UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(cid:2)
(cid:3)
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2018
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from__________________ to __________________
Commission File Number: 000-19202
ChoiceOne Financial Services, Inc.
(Exact Name of Registrant as Specified in its Charter)
Michigan
(State or Other Jurisdiction of
Incorporation or Organization)
109 East Division Street, Sparta, Michigan
(Address of Principal Executive Offices)
38-2659066
(I.R.S. Employer Identification No.)
49345
(Zip Code)
(616) 887-7366
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934:
Common Stock
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:3) No (cid:2)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:3) No (cid:2)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes (cid:2) No □
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant
to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files). Yes (cid:2) No □
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained in this form, and will
not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. □
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting
company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”,
and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
□
Accelerated filer
(cid:2)
□
Smaller reporting company
Non-accelerated filer
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. □
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes □ No (cid:2)
As of June 30, 2018, the aggregate market value of common stock held by non-affiliates of the Registrant was $87.2 million. This
amount is based on an average bid price of $26.25 per share for the Registrant’s stock as of such date.
Emerging growth company
□
(cid:2)
As of February 28, 2019, the Registrant had 3,617,629 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement of ChoiceOne Financial Services, Inc. for the Annual Meeting of Shareholders to be held on
May 22, 2019 are incorporated by reference into Part III of this Form 10-K.
CHOICEONE FINANCIAL SERVICES, INC.
FORM 10-K ANNUAL REPORT
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management’s Discussion and Analysis of Results of Operations and Financial Condition . . . . . . . . . . . . . . . .
Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . .
Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . . . . .
Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contents
PART I
Item 1:
Item 1A:
Item 1B:
Item 2:
Item 3:
Item 4:
PART II
Item 5:
Item 6:
Item 7:
Item 7A:
Item 8:
Item 9:
Item 9A:
Item 9B:
PART III
Item 10:
Item 11:
Item 12:
Item 13:
Item 14:
PART IV
Item 15:
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
3
12
16
17
18
18
18
19
20
30
32
66
66
67
68
68
68
68
69
69
71
Page | 2
FORWARD-LOOKING STATEMENTS
This report and the documents incorporated into this 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 Financial
Services, Inc. Words such as “anticipates,” “believes,” “expects,” “forecasts,” “intends,” “is likely,” “plans,” “predicts,” “projects,” “may,”
“could,” “estimates,” and 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, loan servicing rights and other
real estate owned, and the fair value of investment securities (including whether any impairment on any investment security is temporary
or other than temporary and the amount of any impairment) 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. All statements with references to future time periods are 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 Financial Services, Inc. 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 disclosed in Item 1A of this report. These are representative of the risk factors
that could cause a difference between an ultimate actual outcome and a preceding forward-looking statement.
Item 1.
Business
PART I
General
ChoiceOne Financial Services, Inc. (“ChoiceOne” or the “Company”) is a financial holding company registered under the Bank Holding
Company Act of 1956, as amended (“BHC Act”). The Company was incorporated on February 24, 1986, as a Michigan corporation.
The Company was formed to create a bank holding company for the purpose of acquiring all of the capital stock of ChoiceOne Bank
(the “Bank”), which became a wholly owned subsidiary of the Company on April 6, 1987. Effective November 1, 2006, the Company
merged with Valley Ridge Financial Corp. (“VRFC”), a one-bank holding company for Valley Ridge Bank (“VRB”). In December 2006,
VRB was consolidated into the Bank. The Bank owns all of the outstanding common stock of ChoiceOne Insurance Agencies, Inc., an
independent insurance agency headquartered in Sparta, Michigan (the “Insurance Agency”).
The Company’s business is primarily concentrated in a single industry segment - banking. The Bank is a full-service banking institution
that offers a variety of deposit, payment, credit and other financial services to all types of customers. These services include time, savings,
and demand deposits, safe deposit services, and automated transaction machine services. Loans, both commercial and consumer, are
extended primarily on a secured basis to corporations, partnerships and individuals. Commercial lending covers such categories as
business, industry, agricultural, construction, inventory and real estate. The Bank’s consumer loan department makes direct and indirect
loans to consumers and purchasers of residential and real property. No material part of the business of the Company or the Bank is
dependent upon a single customer or very few customers, the loss of which would have a materially adverse effect on the Company.
The Bank’s primary market area lies within Kent, Muskegon, Newaygo, and Ottawa counties in Michigan in the communities where
the Bank’s offices are located. The Bank serves these markets through fourteen full-service offices. The Bank opened two full-service
offices in 2018. The Company and the Bank have no foreign assets or income except for foreign debt securities.
At December 31, 2018, the Company had consolidated total assets of $670.5 million, net loans of $404.4 million, total deposits of $577.0
million and total shareholders’ equity of $80.5 million. For the year ended December 31, 2018, the Company recognized consolidated net
income of $7.3 million. The principal source of revenue for the Company and the Bank is interest and fees on loans. On a consolidated
basis, interest and fees on loans accounted for 64%, 60%, and 59% of total revenues in 2018, 2017, and 2016, respectively. Interest on
securities accounted for 14%, 13%, and 13% of total revenues in 2018, 2017, and 2016, respectively. For more information about the
Company’s financial condition and results of operations, see the consolidated financial statements and related notes included in Part II,
Item 8 of this report.
Competition
The Bank’s competition primarily comes from other financial institutions located within Kent, Muskegon, Newaygo, and Ottawa counties
in western Michigan. There are a number of larger commercial banks within the Bank’s primary market area. The Bank also competes
with a large number of other financial institutions, such as savings and loan associations, insurance companies, consumer finance
companies, credit unions, internet banks and other financial technology companies, and commercial finance and leasing companies
for deposits, loans and service business. Money market mutual funds, brokerage houses and nonfinancial institutions provide many of
the financial services offered by the Bank. Many of these competitors have substantially greater resources than the Bank. The principal
methods of competition for financial services are price (the rates of interest charged for loans, the rates of interest paid for deposits and
the fees charged for services) and the convenience and quality of services rendered to customers.
Page | 3
Supervision and Regulation
Banks and bank holding companies are extensively regulated. The Company is subject to supervision and regulation by the Board of
Governors of the Federal Reserve System (the “Federal Reserve Board”). The Company’s activities are generally limited to owning or
controlling banks and engaging in such other activities as the Federal Reserve Board may determine to be closely related to banking.
Prior approval of the Federal Reserve Board, and in some cases various other government agencies, is required for the Company to
acquire control of any additional bank holding companies, banks or other operating subsidiaries. Under Federal Reserve Board policy,
the Company is expected to act as a source of financial strength to the Bank and to commit resources to support it.
The Bank is chartered under state law and is subject to regulation by the Michigan Department of Insurance and Financial Services
(“DIFS”). State banking laws place restrictions on various aspects of banking, including permitted activities, loan interest rates,
branching, payment of dividends and capital and surplus requirements. The Bank is a member of the Federal Reserve System and is also
subject to regulation by the Federal Reserve Board. The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (the
“FDIC”) to the maximum extent provided by law. The Bank is a member of the Federal Home Loan Bank system, which provides certain
advantages to the Bank, including favorable borrowing rates for certain funds.
The Company is a legal entity separate and distinct from the Bank. The Company’s primary source of funds available to pay dividends
to shareholders is dividends paid to it by the Bank. There are legal limitations on the extent to which the Bank can lend or otherwise
supply funds to the Company. In addition, payment of dividends to the Company by the Bank is subject to various state and federal
regulatory limitations.
The FDIC formed the Deposit Insurance Fund (“DIF”) in accordance with the Federal Deposit Insurance Reform Act of 2005 (“Reform
Act”) to create a stronger and more stable insurance system. The FDIC maintains the insurance reserves of the DIF by assessing
depository institutions an insurance premium. The DIF insures deposit accounts of the Bank up to a maximum amount of $250,000
per separately insured depositor. FDIC insured depository institutions are required to pay deposit insurance premiums based on the
risk an institution poses to the DIF. In February 2011, the FDIC finalized rules, effective for assessments occurring after April 1, 2011,
which redefined an institution’s assessment base as average consolidated total assets minus average Tier 1 capital. The new rules
also established the initial base assessment rate for Risk Category 1 institutions, such as the Bank, at 5 to 9 basis points (annualized).
Effective July 1, 2016, the FDIC amended its rules to eliminate Risk Categories for small banks, replacing them with a method based on
a bank’s CAMELS composite rating and several financial ratios. On that date, the Bank’s initial base assessment rate was reduced to 3
basis points, since the Federal Deposit Insurance Reserve Ratio reached 1.15% as of June 30, 2016.
The Deposit Insurance Funds Act of 1996 authorized the Financing Corporation (“FICO”) to impose periodic assessments on all
depository institutions. The purpose of these periodic assessments is to spread the cost of the interest payments on the outstanding FICO
bonds issued to recapitalize the Savings Association Insurance Fund (“SAIF”) over a larger number of institutions.
The federal banking agencies have adopted guidelines to promote the safety and soundness of federally-insured depository institutions.
These guidelines establish standards for, among other things, internal controls, information systems, internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings.
The Company and the Bank are subject to regulatory “risk-based” capital guidelines. Failure to meet these capital guidelines could
subject the Company or the Bank to a variety of enforcement remedies, including issuance of a capital directive, the termination of
deposit insurance by the FDIC, a prohibition on accepting brokered deposits, and other restrictions on its business. In addition, the Bank
would generally not receive regulatory approval of any application that requires the consideration of capital adequacy, such as a branch
or merger application, unless it could demonstrate a reasonable plan to meet the capital requirement within a reasonable period of time.
Under Federal Reserve Board policy, the Company is expected to act as a source of financial strength to the Bank and to commit
resources to support the Bank. In addition, if DIFS deems the Bank’s capital to be impaired, DIFS may require the Bank to restore
its capital by a special assessment on the Company as the Bank’s sole shareholder. If the Company fails to pay any assessment, the
Company’s directors will be required, under Michigan law, to sell the shares of the Bank’s stock owned by the Company to the highest
bidder at either a public or private auction and use the proceeds of the sale to restore the Bank’s capital.
The Federal Deposit Insurance Corporation Improvement Act (“FDICIA”) requires, among other things, federal banking agencies to
take “prompt corrective action” in respect of depository institutions that do not meet minimum capital requirements. FDICIA sets forth
the following five capital categories: “well-capitalized,” “adequately-capitalized,” “undercapitalized,” “significantly-undercapitalized”
and “critically-undercapitalized.” A depository institution’s capital category will depend upon how its capital levels compare with
various relevant capital measures as established by regulation, which include Tier 1 and total risk-based capital ratio measures and a
leverage capital ratio measure. Under certain circumstances, the appropriate banking agency may treat a well-capitalized, adequately-
capitalized, or undercapitalized institution as if the institution were in the next lower capital category.
Page | 4
Federal banking regulators are required to take specified mandatory supervisory actions and are authorized to take other discretionary
actions with respect to institutions in the three undercapitalized categories. The severity of the action depends upon the capital category
in which the institution is placed. Subject to a narrow exception, the banking regulator must generally appoint a receiver or conservator
for an institution that is critically undercapitalized. An institution in any of the undercapitalized categories is required to submit an
acceptable capital restoration plan to its appropriate federal banking agency. An undercapitalized institution is also generally prohibited
from paying any dividends, increasing its average total assets, making acquisitions, establishing any branches, accepting or renewing
any brokered deposits or engaging in any new line of business, except under an accepted capital restoration plan or with FDIC approval.
On July 3, 2013, the FDIC Board of Directors approved the Regulatory Capital Interim Final Rule, implementing Basel III. This rule
redefines Tier 1 capital as two components (Common Equity Tier 1 and Additional Tier 1), creates a new capital ratio (Common Equity
Tier 1 Risk-based Capital Ratio) and implements a capital conservation buffer. It also revises the prompt corrective action thresholds
and makes changes to risk weights for certain assets and off-balance-sheet exposures. The Bank was required to transition into the new
rule beginning on January 1, 2015.
Banks are subject to a number of federal and state laws and regulations, which have a material impact on their business. These include,
among others, minimum capital requirements, state usury laws, state laws relating to fiduciaries, the Truth in Lending Act, the Truth in
Savings Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Fair Credit Reporting Act, the Expedited Funds Availability
Act, the Community Reinvestment Act, the Real Estate Settlement Procedures Act, the Service Members Civil Relief Act, the USA
PATRIOT Act, the Bank Secrecy Act, regulations of the Office of Foreign Assets Controls, the Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010, electronic funds transfer laws, redlining laws, predatory lending laws, antitrust laws, environmental
laws, money laundering laws and privacy laws. The monetary policy of the Federal Reserve Board may influence the growth and
distribution of bank loans, investments and deposits, and may also affect interest rates on loans and deposits. These policies may have a
significant effect on the operating results of banks.
In general, the BHC Act limits the business of bank holding companies to banking, managing or controlling banks and other activities
that the Federal Reserve Board has determined to be closely related to the business of banking. In addition, bank holding companies
that qualify and elect to be financial holding companies may engage in any activities that are financial in nature or complementary to a
financial activity and do not pose a substantial risk to the safety and soundness of depository institutions or the financial system without
prior approval of the Federal Reserve Board. Activities that are financial in nature include securities underwriting and dealing, insurance
underwriting and making merchant banking investments.
In order for the Company to maintain financial holding company status, both the Company and the Bank must be categorized as “well-
capitalized” and “well-managed” under applicable regulatory guidelines. If the Company or the Bank ceases to meet these requirements,
the Federal Reserve Board may impose corrective capital and/or managerial requirements and place limitations on the Company’s ability
to conduct the broader financial activities permissible for financial holding companies. In addition, if the deficiencies persist, the Federal
Reserve Board may require the Company to divest of the Bank. The Company and the Bank were both categorized as “well-capitalized”
and “well-managed” as of December 31, 2018.
Bank holding companies may acquire banks and other bank holding companies located in any state in the United States without regard
to geographic restrictions or reciprocity requirements imposed by state banking law. Banks may also establish interstate branch networks
through acquisitions of and mergers with other banks. The establishment of de novo interstate branches or the acquisition of individual
branches of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) is allowed only if specifically
authorized by state law.
Michigan banking laws do not significantly restrict interstate banking. The Michigan Banking Code permits, in appropriate circumstances
and with the approval of the Department of Insurance and Financial Services, (1) acquisition of Michigan banks by FDIC-insured banks,
savings banks or savings and loan associations located in other states, (2) sale by a Michigan bank of branches to an FDIC-insured bank,
savings bank or savings and loan association located in a state in which a Michigan bank could purchase branches of the purchasing
entity, (3) consolidation of Michigan banks and FDIC-insured banks, savings banks or savings and loan associations located in other
states having laws permitting such consolidation, (4) establishment of branches in Michigan by FDIC-insured banks located in other
states, the District of Columbia or U.S. territories or protectorates having laws permitting a Michigan bank to establish a branch in such
jurisdiction, and (5) establishment by foreign banks of branches located in Michigan.
Banks are subject to the provisions of the Community Reinvestment Act (“CRA”). Under the terms of the CRA, the appropriate federal
bank regulatory agency is required, in connection with its examination of a bank, to assess the bank’s record in meeting the credit needs
of the community served by that bank, including low- and moderate-income neighborhoods, consistent with the safe and sound operation
of the institution. Under the CRA, institutions are assigned a rating of “outstanding,” “satisfactory,” “needs to improve,” or “substantial
non-compliance.” The regulatory agency’s assessment of the bank’s record is made available to the public. Further, a bank’s federal
regulatory agency is required to assess the CRA compliance record of any bank that has applied to establish a new branch office that will
accept deposits, relocate an office, or merge or consolidate with, or acquire the assets or assume the liabilities of, a federally regulated
Page | 5
financial institution. In the case of a bank holding company applying for approval to acquire a bank or another bank holding company,
the Federal Reserve Board will assess the CRA compliance record of each subsidiary bank of the applicant bank holding company, and
such compliance records may be the basis for denying the application. Upon receiving notice that a subsidiary bank is rated less than
“satisfactory,” a financial holding company will be prohibited from additional activities that are permitted to be conducted by a financial
holding company and from acquiring any company engaged in such activities. The Bank’s CRA rating was “Satisfactory” as of its more
recent examination.
Effects of Compliance With Environmental Regulations
The nature of the business of the Bank is such that it holds title, on a temporary or permanent basis, to a number of parcels of real
property. These include properties owned for branch offices and other business purposes as well as properties taken in or in lieu of
foreclosure to satisfy loans in default. Under current state and federal laws, present and past owners of real property may be exposed to
liability for the cost of cleanup of environmental contamination on or originating from those properties, even if they are wholly innocent
of the actions that caused the contamination. These liabilities can be material and can exceed the value of the contaminated property.
Management is not presently aware of any instances where compliance with these provisions will have a material effect on the capital
expenditures, earnings or competitive position of the Company or the Bank, or where compliance with these provisions will adversely
affect a borrower’s ability to comply with the terms of loan contracts.
Employees
As of February 28, 2019, the Company, the Bank and the Insurance Agency employed 174 employees, of which 141 were full-time
employees. The Company, the Bank, and the Insurance Agency believe their overall relations with their employees are good.
Statistical Information
Additional statistical information describing the business of the Company appears on the following pages and in Management’s
Discussion and Analysis of Financial Condition and Results of Operations and in Item 7 of this report and in the Consolidated Financial
Statements and the notes thereto in Item 8 of this report. The following statistical information should be read in conjunction with
Management’s Discussion and Analysis of Results of Operations and Financial Condition and the Consolidated Financial Statements
and notes in this report.
Securities Portfolio
The carrying value of securities categorized by type at December 31 was as follows:
(Dollars in thousands)
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2,847 $
— $
—
2018
2017
2016
U.S. Government and federal agency . . . . . . . . . . . . . .
U.S. Treasury notes and bonds . . . . . . . . . . . . . . . . . . .
State and municipal . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign debt securities . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trust preferred securities . . . . . . . . . . . . . . . . . . . . . . .
Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,947
1,960
103,928 100,048
9,820
5,151
—
2,892
500
94
$ 33,529 $ 35,126 $ 59,052
4,072
88,973
7,789
7,041
4,400
2,383
500
178
$ 166,602 $ 155,591 $ 174,388
21,575
5,102
—
—
500
21
The Company did not hold investment securities from any one issuer at December 31, 2018, that were greater than 10% of the Company’s
shareholders’ equity, exclusive of U.S. Government and U.S. Government agency securities.
Page | 6
Presented below is the fair value of securities as of December 31, 2018 and 2017, a schedule of maturities of securities as of
December 31, 2018, and the weighted average yields of securities as of December 31, 2018:
(Dollars in thousands)
U.S. Government and federal agency . . . . . . . . . . . . .
U.S. Treasury notes and bonds . . . . . . . . . . . . . . . . . .
State and municipal(1) . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trust preferred securities . . . . . . . . . . . . . . . . . . . . . .
Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . .
Total debt securities . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . .
Equity securities(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities maturing within:
Less than
1 Year
1 Year -
5 Years
5 Years -
10 Years
More
than
10 Years
Fair Value
at Dec.
31,
2018
Fair Value
at Dec.
31,
2017
$ 16,695 $ 12,897 $
1,947
51,357
2,609
—
—
68,810
—
10,681
2,493
500
21
30,390
3,937 $
—
39,958
—
—
—
43,895
— $ 33,529 $ 35,126
1,960
1,947
—
1,932 103,928 100,048
5,151
500
94
1,932 145,027 142,879
5,102
500
21
—
—
—
—
—
8,965
886
$ 30,390 $ 81,420 $ 53,746 $
12,610
—
9,820
—
1,961
2,892
3,893 $ 169,449 $ 155,591
21,575
2,847
Weighted average yields:
U.S. Government and federal agency . . . . . . . . . . . . .
U.S. Treasury notes and bonds . . . . . . . . . . . . . . . . . .
State and municipal(1) . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trust preferred securities . . . . . . . . . . . . . . . . . . . . . .
Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . .
Equity securities(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less than
Year
1 Year -
5 Years
5 Years -
10 Years
2.20%
—
2.65
2.02
6.00
3.07
—
—
2.10%
1.85
2.83
2.66
—
—
3.17
—
2.71%
—
3.19
—
—
—
2.93
4.56
More than
10 Years
Total
—% 2.22%
—
4.12
—
—
—
—
—
1.85
2.97
2.35
6.00
3.07
3.07
1.05
(1) The yield is computed for tax-exempt securities on a fully tax-equivalent basis at an incremental tax rate of 21% for 2018.
(2) Equity securities are preferred and common stock that may or may not have a stated maturity.
