CHOICEONE FINANCIAL SERVICES, INC.
2012
ANNUAL REPORT TO SHAREHOLDERS
CHOICEONE FINANCIAL SERVICES, INC.
2012 Annual Report to Shareholders
Contents
To Our Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
About ChoiceOne Financial Services, Inc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3
3
3
5
6
Management’s Report on Internal Control Over Financial Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21
Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
22
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
27
Corporate and Shareholder Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
55
Directors and Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
56
2
CHOICEONE FINANCIAL SERVICES, INC.
To Our Shareholders
This 2012 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. 2012 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 2012 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, 2012, 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
ChoiceOne’s offices are located and the areas immediately surrounding those communities. Currently ChoiceOne 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’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
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 62%, 67%, and 69% of total revenues in 2012, 2011, and 2010, respectively. Interest from securities accounted for 12%,
11%, and 10% of total revenues in 2012, 2011, and 2010, 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
2012
2011
Low
$11.25
13.01
13.50
14.30
High
$14.14
15.38
16.50
15.50
Low
$11.00
10.50
10.60
10.26
High
$20.00
13.00
12.75
12.50
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, 2013, the average bid price for shares of ChoiceOne common stock
was $16.05.
As of February 28, 2013, there were 3,299,120 shares of ChoiceOne Financial Services, Inc. common stock issued and outstanding.
As of February 28, 2013, there were 777 shareholders of record of ChoiceOne Financial Services, Inc. common stock.
3
The following table summarizes cash dividends declared per share of common stock during 2012 and 2011:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Total
2012
$ 0.12
0.12
0.13
0.13
$ 0.50
2011
$ 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 2013, although the amount of the quarterly dividends will be dependent on market conditions and
ChoiceOne’s requirements for cash and capital, among other things.
4
ChoiceOne Financial Services, Inc.
SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data)
2012
2011
2010
2009
2008
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 . . . . . . . . . . . . . . . . . . . .
17,675
2,515
6,889
16,444
5,605
1,343
4,262
1,648
Per share
Basic earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted earnings . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends declared . . . . . . . . . . . . . . . . . . . .
Shareholders’ equity (at year end) . . . . . . . . . . . .
1.29
1.29
0.50
18.35
Average for the year
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Gross loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank advances . . . . . . . . . . .
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . .
Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
129,337
307,639
408,785
6,130
59,431
500,636
At year end
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Gross loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank advances . . . . . . . . . . .
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . .
Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
138,242
311,468
424,199
420
60,506
508,913
$
$
$
$
17,922
3,700
6,139
15,788
4,573
1,060
3,513
1,578
1.07
1.07
0.48
17.58
104,986
317,271
396,474
8,461
56,098
486,478
118,025
320,127
403,365
8,447
57,904
495,914
$
$
$
$
16,995
3,950
5,569
15,249
3,365
654
2,711
1,572
0.83
0.83
0.48
16.56
86,437
315,031
374,274
16,477
54,012
469,484
94,979
316,940
389,884
8,473
54,313
480,524
$
$
$
$
15,996
4,875
5,421
15,259
1,283
(195)
1,478
1,563
0.45
0.45
0.48
16.21
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
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) . . . . .
0.85%
7.17
0.72%
6.26
0.58%
5.02
0.33%
2.78
0.31%
2.69
38.67
11.89
44.92
11.68
57.99
11.30
105.75
11.36
153.45
11.26
5
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”) and ChoiceOne Insurance Agencies, Inc. (the “Insurance Agency”). 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 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 2012 Annual Report to Shareholders is to provide a narrative discussion about the Company’s
financial condition and results of operations during 2012. Management’s discussion and analysis of financial condition and results of
operations as well as disclosures found elsewhere in the 2012 Annual Report to Shareholders 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 market value of securities, 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.
6
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 values 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. 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, 2012. ChoiceOne engaged an outside consulting firm to assist in
the 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. It was determined that the relevant reporting unit to be valued was ChoiceOne Bank.
The standard of value used in the valuation was fair value as determined by generally accepted 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 12.50%. The growth assumption for assets was 1.8% for the first year and 2.0% 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.
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 10.8%. 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 likely than not” standard. Based on its review of ChoiceOne’s deferred tax assets as of December 31, 2012, management
determined that a valuation allowance of $89,000 was necessary.
7
RESULTS OF OPERATIONS
Summary
(Dollars in thousands)
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year ended December 31
2012
17,675
(2,515)
6,889
(16,444)
(1,343)
$
2011
17,922
(3,700)
6,139
(15,788)
(1,060)
$
2010
16,995
(3,950)
5,569
(15,249)
(654)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
4,262
$
3,513
$
2,711
Return on average assets . . . . . . . . . . . . . . . . . . . . . . . .
Return on average equity . . . . . . . . . . . . . . . . . . . . . . .
2012
0.85%
7.17%
2011
0.72%
6.26%
2010
0.58%
5.02%
Net income for 2012 was $4,262,000, which represented a $749,000 or 21% increase from 2011. The growth in net income resulted
from an increase in noninterest income and a decrease in the provision for loan losses, which was partially offset by a decrease in net
interest income and an increase in noninterest expense in 2012 compared to 2011. The increase in noninterest income was due
primarily to increases in gains on sales of loans and gains on sales of securities. The decrease in the provision for loan losses resulted
from lower net charge-offs in 2012 than in 2011. The decrease in net interest income was primarily due to a lower average rate on
average earning assets resulting in a decrease in ChoiceOne’s net interest spread in 2012 compared to the prior year. The increase in
noninterest expense was due to higher salaries and benefits, data processing, professional fees, and other noninterest expense as well
as smaller increases in other expense categories in 2012 compared to the prior year offset by decreases in supplies and postage and
FDIC insurance expenses.
Net income for 2011 was $3,513,000, which represented an $802,000 or 30% increase from 2010. The growth in net income resulted
from increases in net interest income and noninterest income and a decrease in the provision for loan losses, which was partially offset
by an increase in noninterest expense in 2011 compared to 2010. The increase in net interest income was due to growth in average
earning assets and an increase in ChoiceOne’s net interest spread in 2011 compared to the prior year. The expansion in noninterest
income was due to growth in customer service charges and other noninterest income and an improvement in gains (losses) on sales of
other assets in 2011 compared to 2010. The decrease in the provision for loan losses resulted from lower net charge-offs in 2011 than
in 2010 and a $1.8 million reduction in nonperforming loans from December 31, 2010 to December 31, 2011. The increase in
noninterest expense was due to higher salaries and benefits, professional fees, and other noninterest expense as well as smaller
increases in other expense categories in 2011 compared to the prior year.
Dividends
Cash dividends of $1,648,000 or $0.50 per common share were declared in 2012, compared to $1,578,000 or $0.48 per common share
in 2011 and $1,572,000 or $0.48 per common share in 2010. Dividends declared were $0.13 per share for the last two quarters and
$0.12 per share for the first two quarters in 2012. Dividends declared were $0.12 for each quarter in 2011 and 2010. The dividend
yield on ChoiceOne’s common stock was 3.53% in 2012, compared to 4.05% in 2011 and 4.79% in 2010. The cash dividend payout
as a percentage of net income was 39% in 2012, compared to 45% in 2011 and 58% in 2010.
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 2013 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.
8
Table 1 – Average Balances and Tax-Equivalent Interest Rates
(Dollars in thousands)
2012
Year ended December 31
2011
Average
Balance
Interest
Average
Rate
Average
Balance
Interest
Average
Rate
Average
Balance
2010
Interest
Average
Rate
Assets
Loans (1) (2) . . . . . . . . . . . . . . . . $ 307,639 $ 16,891
1,958
Taxable securities (3)
. . . . . . . . .
2,053
Tax-exempt securities (1) . . . . . .
25
Other . . . . . . . . . . . . . . . . . . . . . .
90,783
38,554
10,021
5.49%$ 317,271 $ 18,417
2.16
1,789
71,871
5.32
1,913
33,115
0.25
20
8,426
5.80% $ 315,031 $ 19,103
1,460
50,997
2.49
2,110
35,440
5.78
22
6,498
0.25
6.06%
2.86
5.95
0.34
Noninterest-earning assets (4)
Interest-earning assets . . . . . . .
. . .
446,997
53,639
Total assets . . . . . . . . . . . . . . . $ 500,636
Liabilities and Shareholders’ Equity
Interest-bearing demand
deposits . . . . . . . . . . . . . . . . . . $ 136,118
50,252
138,805
6,130
22,282
Savings deposits . . . . . . . . . . . . .
. . . . . . . . .
Certificates of deposit
Advances from FHLB . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . .
Interest-bearing liabilities . . . .
353,587
Demand deposits . . . . . . . . . . . . .
Other noninterest-bearing
liabilities . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . .
Shareholders’ equity . . . . . . . . . .
83,810
3,808
441,205
59,431
Total liabilities and
20,927
4.68
430,683
55,795
$ 486,478
22,139
5.14
407,966
61,518
$ 469,484
22,695
5.56
364
59
1,664
271
186
2,544
0.27%$ 124,575
0.12
45,698
1.20
153,494
4.42
8,461
0.83
21,179
0.72
353,407
541
51
2,364
307
290
3,553
0.43% $ 108,522
40,534
0.11
160,390
1.54
16,477
3.63
19,273
1.37
1.01
345,196
553
80
3,281
748
304
4,966
0.51%
0.20
2.05
4.54
1.58
1.44
72,707
4,266
430,380
56,098
64,828
5,448
415,472
54,012
shareholders’ equity . . . . . . . $ 500,636
$ 486,478
$ 469,484
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) . . . . . . . . . . . . . . . . . . . . . .
18,383
3.96%
18,586
4.13%
17,729
4.12%
(708)
$ 17,375
(664)
$ 17,922
(734)
$ 16,995
4.11%
4.32%
4.35%
(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 $885,000, $831,000, and $751,000 in 2012,
2011, and 2010, 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 $4,364,000, $6,256,000, and
$10,286,000 in 2012, 2011, and 2010, respectively.
Net Interest Income
As shown in Tables 1 and 2, tax-equivalent net interest income decreased $203,000 in 2012 compared to 2011. The decrease was
attributed to a 46 basis point decline in the average rate on interest bearing assets offset by a 29 basis point decline in average interest
bearing liabilities. The effect of the reduction in ChoiceOne’s net interest spread was partially offset by growth of $16.3 million in
average interest-earning assets in 2012 compared to 2011.
9
The average balance of loans increased $9.6 million in 2012 compared to 2011. Combined with a 31 basis point decrease in the
average rate earned on loans, interest income on loans declined $1,526,000 in 2012 compared to the prior year. The average balance
of total securities increased by $24.4 million in 2012 compared to 2011. This growth in the average balance, partially offset by a
lower average rate earned on securities, caused interest income from securities to increase $169,000 in 2012 compared to the prior
year. A small increase in the average balance of other interest-earning assets resulted in an increase of $5,000 in 2012 compared to
2011. As average loans experienced a decline in 2012 compared to 2011, growth in securities was ChoiceOne’s method to achieve
growth in earning assets in 2012.
The average balance of interest-bearing demand deposits increased $11.5 million in 2012 compared to 2011. The effect of this
increase, offset by a 16 basis point decline in the average rate paid, caused interest expense to be $177,000 lower in 2012 than in the
prior year. The effect of $4.6 million of growth in average savings deposits caused an $8,000 increase in interest expense in 2012
compared to the prior year. The average balance of certificates of deposit was $14.7 million lower in 2012 than in the prior year.
