately $200,000 of the allowance for loan
losses had been specifically allocated to these loans at December 31, 1998.
LOAN CONCENTRATIONS
As of December 31, 1998, there was no concentration of loans exceeding 10%
of total loans that are not otherwise disclosed as a category of loans in
the loan portfolio listing in Note 4 to the Consolidated Financial
Statements incorporated by reference in Item 7 of this report.
OTHER INTEREST-BEARING ASSETS
As of December 31, 1998, there were no other interest-bearing assets that
would be required to be disclosed if such assets were loans.
SUMMARY OF LOAN LOSS EXPERIENCE
The following schedule presents a summary of activity in the allowance for
loan losses for the periods shown and the percentage of net charge-offs
during each period to average gross loans outstanding during the period.
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<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
1998 1997
------ ------
(Dollars in thousands)
<S> <C> <C>
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
Balance at beginning of period $ 1,567 $ 1,487
--------- ----------
Charge-offs:
Commercial 204 199
Agricultural -- 7
Real estate - construction -- --
Real estate - mortgage -- 6
Consumer 321 315
--------- ----------
525 527
--------- ----------
Recoveries:
Commercial 3 13
Agricultural -- --
Real estate - construction -- --
Real estate - mortgage -- --
Consumer 76 55
--------- ----------
79 68
--------- ----------
Net charge-offs 446 459
Additions charged to operations<F1> 730 539
--------- ----------
Balance at end of period $ 1,851 $ 1,567
========= ==========
Ratio of net charge-offs during the period to average
loans outstanding during the period .33% .39%
========= ==========
<FN>
<F1> The amount of additions to the allowance for loan losses
charged to operations during the periods shown was based on
management's judgment after considering factors such as loan
loss experience, evaluation of the loan portfolio, and
prevailing and anticipated economic conditions. The
evaluation of the loan portfolio is based upon various risk
factors such as the financial condition of the borrower, the
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value of collateral and other considerations which, in
the opinion of management, deserve current recognition in
estimating possible loan losses.
</FN>
</TABLE>
The following schedule presents an allocation of the allowance for loan
losses to the various loan categories as of the dates indicated.
<TABLE>
<CAPTION>
ALLOCATION OF THE
ALLOWANCE FOR LOAN LOSSES
AS OF DECEMBER 31,
---------------------------------------------
1998 1997
---------------------- -------------------
PERCENT PERCENT
OF LOANS OF LOANS
IN EACH IN EACH
ALLOW- CATEGORY ALLOW- CATEGORY
ANCE TO TOTAL ANCE TO TOTAL
AMOUNT LOANS AMOUNT LOANS
------ ----- ------ ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commercial $ 475 36.98% $ 425 34.08%
Agricultural 97 6.56 75 7.32
Real estate - construction 8 2.22 6 1.96
Real estate - mortgage 131 32.40 121 34.21
Consumer 834 21.84 685 22.43
Unallocated 306 N/A 255 N/A
-------- ------ ------ ------
Totals $ 1,851 100.00% $1,567 100.00%
======== ====== ====== ======
</TABLE>
Charge-offs and recoveries did not change significantly in 1998 when
compared to 1997. This is in contrast to the comparison of 1997 to
1996 when both charge-offs in the commercial and consumer loans
categories increased significantly in 1997 compared to 1996. Most of
the commercial loan charge-offs in 1998 and 1997 were due to a few
large loans. The higher level of consumer loan charge-offs in 1998 and
1997 compared to 1996 resulted from a higher level of bankruptcies
during the two years and from charge-offs of indirect automobile loans.
The level of consumer loan charge-offs has also been affected by growth
in the loan portfolio.
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<PAGE>
The increase in the allowance for loan losses allocation to the
consumer loans category from the end of 1997 to the end of 1998 was
believed prudent by management based on the level of consumer charge-
offs experienced in 1998 and 1997. Increases in the allocation to
other loan categories was due primarily to growth in total balances.
The allocation of the allowance to commercial and consumer loans
increased from the end of 1996 to the end of 1997. This change was
based on the higher level of charge-offs experienced in these two loan
categories in 1997 than in the prior year. There were no significant
allocation changes from the end of 1995 to the end of 1996.
DEPOSITS
The following schedule presents daily average balances and the average
interest rate paid by the deposit category for 1998 and 1997. It also
presents the maturities of time certificates of deposit issued in
denominations of $100,000 or more as of December 31, 1998.
<TABLE>
<CAPTION>
DAILY AVERAGE
AVERAGE BALANCES RATE PAID
------------------------- ----------------------
1998 1997 1998 1997
--------- ----------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Demand deposits $ 13,675 $ 11,479 --% --%
Interest-bearing
transaction accounts 24,255 22,242 3.34 3.23
Savings deposits 8,316 8,836 1.65 1.83
Time deposits 67,724 58,258 5.80 5.83
--------- ---------
Total deposits $ 113,970 $ 100,815
========= =========
Maturities of time certificates of
deposit issued in denominations
of $100,000 or more
- ------------------------------------
Maturities of 3 months or less $ 5,356
Maturities over 3 months
through 6 months 6,583
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<PAGE>
Maturities over 6 months
through 12 months 3,909
Maturities over 12 months 2,773
--------
Total $ 18,621
========
</TABLE>
RETURN ON EQUITY AND ASSETS
The following schedule presents the ratios indicated for 1998, 1997 and
1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
------- ------ -------
<S> <C> <C> <C>
Return on assets (net income divided by average
total assets) 1.18% 1.17% 1.38%
Return on equity (net income divided by average
equity) 12.01 11.58 12.00
Dividend payout ratio (dividends declared per
share divided by net income per share) 44.02 45.08 39.12
Equity to assets ratio (average equity divided
by average total assets) 9.81 10.09 11.47
</TABLE>
SHORT-TERM BORROWINGS
There were no categories of short-term borrowings whose average balance
outstanding exceeded 30% of shareholders' equity in 1998 or 1997.
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ITEM 2. DESCRIPTION OF PROPERTY
The offices of the Bank, Insurance Agency, and Travel Agency as of
February 28, 1999, were as follows:
Registrant's and Bank's main office
109 East Division, Sparta, Michigan
Office is owned by the Bank and comprises 24,000 square feet.
Bank's branch office and Insurance Agency's main office
416 and 440 West Division, Sparta, Michigan
Office is owned by the Bank. Office comprises 7,000 square feet, of
which 3,000 feet are occupied by the Bank and 4,000 feet are
occupied by the Insurance Agency.
Bank's branch office and Insurance Agency's branch office
4170 Seventeen Mile Road, Cedar Springs, Michigan
Office is owned by the Bank. Office comprises 3,000 square feet, of
which 2,000 feet are occupied by the Bank and 1,000 feet are
occupied by the Insurance Agency.
Bank's branch office and Insurance Agency's branch office
4949 Plainfield Avenue NE, Grand Rapids, Michigan
Office is leased by the Bank and the Insurance Agency.
Approximately 3,000 square feet are occupied by the Bank and 3,000
feet are occupied by the Insurance Agency.
Bank's branch office
565 South State Street, Sparta, Michigan
Office is leased by the Bank and comprises approximately 300 square
feet.
Bank's branch office and Travel Agency's main office
3527 Alpine Avenue NW, Grand Rapids, Michigan
Office is leased by the Travel Agency. Approximately 800 square
feet are occupied by the Bank and 1,200 feet are occupied by the
Travel Agency.
The Registrant operates its business at the main office of the Bank.
No properties were owned by the Registrant as of February 28, 1999.
The Registrant, Bank, Insurance Agency, and Travel Agency believe that
their offices are suitable and adequate for their future needs and are
in good condition and repair. The Registrant's management believes the
offices are adequately covered by insurance.
As part of its business, the Bank generates all types of mortgages.
The Bank generally did not purchase mortgages as part of its business
through the end of 1998. The Bank is currently investigating the
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purchase of mortgages from mortgage brokers. The mortgages may be for
the Bank's loan portfolio or may be designated for sale into the
secondary market.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Registrant
or the Bank is a party or to which any of their property is subject,
except for proceedings which arose in the ordinary course of business.
In the opinion of management, pending legal proceedings will not have a
material effect on the consolidated financial condition of the
Registrant.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the quarter ended December 31, 1998.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information under the caption "Common Stock Information" on page
A-1 of the Registrant's Annual Report to Shareholders for the year ended
December 31, 1998, is incorporated herein by reference.
On October 14, 1998, the Registrant issued 336 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 $8,568.00. The Registrant relied on the
exemption contained in Section 4(2) of the Securities Act of 1933 in
connection with this sale.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The information under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations," including all
subheadings, on pages A-23 through A-32, inclusive, of the
Registrant's Annual Report to Shareholders for the year ended December
31, 1998, is incorporated herein by reference.
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ITEM 7. FINANCIAL STATEMENTS
The Consolidated Financial Statements, Notes to Consolidated Financial
Statements, and Independent Auditors' Report on pages A-3 through A-22,
inclusive, of the Registrant's Annual Report to Shareholders for
the year ended December 31, 1998, are incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The information under the captions "Directors and Executive Officers"
and "Section 16(a) Beneficial Ownership Reporting Compliance" in the
Registrant's Definitive Proxy Statement for the Annual Meeting of
Shareholders to be held April 29, 1999, is incorporated herein by
reference.
ITEM 10. EXECUTIVE COMPENSATION
The information under the caption "Compensation of Executive Officers
and Directors" in the Registrant's Definitive Proxy Statement for the
Annual Meeting of Shareholders to be held April 29, 1999, is
incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information under the caption "Voting Securities" in the
Registrant's Definitive Proxy Statement for the Annual Meeting of
Shareholders to be held April 29, 1999, is incorporated herein by
reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption "Certain Relationships and Related
Transactions" in the Registrant's Definitive Proxy Statement for the
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Annual Meeting of Shareholders to be held April 29, 1999, is
incorporated herein by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
1. EXHIBITS
The following exhibits are filed as part of this report:
EXHIBIT DOCUMENTS
3.1 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.
3.2 Bylaws of the Registrant as currently in effect and any amendments
thereto. Previously filed as an exhibit to the Registrant's
Form 10-QSB Quarterly Report for the quarter ended September 30,
1998. Here incorporated by reference.
4. Advances, Pledge and Security Agreement between ChoiceOne Bank and
the Federal Home Loan Bank of Indianapolis. Previously filed as
an exhibit to the Registrant's Form 10-KSB Annual Report for
its fiscal year ended December 31, 1997. Here incorporated by
reference.
10.1 Employment Agreement With Jae M. Maxfield.<F1> Previously filed as
an exhibit to the Registrant's Form 10-KSB Annual Report for its
fiscal year ended December 31, 1995. Here incorporated by
reference.
10.2 Employment Agreement With Lawrence D. Bradford.<F1> Previously
filed as an exhibit to the Registrant's Form 10-KSB Annual Report
for its fiscal year ended December 31, 1995. Here incorporated
by reference.
10.3 Executive Stock Incentive Plan of 1997.<F1> Previously filed as
Appendix B to the Registrant's Definitive Proxy Statement with
respect to its Annual Meeting of Shareholders held on April 29,
1997. Here incorporated by reference.
13 Annual Report to Shareholders for the year ended December 31,
1998.
21 Subsidiaries of the Small Business Issuer.
-17-
<PAGE>
27 Financial Data Schedule for Year Ended December 31, 1998.
- --------------------
<F1> These agreements are management contracts or compensation
plans or arrangements required to be filed as exhibits to
this Form 10-KSB.
Copies of any exhibits will be furnished to shareholders upon written
request. Requests should be directed to Tom Lampen, Treasurer,
ChoiceOne Financial Services, Inc., 109 East Division, Sparta, Michigan
49345.
2. REPORTS ON FORM 8-K
No report on Form 8-K was filed during the fourth quarter of the
period covered by this report.
-18-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
ChoiceOne Financial Services, Inc.
/S/ JAE M. MAXFIELD March 29, 1999
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
/S/ JAE M. MAXFIELD President and Chief Executive March 29, 1999
Officer and Director (Principal
Executive Officer)
/S/ FRANK G. BERRIS Director March 10, 1999
/S/ LAWRENCE D. BRADFORD Director March 10, 1999
/S/ WILLIAM F. CUTLER, JR. Director March 10, 1999
/S/ LEWIS G. EMMONS Director March 15, 1999
/S/ STUART GOODFELLOW Director March 10, 1999
/S/ JON E. PIKE Chairman of the Board March 16, 1999
and Director
/S/ LINDA R. PITSCH Secretary and Director March 10, 1999
/S/ ANDREW W. ZAMIARA Director March 10, 1999
/S/ THOMAS L. LAMPEN Treasurer (Principal Financial March 10, 1999
and Accounting Officer)
-19-
<PAGE>
EXHIBIT INDEX
EXHIBIT DOCUMENTS
3.1 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.
3.2 Bylaws of the Registrant as currently in effect and any amendments
thereto. Previously filed as an exhibit to the Registrant's
Form 10-QSB Quarterly Report for the quarter ended September
30, 1998. Here incorporated by reference.
4. Advances, Pledge and Security Agreement between ChoiceOne Bank and
the Federal Home Loan Bank of Indianapolis. Previously filed
as an exhibit to the Registrant's Form 10-KSB Annual Report for
its fiscal year ended December 31, 1997. Here incorporated by
reference.
10.1 Employment Agreement With Jae M. Maxfield.<F1> Previously filed as
an exhibit to the Registrant's Form 10-KSB Annual Report for its
fiscal year ended December 31, 1995. Here incorporated by
reference.
10.2 Employment Agreement With Lawrence D. Bradford.<F1> Previously
filed as an exhibit to the Registrant's Form 10-KSB Annual
Report for its fiscal year ended December 31, 1995. Here
incorporated by reference.
10.3 Executive Stock Incentive Plan of 1997.<F1> Previously filed as
Appendix B to the Registrant's Definitive Proxy Statement with
respect to its Annual Meeting of Shareholders held on April 29,
1997. Here incorporated by reference.
13 Annual Report to Shareholders for the year ended December 31,
1998.
21 Subsidiaries of the Small Business Issuer.
27 Financial Data Schedule for Year Ended December 31, 1998.
<F1> These agreements are management contracts or compensation plans or
arrangements required to be filed as exhibits to this Form 10-KSB.
<PAGE>
[CHOICEONE LOGO]
CHOICEONE FINANCIAL SERVICES, INC.
1998
ANNUAL REPORT TO SHAREHOLDERS
<PAGE>
CHOICEONE FINANCIAL SERVICES, INC.