Loan Portfolio
The Bank’s loan portfolio categorized by loan type (excluding loans held for sale and loans to other financial institutions) is presented
below for the respective years ended December 31:
2016
2018
2015
2017
91,406 104,386
24,513
24,382
2014
$ 49,109 $ 48,464 $ 44,614 $ 40,232 $ 41,098
88,062
20,752
99,807
2,691
93,703
$ 409,073 $ 398,785 $ 369,000 $ 349,304 $ 346,113
96,088
21,596
139,453 123,487 110,762
6,153
89,787
94,347
20,090
97,736
5,390
91,509
6,613
91,322
8,843
95,880
(Dollars in thousands)
Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate - commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate - construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate - residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans, gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page | 7
Maturities and Sensitivities of Loans to Changes in Interest Rates
The following schedule presents the maturities of loans (excluding residential real estate and consumer loans) as of December 31, 2018.
All loans over one year in maturity (excluding residential real estate and consumer loans) are also presented classified according to the
sensitivity to changes in interest rates as of December 31, 2018.
(Dollars in thousands)
Less than
1 Year
1 Year -
5 Years
More than
5 Years
Total
Loan Type . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate - commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate - construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Totals
(Dollars in thousands)
Loan Sensitivity to Changes in Interest Rates
Loans with fixed interest rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans with floating or adjustable interest rates . . . . . . . . . . . . . . . . . . . . . . . . . .
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 14,825 $ 16,071 $ 18,213 $ 49,109
13,928
91,406
71,070 139,453
8,843
$ 61,245 $ 124,355 $ 103,211 $ 288,811
25,982
11,976
8,462
51,496
56,407
381
—
Less than
1 Year
1 Year -
5 Years
More than
5 Years
Total
$ 18,173 $ 110,165 $ 85,740 $ 214,078
74,877
$ 61,245 $ 124,499 $ 103,211 $ 288,955
43,072
14,334
17,471
Loan maturities are classified according to the contractual maturity date or the anticipated amortization period, whichever is appropriate.
The anticipated amortization period is used in the case of loans where a balloon payment is due before the end of the loan’s normal
amortization period. At the time the balloon payment is due, the loan can either be rewritten or payment in full can be requested. The
decision regarding whether the loan will be rewritten or a payment in full will be requested will be based upon the loan’s payment
history, the borrower’s current financial condition, and other relevant factors.
Risk Elements
The following loans were classified as nonperforming as of December 31:
(Dollars in thousands)
Loans accounted for on a nonaccrual basis . . . . . . . . . . . . . . . . . . . .
Accruing loans which are contractually past due 90 days or
$
2018
1,532 $
2017
1,096 $
2016
1,983 $
2015
2,198 $
2014
3,361
more as to principal or interest payments . . . . . . . . . . . . . . . . .
Loans defined as “troubled debt restructurings” . . . . . . . . . . . . . . . .
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
—
2,254
3,786 $
258
2,896
4,250 $
229
2,853
5,065 $
29
3,271
5,498 $
58
3,175
6,594
A loan is placed on nonaccrual status at the point in time at which the collectability of principal or interest is considered doubtful.
The table below illustrates interest forgone and interest recorded on nonperforming loans for the years presented:
(Dollars in thousands)
Interest on non-performing loans that would have been earned had the loans been in an
accrual or performing status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest on non-performing loans that was actually recorded when received . . . . . . . . . . . . . . .
$
$
224 $
122 $
218 $
145 $
245
138
2018
2017
2016
Potential Problem Loans
At December 31, 2018, there were no loans not disclosed above where known information about possible credit problems of borrowers
caused management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms. Specific
loss allocations totaling $297,000 from the allowance for loan losses had been allocated for all nonperforming and potential problem
loans as of December 31, 2018. However, the entire allowance for loan losses is also available for any potential problem loans.
Loan Concentrations
As of December 31, 2018, there was no concentration of loans exceeding 10% of total loans that is not otherwise disclosed as a category
of loans pursuant to Item III.A. of Industry Guide 3.
Page | 8
Other Interest-Bearing Assets
As of December 31, 2018, there were no other interest-bearing assets requiring disclosure under Item III.C.1. or 2. of Industry Guide 3
if such assets were loans.
Summary of Loan Loss Experience
The following schedule presents a summary of activity in the allowance for loan losses for the periods shown and the percentage of net
charge-offs during each period to average gross loans outstanding during the period:
(Dollars in thousands)
Allowance for loan losses at beginning of year . . . . . . . . . . . . . .
$
2018
4,577
$
2017
4,277
$
2016
4,194
$
2015
4,173 $
2014
4,735
Charge-offs:
Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate - commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate - construction . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate - residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recoveries:
Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate - commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate - construction . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate - residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
58
282
—
—
25
365
33
107
112
61
—
113
426
—
439
253
—
—
43
735
—
21
169
258
40
62
550
—
37
218
—
—
102
357
—
31
149
89
—
171
440
—
30
291
—
—
140
461
1
64
121
47
—
149
382
—
1
273
665
—
133
1,072
20
119
179
48
—
44
410
Net charge-offs (recoveries) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(61)
185
(83)
79
662
Provision for loan losses(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
35
485
—
100
100
Allowance for loan losses at end of year . . . . . . . . . . . . . . . . . . .
$
4,673 $
4,577 $
4,277 $
4,194 $
4,173
Allowance for loan losses as a percentage of:
Total loans as of year end . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonaccrual loans, accrual loans past due 90 days or more
1.14 %
1.15%
1.16 %
1.20%
1.21%
and troubled debt restructurings . . . . . . . . . . . . . . . . . . .
123 %
108%
84 %
76%
63%
Ratio of net charge-offs during the period to average loans
outstanding during the period . . . . . . . . . . . . . . . . . . . . . . . .
Loan recoveries as a percentage of prior year’s charge-offs . . . . .
(0.02)%
58 %
0.05%
154%
(0.02)%
95 %
0.02%
36%
0.20%
19%
(1) Additions to the allowance for loan losses charged to operations during the periods shown were based on management’s judgment after considering factors such as
loan loss experience, evaluation of the loan portfolio, and prevailing and anticipated economic conditions. The evaluation of the loan portfolio is based upon various
(cid:85)(cid:76)(cid:86)(cid:78)(cid:3)(cid:73)(cid:68)(cid:70)(cid:87)(cid:82)(cid:85)(cid:86)(cid:3)(cid:86)(cid:88)(cid:70)(cid:75)(cid:3)(cid:68)(cid:86)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:191)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:70)(cid:82)(cid:81)(cid:71)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:69)(cid:82)(cid:85)(cid:85)(cid:82)(cid:90)(cid:72)(cid:85)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:70)(cid:82)(cid:79)(cid:79)(cid:68)(cid:87)(cid:72)(cid:85)(cid:68)(cid:79)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:82)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:70)(cid:82)(cid:81)(cid:86)(cid:76)(cid:71)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:15)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:15)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:82)(cid:83)(cid:76)(cid:81)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:80)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:15)(cid:3)(cid:71)(cid:72)(cid:86)(cid:72)(cid:85)(cid:89)(cid:72)(cid:3)(cid:70)(cid:88)(cid:85)(cid:85)(cid:72)(cid:81)(cid:87)(cid:3)
recognition in estimating loan losses.
Page | 9
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate - commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate - construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate - residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unallocated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2018
481 $
892
254
1,926
38
537
545
4,673 $
2017
506 $
1,001
262
1,761
35
726
286
4,577 $
2016
433 $
688
305
1,438
62
1,013
338
4,277 $
2015
420 $
586
297
1,030
46
1,388
427
4,194 $
2014
186
527
184
1,641
9
1,193
433
4,173
The higher levels in the allowance allocation to commercial and industrial loans and commercial real estate loans was due to growth in
these loan categories. The lower levels in the allocation to residential real estate loans was caused by lower historical charge-off levels.
Changes in historical charge-off levels and environmental factors affected all loan categories.
Management periodically reviews the assumptions, loss ratios and delinquency trends in estimating the appropriate level of its allowance
for loan losses and believes the unallocated portion of the total allowance was sufficient at December 31, 2018.
The following schedule presents the stratification of the loan portfolio by category, based on the amount of loans outstanding as a
percentage of total loans for the respective years ended December 31.
Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate - commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate - construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate - residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deposits
2018
2017
2016
2015
12%
22
6
34
2
24
100%
12%
26
6
31
2
23
100%
12%
26
6
30
2
24
100%
12%
26
6
28
2
26
100%
2014
12%
25
6
29
1
27
100%
The following schedule presents the average deposit balances by category and the average rates paid thereon for the respective years:
(Dollars in thousands)
Noninterest-bearing demand . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest-bearing demand and money market deposits . . . . . . . . .
Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018
2017
$ 148,495 —% $ 136,353 —% $ 123,848 —%
196,662 0.13
208,049 0.18
209,542 0.33
73,118 0.03
76,107 0.02
76,102 0.02
109,834 1.34
86,042 0.60
104,936 0.75
$ 543,973 0.40% $ 525,445 0.22% $ 479,670 0.17%
2016
The following table illustrates the maturities of certificates of deposits issued in denominations of $100,000 or more as of
December 31, 2018:
(Dollars in thousands)
Maturing in less than 3 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maturing in 3 to 6 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maturing in 6 to 12 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maturing in more than 12 months . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 17,237
31,617
15,414
12,127
$ 76,395
At December 31, 2018, the Bank had no material foreign deposits.
Page | 10
Short-Term Borrowings
Federal funds purchased by the Company are unsecured overnight borrowings from correspondent banks. Federal funds purchased are
due the next business day. The table below provides additional information regarding these short-term borrowings:
(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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2018
$
4,800
2.80%
2,174
$
2.31%
$
2017
$
—
— %
703
$
1.47%
$
5,470
2016
—
— %
610
0.70%
4,100
$ 13,000
Repurchase agreements include advances by Bank customers that are not covered by federal deposit insurance. These agreements are
direct obligations of the Company and are secured by securities held in safekeeping at a correspondent bank. The table below provides
additional information regarding these short-term borrowings:
(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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
2018
—
$
— %
$
0.05%
$
7,148
1,412
2017
7,148
$
0.05%
4,958
$
0.05%
8,440
2016
7,913
0.05%
7,762
0.05%
$ 10,539
Advances from the Federal Home Loan Bank (“FHLB”) with original repayment terms less than one year are considered short-term
borrowings for the Company. These advances are secured by residential real estate mortgage loans. The advances have maturities
ranging from 1 month to 12 months from the date of issue.
The table below provides additional information regarding these short-term borrowings:
(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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2018
5,000
2.57%
2017
$ 20,000
2016
$ 12,000
1.32%
0.86%
$ 11,752
$ 22,546
$ 25,732
1.92%
1.18%
0.61%
$ 25,000
$ 40,000
$ 45,000
There were no other categories of short-term borrowings whose average balance outstanding exceeded 30% of shareholders’ equity in
2018, 2017 or 2016.
Return on Equity and Assets
The following schedule presents certain financial ratios of the Company for the years ended December 31:
Return on assets (net income divided by average total assets) . . . . . . . . . . . . . . . . . . . . . . . .
2018
1.15%
2017
0.98%
2016
1.04%
Return on equity (net income dividend by average equity) . . . . . . . . . . . . . . . . . . . . . . . . . .
9.55%
8.22%
8.44%
Dividend payout ratio (dividends declared per share divided by net income per share) . . . .
35.08%
37.57%
36.63%
Equity to assets ratio (average equity divided by average total assets) . . . . . . . . . . . . . . . . .
12.04%
11.91%
12.30%
Page | 11
Item 1A. Risk Factors
The Company is subject to many risks and uncertainties. Although the Company seeks ways to manage these risks and develop programs
to control risks to the extent that management can control them, the Company cannot predict the future. Actual results may differ
materially from management’s expectations. Some of these significant risks and uncertainties are discussed below. The risks and
uncertainties described below are not the only ones that the Company faces. Additional risks and uncertainties of which the Company
is unaware, or that it currently does not consider to be material, also may become important factors that affect the Company and its
business. If any of these risks were to occur, the Company’s business, financial condition or results of operations could be materially
and adversely affected.
Investments in the Company’s common stock involve risk.
The market price of the Company’s common stock may fluctuate significantly in response to a number of factors, including:
• Variations in quarterly or annual operating results
• Changes in dividends per share
• Changes in interest rates
• New developments, laws or regulations in the banking industry
• Acquisitions or business combinations involving the Company or its competition
• Regulatory actions, including changes to regulatory capital levels, the components of regulatory capital and how regulatory
capital is calculated
• Volatility of stock market prices and volumes
• Changes in market valuations of similar companies
• New litigation or contingencies or changes in existing litigation or contingencies
• Changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or other
regulatory agencies
• Rumors or erroneous information
• Credit and capital availability
•
Issuance of additional shares of common stock or other debt or equity securities of the Company
Asset quality could be less favorable than expected.
A significant source of risk for the Company arises from the possibility that losses will be sustained because borrowers, guarantors and
related parties may fail to perform in accordance with the terms of their loan agreements. Most loans originated by the Company are
secured, but some loans are unsecured depending on the nature of the loan. With respect to secured loans, the collateral securing the
repayment of these loans includes a wide variety of real and personal property that may be insufficient to cover the obligations owed
under such loans. Collateral values may be adversely affected by changes in prevailing economic, environmental and other conditions,
including declines in the value of real estate, changes in interest rates, changes in monetary and fiscal policies of the federal government,
terrorist activity, environmental contamination and other external events.
The Company’s allowance for loan losses may not be adequate to cover actual loan losses.
The risk of nonpayment of loans is inherent in all lending activities and nonpayment of loans may have a material adverse effect on the
Company’s earnings and overall financial condition, and the value of its common stock. The Company makes various assumptions and
judgments about the collectability of its loan portfolio and provides an allowance for potential losses based on a number of factors. If its
assumptions are wrong, the allowance for loan losses may not be sufficient to cover losses, which could have an adverse effect on the
Company’s operating results, and may cause it to increase the allowance in the future. The actual amount of future provisions for loan
losses cannot now be determined and may exceed the amounts of past provisions for loan losses. Federal and state banking regulators, as
an integral part of their supervisory function, periodically review the allowance for loan losses. These regulatory agencies may require
the Company to increase its provision for loan losses or to recognize further loan charge-offs based upon their judgments, which may be
different from the Company’s judgments. Any increase in the allowance for loan losses could have a negative effect on the Company’s
regulatory capital ratios, net income, financial condition and results of operations.
Page | 12
General economic conditions in the state of Michigan could be less favorable than expected.
The Company is affected by general economic conditions in the United States, although most directly within Michigan. An economic
downturn within Michigan could negatively impact household and corporate incomes. This impact may lead to decreased demand for
both loan and deposit products and increase the number of customers who fail to pay interest or principal on their loans.
The Company could be adversely affected by the soundness of other financial institutions, including defaults by larger
financial institutions.
The Company’s ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness
of other financial institutions. Financial services institutions are interrelated as a result of credit, trading, clearing, counterparty or other
relationships between financial institutions. The Company has exposure to multiple counterparties, and it routinely executes transactions
with counterparties in the financial industry. As a result, defaults by, or even rumors or questions about, one or more financial services
institutions, or the financial services industry generally, could lead to market-wide liquidity problems and losses or defaults by the
Company or by other institutions. This is sometimes referred to as “systemic risk” and may adversely affect financial intermediaries,
such as clearing agencies, clearing houses, banks, securities firms and exchanges, with which the Company interacts on a daily basis,
and therefore could adversely affect the Company.
If the Company does not adjust to changes in the financial services industry, its financial performance may suffer.
The Company’s ability to maintain its financial performance and return on investment to shareholders will depend in part on its ability
to maintain and grow its core deposit customer base and expand its financial services to its existing customers. In addition to other
banks, competitors include credit unions, securities dealers, brokers, mortgage bankers, investment advisors, internet banks and other
financial technology companies, and finance and insurance companies. The increasingly competitive environment is, in part, a result of
changes in the economic environment within the state of Michigan, regulation, changes in technology and product delivery systems and
consolidation among financial service providers. New competitors may emerge to increase the degree of competition for the Company’s
customers and services. Financial services and products are also constantly changing. The Company’s financial performance will
also depend in part upon customer demand for the Company’s products and services and the Company’s ability to develop and offer
competitive financial products and services.
Changes in interest rates could reduce the Company’s income and cash flow.
The Company’s income and cash flow depends, to a great extent, on the difference between the interest earned on loans and securities,
and the interest paid on deposits and other borrowings. Market interest rates are beyond the Company’s control, and they fluctuate in
response to general economic conditions and the policies of various governmental and regulatory agencies including, in particular, the
Federal Reserve Board. Changes in monetary policy, including changes in interest rates and interest rate relationships, will influence the
origination of loans, the purchase of investments, the generation of deposits and the rate received on loans and securities and paid on
deposits and other borrowings.
Interest rates on our outstanding financial instruments might be subject to change based on regulatory developments, which could
adversely affect our revenue, expenses, and the value of those financial instruments.
LIBOR and certain other “benchmarks” are the subject of recent national, international, and other regulatory guidance and proposals
for reform. These reforms may cause such benchmarks to perform differently than in the past or have other consequences which cannot
be predicted. On July 27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, publicly announced that
it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. It is unclear whether, at that time, LIBOR will
cease to exist or if new methods of calculating LIBOR will be established. If LIBOR ceases to exist or if the methods of calculating
LIBOR change from current methods for any reason, interest rates on our floating rate obligations, loans, deposits, and other financial
instruments tied to LIBOR rates, as well as the revenue and expenses associated with those financial instruments, may be adversely
affected. Further, any uncertainty regarding the continued use and reliability of LIBOR as a benchmark interest rate could adversely
affect the value of our floating rate obligations, loans, deposits, and other financial instruments tied to LIBOR rates.
The Company is subject to liquidity risk in its operations, which could adversely affect its ability to fund various obligations.
Liquidity risk is the possibility of being unable to meet obligations as they come due or capitalize on growth opportunities as they arise
because of an inability to liquidate assets or obtain adequate funding on a timely basis, at a reasonable cost and within acceptable risk
tolerances. Liquidity is required to fund various obligations, including credit obligations to borrowers, loan originations, withdrawals
by depositors, repayment of debt, dividends to shareholders, operating expenses and capital expenditures. Liquidity is derived primarily
from retail deposit growth and earnings retention, principal and interest payments on loans and investment securities, net cash provided
from operations and access to other funding. If the Company is unable to maintain adequate liquidity, then its business, financial
condition and results of operations would be negatively affected.
Page | 13
Legislative or regulatory changes or actions could adversely impact the Company or the businesses in which it is engaged.
The Company and the Bank are subject to extensive state and federal regulation, supervision and legislation that govern almost all
aspects of their operations. Laws and regulations may change from time to time and are primarily intended for the protection of
consumers, depositors and the deposit insurance fund, and not to benefit the Company’s shareholders. The impact of any changes to
laws and regulations or other actions by regulatory agencies may negatively impact the Company or its ability to increase the value of
its business. Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including
the imposition of restrictions on the operation of an institution, the classification of assets by the institution and the adequacy of an
institution’s allowance for loan losses. Future regulatory changes or accounting pronouncements may increase the Company’s regulatory
capital requirements or adversely affect its regulatory capital levels. Additionally, actions by regulatory agencies against the Company
or the Bank could require the Company to devote significant time and resources to defending its business and may lead to penalties that
materially affect the Company.
The Company relies heavily on its management and other key personnel, and the loss of any of them may adversely affect
its operations.
The Company is and will continue to be dependent upon the services of its management team and other key personnel. Losing the
services of one or more key members of the Company’s management team could adversely affect its operations.
The Company may be a defendant in a variety of litigation and other actions, which may have a material adverse effect on the
Company’s financial condition and results of operations.
The Company and the Bank are regularly involved in a variety of litigation arising out of the normal course of business. The Company’s
insurance may not cover all claims that may be asserted against it, and any claims asserted against it, regardless of merit or eventual
outcome, may harm its reputation or cause the Company to incur unexpected expenses, which could be material in amount. Should the
ultimate expenses, judgments or settlements in any litigation exceed the Company’s insurance coverage, they could have a material
adverse effect on the Company’s financial condition and results of operations. In addition, the Company may not be able to obtain
appropriate types or levels of insurance in the future, nor may it be able to obtain adequate replacement policies with acceptable terms,
if at all.
If the Company cannot raise additional capital when needed, its ability to further expand its operations through organic growth or
acquisitions could be materially impaired.
The Company is required by federal and state regulatory authorities to maintain specified levels of capital to support its operations.
The Company may need to raise additional capital to support its current level of assets or its growth. The Company’s ability to raise
additional capital will depend on conditions in the capital markets at that time, which are outside its control, and on its financial
performance. The Company cannot assure that it will be able to raise additional capital in the future on terms acceptable to it or at all.
If the Company cannot raise additional capital when needed, its ability to maintain its current level of assets or to expand its operations
through organic growth or acquisitions could be materially limited.
