EXHIBIT 13
[CHOICEONE LOGO]
CHOICEONE FINANCIAL SERVICES, INC.
1997
ANNUAL REPORT TO SHAREHOLDERS
CHOICEONE FINANCIAL SERVICES, INC.
1997 Annual Report to Shareholders
CONTENTS PAGE
To Our Shareholders . . . . . . . . . . . . . . . . . . . . . . . . A-1
ChoiceOne Financial Services, Inc. . . . . . . . . . . . . . . . . . A-1
Common Stock Information . . . . . . . . . . . . . . . . . . . . . . A-1
Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . A-2
Consolidated Financial Statements . . . . . . . . . . . . . . . . . A-3
Notes to Consolidated Financial Statements . . . . . . . . . . . . . A-7
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . A-22
Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . A-23
Corporate Information . . . . . . . . . . . . . . . . . . . . . . . A-32
Directors and Officers . . . . . . . . . . . . . . . . . . . . . . . A-33
-i-
CHOICEONE FINANCIAL SERVICES, INC.
ChoiceOne Financial Services, Inc. is a single-bank holding company. Its
principal banking subsidiary, ChoiceOne Bank (Sparta, Michigan) primarily
serves communities in portions of Kent, Muskegon, Newaygo, and Ottawa counties
in Michigan where the Bank's offices are located and the areas immediately
surrounding those communities. Currently the Bank serves those markets through
four full-service offices and one off-premises automated transaction machine.
The Bank provides a variety of banking and other financial services to all
types of customers.
TO OUR SHAREHOLDERS
This 1997 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. 1997 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 1997 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, 1997,
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.
COMMON STOCK INFORMATION
ChoiceOne's shares are traded in the over-the-counter market by several
brokers. There is no well established public trading market for the shares,
trading activity is infrequent, and price information is not regularly
published.
The range of high and low bid information for shares of common stock for each
quarterly period during the past two years is as follows:
1997 1996
------------------------------
LOW HIGH LOW HIGH
------------------------------
First Quarter. . . . . . . $36 $38 $32 $37
Second Quarter . . . . . . 36 42 34 39
Third Quarter. . . . . . . 37 42 34 39
Fourth Quarter . . . . . . 38 42 35 38
The above market prices have been adjusted where necessary to reflect the
stock dividends declared in 1998 and 1997. The prices listed above are over-
the-counter market quotations reported to ChoiceOne by its market makers
listed in this annual report. The over-the-counter market quotations reflect
inter-dealer prices without retail markup, markdown or commission and may not
necessarily represent actual transactions.
As of February 28, 1998, there were 513,325 shares of ChoiceOne Financial
Services, Inc. common stock issued and outstanding. These shares were held
of record by 586 shareholders.
The following table summarizes cash dividends paid per share of common stock
during 1997 and 1996:
1997 1996
---------------
First Quarter. . . . . . . . . $ .32 $ .29
Second Quarter . . . . . . . . .38 .31
Third Quarter. . . . . . . . . .38 .31
Fourth Quarter . . . . . . . . .38 .32
---------------
Totals. . . . . . . . . . . . $1.46 $1.23
===============
The above dividend per share amounts have been adjusted where necessary to
reflect the stock dividends declared in 1998 and 1997.
ChoiceOne's principal source of funds to pay cash dividends are the earnings
and dividends paid by ChoiceOne Bank. ChoiceOne Bank is restricted in its
ability to pay cash dividends under current regulations (Note 14). Based on
information presently available, management expects ChoiceOne to declare and
pay regular quarterly cash dividends in 1998.
FINANCIAL HIGHLIGHTS
CHOICEONE FINANCIAL SERVICES, INC.
1997 1996 1995 1994 1993
------------------------------------------------------------
FOR THE YEAR (IN THOUSANDS)
Net interest income . . . . . . . . . . . . . $ 6,315 $ 5,754 $ 4,931 $ 4,468 $ 4,264
Provision for loan losses . . . . . . . . . . 539 523 164 126 121
Noninterest income. . . . . . . . . . . . . . 1,769 1,555 656 597 710
Noninterest expense . . . . . . . . . . . . . 5,176 4,436 3,448 3,340 3,225
Income before income taxes. . . . . . . . . . 2,369 2,350 1,975 1,599 1,628
Income tax expense. . . . . . . . . . . . . . 632 655 511 356 372
Net income. . . . . . . . . . . . . . . . . . 1,737 1,695 1,464 1,243 1,256
Cash dividends declared . . . . . . . . . . . 783 663 551 469 429
PER SHARE<F*>
Net income. . . . . . . . . . . . . . . . . . $ 3.23 $ 3.14 $ 2.79 $ 2.29 $ 2.32
Cash dividends. . . . . . . . . . . . . . . . 1.46 1.23 1.06 .87 .79
Shareholders' equity. . . . . . . . . . . . . 28.93 27.06 26.64 23.76 23.90
AVERAGE FOR THE YEAR (IN THOUSANDS)
Securities. . . . . . . . . . . . . . . . . . $ 22,189 $ 22,547 $ 27,609 $ 31,122 $ 31,079
Gross loans . . . . . . . . . . . . . . . . . 118,369 94,461 74,223 68,077 64,705
Deposits. . . . . . . . . . . . . . . . . . . 100,815 95,210 91,446 90,772 89,448
Shareholders' equity. . . . . . . . . . . . . 14,998 14,129 13,200 12,922 12,325
Assets. . . . . . . . . . . . . . . . . . . . 148,652 123,134 107,552 105,445 103,155
AT YEAR END (IN THOUSANDS)
Securities. . . . . . . . . . . . . . . . . . $ 19,942 $ 23,006 $ 23,187 $ 30,410 $ 32,315
Gross loans . . . . . . . . . . . . . . . . . 127,776 110,079 79,082 69,410 66,844
Deposits. . . . . . . . . . . . . . . . . . . 107,492 95,606 92,902 91,236 88,630
Shareholders' equity. . . . . . . . . . . . . 15,537 14,537 13,784 12,876 12,954
Assets. . . . . . . . . . . . . . . . . . . . 156,329 141,731 109,916 106,137 104,542
RATIOS
Return on average assets. . . . . . . . . . . 1.17% 1.38% 1.36% 1.18% 1.22%
Return on average shareholders' equity. . . . 11.58 12.00 11.09 9.62 10.19
Dividend payout
Cash (based on net income). . . . . . . . . 45.08 39.12 37.64 37.73 34.16
Stock (based on shares outstanding) . . . . 6.00 None 20.00 25.00 None
Shareholders' equity to assets (at
year end) . . . . . . . . . . . . . . . . . 9.94 10.26 12.54 12.13 12.39
<FN>
<F*> Per share amounts are retroactively adjusted for the effect of stock
dividends and stock splits.
</FN>
A-2
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
ChoiceOne Financial Services, Inc.
December 31
1997 1996
--------------------------------
ASSETS
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . $ 3,769,000 $ 4,952,000
Securities available for sale . . . . . . . . . . . . . . . . . . 19,942,000 23,006,000
Loans, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . 126,209,000 108,592,000
Premises and equipment, net . . . . . . . . . . . . . . . . . . . 3,663,000 2,987,000
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,746,000 2,194,000
--------------------------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . $156,329,000 $141,731,000
================================
LIABILITIES
Deposits - noninterest bearing. . . . . . . . . . . . . . . . . . $ 13,464,000 $ 13,188,000
Deposits - interest bearing . . . . . . . . . . . . . . . . . . . 94,028,000 82,418,000
Federal funds purchased and repurchase agreements . . . . . . . . 2,060,000 4,731,000
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . 4,248,000 1,657,000
Long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . 26,992,000 25,200,000
--------------------------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . 140,792,000 127,194,000
SHAREHOLDERS' EQUITY
Preferred stock; shares authorized: 100,000; shares
outstanding: none . . . . . . . . . . . . . . . . . . . . . . . - -
Common stock, $10 par value; shares authorized:
1,000,000; shares outstanding: 537,015 in 1997
and 482,710 in 1996 . . . . . . . . . . . . . . . . . . . . . . 5,370,000 4,827,000
Paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . 7,005,000 5,292,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . 2,994,000 4,305,000
Unrealized gains and losses on securities . . . . . . . . . . . . 168,000 113,000
--------------------------------
Total shareholders' equity. . . . . . . . . . . . . . . . . . 15,537,000 14,537,000
--------------------------------
Total liabilities and shareholders' equity. . . . . . . . . . $156,329,000 $141,731,000
================================
See accompanying notes to consolidated financial statements.
A-3
CONSOLIDATED STATEMENTS OF INCOME
ChoiceOne Financial Services, Inc.
Years ended December 31
1997 1996 1995
-----------------------------------------------
INTEREST INCOME
Loans, including fees . . . . . . . . . . . . . . . . . . . $11,230,000 $ 9,050,000 $ 7,099,000
Securities
Taxable . . . . . . . . . . . . . . . . . . . . . . . . . 845,000 916,000 1,181,000
Nontaxable. . . . . . . . . . . . . . . . . . . . . . . . 484,000 450,000 511,000
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,000 3,000 8,000
-----------------------------------------------
Total interest income . . . . . . . . . . . . . . . . . 12,567,000 10,419,000 8,799,000
INTEREST EXPENSE
Deposits. . . . . . . . . . . . . . . . . . . . . . . . . . 4,279,000 3,919,000 3,760,000
Short-term borrowings . . . . . . . . . . . . . . . . . . . 264,000 154,000 106,000
Long-term debt. . . . . . . . . . . . . . . . . . . . . . . 1,709,000 592,000 2,000
-----------------------------------------------
Total interest expense. . . . . . . . . . . . . . . . . 6,252,000 4,665,000 3,868,000
-----------------------------------------------
NET INTEREST INCOME. . . . . . . . . . . . . . . . . . . . . 6,315,000 5,754,000 4,931,000
PROVISION FOR LOAN LOSSES. . . . . . . . . . . . . . . . . . 539,000 523,000 164,000
-----------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES. . . . . 5,776,000 5,231,000 4,767,000
NONINTEREST INCOME
Customer service fees . . . . . . . . . . . . . . . . . . . 448,000 428,000 420,000
Security gains or losses. . . . . . . . . . . . . . . . . . 28,000 - -
Insurance commission income . . . . . . . . . . . . . . . . 895,000 811,000 -
Mortgage loan sales and servicing . . . . . . . . . . . . . 152,000 105,000 93,000
Other income. . . . . . . . . . . . . . . . . . . . . . . . 246,000 211,000 143,000
-----------------------------------------------
Total noninterest income. . . . . . . . . . . . . . . . 1,769,000 1,555,000 656,000
NONINTEREST EXPENSE
Salaries and benefits . . . . . . . . . . . . . . . . . . . 2,829,000 2,366,000 1,740,000
Occupancy expense . . . . . . . . . . . . . . . . . . . . . 761,000 657,000 475,000
Computer processing . . . . . . . . . . . . . . . . . . . . 156,000 162,000 156,000
Other expense . . . . . . . . . . . . . . . . . . . . . . . 1,430,000 1,251,000 1,077,000
-----------------------------------------------
Total noninterest expense . . . . . . . . . . . . . . . 5,176,000 4,436,000 3,448,000
-----------------------------------------------
INCOME BEFORE INCOME TAX . . . . . . . . . . . . . . . . . . 2,369,000 2,350,000 1,975,000
INCOME TAX EXPENSE . . . . . . . . . . . . . . . . . . . . . 632,000 655,000 511,000
-----------------------------------------------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,737,000 $ 1,695,000 $ 1,464,000
===============================================
BASIC EARNINGS PER COMMON SHARE AND EARNINGS PER COMMON
SHARE ASSUMING DILUTION. . . . . . . . . . . . . . . . . . $ 3.23 $ 3.14 $ 2.79
===============================================
See accompanying notes to consolidated financial statements.
