CHOICEONE FINANCIAL SERVICES, INC.
2010
ANNUAL REPORT TO SHAREHOLDERS
CHOICEONE FINANCIAL SERVICES, INC.
2010 Annual Report to Shareholders
Contents
To Our Shareholders................................................................................................................................ 1
About ChoiceOne Financial Services, Inc............................................................................................... 1
Stock Information .................................................................................................................................... 1
Selected Financial Data ........................................................................................................................... 3
Management’s Discussion and Analysis of Financial Condition and Results of Operations.................. 4
Management’s Report on Internal Control Over Financial Reporting .................................................... 18
Report of Independent Registered Public Accounting Firm.................................................................... 19
Consolidated Financial Statements.......................................................................................................... 20
Notes to Consolidated Financial Statements ........................................................................................... 24
Corporate and Shareholder Information .................................................................................................. 48
Directors and Officers.............................................................................................................................. 49
TO OUR SHAREHOLDERS
This 2010 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. 2010 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 2010 Annual Report to Shareholders are invited to request
our Annual Report on Form 10-K.
Our Annual Report on Form 10-K for the year ended December 31, 2010, 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.
ABOUT 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
thirteen full-service offices. ChoiceOne Insurance Agencies, Inc. is a wholly-owned subsidiary of ChoiceOne Bank and sells insurance
and investment products. ChoiceOne Mortgage Company of Michigan, formerly a wholly-owned subsidiary of ChoiceOne Bank, was
formed on January 1, 2002 and was engaged in mortgage lending. As of December 31, 2008, ChoiceOne consolidated the operations
of ChoiceOne Mortgage Company of Michigan into ChoiceOne Bank and eliminated the separate mortgage company subsidiary.
ChoiceOne’s business is primarily concentrated in a single industry segment – banking. ChoiceOne Bank is a full-service banking
institution that offers a variety of deposit, payment, credit and other financial services to all types of customers. These services include
time, savings, and demand deposits, safe deposit services, and automated transaction machine services. Loans, both commercial and
consumer, are extended primarily on a secured basis to corporations, partnerships and individuals. Commercial lending covers such
categories as business, industry, agricultural, construction, inventory and real estate. ChoiceOne Bank’s consumer loan department
(and ChoiceOne Mortgage Company of Michigan through December 31, 2008) makes direct loans to consumers and purchasers of
residential property.
The principal source of revenue for ChoiceOne is interest and fees on loans. On a consolidated basis, interest and fees on loans
accounted for 69%, 70%, and 74% of total revenues in 2010, 2009, and 2008, respectively. Interest from securities accounted for
10%, 11%, and 12% of total revenues in 2010, 2009, and 2008, respectively.
STOCK INFORMATION
Several brokers trade ChoiceOne’s common shares in the over-the-counter bulletin board market. There is no well-established public
trading market for the shares and trading activity is infrequent. ChoiceOne’s trading volume and recent share price information can be
viewed under the symbol ‘COFS.OB’ on certain financial websites.
The range of high and low bid prices for shares of common stock for each quarterly period during the past two years is as follows:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2010
2009
Low
High
Low
$ 7.75
8.30
9.50
10.25
$ 9.00
10.10
11.00
12.25
$ 4.25
5.65
7.75
7.50
High
$ 10.01
8.00
9.50
9.00
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, 2011, there were 3,281,944 shares of ChoiceOne Financial Services, Inc. common stock issued and outstanding.
As of February 28, 2011, there were 824 shareholders of record of ChoiceOne Financial Services, Inc. common stock.
1
The following table summarizes cash dividends declared per share of common stock during 2010 and 2009:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Total
2010
$ 0.12
0.12
0.12
0.12
$ 0.48
2009
$ 0.12
0.12
0.12
0.12
$ 0.48
ChoiceOne’s principal source of funds to pay cash dividends is the earnings and dividends paid by ChoiceOne Bank. ChoiceOne Bank
is restricted in its ability to pay cash dividends under current banking regulations. See Note 21 to the consolidated financial statements
for a description of these restrictions. Based on information presently available, management expects ChoiceOne to declare and pay
regular quarterly cash dividends in 2011, although the amount of the quarterly dividends will be dependent on market conditions and
ChoiceOne’s requirements for cash and capital, among other things.
2
ChoiceOne Financial Services, Inc.
SELECTED FINANCIAL DATA
(Dollars in thousands)
2010
2009
2008
2007
2006
For the year
Net interest income ............................................ $
Provision for loan losses....................................
Noninterest income............................................
Noninterest expense...........................................
Income before income taxes ..............................
Income tax expense/(benefit).............................
Net income.........................................................
Cash dividends declared ....................................
16,995
3,950
5,569
15,249
3,365
654
2,711
1,572
$ 15,996
4,875
5,421
15,259
1,283
(195)
1,478
1,563
Per share *
Basic earnings.................................................... $
Diluted earnings.................................................
Cash dividends declared ....................................
Shareholders’ equity (at year end) .....................
0.83
0.83
0.48
16.56
$
0.45
0.45
0.48
16.21
Average for the year
Securities ........................................................... $
Gross loans ........................................................
Deposits .............................................................
Federal Home Loan Bank advances ..................
Shareholders’ equity ..........................................
Assets.................................................................
At year end
Securities ........................................................... $
Gross loans ........................................................
Deposits .............................................................
Federal Home Loan Bank advances ..................
Shareholders’ equity ..........................................
Assets.................................................................
86,437
315,031
374,274
16,477
54,012
469,484
94,979
316,940
389,884
8,473
54,313
480,524
$ 76,934
320,328
347,007
28,857
53,115
453,876
$ 78,987
322,716
365,010
21,980
52,926
465,915
$
$
$
$
$
$
$
$
15,331
3,475
4,083
14,711
1,228
(207)
1,435
2,202
0.44
0.44
0.68
16.08
85,086
326,420
347,190
38,803
53,411
465,741
81,941
325,977
346,998
39,957
52,185
463,551
$
$
15,143
2,035
6,481
15,070
4,519
939
3,580
2,200
1.11
1.10
0.68
16.45
8,748
200
2,877
8,698
2,727
639
2,088
1,397
1.09
1.09
0.68
15.85
84,059
328,335
358,244
27,061
52,205
465,143
$ 57,407
205,851
222,287
26,073
27,349
288,407
87,725
328,358
351,844
35,933
53,142
470,155
$ 81,417
331,631
366,380
23,908
51,519
466,650
Selected financial ratios
Return on average assets....................................
Return on average shareholders’ equity.............
Cash dividend payout as a percentage
of net income ..................................................
Shareholders’ equity to assets (at year end).......
0.58%
5.02
0.33%
2.78
0.31%
2.69
0.77%
6.86
0.72%
7.63
57.99
11.30
105.75
11.36
153.45
11.26
61.45
11.30
66.91
11.04
* Per share amounts are retroactively adjusted for the effect of stock dividends and stock splits.
In November 2006, ChoiceOne merged with Valley Ridge Financial Corp. Accordingly, two months of combined operations are
included in the 2006 results of operations and all assets acquired and liabilities assumed from Valley Ridge Financial Corp. are
included in the 2006 year-end balance sheet.
3
ChoiceOne Financial Services, Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is designed to provide a review of the consolidated financial condition and results of operations of
ChoiceOne Financial Services, Inc. ("ChoiceOne" or the “Company”), and its wholly-owned subsidiaries, ChoiceOne Bank (the
"Bank"), ChoiceOne Insurance Agencies, Inc. (the "Insurance Agency"), and ChoiceOne Mortgage Company of Michigan (the
“Mortgage Company”). As of December 31, 2008, ChoiceOne consolidated the operations of the Mortgage Company into the Bank
and eliminated the mortgage company subsidiary. This discussion should be read in conjunction with the consolidated financial
statements and related footnotes.
FORWARD-LOOKING STATEMENTS
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 ChoiceOne itself.
Words such as "anticipates," "believes," "estimates," "expects," "forecasts," "intends," "is likely," "plans," "predicts," "projects,"
"may," "could," variations of such words and similar expressions are intended to identify such forward-looking statements.
Management’s determination of the provision and allowance for loan losses, the carrying value of goodwill and loan servicing rights,
and the fair value of investment securities (including whether any impairment on any investment security is temporary or other than
temporary) and management’s assumptions concerning pension and other postretirement benefit plans involve judgments that are
inherently forward-looking. All of the information concerning interest rate sensitivity is forward-looking. These statements are not
guarantees of future performance and involve certain risks, uncertainties and assumptions ("risk factors") that are difficult to predict
with regard to timing, extent, likelihood, and degree of occurrence. Therefore, actual results and outcomes may materially differ from
what may be expressed, implied or forecasted in such forward-looking statements. Furthermore, ChoiceOne undertakes no obligation
to update, amend, or clarify forward-looking statements, whether as a result of new information, future events, or otherwise.
Risk factors include, but are not limited to, the risk factors discussed in Item 1A of the Company’s Annual Report on Form 10-K;
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 laws and 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 abilities to repay loans; changes in the local and national economies;
changes in market conditions; the possibility that anticipated cost savings and revenue enhancements from the merger with Valley
Ridge Financial Corp. may not be realized in full or at all or within the expected time frames; the level and timing of asset growth;
various other local and global uncertainties such as acts of terrorism and military actions; and current uncertainties and fluctuations in
the financial markets and stocks of financial services providers due to concerns about capital and credit availability and concerns about
the Michigan economy in particular. These are representative of the risk factors that could cause a difference between an ultimate
actual outcome and a preceding forward-looking statement.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The purpose of this section of the annual report is to provide a narrative discussion about the Company’s financial condition and
results of operations during 2010. Management’s discussion and analysis of financial condition and results of operations as well as
disclosures found elsewhere in the annual report are based upon the Company’s consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these
financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses. Material estimates that are particularly susceptible to significant change in the near-term relate to the
determination of the allowance for loan losses and loan servicing rights. Actual results could differ from those estimates.
Securities
Securities available for sale may be sold prior to maturity due to changes in interest rate, prepayment risks, yield, availability of
alternative investments, liquidity needs, credit rating changes, or other factors. Securities classified as available for sale are reported at
their fair value. Declines in the fair value of securities below their cost that are considered to be “other than temporary” are recorded
as losses in the income statement. In estimating whether a fair value decline is considered to be “other than temporary,” management
considers the length of time and extent that the security’s fair value has been less than its carrying value, the financial condition and
near term prospects of the issuer, and the Bank’s ability and intent to hold the security for a period of time sufficient to allow for any
anticipated recovery in fair value.
Market values for securities available for sale are obtained from outside sources and applied to individual securities within the
portfolio. The difference between the amortized cost and the fair value of securities is recorded as a valuation adjustment and reported
net of tax effect in other comprehensive income.
4
Allowance for Loan Losses
The allowance for loan losses is maintained at a level believed adequate by management to absorb probable incurred losses inherent in
the consolidated loan portfolio. Management’s evaluation of the adequacy of the allowance is an estimate based on reviews of
individual loans, assessments of the impact of current economic conditions on the portfolio and historical loss experience of seasoned
loan portfolios.
Management believes the accounting estimate related to the allowance for loan losses is a “critical accounting estimate” because (1)
the estimate is highly susceptible to change from period to period because of assumptions concerning the changes in the types and
volumes of the portfolios and current economic conditions and (2) the impact of recognizing an impairment or loan loss could have a
material effect on the Company’s assets reported on the balance sheet as well as its net income.
Loan Servicing Rights
Loan servicing rights represent the estimated value of servicing loans that are sold with servicing retained by ChoiceOne. Servicing
rights are expensed in proportion to, and over the period of, estimated net servicing revenues. Management’s accounting treatment of
loan servicing rights is estimated based on current prepayment speeds that are typically market driven.
Management believes the accounting estimate related to loan servicing rights is a “critical accounting estimate” because (1) the
estimate is highly susceptible to change from period to period because of significant changes within long-term interest rates affecting
the prepayment speeds for current loans being serviced and (2) the impact of recognizing an impairment loss could have a material
effect on ChoiceOne’s net income. Management has obtained a third-party valuation of its loan servicing rights to corroborate its
current carrying value at the end of each reporting period.
Goodwill
Generally accepted accounting principles require that the fair value of the assets and liabilities of an acquired entity be recorded at
their fair value on the date of acquisition. The fair values are determined using both internal computations and information obtained
from outside parties when deemed necessary. The net difference between the price paid for the acquired company and the net value of
its balance sheet is recorded as goodwill. Generally accepted accounting principles also require that goodwill be evaluated for
impairment on an annual basis or more frequently whenever events or changes in circumstances indicate that the carrying value may
not be recoverable.
Management performed its annual review of goodwill as of June 30, 2010. ChoiceOne engaged an outside consulting firm to perform
a goodwill impairment analysis. The following steps were used in the valuation: determination of the reporting unit, determination of
the appropriate standard of value, determination of the appropriate level of value, calculation of fair value, and comparison of the fair
value computed to the equity carrying value. The standard of value used in the valuation was fair value as determined by generally
accepting accounting principles. The appropriate level of value was determined to be the controlling interest level. The appraisal
methodology used to calculate the fair value included the following valuation approaches:
Income Approach: A discounted cash flow value was calculated based on earnings capacity. The discount rate used for the
calculation was 12.70%. The discount rate was based on a risk free rate adjusted for both external and internal risk factors. The
growth assumption for assets was 0% for the first year and 2% in subsequent years. In addition, it was assumed that cost savings
of 20% of noninterest expense would occur as a result of synergies and cost reductions from a change in control. The cost savings
assumption percentage was based on estimated cost savings for bank and thrift merger and acquisition transactions that were
announced from January 1, 2007 through June 30, 2010.
Market Approach: The analysis was based on price-to-earnings multiples, price-to-tangible-book-value ratios, and core deposit
premiums for selected bank sale transactions.
The Asset Approach was also an approach reviewed, but it was not used in determining the fair value since it did not render a control
level indication of value. The results from the valuation approaches were used to calculate an estimate of the fair value of
ChoiceOne’s equity. The fair value was compared to the carrying value of equity to determine whether the Step 1 test under generally
accepted accounting principles that govern the valuation of goodwill was passed. The goodwill analysis determined that the fair value
of ChoiceOne’s equity exceeded the carrying value by 4.6%. Based on this assessment, management believed that there was no
indication of goodwill impairment.
Taxes
Income taxes include both a current and deferred portion. Deferred tax assets and liabilities are recorded to account for differences in
the timing of the recognition of revenues and expenses for financial reporting and tax purposes. Generally accepted accounting
principles require that deferred tax assets be reviewed to determine whether a valuation allowance should be established using a “more
5
likely than not” standard. Based on its review of ChoiceOne’s deferred tax assets as of December 31, 2010, management determined
that a valuation allowance of $87,000 was necessary.
MERGER WITH VALLEY RIDGE FINANCIAL CORP.
On November 1, 2006, ChoiceOne merged with Valley Ridge Financial Corp. (“VRFC”). At the time of the merger, VRFC was
roughly equal in size in terms of assets with ChoiceOne. The 2006 results of operations include two months of combined financial
results after the close of the merger and the 2006 year-end balance sheet includes all of the assets acquired and all of the liabilities
assumed from VRFC in the merger. Therefore, a comparison of 2006 financial condition and results of operations to the financial
condition and results of operations for any subsequent year is materially affected as a result of the merger. The increase in the total
allowance for loan losses in 2006 was related to the allowance of $1,751,000 acquired from the merger with VRFC in November 2006.
Summary
(Dollars in thousands)
RESULTS OF OPERATIONS
Year ended December 31
2010
16,995
Net interest income ................................................................
Provision for loan losses................................................................
(3,950 )
Noninterest income................................................................ 5,569
Noninterest expense................................................................(15,249 )
Income tax (expense)/benefit...........................................................
(654 )
2,711
Net income................................................................$
$
$
$
2009
15,996
(4,875)
5,421
(15,259)
195
1,478
$
$
2008
15,331
(3,475)
4,083
(14,711)
207
1,435
Return on average assets................................................................0.58 %
Return on average equity ................................................................5.02 %
2010
2009
0.33%
2.78%
2008
0.31%
2.69%
Net income for 2010 was $2,711,000, which represented a $1,233,000 or 84% increase from 2009. The growth in net income resulted
from increases in net interest income and noninterest income while decreases occurred in the provision for loan losses and noninterest
expense in 2010 compared to 2009. The increase in net interest income was due to growth in average earning assets and an increase in
ChoiceOne’s net interest spread in 2010 compared to the prior year. The expansion in noninterest income was due to higher levels of
gains on sales of loans and gains on sales of securities in 2010 than in 2009. The decrease in the provision for loan losses resulted
from lower net charge-offs in 2010 than in 2009 and a $5.6 million reduction in nonperforming loans from December 31, 2009 to
December 31, 2010. The small decline in noninterest expense was due to lower occupancy and equipment expense, loan and
collection expense, and FDIC insurance expense, offset by increases in salaries and benefits and various other expenses in 2010
compared to the prior year.