1998 ANNUAL REPORT TO SHAREHOLDERS
CONTENTS PAGE
To Our Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . A-1
ChoiceOne Financial Services, Inc. . . . . . . . . . . . . . . . . . A-1
Common Stock Information . . . . . . . . . . . . . . . . . . . . . . A-1
Financial Highlights. . . . . . . . . . . . . . . . . . . . . . . . . A-2
Consolidated Financial Statements . . . . . . . . . . . . . . . . . . A-3
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . A-8
Independent Auditors' Report. . . . . . . . . . . . . . . . . . . . . A-22
Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . A-23
Corporate and Shareholder Information . . . . . . . . . . . . . . . . A-33
Directors and Officers. . . . . . . . . . . . . . . . . . . . . . . . A-34
-i-
<PAGE>
TO OUR SHAREHOLDERS
This 1998 Annual Report to Shareholders contains our audited financial
statements, detailed financial review and all of the information that
regulations of the Securities and Exchange Commission (the "SEC") require
to be presented in annual reports to shareholders. For legal purposes,
this is the ChoiceOne Financial Services, Inc. 1998 Annual Report to
Shareholders. Although attached to our proxy statement, this report is not
part of our proxy statement, is not considered to be soliciting material
and is not considered to be filed with the SEC except to the extent that it
is expressly incorporated by reference in a document filed with the SEC.
Shareholders who would like to receive even more detailed information than
that contained in this 1998 Annual Report to Shareholders are invited to
request our Annual Report on Form 10-KSB.
OUR ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 1998,
INCLUDING THE FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES, WILL
BE PROVIDED TO ANY SHAREHOLDER, WITHOUT CHARGE, UPON WRITTEN REQUEST TO MR.
THOMAS LAMPEN, TREASURER, CHOICEONE FINANCIAL SERVICES, INC., 109 EAST
DIVISION STREET, SPARTA, MICHIGAN 49345.
CHOICEONE FINANCIAL SERVICES, INC.
ChoiceOne Financial Services, Inc. is a single-bank holding company. Its
principal banking subsidiary, ChoiceOne Bank (Sparta, Michigan) primarily
serves communities in portions of Kent, Muskegon, Newaygo, and Ottawa
counties in Michigan where the Bank's offices are located and the areas
immediately surrounding those communities. Currently the Bank serves those
markets through six full-service offices. The Bank provides a variety of
banking and other financial services to all types of customers.
COMMON STOCK INFORMATION
ChoiceOne's shares are traded in the over-the-counter market by several
brokers. There is no well established public trading market for the shares,
trading activity is infrequent, and price information is not regularly
published.
The range of high and low bid information for shares of common stock for
each quarterly period during the past two years is as follows:
<PAGE>
<TABLE>
<CAPTION>
1998 1997
---------------------------------------
LOW HIGH LOW HIGH
---------------------------------------
<S> <C> <C> <C> <C> <C>
First Quarter $ 19 $ 21 $ 18 $ 19
Second Quarter 19 25 18 21
Third Quarter 22 27 19 21
Fourth Quarter 24 27 19 21
</TABLE>
The above market prices have been adjusted where necessary to reflect the
stock dividends and stock split declared in 1998 and 1997. The prices
listed above are over-the-counter market quotations reported to ChoiceOne
by its market makers listed in this annual report. The over-the-counter
market quotations reflect inter-dealer prices without retail markup,
markdown or commission and may not necessarily represent actual
transactions.
As of February 28, 1999, there were 1,053,601 shares of ChoiceOne Financial
Services, Inc., common stock issued and outstanding. These shares were
held of record by 602 shareholders.
The following table summarizes cash dividends paid per share of common
stock during 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------------------------------
<S> <C> <C> <C>
First Quarter $ .19 $ .16
Second Quarter .20 .19
Third Quarter .20 .19
Fourth Quarter .20 .19
-----------------------------
Totals $ .79 $ .73
=============================
</TABLE>
The above dividend per share amounts have been adjusted where necessary to
reflect the stock dividends and stock split declared in 1998 and 1997.
ChoiceOne's principal source of funds to pay cash dividends are the
earnings and dividends paid by ChoiceOne Bank. ChoiceOne Bank is
restricted in its ability to pay cash dividends under current regulations
(see Note 16 to the Consolidated Financial Statements). Based on
information presently available, management expects ChoiceOne to declare
and pay regular quarterly cash dividends in 1999.
A-1
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
Choiceone Financial Services, Inc.
<CAPTION>
1998 1997 1996 1995 1994
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR (DOLLARS IN THOUSANDS)
Net interest income . . . . . . . . . . . $ 7,207 $ 6,315 $ 5,754 $ 4,931 $ 4,468
Provision for loan losses . . . . . . . . 730 539 523 164 126
Noninterest income. . . . . . . . . . . . 1,993 1,769 1,555 656 597
Noninterest expense . . . . . . . . . . . 5,675 5,176 4,436 3,448 3,340
Income before income taxes. . . . . . . . 2,795 2,369 2,350 1,975 1,599
Income tax expense. . . . . . . . . . . . 873 632 655 511 356
Net income. . . . . . . . . . . . . . . . 1,922 1,737 1,695 1,464 1,243
Cash dividends declared . . . . . . . . . 846 783 663 551 469
PER SHARE<F*>
Net income. . . . . . . . . . . . . . . . $ 1.79 $ 1.62 $ 1.57 $ 1.39 $ 1.15
Cash dividends. . . . . . . . . . . . . . .79 .73 .62 .53 .43
Shareholders' equity. . . . . . . . . . . 15.32 14.47 13.53 13.32 11.88
AVERAGE FOR THE YEAR (DOLLARS IN THOUSANDS)
Securities. . . . . . . . . . . . . . . . $ 21,017 $ 22,189 $ 22,547 $ 27,609 $ 31,122
Gross loans . . . . . . . . . . . . . . . 133,279 118,369 94,461 74,223 68,077
Deposits. . . . . . . . . . . . . . . . . 113,970 100,815 95,210 91,446 90,772
Shareholders' equity. . . . . . . . . . . 16,001 14,998 14,129 13,200 12,922
Assets. . . . . . . . . . . . . . . . . . 163,257 148,652 123,134 107,552 105,445
AT YEAR END (DOLLARS IN THOUSANDS)
Securities. . . . . . . . . . . . . . . . $ 20,282 $ 19,942 $ 23,006 $ 23,187 $ 30,410
Gross loans . . . . . . . . . . . . . . . 140,775 127,776 110,079 79,082 69,410
Deposits. . . . . . . . . . . . . . . . . 122,332 107,492 95,606 92,902 91,236
Shareholders' equity. . . . . . . . . . . 16,141 15,537 14,537 13,784 12,876
Assets. . . . . . . . . . . . . . . . . . 170,602 156,329 141,731 109,916 106,137
RATIOS
Return on average assets. . . . . . . . . 1.18% 1.17% 1.38% 1.36% 1.18%
Return on average shareholders' equity 12.01 11.58 12.00 11.09 9.62
Cash dividend payout. . . . . . . . . . . 44.02 45.08 39.12 37.64 37.73
Shareholders' equity to assets (at year end) 9.46 9.94 10.26 12.54 12.13
<FN>
<F*>Per share amounts are retroactively adjusted for the effect of stock
dividends and stock splits.
</FN>
</TABLE>
A-2
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
Choiceone Financial Services, Inc.
<CAPTION>
DECEMBER 31
1998 1997
----------------------------
<S> <C> <C>
ASSETS
Cash and due from banks . . . . . . . . . . . . . . $ 5,055,000 $ 3,769,000
Securities available for sale . . . . . . . . . . . 20,282,000 19,942,000
Loans, net. . . . . . . . . . . . . . . . . . . . . 138,924,000 126,209,000
Premises and equipment, net . . . . . . . . . . . . 4,086,000 3,663,000
Other assets. . . . . . . . . . . . . . . . . . . . 2,255,000 2,746,000
----------------------------
Total assets. . . . . . . . . . . . . . . . . . $170,602,000 $156,329,000
============================
LIABILITIES
Deposits - noninterest bearing. . . . . . . . . . . $ 15,661,000 $ 13,464,000
Deposits - interest bearing . . . . . . . . . . . . 106,671,000 94,028,000
Federal funds purchased and repurchase agreements 3,310,000 2,060,000
Other liabilities . . . . . . . . . . . . . . . . . 1,588,000 4,178,000
Federal Home Loan Bank advances . . . . . . . . . . 26,650,000 26,114,000
Long-term debt. . . . . . . . . . . . . . . . . . . 581,000 948,000
----------------------------
Total liabilities . . . . . . . . . . . . . . . 154,461,000 140,792,000
SHAREHOLDERS' EQUITY
Preferred stock; shares authorized: 100,000; shares
outstanding: none. . . . . . . . . . . . . . . . . -- --
Common stock; shares authorized: 2,000,000; shares
outstanding: 1,053,285 in 1998 and 537,015 in 1997 11,824,000 12,375,000
Retained earnings . . . . . . . . . . . . . . . . . 4,070,000 2,994,000
Accumulated other comprehensive income. . . . . . . 247,000 168,000
----------------------------
Total shareholders' equity. . . . . . . . . . . 16,141,000 15,537,000
----------------------------
Total liabilities and shareholders' equity $170,602,000 $156,329,000
============================
</TABLE>
See accompanying notes to consolidated financial statements.
A-3
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
Choiceone Financial Services, Inc.
<CAPTION>
YEARS ENDED DECEMBER 31
1998 1997 1996
--------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Loans, including fees . . . . . . . . . . . . . . . $ 12,851,000 $ 11,230,000 $ 9,050,000
Securities
Taxable . . . . . . . . . . . . . . . . . . . . . 705,000 845,000 916,000
Nontaxable. . . . . . . . . . . . . . . . . . . . 436,000 484,000 450,000
Other . . . . . . . . . . . . . . . . . . . . . . . 18,000 8,000 3,000
--------------------------------------------
Total interest income . . . . . . . . . . . . . 14,010,000 12,567,000 10,419,000
INTEREST EXPENSE
Deposits. . . . . . . . . . . . . . . . . . . . . . 4,876,000 4,279,000 3,919,000
Short-term borrowings . . . . . . . . . . . . . . . 211,000 264,000 154,000
Federal Home Loan Bank advances . . . . . . . . . . 1,650,000 1,619,000 592,000
Long-term debt. . . . . . . . . . . . . . . . . . . 66,000 90,000 --
--------------------------------------------
Total interest expense. . . . . . . . . . . . . 6,803,000 6,252,000 4,665,000
--------------------------------------------
NET INTEREST INCOME. . . . . . . . . . . . . . . . . 7,207,000 6,315,000 5,754,000
PROVISION FOR LOAN LOSSES. . . . . . . . . . . . . . 730,000 539,000 523,000
--------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 6,477,000 5,776,000 5,231,000
NONINTEREST INCOME
Customer service fees . . . . . . . . . . . . . . . 502,000 448,000 428,000
Net gains or losses on sales of securities 35,000 28,000 --
Insurance commission income . . . . . . . . . . . . 862,000 895,000 811,000
Mortgage loan sales and servicing . . . . . . . . . 419,000 152,000 105,000
Other income. . . . . . . . . . . . . . . . . . . . 175,000 246,000 211,000
--------------------------------------------
Total noninterest income. . . . . . . . . . . . 1,993,000 1,769,000 1,555,000
NONINTEREST EXPENSE
Salaries and benefits . . . . . . . . . . . . . . . 2,948,000 2,829,000 2,366,000
Occupancy expense . . . . . . . . . . . . . . . . . 888,000 761,000 657,000
Other expense . . . . . . . . . . . . . . . . . . . 1,839,000 1,586,000 1,413,000
--------------------------------------------
Total noninterest expense . . . . . . . . . . . 5,675,000 5,176,000 4,436,000
--------------------------------------------
<PAGE>
INCOME BEFORE INCOME TAX . . . . . . . . . . . 2,795,000 2,369,000 2,350,000
INCOME TAX EXPENSE . . . . . . . . . . . . . . 873,000 632,000 655,000
--------------------------------------------
NET INCOME . . . . . . . . . . . . . . . . . . $ 1,922,000 $ 1,737,000 $ 1,695,000
============================================
BASIC EARNINGS PER COMMON SHARE AND EARNINGS PER
COMMON SHARE ASSUMING DILUTION. . . . . . . . $ 1.79 $ 1.62 $ 1.57
============================================
</TABLE>
See accompanying notes to consolidated financial statements.
A-4
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Choiceone Financial Services, Inc.
<CAPTION>
YEARS ENDED DECEMBER 31
1998 1997 1996
-------------------------------------------
<S> <C> <C> <C>
Net income . . . . . . . . . . . . . . . . . . . . $ 1,922,000 $ 1,737,000 $ 1,695,000
Other comprehensive income
Change in unrealized gains and losses on securities
Unrealized gains/(losses) arising during the year 155,000 111,000 (209,000)
Reclassification adjustments for gains included in
net income . . . . . . . . . . . . . . . . . . (35,000) (28,000) --
-------------------------------------------
Net change in unrealized gains and losses on
securities. . . . . . . . . . . . . . . . . 120,000 83,000 (209,000)
Tax effect. . . . . . . . . . . . . . . . . . . (40,000) (28,000) 71,000
-------------------------------------------
Total other comprehensive income. . . . . . . 79,000 55,000 (138,000)
-------------------------------------------
Comprehensive income . . . . . . . . . . . . . . . $ 2,001,000 $ 1,792,000 $ 1,557,000
===========================================
</TABLE>
See accompanying notes to consolidated financial statements.
A-5
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Choiceone Financial Services, Inc.