A-4
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
ChoiceOne Financial Services, Inc.
Years ended December 31
COMMON
STOCK AND UNREALIZED
PAID-IN RETAINED GAINS AND LOSSES
CAPITAL EARNINGS ON SECURITIES TOTAL
----------------------------------------------------------------
Balance, start of 1995 . . . . . . . . . . . . . . $ 8,169,000 $ 5,266,000 $(559,000) $12,876,000
Net income. . . . . . . . . . . . . . . . . . . . - 1,464,000 - 1,464,000
Repurchase of 18,324 shares of stock. . . . . . . (810,000) - - (810,000)
Change in unrealized gains and losses . . . . . . - - 810,000 810,000
20% stock dividend paid in May 1995 . . . . . . . 2,901,000 (2,906,000) - (5,000)
Cash dividends ($1.06 per share). . . . . . . . . - (551,000) - (551,000)
----------------------------------------------------------------
Balance, end of 1995 . . . . . . . . . . . . . . . 10,260,000 3,273,000 251,000 13,784,000
Issuance of 20,610 shares of stock to
effect a business combination of
insurance subsidiary. . . . . . . . . . . . . . (26,000) - - (26,000)
Net income. . . . . . . . . . . . . . . . . . . . - 1,695,000 - 1,695,000
Repurchase of 2,703 shares of stock . . . . . . . (115,000) - - (115,000)
Change in unrealized gains and losses . . . . . . - - (138,000) (138,000)
Cash dividends ($1.23 per share). . . . . . . . . - (663,000) - (663,000)
----------------------------------------------------------------
Balance, end of 1996 . . . . . . . . . . . . . . . 10,119,000 4,305,000 113,000 14,537,000
Net income. . . . . . . . . . . . . . . . . . . . - 1,737,000 - 1,737,000
Change in unrealized gains and losses . . . . . . - - 55,000 55,000
6% stock dividend paid in May 1997. . . . . . . . 1,178,000 (1,187,000) - (9,000)
5% stock dividend to be paid in March
1998. . . . . . . . . . . . . . . . . . . . . . 1,078,000 (1,078,000) - -
Cash dividends ($1.46 per share). . . . . . . . . - (783,000) - (783,000)
----------------------------------------------------------------
BALANCE, END OF 1997 . . . . . . . . . . . . . . . $12,375,000 $ 2,994,000 $ 168,000 $15,537,000
================================================================
See accompanying notes to consolidated financial statements.
A-5
CONSOLIDATED STATEMENTS OF CASH FLOWS
ChoiceOne Financial Services, Inc.
Years ended December 31
1997 1996 1995
-----------------------------------------------
Cash flows from operating activities:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 1,737,000 $ 1,695,000 $ 1,464,000
Reconciling items:
Security gains. . . . . . . . . . . . . . . . . . . . . . (28,000) - -
Net amortization on securities. . . . . . . . . . . . . . 74,000 65,000 144,000
Net gain on sales of loans. . . . . . . . . . . . . . . . (42,000) (70,000) (31,000)
Provision for loan losses . . . . . . . . . . . . . . . . 539,000 523,000 164,000
Depreciation. . . . . . . . . . . . . . . . . . . . . . . 320,000 288,000 233,000
Other non-cash charges and credits. . . . . . . . . . . . (13,000) (139,000) (103,000)
Deferred income tax benefit . . . . . . . . . . . . . . . (69,000) (61,000) (42,000)
Changes in assets and liabilities:
Interest receivable . . . . . . . . . . . . . . . . . . (85,000) (86,000) 78,000
Other assets. . . . . . . . . . . . . . . . . . . . . . (419,000) (558,000) (5,000)
Interest payable. . . . . . . . . . . . . . . . . . . . 88,000 96,000 48,000
Other liabilities . . . . . . . . . . . . . . . . . . . 2,503,000 331,000 157,000
-----------------------------------------------
Net cash from operating activities. . . . . . . . . . 4,605,000 2,084,000 2,107,000
-----------------------------------------------
Cash flows from investing activities:
Securities available for sale:
Purchases . . . . . . . . . . . . . . . . . . . . . . . . (4,219,000) (5,472,000) (595,000)
Sales proceeds. . . . . . . . . . . . . . . . . . . . . . 4,618,000 1,874,000 2,179,000
Principal payments. . . . . . . . . . . . . . . . . . . . 2,764,000 3,504,000 4,894,000
Securities held to maturity:
Purchases . . . . . . . . . . . . . . . . . . . . . . . . - - (350,000)
Principal payments. . . . . . . . . . . . . . . . . . . . - - 2,179,000
Net change in loans . . . . . . . . . . . . . . . . . . . . (18,120,000) (30,913,000) (9,620,000)
Purchase of travel agency . . . . . . . . . . . . . . . . . (50,000) - -
Premises and equipment expenditures, net. . . . . . . . . . (996,000) (762,000) (236,000)
-----------------------------------------------
Net cash used in investing activities . . . . . . . . (16,003,000) (31,769,000) (1,549,000)
-----------------------------------------------
Cash flows from financing activities:
Net change in deposits. . . . . . . . . . . . . . . . . . . 11,886,000 2,704,000 1,666,000
Net change in short-term borrowings . . . . . . . . . . . . (2,671,000) 3,731,000 -
Proceeds from long-term debt. . . . . . . . . . . . . . . . 3,731,000 24,200,000 1,000,000
Payments on long-term debt. . . . . . . . . . . . . . . . . (1,939,000) - -
Effect of business combination of insurance
subsidiary. . . . . . . . . . . . . . . . . . . . . . . . - (26,000) -
Repurchase of common stock. . . . . . . . . . . . . . . . . - (115,000) (810,000)
Cash dividends and fractional shares from stock
dividends . . . . . . . . . . . . . . . . . . . . . . . . (792,000) (663,000) (556,000)
-----------------------------------------------
Net cash from financing activities. . . . . . . . . . 10,215,000 29,831,000 1,300,000
-----------------------------------------------
Net change in cash and cash equivalents. . . . . . . . . . . (1,183,000) 146,000 1,858,000
Beginning cash and cash equivalents. . . . . . . . . . . . . 4,952,000 4,806,000 2,948,000
-----------------------------------------------
Ending cash and cash equivalents . . . . . . . . . . . . . . $ 3,769,000 $ 4,952,000 $ 4,806,000
===============================================
Cash paid for interest . . . . . . . . . . . . . . . . . . . $ 6,165,000 $ 4,569,000 $ 3,820,000
Cash paid for income taxes . . . . . . . . . . . . . . . . . 605,000 774,000 515,000
Loans transferred to other real estate . . . . . . . . . . . 279,000 - -
Securities transferred to available for sale . . . . . . . . - - 8,354,000
Securities transferred to held to maturity . . . . . . . . . - - 1,795,000
See accompanying notes to consolidated financial statements.
A-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ChoiceOne Financial Services, Inc.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include ChoiceOne Financial Services,
Inc., its wholly-owned subsidiary, ChoiceOne Bank, and ChoiceOne Bank's
wholly-owned subsidiaries, ChoiceOne Insurance Agencies, Inc., and Alpine
Travel, Inc. (together referred to as "ChoiceOne"). Intercompany
transactions and balances have been eliminated in consolidation.
NATURE OF OPERATIONS
ChoiceOne Financial Services, Inc. was formerly 1st Community Bancorp, Inc.
The company's name change was approved by the shareholders at the April 29,
1997, annual meeting. The name change was made to more easily identify the
bank holding company with ChoiceOne Bank and ChoiceOne Insurance Agencies,
Inc.
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. Alpine 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 held to maturity and carried at amortized cost
when ChoiceOne's management has the positive intent and ability to hold
them to maturity. Securities are classified as available for sale when
they might be sold before maturity. Securities classified as available for
sale are carried at fair value, with unrealized holding gains and losses
reported separately in shareholders' equity, net of tax effect. Realized
gains or losses are based on specific identification of amortized cost.
Securities are written down to fair value when a decline in fair value is
not considered to be temporary. Interest income includes amortization of
purchase premium or discount. Other securities, such as Federal Reserve
Bank stock or Federal Home Loan Bank stock, are carried at cost. A
transfer of securities from held to maturity to available for sale was made
in 1995 in accordance with new interpretive guidance.
LOANS
Loans are reported at the principal balance outstanding, net of deferred
loan fees and costs and an allowance for loan losses. Loans held for sale
are reported at the lower of cost or market, on an aggregate basis. When
loans are sold, they are removed from the loans balance if the tests for
loan sales are met. If the accounting tests for loan sales are not met,
sales of loans are accounted for as secured loan borrowings.
A-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ChoiceOne Financial Services, Inc.
LOAN INCOME
Interest income is reported on the interest method and includes
amortization of net deferred loan fees and costs over the estimated loan
term. Interest on loans is accrued based upon the principal balance
outstanding. The accrual of interest is discontinued at the point in time
at which the collectibility of principal or interest is considered
doubtful. Each loan is evaluated on its own merits; therefore, loans are
not automatically classified as non-accrual based upon standardized
criteria.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is a valuation allowance for probable credit
losses. The allowance is increased by the provision for loan losses and
decreased by charge-offs less recoveries. Management estimates the
allowance balance required based on past loan loss experience, known and
inherent risks in the portfolio, information about specific borrower
situations and estimated collateral values, economic conditions, and other
factors. Allocations of the allowance may be made for specific loans, but
the entire allowance is available for any loan that, in management's
judgment, should be charged-off.
Loans are classified as impaired when full payment under the loan terms is
not expected. Impairment is evaluated in total for smaller-balance loans
of similar nature. Construction real estate mortgages, residential real
estate mortgages, and consumer loans have been classified in this category.
Impairment is evaluated on an individual loan basis for commercial and
agricultural loans. If a loan is considered impaired, a portion of the
allowance for loan losses is allocated to the loan so that it is reported,
net, at the present value of estimated future cash flows using the loan's
existing rate or at the fair value of collateral if repayment is expected
solely from the collateral. Loans are evaluated for impairment when
payments are delayed or when it is probable that all principal and interest
amounts will not be collected according to the original terms of the loan.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed over the assets' useful lives on the straight-line
method.
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.
LONG-TERM ASSETS
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.
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.
A-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ChoiceOne Financial Services, Inc.