Net income for 2009 was $1,478,000, which represented a $43,000 or 3% increase from 2008. The increase in net income resulted
from increased net interest income and noninterest income in 2009, which was offset by a higher provision for loan losses and higher
noninterest expense in 2009 than in 2008. The growth in net interest income was due to an increase in ChoiceOne’s net interest
spread, which was partially offset by lower average earning assets in 2009 than in 2008. The expansion in noninterest income was due
to an increase in gains on sales of loans and gains on sales of securities in 2009 compared to the prior year. Noninterest income was
affected in 2008 by $867,000 of securities losses related to money market preferred securities. The increase in the provision for loan
losses was caused by a higher level of charge-offs in 2009 than in 2008. The growth in noninterest expense was due to increased FDIC
insurance expense and costs related to carrying other real estate properties and loan collection expenses.
Dividends
Cash dividends of $1,572,000 or $0.48 per common share were declared in 2010, compared to $1,563,000 or $0.48 per common share
in 2009 and $2,202,000 or $0.68 per common share in 2008. Dividends declared were $0.12 per share in each quarter in 2010 and
2009, compared to $0.17 per share in each quarter in 2008. The dividend reduction in 2009 was believed prudent based on the Board
of Directors’ desire to retain more capital due to the uncertainty of Michigan’s economy. The dividend yield on ChoiceOne’s common
stock was 4.79% in 2010, compared to 6.66% in 2009 and 6.50% in 2008. The cash dividend payout as a percentage of net income
was 58% in 2010, compared to 106% in 2009 and 153% in 2008.
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.
ChoiceOne expects to pay quarterly cash dividends in 2011 to shareholders based on the actual earnings of the Bank, although the
amount of the quarterly dividends will be dependent on market conditions and ChoiceOne’s requirements for cash and capital, among
other things.
6
Table 1 – Average Balances and Tax-Equivalent Interest Rates
(Dollars in thousands)
2010
Year ended December 31
2009
2008
Average
Balance
Interest
Average
Rate
Average
Balance
Average
Rate
Average
Balance
Interest
Interest
Average
Rate
Assets
Loans (1) (2) ................................ $ 315,031 $ 19,103
Taxable securities (3)...................
50,997
1,460
Tax-exempt securities (1).............
35,440
2,110
Other ............................................
6,498
22
Interest-earning assets ...............
407,966
22,695
Noninterest-earning assets (4)......
61,518
Total assets................................ $ 469,484
6.06% $ 320,328$ 19,944
1,390
34,115
2.86
2,669
42,819
5.95
7
2,695
0.34
399,957 24,010
5.56
53,919
$ 453,876
6.23% $ 326,420 $ 22,677
2,105
39,160
4.07
2,609
45,926
6.23
66
2,527
0.26
414,033
27,457
6.00
51,708
$ 465,741
6.95%
5.38
5.68
2.61
6.63
Liabilities and Shareholders’ Equity
Interest-bearing
demand deposits........................ $ 108,522
Savings deposits...........................
40,534
Certificates of deposit ..................
160,390
Advances from FHLB ..................
16,477
Other ............................................
19,273
Interest-bearing liabilities.......
345,196
Demand deposits..........................
64,828
Other noninterest-bearing
liabilities....................................
Total liabilities ..........................
Shareholders’ equity ....................
Total liabilities and
shareholders’ equity ............... $ 469,484
5,448
415,472
54,012
Net interest income
(tax-equivalent basis) –
interest spread ..............................
Tax-equivalent adjustment (1) ........
Net interest income .........................
Net interest income as a
percentage of earning assets
(tax-equivalent basis) ...................
553
80
3,281
748
304
4,966
0.51% $ 85,154
36,371
0.20
167,065
2.05
28,857
4.54
19,435
1.58
336,882
1.44
58,417
520
113
4,920
1,186
351
7,090
0.61% $ 89,035
30,554
0.31
173,963
2.94
38,803
4.11
19,928
1.81
352,283
2.10
53,638
1,295
140
7,497
1,704
567
11,203
1.45%
0.46
4.31
4.39
2.85
3.18
5,462
400,761
53,115
$ 453,876
6,409
412,330
53,411
$ 465,741
17,729
4.12
%
16,920
3.90
%
16,254
3.45
%
(734)
$ 16,995
(924)
$ 15,996
(923)
$ 15,331
4.35
%
4.23
%
3.93
%
(1)
(2)
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.
Interest on loans included net origination fees charged on loans of approximately $751,000, $783,000, and $758,000 in
2010, 2009, and 2008, respectively.
Interest on taxable securities includes dividends on Federal Home Loan Bank and Federal Reserve Bank stock.
(3)
(4) Noninterest-earning assets include loans on a nonaccrual status, which averaged approximately $10,286,000,
$8,961,000, and $7,075,000 in 2010, 2009, and 2008, respectively.
Net Interest Income
As shown in Tables 1 and 2, tax-equivalent net interest income increased $809,000 in 2010 compared to 2009. The growth was due to
growth of $8.0 million in average interest-earning assets in 2010 compared to 2009 and a 22 basis point increase in ChoiceOne’s net
interest income spread compared to 2009. The higher level of average interest-earning assets contributed an additional $406,000 in net
interest income in 2010 compared to 2009, while the growth in the net interest income spread caused an increase of $403,000 in net
interest income in 2010 compared to the prior year.
7
The average balance of loans declined $5.3 million in 2010 compared to 2009. This decline, combined with a 17 basis point decrease
in the average rate earned on loans, caused interest income on loans to fall $841,000 in 2010 compared to the prior year. The average
balance of total securities increased by $9.5 million in 2010 compared to 2009. This growth in the average balance was offset by a
lower average rate earned on securities, causing interest income from securities to decrease $489,000 in 2010 compared to the prior
year. An increase in both the average balance and average rate earned on other interest-earning assets resulted in an increase in interest
income of $15,000 in 2010 compared to 2009. The reduction in loans resulted from sluggish loan demand, which was caused by
continued concerns about the Michigan economy. Growth in securities was due to ChoiceOne’s desire to maintain earning assets.
The average balance of interest-bearing demand deposits increased $23.4 million in 2010 compared to 2009. The effect of this
increase, partially offset by a 10 basis point decline in the average rate paid, caused interest expense to be $33,000 higher in 2010 than
in the prior year. The effect of an 11 basis point decrease in the average rate paid on savings deposits in 2010 compared to 2009 was
partially offset by the effect of growth of $4.2 million in the average balance as interest expense dropped $33,000. The average
balance of certificates of deposit was $6.7 million lower in 2010 than in the prior year. Approximately $4.9 million of the certificates
of deposit decline was related to certificates from ChoiceOne’s local markets, while the remaining $1.8 million was a lower level of
brokered certificates. The average balance decrease plus the effect of an 89 basis point decline in the average rate paid caused interest
expense on certificates of deposit to fall $1.6 million in 2010 compared to 2009. A $12.4 million decrease in the average balance of
Federal Home Loan Bank advances offset by a 43 basis point increase in the average rate paid caused interest expense to decline
$438,000 in 2010 compared to the prior year. Interest expense on other interest-bearing liabilities fell $47,000 in 2010 compared to
2009 due to a small decline in the average balance and a 23 basis point decrease in the average rate paid. The growth experienced in
interest-bearing demand deposits and savings deposits was primarily due to depositors choosing the liquidity and safety afforded by
this type of deposit as compared to certificates of deposit or nonbank investments.
ChoiceOne’s net interest income spread was 4.12% (shown in Table 1) for 2010, compared to 3.90% in 2009. The average yield
received on interest-earning assets in 2010 decreased 44 basis points to 5.56% while the average rate paid on interest-bearing liabilities
in 2010 fell 66 basis points to 1.44%. The decline in general market interest rates in both 2009 and 2010 caused the reduction in rates
for both assets and liabilities in the two time periods.
Table 2 – Changes in Tax-Equivalent Net Interest Income
(Dollars in thousands)
Year ended December 31
2010 Over 2009
Volume
Rate
Total
2009 Over 2008
Volume
Rate
Total
Increase (decrease) in interest income (1)
Loans (2) ...................................................... $
Taxable securities.........................................
Tax-exempt securities (2).............................
Other ............................................................
Net change in tax-equivalent income ........
(841) $
70
(559)
15
(1,315)
(326) $ (515)
(490)
560
(115)
(444)
12
3
(1,117)
(198)
$
(2,733) $
(715)
60
(59)
(3,447)
(417) $ (2,316)
(467)
(248)
244
(184)
(63)
4
(2,602)
(845)
Increase (decrease) in interest expense (1)
Interest-bearing demand deposits.................
Savings deposits...........................................
Certificates of deposit ..................................
Advances from Federal Home Loan Bank ...
Other ............................................................
Net change in interest expense ..................
Net change in tax-equivalent
net interest income
33
(33)
(1,639)
(438)
(47)
(2,124)
128
12
(189)
(552)
(3)
(604)
(95)
(45)
(1,450)
114
(44)
(1,520)
(775)
(27)
(2,577)
(518)
(216)
(4,113)
(54)
23
(287)
(414)
(14)
(746)
(721)
(50)
(2,290)
(104)
(202)
(3,367)
$
809
$
406
$
403
$
666
$
(99) $
765
(1) The volume variance is computed as the change in volume (average balance) multiplied by the previous year’s
interest rate. The rate variance is computed as the change in interest rate multiplied by the previous year’s volume
(average balance). The change in interest due to both volume and rate has been allocated to the volume and rate
changes in proportion to the relationship of the absolute dollar amounts of the change in each.
Interest on tax-exempt securities and loans has been adjusted to a fully tax-equivalent basis using an incremental tax
rate of 34% for the years presented.
(2)
8
Tax-equivalent net interest income increased $666,000 in 2009 compared to 2008. The increase was caused by a 45 basis point
increase in the net interest spread, offset by a decline in average interest-earning assets. The growth in ChoiceOne’s net interest spread
was caused by a 108 basis point decrease in the average rate paid on interest-bearing liabilities compared to a 63 basis point decline in
the average rate earned on interest-earning assets. The decline in general market interest rates in 2009 caused almost all of the rates
earned on assets and paid on liabilities to be lower than in the prior year. Average interest-earning assets decreased $14.1 million
while average interest-bearing liabilities fell $15.4 million in 2009 compared to 2008.
Management anticipates that the level of net interest income in 2011 will depend upon the Bank’s ability to grow or maintain interest-
earning assets in the form of loans and securities as well as its ability to do the same with its base of core deposits. Growth in earning
assets will continue to be dependent on the Michigan economy. If growth in loans is difficult to obtain, the Bank can opt to invest in
securities as it did in 2010. The Bank’s ability to maintain or grow its net interest spread will be contingent on movement in general
market interest rates and their effect on new and maturing assets and liabilities.
Allowance and Provision For Loan Losses
Information regarding the allowance and provision for loan losses can be found in Table 3 below:
Table 3 – Provision and Allowance For Loan Losses
(Dollars in thousands)
$
Allowance for loan losses at beginning of year ................................
$
2010
4,322
2009
3,600
$
2008
3,600
2007
3,569
$
2006
1,963
$
Charge-offs:
Agricultural................................................................
Commercial and industrial................................................................
Real estate - commercial................................................................
Real estate - construction................................................................
Real estate - residential................................................................
Consumer................................................................
Total ................................................................................................
—
765
1,523
—
1,152
444
3,884
—
1,558
1,218
14
1,369
535
4,694
Recoveries:
Agricultural................................................................
Commercial and industrial................................................................
Real estate - commercial................................................................
Real estate - construction................................................................
Real estate - residential................................................................
Consumer................................................................
Total ................................................................................................
—
68
16
—
27
230
341
—
102
58
29
106
246
541
—
1,193
816
—
1,252
567
3,828
—
60
35
—
6
252
353
33
599
841
—
191
635
2,299
3
27
1
—
10
254
295
Net charge-offs ................................................................3,543
4,153
3,475
2,004
—
221
—
—
92
200
513
—
51
—
—
—
117
168
345
Provision for loan losses................................................................
Allowance for loan losses acquired from VRFC ................................
3,950
—
4,875
—
3,475
—
2,035
—
200
1,751
Allowance for loan losses at end of year ................................
4,729
$
$
4,322
$
3,600
$
3,600
$
3,569
Allowance for loan losses as a percentage of:
Total loans as of year end ................................................................
Nonaccrual loans, accrual loans past due 90
days or more and troubled debt
restructurings ................................................................
Ratio of net charge-offs to average total loans
outstanding during the year................................................................
Loan recoveries as a percentage of prior year’s
charge-offs ................................................................
1.49 %
1.12 %
9 %
56
%
1.34%
1.10%
1.10%
1.08%
31
%
39
%
62
%
53
%
1.30%
1.06%
0.61%
0.17%
16%
15%
58%
42%
9
As shown in Table 3, the provision for loan losses was $925,000 lower in 2010 than in 2009. The reduction in the provision level
resulted in part from a decrease of $610,000 in net charge-offs experienced in 2010 compared to 2009. Net charge-offs of commercial
and industrial loans declined $759,000 in 2010 from the level experienced in 2009. Approximately $737,000 of the commercial and
industrial charge-offs in 2009 was related to an unsecured relationship with one borrower that was charged off in December 2009 due
to the borrower’s bankruptcy. Commercial real estate loan net charge-offs increased $347,000 in 2010 compared to the prior year.
Residential real estate loan net charge-offs declined $138,000 in 2010 compared to 2009. Consumer loan net charge-offs were down
slightly in 2010 compared to the prior year. The allowance for loan losses as a percentage of total loans increased from 1.34% as of
the end of 2009 to 1.49% as of the end of 2010. The coverage ratio of the allowance for loan losses to nonperforming loans increased
from 31% as of December 31, 2009 to 56% as of December 31, 2010. This was primarily due to a reduction of nonperforming loans
from $14.0 million as of the end of 2009 to $8.4 million as of the end of 2010. ChoiceOne had $582,000 of specific allowance
allocations for problem loans as of the end of 2010, compared to $1,112,000 as of the prior year end. Special allowance amounts have
been allocated where the fair value of loans was considered to be less than their carrying value. ChoiceOne obtains valuations on
collateral dependent loans when the loan is considered by management to be impaired and uses the valuation amounts in the
determination of fair value. Management believes the specific reserves allocated to certain problem loans at the end of 2010 and 2009
were reasonable based on the circumstances surrounding each particular borrower.
The following schedule presents an allocation of the allowance for loan losses to the various loan categories as of the years ended
December 31:
(Dollars in thousands)
Agricultural................................................................$
$
Commercial and industrial................................................................
Real estate - commercial................................................................
Real estate - construction................................................................
Real estate - residential................................................................
Consumer................................................................
Unallocated................................................................
2010
181
641
1,729
2
1,554
243
379
2009
124
735
1,546
3
1,590
306
18
$
2008
242
616
996
5
1,124
351
266
$
2007
397
873
886
10
881
489
64
$
2006
314
1,160
1,029
12
575
289
190
Total allowance for loan losses................................ $
4,729
$
4,322
$
3,600
$
3,600
$
3,569
The increase in the allowance allocation to agricultural loans from 2009 to 2010 was based on the slightly higher perceived level of
risk in this portfolio. The increase in the allocation to commercial real estate loans in 2010 was due to the higher level of charge-offs
experienced in 2010 than in the prior year. The small decline in the allowance allocated to the other loan categories was due to lower
charge-off levels in 2010 than the prior year. The growth in the unallocated allowance from 2009 to 2010 was believed prudent based
on management’s continued concerns regarding the economy and its impact on the ability of borrowers to make loan payments.
Management maintains the allowance at a level which it believes adequately provides for losses inherent in the loan portfolio. Such
losses are estimated by a variety of factors, including specific examination of certain borrowing relationships and consideration of
historical losses incurred on certain types of credits. Current economic conditions and declining collateral values affect loss estimates.
Management focuses on early identification of problem credits through ongoing reviews by management and the independent loan
review function. Based on the current state of the economy and a recent review of the loan portfolio, management believes that the
allowance for loan losses as of December 31, 2010 is adequate. As charge-offs, changes in the level of nonperforming loans, and
changes within the composition of the loan portfolio occur, the provision and allowance for loan losses will be reviewed by the Bank's
management and adjusted as necessary.
Noninterest Income
Total noninterest income increased $148,000 in 2010 compared to 2009. Customer service charges were virtually unchanged as
decreases in overdraft charges were offset by increases in fees from debit card usage. Gains on sales of loans grew $81,000 in 2010
compared to the prior year as mortgage refinancing activity continued to be stimulated by low interest rates for long-term fixed rate
mortgages. ChoiceOne sold $28.1 million and $28.0 million of mortgage loans in 2010 and 2009, respectively. If rates for long-term
fixed rate mortgage loans rise in 2011, management believes that mortgage refinancing activity may slow and resulting gains on sales
of loans may be lower than in 2010. ChoiceOne’s net gains on sales of securities grew $135,000 in 2010 compared to 2009. Gains on
sales of preferred stock were $386,000 in 2010 compared to $245,000 in the prior year. These gains represented a recovery of losses
recognized on money market preferred securities in 2008. The loss on other than temporary impairment of securities in 2010 and 2009
was related to a municipal security that defaulted upon its maturity in September 2009.
Total noninterest income increased $1,338,000 in 2009 compared to 2008. Customer service charges were $103,000 less in 2009
compared to 2008 due to a $99,000 decrease in overdraft charges. Lower levels of life insurance commission income and mutual fund
10
commission income in 2009 caused the decline in insurance and investment commission income from 2008. Gains on sales of loans
increased $386,000 in 2009 compared to 2008 due to a higher level of mortgage refinancing activity stimulated by low interest rates
for long-term fixed rate mortgage loans. ChoiceOne sold $28.0 million of mortgage loans in 2009 compared to $12.2 million in 2008.
