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Previous: CHOICEONE FINANCIAL SERVICES INC, 10KSB, 2000-03-30 |
Next: CHOICEONE FINANCIAL SERVICES INC, 10KSB, 2000-03-30 |
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| Contents |
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| To Our Shareholders |
S-1 |
| ChoiceOne Financial Services, Inc. |
S-1 |
| Common Stock Information |
S-1 |
| Financial Highlights |
S-2 |
| Consolidated Financial Statements |
S-3 |
| Notes to Consolidated Financial Statements |
S-7 |
| Independent Auditors' Report |
S-23 |
| Management's Discussion and Analysis of Financial Condition and Results of Operations |
S-24 |
| Corporate and Shareholder Information |
S-34 |
| Directors and Officers |
S-35 |
This 1999 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. 1999 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 1999 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, 1999, 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") 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 five full-service offices and one
drive-up facility. The Bank provides a variety of banking and other financial
services to all types of customers.
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:
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| First Quarter |
$ 23 |
$ 27 |
$ 18 |
$ 20 |
|||||
| Second Quarter |
24 |
28 |
18 |
24 |
|||||
| Third Quarter |
26 |
28 |
20 |
26 |
|||||
| Fourth Quarter |
26 |
28 |
23 |
26 |
The above market prices have been adjusted where necessary to reflect the stock dividends and stock split declared in 1999 and 1998. 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 29, 2000, there were 1,106,391 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 1999 and 1998:
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| First Quarter |
$ .19 |
$ .18 |
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| Second Quarter |
.21 |
.19 |
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| Third Quarter |
.21 |
.19 |
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| Fourth Quarter |
.21 |
|
.19 |
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| Totals |
$ .82 |
|
$ .75 |
The above dividend per share amounts have been adjusted where necessary to reflect the stock dividends and stock split declared in 1999 and 1998.
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 15 to the Consolidated Financial Statements). Based on information
presently available, management expects ChoiceOne to declare and pay regular
quarterly cash dividends in 2000.
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| For the year (dollars in thousands) | |||||||||||
| Net interest income |
$ 7,699 |
$ 7,207 |
$ 6,315 |
$ 5,754 |
$ 4,931 |
||||||
| Provision for loan losses |
625 |
730 |
539 |
523 |
164 |
||||||
| Noninterest income |
1,984 |
1,993 |
1,769 |
1,555 |
656 |
||||||
| Noninterest expense |
6,219 |
5,675 |
5,176 |
4,436 |
3,448 |
||||||
| Income before income taxes |
2,839 |
2,795 |
2,369 |
2,350 |
1,975 |
||||||
| Income tax expense |
887 |
873 |
632 |
655 |
511 |
||||||
| Net income |
1,952 |
1,922 |
1,737 |
1,695 |
1,464 |
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| Cash dividends declared |
909 |
846 |
783 |
663 |
551 |
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| Per share* | |||||||||||
| Net income |
$ 1.76 |
$ 1.71 |
$ 1.54 |
$ 1.50 |
$ 1.33 |
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| Cash dividends |
.82 |
.75 |
.69 |
.59 |
.50 |
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| Shareholders' equity (at year end) |
15.26 |
14.59 |
13.78 |
12.88 |
12.69 |
||||||
| Average for the year (dollars in thousands) | |||||||||||
| Securities |
$ 18,176 |
$ 21,017 |
$ 22,189 |
$ 22,547 |
$ 27,609 |
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| Gross loans |
149,402 |
133,279 |
118,369 |
94,461 |
74,223 |
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| Deposits |
123,006 |
113,970 |
100,815 |
95,210 |
91,446 |
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| Federal Home Loan Bank advances |
28,019 |
26,016 |
25,425 |
9,385 |
77 |
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| Shareholders' equity |
16,572 |
16,001 |
14,998 |
14,129 |
13,200 |
||||||
| Assets |
177,279 |
163,257 |
148,652 |
123,134 |
107,552 |
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| At year end (dollars in thousands) | |||||||||||
| Securities |
$ 15,243 |
$ 20,282 |
$ 19,942 |
$ 23,006 |
$ 23,187 |
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| Gross loans |
167,980 |
140,775 |
127,776 |
110,079 |
79,082 |
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| Deposits |
127,553 |
122,332 |
107,492 |
95,606 |
92,902 |
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| Federal Home Loan Bank advances |
36,999 |
26,650 |
26,114 |
25,200 |
1,000 |
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| Shareholders' equity |
16,888 |
16,141 |
15,537 |
14,537 |
13,784 |
||||||
| Assets |
193,107 |
170,602 |
156,329 |
141,731 |
109,916 |
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| Ratios | |||||||||||
| Return on average assets |
1.10 |
% |
1.18 |
% |
1.17 |
% |
1.38 |
% |
1.36 |
% | |
| Return on average shareholders' equity |
11.78 |
12.01 |
11.58 |
12.00 |
11.09 |
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| Cash dividend payout |
46.57 |
44.02 |
45.08 |
39.12 |
37.64 |
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| Shareholders' equity to assets (at year end) |
8.75 |
9.46 |
9.94 |
10.26 |
12.54 |
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*Per share amounts are retroactively adjusted for the effect of stock dividends and stock splits.
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| Assets | ||||||
| Cash and due from banks |
$ 3,998,000
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$ 5,055,000
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| Securities available for sale |
15,243,000
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20,282,000
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| Loans, net |
166,073,000
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138,924,000
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| Premises and equipment, net |
4,914,000
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4,086,000
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| Other assets |
2,879,000
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2,255,000
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| Total assets |
$ 193,107,000
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$ 170,602,000
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| Liabilities | ||||||
| Deposits - noninterest bearing |
$ 14,701,000
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$ 15,661,000
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| Deposits - interest bearing |
112,852,000
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106,671,000
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| Federal funds purchased and repurchase agreements |
9,527,000
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3,310,000
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| Other liabilities |
2,140,000
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2,169,000
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| Federal Home Loan Bank advances |
36,999,000
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26,650,000
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| Total liabilities |
176,219,000
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154,461,000
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| Shareholders' Equity | ||||||
| Preferred stock; shares authorized: 100,000; shares outstanding: none |
--
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--
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| Common stock; shares authorized: 2,000,000; shares outstanding: | ||||||
| 1,106,391 in 1999 and 1,053,285 in 1998 |
13,264,000
|
11,824,000
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| Retained earnings |
3,677,000
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4,070,000
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| Accumulated other comprehensive income |
(53,000
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) |
247,000
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| Total shareholders' equity |
16,888,000
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16,141,000
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| Total liabilities and shareholders' equity |
$ 193,107,000
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$ 170,602,000
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| Interest income | |||||||||
| Loans, including fees |
$ 13,698,000 |
$ 12,851,000 |
$ 11,230,000 |
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| Securities | |||||||||
| Taxable |
609,000 |
705,000 |
845,000 |
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| Nontaxable |
385,000 |
436,000 |
484,000 |
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| Other |
1,000 |
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18,000 |
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8,000 |
||||
| Total interest income |
14,693,000 |
14,010,000 |
12,567,000 |
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| Interest expense | |||||||||
| Deposits |
4,853,000 |
4,876,000 |
4,279,000 |
||||||
| Short-term borrowings |
376,000 |
211,000 |
264,000 |
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| Federal Home Loan Bank advances |
1,734,000 |
1,650,000 |
1,619,000 |
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| Long-term debt |
31,000 |
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66,000 |
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90,000 |
||||
| Total interest expense |
6,994,000 |
|
6,803,000 |
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6,252,000 |
||||
| Net interest income |
7,699,000 |
7,207,000 |
6,315,000 |