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
based on Accounting Principles Board Opinion No. 25, with expense reported
only if options are granted below market price at the grant date. Pro forma
disclosures of net income and earnings per share are provided as if the fair
value method of Statement of Financial Accounting Standards No. 123 was used
for stock based compensation.
INCOME TAXES
Income tax expense is the sum of the current year income tax due and the
change in deferred tax assets and liabilities. Deferred tax assets and
liabilities are the expected future tax consequences of temporary
differences between the carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if
needed, reduces deferred tax assets to the amount expected to be realized.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
Off-balance sheet financial instruments represent credit instruments, such
as loan commitments, lines of credit, and standby letters of credit. The
face amount of credit instruments represents the exposure to loss assuming
customer collateral or ability to repay is worthless.
LEASE COMMITMENTS
Expense is recognized as payments are made on operating leases. Leasing
arrangements are typically for 5 years and contain renewal options.
LOSS CONTINGENCIES
Loss contingencies, including claims and legal actions arising in the
ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be
reasonably estimated.
SHAREHOLDERS' EQUITY
As of December 31, 1997, ChoiceOne's common stock had a par value of $10
and 1,000,000 shares were authorized. The par value of common stock was
changed from $10 to no par by ChoiceOne's Board of Directors at its
February 1998 meeting. 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. The accounting standard for computing EPS was
revised for 1997, and requires previously reported EPS to be restated for
comparability. Adoption of the new standard had no effect on ChoiceOne's
EPS data for the current or prior years. EPS has been restated for stock
dividends and splits.
A-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ChoiceOne Financial Services, Inc.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair values of financial instruments are estimated using relevant market
information and other assumptions, which are more fully documented in Note
15 to the financial statements. Fair value estimates involve uncertainties
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.
FUTURE ACCOUNTING CHANGES
New accounting standards have been issued which will require future
reporting of comprehensive income (net income plus changes in holding gains
or losses on available for sale securities) and may require redetermination
of industry segment financial information. These standards are not
expected to have a material impact on the consolidated financial
statements.
NOTE 2 - ACQUISITION OF SUBSIDIARIES
On January 1, 1996, the Bank completed a business combination with
the Insurance Agency in a tax-free exchange of stock. Under the terms of
the agreement, 20,610 shares of ChoiceOne Financial Services, Inc. common
stock were exchanged for all of the outstanding shares of the Insurance
Agency. The transaction was accounted for as a pooling of interests. The
operations of the Insurance Agency were not material to ChoiceOne's
consolidated financial position or results of operations.
Effective August 1, 1997, the Bank purchased the Travel Agency. Cash was
paid for all of the outstanding shares of the Travel Agency. The
transaction was accounted for as a purchase.
NOTE 3 - SECURITIES
Information at year-end or for the year:
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------------------------------------------------------
SECURITIES AVAILABLE FOR SALE DECEMBER 31, 1997
U.S. Treasuries and U.S. Government
agencies . . . . . . . . . . . . . . . . . . . $ 3,259,000 $ 7,000 $ (2,000) $ 3,264,000
States and municipalities. . . . . . . . . . . . 7,458,000 232,000 (4,000) 7,686,000
Mortgage-backed securities . . . . . . . . . . . 6,005,000 32,000 (12,000) 6,025,000
Other securities . . . . . . . . . . . . . . . . 2,966,000 1,000 - 2,967,000
------------------------------------------------------------
Total. . . . . . . . . . . . . . . . . . . . . $19,688,000 $272,000 $(18,000) $19,942,000
============================================================
December 31, 1996
U.S. Treasuries and U.S. Government
agencies . . . . . . . . . . . . . . . . . . . $ 4,831,000 $ 36,000 $(14,000) $ 4,853,000
States and municipalities. . . . . . . . . . . . 10,276,000 191,000 (39,000) 10,428,000
Mortgage-backed securities . . . . . . . . . . . 4,869,000 32,000 (35,000) 4,866,000
Other securities . . . . . . . . . . . . . . . . 2,859,000 - - 2,859,000
------------------------------------------------------------
Total. . . . . . . . . . . . . . . . . . . . . $22,835,000 $259,000 $(88,000) $23,006,000
============================================================
SECURITIES HELD TO MATURITY
There were no securities classified as held to maturity as of December 31,
1997, or December 31, 1996.
A-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ChoiceOne Financial Services, Inc.
Contractual maturities of securities available for sale at December 31,
1997, follows:
AMORTIZED FAIR
COST VALUE
-----------------------------
Due within one year. . . . . . . . . . . . . . . . . . . . . . $ 1,782,000 $ 1,788,000
Due after one year through five years. . . . . . . . . . . . . 6,701,000 6,801,000
Due after five years through ten years . . . . . . . . . . . . 510,000 535,000
Due after ten years. . . . . . . . . . . . . . . . . . . . . . 1,985,000 2,088,000
-----------------------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,978,000 11,212,000
Mortgage-backed securities not due at a specific date. . . . . 6,005,000 6,025,000
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,705,000 2,705,000
-----------------------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $19,688,000 $19,942,000
=============================
Information regarding sales of available for sale securities follows:
1997 1996 1995
--------------------------------------------
Proceeds from sales of securities. . . . . . . . . $4,618,000 $1,874,000 $2,179,000
Gross realized gains . . . . . . . . . . . . . . . 38,000 7,000 11,000
Gross realized losses. . . . . . . . . . . . . . . 10,000 7,000 11,000
There were no sales of securities held to maturity in 1997, 1996, or 1995.
Various securities were pledged as collateral for the purposes below. In
the case of repurchase agreements and public deposits, the balance of the
repurchase agreements or public deposits was 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:
1997 1996
---------------------------
Securities sold under agreements to repurchase . . . . . . $2,259,000 $2,028,000
Public deposits. . . . . . . . . . . . . . . . . . . . . . 505,000 252,000
Federal Home Loan Bank advances. . . . . . . . . . . . . . - 5,079,000
---------------------------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . $2,764,000 $7,359,000
===========================
NOTE 4 - LOANS
Loan information at year-end or for the year follows:
1997 1996
-------------------------------
LOAN COMPONENTS
Commercial . . . . . . . . . . . . . . . . . . . . . . . . $ 43,546,000 $ 34,696,000
Agricultural . . . . . . . . . . . . . . . . . . . . . . . 9,350,000 9,996,000
Real estate mortgage - construction. . . . . . . . . . . . 2,499,000 2,215,000
Real estate mortgage - residential . . . . . . . . . . . . 43,715,000 37,168,000
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . 28,666,000 26,000,000
-------------------------------
Total loans before allowance for loan losses . . . . . . 127,776,000 110,079,000
Less allowance for loan losses . . . . . . . . . . . . . . 1,567,000 1,487,000
-------------------------------
Loans, net . . . . . . . . . . . . . . . . . . . . . . . $126,209,000 $108,592,000
===============================
A-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ChoiceOne Financial Services, Inc.
1997 1996
-----------------------------
LOANS SERVICED FOR OTHERS
Commercial and agricultural loans. . . . . . . . . . . . . . . $ 2,739,000 $ 1,589,000
Residential real estate mortgage loans . . . . . . . . . . . . 19,460,000 18,151,000
-----------------------------
Total loans serviced for others. . . . . . . . . . . . . . . $22,199,000 $19,740,000
=============================
MORTGAGE SERVICING RIGHTS
Beginning of year. . . . . . . . . . . . . . . . . . . . . . . $ 19,000 $ -
Originations . . . . . . . . . . . . . . . . . . . . . . . . . 46,000 20,000
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . (7,000) (1,000)
-----------------------------
End of year. . . . . . . . . . . . . . . . . . . . . . . . . . $ 58,000 $ 19,000
=============================
LOANS TO RELATED PARTIES
Beginning of year. . . . . . . . . . . . . . . . . . . . . . . $ 1,603,000
New loans. . . . . . . . . . . . . . . . . . . . . . . . . . . 512,000
Repayments . . . . . . . . . . . . . . . . . . . . . . . . . . (701,000)
Change in persons included . . . . . . . . . . . . . . . . . . (61,000)
-----------
End of year. . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,353,000
===========
COST OF LOANS PLEDGED FOR BORROWINGS
Residential real estate mortgage loans pledged
for Federal Home Loan Bank advances. . . . . . . . . . . . . $39,505,000 $35,241,000
Commercial loans pledged for secured loan borrowings . . . . . 878,000 -
-----------------------------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . $40,383,000 $35,241,000
=============================
LOANS HELD FOR SALE
Agricultural loans . . . . . . . . . . . . . . . . . . . . . . $ 1,276,000 $ 1,386,000
Residential real estate mortgage loans . . . . . . . . . . . . 381,000 52,000
-----------------------------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,657,000 $ 1,438,000
=============================
NOTE 5 - ALLOWANCE FOR LOAN LOSSES
An analysis of changes in the allowance for loan losses follows:
1997 1996 1995
--------------------------------------------
Beginning of year balance. . . . . . . . . . . . . . . $1,487,000 $1,121,000 $1,039,000
Provision charged to expense . . . . . . . . . . . . . 539,000 523,000 164,000
Recoveries credited to the allowance . . . . . . . . . 70,000 64,000 43,000
Loans charged off. . . . . . . . . . . . . . . . . . . (529,000) (221,000) (125,000)
--------------------------------------------
End of year balance. . . . . . . . . . . . . . . . . . $1,567,000 $1,487,000 $1,121,000
============================================
Information regarding impaired loans as of and for the year ended December
31 follows:
Loans with no allowance allocated. . . . . . . . . . . $ 780,000 $ 450,000
Loans with allowance allocated . . . . . . . . . . . . 152,000 149,000
Amount of allowance for loan losses allocated. . . . . 86,000 6,000
A-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ChoiceOne Financial Services, Inc.
1997 1996 1995
--------------------------------------
IMPAIRED LOANS
Average balance during the year. . . . . . . . . . . $759,000 $477,000 $432,000
Interest income recognized thereon . . . . . . . . . 43,000 39,000 41,000
Cash-basis interest income recognized. . . . . . . . 33,000 29,000 40,000
NOTE 6 - OTHER BALANCE SHEET INFORMATION
1997 1996
-----------------------------
RESTRICTIONS ON CASH BALANCES
Cash subject to restrictions for reserve requirements. . . . . . . $ 745,000 $ 707,000
=============================
PREMISES AND EQUIPMENT
Land and land improvements . . . . . . . . . . . . . . . . . . . . $ 626,000 $ 500,000
Buildings and improvements . . . . . . . . . . . . . . . . . . . . 3,105,000 2,573,000
Construction in progress . . . . . . . . . . . . . . . . . . . . . 47,000 47,000
Equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,494,000 2,128,000
-----------------------------
Total cost . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,272,000 5,248,000
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . (2,609,000) (2,261,000)
-----------------------------
Premises and equipment, net. . . . . . . . . . . . . . . . . . . $ 3,663,000 $ 2,987,000
=============================
OTHER REAL ESTATE
Balance as of end of year. . . . . . . . . . . . . . . . . . . . . $ 246,000 $ 18,000
=============================
NOTE 7 - DEPOSITS
Deposit information as of year-end follows:
1997 1996
-----------------------------
Certificates of deposit issued in denominations
of $100,000 or more. . . . . . . . . . . . . . . . . . . . . . . $14,751,000 $ 9,693,000
=============================
Related party deposits . . . . . . . . . . . . . . . . . . . . . . $ 2,417,000 $ 2,006,000
=============================
Maturities of certificates of deposit
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $27,094,000
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $41,712,000 12,443,000
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,245,000 5,714,000
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,726,000 3,025,000
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,935,000 2,128,000
2002 (and after for 1996). . . . . . . . . . . . . . . . . . . . 2,059,000 124,000
2003 and after . . . . . . . . . . . . . . . . . . . . . . . . . 129,000
-----------------------------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $62,806,000 $50,528,000
=============================
Certificates of deposit included $6,738,000 at December 31, 1997, of
deposits that were acquired through a national rate service. The deposits
mature through 1999 and bear an average interest rate of 6.35%.