ChoiceOne had $355,000 of net gains on sales of securities in 2009, compared to $833,000 of net losses in 2008. The net gains in
2009 included $245,000 of gains on sales of preferred stock that represented a recovery of losses recognized on money market
preferred securities in 2008. Net losses from sales of securities in 2008 included a $435,000 loss recognized when a money market
preferred security was converted to preferred stock. A $432,000 loss on other than temporary impairment of securities in 2008
resulted when a decline in the market value of another money market preferred security was considered to be other than temporary.
The net loss on sales of other assets was $230,000 larger in 2009 than in 2008 due to the sale of more real estate properties. An
increase of $184,000 in other noninterest income in 2009 compared to 2008 was caused in part by higher levels of check printing fees,
rental income from foreclosed properties, and income from an investment in Michigan Bankers Title Company.
Management anticipates that regulatory changes in 2010 and proposed changes for 2011 will continue to have a negative impact on
deposit-related fees in 2011. A change that became effective July 1, 2010 restricted ChoiceOne’s ability to charge overdraft fees for
certain types of transactions, which include automatic teller machine or one-time debit card usage, unless the depositors opted in for
overdraft coverage for these types of transactions. This caused some decrease in overdraft fees in the second half of 2010 and will
affect the full year of 2011. In addition, the Dodd-Frank Act passed in 2010 gave the Federal Reserve the authority to establish rules
regarding interchange fees that are charged for electronic debit transactions. In December 2010, the Federal Reserve proposed a new
regulation that would establish standards for determining whether an interchange fee related to an electronic debit transaction is
reasonable. The new standards, which are scheduled to become effective on July 21, 2011, propose to set limits at one-third to one-
half of the fees currently charged by banks. Although the standards are restricted to banks with assets of $10 billion or more,
ChoiceOne believes that the potential restrictions for big banks may also affect community banks like ChoiceOne.
Noninterest Expense
Total noninterest expense decreased $10,000 in 2010 compared to 2009. Salaries and benefits increased $138,000 in 2010 compared
to the prior year, partly due to an increase of $113,000 in 401(k) plan expense as ChoiceOne reinstated its company contribution in
2010. Occupancy and equipment expense was $70,000 lower in 2010 than in 2009 as depreciation expense and various other expenses
declined from the prior year. The $52,000 increase in data processing expense in 2010 compared to the prior year resulted from higher
costs related to electronic banking usage. Professional fees were $46,000 higher in 2010 than in 2009 due to increases in legal,
accounting, and consulting costs. Advertising and promotional expense grew $44,000 in 2010 compared to the prior year as a result of
more promotion of ChoiceOne’s new and existing products. Loan and collection expense declined $99,000 in 2010 compared to 2009
due to lower collection costs for problem loans. FDIC insurance expense was $144,000 lower in 2010 than in the prior year due to a
special assessment of $204,000 that was levied in the second quarter of 2009, the effect of which was partially offset by higher deposit
balances in 2010 than in 2009. Other noninterest expense grew by $51,000 in 2010 compared to 2009 as a result of changes in a
number of expense accounts.
Total noninterest expense increased $548,000 in 2009 compared to 2008. The $238,000 decrease in salaries and benefits expense in
2009 compared to the prior year was partly due to a $141,000 reduction in 401(k) plan expense as no company contribution was made
in 2009. Data processing expense grew $213,000 in 2009 compared to 2008 as a result of increased numbers of accounts and
increased volumes, especially in the form of electronic banking. Loan and collection expense increased $355,000 in 2009 compared to
2008 as a result of more costs related to other real estate owned and problem loans. FDIC insurance expense was $518,000 higher in
2009 as a result of a special assessment of $204,000 levied in the second quarter of 2009 and a doubling of assessment rates in 2009
compared to 2008. A decrease of $262,000 in other noninterest expense in 2009 compared to 2008 was caused by reductions in
training and seminars, Michigan business tax, directors’ fees, and various other expenses.
Management believes that loan and collection expense will continue to be affected by Michigan’s economy in 2011. The FDIC passed
a regulation in November 2010 that changed the deposit insurance assessment base from total domestic deposits to average total assets
less average tangible equity. The change is effective with the quarter beginning April 1, 2011. Management anticipates that
ChoiceOne’s insurance expense may be lower under the adjusted total assets assessment base than it would have been under the total
domestic deposits assessment base.
Income Taxes
Income taxes were $654,000 in 2010, compared to benefits of $195,000 in 2009 and $207,000 in 2008. The change in the income tax
effect from 2009 to 2010 was caused by a $2.1 million increase in income before income tax in 2010 compared to the prior year. The
tax benefit realized in both 2009 and 2008 was due to the level of ChoiceOne’s tax-exempt interest income, which was larger than
income before income tax in both years.
11
FINANCIAL CONDITION
Summary
Total assets were $480.5 million as of December 31, 2010, which represented an increase of $14.6 million or 3% from the end of
2009. Cash and cash equivalents grew $4.3 million in 2010 as excess funds from deposit growth were held at correspondent banks or
sold as overnight federal funds. Securities available for sale increased $16.4 million during 2010 as management purchased securities
to use funds that were provided by deposit growth. Loans declined $5.8 million in 2010 due to sluggish loan demand. Total deposits
grew $24.9 million in 2010 due to increases in checking and savings deposits, which were partially offset by a decrease in certificates
of deposit. Advances from the Federal Home Loan Bank of Indianapolis were reduced $13.5 million in 2010 as the deposit growth
was used to pay off maturing advances.
Securities
The Bank’s securities available for sale balances as of December 31 were as follows:
(Dollars in thousands)
U.S. Government and federal agency ................................................................................... $
State and municipal...............................................................................................................
Mortgage-backed ..................................................................................................................
Corporate ..............................................................................................................................
FDIC-guaranteed financial institution debt...........................................................................
Equity securities....................................................................................................................
Total ................................................................................................................................ $
2010
29,066
47,881
7,599
2,883
2,053
1,338
90,820
$
$
2009
18,571
44,599
8,929
—
—
2,314
74,413
The securities available for sale portfolio increased $16.4 million from December 31, 2009 to December 31, 2010. ChoiceOne
purchased a mix of government agency, municipal, mortgage-backed, corporate securities, and FDIC-guaranteed financial institution
debt totaling $44.1 million during 2010 to replace securities that matured or were called and to provide growth in earning assets.
Approximately $19.6 million in various securities were called or matured in 2010. Principal payments for municipal and mortgage-
backed securities totaling $2.7 million were received during 2010. Various securities totaling approximately $6.1 million were sold
during 2010 for net gains totaling $537,000. Approximately $3.7 million of the sales that occurred in 2010 were sales of municipal
securities as ChoiceOne lessened its exposure to certain issuers. The Bank’s Investment Committee continues to monitor the portfolio
and purchases securities as it considers prudent. Also, certain securities are sold under agreements to repurchase and management
plans to continue this practice as a low-cost source of funding.
State and municipal securities as of the end of 2010 included a security that matured on September 1, 2009 and was not redeemed by
the issuer. A principal payment of $29,000 was received in October 2009 on the par value of $500,000. No further payments have
been received. Legal counsel was engaged in September 2009 by the bondholders to work with the issuer on their behalf.
ChoiceOne’s third party investment advisor is a member of the bondholder executive committee and is working closely with the legal
counsel. Due to the uncertainty as to when and how much value will be received for the remaining principal balance of the bond, other
than temporary impairments were recorded in 2009 and 2010 to reduce the carrying value to 70% of the remaining par value as of
December 31, 2010.
Equity securities included a money market preferred security (MMP) of $838,000 and a trust preferred security of $500,000 as of
December 31, 2010 and preferred stock of $954,000, an MMP of $860,000, and a trust preferred security of $500,000 as of December
31, 2009. The preferred stock held as of the end of 2009 was sold in the first quarter of 2010 and a gain of $386,000 was recognized.
The MMP had a $162,000 unrealized loss as of December 31, 2010 that was recorded to other comprehensive income. Auctions
remain active for this security and interest continues to be received.
Management will continue to monitor its municipal and equity securities closely in 2011. Securities may be sold if believed prudent
from a risk standpoint.
12
Loans
The Bank’s loan portfolio as of December 31 was as follows:
(Dollars in thousands)
Agricultural........................................................................................................................... $
Commercial and industrial....................................................................................................
Consumer..............................................................................................................................
Real estate - commercial.......................................................................................................
Real estate - construction......................................................................................................
Real estate - residential.........................................................................................................
Total loans ....................................................................................................................... $
2010
29,681
55,947
16,709
116,351
853
97,399
316,940
$
$
2009
31,322
53,964
16,285
121,100
1,158
98,887
322,716
The loan portfolio (excluding loans held for sale) decreased $5.8 million from December 31, 2009 to December 31, 2010. Loan
demand continued to be sluggish in 2010 as the uncertain economy in Michigan affected the willingness of borrowers to assume debt.
Growth was achieved in commercial and industrial loans and consumer loans in 2010 through officer calling activities and marketing
of consumer loan products. Loans secured by real estate continued to be affected by reduced collateral values, which impacted the
ability to originate these loans. Residential real estate loans were also affected by portfolio loans that were refinanced into long-term
fixed rate loans and sold in the secondary market.
Information regarding impaired loans can be found in Note 3 to the consolidated financial statements included in this report. In
addition to its review of the loan portfolio for impaired loans, management also monitors various nonperforming loans.
Nonperforming loans are comprised of (1) loans accounted for on a nonaccrual basis; (2) loans, not included in nonaccrual loans,
which are contractually past due 90 days or more as to interest or principal payments; and (3) loans, not included in nonaccrual or past
due 90 days or more, which are considered troubled debt restructurings.
The balances of these nonperforming loans as of December 31 were as follows:
(Dollars in thousands)
Loans accounted for on a nonaccrual basis
Loans contractually past due 90 days
or more as to principal or interest payments
Loans considered troubled debt restructurings
which are not included above
Total
$
$
2010
6,273
23
2,141
8,437
$
$
2009
11,882
206
1,919
14,007
Nonaccrual loans included $3,621,000 in commercial and industrial and commercial real estate loans, $2,646,000 in residential real
estate loans, and $6,000 in consumer loans as of December 31, 2010, compared to $7,805,000, $4,060,000, and $17,000, respectively,
as of December 31, 2009. The decreases in nonaccrual loans in 2010 were caused by charge-offs, transfers to other real estate owned,
and payments received on loans. Loans considered troubled debt restructurings which were not on a nonaccrual basis and were not 90
days or more past due as to principal or interest payments consisted of $2,141,000 in residential real estate loans as of December 31,
2010, compared to $134,000 in commercial and industrial loans and $1,785,000 in residential real estate loans as of December 31,
2009. Troubled debt restructurings consist of loans where the terms have been modified to assist the borrowers in making their
payments. The modifications can include capitalization of interest onto the principal balance, reduction in interest rate, and extension
of the loan term. ChoiceOne began making the modifications for residential real estate loans in September 2009 and plans to continue
this process in 2011.
Management also maintains a list of loans that are not classified as nonperforming loans but where some concern exists as to the
borrowers’ abilities to comply with the original loan terms. These loans totaled $21.2 million as of December 31, 2010, compared to
$17.1 million as of December 31, 2009.
13
Deposits and Other Funding Sources
The Bank’s deposit balances as of December 31 were as follows:
(Dollars in thousands)
Noninterest-bearing demand deposits................................................................................... $
Interest-bearing demand deposits .........................................................................................
Money market deposits.........................................................................................................
Savings deposits ...................................................................................................................
Local certificates of deposit..................................................................................................
Brokered certificates of deposit ............................................................................................
Total deposits .................................................................................................................. $
2010
66,932
59,853
59,021
43,572
152,602
7,904
389,884
$
$
2009
60,802
43,731
58,094
36,791
159,217
6,375
365,010
Total deposits increased $24.9 million from December 31, 2009 to December 31, 2010. Local deposits grew $23.4 million while
brokered certificates of deposit grew $1.5 million since the end of 2009. Management believes that the local deposit growth was due
in part to the attractiveness of FDIC-guaranteed deposits in contrast to the uncertainty of investments in the stock market. Deposit
growth also resulted from new product offerings and calling efforts on business and municipal clients. The balance in all checking and
savings account categories increased during the year while the balance of local certificates of deposit declined. Management believes
that some of the local certificate of deposit decrease consisted of transfers into the other interest-bearing deposit accounts since the
liquidity obtained offset the relatively small difference in the interest rate paid.
Securities sold under agreements to repurchase increased $1.6 million during 2010. The change was due to a higher balance in sweep
repurchase accounts used by the Bank’s local customers. Advances from the Federal Home Loan Bank of Indianapolis (“FHLB”)
decreased $13.5 million in 2010 as growth in deposits caused it to be unnecessary to replace maturing advances. A blanket collateral
agreement covering residential real estate loans was pledged against all outstanding advances at the end of 2010. Approximately $35
million of additional advances were available as of December 31, 2010 based on the collateral pledged.
In 2011, management will continue to focus its marketing efforts toward growth in local deposits. If local deposit growth is
insufficient to support asset growth, management believes that advances from the FHLB, repurchase agreements and brokered
certificates of deposit can address corresponding funding needs.
Shareholders’ Equity
Total shareholders' equity increased $1.4 million from December 31, 2009 to December 31, 2010. The growth in equity resulted
primarily from the retention of earnings in 2010 as net income exceeded dividends paid by $1.1 million. Issuances of common stock
and an increase in accumulated other comprehensive income also contributed to the growth in 2010.
Note 21 to the consolidated financial statements presents regulatory capital information for the Bank at the end of 2010 and 2009. The
Bank’s capital ratios for total risk-based capital and Tier 1 capital increased slightly in 2010 while the Tier 1 leverage capital ratio
declined slightly. Management will monitor these capital ratios closely during 2011 as they relate to asset growth and earnings
retention. ChoiceOne’s Board of Directors and management do not plan to allow capital to decrease below those levels necessary to
be considered “well capitalized” by regulatory guidelines. The Board of Directors and management believe that ChoiceOne’s capital
level as of December 31, 2010 is adequate for the foreseeable future.
Table 4 – Contractual Obligations
The following table discloses information regarding the maturity of ChoiceOne’s contractual obligations at December 31, 2010:
(Dollars in thousands)
Contractual Obligations
Time deposits.......................................................................$ 160,506
Repurchase agreements........................................................
22,249
Advances from Federal Home Loan Bank...........................
8,473
Operating leases................................................................
141
Other obligations ................................................................
1,161
Total .................................................................................$ 192,530
Total
14
Payment Due By Period
Less
than
1 year
$ 101,768
17,249
26
61
151
$ 119,255
1-3
Years
50,858
5,000
8,055
80
124
64,117
$
$
$
$
3-5
Years
More
than
5 Years
116
–
332
–
735
1,183
7,764 $
–
60
–
151
7,975 $
Liquidity and Interest Rate Risk
Net cash from operating activities was $9.2 million for both 2010 and 2009. The effect of higher net income and the positive change
in other assets was offset by the effect of a lower provision for loan losses and lower proceeds from sales of other real estate owned in
2010 compared to 2009. Cash used in investing activities was $16.4 million in 2010 compared to $1.1 million in 2009. The increase
was caused by higher net purchases of securities, which was partially offset by lower net loan originations. Cash flows from financing
activities were $11.5 million in 2010 compared to $0.5 million in the prior year. The increase resulted from more growth in deposits in
2010 than in 2009 and lower net payments of FHLB advances.
ChoiceOne's primary market risk exposure occurs in the form of interest rate risk. Liquidity risk also can have an impact but to a lesser
extent. ChoiceOne's business is transacted in U.S. dollars with no foreign exchange risk exposure. Agricultural loans comprise a small
portion of ChoiceOne's total assets. Management believes that ChoiceOne's exposure to changes in commodity prices is insignificant.
Management believes that the current level of liquidity is sufficient to meet the Bank's normal operating needs. This belief is based
upon the availability of deposits from both the local and national markets, maturities of securities, normal loan repayments, income
retention, federal funds purchased lines from correspondent banks, and advances available from the FHLB. Liquidity risk deals with
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. As of December 31, 2010, the amount of federal funds available for purchase from the Bank's
correspondent banks totaled approximately $23.5 million. ChoiceOne had no federal funds purchased at the end of 2010 or 2009. The
Bank also has a line of credit secured by ChoiceOne’s commercial loans with the Federal Reserve Bank of Chicago for $41 million,
which is designated for nonrecurring short-term liquidity needs. Longer-term liquidity needs may be met through local deposit growth,
maturities of securities, normal loan repayments, advances from the FHLB, brokered certificates of deposit, and income retention.
Approximately $35 million of borrowing capacity was available from the FHLB based on residential real estate loans pledged as
collateral at year-end 2010. The acceptance of brokered certificates of deposit is not limited as long as the Bank’s capital to assets
ratio is considered to be “well capitalized” under regulatory guidelines.