Unauthorized disclosure of sensitive or confidential client or customer information, whether through a breach of computer systems
or otherwise, could severely harm the Company’s business.
As part of its business, the Company collects, processes and retains sensitive and confidential client and customer information on behalf
of itself and other third parties. Despite the security measures the Company has in place for its facilities and systems, and the security
measures of its third party service providers, the Company may be vulnerable to security breaches, acts of vandalism, computer viruses,
misplaced or lost data, programming and/or human errors or other similar events. Any security breach involving the misappropriation,
loss or other unauthorized disclosure of confidential customer information, whether by the Company or by its vendors, could severely
damage the Company’s reputation, expose it to the risks of litigation and liability, disrupt the Company’s operations and have a material
adverse effect on the Company’s business.
The Company’s information systems may experience an interruption or breach in security.
The Company relies heavily on communications and information systems to conduct its business and deliver its products. Any failure,
interruption or breach in security of these systems could result in failures or disruptions in the Company’s customer relationship
management, general ledger, deposit, loan and other systems. While the Company has policies and procedures designed to prevent or
limit the effect of the failure, interruption or security breach of its information systems, there can be no assurance that any such failures,
interruptions or security breaches of the Company’s information systems or its customers’ information or computer systems would not
damage the Company’s reputation, result in a loss of customer business, subject the Company to additional regulatory scrutiny, or expose
the Company to civil litigation and financial liability, any of which could have a material adverse effect on the Company’s financial
condition and results of operations.
Page | 14
Cybersecurity incidents could disrupt business operations, result in the loss of critical and confidential information, and adversely
impact our reputation and results of operations.
Global cybersecurity threats and incidents can range from uncoordinated individual attempts to gain unauthorized access to information
technology (IT) systems to sophisticated and targeted measures known as advanced persistent threats, directed at the Company and/or
its third party service providers. While we have experienced, and expect to continue to experience, these types of threats and incidents,
none of them to date have been material to the Company. Although we employ comprehensive measures to prevent, detect, address and
mitigate these threats (including access controls, employee training, data encryption, vulnerability assessments, continuous monitoring
of our IT networks and systems and maintenance of backup and protective systems), cybersecurity incidents, depending on their nature
and scope, could potentially result in the misappropriation, destruction, corruption or unavailability of critical data and confidential
or proprietary information (our own or that of third parties) and the disruption of business operations. The potential consequences of
a material cybersecurity incident include reputational damage, litigation with third parties and increased cybersecurity protection and
remediation costs, which in turn could materially adversely affect our results of operations.
Environmental liability associated with commercial lending could result in losses.
In the course of its business, the Company may acquire, through foreclosure, properties securing loans it has originated or purchased
that are in default. Particularly in commercial real estate lending, there is a risk that hazardous substances could be discovered on these
properties. In this event, the Company might be required to remove these substances from the affected properties at the Company’s
sole cost and expense. The cost of this removal could substantially exceed the value of affected properties. The Company may not
have adequate remedies against the prior owner or other responsible parties and could find it difficult or impossible to sell the affected
properties. These events could have an adverse effect on the Company’s business, results of operations and financial condition.
The Company depends upon the accuracy and completeness of information about customers.
In deciding whether to extend credit to customers, the Company relies on information provided to it by its customers, including
financial statements and other financial information. The Company may also rely on representations of customers as to the accuracy and
completeness of that information and on reports of independent auditors on financial statements. The Company’s financial condition and
results of operations could be negatively impacted to the extent that the Company extends credit in reliance on financial statements that
do not comply with generally accepted accounting principles or that are misleading or other information provided by customers that is
false or misleading.
The Company operates in a highly competitive industry and market area.
The Company faces substantial competition in all areas of its operations from a variety of different competitors, many of which are larger
and may have more financial resources. Such competitors primarily include national and regional banks within the various markets
where the Company operates, as well as internet banks and other financial technology companies. The Company also faces competition
from many other types of financial institutions, including savings and loan associations, credit unions, finance companies, brokerage
firms, insurance companies and other financial intermediaries. The financial services industry could become even more competitive as a
result of legislative, regulatory and technological changes and continued consolidation. Banks, securities firms and insurance companies
can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking,
securities underwriting, insurance (both agency and underwriting) and merchant banking. The Company competes with these institutions
both in attracting deposits and in making new loans. Technology has lowered barriers to entry into the market and made it possible for
non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems.
Many of the Company’s competitors have fewer regulatory constraints and may have lower cost structures, such as credit unions that are
not subject to federal income tax. Due to their size, many competitors may be able to achieve economies of scale and, as a result, may
offer a broader range of products and services as well as better pricing for those products and services than the Company can.
Severe weather, natural disasters, acts of war or terrorism and other external events could significantly impact the
Company’s business.
Severe weather, natural disasters, acts of war or terrorism and other adverse external events could have a significant impact on the
Company’s ability to conduct business. Such events could affect the stability of the Company’s deposit base, impair the ability of
borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of
revenue and/or cause the Company to incur additional expenses.
Page | 15
The Company relies on dividends from the Bank for most of its revenue.
The Company is a separate and distinct legal entity from the Bank. It receives substantially all of its revenue from dividends from the
Bank. These dividends are the principal source of funds to pay cash dividends on the Company’s common stock. Various federal and/or
state laws and regulations limit the amount of dividends that the Bank may pay to the Company. If the Bank is unable to pay dividends
to the Company, the Company may not be able to pay cash dividends on its common stock. The earnings of the Bank have been the
principal source of funds to pay cash dividends to shareholders. Over the long-term, cash dividends to shareholders are dependent upon
earnings, as well as capital requirements, regulatory restraints and other factors affecting the Company and the Bank.
Additional risks and uncertainties could have a negative effect on financial performance.
Additional factors could have a negative effect on the financial performance of the Company and the Company’s common stock. Some
of these factors are financial market conditions, changes in financial accounting and reporting standards, new litigation or changes in
existing litigation, regulatory actions and losses.
Item 1B. Unresolved Staff Comments
None.
Page | 16
Item 2.
Properties
The offices of the Company as of February 28, 2019, were as follows:
Company’s main office:
109 East Division, Sparta, Michigan
Office is owned by the Bank and comprises 24,000 square feet.
Bank’s branch office:
416 West Division, Sparta, Michigan
Office is leased by the Bank and comprises 3,000 square feet.
Bank’s branch office:
4170 - 17 Mile Road, Cedar Springs, Michigan
Office is owned by the Bank and comprises 3,000 square feet.
Bank’s branch office:
6795 Courtland Drive, Rockford, Michigan
Office is owned by the Bank and comprises 2,400 square feet.
Bank’s branch office:
590 East Division Street NE, Rockford, Michigan
Office is owned by the Bank and comprises 4,600 square feet.
Bank’s branch office:
5050 Alpine Avenue NW, Comstock Park, Michigan
Office is owned by the Bank and comprises 2,400 square feet.
Bank’s branch office:
450 West Muskegon, Kent City, Michigan
Office is owned by the Bank and comprises 27,300 square feet.
Bank’s branch office:
3069 Slocum Road, Ravenna, Michigan
Office is owned by the Bank and comprises 4,800 square feet.
Bank’s branch office:
5475 East Apple Avenue, Muskegon, Michigan
Office is owned by the Bank and comprises 4,800 square feet.
Bank’s branch office:
661 West Randall, Coopersville, Michigan
Office is owned by the Bank and comprises 2,700 square feet.
Bank’s branch office:
10 West Main Street, Grant, Michigan
Office is owned by the Bank and comprises 4,800 square feet.
Bank’s branch office:
246 West River Valley Drive, Newaygo, Michigan
Office is owned by the Bank and comprises 2,600 square feet.
Bank’s branch office:
1423 West Main Street, Fremont, Michigan
Office is owned by the Bank and comprises 1,600 square feet.
Bank’s branch office:
330 Market Avenue SW, Grand Rapids, Michigan
Office is leased by the Bank and comprises 4,800 square feet.
The Company believes that the offices are suitable and adequate for future needs and are in good condition. The Company’s management
believes all offices are adequately covered by property insurance.
Page | 17
Item 3.
Legal Proceedings
As of December 31, 2018, there were no significant pending legal proceedings to which the Company or the Bank is a party or to
which any of their properties were subject, except for legal proceedings arising in the ordinary course of business. In the opinion of
management, pending legal proceedings will not have a material adverse effect on the consolidated financial condition of the Company.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
STOCK INFORMATION
Several brokers trade ChoiceOne’s common shares in the OTC Pink marketplace. 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’ 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:
2018
2017
Low
High
Low
High
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
20.41 $
22.81
26.15
24.75
23.14 $
26.50
29.99
27.95
20.41 $
20.64
20.90
20.98
22.22
22.85
22.43
22.95
The prices listed above are over-the-counter market quotations reported to ChoiceOne by its market makers. Per share amounts have
been adjusted for the 5% stock dividends paid in 2017 and 2018. 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, 2019, the
average bid price for shares of ChoiceOne common stock was $24.65.
As of February 28, 2019, there were 679 shareholders of record of ChoiceOne common stock.
The following table summarizes the quarterly cash dividends declared per share of common stock during 2018 and 2017:
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
0.17 $
0.18
0.18
0.18
0.71 $
0.16
0.16
0.16
0.16
0.64
2018
2017
Per share amounts have been adjusted for the 5% stock dividends paid in 2017 and 2018. ChoiceOne’s principal source of funds to pay
cash dividends is the earnings and dividends paid by the Bank. The Bank is restricted in its ability to pay cash dividends under current
banking regulations. See Note 20 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 2019, although the amount of
the quarterly dividends will be dependent on market conditions and ChoiceOne’s requirements for cash and capital, among other things.
On October 24, 2018, the Company issued 867 shares of common stock to its directors pursuant to the Directors’ Stock Purchase Plan
for an aggregate cash price of $19,000. The Company relied on the exemption contained in Section 4(6) of the Securities Act of 1933 in
connection with these sales.
Information regarding the Company’s equity compensation plans may be found in Item 12 of this report and is here incorporated
by reference.
There were no issuer purchases of equity securities during the fourth quarter of 2018.
ISSUER PURCHASES OF EQUITY SECURITIES
Page | 18
Item 6.
Selected Financial Data
(Dollars in thousands, except per share data)
For the year
ChoiceOne Financial Services, Inc.
SELECTED FINANCIAL DATA
2018
2017
2016
2015
2014
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends declared . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 22,064
35
6,920
20,461
8,488
1,155
7,333
2,572
$ 20,563
485
7,811
19,334
8,555
2,387
6,168
2,317
$ 19,343
—
7,881
18,972
8,252
2,162
6,090
2,231
$ 18,362
100
7,702
18,276
7,688
1,945
5,743
2,170
$ 17,863
100
6,802
16,794
7,771
2,076
5,695
1,945
Per share *
Basic earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends declared . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholders’ equity (at year end) . . . . . . . . . . . . . . . . . . . . .
$
$
2.03
2.02
0.71
22.25
$
1.70
1.70
0.64
21.14
$
1.68
1.68
0.62
19.73
1.59
1.58
0.60
19.22
$
1.57
1.56
0.53
18.21
Average for the year
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank advances . . . . . . . . . . . . . . . . . . .
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 170,461
404,494
543,973
12,002
76,801
637,790
$ 177,125
388,609
525,445
22,830
75,026
629,748
$ 173,119
357,880
479,670
26,049
72,134
586,299
$ 152,361
342,382
443,972
19,989
68,439
551,762
$ 142,361
330,355
422,737
14,555
64,143
526,669
At year end
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank advances . . . . . . . . . . . . . . . . . . .
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 173,016
409,073
577,015
5,233
80,477
670,544
$ 159,158
398,785
539,853
20,268
76,550
646,544
$ 177,955
369,000
512,386
12,301
71,698
607,371
$ 163,323
349,304
474,696
11,332
69,842
567,746
$ 145,706
346,113
434,828
18,363
66,190
549,640
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) . . . . . . . . . . . . . .
1.15%
9.55
35.08
12.00
0.98%
8.22
37.57
11.84
1.04%
8.44
36.63
11.80
1.04%
8.39
37.79
12.30
1.08%
8.88
34.15
12.04
* Per share amounts have been adjusted for the 5% stock dividends paid in 2017 and 2018.
Page | 19
Item 7. Management’s Discussion and Analysis of Results of Operations and Financial Condition
The following discussion is designed to provide a review of the consolidated financial condition and results of operations of ChoiceOne,
and its wholly-owned subsidiaries. This discussion should be read in conjunction with the consolidated financial statements and
related footnotes.
RESULTS OF OPERATIONS
Summary
Net income for 2018 was $7,333,000, which represented an increase of $1,165,000 or 19% from 2017. Growth in net income resulted
primarily from an increase in net interest income in 2018 compared to 2017, a reduction of tax expense related to the Tax Cut and
Jobs Act along with a decline in the provision for loan losses. This impact was partially offset by a reduction in noninterest income
and growth in noninterest expense in 2018 compared to the prior year. The benefit of $7.3 million of growth in average earning assets
in 2018 compared to 2017 was aided by an 11 basis point increase in ChoiceOne’s net interest spread. Net loan recoveries of $61,000
in 2018 allowed ChoiceOne to take a minimal provision for loan losses, compared to net charge-offs of $185,000 in 2017 which
necessitated provision expense of $485,000. A decline in noninterest income of $891,000 in 2018 compared to 2017 was primarily due to
a nonrecurring gain of $908,000 on the sale of a portion of ChoiceOne’s investment book of business that occurred in the fourth quarter
of 2017. The increase of $1,127,000 in noninterest expense in 2018 compared to the prior year was primarily caused by higher salaries
and benefits expense and other noninterest expense.
Net income for 2017 was $6,168,000, which represented a $78,000 or 1% increase from 2016. The growth in net income resulted
primarily from an increase in interest income in 2017 compared to 2016, which was partially offset by a higher provision for loan losses
and higher noninterest expense. The effect of $39.8 million of growth in average earning assets in 2017 compared to 2016 was partially
offset by a 5 basis point decrease in the rate earned on average earning assets. A combination of an increase in net charge-offs in 2017
compared to the prior year and loan growth in 2017 caused ChoiceOne to add $485,000 in expense for provision for loan losses in 2017
compared to no provision in 2016. ChoiceOne had $185,000 in net loan charge-offs in 2017, compared to net loan recoveries of $83,000
in 2016. A decline in noninterest income of $70,000 in 2017 compared to 2016 was mainly caused by a decrease in gains on sales of loans
and net losses on sales of securities in 2017 in contrast to net gains recognized in 2016. This was also offset by a $908,000 gain on the
sale of a portion of ChoiceOne’s investment book of business discussed further in the non-interest income section below. The increase
of $362,000 in noninterest expense in 2017 compared to the prior year was primarily due to higher salaries and benefits expense as well
as increased occupancy expense and professional fees.
Dividends
Cash dividends of $2,572,000 or $0.71 per common share were declared in 2018, compared to $2,317,000 or $0.64 per common share
in 2017 and $2,231,000 or $0.62 per common share in 2016. The dividend yield on ChoiceOne’s common stock was 2.84% as of the
end of 2018, compared to 2.86% in both 2017 and 2016. The cash dividend payout as a percentage of net income was 35% in 2018,
compared to 38% in 2017 and 37% in 2016. In addition, a 5% stock dividend was paid on May 31, 2018, which caused $4,335,000 to
be transferred from retained earnings to paid-in capital. A 5% stock dividend was also paid on May 31, 2017 and produced a transfer of
$3,779,000 from retained earnings to paid-in capital.
Page | 20
Table 1 – Average Balances and Tax-Equivalent Interest Rates
(Dollars in thousands)
Assets:
2018
2017
2016
Average
Balance
Interest Rate
Average
Balance
Interest
Rate
Average
Balance
Interest Rate
Year ended December 31,
Loans(1)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $404,494 $ 20,038
Taxable securities(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114,570
2,896
Nontaxable securities(1) . . . . . . . . . . . . . . . . . . . . . . . . . . 55,891
1,858
131
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24,923
Interest-earning assets . . . . . . . . . . . . . . . . . . . . . . . 582,459
Noninterest-earning assets(4). . . . . . . . . . . . . . . . . . . . . . . 55,331
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $637,790
7,504
Liabilities and Shareholders’ Equity:
Interest-bearing demand deposits . . . . . . . . . . . . . . . . . . $209,542 $
Savings deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76,102
Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . 109,834
Advances from Federal Home Loan Bank . . . . . . . . . . . . 12,002
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,586
Interest-bearing liabilities . . . . . . . . . . . . . . . . . . . . 411,066
688
17
1,470
235
51
2,461
Demand deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148,495
Other noninterest-bearing liabilities . . . . . . . . . . . . . . . .
1,428
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 560,989
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76,801
Total liabilities and shareholders’ equity . . . . . . . . $637,790
122,150
54,975
4.95% $388,609 $ 17,974
2,371
2.53
2,142
3.32
102
1.74
22,589
4.28
9,465
575,199
54,549
$629,748
118,787
54,332
4.63% $357,880 $ 16,518
2,171
1.94
2,190
3.90
1.08
21
20,900
3.93
4,231
535,230
51,069
$586,299
4.62%
1.83
4.03
0.49
3.91
76,107
104,936
22,830
0.33% $208,049 $
0.02
1.34
1.96
1.42
0.60
5,661
417,583
136,353
786
554,722
75,026
$629,748
253
20
517
171
8
969
0.13%
0.03
0.60
0.66
0.10
0.25
385
14
790
276
13
1,478
73,118
86,042
26,049
0.18% $196,662 $
0.02
0.75
1.21
0.23
0.36
8,372
390,243
123,848
74
514,165
72,134
$586,299
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) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.68%
22,462
(398)
$ 22,064
21,111
(548)
$ 20,563
3.57%
3.66%
19,931
(588)
$ 19,343
3.86%
3.67%
3.72%
(1)
Interest on nontaxable securities and loans has been adjusted to a fully tax-equivalent basis to facilitate comparison to the taxable interest-earning assets. The
adjustment uses an incremental tax rate of 21% for 2018 and 34% for 2017 and 2016.
(2)
Interest on loans included net origination fees charged on loans of approximately $1,087,000, $1,003,000, and $1,054,000 in 2018, 2017, and 2016, respectively.
(3)
Interest on taxable securities includes dividends on Federal Home Loan Bank and Federal Reserve Bank stock.
(4) Noninterest-earning assets include loans in nonaccrual status, which averaged approximately $1,266,000, $1,486,000, and $2,416,000 in 2018, 2017, and
2016, respectively.
Table 2 – Changes in Tax-Equivalent Net Interest Income
(Dollars in thousands)
Increase (decrease) in interest income(1)
Year ended December 31,
2018 Over 2017
Volume
Total
Rate
Total
2017 Over 2016
Volume
Loans(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nontaxable securities(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change in interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2,064
525
(284)
29
2,334
Increase (decrease) in interest expense(1)
Interest-bearing demand deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Savings deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advances from Federal Home Loan Bank . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change in interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change in tax-equivalent net interest income . . . . . . . . . . . . . .
303
3
680
(41)
38
983
$ 1,351 $
754
(155)
35
(24)
610
3
—
39
(165)
(7)
(130)
740
$
$ 1,310
680
(319)
53
1,724
300
3
641
124
45
1,113
$
611 $
1,456
200
(48)
81
1,689
132
(6)
273
105
5
509
1,180
$
$
$
1,421
63
26
41
1,551
16
1
127
(23)
(4
)
117
$
1,434
Rate
35
137
(74)
40
138
116
(7)
146
128
9
392
(254)
(1) The volume variance is computed as the change in volume (average balance) multiplied by the previous year’s interest rate. The rate variance is computed as the
change in interest rate multiplied by the previous year’s volume (average balance). The change in interest due to both volume and rate has been allocated to the
volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.
(2)
Interest on tax-exempt securities and loans has been adjusted to a fully tax-equivalent basis using an incremental tax rate of 21% for 2018 and 34% for 2017
and 2016.
Page | 21
Net Interest Income
The presentation of net interest income on a tax-equivalent basis is not in accordance with generally accepted accounting principles
(“GAAP”), but is customary in the banking industry. This non-GAAP measure ensures comparability of net interest income arising from
both taxable and tax-exempt loans and investment securities. The adjustments to determine net interest income on a tax-equivalent basis
were $398,000, $548,000 and $588,000 for the years ended 2018, 2017 and 2016, respectively. These adjustments were computed using
a 21% federal income tax rate in 2018 and a 34% federal income tax rate in 2017 and 2016.
Tax-equivalent net interest income increased $1,351,000 in 2018 compared to 2017. The increase was attributed to an increase of $6.7
million in interest-earning assets and 11 basis points of growth in ChoiceOne’s net interest spread. The increase in the net interest spread
resulted from growth of 35 basis points in the average rate on interest-earning assets, while the average rate on interest-bearing liabilities
increased 24 basis points.