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| Provision for loan losses |
625,000 |
|
730,000 |
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539,000 |
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| Net interest income after provision for loan losses |
7,074,000 |
6,477,000 |
5,776,000 |
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| Noninterest income | |||||||||
| Customer service fees |
588,000 |
502,000 |
448,000 |
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| Net gains or losses on sales of securities |
4,000 |
35,000 |
28,000 |
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| Insurance commission income |
977,000 |
862,000 |
895,000 |
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| Mortgage loan sales and servicing |
177,000 |
419,000 |
152,000 |
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| Other income |
238,000 |
|
175,000 |
|
246,000 |
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| Total noninterest income |
1,984,000 |
1,993,000 |
1,769,000 |
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| Noninterest expense | |||||||||
| Salaries and benefits |
3,099,000 |
2,948,000 |
2,829,000 |
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| Occupancy expense |
1,069,000 |
888,000 |
761,000 |
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| Computer service expense |
185,000 |
155,000 |
156,000 |
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| Other expense |
1,866,000 |
|
1,684,000 |
|
1,430,000 |
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| Total noninterest expense |
6,219,000 |
|
5,675,000 |
|
5,176,000 |
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| Income before income tax |
2,839,000 |
2,795,000 |
2,369,000 |
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| Income tax expense |
887,000 |
|
873,000 |
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632,000 |
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| Net income |
$ 1,952,000 |
|
$ 1,922,000 |
|
$ 1,737,000 |
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| Basic earnings per common share and earnings per | |||||||||
| common share assuming dilution |
$
1.76 |
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$
1.71 |
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$
1.54 |
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| Balance, start of 1997 |
$ 10,119,000 |
$ 4,305,000 |
$ 113,000 |
$ 14,537,000 |
||||||
| Comprehensive income | ||||||||||
| Net income |
-- |
1,737,000 |
-- |
1,737,000 |
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| Change in unrealized gains and losses, net |
-- |
-- |
55,000 |
55,000 |
||||||
| Total comprehensive income |
1,792,000 |
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| 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 ($.69 per share) |
-- |
|
(783,000 |
) |
-- |
|
(783,000 |
) | ||
| Balance, end of 1997 |
12,375,000 |
2,994,000 |
168,000 |
15,537,000 |
||||||
| Comprehensive income | ||||||||||
| Net income |
-- |
1,922,000 |
-- |
1,922,000 |
||||||
| Change in unrealized gains and losses, net |
-- |
-- |
79,000 |
79,000 |
||||||
| Total comprehensive income |
2,001,000 |
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| 24,517 shares of stock repurchased for | ||||||||||
| employee benefit plans, stock dividends, | ||||||||||
| and other |
(629,000 |
) |
-- |
-- |
(629,000 |
) | ||||
| 2,218 shares of stock issued to employee | ||||||||||
| benefit plans and other |
89,000 |
-- |
-- |
89,000 |
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| Fractional shares paid for 5% stock dividend | ||||||||||
| declared in 1997 and two-for-one stock | ||||||||||
| split declared in 1998 |
(11,000 |
) |
-- |
-- |
(11,000 |
) | ||||
| Cash dividends ($.75 per share) |
-- |
|
(846,000 |
) |
-- |
|
(846,000 |
) | ||
| Balance, end of 1998 |
11,824,000 |
4,070,000 |
247,000 |
16,141,000 |
||||||
| Comprehensive income | ||||||||||
| Net income |
-- |
1,952,000 |
-- |
1,952,000 |
||||||
| Change in unrealized gains and losses, net |
-- |
-- |
(300,000 |
) |
(300,000 |
) | ||||
| Total comprehensive income |
1,652,000 |
|||||||||
| 5% stock dividend paid in June 1999 |
1,430,000 |
(1,436,000 |
) |
-- |
(6,000 |
) | ||||
| 4,781 shares of stock repurchased for | ||||||||||
| employee benefit plans, stock dividends, | ||||||||||
| and other |
(131,000 |
) |
-- |
-- |
(131,000 |
) | ||||
| 5,406 shares of stock issued to employee | ||||||||||
| benefit plans and other |
141,000 |
-- |
-- |
141,000 |
||||||
| Cash dividends ($.82 per share) |
-- |
|
(909,000 |
) |
-- |
|
(909,000 |
) | ||
| Balance, end of 1999 |
$ 13,264,000 |
|
$ 3,677,000 |
|
$ (53,000) |
|
$ 16,888,000 |
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See accompanying notes to consolidated financial statements.
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| Cash flows from operating activities: | ||||||||||
| Net income |
$ 1,952,000 |
$ 1,922,000 |
$ 1,737,000 |
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| Reconciling items: | ||||||||||
| Net securities gains |
(4,000 |
) |
(35,000 |
) |
(28,000 |
) | ||||
| Net amortization on securities |
113,000 |
166,000 |
74,000 |
|||||||
| Net gain on sales of loans |
(114,000 |
) |
(268,000 |
) |
(42,000 |
) | ||||
| Loans originated for sale |
(7,289,000 |
) |
(22,993,000 |
) |
(4,742,000 |
) | ||||
| Proceeds from loan sales |
7,490,000 |
23,497,000 |
4,762,000 |
|||||||
| Provision for loan losses |
625,000 |
730,000 |
539,000 |
|||||||
| Depreciation |
513,000 |
381,000 |
320,000 |
|||||||
| Other non-cash charges and credits |
(40,000 |
) |
(12,000 |
) |
(13,000 |
) | ||||
| Deferred income tax expense/(benefit) |
(8,000 |
) |
(8,000 |
) |
(69,000 |
) | ||||
| Changes in assets and liabilities: | ||||||||||
| Interest receivable |
(49,000 |
) |
(38,000 |
) |
(85,000 |
) | ||||
| Other assets |
(419,000 |
) |
449,000 |
(419,000 |
) | |||||
| Interest payable |
52,000 |
13,000 |
88,000 |
|||||||
| Other liabilities |
302,000 |
|
(2,603,000 |
) |
2,503,000 |
|||||
| Net cash from operating activities |
3,124,000 |
|
1,201,000 |
|
4,625,000 |
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| Cash flows from investing activities: | ||||||||||
| Securities available for sale: | ||||||||||
| Purchases |
(1,890,000 |
) |
(6,686,000 |
) |
(4,219,000 |
) | ||||
| Sales proceeds |
274,000 |
1,456,000 |
4,618,000 |
|||||||
| Principal payments |
6,085,000 |
4,890,000 |
2,764,000 |
|||||||
| Net change in loans |
(27,753,000 |
) |
(13,633,000 |
) |
(18,140,000 |
) | ||||
| Purchase of insurance or travel agencies |
(74,000 |
) |
-- |
(50,000 |
) | |||||
| Premises and equipment expenditures, net |
(1,341,000 |
) |
(804,000 |
) |
(996,000 |
) | ||||
| Net cash used in investing activities |
(24,699,000 |
) |
(14,777,000 |
) |
(16,023,000 |
) | ||||
| Cash flows from financing activities: | ||||||||||
| Net change in deposits |
5,221,000 |
14,840,000 |
11,886,000 |
|||||||
| Net change in short-term borrowings |
6,217,000 |
1,250,000 |
(2,671,000 |
) | ||||||
| Proceeds from long-term debt |
17,500,000 |
10,000,000 |
3,731,000 |
|||||||
| Payments on long-term debt |
(7,515,000 |
) |
(9,831,000 |
) |
(1,939,000 |
) | ||||
| Issuance of common stock |
141,000 |
89,000 |
-- |
|||||||
| Repurchase of common stock |
(131,000 |
) |
(629,000 |
) |
-- |
|||||
| Cash dividends and fractional shares from stock dividends and splits |
(915,000 |
) |
(857,000 |
) |
(792,000 |
) | ||||
| Net cash from financing activities |
20,518,000 |
|
14,862,000 |
|
10,215,000 |
|||||
| Net change in cash and cash equivalents |
(1,057,000 |
) |
1,286,000 |
(1,183,000 |
) | |||||
| Beginning cash and cash equivalents |
5,055,000 |
|
3,769,000 |
|
4,952,000 |
|||||
| Ending cash and cash equivalents |
$ 3,998,000 |
|
$ 5,055,000 |
|
$ 3,769,000 |
|||||
| Cash paid for interest |
$ 6,942,000 |
$ 6,790,000 |
$ 6,165,000 |
|||||||
| Cash paid for income taxes |
925,000 |
915,000 |
605,000 |
|||||||
| Loans transferred to other real estate |
-- |
47,000 |
279,000 |
|||||||
During 1998, $2,278,000 of loans were transferred from portfolio loans to loans held for sale. During 1999, $270,000 of loans were transferred from loans held for sale to portfolio loans.
See accompanying notes to consolidated financial statements.
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.
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 other comprehensive income and 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 loan 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. Payments received on such loans are reported as interest recoveries,
principal reductions or both. Each loan is evaluated on its own merits; therefore,
loans are not automatically classified as non-accrual based upon standardized
criteria.
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.
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 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 to
measure expense for options using an option pricing model to estimate fair value.
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.
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, 1999, 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 16 to the financial statements. Fair value estimates
involve uncertainties 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.
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 1999 presentation.
Effective August 1, 1997, the Bank purchased ChoiceOne
Travel, Inc. (formerly Alpine Travel, Inc.). Cash was paid for all of the
outstanding shares of the Travel Agency. The transaction was accounted
for as a purchase. Effective September 1, 1999, the Insurance Agency purchased
InsuranceSource, Inc., an insurance agency located in Grand Rapids, Michigan.
Cash and a note payable were paid for all of the outstanding shares of
InsuranceSource, Inc. The note payable includes payments due in each of
the next four years. The amount of the payments will be based on the retained
business of InsuranceSource, Inc. The transaction was accounted for as
a purchase.