Interest rate risk is related to liquidity because each is affected by maturing assets and sources of funds. ChoiceOne’s Asset/Liability
Management Committee (the "ALCO") attempts to stabilize the interest rate spread and avoid possible adverse effects when unusual or
rapid changes in interest rates occur. The ALCO uses a simulation model to measure the Bank’s interest rate risk. The model
incorporates changes in interest rates on rate-sensitive assets and liabilities. The degree of rate sensitivity is affected by prepayment
assumptions that exist in the assets and liabilities. One method the ALCO uses of measuring interest rate sensitivity is the ratio of rate-
sensitive assets to rate-sensitive liabilities. An asset or liability is considered to be rate-sensitive if it matures or otherwise reprices
within a given time frame.
15
Table 5 documents the maturity or repricing schedule for ChoiceOne’s rate-sensitive assets and liabilities for selected time periods.
Table 5 – Maturities and Repricing Schedule
(Dollars in thousands)
0-3
Months
As of December 31, 2010
1-5
Years
3-12
Months
Over
5 Years
Assets
Federal funds sold...........................................................$
5,000
Securities available for sale ............................................ 14,280
–
Federal Home Loan Bank stock……………………
Federal Reserve Bank stock............................................
–
Loans held for sale..........................................................
1,610
Loans .............................................................................. 72,792
–
Cash surrender value of life insurance policies...............
Rate-sensitive assets .................................................... 93,682
$
–
12,049
2,889
–
–
79,576
–
94,514
$
–
37,215
–
1,270
–
134,245
9,520
182,250
Liabilities
Interest-bearing demand deposits ................................
59,853
Savings deposits ............................................................. 43,572
Money market deposits…………………………….
59,021
Certificates of deposit ..................................................... 47,038
Repurchase agreements................................................... 17,249
Advances from FHLB.....................................................
–
Rate-sensitive liabilities............................................... 226,733
Rate-sensitive assets less rate-sensitive liabilities:
Asset (liability) gap for the period ...............................$ (133,051) $
Cumulative asset (liability) gap ................................$ (133,051) $ (94,101) $
–
–
–
55,564
–
–
55,564
38,950
–
–
–
57,904
5,000
8,000
70,904
$ 111,346
17,245
$
– $
27,276
–
–
–
30,327
–
57,603
–
–
–
–
–
473
473
$ 57,130 $
$ 74,375
Total
5,000
90,820
2,889
1,270
1,610
316,940
9,520
428,049
59,853
43,572
59,021
160,506
22,249
8,473
353,674
74,375
Under this method, the ALCO measures interest rate sensitivity by focusing on the one-year repricing gap. ChoiceOne’s ratio of rate-
sensitive assets to rate-sensitive liabilities that matured or repriced within a one-year time frame was 67% at December 31, 2010,
compared to 69% at December 31, 2009. Table 5 above shows the entire balance of interest-bearing demand deposits, savings
deposits, money market deposits, and overnight repurchase agreements in the shortest repricing term. Although these categories have
the ability to reprice immediately, management has some control over the actual timing or extent of the changes in interest rates on
these liabilities. The ALCO plans to continue to monitor the ratio of rate-sensitive assets to rate-sensitive liabilities on a quarterly
basis in 2011. As interest rates change during 2011, the ALCO will attempt to match its maturing assets with corresponding liabilities
to maximize ChoiceOne’s net interest income.
Another method the ALCO uses to monitor its interest rate sensitivity is to subject rate-sensitive assets and liabilities to interest rate
shocks. At December 31, 2010, management used a simulation model to subject its assets and liabilities up to an immediate 400 basis
point increase. Management limited the immediate interest rate decrease to a maximum of 15 basis points due to the very low general
market rates that existed as of the end of 2010. The maturities of loans and mortgage-backed securities were affected by certain
prepayment assumptions. Maturities for interest-bearing core deposits were based on an estimate of the period over which they would
be outstanding. The maturities of advances from the FHLB were based on their contractual maturity dates. In the case of variable rate
assets and liabilities, repricing dates were used to determine their values. The simulation model measures the effect of immediate
interest rate changes on both net interest income and shareholders' equity. ChoiceOne’s Interest Rate Risk Policy states that the
changes in interest rates cannot cause net interest income to decrease more than 10% if rates are instantaneously shocked 200 basis
points upward or downward. ChoiceOne’s Interest Rate Risk Policy states that the changes in interest rates cannot cause the market
value of shareholders’ equity to decrease more than 20% if rates are instantaneously shocked 200 basis points upward or downward.
Table 6 provides an illustration of hypothetical interest rate changes as of December 31, 2010 and 2009, respectively:
16
Table 6 – Sensitivity to Changes in Interest Rates
(Dollars in thousands)
2010
Net
Interest
Income
Percent
Change
Market
Value of
Equity
Percent
Change
Change in Interest Rates
400 basis point rise .........................................................
17,936
300 basis point rise .........................................................
17,896
200 basis point rise .........................................................
17,853
100 basis point rise .........................................................
17,541
Base rate scenario ...........................................................
17,606
15 basis point decline .....................................................
17,587
$
+ 2%
+ 2%
+ 1%
–%
–%
- 1%
(Dollars in thousands)
2009
Net
Interest
Income
Percent
Change
Change in Interest Rates
16,620
300 basis point rise .........................................................
200 basis point rise .........................................................
16,467
100 basis point rise .........................................................
16,313
Base rate scenario ...........................................................
16,147
16,056
15 basis point decline .....................................................
20 basis point decline .....................................................
16,023
15,986
25 basis point decline .....................................................
$
+ 3%
+ 2%
+ 1%
–%
- 1%
- 1%
- 1%
$
$
68,278
71,110
74,274
77,547
80,508
80,698
- 15%
- 12%
- 8%
- 4%
–%
–%
Market
Value of
Equity
Percent
Change
66,959
70,620
74,682
79,513
79,871
80,086
80,250
- 16%
- 11%
- 6%
–%
+ 1%
+ 1%
+ 1%
As of both December 31, 2010 and December 31, 2009, the Bank was within its guidelines for immediate rate shocks up and down for
both net interest income and the market value of shareholders’ equity. The ALCO plans to continue to monitor the effect of changes in
interest rates on both net interest income and shareholders’ equity and will make changes in the duration of its rate-sensitive assets and
rate-sensitive liabilities where necessary.
17
ChoiceOne Financial Services, Inc.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of ChoiceOne Financial Services, Inc. is responsible for establishing and maintaining adequate internal control over
financial reporting that is designed to produce reliable financial statements in conformity with United States generally accepted
accounting principles. The system of internal control over financial reporting as it relates to the financial statements is evaluated for
effectiveness by management and tested for reliability through a program of internal audits. Actions are taken to correct potential
deficiencies as they are identified. Any system of internal control, no matter how well designed, has inherent limitations, including the
possibility that a control can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected.
Also, because of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of
internal control will provide only reasonable assurance with respect to financial statement preparation.
Management assessed the effectiveness of the Company’s system of internal control over financial reporting as of December 31, 2010,
as required by Section 404 of the Sarbanes-Oxley Act of 2002. Management’s assessment is based on the criteria for effective internal
control over financial reporting as described in “Internal Control – Integrated Framework,” issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”). Based on this assessment, management has concluded that, as of December
31, 2010, its system of internal control over financial reporting was effective and meets the criteria of the “Internal Control –
Integrated Framework.” This annual report is not required to include an attestation report of the Company’s independent registered
public accounting firm regarding internal control over financial reporting.
James A. Bosserd
President and Chief Executive Officer
March 25, 2011
Thomas L. Lampen
Treasurer
March 25, 2011
18
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors
of ChoiceOne Financial Services, Inc.
We have audited the accompanying consolidated balance sheet of ChoiceOne Financial Services, Inc. as of December 31, 2010 and
2009, and the related consolidated statements of income, shareholders’ equity, and cash flows for each year in the three-year period
ended December 31, 2010. These consolidated financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial
position of ChoiceOne Financial Services, Inc. as of December 31, 2010 and 2009, and the consolidated results of its operations and its
cash flows for each year in the three-year period ended December 31, 2010, in conformity with accounting principles generally
accepted in the United States of America.
Grand Rapids, Michigan
March 25, 2011
Plante & Moran, PLLC
19
ChoiceOne Financial Services, Inc.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
Assets
Cash and due from banks...............................................................................................
Federal funds sold..........................................................................................................
Cash and cash equivalents ........................................................................................
$
Securities available for sale (Note 2) .............................................................................
Federal Home Loan Bank stock.....................................................................................
Federal Reserve Bank stock...........................................................................................
Loans held for sale.........................................................................................................
Loans (Note 3) ...............................................................................................................
Allowance for loan losses (Note 3)................................................................................
Loans, net .................................................................................................................
Premises and equipment, net (Note 5) ...........................................................................
Other real estate owned, net (Note 7) ............................................................................
Loan servicing rights, net (Note 4) ................................................................................
Cash value of life insurance policies..............................................................................
Intangible assets, net (Note 6)........................................................................................
Goodwill (Note 6)..........................................................................................................
Other assets....................................................................................................................
Total assets ...............................................................................................................
Liabilities
Deposits – noninterest-bearing (Note 8) ........................................................................
Deposits – interest-bearing (Note 8) ..............................................................................
Total deposits ...........................................................................................................
Repurchase agreements (Note 9) ...................................................................................
Advances from Federal Home Loan Bank (Note 10) ....................................................
Other liabilities (Notes 11 and 13).................................................................................
Total liabilities..........................................................................................................
$
$
December 31
2010
$
$
$
19,074
5,000
24,074
90,820
2,889
1,270
1,610
316,940
(4,729)
312,211
12,525
1,953
347
9,520
2,620
13,728
6,957
480,524
66,932
322,952
389,884
22,249
8,473
5,605
426,211
2009
9,957
9,793
19,750
74,413
3,304
1,270
322
322,716
(4,322)
318,394
11,918
2,201
491
9,201
3,068
13,728
7,855
465,915
60,802
304,208
365,010
20,684
21,980
5,315
412,989
Shareholders’ Equity (Note 21)
Preferred stock; shares authorized: 100,000; shares outstanding: none...........................
Common stock and paid-in capital, no par value; shares authorized: 7,000,000;
shares outstanding: 3,280,515 in 2010 and 3,265,714 in 2009 (Note 14) ....................
Retained earnings.............................................................................................................
Accumulated other comprehensive income, net (Note 16) ..............................................
Total shareholders’ equity ..........................................................................................
Total liabilities and shareholders’ equity.................................................................... $
–
–
46,461
6,952
900
54,313
480,524
$
46,326
5,813
787
52,926
465,915
See accompanying notes to consolidated financial statements.
20
ChoiceOne Financial Services, Inc.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
Interest income
Loans, including fees ....................................................................$
Securities
Taxable ......................................................................................
Tax exempt ................................................................................
Other .............................................................................................
Total interest income ............................................................
Interest expense
Deposits ........................................................................................
Advances from Federal Home Loan Bank....................................
Other borrowings ..........................................................................
Total interest expense ...........................................................
Net interest income ........................................................................
Provision for loan losses (Note 3)..................................................
Net interest income after provision for loan losses .....................
Noninterest income
Customer service charges .............................................................
Insurance and investment commissions ........................................
Gains on sales of loans (Note 4) ...................................................
Gains (losses) on sales of securities (Note 2) ...............................
Loss on other than temporary impairment of securities (Note 2)..
Losses on sales of other assets (Note 7)........................................
Earnings on life insurance policies ...............................................
Other income ................................................................................
Total noninterest income......................................................
Noninterest expense
Salaries and benefits (Notes 13 and 14)........................................
Occupancy and equipment (Note 5) .............................................
Data processing.............................................................................
Professional fees ...........................................................................
Supplies and postage ....................................................................
Advertising and promotional ........................................................
Intangible asset amortization (Note 6) ..........................................
Loan and collection expense.........................................................
FDIC insurance.............................................................................
Other expense ...............................................................................
Total noninterest expense.....................................................
Income before income tax .............................................................
Income tax expense/(benefit) (Note 11) ........................................
Net income ......................................................................................$
2,711
Basic earnings per common share (Note 15)................................$
Diluted earnings per common share (Note 15) ............................$
Dividends declared per common share ........................................$
0.83
0.83
0.48
See accompanying notes to consolidated financial statements.
21
Years ended December 31
2010
2009
2008
19,081
$
19,915
$
22,641
1,460
1,398
22
21,961
3,914
748
304
4,966
16,995
3,950
13,045
3,160
690
682
537
(94)
(432)
360
666
5,569
7,040
2,157
1,651
675
497
168
448
678
641
1,294
15,249
3,365
654
1,390
1,774
7
23,086
5,553
1,186
351
7,090
15,996
4,875
11,121
3,177
690
601
402
(47)
(434)
365
667
5,421
6,902
2,227
1,599
629
504
124
469
777
785
1,243
15,259
1,283
(195)
1,478
0.45
0.45
0.48
$
$
$
$
$
$
$
$
2,105
1,722
66
26,534
8,932
1,704
567
11,203
15,331
3,475
11,856
3,280
769
215
(401)
(432)
(204)
373
483
4,083
7,140
2,163
1,386
645
537
152
494
422
267
1,505
14,711
1,228
(207)
1,435
0.44
0.44
0.68
ChoiceOne Financial Services, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Dollars in thousands, except per share data)
Common
Stock and
Paid in
Capital
Accumulated
Other
Comprehensive
Income (Loss),
Net
Retained
Earnings
Number of
Shares
Total
Balance, January 1, 2008
3,229,814
$ 45,956
$ 6,665
$ 521
$ 53,142
Comprehensive income:
Net income
Net change in unrealized gain (loss) on
securities available for sale, net of tax
of ($228)
Net change in funded status of post-
retirement benefit plan
Total comprehensive income
Shares issued
Change in ESOP repurchase obligation
Effect of stock options granted
Effect of employee stock purchases
Cash dividends declared ($0.68 per share)
1,435
1,435
16,295
147
23
33
12
(2,202)
(442)
(442)
37
37
1,030
147
23
33
12
(2,202)
Balance, December 31, 2008
3,246,109
$ 46,171
$ 5,898
$ 116
$ 52,185
Comprehensive income:
Net income
Net change in unrealized gain (loss) on
securities available for sale, net of tax
of $343
Net change in funded status of post-
retirement benefit plan
Total comprehensive income
Shares issued
Change in ESOP repurchase obligation
Effect of stock options granted
Effect of employee stock purchases
Cash dividends declared ($0.48 per share)
1,478
665
6
19,605
126
(4 )
22
11
(1,563)
1,478
665
6
2,149
126
(4)
22
11
(1,563)
Balance, December 31, 2009
3,265,714
$ 46,326
$ 5,813
$ 787
$ 52,926
Comprehensive income:
Net income
Net change in unrealized gain (loss) on
securities available for sale, net of tax of $65
Net change in funded status of post-
retirement benefit plan
Total comprehensive income
Shares issued
Shares cancelled
Change in ESOP repurchase obligation
Effect of stock options granted
Effect of employee stock purchases
Cash dividends declared ($0.48 per share)
2,711
(1,572)
127
(14)
2,711
127
(14)
2,824
125
–
(16)
15
11
(1,572)
14,805
(4)
125
–
(16 )
15
11
Balance, December 31, 2010
See accompanying notes to consolidated financial statements.
3,280,515
$ 46,461
$ 6,952
$ 900
$ 54,313
22
ChoiceOne Financial Services, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Cash flows from operating activities:
Net income................................................................................................. $
Adjustments to reconcile net income to net cash from operating
activities:
Provision for loan losses.........................................................................
Depreciation ...........................................................................................
Amortization...........................................................................................
Compensation expense on stock options and employee purchases.........
Losses (gains) on sales of securities .......................................................
Loss on other than temporary impairment of securities ..........................
Gains on sales of loans ...........................................................................
Loans originated for sale ........................................................................
Proceeds from loan sales ........................................................................
Earnings on bank-owned life insurance ..................................................
(Gains)/losses on sales of other real estate owned ..................................
Write-downs of other real estate owned .................................................
Proceeds from sales of other real estate owned ......................................
Deferred federal income tax benefit .......................................................
Net change in:
Other assets..........................................................................................
Other liabilities ....................................................................................
Net cash from operating activities .....................................................
Cash flows from investing activities:
Sales of securities available for sale .........................................................
Maturities, prepayments and calls of securities available for sale ............
Purchases of securities available for sale..................................................
Purchase of Federal Reserve Bank stock ..................................................
Loan originations and payments, net ........................................................
Additions to premises and equipment.......................................................
Net cash from investing activities ......................................................
Cash flows from financing activities:
Net change in deposits ..............................................................................
Net change in repurchase agreements .......................................................
Proceeds from Federal Home Loan Bank advances .................................
Payments on Federal Home Loan Bank advances ....................................
Issuance of common stock ........................................................................
Cash dividends and fractional shares from stock dividends......................
Net cash from financing activities......................................................
Net change in cash and cash equivalents .....................................................
Beginning cash and cash equivalents...........................................................
Ending cash and cash equivalents...................................................... $
Supplemental disclosures:
Cash paid for interest ................................................................................... $
Cash paid for income taxes..........................................................................
Loans transferred to other real estate owned ...............................................
Other real estate owned transferred to premises and equipment..................
See accompanying notes to consolidated financial statements.
