EXHIBIT 13
CHOICEONE FINANCIAL SERVICES, INC.
2007
ANNUAL REPORT TO SHAREHOLDERS
CHOICEONE FINANCIAL SERVICES, INC.
2007 Annual Report to Shareholders
Contents |
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To Our Shareholders | 1 |
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About ChoiceOne Financial Services, Inc | 1 |
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Stock Information | 1 |
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Selected Financial Data | 3 |
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Management's Discussion and Analysis of Financial Condition and Results of Operations | 4 |
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Management's Report on Internal Control Over Financial Reporting | 16 |
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Report of Independent Registered Public Accounting Firm | 17 |
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Consolidated Financial Statements | 18 |
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Notes to Consolidated Financial Statements | 22 |
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Corporate and Shareholder Information | 41 |
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Directors and Officers | 42 |
TO OUR SHAREHOLDERS
This 2007 Annual Report to Shareholders contains our audited financial statements, detailed financial review and all of the information that regulations of the Securities and Exchange Commission (the "SEC") require to be presented in annual reports to shareholders. For legal purposes, this is the ChoiceOne Financial Services, Inc. 2007 Annual Report to Shareholders. Although attached to our proxy statement, this report is not part of our proxy statement, is not considered to be soliciting material and is not considered to be filed with the SEC except to the extent that it is expressly incorporated by reference in a document filed with the SEC. Shareholders who would like to receive even more detailed information than that contained in this 2007 Annual Report to Shareholders are invited to request our Annual Report on Form 10-K.
Our Annual Report on Form 10-K for the year ended December 31, 2007, including the financial statements and financial statement schedules, will be provided to any shareholder, without charge, upon written request to Mr. Thomas Lampen, Treasurer, ChoiceOne Financial Services, Inc., 109 East Division Street, Sparta, Michigan 49345.
ABOUT CHOICEONE FINANCIAL SERVICES, INC.
ChoiceOne Financial Services, Inc. is a single-bank holding company. Its principal banking subsidiary, ChoiceOne Bank (Sparta, Michigan), primarily serves communities in portions of Kent, Muskegon, Newaygo, and Ottawa counties in Michigan where the Bank's offices are located and the areas immediately surrounding those communities. Currently the Bank serves those markets through thirteen full-service offices. ChoiceOne Insurance Agencies, Inc. is a wholly-owned subsidiary of ChoiceOne Bank and sells insurance and investment products. ChoiceOne Mortgage Company of Michigan, a wholly-owned subsidiary of ChoiceOne Bank, was formed on January 1, 2002 and is engaged in mortgage lending.
ChoiceOne's business is primarily concentrated in a single industry segment - banking. ChoiceOne Bank is a full-service banking institution that offers a variety of deposit, payment, credit and other financial services to all types of customers. These services include time, savings, and demand deposits, safe deposit services, and automated transaction machine services. Loans, both commercial and consumer, are extended primarily on a secured basis to corporations, partnerships and individuals. Commercial lending covers such categories as business, industry, agricultural, construction, inventory and real estate. ChoiceOne Bank's consumer loan department and ChoiceOne Mortgage Company of Michigan make direct loans to consumers and purchasers of residential property.
The principal source of revenue for ChoiceOne is interest and fees on loans. On a consolidated basis, interest and fees on loans accounted for 70%, 73%, and 73% of total revenues in 2007, 2006, and 2005, respectively. Interest from securities accounted for 11%, 12%, and 11% of total revenues in 2007, 2006, and 2005, respectively.
STOCK INFORMATION
Several brokers trade ChoiceOne's common shares in the over-the-counter bulletin board market. There is no well-established public trading market for the shares and trading activity is infrequent. ChoiceOne's trading volume and recent share price information can be viewed under the symbol 'COFS.OB' on certain financial websites.
The range of high and low bid prices for shares of common stock for each quarterly period during the past two years is as follows:
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| 2007 | 2006 |
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| Low | High | Low | High |
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| First Quarter | $ 16.25 | $ 17.80 | $ 17.35 | $ 19.15 |
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| Second Quarter | 15.05 | 17.25 | 18.00 | 19.20 |
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| Third Quarter | 13.65 | 16.25 | 17.80 | 18.90 |
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| Fourth Quarter | 11.05 | 16.00 | 17.60 | 18.50 |
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The prices listed above are over-the-counter market quotations reported to ChoiceOne by its market makers listed in this annual report. The over-the-counter market quotations reflect inter-dealer prices without retail markup, markdown or commission and may not necessarily represent actual transactions.
As of February 29, 2008, there were 3,230,863 shares of ChoiceOne Financial Services, Inc. common stock issued and outstanding. As of February 29, 2008, there were 836 holders of record of shares of ChoiceOne Financial Services, Inc. common stock.
The following table summarizes cash dividends declared per share of common stock during 2007 and 2006:
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| 2007 | 2006 |
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| First Quarter | $ 0.17 | $ 0.17 |
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| Second Quarter | 0.17 | 0.17 |
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| Third Quarter | 0.17 | 0.17 |
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| Fourth Quarter | 0.17 | 0.17 |
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| Total | $ 0.68 | $ 0.68 |
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ChoiceOne's principal source of funds to pay cash dividends is the earnings and dividends paid by ChoiceOne Bank. ChoiceOne Bank is restricted in its ability to pay cash dividends under current banking regulations. See Note 22 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 2008.
ChoiceOne Financial Services, Inc.
SELECTED FINANCIAL DATA
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| 2007 |
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| 2006 |
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| 2005 |
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| 2004 |
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| 2003 |
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For the year |
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Net interest income | $ | 15,143 |
| $ | 8,748 |
| $ | 8,045 |
| $ | 7,672 |
| $ | 7,775 |
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Provision for loan losses |
| 2,035 |
|
| 200 |
|
| 495 |
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| 465 |
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| 400 |
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Noninterest income |
| 6,481 |
|
| 2,877 |
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| 2,580 |
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| 2,570 |
|
| 3,109 |
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Noninterest expense |
| 15,070 |
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| 8,698 |
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| 7,184 |
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| 7,228 |
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| 7,668 |
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Income before income taxes |
| 4,519 |
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| 2,727 |
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| 2,946 |
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| 2,549 |
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| 2,816 |
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Income tax expense |
| 939 |
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| 639 |
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| 780 |
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| 695 |
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| 715 |
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Net income |
| 3,580 |
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| 2,088 |
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| 2,166 |
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| 1,854 |
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| 2,101 |
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Cash dividends declared |
| 2,200 |
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| 1,397 |
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| 1,105 |
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| 1,065 |
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| 1,059 |
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Per share * |
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Basic earnings | $ | 1.11 |
| $ | 1.09 |
| $ | 1.31 |
| $ | 1.13 |
| $ | 1.29 |
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Diluted earnings |
| 1.10 |
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| 1.09 |
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| 1.31 |
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| 1.13 |
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| 1.29 |
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Cash dividends declared |
| 0.68 |
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| 0.68 |
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| 0.67 |
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| 0.65 |
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| 0.65 |
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Shareholders' equity (at year end) |
| 16.45 |
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| 15.85 |
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| 13.16 |
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| 12.77 |
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| 12.53 |
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Average for the year |
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Securities | $ | 84,059 |
| $ | 57,407 |
| $ | 44,741 |
| $ | 42,361 |
| $ | 31,165 |
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Gross loans |
| 328,335 |
|
| 205,851 |
|
| 180,100 |
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| 170,045 |
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| 165,224 |
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Deposits |
| 358,244 |
|
| 222,287 |
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| 173,419 |
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| 156,837 |
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| 149,941 |
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Federal Home Loan Bank advances |
| 27,061 |
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| 26,073 |
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| 32,765 |
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| 36,652 |
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| 28,416 |
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Shareholders' equity |
| 52,205 |
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| 27,349 |
|
| 21,338 |
|
| 20,753 |
|
| 20,045 |
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Assets |
| 465,143 |
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| 288,407 |
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| 237,864 |
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| 223,742 |
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| 207,656 |
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At year end |
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Securities | $ | 87,725 |
| $ | 81,417 |
| $ | 47,211 |
| $ | 47,858 |
| $ | 40,921 |
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Gross loans |
| 328,358 |
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| 331,631 |
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| 185,832 |
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| 173,559 |
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| 163,132 |
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Deposits |
| 351,844 |
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| 366,380 |
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| 182,112 |
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| 167,066 |
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| 146,263 |
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Federal Home Loan Bank advances |
| 35,933 |
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| 23,908 |
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| 30,750 |
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| 34,250 |
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| 33,750 |
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Shareholders' equity |
| 53,142 |
|
| 51,519 |
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| 21,717 |
|
| 21,069 |
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| 20,568 |
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Assets |
| 470,155 |
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| 466,650 |
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| 248,110 |
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| 232,285 |
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| 215,467 |
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Selected financial ratios |
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Return on average assets |
| 0.77 | % |
| 0.72 | % |
| 0.91 | % |
| 0.83 | % |
| 1.01 | % |
Return on average shareholders' equity |
| 6.86 |
|
| 7.63 |
|
| 10.15 |
|
| 8.93 |
|
| 10.48 |
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Cash dividend payout |
| 61.45 |
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| 66.91 |
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| 51.02 |
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| 57.44 |
|
| 50.40 |
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Shareholders' equity to assets (at year end) |
| 11.30 |
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| 11.04 |
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| 8.75 |
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| 9.07 |
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| 9.55 |
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* Per share amounts are retroactively adjusted for the effect of stock dividends and stock splits.
In November 2006, ChoiceOne merged with Valley Ridge Financial Corp. Accordingly, two months of combined operations are included in the 2006 results of operations and all assets acquired and liabilities assumed from Valley Ridge Financial Corp. are included in the 2006 year-end balance sheet. See Note 2 to the consolidated financial statements for information concerning the merger.
ChoiceOne Financial Services, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is designed to provide a review of the consolidated financial condition and results of operations of ChoiceOne Financial Services, Inc. ("ChoiceOne" or the "Company"), and its wholly-owned subsidiaries, ChoiceOne Bank (the "Bank"), ChoiceOne Insurance Agencies, Inc. (the "Insurance Agency"), and ChoiceOne Mortgage Company of Michigan (the "Mortgage Company"). This discussion should be read in conjunction with the consolidated financial statements and related footnotes.
FORWARD-LOOKING STATEMENTS
This discussion and other sections of this annual report contain forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and ChoiceOne itself. Words such as "anticipates," "believes," "estimates," "expects," "forecasts," "intends," "is likely," "plans," "predicts," "projects," "may," "could," variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions ("risk factors") that are difficult to predict with regard to timing, extent, likelihood, and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed, implied or forecasted in such forward-looking statements. Furthermore, ChoiceOne undertakes no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events, or otherwise.
Risk factors include, but are not limited to, the risk factors discussed in Item 1A of the Company's Annual Report on Form 10-K; changes in interest rates and interest rate relationships; demand for products and services; the degree of competition by traditional and non-traditional competitors; changes in banking laws and regulations; changes in tax laws; changes in prices, levies, and assessments; the impact of technological advances; governmental and regulatory policy changes; the outcomes of pending and future litigation and contingencies; trends in customer behavior as well as their ability to repay loans; changes in the local and national economies; changes in market conditions; the possibility that anticipated cost savings and revenue enhancements from the merger with Valley Ridge Financial Corp. may not be fully realized at all or within the expected time frames; the level and timing of asset growth; various other local and global uncertainties such as acts of terrorism and military actions; and cu rrent uncertainties and fluctuations in the financial markets and stocks of financial services providers due to concerns about credit availability and concerns about the Michigan economy in particular. These are representative of the risk factors that could cause a difference between an ultimate actual outcome and a preceding forward-looking statement.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The purpose of this section of the annual report is to provide a narrative discussion about the Company's financial condition and results of operations during 2007. Management's discussion and analysis of financial condition and results of operations as well as disclosures found elsewhere in the annual report are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses and loan servicing rights. Actual results could differ from those estimates.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level believed adequate by management to absorb probable incurred losses inherent in the consolidated loan portfolio. Management's evaluation of the adequacy of the allowance is an estimate based on reviews of individual loans, assessments of the impact of current and anticipated 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 anticipated economic conditions and (2) the impact of recognizing an impairment or loan loss could have a material effect on the Company's assets reported on the balance sheet as well as its net income.
Loan Servicing Rights
Loan servicing rights represent the estimated value of servicing loans that are sold with servicing retained by ChoiceOne. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues. Management's accounting treatment of loan servicing rights is estimated based on current prepayment speeds that are typically market driven.
Management believes the accounting estimate related to loan servicing rights is a "critical accounting estimate" because (1) the estimate is highly susceptible to change from period to period because of significant changes within long-term interest rates affecting the prepayment speeds for current loans being serviced and (2) the impact of recognizing an impairment loss could have a material effect on ChoiceOne's net income. Management has obtained a third-party valuation of its loan servicing rights to corroborate its current carrying value at the end of each reporting period.
MERGER WITH VALLEY RIDGE FINANCIAL CORP.
On November 1, 2006, ChoiceOne merged with Valley Ridge Financial Corp. ("VRFC"). At the time of the merger, VRFC was roughly equal in size in terms of assets with ChoiceOne. The 2006 results of operations include two months of combined financial results after the close of the merger and the 2006 year-end balance sheet includes all of the assets acquired and all of the liabilities assumed from VRFC in the merger. Therefore, a comparison of 2007 financial condition and results of operations to 2006 and 2005 financial condition and results of operations is materially affected as a result of the merger. For more detailed information concerning the merger, see Note 2 to the consolidated financial statements.
RESULTS OF OPERATIONS
Summary
(Dollars in thousands) |
| Year ended December 31 |
| ||||||
|
| 2007 |
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| 2006 |
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| 2005 |
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Net interest income | $ | 15,143 |
| $ | 8,748 |
| $ | 8,045 |
|
Provision for loan losses |
| (2,035 | ) |
| (200 | ) |
| (495 | ) |
Noninterest income |
| 6,481 |
|
| 2,877 |
|
| 2,580 |
|
Noninterest expense |
| (15,070 | ) |
| (8,698 | ) |
| (7,184 | ) |
Income tax expense |
| (939 | ) |
| (639 | ) |
| (780 | ) |
Net income | $ | 3,580 |
| $ | 2,088 |
| $ | 2,166 |
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|
| 2007 |
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| 2006 |
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| 2005 |
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Return on average assets |
| 0.77 | % |
| 0.72 | % |
| 0.91 | % |
Return on average equity |
| 6.86 | % |
| 7.63 | % |
| 10.15 | % |
Net income for 2007 was $3,580,000, which represented a $1.5 million or 71% increase from 2006. The increase in net income from 2006 was primarily due to a complete year of combined results after the VRFC merger that was completed in November 2006. A contributing factor to the increase in noninterest income was a nonrecurring pre-tax gain of $875,000 recognized during 2007 from the sale of ChoiceOne's property and casualty insurance lines of business. Offsetting these increases was growth in expense for the provision for loan losses of $1.8 million compared to the prior year. The increased provision was a result of increased charge-offs experienced during 2007, deterioration in certain commercial credits, and continued concerns regarding the Michigan economy. Noninterest expense was impacted by a full year of amortization of the core deposit intangible and other intangible assets in 2007, which caused expense related to these assets to be $498,000 in 2007 compared to $77,000 in 2006.
Net income for 2006 was $2,088,000, which represented a $78,000 or 4% decrease from 2005. The decrease in net income from 2005 was primarily due to increased noninterest expense. Net interest income increased in 2006 compared to 2005 due to the merger with VRFC in November 2006. A lower provision to the allowance for loan losses was possible due to slow loan growth during 2006 and the allowance acquired from VRFC during 2006. Noninterest income was up 12% in 2006 primarily due to two months of deposit fees from customers acquired in November 2006 from VRFC. Noninterest expense in 2006 was up 21% in 2006 as compared to 2005 largely because the merger with VRFC added two months of compensation expense and occupancy costs for the VRFC employees and VRFC offices acquired in November 2006. ChoiceOne also incurred $160,000 of merger-related expenses in the fourth quarter of 2006 that could not be capitalized as part of the merger.
Dividends
Cash dividends of $2,200,000 or $0.68 per common share were declared in 2007, compared to $1,397,000 or $0.68 per common share in 2006, and $1,105,000 or $0.67 per common share in 2005. Dividends declared rose 57% in 2007 from 2006 due to the 1.6 million shares of common stock issued in November 2006 in connection with the merger with VRFC. The dividend yield on ChoiceOne's common stock was 4.38% in 2007, compared to 3.78% in 2006, and 3.41% in 2005. The cash dividend payout percentage was 61% in 2007, compared to 67% in 2006 and 51% in 2005.