Note 3 -- Securities
Information at year-end follows:
|
|
|
|
|
|
|
|
|||
| Securities Available for Sale |
|
||||||||
| U.S. Treasuries and U.S. Government agencies |
$ 750,000 |
$
-- |
$ (1,000 |
) |
$ 749,000 |
||||
| States and municipalities |
7,794,000 |
60,000 |
(137,000 |
) |
7,717,000 |
||||
| Mortgage-backed securities |
4,058,000 |
24,000 |
(27,000 |
) |
4,055,000 |
||||
| Other securities |
2,722,000 |
|
-- |
|
-- |
|
2,722,000 |
||
| Total |
$ 15,324,000 |
|
$ 84,000 |
|
$ (165,000 |
) |
$ 15,243,000 |
||
|
|
|||||||||
| 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 |
||
Contractual maturities of securities available for sale at December 31, 1999, follows:
|
|
|
|
|||
| Due within one year |
$ 1,511,000 |
$ 1,511,000 |
|||
| Due after one year through five years |
1,922,000 |
1,943,000 |
|||
| Due after five years through ten years |
2,495,000 |
2,444,000 |
|||
| Due after ten years |
2,616,000 |
|
2,568,000 |
||
| Total |
8,544,000 |
8,466,000 |
|||
| Mortgage-backed securities not due at a specific date |
4,058,000 |
4,055,000 |
|||
| Other securities not due at a specific date |
2,722,000 |
|
2,722,000 |
||
| Total |
$15,324,000 |
|
$ 15,243,000 |
||
|
|
|
|
|
|
||
| Proceeds from sales of securities |
$ 274,000 |
$ 1,456,000 |
$ 4,618,000 |
|||
| Gross realized gains |
4,000 |
36,000 |
38,000 |
|||
| Gross realized losses |
-- |
1,000 |
10,000 |
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:
|
|
|
|
|||
| Securities sold under agreements to repurchase |
$ 3,450,000 |
$ 3,034,000 |
|||
| Public deposits |
-- |
|
503,000 |
||
| Total |
$ 3,450,000 |
|
$ 3,537,000 |
||
Note 4-- Loans
Loan information at year-end or for the year follows:
|
|
|
|
|||
| Loan Components | |||||
| Commercial |
$ 59,826,000 |
$52,062,000 |
|||
| Agricultural |
8,777,000 |
9,236,000 |
|||
| Real estate mortgage -- construction |
4,399,000 |
3,122,000 |
|||
| Real estate mortgage -- residential |
60,093,000 |
45,611,000 |
|||
| Consumer |
34,885,000 |
|
30,744,000 |
||
| Total loans before allowance for loan losses |
167,980,000 |
140,775,000 |
|||
| Less allowance for loan losses |
1,907,000 |
|
1,851,000 |
||
| Loans, net |
$166,073,000 |
|
$138,924,000 |
||
| Loans Serviced for Others | |||||
| Commercial and agricultural loans |
$ 5,417,000 |
$ 4,026,000 |
|||
| Residential real estate mortgage loans |
37,462,000 |
|
34,612,000 |
||
| Total loans serviced for others |
$ 42,879,000 |
|
$38,638,000 |
||
| Mortgage Servicing Rights | |||||
| Beginning of year |
$ 149,000 |
$ 58,000 |
|||
| Originations |
40,000 |
130,000 |
|||
| Amortization |
(46,000) |
|
(39,000 |
) | |
| End of year |
$ 143,000 |
|
$ 149,000 |
||
| Loans to Related Parties | |||||
| Beginning of year |
$ 1,573,000 |
$ 1,353,000 |
|||
| New loans |
1,281,000 |
1,728,000 |
|||
| Repayments |
(364,000 |
) |
(1,490,000 |
) | |
| Change in persons included |
246,000 |
|
(18,000 |
) | |
| End of year |
$ 2,736,000 |
|
$ 1,573,000 |
||
|
|
|
|
|||
| Cost of Loans Pledged for Borrowings | |||||
| Residential real estate mortgage loans pledged for Federal Home Loan Bank advances |
$ 51,884,000 |
$ 37,915,000 |
|||
| Commercial loans pledged for secured loan borrowings |
200,000 |
|
536,000 |
||
| Total |
$ 52,084,000 |
|
$ 38,451,000 |
||
| Loans Held for Sale | |||||
| Commercial loans |
$ 79,000 |
$ 186,000 |
|||
| Residential real estate mortgage loans |
1,209,000 |
|
1,684,000 |
||
| Total |
$ 1,288,000 |
|
$ 1,870,000 |
||
Note 5 -- Allowance for Loan Losses
An analysis of changes in the allowance for loan losses follows:
|
|
|
|
|
|
||
| Beginning of year balance |
$ 1,851,000 |
$ 1,567,000 |
$ 1,487,000 |
|||
| Provision charged to expense |
625,000 |
730,000 |
539,000 |
|||
| Recoveries credited to the allowance |
77,000 |
79,000 |
70,000 |
|||
| Loans charged off |
(646,000 |
) |
(525,000 |
) |
(529,000 |
) |
| End of year balance |
$ 1,907,000 |
|
$ 1,851,000 |
|
$ 1,567,000 |
|
| Information regarding impaired loans as of and for the year ended December 31 follows: | ||||||
| Loans with no allowance allocated at year end |
$ 463,000 |
$ 2,194,000 |
$ 780,000 |
|||
| Loans with allowance allocated at year end |
434,000 |
559,000 |
152,000 |
|||
| Amount of allowance for loan losses allocated at year end |
214,000 |
244,000 |
86,000 |
|||
| Average balance during the year |
1,238,000 |
2,326,000 |
759,000 |
|||
| Interest income recognized thereon |
69,000 |
270,000 |
43,000 |
|||
| Cash-basis interest income recognized |
59,000 |
283,000 |
33,000 |
|||
Note 6 -- Other Balance Sheet Information
|
|
|
|
||
| Restrictions on Cash Balances | ||||
| Cash subject to restrictions for reserve requirements |
$ 803,000 |
|
$ 780,000 |
|
|
|
|
|||
| Premises and Equipment | |||||
| Land and land improvements |
$ 734,000 |
$ 723,000 |
|||
| Buildings |
3,731,000 |
2,985,000 |
|||
| Construction in progress |
291,000 |
66,000 |
|||
| Leasehold improvements |
288,000 |
276,000 |
|||
| Equipment |
2,991,000 |
|
2,824,000 |
||
| Total cost |
8,035,000 |
6,874,000 |
|||
| Accumulated depreciation |
(3,121,000 |
) |
(2,788,000 |
) | |
| Premises and equipment, net |
$ 4,914,000 |
|
$ 4,086,000 |
||
| Other Real Estate | |||||
| Balance as of end of year |
$ 15,000 |
|
$ 52,000 |
||
Note 7 -- Deposits
Deposit information as of year-end follows:
|
|
|
|||||
| Certificates of deposit issued in denominations of $100,000 or more |
$23,589,000 |
|
$18,621,000 |
|||
| Related party deposits |
$ 1,901,000 |
|
$ 1,583,000 |
|||
| Maturities of certificates of deposit | ||||||
| 1999 |
$55,556,000 |
|||||
| 2000 |
$45,486,000 |
9,116,000 |
||||
| 2001 |
22,585,000 |
2,631,000 |
||||
| 2002 |
6,661,000 |
2,808,000 |
||||
| 2003 |
878,000 |
804,000 |
||||
| 2004 |
3,259,000 |
|
144,000 |
|||
| Total |
$78,869,000 |
|
$71,059,000 |
|||
The total of certificates of deposit that were acquired
through a national rate service was $18,543,000 at December 31, 1999, compared
to a balance of $7,227,000 at December 31, 1998. The average interest rate
on the national market certificates of deposit was 6.02% with maturities
ranging from 2000 to 2004 as of December 31, 1999.
Information as of year-end and for the year follows:
|
|
|
|
|
|
||||
| Provision for Income Taxes | ||||||||
| Current federal income tax expense |
$ 895,000 |
$881,000 |
$ 701,000 |
|||||
| Deferred federal income tax benefit |
(8,000 |
) |
(8,000 |
) |
(69,000 |
) | ||
| Income tax expense |
$ 887,000 |
|
$873,000 |
|
$ 632,000 |
|||
| Reconciliation of Income Tax Provision to Statutory Rate | ||||||||
| Income tax computed at statutory federal rate of 34% |
$ 965,000 |
$ 950,000 |
$ 805,000 |
|||||
| Tax exempt interest income |
(140,000 |
) |
(159,000 |
) |
(182,000 |
) | ||
| Nondeductible interest expense |
24,000 |
29,000 |
29,000 |
|||||
| Other items |
38,000 |
|
53,000 |
|
(20,000 |
) | ||
| Income tax expense |
$ 887,000 |
|
$ 873,000 |
|
$ 632,000 |
|||
| Components of Deferred Tax Assets and Liabilities | ||||||||
| Deferred tax assets: | ||||||||
| Allowance for loan losses |
$ 503,000 |
$525,000 |
||||||
| Deferred loan costs |
98,000 |
95,000 |
||||||
| Postretirement benefits obligation |
52,000 |
51,000 |
||||||
| Deferred compensation |
48,000 |
54,000 |
||||||
| Unrealized depreciation on securities available for sale |
28,000 |
-- |
||||||
| Other |
30,000 |
|
17,000 |
|||||
| Total deferred tax assets |
759,000 |
742,000 |
||||||
| Deferred tax liabilities: | ||||||||
| Depreciation |
228,000 |
239,000 |
||||||
| Loan servicing rights |
67,000 |
57,000 |
||||||
| Unrealized appreciation on securities available for sale |
-- |
127,000 |
||||||
| Other |
12,000 |
|
30,000 |
|||||
| Total deferred tax liabilities |
307,000 |
|
453,000 |
|||||
| Net deferred tax asset |
$ 452,000 |
|
$289,000 |
|||||
A valuation allowance related to deferred taxes 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, 1999 and 1998.