Years ended December 31
<CAPTION>
ACCUMULATED
COMMON RETAINED OTHER COMPREHENSIVE
STOCK EARNINGS INCOME TOTAL
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, start of 1996 . . . . . . . . . . . . $ 10,260,000 $3,273,000 $ 251,000 $ 13,784,000
Issuance of 20,610 shares of stock to effect a
business combination of insurance
subsidiary. . . . . . . . . . . . . . . . . (26,000) -- -- (26,000)
Net income. . . . . . . . . . . . . . . . . . -- 1,695,000 -- 1,695,000
2,703 shares of stock repurchased for
employee benefit plans, stock dividends,
and other . . . . . . . . . . . . . . . . . (115,000) -- -- (115,000)
Change in unrealized gains and losses -- -- (138,000) (138,000)
Cash dividends ($.62 per share) -- (663,000) -- (663,000)
-------------------------------------------------------------
Balance, end of 1996 . . . . . . . . . . . . . 10,119,000 4,305,000 113,000 14,537,000
Net income. . . . . . . . . . . . . . . . . . -- 1,737,000 -- 1,737,000
Change in unrealized gains and losses -- -- 55,000 55,000
6% stock dividend paid in May 1997 1,178,000 (1,187,000) -- (9,000)
5% stock dividend to be paid in March 1998 1,078,000 (1,078,000) -- --
Cash dividends ($.73 per share) -- (783,000) -- (783,000)
-------------------------------------------------------------
Balance, end of 1997 . . . . . . . . . . . . . 12,375,000 2,994,000 168,000 15,537,000
Net income. . . . . . . . . . . . . . . . . . -- 1,922,000 -- 1,922,000
Change in unrealized gains and losses -- -- 79,000 79,000
24,517 shares of stock repurchased for
employee benefit plans, stock dividends,
and other . . . . . . . . . . . . . . . . . (629,000) -- -- (629,000)
<PAGE>
2,218 shares of stock issued to employee
benefit plans and other . . . . . . . . . . 89,000 -- -- 89,000
Cash dividends ($.79 per share) and cash
paid for fractional shares (11,000) (846,000) -- (857,000)
-------------------------------------------------------------
BALANCE, END OF 1998 . . . . . . . . . . . . . $ 11,824,000 $4,070,000 $ 247,000 $ 16,141,000
=============================================================
</TABLE>
See accompanying notes to consolidated financial statements.
A-6
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Choiceone Financial Services, Inc.
Years ended December 31
<CAPTION>
1998 1997 1996
--------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income. . . . . . . . . . . . . . . . . $ 1,922,000 $ 1,737,000 $ 1,695,000
Reconciling items:
Net securities gains. . . . . . . . . . . (35,000) (28,000) --
Net amortization on securities. . . . . . 166,000 74,000 65,000
Net gain on sales of loans. . . . . . . . (268,000) (42,000) (70,000)
Loans originated for sale . . . . . . . . (22,993,000) (4,742,000) (1,473,000)
Proceeds from loan sales. . . . . . . . . 23,497,000 4,762,000 2,032,000
Provision for loan losses . . . . . . . . 730,000 539,000 523,000
Depreciation. . . . . . . . . . . . . . . 381,000 320,000 288,000
Other non-cash charges and credits. . . . (12,000) (13,000) (139,000)
Deferred income tax benefit . . . . . . . (8,000) (69,000) (61,000)
Changes in assets and liabilities:
Interest receivable . . . . . . . . . . (38,000) (85,000) (86,000)
Other assets. . . . . . . . . . . . . . 449,000 (419,000) (558,000)
Interest payable. . . . . . . . . . . . 13,000 88,000 96,000
Other liabilities . . . . . . . . . . . (2,603,000) 2,503,000 331,000
--------------------------------------------
Net cash from operating activities 1,201,000 4,625,000 2,643,000
--------------------------------------------
Cash flows from investing activities:
Securities available for sale:
Purchases . . . . . . . . . . . . . . . . (6,686,000) (4,219,000) (5,472,000)
Sales proceeds. . . . . . . . . . . . . . 1,456,000 4,618,000 1,874,000
Principal payments. . . . . . . . . . . . 4,890,000 2,764,000 3,504,000
Net change in loans . . . . . . . . . . . . (13,633,000) (18,140,000) (31,472,000)
Purchase of travel agency . . . . . . . . . -- (50,000) --
Premises and equipment expenditures, net (804,000) (996,000) (762,000)
--------------------------------------------
Net cash used in investing activities (14,777,000) (16,023,000) (32,328,000)
--------------------------------------------
Cash flows from financing activities:
Net change in deposits. . . . . . . . . . . 14,840,000 11,886,000 2,704,000
Net change in short-term borrowings . . . . 1,250,000 (2,671,000) 3,731,000
Proceeds from long-term debt. . . . . . . . 10,000,000 3,731,000 24,200,000
Payments on long-term debt. . . . . . . . . (9,831,000) (1,939,000) --
Effect of business combination of insurance
subsidiary. . . . . . . . . . . . . . . . -- -- (26,000)
<PAGE>
Issuance of common stock. . . . . . . . . . 89,000 -- --
Repurchase of common stock. . . . . . . . . (629,000) -- (115,000)
Cash dividends and fractional shares from stock
dividends . . . . . . . . . . . . . . . (857,000) (792,000) (663,000)
--------------------------------------------
Net cash from financing activities 14,862,000 10,215,000 29,831,000
--------------------------------------------
Net change in cash and cash equivalents. . . 1,286,000 (1,183,000) 146,000
Beginning cash and cash equivalents. . . . . 3,769,000 4,952,000 4,806,000
--------------------------------------------
Ending cash and cash equivalents . . . . . . $ 5,055,000 $ 3,769,000 $ 4,952,000
============================================
Cash paid for interest . . . . . . . . . . . $ 6,790,000 $ 6,165,000 $ 4,569,000
Cash paid for income taxes . . . . . . . . . 915,000 605,000 774,000
Loans transferred to other real estate . . . 47,000 279,000 --
</TABLE>
During 1998, $2,278,000 of loans were transferred from portfolio loans to
loans held for sale.
See accompanying notes to consolidated financial statements.
A-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHOICEONE FINANCIAL SERVICES, INC.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include ChoiceOne Financial Services,
Inc., its wholly-owned subsidiary, ChoiceOne Bank, and ChoiceOne Bank's
wholly-owned subsidiaries, ChoiceOne Insurance Agencies, Inc., and
ChoiceOne Travel, Inc. (together referred to as "ChoiceOne"). Intercompany
transactions and balances have been eliminated in consolidation.
NATURE OF OPERATIONS
ChoiceOne Bank (the "Bank") is a full-service community bank that offers
commercial, consumer, and real estate loans as well as both traditional
deposit and alternative investment products to both commercial and consumer
clients in portions of Kent, Muskegon, Newaygo, and Ottawa counties in
Michigan. Substantially all loans are secured by specific items of
collateral including business assets, consumer assets, and real estate.
Commercial loans are expected to be repaid from the cash flows from
operations of businesses. Real estate loans are secured by both
residential and commercial real estate.
ChoiceOne Insurance Agencies, Inc. (the "Insurance Agency") became a
wholly-owned subsidiary of the Bank on January 1, 1996. The Insurance
Agency sells a full line of insurance products. ChoiceOne Travel, Inc.
(the "Travel Agency") was acquired by the Bank effective August 1, 1997.
The Travel Agency primarily sells travel-related products such as airline
tickets and trips.
Together, the Bank, the Insurance Agency, and the Travel Agency account for
substantially all of ChoiceOne's assets, revenues and operating income.
USE OF ESTIMATES
To prepare financial statements in conformity with generally accepted
accounting principles, ChoiceOne's management makes estimates and
assumptions based on available information. These estimates and
assumptions affect the amounts reported in the financial statements and the
disclosures provided. Actual results may differ from these estimates.
Estimates associated with the allowance for loan losses and fair values of
certain financial instruments are particularly susceptible to change.
CASH FLOW REPORTING
Cash and cash equivalents is defined to include cash on hand, demand
deposits with other banks, and federal funds sold. Cash flows are reported
on a net basis for customer loan and deposit transactions, deposits with
other financial institutions, and short-term borrowings.
<PAGE>
SECURITIES
Securities are classified as available for sale when they might be sold
before maturity. Securities classified as available for sale are carried
at fair value, with unrealized holding gains and losses reported separately
in shareholders' equity, net of tax effect. Realized gains or losses are
based on specific identification of amortized cost. Securities are written
down to fair value when a decline in fair value is not considered to be
temporary. Interest income includes amortization of purchase premium or
discount. Other securities, such as Federal Reserve Bank stock or Federal
Home Loan Bank stock, are carried at cost.
LOANS
Loans are reported at the principal balance outstanding, net of deferred
loan fees and costs and an allowance for loan losses. Loans held for sale
are reported at the lower of cost or market, on an aggregate basis. When
loans are sold, they are removed from the loans balance if the tests for
loan sales are met. If the accounting tests for loan sales are not met,
sales of loans are accounted for as secured loan borrowings.
LOAN INCOME
Interest income is reported on the interest method and includes
amortization of net deferred loan fees and costs over the estimated loan
term. Interest on loans is accrued based upon the principal balance
outstanding. The accrual of interest is discontinued at the point in time
at which the collectibility of principal or interest is considered
doubtful. Each loan is evaluated on its own merits; therefore, loans are
not automatically classified as non-accrual based upon standardized
criteria.
A-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHOICEONE FINANCIAL SERVICES, INC.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is a valuation allowance for probable credit
losses. The allowance is increased by the provision for loan losses and
decreased by charge-offs less recoveries. Management estimates the
allowance balance required based on past loan loss experience, known and
inherent risks in the portfolio, information about specific borrower
situations and estimated collateral values, economic conditions, and other
factors. Allocations of the allowance may be made for specific loans, but
the entire allowance is available for any loan that, in management's
judgment, should be charged-off.
Loans are evaluated for impairment when payments are delayed or when it is
probable that all principal and interest amounts will not be collected
according to the original terms of the loan. Impairment is evaluated in
total for smaller-balance loans of similar nature. Construction real
estate mortgages, residential real estate mortgages, and consumer loans
have been classified in this category. Impairment is evaluated on an
individual loan basis for commercial and agricultural loans. If a loan is
considered impaired, a portion of the allowance for loan losses is
allocated to the loan so that it is reported, net, at the present value of
estimated future cash flows using the loan's existing rate or at the fair
value of collateral if repayment is expected solely from the collateral.
Loans are evaluated for impairment when payments are delayed or when it is
probable that all principal and interest amounts will not be collected
according to the original terms of the loan.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed over the assets' useful lives on the straight-line
method. Long-term assets are reviewed for impairment when events indicate
their carrying amount may not be recoverable from future undiscounted cash
flows. If impaired, the assets are recorded at discounted amounts.
OTHER REAL ESTATE OWNED
Real estate properties acquired in collection of a loan are recorded at
estimated fair value at acquisition. Any reduction to fair value from the
carrying value of the related loan is accounted for as a loan loss. After
acquisition, a valuation allowance reduces the reported amount to the lower
of the initial amount or fair value less costs to sell. Expenses, gains
and losses on disposition, and changes in the valuation allowance are
reported in other expenses.
LOAN SERVICING RIGHTS
Servicing rights represent the allocated value of servicing rights on loans
sold. Servicing rights are expensed in proportion to, and over the period
<PAGE>
of, estimated net servicing revenues. Impairment is evaluated based on the
fair value of the rights, using groupings of the underlying loans as to
interest rates and then, secondarily, as to geographic and prepayment
characteristics. Any impairment of a grouping is reported as a valuation
allowance.
REPURCHASE AGREEMENTS
Substantially all repurchase agreement liabilities represent amounts
advanced by deposit clients that are not covered by federal deposit
insurance and are secured by securities owned by ChoiceOne.
BENEFIT PLANS
The incentive bonus plan pays an annual bonus based on average return on
equity goals set by the Board of Directors. The Bank's 401(k) savings and
retirement plan allows participant contributions of up to 15% of
compensation. Contributions to the 401(k) savings and retirement plan by
the Bank are discretionary. The Bank provides certain health insurance
benefits to retired employees. These postretirement benefits are accrued
during the years in which the employee provides services. The Bank
previously offered a defined benefit pension plan to qualifying employees.
The defined benefit pension plan was terminated in 1997 and vested benefits
were distributed to participants.
STOCK BASED COMPENSATION
Expense for employee compensation under ChoiceOne'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 of Statement of Financial Accounting Standards No. 123 to
measure expense for options using an option pricing model to estimate fair
value.
A-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHOICEONE FINANCIAL SERVICES, INC.
INCOME TAXES
Income tax expense is the sum of the current year income tax due and the
change in deferred tax assets and liabilities. Deferred tax assets and
liabilities are the expected future tax consequences of temporary
differences between the carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if
needed, reduces deferred tax assets to the amount expected to be realized.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
Off-balance sheet financial instruments represent credit instruments, such
as loan commitments, lines of credit, and standby letters of credit. The
face amount of credit instruments represents the exposure to loss assuming
customer collateral or ability to repay is worthless.
LEASE COMMITMENTS
Expense is recognized as payments are made on operating leases. Leasing
arrangements are typically for 5 years and contain renewal options.
LOSS CONTINGENCIES
Loss contingencies, including claims and legal actions arising in the
ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be
reasonably estimated.
SHAREHOLDERS' EQUITY
As of December 31, 1998, ChoiceOne's common stock had no par value and
2,000,000 shares were authorized. ChoiceOne also has 100,000 shares of
preferred stock authorized. Transfers at fair value from retained earnings
are made for stock dividends.
DIVIDEND RESTRICTIONS
Banking regulations require the maintenance of certain capital levels and
may limit the amount of dividends which may be paid by the Bank to
ChoiceOne or by ChoiceOne to its shareholders.
EARNINGS PER SHARE
Earnings per common share ("EPS") is based on weighted-average common
shares outstanding. Diluted EPS further assumes issue of any dilutive
potential common shares. EPS has been restated for stock dividends and
splits.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair values of financial instruments are estimated using relevant market
information and other assumptions, which are more fully documented in Note
15 to the financial statements. Fair value estimates involve uncertainties
<PAGE>
and matters of significant judgment regarding interest rates, credit risk,
prepayments, and other factors, especially in the absence of broad markets
for particular items. Changes in assumptions or in market conditions could
significantly affect the estimates.
COMPREHENSIVE INCOME
Comprehensive income consists of net income and unrealized gains and losses
on securities available for sale which are also recognized as separate
components of equity. The accounting standard that requires reporting
comprehensive income became applicable in 1998, with prior years'
information restated to be comparable.
INDUSTRY SEGMENTS
Internal financial information is primarily reported and aggregated in
three lines of business: banking, insurance and travel. The majority of
ChoiceOne's income and assets are obtained from banking.
RECLASSIFICATIONS
Certain amounts presented in prior year consolidated financial statements
have been reclassified to conform with the 1998 presentation.
A-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHOICEONE FINANCIAL SERVICES, INC.
NOTE 2 - ACQUISITION OF SUBSIDIARIES
On January 1, 1996, ChoiceOne Bank completed a business combination with
ChoiceOne Insurance Agencies, Inc. in a tax-free exchange of stock. Under
the terms of the agreement, 20,610 shares of ChoiceOne Financial Services,
Inc. common stock were exchanged for all of the outstanding shares of
ChoiceOne Insurance Agencies, Inc. The transaction was accounted for as a
pooling of interests. The operations of the Insurance Agency were not
material to ChoiceOne's consolidated financial position or results of
operations.