ChoiceOne's Board of Directors declared a 5% stock dividend payable on common stock in April 2005. The dividend was paid in May 2005 and per share data for all periods presented has been adjusted for this stock dividend.
ChoiceOne's principal source of funds to pay cash dividends is the earnings of the Bank. The availability of these earnings is dependent upon the capital needs, regulatory constraints and other factors involving the Bank. Regulatory constraints include the maintenance of minimum capital ratios and limits based on net income and retained earnings of the Bank for the past three years. ChoiceOne expects to pay quarterly cash dividends in 2008 to shareholders based on the actual earnings of the Bank.
Table 1 - Average Balances and Tax-Equivalent Interest Rates
(Dollars in thousands)
|
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| Year ended December 31 |
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| ||||||
| 2007 |
| 2006 |
| 2005 |
| ||||||
| Average |
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| Average |
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| Average |
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Assets |
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Loans (1) (2) | $ 328,335 | $ 24,839 | 7.57 | % | $ 205,851 | $ 14,907 | 7.24 | % | $ 180,100 | $ 11,659 | 6.47 | % |
Taxable securities (3) | 43,525 | 2,237 | 5.14 |
| 36,032 | 1,598 | 4.43 |
| 26,937 | 993 | 3.69 |
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Tax-exempt securities (1) | 40,534 | 2,507 | 6.18 |
| 21,375 | 1,327 | 6.21 |
| 17,804 | 1,038 | 5.83 |
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Other | 1,472 | 79 | 5.39 |
| 1,752 | 97 | 5.54 |
| 151 | 5 | 3.31 |
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Interest-earning assets | 413,866 | 29,662 | 7.17 |
| 265,010 | 17,929 | 6.77 |
| 224,992 | 13,695 | 6.09 |
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Noninterest-earning assets (4) | 51,277 |
|
|
| 23,397 |
|
|
| 12,872 |
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Total assets | $ 465,143 |
|
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| $ 288,407 |
|
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| $ 237,864 |
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Liabilities and Shareholders' Equity |
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demand deposits | $ 90,804 | 2,204 | 2.43 | % | $ 56,617 | 1,492 | 2.64 | % | $ 56,745 | 1,195 | 2.11 | % |
Savings deposits | 28,097 | 139 | 0.50 |
| 11,524 | 58 | 0.50 |
| 9,136 | 46 | 0.50 |
|
Certificates of deposit | 187,648 | 9,113 | 4.86 |
| 126,535 | 5,637 | 4.45 |
| 87,443 | 2,841 | 3.25 |
|
Advances from FHLB | 27,061 | 1,405 | 5.19 |
| 26,073 | 1,182 | 4.53 |
| 32,765 | 974 | 2.97 |
|
Other | 20,069 | 761 | 3.79 |
| 9,750 | 328 | 3.36 |
| 8,943 | 223 | 2.49 |
|
Interest-bearing liabilities | 353,679 | 13,622 | 3.85 |
| 230,499 | 8,697 | 3.77 |
| 195,032 | 5,279 | 2.71 |
|
Demand deposits | 51,695 |
|
|
| 27,611 |
|
|
| 20,095 |
|
|
|
Other noninterest-bearing |
|
|
|
|
|
|
|
|
|
|
|
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Shareholders' equity | 52,205 |
|
|
| 27,349 |
|
|
| 21,338 |
|
|
|
Total liabilities and |
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Net interest income |
|
|
|
|
|
|
|
|
|
|
| |
Tax-equivalent adjustment (1) |
| (897 | ) |
|
| (484 | ) |
|
| (371 | ) |
|
Net interest income |
| $ 15,143 |
|
|
| $ 8,748 |
|
|
| $ 8,045 |
|
|
Net interest income as a |
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| |
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(1) | Interest on nontaxable securities and loans has been adjusted to a fully tax-equivalent basis to facilitate comparison to the taxable interest-earning assets. The adjustment uses an incremental tax rate of 34% for the years presented. |
(2) | Interest on loans included net origination fees charged on loans of approximately $739,000, $402,000, and $401,000 in 2007, 2006, and 2005, respectively. |
(3) | Interest on taxable securities includes dividends on Federal Home Loan Bank and Federal Reserve Bank stock. |
(4) | Noninterest-earning assets include loans on a nonaccrual status, which averaged approximately $6,063,000, $1,844,000, and $1,079,000 in 2007, 2006, and 2005, respectively. |
Net Interest Income
As shown in Tables 1 and 2, tax-equivalent net interest income increased $6.8 million in 2007 compared to 2006. Most of the increase was caused by growth in average earning assets of $149 million or 56% compared to 2006 primarily due to the merger with VRFC. Additionally, net interest spread improved by 32 basis points as a result of less reliance on non-core funding, such as brokered certificates of deposit. Brokered certificates of deposit, which generally are more expensive than certificates of deposit obtained through ChoiceOne's branch network, decreased to $17.7 million at December 31, 2007 from $41.1 million at December 31, 2006. Interest income included $327,000 in 2007 of accretion income from purchase accounting adjustments on loans acquired from VRFC in November 2006, compared to $60,000 in 2006.
The average balance of loans increased approximately $122.4 million in 2007 compared to 2006. In addition, higher interest rates on new and existing loans helped interest income on loans to increase $9.9 million in 2007 compared to 2006. The average balance of total securities grew $26.7 million in 2007 and, coupled with higher yields, increased ChoiceOne's tax-equivalent interest income on securities $1.8 million over 2006. The average balance of other interest-earning assets (primarily federal funds sold) declined $0.3 million in 2007, which caused interest income to decline $18,000 in 2007 compared to 2006.
The average balance of interest-bearing demand deposits increased by approximately $34.2 million in 2007 compared to 2006. The effect of this increase was partially offset by lower average rates paid on those interest-bearing demand deposits resulting in a $712,000 increase in interest expense in 2007 compared to 2006. Growth of $16.6 million in savings deposits caused the $81,000 increase in interest expense in 2007 compared to the prior year. Growth of $61.1 million in the average balance of certificates of deposit, in addition to higher rates paid on these accounts, resulted in an increase of $3.5 million in interest expense in 2007 versus 2006. Certificate of deposit interest expense also included an increase of $76,000 of amortization of a mark to market adjustment when compared to 2006. The average balance of Federal Home Loan Bank advances increased approximately $1 million in addition to continuing repricing upward of interest rates that caused interest expense to increase $223,000 in 2007 compare d to 2006. Growth of approximately $10.3 million in other interest-bearing liabilities (federal funds purchased and repurchase agreements) and an increase in the average rate paid caused interest expense to increase $433,000 in 2007 compared to 2006.
Net interest income spread was 3.32% (shown in Table 1) for 2007, compared to 3.00% in 2006. The average yield received on interest-earning assets in 2007 increased 40 basis points to 7.17% while the average rate paid on interest-bearing liabilities in 2007 climbed 8 basis points to 3.85%.
Table 2 - Changes in Tax-Equivalent Net Interest Income
(Dollars in thousands)
| Year ended December 31 |
| |||||||||||||||||
| 2007 Over 2006 |
| 2006 Over 2005 |
| |||||||||||||||
| Total |
| Volume |
| Rate |
| Total |
| Volume |
| Rate |
| |||||||
Increase (decrease) in interest income (1) |
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|
|
|
|
|
|
| |
Loans (2) | $ | 9,932 |
| $ | 9,238 |
| $ | 694 |
| $ | 3,248 |
| $ | 1,775 |
| $ | 1,473 |
| |
Taxable securities |
| 639 |
|
| 362 |
|
| 277 |
|
| 605 |
|
| 378 |
|
| 227 |
| |
Tax-exempt securities (2) |
| 1,180 |
|
| 1,185 |
|
| (5 | ) |
| 289 |
|
| 218 |
|
| 71 |
| |
Other |
| (18 | ) |
| (15 | ) |
| (3 | ) |
| 92 |
|
| 87 |
|
| 5 |
| |
Net change in tax-equivalent income |
| 11,733 |
|
| 10,770 |
|
| 963 |
|
| 4,234 |
|
| 2,458 |
|
| 1,776 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Increase (decrease) in interest expense (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Interest-bearing transaction accounts |
| 712 |
|
| 838 |
|
| (126 | ) |
| 297 |
|
| (3 | ) |
| 300 |
| |
Savings deposits |
| 81 |
|
| 82 |
|
| (1 | ) |
| 12 |
|
| 12 |
|
| - |
| |
Certificates of deposit |
| 3,476 |
|
| 2,929 |
|
| 547 |
|
| 2,796 |
|
| 1,528 |
|
| 1,268 |
| |
Advances from Federal Home Loan Bank |
| 223 |
|
| 46 |
|
| 177 |
|
| 208 |
|
| (228 | ) |
| 436 |
| |
Other |
| 433 |
|
| 387 |
|
| 46 |
|
| 105 |
|
| 22 |
|
| 83 |
| |
Net change in interest expense |
| 4,925 |
|
| 4,282 |
|
| 643 |
|
| 3,418 |
|
| 1,331 |
|
| 2,087 |
| |
Net change in tax-equivalent |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 34% for the years presented. |
Tax-equivalent net interest income increased $816,000 in 2006 compared to 2005. This was caused by growth in earning assets of $40 million compared to 2005 largely due to the merger with VRFC. The increase in market interest rates during 2006 had a negative impact on tax-equivalent net interest income. The change in tax-equivalent interest income due to changes in rates was negative compared to 2005 as rates increased more on ChoiceOne's funding than its assets. Interest income included $60,000 in 2006 of accretion income from purchase accounting adjustments on loans acquired from VRFC in November 2006.
Management anticipates that net interest income in 2008 will depend upon the Bank's ability to grow loans as well as maintain a stable base of core deposits. Growth in earning assets may prove difficult in 2008 given the continued downturn in the Michigan economy. Additionally, if general market interest rates continue to decline it may lead to compression of ChoiceOne's net interest margin as variable rate loans may tend to be more responsive to interest rate changes than ChoiceOne's funding costs.
Allowance and Provision For Loan Losses
Information regarding the allowance and provision for loan losses can be found in Table 3 below:
Table 3 - Provision and Allowance For Loan Losses
(Dollars in thousands)
|
| 2007 |
|
| 2006 |
|
| 2005 |
|
| 2004 |
|
| 2003 |
|
Allowance for loan losses at beginning of year | $ | 3,569 |
| $ | 1,963 |
| $ | 1,739 |
| $ | 1,974 |
| $ | 2,211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agricultural |
| 33 |
|
| - |
|
| - |
|
| - |
|
| 17 |
|
Commercial and industrial |
| 599 |
|
| 221 |
|
| 72 |
|
| 689 |
|
| 343 |
|
Real estate - commercial |
| 841 |
|
| - |
|
| 25 |
|
| 66 |
|
| 190 |
|
Real estate - construction |
| - |
|
| - |
|
| 20 |
|
| - |
|
| - |
|
Real estate - residential |
| 191 |
|
| 92 |
|
| 120 |
|
| 41 |
|
| 76 |
|
Consumer |
| 635 |
|
| 200 |
|
| 162 |
|
| 144 |
|
| 354 |
|
Total |
| 2,299 |
|
| 513 |
|
| 399 |
|
| 940 |
|
| 980 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agricultural |
| 3 |
|
| - |
|
| - |
|
| - |
|
| - |
|
Commercial and industrial |
| 27 |
|
| 51 |
|
| 47 |
|
| 58 |
|
| 96 |
|
Real estate - commercial |
| 1 |
|
| - |
|
| - |
|
| - |
|
| - |
|
Real estate - construction |
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
Real estate - residential |
| 10 |
|
| - |
|
| - |
|
| - |
|
| 5 |
|
Consumer |
| 254 |
|
| 117 |
|
| 81 |
|
| 182 |
|
| 242 |
|
Total |
| 295 |
|
| 168 |
|
| 128 |
|
| 240 |
|
| 343 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
| 2,004 |
|
| 345 |
|
| 271 |
|
| 700 |
|
| 637 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses |
| 2,035 |
|
| 200 |
|
| 495 |
|
| 465 |
|
| 400 |
|
Allowance for loan losses acquired from VRFC |
| - |
|
| 1,751 |
|
| - |
|
| - |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses at end of year | $ | 3,600 |
| $ | 3,569 |
| $ | 1,963 |
| $ | 1,739 |
| $ | 1,974 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses as a percentage of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans as of year end |
| 1.10 | % |
| 1.08 | % |
| 1.06 | % |
| 1.00 | % |
| 1.21 | % |
Nonaccrual loans, accrual loans past due 90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of net charge-offs to average total loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding during the year |
| 0.61 | % |
| 0.17 | % |
| 0.15 | % |
| 0.41 | % |
| 0.39 | % |
Loan recoveries as a percentage of prior year's |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
charge-offs |
| 58 | % |
| 42 | % |
| 14 | % |
| 24 | % |
| 27 | % |
As shown in Table 3, the provision for loan losses was $1.8 million higher in 2007 than in 2006. The increase in the provision resulted from higher net charge-offs experienced in 2007 compared to 2006, as well as deterioration in certain commercial credits and continued concerns regarding the Michigan economy. Over $700,000 of the charge-offs in 2007 were related to one commercial real estate developer.
Net charge-offs of total loans increased $1.7 million in 2007 compared to 2006 with part of the increase due to the merger with VRFC. The loan categories that experienced significant increases in 2007 were commercial and industrial loans, commercial real estate loans, and consumer loans. Approximately 30% of the commercial and industrial loans charge-offs were related to one borrower; the remaining charge-offs were comprised of a number of smaller loans. Approximately $655,000 of the commercial real estate charge-offs were related to one commercial real estate developer. The Bank had approximately $6,055,000 of land development loans in its commercial real estate portfolio as of December 31, 2007. The sluggish economy in the State of Michigan has affected the ability of developers to sell lots and homes. The Bank continues to monitor these loans closely. The increase in consumer loan charge-offs was primarily due to charge-offs of overdrawn checking accounts. Net charge-offs of checking accounts were $279 ,000 in 2007, compared to $24,000 in 2006. Part of the increase in checking account charge-offs in 2007 was due to an expansion of the Bank's overdraft protection program in January 2007. Net charge-offs of residential real estate loans in 2007 were approximately double the balance of the prior year with the majority of the charge-offs occurring in second mortgages. ChoiceOne held approximately $607,000 of sub-prime loans in its residential mortgage portfolio as of December 31, 2007. The Bank does not intend to originate any more sub-prime loans in the future. The allowance for loan losses as a percentage of total loans increased slightly from 1.08% at the end of 2006 to 1.10% at the end of 2007. The ratio of the allowance for loan losses to nonperforming loans also grew slightly from 53% as of December 31, 2006 to 62% as of December 31, 2007. At the end of 2007, the Bank had $854,000 specifically reserved for problem loans, compared to $942,000 as of the end of the prior year. Management believes the specif ic reserves allocated to certain problem loans at the end of 2007 are reasonable based on the circumstances surrounding each particular borrower.
The following schedule presents an allocation of the allowance for loan losses to the various loan categories as of the years ended December 31:
(Dollars in thousands)
|
| 2007 |
|
| 2006 |
|
| 2005 |
|
| 2004 |
|
| 2003 |
|
Agricultural | $ | 397 |
| $ | 314 |
| $ | 202 |
| $ | 169 |
| $ | 210 |
|
Commercial and industrial |
| 873 |
|
| 1,160 |
|
| 1,060 |
|
| 939 |
|
| 850 |
|
Real estate - commercial |
| 886 |
|
| 1,029 |
|
| 254 |
|
| 265 |
|
| 215 |
|
Real estate - construction |
| 10 |
|
| 12 |
|
| 19 |
|
| 32 |
|
| 33 |
|
Real estate - residential |
| 881 |
|
| 575 |
|
| 229 |
|
| 181 |
|
| 240 |
|
Consumer |
| 489 |
|
| 289 |
|
| 195 |
|
| 123 |
|
| 325 |
|
Unallocated |
| 64 |
|
| 190 |
|
| 4 |
|
| 30 |
|
| 101 |
|
|
|
|
| �� |
|
|
|
|
|
|
|
|
|
|
|
Total allowance for loan losses | $ | 3,600 |
| $ | 3,569 |
| $ | 1,963 |
| $ | 1,739 |
| $ | 1,974 |
|
The decrease in the allowance allocation to commercial and industrial loans and commercial real estate loans and the increase in the allocation to residential real estate loans reflect changes in nonperforming loans from the end of 2006 to the end of 2007. Nonperforming commercial loans were lower as of December 31, 2007 than at the end of the prior year, while nonperforming residential real estate loans have increased. Specific loss allocations to commercial and industrial loans and commercial real estate loans totaled $854,000 at December 31, 2007 versus $942,000 at December 31, 2006. Specific loss allocations are based upon either a discounted collateral amount or the net present value of future expected cashflows from borrowers. The increase in the allowance allocation to consumer loans in 2007 was caused by the higher level of charge-offs of overdrawn checking accounts in 2007. The significant increase in the total allowance from 2005 to 2006 was related to the allowance of $1,751,000 acquired from t he merger with VRFC in November 2006. The majority of the reserve acquired from VRFC was allocated to commercial real estate and residential real estate loans.