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 year ended December 31, 1997:
| Service cost/benefits earned during the year |
$ 17,000 |
|
| Interest cost on projected benefit obligation |
129,000 |
|
| Actual return on plan assets |
(112,000 |
) |
| Net amortization and deferral |
(82,000 |
) |
| Net pension income |
$ (48,000 |
) |
Postretirement Benefits Plan
Information regarding the postretirement benefits plan as of year-end and for the year follows:
|
|
|
|
|
|
||
| Accumulated benefit obligation |
$ 139,000 |
$ 137,000 |
$ 134,000 |
|||
| Accrued benefit cost |
154,000 |
152,000 |
149,000 |
|||
| Postretirement benefit expense |
2,000 |
3,000 |
9,000 |
|||
| Employer contributions |
18,000 |
15,000 |
7,000 |
|||
| Participant contributions |
26,000 |
23,000 |
11,000 |
|||
| Benefits paid |
42,000 |
38,000 |
18,000 |
|||
| Actuarial assumption - discount rate on benefit obligation |
7% |
7% |
7% |
The postretirement benefits plan had an immaterial effect on the consolidated financial statements in 1999, 1998 and 1997. Therefore, only selected information regarding plan activity is presented in the above table. The trend for annual increases in health care costs was assumed to be 8% for the year beginning January 1, 2000, dropping to 5.5% for each year 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.
| Other Employee Benefit Plan Expenses | ||||||
| 401(k) savings and retirement plan |
$ -- |
$ 9,000 |
$ 323,000 |
|||
| Incentive bonus plan |
145,000 |
169,000 |
100,000 |
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.
Note 10 - Stock Options
The following pro forma information presents net income
and earnings per share for 1999, 1998 and 1997 had the fair value method
been used to measure compensation cost for stock option plans. No compensation
cost was recognized for stock options in 1999, 1998 and 1997.
|
|
|
|
|
|
|||
| Net income as reported |
$1,952,000 |
$1,922,000 |
$1,737,000 |
||||
| Pro forma net income |
1,945,000 |
1,914,000 |
1,733,000 |
||||
| Basic earnings per common share and diluted earnings per common share | |||||||
| as reported |
1.76 |
1.70 |
1.54 |
||||
| Pro forma basic earnings per common share and diluted earnings per | |||||||
| common share |
1.75 |
1.70 |
1.54 |
||||
In future years, the pro forma effect of not applying the fair value method 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, 1999, a total of 44,100 shares were authorized for stock option grants, of which 33,075 were available for future grants. Information about option grants follows:
|
|
|
|
|
|
||
| Granted during 1997 and outstanding at end of 1999 |
|
|
|
|||
| Options exercisable at end of 1999 |
|
|
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
Federal Home Loan Bank advances totaling $33,999,000 have fixed interest rates ranging from 5.53% to 6.79%. A $3,000,000 advance had a variable interest rate of 4.05% at December 31, 1999. Advances were secured by specific mortgage loans with a carrying value of approximately $52,000,000 at December 31, 1999. Penalties are charged on advances that are paid prior to maturity. No advances were paid prior to maturity in 1999 or 1998.
The maturities of Federal Home Loan Bank advances at December 31, 1999, follow:
| 2000 |
$ 4,792,000 |
||
| 2001 |
7,332,000 |
||
| 2002 |
12,584,000 |
||
| 2003 |
8,291,000 |
||
| 2004 |
4,000,000 |
||
| Total |
$ 36,999,000 |
||
Note 12 - Leases and Other Commitments
Following is lease and other commitment information:
|
|
|
|
|
|
||
| Lease rental expense |
|
|
|
|
|
|
|
||||
| Future minimum operating lease commitments | ||||
| 2000 |
$ 104,000 |
|||
| 2001 |
88,000 |
|||
| 2002 |
88,000 |
|||
| 2003 |
13,000 |
|||
| Total |
$ 293,000 |
|||
Lease commitments include $68,000 to a related party in the
years 2000 through 2002.
Note 13 - Shareholders' Equity and Earnings Per Share
Information regarding shareholders' equity as of year-end and for the year follows:
|
|
|
|
|
|
||
| Common Stock | ||||||
| Shares authorized |
2,000,000 |
2,000,000 |
1,000,000 |
|||
| Shares outstanding |
1,106,391 |
1,053,285 |
537,015 |
|||
| Issued during the year |
57,887 |
540,787 |
28,733 |
|||
| Repurchased during the year |
4,781 |
24,517 |
-- |
Shares of common stock issued for the purposes of stock dividends
and stock splits totaled 52,481 in 1999, 538,569 in 1998 and 28,733 in
1997. Shares in the above table have not been adjusted for stock dividends
and splits.
The factors used in the earnings per share computation follow:
|
|
|
|
|
|
|||
| Basic | |||||||
| Net income |
$ 1,952,000 |
|
$ 1,922,000 |
|
$ 1,737,000 |
||
| Weighted average common shares outstanding |
1,107,530 |
|
1,125,321 |
|
1,127,858 |
||
| Basic earnings per common share |
$ 1.76 |
|
$ 1.71 |
|
$ 1.54 |
||
| Diluted | |||||||
| Net income |
$ 1,952,000 |
|
$ 1,922,000 |
|
$ 1,737,000 |
||
| Weighted average common shares outstanding |
1,107,530 |
1,125,321 |
1,127,858 |
||||
| Plus dilutive effect of assumed exercises of stock options |
2,238 |
|
553 |
|
-- |
||
| Average shares and dilutive potential common shares |
1,109,768 |
|
1,125,874 |
|
1,127,858 |
||
| Diluted earnings per common share |
$ 1.76 |
|
$ 1.71 |
|
$ 1.54 |
||
Weighted average common shares outstanding for purposes of
computing earnings per share have been adjusted for stock dividends and
stock splits. Stock options for common stock were not considered in computing
diluted earnings per share for 1997 because they were antidilutive.