A-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ChoiceOne Financial Services, Inc.
NOTE 8 - INCOME TAXES
Information as of year-end and for the year follows:
1997 1996 1995
-----------------------------------------
PROVISION FOR INCOME TAXES
Current federal income tax expense . . . . . . . . . . . . . . . . $ 701,000 $ 716,000 $ 553,000
Deferred federal income tax benefit. . . . . . . . . . . . . . . . (69,000) (61,000) (42,000)
-----------------------------------------
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . $ 632,000 $ 655,000 $ 511,000
=========================================
RECONCILIATION OF INCOME TAX PROVISION TO STATUTORY RATE
Income tax computed at statutory federal rate of 34% . . . . . . . $ 805,000 $ 799,000 $ 672,000
Tax exempt interest income . . . . . . . . . . . . . . . . . . . . (182,000) (175,000) (197,000)
Nondeductible interest expense . . . . . . . . . . . . . . . . . . 29,000 24,000 25,000
Other items. . . . . . . . . . . . . . . . . . . . . . . . . . . . (20,000) 7,000 11,000
-----------------------------------------
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . $ 632,000 $ 655,000 $ 511,000
=========================================
COMPONENTS OF DEFERRED TAX ASSETS AND LIABILITIES
Deferred tax assets:
Allowance for loan losses. . . . . . . . . . . . . . . . . . . . $ 428,000 $ 401,000
Deferred compensation. . . . . . . . . . . . . . . . . . . . . . 59,000 62,000
Postretirement benefits obligation . . . . . . . . . . . . . . . 46,000 50,000
Deferred loan fees . . . . . . . . . . . . . . . . . . . . . . . 39,000 53,000
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79,000 68,000
-------------------------
Total deferred tax assets. . . . . . . . . . . . . . . . . . . 651,000 634,000
Deferred tax liabilities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . 215,000 188,000
Unrealized appreciation on securities available for sale . . . . 86,000 58,000
Pension fund asset . . . . . . . . . . . . . . . . . . . . . . . - 96,000
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,000 12,000
-------------------------
Total deferred tax liabilities . . . . . . . . . . . . . . . . 329,000 354,000
-------------------------
Net deferred tax asset . . . . . . . . . . . . . . . . . . . . $ 322,000 $ 280,000
=========================
A valuation allowance related to a deferred tax asset is recognized when it
is considered more likely than not that part or all of the deferred tax
benefits will not be realized. Management has determined that no such
allowance was required at December 31, 1997 and 1996.
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 has 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
has not yet received a written ruling on its request.
A-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ChoiceOne Financial Services, Inc.
Net pension cost included the following for the years ended December 31:
1997 1996 1995
------------------------------------------
Service cost/benefits earned during the year . . . . . . $ 17,000 $ 86,000 $ 70,000
Interest cost on projected benefit obligation. . . . . . 129,000 130,000 122,000
Actual return on plan assets . . . . . . . . . . . . . . (112,000) (122,000) (368,000)
Net amortization and deferral. . . . . . . . . . . . . . (82,000) (69,000) 199,000
------------------------------------------
Net pension cost/(income). . . . . . . . . . . . . . . . $ (48,000) $ 25,000 $ 23,000
==========================================
POSTRETIREMENT BENEFITS PLAN
Information regarding the postretirement benefits plan as of year-end and
for the year follows:
1997 1996 1995
---------------------------------------
Retirees . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 39,000 $ 36,000
Employees not yet eligible to receive benefits . . . . . . . . 39,000 36,000
Employees eligible to receive benefits . . . . . . . . . . . . 56,000 34,000
------------------------
Total accumulated benefit obligation . . . . . . . . . . . . 134,000 106,000
Unrecognized net gain. . . . . . . . . . . . . . . . . . . . . 15,000 42,000
------------------------
Accrued postretirement benefit cost. . . . . . . . . . . . . $149,000 $ 148,000
========================
Service cost/benefits attributed to service during
the year . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,000 $ 8,000 $ 7,000
Interest cost on accumulated postretirement benefit
obligation . . . . . . . . . . . . . . . . . . . . . . . . . 8,000 16,000 18,000
Recognized gain. . . . . . . . . . . . . . . . . . . . . . . . (3,000) (3,000) (5,000)
Settlement gain from discontinuance of life
insurance plan . . . . . . . . . . . . . . . . . . . . . . . - (139,000) -
---------------------------------------
Postretirement benefit cost/(credit) . . . . . . . . . . . . $ 9,000 $(118,000) $ 20,000
=======================================
The trend for annual increases in health care costs was assumed to be 11.5%
for 3 years beginning January 1, 1998, dropping to 5.5% after 3 years and
remaining at that level thereafter. The effect of a 1% increase 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. A weighted average discount rate of
7% was used in determining the actuarial present value of the accumulated
postretirement benefit obligation for 1997, 1996, and 1995.
1997 1996 1995
----------------------------------------
OTHER EMPLOYEE BENEFIT PLAN EXPENSES
401(k) savings and retirement plan . . . . . . . . . . . . . . $323,000 $ 17,000 $ 13,000
Incentive bonus plan . . . . . . . . . . . . . . . . . . . . . 100,000 232,000 194,000
The 401(k) expense recorded in 1997 represents the amount of defined
benefit pension plan assets remaining at December 31, 1997, after payment
of vested benefits to plan participants. The Bank intends to contribute
these excess assets to the 401(k) savings and retirement plan (the "401(k)
plan") in 1998. Approximately 25% of the total was contributed 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 will be
contributed to the 401(k) plan upon receipt of a determination letter from
the Internal Revenue Service as to whether the pension plan excess assets
can be transferred to the 401(k) plan. 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.
A-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ChoiceOne Financial Services, Inc.
NOTE 10 STOCK OPTIONS
Statement of Financial Accounting Standards No. 123 ("Statement No. 123"),
"Accounting for Stock-Based Compensation," became effective in 1996 and
requires pro forma disclosures for companies that do not adopt its fair value
accounting method for stock based employee compensation. Accordingly, the
following pro forma information presents net income and earnings per share
for 1997 had the fair value method of Statement No. 123 been used to measure
compensation cost for stock option plans. Compensation cost actually
recognized for stock options was $0 for 1997. There were no stock options
granted prior to 1997.
Net income as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,737,000
Pro forma net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,733,000
Basic earnings per common share and diluted earnings per common share as reported . . . . . . . 3.23
Pro forma basic earnings per common share and diluted earnings per common share . . . . . . . . 3.23
In future years, the pro forma effect of not applying Statement No. 123 may
increase if additional options are granted.
ChoiceOne's stock option plan is used to reward key employees and provide them
with an additional equity interest in ChoiceOne. The options issued in 1997
were issued for 10-year periods with vesting occurring over a three-year period.
At December 31, 1997, 20,000 shares were authorized for stock option grants, of
which 15,000 were available for future grants. Information about option grants
follows:
NUMBER WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OF OPTIONS EXERCISE PRICE FAIR VALUE OF GRANTS
---------- ---------------- --------------------
Granted during 1997 and outstanding at end of year . . . . . 5,000 $ 40.00 $ 7.08
Options exercisable at end of 1997 . . . . . . . . . . . . . 1,250 $ 40.00
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.
NOTE 11 - LONG-TERM DEBT
Long-term debt as of year-end was comprised as follows:
1997 1996
-----------------------------
Federal Home Loan Bank advances. . . . . . . . . . . . . $26,114,000 $25,200,000
Secured loan borrowings. . . . . . . . . . . . . . . . . 878,000 -
-----------------------------
Total. . . . . . . . . . . . . . . . . . . . . . . . . $26,992,000 $25,200,000
=============================
Interest rates on Federal Home Loan Bank advances range from 5.27% to 6.66%
and are fixed. Advances are secured by mortgage loans. Penalties are
charged on advances that are paid prior to maturity. No advances were paid
prior to maturity in 1997 or 1996. Secured loan borrowings consist of five
commercial loans of which participations were sold in 1997. The
participations carry an interest rate of 7.60% and are secured by the
related commercial loans.
A-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ChoiceOne Financial Services, Inc.
The maturities of Federal Home Loan Bank advances and secured loan
borrowings at December 31, 1997, follow:
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,586,000
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,323,000
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,501,000
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,590,000
2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,966,000
2003 and after . . . . . . . . . . . . . . . . . . . . . . . . . 1,026,000
-----------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $26,992,000
===========
NOTE 12 - LEASES AND OTHER COMMITMENTS
Following is lease and other commitment information:
1997 1996 1995
--------------------------------------
Lease rental expense. . . . . . . . . . . . . . $ 70,000 $ 45,000 $ 10,000
======================================
Future minimum operating lease commitments
1998. . . . . . . . . . . . . . . . . . . . . $ 80,000
1999. . . . . . . . . . . . . . . . . . . . . 77,000
2000. . . . . . . . . . . . . . . . . . . . . 74,000
2001. . . . . . . . . . . . . . . . . . . . . 63,000
2002. . . . . . . . . . . . . . . . . . . . . 63,000
--------
Total . . . . . . . . . . . . . . . . . . . $357,000
========
Lease commitments include $63,000 to a related party in the years 1998
through 2002.
Future minimum computer processing commitments
1998. . . . . . . . . . . . . . . . . . . . . $ 120,000
1999. . . . . . . . . . . . . . . . . . . . . 120,000
-----------
Total . . . . . . . . . . . . . . . . . . . $ 240,000
===========
Credit commitments
Loan commitments. . . . . . . . . . . . . . . $16,830,000 $12,749,000
Unused lines of credit. . . . . . . . . . . . 3,002,000 2,562,000
Letters of credit . . . . . . . . . . . . . . 33,000 165,000
-----------------------------
Total . . . . . . . . . . . . . . . . . . . $19,865,000 $15,476,000
=============================
A-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ChoiceOne Financial Services, Inc.