Approximately $12.1 million of the certificates of deposit decline was related to certificates from ChoiceOne’s local markets, while
the remaining $2.6 million resulted from a lower level of brokered certificates. The average balance decrease plus the effect of a 34
basis point decline in the average rate paid caused interest expense on certificates of deposit to fall $700,000 in 2012 compared to
2011. A $2.3 million decrease in the average balance of Federal Home Loan Bank advances, partially offset by a 79 basis point
increase in the average rate paid, caused interest expense to decline $36,000 in 2012 compared to the prior year. The increase in the
rate paid on FHLB advances in 2012 compared to 2011 was caused by the payoff of a $3 million advance with an interest rate of
2.54% in June 2012. Interest expense on other interest-bearing liabilities fell $104,000 in 2012 compared to 2011 due to a reduction of
54 basis points in the average interest rate paid, which was partially offset by a $1.1 million increase in the average balance. The
growth experienced in interest-bearing demand deposits and savings deposits was primarily due to depositors choosing the liquidity
and safety afforded by this type of deposit as compared to certificates of deposit or nonbank investments.
ChoiceOne’s net interest income spread was 3.96% (shown in Table 1) for 2012, compared to 4.13% in 2011. The average yield
received on interest-earning assets in 2012 decreased 46 basis points to 4.68% while the average rate paid on interest-bearing
liabilities in 2012 fell 29 basis points to 0.72%. The decline in general market interest rates in both 2011 and 2012 caused the
reduction in rates for both assets and liabilities in the two time periods.
Table 2 – Changes in Tax-Equivalent Net Interest Income
(Dollars in thousands)
Year ended December 31
2012 Over 2011
Total Volume
Rate
2011 Over 2010
Volume
Rate
Total
Increase (decrease) in interest income (1)
Loans (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$(1,526) $ (548)
429
Taxable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
297
Tax-exempt securities (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other
169
140
5
$ (978) $ (686) $ 135
538
(136)
(30)
(260)
(157)
1
329
(197)
(2)
$ (821)
(209)
(61)
28
Net change in tax-equivalent income . . . . . . . . . . . . . . . . . (1,212)
182
(1,394)
(556)
507
(1,063)
Increase (decrease) in interest expense (1)
Interest-bearing demand deposits . . . . . . . . . . . . . . . . . . . . . .
Savings deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certificates of deposit
Advances from Federal Home Loan Bank . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other
(177)
8
(700)
(36)
(104)
Net change in interest expense . . . . . . . . . . . . . . . . . . . . . . (1,009)
46
5
(211)
(95)
15
(240)
(223)
3
(489)
59
(119)
(12)
(29)
(917)
(441)
(14)
(769)
(1,413)
76
9
(136)
(312)
28
(335)
(88)
(38)
(781)
(129)
(42)
(1,078)
Net change in tax-equivalent net interest income . . . . . . . .$ (203) $ 422
$ (625) $
857
$ 842
$
15
(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)
10
Tax-equivalent net interest income increased $857,000 in 2011 compared to 2010. The growth was due to growth of $15.4 million in
average interest-earning assets in 2011 compared to 2010 and a 10 basis point increase in ChoiceOne’s net interest income spread
compared to 2010. The higher level of average interest-earning assets contributed an additional $842,000 in net interest income in
2011 compared to 2010, while the growth in the net interest income spread caused an increase of $15,000 in net interest income in
2011 compared to the prior year.
The average balance of loans increased $2.2 million in 2011 compared to 2010. A 26 basis point decrease in the average rate earned
on loans had a larger impact on interest income on loans as it declined $686,000 in 2011 compared to the prior year. The average
balance of total securities increased by $18.5 million in 2011 compared to 2010. This growth in the average balance, partially offset
by a lower average rate earned on securities, caused interest income from securities to increase $132,000 in 2011 compared to the
prior year. A decrease in the average balance of other interest-earning assets, offset by an increase in the average rate earned resulted
in a decrease in interest income of $2,000 in 2011 compared to 2010. Although the average balance of loans grew slightly in 2011
compared to 2010, loan demand continued to be sluggish due to continued concerns about the Michigan economy. Growth in
securities was due to ChoiceOne’s desire to achieve growth in earning assets.
The average balance of interest-bearing demand deposits increased $16.1 million in 2011 compared to 2010. The effect of this
increase, offset by an 8 basis point decline in the average rate paid, caused interest expense to be $12,000 lower in 2011 than in the
prior year. The effect of a 9 basis point decrease in the average rate paid on savings deposits in 2011 compared to 2010 was partially
offset by the effect of growth of $5.2 million in the average balance as interest expense dropped $29,000. The average balance of
certificates of deposit was $6.9 million lower in 2011 than in the prior year. Approximately $5.3 million of the certificates of deposit
decline was related to certificates from ChoiceOne’s local markets, while the remaining $1.6 million was a lower level of brokered
certificates. The average balance decrease plus the effect of a 51 basis point decline in the average rate paid caused interest expense
on certificates of deposit to fall $917,000 in 2011 compared to 2010. An $8.0 million decrease in the average balance of Federal
Home Loan Bank advances and a 91 basis point decrease in the average rate paid caused interest expense to decline $441,000 in 2011
compared to the prior year. Interest expense on other interest-bearing liabilities fell $14,000 in 2011 compared to 2010 due to a
reduction of 21 basis points in the average interest rate paid, which was partially offset by a $1.9 million increase in the average
balance. 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.
11
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)
2012
2011
2010
2009
2008
Allowance for loan losses at beginning of year . . . . . . . . . . . . . . . $
5,213
$
4,729
$
4,322
$
3,600
$
3,600
Charge-offs:
Agricultural
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate - commercial
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate - construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate - residential
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
405
869
—
887
338
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,499
Recoveries:
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Agricultural
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate - commercial
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate - construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate - residential
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5
61
224
—
119
214
623
45
228
1,357
—
1,677
361
3,668
10
32
89
—
104
217
452
—
765
1,523
—
1,152
444
3,884
—
68
16
—
27
230
341
—
1,558
1,218
14
1,369
535
4,694
—
102
58
29
106
246
541
—
1,193
816
—
1,252
567
3,828
—
60
35
—
6
252
353
Net charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,876
2,515
3,216
3,700
3,543
3,950
4,153
4,875
3,475
3,475
Allowance for loan losses at end of year . . . . . . . . . . . . . . . . . . . . $
5,852
$
5,213
$
4,729
$
4,322
$
3,600
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 . . . . .
1.88%
1.63%
1.49%
1.34%
1.10%
86%
78%
56%
31%
39%
0.61%
17%
1.01%
12%
1.12%
7%
1.30%
14%
1.06%
15%
As shown in Table 3, the provision for loan losses was $1,185,000 lower in 2012 than in 2011. The reduction in the provision level
resulted from a decrease of $1,341,000 in net charge-offs experienced in 2012 compared to 2011. Net charge-offs of residential real
estate loans declined $805,000 and net charge-offs of commercial real estate loans decreased $623,000 in 2012 compared to 2011,
while net charge-offs of commercial and industrial loans increased $148,000. Agricultural loans and consumer loans net charge-offs
both decline slightly in 2012 compared to 2011. Management believes that the lower net charge-off levels are due in part to the
improving economy in the bank’s market areas. The allowance for loan losses as a percentage of total loans increased from 1.63% as
of the end of 2011 to 1.88% as of the end of 2012. The coverage ratio of the allowance for loan losses to nonperforming loans
increased from 78% as of December 31, 2011 to 86% as of December 31, 2012. This was due to growth of $639,000 in the allowance
balance during 2012. ChoiceOne had $700,000 of specific allowance allocations for problem loans as of the end of 2012, compared to
$431,000 as of the prior year end. Special allowance amounts have been allocated where the fair values of loans were considered to be
less than their carrying values. 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 2012 and 2011 were reasonable based on the circumstances surrounding each
particular borrower.
12
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2012
140
381
2,596
15
1,923
250
547
$
2011
55
609
2,299
34
1,847
197
172
$
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
Total allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . $
5,852
$
5,213
$
4,729
$
4,322
$
3,600
The increase in the allowance allocation to agricultural loans was due in part to weather conditions that affected certain agricultural
borrowers in 2012. The decrease in the allowance allocation to commercial and industrial loans and the increase in the allocation to
commercial real estate loans were based on the perceived risk level in these loan categories.
Management maintains the allowance at a level that 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, 2012 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 $750,000 in 2012 compared to 2011. Customer service charges decreased $89,000 in 2012
compared to the prior year as lower income from overdraft fees was partially offset by growth in debit card interchange fees. Gains on
sales of loans grew $962,000 in 2012 compared to 2011 as proceeds from loan sales totaled $46 million in 2012 compared to $27
million in 2011. An increase of $290,000 in gains on sales of securities was caused by sales of $9.4 million of securities in 2012
compared to $3.3 million in the prior year. Losses on sales of other assets were $387,000 higher in 2012 than in the prior year as
write-downs of values of other real estate properties and losses on sales of properties were more in 2012 than in 2011. Earnings on life
insurance policies were $93,000 higher in 2012 than the prior year as a result of a death benefit received. The $158,000 decrease in
other noninterest income in 2012 compared to 2011 was primarily due to lower ATM surcharge fees.
Total noninterest income increased $570,000 in 2011 compared to 2010. Customer service charges increased $294,000 in 2011
compared to the prior year as growth in debit card interchange fees and checking account fees were partially offset by a continued
decline in overdraft fees. Gains on sales of securities declined $408,000 in 2011 compared to the prior year. Gains on sales of
securities in 2010 included $386,000 from sales of preferred stock that represented a recovery of losses recognized on money market
preferred securities in 2008. Gains (losses) on sales of other assets improved by $461,000 as write-downs of values of other real estate
properties and losses on sales of properties were less in 2011 than in 2010. Most of the $163,000 increase in other noninterest income
resulted from amortization of mark-to-market adjustment of mortgage servicing fees that ended in October 2010.
Noninterest Expense
Total noninterest expense increased $656,000 in 2012 compared to 2011. Salaries and benefits increased $525,000 in 2012 compared
to the prior year as a result of higher commission expense related to mortgage originations, performance bonuses, and supplemental
retirement expense. Data processing expense was $112,000 higher in 2012 than in 2011 due to higher software maintenance costs.
Professional fees grew $94,000 higher in 2012 than in 2011 due to increased use of outside consultants. Supplies and postage expense
was $87,000 lower in 2012 than in 2011 as a result of postage savings from increased electronic statement usage. The $52,000
increase in advertising and promotional expense in 2012 compared to the prior year was caused by higher radio and television
advertising and website development expenses. FDIC insurance expense declined $111,000 in 2012 compared to 2011 due to a change
in the insurance assessment base beginning in the second quarter of 2011.
13
Total noninterest expense increased $539,000 in 2011 compared to 2010. Salaries and benefits increased $308,000 in 2011 compared
to the prior year as a result of staffing additions and increased incentives. Occupancy and equipment expense was $90,000 higher in
2011 than in 2010 as depreciation expense, utilities, and various other expenses increased from the prior year. The $89,000 increase in
data processing expense in 2011 compared to the prior year resulted from higher costs related to electronic banking usage.