Effective August 1, 1997, ChoiceOne Bank purchased Alpine Travel, Inc.
Cash was paid for all of the outstanding shares of Alpine Travel, Inc. The
transaction was accounted for as a purchase.
NOTE 3 - SECURITIES
Information at year-end or for the year:
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------------------------------------------------
SECURITIES AVAILABLE FOR SALE DECEMBER 31, 1998
<S> <C> <C> <C> <C>
U.S. Treasuries and U.S. Government agencies $ 4,264,000 $ 18,000 $ (1,000) $ 4,281,000
States and municipalities. . . . . . . . . . 8,324,000 341,000 -- 8,665,000
Mortgage-backed securities . . . . . . . . . 4,350,000 31,000 (16,000) 4,365,000
Other securities . . . . . . . . . . . . . . 2,970,000 1,000 -- 2,971,000
------------------------------------------------------
Total . . . . . . . . . . . . . . . . . . . $ 19,908,000 $391,000 $ (17,000) $20,282,000
======================================================
DECEMBER 31, 1997
U.S. Treasuries and U.S. Government agencies $ 3,259,000 $ 7,000 $ (2,000) $ 3,264,000
States and municipalities. . . . . . . . . . 7,458,000 232,000 (4,000) 7,686,000
Mortgage-backed securities . . . . . . . . . 6,005,000 32,000 (12,000 6,025,000
Other securities . . . . . . . . . . . . . . 2,966,000 1,000 -- 2,967,000
------------------------------------------------------
Total . . . . . . . . . . . . . . . . . . . $ 19,688,000 $272,000 $(18,000) $19,942,000
======================================================
</TABLE>
<PAGE>
Contractual maturities of securities available for sale at December 31,
1998, follows:
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
-------------------------------
<S> <C> <C>
Due within one year. . . . . . . . . . . . . . . . . . $ 4,926,000 $ 4,952,000
Due after one year through five years. . . . . . . . . 3,235,000 3,334,000
Due after five years through ten years . . . . . . . . 2,036,000 2,111,000
Due after ten years. . . . . . . . . . . . . . . . . . 2,645,000 2,804,000
-------------------------------
Total . . . . . . . . . . . . . . . . . . . . . . . . 12,842,000 13,201,000
Mortgage-backed securities not due at a specific date 4,350,000 4,365,000
Other. . . . . . . . . . . . . . . . . . . . . . . . . 2,716,000 2,716,000
-------------------------------
Total . . . . . . . . . . . . . . . . . . . . . . . . $19,908,000 $20,282,000
===============================
</TABLE>
A-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHOICEONE FINANCIAL SERVICES, INC.
Information regarding sales of available for sale securities follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------------------
<S> <C> <C> <C>
Proceeds from sales of securities. . . . . . . . $ 1,456,000 $ 4,618,000 $ 1,874,000
Gross realized gains . . . . . . . . . . . . . . 36,000 38,000 7,000
Gross realized losses. . . . . . . . . . . . . . 1,000 10,000 7,000
</TABLE>
Various securities were pledged as collateral for the purposes below. For
repurchase agreements and public deposits, the balance of the repurchase
agreements or public deposits were less than the collateral balance as of
the end of the years presented. The fair value of securities pledged as
collateral at December 31 was as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------------------
<S> <C> <C>
Securities sold under agreements to repurchase . . . . . . $ 3,034,000 $ 2,259,000
Public deposits. . . . . . . . . . . . . . . . . . . . . . 503,000 505,000
--------------------------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,537,000 $ 2,764,000
================================
</TABLE>
NOTE 4 - LOANS
Loan information at year-end or for the year follows:
<TABLE>
<CAPTION>
1998 1997
----------------------------------
<S> <C> <C>
LOAN COMPONENTS
Commercial . . . . . . . . . . . . . . . . . . . . . . . $ 52,062,000 $ 43,546,000
Agricultural . . . . . . . . . . . . . . . . . . . . . . 9,236,000 9,350,000
Real estate mortgage construction. . . . . . . . . . . 3,122,000 2,499,000
Real estate mortgage residential . . . . . . . . . . . 45,611,000 43,715,000
Consumer . . . . . . . . . . . . . . . . . . . . . . . . 30,744,000 28,666,000
----------------------------------
Total loans before allowance for loan losses. . . . . . 140,775,000 127,776,000
<PAGE>
Less allowance for loan losses . . . . . . . . . . . . . 1,851,000 1,567,000
----------------------------------
Loans, net. . . . . . . . . . . . . . . . . . . . . . . $ 138,924,000 $ 126,209,000
==================================
LOANS SERVICED FOR OTHERS
Commercial and agricultural loans. . . . . . . . . . . . $ 4,026,000 $ 2,739,000
Residential real estate mortgage loans . . . . . . . . . 34,612,000 19,460,000
----------------------------------
Total loans serviced for others . . . . . . . . . . . . $ 38,638,000 $ 22,199,000
==================================
MORTGAGE SERVICING RIGHTS
Beginning of year. . . . . . . . . . . . . . . . . . . . $ 58,000 $ 19,000
Originations . . . . . . . . . . . . . . . . . . . . . . 130,000 46,000
Amortization . . . . . . . . . . . . . . . . . . . . . . (39,000) (7,000)
----------------------------------
End of year. . . . . . . . . . . . . . . . . . . . . . . $ 149,000 $ 58,000
==================================
LOANS TO RELATED PARTIES
Beginning of year. . . . . . . . . . . . . . . . . . . . $ 1,353,000 $ 1,603,000
New loans. . . . . . . . . . . . . . . . . . . . . . . . 1,728,000 512,000
Repayments . . . . . . . . . . . . . . . . . . . . . . . (1,490,000) (701,000)
Change in persons included . . . . . . . . . . . . . . . (18,000) (61,000)
----------------------------------
End of year. . . . . . . . . . . . . . . . . . . . . . . $ 1,573,000 $ 1,353,000
==================================
</TABLE>
A-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHOICEONE FINANCIAL SERVICES, INC.
<TABLE>
<CAPTION>
1998 1997
---------------------------------
<S> <C> <C>
COST OF LOANS PLEDGED FOR BORROWINGS
Residential real estate mortgage loans pledged for Federal
Home Loan Bank advances. . . . . . . . . . . . . . . . . $ 37,915,000 $ 39,505,000
Commercial loans pledged for secured loan borrowings 536,000 878,000
---------------------------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . $ 38,451,000 $ 40,383,000
=================================
LOANS HELD FOR SALE
Commercial loans . . . . . . . . . . . . . . . . . . . . $ 186,000 $ 1,276,000
Residential real estate mortgage loans . . . . . . . . . 1,684,000 381,000
---------------------------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,870,000 $ 1,657,000
=================================
</TABLE>
NOTE 5 - ALLOWANCE FOR LOAN LOSSES
An analysis of changes in the allowance for loan losses follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------------------
<S> <C> <C> <C>
Beginning of year balance. . . . . . . . . . . . $ 1,567,000 $1,487,000 $ 1,121,000
Provision charged to expense . . . . . . . . . . 730,000 539,000 523,000
Recoveries credited to the allowance . . . . . . 79,000 70,000 64,000
Loans charged off. . . . . . . . . . . . . . . . (525,000) (529,000) (221,000)
--------------------------------------------
End of year balance. . . . . . . . . . . . . . . $ 1,851,000 $1,567,000 $ 1,487,000
============================================
</TABLE>
<PAGE>
Information regarding impaired loans as of and for the year ended December
31 follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Loans with no allowance allocated. . . . . . . . $ 2,194,000 $ 780,000
Loans with allowance allocated . . . . . . . . . 559,000 152,000
Amount of allowance for loan losses allocated 244,000 86,000
IMPAIRED LOANS
Average balance during the year. . . . . . . . . $ 2,326,000 $ 759,000 $ 477,000
Interest income recognized thereon . . . . . . . 270,000 43,000 39,000
Cash-basis interest income recognized. . . . . . 283,000 33,000 29,000
</TABLE>
NOTE 6 - OTHER BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
1998 1997
---------------------------
<S> <C> <C>
RESTRICTIONS ON CASH BALANCES
Cash subject to restrictions for reserve requirements $ 780,000 $ 734,000
===========================
</TABLE>
A-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHOICEONE FINANCIAL SERVICES, INC.
<TABLE>
<CAPTION>
1998 1997
------------------------------
<S> <C> <C>
PREMISES AND EQUIPMENT
Land and land improvements . . . . . . . . . . . . . . . $ 723,000 $ 626,000
Buildings. . . . . . . . . . . . . . . . . . . . . . . . 2,985,000 3,105,000
Construction in progress . . . . . . . . . . . . . . . . 66,000 47,000
Leasehold improvements . . . . . . . . . . . . . . . . . 276,000 26,000
Equipment. . . . . . . . . . . . . . . . . . . . . . . . 2,824,000 2,468,000
------------------------------
Total cost. . . . . . . . . . . . . . . . . . . . . . . 6,874,000 6,272,000
Accumulated depreciation . . . . . . . . . . . . . . . (2,788,000) (2,609,000)
------------------------------
Premises and equipment, net . . . . . . . . . . . . . . $ 4,086,000 $ 3,663,000
==============================
OTHER REAL ESTATE
Balance as of end of year. . . . . . . . . . . . . . . . $ 52,000 $ 246,000
==============================
</TABLE>
NOTE 7 - DEPOSITS
Deposit information as of year-end follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------
<S> <C> <C>
Certificates of deposit issued in denominations of
$100,000 or more. . . . . . . . . . . . . . . . . . . . $ 18,621,000 $ 14,751,000
==============================
Related party deposits . . . . . . . . . . . . . . . . . $ 1,583,000 $ 2,417,000
==============================
Maturities of certificates of deposit
1998. . . . . . . . . . . . . . . . . . . . . . . . . . $ 41,712,000
1999. . . . . . . . . . . . . . . . . . . . . . . . . . $ 55,556,000 12,245,000
2000. . . . . . . . . . . . . . . . . . . . . . . . . . 9,116,000 4,726,000
2001. . . . . . . . . . . . . . . . . . . . . . . . . . 2,631,000 1,935,000
2002. . . . . . . . . . . . . . . . . . . . . . . . . . 2,808,000 2,059,000
2003 (and after for 1997) . . . . . . . . . . . . . . . 804,000 129,000
2004 and after. . . . . . . . . . . . . . . . . . . . . 144,000
------------------------------
Total . . . . . . . . . . . . . . . . . . . . . . . . $ 71,059,000 $ 62,806,000
==============================
</TABLE>
<PAGE>
Certificates of deposit included $7,227,000 at December 31, 1998, of
deposits that were acquired through a national rate service. The deposits
mature through 2000 and bear an average interest rate of 5.83%.
NOTE 8 - INCOME TAXES
Information as of year-end and for the year follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------
<S> <C> <C> <C>
PROVISION FOR INCOME TAXES
Current federal income tax expense . . . . . . . . $881,000 $701,000 $716,000
Deferred federal income tax benefit. . . . . . . . (8,000) (69,000) (61,000)
-----------------------------------------
Income tax expense. . . . . . . . . . . . . . . . $873,000 $632,000 $655,000
=========================================
</TABLE>
A-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHOICEONE FINANCIAL SERVICES, INC.
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------------------
<S> <C> <C> <C>
RECONCILIATION OF INCOME TAX PROVISION TO STATUTORY RATE
Income tax computed at statutory federal rate of 34% $ 950,000 $ 805,000 $ 799,000
Tax exempt interest income . . . . . . . . . . . . . . (159,000) (182,000) (175,000)
Nondeductible interest expense . . . . . . . . . . . . 29,000 29,000 24,000
Other items. . . . . . . . . . . . . . . . . . . . . . 53,000 (20,000) 7,000
-----------------------------------------
Income tax expense. . . . . . . . . . . . . . . . . . $ 873,000 $ 632,000 $ 655,000
=========================================
COMPONENTS OF DEFERRED TAX ASSETS AND LIABILITIES
Deferred tax assets:
Allowance for loan losses . . . . . . . . . . . . . . $ 525,000 $ 428,000
Deferred loan costs . . . . . . . . . . . . . . . . . 95,000 103,000
Deferred compensation . . . . . . . . . . . . . . . . 54,000 59,000
Postretirement benefits obligation. . . . . . . . . . 51,000 46,000
Other . . . . . . . . . . . . . . . . . . . . . . . . 17,000 15,000
---------------------------
Total deferred tax assets . . . . . . . . . . . . . 742,000 651,000
Deferred tax liabilities:
Depreciation. . . . . . . . . . . . . . . . . . . . . 239,000 215,000
Unrealized appreciation on securities available
for sale. . . . . . . . . . . . . . . . . . . . . . 127,000 86,000
Loan servicing rights . . . . . . . . . . . . . . . . 57,000 20,000
Other . . . . . . . . . . . . . . . . . . . . . . . . 30,000 8,000
---------------------------
Total deferred tax liabilities. . . . . . . . . . . 453,000 329,000
---------------------------
Net deferred tax asset. . . . . . . . . . . . . . . $ 289,000 $ 322,000
===========================
</TABLE>
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 December 31, 1998 and 1997.
<PAGE>
NOTE 9 - EMPLOYEE BENEFIT PLANS
PENSION PLAN
The Board of Directors approved the termination of the Bank's defined
benefit pension plan in January 1997. Benefit accruals for plan
participants were frozen as of March 31, 1997. As a result of the plan's
curtailment in April 1997, ChoiceOne recognized a curtailment gain of
$249,000 in the second quarter of 1997. Vested plan benefits were paid to
plan participants in the third and fourth quarters of 1997. The benefit
payments caused a settlement loss of $259,000 to be recognized in these two
quarters. After participant benefits had been paid, the remaining plan
assets in excess of benefit payments totaled $323,000. The Bank filed a
request with the Internal Revenue Service to transfer the excess plan
assets to the ChoiceOne Bank 401(k) savings and retirement plan. The Bank
received a determination letter from the Internal Revenue Service in 1998
that allowed the transfer of the excess plan assets and the assets were
transferred to the 401(k) savings and retirement plan in September 1998.
Net pension cost included the following for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996
----------------------------
<S> <C> <C>
Service cost/benefits earned during the year . . . . . . $ 17,000 $ 86,000
Interest cost on projected benefit obligation. . . . . . 129,000 130,000
Actual return on plan assets . . . . . . . . . . . . . . (112,000) (122,000)
Net amortization and deferral. . . . . . . . . . . . . . (82,000) (69,000)
----------------------------
Net pension cost/(income). . . . . . . . . . . . . . . . $ (48,000) $ 25,000
============================
</TABLE>
A-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHOICEONE FINANCIAL SERVICES, INC.