23
Years ended December 31
2010
2009
2008
2,711
$
1,478
$
1,435
3,950
903
1,173
26
(537)
94
(682 )
(28,816)
28,088
(360)
(96)
528
1,174
(163)
875
357
9,225
6,059
22,271
(44,063)
—
875
(1,510)
(16,368)
24,874
1,565
—
(13,525)
125
(1,572)
11,467
4,324
19,750
24,074
5,112
285
1,358
—
$
$
4,875
974
1,102
33
(402)
47
(601)
(27,598)
27,983
(365)
7
442
4,200
(410)
(2,289)
(241)
9,235
8,171
27,180
(31,269)
(1)
(4,381)
(816)
(1,116)
18,012
1,898
37,000
(55,002)
126
(1,563)
471
8,590
11,160
19,750
7,288
31
3,489
331
$
$
3,475
844
996
45
401
432
(215)
(12,249)
12,198
(373)
9
204
1,270
(644)
372
(970)
7,230
2,540
22,206
(20,603)
(4)
(4,760)
(764)
(1,385)
(4,846)
(2,924)
50,000
(46,000)
147
(2,202)
(5,825)
20
11,140
11,160
11,519
575
3,666
—
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include ChoiceOne Financial Services, Inc., its wholly-owned subsidiary, ChoiceOne Bank, and
ChoiceOne Bank’s wholly-owned subsidiary, ChoiceOne Insurance Agencies, Inc., and its former wholly-owned subsidiary,
ChoiceOne Mortgage Company of Michigan (together referred to as "ChoiceOne"). Intercompany transactions and balances have
been eliminated in consolidation.
Nature of Operations
ChoiceOne Bank (the "Bank") is a full-service community bank that offers commercial, consumer, and real estate loans as well as
traditional demand, savings and time deposits 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 collateralized by either residential or commercial real estate.
ChoiceOne Insurance Agencies, Inc. (the "Insurance Agency") is a wholly-owned subsidiary of the Bank. The Insurance Agency sells
insurance policies such as life and health for both commercial and consumer clients. The Insurance Agency also offers alternative
investment products such as annuities and mutual funds through a registered broker.
ChoiceOne Mortgage Company of Michigan (the “Mortgage Company”) originated and sold a full line of conventional type mortgage
loans for 1-4 family and multi-family residential real estate properties. It also originated second mortgages on residential real estate
with home equity term loans and lines of credit. Effective December 31, 2008, ChoiceOne consolidated the operations of the
Mortgage Company into the Bank and eliminated the mortgage company subsidiary.
Together, the Bank, the Insurance Agency, and the former Mortgage Company account for substantially all of ChoiceOne’s assets,
revenues and operating income.
Use of Estimates
To prepare financial statements in conformity with accounting principles generally accepted in the United States of America,
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 securities available for sale, the allowance for loan losses, other real estate owned, core deposit intangible
assets, loan servicing rights, goodwill, and fair values of certain financial instruments are particularly susceptible to change.
Cash and Cash Equivalents
Cash and cash equivalents are 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 with original terms of 90 days or less.
Securities
Securities are classified as available for sale because 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 the accumulated other comprehensive income or
loss section of shareholders’ equity, net of tax effect. Restricted investments in Federal Reserve Bank stock and Federal Home Loan
Bank stock are carried at cost. Equity securities consist of investments in preferred stock, trust-preferred securities, and investments in
common stock of other financial institutions.
Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized using the
level-yield method without anticipating prepayments. Gains or losses on sales are recorded on the trade date based on the amortized
cost of the security sold.
Declines in the fair value of securities below their cost that are other than temporary are reflected as recognized losses. In estimating
other than temporary losses, management considers: the length of time and extent that fair value has been less than cost, the financial
condition and near-term prospects of the issuer, and ChoiceOne’s ability and intent to hold the security for a period sufficient to allow
for any anticipated recovery in fair value.
24
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the
principal balance outstanding, net of unearned interest, 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.
Interest income on loans 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 time at which commercial loans are 90 days past due unless the loan is secured by sufficient collateral and in the process of
collection. Interest on consumer or real estate secured loans is discontinued at the time at which the loan is 120 days past due unless
the credit is secured by sufficient collateral and in the process of collection. Past due status is based on the contractual terms of the
loan. In all cases, loans are placed into nonaccrual status or charged off at an earlier date if collection of principal or interest is
considered doubtful. Interest accrued but not received is reversed against interest income when the loans are placed into nonaccrual
status. Interest received on such loans is applied to principal until qualifying for return to accrual. Loans are returned to accrual basis
when all the principal and interest amounts contractually due are brought current and future payment is reasonably assured.
Allowance for Loan Losses
The allowance for loan losses is a valuation allowance for probable incurred credit losses. The allowance is increased by the provision
for loan losses and decreased by loans charged off less any recoveries of charged off loans. Management estimates the allowance
balance required based on past loan loss experience, the nature and volume of the loan 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. Loan losses
are charged against the allowance when management believes the collectibility of a loan balance is not possible.
The allowance consists of general and specific components. The general component covers non-classified loans and is based on
historical loss experience adjusted for current factors. The specific component relates to loans that are individually classified as
impaired or loans otherwise classified as substandard or doubtful.
A loan is impaired when full payment under the loan terms is not expected. Commercial loans are evaluated for impairment on an
individual loan basis. 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. Large groups of smaller balance homogeneous loans such as consumer and real
estate mortgage loans are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment
disclosures.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation. Land is carried at cost. Land improvements are depreciated
using the straight-line method with useful lives ranging from 7 to 15 years. Building and related components are depreciated using the
straight-line method with useful lives ranging from 5 to 39 years. Leasehold improvements are depreciated over the shorter of the
estimated life or the lease term. Furniture and equipment are depreciated using the straight-line method with useful lives ranging from
3 to 7 years. Fixed assets are periodically reviewed for impairment when events indicate their carrying amounts may not be
recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.
Other Real Estate Owned
Real estate properties acquired in the collection of a loan are initially recorded at fair value at acquisition establishing a new cost basis.
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 to repair or maintain
properties are included within other noninterest expenses. Gains and losses upon disposition and changes in the valuation allowance
are reported net within other noninterest income.
Loan Servicing Rights
Servicing rights represent the allocated value of servicing rights on loans sold with servicing retained. 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. Fair
value is determined using prices for similar assets with similar characteristics when available or based upon discounted cashflows using
market-based assumptions. Any impairment of a grouping is reported as a valuation allowance.
25
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Goodwill
Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of the acquired tangible
assets and liabilities and identifiable intangible assets. Goodwill is assessed at least annually for impairment and any such impairment
will be recognized in the period identified.
Loan Commitments and Related Financial Instruments
Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit
issued to meet financing needs of customers. The face amount for these items represents the exposure to loss, before considering
customer collateral or ability to repay. Such financial instruments are recorded when they are funded.
Employee Benefit Plans
ChoiceOne’s 401(k) plan allows participants to contribute up to the IRS maximum. Contributions from ChoiceOne to its 401(k) plan
are discretionary. ChoiceOne also allows retired employees to participate in its health insurance plan. Employees who have attained
age 55 and completed at least ten years of service to ChoiceOne are eligible to participate as a retiree until they are eligible for
Medicare. These postretirement benefits are accrued during the years in which the employee provides service.
Employee Stock Ownership Plan
The cost of shares issued to the Employee Stock Ownership Plan (the "ESOP") but not yet allocated to participants is presented as a
reduction of shareholders’ equity. Compensation expense is recorded based on the market price of the shares as they are committed to
be released for allocation to participant accounts. The difference between the market price and the cost of shares committed to be
released is recorded as an adjustment to additional paid-in capital. Dividends on allocated ESOP shares are recorded as a reduction of
retained earnings while dividends on unallocated ESOP shares are reflected as a reduction of debt and accrued interest. Upon
distribution of shares to a participant, the participant has the right to require the Company to purchase his or her shares at fair value in
accordance with the terms and conditions of the ESOP. As such, these shares are not classified in shareholders’ equity as permanent
equity.
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.
Earnings Per Share
Basic earnings per common share ("EPS") is based on weighted-average common shares outstanding. The weighted-average number
of shares used in the computation of basic and diluted EPS includes shares allocated to the ESOP. Diluted EPS further assumes issue
of any dilutive potential common shares issuable under stock options. Earnings and dividends per share are restated for stock
dividends and splits through the issue date of the financial statements.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income or loss. Other comprehensive income or loss includes
unrealized gains and losses on securities available for sale, net of tax, and changes in the funded status of postretirement plans which
are also recognized as a separate component of shareholders’ equity.
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. Management does not believe that there are
any such matters that may have a material effect on the financial statements.
Cash Restrictions
Cash on hand or on deposit with the Federal Reserve Bank of $83,000 and $221,000 was required to meet regulatory reserve and
clearing requirements at December 31, 2010 and 2009, respectively. The balance in excess of the amount required was interest-
bearing as of December 31, 2010 and December 31, 2009.
Stock-Based Compensation
ChoiceOne records stock-based compensation cost using the fair value method. Compensation costs related to stock options granted is
disclosed in Note 14.
26
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dividend Restrictions
Banking regulations require the maintenance of certain capital levels and may limit the amount of dividends that may be paid by the
Bank to ChoiceOne (see Note 21).
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 18 to the consolidated 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.
Operating Segments
While ChoiceOne’s management monitors the revenue streams of various products and services for the Bank and Insurance Agency,
operations and financial performance are evaluated on a company-wide basis. Accordingly, all of the financial service operations are
considered by management to be aggregated into one reportable operating segment.
Recent Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board ("FASB") issued ASU No. 2010-06 "Fair Value Measurements and
Disclosures (Topic 820) - Improving Disclosures about Fair Value Measurements." ASU 2010-06 amends the fair value disclosure
guidance. The amendments include new disclosures and changes to clarify existing disclosure requirements. ASU 2010-06 was
effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases,
sales, issuances, and settlements of Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after
December 15, 2010, and for interim periods within those fiscal years. The impact of ASU 2010-06 on ChoiceOne’s disclosures is
reflected in Note 19 of the consolidated financial statements.
In July 2010, the FASB issued ASU No. 2010-20 "Disclosures about the Credit Quality of Financing Receivables and the Allowance
for Credit Losses." ASU 2010-20 requires expansion of the disclosure about the credit quality of ChoiceOne’s loans and the related
reserves against them. The additional disclosures will include details on past due loans and credit quality indicators. For public
entities, ASU 2010-20 disclosures of period-end balances are effective for interim and annual reporting periods ending on or after
December 15, 2010 and are included in Note 3 of the consolidated financial statements. Disclosures related to activity that occurs
during the reporting period are required for interim and annual reporting periods beginning on or after December 15, 2010.
Reclassifications
Certain amounts presented in prior year consolidated financial statements have been reclassified to conform to the current year’s
presentation.
Note 2 – Securities
The fair value of securities available for sale and the related gross unrealized gains and losses recognized in accumulated other
comprehensive income (loss) at December 31 were as follows:
(Dollars in thousands)
2010
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Amortized
Cost
U.S. Government and federal agency ..................................... $
State and municipal.................................................................
Mortgage-backed ....................................................................
Corporate ................................................................................
FDIC-guaranteed financial institution debt.............................
Equity securities......................................................................
Total .................................................................................. $
28,737
47,319
7,307
2,854
2,020
1,500
89,737
$
$
382
935
298
36
33
—
1,684
$
$
(53) $
(373)
(6)
(7)
—
(162)
(601) $
Fair
Value
29,066
47,881
7,599
2,883
2,053
1,338
90,820
27
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
2009
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Amortized
Cost
U.S. Government and federal agency ..................................... $
State and municipal.................................................................
Mortgage-backed ....................................................................
Equity securities......................................................................
Total .................................................................................. $
18,550
44,230
8,672
2,069
73,521
$
$
108
699
285
385
1,477
$
$
(87) $
(330)
(28)
(140)
(585) $
Fair
Value
18,571
44,599
8,929
2,314
74,413
Information regarding sales of securities available for sale follows:
(Dollars in thousands)
Proceeds from sales of securities ................................
Gross realized gains................................................................
Gross realized losses................................................................3
Loss on other than temporary impairment ................................
94
$
$
2010
6,059
540
$
2009
8,171
414
12
47
2008
2,540
39
440
432
Contractual maturities of securities available for sale at December 31, 2010 were as follows:
(Dollars in thousands)
Fair
Value
Due within one year ................................................................................................$
15,389
46,697
Due after one year through five years ............................................................................................
Due after five years through ten years ...........................................................................................
18,337
1,460
Due after ten years ................................................................................................
81,883
Total debt securities................................................................................................
7,599
Mortgage-backed securities, not due at a specific date................................................................
Equity securities.............................................................................................................................
1,338
90,820
Total ................................................................................................................................
$
Various securities were pledged as collateral for securities sold under agreements to repurchase and for Treasury, Tax, and Loan
accounts. The carrying amount of securities pledged as collateral at December 31 was as follows:
(Dollars in thousands)
Securities pledged for securities sold under agreements to repurchase .........................................
Securities pledged for Treasury, Tax, and Loan accounts .............................................................
Total securities pledged as collateral ........................................................................................
$
$
2010
27,509
–
27,509
$
$
2009
24,800
521
25,321
Securities with unrealized losses at year-end 2010 and 2009, aggregated by investment category and length of time the individual
securities have been in a continuous unrealized loss position, were as follows:
(Dollars in thousands)
Less than 12 months
Fair
Value
Unrealized
Losses
2010
More than 12 months
Fair
Value
Unrealized
Losses
Total
Fair
Value
Unrealized
Losses
$
U.S. Government and federal
4,663
agency................................................................
State and municipal................................11,341
Mortgage-backed ................................
938
Corporate ................................................................
540
Equity securities................................
–
Total temporarily impaired ................................
$
17,482
$
$
) $
(53
(297)
(6)
(7)
–
(363) $
28
–
1,460
–
–
838
2,298
$
$
–
(76)
–
–
(162)
(238)
$
$
4,663
12,801
938
540
838
19,780
$
$
)
(53
(373)
(6)
(7)
(162)
(601)
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
Less than 12 months
Fair
Value
Unrealized
Losses
2009
More than 12 months
Fair
Value
Unrealized
Losses
Total
Fair
Value
Unrealized
Losses
U.S. Government and federal
agency................................................................
8,033
State and municipal................................ 9,211
1,465
Mortgage-backed ................................
Equity securities................................
–
$
Total temporarily impaired ................................
18,709
$
$
$
) $
(87
(244)
(28)
–
(359) $
–
1,771
–
860
2,631
$
$
–
(86)
–
(140)
(226)
$
$
8,033
10,982
1,465
860
21,340
$
$
(87
)
(330)
(28)
(140)
(585)
One municipal security with a fair value of $306,000 was considered to be other than temporarily impaired as of December 31, 2010.
The issuer of the security defaulted upon its maturity of September 1, 2009. Impairment losses of $141,000 have been recorded
through December 2010 due to uncertainty as to when principal repayment will be received. In the case of the remaining state and
municipal securities, ChoiceOne does not intend to sell the securities prior to a recovery in their value nor is it likely that ChoiceOne
would be forced to sell them. Equity securities included a Money Market Preferred auction rate security (MMP) with a fair value of
$838,000 as of December 31, 2010. Auctions remain active for the MMP and interest payments have remained current.
An impairment loss of $432,000 was recorded in December 2008 when a decline in the market value of an MMP was considered to be
other than temporary. The MMP was converted to 40,000 shares of preferred stock in January 2009 when auction activity ceased and
the collateral supporting the MMP was unwound. A gain of $32,000 was recognized upon the conversion. Subsequent to the
conversion, ChoiceOne sold 15,000 shares in 2009 for a gain of $92,000 and 25,000 shares in 2010 for a gain of $204,000.
ChoiceOne evaluates all securities on a quarterly basis for other than temporary impairment. Consideration is given to the length of
time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the
intent and ability of ChoiceOne to retain its investment in the issue for a period of time sufficient to allow for any anticipated recovery
in fair value. Except for the impairments described in the previous paragraphs, no other than temporary impairments were recorded in
2010 or 2009.
Note 3 – Loans and Allowance for Loan Losses
The Bank’s loan portfolio as of December 31 was as follows:
(Dollars in thousands)
Agricultural........................................................................................................................... $
Commercial and industrial....................................................................................................
Consumer..............................................................................................................................
Real estate – commercial ......................................................................................................
Real estate - construction......................................................................................................
Real estate - residential.........................................................................................................
Loans, gross ....................................................................................................................
Allowance for loan losses .....................................................................................................
Loans, net ........................................................................................................................ $
2010
29,681
55,947
16,709
116,351
853
97,399
316,940
(4,729)
312,211
Activity in the allowance for loan losses was as follows:
(Dollars in thousands)
Balance, beginning of year .......................................................................... $
Provision charged to expense ......................................................................
Recoveries credited to the allowance...........................................................
Loans charged off ........................................................................................