Professional fees were $118,000 higher in 2011 than in 2010 due to increases in legal, accounting, and consulting costs. Loan and
collection expense declined $103,000 in 2011 compared to 2010 due to lower collection costs for problem loans, including amounts
paid for outside collection services. FDIC insurance expense was $153,000 lower in 2011 than in the prior year due to a change in the
assessment base for insurance beginning in the second quarter of 2011. Other noninterest expense grew by $178,000 in 2011
compared to 2010 as a result of increases in training and recruiting expenses, directors’ fees, loan-related expense, and a number of
other expense accounts.
Income Taxes
Income taxes were $1,343,000 in 2012, compared to tax expense of $1,060,000 in 2011 and a tax expense of $654,000 in 2010. The
increase in income tax expense from 2010 to 2011 and from 2011 to 2012 was caused by higher income before income tax compared
to the prior year in 2011 and 2012. In addition, the portion of income before income tax comprised of nontaxable income declined in
both 2011 and 2012, which caused the effective tax rate to be higher.
Financial Condition
Summary
Total assets were $508.9 million as of December 31, 2012, which represented an increase of $13.0 million or 3% from the end of
2011. Securities available for sale increased $20.2 million during 2012 as management purchased securities to use funds that were
provided by a decline in loans and deposit growth. Loans declined $8.7 million in 2012 with most of the decrease occurring in
commercial real estate and agricultural loans. Total deposits grew $20.8 million in 2012 due to increases in checking and savings
deposits, which were partially offset by a decrease in local and brokered certificates of deposit.
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
U.S. Treasury notes and bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State and municipal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign debt
FDIC-guaranteed financial institution debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2012
40,268
7,398
64,678
12,526
6,712
1,001
—
1,909
2011
40,413
—
54,499
9,780
6,011
—
2,038
1,535
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
134,492
$
114,276
The securities available for sale portfolio increased $20.2 million from December 31, 2011 to December 31, 2012. ChoiceOne
purchased $69.6 million of securities during 2012 to replace securities that matured or were called and to provide growth in earning
assets. Approximately $34.9 million in various securities were called or matured in 2012. Principal payments for municipal and
mortgage-backed securities totaling $4.2 million were received during 2012. Various securities totaling approximately $9.4 million
were sold during 2012 for net gains totaling $419,000. 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 2011 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. Impairment losses totaling
$141,000 had been recorded in 2009 and 2010 due to uncertainty as to when or how much principal repayment would be received.
Settlement was reached with the security’s issuer in December 2011 and ChoiceOne received the remaining carrying value of the
security in the first quarter of 2012.
14
Equity securities included a money market preferred security (MMP) of $1,000,000, a trust preferred security of $500,000, preferred
stock of $263,000, and common stock of $146,000 as of December 31, 2012 and an MMP of $768,000, a trust preferred security of
$500,000, and preferred stock of $267,000 as of December 31, 2011.
Management will continue to monitor its securities in 2013. Securities may be sold if believed prudent from a risk standpoint.
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2012
31,791
67,365
19,367
93,312
1,056
98,577
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
311,468
$
2011
38,929
58,685
18,657
106,250
1,169
96,437
320,127
The loan portfolio (excluding loans held for sale) decreased $8.7 million from December 31, 2011 to December 31, 2012. Economic
concerns in ChoiceOne’s market areas continued to affect loan demand in 2012. The decline in agricultural loans was caused by
increased competition for this type of loan as well as the impact of weather conditions in the second quarter of 2012. The growth in
commercial and industrial loans resulted from calling efforts by ChoiceOne’s loan officers. Commercial real estate loans continued to
be affected by reduced real estate collateral values in 2012. The increase in residential real estate loans resulted from management’s
decision to hold certain longer term fixed-rates loans in portfolio instead of selling them 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
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2012
2,331
30
4,405
6,766
$
$
2011
4,155
70
2,448
6,673
Nonaccrual loans included $94,000 in agricultural loans, $220,000 in commercial and industrial loans, $33,000 in consumer loans,
$1,230,000 in commercial real estate loans, and $754,000 in residential real estate loans as of December 31, 2012. Nonaccrual loans
included $26,000 in agricultural loans, $143,000 in commercial and industrial loans, $22,000 in consumer loans, $2,790,000 in
commercial real estate loans, and $1,174,000 in residential real estate loans as of December 31, 2011. The decreases in nonaccrual
loans in 2012 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 $72,000 in agricultural loans, $32,000 in consumer loans, $2,581,000 in commercial real estate loans, and
$1,720,000 in residential real estate loans at December 31, 2012, compared to $1,197,000 in commercial real estate loans and
$1,251,000 of residential real estate loans at December 31, 2011. 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.
15
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 $14.2 million as of December 31, 2012, compared to
$22.4 million as of December 31, 2011.
Deposits and Other Funding Sources
The Bank’s deposit balances as of December 31 were as follows:
(Dollars in thousands)
Noninterest-bearing demand deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$
Interest-bearing demand deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Money market deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Savings deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Local certificates of deposit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Brokered certificates of deposit
$
2012
101,861
66,569
60,806
63,406
130,057
1,500
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
424,199
$
2011
78,263
64,498
63,007
46,737
144,983
5,877
403,365
Total deposits increased $20.8 million from December 31, 2011 to December 31, 2012. Local deposits grew $25.2 million while
brokered certificates of deposit declined $4.4 million during 2012. Management believes that the local deposit growth was due in part
to the attractiveness of FDIC-guaranteed deposits in contrast to the uncertainty of alternative investments. Deposit growth also
resulted from new product offerings and calling efforts on business and municipal clients. 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 decreased $2.3 million during 2012. The reduction was due to a maturity of a $5
million structured repurchase agreement with a correspondent bank, which was partially offset by growth in sweep repurchase
accounts used by the Bank’s local customers. Advances from the Federal Home Loan Bank of Indianapolis decreased $8.0 million in
2012 due to maturities and payments on advances. A blanket collateral agreement covering residential real estate loans was pledged
against all outstanding advances at the end of 2012. Approximately $46 million of additional advances were available as of
December 31, 2012 based on the collateral pledged.
In 2013, 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 $2.6 million from December 31, 2011 to December 31, 2012. The growth in equity resulted from
the retention of earnings in 2012 as net income exceeded dividends paid by $2.6 million. Funds provided by issuances of common
stock were offset by a small decrease in other comprehensive income in 2012.
Note 21 to the consolidated financial statements presents regulatory capital information for the Bank at the end of 2012 and 2011. All
three capital ratios presented increased in 2012 as a result of more growth in capital than assets during the year. Management will
monitor these capital ratios closely during 2013 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, 2012 is
adequate for the foreseeable future.
16
Table 4 – Contractual Obligations
The following table discloses information regarding the maturity of ChoiceOne’s contractual obligations at December 31, 2012:
(Dollars in thousands)
Contractual Obligations
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase agreements . . . . . . . . . . . . . . . . . . . . .
Advances from Federal Home Loan Bank . . . . . .
Operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other obligations . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Total
131,557
19,572
420
36
1,027
$
Payment Due By Period
Less
than
1 year
1-3
Years
3-5
Years
More
than
5 Years
$
86,086
19,572
28
36
71
$
32,117
—
60
—
171
$
12,819
—
64
—
191
535
—
268
—
594
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
152,612
$
105,793
$
32,348
$
13,074
$
1,397
Liquidity and Interest Rate Risk
Net cash from operating activities was $9.6 million for 2012 compared to $12.5 million for 2011. Lower proceeds from sales of other
real estate owned and net changes in other assets and liabilities contributed to the change in 2012. Cash used in investing activities
was $16.6 million in 2012 compared to $31.1 million in 2011. The decrease was caused by a reduction in loan balances in 2012 in
contrast to growth in 2011. Cash flows from financing activities were $8.9 million in 2012 compared to $11.6 million in the prior
year. A higher level of maturities and payments on Federal Home Loan Bank advances and a decline in the balance of repurchase
agreements was partially offset by more growth in deposits in 2012 than in 2011.
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 relatively 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 four of the
Bank’s correspondent banks. As of December 31, 2012, the amount of federal funds available for purchase from the Bank’s
correspondent banks totaled approximately $33 million. ChoiceOne had no federal funds purchased at the end of 2012 or 2011. The
Bank also has a line of credit secured by ChoiceOne’s commercial loans with the Federal Reserve Bank of Chicago for $57 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 $46 million of borrowing capacity was available from the FHLB based on residential real estate loans
pledged as collateral at year-end 2012. 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.
17
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, 2012
1-5
Years
3-12
Months
Over
5 Years
Total
Assets
Securities available for sale . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank stock . . . . . . . . . . . . . . . . .
Federal Reserve Bank stock . . . . . . . . . . . . . . . . . . . .
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash surrender value of life insurance policies . . . . .
Rate-sensitive assets . . . . . . . . . . . . . . . . . . . . . . . .
$
7,968
2,478
—
1,874
109,286
—
121,606
$
27,957
—
—
—
88,979
—
116,936
$
63,551
—
—
—
103,628
—
167,179
Liabilities
Interest-bearing demand deposits . . . . . . . . . . . . . . . .
Money market deposits . . . . . . . . . . . . . . . . . . . . . . . .
Savings deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase agreements . . . . . . . . . . . . . . . . . . . . . . .
Advances from FHLB . . . . . . . . . . . . . . . . . . . . . . . .
66,569
60,806
63,406
37,801
19,572
7
Rate-sensitive liabilities . . . . . . . . . . . . . . . . . . . . .
248,161
—
—
—
47,956
—
21
47,977
—
—
—
45,265
—
125
45,390
Rate-sensitive assets less rate-sensitive liabilities:
Asset (liability) gap for the period . . . . . . . . . . . . .
$(126,555) $
68,959
$ 121,789
Cumulative asset (liability) gap . . . . . . . . . . . . . . .
$(126,555) $ (57,596) $
64,193
$
$
$
35,016
—
1,272
—
9,575
9,970
55,833
$ 134,492
2,478
1,272
1,874
311,468
9,970
461,554
—
—
—
535
—
267
802
66,569
60,806
63,406
131,557
19,572
420
342,330
55,031
$ 119,224
119,224
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 81% at December 31, 2012,
compared to 80% at December 31, 2011. 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 2013. As interest rates change during 2013, 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, 2012, management used a simulation model to subject its assets and liabilities up to an immediate 400 basis
point increase. 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.
18
Table 6 provides an illustration of hypothetical interest rate changes as of December 31, 2012 and 2011, respectively:
Table 6 – Sensitivity to Changes in Interest Rates
(Dollars in thousands)
Change in Interest Rates
400 basis point rise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
300 basis point rise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
200 basis point rise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100 basis point rise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Base rate scenario . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100 basis point decline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
200 basis point decline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
300 basis point decline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
400 basis point decline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Dollars in thousands)
Change in Interest Rates
400 basis point rise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
300 basis point rise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
200 basis point rise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100 basis point rise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Base rate scenario . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100 basis point decline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
200 basis point decline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
300 basis point decline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
400 basis point decline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2012
Net
Interest
Income
Percent
Change
Market
Value of
Equity
Percent
Change
17,057
17,262
17,391
17,488
17,657
17,226
16,851
16,550
16,489
-3% $
-2%
-2%
-1%
—%
-2%
-5%
-6%
-7%
2011
71,148
76,058
79,555
82,396
83,731
77,256
71,641
72,430
72,335
-15%
-9%
-5%
-2%
—%
-8%
-14%
-13%
-14%
Net
Interest
Income
Percent
Change
Market
Value of
Equity
Percent
Change
18,346
18,229
18,023
17,787
17,630
17,381
17,073
16,868
16,837
+4% $
+3%
+2%
+1%
—%
-1%
-3%
-4%
-4%
72,748
76,878
79,279
81,377
82,249
77,911
70,812
70,806
70,766
-12%
-7%
-4%
-1%
—%
-5%
-14%
-14%
-14%
As of both December 31, 2012 and December 31, 2011, 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.