Note 14 - Other Comprehensive Income
Other comprehensive income components and related taxes follow:
|
|
|
|
|
|
||
| Unrealized holding gains and losses on available-for-sale securities |
$ (459,000 |
) |
$ 155,000 |
$ 111,000 |
||
| Reclassification adjustments for gains included in net income |
(4,000 |
) |
(35,000 |
) |
(28,000 |
) |
| Net unrealized gains and losses |
(455,000 |
) |
120,000 |
83,000 |
||
| Tax effect |
155,000 |
|
(41,000 |
) |
(28,000 |
) |
| Total other comprehensive income |
$ (300,000 |
) |
$ 79,000 |
|
$ 55,000 |
Note 15 -- Condensed Financial Statements of Parent Company
|
|
|
|
||||
| Assets | ||||||
| Cash |
$ 265,000 |
$ 398,000 |
||||
| Securities available for sale |
8,000 |
8,000 |
||||
| Other assets |
2,000 |
1,000 |
||||
| Investment in ChoiceOne Bank and subsidiaries |
16,627,000 |
|
15,734,000 |
|||
| Total assets |
$ 16,902,000 |
|
$ 16,141,000 |
|||
| Liabilities | ||||||
| Other liabilities |
14,000 |
-- |
||||
| Shareholders' equity |
16,888,000 |
|
16,141,000 |
|||
| Total liabilities and shareholders' equity |
$ 16,902,000 |
|
$ 16,141,000 |
|||
|
|
|
|
|
|
|||
| Dividends from ChoiceOne Bank |
$ 797,000 |
$ 1,821,000 |
$ 838,000 |
||||
| Other expenses |
58,000 |
|
88,000 |
|
51,000 |
||
| Income before income tax and equity in undistributed net | |||||||
| income of subsidiary |
739,000 |
1,733,000 |
787,000 |
||||
| Income tax benefit |
20,000 |
|
29,000 |
|
17,000 |
||
| Income before equity in undistributed net income of subsidiary |
759,000 |
1,762,000 |
804,000 |
||||
| Equity in undistributed net income of subsidiary |
1,193,000 |
|
160,000 |
|
933,000 |
||
| Net income |
$ 1,952,000 |
|
$ 1,922,000 |
|
$ 1,737,000 |
||
|
|
|
|
|
|
|||||
| Cash flows from operating activities: | |||||||||
| Net income |
$ 1,952,000 |
$ 1,922,000 |
$ 1,737,000 |
||||||
| Reconciling items: | |||||||||
| Equity in undistributed net subsidiary income |
(1,193,000 |
) |
(160,000 |
) |
(933,000 |
) | |||
| Changes in other assets |
(1,000 |
) |
1,000 |
-- |
|||||
| Changes in liabilities |
14,000 |
|
-- |
|
-- |
||||
| Net cash from operating activities |
772,000 |
|
1,763,000 |
|
804,000 |
||||
| Cash flows from financing activities: | |||||||||
| Issuance of stock |
141,000 |
89,000 |
-- |
||||||
| Dividends paid |
(915,000 |
) |
(857,000 |
) |
(783,000 |
) | |||
| Repurchase of stock |
(131,000 |
) |
(629,000 |
) |
(9,000 |
) | |||
| Net cash used in financing activities |
(905,000 |
) |
(1,397,000 |
) |
(792,000 |
) | |||
| Net change in cash and cash equivalents |
(133,000 |
) |
366,000 |
12,000 |
|||||
| Beginning cash and cash equivalents |
398,000 |
|
32,000 |
|
20,000 |
||||
| Ending cash and cash equivalents |
$ 265,000 |
|
$ 398,000 |
|
$ 32,000 |
||||
| Amount of dividends that could be paid from ChoiceOne Bank | |||||||||
| without regulatory approval |
$ 3,082,000 |
||||||||
Note 16 -- Financial Instruments
Financial instruments as of year-end were as follows:
|
|
|
|
||||||||
|
|
|
|
|
|
|
|
||||
| Assets: | ||||||||||
| Cash and cash equivalents |
$ 3,998,000 |
$ 3,998,000 |
$ 5,055,000 |
$ 5,055,000 |
||||||
| Securities available for sale |
15,243,000 |
15,243,000 |
20,282,000 |
20,282,000 |
||||||
| Loans, net |
166,073,000 |
166,283,000 |
138,924,000 |
147,379,000 |
||||||
| Liabilities: | ||||||||||
| Demand, savings and money market | ||||||||||
| deposit accounts |
48,684,000 |
48,684,000 |
51,273,000 |
51,273,000 |
||||||
| Time deposits |
78,869,000 |
78,921,000 |
71,059,000 |
72,237,000 |
||||||
| Federal funds purchased and repurchase | ||||||||||
| agreements |
9,527,000 |
9,527,000 |
3,310,000 |
3,310,000 |
||||||
| Long-term debt |
37,199,000 |
37,176,000 |
27,231,000 |
27,826,000 |
||||||
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 and long-term debt is based on the rates paid at year end for new deposits or new long-term debt, applied until maturity. The estimated fair value for other financial instruments and off-balance-sheet loan commitments are considered nominal.
Note 17 -- 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, 1999 and 1998. Actual capital levels and minimum required levels were as follows:
|
|
|
|
|
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|||||||||||||
| December 31, 1999 | |||||||||||||
| Total capital (to risk weighted assets) | |||||||||||||
| Consolidated |
$ 18,120 |
12.4% |
$ 11,664 |
8.0% |
$ 14,580 |
10.0% |
|||||||
| Bank |
17,859 |
12.3% |
11,664 |
8.0% |
14,580 |
10.0% |
|||||||
| Tier 1 capital (to risk weighted assets) | |||||||||||||
| Consolidated |
16,297 |
11.2% |
5,832 |
4.0% |
8,748 |
6.0% |
|||||||
| Bank |
16,036 |
11.0% |
5,832 |
4.0% |
8,748 |
6.0% |
|||||||
| Tier 1 capital (to average assets) | |||||||||||||
| Consolidated |
16,297 |
8.7% |
7,522 |
4.0% |
9,402 |
5.0% |
|||||||
| Bank |
16,036 |
8.5% |
7,521 |
4.0% |
9,402 |
5.0% |
|||||||
| December 31, 1998 | |||||||||||||
| 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% |
|||||||
Note 18 -- Subsequent Events
On February 16, 2000, ChoiceOne's Board of Directors declared a conditional five-for-four stock split on ChoiceOne's common stock. The stock split, to be effected in the form of a share dividend, will cause one additional share of common stock to be issued for each four shares outstanding. The stock split will be payable to shareholders of record as of April 27, 2000, and will be paid on May 22, 2000. The stock split is conditioned upon and subject to approval by ChoiceOne's shareholders at the April 27, 2000, annual meeting of a proposed amendment to ChoiceOne's Restated Articles of Incorporation to increase the authorized common stock of ChoiceOne from 2,000,000 shares to 4,000,000 shares.
Earnings per share amounts, after giving retroactive effect to the five-for-four stock split on a pro forma basis, are presented below. Because the stock split is contingent upon shareholder approval of an amendment to increase the authorized common stock, financial information contained elsewhere in these financial statements has not been adjusted to reflect the impact of the proposed stock split.
|
|
|
|
||
| Basic and diluted earnings per common share (pro forma) |
|
|
|
We have audited the accompanying consolidated balance sheets of ChoiceOne Financial Services, Inc. as of December 31, 1999 and 1998 and the related statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1999. 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, 1999
and 1998, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1999, in conformity
with generally accepted accounting principles.
| /s/Crowe, Chizek and Company LLP | ||||||||
| Crowe, Chizek and Company LLP |
Grand Rapids, Michigan
March 6, 2000
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. 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, but are not limited to, changes in interest rates and interest rate relationships; demand for products and services; the degree of competition by traditional and non-traditional competitors; changes in banking regulations; changes in tax laws; changes in prices, levies, and assessments; the impact of technological advances; governmental and regulatory policy changes; the outcomes of pending and future litigation and contingencies; trends in customer behavior as well as their ability to repay loans; and changes in the national 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 1999 was $1,952,000, which represented a $30,000 or 2% increase over 1998. The increase in ChoiceOne's net income in 1999 was attributable to higher net interest income and a lower provision for loan losses, which was offset by growth in noninterest expense. The growth in net interest income was due to an increase in ChoiceOne's loan portfolio. The decrease in the provision for loan losses was due to the fact that much of 1999's loan growth occurred in residential mortgage loans. The increase in noninterest expense was primarily due to expenses of the Bank's new branches, expenses related to remodeling of the Bank's main office, and general growth in expenses.
|
|
||||||
|
|
|
|
|
|
||
| Net interest income |
$ 7,699,000 |
$ 7,207,000 |
$ 6,315,000 |
|||
| Provision for loan losses |
(625,000 |
) |
(730,000 |
) |
(539,000 |
) |
| Noninterest income |
1,984,000 |
1,993,000 |
1,769,000 |
|||
| Noninterest expense |
(6,219,000 |
) |
(5,675,000 |
) |
(5,176,000 |
) |
| Income tax expense |
(887,000 |
) |
(873,000 |
) |
(632,000 |
) |
| Net income |
$ 1,952,000 |
|
$ 1,922,000 |
|
$ 1,737,000 |
|
Increased net income in 1998 was due to higher net interest
income and noninterest income, which was offset by growth in the provision
for loan losses and noninterest expense. Net interest income growth was
due primarily to loan growth. The increase in noninterest income was caused
by higher mortgage loan sales and servicing income. The increase in the
provision for loan losses in 1998 was believed prudent based on management's review of the risk in the loan portfolio. 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.
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 1999 was 1.10%, compared to 1.18% for 1998 and 1.17% for 1997. The return on average shareholders' equity was 11.78%, 12.01%, and 11.58% for 1999, 1998 and 1997, respectively.
Dividends
Cash dividends declared by ChoiceOne in 1999 of $909,000, or $.82 per share, represent the eighteenth consecutive year that ChoiceOne has increased cash dividends paid to shareholders. The total cash dividends paid in 1999 represented a $63,000 or 7% increase over 1998. The cash dividend payout percentage (total cash dividends divided by net income) was 47% in 1999, compared to 44% in 1998. In addition to the cash dividends declared, ChoiceOne declared a 5% stock dividend in 1999, a 5% stock dividend in 1998, and a two-for-one stock split in 1998. Cash dividends per share were adjusted for the stock dividends and stock split.
Cash dividends paid in 1997 through 1999 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 2000.
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.