Balance, end of year .................................................................................... $
2010
4,322
3,950
341
(3,884)
4,729
$
$
2009
3,600
4,875
541
(4,694)
4,322
2009
31,322
53,964
16,285
121,100
1,158
98,887
322,716
(4,322)
318,394
2008
3,600
3,475
353
(3,828)
3,600
$
$
$
$
29
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ChoiceOne manages its credit risk through the use of its loan policy and its loan approval process and by monitoring of loan credit
performance. The loan approval process for commercial loans involves individual and group approval authorities. Individual
authority levels are based on the experience of the lender. Group authority approval levels can consist of an internal loan committee
that includes the Bank’s President or Senior Lender and other loan officers for loans that exceed individual approval levels, or a loan
committee of the Board of Directors for larger commercial loans. Most consumer loans are approved by individual loan officers based
on standardized underwriting criteria, with larger consumer loans subject to approval by the internal loan committee.
Ongoing credit review of commercial loans is the responsibility of the loan officers. ChoiceOne’s internal credit committee meets at
least monthly and reviews loans with payment issues and loans with a risk rating of 5, 6, or 7. Risk ratings of commercial loans are
reviewed periodically and adjusted if needed. ChoiceOne’s consumer loan portfolio is primarily monitored on an exception basis.
Loans where payments are past due are turned over to the Bank’s collection department, who works with the borrower to bring
payments current or takes other actions when necessary. In addition to internal reviews of credit performance, ChoiceOne contracts
with a third party for independent loan review that monitors the loan approval process and the credit quality of the loan portfolio.
Activity in the allowance for loan losses and balances in the loan portfolio were as follows:
(Dollars in thousands)
Commercial
Agricultural
and
Industrial
Consumer
Commercial
Real Estate
Construction
Real Estate
Residential
Real Estate
Unallocated
Total
2010
Allowance for Loan Losses
Beginning balance ............... $
Charge-offs ..........................
Recoveries ...........................
Provision .............................
Ending balance .................... $
Individually evaluated for
impairment.........................
$
Collectively evaluated for
impairment......................... $
124
–
–
57
181
–
181
Loans
Individually evaluated for
impairment......................... $
Collectively evaluated for
impairment.........................
Ending balance .................... $
39
29,642
29,681
2009
Allowance for Loan Losses
Beginning balance ............... $
Charge-offs ..........................
Recoveries ...........................
Provision .............................
Ending balance .................... $
Individually evaluated for
impairment......................... $
Collectively evaluated for
impairment......................... $
–
–
–
124
124
29
95
$
$
$
$
$
$
$
$
$
$
735
(765)
68
603
641
–
641
$
$
$
$
306
(444)
230
151
243
–
243
272
$
–
55,675
55,947
16,709
$ 16,709
754
(1,558)
102
1,437
735
52
683
$
$
$
$
351
(535)
246
244
306
–
306
1,546
(1,523)
16
1,690
1,729
582
1,147
3,529
112,822
116,351
1,100
(1,218)
58
1,606
1,546
1,031
515
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
30
3
–
–
(1)
2
–
2
–
853
853
5
(14)
29
(17)
3
–
3
$
$
$
$
$
$
$
$
$
$
1,590
(1,152)
27
1,089
1,554
–
1,554
2,733
94,666
97,399
1,124
(1,369)
106
1,729
1,590
–
1,590
$
$
$
$
$
$
$
$
18
–
–
361
379
–
379
$
$
$
$
4,322
(3,884)
341
3,950
4,729
582
4,147
$
6,573
310,367
$ 316,940
266
–
–
(248)
18
–
18
$
$
$
$
3,600
(4,694)
541
4,875
4,322
1,112
3,210
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Commercial
Agricultural
and
Industrial
Consumer
Commercial
Real Estate
Construction
Real Estate
Residential
Real Estate
Unallocated
Total
Loans
Individually evaluated for
impairment......................... $
Collectively evaluated for
impairment.........................
Ending balance .................... $
378
30,944
31,322
2008
Allowance for Loan Losses
Beginning balance ............... $
Charge-offs ..........................
Recoveries ...........................
Provision .............................
Ending balance .................... $
Individually evaluated for
impairment......................... $
Collectively evaluated for
impairment......................... $
Loans
Individually evaluated for
impairment......................... $
Collectively evaluated for
impairment.........................
Ending balance .................... $
–
–
–
–
–
–
–
–
23,408
23,408
$
$
$
$
$
$
$
$
698
$
–
53,266
53,964
16,285
$ 16,285
1,211
(1,193)
60
676
754
75
679
$
$
$
$
489
(568)
252
178
351
–
351
273
$
–
57,314
57,587
16,047
$ 16,047
$
$
$
$
$
$
$
$
6,886
114,214
121,100
945
(815)
35
935
1,100
470
630
1,845
122,107
123,952
$
$
$
$
$
$
$
$
–
1,158
1,158
–
–
–
5
5
–
5
$
$
$
$
$
$
1,785
97,102
98,887
891
(1,252)
$
6
1,479
1,124
–
1,124
$
$
$
$
9,747
312,969
$ 322,716
64
–
–
202
266
–
266
$
$
$
$
3,600
(3,828)
353
3,475
3,600
545
3,055
–
$
–
2,026
2,026
102,957
$ 102,957
$
2,118
323,859
$ 325,977
The process to monitor the credit quality of ChoiceOne’s loan portfolio includes tracking (1) the risk ratings of business loans, (2) the
level of classified business loans, and (3) delinquent and nonperforming consumer loans. Business loans are risk rated on a scale of 1
to 8. A description of the characteristics of the ratings follows:
Risk rating 1 through 3: These loans are considered pass credits. They exhibit acceptable to exceptional credit risk and demonstrate
the ability to repay the loan from normal business operations.
Risk rating 4: These loans are considered watch credits. They have potential developing weaknesses that, if not corrected, may cause
deterioration in the ability of the borrower to repay the loan. While a loss is possible for a loan with this rating, it is not anticipated.
Risk rating 5: These loans are considered special mention credits. Loans in this risk rating are considered to be inadequately protected
by the net worth and debt service coverage of the borrower or of any pledged collateral. These loans have well defined weaknesses
that may jeopardize the borrower’s ability to repay the loan. If the weaknesses are not corrected, loss of principal and interest could be
probable.
Risk rating 6: These loans are considered substandard credits. These loans have well defined weaknesses, the severity of which makes
collection of principal and interest in full questionable. Loans in this category may be placed on nonaccrual status.
Risk rating 7: These loans are considered doubtful credits. Some loss of principal and interest has been determined to be probable.
The estimate of the amount of loss could be affected by factors such as the borrower’s ability to provide additional capital or collateral.
Loans in this category are on nonaccrual status.
Risk rating 8: These loans are considered loss credits. They are considered uncollectible and will be charged off against the allowance
for loan losses.
31
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information regarding the Bank’s credit exposure as of December was as follows:
(Dollars in thousands)
Corporate Credit Exposure - Credit Risk Profile By Creditworthiness Category
Risk rating 2.................................... $
Risk rating 3....................................
Risk rating 4....................................
Risk rating 5....................................
Risk rating 6....................................
Risk rating 7....................................
$
$
Agricultural
2010
1,901
17,592
8,919
1,017
213
39
29,681
2009
2,248
21,112
7,417
–
488
57
$ 31,322
$
$
Commercial and Industrial
2009
3,438
28,342
17,650
3,780
328
426
53,964
2010
2,818
29,806
20,198
2,703
251
171
55,947
$
$
Consumer Credit Exposure - Credit Risk Profile Based On Payment Activity
Performing ...................................... $
Nonperforming................................
$
Consumer
2010
16,519
190
16,709
2009
$ 16,267
18
$ 16,285
Construction Real Estate
2009
1,158
–
1,158
2010
853
–
853
$
$
$
$
Commercial Real Estate
$
2010
6,755
57,265
31,921
14,069
5,412
929
$ 116,351
2009
6,066
56,402
38,597
9,600
5,451
4,984
121,100
$
$
Residential Real Estate
2010
92,885
4,514
97,399
$
$
$
$
2009
93,177
5,710
98,887
Loans are classified as performing when they are current as to principal and interest payments or are past due on payments less than 90
days. Loans are classified as nonperforming when they are past due 90 days or more as to principal and interest payments or are
considered a troubled debt restructuring.
32
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Impaired loans by loan category as of December 31 follow:
(Dollars in thousands)
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
2010
With no related allowance recorded
Agricultural .............................................. $
Commercial and industrial ........................
Commercial real estate..............................
Residential real estate................................
With an allowance recorded.........................
Agricultural ...............................................
Commercial and industrial ........................
Commercial real estate..............................
Residential real estate................................
Total.............................................................
Agricultural ...............................................
Commercial and industrial ........................
Commercial real estate..............................
Residential real estate................................
2009
With no related allowance recorded
Agricultural ............................................... $
Commercial and industrial ........................
Commercial real estate..............................
Residential real estate................................
With an allowance recorded.........................
Agricultural ...............................................
Commercial and industrial ........................
Commercial real estate..............................
Residential real estate................................
Total.............................................................
Agricultural ...............................................
Commercial and industrial ........................
Commercial real estate..............................
Residential real estate................................
39
222
1,914
2,733
–
50
1,615
–
39
272
3,529
2,733
321
535
2,287
1,785
57
163
4,599
–
378
698
6,886
1,785
$
$
$
$
$
$
44
229
2,385
2,736
–
50
1,672
–
44
279
4,057
2,736
321
1,304
2,549
1,785
58
163
4,637
–
379
1,467
7,186
1,785
–
–
–
–
–
50
531
–
–
50
531
–
–
–
–
–
28
82
986
–
28
82
986
–
$
$
165
211
1,951
2,640
65
464
3,591
–
230
675
5,542
2,640
174
550
3,728
357
48
191
3,200
–
222
741
6,928
357
–
(5)
(2)
170
–
12
(3)
–
–
7
(5)
170
1
21
67
20
–
6
(17)
–
1
27
50
20
An aging analysis of loans by loan category as of December 31 follows:
(Dollars in thousands)
30 to 59
Days
60 to 89
Days
2010
Agricultural .....................................
Commercial and industrial ..............
Consumer ........................................
Commercial real estate....................
Construction real estate...................
Residential real estate......................
$
71
133
84
266
–
1,223
$ 1,777
$
7
175
41
646
–
833
$ 1,702
(1) Includes nonaccrual loans.
Greater
Than 90
Days (1)
$
$
39
142
29
2,129
–
2,249
4,588
33
Total
$
117
450
154
3,041
–
4,305
$ 8,067
Loans Not
Past Due
$
29,564
55,497
16,555
113,310
853
93,094
$ 308,873
Total Loans
$
$
29,681
55,947
16,709
116,351
853
97,399
316,940
90 Days Past
Due and
Accruing
$
$
–
–
23
–
–
–
23
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nonaccrual loans by loan category as of December 31 follow:
(Dollars in thousands)
Agricultural ................................................................... $
Commercial and industrial ............................................
Consumer ......................................................................
Commercial real estate..................................................
Construction real estate.................................................
Residential real estate....................................................
$
2010
64
256
5
3,302
–
2,646
6,273
$
2009
387
441
17
6,977
–
4,060
$ 11,882
Note 4 – Mortgage Banking
Activity during the year was as follows:
(Dollars in thousands)
2010
Loans originated for resale, net of principal payments ................................
28,816
$
Proceeds from loan sales ................................................................
28,088
Net gains on sales of loans held for sale ................................................................682
Loan servicing fees, net of amortization ................................................................41
$
$
2009
27,598
27,983
601
4
2008
12,249
12,198
215
67
Loans serviced for others are not reported as assets in the accompanying consolidated balance sheets. The unpaid principal balances of
these loans were $107 million and $117 million at December 31, 2010 and 2009, respectively. The Bank maintains custodial escrow
balances in connection with these serviced loans; however, such escrows were immaterial at December 31, 2010 and 2009.
Activity for loan servicing rights was as follows:
(Dollars in thousands)
2010
Balance, beginning of year ................................................................................................
491
$
122
Capitalized................................................................................................
(266)
Amortization................................................................................................
347
$
Balance, end of year ................................................................................................
$
$
2009
580
210
(299)
491
$
$
2008
792
51
(263)
580
The fair value of loan servicing rights was $852,000 and $1,048,000 as of December 31, 2010 and 2009, respectively. Consequently,
a valuation allowance was not necessary at year-end 2010 or 2009. The fair value of servicing rights at December 31, 2010 was
determined using a discount rate of 7.7% and prepayment speeds ranging from 0% to 35%. The fair value of servicing rights at
December 31, 2009 was determined using a discount rate of 7.6% and prepayment speeds ranging from 0% to 17%.
Note 5 – Premises and Equipment
As of December 31, premises and equipment consisted of the following:
(Dollars in thousands)
Land and land improvements................................................................................................ $
Leasehold improvements ......................................................................................................
Buildings...............................................................................................................................
Furniture and equipment.......................................................................................................
Total cost .........................................................................................................................
Accumulated depreciation ....................................................................................................
Premises and equipment, net............................................................................................ $
2010
4,025
36
10,950
4,178
19,189
(6,664)
12,525
$
$
2009
3,918
37
10,595
3,312
17,862
(5,944)
11,918
Depreciation expense was $903,000, $974,000, and $844,000 for 2010, 2009 and 2008, respectively.
34
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Bank leases certain branch properties and automated-teller machine locations in its normal course of business. Rent expense
totaled $78,000, $71,000, and $70,000 for 2010, 2009 and 2008, respectively. Rent commitments under non-cancelable operating
leases were as follows, before considering renewal options that generally are present (dollars in thousands):
2011 ................................................................................................
2012 ................................................................................................
2013 ................................................................................................
Total................................................................................................
60
46
34
140
$
$
Note 6 - Goodwill and Intangible Assets
Goodwill
There were no changes in the goodwill balance in 2010 or 2009. ChoiceOne engaged an outside consulting firm to assist management
in performing its annual evaluation of goodwill for impairment as of June 30, 2010. The appraisal methodology used to calculate the
fair value included the income approach, which was a discounted cash flow value based on projected earnings capacity, and the market
approach, which was based on price-to-earnings multiples, price-to-tangible book value ratios, and core deposit premiums for selected
bank sale transactions. The results from the valuation approaches were used to calculate an estimate of the fair value of ChoiceOne’s
equity, which was compared to the carrying value of equity to determine whether the Step 1 test under generally accepted accounting
principles that govern the valuation of goodwill was passed. The goodwill analysis determined that the fair value of ChoiceOne’s
equity exceeded the carrying value by 4.6%. Based on this assessment, management believed that there was no indication of goodwill
impairment at June 30, 2010. Based on the testing performed and a review of factors that might impact ChoiceOne’s stock value
subsequent to the annual evaluation, no impairment of goodwill was deemed to exist as of December 31, 2010.
Acquired Intangible Assets
Information for acquired intangible assets at December 31 follows:
(Dollars in thousands)
Gross
Carrying
Amount
Core deposit intangible ................................................................
Other intangible assets ................................................................
Totals ................................................................................................
4,134
348
4,482
$
$
2010
2009
Accumulated
Amortization
1,723
139
1,862
$
$
Gross
Carrying
Amount
$
$
4,134
473
4,607
Accumulated
Amortization
1,309
230
1,539
$
$
The core deposit intangible is being amortized on a straight-line basis over ten years and other intangible assets are being amortized
over periods ranging from two to ten years. Aggregate amortization expense was $448,000, $469,000 and $494,000 for 2010, 2009
and 2008, respectively. The estimated amortization expense for the next five years ending December 31 is as follows:
(Dollars in thousands)
Core
Deposit
Intangible
413
2011 ................................................................................................
2012 ................................................................................................ 413
2013 ................................................................................................ 413
2014 ................................................................................................ 413
2015 ................................................................................................ 413
Thereafter................................................................................................345
2,410
Total................................................................................................
$
$
Other
Intangible
Assets
35
35
35
35
35
35
210
$
$
Total
448
448
448
448
448
380
2,620
$
$
35
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 – Other Real Estate Owned
Other real estate owned represents residential and commercial properties owned and is reported net of a valuation allowance. Activity
within other real estate owned was as follows:
(Dollars in thousands)
2010
Balance, beginning of year ................................................................ $
2,201
Transfers from loans ................................................................................................1,358
Reclassification to buildings ................................................................
—
Proceeds from sales ................................................................................................
(1,174)
(Gains)/losses on sales................................................................................................96
Write-downs ................................................................................................
(528)
1,953
Balance, end of year ................................................................................................
$
$
$
2009
3,692
3,489
(331)
(4,200)
(7)
(442)
2,201
Activity in the valuation allowance on other real estate owned was as follows:
(Dollars in thousands)
Balance, beginning of year .......................................................................... $
Write-downs charged to expense .................................................................
Deletions from sales of other real estate owned...........................................
Balance, end of year .................................................................................... $
2010
438
528
(57)
909
$
$
2009
206
442
(210)
438
Note 8 – Deposits
Deposit balances as of December 31 consisted of the following:
(Dollars in thousands)
Noninterest-bearing demand deposits................................................................................... $
Interest-bearing demand deposits .........................................................................................
Money market deposits.........................................................................................................
Savings deposits ...................................................................................................................
Local certificates of deposit..................................................................................................
Brokered certificates of deposit ............................................................................................
Total deposits .................................................................................................................. $
Scheduled maturities of certificates of deposit at December 31 were as follows:
(Dollars in thousands)
2010
66,932
59,853
59,021
43,572
152,602
7,904
389,884
2011 ................................................................................................................................. $
2012 .................................................................................................................................
2013 .................................................................................................................................
2014 .................................................................................................................................
2015 .................................................................................................................................