19
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,
2012, 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, 2012, 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 27, 2013
Thomas L. Lampen
Treasurer
March 27, 2013
20
Plante & Moran, PLLC
Suite 400
634 Front Avenue N.W.
Grand Rapids, MI 49504
Tel: 616.774.8221
Fax: 616.774.0702
plantemoran.com
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, 2012 and
2011, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each year in
the three-year period ended December 31, 2012. 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, 2012 and 2011, and the consolidated results of its
operations and its cash flows for each year in the three-year period ended December 31, 2012, in conformity with accounting
principles generally accepted in the United States of America.
Plante & Moran, PLLC
Grand Rapids, Michigan
March 27, 2013
21
(Dollars in thousands)
Assets
ChoiceOne Financial Services, Inc.
CONSOLIDATED BALANCE SHEETS
December 31
2012
2011
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Federal funds sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
19,034
—
19,034
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)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash value of life insurance policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets, net (Note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill (Note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
134,492
2,478
1,272
1,874
311,468
(5,852)
305,616
12,121
2,019
9,970
1,724
13,728
4,585
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
508,913
$
Liabilities
Deposits – noninterest-bearing (Note 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Deposits – interest-bearing (Note 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
101,861
322,338
424,199
Repurchase agreements (Note 9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advances from Federal Home Loan Bank (Note 10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities (Notes 11 and 13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19,572
420
4,216
17,125
—
17,125
114,276
2,478
1,271
1,262
320,127
(5,213)
314,914
12,080
1,934
9,834
2,172
13,728
4,840
495,914
78,263
325,102
403,365
21,869
8,447
4,329
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
448,407
438,010
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: 3,298,081 in 2012 and 3,293,269 in 2011 (Note 14)
. . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income, net (Note 16) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
46,649
11,501
2,356
60,506
—
46,602
8,887
2,415
57,904
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
508,913
$
495,914
See accompanying notes to consolidated financial statements.
22
Years ended December 31
2012
2011
2010
16,875
$
18,398
$
19,081
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 on sales of securities (Note 2)
Loss on other than temporary impairment of securities (Note 2) . . . . . . . . .
Gains (losses) on sales and write-downs 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 (Note 11) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,958
1,361
25
20,219
2,087
271
186
2,544
17,675
2,515
15,160
3,365
711
1,634
419
—
(358)
447
671
6,889
7,873
2,256
1,852
887
430
212
448
589
377
1,520
16,444
5,605
1,343
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
4,262
Basic earnings per common share (Note 15)
. . . . . . . . . . . . . . . . . . . . . . . . $
Diluted earnings per common share (Note 15) . . . . . . . . . . . . . . . . . . . . . . . $
Dividends declared per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1.29
1.29
0.50
$
$
$
$
See accompanying notes to consolidated financial statements.
23
1,789
1,268
20
21,475
2,956
307
290
3,553
17,922
3,700
14,222
3,454
672
672
129
—
29
354
829
6,139
7,348
2,247
1,740
793
517
160
448
575
488
1,472
15,788
4,573
1,060
3,513
1.07
1.07
0.48
$
$
$
$
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
2,711
0.83
0.83
0.48
ChoiceOne Financial Services, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income, net of tax:
Unrealized holding gains on available for sale securities . . . . . . . . . . . . . . . .
Funded status of post-retirement benefit plan . . . . . . . . . . . . . . . . . . . . . . . .
Less: Reclassification adjustment for gain recognized in
earnings, net of tax (Note 2)
Other comprehensive income/(loss), net of tax . . . . . . . . . . . . . . . . . . . . . . .
Years ended December 31
2012
2011
$
4,262
$
3,513
$
240
(22)
218
277
(59)
1,615
(15)
1,600
85
1,515
2010
2,711
419
(14)
405
292
113
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
4,203
$
5,028
$
2,824
See accompanying notes to consolidated financial statements.
24
ChoiceOne Financial Services, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Dollars in thousands, except per share data)
Number of
Shares
Common
Stock and
Paid in
Capital
Accumulated
Other
Comprehensive
Income, Net
Retained
Earnings
Total
Balance, January 1, 2010 . . . . . . . . . . . . . . . . . . . . . . .
3,265,714
$
46,326
$
5,813
$
787
$
52,926
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income . . . . . . . . . . . . . . . . . . . .
Shares issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares cancelled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in ESOP repurchase obligation . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . .
Effect of employee stock purchases . . . . . . . . . . . . . . .
Cash dividends declared ($0.48 per share) . . . . . . . . . .
2,711
113
14,805
(4)
125
—
(16)
15
11
(1,572)
2,711
113
125
—
(16)
15
11
(1,572)
Balance, December 31, 2010 . . . . . . . . . . . . . . . . . . . .
3,280,515
$
46,461
$
6,952
$
900
$
54,313
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income . . . . . . . . . . . . . . . . . . . .
Shares issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in ESOP repurchase obligation . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . .
Effect of employee stock purchases . . . . . . . . . . . . . . .
Cash dividends declared ($0.48 per share) . . . . . . . . . .
3,513
1,515
12,754
127
(1)
5
10
(1,578)
3,513
1,515
127
(1)
5
10
(1,578)
Balance, December 31, 2011 . . . . . . . . . . . . . . . . . . . .
3,293,269
$
46,602
$
8,887
$
2,415
$
57,904
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive (loss) . . . . . . . . . . . . . . . . . . . . .
Shares issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares repurchased . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in ESOP repurchase obligation . . . . . . . . . . . .
Effect of employee stock purchases . . . . . . . . . . . . . . .
Cash dividends declared ($0.50 per share) . . . . . . . . . .
4,262
(59)
9,812
(5,000)
123
(75)
(12)
11
(1,648)
4,262
(59)
123
(75)
(12)
11
(1,648)
Balance, December 31, 2012 . . . . . . . . . . . . . . . . . . . .
3,298,081
$
46,649
$
11,501
$
2,356
$
60,506
See accompanying notes to consolidated financial statements.
25
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 . . . . . . . . . . . . . . .
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 expense/(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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sale of Federal Home Loan Bank stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loan originations and payments, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash 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 of cash flow information:
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.
26
Years ended December 31
2012
2011
2010
4,262
$
3,513
$
2,711
2,515
900
1,569
11
(419)
—
(1,634)
(44,889)
45,622
(447)
(51)
405
1,259
(132)
667
4
9,642
9,369
39,098
(69,564)
(1)
—
5,065
311
(921)
(16,643)
20,834
(2,297)
—
(8,027)
123
(75)
(1,648)
8,910
1,909
17,125
19,034
2,625
1,425
1,718
20
$
$
3,700
944
1,300
15
(129)
—
(672)
(25,685)
26,611
(354)
(279)
255
3,015
378
2,391
(2,458)
12,545
3,310
18,687
(43,651)
(1)
411
(9,375)
—
(499)
(31,118)
13,481
(380)
250
(276)
127
—
(1,578)
11,624
(6,949)
24,074
17,125
3,608
765
2,972
—
$
$
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
—
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,
referred to as “ChoiceOne”).
Intercompany transactions and balances have been eliminated in consolidation.
(together
Inc.
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.
Together, the Bank and the Insurance Agency 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.
Management evaluates securities for other-than-temporary impairment (“OTTI”) on a quarterly basis, and more frequently when
economic or market conditions warrant such an evaluation. The evaluation of securities includes consideration 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,
whether the market decline was affected by macroeconomic conditions and whether ChoiceOne has the intent to sell the security or
more likely than not will be required to sell the security before its anticipated recovery. In analyzing an issuer’s financial condition,
management may consider whether the securities are issued by the federal government or its agencies, or U.S. Government sponsored
enterprises, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition.
The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on
the information available to management at a point in time.
When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether ChoiceOne intends to sell the security or it is
more likely than not it will be required to sell the security before recovery of its amortized cost basis. If ChoiceOne intends to sell or it
27
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
is more likely than not it will be required to sell the security before recovery of its amortized cost basis, the OTTI shall be recognized
in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date.
The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment. If a
security is determined to be other-than-temporarily impaired, but ChoiceOne does not intend to sell the security, only the credit
portion of the estimated loss is recognized in earnings, with the other portion of the loss recognized in other comprehensive income.
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 is 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 is 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 collectability 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. 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 the lower of our basis in the loans or 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.
28
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
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.
29
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash Restrictions
Cash on hand or on deposit with the Federal Reserve Bank of $318,000 and $111,000 was required to meet regulatory reserve and
clearing requirements at December 31, 2012 and 2011, respectively. The balance in excess of the amount required was interest-
bearing as of December 31, 2012 and December 31, 2011.
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.
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 19 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
During 2012, ChoiceOne adopted new guidance related to the presentation of comprehensive income in the financial statements.
Among other changes, the new guidance eliminated the option to only present comprehensive income in the statement of equity.
ChoiceOne has elected to report comprehensive income in a separate statement of comprehensive income that begins with net income.
The change in presentation has been applied retrospectively and the 2011 and 2010 financial statements have been restated to conform
to the new presentation method. Other than the change in presentation of comprehensive income and related disclosures, the new
guidance did not have a material effect on the financial statements.
In 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-02, A
Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring (“ASU 2011-02”). This update applies to all
creditors, both public and non-public, and was introduced to provide clarification surrounding troubled debt restructurings (“TDR”).
The primary characteristics that previously caused a restructuring to quality as a TDR still exist: (1) the restructuring constitutes a
concession to the borrower and (2) the borrower is experiencing financial difficulties. The update provides additional details and
examples to provide clarity surrounding these items. The update also prohibits the use of the effective interest rate test when
determining whether the restructuring constitutes a concession. The update is effective for annual reporting periods ending on or after
December 15, 2012 (therefore, December 31, 2012, for ChoiceOne). Lastly the disclosure requirements set forth by ASU 2010-20
regarding TDRs, and later deferred by ASU 2011-01 until December 31, 2012 for ChoiceOne, are included in Note 3. Other than the
additional disclosures, these updates did not have a significant impact on the financial statements.
In 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value
Measurement and Disclosure Requirements in U.S. GAAP and IFRS (“ASU 2011-04”). This update to Fair Value Measurement
(Topic 820) results in common fair value measurement and disclosure requirements in U.S. GAAP and IFRS. The amendments in this
update explain how to measure fair value. The do not require additional fair value measurements and are not intended to establish
valuation standards or affect valuation practices outside of financial reporting. However, this update does require expanding
disclosure related to the nature and significance of inputs that are used in estimating and measuring the fair value of financial
instruments. The amendments in this update are to be applied prospectively and are effective for annual reporting periods beginning
after December 15, 2011 (therefore, December 31, 2012, for ChoiceOne). This update did not have a significant impact on the
financial statements.