Table 1 -- Average Balances and Tax-Equivalent Interest Rates
|
|
|||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
|
|||||
|
|
|||||||||||||||||||||
| Assets | |||||||||||||||||||||
| Loans (1) (2) |
$ 149,329 |
$ 13,714 |
9.18 |
% |
$ 132,796 |
$ 12,869 |
9.69 |
% |
$ 117,582 |
$ 11,259 |
9.58 |
% | |||||||||
| Taxable securities (3) |
10,112 |
609 |
6.03 |
12,040 |
705 |
5.87 |
12,781 |
845 |
6.61 |
||||||||||||
| Nontaxable securities (1) (3) |
7,959 |
583 |
7.45 |
8,879 |
661 |
7.71 |
9,370 |
733 |
7.82 |
||||||||||||
| Other |
86 |
1 |
1.28 |
382 |
18 |
4.71 |
178 |
8 |
4.49 |
||||||||||||
| Interest-earning assets |
167,486 |
14,907 |
8.90 |
154,097 |
14,253 |
9.25 |
139,911 |
12,845 |
9.18 |
||||||||||||
| Noninterest-earning assets(4) |
9,793 |
9,160 |
8,741 |
||||||||||||||||||
| Total assets |
$ 177,279 |
$ 163,257 |
$ 148,652 |
||||||||||||||||||
| Liabilities and Shareholders' Equity | |||||||||||||||||||||
| Interest-bearing | |||||||||||||||||||||
| transaction accounts |
$ 25,755 |
779 |
3.02 |
$ 24,255 |
809 |
3.34 |
$ 22,242 |
718 |
3.23 |
||||||||||||
| Savings deposits |
8,422 |
99 |
1.18 |
8,316 |
137 |
1.65 |
8,836 |
162 |
1.83 |
||||||||||||
| Time deposits |
73,535 |
3,975 |
5.41 |
67,724 |
3,931 |
5.80 |
58,258 |
3,399 |
5.83 |
||||||||||||
| FHLB advances |
28,019 |
1,734 |
6.19 |
26,016 |
1,650 |
6.34 |
25,425 |
1,619 |
6.37 |
||||||||||||
| Other |
8,070 |
407 |
5.04 |
4,923 |
276 |
5.61 |
5,584 |
354 |
6.34 |
||||||||||||
| Interest-bearing liabilities |
143,801 |
6,994 |
4.86 |
131,234 |
6,803 |
5.18 |
120,345 |
6,252 |
5.20 |
||||||||||||
| Demand deposits |
15,294 |
13,675 |
11,479 |
||||||||||||||||||
| Other noninterest-bearing | |||||||||||||||||||||
| liabilities |
1,612 |
2,347 |
1,830 |
||||||||||||||||||
| Shareholders' equity |
16,572 |
16,001 |
14,998 |
||||||||||||||||||
| Total liabilities and | |||||||||||||||||||||
| shareholders' equity |
$ 177,279 |
$ 163,257 |
$ 148,652 |
||||||||||||||||||
| Net interest income (tax- | |||||||||||||||||||||
| equivalent basis) -- interest | |||||||||||||||||||||
| spread |
7,913 |
4.04 |
% |
7,450 |
4.07 |
% |
6,593 |
3.98 |
% | ||||||||||||
| Tax-equivalent adjustment (1) |
(214 |
) |
(243 |
) |
(278 |
) | |||||||||||||||
| Net interest income | $ 7,699 |
$ 7,207 |
$ 6,315 |
||||||||||||||||||
| Net interest income as a | |||||||||||||||||||||
| percentage of earning assets | |||||||||||||||||||||
| (tax-equivalent basis) |
4.72 |
% |
4.83 |
% |
4.71 |
% | |||||||||||||||
| (1) | Interest on nontaxable securities and loans has been adjusted to a fully tax-equivalent basis to facilitate comparison to the taxable interest-earning assets. The adjustment uses an incremental tax rate of 34% for the years presented. |
| (2) | Interest on loans included net origination fees charged on loans of approximately $643,000, $610,000 and $352,000 in 1999, 1998 and 1997, respectively. |
| (3) | 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. |
| (4) | Noninterest-earning assets includes loans on a nonaccrual status which averaged approximately $910,000, $637,000 and $787,000 in 1999, 1998 and 1997, respectively. |
Table 2 -- Changes in Tax-Equivalent Net Interest Income
|
|
|||||||||||||||
|
|
|
|
|||||||||||||
|
|
|
|
|
|
|
||||||||||
|
|
|||||||||||||||
| Increase (decrease) in interest income (1) | |||||||||||||||
| Loans (2) |
$ 845 |
$ 1,542 |
$ (697 |
) |
$ 1,610 |
$ 1,478 |
$ 132 |
||||||||
| Taxable securities |
(96 |
) |
(115 |
) |
19 |
(140 |
) |
(48 |
) |
(92 |
) | ||||
| Nontaxable securities (2) |
(78 |
) |
(56 |
) |
(22 |
) |
(72 |
) |
(62 |
) |
(10 |
) | |||
| Other |
(17 |
) |
(9 |
) |
(8 |
) |
10 |
|
10 |
|
-- |
||||
| Net change in tax-equivalent income |
654 |
|
1,362 |
|
(708 |
) |
1,408 |
|
1,378 |
|
30 |
||||
| Increase (decrease) in interest expense (1) | |||||||||||||||
| Interest-bearing transaction accounts |
(30 |
) |
49 |
(79 |
) |
91 |
67 |
24 |
|||||||
| Savings deposits |
(38 |
) |
2 |
(40 |
) |
(25 |
) |
(9 |
) |
(16 |
) | ||||
| Time deposits |
44 |
323 |
(279 |
) |
532 |
547 |
(15 |
) | |||||||
| Federal Home Loan Bank advances |
84 |
124 |
(40 |
) |
31 |
38 |
(7 |
) | |||||||
| Other |
131 |
|
161 |
|
(30 |
) |
(78 |
) |
(39 |
) |
(39 |
) | |||
| Net change in interest expense |
191 |
|
659 |
|
(468 |
) |
551 |
|
604 |
|
(53 |
) | |||
| Net change in tax-equivalent | |||||||||||||||
| net interest income |
$ 463 |
|
$ 703 |
|
$ (240 |
) |
$ 857 |
|
$ 774 |
|
$ 83 |
||||
| (1) | The volume variance is computed as the change in volume (average balance) multiplied by the previous year's interest rate. The rate variance is computed as the change in interest rate multiplied by the previous year's volume (average balance). The change in interest due to both volume and rate has been allocated to the volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. |
| (2) | Interest on nontaxable securities and loans has been adjusted to a fully tax-equivalent basis using an incremental tax rate of 34% for the years presented. |
Net Interest Income
Tax-equivalent net interest income ("net margin") increased $463,000 in 1999, compared to an increase of $857,000 in 1998. Both years experienced a net margin benefit due to loan growth. However, changes in interest rates had a negative impact on net margin in 1999, in contrast to 1998 when the variance due to interest rates was slightly positive. The average balance of loans grew $16,533,000 in 1999 compared to growth of $15,214,000 in 1998. Residential real estate mortgage loans comprised a larger portion of the increase in 1999 than in 1998. The lower interest rate earned on mortgage loans compared to the other loan types caused the loan growth to generate less income dollars in 1999 than in the prior year. A decrease in the level of growth of noninterest-bearing liabilities and shareholders' equity also affected net margin in 1999. Just over 10% of interest-earning asset growth was funded by noninterest-bearing liabilities and shareholders' equity in 1999, compared to a percentage of approximately 25% in 1998. This caused more of growth to be funded by interest-bearing liabilities in 1999 than in the prior year.
Per Table 2, the fluctuation in ChoiceOne's net margin
due to changes in the average interest rate was a decrease of $240,000
in 1999 compared to an increase of $83,000 in 1998. The decrease in general
market interest rates that prevailed throughout most of 1999 affected interest-earning
assets more than interest-bearing liabilities. The average rate on interest-earning
assets fell 35 basis points in 1999 while the rate on interest-bearing
liabilities decreased 32 basis points. The net impact was a decline in
the net interest spread of 3 basis points in 1999 compared to an increase
of 9 basis points in 1998. The decline was due in part to a slowdown in
growth in loan fees. Loan fees increased $258,000 from 1997 to 1998, but
increased only $33,000 from 1998 to 1999. The activity level in mortgage
loan fees was much less in 1999 as the level of refinancings was reduced
from the prior year.
Based on the current estimates of ChoiceOne's management, the total dollars of net interest income are expected to increase in 2000. Management anticipates that this will continue to be caused by growth in interest-earning assets. However, management believes that the effect of growth will continue to be offset by a decreasing net interest spread. Management anticipates that loan growth will exceed the funding ability of local deposits. This may cause more loan funding to be provided by Federal Home Loan Bank advances, national market certificates of deposit, and other non-local sources in 2000. It is expected that the higher interest rates associated with these types of funding compared to local deposits will continue to narrow the interest margin earned on asset growth. Increases in general market interest rates in the second half of 1999 have also caused some constriction of the interest margin as ChoiceOne's liabilities have repriced upward more than its assets. Management believes this may continue in 2000. Management plans to focus on growth in loan fees in 2000. Growth in loan fees would help to offset the expected margin decrease.