NOTE 13 - SHAREHOLDERS' EQUITY AND EARNINGS PER SHARE
Information regarding shareholders' equity as of year-end and for the year
follows:
1997 1996 1995
--------------------------------------------
COMMON STOCK
Shares authorized. . . . . . . . . . . . . . . . 1,000,000 500,000 500,000
Shares outstanding . . . . . . . . . . . . . . . 537,015 482,710 464,803
Issued during the year . . . . . . . . . . . . . 28,733 20,610 77,367
Repurchased during the year. . . . . . . . . . . - 2,703 18,324
BASIC EARNINGS PER COMMON SHARE AND EARNINGS
PER SHARE ASSUMING DILUTION
Net income available for common stock. . . . . . $1,737,000 $1,695,000 $1,464,000
Average shares outstanding . . . . . . . . . . . 537,075 539,229 525,303
Stock options granted in 1997 did not have an impact on earnings per share
as the effect of the options was antidilutive.
NOTE 14 - CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY
CONDENSED BALANCE SHEETS
December 31
1997 1996
--------------------------------
Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . $ 32,000 $ 20,000
Securities available for sale. . . . . . . . . . . . 8,000 8,000
Other assets . . . . . . . . . . . . . . . . . . . . 2,000 2,000
Investment in ChoiceOne Bank and subsidiaries. . . . 15,495,000 14,507,000
--------------------------------
Total assets . . . . . . . . . . . . . . . . . . . $15,537,000 $14,537,000
================================
Shareholders' equity . . . . . . . . . . . . . . . . . $15,537,000 $14,537,000
================================
CONDENSED STATEMENTS OF INCOME
Years Ended December 31
1997 1996 1995
--------------------------------------------
Dividends from ChoiceOne Bank. . . . . . . . . . . . . $ 838,000 $ 824,000 $1,409,000
Other expenses . . . . . . . . . . . . . . . . . . . . 51,000 50,000 66,000
--------------------------------------------
Income before income tax and equity in
undistributed net income of subsidiary . . . . . . . 787,000 774,000 1,343,000
Income tax benefit . . . . . . . . . . . . . . . . . . 17,000 17,000 22,000
--------------------------------------------
Income before equity in undistributed net
income of subsidiary . . . . . . . . . . . . . . . . 804,000 791,000 1,365,000
Equity in undistributed net income of
subsidiary . . . . . . . . . . . . . . . . . . . . . 933,000 904,000 99,000
--------------------------------------------
Net income . . . . . . . . . . . . . . . . . . . . . . $1,737,000 $1,695,000 $1,464,000
============================================
A-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ChoiceOne Financial Services, Inc.
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31
1997 1996 1995
--------------------------------------------
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . $1,737,000 $1,695,000 $1,464,000
Reconciling items:
Equity in undistributed net subsidiary income. . . . . . (933,000) (904,000) (99,000)
Changes in other assets. . . . . . . . . . . . . . . . . - (1,000) 3,000
Changes in liabilities . . . . . . . . . . . . . . . . . - (2,000) (1,000)
--------------------------------------------
Net cash from operating activities . . . . . . . . . . 804,000 788,000 1,367,000
--------------------------------------------
Cash flows from investing activities:
Purchase of securities . . . . . . . . . . . . . . . . . . - - (8,000)
--------------------------------------------
Net cash used in investing activities . . . . . . . . . . - - (8,000)
--------------------------------------------
Cash flows from financing activities:
Dividends paid . . . . . . . . . . . . . . . . . . . . . . (783,000) (663,000) (551,000)
Repurchase of stock. . . . . . . . . . . . . . . . . . . . (9,000) (115,000) (815,000)
--------------------------------------------
Net cash used in financing activities. . . . . . . . . . (792,000) (778,000) (1,366,000)
--------------------------------------------
Net change in cash and cash equivalents. . . . . . . . . . . 12,000 10,000 (7,000)
Beginning cash and cash equivalents. . . . . . . . . . . . . 20,000 10,000 17,000
--------------------------------------------
Ending cash and cash equivalents . . . . . . . . . . . . . . $ 32,000 $ 20,000 $ 10,000
============================================
Amount of dividends that could be paid from
ChoiceOne Bank without regulatory approval . . . . . . . . $2,774,000
==========
NOTE 15 - FINANCIAL INSTRUMENTS
Financial instruments as of year-end were as follows:
1997 1996
---------------------------------------------------------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------------------------------------------------------------------
Assets:
Cash and cash equivalents. . . . . . . . $ 3,763,000 $ 3,763,000 $ 4,887,000 $ 4,887,000
Interest-bearing deposits. . . . . . . . 6,000 6,000 65,000 65,000
Securities available for sale. . . . . . 19,942,000 19,942,000 23,006,000 23,006,000
Loans, net . . . . . . . . . . . . . . . 126,209,000 129,870,000 108,592,000 112,179,000
Accrued interest receivable. . . . . . . 944,000 944,000 860,000 860,000
Liabilities:
Demand, savings and money market
deposit accounts . . . . . . . . . . . 44,686,000 44,686,000 45,078,000 45,078,000
Time deposits. . . . . . . . . . . . . . 62,806,000 63,276,000 50,528,000 50,874,000
Federal funds purchased and
repurchase agreements. . . . . . . . . 2,060,000 2,060,000 4,731,000 4,731,000
Accrued interest payable . . . . . . . . 523,000 523,000 435,000 435,000
Long-term debt . . . . . . . . . . . . . 26,992,000 27,170,000 25,200,000 25,328,000
A-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ChoiceOne Financial Services, Inc.
The estimated fair values approximate the carrying amounts for all assets
and liabilities except those described below. The estimated fair value for
securities is based on quoted market values for the individual securities
or for equivalent securities. The estimated fair value for loans is based
on the rates charged at year end for new loans with similar maturities,
applied until the loan is assumed to reprice or be paid. The estimated
fair value for time deposits is based on the rates paid at year end for new
deposits, applied until maturity. The estimated fair value for other
financial instruments and off-balance-sheet loan commitments are considered
nominal.
NOTE 16 - REGULATORY CAPITAL
ChoiceOne Financial Services, Inc. and ChoiceOne Bank are subject to
regulatory capital requirements administered by federal banking agencies.
Capital adequacy guidelines and prompt corrective action regulations
involve quantitative measures of assets, liabilities, and certain
off-balance-sheet items calculated under regulatory accounting practices.
The prompt corrective action regulations provide five classifications,
including well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized, although
these terms are not used to represent overall financial condition. If only
adequately capitalized, regulatory approval is required to accept brokered
deposits. If undercapitalized, capital distributions are limited, as are
asset growth and expansion, and plans for capital restoration are required.
At year-end, the capital requirements were met. Actual capital levels and
minimum required levels were as follows:
MINIMUM REQUIRED
TO BE WELL
MINIMUM REQUIRED CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION REGULATIONS
---------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------------------------------------------------------------------
(Dollars in thousands)
DECEMBER 31, 1997
Total capital (to risk weighted assets)
Consolidated. . . . . . . . . . . . . . $16,409 14.2% $9,212 8.0% $11,515 10.0%
Bank. . . . . . . . . . . . . . . . . . 16,368 14.2 9,211 8.0 11,514 10.0
Tier 1 capital (to risk weighted assets)
Consolidated. . . . . . . . . . . . . . 14,968 13.0 4,606 4.0 6,909 6.0
Bank. . . . . . . . . . . . . . . . . . 14,927 13.0 4,606 4.0 6,908 6.0
Tier 1 capital (to average assets)
Consolidated. . . . . . . . . . . . . . 14,968 9.6 6,213 4.0 7,766 5.0
Bank. . . . . . . . . . . . . . . . . . 14,927 9.6 6,213 4.0 7,766 5.0
December 31, 1996
Total capital (to risk weighted assets)
Consolidated. . . . . . . . . . . . . . $15,313 15.0% $8,169 8.0% $10,211 10.0%
Bank. . . . . . . . . . . . . . . . . . 15,284 15.0 8,168 8.0 10,210 10.0
Tier 1 capital (to risk weighted assets)
Consolidated. . . . . . . . . . . . . . 14,034 13.7 4,084 4.0 6,127 6.0
Bank. . . . . . . . . . . . . . . . . . 14,005 13.7 4,084 4.0 6,126 6.0
Tier 1 capital (to average assets)
Consolidated. . . . . . . . . . . . . . 14,034 10.4 5,403 4.0 6,754 5.0
Bank. . . . . . . . . . . . . . . . . . 14,005 10.4 5,403 4.0 6,754 5.0
A-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ChoiceOne Financial Services, Inc.
NOTE 17 - SUBSEQUENT EVENTS
On February 11, 1998, ChoiceOne's Board of Directors declared a 5% stock
dividend on ChoiceOne's common stock. The record date of the dividend is
March 16, 1998, and the payable date is March 31, 1998. The dividend has
been reflected in shareholders' equity as of December 31, 1997 and all per
share amounts have been retroactively restated for the estimated effect of
the stock dividend.
ChoiceOne's Board of Directors also declared a conditional two-for-one
stock split at its February 1998 meeting. 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 share outstanding. The stock split will be
payable to shareholders of record as of April 30, 1998, and will be paid on
May 22, 1998. The stock split is conditioned upon and subject to approval
by ChoiceOne's shareholders at the April 30, 1998, annual meeting. The
shareholders will be asked to approve a proposed amendment to ChoiceOne's
Restated Articles of Incorporation to increase the authorized capital stock
of ChoiceOne from 1,000,000 shares to 2,000,000 shares.
Earnings per share amounts, after giving retroactive effect to the two-
for-one 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 capital stock, financial information contained
elsewhere in these financial statements has not been adjusted to reflect
the impact of the proposed stock split.
1997 1996 1995
-----------------------------
Earnings per common share (pro forma). . . . . . . . . . $1.62 $1.58 $1.40
On January 14, 1998, ChoiceOne's Board of Directors approved a resolution
to issue approximately 1,900 shares of its common stock, with an estimated
fair value of $81,000, to the 401(k) plan. The issuance of the stock
represents the payment of the Bank's contribution to the 401(k) plan for
the 1997 plan year.
A-21
INDEPENDENT AUDITORS' REPORT
ChoiceOne Financial Services, Inc.
[CROWE CHIZEK LOGO]
To the Shareholders and Board of Directors
of ChoiceOne Financial Services, Inc., Sparta, Michigan
We have audited the accompanying consolidated balance sheets of ChoiceOne
Financial Services, Inc. as of December 31, 1997 and 1996 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, 1997. 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, 1997 and 1996, and
the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
February 20, 1998, except for Note 17 as to
which the date is March 17, 1998
CROWE, CHIZEK AND COMPANY LLP
400 RIVERFRONT PLAZA BUILDING 55 CAMPAU AVENUE NW GRAND RAPIDS, MICHIGAN
49503 616.774.0774 FAX 616.752.4226 A member of Horwath International
A-22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ChoiceOne Financial Services, Inc.
The following discussion is designed to provide a review of the
consolidated financial condition and results of operations of ChoiceOne
Financial Services, Inc. ("ChoiceOne") and its wholly-owned subsidiaries,
ChoiceOne Bank (the "Bank"), ChoiceOne Insurance Agencies, Inc. (the
"Insurance Agency"), and Alpine 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 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 1997 was $1,737,000, which represented a $42,000 or 2%
increase over 1996. The increase in ChoiceOne's net income in 1997 was
attributable to higher net interest income and noninterest income, which
was virtually offset by growth in noninterest expense. The growth in net
interest income was due to an increase in ChoiceOne's loan portfolio. The
rise in noninterest income resulted in part from higher commission income
from the Insurance Agency. The majority of the increase in noninterest
expense was caused by higher salaries and benefits in 1997 than in 1996.