Management maintains the allowance at a level at which it believes adequately provides for losses inherent in the loan portfolio. Such losses are estimated by a variety of factors, including specific examination of certain borrowing relationships and consideration of historical losses incurred on certain types of credits. 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, 2007 is adequate. As charge-offs, changes in the level of nonperforming loans, and changes within the composition of the loan portfolio occur, the provision and allowance for loan losses will be reviewed by the Bank's management and adjusted as necessary.
Noninterest Income
Total noninterest income increased $3.6 million or 125% in 2007 compared to 2006. Customer service charges on deposit accounts were up $1.9 million primarily due to a full year of combined results from the merger with VRFC. An expanded overdraft program was also offered to banking customers beginning in January 2007 which enhanced service charges for the last three quarters of 2007. Insurance and investment commissions increased by $306,000 in 2007 compared to 2006 primarily from the acquisition of a book of business from an investment agent affiliated with Valley Ridge. This book of business was purchased from the agent in January 2007 and the premium paid is being amortized over a 10-year period. The gain on the sale of an insurance book of business was related to the sale of ChoiceOne's property and casualty insurance lines of business. The sale was recorded in October 2007 and a nonrecurring pre-tax gain of $875,000 was recognized. Gains on the sale of loans were up slightly due to a higher volume of loa ns originated for sale by the Mortgage Company. Gains on the sale of securities of $23,000 were partially offset by losses of $10,000 on the sale of securities during 2007. Losses on the sale of other assets included $195,000 in 2007 and $196,000 in 2006 of write-downs and realized losses incurred on foreclosed real estate properties. The decrease in profit sharing income in 2007 resulted from the sale of the property and casualty lines of business in late 2007. Earnings on life insurance policies increased $215,000 in 2007 due to ChoiceOne acquiring $5.7 million of bank owned life insurance policies in the merger with VRFC. Miscellaneous other noninterest income was up $341,000 in 2007 compared to 2006 as a result of increased check printing fees, ATM surcharge fees, safe deposit box fees, certificate of deposit withdrawal penalties and credit card fees resulting from more activity due to the merger with VRFC.
Total noninterest income increased $297,000 or 12% in 2006 compared to 2005. Service charges on deposit accounts were up $391,000 primarily due to the merger with VRFC. In addition, insufficient funds fees and debit card fees were up substantially in 2006 compared to 2005. Insurance and investment commissions were lower due to reduced sales of annuities and mutual funds. Gains on the sale of loans were down due to a slightly lower volume of loans originated for sale by the Mortgage Company. Losses on the sale of securities ($168,000) were partially offset by gains on the sale of securities ($102,000) during 2006. In the fourth quarter of 2006, the Bank sold approximately $15 million of low-yielding securities to pay off certain wholesale borrowings. Losses on the sale of other assets include $196,000 of write-downs and realized losses incurred on foreclosed real estate properties. Profit-sharing income received by the Insurance Agency rose $63,000 due to fewer losses at carriers with whom ChoiceOne writes property and casualty business. Earnings on life insurance policies increased $61,000 in 2006 due to ChoiceOne acquiring $5.7 million in policies from its merger with VRFC.
Management estimates that noninterest income may decrease in 2008 due to the sale of the property and casualty insurance lines of business in October 2007. Operations in 2008 will not include the impact of the $875,000 pre-tax gain on the sale of the property and casualty lines and will not include the commission income related to these lines of business. Management believes that the impact of this sale may be offset by increased revenue from its investment brokerage line of business, which was bolstered in early 2007 by the purchase of an investment book of business mentioned in the previous paragraph. In addition, management plans to emphasize growth of checking and savings deposit accounts in 2008, which could cause an increase in deposit service charges.
Noninterest Expense
Total noninterest expense increased $6.4 million or 73% in 2007 compared to 2006. Growth in salaries and benefits expense of $3.0 million in 2007 compared to 2006 was due to the merger with VRFC. ChoiceOne added 80 full-time equivalent employees in November 2006. As a result, 2006 compensation expense included only two months of payroll cost for former VRFC personnel. Occupancy expense increased $889,000 in 2007 compared to 2006 due to a full year of combined operations after the VRFC merger. Nine offices were acquired in the merger with VRFC in November 2006. One of these offices was closed in early 2007 and sold due to its proximity to two other offices of ChoiceOne. Data processing costs were $758,000 higher in 2007 compared to 2006 which only included 2 months of combined results after the merger. The merger with VRFC more than doubled the number of loan and deposit accounts on the Bank's data processing system and other data processing costs such as amortization of software licenses, Internet banking ch arges, remote item capture costs and automated teller machine (ATM) costs have increased due to more customers, employees, and ATMs as a result of the merger. Professional fees were $156,000 higher in 2007 than in 2006, partly as a result of increased foreclosure related expenses. Supplies and postage expense increased $239,000 in 2007 over the prior year as a result of the VRFC merger. Stationary, envelopes, receipts, and other items were purchased to provide stock for the nine banking locations acquired in the merger with VRFC. Postage expense is higher due to the number of customer accounts more than doubling which increased the number of statements, notices and advices generated for customers. Advertising and promotional expense increased by $195,000 in 2007 compared to the prior year. ChoiceOne launched a detailed branding campaign in early 2007 and promoted a deposit switch campaign during 2007. Intangible asset amortization of $498,000 in 2007 represented twelve months of amortization of intangible as sets acquired as part of the VRFC merger, compared to 2006 which included $77,000 of amortization for the last two months of the year. Other noninterest expenses such as insurance costs, correspondent bank charges, and courier expense have increased in 2007 compared to the prior year as a result of the merger with VRFC. Foreclosed asset expenses have also increased $74,000 in 2007 compared to 2006 as a result of an increase in the number of foreclosed real estate properties.
Total noninterest expense increased $1,514,000 or 21% in 2006 compared to 2005. Salaries and benefits were up $787,000 in 2006 due to the merger with VRFC. Occupancy expense was higher in 2006 due to two months of operations for the nine offices acquired
from VRFC in November 2006. Data processing expense was higher during 2006 due to two months of operations for the nine offices acquired from VRFC in November 2006. Also, an increased volume of deposit accounts and customer electronic activities also drove higher data processing costs as compared to 2005. Intangible amortization included $77,000 for two months of amortization expense of the core deposit intangible asset and other intangible assets recorded in connection with the merger with VRFC. Other noninterest expense included a $157,000 increase from 2005 for state single business taxes. In 2005, the Bank recorded a credit adjustment of $84,000 for overpayments made during 2002, 2003, and 2004. During the fourth quarter of 2006, ChoiceOne also expensed $160,000 in connection with merger-related items that could not be capitalized into goodwill. Certain professional fees, supplies, and severance payments were one-time payments that were not expected to recur in 2007.
Management projects future noninterest expense may decrease due to the sale of its property and casualty lines of business and the related costs. Legal fees and foreclosed real estate costs may continue to increase if asset quality deteriorates and additional resources are necessary for collection and foreclosure.
FINANCIAL CONDITION
Securities
(Dollars in thousands)
|
| 2007 |
|
| 2006 |
|
U.S. Government and federal agency | $ | 15,952 |
| $ | 18,164 |
|
State and municipal |
| 46,486 |
|
| 35,651 |
|
Mortgage-backed |
| 14,423 |
|
| 19,842 |
|
Corporate |
| 1,251 |
|
| 2,254 |
|
Equity securities |
| 5,044 |
|
| 1,525 |
|
Total | $ | 83,156 |
| $ | 77,436 |
|
The securities available for sale portfolio increased $5.7 million or 7% from December 31, 2006 to December 31, 2007. ChoiceOne purchased a mix of government agency, municipal, and money market preferred securities totaling $32.9 million during 2007 to achieve some growth in the earning assets of the Bank. Approximately $17.5 million in various securities were called or matured in 2007. Principal payments for mortgage-backed securities totaling $5.7 million were received during 2007. Various securities totaling approximately $3.9 million were sold during 2007 for net gains totaling $13,000. The Bank's Investment Committee continues to monitor the portfolio and purchases securities when deemed prudent. Also, certain securities are sold under agreements to repurchase and management plans to continue this practice as a low-cost source of funding.
Equity securities included Money Market Preferred Securities (MMPs) of $4.5 million and $1.0 million as of December 31, 2007 and December 31, 2006, respectively. The credit position of the MMPs as of the end of 2007 was stable with ratings from AA3 to A2. MMPs are transacted via auction every 90 days. When sellers exceed buyers at the auction, MMPs may have to be retained until the next auction 90 days forward. Therefore, MMPs bear liquidity risk, which the Bank actively manages including transactions outside the auction process.
Loans
The Bank's loan portfolio as of December 31 was as follows:
(Dollars in thousands)
|
| 2007 |
|
| 2006 |
|
Agricultural | $ | 24,765 |
| $ | 23,606 |
|
Commercial and industrial |
| 51,242 |
|
| 51,419 |
|
Consumer |
| 15,939 |
|
| 15,589 |
|
Real estate - commercial |
| 125,960 |
|
| 123,743 |
|
Real estate - construction |
| 4,048 |
|
| 4,740 |
|
Real estate - residential |
| 106,404 |
|
| 112,534 |
|
Total loans | $ | 328,358 |
| $ | 331,631 |
|
The loan portfolio (excluding loans held for sale) decreased approximately $3.3 million or 1% from December 31, 2006 to December 31, 2007. Loan demand in 2007 was sluggish due to the lackluster Michigan economy and a competitive lending environment. Agricultural, commercial and industrial, consumer, and commercial real estate loans have all stayed stable or increased slightly during 2007. Offsetting growth in the commercial loan portfolio has been payoffs on various purchased participated loans totaling $3.6 million during 2007. Residential real estate loans have declined $6.1 million since the end of 2006 due to normal repayments on adjustable rate and balloon mortgages. Additionally, mortgage demand during 2007 has been affected by the challenges in the residential real estate market.
Management anticipates demand for commercial loans and other loan types in 2008 will depend upon the stability of the local and state economies. The Bank intends to continue its calling program with commercial customers in its expanded marketplace.
Information regarding impaired loans can be found in Note 6 to the consolidated financial statements included in this report. In addition to its review of the loan portfolio for impaired loans, management also monitors various nonperforming loans. Nonperforming loans are comprised of (1) loans accounted for on a nonaccrual basis; (2) loans, not included in nonaccrual loans, which are contractually past due 90 days or more as to interest or principal payments; and (3) loans, not included in nonaccrual or past due 90 days or more, which are considered troubled debt restructurings.
The balances of these nonperforming loans as of December 31 were as follows:
(Dollars in thousands)
|
| 2007 |
|
| 2006 |
|
Loans accounted for on a nonaccrual basis | $ | 5,605 |
| $ | 6,420 |
|
Loans contractually past due 90 days |
|
|
|
|
|
|
or more as to principal or interest payments |
| 188 |
|
| 278 |
|
Loans considered troubled debt restructurings |
| - |
|
| 24 |
|
Total | $ | 5,793 |
| $ | 6,722 |
|
At December 31, 2007, nonaccrual loans included $3,003,000 in commercial industrial and commercial real estate loans, $2,401,000 in residential real estate loans, and $201,000 in consumer loans. At the end of the prior year, nonaccrual loans were comprised of $5,936,000 of commercial industrial and commercial real estate loans, $351,000 of residential real estate loans, and $133,000 of consumer loans. The decline in nonaccrual commercial loans resulted from the charge-offs taken in 2007 and workouts in certain credits. The significant growth in nonaccrual residential mortgage loans is partly due to the economy's impact on borrowers' abilities to make loan payments and the challenges affecting the residential real estate market. The growth was also caused by a change in recording foreclosed residential mortgages that are in the process of redemption. As of the end of 2006, ChoiceOne reclassified these loans to other real estate owned at the time of foreclosure. Beginning in 2007, ChoiceOne retained the loa ns in its loan portfolio and did not transfer them to other real estate owned until the end of the redemption period. As of the end of 2007, ChoiceOne had $1,632,000 of residential mortgage loans that had been foreclosed upon and were in process of redemption.
Management also maintains a list of loans that are not classified as nonperforming loans but where some concern exists as to the borrowers' abilities to comply with the original loan terms. These loans totaled $14.5 million as of December 31, 2007, compared to $8.1 million as of December 31, 2006.
Deposits and Other Funding Sources
Total deposits decreased $14.5 million or 4.0% from December 31, 2006 to December 31, 2007. The decrease was caused by maturities of brokered certificates of deposit, which dropped from a balance of $41.1 million at the end of 2006 to $17.7 million at the end of 2007. Deposits obtained from the Bank's local markets grew $8.9 million during 2007. Approximately $5.8 million of the local deposit growth came from certificates of deposit with the other deposit categories comprising the remainder.
Securities sold under agreements to repurchase increased nearly $6.7 million during 2007. In addition to local retail repurchase agreements, a structured repurchase agreement for $5 million with one of ChoiceOne's correspondent banks was utilized in 2007 as an alternate funding source. Federal funds purchased at the end of 2007 declined $460,000 from year-end 2006 since the Bank sold a small amount of federal funds at the end of 2007. Advances from the Federal Home Loan Bank ("FHLB") increased $12.0 million in 2007 as the interest rates offered were lower than other alternative sources of funding. A blanket collateral agreement covering residential real estate loans was pledged against all outstanding advances at the end of 2007. Approximately $7.2 million of advances were available as of December 31, 2007 based on the collateral pledged.
In 2008, management will continue to focus its marketing efforts towards growing local deposits. If local deposit growth is insufficient to support asset growth during 2008, management believes that FHLB advances, repurchase agreements and brokered certificates of deposit can address corresponding funding needs.
Shareholders' Equity
Total shareholders' equity increased approximately $1.6 million or 3% from December 31, 2006 to December 31, 2007. Growth in equity resulted primarily from current year's net income, proceeds from the issuance of ChoiceOne's stock, and an increase in accumulated other comprehensive income, offset by dividends paid and shares repurchased. ChoiceOne repurchased 32,700 shares of its common stock during 2007 compared to 4,687 in 2006. Management anticipates it may continue to repurchase shares of its common stock in 2008 and retire them. ChoiceOne's Board of Directors authorized an additional repurchase plan on July 26, 2007 to buy back 100,000 shares of common stock.
Note 22 to the consolidated financial statements presents regulatory capital information for the Bank at the end of 2007 and 2006. The Bank's capital ratios increased from December 31, 2006 to December 31, 2007 as shareholders' equity grew at a rate faster than assets. Management believes these capital ratios may continue to grow in 2008 as asset growth may be challenging given the sluggish local and state economies. The Board of Directors and management do not plan to allow capital to decrease below those levels necessary to be considered "well capitalized" by regulatory guidelines. The Registrant believes that its capital level as of December 31, 2007 is adequate for the foreseeable future.