The average balance of loans increased $15.9 million in 2018 compared to 2017. Most of the increase resulted from growth of $14.0
million in commercial real estate loans. Growth in the average balance of consumer loans and residential real estate loans was largely
offset by declines in the average balance of agricultural and commercial and industrial loans in 2018 compared to the prior year. In
addition to the average balance growth, the average rate earned on loans increased 32 basis points in 2018 compared to 2017 as a result of
higher general market interest rates and higher rates charged on new loan originations. Tax-equivalent interest income on loans increased
$2.1 million in 2018 compared to the prior year. A decrease in the average balance of total securities of $6.7 million in 2018 compared
to 2017 was primarily due to the sale of $35 million of securities in the fourth quarter of 2017. The lower average balance of securities
was more than offset by higher average interest rates earned, which caused interest income from securities to grow $242,000 in 2018
compared to the prior year.
Increases in general market interest rates in 2018 compared to 2017 caused the average rate paid to be higher for all interest-bearing
liability categories, except for savings deposits. The average balance of interest-bearing demand deposits increased $1.5 million in
2018 compared to 2017. The effect of this increase and a 15 basis point increase in the average rate paid caused interest expense to be
$303,000 higher in 2018 than in the prior year. The average balance of certificates of deposit was $4.9 million higher in 2018 than in
2017. Growth in the average balance plus the impact of a 59 basis point increase in the average rate paid caused interest expense to grow
$680,000. A $10.8 million decline in the average balance of Federal Home Loan Bank advances, partially offset by a 75 basis point
increase in the average rate paid, caused interest expense to decrease $41,000 in 2018 compared to the prior year. Although the average
balance of other interest-bearing liabilities was $2.1 million lower in 2018 than in 2017, an increase of 119 basis points caused interest
expense to grow by $38,000.
ChoiceOne’s tax-equivalent net interest income spread was 3.68% in 2018 and 3.57% in 2017. The increase in the net interest income spread
resulted from a higher level of growth in the average rate earned on interest-earning assets than the rate paid on interest-bearing liabilities.
Tax-equivalent net interest income increased $1,180,000 in 2017 compared to 2016. The increase was attributed to an increase of $40.0
million in interest-earning assets, which was partially offset by a 2 basis point increase in the rate earned on these assets and an 11 basis
point increase in interest bearing liabilities. ChoiceOne’s net interest spread declined 9 basis points in 2017 compared to 2016.
The average balance of loans increased $30.7 million in 2017 compared to 2016. Most of the increase resulted from growth of $12.7
million in commercial real estate loans and $8.3 million of commercial and industrial loans. This growth in combination with a 1 basis
point increase in the average rate earned on loans caused tax-equivalent interest income on loans to increase $1.5 million in 2017
compared to the prior year. The average balance of total securities increased by $4.0 million in 2017 compared to 2016 as securities
were purchased to provide earning assets growth. Interest income from securities increased $152,000 in 2017 compared to the prior year.
The average balance of interest-bearing demand deposits increased $11.4 million in 2017 compared to 2016. The effect of this increase
and a 5 basis point increase in the average rate paid caused interest expense to be $132,000 higher in 2017 than in the prior year. The
effect of the $3.0 million increase in average savings deposits was partially offset by a 1 basis point decline in the average rate paid.
The average balance of certificates of deposit was $18.9 million higher in 2017 than in the prior year. The average balance increase
plus the impact of a 15 basis point increase in the average rate paid caused interest expense to grow $273,000. A $3.2 million decline in
the average balance of Federal Home Loan Bank advances, partially offset by a 55 basis point increase in the average rate paid, caused
interest expense to increase $105,000 in 2017 compared to the prior year.
ChoiceOne’s tax-equivalent net interest income spread was 3.57% for 2017 and 3.66% for 2016. The decline in the net interest income
spread resulted from the average rate paid on interest-bearing liabilities increased more in 2017 than the average rate earned on
interest-earning assets.
Page | 22
Provision and Allowance For Loan Losses
Table 3 – Provision and Allowance For Loan Losses
(Dollars in thousands)
Allowance for loan losses at beginning of year . . . . . . . . . . . . . .
Charge-offs:
Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate - commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate - construction . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate - residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recoveries:
Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate - commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate - construction . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate - residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net charge-offs (recoveries) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018
4,577
$
2017
4,277
$
2016
4,194
$
2015
4,173
$
2014
4,735
$
—
58
—
—
25
282
365
33
107
61
—
113
112
426
(61)
35
—
439
—
—
43
253
735
—
21
258
40
62
169
550
185
485
—
37
—
—
102
218
357
—
31
89
—
171
149
440
(83)
—
—
30
—
—
140
291
461
1
64
47
—
149
121
382
79
100
—
1
665
—
133
273
1,072
20
119
48
—
44
179
410
662
100
Allowance for loan losses at end of year . . . . . . . . . . . . . . . . . . .
$
4,673
$
4,577
$
4,277
$
4,194
$
4,173
Allowance for loan losses as a percentage of:
Total loans as of year end . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonaccrual loans, accrual loans past due 90 days or more
1.14 %
1.15%
1.16 %
1.20%
1.21%
and troubled debt restructurings . . . . . . . . . . . . . . . . . . .
123 %
108%
84 %
76%
63%
Ratio of net charge-offs (recoveries) to average total loans
outstanding during the year . . . . . . . . . . . . . . . . . . . . . . . . . .
Loan recoveries as a percentage of prior year’s charge-offs . . . . .
(0.02)%
58 %
0.05%
154%
(0.02)%
95 %
0.02%
36%
0.20%
19%
The provision for loan losses was $35,000 in 2018 compared to $485,000 in 2017. The reduction was primarily due to net loan recoveries
of $61,000 in 2018, compared to net loan charge-offs of $185,000 in the prior year. The provision was also impacted by a lower level
of loan growth in 2018 compared to 2017. The allowance for loan losses as a percentage of total loans decreased slightly from 1.15%
as of the end of 2017 to 1.14% as of the end of 2018. The coverage ratio of the allowance for loan losses to nonperforming loans
increased from 108% as of December 31, 2017 to 123% as of December 31, 2018. ChoiceOne had $297,000 of specific allowance
allocations for problem loans as of the end of 2018, compared to $302,000 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 2018 and 2017 were reasonable based
on the circumstances surrounding each particular borrower.
Page | 23
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2018
481 $
892
1,926
38
537
254
545
4,673 $
2017
506 $
1,001
1,761
35
726
262
286
4,577 $
2016
433 $
688
1,438
62
1,013
305
338
4,277 $
2015
420 $
586
1,030
46
1,388
297
427
4,194 $
2014
186
527
1,641
9
1,193
184
433
4,173
The decrease in the allowance allocation to commercial and industrial loans was due to a 12% decline in the balance in this loan category
in 2018. The increase in the allocation to commercial real estate loans was caused by 13% growth in the balance in this loan category
during the year. The reduction in the allocation to residential real estate loans resulted from lower historical charge-off levels in 2018
than in the last four years. Changes in historical charge-off levels and environmental factors affected all 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 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, 2018 was 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 decreased $891,000 in 2018 compared to 2017. Customer service charges increased $391,000 in 2018
compared to the prior year due to higher overdraft fees, checking account service charges, and debit card fees. Insurance and investment
commissions were $491,000 lower and the gain on sale of investment book of business was $908,000 lower in 2018 than in 2017 as a
result of the sale of a majority of ChoiceOne’s investment book of business in the fourth quarter of 2017. Gains on sales of loans declined
$262,000 in 2018 compared to the prior year as higher interest rates for residential real estate loans and a low inventory of homes for
sale in ChoiceOne’s market areas has reduced the level of residential mortgage originations. The $314,000 improvement in net gains
on sales of securities in 2018 compared to 2017 was caused by ChoiceOne’s sale of securities for a loss in the fourth quarter of 2017.
Total noninterest income decreased $70,000 in 2017 compared to 2016. Customer service charges increased $79,000 in 2017 due to
higher overdraft and debit card fees. Gains on loan sales declined $483,000 in 2017 compared to 2016 as mortgage sales volume was
lower in 2017 than in 2016. This was primarily due to higher interest rates and a relatively low inventory of homes available for sale
in ChoiceOne’s primary markets. The large decline in gain on sales of securities was due to ChoiceOne’s decision in the fourth quarter
of 2017 to sell securities to support the funding of loan growth and decrease the bank’s dependence on wholesale borrowings due to
increases in interest rates. As a result, ChoiceOne sold approximately $35 million in securities and recorded a loss in the fourth quarter of
2017 of $457,000 on the sale. The decision was accretive to income in 2018 and recognizing the losses during 2017 resulted in beneficial
tax treatment. A gain of $908,000 was recognized upon the sale of a portion of ChoiceOne’s investment book of business during the
fourth quarter of 2017. This sale was the primary reason for the decrease in insurance and investment commissions from 2016 to 2017.
The increase in other noninterest income from 2016 to 2017 was primarily due to a $61,000 improvement in income from ChoiceOne’s
investment in a title insurance agency.
Noninterest Expense
Total noninterest expense increased $1,127,000 in 2018 compared to 2017. Salaries and benefits expense grew $748,000 due to higher
costs related to salaries and health insurance, the impact of which was partially offset by lower commission expense as a result of the sale
of the majority of the investment book of business in 2017. Part of the salaries increase was caused by staffing for ChoiceOne’s two new
offices that opened in 2018. A decline of $174,000 in occupancy and equipment expense resulted from lower equipment depreciation
in 2018 than in 2017. Professional fees increased $183,000 in 2018 compared to the prior year as a result of higher external and
internal audit costs connected with new audit requirements for ChoiceOne’s internal controls over financial reporting in 2018 and higher
consulting costs. Other noninterest expense was $440,000 higher in 2018 than in the prior year. Higher loan related costs, expenses
connected to low income housing tax credits, and general growth in operating expenses contributed to the growth.
Page | 24
Total noninterest expense increased $362,000 in 2017 compared to 2016. Salaries and benefits increased $267,000 in 2017 compared
to the prior year due to higher costs related to salaries, stock-based compensation, and health insurance. Occupancy and equipment
expense grew $308,000 in 2017 compared to the prior year primarily as a result of costs related to remodeling expenses to ChoiceOne’s
headquarters in Sparta, Michigan which was completed in 2017. Expense was also affected by a full year’s cost of two new ATM
locations that were added during 2016. Professional fees increased $231,000 in 2017 compared to 2016 due in part to higher legal fees
related to the sale of the investment book of business and costs associated with the search, purchase, and branch application process on
two additional branches that opened in 2018. Intangible amortization expense was $0 in 2017 as the related intangible assets were fully
amortized by the end of 2016. The decrease in other noninterest expense in 2017 compared to the prior year was caused in part by lower
recruiting expense and declines in various other operating expenses.
Income Taxes
Income tax expense was $1,233,000 less in 2018 than in 2017. The reduction was principally caused by the effect of the Tax Cut and
Jobs Act passed in December 2017, which reduced ChoiceOne’s federal tax rate from 34% to 21%. The effective tax rate was 14% in
2018, compared to 28% in 2017 and 26% in 2016. Income tax expense increased $225,000 in 2017 compared to 2016. The increase
was due in part to an adjustment of ChoiceOne’s deferred tax asset at the end of 2017 for the lower corporate tax rate effective in 2018.
Financial Condition
Summary
Total assets were $670.5 million as of December 31, 2018, which represented an increase of $24.0 million or 3.7% from the end of 2017.
Cash and due from banks declined $17.2 million and investment securities grew $13.9 million in 2018 as excess funds were redeployed
into the purchase of securities. Loans to other financial institutions grew $13.8 million as ChoiceOne experienced a higher level of
volume in this asset category. Net loans increased $10.2 million in 2018, with most of the increase occurring in commercial real estate
loans. Growth of $3.0 million in premises and equipment occurred primarily as a result of ChoiceOne’s two offices opened in 2018. Total
deposits increased $37.2 million in 2018 due to growth in checking deposits and certificates of deposit.
Securities
The Bank’s securities balances as of December 31 were as follows:
(Dollars in thousands)
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2,847 $
—
2018
2017
Available for Sale Securities
U.S. Government and federal agency . . . . . . . . . . . . .
U.S. Treasury notes and bonds . . . . . . . . . . . . . . . . . .
State and municipal . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trust preferred securities . . . . . . . . . . . . . . . . . . . . . .
Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,947
$ 33,529 $ 35,126
1,960
103,928 100,048
9,820
21,575
5,151
5,102
2,892
—
500
500
21
94
$ 166,602 $ 155,591
The table above reflects the reclassification of equity securities due to ChoiceOne’s implementation of Accounting Standard 2016-01
effective January 1, 2018.
Total investment securities increased $13.9 million from December 31, 2017 to December 31, 2018. Approximately $31.5 million
of securities were purchased in 2018, a part of which was funded by excess funds existing at the end of 2017. Securities totaling
$10.1 million were called or matured in 2018. Principal payments for municipal and mortgage-backed securities totaling $3.3 million
were received during 2018. Approximately $2.7 million of securities were sold during the year for net gains of $34,000. The Bank’s
Investment Committee continues to monitor the portfolio and purchases securities as it considers prudent.
Equity securities included a money market preferred security (MMP) of $0.9 million and common stock of $1.9 million as of
December 31, 2018. As of December 31, 2017, equity securities included an MMP of $1.0 million, and common stock of $1.9 million.
Page | 25
Loans
The Bank’s loan portfolio as of December 31 was as follows:
(Dollars in thousands)
2017
Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 49,109 $ 48,464
91,406 104,386
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24,513
24,382
Real estate - commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139,453 123,487
6,613
Real estate - construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate - residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
91,322
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 409,073 $ 398,785
8,843
95,880
2018
The loan portfolio (excluding loans held for sale and loans to other financial institutions) increased $10.3 million from December 31, 2017
to December 31, 2018. Economic factors in ChoiceOne’s market areas are continuing to improve in most industry sectors. Growth in
commercial real estate loans resulted from calling efforts by ChoiceOne’s loan officers in existing and new markets. The decline in
commercial and industrial loans was caused by paydowns of both portfolio and participation loans as well as less usage of lines of credits
in 2018 compared to the prior year. The increase in residential real estate loans was primarily due to growth in home equity loans in 2018.
The Bank entered into an agreement at the beginning of 2017 to provide a line of credit to facilitate funding of residential mortgage loan
originations at other financial institutions. The loans are short-term in nature and are designed to provide funding for the time period
between the loan origination and its subsequent sale in the secondary market. The balance of the line of credit was $20.6 million as of
December 31, 2018 and $6.8 million as of December 31, 2017.
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. 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.
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2018
1,532 $
—
2,254
3,786 $
2017
1,096
258
2,896
4,250
Nonaccrual loans included $393,000 in agricultural loans, $62,000 in consumer loans, $123,000 in commercial real estate loans, and
$954,000 in residential real estate loans as of December 31, 2018. Nonaccrual loans included $423,000 in agricultural loans, $222,000 in
commercial and industrial loans, $15,000 in consumer loans, and $436,000 in residential real estate loans as of December 31, 2017. The
primary reason for the increase in nonaccrual loans in 2018 was the movement of a number of smaller residential real estate loans into
nonaccrual status during the year. 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 $19,000 in commercial and industrial loans, $14,000 in consumer
loans, $500,000 in commercial real estate loans, and $1,721,000 in residential real estate loans at December 31, 2018, compared to
$24,000 in commercial and industrial loans, $556,000 in commercial real estate loans, $17,000 in consumer loans, and $2,299,000 in
residential real estate loans at December 31, 2017.
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 $1.8 million as of December 31, 2018, compared to $3.6
million as of December 31, 2017.
Page | 26
Deposits and Other Funding Sources
The Bank’s deposit balances as of December 31 were as follows:
(Dollars in thousands)
Noninterest-bearing demand deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest-bearing demand deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Money market deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Savings deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Local certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Brokered certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018
2017
$ 153,542 $ 151,462
135,425 126,363
94,178
75,080
82,598
10,172
$ 577,015 $ 539,853
86,720
75,615
91,343
34,370
Total deposits increased $37.2 million from December 31, 2017 to December 31, 2018. Noninterest-bearing and interest-bearing demand
deposits grew a total of $11.1 million as the Bank’s depositors valued the liquidity available in this deposit category. The $7.5 million
decline in money market deposits was primarily due to transfers to the demand deposit and local certificates of deposit categories.
Higher rates paid on local certificates of deposit in 2018 compared to 2017 as a result of rising general market interest rates helped to
generate depositor interest in this category and contributed to the $8.7 million of growth during 2018. Brokered certificates of deposit
increased $24.2 million in 2018 as they were used to help fund earning asset growth and replaced Federal Home Loan Bank advances
that carried higher interest rates.
Federal funds purchased increased $4.8 million from December 31, 2017 to December 31, 2018 as overnight funding was used to meet
short-term funding needs. A decline of $7.1 million in the balance of securities sold under agreements to repurchase was primarily due
to transfers into deposit accounts offered by the Bank. Federal Home Loan Bank advances declined $15.0 million in 2018 as interest
rates for brokered certificates of deposit were lower than comparable advances. A blanket collateral agreement covering agricultural
real estate loans and residential real estate loans was pledged against all outstanding advances at the end of 2018. Approximately $45.5
million of additional advances were available as of December 31, 2018 based on the collateral pledged.
In 2019, 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 and brokered certificates of deposit can address corresponding
funding needs.
Shareholders’ Equity
Total shareholders’ equity increased $3.9 million from December 31, 2017 to December 31, 2018. The growth in equity resulted from
the retention of earnings in 2018 as net income exceeded dividends paid by $4.8 million. Accumulated other comprehensive income
decreased by $1.0 million in 2018 principally as a result of available for sale securities moving from a net unrealized gain at the end of
2017 to a net unrealized loss as of the end of 2018. Market rate changes drove the shift to a loss position; however, none of the losses
were considered to be other than temporary in nature as of the end of 2018.
Note 20 to the consolidated financial statements presents regulatory capital information for the Bank at the end of 2018 and 2017.
Management will monitor these capital ratios during 2019 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. At December 31, 2018, the Bank was categorized as “well-capitalized.” On July 3, 2013, the FDIC Board
of Directors approved the Regulatory Capital Interim Final Rule, implementing Basel III. This rule redefines Tier 1 capital as two
components (Common Equity Tier 1 and Additional Tier 1), creates a new capital ratio (Common Equity Tier 1 Risk-based Capital
Ratio) and implements a capital conservation buffer. It also revises the prompt corrective action thresholds and makes changes to risk
weights for certain assets and off-balance-sheet exposures. Banks were required to transition into the new rule beginning on January 1,
2015. A 2.5% capital conservation buffer will be phased in over a period of four years beginning in 2016. Based on ChoiceOne’s capital
levels and balance sheet composition at December 31, 2018, management believes implementation of the new rule will have no material
impact on ChoiceOne’s capital needs.
Page | 27
Table 4 – Contractual Obligations
The following table discloses information regarding the maturity of ChoiceOne’s contractual obligations at December 31, 2018:
(Dollars in thousands)
Total
Payment Due by Period
Less
than
1 year
1 - 3
Years
3 - 5
Years
More
than
5 Years
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advances from Federal Home Loan Bank . . . . . . . . . . . . . . . . . . . .
Operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 125,713 $ 99,281 $ 19,232 $
75
246
190
$ 132,480 $ 104,546 $ 19,743 $
5,036
119
110
5,233
939
595
7,200 $
82
256
141
7,679 $
—
40
318
154
512
Liquidity and Interest Rate Risk
Net cash from operating activities was $10.0 million in 2018 compared to $8.1 million in 2017. Net cash used in investing activities was
$43.9 million in 2018 compared to $18.3 million in 2017. The increase was caused by lower proceeds from sales of securities in 2018
compared to 2017, which was partially offset by lower net securities purchases and a lower level of loan growth. Net cash flows from
financing activities were $16.8 million in 2018 compared to $32.2 million in the prior year. The primary reason for the decline was net
payments on Federal Home Loan Bank advances in 2018, in contrast to 2017 when net proceeds were received.
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 of credit 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 correspondent banks. As
of December 31, 2018, the amount of federal funds available for purchase from the Bank’s correspondent banks totaled approximately
$58.5 million. ChoiceOne’s federal funds purchased balance was $4.8 million as of December 31, 2018 and $0 as of December 31,
2017. The Bank also has a line of credit secured by ChoiceOne’s commercial loans with the Federal Reserve Bank of Chicago for
$67.4 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 $45.5 million of borrowing capacity was available from the FHLB based on agricultural real estate loans and
residential real estate loans pledged as collateral at the end of 2018. The acceptance of brokered certificates of deposit is not limited as
long as the Bank is categorized as “well capitalized” under regulatory guidelines.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management’s discussion and analysis of results of operations and financial condition as well as disclosures found elsewhere in this report are
based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Material estimates that are particularly susceptible to
significant change in the near-term relate to the determination of the market value of securities, the amount of the allowance for loan losses,
loan servicing rights, carrying value of goodwill, and income taxes. Actual results could differ from those estimates.