Increases in 401(k) savings and retirement plan expense and postretirement
benefit expense comprised most of the increase in salaries and benefits
expense in 1997.
YEAR ENDED DECEMBER 31,
1997 1996 1995
-----------------------------------------------
Net interest income. . . . . . . . . . . . . . . . $ 6,315,000 $ 5,754,000 $ 4,931,000
Provision for loan losses. . . . . . . . . . . . . (539,000) (523,000) (164,000)
Noninterest income . . . . . . . . . . . . . . . . 1,769,000 1,555,000 656,000
Noninterest expense. . . . . . . . . . . . . . . . (5,176,000) (4,436,000) (3,448,000)
Income tax expense . . . . . . . . . . . . . . . . (632,000) (655,000) (511,000)
Net income . . . . . . . . . . . . . . . . . . . . $ 1,737,000 $ 1,695,000 $ 1,464,000
Increased net income in 1996 was due to higher net interest income and
noninterest expense, which was partially offset by increases 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 commission income from the Insurance Agency. The
higher provision for loan losses resulted from both higher loan growth and
net charge-offs in 1996 than in 1995. Most of the increase in 1996's
noninterest expense was due to the inclusion of the Insurance Agency's
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 1997 was 1.17%, compared to 1.38% for 1996 and 1.36% for
1995. The return on average shareholders' equity was 11.58%, 12.00%, and
11.09% for 1997, 1996, and 1995, respectively.
A-29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ChoiceOne Financial Services, Inc.
DIVIDENDS
Cash dividends declared by ChoiceOne in 1997 of $783,000 or $1.46 per share
represent the sixteenth consecutive year that ChoiceOne has increased cash
dividends paid to shareholders. The total cash dividends paid in 1997
represented a $120,000 or 18% increase over 1996. The cash dividend payout
percentage (total cash dividends divided by net income) was 45% in 1997,
compared to 39% in 1996. In addition to the cash dividends declared,
ChoiceOne declared a 6% stock dividend in 1997 and a 20% stock dividend in
1995. A stock dividend was also declared in February 1998. Cash dividends
per share were adjusted for the stock dividends declared in 1995, 1997, and
1998.
Cash dividends paid in 1995 through 1997 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 which 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 1998.
RESULTS OF OPERATIONS
Table 1 documents average balances and interest income and expense, as well
as the average rates earned or paid on assets and liabilities. Table 2
documents the effect on interest income and expense of changes in volume
(average balance) and interest rates. Management will refer to these tables
in its discussion of interest income, interest expense and net interest
income.
A-24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ChoiceOne Financial Services, Inc.
TABLE 1 - AVERAGE BALANCES AND TAX-EQUIVALENT INTEREST RATES
YEAR ENDED DECEMBER 31,
1997 1996 1995
-------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
-------------------------------------------------------------------------------------------
(Dollars in thousands)
ASSETS
Loans <F1> <F2> . . . . . . . . . $117,582 $11,259 9.58% $ 94,077 $ 9,087 9.66% $ 73,742 $7,135 9.68%
Taxable securities <F3> . . . . . 12,781 845 6.61 14,147 916 6.47 18,403 1,181 6.42
Nontaxable securities <F1> <F3> . 9,370 733 7.82 8,365 681 8.14 9,181 774 8.43
Other . . . . . . . . . . . . . . 178 8 4.49 65 3 4.62 160 8 5.00
-------- ------- -------- ------- -------- ------
Interest-earning assets . . . . 139,911 12,845 9.18 116,654 10,687 9.16 101,486 9,098 8.96
Noninterest-earning assets <F4> . 8,741 6,480 6,066
-------- -------- --------
Total assets. . . . . . . . . . $148,652 $123,134 $107,552
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing
transaction accounts. . . . . . $ 22,242 718 3.23 $ 24,711 798 3.23 $ 25,522 912 3.57
Savings deposits. . . . . . . . . 8,836 162 1.83 9,363 174 1.86 9,845 229 2.33
Time deposits . . . . . . . . . . 58,258 3,399 5.83 50,126 2,947 5.88 45,930 2,619 5.70
FHLB advances . . . . . . . . . . 25,425 1,619 6.37 9,385 592 6.31 77 2 3.04
Other . . . . . . . . . . . . . . 5,584 354 6.34 2,785 154 5.53 1,722 106 6.11
-------- ------- -------- ------- -------- ------
Interest-bearing liabilities. . 120,345 6,252 5.20 96,370 4,665 4.84 83,096 3,868 4.65
------- ---- ------- ---- ------ ----
Demand deposits . . . . . . . . . 11,479 11,010 10,149
Other noninterest-bearing
liabilities . . . . . . . . . . 1,830 1,625 1,107
Shareholders' equity. . . . . . . 14,998 14,129 13,200
-------- -------- --------
Total liabilities and
shareholders' equity. . . . . $148,652 $123,134 $107,552
======== ======== ========
Net interest income (tax-
equivalent basis) - interest
spread. . . . . . . . . . . . . . 6,593 3.98% 6,022 4.32% 5,230 4.31%
==== ==== ====
Tax-equivalent adjustment <F1>. . . (278) (268) (299)
------- ------- ------
Net interest income . . . . . . . . $ 6,315 $ 5,754 $4,931
======= ======= ======
Net interest income as a
percentage of earning assets
(tax-equivalent basis). . . . . . 4.71% 5.16% 5.15%
==== ==== ====
<FN>
<F1> Interest on nontaxable securities and loans has been adjusted to a
fully tax-equivalent basis to facilitate comparison to the taxable
interest-earning assets. The adjustment uses an incremental tax rate
of 34% for the years presented.
<F2> Interest on loans included net origination fees charged on loans of
approximately $352,000, $363,000, and $253,000 in 1997, 1996, and 1995,
respectively.
<F3> The average balance includes the effect of unrealized gains or losses
on securities, while the average rate was computed on the average
amortized cost of the securities.
<F4> Noninterest-earning assets includes loans on a nonaccrual status
which averaged approximately $787,000, $383,000, and $482,000 in 1997,
1996, and 1995, respectively.
</FN>
A-25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ChoiceOne Financial Services, Inc.
TABLE 2 - CHANGES IN TAX-EQUIVALENT NET INTEREST INCOME
YEAR ENDED DECEMBER 31,
1997 OVER 1996 1996 OVER 1995
--------------------------------------------------------------------
TOTAL VOLUME RATE TOTAL VOLUME RATE
--------------------------------------------------------------------
(Dollars in thousands)
INCREASE (DECREASE) IN INTEREST INCOME <F1>
Loans <F2>. . . . . . . . . . . . . . . . . . . $2,172 $2,252 $(80) $1,952 $1,967 $(15)
Taxable securities. . . . . . . . . . . . . . . (71) (91) 20 (265) (275) 10
Nontaxable securities <F2>. . . . . . . . . . . 52 79 (27) (93) (67) (26)
Other . . . . . . . . . . . . . . . . . . . . . 5 5 - (5) (4) (1)
--------------------------------------------------------------------
Net change in tax-equivalent income . . . . . 2,158 2,245 (87) 1,589 1,621 (32)
--------------------------------------------------------------------
INCREASE (DECREASE) IN INTEREST EXPENSE <F1>
Interest-bearing transaction accounts . . . . . (80) (80) - (114) (28) (86)
Savings deposits. . . . . . . . . . . . . . . . (12) (10) (2) (55) (11) (44)
Time deposits . . . . . . . . . . . . . . . . . 452 475 (23) 328 244 84
Federal Home Loan Bank advances . . . . . . . . 1,027 1,021 6 590 585 5
Other . . . . . . . . . . . . . . . . . . . . . 200 175 25 48 59 (11)
--------------------------------------------------------------------
Net change in interest expense. . . . . . . . 1,587 1,581 6 797 849 (52)
--------------------------------------------------------------------
Net change in tax-equivalent
net interest income . . . . . . . . . . . . $ 571 $ 664 $(93) $ 792 $ 772 $ 20
====================================================================
<FN>
<F1> The volume variance is computed as the change in volume (average
balance) multiplied by the previous year's interest rate. The rate
variance is computed as the change in interest rate multiplied by the
previous year's volume (average balance). The change in interest due
to both volume and rate has been allocated to the volume and rate
changes in proportion to the relationship of the absolute dollar
amounts of the change in each.
<F2> Interest on nontaxable securities and loans has been adjusted to a
fully tax-equivalent basis using an incremental tax rate of 34% for
the years presented.
</FN>
NET INTEREST INCOME
Tax-equivalent net interest income ("net margin") increased $571,000 in
1997, compared to an increase of $792,000 in 1996. The increase in net
margin in both years was due to loan growth. Table 2 shows that the
smaller increase in 1997 was due to both changes in volume and rate.
Although the growth in average interest-earning assets was $8,089,000 more
in 1997 than in 1996, the increase in average interest-bearing liabilities
in 1997 was $10,701,000 greater than the prior year. The higher level of
growth in interest-bearing liabilities contributed to the slowing in
additional net margin due to volume. The lower level of growth in net
margin was also affected by the funding method that ChoiceOne used for its
loan growth in 1997. Core deposits in the form of deposits obtained in
ChoiceOne's market area were insufficient to fund loan growth in 1997.
Therefore, ChoiceOne turned to other sources of funding such as Federal
Home Loan Bank advances ("FHLB advances") and certificates of deposit from
a national rate service ("national CDS"). Table 1 shows that the average
balance of FHLB advances grew $16,040,000 in 1997, compared to $9,308,000
of growth in 1996. The average balance of national CDS, which are included
in the time deposits balance in Table 1, increased $4,263,000 in 1997.
FHLB advances carried the highest average interest rate of the interest-
bearing liabilities in both 1997 and 1996. National CDS also bear one of
the higher interest rates among interest-bearing liabilities. The use of
FHLB advances and national CDS as a major funding source for loan growth
caused the loan growth to generate less additional net margin dollars in
1997 than in 1996.
As set forth in Table 2, the change in net margin due to changes in the
average interest rate was a decrease in 1997 of $93,000 compared to an
increase of $20,000 in 1996. The average rate earned on loans decreased
more in 1997 than it had in the previous year. The lower rate in 1997 was
a result of the higher level in average loan growth in 1997 than in 1996. The
change in net margin due to rate was also affected by interest-bearing
transaction accounts. The average rate paid on interest-bearing transaction
accounts was unchanged in 1997, in contrast to 1996 when the rate declined 34
basis points.
A-26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ChoiceOne Financial Services, Inc.
Based on the current estimates of ChoiceOne's management, net margin is
expected to increase in 1998. However, the rate of growth in net margin
may slow in 1998 compared to 1997 as it did in 1997. Management
anticipates that loan growth will exceed the amount of funds that can be
obtained through local market deposit growth. This will cause the need for
funds from Federal Home Loan Bank advances, certificates of deposit from
the national rate service, and other sources. The interest cost from these
types of sources is higher than the rate on deposits from local markets.