Table 4 - Contractual Obligations
The following table discloses information regarding the maturity of ChoiceOne's contractual obligations at December 31, 2007:
(Dollars in thousands)
| Payment Due By Period |
| ||||||||||||
|
|
|
|
| Less |
|
|
|
|
|
|
| More |
|
Time deposits | $ | 181,065 |
| $ | 129,560 |
| $ | 42,490 |
| $ | 8,898 | $ | 117 |
|
Repurchase agreements |
| 21,710 |
|
| 16,210 |
|
| 500 |
|
| 5,000 |
| - |
|
Advances from Federal Home Loan Bank |
| 35,933 |
|
| 10,976 |
|
| 19,957 |
|
| 5,000 |
| - |
|
Operating leases |
| 16 |
|
| 16 |
|
| - |
|
| - |
| - |
|
Total | $ | 238,724 |
| $ | 156,762 |
| $ | 62,947 |
| $ | 18,898 | $ | 117 |
|
Liquidity and Interest Rate Risk
Net cash from operating activities was $6.5 million for 2007 compared to $7.2 million used for 2006. Net income increased $1.5 million, the provision for loan losses increased $1.8 million, depreciation and amortization increased $0.7 million, and proceeds from sales of other real estate owned increased $.9 million over 2006. The net change in other assets and other liabilities of $2.2 million and $6.8 million, respectively, in 2007 over 2006 offset cash flows from operating activities. Net cash from investing activities was $28.5 million less for 2007 compared to 2006 as $32.9 million of cash was used to purchase securities in 2007 compared to $22.2 million in 2006. ChoiceOne received $20 million in cash in the merger with VRFC in 2006. Net cash flows from financing activities for 2007 were $1.1 million compared to $9.9 million used in 2006. The $14.5 million decline in deposits in 2007 was offset by a $6.7 million increase in repurchase agreements and $12 million from FHLB advances. Dividends declared and stock repurchases of $2.7 million also increased the amount of cash used in financing activities for 2007.
ChoiceOne's primary market risk exposure occurs in the form of interest rate risk. Liquidity risk also can have an impact but to a lesser extent. ChoiceOne's business is transacted in U.S. dollars with no foreign exchange risk exposure. Agricultural loans comprise a small portion of ChoiceOne's total assets. Management believes that ChoiceOne's exposure to changes in commodity prices is insignificant.
Management believes that the current level of liquidity is sufficient to meet the Bank's normal operating needs. This belief is based upon the availability of deposits from both the local and national markets, maturities of securities, normal loan repayments, income retention, federal funds purchased from correspondent banks, and advances available from the Federal Home Loan Bank. 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 five of the Bank's correspondent banks. As of December 31, 2007, the amount of federal funds available for purchase from the Bank's correspondent banks totaled approximately $42 million. ChoiceOne had no federal funds purchased at the end of 2007. The Bank also has a line of credit secured by ChoiceOne's commercial loans with the Federal Reserve Bank of Ch icago for $63 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 Federal Home Loan Bank, brokered time deposits, and income retention. Approximately $7.2 million of borrowing capacity was available from the Federal Home Loan Bank based on the Mortgage Company's residential mortgage loans pledged as collateral at year-end 2007. The acceptance of brokered time deposits is not limited as long as the Bank's capital to assets ratio is considered to be "well capitalized" under regulatory guidelines.
Interest rate risk is related to liquidity because each is affected by maturing assets and sources of funds. ChoiceOne's Asset/Liability Management Committee (the "ALCO") attempts to stabilize the interest rate spread and avoid possible adverse effects when unusual or rapid changes in interest rates occur. The ALCO uses a simulation model to measure the Bank's interest rate risk. The model incorporates changes in interest rates on rate-sensitive assets and liabilities. The degree of rate sensitivity is affected by prepayment assumptions that exist in the assets and liabilities. One method the ALCO uses of measuring interest rate sensitivity is the ratio of rate-sensitive assets to rate-sensitive liabilities. An asset or liability is considered to be rate-sensitive if it matures or otherwise reprices within a given time frame.
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)
|
| As of December 31, 2007 |
| |||||||||||
|
| 0-3 |
|
| 3-12 |
|
| 1-5 |
|
| Over |
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold | $ | 217 |
| $ | - |
| $ | - |
| $ | - | $ | 217 |
|
Securities available for sale |
| 8,390 |
|
| 7,806 |
|
| 25,580 |
|
| 41,380 |
| 83,156 |
|
Federal Home Loan Bank stock |
| - |
|
| 3,304 |
|
| - |
|
| - |
| 3,304 |
|
Federal Reserve Bank stock |
| - |
|
| - |
|
| 1,265 |
|
| - |
| 1,265 |
|
Loans held for sale |
| 100 |
|
| - |
|
| - |
|
| - |
| 100 |
|
Loans |
| 88,968 |
|
| 55,871 |
|
| 149,392 |
|
| 34,127 |
| 328,358 |
|
Cash surrender value of life insurance policies |
| - |
|
| - |
|
| 8,538 |
|
| - |
| 8,538 |
|
Rate-sensitive assets |
| 97,675 |
|
| 66,981 |
|
| 184,775 |
|
| 75,507 |
| 424,938 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing checking deposits |
| 36,850 |
|
| - |
|
| - |
|
| - |
| 36,850 |
|
Savings deposits |
| 27,249 |
|
| - |
|
| - |
|
| - |
| 27,249 |
|
Money market deposits |
| 52,325 |
|
| - |
|
| - |
|
| - |
| 52,325 |
|
Certificates of deposit |
| 42,474 |
|
| 87,086 |
|
| 51,388 |
|
| 117 |
| 181,065 |
|
Repurchase agreements |
| - |
|
| 7,816 |
|
| 13,894 |
|
| - |
| 21,710 |
|
Advances from Federal Home Loan Bank |
| 2,750 |
|
| 8,250 |
|
| 22,433 |
|
| 2,500 |
| 35,933 |
|
Rate-sensitive liabilities |
| 161,648 |
|
| 103,152 |
|
| 87,715 |
|
| 2,617 |
| 355,132 |
|
Rate-sensitive assets less rate-sensitive liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset (liability) gap for the period | $ | (63,973 | ) | $ | (36,171 | ) | $ | 97,060 |
| $ | 72,890 | $ | 69,806 |
|
Cumulative asset (liability) gap | $ | (63,973 | ) | $ | (100,144 | ) | $ | (3,084 | ) | $ | 69,806 |
|
|
|
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 62% at December 31, 2007, compared to 56% at December 31, 2006. Table 5 above shows the entire balance of interest-bearing demand deposits, savings deposits, and overnight repurchase agreements in the shortest repricing term. Although these three 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 deposits. The ALCO plans to continue to monitor the ratio of rate-sensitive assets to rate-sensitive liabilities on a quarterly basis in 2008. As interest rates change during 2008, 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, 2007, management used a simulation model to subject its assets and liabilities to an immediate 300 basis point increase and an immediate 300 basis point decrease in interest rates. 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 Federal Home Loan Bank were based on their contractual maturity dates. In the case of variable rate assets and liabilities, repricing dates were used to determine their values. The simulation model measures the effect of immediate interest rate changes on both net interest income and shareholders' equity. ChoiceOne's Interest Rate Risk Policy states that the changes in interest rates cannot cause net interest income to decrease more than 10% if rates are instantaneously shocked 200 basis points upward or downward. ChoiceOne's Interest Rate Risk Policy states that the changes in interest rates cannot cause the market value of shareholders' equity to decrease more than 20% if rates are instantaneously shocked 200 basis points upward or downward.
Table 6 provides an illustration of hypothetical interest rate changes as of December 31, 2007 and 2006, respectively:
Table 6 - Sensitivity to Changes in Interest Rates
|
| 2007 |
| |||||||||
(Dollars in thousands) |
| Net |
|
|
|
|
| Market |
|
|
|
|
Change in Interest Rates |
|
|
|
|
|
|
|
|
|
|
|
|
300 basis point rise | $ | 17,229 |
|
| + 7 | % | $ | 49,997 |
|
| - 20 | % |
200 basis point rise |
| 16,833 |
|
| + 5 | % |
| 53,862 |
|
| - 14 | % |
100 basis point rise |
| 16,436 |
|
| + 2 | % |
| 58,070 |
|
| - 7 | % |
Base rate scenario |
| 16,053 |
|
| - | % |
| 62,686 |
|
| - | % |
100 basis point decline |
| 15,662 |
|
| - 2 | % |
| 66,585 |
|
| + 6 | % |
200 basis point decline |
| 15,229 |
|
| - 5 | % |
| 71,366 |
|
| + 14 | % |
300 basis point decline |
| 14,695 |
|
| - 8 | % |
| 76,445 |
|
| + 22 | % |
|
| 2006 |
| |||||||||
(Dollars in thousands) |
| Net |
|
|
|
|
| Market |
|
|
|
|
Change in Interest Rates |
|
|
|
|
|
|
|
|
|
|
|
|
300 basis point rise | $ | 16,364 |
|
| + 5 | % | $ | 58,116 |
|
| - 15 | % |
200 basis point rise |
| 16,194 |
|
| + 4 | % |
| 61,345 |
|
| - 10 | % |
100 basis point rise |
| 16,021 |
|
| + 2 | % |
| 64,784 |
|
| - 5 | % |
Base rate scenario |
| 15,842 |
|
| - | % |
| 68,428 |
|
| - | % |
100 basis point decline |
| 15,762 |
|
| - 1 | % |
| 72,167 |
|
| + 5 | % |
200 basis point decline |
| 15,640 |
|
| - 1 | % |
| 75,938 |
|
| + 11 | % |
300 basis point decline |
| 15,363 |
|
| - 3 | % |
| 79,713 |
|
| + 16 | % |
As of both December 31, 2007 and December 31, 2006, the Bank is within its guidelines for immediate rate shocks up and down for both net interest income and the market value of shareholder's equity. The ALCO plans to continue to monitor the effect of changes in interest rates on both net interest income and shareholders' equity and will make changes in the duration of its rate-sensitive assets and rate-sensitive liabilities where necessary.
ChoiceOne Financial Services, Inc.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of ChoiceOne Financial Services, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting that is designed to produce reliable financial statements in conformity with United States generally accepted accounting principles. The system of internal control over financial reporting as it relates to the financial statements is evaluated for effectiveness by management and tested for reliability through a program of internal audits. Actions are taken to correct potential deficiencies as they are identified. Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected. Also, because of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial statemen t preparation.
Management assessed the effectiveness of the Company's system of internal control over financial reporting as of December 31, 2007, as required by Section 404 of the Sarbanes-Oxley Act of 2002. Management's assessment is based on the criteria for effective internal control over financial reporting as described in "Internal Control - Integrated Framework," issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based on this assessment, management has concluded that, as of December 31, 2007, its system of internal control over financial reporting was effective and meets the criteria of the "Internal Control - Integrated Framework." This annual report does not include an attestation report of the Company's independent registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange C ommission that permit the Company to provide only management's report in this annual report.
James A. Bosserd | Thomas L. Lampen |
|
|
March 17, 2008 | March 17, 2008 |
Plante & Moran, PLLC |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors
of ChoiceOne Financial Services, Inc., Sparta, Michigan
We have audited the accompanying consolidated balance sheets of ChoiceOne Financial Services, Inc. as of December 31, 2007 and December 31, 2006, and the related consolidated statements of income, changes in shareholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. The consolidated balance sheet of ChoiceOne Financial Services, Inc. as of December 31, 2005, and the related consolidated statements of income, changes in shareholders' equity and cash flows for the one year ended December 31, 2005, were audited by other auditors whose report, dated March 7, 2006, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall fina ncial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ChoiceOne Financial Services, Inc. as of December 31, 2007 and 2006, and the results of its operations and its cash flows for the years ended December 31, 2007 and 2006, in conformity with U.S. generally accepted accounting principles.
| Plante & Moran, PLLC |
Grand Rapids, Michigan
March 17, 2008
ChoiceOne Financial Services, Inc.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
|
| December 31 |
| |||
|
| 2007 |
|
| 2006 |
|
Assets |
|
|
|
|
|
|
Cash and due from banks | $ | 10,923 |
| $ | 9,936 |
|
Federal funds sold |
| 217 |
|
| - |
|
Cash and cash equivalents |
| 11,140 |
|
| 9,936 |
|
|
|
|
|
|
|
|
Securities available for sale |
| 83,156 |
|
| 77,436 |
|
Federal Home Loan Bank stock |
| 3,304 |
|
| 3,304 |
|
Federal Reserve Bank stock |
| 1,265 |
|
| 677 |
|
Loans held for sale |
| 100 |
|
| 236 |
|
|
|
|
|
|
|
|
Loans |
| 328,358 |
|
| 331,631 |
|
Allowance for loan losses |
| (3,600 | ) |
| (3,569 | ) |
Loans, net |
| 324,758 |
|
| 328,062 |
|
|
|
|
|
|
|
|
Premises and equipment, net |
| 11,865 |
|
| 11,622 |
|
Other real estate owned, net |
| 1,509 |
|
| 1,774 |
|
Loan servicing rights, net |
| 792 |
|
| 992 |
|
Cash value of life insurance policies |
| 8,538 |
|
| 8,070 |
|
Intangible assets, net |
| 4,031 |
|
| 4,182 |
|
Goodwill |
| 13,728 |
|
| 14,280 |
|
Other assets |
| 5,969 |
|
| 6,079 |
|
Total assets | $ | 470,155 |
| $ | 466,650 |
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
Deposits - noninterest-bearing | $ | 54,355 |
| $ | 57,986 |
|
Deposits - interest-bearing |
| 297,489 |
|
| 308,394 |
|
Total deposits |
| 351,844 |
|
| 366,380 |
|
|
|
|
|
|
|
|
Repurchase agreements |
| 21,710 |
|
| 15,013 |
|
Federal funds purchased |
| - |
|
| 460 |
|
Advances from Federal Home Loan Bank |
| 35,933 |
|
| 23,908 |
|
Other liabilities |
| 7,526 |
|
| 9,370 |
|
Total liabilities |
| 417,013 |
|
| 415,131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders' Equity |
|
|
|
|
|
|
Preferred stock; shares authorized: 100,000; shares outstanding: none |
| - |
|
| - |
|
Common stock and paid-in capital, no par value; shares authorized: 4,000,000; |
|
|
|
|
|
|
Retained earnings |
| 6,665 |
|
| 5,285 |
|
Accumulated other comprehensive income (loss), net |
| 521 |
|
| (19 | ) |
Total shareholders' equity |
| 53,142 |
|
| 51,519 |
|
Total liabilities and shareholders' equity | $ | 470,155 |
| $ | 466,650 |
|
See accompanying notes to consolidated financial statements.
ChoiceOne Financial Services, Inc.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
|
| Years ended December 31 |
| ||||||
|
| 2007 |
|
| 2006 |
|
| 2005 |
|
Interest income |
|
|
|
|
|
|
|
|
|
Loans, including fees | $ | 24,794 |
| $ | 14,874 |
| $ | 11,641 |
|
Securities |
|
|
|
|
|
|
|
|
|
Taxable |
| 2,237 |
|
| 1,598 |
|
| 993 |
|
Tax exempt |
| 1,655 |
|
| 876 |
|
| 685 |
|
Other |
| 79 |
|
| 97 |
|
| 5 |
|
Total interest income |
| 28,765 |
|
| 17,445 |
|
| 13,324 |
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
|
|
|
|
|
|
|
Deposits |
| 11,456 |
|
| 7,187 |
|
| 4,082 |
|
Advances from Federal Home Loan Bank |
| 1,405 |
|
| 1,182 |
|
| 974 |
|
Federal funds purchased and repurchase agreements |
| 761 |
|
| 328 |
|
| 223 |
|
Total interest expense |
| 13,622 |
|
| 8,697 |
|
| 5,279 |
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
| 15,143 |
|
| 8,748 |
|
| 8,045 |
|
Provision for loan losses |
| 2,035 |
|
| 200 |
|
| 495 |
|
Net interest income after provision for loan losses |
| 13,108 |
|
| 8,548 |
|
| 7,550 |
|
|
|
|
|
|
|
|
|
|
|
Noninterest income |
|
|
|
|
|
|
|
|
|
Customer service charges |
| 3,321 |
|
| 1,450 |
|
| 1,059 |
|
Insurance and investment commissions |
| 1,137 |
|
| 831 |
|
| 866 |
|
Gain on sale of insurance book of business |
| 875 |
|
| - |
|
| - |
|
Gains on sales of loans |
| 287 |
|
| 234 |
|
| 264 |
|
Gains (losses) on sales of securities |
| 13 |
|
| (66 | ) |
| (28 | ) |
Gains (losses) on sales of other assets |
| (149 | ) |
| (160 | ) |
| 2 |
|
Profit sharing income |
| 41 |
|
| 188 |
|
| 125 |
|
Earnings on life insurance policies |
| 364 |
|
| 149 |
|
| 88 |
|
Other income |
| 592 |
|
| 251 |
|
| 204 |
|
Total noninterest income |
| 6,481 |
|
| 2,877 |
|
| 2,580 |
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense |
|
|
|
|
|
|
|
|
|
Salaries and benefits |
| 7,709 |
|
| 4,664 |
|
| 3,877 |
|
Occupancy and equipment |
| 2,190 |
|
| 1,301 |
|
| 1,116 |
|
Data processing |
| 1,470 |
|
| 712 |
|
| 570 |
|
Professional fees |
| 589 |
|
| 433 |
|
| 464 |
|
Supplies and postage |
| 505 |
|
| 266 |
|
| 227 |
|
Advertising and promotional |
| 306 |
|
| 111 |
|
| 154 |
|
Intangible asset amortization |
| 498 |
|
| 77 |
|
| 13 |
|
Other expense |
| 1,803 |
|
| 1,134 |
|
| 763 |
|
Total noninterest expense |
| 15,070 |
|
| 8,698 |
|
| 7,184 |
|
|
|
|
|
|
|
|
|
|
|
Income before income tax |
| 4,519 |
|
| 2,727 |
|
| 2,946 |
|
Income tax expense |
| 939 |
|
| 639 |
|
| 780 |
|
|
|
|
|
|
|
|
|
|
|
Net income | $ | 3,580 |
| $ | 2,088 |
| $ | 2,166 |
|
Comprehensive income | $ | 4,120 |
| $ | 2,368 |
| $ | 1,755 |
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share | $ | 1.11 |
| $ | 1.09 |
| $ | 1.31 |
|
Diluted earnings per common share | $ | 1.10 |
| $ | 1.09 |
| $ | 1.31 |
|
Dividends declared per common share | $ | 0.68 |
| $ | 0.68 |
| $ | 0.67 |
|
See accompanying notes to consolidated financial statements.