POSTRETIREMENT BENEFITS PLAN
Information regarding the postretirement benefits plan as of year-end and
for the year follows:
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------------------
<S> <C> <C> <C>
Accumulated benefit obligation . . . . . . . . . . $137,000 $134,000 $ 106,000
Accrued benefit cost . . . . . . . . . . . . . . . 152,000 149,000 148,000
Postretirement benefit expense/(credit). . . . . . 3,000 9,000 (118,000)
Employer contributions . . . . . . . . . . . . . . 15,000 7,000 12,000
Participant contributions. . . . . . . . . . . . . 23,000 11,000 19,000
Benefits paid. . . . . . . . . . . . . . . . . . . 38,000 18,000 31,000
Actuarial assumption - discount rate on benefit obligation 7% 7% 7%
</TABLE>
The trend for annual increases in health care costs was assumed to be 11.5%
for 2 years beginning January 1, 1999, dropping to 5.5% after 2 years and
remaining at that level thereafter. The effect of a 1% increase or
decrease in the assumed health care cost trend rate would have an
immaterial impact on the combined service and interest cost components of
net periodic postretirement health care benefits cost and the accumulated
benefit obligation for health care benefits.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
OTHER EMPLOYEE BENEFIT PLAN EXPENSES
401(k) savings and retirement plan . . . . . . . . $ 9,000 $323,000 $ 17,000
Incentive bonus plan . . . . . . . . . . . . . . . 169,000 100,000 232,000
</TABLE>
The 401(k) expense recorded in 1997 represented the amount of defined
benefit pension plan assets remaining at December 31, 1997, after payment
of vested benefits to plan participants. The Bank transferred the excess
assets to the 401(k) savings and retirement plan (the "401(k) plan") in
1998. Approximately 25% of the total was transferred to the 401(k) plan
and allocated to plan participants in early 1998 as the Bank's contribution
for the 1997 plan year. The remaining amount was contributed to the 401(k)
plan upon receipt of a determination letter from the Internal Revenue
Service indicating its approval of the transfer. This remaining amount
will be allocated to participants in the 401(k) plan as the Bank's
contribution over a period not to exceed seven years.
<PAGE>
NOTE 10 - STOCK OPTIONS
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("Statement No. 123"), became effective in 1996 and
requires pro forma disclosures for companies that do not adopt its fair
value accounting method for stock-based employee compensation.
Accordingly, the following pro forma information presents net income and
earnings per share for 1998 and 1997 had the Statement No. 123 fair value
method been used to measure compensation cost for stock option plans. No
compensation cost was recognized for stock options in 1998 and 1997. There
were no stock options granted prior to 1997.
<TABLE>
<CAPTION>
1998 1997
-----------------------------
<S> <C> <C>
Net income as reported . . . . . . . . . . . . . . . . . . $ 1,922,000 $ 1,737,000
Pro forma net income . . . . . . . . . . . . . . . . . . . 1,914,000 1,733,000
Basic earnings per common share and diluted earnings per
common share as reported . . . . . . . . . . . . . . . . 1.79 1.62
Pro forma basic earnings per common share and diluted
earnings per common share. . . . . . . . . . . . . . . . 1.79 1.62
</TABLE>
A-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHOICEONE FINANCIAL SERVICES, INC.
In future years, the pro forma effect of not applying Statement No. 123 may
increase if additional options are granted.
ChoiceOne's stock option plan is used to reward key employees and provide
them with an additional equity interest in ChoiceOne. Options were issued
in 1997 for 10 year periods with vesting occurring over a three year
period. At December 31, 1998, a total of 42,000 shares were authorized for
stock option grants, of which 31,500 were available for future grants.
Information about option grants follows:
<TABLE>
<CAPTION>
NUMBER WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OF OPTIONS EXERCISE PRICE FAIR VALUE OF GRANTS
--------------------------------------------------
<S> <C> <C> <C>
Granted during 1997 and outstanding at end of 1998. . . . . . . 10,500 $19.05 $3.37
Options exercisable at end of 1998 . . . . . . . . . . . . . . 5,250 19.05
</TABLE>
The fair value of options granted during 1997 was estimated using the
following weighted-average information: risk-free interest rate of 6.53%,
expected life of 8.5 years, expected annual volatility of stock price of
10.0%, and expected cash dividends of 3.5% per year. Information regarding
stock options has been adjusted for the effect of stock dividends and stock
splits.
NOTE 11 - FEDERAL HOME LOAN BANK ADVANCES
Interest rates on Federal Home Loan Bank advances range from 5.53% to 6.66%
and are fixed. Advances are secured by mortgage loans. Penalties are
charged on advances that are paid prior to maturity. No advances were paid
prior to maturity in 1998 or 1997.
The maturities of Federal Home Loan Bank advances at December 31, 1998,
follow:
<TABLE>
<CAPTION>
<S> <C>
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,151,000
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,792,000
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,832,000
2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,584,000
2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,291,000
-----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $26,650,000
===========
</TABLE>
<PAGE>
NOTE 12 - LEASES AND OTHER COMMITMENTS
Following is lease and other commitment information:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------------
<S> <C> <C> <C>
Lease rental expense . . . . . . . . . . . . . $ 99,000 $ 70,000 $ 45,000
======================================
Future minimum operating lease commitments
1999. . . . . . . . . . . . . . . . . . . . . $105,000
2000. . . . . . . . . . . . . . . . . . . . . 96,000
2001. . . . . . . . . . . . . . . . . . . . . 84,000
2002. . . . . . . . . . . . . . . . . . . . . 84,000
2003. . . . . . . . . . . . . . . . . . . . . 13,000
---------
Total . . . . . . . . . . . . . . . . . . . $382,000
=========
</TABLE>
Lease commitments include $64,000 to a related party in the years 1999
through 2002.
A-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHOICEONE FINANCIAL SERVICES, INC.
<TABLE>
<CAPTION>
1998 1997
------------------------------
<S> <C> <C>
Future minimum branch consulting commitments
1999. . . . . . . . . . . . . . . . . . . . . $ 10,000
2000. . . . . . . . . . . . . . . . . . . . . 10,000
2001. . . . . . . . . . . . . . . . . . . . . 10,000
2002. . . . . . . . . . . . . . . . . . . . . 10,000
2003. . . . . . . . . . . . . . . . . . . . . 8,000
-----------
Total . . . . . . . . . . . . . . . . . . . $ 48,000
===========
Future minimum computer processing commitments
1999. . . . . . . . . . . . . . . . . . . . . $ 120,000
===========
Credit commitments
Loan commitments. . . . . . . . . . . . . . . $20,110,000 $16,830,000
Unused lines of credit. . . . . . . . . . . . 4,318,000 3,002,000
Letters of credit . . . . . . . . . . . . . . 194,000 33,000
------------------------------
Total . . . . . . . . . . . . . . . . . . . $24,622,000 $19,865,000
==============================
</TABLE>
NOTE 13 - SHAREHOLDERS' EQUITY AND EARNINGS PER SHARE
Information regarding shareholders' equity as of year-end and for the year
follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------------
<S> <C> <C> <C>
COMMON STOCK
Shares authorized. . . . . . . . . . . . . . . . 2,000,000 1,000,000 500,000
Shares outstanding . . . . . . . . . . . . . . . 1,053,285 537,015 482,710
Issued during the year . . . . . . . . . . . . . 566,359 28,733 20,610
Repurchased during the year. . . . . . . . . . . 24,517 -- 2,703
</TABLE>
<PAGE>
Shares of common stock issued for the purposes of stock dividends and stock
splits totaled 564,141 in 1998 and 28,733 in 1997. There were no shares
issued for stock dividends or stock splits in 1996.
The factors used in the earnings per share computation follow.
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------------------
<S> <C> <C> <C>
BASIC
Net income . . . . . . . . . . . . . . . . . . . $ 1,922,000 $1,737,000 $ 1,695,000
=======================================
Weighted average common shares outstanding . . . 1,071,734 1,074,150 1,078,458
=======================================
Basic earnings per common share. . . . . . . . . $ 1.79 $ 1.62 $ 1.57
=======================================
</TABLE>
Shares shown in the common stock section represent unadjusted shares, while
weighted average common shares outstanding for purposes of computing
earnings per share have been adjusted for stock dividends and stock splits.
A-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHOICEONE FINANCIAL SERVICES, INC.
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------------------
<S> <C> <C> <C>
DILUTED
Net income . . . . . . . . . . . . . . . . . . . . . $ 1,922,000 $ 1,737,000 $ 1,695,000
========================================
Weighted average common shares outstanding . . . . . 1,071,734 1,074,150 1,078,458
Plus dilutive effect of assumed exercises of stock
options . . . . . . . . . . . . . . . . . . . . . 527 -- --
----------------------------------------
Average shares and dilutive potential common shares 1,072,261 1,074,150 1,078,458
========================================
Diluted earnings per common share. . . . . . . . . . $ 1.79 $ 1.62 $ 1.57
========================================
</TABLE>
Stock options for common stock were not considered in computing diluted
earnings per share for 1997 because they were antidilutive. No stock
options were granted prior to 1997.
NOTE 14 - CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY
<TABLE>
CONDENSED BALANCE SHEETS
December 31
<CAPTION>
1998 1997
----------------------------
<S> <C> <C>
Assets
Cash. . . . . . . . . . . . . . . . . . . . $ 398,000 $ 32,000
Securities available for sale . . . . . . . 8,000 8,000
Other assets. . . . . . . . . . . . . . . . 1,000 2,000
Investment in ChoiceOne Bank and subsidiaries 15,734,000 15,495,000
----------------------------
Total assets. . . . . . . . . . . . . . . $16,141,000 $15,537,000
============================
Shareholders' equity . . . . . . . . . . . . $16,141,000 $15,537,000
============================
</TABLE>
<PAGE>
<TABLE>
CONDENSED STATEMENTS OF INCOME
Years Ended December 31
<CAPTION>
1998 1997 1996
----------------------------------------
<S> <C> <C> <C>
Dividends from ChoiceOne Bank. . . . . . . . $ 1,821,000 $ 838,000 $ 824,000
Other expenses . . . . . . . . . . . . . . . 88,000 51,000 50,000
----------------------------------------
Income before income tax and equity in undistributed
net income of subsidiary. . . . . . . . . . 1,733,000 787,000 774,000
Income tax benefit . . . . . . . . . . . . . 29,000 17,000 17,000
----------------------------------------
Income before equity in undistributed net income of
subsidiary . . . . . . . . . . . . . . . . 1,762,000 804,000 791,000
Equity in undistributed net income of subsidiary 160,000 933,000 904,000
----------------------------------------
Net income . . . . . . . . . . . . . . . . . $ 1,922,000 $1,737,000 $1,695,000
========================================
</TABLE>
A-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHOICEONE FINANCIAL SERVICES, INC.
<TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31
<CAPTION>
1998 1997 1996
----------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income. . . . . . . . . . . . . . . . . . . $ 1,922,000 $ 1,737,000 $ 1,695,000
Reconciling items:
Equity in undistributed net subsidiary income (160,000) (933,000) (904,000)
Changes in other assets . . . . . . . . . . . 1,000 -- (1,000)
Changes in liabilities. . . . . . . . . . . . -- -- (2,000)
----------------------------------------
Net cash from operating activities . . . . 1,763,000 804,000 788,000
----------------------------------------
Cash flows from financing activities:
Issuance of stock . . . . . . . . . . . . . . . 89,000 -- --
Dividends paid. . . . . . . . . . . . . . . . . (857,000) (783,000) (663,000)
Repurchase of stock . . . . . . . . . . . . . . (629,000) (9,000) (115,000)
----------------------------------------
Net cash used in financing activities . . (1,397,000) (792,000) (778,000)
----------------------------------------
Net change in cash and cash equivalents. . . . . 366,000 12,000 10,000
Beginning cash and cash equivalents. . . . . . . 32,000 20,000 10,000
----------------------------------------
Ending cash and cash equivalents . . . . . . . . $ 398,000 $ 32,000 $ 20,000
========================================
Amount of dividends that could be paid from
ChoiceOne Bank without regulatory approval . . $ 3,817,000
===========
</TABLE>
NOTE 15 FINANCIAL INSTRUMENTS
Financial instruments as of year-end were as follows:
<PAGE>
<TABLE>
<CAPTION>
1998 1997
--------------------------------------------------------------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents . . . . . . $ 5,055,000 $ 5,055,000 $ 3,769,000 $ 3,769,000
Securities available for sale . . . . 20,282,000 20,282,000 19,942,000 19,942,000
Loans, net. . . . . . . . . . . . . . 138,924,000 147,379,000 126,209,000 129,870,000
Liabilities:
Demand, savings and money market
deposit accounts. . . . . . . . . . 51,273,000 51,273,000 44,686,000 44,686,000
Time deposits . . . . . . . . . . . . 71,059,000 72,237,000 62,806,000 63,276,000
Federal funds purchased and repurchase
agreements . . . . . . . . . . . . 3,310,000 3,310,000 2,060,000 2,060,000
Long-term debt. . . . . . . . . . . . 27,231,000 27,826,000 27,062,000 27,240,000
</TABLE>
A-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHOICEONE FINANCIAL SERVICES, INC.
The estimated fair values approximate the carrying amounts for all assets
and liabilities except those described below. The estimated fair value for
securities is based on quoted market values for the individual securities
or for equivalent securities. The estimated fair value for loans is based
on the rates charged at year end for new loans with similar maturities,
applied until the loan is assumed to reprice or be paid. The estimated
fair value for time deposits is based on the rates paid at year end for new
deposits, applied until maturity. The estimated fair value for other
financial instruments and off-balance-sheet loan commitments are considered
nominal.
NOTE 16 - REGULATORY CAPITAL
ChoiceOne Financial Services, Inc. and ChoiceOne Bank are subject to
regulatory capital requirements administered by federal banking agencies.
Capital adequacy guidelines and prompt corrective action regulations
involve quantitative measures of assets, liabilities, and certain off-
balance-sheet items calculated under regulatory accounting practices.
The prompt corrective action regulations provide five classifications,
including well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized, although
these terms are not used to represent overall financial condition. If only
adequately capitalized, regulatory approval is required to accept brokered
deposits. If undercapitalized, capital distributions are limited, as are
asset growth and expansion, and plans for capital restoration are required.