2016 .................................................................................................................................
Total ........................................................................................................................... $
101,768
41,245
9,613
2,710
5,054
116
160,506
2008
30
205
(29)
206
2009
60,802
43,731
58,094
36,791
159,217
6,375
365,010
$
$
$
$
The Bank had certificates of deposit issued in denominations of $100,000 or greater totaling $72.6 million and $68.4 million at
December 31, 2010 and 2009, respectively. The Bank had brokered certificates of deposit totaling $7.9 million at December 31, 2010
compared to $6.4 million at December 31, 2009. As of December 31, 2010, the weighted average interest rate on these brokered
certificates of deposit was 1.26% with maturities ranging from May 2011 to May 2013. In addition, the Bank had $18.5 million of
certificates of deposit as of December 31, 2010 and $20.0 million as of December 31, 2009 that had been issued through the
36
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Certificate of Deposit Account Registry Service (CDARS). Although certificates of deposit issued through CDARS are issued to local
customers, this type of deposit is classified as brokered deposits for regulatory purposes.
Note 9 – Repurchase Agreements
Securities sold under agreements to repurchase are advances to the Bank by customers or another bank. These agreements are direct
obligations of the Bank and are secured by securities held in safekeeping at a correspondent bank. Most repurchase agreements with
Bank customers mature daily. As of December 31, 2010, the Bank had a $5 million structured repurchase agreement with a
correspondent bank maturing on July 31, 2012 with a fixed interest rate of 4.55%. The repurchase agreement became putable by the
correspondent quarterly starting July 1, 2009. Information regarding repurchase agreements follows:
(Dollars in thousands)
Outstanding balance at December 31 ................................$
Average interest rate at December 31 ................................
1.33%
Average balance during the year................................................................
$
Average interest rate during the year ................................
1.58%
Maximum month end balance during the year ................................
$
19,269
22,249
2010
22,249
2009
20,684
1.64%
18,419
1.88%
20,684
$
$
$
Note 10 – Federal Home Loan Bank Advances
At December 31, advances from the Federal Home Loan Bank (the “FHLB”) were as follows:
(Dollars in thousands)
2010
2009
Maturities ranging from January 2011 to November
2024, fixed interest rates ranging from 2.54% to
4.16%, with an average rate of 3.58% ................................$
8,473
Maturities ranging from January 2010 to November
2024, fixed interest rates ranging from 3.98% to
5.95%, with an average rate of 4.55% ................................
Total advances outstanding at year-end ................................$
8,473
$
$
21,980
21,980
Penalties are charged on fixed rate advances that are paid prior to maturity. No fixed rate advances were paid prior to maturity in
2010, 2009 or 2008. An advance maturing in 2012 may be converted to a variable rate by the FHLB. If the FHLB exercises its
option, the Bank may prepay the advance without penalty. Advances were secured by residential real estate loans with a carrying value
of approximately $66 million at December 31, 2010 and by residential real estate loans with a carrying value of approximately $83
million at December 31, 2009. Based on this collateral, the Bank was eligible to borrow an additional $35 million at year-end 2010.
The scheduled maturities of advances from the FHLB at December 31, 2010 were as follows (dollars in thousands):
2011 ................................................................................................
26
2012 ................................................................................................5,027
2013 ................................................................................................3,028
2014 ................................................................................................
29
2015 ................................................................................................
31
Thereafter................................................................................................332
8,473
Total................................................................................................
$
$
37
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 – Income Taxes
Information as of December 31 and for the year follows:
(Dollars in thousands)
2010
2009
Provision for Income Taxes
Current federal income tax expense................................................................$
817
Deferred federal income tax benefit ................................................................
(163)
Income tax expense/(benefit)...........................................................................................
654
$
Reconciliation of Income Tax Provision to Statutory Rate
1,144
Income tax computed at statutory federal rate of 34%................................ $
Tax exempt interest income ................................................................................................
(483 )
(122 )
Tax exempt earnings on bank-owned life insurance .............................................................
25
Nondeductible interest expense ............................................................................................
Other items ...........................................................................................................................
90
654
Income tax expense/(benefit)...........................................................................................
$
2010
$
$
$
$
$
215
(410)
(195) $
2009
436
(608)
(124)
44
57
(195)
$
$
2008
437
(644)
(207)
2008
418
(644)
(126)
72
73
(207)
19 %
Effective income tax rate ................................................................................................
(15)%
(17)%
Components of Deferred Tax Assets and Liabilities
Deferred tax assets:
Allowance for loan losses ................................................................................................... $
Deferred compensation.......................................................................................................
Write-downs on other real estate owned.............................................................................
Alternative minimum tax credit carryforward.....................................................................
Nonaccrual loan interest .....................................................................................................
Purchase accounting adjustments from merger with VRFC................................................
Other ...................................................................................................................................
Total deferred tax assets ................................................................................................
Deferred tax liabilities:
Depreciation .......................................................................................................................
Purchase accounting adjustments from merger with VRFC................................................
Unrealized gains on securities available for sale ................................................................
Loan servicing rights ..........................................................................................................
Postretirement benefits obligation .......................................................................................
Other ...................................................................................................................................
Total deferred tax liabilities...........................................................................................
Net deferred tax liabilities ............................................................................................. $
$
2010
773
377
309
154
124
83
259
2,079
1,142
883
369
118
95
116
2,723
(644) $
2009
1,214
426
113
399
154
184
300
2,790
1,132
1,057
303
140
64
201
2,897
(107)
ChoiceOne had a deferred tax asset of $69,000 as of December 31, 2010 that resulted from capital losses incurred on the sales of
equity securities in 2009 and 2010. A capital loss of $72,000 can be carried back to 2007, which will utilize $24,000 of the deferred
tax asset. A valuation allowance of $45,000 has been recorded for the remaining balance due to the uncertainty as to ChoiceOne’s
ability to generate capital gains in the future that can offset the capital loss carryforward. ChoiceOne also had a $42,000 deferred tax
asset as of December 31, 2010 that was related to unexercised stock options. A valuation allowance for the entire balance has been
recorded due to the fact that the exercise price of all of the options was higher than the market price of ChoiceOne’s stock as of the end
of 2010. The valuation allowance totaling $87,000 has been netted in the total deferred tax assets listed above. There was no
valuation allowance related to deferred taxes as of December 31, 2009.
38
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 – Related Party Transactions
Loans to executive officers, directors and their affiliates were as follows at December 31:
(Dollars in thousands)
Balance, beginning of year ................................................................................................... $
New loans .............................................................................................................................
Repayments...........................................................................................................................
Balance, end of year ............................................................................................................. $
2010
5,786
2,152
(1,370)
6,568
$
$
2009
6,266
574
(1,054)
5,786
Deposits from executive officers, directors and their affiliates were $13.5 million and $11.1 million at December 31, 2010 and 2009,
respectively.
Note 13 – Employee Benefit Plans
401(k) Plan:
The 401(k) plan allows employees to contribute up to the IRS maximum. Matching company contributions to the plan are
discretionary. Expense of this plan was $112,000, $0, and $141,000 in 2010, 2009, and 2008, respectively.
Employee Stock Ownership Plan:
Employees participate in an Employee Stock Ownership Plan (the "ESOP"). ChoiceOne makes discretionary contributions to the
ESOP. Shares of ChoiceOne common stock are allocated to participants based on relative compensation earned and compensation
expense is recorded when allocated. Dividends on allocated shares increase the participant accounts. Participants become fully vested
upon completing six years of qualifying service. Participants receive the shares at the end of employment. A participant may require
stock received to be repurchased by ChoiceOne at any time. ChoiceOne did not contribute to the ESOP nor was any expense recorded
in 2010, 2009, or 2008.
Shares held by the ESOP as of December 31 were as follows:
(Dollars in thousands)
Shares allocated to participants ........................................................................
Shares unallocated ...........................................................................................
Total shares of ChoiceOne stock held by ESOP...............................................
2010
5,355
–
5,355
2009
5,355
–
5,355
2008
5,355
–
5,355
Fair value of allocated shares, subject to repurchase obligation,
recorded in other liabilities ............................................................................ $
64
$
48
$
44
Postretirement Benefits Plan:
ChoiceOne maintains an unfunded postretirement health care plan, which permits employees (and their dependents) the ability to
participate upon retirement from ChoiceOne. ChoiceOne does not pay any portion of the health care premiums charged to its retired
participants. A liability has been accrued for the obligation under this plan. ChoiceOne incurred negative postretirement benefit
expense of $15,000 in 2010, $17,000 in 2009, and $6,000 in 2008. The postretirement obligation liability was $119,000 as of
December 31, 2010 and $113,000 as of December 31, 2009.
Deferred Compensation Plans:
A deferred director compensation plan covers former directors of Valley Ridge Bank. Under the plan, ChoiceOne pays each former
director the amount of director fees deferred plus interest at rates ranging from 0.90% to 5.84% over various periods as elected by each
director. The payout periods range from 1 month to 10 years beginning with the individual’s termination of service. A liability has
been accrued for the obligation under this plan. ChoiceOne incurred deferred compensation plan expense of $20,000, $28,000, and
$49,000 in 2010, 2009, and 2008, respectively. The deferred compensation liability was $357,000 as of December 31, 2010 and
$476,000 as of December 31, 2009.
39
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A supplemental retirement plan covers four former executive officers of Valley Ridge Bank. Under the plan, ChoiceOne pays these
individuals a specific amount of compensation plus interest at 7.50% over a 15-year period commencing upon early retirement age (as
defined in the plan) or normal retirement age (as defined in the plan). A liability has been accrued for the obligation under this plan.
ChoiceOne incurred deferred compensation plan expense of $41,000 in 2010, $76,000 in 2009, and $104,000 in 2008. Deferred
compensation liabilities of $751,000 and $778,000 were outstanding as of December 31, 2010 and December 31, 2009, respectively.
Note 14 - Stock Options
Options to buy stock are granted to key employees under an incentive stock option plan to provide them with an additional equity
interest in ChoiceOne. The plan provides for the issuance of up to 147,767 shares of common stock. ChoiceOne recognized
compensation expense of $15,000 in 2010, $22,000 in 2009, and $33,000 in 2008 in connection with stock options that vested for
current participants during these years. The maximum option term is 10 years and options vest over 3 years. At December 31, 2010,
there were 98,535 options available for future grants.
A summary of the activity in the plan follows:
Options outstanding, beginning of year ................................
49,232
Options granted................................................................–
Options exercised ................................................................
Options forfeited or expired................................
Options outstanding, end of year ................................
–
–
49,232
$16.46
–
–
–
$16.46
49,232
–
–
–
49,232
2010
Weighted
average
exercise
price
Shares
Shares
2009
2008
Weighted
average
exercise
price
$16.46
–
–
–
$16.46
Weighted
average
exercise
price
$17.36
13.50
–
–
$16.46
Shares
37,732
11,500
–
–
49,232
Options exercisable at December 31 ................................
46,357
$16.64
41,107
$16.78
34,357
$16.89
The range of prices for options outstanding and exercisable at the end of 2010 ranged from $13.04 to $21.43 per share. The weighted
average remaining contractual life of options outstanding and exercisable at the end of 2010 was approximately 4.5 years. The
exercise price of all options outstanding was higher than ChoiceOne’s closing stock price as of the end of 2010. As a result, the
aggregate intrinsic value of both options outstanding and options exercisable was $0 as of December 31, 2010. The number of
options, weighted average exercise prices, and fair value of options granted has been adjusted for all stock dividends and splits.
Information pertaining to options outstanding at December 31, 2010 is as follows:
Number of
options
outstanding
at year-end
Exercise price of stock options:
$ 13.04 ................................................................ 3,857
$ 13.50 ................................................................11,500
$ 13.70 ................................................................ 5,250
$ 16.31 ................................................................ 6,299
$ 17.95 ................................................................ 9,500
$ 18.85 ................................................................ 6,000
$ 21.43 ................................................................ 6,826
Number of
options
exercisable
at year-end
Average
remaining
contractual life
(in years)
3,857
8,625
5,250
6,299
9,500
6,000
6,826
1.14
7.07
2.04
3.06
6.05
5.05
4.05
The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model that uses the
weighted average assumptions noted in the following table. ChoiceOne uses historical data to estimate the volatility of the option
exercise price and employee terminations within the valuation model. The risk-free rate for periods within the contractual life of the
option is based on the U.S. Treasury yield curve in effect at the time of grant. No options were granted in 2010 or 2009. Information
regarding options granted in 2008 is as follows:
40
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2008
21.96%
Expected stock price volatility................................................................
Dividend yield................................................................
4.41%
Expected option life (in years) ................................................................7
Risk-free interest rate................................................................
Fair value of options granted during year ................................
3.02%
1.91
$
During 2010, shares totaling 5,250 were vested at an average exercise price of $15.51. As of December 31, 2010, there was
approximately $5,000 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted
under the plan. That cost is expected to be recognized by ChoiceOne in 2011.
Note 15 - Earnings Per Share
(Dollars in thousands, except per share data)
Basic
Net income..................................................................................................... $
2010
2009
2008
2,711
$
1,478
$
1,435
Weighted average common shares outstanding .............................................
3,273,151
3,255,984
3,236,984
Basic earnings per common share.................................................................. $
0.83
Diluted
Net income..................................................................................................... $
2,711
$
$
0.45
1,478
$
$
0.44
1,435
Weighted average common shares outstanding .............................................
Plus: dilutive effect of assumed exercises of stock options ...........................
Average shares and dilutive potential common shares...................................
3,273,151
–
3,273,151
3,255,984
–
3,255,984
3,236,984
–
3,236,984
Diluted earnings per common share............................................................... $
0.83
$
0.45
$
0.44
There were 49,232 stock options as of December 31, 2010 and December 31, 2009 considered to be anti-dilutive to earnings per share
and thus have been excluded from the calculations above.
Note 16 - Other Comprehensive Income (Loss)
Other comprehensive income (loss) components and related taxes follow:
(Dollars in thousands)
Unrealized holding gains (losses) on available for sale securities ................. $
Less reclassification adjustments for gains (losses) included in net income ..
Net unrealized gains (losses) .........................................................................
Less tax effect ................................................................................................
Net-of-tax amount.......................................................................................
Change in funded status of postretirement benefit plan .................................
Tax effect.......................................................................................................
Net-of-tax amount.......................................................................................
Total
$
2010
635
443
192
65
127
(21)
(7)
(14)
113
$
$
2009
1,364
355
1,009
344
665
9
3
6
671
$
$
2008
(1,502)
(833)
(669)
(227)
(442)
56
19
37
(405)
41
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accumulated other comprehensive income, a component of equity, was comprised of the following at December 31:
(Dollars in thousands)
Unrealized holding gains (losses) on available for sale securities ........................................ $
Unrecognized actuarial gains on postretirement benefit plan ...............................................
Tax effect..............................................................................................................................
Net accumulated other comprehensive income..................................................................... $
Note 17 – Condensed Financial Statements of Parent Company
(Dollars in thousands)
Condensed Balance Sheets
2010
1,084
280
(464)
900
$
$
2009
892
301
(406)
787
December 31
2010
Assets
Cash ................................................................................................................................. $
Securities available for sale .............................................................................................
Other assets......................................................................................................................
Investment in ChoiceOne Bank .......................................................................................
Total assets ................................................................................................................. $
Liabilities
Mandatory redeemable shares under ESOP, at fair value................................................ $
Other liabilities ................................................................................................................
Total liabilities............................................................................................................
201
207
76
53,899
54,383
64
6
70
Shareholders’ equity .............................................................................................................
Total liabilities and shareholders’ equity.................................................................... $
54,313
54,383
$
$
$
$
(Dollars in thousands)
Years Ended December 31
Condensed Statements of Income
Interest and dividends from ChoiceOne Bank ......................................... $
Interest and dividends from other securities ............................................
Gains on sales of securities......................................................................
Total income............................................................................................
Other expenses.........................................................................................
Income before income tax and equity in undistributed net
income of subsidiary.............................................................................
Income tax benefit ...................................................................................
Income before equity in undistributed net income of subsidiary .............
Equity in undistributed net income (distributions in excess
of net income) of subsidiary .................................................................
Net income............................................................................................... $
2010
1,641
7
—
1,648
67
1,581
23
1,604
1,107
2,711
$
$
42
2009
81
202
59
52,655
52,997
48
23
71
52,926
52,997
2008
2,017
27
18
2,062
61
2,001
26
2,027
$
2009
938
17
17
972
67
905
17
922
556
1,478
$
)
(592
1,435
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Statements of Cash Flows
(Dollars in thousands)
Cash flows from operating activities:
Net income............................................................................................ $
Adjustments to reconcile net income to net cash from operating
activities:
Equity in (undistributed net income) distributions in excess
of net income of subsidiary..............................................................
Amortization.......................................................................................
Gains on sales of securities.................................................................
Changes in other assets .......................................................................
Changes in other liabilities .................................................................
Net cash from operating activities .................................................
Cash flows from investing activities:
Sales of securities .................................................................................
Maturities of securities .........................................................................
Purchases of securities..........................................................................
Net cash from (used in) investing activities ...................................
Cash flows from financing activities:
Issuance of common stock ....................................................................
Cash dividends paid..............................................................................
Net cash used in financing activities..............................................