ChoiceOne Financial Services, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2005 | 1,570,937 |
| $ 15,913 |
| $ (9 | ) | $ 5,053 |
| $ 112 |
| $ 21,069 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
| 2,166 |
|
|
| 2,166 |
|
Net change in unrealized gain (loss) |
|
|
|
|
|
|
|
| (411 | ) | (411 | ) |
Total comprehensive income |
|
|
|
|
|
|
|
|
|
| 1,755 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued | 15,976 |
| 307 |
|
|
|
|
|
|
| 307 |
|
Shares repurchased | (15,412 | ) | (322 | ) |
|
|
|
|
|
| (322 | ) |
Shares committed to be released |
|
|
|
|
|
|
|
|
|
|
|
|
Change in ESOP repurchase obligation |
|
| 17 |
|
|
|
|
|
|
| 17 |
|
Cash dividends declared ($0.67 per share) |
|
|
|
|
|
| (1,105 | ) |
|
| (1,105 | ) |
Stock dividends declared (5%) | 78,439 |
| 1,516 |
|
|
| (1,520 | ) |
|
| (4 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005 | 1,649,940 |
| $ 17,422 |
| $ - |
| $ 4,594 |
| $ (299 | ) | $ 21,717 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
| 2,088 |
|
|
| 2,088 |
|
Net change in unrealized gain (loss) |
|
|
|
|
|
|
|
| 280 |
| 280 |
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
| 2,368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued | 19,894 |
| 339 |
|
|
|
|
|
|
| 339 |
|
Shares issued in merger with Valley Ridge |
|
|
|
|
|
|
|
|
|
|
|
|
Shares repurchased | (4,687 | ) | (84 | ) |
|
|
|
|
|
| (84 | ) |
Change in ESOP repurchase obligation |
|
| 4 |
|
|
|
|
|
|
| 4 |
|
Effect of stock options granted |
|
| 24 |
|
|
|
|
|
|
| 24 |
|
Effect of employee stock purchases |
|
| 10 |
|
|
|
|
|
|
| 10 |
|
Cash dividends declared ($0.68 per share) |
|
|
|
|
|
| (1,397 | ) |
|
| (1,397 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006 | 3,250,629 |
| $ 46,253 |
| $ - |
| $ 5,285 |
| $ (19 | ) | $ 51,519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
| 3,580 |
|
|
| 3,580 |
|
Net change in unrealized gain (loss) on |
|
|
|
|
|
|
|
|
|
|
|
|
securities available for sale |
|
|
|
|
|
|
|
| 384 |
| 384 |
|
Net change in funded status of post- |
|
|
|
|
|
|
|
|
|
|
|
|
retirement benefit plan |
|
|
|
|
|
|
|
| 156 |
| 156 |
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
| 4,120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued | 11,885 |
| 169 |
|
|
|
|
|
|
| 169 |
|
Shares repurchased | (32,700 | ) | (537 | ) |
|
|
|
|
|
| (537 | ) |
Change in ESOP repurchase obligation |
|
| 28 |
|
|
|
|
|
|
| 28 |
|
Effect of stock options granted |
|
| 31 |
|
|
|
|
|
|
| 31 |
|
Effect of employee stock purchases |
|
| 12 |
|
|
|
|
|
|
| 12 |
|
Cash dividends declared ($0.68 per share) |
|
|
|
|
|
| (2,200 | ) |
|
| (2,200 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007 | 3,229,814 |
| $ 45,956 |
| $ - |
| $ 6,665 |
| $ 521 |
| $ 53,142 |
|
See accompanying notes to consolidated financial statements.
ChoiceOne Financial Services, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
|
| Years ended December 31 |
| ||||||
|
| 2007 |
|
| 2006 |
|
| 2005 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
Net income | $ | 3,580 |
| $ | 2,088 |
| $ | 2,166 |
|
Adjustments to reconcile net income to net cash from operating |
|
|
|
|
|
|
|
|
|
Provision for loan losses |
| 2,035 |
|
| 200 |
|
| 495 |
|
Depreciation |
| 832 |
|
| 587 |
|
| 535 |
|
Amortization |
| 978 |
|
| 531 |
|
| 582 |
|
Compensation expense on stock options and employee purchases |
| 43 |
|
| 34 |
|
| - |
|
Stock dividends on Federal Home Loan Bank stock |
| - |
|
| - |
|
| (54 | ) |
Losses (gains) on sales of securities |
| (13 | ) |
| 66 |
|
| 28 |
|
Gains on sales of loans |
| (287 | ) |
| (234 | ) |
| (264 | ) |
Loans originated for sale |
| (15,700 | ) |
| (15,187 | ) |
| (18,757 | ) |
Proceeds from loan sales |
| 16,015 |
|
| 15,386 |
|
| 18,929 |
|
Earnings on bank-owned life insurance |
| (364 | ) |
| (149 | ) |
| (88 | ) |
Losses on sales of other real estate owned |
| 162 |
|
| 196 |
|
| 24 |
|
Proceeds from sales of other real estate owned |
| 1,241 |
|
| 313 |
|
| 380 |
|
Net change in: |
|
|
|
|
|
|
|
|
|
Other assets |
| 141 |
|
| (2,071 | ) |
| (85 | ) |
Other liabilities |
| (2,149 | ) |
| (8,926 | ) |
| (59 | ) |
Net cash from operating activities |
| 6,514 |
|
| (7,166 | ) |
| 3,832 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
Sales of securities available for sale |
| 3,897 |
|
| 16,982 |
|
| 3,748 |
|
Maturities, prepayments and calls of securities available for sale |
| 23,196 |
|
| 7,156 |
|
| 5,928 |
|
Purchases of securities available for sale |
| (32,294 | ) |
| (22,223 | ) |
| (10,004 | ) |
Purchase of Federal Reserve Bank stock |
| (588 | ) |
| - |
|
| - |
|
Loan originations and payments, net |
| 371 |
|
| 421 |
|
| (13,249 | ) |
Additions to premises and equipment |
| (528 | ) |
| (301 | ) |
| (1,225 | ) |
Purchase of investment book of business |
| (347 | ) |
| - |
|
| - |
|
Purchase of bank-owned life insurance |
| (150 | ) |
| - |
|
| (2,000 | ) |
Cash received in merger with Valley Ridge Financial Corp |
| - |
|
| 19,995 |
|
| - |
|
Net cash from investing activities |
| (6,443 | ) |
| 22,030 |
|
| (16,802 | ) |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
Net change in deposits |
| (14,536 | ) |
| 14,104 |
|
| 15,046 |
|
Net change in repurchase agreements |
| 6,697 |
|
| (691 | ) |
| 801 |
|
Net change in federal funds purchased |
| (460 | ) |
| (3,939 | ) |
| 3,118 |
|
Proceeds from Federal Home Loan Bank advances |
| 31,000 |
|
| 68,000 |
|
| 52,000 |
|
Payments on Federal Home Loan Bank advances |
| (19,000 | ) |
| (86,250 | ) |
| (55,500 | ) |
Issuance of common stock |
| 169 |
|
| 339 |
|
| 307 |
|
Repurchase of common stock |
| (537 | ) |
| (84 | ) |
| (322 | ) |
Cash dividends and fractional shares from stock dividends |
| (2,200 | ) |
| (1,397 | ) |
| (1,109 | ) |
Net cash from financing activities |
| 1,133 |
|
| (9,918 | ) |
| 14,341 |
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents |
| 1,204 |
|
| 4,946 |
|
| 1,371 |
|
Beginning cash and cash equivalents |
| 9,936 |
|
| 4,990 |
|
| 3,619 |
|
Ending cash and cash equivalents | $ | 11,140 |
| $ | 9,936 |
| $ | 4,990 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures: |
|
|
|
|
|
|
|
|
|
Cash paid for interest | $ | 13,971 |
| $ | 8,342 |
| $ | 5,082 |
|
Cash paid for income taxes |
| 945 |
|
| 910 |
|
| 570 |
|
Loans transferred to other real estate owned |
| 898 |
|
| 1,093 |
|
| 688 |
|
See accompanying notes to consolidated financial statements.
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include ChoiceOne Financial Services, Inc., its wholly-owned subsidiary, ChoiceOne Bank, and ChoiceOne Bank's wholly-owned subsidiaries, ChoiceOne Mortgage Company of Michigan, and ChoiceOne Insurance Agencies, Inc., (together referred to as "ChoiceOne"). Intercompany transactions and balances have been eliminated in consolidation.
Nature of Operations
ChoiceOne Bank (the "Bank") is a full-service community bank that offers commercial, consumer, and real estate loans as well as traditional demand, savings and time deposits to both commercial and consumer clients in portions of Kent, Muskegon, Newaygo, and Ottawa counties in Michigan. Substantially all loans are secured by specific items of collateral including business assets, consumer assets, and real estate. Commercial loans are expected to be repaid from the cash flows from operations of businesses. Real estate loans are collateralized by either residential or commercial real estate.
ChoiceOne Mortgage Company of Michigan (the "Mortgage Company") originates and sells a full line of conventional type mortgage loans for 1-4 family and multi-family residential real estate properties. It also originates second mortgages on residential real estate with home equity term loans and lines of credit.
ChoiceOne Insurance Agencies, Inc. (the "Insurance Agency") is a wholly-owned subsidiary of the Bank. The Insurance Agency sells insurance policies such as life and health for both commercial and consumer clients. The Insurance Agency also offers alternative investment products such as annuities and mutual funds through a registered broker.
Together, the Bank, the Mortgage Company, 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 the allowance for loan losses, core deposit intangible asset, 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 terms of 90 days or less.
Securities
Securities are classified as available for sale because they might be sold before maturity. Securities classified as available for sale are carried at fair value, with unrealized holding gains and losses reported separately in other comprehensive income or loss and 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 short-term investments in preferred stock, trust-preferred securities, and investments in common stock of other financial institutions.
Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized using the level-yield method without anticipating prepayments. Gains or losses on sales are recorded on the trade date based on the amortized cost of the security sold.
Declines in the fair value of securities below their cost that are other than temporary are reflected as realized losses. In estimating other-than-temporary losses, management considers: the length of time and extent that fair value has been less than cost, the financial condition and near-term prospects of the issuer, and ChoiceOne's ability and intent to hold the security for a period sufficient to allow for any anticipated recovery in fair value.
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of unearned interest, deferred loan fees and costs, and an allowance for loan losses. Loans held for sale are reported at the lower of cost or market, on an aggregate basis.
Interest income on loans is reported on the interest method and includes amortization of net deferred loan fees and costs over the estimated loan term. Interest on loans is accrued based upon the principal balance outstanding. The accrual of interest is discontinued at the time at which commercial loans are 90 days past due unless the loan is secured by sufficient collateral and in the process of collection. Interest on consumer or real estate secured loans is discontinued at the time at which the loan is 120 days past due unless the credit is secured by sufficient collateral and in the process of collection. Past due status is based on the contractual terms of the loan. In all cases, loans are placed into nonaccrual status or charged off at an earlier date if collection of principal or interest is considered doubtful. Interest accrued but not received is reversed against interest income when the loans are placed into nonaccrual status. Interest received on such loans is applied to principal until qualify ing for return to accrual. Loans are returned to accrual basis when all the principal and interest amounts contractually due are brought current and future payment is reasonably assured.
Allowance for Loan Losses
The allowance for loan losses is a valuation allowance for probable incurred credit losses. The allowance is increased by the provision for loan losses and decreased by loans charged off less any recoveries of charged off loans. Management estimates the allowance balance required based on past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, should be charged off. Loan losses are charged against the allowance when management believes the collectibility of a loan balance is not possible.
The allowance consists of general and specific components. The general component covers non-classified loans and is based on historical loss experience adjusted for current factors. The specific component relates to loans that are individually classified as impaired or loans otherwise classified as substandard or doubtful.
A loan is impaired when full payment under the loan terms is not expected. Commercial loans are evaluated for impairment on an individual loan basis. If a loan is considered impaired, a portion of the allowance for loan losses is allocated to the loan so that it is reported, net, at the present value of estimated future cash flows using the loan's existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of smaller balance homogeneous loans such as consumer and real estate mortgage loans are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation. Land is carried at cost. Land improvements are depreciated using the straight-line method with useful lives ranging from 7 to 15 years. Building and related components are depreciated using the straight-line method with useful lives ranging from 5 to 39 years. Leasehold improvements are depreciated over the shorter of the estimated life or the lease term. Furniture and equipment are depreciated using the straight-line method with useful lives ranging from 3 to 7 years. Fixed assets are periodically reviewed for impairment when events indicate their carrying amounts may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.
Other Real Estate Owned
Real estate properties acquired in the collection of a loan are initially recorded at fair value at acquisition establishing a new cost basis. Any reduction to fair value from the carrying value of the related loan is accounted for as a loan loss. After acquisition, a valuation allowance reduces the reported amount to the lower of the initial amount or fair value less costs to sell. Expenses to repair or maintain properties are included within other noninterest expenses. Gains and losses upon disposition and changes in the valuation allowance are reported net within other noninterest income.
Loan Servicing Rights
Servicing rights represent the allocated value of servicing rights on loans sold with servicing retained. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the rights, using groupings of the underlying loans as to interest rates and then, secondarily, as to geographic and prepayment characteristics. Fair value is determined using prices for similar assets with similar characteristics when available or based upon discounted cashflows using market-based assumptions. Any impairment of a grouping is reported as a valuation allowance.
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Goodwill
Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of the acquired tangible assets and liabilities and identifiable intangible assets. Goodwill is assessed at least annually for impairment and any such impairment will be recognized in the period identified.
Loan Commitments and Related Financial Instruments
Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit issued to meet financing needs of customers. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.
Employee Benefit Plans
ChoiceOne's 401(k) plan allows participants to contribute up to 15% of their compensation. Contributions from ChoiceOne to its 401(k) plan are discretionary. ChoiceOne also allows retired employees to participate in its health insurance plan. Employees who have attained age 55 and completed at least ten years of service to ChoiceOne are eligible to participate as a retiree until they are eligible for Medicare. These postretirement benefits are accrued during the years in which the employee provides service.
Employee Stock Ownership Plan
The cost of shares issued to the Employee Stock Ownership Plan (the "ESOP") but not yet allocated to participants is presented as a reduction of shareholders' equity. Compensation expense is recorded based on the market price of the shares as they are committed to be released for allocation to participant accounts. The difference between the market price and the cost of shares committed to be released is recorded as an adjustment to additional paid-in capital. Dividends on allocated ESOP shares are recorded as a reduction of retained earnings while dividends on unallocated ESOP shares are reflected as a reduction of debt and accrued interest. Upon distribution of shares to a participant, the participant has the right to require the Company to purchase his or her shares at fair value in accordance with the terms and conditions of the ESOP. As such, these shares are not classified in shareholders' equity as permanent equity.