At year-end, the capital requirements were met. Both ChoiceOne and the
Bank met requirements to be considered well capitalized as of December 31,
1998. Actual capital levels and minimum required levels were as follows:
<PAGE>
<TABLE>
<CAPTION>
MINIMUM REQUIRED
TO BE WELL
MINIMUM REQUIRED CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION REGULATIONS
------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------------------------------------------------------------
(Dollars in thousands)
DECEMBER 31, 1998
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk weighted assets)
Consolidated. . . . . . . . . . . . $ 17,119 13.4% $ 10,198 8.0% $ 12,747 10.0%
Bank. . . . . . . . . . . . . . . . 16,711 13.1% 10,197 8.0% 12,746 10.0%
Tier 1 capital (to risk weighted assets)
Consolidated. . . . . . . . . . . . 15,531 12.2% 5,099 4.0% 7,648 6.0%
Bank. . . . . . . . . . . . . . . . 15,124 11.9% 5,098 4.0% 7,648 6.0%
Tier 1 capital (to average assets)
Consolidated. . . . . . . . . . . . 15,531 9.2% 6,744 4.0% 8,430 5.0%
Bank. . . . . . . . . . . . . . . . 15,124 9.0% 6,744 4.0% 8,429 5.0%
December 31, 1997
Total capital (to risk weighted assets)
Consolidated. . . . . . . . . . . . $ 16,409 14.2% $ 9,212 8.0% $ 11,515 10.0%
Bank. . . . . . . . . . . . . . . . 16,368 14.2% 9,211 8.0% 11,514 10.0%
Tier 1 capital (to risk weighted assets)
Consolidated. . . . . . . . . . . . 14,968 13.0% 4,606 4.0% 6,909 6.0%
Bank. . . . . . . . . . . . . . . . 14,927 13.0% 4,606 4.0% 6,908 6.0%
Tier 1 capital (to average assets)
Consolidated. . . . . . . . . . . . 14,968 9.6% 6,213 4.0% 7,766 5.0%
Bank. . . . . . . . . . . . . . . . 14,927 9.6% 6,213 4.0% 7,766 5.0%
</TABLE>
A-21
<PAGE>
INDEPENDENT AUDITORS' REPORT
[CROWE CHIZEK LOGO]
To the Shareholders and Board of Directors
of ChoiceOne Financial Services, Inc., Sparta, Michigan
We have audited the accompanying consolidated balance sheets of ChoiceOne
Financial Services, Inc. as of December 31, 1998 and 1997 and the related
statements of income, comprehensive income, changes in shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1998. These financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
ChoiceOne Financial Services, Inc. as of December 31, 1998 and 1997, and
the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
/S/Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
March 5, 1999
A-22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CHOICEONE FINANCIAL SERVICES, INC.
The following discussion is designed to provide a review of the
consolidated financial condition and results of operations of ChoiceOne
Financial Services, Inc. ("ChoiceOne"), and its wholly-owned subsidiaries,
ChoiceOne Bank (the "Bank"), ChoiceOne Insurance Agencies, Inc. (the
"Insurance Agency"), and ChoiceOne Travel, Inc. (the "Travel Agency"). This
discussion should be read in conjunction with the consolidated financial
statements and related footnotes.
This discussion and other sections of this annual 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 ChoiceOne 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 ChoiceOne 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. Furthermore, ChoiceOne
undertakes no obligation to update, amend, or clarify forward-looking
statements, whether as a result of new information, future events, or
otherwise.
Future factors include 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 ChoiceOne 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.
SUMMARY OF OPERATING RESULTS
Net income for 1998 was $1,922,000, which represented a $185,000 or 11%
increase over 1997. The increase in ChoiceOne's net income in 1998 was
<PAGE>
attributable to higher net interest income and noninterest income, which
was partially offset by growth in the provision for loan losses and
noninterest expense. The growth in net interest income was due to an
increase in ChoiceOne's loan portfolio. The rise in noninterest income
resulted from higher mortgage loan sales and servicing income. The
provision for loan losses was higher in 1998 due to management's desire to
provide an adequate balance in the allowance for loan losses.
Approximately one-half of the increase in noninterest expense was in the
other noninterest expense category, which experienced higher levels in
advertising and marketing, customer relations and consulting expenses.
<TABLE>
<CAPTION>
Year ended December 31
1998 1997 1996
-----------------------------------------------
<S> <C> <C> <C>
Net interest income. . . . . . . . . . . . . . . $ 7,207,000 $ 6,315,000 $ 5,754,000
Provision for loan losses. . . . . . . . . . . . (730,000) (539,000) (523,000)
Noninterest income . . . . . . . . . . . . . . . 1,993,000 1,769,000 1,555,000
Noninterest expense. . . . . . . . . . . . . . . (5,675,000) (5,176,000) (4,436,000)
Income tax expense . . . . . . . . . . . . . . . (873,000) (632,000) (655,000)
-----------------------------------------------
Net income . . . . . . . . . . . . . . . . . . . $ 1,922,000 $ 1,737,000 $ 1,695,000
===============================================
</TABLE>
Increased net income in 1997 was due to higher net interest income and
noninterest income, which was offset by growth in noninterest expense. Net
interest income growth was due primarily to loan growth. The increase in
noninterest income was caused by commission income from the Insurance
Agency. Most of the increase in 1997's noninterest expense was due to the
higher salaries and benefits in 1997 than in 1996. Increases in 401(k)
savings and retirement plan expense and postretirement benefit expense
comprised most of the increase in salaries and benefits expense in 1997.
A-23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CHOICEONE FINANCIAL SERVICES, INC.
RETURN ON AVERAGE ASSETS AND AVERAGE SHAREHOLDERS' EQUITY
The return on average assets and return on average shareholders' equity are
key performance indices that measure how effectively ChoiceOne is using its
assets and its shareholders' invested capital. ChoiceOne's return on
average assets for 1998 was 1.18%, compared to 1.17% for 1997 and 1.38% for
1996. The return on average shareholders' equity was 12.01%, 11.58% and
12.00% for 1998, 1997 and 1996, respectively.
DIVIDENDS
Cash dividends declared by ChoiceOne in 1998 of $846,000 or $.79 per share
represent the seventeenth consecutive year that ChoiceOne has increased
cash dividends paid to shareholders. The total cash dividends paid in 1998
represented a $63,000 or 8% increase over 1997. The cash dividend payout
percentage (total cash dividends divided by net income) was 44% in 1998,
compared to 45% in 1997. In addition to the cash dividends declared,
ChoiceOne declared a 5% stock dividend and a two-for-one stock split in
1998 and a 6% stock dividend in 1997. Cash dividends per share were
adjusted for the stock dividends and stock split.
Cash dividends paid in 1996 through 1998 were consistent with management's
objectives regarding the capital structure of ChoiceOne. A primary
objective is to continue the per share and total dollar increase in cash
dividend payments to shareholders, which ChoiceOne achieved in all three
years. However, management will not raise dividends above a level that it
considers to be reasonable and prudent.
ChoiceOne's principal source of funds to pay cash dividends is the earnings
of the Bank. The availability of these earnings is dependent upon the
capital needs, regulatory constraints and other factors involving the Bank.
Regulatory constraints include the maintenance of minimum capital ratios
and limits based on net income and retained earnings of the Bank for the
past three years. Based on projected earnings for the Bank, management
currently expects ChoiceOne to pay regular quarterly cash dividends to its
shareholders in 1999.
RESULTS OF OPERATIONS
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. Management will refer to these tables
in its discussion of interest income, interest expense and net interest
income.
A-24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CHOICEONE FINANCIAL SERVICES, INC.
<TABLE>
TABLE 1 - AVERAGE BALANCES AND TAX-EQUIVALENT INTEREST RATES
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
-----------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
-----------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Loans <F1> <F2> . . . . . . . . $ 132,796 $ 12,869 9.69% $ 117,582 $ 11,259 9.58% $ 94,077 $ 9,087 9.66%
Taxable securities <F3> . . . . 12,040 705 5.87 12,781 845 6.61 14,147 916 6.47
Nontaxable securities <F1> <F3> 8,879 661 7.71 9,370 733 7.82 8,365 681 8.14
Other . . . . . . . . . . . . . 382 18 4.71 178 8 4.49 65 3 4.62
--------- --------- --------- --------- --------- -------
Interest-earning assets . . . 154,097 14,253 9.25 139,911 12,845 9.18 116,654 10,687 9.16
Noninterest-earning assets <F4> 9,160 8,741 6,480
--------- --------- ---------
Total assets. . . . . . . . . $ 163,257 $ 148,652 $123,134
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing
transaction accounts. . . . . $ 24,255 809 3.34 $ 22,242 718 3.23 $ 24,711 798 3.23
Savings deposits . . . . . . . 8,316 137 1.65 8,836 162 1.83 9,363 174 1.86
Time deposits . . . . . . . . . 67,724 3,931 5.80 58,258 3,399 5.83 50,126 2,947 5.88
FHLB advances . . . . . . . . . 26,016 1,650 6.34 25,425 1,619 6.37 9,385 592 6.31
Other . . . . . . . . . . . . . 4,923 276 5.61 5,584 354 6.34 2,785 154 5.53
--------- --------- --------- --------- --------- -------
Interest-bearing liabilities. 131,234 6,803 5.18 120,345 6,252 5.20 96,370 4,665 4.84
--------- ---- --------- ---- ------- ----
Demand deposits . . . . . . . . 13,675 11,479 11,010
Other noninterest-bearing
liabilities . . . . . . . . . 2,347 1,830 1,625
Shareholders' equity . . . . . 16,001 14,998 14,129
--------- --------- ---------
Total liabilities and
shareholders' equity . . . . $ 163,257 $ 148,652 $123,134
========= ========= =========
Net interest income (tax-
equivalent basis) - interest
spread. . . . . . . . . . . . . 7,450 4.07% 6,593 3.98% 6,022 4.32%
==== ==== ====
<PAGE>
Tax-equivalent adjustment <F1> . (243) (278) (268)
--------- --------- -------
Net interest income . . . . . . $ 7,207 $ 6,315 $ 5,754
========= ========= =======
Net interest income as a
percentage of earning assets
(tax-equivalent basis). . . . . 4.83% 4.71% 5.16%
==== ==== ====
<FN>
<F1>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 years
presented.
<F2>Interest on loans included net origination fees charged on loans of
approximately $610,000, $352,000 and $363,000 in 1998, 1997 and 1996,
respectively.
<F3>The average balance includes the effect of unrealized gains or losses on
securities, while the average rate was computed on the average amortized
cost of the securities.
<F4>Noninterest-earning assets includes loans on a nonaccrual status which
averaged approximately $637,000, $787,000 and $383,000 in 1998, 1997 and
1996, respectively.
</FN>
</TABLE>
A-25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CHOICEONE FINANCIAL SERVICES, INC.
<TABLE>
TABLE 2 - CHANGES IN TAX-EQUIVALENT NET INTEREST INCOME
<CAPTION>
YEAR ENDED DECEMBER 31
1998 OVER 1997 1997 OVER 1996
------------------------------------------------------------------
TOTAL VOLUME RATE TOTAL VOLUME RATE
------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN INTEREST INCOME <F1>
Loans <F2> . . . . . . . . . . . . . . . $ 1,610 $ 1,478 $ 132 $ 2,172 $ 2,252 $ (80)
Taxable securities . . . . . . . . . . . (140) (48) (92) (71) (91) 20
Nontaxable securities <F2> . . . . . . . (72) (62) (10) 52 79 (27)
Other . . . . . . . . . . . . . . . . . 10 10 -- 5 5 --
-----------------------------------------------------------------
Net change in tax-equivalent income. . 1,408 1,378 30 2,158 2,245 (87)
-----------------------------------------------------------------
INCREASE (DECREASE) IN INTEREST EXPENSE <F1>
Interest-bearing transaction accounts. . 91 67 24 (80) (80) --
Savings deposits . . . . . . . . . . . . (25) (9) (16) (12) (10) (2)
Time deposits . . . . . . . . . . . . . 532 547 (15) 452 475 (23)
Federal Home Loan Bank advances. . . . . 31 38 (7) 1,027 1,021 6
Other . . . . . . . . . . . . . . . . . (78) (39) (39) 200 175 25
-----------------------------------------------------------------
Net change in interest expense . . . . 551 604 (53) 1,587 1,581 6
-----------------------------------------------------------------
Net change in tax-equivalent
net interest income . . . . . . . . $ 857 $ 774 $ 83 $ 571 $ 664 $ (93)
=================================================================
<FN>
<F1> 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.
<F2> Interest on nontaxable securities and loans has been adjusted to a
fully tax-equivalent basis using an incremental tax rate of 34% for the
years presented.
</FN>
</TABLE>
<PAGE>
NET INTEREST INCOME
Tax-equivalent net interest income ("net margin") increased $857,000 in
1998, compared to an increase of $571,000 in 1997. Both years experienced
a net margin benefit due to loan growth while an increase in loan fees also
impacted net margin in 1998. Table 2 shows that the larger increase in
1998 was due to more favorable variances in both changes in volume and
rate. The average balance of interest-earning assets grew $14,186,000 in
1998 while interest-bearing liabilities grew less at $10,889,000. This
relationship indicates that approximately one-quarter of the interest-
earning asset growth was funded by noninterest-bearing liabilities and by
shareholders' equity, which helped to increase the net margin in 1998. The
higher level of growth in net margin in 1998 was also affected by the
interest-bearing funding method that ChoiceOne used for loan growth in
1998. Growth in the average balance of Federal Home Loan Bank advances
comprised only 5% of the increase in interest-bearing liabilities in 1998,
compared to 67% of the change in 1997. Lower-cost funding methods such as
interest-bearing transaction accounts and time deposits comprised a much
larger portion of loan funding in 1998 and this improved ChoiceOne's net
margin.
Per Table 2, the change in ChoiceOne's net margin due to changes in the
average interest rate was an increase of $83,000 in 1998 compared to a
decrease of $93,000 in 1997. The difference was caused by an increase in
loan fees from $352,000 in 1997 to $610,000 in 1998. Most of the loan fee
increase resulted from higher mortgage fees in 1998. This was caused by
the higher level of mortgage refinancings that occurred in 1998 than in the
prior year. If the effect of loan fees was excluded from interest income
in both 1998 and 1997, the average interest rate earned on loans would have
been 9.23% in 1998 compared to 9.28% in 1997. The
A-26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CHOICEONE FINANCIAL SERVICES, INC.
decline in the adjusted loan rate and most other rates shown in Table 1
represented the decrease in general market interest rates that occurred in
1998.
Based on the current estimates of ChoiceOne's management, the total dollars
of net interest income is expected to increase in 1999. Management
anticipates that this will be caused by growth in interest-earning assets.