In July 2012, the FASB issued ASU No. 2012-02, Intangibles – Goodwill and Other: Testing Indefinite-Lived Intangible Assets for
Impairment (“ASU 2012-02”) to reduce the cost and complexity of testing indefinite-lived intangible assets for impairment. ASU
2012-02 gives an entity the option of first assessing qualitative factors to determine whether the existence of events and circumstances
30
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and
circumstances, an entity concludes that it is not more likely than not that the indefinite-lived asset is impaired, then the entity is not
required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the
indefinite-lived asset and perform the quantitative impairment test by comparing the fair value with the carrying amount in accordance
with Subtopic 350-30. An entity also has the option to bypass the qualitative assessment for any indefinite-lived asset in any period
and proceed directly to performing the quantitative impairment test. An entity will be able to resume performing the qualitative
assessment in any subsequent period. ASU 2012-02 is effective for fiscal years beginning after September 15, 2012 and early adoption
is permitted. The adoption of ASU 2012-02 is not expected to have a material impact on ChoiceOne’s consolidated financial condition
or results of operations.
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)
Amortized
Cost
U.S. Government and federal agency . . . . . . . . . . . . . . . . . . . . . . . . $
U.S. Treasury notes and bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State and municipal
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign debt
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
39,815
7,362
62,248
12,218
6,600
1,000
1,902
2012
Gross
Unrealized
Gains
$
455
45
2,668
308
113
1
12
Gross
Unrealized
Losses
(2)
$
(9)
(238)
—
(1)
—
(5)
$
Fair
Value
40,268
7,398
64,678
12,526
6,712
1,001
1,909
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
131,145
$ 3,602
$ (255)
$
134,492
(Dollars in thousands)
Amortized
Cost
U.S. Government and federal agency . . . . . . . . . . . . . . . . . . . . . . . . $
State and municipal
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FDIC-guaranteed financial institution debt
. . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
39,829
51,859
9,511
5,914
2,010
1,751
2011
Gross
Unrealized
Gains
$
584
2,729
276
100
28
16
Gross
Unrealized
Losses
$ — $
(89)
(7)
(3)
—
(232)
Fair
Value
40,413
54,499
9,780
6,011
2,038
1,535
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
110,874
$ 3,733
$ (331)
$
114,276
Information regarding sales of securities available for sale follows:
(Dollars in thousands)
2012
2011
2010
Proceeds from sales of securities . . . . . . . . . . . . . . . . . . $
Gross realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross realized losses . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . .
Loss on other than temporary impairment
$
9,369
421
2
—
$
3,310
133
4
—
6,059
540
3
94
31
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Contractual maturities of securities available for sale at December 31, 2012 were as follows:
(Dollars in thousands)
Due within one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Due after one year through five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after five years through ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities, not due at a specific date . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair
Value
31,817
53,249
32,565
2,426
120,057
12,526
1,909
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
134,492
Various securities were pledged as collateral for securities sold under agreements to repurchase. 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 . . . . . . . . . . . . . . . . . . . .
$
2012
27,085
$
2011
27,421
Securities with unrealized losses at year-end 2012 and 2011, 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
2012
More than 12 months
Unrealized
Losses
Fair
Value
Total
Fair
Value
Unrealized
Losses
U.S. Government agencies . . . . . . . . . . . . . . . . $
U.S. Treasury notes and bonds . . . . . . . . . . . . .
State and municipal
. . . . . . . . . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . .
Total temporarily impaired . . . . . . . . . . . . . . $
1,997
2,187
7,623
768
146
12,721
$
$
(2) $
(9)
(203)
(1)
(5)
(220) $
— $
—
811
—
—
811
$
— $
—
(35)
—
—
(35) $
1,997
2,187
8,434
768
146
13,532
$
$
(2)
(9)
(238)
(1)
(5)
(255)
(Dollars in thousands)
Less than 12 months
Fair
Value
Unrealized
Losses
2011
More than 12 months
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
. . . . . . . . . . . . . . . . . . . . . $
State and municipal
Mortgage-backed . . . . . . . . . . . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . .
$
2,938
2,045
1,023
—
Total temporarily impaired . . . . . . . . . . . . . . $
6,006
$
(28) $
(7)
(3)
—
(38) $
$
1,245
—
—
768
(61) $
—
—
(232)
$
4,183
2,045
1,023
768
2,013
$
(293) $
8,019
$
(89)
(7)
(3)
(232)
(331)
One municipal security with a fair value of $306,000 was considered to be other than temporarily impaired as of December 31, 2011.
The issuer of the security defaulted upon its maturity of September 1, 2009. Impairment losses totaling $141,000 had been recorded
through the end of 2010 due to uncertainty as to how much and when principal repayment would be received. Settlement was reached
with the security’s issuer in December 2011 and the bond’s carrying value was reclassified from securities to other assets in January
2012 upon termination of the bond’s contractual agreement. ChoiceOne received the carrying value of the security in the second
quarter of 2012.
32
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ChoiceOne evaluates all securities on a quarterly basis to determine whether unrealized losses are temporary or other than temporary.
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. Management believed that unrealized losses as of December 31, 2012
were temporary in nature and were caused primarily by changes in interest rates, increased credit spreads, and reduced market
liquidity and were not caused by the credit status of the issuer. No other than temporary impairments were recorded in 2012 or 2011.
Note 3 – Loans and Allowance for Loan Losses
The Bank’s loan portfolio as of December 31 was as follows:
(Dollars in thousands)
2012
2011
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Agricultural
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate – commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate – construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate – residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
31,790
67,365
19,367
93,312
1,056
98,578
Loans, gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
311,468
(5,852)
38,929
58,685
18,657
106,250
1,169
96,437
320,127
(5,213)
Loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
305,616
$
314,914
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.
33
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Activity in the allowance for loan losses and balances in the loan portfolio were as follows:
(Dollars in thousands)
Commercial
and
Industrial
Agricultural
Consumer
Commercial
Real Estate
Construction
Real Estate
Residential
Real Estate Unallocated
Total
2012
Allowance for Loan Losses
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . $
Charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
55 $
—
5
80
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
140 $
609 $
(405)
61
116
381 $
197 $
(338)
214
177
2,299 $
(869)
224
942
34 $
—
—
(19)
1,847 $
(887)
119
844
250 $
2,596 $
15 $
1,923 $
172 $
—
—
375
547 $
5,213
(2,499)
623
2,515
5,852
Individually evaluated for impairment . . . . . . . . . . . $
1 $
112 $
— $
449 $
— $
138 $
— $
700
Collectively evaluated for impairment . . . . . . . . . . . $
139 $
269 $
250 $
2,147 $
15 $
1,785 $
547 $
5,152
Loans
Individually evaluated for impairment . . . . . . . . . . . $
Collectively evaluated for impairment . . . . . . . . . . .
166 $
198 $
32 $
31,624
67,167
19,335
3,723 $
89,589
— $
1,056
1,820
96,578
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 31,790 $
67,365 $
19,367 $
93,312 $
1,056 $ 98,578
$
5,939
305,529
$ 311,468
2011
Allowance for Loan Losses
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . $
Charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
181 $
(45)
10
(91)
55 $
641 $
(228)
32
164
609 $
243 $
(361)
217
98
1,729 $
(1,357)
89
1,838
1,554 $
2 $
— (1,677)
104
—
1,866
32
379 $
—
—
(207)
4,729
(3,668)
452
3,700
197 $
2,299 $
34 $
1,847 $
172 $
5,213
Individually evaluated for impairment . . . . . . . . . . . $
— $
7 $
— $
424 $
— $
— $
— $
431
Collectively evaluated for impairment . . . . . . . . . . . $
55 $
602 $
197 $
1,875 $
34 $
1,847 $
172 $
4,782
Loans
Individually evaluated for impairment . . . . . . . . . . . $
Collectively evaluated for impairment . . . . . . . . . . .
— $
163 $
— $
2,758 $
— $
38,929
58,522
18,657
103,492
1,169
1,580
94,857
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 38,929 $
58,685 $
18,657 $ 106,250 $
1,169 $ 96,437
$
4,501
315,626
$ 320,127
34
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Commercial
and
Industrial
Agricultural
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
124 $
—
—
57
181 $
735 $
(765)
68
603
641 $
306 $
(444)
230
151
1,546 $
(1,523)
16
1,690
1,590 $
3 $
— (1,152)
27
—
1,089
(1)
243 $
1,729 $
2 $
1,554 $
18
—
—
361
379
$
4,322
(3,884)
341
3,950
$
4,729
Individually evaluated for impairment . . . . . . . . . . . $
— $
50 $
— $
531 $
— $
— $
— $
581
Collectively evaluated for impairment . . . . . . . . . . . $
181 $
591 $
243 $
1,198 $
2 $
1,554 $
379
$
4,148
Loans
Individually evaluated for impairment . . . . . . . . . . . $
Collectively evaluated for impairment . . . . . . . . . . .
39 $
272 $
— $
3,529 $
29,642
55,675
16,709
112,822
— $
853
2,733
94,666
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 29,681 $
55,947 $
16,709 $ 116,351 $
853 $ 97,399
$
6,573
310,367
$316,940
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 ratings 1 and 2: These loans are considered pass credits. They exhibit good to exceptional credit risk and demonstrate the ability
to repay the loan from normal business operations.
Risk rating 3: These loans are considered pass credits. They exhibit acceptable 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.
35
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information regarding the Bank’s credit exposure as of December 31 was as follows:
(Dollars in thousands)
Corporate Credit Exposure - Credit Risk Profile By Creditworthiness Category
Agricultural
Commercial and Industrial Commercial Real Estate
2012
2011
2012
2011
2012
2011
Risk ratings 1 and 2 . . . . . . . . . . . . . . . . . . . . . . $
Risk rating 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk rating 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk rating 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk rating 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk rating 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,615
16,173
5,040
1,939
19
4
$
6,486
20,211
9,499
2,672
57
4
$
9,040
43,549
13,417
855
361
143
$
4,149
30,109
21,993
1,669
680
85
$
$
2,711
45,295
30,223
7,847
6,960
276
6,403
45,034
33,462
14,313
5,009
2,029
$
31,790
$
38,929
$
67,365
$
58,685
$
93,312
$
106,250
Consumer Credit Exposure - Credit Risk Profile Based On Payment Activity
Performing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Nonperforming . . . . . . . . . . . . . . . . . . . . . . . . . . .
19,334
33
2012
$
19,367
2011
18,634
23
18,657
$
$
Consumer
Construction Real
Estate
2012
2011
$
$
1,056
—
1,056
$
$
1,169
—
1,169
$
$
Residential Real Estate
2012
98,018
560
98,578
2011
95,732
705
96,437
$
$
The following schedule provides information on loans that were considered troubled debt restructurings (“TDRs”) that were modified
during the twelve months ended December 31, 2012 and December 31, 2011:
(Dollars in thousands)
Number of
Loans
Agricultural . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . .
Residential real estate . . . . . . . . . . . . . . . .
1
2
1
5
3
December 31, 2012
Pre-
Modification
Outstanding
Recorded
Investment
72
$
159
32
1,990
353
Post-
Modification
Outstanding
Recorded
Investment
72
$
149
32
1,990
353
12
$
2,606
$
2,596
December 31, 2011
Pre-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
Number of
Loans
— $
1
—
7
5
13
$
— $
48
—
1,789
639
2,476
$
—
48
—
1,789
639
2,476
The pre-modification and post-modification outstanding recorded investment represents amounts as of the date of loan modification.