Income Taxes
Income tax expense is the sum of the current year income tax due and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.
Earnings Per Share
Basic earnings per common share ("EPS") is based on weighted-average common shares outstanding. The weighted-average number of shares used in the computation of basic and diluted earnings per common share includes shares allocated to the ESOP. Diluted EPS further assumes issue of any dilutive potential common shares issuable under stock options. Earnings and dividends per share are restated for stock dividends and splits through the issue date of the financial statements.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income or loss. Other comprehensive income or loss includes unrealized gains and losses on securities available for sale, net of tax, and changes in funded status of postretirement plans which are also recognized as a separate component of shareholders' equity.
Loss Contingencies
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe that there are any such matters that may have a material effect on the financial statements.
Cash Restrictions
Cash on hand or on deposit with the Federal Reserve Bank of $3.4 million and $1.9 million was required to meet regulatory reserve and clearing requirements at December 31, 2007 and 2006, respectively. These balances do not earn interest.
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Dividends
Dividends issued in stock are reported by transferring the market value of the stock issued from retained earnings to common stock and additional paid-in capital. Fractional shares resulting from stock dividends are paid in cash.
Stock Based Compensation
ChoiceOne adopted the provisions of Statement of Financial Accounting Standards ("SFAS") 123R as of January 1, 2006. This standard provides for a modified prospective application. Under this method, ChoiceOne began recognizing compensation cost for equity-based compensation for all new or modified grants after the date of adoption. Awards issued prior to 2006 that have not been modified are not affected by SFAS 123R.
Prior to January 1, 2006, ChoiceOne used the intrinsic value method under Accounting Principles Board Opinion ("APB") 25 to account for its stock option plans. No compensation cost was recognized for ChoiceOne's plans during 2005 as all stock options granted under those plans had an exercise price equal to the market value of the underlying stock on the date of grant.
The following table illustrates the effect on net income and earnings per share if expense was measured using the fair value recognition provisions of SFAS 123, "Accounting for Stock Based Compensation," for the year ended December 31, 2005:
(Dollars in thousands)
|
|
|
|
| 2005 |
|
Net income, as reported |
|
|
| $ | 2,166 |
|
Less: Compensation costs based on the fair value method for all |
|
|
|
|
|
|
Pro forma net income |
|
|
| $ | 2,149 |
|
|
|
|
|
|
|
|
Basic earnings per common share, as reported |
|
|
| $ | 1.31 |
|
Basic earnings per common share, pro forma |
|
|
| $ | 1.30 |
|
|
|
|
|
|
|
|
Diluted earnings per common share, as reported |
|
|
| $ | 1.31 |
|
Diluted earnings per common share, pro forma |
|
|
| $ | 1.30 |
|
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 22).
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 20 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, Insurance Agency and Mortgage Company, 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.
Adoption of New Accounting Standards
Financial Accounting Standards Board ("FASB") Interpretation No. 48,Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109(FIN 48)
On January 1, 2007 ChoiceOne adopted Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109," ("FIN 48"), which clarifies the accounting for uncertainty in income taxes recognized in a company's financial statements in accordance with SFAS 109, "Accounting for Income Taxes." FIN 48 prescribes a recognition and measurement threshold for a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The adoption of FIN 48 at January 1, 2007 did not have an impact on ChoiceOne's financial statements.
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Statement of Financial Accounting Standards Number 157,Fair Value Measurements (SFAS 157)
SFAS 157 clarifies the definition of fair value, establishes a framework for measuring fair value, and expands the disclosures on fair value measurements. It applies under other accounting pronouncements that require or permit fair value measurements and does not require any new fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. ChoiceOne has determined that the impact of adopting SFAS 157 will not have a material impact on its consolidated financial statements.
Statement of Financial Accounting Standards Number 159,The F air Value Option for Financial Assets and Financial Liabilities (SFAS 159)
SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS 159 is effective for fiscal years beginning after November 15, 2007. ChoiceOne has determined that the impact of adopting SFAS 159 will not have a material impact on its consolidated financial statements.
Statement of Financial Accounting Standards Number 141R,Business Combinations (SFAS 141(R))
In December 2007, the FASB issued Statement No. 141(Revised), "Business Combinations." SFAS 141(R) prescribes changes to the method of accounting for acquisitions. All assets and liabilities acquired are to be adjusted to fair value at the acquisition date. Costs are to be expensed rather than capitalized. Restructuring costs that the acquirer expects to incur are expensed rather than set up as a liability at the date of acquisition. The statement is effective for fiscal years beginning after December 15, 2008. ChoiceOne has determined that the adoption of FASB 141(R) will not have an impact on its consolidated financial statements. The statement will have an impact if acquisitions are completed in the future.
Reclassifications
Certain amounts presented in prior year consolidated financial statements have been reclassified to conform to the current year's presentation.
Note 2 - Merger
On November 1, 2006, ChoiceOne completed a merger with Valley Ridge Financial Corp. ("VRFC"), parent company of Valley Ridge Bank ("VRB"). On December 7, 2006, Valley Ridge Bank was consolidated into ChoiceOne Bank, and Valley Ridge Mortgage Company ("VRMC") was merged into ChoiceOne Mortgage Company of Michigan. The merger was accounted for using the purchase method of accounting, and accordingly, the purchase price was allocated to the assets acquired and the liabilities assumed based upon the estimated fair values as of the date of the merger.
The aggregate purchase price was $28.5 million including merger costs. The purchase price was determined using ChoiceOne's market price of common stock as of November 1, 2006. ChoiceOne issued a total of 1,585,482 shares of its common stock to former shareholders of Valley Ridge Financial Corp.
The following table summarizes the estimated fair values of the consolidated assets acquired and the liabilities assumed at the date of the merger with VRFC:
(Dollars in thousands) |
| Fair |
|
Cash and cash equivalents | $ | 19,995 |
|
Securities |
| 34,446 |
|
Federal Reserve Bank and Federal Home Loan Bank stock |
| 1,560 |
|
Loans, net |
| 146,171 |
|
Premises and equipment |
| 6,312 |
|
Cash surrender value of bank-owned life insurance |
| 5,713 |
|
Loan servicing rights |
| 635 |
|
Core deposit intangible |
| 4,134 |
|
Other intangible assets |
| 125 |
|
Goodwill |
| 14,280 |
|
Other assets |
| 1,463 |
|
Total assets acquired | $ | 234,834 |
|
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
| Fair |
|
Deposits | $ | 170,164 |
|
Advances from Federal Home Loan Bank |
| 11,404 |
|
Repurchase agreements |
| 8,565 |
|
Other liabilities |
| 16,163 |
|
Total liabilities assumed | $ | 206,296 |
|
Net assets acquired | $ | 28,538 |
|
The purchase accounting fair value adjustments are being amortized under various methods and over the estimated lives of the corresponding assets and liabilities. Goodwill recorded from the merger amounted to $14.3 million. A core deposit intangible asset of $4.1 million was recorded as part of the deposits assumed and is being amortized on a straight-line method over a period of 10 years. Goodwill recorded from the merger is not deductible for federal tax purposes.
The following pro forma disclosures, including the effect of purchase accounting adjustments, depict the results of operations as though the merger with VRFC had taken place as of January 1 for each period presented:
(Dollars in thousands, except per share data)
|
| 2006 |
|
| 2005 |
|
Net interest income | $ | 15,833 |
| $ | 15,952 |
|
Noninterest income |
| 5,195 |
|
| 5,265 |
|
Total income | $ | 21,028 |
| $ | 21,217 |
|
|
|
|
|
|
|
|
Provision for loan losses |
| 350 |
|
| 615 |
|
Noninterest expense |
| 15,954 |
|
| 15,244 |
|
Income taxes |
| 1,166 |
|
| 1,333 |
|
Net income | $ | 3,558 |
| $ | 4,025 |
|
|
|
|
|
|
|
|
Basic earnings per common share | $ | 1.02 |
| $ | 1.24 |
|
Diluted earnings per common share | $ | 1.02 |
| $ | 1.24 |
|
Note 3 - Securities
The fair value of securities available for sale and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) at December 31 were as follows:
|
| 2007 |
|
| ||||||
(Dollars in thousands) |
|
|
|
| Gross |
|
| Gross |
|
|
U.S. Government and federal agency | $ | 15,952 |
| $ | 215 |
| $ | (1) |
|
|
State and municipal |
| 46,486 |
|
| 372 |
|
| (186) |
|
|
Mortgage-backed |
| 14,423 |
|
| 191 |
|
| (35) |
|
|
Corporate |
| 1,251 |
|
| - |
|
| (25) |
|
|
Equity securities |
| 5,044 |
|
| 22 |
|
| - |
|
|
Total | $ | 83,156 |
| $ | 800 |
| $ | (247) |
|
|
|
| 2006 |
|
| ||||||
(Dollars in thousands) |
|
|
|
| Gross |
|
| Gross |
|
|
U.S. Government and federal agency | $ | 18,164 |
| $ | 39 |
| $ | (25 | ) |
|
State and municipal |
| 35,651 |
|
| 153 |
|
| (166 | ) |
|
Mortgage-backed |
| 19,842 |
|
| 102 |
|
| (123 | ) |
|
Corporate |
| 2,254 |
|
| 1 |
|
| (13 | ) |
|
Equity securities |
| 1,525 |
|
| 4 |
|
| (1 | ) |
|
Total | $ | 77,436 |
| $ | 299 |
| $ | (328 | ) |
|
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information regarding sales of securities available for sale follows:
(Dollars in thousands)
|
| 2007 |
|
| 2006 |
|
| 2005 |
|
Proceeds from sales of securities | $ | 3,897 |
| $ | 16,982 |
| $ | 3,748 |
|
Gross realized gains |
| 23 |
|
| 102 |
|
| 9 |
|
Gross realized losses |
| 10 |
|
| 168 |
|
| 37 |
|
Contractual maturities of securities available for sale at December 31, 2007 were as follows:
(Dollars in thousands) |
| Fair |
|
Due within one year | $ | 18,649 |
|
Due after one year through five years |
| 25,615 |
|
Due after five years through ten years |
| 17,261 |
|
Due after ten years |
| 2,164 |
|
Total debt securities |
| 63,689 |
|
Mortgage-backed securities, not due at a specific date |
| 14,423 |
|
Equity securities |
| 5,044 |
|
Total | $ | 83,156 |
|
Various securities were pledged as collateral for securities sold under agreements to repurchase and as collateral for advances from the Federal Home Loan Bank. The carrying amount of securities pledged as collateral at December 31 was as follows:
(Dollars in thousands)
|
| 2007 |
|
| 2006 |
|
Securities pledged for securities sold under agreements to repurchase | $ | 29,171 |
| $ | 15,474 |
|
Securities pledged for Treasury, Tax, and Loan accounts |
| 537 |
|
| - |
|
Total securities pledged as collateral | $ | 29,708 |
| $ | 15,474 |
|
Securities with unrealized losses at year-end 2007 and 2006, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position, were as follows:
(Dollars in thousands) |
| 2007 |
| ||||||||||||||
|
| Less than 12 months |
|
| More than 12 months |
|
| Total |
| ||||||||
|
| Fair |
|
| Unrealized |
|
| Fair |
|
| Unrealized |
|
| Fair |
| Unrealized |
|
U.S. Government and federal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and municipal |
| 6,401 |
|
| (143 | ) |
| 4,280 |
|
| (43 | ) |
| 10,681 |
| (186 | ) |
Mortgage-backed |
| - |
|
| - |
|
| 2,531 |
|
| (35 | ) |
| 2,531 |
| (35 | ) |
Corporate |
| 376 |
|
| (2 | ) |
| 677 |
|
| (23 | ) |
| 1,053 |
| (25 | ) |
Total temporarily impaired | $ | 7,777 |
| $ | (145 | ) | $ | 8,487 |
| $ | (102 | ) | $ | 16,264 | $ | (247 | ) |
(Dollars in thousands) |
| 2006 |
| ||||||||||||||
|
| Less than 12 months |
|
| More than 12 months |
|
| Total |
| ||||||||
|
| Fair |
|
| Unrealized |
|
| Fair |
|
| Unrealized |
|
| Fair |
| Unrealized |
|
U.S. Government and federal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and municipal |
| 11,413 |
|
| (66 | ) |
| 7,783 |
|
| (100 | ) |
| 19,196 |
| (166 | ) |
Mortgage-backed |
| 2,664 |
|
| (5 | ) |
| 4,992 |
|
| (118 | ) |
| 7,656 |
| (123 | ) |
Corporate |
| 3,056 |
|
| (13 | ) |
| - |
|
| - |
|
| 3,056 |
| (13 | ) |
Equity |
| 21 |
|
| (1 | ) |
| - |
|
| - |
|
| 21 |
| (1 | ) |
Total temporarily impaired | $ | 20,122 |
| $ | (86 | ) | $ | 14,259 |
| $ | (242 | ) | $ | 34,381 | $ | (328 | ) |
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ChoiceOne evaluates securities for other-than-temporary impairment at least on a semi-annual basis, and more frequently when economic or market concerns warrant such evaluation. As of December 31, 2007 and 2006, management has determined that no other-than-temporary declines in market value have occurred. 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.
Note 4 - Loans
The Bank's loan portfolio as of December 31 was as follows:
(Dollars in thousands)
|
| 2007 |
|
| 2006 |
|
Agricultural | $ | 24,765 |
| $ | 23,606 |
|
Commercial and industrial |
| 51,242 |
|
| 51,419 |
|
Consumer |
| 15,939 |
|
| 15,589 |
|
Real estate - commercial |
| 125,960 |
|
| 123,743 |
|
Real estate - construction |
| 4,048 |
|
| 4,740 |
|
Real estate - residential |
| 106,404 |
|
| 112,534 |
|
Loans, gross |
| 328,358 |
|
| 331,631 |
|
Allowance for loan losses |
| (3,600 | ) |
| (3,569 | ) |
Loans, net | $ | 324,758 |
| $ | 328,062 |
|
Note 5 - Mortgage Banking
Activity during the year was as follows:
(Dollars in thousands)
|
| 2007 |
|
| 2006 |
|
| 2005 |
|
Loans originated for resale, net of principal payments | $ | 15,700 |
| $ | 15,187 |
| $ | 18,757 |
|
Proceeds from loan sales |
| 16,015 |
|
| 15,386 |
|
| 18,929 |
|
Net gains on sales of loans held for sale |
| 287 |
|
| 234 |
|
| 264 |
|
Loan servicing fees, net of amortization |
| 85 |
|
| 53 |
|
| 56 |
|
Loans serviced for others are not reported as assets in the accompanying consolidated balance sheets. The unpaid principal balances of these loans were $130.8 million and $138.9 million at December 31, 2007 and 2006, respectively. The Bank maintains custodial escrow balances in connection with these serviced loans; however, such escrows were immaterial at December 31, 2007 and 2006.
Activity for loan servicing rights was as follows:
(Dollars in thousands)
|
| 2007 |
|
| 2006 |
|
| 2005 |
|
Balance, beginning of year | $ | 992 |
| $ | 445 |
| $ | 472 |
|
Capitalized |
| 108 |
|
| 63 |
|
| 109 |
|
Amortization |
| (308 | ) |
| (151 | ) |
| (136 | ) |
Acquisition of servicing rights from VRMC |
| - |
|
| 635 |
|
| - |
|
Balance, end of year | $ | 792 |
| $ | 992 |
| $ | 445 |
|
The fair value of loan servicing rights was $1,309,000 and $1,300,000 as of December 31, 2007 and 2006, respectively. Consequently, a valuation allowance was not necessary at year-end 2007 or 2006. The fair value of servicing rights at December 31, 2007 was determined using a discount rate of 8.3% and prepayment speeds ranging from 4% to 30%. The fair value of servicing rights at December 31, 2006 was determined using a discount rate of 9.5% and prepayment speeds ranging from 9% to 30%.