Years Ended December 31
2010
2009
2008
2,711 $
1,478
$
1,435
(1,107)
—
—
(17)
(18)
1,569
—
200
(202)
(2)
125
(1,572)
(1,447)
(556)
2
(17)
3
30
940
524
—
—
524
126
(1,563)
(1,437)
592
2
(18)
3
(13)
2,001
40
—
—
40
147
(2,202)
(2,055)
(14)
68
54
Net change in cash and cash equivalents .................................................
Beginning cash and cash equivalents.......................................................
Ending cash and cash equivalents............................................................ $
120
81
201 $
27
54
81
$
Note 18 – Financial Instruments
Financial instruments as of December 31 were as follows:
(Dollars in thousands)
Assets:
Cash and due from banks........................................$
Federal funds sold...................................................
Securities available for sale ....................................
Federal Home Loan Bank and Federal Reserve
Bank stock .........................................................
Loans held for sale..................................................
Loans, net ...............................................................
Accrued interest receivable.....................................
Liabilities:
Demand, savings and money market deposits.........
Time deposits..........................................................
Repurchase agreements...........................................
Advances from Federal Home Loan Bank..............
Accrued interest payable.........................................
2010
2009
Carrying
Amount
Estimated
Fair
Value
Carrying
Amount
Estimated
Fair
Value
$
19,074
5,000
90,820
$
19,074
5,000
90,820
$
9,957
9,793
74,413
4,159
1,610
314,781
2,000
229,378
159,616
22,251
8,947
231
4,574
322
318,394
2,091
199,418
165,592
20,684
21,980
377
4,159
1,610
312,211
2,000
229,378
160,506
22,249
8,473
231
43
9,957
9,793
74,413
4,574
322
314,491
2,091
199,418
165,597
20,686
21,986
377
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The estimated fair values approximate the carrying amounts for all assets and liabilities except those described later in this paragraph.
The methodology for determining the estimated fair value for securities available for sale is described in Note 19. The estimated fair
value for loans is based on the rates charged at December 31 for new loans with similar maturities, applied until the loan is assumed to
reprice or be paid. The allowance for loan losses is considered to be a reasonable estimate of discount for credit quality concerns. The
estimated fair values for time deposits and FHLB advances are based on the rates paid at December 31 for new deposits or FHLB
advances, applied until maturity. The estimated fair values for other financial instruments and off-balance sheet loan commitments are
considered nominal.
Note 19 – Fair Value Measurements
The following tables present information about the Bank’s assets and liabilities measured at fair value on a recurring basis at December
31, 2010 and December 31, 2009, and the valuation techniques used by the Bank to determine those fair values.
In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities that the Bank
has the ability to access.
Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs
include quoted prices for similar assets and liabilities in active markets, and other inputs such as interest rates and yield curves that are
observable at commonly quoted intervals.
Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for
the related asset or liability.
In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements
in their entirety are categorized based on the lowest level input that is significant to the valuation. The Bank’s assessment of the
significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or
liability.
There were no liabilities measured at fair value as of December 31, 2010 or December 31, 2009. Disclosures concerning assets
measured at fair value are as follows:
Assets Measured at Fair Value on a Recurring Basis
(Dollars in Thousands)
Quoted Prices
in Active
Markets for Identical
Assets (Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Balance at
Date Indicated
Investment Securities, Available for
Sale – December 31, 2010
U.S. Government and federal agency
State and municipal
Mortgage-backed
Corporate
FDIC-guaranteed financial institution debt
Equity securities
Total
Investment Securities, Available for
Sale - December 31, 2009
U.S. Government and federal agency
State and municipal
Mortgage-backed
Equity securities
Total
$ 29,066
—
—
2,883
2,053
—
$ 34,002
$ 18,571
1,904
8,929
954
$ 30,358
$
—
45,542
7,599
—
—
838
$ 53,979
$
—
40,388
—
860
$ 41,248
$
—
2,339
—
—
—
500
$ 2,839
$
—
2,307
—
500
$ 2,807
$ 29,066
47,881
7,599
2,883
2,053
1,338
$ 90,820
$ 18,571
44,599
8,929
2,314
$ 74,413
44
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Changes in Level 3 Assets Measured at Fair Value on a Recurring Basis
(Dollars in Thousands)
Investment Securities, Available for Sale
Balance at December 31, 2009
Total realized and unrealized gains included in income
Total unrealized gains included in other comprehensive income
Net purchases, sales, calls, and maturities
Net transfers into Level 3
Balance at December 31, 2010
$ 2,807
—
10
(284)
306
$ 2,839
Of the Level 3 assets that were still held by the Bank at December 31, 2010, the net unrealized gain for the twelve months ended
December 31, 2010 was $10,000, which is recognized in other comprehensive income in the consolidated balance sheet. There were
no sales or purchases of Level 3 securities in 2010. One security was reclassified from a Level 2 measurement of fair value to a Level
3 measurement in 2010 as a result of a change in the marketability of the security.
Both observable and unobservable inputs may be used to determine the fair value of positions classified as Level 3 assets and
liabilities. As a result, the unrealized gains and losses for these assets and liabilities presented in the tables above may include changes
in fair value that were attributable to both observable and unobservable inputs.
Available for sale investment securities categorized as Level 3 assets consist of bonds issued by local municipalities and a trust
preferred security. The Bank estimates the fair value of these assets based on the present value of expected future cash flows using
management’s best estimate of key assumptions, including forecasted interest yield and payment rates, credit quality and a discount
rate commensurate with the current market and other risks involved.
The Bank also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis. These assets
are not normally measured at fair value, but can be subject to fair value adjustments in certain circumstances, such as impairment.
Disclosures concerning assets measured at fair value on a non-recurring basis are as follows:
Assets Measured at Fair Value on a Non-recurring Basis
(Dollars in Thousands)
Significant
Balance at
Dates
Indicated
Quoted Prices
in Active
Markets for Identical
Assets (Level 1)
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total Losses
for the
Period Ended
Impaired Loans
December 31, 2010
December 31, 2009
Other Real Estate
December 31, 2010
December 31, 2009
$ 6,573
$ 9,747
$ 1,953
$ 2,201
$ –
$ –
$ –
$ –
$ –
$ –
$ –
$ –
$ 6,573
$ 9,747
$ 164
$ 1,855
$ 1,953
$ 2,201
$ 528
$ 319
Impaired loans categorized as Level 3 assets consist of non-homogeneous loans that are considered impaired. The Bank estimates the
fair value of the loans based on the present value of expected future cash flows using management’s best estimate of key assumptions.
These assumptions include future payment ability, timing of payment streams, and estimated realizable values of available collateral
(typically based on outside appraisals). The changes in fair value consisted of charge-downs of impaired loans that were posted to the
allowance for loan losses and write-downs of other real estate that were posted to a valuation account. The fair value of other real
estate owned was based on appraisals or other reviews of property values, adjusted for estimated costs to sell.
Note 20 – Off-Balance Sheet Activities
Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet
customers’ financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established
in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance sheet risk to
45
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are
used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.
The contractual amount of financial instruments with off-balance sheet risk was as follows at December 31:
(Dollars in thousands)
2010
2009
Fixed
Rate
Variable
Rate
Fixed
Rate
Variable
Rate
Unused lines of credit and letters of credit ..................$
Commitments to fund loans (at market rates) ..............
5,370
5,088
$
42,985
3,000
$
4,246
4,683
$
41,575
1,190
Commitments to fund loans are generally made for periods of 180 days or less. The fixed rate loan commitments have interest rates
ranging from 4.00% to 7.00% and maturities ranging from 2 years to 30 years.
Note 21 – Regulatory Capital
ChoiceOne Bank is 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 2010 and 2009, the most recent regulatory notifications categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that
management believes have changed the Bank’s categories.
Actual capital levels and minimum required levels for ChoiceOne Bank were as follows:
(Dollars in thousands)
Actual
Minimum Required
for Capital
Adequacy Purposes
Amount
Ratio
Amount
Ratio
Minimum Required
to be Well
Capitalized Under
Prompt Corrective
Action Regulations
Amount
Ratio
December 31, 2010
Total capital (to risk weighted assets) .................$
Tier 1 capital (to risk weighted assets)................
Tier 1 capital (to average assets).........................
40,588
36,654
36,654
12.1%
10.9
7.9
December 31, 2009
Total capital (to risk weighted assets) .................$
Tier 1 capital (to risk weighted assets)................
Tier 1 capital (to average assets).........................
39,130
35,073
35,073
11.9%
10.7
8.0
$
$
26,787
13,393
18,502
26,278
13,139
17,450
$
$
8.0%
4.0
4.0
8.0%
4.0
4.0
33,483
20,090
23,128
10.0%
6.0
5.0
32,847
19,708
21,812
10.0%
6.0
5.0
Banking regulations limit capital distributions by state-chartered banks. Generally, capital distributions are limited to undistributed net
income for the current and prior two years. At December 31, 2010, approximately $1,071,000 was available for ChoiceOne Bank to
pay dividends to ChoiceOne Financial Services, Inc. ChoiceOne’s ability to pay dividends to shareholders is dependent on the Bank,
which is restricted by state law and regulations.
46
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 22 – Quarterly Financial Data (Unaudited)
(Dollars in thousands)
Interest
Income
Net Interest
Income
Net
Income
Earnings Per Share
Fully
Diluted
Basic
2010
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2009
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$
$
$
$
5,438
5,494
5,507
5,522
5,913
5,816
5,794
5,563
4,060 $
4,210
4,289
4,436
3,898 $
4,018
4,084
3,996
644
669
739
659
741
305
409
23
$ 0.20
0.20
0.23
0.20
$ 0.23
0.09
0.13
0.00
$ 0.20
0.20
0.23
0.20
$ 0.23
0.09
0.13
0.00
There were no significant fluctuations in the quarterly financial data in 2010. The low net income in the fourth quarter of 2009
resulted from a higher provision for loan losses. The provision for loan losses in the fourth quarter of 2009 was $1,700,000, compared
to a provision of $3,175,000 for the first three quarters of 2009.
47
ChoiceOne Financial Services, Inc.
CORPORATE AND SHAREHOLDER INFORMATION
Corporate Headquarters
ChoiceOne Financial Services, Inc.
109 East Division Street
Sparta, Michigan 49345
Phone: (616) 887-7366
Fax: (616) 887-7990
Website: www.choiceone.com
Market Makers in ChoiceOne Financial
Services, Inc. Stock
Howe Barnes Hoefer & Arnett
Chicago, Illinois
(800) 800-4693
Kent King Securities, Division of Royal
Securities, Inc.
Grand Rapids, Michigan
(616) 459-3317
(800) 321-9171
Stifel Nicolaus & Company, Inc.
Grand Rapids, Michigan
(616) 942-1717
(800) 676-0477
Stock Registrar and Transfer Agent
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
(800) 368-5948
Annual Shareholder Meeting
The 2011 Annual Shareholder Meeting of
ChoiceOne Financial Services, Inc., will
be held at 11:00 a.m. local time on Thursday,
April 28, 2011, at Moss Ridge Golf Club in
Ravenna, Michigan.
ChoiceOne Bank
Alpine Office
5050 Alpine Avenue NW
Comstock Park, Michigan 49321
ChoiceOne Insurance Agencies, Inc.
Sparta Office
109 East Division Street
Sparta, Michigan 49345
Cedar Springs Office
4170 – 17 Mile Road
Cedar Springs, Michigan 49319
Coopersville Office
661 West Randall Street
Coopersville, Michigan 49404
Egelston Office
5475 East Apple Avenue
Muskegon, Michigan 49442
Fremont Office
1423 West Main Street
Fremont, Michigan 49412
Grant Office
10 West Main Street
Grant, Michigan 49327
Kent City Office
450 West Muskegon Street
Kent City, Michigan 49330
Newaygo Office
246 West River Drive
Newaygo, Michigan 49337
Ravenna Office
3069 Slocum Road
Ravenna, Michigan 49451
Rockford Office
6795 Courtland Drive
Rockford, Michigan 49341
Sparta - Main Office
109 East Division Street
Sparta, Michigan 49345
Sparta - Appletree Office
416 West Division Street
Sparta, Michigan 49345
White Cloud Office
47 South Charles Street
White Cloud, Michigan 49349
48
Officers
ChoiceOne Financial Services, Inc.
James A. Bosserd
President and Chief Executive Officer
Louis D. Knooihuizen
Senior Vice President
Michael E. McHugh
Senior Vice President
Linda R. Pitsch
Secretary
Thomas L. Lampen
Treasurer
ChoiceOne Financial Services, Inc.
DIRECTORS AND OFFICERS
Directors
ChoiceOne Financial Services, Inc.
(continued)
Nels W. Nyblad
President, Nyblad Orchards
(Fruit Producer)
Roxanne M. Page
CPA and Partner, Beene Garter LLP
(Certified Public Accountants)
Jon E. Pike
CPA and Chairman, Beene Garter LLP
(Certified Public Accountants)
Donald VanSingel
Former Consultant, Governmental
Consultant Services. Former Legislator,
Michigan House of Representatives
Director Emeritus
Richard L. Edgar
Former Director and Chairman of the
Board, ChoiceOne Financial Services, Inc.
and ChoiceOne Bank. Former President
and Chief Executive Officer, Valley
Ridge Financial Corp. and Valley
Ridge Bank
Directors
ChoiceOne Financial Services, Inc.
Jerome B. Arends
Former President and Chief Executive
Officer of Ravenna Farm Equipment
(Agricultural Equipment Supplier)
Frank G. Berris
President and Chief Executive Officer,
American Gas & Oil Co., Inc.
(Distributor of Petroleum Products)
James A. Bosserd
President and Chief Executive Officer,
ChoiceOne Financial Services, Inc. and
ChoiceOne Bank
K. Timothy Bull
President, Moon Lake Orchards, Inc.
(Fruit Producer)
William F. Cutler, Jr.
Former Vice President, H. H. Cutler Co.
(Apparel Manufacturer)
Lewis G. Emmons
President, Emmons Development;
President, Brat Development
(Real Estate Development)
Stuart Goodfellow
Owner, Goodfellow Blueberry Farms
and Former Owner, Goodfellow Vending
Services (Vending Company)
Gary Gust
Former President, Gust Construction Company
(General Contractor)
Paul L. Johnson
Former President, Falcon Resources, Inc.
(Automotive and Furniture Design)
Dennis C. Nelson, DDS
General Dentistry
49
Officers
ChoiceOne Bank
James A. Bosserd
President
Chief Executive Officer
Sheila R. Clark
Senior Vice President
Human Resources Director
Mary J. Johnson
Senior Vice President
Cashier
Louis D. Knooihuizen
Senior Vice President
Chief Lending Officer
Michael E. McHugh
Senior Vice President
Accounting, Sales and Marketing
Linda R. Pitsch
Senior Vice President
Operations
Kelly J. Potes
Senior Vice President
Retail Services
Linda K. Anderson
Vice President
Office Manager – Rockford
Customer Service Center Manager
Lee A. Braford
Vice President
Commercial Loans and Credit Risk
Amy S. Homich
Vice President
Business Development Officer
Thomas L. Lampen, CPA
Vice President
Chief Financial Officer
Valerie F. VanKlompenberg
Vice President
Information Systems Officer
Daniel C. Wheat
Vice President
Consumer Loan Sales
Office Manager – Grant
Brian R. Bacon
Assistant Vice President
Commercial Loans
Marilyn B. Childress
Assistant Vice President
Mortgage Loans
Officers
ChoiceOne Bank (continued)
Officers
ChoiceOne Bank (continued)
Judy A. Schulz
Assistant Vice President
Collections Manager
Cynthia J. Watson
Assistant Vice President
Operations
Marva J. Zeldenrust
Assistant Vice President
Office Manager – Fremont
Sally K. Anderson
Credit Analyst Officer
Jennifer M. Bellamy
Office Manager – Kent City
Candace J. Bouwkamp
Administrative Services Manager
Erin M. Burdick-Bloom
Office Manager – Alpine
Lee J. Decker
Office Manager – Egelston
Officers
ChoiceOne Insurance Agencies, Inc.
James A. Bosserd
President
Kelly J. Potes, CFP
Senior Vice President
Randy A. Schmidt, CFP
Vice President
Linda R. Pitsch
Secretary
Thomas L. Lampen, CPA
Treasurer
Rita A. Flintoff
Assistant Vice President
Office Manager – Newaygo and
White Cloud
Denise L. Gates
Assistant Vice President
Office Manager – Cedar Springs
Gregory M. Goss
Assistant Vice President
Security Officer
Stephen P. Grey
Assistant Vice President
Commercial Loans,
Credit Department Manager
Jason J. Herbig
Assistant Vice President
Information Technology
Rebecca J. Johnson
Assistant Vice President
Retail Banking
Kevin T. Kelling
Assistant Vice President
Mortgage Loans Sales & Operations
Bonnie K. Koehn
Assistant Vice President
Office Manager – Sparta
Linda S. Nichols
Assistant Vice President
Office Manager – Ravenna
Lori J. O’Brien
Assistant Vice President
Commercial Loans
Peggy A. O’Dea
Assistant Vice President
Office Manager – Coopersville
Ryan F. Peacock
Assistant Vice President
Commercial Loan Officer
Maria J. Roossinck
Assistant Vice President
Risk Management
Paul E. Tucker
Assistant Vice President
Information Technology
50