If a difference exists between the pre-modification and post-modification outstanding recorded investment, it represents impairment
recognized through the provision for loan losses computed based on a loan’s post-modification present value of expected future cash
flows discounted at the loan’s original effective interest rate. If no difference exists, a loss is not expected to be incurred based on an
assessment of the borrower’s expected cash flows.
36
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following schedule provides information on TDRs as of December 31, 2012 where the borrower was past due with respect to
principal and/or interest for 30 days or more during the twelve months ended December 31, 2012 and December 31, 2011 that had
been modified during the 12-month period prior to the default:
(Dollars in thousands)
Agricultural
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
With Payment Defaults During the Following Periods:
December 31, 2012
December 31, 2011
Number of
Loans
Recorded
Investment
Number of
Loans
Recorded
Investment
1
2
1
1
—
5
$
$
72
149
32
68
—
321
—
1
—
3
7
11
$
$
—
48
—
1,135
865
2,048
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.
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
2012
With no related allowance recorded
Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
With an allowance recorded
Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
94
49
—
577
—
720
72
149
32
3,146
1,820
5,219
166
198
32
3,723
1,820
$
441
49
—
848
—
1,338
72
169
32
3,193
1,820
5,286
513
218
32
4,041
1,820
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
5,939
$ 6,624
$
37
$
— $
—
—
—
—
—
19 $
223
—
1,586
1,366
3,194
14
112
6
1,576
364
2,072
33
335
6
3,162
1,730
$
5,266 $
1
112
—
449
138
700
1
112
—
449
138
700
—
6
—
—
48
54
1
—
—
24
20
45
1
6
—
24
68
99
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
2011
With no related allowance recorded
Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
— $
102
1,122
1,580
— $
105
1,538
1,580
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,804
3,223
— $
—
—
—
—
With an allowance recorded
Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
61
1,636
—
1,697
—
163
2,758
1,580
—
63
2,120
—
2,183
—
168
3,658
1,580
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
4,501
$ 5,406
$
—
7
424
—
431
—
7
424
—
431
An aging analysis of loans by loan category as of December 31 follows:
(Dollars in thousands)
$
45
167
2,369
1,620
4,201
—
85
1,490
—
1,575
45
252
3,859
1,620
$
5,776
$
30 to 59
Days (1)
60 to 89
Days (1)
Greater
Than 90
Days (1)
Total (1)
Loans Not
Past Due
Total
Loans
90 Days Past
Due and
Accruing
. . . . . . . . . . . . . . . . . . . . . . . . . $
2012
Agricultural
Commercial and industrial . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . .
Construction real estate . . . . . . . . . . . . . . . .
Residential real estate . . . . . . . . . . . . . . . . . .
262
102
173
64
—
1,438
$ — $ — $
198
33
339
—
559
$
262
304
234
471
—
2,688
31,529
67,061
19,133
92,841
1,056
95,889
$
$
31,790
67,365
19,367
93,312
1,056
98,578
4
28
68
—
691
791
$ 2,039
$
$ 1,129
$ 3,959
$ 307,509
$ 311,468
$
. . . . . . . . . . . . . . . . . . . . . . . . . $
2011
Agricultural
Commercial and industrial . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . .
Construction real estate . . . . . . . . . . . . . . . .
Residential real estate . . . . . . . . . . . . . . . . . .
151
541
104
1,752
—
1,320
$ — $
143
52
713
—
1,015
22
97
23
1,816
—
705
$
173
781
179
4,281
—
3,040
$
38,756
57,904
18,478
101,969
1,169
93,397
$
$
38,929
58,685
18,657
106,250
1,169
96,437
$ 3,868
$ 1,923
$ 2,663
$ 8,454
$ 311,673
$ 320,127
$
(1)
Includes nonaccrual loans.
38
—
—
15
50
65
—
—
6
—
6
—
—
21
50
71
—
—
1
—
—
29
30
—
—
2
—
—
68
70
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2012
94
220
33
1,230
—
754
$
2,331
$
2011
26
143
22
2,790
—
1,174
4,155
Note 4 – Mortgage Banking
Activity in secondary market loans during the year was as follows:
(Dollars in thousands)
2012
2011
2010
Loans originated for resale, net of principal payments . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from loan sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gains on sales of loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loan servicing fees, net of amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 44,889
45,622
1,634
131
$ 25,685
26,611
672
161
$ 28,816
28,088
682
41
Loans serviced for others are not reported as assets in the accompanying consolidated balance sheets. The unpaid principal balances of
these loans were $97 million and $96 million at December 31, 2012 and 2011, respectively. The Bank maintains custodial escrow
balances in connection with these serviced loans; however, such escrows were immaterial at December 31, 2012 and 2011.
Activity for loan servicing rights (included in other assets) was as follows:
(Dollars in thousands)
Balance, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capitalized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012
318
289
(134)
$
2011
347
94
(123)
$
473
$
318
$
$
$
2010
491
122
(266)
347
The fair value of loan servicing rights was $807,000 and $797,000 as of December 31, 2012 and 2011, respectively. Consequently, a
valuation allowance was not necessary at year-end 2012 or 2011. The fair value of servicing rights at December 31, 2012 was
determined using a discount rate of 7.7% and prepayment speeds ranging from 14% to 34%. The fair value of servicing rights at
December 31, 2011 was determined using a discount rate of 7.7% and prepayment speeds ranging from 7% to 26%.
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2012
4,108
38
11,190
4,556
19,892
(7,771)
2011
4,084
36
11,080
3,768
18,968
(6,888)
Premises and equipment, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
12,121
$
12,080
39
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Depreciation expense was $900,000, $944,000, and $903,000 for 2012, 2011 and 2010, respectively.
The Bank leases certain branch properties and automated-teller machine locations in its normal course of business. Rent expense
totaled $98,000, $75,000, and $78,000 for 2012, 2011 and 2010, respectively. Rent commitments under non-cancelable operating
leases were as follows, before considering renewal options that generally are present (dollars in thousands):
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
36
Note 6 – Goodwill and Intangible Assets
Goodwill
There were no changes in the goodwill balance in 2012 or 2011. ChoiceOne engaged an outside consulting firm to assist management
in performing its annual evaluation of goodwill for impairment as of June 30, 2012. 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. It was determined that the relevant
reporting unit to be valued was ChoiceOne Bank. The standard of value used in the valuation was fair value as determined by
generally accepted 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 income approach, which was a discounted cash flow value based
on projected earnings capacity. The income approach used a discount rate of 12.50%, a growth assumption of 1.8% for assets for the
first year and 2.0% in subsequent years, and an assumption of cost savings of 20% of noninterest expense as a result of synergies and
cost reductions from a change in control. The appraisal methodology also included 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 asset
approach was also an approach that was 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, 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 10.8%. Based on this assessment, management believed that there was no
indication of goodwill impairment at June 30, 2012. 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,
2012.
Acquired Intangible Assets
Information for acquired intangible assets at December 31 follows:
(Dollars in thousands)
2012
2011
Gross
Carrying
Amount
Accumulated
Amortization
Gross
Carrying
Amount
Accumulated
Amortization
Core deposit intangible . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
4,134
347
4,481
$
$
2,549
208
2,757
$
$
4,134
347
4,481
$
$
2,136
173
2,309
40
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The core deposit intangible and other intangible assets are being amortized on a straight-line basis over ten years. Aggregate
amortization expense was $448,000 for 2012, 2011 and 2010. The estimated amortization expense for the next four years ending
December 31 is as follows:
(Dollars in thousands)
Core
Deposit
Intangible
Other
Intangible
Assets
Total
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
413
413
413
346
35
35
35
34
448
448
448
380
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,585
$
139
$
1,724
Note 7 – Other Real Estate Owned
Other real estate owned represents residential and commercial properties primarily owned as a result of loan collection activities and
is reported net of a valuation allowance. Activity within other real estate owned was as follows:
(Dollars in thousands)
Balance, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfers from loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassification to buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gains/(losses) on sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Write-downs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012
2011
2010
$
$
$
1,934
1,718
(20)
(1,259)
51
(405)
1,953
2,972
—
(3,015)
279
(255)
2,201
1,358
—
(1,174)
96
(528)
Balance, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2,019
$
1,934
$
1,953
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
$
2012
101,861
66,569
60,806
63,406
130,057
1,500
$
2011
78,263
64,498
63,007
46,737
144,983
5,877
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
424,199
$
403,365
41
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Scheduled maturities of certificates of deposit at December 31 were as follows:
(Dollars in thousands)
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
86,086
21,923
10,194
7,769
5,050
535
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
131,557
The Bank had certificates of deposit issued in denominations of $100,000 or greater totaling $66.9 million and $70.9 million at
December 31, 2012 and 2011, respectively. The Bank had brokered certificates of deposit totaling $1.5 million at December 31, 2012
compared to $5.9 million at December 31, 2011. As of December 31, 2012, the weighted average interest rate on the brokered
certificate of deposit was 1.40%. In addition, the Bank had $14.2 million of certificates of deposit as of December 31, 2012 and $18.3
million as of December 31, 2011 that had been issued through the 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. Repurchase agreements with Bank
customers mature daily. As of December 31, 2011, 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%. Information regarding repurchase agreements follows:
(Dollars in thousands)
Outstanding balance at December 31 . . . . . . . . . . . . . . . . . . . . . $
Average interest rate at December 31 . . . . . . . . . . . . . . . . . . . . .
Average balance during the year . . . . . . . . . . . . . . . . . . . . . . . . . $
Average interest rate during the year
Maximum month end balance during the year . . . . . . . . . . . . . . $
. . . . . . . . . . . . . . . . . . . . .
2012
19,572
0.25%
22,185
0.84%
24,662
2011
21,869
1.27%
20,815
1.38%
22,249
$
$
$
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)
2012
2011
Maturity of November 2024 with a fixed interest rate of
3.98% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
420
Maturities ranging from November 2012 to November 2024,
fixed interest rates ranging from 2.54% to 4.16%, with an
average rate of 3.58% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total advances outstanding at year-end . . . . . . . . . . . . . . . . . . . . . $
420
$
$
8,447
8,447
42
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Penalties are charged on fixed rate advances that are paid prior to maturity. A $3,000,000 advance was paid prior to its maturity in
June 2012 and a $37,000 prepayment penalty was charged. No fixed rate advances were paid prior to maturity in 2011 or 2010.
Advances were secured by residential real estate loans with a carrying value of approximately $74 million at December 31, 2012 and
$69 million at December 31, 2011. Based on this collateral, the Bank was eligible to borrow an additional $46 million at year-end
2012. The scheduled maturities of advances from the FHLB at December 31, 2012 were as follows (dollars in thousands):
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
28
29
30
32
33
268
420
Note 11 – Income Taxes
Information as of December 31 and for the year follows:
(Dollars in thousands)
Provision for Income Taxes
Current federal income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Deferred federal income tax expense/(benefit) . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Reconciliation of Income Tax Provision to Statutory Rate
Income tax computed at statutory federal rate of 34% . . . . . . . . . . . . . . . . . . . . $
Tax exempt interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax exempt earnings on bank-owned life insurance . . . . . . . . . . . . . . . . . . . . . .