Securities
Debt securities available for sale may be sold prior to maturity due to changes in interest rates, prepayment risks, yield, availability of
alternative investments, liquidity needs, credit rating changes, or other factors. Debt securities classified as available for sale are reported
at their fair value with changes flowing through other comprehensive income. 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.
Page | 28
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.
Effective January 1, 2018, equity securities are reported at their fair value with changes in market value flowing through net income.
Prior to 2018, equity securities were accounting for in a manner similar to available for sale debt securities.
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 for loan losses 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 and are
initially recorded at estimated fair value. 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. Under recently
issued accounting pronouncements, ChoiceOne is permitted to first perform a qualitative assessment to determine whether it is more
likely than not (that is, a likelihood of more than 50 percent) that the fair value of equity is less than its carrying value. If the conclusion
is that it is more likely than not that the fair value of equity is more than its carrying value, no further testing in the form of a quantitative
assessment is necessary. If the conclusion is that it is more likely than not that the fair value of equity is less than its carrying value, then
a two-step quantitative assessment test is performed to identify any potential goodwill impairment.
Management performed a qualitative assessment of goodwill as of September 30, 2018. The analysis was performed including evaluation
of the share price, book value, and financial results of ChoiceOne as compared to the previous year. Additionally, industry and market
conditions were evaluated and compared. Average deal prices in the Midwest of closed transactions have indicated increases in deal
values to tangible common equity, deal values to earnings, and core deposit premiums when compared to the observed prices used in the
last quantitative assessment of goodwill in 2016. Further, macro-economic trends have been on a positive trajectory recently and there
have been no adverse legal, regulatory, contractual, political or other factors that have materially impacted ChoiceOne. Upon completion
of the qualitative assessment, ChoiceOne believes that it was more likely than not that the fair value of ChoiceOne’s equity exceeded the
carrying value at the assessment date and there was no further quantitative assessment necessary.
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, 2018, management determined that no
valuation allowance was necessary.
Page | 29
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
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.
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)
Assets
0 - 3
Months
As of December 31, 2018
1 - 5
Years
Over
5 Years
3 - 12
Months
Total
Equity securities at fair value . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank stock . . . . . . . . . . . . . . . . . . . . . . . .
Federal Reserve Bank stock . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans to other financial institutions . . . . . . . . . . . . . . . . . . . . .
Loans
Cash surrender value of life insurance policies . . . . . . . . . . . . .
Rate-sensitive assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities
Interest-bearing demand deposits . . . . . . . . . . . . . . . . . . . . . . .
Money market deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Savings deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal funds purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advances from FHLB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate-sensitive liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate-sensitive assets less rate-sensitive liabilities:
$
$
$
$
—
13,224
—
—
—
—
85,658
2,847
14,475
1,994
—
831
20,644
116,606
$
2,847
166,602
1,994
1,573
831
20,644
409,073
14,899
$ 157,397 $ 98,882 $ 260,978 $ 101,204 $ 618,461
—
51,519
—
1,573
—
—
33,213
14,899
—
87,382
—
—
—
—
173,596
—
—
—
$
$
$
$ 135,425
86,720
75,615
38,570
4,800
5,009
—
—
—
26,391
—
157
$ 346,139 $ 60,742 $ 26,548 $
—
—
—
60,715
—
27
$ 135,425
—
86,720
—
75,615
—
125,713
37
4,800
—
40
5,233
77 $ 433,506
Asset (liability) gap for the period . . . . . . . . . . . . . . . . . . .
Cumulative asset (liability) gap . . . . . . . . . . . . . . . . . . . . .
$(188,742) $ 38,140 $ 234,430 $ 101,127 $ 184,955
$(188,742) $(150,602) $ 83,828 $ 184,955
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 63% at December 31, 2018,
compared to 63% at December 31, 2017. 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 2019. As
interest rates change during 2019, 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, 2018, 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.
Page | 30
Table 6 provides an illustration of hypothetical interest rate changes as of December 31, 2018 and 2017:
Table 6 – Sensitivity to Changes in Interest Rates
(Dollars in thousands)
Change in Interest Rate
Net
Interest
Income
Percent
Change
2018
Market
Value of
Equity
Percent
Change
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 23,929
23,884
23,794
23,669
23,534
22,769
21,316
20,392
19,959
2% $ 162,529
1% 165,869
1% 167,245
1% 169,173
—% 168,501
-3% 156,542
-9% 135,114
-13% 113,880
-15% 114,152
2017
-4%
-2%
-1%
—%
—%
-7%
-20%
-32%
-32%
(Dollars in thousands)
Change in Interest Rate
Net
Interest
Income
Percent
Change
Market
Value of
Equity
Percent
Change
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 23,742
23,409
23,064
22,704
22,336
20,987
19,769
19,206
18,805
6% $ 176,632
5% 174,281
3% 171,240
2% 167,423
—% 161,760
-6% 145,174
-11% 122,923
-14% 109,403
-16% 108,928
9%
8%
6%
4%
—%
-10%
-24%
-32%
-33%
As of December 31, 2018, the Bank was within its guidelines for immediate rate shocks up and down for all net interest income scenarios
and for the up rate scenarios and the down 100 and 200 basis points scenarios for the market value of shareholders’ equity. The Bank’s
percent change in the 300 and 400 basis points down scenarios for the market value of shareholders’ equity was slightly higher than
the policy guidelines. As of December 31, 2017, the Bank was within its guidelines for immediate rate shocks up and down for all net
interest income scenarios and for the up rate scenarios and the down 100 basis points scenario for the market value of shareholders’
equity. The Bank’s percent change in the 200, 300, and 400 basis points down scenarios for the market value of shareholders’ equity
was slightly higher than the policy guidelines. 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.
Page | 31
Item 8.
Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
of ChoiceOne Financial Services, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying balance sheets of ChoiceOne Financial Services, Inc. (the “Company”) as of December 31, 2018 and
2017, the related statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year
period ended December 31, 2018, and the related notes and schedules (collectively referred to as the “financial statements”). We also have
audited the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO framework”).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as
of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three-year period ended
December 31, 2018, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion,
the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on
criteria established in the COSO framework.
Basis for Opinion
The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Report on
Management’s Assessment of Internal Control Over Financial Reporting.” Our responsibility is to express an opinion on the Company’s
financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public
accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of
the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud,
and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining,
on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
We have served as the Company’s auditor since 2006.
Auburn Hills, Michigan
March 15, 2019
Page | 32
(Dollars in thousands)
Assets
ChoiceOne Financial Services, Inc.
CONSOLIDATED BALANCE SHEETS
December 31,
2018
2017
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 19,690
$ 36,837
Equity securities at fair value (Note 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities available for sale (Note 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Reserve Bank stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans to other financial institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans (Note 3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan losses (Note 3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,847
166,602
1,994
1,573
831
20,644
409,073
(4,673)
404,400
—
155,591
1,994
1,573
1,721
6,802
398,785
(4,577)
394,208
Premises and equipment, net (Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate owned, net (Note 7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash value of life insurance policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill (Note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15,879
102
14,899
13,728
7,355
12,855
106
14,514
13,728
6,615
$ 670,544 $ 646,544
Liabilities
Deposits – noninterest-bearing (Note 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deposits – interest-bearing (Note 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 151,462
$ 153,542
423,473 388,391
539,853
577,015
Federal funds purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase agreements (Note 9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advances from Federal Home Loan Bank (Note 10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities (Notes 11 and 13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,800
—
5,233
3,019
—
7,148
20,268
2,725
569,994
590,067
Shareholders’ Equity (Note 20)
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:
—
—
3,616,483 in 2018 and 3,448,569 in 2017 (Note 14) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income (loss), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
54,523
26,686
(732)
80,477
50,290
26,023
237
76,550
$ 670,544 $ 646,544
See accompanying notes to consolidated financial statements.
Page | 33
ChoiceOne Financial Services, Inc.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
Interest income
Years ended December 31,
2017
2016
2018
Loans, including fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities:
Taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax exempt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 20,033
$ 17,964
$ 16,507
2,896
1,465
2,556
1,419
131
24,525
102
22,041
2,334
1,450
21
20,312
Interest expense
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advances from Federal Home Loan Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,175
235
1,189
276
51
2,461
13
1,478
790
171
8
969
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan losses (Note 3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income after provision for loan losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
22,064
20,563
35
485
22,029
20,078
19,343
—
19,343
Noninterest income
Customer service charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Insurance and investment commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gains on sales of loans (Note 4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gains/(losses) on sales of securities (Note 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gains/(losses) on sales and write-downs of other assets (Note 7) . . . . . . . . . . . . . . . . .
Earnings on life insurance policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in market value of equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of investment book of business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 amortization (Note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FDIC insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,525
335
1,003
34
83
385
71
—
484
6,920
4,135
826
1,265
(280)
26
398
—
908
533
7,811
4,056
1,009
1,748
312
(41)
356
—
—
441
7,881
10,997
2,722
2,205
1,349
408
308
—
185
2,287
20,461
10,249
2,896
2,279
1,166
399
298
—
200
1,847
19,334
9,982
2,588
2,273
935
385
222
379
238
1,970
18,972
Income before income tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense (Note 11) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,488
1,155
8,555
2,387
8,252
2,162
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic earnings per share (Note 15) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings per share (Note 15) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends declared per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
7,333 $
6,168 $
6,090
2.03 $
2.02 $
0.71 $
1.70 $
1.70 $
0.64 $
1.68
1.68
0.62
See accompanying notes to consolidated financial statements.
Per share amounts have been adjusted for the 5% stock dividend paid in 2017 and 2018.
Page | 34
ChoiceOne Financial Services, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
Years ended December 31,
2017
2016
2018
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
7,333
$
6,168
$
6,090
Other comprehensive income:
Changes in net unrealized gains (losses) on investment securities available for sale, net of tax
expense (benefit) of $(196), $324, and $(812) for the years ended December 31, 2018,
2017, and 2016, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(737)
628
(1,573)
Reclassification adjustment for realized gain on sale of investment securities available for
sale included in net income, net of tax expense (benefit) of $(7), $95, and $(106) for the
years ended December 31, 2018, 2017, and 2016, respectively . . . . . . . . . . . . . . . . . . . . . .
(27)
185
(206)
Change in adjustment for postretirement benefits, net of tax expense (benefit) of $10, $(9),
and $(12) for the years ended December 31, 2018, 2017, and 2016, respectively . . . . . . . .
39
(17)
(22)
Other comprehensive income (loss), net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(725)
796
(1,801)
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
6,608 $
6,964 $
4,289
See accompanying notes to consolidated financial statements.
Page | 35
ChoiceOne Financial Services, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Dollars in thousands, except per share data)
Common
Stock and
Paid in
Capital
Number of
Shares
Retained
Earnings
Accumulated
Other
Comprehensive
Income/(Loss),
Net
Total
Balance, January 1, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,295,228
$ 46,501
$ 22,138
$
1,203
$ 69,842
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares repurchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Termination of ESOP repurchase obligation. . . . . . . . . . . . .
Effect of employee stock purchases . . . . . . . . . . . . . . . . . . .
Stock compensation shares issued . . . . . . . . . . . . . . . . . . . .
Stock compensation expense . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends declared ($0.62 per share)(1)(2) . . . . . . . . . . .
6,090
(1,801)
8,460
(35,000)
9,256
173
(794)
127
13
279
(2,231)
6,090
(1,801)
173
(794)
127
13
—
279
(2,231)
Balance, December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . .
3,277,944
$ 46,299
$ 25,997
$
(598) $ 71,698
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . .
Shares issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares repurchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of employee stock purchases . . . . . . . . . . . . . . . . . . .
Stock options exercised and issued(3) . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . . . . . . . . . . . . . .
Restricted stock units issued . . . . . . . . . . . . . . . . . . . . . . . . .
Stock dividend declared (5%) . . . . . . . . . . . . . . . . . . . . . . . .
Effect of tax law change on other comprehensive income . .
Cash dividends declared ($0.64 per share)(1)(2) . . . . . . . . . . .
8,776
(8,800)
1,463
5,197
163,989
149
(203)
13
13
240
3,779
6,168
(3,786)
(39)
(2,317)
796
39
6,168
796
149
(203)
13
13
240
—
(7)
—
(2,317)
Balance, December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . .
3,448,569
$ 50,290
$ 26,023
$
237
$ 76,550
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares repurchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of employee stock purchases . . . . . . . . . . . . . . . . . . .
Stock options exercised and issued(3) . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . . . . . . . . . . . . . .
Restricted stock units issued . . . . . . . . . . . . . . . . . . . . . . . . .
Adoption effect of ASU 2016-01(4) . . . . . . . . . . . . . . . . . . . .
Stock dividend declared (5%) . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends declared ($0.71 per share)(2). . . . . . . . . . . . .
7,904
(20,628)
1,241
7,303
126
(523)
13
282
172,094
4,335
7,333
244
(4,342)
(2,572)
(725)
(244)
7,333
(725)
126
(523)
13
—
282
—
—
(7)
(2,572)
Balance, December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . .
3,616,483 $ 54,523 $ 26,686 $
(732) $ 80,477
(1) Adjusted for 5% stock dividend issued on May 31, 2017.
(2) Adjusted for 5% stock dividend issued on May 31, 2018.
(3) The amount shown includes the number of shares issued in cashless transactions where some taxes are netted on a portion of the exercises.
(cid:11)(cid:23)(cid:12)(cid:3) (cid:36)(cid:54)(cid:56)(cid:3)(cid:21)(cid:19)(cid:20)(cid:25)(cid:16)(cid:19)(cid:20)(cid:3)(cid:76)(cid:86)(cid:3)(cid:73)(cid:88)(cid:85)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:68)(cid:71)(cid:71)(cid:85)(cid:72)(cid:86)(cid:86)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:49)(cid:82)(cid:87)(cid:72)(cid:3)(cid:20)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:191)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:86)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:17)
See accompanying notes to consolidated financial statements.
Page | 36
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 employee and director stock purchases, stock options, and restricted stock units . . . . .
Net (gains)/losses on sales of securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change in market value of equity 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred federal income tax (benefit)/expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases or calls of FHLB stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of bank-owned life insurance policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loan originations and payments, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions to premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flows from financing activities:
Net change in deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change in repurchase agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change in fed funds purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from Federal Home Loan Bank advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments on Federal Home Loan Bank advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends and fractional shares from stock dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash from financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Beginning cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years ended December 31,
2017
2016
2018
$
7,333
$
6,168
$
6,090
35
1,183
893
344
(34)
(71)
(1,003)
(33,555)
34,872
(385)
(79)
515
209
(875)
573
9,955
2,725
13,443
(31,450)
—
—
(24,366)
(4,207)
(43,855)
37,162
(7,148)
4,800
128,500
(143,535)
77
(523)
(2,580)
16,753
(17,147)
36,837
485
1,389
1,061
317
280
—
(1,265)
(43,171)
42,883
(398)
(18)
663
62
417
(783)
8,090
57,628
17,572
(56,123)
—
—
(35,723)
(1,656)
(18,302)
—
1,078
1,531
380
(312)
—
(1,748)
(53,591)
57,830
(356)
8
247
(82)
(1,952)
1,804
10,927
15,317
36,705
(69,526)
(380)
(1,500)
(20,274)
(1,819)
(41,477)
27,467
(765)
—
212,500
(204,533)
98
(203)
(2,324)
32,240
37,690
(1,547)
—
311,017
(310,048)
85
(794)
(2,231)
34,172
22,028
14,809
3,622
11,187
Ending cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
19,690
$
36,837 $
14,809
Supplemental disclosures of cash flow information:
Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans transferred to other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2,300
850
432
$
1,465
2,120
314
984
1,760
661
See accompanying notes to consolidated financial statements.
Page | 37
Note 1 – Summary of Significant Accounting Policies
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Principles of Consolidation
The consolidated financial statements include ChoiceOne Financial Services, Inc., its wholly-owned subsidiary, ChoiceOne Bank (the
“Bank”), and ChoiceOne Bank’s wholly-owned subsidiary, ChoiceOne Insurance Agencies, Inc. (together referred to as “ChoiceOne”).
Intercompany transactions and balances have been eliminated in consolidation.
Nature of Operations
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 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.
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, 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
Debt securities are classified as available for sale because they might be sold before maturity. Debt 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 and investments in common stock of other
financial institutions. Effective January 1, 2018, equity securities are reported at their fair value with changes in market value flowing
through net income. Prior to 2018, equity securities were accounted for in a manner similar to available for sale debt securities.
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 it is more
likely than not it will be required to sell the security before recovery of its amortized cost basis. 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.
Page | 38
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
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 loans are 90 days past due unless the loan is secured by sufficient collateral and is in the process of collection.
Past due status is based on the contractual terms of the loan. 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.
Loans to Other Financial Institutions
Loans to other financial institutions are made for the purpose of providing a warehouse line of credit to facilitate funding of residential
mortgage loan originations at other financial institutions. The loans are short-term in nature and are designed to provide funding for
the time period between the loan origination and its subsequent sale in the secondary market. Loans to other financial institutions earn
a share of interest income, determined by the contract, from when the loan is funded to when the loan is sold on the secondary market.
Similar to loans held for sale, these loans are excluded from the allowance for loan losses as the risk of default is minimal during the
short time period held.
Allowance for Loan Losses
The allowance for loan losses is a valuation allowance for probable incurred credit losses. The allowance for loan losses 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 for loan losses 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
for loan losses may be made for specific loans, but the entire allowance for loan losses is available for any loan that, in management’s
judgment, should be charged off. Loan losses are charged against the allowance for loan losses when management believes that collection
of a loan balance is not possible.
The allowance for loan losses 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. Troubled debt restructuring of loans is undertaken to
improve the likelihood that the loan will be repaid in full under the modified terms in accordance with a reasonable repayment schedule.
All modified loans are evaluated to determine whether the loans should be reported as Troubled Debt Restructurings (TDR). A loan
is a TDR when the Bank, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the
borrower by modifying a loan. To make this determination, the Bank must determine whether (a) the borrower is experiencing financial
difficulties and (b) the Bank granted the borrower a concession. This determination requires consideration of all facts and circumstances
surrounding the modification. An overall general decline in the economy or some deterioration in a borrower’s financial condition
does not automatically mean the borrower is experiencing financial difficulties. Commercial loans are evaluated for impairment on an
individual loan basis. If a loan is considered impaired or if a loan has been classified as a TDR, 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 residential real estate mortgage loans are collectively evaluated for impairment and, accordingly, they are not separately
identified for impairment disclosures.
Page | 39
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 the Bank’s 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 noninterest income.
Bank Owned Life Insurance
Bank owned life insurance policies are stated at the current cash surrender value of the policy, or the policy death proceeds less any
obligation to provide a death benefit to an insured’s beneficiaries if that value is less than the cash surrender value. Increases in the asset
value are recorded as earnings in other income.
Loan Servicing Rights
Loan 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.
Servicing rights are initially recorded at estimated fair value and fair value is determined using prices for similar assets with similar
characteristics when available or based upon discounted cash flows 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 make contributions to their individual accounts under the plan in amounts up to the
IRS maximum. Employer matching 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 post-retirement benefits are accrued during
the years in which the employee provides service.
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. Diluted EPS assumes issue of any
dilutive potential common shares issuable under stock options or restricted stock units granted.
Page | 40
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income or loss. Other comprehensive income or loss includes
unrealized gains and losses on securities available for sale and changes in the funded status of post-retirement plans, net of tax, which
are also recognized as a separate component of shareholders’ equity.
Accumulated other comprehensive income was as follows:
(Dollars in thousands)
Years ended December 31,
2018
2017
Unrealized gain (loss) on available for sale securities . . . . . . . . . . . .
Unrecognized gains on post-retirement benefits . . . . . . . . . . . . . . . . .
Tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income (loss) . . . . . . . . . . . .
$
$
(1,108) $
181
195
(732) $
169
132
(64)
237
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 as of December 31, 2018.
Cash Restrictions
Cash on hand or on deposit with the Federal Reserve Bank of $781,000 and $810,000 was required to meet regulatory reserve and
clearing requirements at December 31, 2018 and 2017, respectively. The balance in excess of the amount required was interest-bearing
as of December 31, 2018 and December 31, 2017.
Stock-Based Compensation
The Company values share-based stock option awards granted using the Black-Scholes option-pricing model. The Company recognizes
compensation expense for its awards on a straight-line basis over the requisite service period for the entire award (straight-line attribution
method), ensuring that the amount of compensation cost recognized at any date at least equals the portion of the grant-date fair value of
the award that is vested at that time. Compensation costs related to stock options granted are disclosed in Note 14.