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 was lower in 1999 than in 1998 and the allowance for loan losses changed little from December 31, 1998 to December 31, 1999. This was in contrast to 1998 when both the provision and allowance increased significantly from the prior year. The level of residential real estate mortgage growth in 1999 compared to 1998 was management's primary reason for the decreased provision for loan losses. Residential mortgages comprised almost 60% of the total loan growth in 1999 compared to approximately 20% in 1998. This loan category has experienced very few charge-offs in past years and is considered by ChoiceOne's lenders to be the least risky loan type. The balance of impaired loans was also lower at the end of 1999 than at the prior year end.
Net charge-offs by loan category are shown in Table 3. The dollar amount of charge-offs in commercial loans and consumer loans increased in 1999, in contrast to 1998 when charge-offs were approximately the same as 1997. Approximately $40% of the commercial loan charge-offs in 1999 were caused by one large item, while the majority of consumer charge-offs were experienced in indirect auto loans. The ratio of net charge-offs as a percentage of loans increased slightly from 1998 to 1999.
Table 3 -- Provision and Allowance For Loan Losses
|
As of and for the years ended December
31
|
||||||||
|
|
|
|
|
|
||||
| Provision for loan losses |
$ 625,000
|
|
$ 730,000
|
|
$ 539,000
|
|||
| Net charge-offs | ||||||||
| Commercial loans |
$ 258,000
|
$ 201,000
|
$ 186,000
|
|||||
| Agricultural loans |
2,000
|
--
|
7,000
|
|||||
| Real estate mortgage - residential |
--
|
--
|
6,000
|
|||||
| Consumer |
309,000
|
|
245,000
|
|
260,000
|
|||
| Total |
$ 569,000
|
|
$ 446,000
|
|
$ 459,000
|
|||
| Allowance for loan losses at year end |
$1,907,000
|
|
$1,851,000
|
|
$1,567,000
|
|||
|
|
||||||||
|
|
|
|
|
|
||||
| Allowance for loan losses as a percentage of: | ||||||||
| Total loans as of year end |
1.14 |
% |
1.31 |
% |
1.23 |
% | ||
| Nonaccrual loans, accrual loans past due 90 days or more and | ||||||||
| troubled debt restructurings |
93.05 |
183.89 |
130.17 |
|||||
| Ratio of net charge-offs to average total loans outstanding during the year |
.38 |
.33 |
.39 |
|||||
| Loan recoveries as a percentage of prior year's charge-offs |
14.67 |
14.98 |
31.84 |
|||||
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, 1999, 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. Management began to purchase a limited amount of sub-prime residential mortgages in 1999. If a larger amount of these mortgages are purchased and retained in ChoiceOne's loan portfolio in 2000, management may need to set aside a higher allowance for these mortgages than for residential mortgages originated through the Bank's normal channels. The higher allowance may be necessary since management believes that sub-prime mortgages may have a higher risk level than mortgages originated by the Bank. Management is reviewing its involvement in indirect auto lending. While indirect auto loans comprised less than one-half of the consumer loans balance during 1999, charge-offs on indirect auto loans were approximately 75% of consumer loan charge-offs. Management has begun to tighten its credit standards in indirect auto lending and plans to decrease the number of dealers from which it buys loans. As loan growth, changes in the mix of the loan portfolio and charge-offs occur in 2000, 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 decreased $9,000 in 1999 compared to an increase of $224,000 in 1998. The primary reason for the change was a $242,000 drop in mortgage loan sales and servicing income in 1999. The level of mortgage loan sales was much less in 1999 than in 1998. Decreasing interest rates in 1998 on long-term fixed rate mortgages caused many borrowers to refinance their loans in 1998 and the first few months of 1999. Since virtually all of these loans were sold on the secondary market, this caused a higher level of gains on mortgage sales in 1998. Interest rates increased during the year of 1999 which caused much less activity in long-term fixed rate mortgages. In addition, a higher percentage of borrowers selected adjustable rate mortgages in 1999 than in 1998. ChoiceOne has retained these adjustable rate mortgages in its loan portfolio. The effect of mortgage loan sales was offset in 1999 by higher customer service fees, insurance commission income, and other noninterest income.
ChoiceOne's management anticipates that noninterest income will grow in 2000. Customer service fees will be reviewed for possible increases. ChoiceOne purchased InsuranceSource, Inc., a local insurance agency on September 1, 1999. Management anticipates that a full year of its operations in 2000 should increase insurance commission income. Management believes a higher level of mortgage activity in both originated and purchased sub-prime loans will occur in 2000. ChoiceOne's mortgage loan officers plan to sell the majority of these loans.
Noninterest Expense
Total noninterest expense grew $544,000 in 1999 compared to an increase of $499,000 in 1998. Salaries and benefits expense increased $151,000 in 1999 compared to $119,000 in 1998. The increase in both years was due to staff growth and personnel at the Bank's new branches. The increase in 1998 was net of a $282,000 decrease in retirement expense from 1997 to 1998. The decrease in retirement expense resulted from expense recognized in 1997 upon the termination of ChoiceOne's pension plan. Excess plan assets that were left after the pension plan termination were transferred from the pension plan to the Bank's 401(k) savings and retirement plan in 1998. These assets were used for company contributions in 1998 and 1999. ChoiceOne's management plans to use the remaining assets for company contributions in 2000 and 2001.
Occupancy expense grew $181,000 in 1999 compared to an
increase of $127,000 in 1998. The main reason for the change between the
two years was increased depreciation expense. Depreciation expense in 1999
increased $132,000 compared to a $61,000 increase in 1998. The growth in
depreciation expense was caused by remodeling at the Bank's main office
and a full year of depreciation in 1999 at the Bank's two new branches.
Other noninterest expense increased $182,000 in 1999 compared to an increase
of $254,000 in 1998. Approximately 60% of the increase in other noninterest
expense in 1999 was due to expense from assets that were abandoned as part
of
the Bank's main office remodeling. The remainder of the increase in 1999 was due to charge-offs of deposit accounts and checks, and general growth in expenses. Advertising and marketing expense decreased $47,000 in 1999, in contrast to 1998 when it increased $49,000.
Management anticipates that noninterest expense will continue to grow in 2000. Increased levels of activity in mortgage lending and insurance are anticipated. This would result in a higher level of commission expense in 2000. The remodeling of the Bank's main office was completed in early 2000. This will cause depreciation expense to increase in 2000. ChoiceOne's management anticipates that more advertising and marketing of products and services will occur in 2000 than in 1999. General growth in expenses is also expected due to higher activity levels anticipated in 2000.
Year 2000 Impact
The change from the year 1999 to the year 2000 did not cause any significant problems for ChoiceOne in January 2000. ChoiceOne's computer-based systems worked properly based on available information. No problems were noted with services provided by third parties. ChoiceOne is not aware of difficulties experienced by any of its loan customers.
Approximately $80,000 was spent on new computer hardware, new software and software changes in 1998 and 1999. Many staff hours were also spent to prepare for Year 2000. ChoiceOne's Year 2000 committee established contingency plans in case certain systems did not function properly in early 2000. These investments of money and time will continue to benefit ChoiceOne in future years.
Insurance and Travel Subsidiaries
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. InsuranceSource, Inc. ("InsuranceSource"), a local insurance agency, was purchased on September 1, 1999. Its operations have been included in ChoiceOne's financial results since that date and did not have a material impact on ChoiceOne's results in 1999. The acquisition of InsuranceSource was accounted for as a purchase transaction. A cash downpayment was paid in 1999 to the former owners of InsuranceSource. Four future payments are scheduled for the remainder of the purchase price. The annual amounts due will be based on the retention level of business existing as of the original purchase date.
Securities
Total securities decreased $5,039,000 in 1999 after increasing $340,000 in 1998. Some maturities of securities were used to fund loan growth in 1999, in contrast to 1998 when management held the total securities balance steady. Management anticipates that the securities balance will remain steady or may increase slightly in 2000. Management is investigating the possibility of setting securities as a percentage of assets or deposits. 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.
Loans
Total loans grew $27,205,000 in 1999 compared to $12,999,000 of growth in 1998. Residential real estate mortgage loans comprised most of the difference between 1998 and 1999. Residential mortgage loans increased $14,482,000 in 1999 compared to growth of $1,896,000 in 1998. ChoiceOne's residential mortgage department processed less mortgage applications in 1999 than in 1998. However, most of the mortgage activity in 1998 was in long-term fixed rate mortgages which were sold by ChoiceOne into the secondary market. In contrast, the majority of ChoiceOne's borrowers selected adjustable rate mortgages in 1999 due to higher interest rates on fixed rate mortgages in 1999 than in 1998. The adjustable rate mortgages were held in the mortgage loan portfolio. Consumer loans experienced $4,141,000 of growth in 1999 compared to a level of $2,078,000 in 1998. The change in the other loan categories in 1999 was not significantly different from that of 1998.