However, management believes that the rate of growth in net margin may be
less in 1999 than in 1998. Management believes that more loan funding may
need to be provided by Federal Home Loan Bank advances, national market
certificates of deposit, and other non-local sources in 1999 than occurred
in 1998. The higher interest rates associated with these types of funding
compared to local deposits will narrow the interest margin earned on asset
growth. Decreases in general market interest rates in late 1998 have also
caused some constriction of the interest margin and management believes
this may continue in 1999. In addition, ChoiceOne's management believes
that mortgage refinancing activity may be less in 1999 than was experienced
in 1998. If this occurs, loan fees may decrease in 1999 compared to 1998.
ALLOWANCE AND PROVISION FOR LOAN LOSSES
Information regarding the allowance and provision for loan losses can be
found in Table 3 and in Note 5 to the Consolidated Financial Statements.
As indicated in Table 3, the provision for loan losses and allowance for
loan losses increased significantly in 1998 in contrast to 1997 when little
change was experienced from the prior year. Although net charge-offs in
the various loan categories and total net charge-offs were approximately
the same in 1998 as in 1997 and loan growth was less in 1998 than in 1997,
ChoiceOne's management believed that an increase in the provision for loan
losses was a prudent part of its desire to maintain an adequate allowance
for loan losses. Although total net charge-offs were higher in 1997 than
in 1996, the provision for loan losses in 1997 was believed adequate due to
the lower level of loan growth in 1997 than occurred in 1996. Net charge-
offs by loan category are shown in Table 3. There were no significant
changes in any category in 1998 compared to 1997.
The balance of impaired loans increased substantially from the end of 1997
to the end of 1998. The average balance of impaired loans was also
significantly higher in 1998 than in the prior year. This was due to the
inclusion of one commercial loan which was classified as impaired from
March 31, 1998, through the end of 1998. ChoiceOne's management plans to
monitor the performance of this loan as well as the other loans classified
as impaired and will take action as believed necessary.
<PAGE>
<TABLE>
TABLE 3 - PROVISION AND ALLOWANCE FOR LOAN LOSSES
<CAPTION>
As of and for the years ended December 31,
1998 1997 1996
---------------------------------------------
<S> <C> <C> <C>
Provision for loan losses. . . . . . . . . . . . $ 730,000 $ 539,000 $ 523,000
=============================================
Net charge-offs
Commercial loans. . . . . . . . . . . . . . . . $ 201,000 $ 186,000 $ 26,000
Agricultural loans. . . . . . . . . . . . . . . -- 7,000 (10,000)
Real estate mortgage - residential. . . . . . . -- 6,000 --
Consumer. . . . . . . . . . . . . . . . . . . . 245,000 260,000 141,000
---------------------------------------------
Total . . . . . . . . . . . . . . . . . . . . $ 446,000 $ 459,000 $ 157,000
=============================================
Allowance for loan losses at year end. . . . . . $ 1,851,000 $1,567,000 $ 1,487,000
=============================================
Allowance for loan losses as a percentage of:
Total loans as of year end. . . . . . . . . . . 1.31% 1.23% 1.35%
Nonaccrual loans, accrual loans past due 90 days or
more and troubled debt restructurings . . . . 183.89 130.17 148.65
Ratio of net charge-offs to average total loans
outstanding during the year . . . . . . . . . .33 .39 .17
Loan recoveries as a percentage of prior year's
charge-offs . . . . . . . . . . . . . . . . . 14.98 31.84 51.60
</TABLE>
Based on the current state of the economy and reviews of the loan portfolio
by ChoiceOne's management, management believes that the allowance for loan
losses as of December 31, 1998, is adequate to absorb possible charge-offs.
Management is aware that continued growth in ChoiceOne's loan portfolio may
cause the total dollar of loan charge-offs to increase in the future.
Manage-ment is investigating the purchase of sub-prime residential
mortgages. If these mortgages are retained in ChoiceOne's loan port-folio,
a higher allowance may be necessary for these mortgages than for
residential mortgages originated through the Bank's normal
A-27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CHOICEONE FINANCIAL SERVICES, INC.
channels. As loan growth, changes in the mix of the loan portfolio and
charge-offs occur in 1999, the allowance and provision for loan losses will
be reviewed and changes will be made to maintain the allowance at a level
that management considers adequate.
NONINTEREST INCOME
Noninterest income increased $224,000 in 1998, compared to an increase of
$214,000 in 1997. The growth in 1998 resulted from increased mortgage loan
sales and servicing. The high level of mortgage refinancings was due to
long-term mortgage rates that fell throughout the year of 1998. A large
part of the growth in noninterest income in 1997 came from increased
insurance commission income.
ChoiceOne experienced integration problems in the areas of accounting and
internal controls with the Travel Agency in 1998. This situation caused
less commission income to be recognized from the sale of airline tickets
and other travel products than was anticipated for the year. Changes have
been made in both accounting and internal controls. ChoiceOne's management
believes that these changes and an increased emphasis on marketing should
help the Travel Agency to achieve a higher level of commission income in
1999.
NONINTEREST EXPENSE
Noninterest expense grew $499,000 in 1998 compared to an increase of
$740,000 in 1997. Salaries and benefits expense increased $119,000 in 1998
compared to an increase of $463,000 in 1997. Salaries and benefits expense
was affected in 1997 by $282,000 of expense related to the termination of
ChoiceOne's pension plan. This was comprised of $323,000 of expense of the
401(k) savings and retirement plan (the "401(k) plan") and income of
$41,000 recognized upon the pension plan termination. The $323,000
represented the excess assets left in the pension plan after all vested
benefits had been paid to plan participants. The excess assets were
transferred from ChoiceOne's pension plan to the 401(k) plan in 1998.
Approximately 25% of the assets were used for the 1997 company contribution
to the 401(k) plan. ChoiceOne's management plans to use the remaining
assets for company contributions in future years. If the effect of the
pension termination were eliminated from the expenses of 1997, salaries and
benefits expense would have increased $181,000 from 1996 to 1997 and
$401,000 from 1997 to 1998. The additional increase in salaries and
benefits expense in 1998 resulted from higher wages due to staff growth and
personnel at the Bank's new branches, higher commission expense caused by
mortgage activity and higher incentive bonus expense due to increased
earnings by ChoiceOne.
<PAGE>
Occupancy expense grew $127,000 in 1998 compared to growth of $104,000 in
1997. Increases for the two years were caused by additional expenses of
the Bank's new locations and increased lease expense of ChoiceOne's
Plainfield Avenue office. Other noninterest expense increased $253,000 in
1998 compared to an increase of 173,000 in 1997. Expense categories that
provided approximately 60% of the growth in 1998 were advertising and
marketing, customer relations and consulting expense. Growth in
advertising and marketing expense caused approximately half of the expense
increase in 1997. Other noninterest expense in both years was also
affected by new branches and general growth in expenses.
Management anticipates that noninterest expense will continue to grow in
1998. ChoiceOne's management began in 1998 to develop plans to remodel the
Bank's main office. Management anticipates that the remodeling will begin
in the second quarter of 1999 and will be substantially complete by the end
of the third quarter. The total cost of remodeling is estimated at
$750,000 to $1,000,000. Other factors that management believes will affect
noninterest expense in 1999 will be a full year of operations for the
Bank's two new branches, additional advertising and marketing of
ChoiceOne's products and services, and general expense growth due to
increased activity levels.
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.
A-28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CHOICEONE FINANCIAL SERVICES, INC.
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. Management believes validation was 80% complete as
of December 31, 1998 with an estimated completion date of March 31, 1999.
Management believes implementation was also 80% complete as of the end
of 1998 with an estimated completion date of March 31, 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 is currently engaged in Y2K readiness testing and is
estimated to be 85% complete as of December 31, 1998. The estimated
completion date for all testing is March 31, 1999. The Committee has
identified what it considers to be critical internal systems. Testing of
internal systems is estimated to be 80% complete as of December 31, 1998
with an estimated final completion date 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 middle 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 $63,000 has been spent through December 31, 1998 on new
hardware, new software and software changes to ready ChoiceOne's systems
for Y2K. ChoiceOne's management estimates that approximately $17,000 in
staff time has been spent to prepare for Y2K. Management anticipates that
an additional $25,000 in hardware and software costs and $10,000 in staff
time may be necessary in 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.
<PAGE>
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 or is
developing backup plans for these areas. A time line has been established
to ensure that appropriate plan development and testing of the plans will
occur prior to December 31, 1999.
INSURANCE AND TRAVEL SUBSIDIARIES
The business combination with the Insurance Agency was effective January 1,
1996. The business combination was accounted for as a pooling-of-
interests. The operations of the Insurance Agency are included in
ChoiceOne's consolidated financial statements for 1996, 1997 and 1998. The
acquisition of the Travel Agency was effective August 1, 1997. The
acquisition was accounted for as a purchase transaction. The operations of
the Travel Agency beginning August 1, 1997, are included in ChoiceOne's
consolidated financial statements.
SECURITIES
Total securities increased $340,000 in 1998 after decreasing $3,064,000 in
1997. The difference was due to management's desire to hold total
securities at a constant level in 1998, in contrast to 1997 when some sales
and maturities of securities were used to fund
A-29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CHOICEONE FINANCIAL SERVICES, INC.
loan growth. Management anticipates that the securities balance will
remain steady or may increase slightly in 1999. ChoiceOne's management
intends that securities will continue to be used as collateral for public
deposits and repurchase agreements as well as serve as a source of
liquidity. The liquidity source may become important if some of
ChoiceOne's depositors withdraw their funds in late 1999 in anticipation of
computer problems associated with January 1, 2000.
LOANS
Total loans grew $12,999,000 in 1998 compared to $17,697,000 of growth in
1997. Dollar growth in all loan categories except for residential real
estate mortgages did not change significantly between 1997 and 1998.
Although ChoiceOne's residential mortgage department processed more
mortgage applications and closed more loans in 1998 than in 1997,
approximately one-half of 1998's activity was in long-term fixed rate
loans. Virtually all long-term fixed rate mortgages were sold by ChoiceOne
into the secondary market. This was in contrast to 1997 when slightly more
than 25% of mortgage originations were sold. Since a larger portion of
ChoiceOne's residential mortgages were kept in the loan portfolio in 1997,
this caused more growth in the mortgage loan balance than occurred in 1998.
ChoiceOne's management intends to focus on growth in all loan areas in
1999. Competition in the areas of loan rates and loan terms will continue
to affect ChoiceOne's ability to achieve the amount of loan growth desired.
Management intends to use business development activities to attempt to
generate demand in the commercial and agricultural loan categories.
Management intends to use contacts with real estate agents, advertising and
other methods to continue its growth in the residential real estate
financing market. The purchase of sub-prime residential mortgage loans for
the loan portfolio or for sale into the secondary market is also being
investigated by management. Management anticipates it will continue to use
special promotions and target marketing to encourage demand in direct
consumer loans. Management anticipates that it will also continue to
emphasize indirect consumer loans for automobiles and other items.
DEPOSITS
The balance of total deposits increased $14,840,000 in 1998, compared to an
increase of $11,886,000 in 1997. Certificate of deposit growth of
$8,253,000 in 1998 still comprised 56% of total deposit growth during 1998,
but not to the extent of 1997 when $12,278,000 of growth in certificates of
deposit provided more than the total deposit growth in 1997. Noninterest-
bearing and interest-bearing demand deposits increased $5,953,000 in 1998,
<PAGE>
compared to an increase of only $623,000 in 1997. Management believes that
the higher level of growth in demand deposits in 1998 resulted from
commercial deposit development activities and new interest-bearing demand
deposit products. ChoiceOne continued to use a national rate service to
obtain certificates of deposit in 1998. However, the rate service was used
to generate much less in deposit growth as the total balance of deposits
obtained through the service grew only $489,000 in 1998 compared to
$6,738,000 of growth in 1997.
ChoiceOne intends to continue to emphasize the attraction and retention of
deposits from its local market areas. Management believes that
certificates of deposit may continue to comprise a major share of the
deposit growth in 1999. Management intends to continue to emphasize its
non-certificate products in 1999 in an attempt to use the lower cost of
funds of these products. However, competition involving interest rates
paid and fees charged will continue to affect ChoiceOne's ability to
generate deposit growth in any of the deposit categories. To the extent
that local market deposit growth is not sufficient to meet loan demand,
ChoiceOne may use the national rate service for certificates of deposit in
1999.
A-30
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CHOICEONE FINANCIAL SERVICES, INC.
FEDERAL HOME LOAN BANK ADVANCES
The total balance of Federal Home Loan Bank advances ("FHLB advances") grew
$536,000 in 1998 and $914,000 in 1997. This was in contrast to 1996 when
FHLB advances provided a significant portion of the funding for loan
growth. ChoiceOne pledged certain residential real estate mortgages as
collateral during 1997 and 1998. ChoiceOne plans to use FHLB advances in
1999 to fund loan growth to the extent allowed by mortgage growth, if
needed.
SHAREHOLDERS' EQUITY
ChoiceOne's shareholders' equity increased $604,000 in 1998, compared to an
increase of $1,000,000 in 1997. Equity in both 1997 and 1998 experienced
increases due to the retention of earnings. Shareholders' equity was also
affected in 1998 by the issuance and repurchase of ChoiceOne's common
stock. ChoiceOne began its stock repurchase plan in August 1998. The
authorized number of common shares that can be repurchased is 50,000.
ChoiceOne had repurchased 24,517 shares of its common stock through
December 31, 1998. Management intends to use the repurchased stock for
employee benefit plans, stock dividends and other purposes. Of the shares
repurchased in 1998, a total of 2,218 shares were issued in 1998 to the
401(k) savings and retirement plan as ChoiceOne's company contribution and
to certain of ChoiceOne's directors as compensation in lieu of cash.
ChoiceOne's management anticipates that it will continue to repurchase
shares of its common stock in 1999 and will use the shares for the purposes
indicated above.
Note 16 to the Consolidated Financial Statements presents regulatory
capital information as of the end of 1998 and 1997. The capital to assets
percentages declined slightly in 1998 as ChoiceOne's assets grew slightly
more than its capital. This relationship is consistent with management's
desire to decrease capital as a percentage of assets to better leverage
shareholders' investment. However, management does not desire to decrease
ChoiceOne's capital below those levels considered to be well capitalized.