ChoiceOne has granted restricted stock units to a select group of employees under the Stock Incentive Plan of 2012. Restricted stock
units vest in three annual installments on each of the next three anniversaries of the grant date. Certain additional vesting provisions
apply. Each unit, once vested, is settled by delivery of one share of ChoiceOne common stock.
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 20).
Fair Value of Financial Instruments
Fair values of financial instruments are estimated using relevant market information and other assumptions, which are more fully
documented in Note 18 to the consolidated financial statements. Fair value estimates involve uncertainties and matters of significant
judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular
items. Changes in assumptions or in market conditions could significantly affect the estimates.
Operating Segments
While ChoiceOne’s management monitors the revenue streams of various products and services for the Bank and Insurance Agency,
operations and financial performance are evaluated on a company-wide basis. Accordingly, all of the financial service operations are
considered by management to be aggregated into one reportable operating segment.
Recent Accounting Pronouncements
The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts
with Customers (Topic 606). This ASU establishes a comprehensive revenue recognition standard for virtually all industries under
U.S. GAAP, including those that previously followed industry-specific guidance such as the real estate, construction and software
industries. The revenue standard’s core principle is built on the contract between a vendor and a customer for the provision of goods
and services. It attempts to depict the exchange of rights and obligations between the parties in the pattern of revenue recognition based
on the consideration to which the vendor is entitled. To accomplish this objective, the standard requires five basic steps: (i) identify the
Page | 41
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the
transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance
obligation. The ASU does not apply to financial instruments. The ASU is effective for public entities for reporting periods beginning
after December 15, 2017 (therefore, for the year ending December 31, 2018 for ChoiceOne). Early implementation is not allowed for
public companies. Management implemented ASU 2014-09 effective January 1, 2018 by identifying revenue streams in scope of the
guidance, including interchange revenue, deposit service charges, and investment advisory income, but the timing and amount of these
revenue streams were not significantly changed upon implementation.
The FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. The ASU covers various
changes to the accounting, measurement, and disclosure related to certain financial instruments. The most significant change included
in the update is the requirement for certain equity investments (excluding investments that are consolidated or accounted for under the
equity method of accounting) to be measured at fair value with changes in fair value recognized in net income. An entity may choose to
measure equity investments that do not have readily determinable fair values at cost, minus impairment. When a qualitative assessment
of equity investments without readily determinable fair values indicates that impairment exists, an entity is required to measure the
investment at fair value. The update also eliminates the requirement for public business entities to disclose the methods and significant
assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The new
standard is effective for ChoiceOne for the fiscal year beginning after December 15, 2017, including interim periods within this fiscal
year. Management implemented ASU 2016-01 effective January 1, 2018. A cumulative effect adjustment was recorded as of January 1,
2018 to reclassify $244,000 of unrealized gains on equity securities from accumulated other comprehensive income to retained earnings.
Equity securities have been presented separately from available for sale securities on the Consolidated Balance Sheet and changes in the
market value of securities is presented on the Consolidated Statement of Income. In addition, the fair value of loans has been estimated
using an exit price notion.
The FASB issued ASU 2016-02, Leases. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU
asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance
or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for
fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition
approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative
period presented in the financial statements, with certain practical expedients available. As ChoiceOne owns most of its branch locations,
the impact of this ASU is not expected to be material.
The FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments. This ASU provides financial statement users with more decision-useful information about the expected credit losses on
financial instruments and other commitments to extend credit held by a reporting entity at each reporting date by replacing the incurred
loss impairment methodology in current generally accepted accounting principles (GAAP) with a methodology that reflects expected
credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.
The new guidance attempts to reflect an entity’s current estimate of all expected credit losses and broadens the information that an entity
must consider in developing its expected credit loss estimate for assets measured either collectively or individually to include forecasted
information, as well as past events and current conditions. There is no specified method for measuring expected credit losses, and an
entity may apply methods that reasonably reflect its expectations of the credit loss estimate. Although an entity may still use its current
systems and methods for recording the allowance for credit losses, under the new rules, the inputs used to record the allowance for
credit losses generally will need to change to appropriately reflect an estimate of all expected credit losses and the use of reasonable and
supportable forecasts. Additionally, credit losses on available-for-sale debt securities will have to be presented as an allowance rather
than as a write-down. This ASU is effective for fiscal years beginning after December 15, 2019, and for interim periods within those
years. Management is currently evaluating the impact of this new ASU on its consolidated financial statements which may be significant.
The FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure
Requirements for Fair Value Measurement. This ASU improves the effectiveness of disclosures in the notes to financial statements by
facilitating clear communication of the information required by generally accepted accounting principles that is most important to users
of each entity’s financial statements. The objective of improving the effectiveness will include the development of a framework that
promotes consistent decisions by FASB about disclosure requirements and the appropriate exercise of discretion by reporting entities.
This ASU is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2019. Management is
currently evaluating the impact of this new ASU on its consolidated financial statements.
Reclassifications
Certain amounts presented in prior year consolidated financial statements have been reclassified to conform to the 2018 presentation.
Page | 42
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 – Securities
The fair value of equity securities and the related gross unrealized gains and losses recognized in noninterest income at December 31
were as follows:
(Dollars in thousands)
2018
Gross
Gross
Amortized Unrealized Unrealized
Cost
Gains
Losses
Fair
Value
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2,502
459
(114)
2,847
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)
U.S. Government and federal agency
U.S. Treasury notes and bonds
State and municipal
Mortgage-backed
Corporate
Trust preferred securities
Asset-backed securities
Total
(Dollars in thousands)
U.S. Government and federal agency
U.S. Treasury notes and bonds
State and municipal
Mortgage-backed
Corporate
Equity securities
Trust preferred securities
Asset-backed securities
Total
2018
Gross
Gross
Amortized Unrealized Unrealized
Cost
Gains
Losses
Fair
Value
$
$
34,079 $
1,992
104,317
21,654
5,147
500
21
167,710 $
(551) $
(45)
(933)
(205)
(46)
—
—
(1,780) $
33,529
1,947
103,928
21,575
5,102
500
21
166,602
1 $
—
544
126
1
—
—
672 $
2017
Gross
Gross
Amortized Unrealized Unrealized
Cost
Gains
Losses
Fair
Value
$
$
35,518 $
1,991
99,609
9,943
5,184
2,583
500
95
155,423 $
— $
—
910
8
2
309
—
—
1,229 $
(392) $
(31)
(471)
(131)
(35)
—
—
(1)
(1,061) $
35,126
1,960
100,048
9,820
5,151
2,892
500
94
155,591
Information regarding sales of equity securities and securities available for sale for the year ended December 31 follows:
(Dollars in thousands)
Proceeds from sales of securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross realized losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2,725 $
42
8
57,628 $
184
464
15,317
312
—
2018
2017
2016
Page | 43
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Contractual maturities of equity securities and securities available for sale at December 31, 2018 were as follows:
(Dollars in thousands)
Amortized
Cost
Fair
Value
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
30,224 $
69,299
44,108
2,425
146,056
21,654
2,502
170,212 $
30,390
68,809
43,895
1,933
145,027
21,575
2,847
169,449
Various securities were pledged as collateral for securities sold under agreements to repurchase and participation in a program that
provided Community Reinvestment Act credits. 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 . . . . . . . . . . . . . . . . . . . . . . . . .
Security pledged for Community Reinvestment Act credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2018
2017
— $
257
257 $
9,902
262
10,164
The fair value of securities pledged to secure repurchase agreements may decline, and the Company may be required to provide additional
collateral. The Company manages this risk by pledging securities with fair values in excess of the repurchase liability.
Securities with unrealized losses at year-end 2018 and 2017, aggregated by investment category and length of time the individual
securities have been in an unrealized loss position, were as follows:
(Dollars in thousands)
2018
Less than 12 months
More than 12 months
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
U.S. Government and federal agency . . . . . . . . . . . .
U.S. Treasury notes and bonds . . . . . . . . . . . . . . . . .
State and municipal . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total temporarily impaired . . . . . . . . . . . . . . . .
$
— $
—
9,726
5,384
—
886
$ 15,996 $
$ 31,499 $
—
1,947
—
56,763
(36)
7,443
(28)
4,604
—
(114)
—
(178) $ 102,256 $
(551) $ 31,499 $
1,947
66,489
12,827
4,604
886
(1,716) $ 118,252 $
(45)
(897)
(177)
(46)
—
(551)
(45)
(933)
(205)
(46)
(114)
(1,894)
(Dollars in thousands)
2017
Less than 12 months
More than 12 months
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
U.S. Government and federal agency . . . . . . . . . . . .
U.S. Treasury notes and bonds . . . . . . . . . . . . . . . . .
State and municipal . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . .
Total temporarily impaired . . . . . . . . . . . . . . . .
$ 20,297 $
1,960
38,887
8,481
2,471
—
$ 72,096 $
(190) $
(31)
(319)
(104)
(17)
—
9,798 $
—
6,889
838
687
94
(661) $ 18,306 $
—
(152)
(27)
(18)
(1)
(202) $ 30,095 $
1,960
45,776
9,319
3,158
94
(400) $ 90,402 $
(392)
(31)
(471)
(131)
(35)
(1)
(1,061)
Page | 44
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 of amortized cost basis. Management believed that unrealized losses as of December
31, 2018 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 2018 or 2017.
Following is information regarding unrealized gains and losses on equity securities for the year ending December 31, 2018:
New gains and losses recognized during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Net gains and losses recognized during the period on securities sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gains and losses recognized during the reporting period on securities still held at the reporting date . . . . . . . .
$
$
71
9
62
2018
No presentation is necessary for years prior to 2018 due to implementation of ASU 2016-01 effective January 1, 2018.
At December 31, 2018, there were 210 securities with an unrealized loss, compared to 154 securities with an unrealized loss as of
December 31, 2017.
Note 3 – Loans and Allowance for Loan Losses
The Bank’s loan portfolio as of December 31 was as follows:
(Dollars in thousands)
Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate - commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate - construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate - residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans, gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018
$ 49,109
91,406
24,382
139,453
8,843
95,880
409,073
(4,673)
$ 404,400
2017
$ 48,464
104,386
24,513
123,487
6,613
91,322
398,785
(4,577)
$ 394,208
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, which works with the borrower to bring payments current
or take 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.
Page | 45
Activity in the allowance for loan losses and balances in the loan portfolio was as follows:
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Commercial
and
Industrial
Consumer
Agricultural
Commercial
Real Estate
Construction
Real Estate
Residential
Real Estate
Unallocated
Total
(Dollars in thousands)
2018
Allowance for
Loan Losses
Beginning balance . . . . .
Charge-offs . . . . . . . . . .
Recoveries . . . . . . . . . . .
Provision . . . . . . . . . . . .
Ending balance . . . . . . .
$
$
506 $
—
33
(58)
481 $
1,001 $
(58)
107
(158)
892 $
262 $
(282)
112
162
254 $
1,761 $
—
61
104
1,926 $
35 $
—
—
3
38 $
726 $
(25)
113
(277)
537 $
286 $
—
—
259
545 $
4,577
(365)
426
35
4,673
Individually evaluated
for impairment . . . .
$
94 $
3 $
13 $
20 $
— $
167 $
— $
297
Collectively evaluated
for impairment . . . .
$
387 $
889 $
241 $
1,906 $
38 $
370 $
545 $
4,376
Loans
Individually evaluated
for impairment . . . .
$
578 $
21 $
90 $
623 $
— $
2,712
$
4,024
Collectively evaluated
for impairment . . . .
Ending balance . . . . . . .
$
48,531
49,109 $
24,292
91,385
91,406 $ 24,382 $
138,830
139,453 $
8,843
8,843 $
93,168
95,880
405,049
$409,073
(Dollars in thousands)
Commercial
and
Industrial
Consumer
Agricultural
Commercial
Real Estate
Construction
Real Estate
Residential
Real Estate
Unallocated
Total
2017
Allowance for
Loan Losses
Beginning balance . . . . .
Charge-offs . . . . . . . . . .
Recoveries . . . . . . . . . . .
Provision . . . . . . . . . . . .
Ending balance . . . . . . .
$
$
433 $
—
—
73
506 $
688 $
(439)
21
731
1,001 $
305 $
(253)
169
41
262 $
1,438 $
—
258
65
1,761 $
62 $
—
40
(67)
35 $
1,013 $
(43)
62
(306)
726 $
338 $
—
—
(52)
286 $
4,277
(735)
550
485
4,577
Individually evaluated
for impairment . . . .
$
— $
26 $
3 $
49 $
— $
224 $
— $
302
Collectively evaluated
for impairment . . . .
$
506 $
975 $
259 $
1,712 $
35 $
502 $
286 $
4,275
Loans
Individually evaluated
for impairment . . . .
$
423 $
124 $
36 $
778 $
— $
2,779
$
4,140
Collectively evaluated
for impairment . . . .
Ending balance . . . . . . .
$
Page | 46
48,041
48,464 $
104,262
24,477
104,386 $ 24,513 $
122,709
123,487 $
6,613
6,613 $
88,543
91,322
394,645
$398,785
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
Commercial
and
Industrial
Consumer
Agricultural
Commercial
Real Estate
Construction
Real Estate
Residential
Real Estate
Unallocated
Total
2016
Allowance for
Loan Losses
Beginning balance . . . . . $
Charge-offs . . . . . . . . . .
Recoveries . . . . . . . . . . .
Provision . . . . . . . . . . . .
Ending balance . . . . . . . $
420 $
—
—
13
433 $
586 $
(37)
31
108
688 $
297 $
(218)
149
77
305 $
1,030 $
—
89
319
1,438 $
46 $
—
—
16
62 $
1,388 $
(102)
171
(444)
1,013 $
427 $
—
—
(89)
338 $
4,194
(357)
440
—
4,277
Individually evaluated
for impairment . . . . $
3 $
11 $
2 $
91 $
— $
296 $
— $
403
Collectively evaluated
for impairment . . . . $
430 $
677 $
303 $
1,347 $
62 $
717 $
338 $
3,874
Loans
Individually evaluated
for impairment . . . . $
526 $
301 $
28 $
1,073 $
— $
2,983
$
4,911
Collectively evaluated
for impairment . . . .
Ending balance . . . . . . . $
44,088
44,614 $
109,689
95,787
96,088 $ 21,596 $ 110,762 $
21,568
6,153
6,153 $
86,804
89,787
364,089
$369,000
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. No loans are classified as risk rating 7 and the category has been omitted from the table below.
Risk rating 8: These loans are considered loss credits. They are considered uncollectible and will be charged off against the allowance
for loan losses. No loans are classified as risk rating 8 and the category has been omitted from the table below.
Page | 47
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information regarding the Bank’s credit exposure as of December 31 was as follows:
Corporate Credit Exposure - Credit Risk Profile By Creditworthiness Category
(Dollars in thousands)
Agricultural
Commercial and Industrial Commercial Real Estate
2018
2017
2018
2017
2018
2017
Risk ratings 1 and 2 . . . . . . . . . . . . . . . . . . . .
Risk rating 3 . . . . . . . . . . . . . . . . . . . . . . . . .
Risk rating 4 . . . . . . . . . . . . . . . . . . . . . . . . .
Risk rating 5 . . . . . . . . . . . . . . . . . . . . . . . . .
Risk rating 6 . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
15,300 $
23,938
9,082
211
578
49,109 $
14,813 $
22,721
10,199
308
423
48,464 $
Consumer Credit Exposure - Credit Risk Profile Based On Payment Activity
11,972 $
50,266
23,961
5,204
3
8,227
78,868
33,429
1,533
1,430
91,406 $ 104,386 $ 139,453 $ 123,487
13,491 $
63,366
26,943
491
95
7,962 $
89,173
36,193
4,850
1,275
(Dollars in thousands)
Performing . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonperforming . . . . . . . . . . . . . . . . . . . . . . .
Nonaccrual . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer
Construction Real Estate
Residential Real Estate
2018
2017
2018
2017
2018
2017
$
$
24,320 $
—
62
24,382 $
24,497 $
1
15
24,513 $
8,843 $
—
—
8,843 $
6,613 $
—
—
6,613 $
94,925 $
—
955
95,880 $
90,629
257
436
91,322
Included within the loan categories above were loans in the process of foreclosure. As of December 31, 2018 and 2017, loans in the
process of foreclosure totaled $156,000 and $131,000, respectively.
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.
The following schedule provides information on loans that were considered troubled debt restructurings (“TDRs”) that were modified
during the twelve months ended December 31, 2018 and December 31, 2017. The Bank may agree to modify the terms of a loan in order
to improve the Bank’s ability to collect amounts due. These modifications may include reduction of the interest rate, extension of the
loan term, or in some cases, reduction of the principal balance.
(Dollars in thousands)
December 31, 2018
Pre-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
Number
of
Loans
Number
of
Loans
December 31, 2017
Pre-
Modification
Outstanding
Recorded
Investment
Residential real estate . . . . . . . . . . . . . . . .
— $
— $
—
3 $
296 $
Post-
Modification
Outstanding
Recorded
Investment
296
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.
As of December 31, 2018 and December 31, 2017 there were no instances of a borrower who was past due with respect to principal
and/or interest for 30 days or more during the twelve months ended December 31, 2018 and December 31, 2017 that had been modified
during the 12-month period prior to the default. Loans modified in a TDR may already be on nonaccrual status and partial charge-offs
have in some cases already been taken against the outstanding loan balance. As a result, loans modified in a TDR for the Bank may
have the financial effect of increasing the specific allowance associated with the loan. The allowance for impaired loans that have been
modified in a TDR is measured based on the estimated fair value of the collateral, less any selling costs, if the loan is collateral dependent
or on the present value of expected future cash flows discounted at the loan’s effective interest rate. Management exercises significant
judgment in developing these estimates. At December 31, 2018 the Corporation had no commitments to lend additional funds to the
related debtors whose terms have been modified in a TDR.
Page | 48
Impaired loans by loan category as of December 31 were as follows:
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
2018
With no related allowance recorded
Unpaid
Recorded Principal
Related
Average
Recorded
Interest
Income
Investment Balance Allowance Investment Recognized
Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
With an allowance recorded
Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
185
—
1
—
74
250
510
393
21
88
—
550
2,462
3,514
578
21
90
—
623
2,712
4,024 $
$
185
—
1
—
109
261
556
440
21
88
—
609
2,494
3,652
625
21
90
—
718
2,755
4,209 $
$
—
—
—
—
—
—
—
94
3
13
—
20
167
297
94
3
13
—
20
167
297 $
$
291
29
2
54
78
177
631
161
296
59
—
692
2,523
3,731
452
325
61
54
770
2,700
4,362 $
—
2
8
—
30
114
154
13
—
—
—
—
6
19
13
2
8
—
30
120
173
(Dollars in thousands)
2017
With no related allowance recorded
Unpaid
Recorded Principal
Related
Average
Recorded
Interest
Income
Investment Balance Allowance Investment Recognized
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
423
—
—
127
115
665
—
124
36
651
2,664
3,475
423
124
36
778
2,779
4,140 $
$
455
—
—
258
126
839
—
124
36
734
2,690
3,584
455
124
36
992
2,816
4,423 $
$
—
—
—
—
—
—
—
26
3
49
224
302
—
26
3
49
224
302 $
$
322
103
—
110
106
641
121
177
33
826
2,522
3,679
443
280
33
936
2,628
4,320 $
—
—
—
—
4
4
—
1
1
34
110
146
—
1
1
34
114
150
Page | 49
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unpaid
Recorded Principal
Related
Average
Recorded
Interest
Income
Investment Balance Allowance Investment Recognized
(Dollars in thousands)
2016
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
482
206
—
342
301
1,331
44
95
28
731
2,682
3,580
526
301
28
1,073
2,983
4,911 $
$
485
207
—
939
292
1,923
44
95
28
804
2,711
3,682
529
302
28
1,743
3,003
5,605 $
$
—
—
—
—
—
—
3
11
2
91
296
403
3
11
2
91
296
403 $
$
220
91
1
925
167
1,404
72
218
24
1,281
2,672
4,267
292
309
25
2,206
2,839
5,671 $
13
3
—
2
5
23
3
—
2
33
108
146
16
3
2
35
113
169
An aging analysis of loans by loan category as of December 31 follows:
Loans
Past Due
30 to 59
Days(1)
Loans
Past Due
60 to 89
Days(1)
Loans
Past Due
Greater
Than 90
Days(1)
Total(1)
Loans Not
Past Due
Total
Loans
Loans
90 Days
Past
Due and
Accruing
$
— $
5
149
—
—
1,493
$ 1,647 $
$
$
— $
20
142
95
—
585
842 $
— $
—
40
—
—
486
526 $
— $
—
38
58
—
272
368 $
— $ 49,109 $ 49,109 $
— $
91,401 91,406
5
—
24,182 24,382
200
11
73 139,380 139,453
73
—
8,843
8,843
—
648
93,253 95,880
2,627
732 $ 2,905 $ 406,168 $409,073 $
83 $
83 $ 48,381 $ 48,464 $
—
20 104,366 104,386
1
181
24,332 24,513
69
222 123,265 123,487
—
6,613
6,613
90,169 91,322
296
449 $ 1,659 $ 397,126 $398,785 $
—
1,153
—
—
—
—
—
—
—
—
—
—
—
—
258
258
(Dollars in thousands)
2018
Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial. . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate. . . . . . . . . . . . . . . . . . . .