Nondeductible interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012
2011
2010
$
$
$
1,475
(132)
1,343
2012
1,906
(466)
(152)
13
42
$
$
$
682
378
1,060
2011
1,555
(437)
(121)
16
47
817
(163)
654
2010
1,144
(483)
(122)
25
90
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,343
$
1,060
$
654
Effective income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24%
23%
19%
43
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Components of Deferred Tax Assets and Liabilities
Deferred tax assets:
2012
2011
Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Write-downs on other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Alternative minimum tax credit carryforward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other
$
920
349
255
—
294
779
341
339
75
327
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,818
1,861
Deferred tax liabilities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gains on securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase accounting adjustments from merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loan servicing rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock dividends received from Federal Home Loan Bank . . . . . . . . . . . . . . . . . . . . . . . . . .
Post-retirement benefits obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,396
1,138
602
161
83
75
112
3,567
1,382
1,157
743
108
83
87
103
3,663
Net deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(1,749) $
(1,802)
ChoiceOne had a deferred tax asset of $45,000 as of December 31, 2012 and December 31, 2011 that resulted from capital losses
incurred on the sales of equity securities in 2009 and 2010. A capital loss of $72,000 was carried back to 2007 during 2011 which
utilized $24,000 of the deferred tax asset. A valuation allowance of $45,000 had been recorded as of December 31, 2012 and
December 31, 2011 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 deferred tax asset of $44,000 as of December 31, 2012 and December 31, 2011 that was
related to unexercised stock options. A valuation allowance for the entire balance had been recorded due to the fact that the exercise
price of most of the options was higher than the market price of ChoiceOne’s stock as of the end of 2012 and the exercise price of all
of the options was higher than the market price of ChoiceOne’s stock as of the end of 2011. The valuation allowances totaling
$89,000 as of December 31, 2012 and December 31, 2011 have been netted against the total deferred tax assets listed above.
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012
6,254
669
(1,087)
$
2011
6,568
948
(1,262)
Balance, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
5,836
$
6,254
Deposits from executive officers, directors and their affiliates were $12.5 million and $14.8 million at December 31, 2012 and 2011,
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 $178,000, $115,000, and $112,000 in 2012, 2011, and 2010, respectively.
44
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Employee Stock Ownership Plan:
Employees participate in an Employee Stock Ownership Plan (the “ESOP”). ChoiceOne may make 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 2012, 2011, or 2010.
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 . . . . . . . . . . . . . . . . . . . . . . . .
2012
5,355
—
5,355
2011
5,355
—
5,355
2010
5,355
—
5,355
Fair value of allocated shares, subject to repurchase obligation,
recorded in other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
77
$
64
$
64
Post-retirement Benefits Plan:
ChoiceOne maintains an unfunded post-retirement 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 post-retirement benefit
expense of $10,000 in 2012, $11,000 in 2011, and $15,000 in 2010. The post-retirement obligation liability was $158,000 as of
December 31, 2012 and $131,000 as of December 31, 2011.
Deferred Compensation Plans:
A deferred director compensation plan covers former directors of Valley Ridge Bank, which was acquired by ChoiceOne in 2006.
Under the plan, ChoiceOne pays each former director the amount of director fees deferred plus interest at rates ranging from 5.50% to
5.84% over various periods as elected by each director. The payout periods range from one month to ten 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 $15,000, $17,000, and $20,000 in 2012, 2011, and 2010, respectively. The deferred compensation
liability was $261,000 as of December 31, 2012 and $287,000 as of December 31, 2011.
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 $120,000 in 2012, $32,000 in 2011, and $41,000 in 2010. Deferred
compensation liabilities of $766,000 and $715,000 were outstanding as of December 31, 2012 and December 31, 2011, respectively.
Note 14 – Stock Options
Options to buy stock have been granted to key employees under an incentive stock option plan to provide them with additional equity
interest in ChoiceOne. ChoiceOne recognized compensation expense of $0 in 2012, $5,000 in 2011, and $15,000 in 2010 in
connection with stock options that vested for current participants during these years. The Amended and Restated Executive Stock
Incentive Plan under which the stock options were granted expired in 2012. A new Stock Incentive Plan was approved by the
Registrant’s shareholders at the Annual Meeting held on April 25, 2012. The new plan provides for the issuance of up to 100,000
shares of common stock. At December 31, 2012, there were 100,000 shares available for future grants.
45
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the activity in the plan follows:
. . . . .
Options outstanding, beginning of year
Options granted . . . . . . . . . . . . . . . . . . . . . . . .
Options exercised . . . . . . . . . . . . . . . . . . . . . .
Options forfeited or expired . . . . . . . . . . . . . .
Options outstanding, end of year . . . . . . . . . . .
2012
2011
2010
Weighted
average
exercise
price
$
$
$
$
16.62
—
13.70
15.97
16.95
Weighted
average
exercise
price
$16.46
—
$13.44
—
$16.62
Weighted
average
exercise
price
$16.46
—
—
—
$16.46
Shares
49,232
—
—
—
49,232
Shares
49,232
—
2,576
—
46,656
Shares
46,656
—
2,625
7,131
36,900
Options exercisable at December 31 . . . . . . . .
36,900
$
16.95
46,656
$16.62
46,357
$16.64
The range of prices for options outstanding and exercisable at the end of 2012 ranged from $13.50 to $21.43 per share. The weighted
average remaining contractual life of options outstanding and exercisable at the end of 2012 was approximately 3.2 years. A total of
12,100 options had an exercise price lower than ChoiceOne’s closing stock price as of the end of 2012, while 24,800 options had an
exercise price higher than the closing stock price. Information pertaining to options outstanding at December 31, 2012 is as follows:
Exercise price of stock options:
$13.50 . . . . . . . . . . . . . . . . . . . .
$13.70 . . . . . . . . . . . . . . . . . . . .
$16.31 . . . . . . . . . . . . . . . . . . . .
$17.95 . . . . . . . . . . . . . . . . . . . .
$18.85 . . . . . . . . . . . . . . . . . . . .
$21.43 . . . . . . . . . . . . . . . . . . . .
Number of
options
outstanding
at year-end
Number of
options
exercisable
at year-end
Average
remaining
contractual life
(in years)
10,000
2,100
5,512
8,000
5,250
6,038
10,000
2,100
5,512
8,000
5,250
6,038
5.07
0.04
1.06
4.05
3.05
2.05
The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model. ChoiceOne uses
historical data to estimate the volatility of the market price of ChoiceOne stock 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 2012, 2011, or 2010.
There were no shares that were vested during 2012. As of December 31, 2012, there was no unrecognized compensation cost related
to non-vested share-based compensation arrangements granted under the plan.
46
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15 – Earnings Per Share
(Dollars in thousands, except per share data)
2012
2011
2010
Basic
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
4,262
$
3,513
$
2,711
Weighted average common shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,296,462
3,286,969
3,273,151
Basic earnings per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1.29
$
1.07
$
0.83
Diluted
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
4,262
$
3,513
$
2,711
Weighted average common shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plus: dilutive effect of assumed exercises of stock options . . . . . . . . . . . . . . . . . .
3,296,462
436
3,286,969
—
3,273,151
—
Average shares and dilutive potential common shares . . . . . . . . . . . . . . . . . . . . .
3,296,898
3,286,969
3,273,151
Diluted earnings per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1.29
$
1.07
$
0.83
There were 28,625 stock options as of December 31, 2012, 46,656 as of December 31, 2011, and 49,232 as of December 31, 2010
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 on available for sale securities . . . . . . . . . . . . . . . . . . $
Less reclassification adjustments for gains included in net income . . . . . . . . . .
Net unrealized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less tax effect
Net-of-tax amount
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in funded status of post-retirement benefit plan . . . . . . . . . . . . . . . . . . .
Tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net-of-tax amount
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012
363
419
$
(56)
(19)
(37)
(34)
(12)
(22)
$
2011
2,448
129
2,319
789
1,530
(23)
(8)
(15)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(59) $
1,515
$
2010
635
443
192
65
127
(21)
(7)
(14)
113
Accumulated other comprehensive income, a component of equity, was comprised of the following at December 31:
(Dollars in thousands)
Unrealized holding gains on available for sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . $
Unrecognized actuarial gains on post-retirement benefit plan . . . . . . . . . . . . . . . . . . . . . .
Tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2012
3,347
223
(1,214)
2,356
$
$
2011
3,402
258
(1,245)
2,415
47
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17 – Condensed Financial Statements of Parent Company
Condensed Balance Sheets
(Dollars in thousands)
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31
2012
$
$
$
135
628
27
59,810
60,600
77
17
94
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
60,506
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
60,600
$
(Dollars in thousands)
Condensed Statements of Income
Years Ended December 31
2012
1,710
16
—
2011
1,695
7
33
$
$
1,726
89
1,637
29
1,666
2,596
4,262
$
1,735
81
1,654
16
1,670
1,843
3,513
$
Interest and dividends from ChoiceOne Bank . . . . . . . . . . . . . . . . . . . . . . . $
Interest and dividends from other securities . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 of subsidiary . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
48
2011
487
218
26
57,264
57,995
65
26
91
57,904
57,995
2010
1,641
7
—
1,648
67
1,581
23
1,604
1,107
2,711
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Statements of Cash Flows
Years Ended December 31
2012
2011
2010
4,262
$
3,513
$
2,711
(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 of subsidiary . . . . . . . . . . . . . . .
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash from operating activities . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flows from investing activities:
Maturities of securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash from investing activities . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flows from financing activities:
Issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash from financing activities . . . . . . . . . . . . . . . . . . . . . . . . .
(2,596)
2
(1)
(10)
1,657
—
(409)
(409)
123
(75)
(1,648)
(1,600)
(1,843)
—
50
17
1,737
—
—
—
127
—
(1,578)
(1,451)
(1,107)
—
(17)
(18)
1,569
200
(202)
(2)
125
—
(1,572)
(1,447)
120
81
201
Net change in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Beginning cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(352)
487
135
$
286
201
487
$
49
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 18 – Financial Instruments
Financial instruments as of the dates indicated were as follows (dollars in thousands):
December 31, 2012
Assets:
Cash and due from banks . . . . . . . . . . . . $
Securities available for sale . . . . . . . . . . .
Federal Home Loan Bank and Federal
Reserve Bank stock . . . . . . . . . . . . . . .
Loans held for sale . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . .
Loans, net
Liabilities:
Noninterest-bearing deposits . . . . . . . . . .
Interest-bearing deposits . . . . . . . . . . . . .
Repurchase agreements . . . . . . . . . . . . . .
Federal Home Loan Bank advances . . . .
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Carrying
Amount
Estimated
Fair Value
19,034
134,492
$
19,034
134,492
$
19,034
—
$
— $
131,893
—
2,599
3,750
1,874
305,616
101,861
322,338
19,572
420
3,750
1,933
310,175
101,861
323,457
19,573
485
Carrying
Amount
Estimated
Fair Value
—
—
—
—
—
—
—
3,750
1,933
—
—
—
310,175
101,861
323,457
19,573
485
—
—
—
—
December 31, 2011
Assets:
Cash and due from banks . . . . . . . . . . . . $
Securities available for sale . . . . . . . . . . .
Federal Home Loan Bank and Federal
Reserve Bank stock . . . . . . . . . . . . . . .
Loans held for sale . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . .
Loans, net
Liabilities:
Noninterest-bearing deposits . . . . . . . . . .
Interest-bearing deposits . . . . . . . . . . . . .
Repurchase agreements . . . . . . . . . . . . . .
Federal Home Loan Bank advances . . . .
17,125
114,276
$
17,125
114,276
3,749
1,262
314,914
78,263
325,102
21,869
8,447
3,749
1,262
319,017
78,263
326,123
21,083
8,664
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.
50
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2012 and December 31, 2011, 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, 2012 or December 31, 2011. 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, 2012
U.S. Government and federal agency . . . . . . . . . . . . . .
U.S. Treasury notes and bonds . . . . . . . . . . . . . . . . . . .
State and municipal
. . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment Securities, Available for
Sale – December 31, 2011
U.S. Government and federal agency . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . .
State and municipal
Mortgage-backed . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FDIC-guaranteed financial institution debt
. . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$—
—
—
—
—
—
—
$—
$—
—
—
—
—
—
$—
51
$ 40,268
7,398
62,579
12,526
6,712
1,001
1,409
$131,893
$ 40,413
52,228
9,780
6,011
2,038
1,035
$111,505
$ —
—
2,099
—
—
—
500
$2,599
$ —
2,271
—
—
—
500
$2,771
$ 40,268
7,398
64,678
12,526
6,712
1,001
1,909
$134,492
$ 40,413
54,499
9,780
6,011
2,038
1,535
$114,276
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Securities classified as available for sale are generally reported at fair value utilizing Level 2 inputs. ChoiceOne’s external investment
advisor obtained fair value measurements from an independent pricing service that uses matrix pricing, which is a mathematical
technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities
but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). The fair value
measurements considered observable data that may include dealer quotes, market spreads, cash flows and the bonds’ terms and
conditions, among other things. Securities classified in Level 2 included U.S. Government and federal agency securities, state and
municipal securities, mortgage-backed securities, corporate bonds, FDIC—guaranteed financial institution debt, and equity securities.
The Company classified certain state and municipal securities and privately issued trust preferred securities as Level 3. Based on the
lack of observable market data, estimated fair values were based on the observable data available and reasonable unobservable market
data.
ChoiceOne reviewed the methodologies used to estimate the fair values of all securities in 2012. Based on an updated analysis, it was
determined that the fair values of U.S. Government and federal agency securities, corporate securities, and FDIC-guaranteed financial
institution debt were based upon Level 2 inputs. These securities classes, which were previously disclosed as based on Level 1 inputs,
have been adjusted accordingly.
Changes in Level 3 Assets Measured at Fair Value on a Recurring Basis
(Dollars in Thousands)
Investment Securities, Available for Sale
Balance, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total realized and unrealized gains included in income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total unrealized gains (losses) included in other comprehensive income . . . . . . . . . . . . . . . .
Net purchases, sales, calls, and maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net transfers into Level 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2012
2011
$
2,771
—
(9)
(163)
—
2,839
—
164
(299)
67
Balance, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2,599
$
2,771
Of the Level 3 assets that were still held by the Bank at December 31, 2012, the net unrealized loss for the twelve months ended
December 31, 2012 was $9,000, which is recognized in other comprehensive income in the consolidated balance sheet. A total of
$564,000 of Level 3 securities were purchased in 2012. One security was reclassified from a Level 2 measurement of fair value to a
Level 3 measurement in 2011 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.
52
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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)
Balance at
Dates
Indicated
Quoted Prices in
Active
Markets for Identical
Assets (Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Impaired Loans
December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . .
Other Real Estate
December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . .
$ 5,939
$ 4,501
$ 2,019
$ 1,934
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$ 5,939
$ 4,501
$ 2,019
$ 1,934
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 owned 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
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)
2012
2011
Fixed
Rate
Variable
Rate
Fixed
Rate
Variable
Rate
Unused lines of credit and letters of credit . . . . . . . . . . . . . . $
Commitments to fund loans (at market rates) . . . . . . . . . . . .
2,474
5,145
$
49,196
5,798
$
2,868
3,610
$
47,217
1,919
Commitments to fund loans are generally made for periods of 180 days or less. The fixed rate loan commitments have interest rates
ranging from 1.00% to 4.35% and maturities ranging from 1 year 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
53
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
brokered deposits. If undercapitalized, capital distributions are limited, as are asset growth and expansion, and plans for capital
restoration are required. At year-end 2012 and 2011, 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)
Minimum Required
for Capital
Adequacy Purposes
Ratio
Ratio Amount
Actual
Amount
Minimum Required
to be Well
Capitalized Under
Prompt Corrective
Action Regulations
Ratio
Amount
46,004
42,015
42,015
13.7% $26,856
13,428
12.5
19,191
8.8
8.0% $33,570
20,142
4.0
23,988
4.0
10.0%
6.0
5.0
43,042
38,960
38,960
12.5% $27,510
13,755
11.3
18,801
8.3
8.0% $34,387
20,632
4.0
23,502
4.0
10.0%
6.0
5.0
December 31, 2012
Total capital (to risk weighted assets)
Tier 1 capital (to risk weighted assets) . . . . . .
. . . . . . . . . .
Tier 1 capital (to average assets)
. . . . . . $
December 31, 2011
Total capital (to risk weighted assets)
Tier 1 capital (to risk weighted assets) . . . . . .
. . . . . . . . . .
Tier 1 capital (to average assets)
. . . . . . $
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, 2012, approximately $5,546,000 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.
Note 22 – Quarterly Financial Data (Unaudited)
(Dollars in thousands)
Interest
Income
Net Interest
Income
Net
Income
Earnings Per Share
Fully
Diluted
Basic
2012
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . $
Second Quarter . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . .
2011
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . .$
Second Quarter . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . .
$
$
5,175
5,004
5,103
4,937
5,282
5,386
5,399
5,408
$
$
4,419
4,290
4,512
4,454
4,345
4,472
4,523
4,582
$
$
1,015
1,021
1,122
1,104
704
904
886
1,019
$
$
0.31
0.31
0.34
0.33
0.21
0.28
0.27
0.31
0.31
0.31
0.34
0.33
0.21
0.28
0.27
0.31
There were no significant fluctuations in the quarterly financial data in 2011 or 2012. The growth in net income that occurred in 2012
was due to reduced provision for loan losses and increased noninterest income, which was partially offset by a decline in net interest
income and growth in noninterest expenses.
54
ChoiceOne Financial Services, Inc.
CORPORATE AND SHAREHOLDER INFORMATION
Corporate Headquarters
ChoiceOne Financial Services, Inc.
ChoiceOne Bank
Alpine Office
ChoiceOne Insurance Agencies, Inc.
Sparta Office
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
Boenning & Scattergood
Powell, Ohio
(866) 326-8113
Stock Registrar and Transfer Agent
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
(800) 368-5948
Annual Shareholder Meeting
The 2013 Annual Shareholder Meeting of
ChoiceOne Financial Services, Inc., will be
held at 11:00 a.m. local time on Wednesday,
May 1, 2013, at Moss Ridge Golf Club in
Ravenna, Michigan.
5050 Alpine Avenue NW
Comstock Park, Michigan 49321
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 Valley
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
55
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
Mary J. Johnson
Secretary
Thomas L. Lampen
Treasurer
ChoiceOne Financial Services, Inc.
DIRECTORS AND OFFICERS
Directors
ChoiceOne Financial Services, Inc.
Jerome B. Arends
Directors
ChoiceOne Financial Services, Inc.
(continued)
Former President and Chief Executive
Officer of Ravenna Farm Equipment
(Agricultural Equipment Supplier)
Nels W. Nyblad
President, Nyblad Orchards
(Fruit Producer)
Frank G. Berris
Roxanne M. Page
CPA and Partner, Beene Garter LLP
(Certified Public Accountants)
Donald VanSingel
Vice Chairman of The Board,
ChoiceOne
Financial Services, Inc. and
ChoiceOne Bank
Former Consultant, Governmental
Consultant Services, Inc.
Former Legislator, Michigan House of
Representatives
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
(Real Estate Development)
Stuart Goodfellow
Chairman of The Board, ChoiceOne Financial
Services, Inc. and ChoiceOne Bank
Former Owner, Goodfellow Blueberry Farms
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
56
Officers
ChoiceOne Bank
James A. Bosserd
President
Chief Executive Officer
Lee A. Braford
Senior Vice President
Chief Credit Officer
Sheila R. Clark
Senior Vice President
Human Resources Director
Mary J. Johnson
Senior Vice President
Operations/Cashier
Louis D. Knooihuizen
Senior Vice President
Chief Lending Officer
Thomas L. Lampen, CPA
Senior Vice President
Chief Financial Officer
Michael E. McHugh
Senior Vice President
Accounting, Sales & Marketing
Kelly J. Potes
Senior Vice President
Retail Banking & GM Investments/Ins.
Linda K. Anderson
Vice President
Call Center & Regional/Branch
Sales Manager, Rockford
Brian R. Bacon
Vice President
Commercial Loan Officer
Kent G. Gagnon
Vice President
Business Development
Denise L. Gates
Vice President
Regional/Branch Sales Manager,
Cedar Springs
Gregory M. Goss
Vice President
Security/BSA Officer
Amy S. Homich
Vice President
Marketing & Business Development
Officers
ChoiceOne Bank (continued)
Officers
ChoiceOne Bank (continued)
Paul E. Tucker
Assistant Vice President
Network Administrator
Cynthia J. Watson
Assistant Vice President
Operations
Jennifer M. Bellamy
Commercial Loan Officer
Veronica M. Bishop
Call Center Manager
Candace J. Bouwkamp
Administrative Services Manager
Patricia J. Brown
Branch Sales Manager, Egelston
Susan Compton
Branch Sales Manager, Kent City
Lee J. Decker
Consumer Loan Manager/
IT Specialist
Gary B. Hall
Mortgage Sales Manager
John K. Harpst
Mortgage Operations Manager
Carrie J. Olson
Branch Sales Manager, Alpine
Officers
ChoiceOne Insurance Agencies, Inc.
James A. Bosserd
President
Kelly J. Potes, CFP
Senior Vice President
Randy A. Schmidt, CFP
Vice President
Investment Advisor/Agent
Thomas L. Lampen, CPA
Treasurer
Kevin T. Kelling
Vice President
Mortgage Loan Sales &
Operations Officer
Peggy A. O’Dea
Vice President
Regional/Branch Sales Manager,
Coopersville
Nicole N. Sakowski
Vice President
Collections Department Manager
Daniel C. Wheat
Vice President
Regional/Branch Sales Manager,
Grant
Lisa R. Beard
Assistant Vice President Branch Sales
Manager – Fremont
Rita A. Flintoff
Assistant Vice President
Branch Sales Manager – Newaygo
Stephen P. Grey
Assistant Vice President
Credit Department Manager &
Loan Officer
Jason J. Herbig
Assistant Vice President
Network Administrator
Rebecca J. Johnson
Assistant Vice President
Retail Banking
Bonnie K. Koehn
Assistant Vice President
Branch Sales Manager – Sparta
Main & Appletree
Linda S. Nichols
Assistant Vice President
Branch Sales Manager, Ravenna
Lori J. O’Brien
Assistant Vice President
Loan Operations
Jason A. Parker
Assistant Vice President
Commercial Loan Officer
Maria J. Roossinck
Assistant Vice President
Risk Management
57