ChoiceOne's management intends to focus on growth in all loan areas in 2000. 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. Due to increased competition for agricultural loans in the forms of price and terms, management anticipates that the agricultural loans balance may continue to decrease in 2000. Management intends to use contacts with real estate agents, advertising and other methods to continue its growth in
the residential real estate financing market. ChoiceOne's mortgage department began to purchase sub-prime residential mortgage loans in the second half of 1999 and management anticipates that this activity will increase in 2000. The sub-prime mortgage loans will be placed in ChoiceOne's loan portfolio and will be sold into the secondary market. Although management believes that the sub-prime loans may be riskier than originated loans, ChoiceOne expects it will be compensated in the form of higher interest rates on the sub-prime loans. Management anticipates it will continue to use special promotions and target marketing to encourage demand in direct consumer loans. Management is considering the possibility of reducing its activity level in indirect consumer loans. This may be accomplished through higher interest rates or more stringent credit standards.
Deposits
The balance of total deposits increased $5,221,000 in 1999 compared to an increase of $14,840,000 in 1998. However, the change in the mix of deposits was even more dramatic. Local market deposits declined $6,095,000 in 1999 after rising $14,351,000 in 1998. National market certificates of deposit grew $11,316,000 in 1999 compared to growth of only $489,000 in 1998. The balance in every local market deposit category decreased in 1999; all categories increased in 1998. Management believes that the significant decrease in deposit growth was caused by intense competition on interest rates and on products in ChoiceOne's markets. With the lack of local market deposit growth, the increase in national market certificates of deposit was necessary to provide funding for loan growth.
ChoiceOne intends to place a great deal of emphasis on growth in local market deposits in 2000. Management plans to aggressively seek to attract new deposits and to retain existing deposits. Management anticipates it will offer attractive interest rates to attempt to generate growth. Management intends to emphasize its non-certificate products in 2000 in an attempt to use the lower cost of funds of these products. As occurred in 1999, ChoiceOne may use the national rate service for certificates of deposit if local market deposit growth is not sufficient to fund loan growth.
Federal Home Loan Bank Advances
The total balance of Federal Home Loan Bank advances ("FHLB advances") grew $10,349,000 in 1999 after increasing only $536,000 in 1998. The higher level of residential real estate mortgage loan growth in 1999 caused the need for a higher level of FHLB advances in 1999. ChoiceOne pledged certain residential real estate mortgages as collateral during 1998 and 1999. ChoiceOne plans to use FHLB advances in 2000 to fund loan growth to the extent allowed by mortgage growth, if needed.
Shareholders' Equity
ChoiceOne's shareholders' equity increased $747,000 in
1999, compared to an increase of $604,000 in 1998. Equity in both 1998
and 1999 experienced increases due to the retention of earnings. The net
difference between the issuance and repurchase of stock was a positive
$10,000 in 1999, in contrast to 1998 when repurchases exceeded issuances
by $540,000. ChoiceOne repurchased 4,781 shares of its common stock in
1999 compared to 24,517 shares in 1998. Management has used and intends
to continue to use the repurchased stock for employee benefit plans, stock
dividends, and other purposes. ChoiceOne's management anticipates that
it will continue to repurchase shares of its common stock in 2000.
Note 17 to the Consolidated Financial Statements presents regulatory capital information as of the end of 1999 and 1998. ChoiceOne's capital to assets percentages continued to decline in 1999 as ChoiceOne's assets grew 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 banks was $14,200,000 at December 31, 1999, while the Bank's actual federal funds purchased balance was $6,550,000 as of the same date. ChoiceOne established a secured line of credit with the Federal Reserve Bank of Chicago in 1999. This line is secured by ChoiceOne's commercial loans and is designed to be used for nonrecurring short-term liquidity needs. 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 $737,000 of additional Federal Home Loan Bank advances were available at the end of 1999 based on ChoiceOne's mortgage loan collateral at the Federal Home Loan Bank. The Bank also used a national rate service in 1997, 1998 and 1999 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 anticipated that liquidity could be an issue in late 1999 due to depositor concerns with the Year 2000. Management believed that some depositors might convert their balances to immediately available funds and others may remove their deposits from the Bank and convert them to cash. Management communicated to ChoiceOne's customers in late 1999 that their funds were safe. Extra cash was maintained at the Bank's branches to handle depositor requests for funds. An insignificant amount of deposits were withdrawn in late 1999 by depositors who stated that their withdrawals were Year 2000 related.
Table 4 -- Maturities and Repricing Schedule
|
|
|||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||
| Assets | |||||||||||||
| Loans |
$ 39,094 |
$ 18,736 |
$ 96,582 |
$ 13,568 |
$ 167,980 |
||||||||
| Interest-bearing deposits with banks |
5 |
-- |
-- |
-- |
5 |
||||||||
| Taxable securities |
3,354 |
1,208 |
2,753 |
358 |
7,673 |
||||||||
| Nontaxable securities |
-- |
|
615 |
|
1,681 |
|
5,274 |
|
7,570 |
||||
| Rate-sensitive assets |
42,453 |
20,559 |
101,016 |
19,200 |
183,228 |
||||||||
| Liabilities | |||||||||||||
| Interest-bearing transaction accounts |
26,343 |
-- |
-- |
-- |
26,343 |
||||||||
| Savings deposits |
7,641 |
-- |
-- |
-- |
7,641 |
||||||||
| Time deposits |
12,488 |
32,999 |
33,382 |
-- |
78,869 |
||||||||
| Federal Home Loan Bank advances |
3,859 |
933 |
32,207 |
-- |
36,999 |
||||||||
| Other |
9,544 |
|
40 |
|
160 |
|
-- |
|
9,744 |
||||
| Rate-sensitive liabilities |
59,875 |
|
33,972 |
|
65,749 |
|
-- |
|
159,596 |
||||
| Rate-sensitive assets less rate-sensitive liabilities | |||||||||||||
| Asset (liability) gap for the period |
$(17,422 |
) |
$(13,413 |
) |
$ 35,267 |
|
$ 19,200 |
|
$ 23,632 |
||||
| Cumulative asset (liability) gap |
$(17,422 |
) |
$(30,835 |
) |
$ 4,432 |
|
$ 23,632 |
||||||
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 1999 to measure interest rate sensitivity was one year. ChoiceOne's ratio of
rate-sensitive assets to rate-sensitive liabilities which matured or repriced within a one year time frame was 67% as of December 31, 1999, compared to 66% as of December 31, 1998, and 76% as of December 31, 1997. 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 percentages at the end of 1998 and 1999 were low for two reasons. All balances of 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. Secondly, the growth in assets in 1997 and 1998 was funded to a large extent by short-term deposits. The ALCO plans to continue to review the ratio of rate-sensitive assets to rate-sensitive liabilities in 2000. Management plans to investigate the possibility of shortening some of its asset maturities and lengthening some of its liability maturities 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, 1999, caused net income to decrease 12.4% if rates increased and to increase 2.2% if rates decreased. The shock computation caused an insignificant change in the value of shareholders' equity. The ALCO plans to investigate some changes in asset and liability maturities to attempt to bring the net income shock effects within the 10% limit.
| 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 Morgan Stanley Dean Witter
Paine Webber, Inc.
Raymond James & Associates, Inc.
Stifel Nicolaus & Company, Inc.
Tucker Anthony
|
Annual Meeting
The annual meeting of shareholders of ChoiceOne Financial Services, Inc., will be held at 7:30 p.m. EST on Thursday, April 27, 2000, at Sparta Ridgeview Elementary School, Sparta, Michigan.
Subsidiary Information ChoiceOne Bank
Appletree Office
Cedar Springs Office
Plainfield Office
Sparta Great Day Office
Alpine Office
ChoiceOne Bank is a member of the [HOUSING LOGO] ChoiceOne Insurance
|
Plainfield Office
4949 Plainfield Avenue NE Grand Rapids, MI 49505 ChoiceOne Travel, Inc.
|
| Directors
ChoiceOne Financial Services, Inc. Frank G. Berris Lawrence D. Bradford William F. Cutler, Jr. Lewis G. Emmons Stuart Goodfellow Paul L. Johnson
Jae M. Maxfield Jon E. Pike Linda R. Pitsch
Officers
Jon E. Pike
|
Jae M. Maxfield President and Chief Executive Officer Denis L. Crosby Linda R. Pitsch Thomas L. Lampen Subsidiary - ChoiceOne Bank Jon E. Pike Jae M. Maxfield Denis L. Crosby Linda R. Pitsch Keane Blaszczynski Kecia A. Flynn Deanne Gavalis Karen M. Gilbert Mary Johnson Thomas L. Lampen Daniel Mitchell Sherry Conklin |
Dean Hanson Assistant Vice President - Commercial Loans Philip Ottinger Paul Cooper Nancy Jo Wade Officers
Jae M. Maxfield Lawrence D. Bradford Jeffrey S. Bradford, CIC Tab M. Bradford, CIC Linda DeVries Carlo Vanin Linda R. Pitsch Thomas L. Lampen Officers Jae M. Maxfield Linda R. Pitsch Thomas L. Lampen |
|
|