Construction real estate . . . . . . . . . . . . . . . . . . .
Residential real estate . . . . . . . . . . . . . . . . . . . .
2017
Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial. . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate. . . . . . . . . . . . . . . . . . . .
Construction real estate . . . . . . . . . . . . . . . . . . .
Residential real estate . . . . . . . . . . . . . . . . . . . .
(1) Includes nonaccrual loans.
Page | 50
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nonaccrual loans by loan category as of December 31 as follows:
(Dollars in thousands)
Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018
2017
$
393 $
—
62
123
—
954
423
—
15
222
—
436
$ 1,532 $ 1,096
Note 4 – Mortgage Banking
Activity in secondary market loans during the year was as follows:
(Dollars in thousands)
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016
2018
2017
$ 33,555 $ 43,171 $ 53,591
34,872 42,883 57,830
1,748
159
1,265
155
1,003
91
Net gains on sales of loans held for sale include capitalization of loan servicing rights. Loans serviced for others are not reported as assets
in the accompanying consolidated balance sheets. The unpaid principal balances of these loans were $134.6 million and $122.5 million
at December 31, 2018 and 2017, respectively. The Bank maintains custodial escrow balances in connection with these serviced loans;
however, such escrows were immaterial at December 31, 2018 and 2017.
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
908 $
441
(300)
$ 1,049 $
697 $
443
(232)
908 $
2018
2017
2016
378
491
(172)
697
The fair value of loan servicing rights was $1,700,000 and $1,402,000 as of December 31, 2018 and 2017, respectively. Consequently, a
valuation allowance was not necessary at year-end 2018 or 2017. The fair value of servicing rights at December 31, 2018 was determined
using a discount rate of 6.92% and prepayment speeds ranging from 7% to 13%. The fair value of servicing rights at December 31, 2017
was determined using a discount rate of 6.29% and prepayment speeds ranging from 7% to 14%.
Note 5 – Premises and Equipment
As of December 31, premises and equipment consisted of the following:
(Dollars in thousands)
Land and land improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premises and equipment, net
Page | 51
2018
2017
$ 5,318 $ 5,560
38
38
13,290
16,251
5,932
7,357
24,820
28,964
(13,085)
(11,965)
$ 15,879 $ 12,855
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Depreciation expense was $1,183,000, $1,389,000, and $1,078,000 for 2018, 2017 and 2016, respectively.
The Bank leases certain branch properties and automated-teller machine locations in its normal course of business. Rent expense totaled
$108,000, $99,000, and $99,000 for 2018, 2017 and 2016, respectively. Rent commitments under non-cancelable operating leases were
as follows, before considering renewal options that generally are present (dollars in thousands):
2019. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
119
122
124
127
129
318
939
Note 6 – Goodwill and Intangible Assets
Goodwill
There were no changes in the goodwill balance in 2018 or 2017. ChoiceOne evaluates goodwill annually for impairment. Accounting
pronouncements allow a company to first perform a qualitative assessment for goodwill prior to a quantitative assessment (Step 1
assessment). If the results of the qualitative assessment indicate that it is more likely than not that goodwill is impaired, then a quantitative
assessment must be performed. If not, there is no further assessment required.
ChoiceOne engaged an outside consulting firm to assist management in performing its annual evaluation of goodwill for impairment
during 2016. 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 11.50%,
a growth assumption of 5.0% for assets, 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 31%. Based on this assessment, management believed that there was no indication of goodwill impairment in 2016.
Based on the third-party valuation in 2016, and the qualitative analysis performed in 2017 and 2018, no impairment of goodwill was
deemed to exist as of December 31, 2018.
Acquired Intangible Assets
A core deposit intangible and other intangible assets were being amortized on a straight-line basis over ten years. Intangible assets were
reviewed for impairment on a quarterly basis. These intangible assets were fully amortized as of the end of 2016 and had no carrying
value on the balance sheet during 2017 or 2018. Aggregate amortization expense was $0 in 2018 and 2017 and $379,000 in 2016.
Page | 52
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gains/(losses) on sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
106 $
432
(515)
79
102 $
437 $
314
(663)
18
106 $
2018
2017
2016
31
661
(247)
(8)
437
Included in the balances above were residential real estate mortgage loans of $102,000, $106,000, and $291,000 as of December 31,
2018, 2017, and 2016, respectively, and $146,000 of commercial real estate loans as of December 31, 2016.
Note 8 – Deposits
Deposit balances as of December 31 consisted of the following:
(Dollars in thousands)
Noninterest-bearing demand deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest-bearing demand deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Money market deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Savings deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Local certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Brokered certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018
2017
$153,542 $151,462
135,425 126,363
86,720 94,178
75,615 75,080
91,343 82,598
34,370 10,172
$577,015 $539,853
Scheduled maturities of certificates of deposit at December 31, 2018 were as follows:
(Dollars in thousands)
2019. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
99,281
15,010
4,222
7,163
37
$ 125,713
The Bank had certificates of deposit issued in denominations of $250,000 or greater totaling $39.3 million and $29.8 million at
December 31, 2018 and 2017, respectively. The Bank held $34.4 million in brokered certificates of deposit at December 31, 2018,
compared to $10.2 million at December 31, 2017. In addition, the Bank had $2.1 million and $2.0 million of certificates of deposit as
of December 31, 2018, and December 31, 2017, respectively, 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 was
classified as brokered deposits for regulatory purposes as of December 31, 2017. As a result of the Economic Growth, Regulatory Relief,
and Consumer Protection Act which became law in May 2018, reciprocal brokered deposits were no longer considered brokered deposits
as of December 31, 2018.
Page | 53
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 10 – Federal Home Loan Bank Advances
At December 31, advances from the FHLB were as follows:
$
2018
—
—%
2017
$ 7,148
0.05%
$ 1,412
$ 4,958
0.05%
0.05%
$ 7,148
$ 8,440
(Dollars in thousands)
2018
2017
Maturity of November 2024 with fixed interest rate of 3.98% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maturity of March 2019 with fixed interest rate of 2.57% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maturities ranging from January 2018 to April 2018, fixed interest rates ranging from 1.25% to 1.39%,
$
233 $
5,000
268
—
with a weighted average of 1.32% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total advances outstanding at year-end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
— 20,000
$ 5,233 $ 20,268
Fees are charged on fixed rate advances that are paid prior to maturity. No fixed rate advances were paid prior to maturity in 2018 or
2017. Advances were secured by agricultural loans and residential real estate loans with a carrying value of approximately $96.8 million
and $95.1 million at December 31, 2018 and December 31, 2017, respectively. Based on this collateral, the Bank was eligible to borrow
an additional $45.5 million at year-end 2018.
The scheduled maturities of advances from the FHLB at December 31, 2018 were as follows:
(Dollars in thousands)
2019. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 5,036
37
38
40
42
40
$ 5,233
Page | 54
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 – Income Taxes
Information as of December 31 and for the year follows:
(Dollars in thousands)
Provision for Income Taxes
Current federal income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred federal income tax expense/(benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
946 $ 2,325 $ 2,244
(82)
62
209
$ 1,155 $ 2,387 $ 2,162
2018
2017
2016
Reconciliation of Income Tax Provision to Statutory Rate
Income tax computed at statutory federal rate of 21% in 2018 and 34% in 2017 and 2016 . . . . . . .
Tax exempt interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax exempt earnings on bank-owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Low income housing tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax adjustment related to reduction in U.S. federal statutory income income tax rate . . . .
Other items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,783 $ 2,909 $ 2,806
(496)
(121)
(45)
—
18
$ 1,155 $ 2,387 $ 2,162
(486)
(135)
(85)
206
(22)
(309)
(81)
(154)
—
(84)
Effective income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14%
28%
26%
(Dollars in thousands)
Components of Deferred Tax Assets and Liabilities
Deferred tax assets:
2018
2017
Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized losses on securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loan costs/fees deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
981 $
233
102
22
66
72
1,476
961
—
125
55
45
123
1,309
Deferred tax liabilities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loan servicing rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gains on securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
797
220
—
88
1,105
$
371 $
644
191
35
106
976
333
On December 22, 2017, H.R. 1, commonly known as the Tax Cuts and Jobs Act (the “Tax Act”), was signed into law. The Tax Act
reduced the corporate income tax rate to 21% effective January 1, 2018 and changed certain other provisions. Accounting guidance
required the Company to remeasure its deferred tax assets and liabilities as of the date of the Tax Act’s enactment using the new effective
tax rate. The effect of the remeasurement is recognized in income tax expense in the year of enactment. The Company recorded $206,000
in additional income tax expense in 2017 as a result of the remeasurement of its net deferred tax asset.
Concurrent with the enactment of the Tax Act, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 118
(“SAB 118”), which allows companies to recognize the cumulative impact of the income tax effects triggered by the enactment of the
Tax Act over a period of up to twelve months in the reporting period in which the adjustment is identified. The Company applied SAB
118 and continued to refine measurement of its deferred tax asset balance during the preparation of its 2017 tax return and review of
additional information throughout 2018. No significant adjustments were made to the preliminary calculations.
Page | 55
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 – Related Party Transactions
Loans to executive officers, directors and their affiliates were as follows at December 31:
(Dollars in thousands)
Balance, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of changes in related parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018
2017
$ 6,477 $ 12,906
2,909
(3,043)
(6,295)
$ 5,343 $ 6,477
3,029
(3,835)
(328)
Deposits from executive officers, directors and their affiliates were $6.3 million and $8.1 million at December 31, 2018 and
2017, respectively.
Note 13 – Employee Benefit Plans
401(k) Plan:
The 401(k) plan allows employees to contribute to their individual accounts under the plan amounts up to the IRS maximum. Matching
company contributions to the plan are discretionary. Expense for matching company contributions under the plan was $207,000,
$189,000, and $180,000 in 2018, 2017, and 2016, respectively.
Employee Stock Ownership Plan:
Through December 31, 2015, employees participated in an Employee Stock Ownership Plan (“ESOP”). ChoiceOne could make
discretionary contributions to the ESOP. Shares of ChoiceOne common stock were allocated to participants based on relative
compensation earned and compensation expense was recorded when allocated. Dividends on allocated shares increased the participant
accounts. Participants became fully vested upon completing six years of qualifying service. Participants received the shares at the end
of employment. A participant could require stock received to be repurchased by ChoiceOne at any time. ChoiceOne did not contribute
to the ESOP nor was any expense recorded in 2018, 2017, and 2016. Effective January 1, 2016, ChoiceOne terminated the ESOP and
transferred shares held by the ESOP to the 401(k) plan and ChoiceOne no longer has a mandatory obligation to repurchase shares from
the 401(k) plan.
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 $12,000, $14,000, and $18,000 in 2018, 2017, and 2016, respectively. The post-retirement obligation liability was $98,000 as of
December 31, 2018 and $160,000 as of December 31, 2017.
Deferred Compensation Plans:
A deferred director compensation plan covers former directors, 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. A liability has been accrued for the obligation under this plan. ChoiceOne incurred deferred compensation
plan expense of $5,000, $7,000, and $7,000 in 2018, 2017, and 2016, respectively. The deferred compensation liability was $65,000 as
of December 31, 2018 and $103,000 as of December 31, 2017.
A supplemental executive retirement plan covers four former executive officers. Under the plan, ChoiceOne pays these individuals
a specific amount of compensation 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. The effective interest rate used for
the accrual for the retirement liability is based on long-term interest rates. ChoiceOne incurred deferred compensation plan expense of
$6,000, $12,000, and $19,000 in 2018, 2017, and 2016, respectively. Liabilities related to the supplemental executive retirement plan of
$420,000 and $492,000 were outstanding as of December 31, 2018 and December 31, 2017, respectively.
Page | 56
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14 – Stock Based Compensation
Options to buy stock have been granted to key employees to provide them with additional equity interests in ChoiceOne. Compensation
expense in connection with stock options granted was $38,000 in 2018, $49,000 in 2017, and $71,000 in 2016. The Stock Incentive Plan
of 2012 was approved by the Company’s shareholders at the Annual Meeting held on April 25, 2012. The Stock Incentive Plan of 2012,
as amended effective May 23, 2018, provides for the issuance of up to 200,000 shares of common stock. At December 31, 2018, there
were 95,771 shares available for future grants.
A summary of stock options activity was as follows:
Weighted
average
exercise
price
Shares
Options outstanding at January 1, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options granted prior to stock dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options exercised prior to stock dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options forfeited or expired prior to stock dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options outstanding prior to stock dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
47,250 $
—
—
—
47,250 $
Options outstanding after 5% stock dividend* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options exercised after stock dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options granted after stock dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options outstanding at December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
49,613 $
(6,484)
15,000
58,129 $
22.32
—
—
—
22.32
21.26
21.08
25.65
22.41
Options exercisable at December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
38,612 $
21.52
*
The 2018 balance was adjusted for the 5% stock dividend paid on May 31, 2018.
The exercise prices for options outstanding and exercisable at the end of 2018 ranged from $20.86 to $25.65 per share. The weighted
average remaining contractual life of options outstanding and exercisable at the end of 2018 was approximately 6.4 years.
The intrinsic value of all outstanding in-the-money stock options and exercisable in-the-money stock options was $106,000 and $31,000
respectively, at December 31, 2018. The aggregate intrinsic values of outstanding and exercisable options at December 31, 2018 were
calculated based on the closing market price of the Company’s common stock on December 31, 2018 of $25.00 per share less the
exercise price.
Information pertaining to options outstanding at December 31, 2018 was as follows:
Exercise price of stock options:
$25.65 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$20.86 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$21.13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number of
options
outstanding
at year-end
15,000
15,707
27,422
Number of
options
exercisable
at year-end
3,750
7,440
27,422
Average
remaining
contractual
life (in years)
9.42
8.68
5.31
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. As of December 31, 2018, there was $43,000 in unrecognized compensation expense related to stock options issued in 2017
and 2018.
Page | 57
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of stock options granted during 2018 was $63,000, which was determined using the following weighted-average
assumptions as of the grant date.
Risk-free interest rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected option life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected stock price volatility. . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of options granted . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.89%
5.75 years
20.79%
3.04%
4.17
$
ChoiceOne has granted restricted stock units to a select group of employees under the Stock Incentive Plan of 2012. Restricted stock
units vest in three annual installments on each of the next three anniversaries of the grant date. Certain additional vesting provisions
apply. Each restricted stock unit, once vested, is settled by delivery of one share of ChoiceOne common stock. ChoiceOne recognized
compensation expense of $244,000, $191,000, and $207,000 in 2018, 2017, and 2016, respectively, in connection with restricted stock
units for current participants during these years.
A summary of the activity for RSU’s during the year ended December 31, 2018 is presented below:
Outstanding Stock Awards
Outstanding at January 1, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impact of stock dividend paid May 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted Average
Grant Date Fair
Value Per Share
23.14
26.00
23.15
24.71
24.74
Shares
18,060 $
10,900
(9,536)
1,016
20,440
At December 31, 2018, there were 20,440 restricted stock units outstanding with an approximate stock value of $511,000 based on
ChoiceOne’s December 31, 2018 stock price. At December 31, 2017, there were 18,060 restricted stock units outstanding with an
approximate stock value of $430,000 based on ChoiceOne’s December 31, 2017 stock price.
Note 15 – Earnings Per Share
(Dollars in thousands, except share data)
Basic
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
7,333 $
6,168 $
6,090
2018
2017
2016
Weighted average common shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,614,302
3,621,216
3,624,037
Basic earnings per common shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2.03 $
1.70 $
1.68
Diluted
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
7,333 $
6,168 $
6,090
Weighted average common shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plus dilutive stock options and restricted stock units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,614,302
13,825
3,621,216
8,465
3,624,037
5,482
Weighted average common shares outstanding and potentially dilutive shares . . . . . . . . . . . .
3,628,127
3,629,681
3,629,519
Diluted earnings per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2.02 $
1.70 $
1.68
Page | 58
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Per share amounts have been adjusted for the 5% stock dividends paid on May 31, 2017 and May 31, 2018.
Stock options considered anti-dilutive to earnings per share were 15,000, 0, and 30,000 as of December 31, 2018, December 31, 2017,
and December 31, 2016, respectively. This calculation is based on the average stock price during the year.
Note 16 – Condensed Financial Statements of Parent Company
Condensed Balance Sheets
(Dollars in thousands)
Assets
December 31,
2018
2017
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in ChoiceOne Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,400 $ 1,249
—
1,960
3,607
1,692
188
122
75,313
71,570
$ 80,487 $ 76,614
Liabilities
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
10 $
10
64
64
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
80,477
76,550
$ 80,487 $ 76,614
(Dollars in thousands)
Years Ended December 31,
Condensed Statements of Income
2018
2017
2016
$ 2,800 $ 3,042 $ 3,161
52
—
—
3,213
133
55
1
—
3,098
123
47
9
184
3,040
144
2,896
(14)
2,882
4,451
3,080
39
3,119
2,971
$ 7,333 $ 6,168 $ 6,090
2,975
73
3,048
3,120
Interest and dividends from ChoiceOne Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and dividends from other securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gains on sales of securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in market value of equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income tax and equity in undistributed net income of subsidiary . . . . . . . . . . . . . . .
Income tax (expense)/benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before equity in undistributed net income of subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in undistributed net income of subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page | 59
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Statements of Cash Flows
(Dollars in thousands)
Cash flows from operating activities:
Years Ended December 31,
2018
2017
2016
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 7,333 $ 6,168 $ 6,090
Adjustments to reconcile net income to net cash from operating activities:
Equity in undistributed net income of subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compensation expense on employee and director stock purchases, stock options, and
restricted stock units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gain on sale of securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in market value of equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash from operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(4,451)
18
(3,120)
19
(2,971)
20
331
(9)
(184)
66
(19)
3,085
304
(1)
—
(37)
(39)
3,294
367
—
—
(68)
(1)
3,437
Cash flows from investing activities:
Sales of securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash from investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
91
—
91
334
(466)
(132)
—
(1,126)
(1,126)
Cash flows from financing activities:
Issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash from financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Beginning cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
77
(523)
(2,579)
(3,025)
151
1,249
98
(203)
(2,324)
(2,429)
733
516
$ 1,400 $ 1,249 $
85
(794)
(2,231)
(2,940)
(629)
1,145
516
Page | 60
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17 – Financial Instruments
Financial instruments as of the dates indicated were as follows:
(Dollars in thousands)
December 31, 2018
Assets
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
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities at fair value . . . . . . . . . . . . . . . . . . . . . . .
Securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank and Federal Reserve Bank stock . .
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans to other financial institutions . . . . . . . . . . . . . . . . . .
Loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . .
$ 19,690 $ 19,690 $
2,847
166,602
3,567
831
20,644
404,400
2,267
2,847
166,602
3,567
856
20,644
399,091
2,267
19,690 $
1,961
—
—
—
—
—
—
— $
—
158,104
3,567
856
20,644
—
2,267
—
886
8,498
—
—
—
399,091
—
Liabilities
Noninterest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . .
Interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal funds purchased . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank advances . . . . . . . . . . . . . . . . . .
Accrued interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . .
153,542
423,473
4,800
5,233
210
153,542
422,381
4,800
5,241
210
—
—
—
—
—
153,542
422,381
4,800
5,241
210
December 31, 2017
Assets
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank and Federal Reserve Bank stock . .
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans to other financial institutions . . . . . . . . . . . . . . . . . .
Loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . .
$ 36,837 $ 36,837 $
155,591
3,567
1,721
6,802
394,208
2,146
155,591
3,567
1,773
6,802
394,819
2,146
36,837 $
1,892
—
—
—
—
—
Liabilities
Noninterest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . .
Interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank advances . . . . . . . . . . . . . . . . . .
Accrued interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . .
151,462
388,391
7,148
20,268
49
151,462
387,343
7,148
20,271
49
—
—
—
—
—
— $
140,301
3,567
1,773
6,802
—
2,146
151,462
387,343
7,148
20,271
49
—
—
—
—
—
—
13,398
—
—
—
394,819
—
—
—
—
—
—
Page | 61
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The estimated fair values approximate the carrying amounts for all financial instruments except those described later in this paragraph.