This higher cost of funds may cause a decrease in the margin dollars
obtained from loan growth. Management expects general market interest rates
to be steady to slightly falling in 1998. ChoiceOne's management does not
anticipate that changes in interest rates will have a material impact on
net margin in 1998.
ALLOWANCE AND PROVISION FOR LOAN LOSSES
Information regarding the allowance and provision for loan losses can be
found in Table 3 and in Note 5 to the Consolidated Financial Statements.
As indicated in Table 3, the provision for loan losses and allowance for
loan losses increased slightly in 1997 in contrast to 1996 when the
increases were much more significant. The provision in 1997 was affected
by higher net charge-offs than in the prior year. This effect was offset
by a lower level of loan growth from the end of 1996 to the end of 1997
than had occurred in the prior year. The increased provision in 1996
resulted from both increased net charge-offs over 1995 and a significantly
higher level of loan growth. Net charge-offs by loan category are shown in
Table 3. The increase in commercial loan charge-offs was primarily due to
one commercial loan. The rise in consumer loan charge-offs was comprised
of a number of loans. Consumer lending was affected in 1997 by an
increasingly high level of personal bankruptcies.
TABLE 3 - PROVISION AND ALLOWANCE FOR LOAN LOSSES
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
1997 1996 1995
--------------------------------------------
Provision for loan losses. . . . . . . . . . . . . . . . . . $ 539,000 $ 523,000 $ 164,000
============================================
Net charge-offs
Commercial loans . . . . . . . . . . . . . . . . . . . . . $ 186,000 $ 26,000 $ (4,000)
Agricultural loans . . . . . . . . . . . . . . . . . . . . 7,000 (10,000) -
Real estate mortgage - residential . . . . . . . . . . . . 6,000 - 3,000
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . 260,000 141,000 83,000
--------------------------------------------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . $ 459,000 $ 157,000 $ 82,000
============================================
Allowance for loan losses at year end. . . . . . . . . . . . $1,567,000 $1,487,000 $1,121,000
============================================
Allowance for loan losses as a percentage of:
Total loans as of year end . . . . . . . . . . . . . . . . 1.23% 1.35% 1.42%
Nonaccrual loans, accrual loans past due 90 days
or more and troubled debt restructurings . . . . . . . . 130.17 148.65 148.23
Ratio of net charge-offs to average total loans
outstanding during the year. . . . . . . . . . . . . . . . .39 .17 .11
Loan recoveries as a percentage of prior year's
charge-offs. . . . . . . . . . . . . . . . . . . . . . . . 31.84 51.60 36.13
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, 1997, is adequate to absorb possible charge-offs.
Management continues to be concerned that relatively high levels of
consumer debt and increasing levels of personal bankruptcies may cause
consumer loan charge-offs to increase in the future. As loan growth and
charge-offs occur in 1998, 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.
A-27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ChoiceOne Financial Services, Inc.
NONINTEREST INCOME
Noninterest income increased $214,000 in 1997, compared to an increase of
$899,000 in 1996. Almost 40% of the growth in 1997 came from increased
insurance commission income with the remainder resulting from the other
noninterest income categories. Most of the increase in 1996 was due to
insurance commission income as the business combination with the Insurance
Agency was effective January 1, 1996. Management anticipates that
noninterest income will increase somewhat in 1998 as a result of a full
year of commission income from the Travel Agency.
NONINTEREST EXPENSE
Noninterest expense grew $740,000 in 1997. An increase in salaries and
benefits expense of $463,000 comprised over 60% of the total expense growth
in 1997. Expense of the 401(k) savings and retirement plan (the "401(k)
plan") contributed approximately $305,000 of the increase in salaries and
benefits in 1997. This was caused by the accrual of $323,000 of expense
for the 401(k) plan in 1997, which represented the amount of assets left in
the pension plan after all vested benefits had been paid to plan
participants. ChoiceOne intends to transfer the excess assets from the
pension plan to the 401(k) plan and use the funds to cover company
contributions in future years. The transfer of the excess assets is
subject to approval by the Internal Revenue Service. Salaries and benefits
expense was also affected by a $119,000 increase in postretirement benefits
expense in 1997 compared to the prior year. The increase in 1997's expense
was due to a settlement gain of $139,000 that decreased the expense recorded
in 1996. The gain resulted from the discontinuance of postretirement life
insurance coverage. Wages and commissions paid to employees grew $223,000
in 1997. This was due to a higher activity level for commissioned
employees, increases in staff size, a full year of wages expense for the
Bank's two new branches, and a partial year of wages for the Travel Agency.
The effect of the wages and commissions increase was partially offset by
decreases of $132,000 in incentive bonus expense and $76,000 in expense
related to the pension plan. Increases in occupancy expense and other
expense in 1997 were due to a full year of operations for the Bank's two
new branches, increased expenses related to the Bank's computer network,
and general growth in expenses.
Noninterest expense grew $988,000 in 1996. Approximately 80% of the higher
expenses in 1996 resulted from the Insurance Agency, whose operations were
included for the first time in 1996. The remainder of the expense growth
in 1996 was due to expenses related to the Bank's two new branches,
expenses related to the name changes of the Bank and the Insurance Agency
and general growth in expenses. Expense growth was offset in 1996 by the
settlement gain from the termination of the postretirement life insurance
benefits plan.
Management anticipates that noninterest expense will continue to grow in
1998. Factors causing the increase will be a full year of operations for
the Travel Agency, expenses related to the new buildings for the Bank's two
new branches, additional advertising and marketing of ChoiceOne's products
and services, and other factors.
YEAR 2000
ChoiceOne's management is aware of the issues associated with the
programming code in existing computer systems as the year 2000 approaches.
The year 2000 will affect virtually every computer operation by the
rollover of the two digit year value to "00." The issue is whether
computer systems will properly recognize date sensitive information when
the year changes to 2000. Systems that do not properly recognize such
information could generate erroneous data or cause a system to fail.
ChoiceOne formed an internal committee in 1997 to address the year 2000
issue. The committee has studied ChoiceOne's internal operating systems
and will begin to make necessary changes in 1998. The committee has also
communicated with the vendors that provide software for ChoiceOne. Almost
all of ChoiceOne's vendors have already indicated that they are year 2000
compliant or are making necessary modifications to make their software
comply.
ChoiceOne's management estimates that the cost to convert existing systems
to make them able to process in the year 2000 will approximate $50,000 to
$75,000 in 1998. Additional costs, at this time undetermined, may be
necessary in 1998 or 1999 to fully covert all of ChoiceOne's computer
systems. In addition, ChoiceOne's operations may be materially affected if
the computer systems of third parties are not converted in a timely fashion
to be able to process properly in the year 2000.
A-28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ChoiceOne Financial Services, Inc.
INSURANCE AND TRAVEL SUBSIDIARIES
The business combination with the Insurance Agency was effective January 1,
1996. The business combination was accounted for as a pooling-of-interests.
The Insurance Agency's balance sheets and results of operations were not
material to ChoiceOne's prior years' consolidated financial statements.
Therefore, consolidated financial statements for prior years were not
restated for the Insurance Agency.
The acquisition of the Travel Agency was effective August 1, 1997. The
acquisition was accounted for as a purchase transaction. The operations of
the Travel Agency beginning August 1, 1997, are included in ChoiceOne's
consolidated financial statements.
SECURITIES
Total securities available for sale decreased $3,064,000 in 1997, compared
to a decrease of $181,000 in 1996. The larger decrease in 1997 was due in
part to the sale of approximately $4,600,000 of securities in the last
quarter of 1997, part of which were replaced by securities purchases.
Proceeds from maturing securities will be used as necessary in 1998 to fund
growth in the loan portfolio. Securities will also be used as collateral
for public deposits and repurchase agreements as well as serve as a source
of liquidity for ChoiceOne. Management expects that the balance of total
securities will not change significantly in 1998.
LOANS
Total loans grew $17,697,000 in 1997, compared to $30,997,000 of growth in
1996. ChoiceOne's management believes that stronger competition for loans
impacted loan growth in 1997. The slowing of growth occurred in all loan
categories. It had the largest impact on consumer loans, which increased
$2,666,000 in 1997 compared to $9,253,000 in 1996, and commercial loans,
which experienced $7,817,000 of growth in 1997 compared to $11,409,000 in
the prior year.
ChoiceOne's management intends to focus on growth in all loan areas in
1998. Management intends to use business development activities to attempt
to generate demand in the commercial and agricultural loan categories.
Management intends to use contacts with real estate agents and other
methods to attempt to capture a larger share of the residential real estate
financing market. Management also intends to continue to use special
promotions and target marketing to encourage demand in direct consumer
loans. Management also intends to emphasize indirect consumer loans for
automobiles and other items in 1998. Advertising and promotion of ChoiceOne
Bank and of specific loan products is intended to be used to stimulate
ChoiceOne's loan demand.
DEPOSITS
The balance of total deposits increased $11,886,000 in 1997, compared to
an increase of $2,704,000 in 1996. The growth in deposits was caused by
certificates of deposit in both years. The balance of certificates of
deposit grew $12,278,000 in 1997 and $2,645,000 in 1996. Approximately
$6,738,000 of the certificate of deposit increase in 1997 resulted from
deposits obtained through a national rate service. ChoiceOne began using
this rate service in March 1997 because funds available from core deposit
growth and other internal sources were insufficient to meet loan demand.
Management believes that the lack of growth in the other deposit
categories in 1997 and 1996 was caused by a high level of competition for
these no-cost or lower-cost deposits.
ChoiceOne intends to continue to emphasize the attraction and retention of
deposits from its local market areas. Management believes that
certificates of deposit may comprise most of the deposit growth in 1998.
Management intends to emphasize its non-certificate products in 1998 in an
attempt to lower ChoiceOne's cost of funds for deposit products. However,
competition involving interest rates paid and fees charged will continue to
affect ChoiceOne's ability to generate deposit growth in any of the deposit
categories. To the extent that local market deposit growth is not
sufficient to meet loan demand, ChoiceOne may use the national rate service
for certificates of deposit in 1998.
A-29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ChoiceOne Financial Services, Inc.
OTHER LIABILITIES
The balance of other liabilities increased $2,591,000 from December 31,
1996 to December 31, 1997. Virtually all of the increase was caused by
$2,385,000 of securities purchase commitments at the end of 1997. The
trades for the securities purchases settled in January 1998.
LONG-TERM DEBT
The majority of the long-term debt balance as of December 31, 1997 and the
total balance as of December 31, 1996 was comprised of FHLB advances. Although
the balance of FHLB advances increased only $914,000 in 1997, the growth in
the balance in 1996 was slightly over $24,000,000. FHLB advances provided a
significant portion of the funding for loan growth in 1996.