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - Allowance for Loan Losses
Activity in the allowance for loan losses was as follows:
(Dollars in thousands)
|
| 2007 |
|
| 2006 |
|
| 2005 |
|
Balance, beginning of year | $ | 3,569 |
| $ | 1,963 |
| $ | 1,739 |
|
Provision charged to expense |
| 2,035 |
|
| 200 |
|
| 495 |
|
Recoveries credited to the allowance |
| 295 |
|
| 168 |
|
| 128 |
|
Transfer of allowance from VRB and VRMC |
| - |
|
| 1,751 |
|
| - |
|
Loans charged off |
| (2,299 | ) |
| (513 | ) |
| (399 | ) |
Balance, end of year | $ | 3,600 |
| $ | 3,569 |
| $ | 1,963 |
|
Information regarding nonperforming loans for the years ended December 31 follows:
(Dollars in thousands)
|
| 2007 |
|
| 2006 |
|
Nonaccrual loans | $ | 5,605 |
| $ | 6,420 |
|
Loans past due over 90 days still on accrual |
| 188 |
|
| 278 |
|
Restructured loans |
| - |
|
| 24 |
|
Total | $ | 5,793 |
| $ | 6,722 |
|
Nonperforming loans includes both smaller balance homogenous loans that are collectively evaluated for impairment and loans individually classified as impaired loans. Information regarding impaired loans as of and for the year ended December 31 follows:
(Dollars in thousands)
|
| 2007 |
|
| 2006 |
|
| 2005 |
|
Loans with no allowance allocated at year end | $ | 7,381 |
| $ | 5,030 |
| $ | 306 |
|
Loans with allowance allocated at year end |
| 2,160 |
|
| 1,807 |
|
| 1,157 |
|
Amount of allowance for loan losses allocated at year end |
| 854 |
|
| 942 |
|
| 465 |
|
Average balance during the year |
| 7,026 |
|
| 2,627 |
|
| 968 |
|
Interest income recognized thereon |
| 237 |
|
| 258 |
|
| 48 |
|
Cash-basis interest income recognized |
| 12 |
|
| 31 |
|
| 60 |
|
Note 7 - Premises and Equipment
As of December 31, premises and equipment consisted of the following:
(Dollars in thousands)
|
| 2007 |
|
| 2006 |
|
Land and land improvements | $ | 3,539 |
| $ | 1,788 |
|
Leasehold improvements |
| 47 |
|
| 42 |
|
Buildings |
| 9,828 |
|
| 10,949 |
|
Furniture and equipment |
| 3,244 |
|
| 2,863 |
|
Total cost |
| 16,658 |
|
| 15,642 |
|
Accumulated depreciation |
| (4,793 | ) |
| (4,020 | ) |
Premises and equipment, net | $ | 11,865 |
| $ | 11,622 |
|
ChoiceOne acquired premises and equipment with a fair market value totaling $6.3 million from Valley Ridge Financial Corp. in November 2006.
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Depreciation expense was $832,000, $587,000, and $535,000 for 2007, 2006 and 2005, respectively. ChoiceOne acquired nine branch offices in Kent City, Ravenna, Muskegon, Sparta, Coopersville, Grant, Newaygo, White Cloud, and Fremont, Michigan in November 2006 as part of the merger with VRFC.
The Bank leases certain branch properties and automated-teller machine locations in its normal course of business. Rent expense totaled $112,000, $49,000, and $57,000 for 2007, 2006 and 2005, respectively. Rent commitments under non-cancelable operating leases were as follows, before considering renewal options that generally are present (dollars in thousands):
2008 | $ | 16 |
|
Total | $ | 16 |
|
Note 8 - Goodwill and Intangible Assets
Goodwill
The change in the balance for goodwill during the year was as follows:
(Dollars in thousands, except per share data)
|
| 2007 |
|
| 2006 |
|
| 2005 |
|
Beginning of year | $ | 14,280 |
| $ | - |
| $ | - |
|
Adjustment of market value of land, buildings, and other real estate |
| (897 | ) |
| - |
|
| - |
|
Adjustment of taxes payable |
| 446 |
|
| - |
|
| - |
|
Adjustment of accrued postretirement benefit obligation |
| (126 | ) |
| - |
|
| - |
|
Acquired goodwill |
| - |
|
| 14,280 |
|
| - |
|
Other |
| 25 |
|
| - |
|
| - |
|
End of year | $ | 13,728 |
| $ | 14,280 |
| $ | - |
|
The other change in goodwill in 2007 was comprised of legal fees and other costs related to the merger with VRFC.
Acquired Intangible Assets
Information for acquired intangible assets at December 31 follows:
(Dollars in thousands)
| 2007 |
| 2006 |
| ||||||||
|
| Gross |
|
|
|
|
| Gross |
|
|
|
|
Core deposit intangible | $ | 4,134 |
| $ | 483 |
| $ | 4,134 |
| $ | 69 |
|
Other intangible assets |
| 472 |
|
| 93 |
|
| 125 |
|
| 8 |
|
Totals | $ | 4,607 |
| $ | 576 |
| $ | 4,259 |
| $ | 77 |
|
Other intangible assets increased by $347,000 in 2007 as a result of the acquisition of a book of business from an investment agent affiliated with Valley Ridge.
The core deposit intangible is being amortized on a straight-line basis over ten years and other intangible assets are being amortized over periods ranging from two to ten years. Aggregate amortization expense was $498,000, $77,000 and $13,000 for 2007, 2006 and 2005, respectively. The estimated amortization expense for the next five years ending December 31 is as follows:
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
|
| Core |
| Other |
|
|
|
2008 | $ | 413 | $ | 85 | $ | 498 |
|
2009 |
| 413 |
| 52 |
| 465 |
|
2010 |
| 413 |
| 35 |
| 448 |
|
2011 |
| 413 |
| 35 |
| 448 |
|
2012 |
| 413 |
| 35 |
| 448 |
|
Thereafter |
| 1,587 |
| 137 |
| 1,724 |
|
Total | $ | 3,652 | $ | 379 | $ | 4,031 |
|
Note 9 - Other Real Estate Owned
Other real estate owned represents residential and commercial properties owned and is reported net of a valuation allowance. Activity within other real estate owned was as follows:
(Dollars in thousands)
|
| 2007 |
|
| 2006 |
|
Balance, beginning of year | $ | 1,774 |
| $ | 1,255 |
|
Transfers from loans |
| 898 |
|
| 1,093 |
|
Reclassification from land and buildings |
| 240 |
|
| - |
|
Acquisition of other real estate from VRFC |
| - |
|
| 75 |
|
Capitalized improvements or purchased assets |
| - |
|
| 15 |
|
Sales |
| (1,307 | ) |
| (509 | ) |
Write-downs |
| (96 | ) |
| (155 | ) |
Balance, end of year | $ | 1,509 |
| $ | 1,774 |
|
The valuation allowance on other real estate owned totaled $30,000 and $223,000 at year-end 2007 and 2006, respectively.
Note 10 - Deposits
Scheduled maturities of certificates of deposit at December 31 were as follows:
(Dollars in thousands)
|
|
|
|
2008 | $ | 129,560 |
|
2009 |
| 36,185 |
|
2010 |
| 6,305 |
|
2011 |
| 6,107 |
|
2012 |
| 2,791 |
|
2013 |
| 117 |
|
Total | $ | 181,065 |
|
The Bank had certificates of deposit issued in denominations of $100,000 or greater totaling $67.8 million and $88.5 million at December 31, 2007 and 2006, respectively. The Bank had brokered certificates of deposit totaling $17.7 million at December 31, 2007 compared to $41.1 million at December 31, 2006. As of December 31, 2007, the weighted average interest rate on these brokered certificates of deposit was 5.15% with maturities ranging from January 2008 to June 2010.
Note 11 - Repurchase Agreements
Securities sold under agreements to repurchase are advances to the Bank by customers or another bank. These agreements are direct obligations of the Bank and are secured by securities held in safekeeping at a correspondent bank. Most repurchase agreements with Bank customers mature daily. The Bank had $800,000 of term repurchase agreements with a Bank customer as of December 31, 2007 that mature in 2008 and 2010. At year-end 2007 the Bank had a $5 million structured repurchase agreement with a correspondent
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
|
| 2007 |
|
|
| 2006 |
|
Outstanding balance at December 31 | $ | 21,710 |
|
| $ | 15,013 |
|
Average interest rate at December 31 |
| 3.79 | % |
|
| 3.58 | % |
Average balance during the year | $ | 16,090 |
|
| $ | 6,492 |
|
Average interest rate during the year |
| 3.50 | % |
|
| 2.63 | % |
Maximum month end balance during the year | $ | 21,811 |
|
| $ | 15,013 |
|
Note 12 - Federal Home Loan Bank Advances
At December 31, advances from the Federal Home Loan Bank (the "FHLB") were as follows:
(Dollars in thousands)
|
| 2007 |
|
|
| 2006 |
|
Maturities ranging from May 2008 to November |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturities ranging from January 2007 to December |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity of March 2008, floating interest rate, with |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total advances outstanding at year-end | $ | 35,933 |
|
| $ | 23,908 |
|
Penalties are charged on fixed rate advances that are paid prior to maturity. No fixed rate advances were paid prior to maturity in 2007, 2006 or 2005. An advance maturing in 2012 may be converted to a variable rate by the FHLB. If the FHLB exercises its option the Bank may prepay the advance without penalty. Advances were secured by residential real estate loans with a carrying value of approximately $62.7 million at December 31, 2007 and by residential real estate loans and U.S. Government agency securities with a carrying value of approximately $41.1 million at December 31, 2006. Based on this collateral, the Bank was eligible to borrow an additional $7.2 million at year-end 2007. The scheduled maturities of advances from the Federal Home Loan Bank at December 31, 2007 were as follows (dollars in thousands):
2008 | $ | 11,000 |
|
2009 |
| 6,500 |
|
2010 |
| 13,500 |
|
2011 |
| - |
|
2012 |
| 4,933 |
|
Total | $ | 35,933 |
|
Note 13 - Income Taxes
Information as of December 31 and for the year follows:
(Dollars in thousands)
|
| 2007 |
|
| 2006 |
|
| 2005 |
|
Provision for Income Taxes |
|
|
|
|
|
|
|
|
|
Current federal income tax expense | $ | 665 |
| $ | 780 |
| $ | 783 |
|
Deferred federal income tax expense (benefit) |
| 274 |
|
| (141 | ) |
| (3 | ) |
Income tax expense | $ | 939 |
| $ | 639 |
| $ | 780 |
|
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
| 2007 |
|
| 2006 |
|
| 2005 |
|
Reconciliation of Income Tax Provision to Statutory Rate |
|
|
|
|
|
|
|
|
|
Income tax computed at statutory federal rate of 34% | $ | 1,537 |
| $ | 927 |
| $ | 1,002 |
|
Tax exempt interest income |
| (569 | ) |
| (323 | ) |
| (245 | ) |
Tax exempt earnings on bank-owned life insurance |
| (124 | ) |
| (51 | ) |
| (30 | ) |
Nondeductible interest expense |
| 86 |
|
| 49 |
|
| 32 |
|
Other items |
| 9 |
|
| 37 |
|
| 21 |
|
Income tax expense | $ | 939 |
| $ | 639 |
| $ | 780 |
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate |
| 21 | % |
| 23 | % |
| 26 | % |
Components of Deferred Tax Assets and Liabilities |
| 2007 |
|
| 2006 |
|
Deferred tax assets: |
|
|
|
|
|
|
Allowance for loan losses | $ | 919 |
| $ | 888 |
|
Purchase accounting adjustments from merger with VRFC |
| 621 |
|
| 515 |
|
Deferred compensation |
| 593 |
|
| 895 |
|
Postretirement benefits obligation |
| 68 |
|
| 183 |
|
Nonaccrual loan interest |
| 60 |
|
| 59 |
|
Write downs on other real estate owned |
| 10 |
|
| 98 |
|
Unrealized losses on securities available for sale |
| - |
|
| 10 |
|
Other |
| 86 |
|
| 71 |
|
Total deferred tax assets |
| 2,357 |
|
| 2,719 |
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
Purchase accounting adjustments from merger with VRFC |
| 2,457 |
|
| 2,418 |
|
Depreciation |
| 297 |
|
| 310 |
|
Unrealized gains on securities available for sale |
| 188 |
|
| - |
|
Loan servicing rights |
| 178 |
|
| 213 |
|
Stock dividends from Federal Home Loan Bank stock |
| 111 |
|
| 111 |
|
Prepaid expenses |
| 88 |
|
| 56 |
|
Investment in West Shore Computer Services |
| 47 |
|
| 46 |
|
Other |
| 16 |
|
| 29 |
|
Total deferred tax liabilities |
| 3,382 |
|
| 3,183 |
|
Net deferred tax assets (liabilities) | $ | (1,025 | ) | $ | (464 | ) |
A valuation allowance related to deferred taxes is recognized when it is considered more likely than not that part or all of the deferred tax benefits will not be realized. Management has determined that no such allowance was required at December 31, 2007 and 2006.
Note 14 - Related Party Transactions
Loans to executive officers, directors and their affiliates were as follows at December 31:
(Dollars in thousands)
|
| 2007 |
|
| 2006 |
|
Balance, beginning of year | $ | 3,275 |
| $ | 3,257 |
|
New loans |
| 2,734 |
|
| 546 |
|
Repayments |
| (687 | ) |
| (797 | ) |
Effect of changes in related parties |
| - |
|
| 269 |
|
Balance, end of year | $ | 5,322 |
| $ | 3,275 |
|
Deposits from executive officers, directors, and their affiliates were $8.1 million and $7.5 million at December 31, 2007 and 2006, respectively.
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15 - Employee Benefit Plans
401(k) Plan:
The 401(k) plan allows employees to contribute up to 15% of their compensation. Matching company contributions to the plan are discretionary. Expense of this plan was $113,000, $94,000, and $95,000 in 2007, 2006, and 2005, respectively.
Employee Stock Ownership Plan:
Employees participate in an Employee Stock Ownership Plan (the "ESOP"). ChoiceOne makes discretionary contributions to the ESOP. Shares of ChoiceOne common stock are allocated to participants based on relative compensation earned and compensation expense is recorded when allocated. Dividends on allocated shares increase the participant accounts. Participants become fully vested upon completing six years of qualifying service. Participants receive the shares at the end of employment. A participant may require stock received to be repurchased by ChoiceOne at any time. ChoiceOne did not contribute to the ESOP in 2007 or 2006; ChoiceOne contributed $12,000 to the ESOP in 2005. No expense was recorded by ChoiceOne in 2007 or 2006; the expense for 2005 was $6,000.
Shares held by the ESOP as of December 31 were as follows:
(Dollars in thousands)
|
| 2007 |
|
| 2006 |
|
| 2005 |
|
Shares allocated to participants |
| 5,355 |
|
| 5,355 |
|
| 5,355 |
|
Shares unallocated |
| - |
|
| - |
|
| - |
|
Total shares of ChoiceOne stock held by ESOP |
| 5,355 |
|
| 5,355 |
|
| 5,355 |
|
|
|
|
|
|
|
|
|
|
|
Fair value of allocated shares, subject to repurchase obligation, |
|
|
|
|
|
|
|
|
|
Postretirement Benefits Plan:
ChoiceOne maintains an unfunded postretirement health care plan, which permits employees (and their dependents) the ability to participate upon retirement from ChoiceOne. ChoiceOne does not pay any portion of the premiums charged its retired participants on its health care plan. A liability has been accrued for the obligation under this plan. ChoiceOne incurred postretirement benefit expense of $25,000 in 2007 and $28,000 in 2006. The postretirement obligation liability was $201,000 as of December 31, 2007 and $273,000 as of December 31, 2006.
Deferred Compensation Plans:
A deferred director compensation plan covers former directors of Valley Ridge Bank. Under the plan, ChoiceOne pays each former director the amount of director fees deferred plus interest at rates ranging from 3.90% to 5.84% over various periods as elected by each director. The payout periods range from 1 month to 10 years beginning with the individual's termination of service. A liability has been accrued for the obligation under this plan. ChoiceOne incurred deferred compensation plan expense of $56,000 in 2007 and $11,000 in 2006. The deferred compensation liability was $1,106,000 as of December 31, 2007 and $1,996,000 as of December 31, 2006.
A supplemental retirement plan covers four former executive officers of Valley Ridge Bank. Under the plan, ChoiceOne pays these individuals a specific amount of compensation plus interest at 7.50% over a 15-year period commencing upon early retirement age (as defined in the plan) or normal retirement age (as defined in the plan). A liability has been accrued for the obligation under this plan. ChoiceOne incurred deferred compensation plan expense of $10,000 in 2007 and $11,000 in 2006. Deferred compensation liabilities of $638,000 and $636,000 were outstanding as of December 31, 2007 and December 31, 2006, respectively.