The methodology for determining the estimated fair value for securities available for sale is described in Note 18. The estimated fair
value for loans in 2017 was 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. In 2018, the estimated fair value of loans follows the guidance in ASU 2016-01 which prescribes an
“exit price” approach, which incorporates discounts for credit, liquidity, and marketability. The allowance for loan losses is considered
to be a reasonable estimate of discount for credit quality concerns. The estimated fair value of deposits is based on comparing the
average rate paid on deposits compared to the three month Libor rate which is assumed to be the replacement value of these deposits. At
December 31, 2018, all average rates were lower than the three month Libor rate causing fair values to be higher than carrying amounts.
The estimated fair values for time deposits and FHLB advances are based on the rates paid at December 31 for new deposits or FHLB
advances, applied until maturity. The estimated fair values for other financial instruments and off-balance sheet loan commitments are
considered nominal.
Note 18 – 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, 2018 and December 31, 2017, 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, 2017 or December 31, 2018. 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
Equity Securities Held at Fair Value - December 31, 2018
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment Securities, Available for Sale - December 31, 2018
U. S. Government and federal agency . . . . . . . . . . . . . . . . . . . . . . . . . . .
U. S. Treasury notes and bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State and municipal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trust preferred securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
1,961 $
— $
886 $
2,847
— $
—
—
—
—
—
—
— $ 158,104 $
33,529 $
1,947
95,930
21,575
5,102
—
21
— $ 33,529
1,947
—
103,928
7,998
21,575
—
5,102
—
500
500
21
—
8,498 $ 166,602
Page | 62
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
Investment Securities, Available for Sale - December 31, 2017
U. S. Government and federal agency . . . . . . . . . . . . . . . . . . . . . . . . . . .
U. S. Treasury notes and bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State and municipal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trust preferred securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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
$
— $
—
—
—
—
1,892
—
—
35,126 $
1,960
88,150
9,820
5,151
—
—
94
$
1,892 $ 140,301 $
— $ 35,126
1,960
—
100,048
11,898
9,820
—
5,151
—
2,892
1,000
500
500
94
—
13,398 $ 155,591
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, U.S. Treasury notes and bonds, state and
municipal securities, mortgage-backed securities, corporate bonds, foreign debt, and asset backed securities. The Company classified
certain equity securities, state and municipal securities, and 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.
Changes in Level 3 Assets Measured at Fair Value on a Recurring Basis
(Dollars in thousands)
Equity Securities Held at Fair Value
Balance, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassification due to implementation of ASU 2016-01 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total realized and unrealized gains included in noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total unrealized gains/(losses) included in other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net purchases, sales, calls, and maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net transfers into Level 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
— $
1,000
(114)
—
—
—
886 $
$
—
—
—
—
—
—
—
2018
2017
Investment Securities, Available for Sale
Balance, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassification due to implementation of ASU 2016-01 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 13,398 $ 15,103
—
—
196
(1,901)
—
$ 8,498 $ 13,398
(1,000)
—
(186)
(3,714)
—
Of the Level 3 assets that were still held by the Bank at December 31, 2018, the net unrealized loss for the twelve months ended
December 31, 2018 was $300,000 compared to a $196,000 unrealized gain as of December 31, 2017, which is recognized in noninterest
income or other comprehensive income in the consolidated balance sheets and income statements. Amounts recognized in noninterest
income relate to changes in equity securities based on ASU 2016-01, which was implemented by ChoiceOne effective January 1, 2018.
A total of $224,000 and $3.2 million of Level 3 securities were purchased in 2018 and 2017, respectively.
Page | 63
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Both observable and unobservable inputs may be used to determine the fair value of positions classified as Level 3 assets and liabilities.
As a result, the unrealized gains and losses for these assets and liabilities presented in the tables above may include changes in fair value
that were attributable to both observable and unobservable inputs.
Available for sale investment securities categorized as Level 3 assets consist of bonds issued by local municipalities and a trust-preferred
security. The Bank estimates the fair value of these assets based on the present value of expected future cash flows using management’s
best estimate of key assumptions, including forecasted interest yield and payment rates, credit quality and a discount rate commensurate
with the current market and other risks involved.
The Bank also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis. These assets
are not normally measured at fair value, but can be subject to fair value adjustments in certain circumstances, such as impairment.
Disclosures concerning assets measured at fair value on a non-recurring basis are as follows:
Assets Measured at Fair Value on a Non-recurring Basis
(Dollars in thousands)
Quoted Prices
In Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Balances at
Dates
Indicated
Impaired Loans
December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Real Estate
December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
4,024 $
4,140 $
— $
— $
— $
— $
4,024
4,140
102 $
106 $
— $
— $
— $
— $
102
106
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 19 – 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)
2018
2017
Fixed
Rate
Variable
Rate
Fixed
Rate
Variable
Rate
Unused lines of credit and letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commitments to fund loans (at market rates) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 20,036 $103,978 $
1,421
20,997
9,033 $104,257
1,225
8,633
Commitments to fund loans are generally made for periods of 180 days or less. The fixed rate loan commitments have interest rates
ranging from 3.25% to 8.00% and maturities ranging from 1 years to 30 years.
Page | 64
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 20 – Regulatory Capital
ChoiceOne and the Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy
guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance sheet
items calculated under regulatory accounting practices. The prompt corrective action regulations provide five classifications, including
well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these
terms are not used to represent overall financial condition. Depending upon the capital category to which an institution is assigned, the
regulators’ corrective powers include: prohibiting the acceptance of brokered deposits; requiring the submission of a capital restoration
plan; placing limits on asset growth and restrictions on activities; requiring the institution to issue additional capital stock (including
additional voting stock) or to be acquired; restricting transactions with affiliates; restricting the interest rate the institution may pay
on deposits; ordering a new election of directors of the institution; requiring that senior executive officers or directors be dismissed;
prohibiting the institution from accepting deposits from correspondent banks; requiring the institution to divest certain subsidiaries;
prohibiting the payment of principal or interest on subordinated debt; and ultimately, appointing a receiver for the institution. At year-end
2018 and 2017, the Bank was categorized as well capitalized under the regulatory framework for prompt corrective action.
Actual capital levels and minimum required levels for ChoiceOne and the Bank were as follows:
(Dollars in thousands)
December 31, 2018
ChoiceOne Financial Services Inc.
Total capital (to risk weighted assets) . . . . . . . . . . . . . . . . . . . . . . .
Common equity Tier 1 capital (to risk weighted assets) . . . . . . . . .
Tier 1 capital (to risk weighted assets) . . . . . . . . . . . . . . . . . . . . . .
Tier 1 capital (to average assets) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Minimum Required
for Capital
Adequacy Purposes
Actual
Amount
Ratio Amount
Ratio Amount
Minimum Required
to be Well
Capitalized Under
Prompt Corrective
Action Regulations
Ratio
$ 72,148
67,481
67,481
67,481
13.8% $ 41,811
23,519
12.9
31,359
12.9
25,658
10.5
8.0%
4.5
6.0
4.0
N/A
N/A
N/A
N/A
ChoiceOne Bank
Total capital (to risk weighted assets) . . . . . . . . . . . . . . . . . . . . . . .
Common equity Tier 1 capital (to risk weighted assets) . . . . . . . . .
Tier 1 capital (to risk weighted assets) . . . . . . . . . . . . . . . . . . . . . .
Tier 1 capital (to average assets) . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 66,976
62,309
62,309
62,309
12.9% $ 41,599
23,399
12.0
31,199
12.0
25,512
9.8
8.0% $ 51,999
33,799
4.5
41,599
6.0
31,890
4.0
December 31, 2017
ChoiceOne Financial Services Inc.
Total capital (to risk weighted assets) . . . . . . . . . . . . . . . . . . . . . . .
Common equity Tier 1 capital (to risk weighted assets) . . . . . . . . .
Tier 1 capital (to risk weighted assets) . . . . . . . . . . . . . . . . . . . . . .
Tier 1 capital (to average assets) . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 67,155
62,584
62,584
62,584
13.9% $ 38,761
21,803
12.9
29,071
12.9
25,301
9.9
8.0%
4.5
6.0
4.0
N/A
N/A
N/A
N/A
ChoiceOne Bank
Total capital (to risk weighted assets) . . . . . . . . . . . . . . . . . . . . . . .
Common equity Tier 1 capital (to risk weighted assets) . . . . . . . . .
Tier 1 capital (to risk weighted assets) . . . . . . . . . . . . . . . . . . . . . .
Tier 1 capital (to average assets) . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 62,393
57,822
57,822
57,822
12.9% $ 38,555
21,687
12.0
28,917
12.0
25,156
9.2
8.0% $ 48,194
31,326
4.5
38,555
6.0
31,445
4.0
Banking regulations limit capital distributions by state-chartered banks. Generally, capital distributions are limited to undistributed net
income for the current and prior two years. At December 31, 2018, approximately $10.5 million was available for ChoiceOne Bank to
pay dividends to ChoiceOne. ChoiceOne’s ability to pay dividends to shareholders is dependent on the payment of dividends from the
Bank, which is restricted by state law and regulations.
Page | 65
N/A
N/A
N/A
N/A
10.0%
6.5
8.0
5.0
N/A
N/A
N/A
N/A
10.0%
6.5
8.0
5.0
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On July 3, 2013, the FDIC Board of Directors approved the Regulatory Capital Interim Final Rule, implementing Basel III. This rule
redefines Tier 1 capital as two components (Common Equity Tier 1 and Additional Tier 1), creates a new capital ratio (Common Equity
Tier 1 Risk-based Capital Ratio) and implements a capital conservation buffer. It also revises the prompt corrective action thresholds
and makes changes to risk weights for certain assets and off-balance-sheet exposures. Banks were required to transition into the new
rule beginning on January 1, 2015.
Note 21 – Quarterly Financial Data (Unaudited)
(Dollars in thousands, except per share data)
2018
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest
Income
Net
Interest
Income
Net
Income
Earnings Per Share
Fully
Diluted
Basic
$ 5,722 $ 5,330 $ 1,658 $
1,833
2,014
1,828
5,595
5,522
5,617
6,141
6,212
6,450
$ 5,161 $ 4,855 $ 1,446 $
1,635
1,720
1,367
5,425
5,624
5,831
5,077
5,238
5,393
0.46 $
0.51
0.55
0.51
0.46
0.51
0.55
0.50
0.40 $
0.45
0.48
0.37
0.40
0.45
0.48
0.37
Per share amounts have been adjusted for 5% stock dividends paid on May 31, 2017 and May 31, 2018.
The increase that occurred during 2017 and 2018 in interest income and net interest income was due to growth in earning assets and a
widening of ChoiceOne’s net interest spread resulting from rising general market interest rates. Higher net income in 2018 compared to
2017 was primarily due to the lower corporate income tax rate in effect during 2018.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief
Executive Officer and principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls
and procedures. Based on and as of the time of that evaluation, the Company’s management, including the Chief Executive Officer and
principal financial officer, concluded that the Company’s disclosure controls and procedures were effective as of the end of the period
covered by this report to ensure that information required to be disclosed by the Company in the reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the required time periods.
Management of the Company 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.
Page | 66
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Management assessed the effectiveness of the Company’s system of internal control over financial reporting as of December 31, 2018,
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 (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”). Based on this assessment, management has concluded that, as of December 31,
2018, its system of internal control over financial reporting was effective and meets the criteria of the “Internal Control – Integrated
Framework.” Plante & Moran PLLC, the independent registered public accounting firm that audited the consolidated financial statements
of the Company incorporated by reference to this Annual Report on Form 10-K, has issued an attestation report, included herein, on the
Company’s internal control over financial reporting as of December 31, 2018.
There was no change in the Company’s internal control over financial reporting that occurred during the three months ended December 31,
2018 that has materially affected, or that is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B. Other Information
None.
Page | 67
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The information under the captions “ChoiceOne’s Board of Directors and Executive Officers,” “Related Matters - Section 16(a) Beneficial
Ownership Reporting Compliance” and “Corporate Governance” in the Company’s Definitive Proxy Statement for the Annual Meeting
of Shareholders to be held May 22, 2019, is incorporated herein by reference.
The Company has adopted a Code of Ethics for Executive Officers and Senior Financial Officers, which applies to the Chief Executive
Officer and the Chief Financial Officer, as well as all other senior financial and accounting officers. The Code of Ethics is posted on
the Company’s website at “www.choiceone.com.” The Company intends to satisfy the disclosure requirements under Item 5.05 of
Form 8-K regarding an amendment to, or a waiver from, a provision of the Code of Ethics by posting such information on its website
at “www.choiceone.com.”
Item 11. Executive Compensation
The information under the captions “Executive Compensation” in the Company’s Definitive Proxy Statement for the Annual Meeting of
Shareholders to be held May 22, 2019, is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information under the caption “Ownership of ChoiceOne Common Stock” in the Company’s Definitive Proxy Statement for the
Annual Meeting of Shareholders to be held May 22, 2019, is incorporated herein by reference.
The following table presents information regarding the equity compensation plans both approved and not approved by shareholders at
December 31, 2018:
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
(a)
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
(c)
Equity compensation plans approved by
security holders . . . . . . . . . . . . . . . . . . . . . . . .
Equity compensation plans not approved by
security holders . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
78,569 $
—
78,569 $
16.58
—
16.58
119,217
4,847
124,064
Equity compensation plans approved by security holders include the Stock Incentive Plan of 2012, as amended May 23, 2018, and the
Employee Stock Purchase Plan. 95,771 shares remain available for future issuance under the Stock Incentive Plan of 2012 and 23,446
shares remain available for future issuance under the Employee Stock Purchase Plan, in each case other than upon the exercise of
outstanding stock options.
The Directors’ Stock Purchase Plan is the only equity compensation plan not approved by security holders. The plan is designed to
provide directors of the Company the option of receiving their fees in the Company’s common stock. Directors who elect to participate in
the plan may elect to contribute to the plan twenty-five, fifty, seventy-five or one hundred percent of their board of director fees and one
hundred percent of their director committee fees earned as directors of the Company. Contributions to the plan are made by the Company
on behalf of each electing participant. Plan participants may terminate their participation in the plan at any time by written notice of
withdrawal to the Company. Participants will cease to be eligible to participate in the plan when they cease to serve as directors of the
Company. Shares are distributed to participants on a quarterly basis. The plan provides for issuance of a maximum of 100,000 shares of
the Company’s common stock, subject to adjustments for certain changes in the capital structure of the Company. New issuances of up
to 4,909 shares may be made under this plan.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information under the captions “Related Matters - Transactions with Related Persons” and “Corporate Governance” in the Company’s
Definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 22, 2019, is incorporated herein by reference.
Page | 68
Item 14. Principal Accountant Fees and Services
The information under the caption “Related Matters - Independent Certified Public Accountants” in the Company’s Definitive Proxy
Statement for the Annual Meeting of Shareholders to be held May 22, 2019, is incorporated herein by reference.
Item 15. Exhibits and Financial Statement Schedules
PART IV
(a)
(1)
Financial Statements. The following financial statements and independent auditors’ reports are filed as part of this report:
Consolidated Balance Sheets at December 31, 2018 and 2017.
Consolidated Statements of Income for the years ended December 31, 2018, 2017, and 2016.
Consolidated Statement of Comprehensive Income for the years ended December 31, 2018, 2017, and 2016.
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2018, 2017, and 2016.
Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017, and 2016.
Notes to Consolidated Financial Statements.
Report of Independent Registered Public Accounting Firm dated March 15, 2019.
(2)
Financial Statement Schedules. None.
Page | 69
Exhibit
3.1
Document
Amended and Restated Articles of Incorporation. Previously filed as an exhibit to ChoiceOne Financial Services, Inc.’s
Form 10-K Annual Report for the year ended December 31, 2013. Here incorporated by reference.
3.2
4
10.1
10.2
10.3
10.4
10.5
10.6
10.7
21
23
24
31.1
31.2
32
Bylaws of the Registrant as currently in effect and any amendments thereto. Previously filed as an exhibit to ChoiceOne
Financial Services, Inc.’s Form 10-K Annual Report for the year ended December 31, 2013. Here incorporated by reference.
Advances, Pledge and Security Agreement between ChoiceOne Bank and the Federal Home Loan Bank of
Indianapolis. Previously filed as an exhibit to ChoiceOne Financial Services, Inc.’s Form 10-K Annual Report for the year
ended December 31, 2013. Here incorporated by reference.
Change in Control Agreement with Kelly J. Potes. (1) Previously filed as an exhibit to ChoiceOne Financial Services, Inc.’s
Form 10-Q Quarterly Report for the period ended March 31, 2016. Here incorporated by reference.
Stock Incentive Plan of 2012. (1) Previously filed as Appendix A to ChoiceOne’s definitive proxy statement for ChoiceOne’s
2018 Annual Meeting of Shareholders, filed on April 19, 2018. Here incorporated by reference.
Amended and Restated Executive Stock Incentive Plan. (1) Previously filed as an exhibit to ChoiceOne Financial Services,
Inc.’s Form 10-K Annual Report for the year ended December 31, 2016. Here incorporated by reference.
Directors’ Stock Purchase Plan. (1) Previously filed as an exhibit to ChoiceOne Financial Services, Inc.’s Form 10-K Annual
Report for the year ended December 31, 2016. Here incorporated by reference.
Former Valley Ridge Executive Employee Salary Continuation Agreements, as amended. (1) Previously filed as an exhibit to
ChoiceOne Financial Services, Inc.’s Form 10-K Annual Report for the year ended December 31, 2013. Here incorporated
by reference.
Former Valley Ridge Directors’ Deferred Compensation Plan and Agreement. (1) Previously filed as an exhibit to the
ChoiceOne Financial Services, Inc.’s Form 10-K Annual Report for the year ended December 31, 2013. Here incorporated
by reference.
Amended and Restated Employee Stock Purchase Plan. (1) Previously filed as an exhibit to ChoiceOne Financial Services,
Inc.’s Form 10-K Annual Report for the year ended December 31, 2016. Here incorporated by reference.
Subsidiaries of ChoiceOne Financial Services, Inc.
Consent of Independent Registered Public Accounting Firm.
Powers of Attorney.
Certification of Chief Executive Officer.
Certification of Treasurer.
Certification pursuant to 18 U.S.C. § 1350.
101.1
Interactive Data File.
(cid:11)(cid:20)(cid:12)(cid:3) (cid:55)(cid:75)(cid:76)(cid:86)(cid:3)(cid:68)(cid:74)(cid:85)(cid:72)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:76)(cid:86)(cid:3)(cid:68)(cid:3)(cid:80)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:68)(cid:70)(cid:87)(cid:3)(cid:82)(cid:85)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:72)(cid:81)(cid:86)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:83)(cid:79)(cid:68)(cid:81)(cid:3)(cid:82)(cid:85)(cid:3)(cid:68)(cid:85)(cid:85)(cid:68)(cid:81)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:87)(cid:82)(cid:3)(cid:69)(cid:72)(cid:3)(cid:191)(cid:79)(cid:72)(cid:71)(cid:3)(cid:68)(cid:86)(cid:3)(cid:68)(cid:81)(cid:3)(cid:72)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:76)(cid:86)(cid:3)(cid:41)(cid:82)(cid:85)(cid:80)(cid:3)(cid:20)(cid:19)(cid:16)(cid:46)(cid:17)
Copies of any exhibits will be furnished to shareholders upon written request. Requests should be directed to: Thomas L. Lampen,
Treasurer, ChoiceOne Financial Services, Inc., 109 East Division, Sparta, Michigan, 49345.
Page | 70
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
ChoiceOne Financial Services, Inc.
By:
/s/ Kelly J. Potes
Kelly J. Potes
Chief Executive Officer
March 18, 2019
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
Chief Executive Officer and
Director (Principal Executive Officer)
March 18, 2019
Treasurer (Principal Financial and
Accounting Officer)
Chairman of the Board and Director
Director
Director
Director
Director
Director
Director
Director
March 18, 2019
March 18, 2019
March 18, 2019
March 18, 2019
March 18, 2019
March 18, 2019
March 18, 2019
March 18, 2019
March 18, 2019
/s/ Kelly J. Potes
Kelly J. Potes
/s/ Thomas L. Lampen
Thomas L. Lampen
*/s/ Paul L. Johnson
Paul L. Johnson
*/s/ Greg L Armock
Greg L. Armock
*/s/ James A. Bosserd
James A. Bosserd
*/s/ Jack G. Hendon
Jack G. Hendon
*/s/ Raymond A. Lanning
Raymond A. Lanning
*/s/ Bradley F. McGinnis
Bradley F. McGinnis
*/s/ Nels W. Nyblad
Nels W. Nyblad
*/s/ Roxanne M. Page
Roxanne M. Page
*By /s/ Thomas L. Lampen
Attorney-in-Fact
Page | 71