LIQUIDITY AND RATE SENSITIVITY
The concept of liquidity addresses the measurement of ChoiceOne's ability
to meet its cash flow requirements. These requirements include depositors
desiring to withdraw funds and borrowers seeking credit. Relatively short-
term liquid funds exist in the form of lines of credit to purchase federal
funds at four of the Bank's correspondent banks. The total amount of
federal funds that were available for purchase at the Bank's correspondent
<PAGE>
banks was $14,200,000 at December 31, 1998, while the Bank's actual federal
funds purchased balance was $1,000,000 as of the same date. Longer-term
liquidity needs may be met through deposit growth, maturities of
securities, normal loan repayments, advances from the Federal Home Loan
Bank and income retention. Approximately $3,680,000 of additional Federal
Home Loan Bank advances were available at the end of 1998 based on
ChoiceOne's collateral at the Federal Home Loan Bank. The Bank also used
a national rate service in 1997 and 1998 for certificates of deposit
to help meet cash flow requirements.
The Bank's Asset/Liability Management Committee monitors liquidity and loan
growth funding issues. Management anticipates that liquidity may be an
issue in a different way in late 1999. Information regarding the Year 2000
and the problems that may be caused with computers and computer-based
systems may cause concern for the Bank's depositors. Management believes
that some depositors may convert their balances to immediately available
funds and others may remove their deposits from the Bank and convert them
to cash. ChoiceOne's Year 2000 Committee will monitor this situation and
has already made some plans to be prepared for funds outflow. The
Committee plans to have higher than normal cash balances on hand during the
last quarter of 1999 to provide access to cash by depositors. In addition
to its current sources of funds, the Bank is working with the Federal
Reserve Bank of Chicago to establish a secured line of credit. Management
anticipates that this line of credit will be collateralized by commercial
loans and management's intention is that this line will serve as an
additional source of liquidity for circumstances such as the end of 1999.
A-31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CHOICEONE FINANCIAL SERVICES, INC.
<TABLE>
TABLE 4 MATURITIES AND REPRICING SCHEDULE
<CAPTION>
DECEMBER 31, 1998
0-3 3-12 1-5 OVER
MONTHS MONTHS YEARS 5 YEARS TOTAL
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Loans . . . . . . . . . . . . . . . . . . . . $ 39,672 $ 19,088 $ 67,989 $ 14,026 $ 140,775
Interest-bearing deposits with banks. . . . . 8 -- -- -- 8
Taxable securities. . . . . . . . . . . . . . 2,934 4,945 3,538 352 11,769
Nontaxable securities . . . . . . . . . . . . 147 1,023 2,428 4,915 8,513
-------------------------------------------------------------
Rate-sensitive assets . . . . . . . . . . . . 42,761 25,056 73,955 19,293 161,065
LIABILITIES
Interest-bearing transaction accounts . . . . 26,835 -- -- -- 26,835
Savings deposits. . . . . . . . . . . . . . . 8,777 -- -- -- 8,777
Time deposits . . . . . . . . . . . . . . . . 16,995 38,561 15,359 144 71,059
Federal Home Loan Bank advances . . . . . . . 680 6,471 19,499 -- 26,650
Other . . . . . . . . . . . . . . . . . . . . 3,328 354 209 -- 3,891
-------------------------------------------------------------
Rate-sensitive liabilities. . . . . . . . . 56,615 45,386 35,067 144 137,212
-------------------------------------------------------------
Rate-sensitive assets less rate-sensitive liabilities
Asset (liability) gap for the period . . $ (13,854) $ (20,330) $ 38,888 $ 19,149 $ 23,853
=============================================================
Cumulative asset (liability) gap. . . . . $ (13,854) $ (34,184) $ 4,704 $ 23,853
=================================================
</TABLE>
Interest sensitivity is related to liquidity because each is affected by
maturing assets and sources of funds. ChoiceOne's Asset/Liability
Management Committee (the "ALCO") attempts to stabilize the interest rate
spread and avoid possible adverse effects when unusual or rapid changes in
interest rates occur. One method it uses of measuring interest rate
sensitivity is the ratio of rate-sensitive assets to rate-sensitive
liabilities. An asset or liability is considered to be rate-sensitive if
it matures or otherwise reprices within a given time frame. Table 4
documents the maturity or repricing schedule for ChoiceOne's rate-sensitive
assets and liabilities for selected time periods. One of the time frames
that the ALCO used in 1998 to measure interest rate sensitivity was one
year. ChoiceOne's ratio of rate-sensitive assets to rate-sensitive
<PAGE>
liabilities which matured or repriced within a one year time frame was 66%
as of December 31, 1998, compared to 76% as of December 31, 1997. The
change was primarily due to longer-term assets which were funded by
shorter-term liabilities in 1998. It is the ALCO's and management's goal
to have the rate-sensitive assets to rate-sensitive liabilities ratio in a
range of 80% to 120% at the one year maturity or repricing point.
Management believes that the percentage at the end of 1998 is low because
interest-bearing transaction accounts and savings deposits have been
classified in the 0 to 3 month repricing category. While these deposits
can reprice within this time frame, management has some control over the
timing or extent of the change in interest rates on these deposits.
However, the ALCO believes that it may be prudent to lengthen some of the
maturities of its rate-sensitive liabilities to take advantage of
relatively low longer-term interest rates and to move the ratio of rate-
sensitive assets to rate-sensitive liabilities closer to its goal range.
Another method ChoiceOne uses to monitor its interest rate sensitivity is
to subject rate-sensitive assets and liabilities to interest rate shocks.
Assets and liabilities are subjected to immediate 200 basis point increases
and decreases in interest rates and the effect on net income and
shareholders' equity is measured. ChoiceOne's Interest Rate Risk Policy
states that the changes in interest rates cannot cause net income to
increase or decrease more than 10% and cannot cause the value of
shareholders' equity to increase or decrease more than 2% of total assets.
The 200 basis point interest rate shock as of December 31, 1998, caused net
income to decrease 6.5% if rates increased and to increase 3.4% if rates
decreased. The shock computation caused the value of shareholders' equity
to decrease by 1.4% if rates increased and to increase by 1.0% if rates
decreased. The ALCO will continue to monitor the effect of interest rate
shocks on a periodic basis.
A-32
<PAGE>
CORPORATE AND SHAREHOLDER INFORMATION
ChoiceOne Financial Services, Inc.
CORPORATE HEADQUARTERS
ChoiceOne Financial Services, Inc.
109 East Division Street
P.O. Box 186
Sparta, Michigan 49345
Phone: (616) 887-7366
Fax: (616) 887-5566
MARKET MAKERS IN CHOICEONE
FINANCIAL SERVICES, INC. STOCK
Robert W. Baird & Company, Inc.
Grandville, Michigan
(616) 534-2755
(888) 534-4864
Morgan Stanley Dean Witter
Grand Rapids, Michigan
(616) 454-8998
(800) 788-9640
Paine Webber, Inc.
Grand Rapids, Michigan
(616) 459-4231
(800) 333-4231
Roney & Company
Grand Rapids, Michigan
(616) 456-8691
(800) 553-2249
Stifel Nicolaus & Company, Inc.
Grand Rapids, Michigan
(616) 942-1717
(800) 676-0477
Tucker Anthony
Grand Rapids, Michigan
(616) 742-3910
(888) 848-3910
STOCK REGISTRAR AND TRANSFER AGENT
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
(800) 866-1340
<PAGE>
ANNUAL MEETING
The annual meeting of shareholders
of ChoiceOne Financial Services,
Inc., will be held at 7:30 p.m. EST on
Thursday, April 29, 1999, at Sparta
Ridgeview Elementary School,
Sparta, Michigan.
SUBSIDIARY INFORMATION
CHOICEONE BANK
Main Office
109 East Division Street
P.O. Box 186
Sparta, MI 49345
Appletree Office
416 West Division Street
Sparta, MI 49345
Cedar Springs Office
4170 Seventeen Mile Road
Cedar Springs, MI 49319
Plainfield Office
4949 Plainfield Avenue NE
Grand Rapids, MI 49505
Sparta Great Day Office
565 South State Street
Sparta, MI 49345
Alpine Office
3527 Alpine Avenue NW
Walker, MI 49544
ChoiceOne Bank is a member of the
Federal Deposit Insurance
Corporation and is an Equal
Opportunity and Housing Lender.
[HOUSING LOGO]
CHOICEONE INSURANCE
AGENCIES, INC.
Sparta Office
440 West Division Street
Sparta, MI 49345
<PAGE>
Cedar Springs Office
4170 Seventeen Mile Road
Cedar Springs, MI 49319
Plainfield Office
4949 Plainfield Avenue NE
Grand Rapids, MI 49505
CHOICEONE TRAVEL, INC.
Alpine Office
3527 Alpine Avenue NW
Walker, MI 49544
A-33
<PAGE>
DIRECTORS AND OFFICERS
ChoiceOne Financial Services, Inc.
DIRECTORS
CHOICEONE FINANCIAL SERVICES, INC.
FRANK G. BERRIS
Owner, American Gas & Oil Co., Inc.
(Distributor of Petroleum Products)
LAWRENCE D. BRADFORD
President, ChoiceOne Insurance
Agencies, Inc.
WILLIAM F. CUTLER, JR.
Former Vice President, H. H. Cutler
Co. (Apparel Manufacturer)
LEWIS G. EMMONS
Special Projects Manager, Great Day
Foods, Inc. (Grocery Retailer)
STUART GOODFELLOW
Owner, Goodfellow Vending Services
(Vending Company) and Goodfellow
Blueberry Farms
JAE M. MAXFIELD
President and Chief Executive Officer,
ChoiceOne Financial Services, Inc.
and ChoiceOne Bank
JON E. PIKE
C.P.A., Managing Partner, Beene
Garter LLP (Certified Public
Accountants)
LINDA R. PITSCH
Secretary, ChoiceOne Financial
Services, Inc., and Senior Vice
President and Cashier, ChoiceOne
Bank
ANDREW W. ZAMIARA, R.PH.
President and Manager, Momber
Pharmacy and Gift Shop and
Momber Hallmark
<PAGE>
OFFICERS
CHOICEONE FINANCIAL SERVICES, INC.
JON E. PIKE
Chairman of the Board
JAE M. MAXFIELD
President and Chief Executive Officer
DENIS L. CROSBY
Vice President
LINDA R. PITSCH
Secretary
THOMAS LAMPEN
Treasurer
OFFICERS
SUBSIDIARY - CHOICEONE BANK
JON E. PIKE
Chairman of the Board
JAE M. MAXFIELD
President and Chief Executive Officer
DENIS L. CROSBY
Senior Vice President - Commercial
Services
LINDA R. PITSCH
Senior Vice President - Cashier
KECIA A. FLYNN
Vice President - Commercial Loans
DEANNE GAVALIS
Vice President - Retail Services
KAREN M. GILBERT
Vice President - Mortgage Loans
MARY JOHNSON
Vice President - Human
Resources/Internal Audit
<PAGE>
THOMAS LAMPEN
Vice President - Chief Financial
Officer
DANIEL MITCHELL
Vice President - Commercial Loans
KEANE BLASZCZYNSKI
Assistant Vice President - Commercial
Loans
SHERRY CONKLIN
Assistant Vice President - Branch
Sales Manager - Cedar Springs Office
DEAN HANSON
Assistant Vice President - Commercial
Loans
PHILIP OTTINGER
Assistant Vice President - Consumer
Loans
RACHEL VANIN MILLER
Assistant Vice President - Branch
Sales Manager - Plainfield Office
LAURIE ZUREK
Assistant Vice President - Consumer
Loans
DEREK DRUDY
Branch Sales Manager - Sparta Great
Day Office
NANCY JO WADE
Branch Sales Manager - Alpine Office
OFFICERS
SUBSIDIARY - CHOICEONE INSURANCE
AGENCIES, INC.
JAE M. MAXFIELD
Chairman of the Board
LAWRENCE D. BRADFORD
President
<PAGE>
JEFFREY S. BRADFORD, CIC
Vice President
TAB M. BRADFORD, CIC
Vice President
LINDA DEVRIES
Assistant Vice President
CARLO VANIN
Plainfield Office President
LINDA R. PITSCH
Secretary
THOMAS LAMPEN
Treasurer
OFFICERS
SUBSIDIARY - CHOICEONE TRAVEL, INC.
JAE M. MAXFIELD
Chairman of the Board and President
LINDA R. PITSCH
Secretary
THOMAS LAMPEN
Treasurer
A-34
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE SMALL BUSINESS ISSUER
The following lists the subsidiaries of the Registrant and the state or
jurisdiction of incorporation.
NAME AND ADDRESS OF SUBSIDIARY INCORPORATED
------------------------------ ------------
1. ChoiceOne Bank Michigan
109 East Division
Sparta, Michigan 49345
2. ChoiceOne Insurance Agencies, Inc.<F*> Michigan
440 West Division
Sparta, Michigan 49345
3. ChoiceOne Travel, Inc.<F*> Michigan
3527 Alpine Avenue NW
Walker, Michigan 49544
4. West Shore Computer Services, Inc.<F**> Michigan
111 North Main Street
Scottville, Michigan 49454
_______________________
<F*>These are wholly owned subsidiaries of ChoiceOne Bank
<F**>ChoiceOne Bank owns a 20% interest in West Shore Compute Services, Inc.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND> THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT OF CHOICEONE
FINANCIAL SERVICES, INC., INCLUDED IN THE DECEMBER 31, 1998, FORM 10-KSB
FILING AND IS QUALIFIED IN ITS ENTIRETY BY SUCH FORM 10-KSB FILING.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 5,055
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 20,282
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 140,775
<ALLOWANCE> 1,851
<TOTAL-ASSETS> 170,602
<DEPOSITS> 122,332
<SHORT-TERM> 3,310
<LIABILITIES-OTHER> 1,588
<LONG-TERM> 27,231
<COMMON> 0
0
0
<OTHER-SE> 16,141
<TOTAL-LIABILITIES-AND-EQUITY> 170,602
<INTEREST-LOAN> 12,851
<INTEREST-INVEST> 1,141
<INTEREST-OTHER> 18
<INTEREST-TOTAL> 14,010
<INTEREST-DEPOSIT> 4,876
<INTEREST-EXPENSE> 6,803
<INTEREST-INCOME-NET> 7,207
<LOAN-LOSSES> 730
<SECURITIES-GAINS> 35
<EXPENSE-OTHER> 5,675
<INCOME-PRETAX> 2,795
<INCOME-PRE-EXTRAORDINARY> 2,795
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,922
<EPS-PRIMARY> 1.79
<EPS-DILUTED> 1.79
<YIELD-ACTUAL> 4.83
<LOANS-NON> 489
<LOANS-PAST> 419
<LOANS-TROUBLED> 62
<LOANS-PROBLEM> 6,440
<ALLOWANCE-OPEN> 1,567
<CHARGE-OFFS> 525
<RECOVERIES> 79
<ALLOWANCE-CLOSE> 1,851
<ALLOWANCE-DOMESTIC> 1,545
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 306
</TABLE>