The decrease in the level of growth in FHLB advances in 1997 was due to the
maximum on allowable advances based on available collateral. ChoiceOne
pledged certain residential real estate mortgages as collateral during 1997
and the amount of advances available was limited to growth in the
collateral base. ChoiceOne plans to use FHLB advances in 1998 to fund loan
growth to the extent allowed by mortgage growth.
SHAREHOLDERS' EQUITY
ChoiceOne's shareholders' equity increased $1,000,000 in 1997, compared to
an increase of $753,000 in the prior year. The change in both years was
caused primarily by retention of earnings. Shareholders' equity was
affected to a lesser extent by issuances and repurchases of stock and by
changes in unrealized gains and losses on securities.
Note 16 to the Consolidated Financial Statements presents regulatory
capital information as of the end of 1997 and 1996. The percentage
declined slightly in 1997 as ChoiceOne's assets grew slightly more than its
capital. This relationship is consistent with management's desire to
decrease capital as a percentage of assets to better leverage shareholders'
investment. However, management does not desire to decrease ChoiceOne's
capital below those levels considered to be well capitalized.
LIQUIDITY AND RATE SENSITIVITY
The concept of liquidity addresses the measurement of ChoiceOne's ability
to meet its cash flow requirements. These requirements include depositors
desiring to withdraw funds and borrowers seeking credit. Relatively short-
term liquid funds exist in the form of lines of credit to purchase federal
funds at three of the Bank's correspondent banks. The total amount of
federal funds that were available for purchase at the Bank's correspondent
banks was $11,200,000 at December 31, 1997, while the Bank's actual federal
funds purchased balance was $200,000 as of the same date. Longer-term
liquidity needs may be met through deposit growth, maturities of
securities, normal loan repayments, advances from the Federal Home Loan
Bank and income retention. Approximately $3,600,000 of additional Federal
Home Loan Bank advances were available at the end of 1997 based on
ChoiceOne's collateral at the Federal Home Loan Bank. The Bank also began
using a national rate service in 1997 for certificates of deposit to help
meet cash flow requirements.
The level of loan growth experienced by ChoiceOne in 1996 and 1997 has
caused liquidity to become a very important issue. The Bank's
Asset/Liability Management Committee (the "Committee") monitored and worked
with liquidity and loan growth funding issues in the past two years and will
continue to do so in 1998.
Interest sensitivity is related to liquidity because each is affected by
maturing assets and sources of funds. The Committee 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 said 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. The
time frame that the Committee used in 1997 to measure its 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 76% as of December 31, 1997, compared to 92% as of December 31,
1996. The change was primarily due to longer-term assets which were funded
by shorter-term liabilities in 1997. It is the Committee's and management's
goal to have the rate-sensitive assets to rate-sensitive liabilities
ratio in a range of 80% to 120% at the one year maturity or repricing
point. Management believes that the percentage at the end of 1997 is
low because interest-bearing transaction accounts and savings deposits
have been classified in the 0 to 3 month repricing category. While these
deposits can reprice within this time frame, management can control the
timing or extent of the change in interest rates on these deposits.
Therefore, ChoiceOne may not be as liability-sensitive as Table 4 indicates.
A-30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ChoiceOne Financial Services, Inc.
TABLE 4 - MATURITIES AND REPRICING SCHEDULE
DECEMBER 31, 1997
0-3 3-12 1-5 OVER
MONTHS MONTHS YEARS 5 YEARS TOTAL
-----------------------------------------------------------------
(DOLLARS IN THOUSANDS)
ASSETS
Loans . . . . . . . . . . . . . . . . . $37,097 $ 21,054 $55,729 $13,896 $127,776
Interest-bearing deposits with banks. . 6 - - - 6
Taxable securities. . . . . . . . . . . 2,476 3,480 6,106 341 12,403
Nontaxable securities . . . . . . . . . - 533 3,682 3,324 7,539
-----------------------------------------------------------------
Rate-sensitive assets . . . . . . . . 39,579 25,067 65,517 17,561 147,724
LIABILITIES
Interest-bearing transaction accounts . 23,079 - - - 23,079
Savings deposits. . . . . . . . . . . . 8,143 - - - 8,143
Time deposits . . . . . . . . . . . . . 10,657 31,055 20,965 129 62,806
Federal Home Loan Bank advances . . . . 3,457 6,006 15,621 1,030 26,114
Other . . . . . . . . . . . . . . . . . 2,082 100 756 - 2,938
-----------------------------------------------------------------
Rate-sensitive liabilities. . . . . . 47,418 37,161 37,342 1,159 123,080
-----------------------------------------------------------------
Rate-sensitive assets less rate-
sensitive liabilities
Asset(liability) gap for the
period. . . . . . . . . . . . . . . $(7,839) $(12,094) $28,175 $16,402 $ 24,644
=================================================================
Cumulative asset (liability) gap. . $(7,839) $(19,933) $ 8,242 $24,644
==================================================
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, 1997 caused net income to decrease 4.1% if rates
increased and to increase 2.9% if rates decreased. The shock computation
caused the value of shareholders' equity to decrease by .6% if rates
increased and to increase by .3% if rates decreased. The Committee will
continue to monitor the effect of interest rate shocks on a periodic basis.
A-31
CORPORATE INFORMATION
ChoiceOne Financial Services, Inc.
CORPORATE HEADQUARTERS
ChoiceOne Financial Services, Inc.
109 East Division Street
P.O. Box 186
Sparta, Michigan 49345
Phone: (616) 887-7366
Fax: (616) 887-5566
MARKET MAKERS IN CHOICEONE
FINANCIAL SERVICES, INC. STOCK
Robert W. Baird & Company, Inc.
Grand Rapids, Michigan
(616) 459-4491
(800) 888-6200
D. H. Brush & Associates
Grand Rapids, Michigan
(616) 285-3700
Dean Witter Reynolds, Inc.
Grand Rapids, Michigan
(616) 454-8998
(800) 788-9640
McDonald & Co.
Grand Rapids, Michigan
(616) 732-3383
(800) 548-6011
Paine Webber, Inc.
Grand Rapids, Michigan
(616) 459-4231
(800) 333-4231
Roney & Company
Grand Rapids, Michigan
(616) 456-8691
(800) 553-2249
Stifel Nicolaus & Company, Inc.
Grand Rapids, Michigan
(616) 942-1717
(800) 676-0477
STOCK REGISTRAR AND TRANSFER AGENT
ChaseMellon Shareholder Services
85 Challenger Road
Ridgefield Park, New Jersey
07660
(800) 288-9541
ANNUAL MEETING
The annual meeting of shareholders of ChoiceOne Financial Services, Inc.
will be held at 7:30 p.m. EST on Thursday, April 30, 1998 at Sparta Ridgeview
Elementary School, Sparta, Michigan.
SUBSIDIARY INFORMATION
CHOICEONE BANK
Main Office
109 East Division Street
P.O. Box 186
Sparta, Michigan 49345
Appletree Office
416 West Division Street
Sparta, Michigan 49345
Cedar Springs Office
4170 Seventeen Mile Road
Cedar Springs, Michigan 49319
Plainfield Office
4949 Plainfield Avenue, NE
Grand Rapids, Michigan 49505
ChoiceOne Bank is a member of the Federal Deposit Insurance Corporation and
is an Equal Opportunity and Housing Lender.
[HOUSING LOGO]
CHOICEONE INSURANCE
AGENCIES, INC.
Sparta Office
440 West Division Street
Sparta, Michigan 49345
Cedar Springs Office
17 North Main Street
Cedar Springs, Michigan 49319
Plainfield Office
4949 Plainfield Avenue, NE
Grand Rapids, Michigan 49505
ALPINE TRAVEL, INC.
Alpine Office
3527 Alpine Avenue, NW
Walker, Michigan 49544
A-32
DIRECTORS AND OFFICERS
ChoiceOne Financial Services, Inc.
DIRECTORS
CHOICEONE FINANCIAL SERVICES, INC.
FRANK G. BERRIS
Owner, American Gas & Oil Co., Inc.
(Distributor of Petroleum Products)
LAWRENCE D. BRADFORD
President, ChoiceOne Insurance
Agencies, Inc.
WILLIAM F. CUTLER, JR.
Former Vice President, H. H. Cutler
Co. (Apparel Manufacturer)
L. EDMOND EARY, JR., M.D.
Chairman, ChoiceOne Financial
Services, Inc.; Retired, Private
Medical Practice
LEWIS G. EMMONS
Special Projects Manager, Great Day
Foods, Inc. (Grocery Retailer)
STUART GOODFELLOW
Owner, Goodfellow Vending Services
(Vending Company) and Goodfellow
Blueberry Farms
JAE M. MAXFIELD
President and Chief Executive Officer,
ChoiceOne Financial Services, Inc. and
ChoiceOne Bank
JON E. PIKE
C.P.A., Managing Partner, Beene
Garter LLP (Certified Public
Accountants)
LINDA R. PITSCH
Secretary, ChoiceOne Financial
Services, Inc. and Senior Vice
President and Cashier, ChoiceOne Bank
ANDREW W. ZAMIARA, R.PH.
President and Manager, Momber
Pharmacy and Gift Shop
OFFICERS
CHOICEONE FINANCIAL SERVICES, INC.
L. EDMOND EARY, JR., M.D.
Chairman of the Board
JAE M. MAXFIELD
President and Chief Executive Officer
DENIS L. CROSBY
Vice President
LINDA R. PITSCH
Secretary
TOM LAMPEN
Treasurer
OFFICERS
CHOICEONE BANK
L. EDMOND EARY, JR., M.D.
Chairman of the Board
JAE M. MAXFIELD
President and Chief Executive Officer
DENIS L. CROSBY
Senior Vice President - Loans
GERALD P. DAVID
Senior Vice President - Commercial
Services
LINDA R. PITSCH
Senior Vice President - Cashier
DEAN ANDERSON
Vice President - Commercial Loans
JAMES R. BECKMAN
Vice President - Consumer Loans
TOM LAMPEN
Vice President - Chief Financial
Officer
KELLY POTES, CFP
Vice President - Retail Financial
Services
KECIA A. FLYNN
Assistant Vice President - Commercial
Loans
KAREN M. GILBERT
Assistant Vice President - Mortgage
Loans
MARY JOHNSON
Assistant Vice President - Compliance
Officer
AUDREY STILES
Assistant Vice President - Human
Resources
SHERRY CONKLIN
Branch Sales Manager - Cedar Springs
Office
RACHEL VANIN MILLER
Branch Sales Manager - Plainfield
Office
OFFICERS
CHOICEONE INSURANCE AGENCIES, INC.
JAE M. MAXFIELD
Chairman of the Board
LAWRENCE D. BRADFORD
President
JEFFREY S. BRADFORD, CIC
Vice President
TAB M. BRADFORD, CIC
Vice President
KELLY POTES, CFP
Vice President
LINDA DEVRIES
Assistant Vice President
CARLO VANIN
Plainfield Office President
TOM LAMPEN
Secretary/Treasurer
OFFICERS
ALPINE TRAVEL, INC.
JAE M. MAXFIELD
Chairman of the Board
THOMAS R. WIERENGA
President
LINDA R. PITSCH
Secretary
TOM LAMPEN
Treasurer
A-33