Note 16 - Stock Options
Options to buy stock are granted to key employees under an incentive stock option plan to provide them with an additional equity interest in ChoiceOne. The plan provides for the issuance of up to 137,760 shares of common stock. ChoiceOne recognized compensation expense of $31,000 in 2007 and $24,000 in 2006 in connection with stock options that vested for current participants during these years. The maximum option term is 10 years and options vest over 3 years. At December 31, 2007, there were 100,028 options available for future grants.
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the activity in the plan follows:
| 2007 |
| 2006 |
| 2005 |
| ||||||
|
|
| Weighted |
|
|
| Weighted |
|
|
| Weighted |
|
Options outstanding, beginning of year | 30,414 |
| $17.27 |
| 23,714 |
| $16.82 |
| 16,259 |
| $14.65 |
|
Options granted | 9,500 |
| 17.95 |
| 6,700 |
| 18.85 |
| 7,875 |
| 21.43 |
|
Options exercised | - |
| - |
| - |
| - |
| - |
| - |
|
Options forfeited or expired | (2,182 | ) | 18.77 |
| - |
| - |
| (420 | ) | 18.87 |
|
Options outstanding, end of year | 37,732 |
| $17.36 |
| 30,414 |
| $17.27 |
| 23,714 |
| $16.82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31 | 25,901 |
| $16.75 |
| 19,877 |
| $16.15 |
| 13,424 |
| $15.26 |
|
The range of prices for options outstanding and exercisable at the end of 2007 ranged from $13.04 to $21.43 per share. The weighted average remaining contractual life of options outstanding and exercisable at the end of 2007 was approximately 7.3 years. The numbers of options, weighted average exercise prices, and fair value of options granted have been adjusted for all stock dividends and splits. Information pertaining to options outstanding at December 31, 2007 was as follows:
| Number of | Number of | Average |
|
$ 13.04 | 3,857 | 3,857 | 4.14 |
|
$ 13.70 | 5,250 | 5,250 | 4.98 |
|
$ 16.31 | 6,299 | 6,299 | 6.06 |
|
$ 17.95 | 9,500 | 2,375 | 9.05 |
|
$ 18.85 | 6,000 | 3,000 | 8.05 |
|
$ 21.43 | 6,826 | 5,120 | 7.06 |
|
The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model that uses the weighted average assumptions noted in the following table. ChoiceOne uses historical data to estimate the volatility of the option exercise price and employee terminations within the valuation model. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
|
| 2007 |
|
| 2006 |
|
| 2005 |
|
Expected stock price volatility |
| 24.96 | % |
| 24.79 | % |
| 24.59 | % |
Dividend yield |
| 3.78 | % |
| 3.39 | % |
| 3.03 | % |
Expected option life (in years) |
| 7 |
|
| 7 |
|
| 7 |
|
Risk-free interest rate |
| 4.75 | % |
| 4.31 | % |
| 4.50 | % |
Fair value of options granted during year | $ | 3.92 |
| $ | 4.18 |
| $ | 5.10 |
|
During 2007, 7,644 shares vested at an average exercise price of $18.66. As of December 31, 2007, there was approximately $52,000 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the plan. That cost is expected to be recognized by ChoiceOne through 2010.
Note 17 - Earnings Per Share
(Dollars in thousands, except per share)
|
| 2007 |
|
| 2006 |
|
| 2005 |
|
Basic |
|
|
|
|
|
|
|
|
|
Net income | $ | 3,580 |
| $ | 2,088 |
| $ | 2,166 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
| 3,238,837 |
|
| 1,918,659 |
|
| 1,647,264 |
|
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
| 2007 |
|
| 2006 |
|
| 2005 |
|
Basic earnings per common share | $ | 1.11 |
| $ | 1.09 |
| $ | 1.31 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
|
|
|
|
|
|
|
Net income | $ | 3,580 |
| $ | 2,088 |
| $ | 2,166 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
| 3,238,837 |
|
| 1,918,659 |
|
| 1,647,264 |
|
Plus: dilutive effect of assumed exercises of stock options |
| 1,178 |
|
| 2,986 |
|
| 4,194 |
|
Average shares and dilutive potential common shares |
| 3,240,015 |
|
| 1,921,645 |
|
| 1,651,458 |
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share | $ | 1.10 |
| $ | 1.09 |
| $ | 1.31 |
|
Weighted average common shares have been adjusted for the stock dividend in 2005. As of December 31, 2007, there were 28,625 stock options considered to be anti-dilutive to earnings per share and thus have been excluded from the calculation above. As of December 31, 2006, there were 14,365 stock options considered to be anti-dilutive to earnings per share and thus have been excluded from the calculation above.
Note 18 - Other Comprehensive Income (Loss)
Other comprehensive income (loss) components and related taxes follow:
(Dollars in thousands)
|
| 2007 |
|
| 2006 |
|
| 2005 |
|
Unrealized holding gains (losses) on available for sale securities | $ | 595 |
| $ | 358 |
| $ | (652 | ) |
Less: reclassification adjustments for gains (losses) included in net income |
| 13 |
|
| (66 | ) |
| (28 | ) |
Net unrealized gains (losses) |
| 582 |
|
| 424 |
|
| (624 | ) |
Tax effect |
| 198 |
|
| (144 | ) |
| 213 |
|
Net-of-tax amount |
| 384 |
|
| 280 |
|
| (411 | ) |
|
|
|
|
|
|
|
|
|
|
Change in funded status of post retirement plan |
| 237 |
|
| - |
|
| - |
|
Tax effect |
| 81 |
|
| - |
|
| - |
|
Net-of-tax amount |
| 156 |
|
| - |
|
| - |
|
Total | $ | 540 |
| $ | 280 |
| $ | (411) |
|
Note 19 - Condensed Financial Statements of Parent Company
Condensed Balance Sheets
(Dollars in thousands) |
| December 31 |
| |||
|
| 2007 |
|
| 2006 |
|
Assets |
|
|
|
|
|
|
Cash | $ | 68 |
| $ | 310 |
|
Securities available for sale |
| 769 |
|
| 740 |
|
Land |
| - |
|
| 116 |
|
Other assets |
| 65 |
|
| 118 |
|
Investment in ChoiceOne Bank |
| 52,324 |
|
| 50,330 |
|
Total assets | $ | 53,226 |
| $ | 51,614 |
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
Mandatory redeemable shares under ESOP, at fair value | $ | 67 |
| $ | 95 |
|
Other liabilities |
| 17 |
|
| - |
|
Total liabilities |
| 84 |
|
| 95 |
|
|
|
|
|
|
|
|
Shareholders' equity |
| 53,142 |
|
| 51,519 |
|
Total liabilities and shareholders' equity | $ | 53,226 |
| $ | 51,614 |
|
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Statements of Income
(Dollars in thousands) |
| Years Ended December 31 |
| ||||||
|
| 2007 |
|
| 2006 |
|
| 2005 |
|
Interest and dividends from ChoiceOne Bank | $ | 2,347 |
| $ | 4,395 |
| $ | 1,160 |
|
Interest and dividends from other securities |
| 27 |
|
| 26 |
|
| 20 |
|
Total income |
| 2,374 |
|
| 4,421 |
|
| 1,180 |
|
Other expenses |
| 149 |
|
| 124 |
|
| 113 |
|
Income before income tax and equity in undistributed net |
|
|
|
|
|
|
|
|
|
income of subsidiary |
| 2,225 |
|
| 4,297 |
|
| 1,067 |
|
Income tax benefit |
| 39 |
|
| 42 |
|
| 32 |
|
Income before equity in undistributed net income of subsidiary |
| 2,264 |
|
| 4,339 |
|
| 1,099 |
|
Equity in undistributed net income (distributions in excess |
|
|
|
|
|
|
|
|
|
Net income | $ | 3,580 |
| $ | 2,088 |
| $ | 2,166 |
|
Condensed Statements of Cash Flows
(Dollars in thousands) |
| Years Ended December 31 |
| ||||||
|
| 2007 |
|
| 2006 |
|
| 2005 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
Net income | $ | 3,580 |
| $ | 2,088 |
| $ | 2,166 |
|
Adjustments to reconcile net income to net cash from operating |
|
|
|
|
|
|
|
|
|
Equity in undistributed net income (distributions in excess |
|
|
|
|
|
|
|
|
|
of net income) of subsidiary |
| (1,316 | ) |
| 2,251 |
|
| (1,067 | ) |
Amortization |
| 2 |
|
| (2 | ) |
| - |
|
Changes in other assets |
| 53 |
|
| (27 | ) |
| 6 |
|
Changes in other liabilities |
| 7 |
|
| (10,090 | ) |
| 2 |
|
Net cash from (used in) operating activities |
| 2,326 |
|
| (5,780 | ) |
| 1,107 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
Capital contribution to subsidiary |
| - |
|
| (3,000 | ) |
| - |
|
Purchases of securities |
| - |
|
| (226 | ) |
| - |
|
Cash acquired from VRFC |
| - |
|
| 10,330 |
|
| - |
|
Net cash from investing activities |
| - |
|
| 7,104 |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
Issuance of common stock |
| 169 |
|
| 339 |
|
| 307 |
|
Repurchase of common stock |
| (537 | ) |
| (84 | ) |
| (322 | ) |
Cash dividends paid |
| (2,200 | ) |
| (1,397 | ) |
| (1,109 | ) |
Net cash used in financing activities |
| (2,568 | ) |
| (1,142 | ) |
| (1,124 | ) |
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents |
| (242 | ) |
| 182 |
|
| (17 | ) |
Beginning cash and cash equivalents |
| 310 |
|
| 128 |
|
| 145 |
|
Ending cash and cash equivalents | $ | 68 |
| $ | 310 |
| $ | 128 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash activities: |
|
|
|
|
|
|
|
|
|
Land acquired from VRFC |
|
|
| $ | (116 | ) |
|
|
|
Other assets acquired from VRFC |
|
|
|
| (37 | ) |
|
|
|
Other liabilities assumed from VRFC |
|
|
|
| 10,089 |
|
|
|
|
Common stock issued to VRFC shareholders |
|
|
|
| 28,538 |
|
|
|
|
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 20 - Financial Instruments
Financial instruments as of December 31 were as follows:
(Dollars in thousands) |
| 2007 |
|
| 2006 |
| ||||||
|
|
|
|
| Estimated |
|
|
|
|
| Estimated |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks | $ | 10,923 |
| $ | 10,923 |
| $ | 9,936 |
| $ | 9,936 |
|
Federal funds sold |
| 217 |
|
| 217 |
|
| - |
|
| - |
|
Securities available for sale |
| 83,156 |
|
| 83,156 |
|
| 77,436 |
|
| 77,436 |
|
Federal Home Loan Bank and Federal Reserve |
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale |
| 100 |
|
| 100 |
|
| 236 |
|
| 236 |
|
Loans, net |
| 324,758 |
|
| 327,605 |
|
| 328,062 |
|
| 327,787 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Demand, savings and money market deposits |
| 170,779 |
|
| 170,779 |
|
| 167,704 |
|
| 167,704 |
|
Time deposits |
| 181,065 |
|
| 185,120 |
|
| 198,676 |
|
| 198,696 |
|
Repurchase agreements |
| 21,710 |
|
| 22,275 |
|
| 15,013 |
|
| 15,013 |
|
Federal funds purchased |
| - |
|
| - |
|
| 460 |
|
| 460 |
|
Advances from Federal Home Loan Bank |
| 35,933 |
|
| 36,229 |
|
| 23,908 |
|
| 23,957 |
|
The estimated fair values approximate the carrying amounts for all assets and liabilities except those described later in this paragraph. The estimated fair value for securities available for sale is based on quoted market values for the individual securities or for equivalent securities. The estimated fair value for loans is based on the rates charged at December 31 for new loans with similar maturities, applied until the loan is assumed to reprice or be paid. The allowance for loan losses is considered to be a reasonable estimate of discount for credit quality concerns. The estimated fair values for time deposits and FHLB advances are based on the rates paid at December 31 for new deposits or FHLB advances, applied until maturity. The estimated fair values for other financial instruments and off-balance sheet loan commitments are considered nominal.
Note 21 - 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) |
| 2007 |
|
| 2006 |
| ||||||
|
| Fixed |
|
| Variable |
|
| Fixed |
|
| Variable |
|
Unused lines of credit and letters of credit | $ | 8,313 |
| $ | 43,583 |
| $ | 12,518 |
| $ | 38,761 |
|
Commitments to fund loans (at market rates) |
| 3,679 |
|
| 8,532 |
|
| 2,833 |
|
| 795 |
|
Commitments to fund loans are generally made for periods of 180 days or less. The fixed rate loan commitments have interest rates ranging from 5.75% to 8.25% and maturities ranging from 5 years to 30 years.
ChoiceOne Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 22 - Regulatory Capital
ChoiceOne Bank is subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If only adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as are asset growth and expansion, and plans for capital restoration are required. At year-end 2007 and 2006, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank's categories.
Actual capital levels and minimum required levels for ChoiceOne Bank were as follows:
|
|
| Minimum Required | ||||||||||||
|
| Amount |
| Ratio |
| Amount |
| Ratio |
| Amount |
| Ratio | |||
December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk weighted assets) | $ | 37,416 |
| 11.4 | % | $ | 26,162 |
| 8.0 | % | $ | 32,702 |
| 10.0 | % |
Tier 1 capital (to risk weighted assets) |
| 34,068 |
| 10.4 |
|
| 13,081 |
| 4.0 |
|
| 19,621 |
| 6.0 |
|
Tier 1 capital (to average assets) |
| 34,068 |
| 7.6 |
|
| 17,965 |
| 4.0 |
|
| 22,456 |
| 5.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk weighted assets) | $ | 35,463 |
| 10.8 | % | $ | 26,339 |
| 8.0 | % | $ | 32,924 |
| 10.0 | % |
Tier 1 capital (to risk weighted assets) |
| 31,891 |
| 9.7 |
|
| 13,170 |
| 4.0 |
|
| 19,754 |
| 6.0 |
|
Tier 1 capital (to average assets) |
| 31,891 |
| 11.0 |
|
| 11,644 |
| 4.0 |
|
| 14,555 |
| 5.0 |
|
Banking regulations limit capital distributions by state-chartered banks. Generally, capital distributions are limited to undistributed net income for the current and prior two years. At December 31, 2007, approximately $132,000 was available for ChoiceOne Bank to pay dividends to ChoiceOne Financial Services, Inc. ChoiceOne's ability to pay dividends to shareholders is dependent on the Bank, which is restricted by state law and regulations. These regulations pose no practical restrictions to paying dividends at historical levels.
Note 23 - Quarterly Financial Data (Unaudited)
(Dollars in thousands) |
|
|
|
|
|
| Earnings Per Share | |||
|
| Interest |
| Net Interest |
| Net |
|
|
| Fully |
2007 |
|
|
|
|
|
|
|
|
|
|
First Quarter | $ | 7,032 | $ | 3,773 | $ | 1,001 |
| $ 0.31 |
| $ 0.30 |
Second Quarter |
| 7,236 |
| 3,831 |
| 901 |
| 0.28 |
| 0.28 |
Third Quarter |
| 7,380 |
| 3,885 |
| 674 |
| 0.20 |
| 0.20 |
Fourth Quarter |
| 7,117 |
| 3,654 |
| 1,004 |
| 0.32 |
| 0.32 |
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
First Quarter | $ | 3,658 | $ | 1,982 | $ | 535 |
| $ 0.32 |
| $ 0.32 |
Second Quarter |
| 3,744 |
| 1,879 |
| 545 |
| 0.33 |
| 0.33 |
Third Quarter |
| 3,902 |
| 1,798 |
| 450 |
| 0.27 |
| 0.27 |
Fourth Quarter |
| 6,141 |
| 3,089 |
| 558 |
| 0.21 |
| 0.21 |
The total of the quarterly basic and fully diluted earnings per share amounts for 2006 do not agree to the earnings per share amount reported in the income statement due to the issuance of shares to VRFC shareholders on November 1, 2006. Per share amounts have been adjusted for the stock dividend in 2005.
ChoiceOne Financial Services, Inc.
CORPORATE AND SHAREHOLDER INFORMATION
Corporate Headquarters | ChoiceOne Bank | ChoiceOne Insurance Agencies, Inc. |
ChoiceOne Financial Services, Inc.
DIRECTORS AND OFFICERS
Directors | Directors | Officers |
Officers | Officers | Officers |