U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File Number: 33-9110
1ST COMMUNITY BANCORP, INC.
(Exact name of small business issuer as specified in its charter)
MICHIGAN 38-2659066
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
109 EAST DIVISION
SPARTA, MICHIGAN 49345
(Address of principal executive offices)
(616) 887-7366
(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes __X__ No _____
As of June 30, 1996, the registrant had outstanding 485,413 shares of
common stock having a par value of $10 per share.
Transitional Small Business Disclosure Format (check one): Yes _____
No __X__
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.
<TABLE>
1ST COMMUNITY BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
June 30, 1996, and December 31, 1995
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 2,963,000 $ 4,806,000
Securities available for sale (Note 2) 21,082,000 22,602,000
Other securities (Note 2) 761,000 585,000
Loans (Note 3) 93,590,000 79,082,000
Allowance for loan losses (Note 4) (1,252,000) (1,121,000)
Net loans 92,338,000 77,961,000
Premises and equipment - net 2,685,000 2,589,000
Accrued interest receivable 884,000 773,000
Other assets 1,329,000 842,000
Total assets $122,042,000 $110,158,000
</TABLE>
See accompanying notes to the consolidated financial statements.
<TABLE>
1ST COMMUNITY BANCORP, INC.
CONSOLIDATED BALANCE SHEETS - Continued
June 30, 1996, and December 31, 1995
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
(Unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits
Demand $ 11,664,000 $ 10,425,000
Interest-bearing transaction accounts 26,618,000 25,167,000
Savings 9,406,000 9,369,000
Time 50,124,000 47,883,000
Total deposits 97,812,000 92,844,000
Federal funds purchased and securities sold under
agreements to repurchase 2,728,000 1,000,000
Accrued interest payable 356,000 339,000
Federal Home Loan Bank advances 6,000,000 1,000,000
Other liabilities 1,209,000 1,217,000
Total liabilities 108,105,000 96,400,000
COMMITMENTS AND CONTINGENCIES (NOTE 5)
SHAREHOLDERS' EQUITY
Common stock, $10 par value; shares
authorized: 1,000,000; shares outstanding:
485,413 at June 30, 1996, and 464,803
at December 31, 1995 (Note 8) 4,854,000 4,648,000
Surplus 3,249,000 3,455,000
Retained earnings 5,894,000 5,404,000
Net unrealized (depreciation)/appreciation
on securities available for sale, net of
deferred tax effect (60,000) 251,000
Total shareholders' equity 13,937,000 13,758,000
Total liabilities and shareholders' equity $122,042,000 $110,158,000
</TABLE>
See accompanying notes to the consolidated financial statements.
-2-
<TABLE>
1ST COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $2,159,000 $1,746,000 $4,142,000 $3,328,000
Securities
Taxable 231,000 311,000 465,000 636,000
Nontaxable 105,000 131,000 212,000 273,000
Other 1,000 1,000 2,000 3,000
Total interest income 2,496,000 2,189,000 4,821,000 4,240,000
INTEREST EXPENSE
Deposits 973,000 929,000 1,934,000 1,792,000
Other 102,000 40,000 142,000 54,000
Total interest expense 1,075,000 969,000 2,076,000 1,846,000
NET INTEREST INCOME 1,421,000 1,220,000 2,745,000 2,394,000
PROVISION FOR LOAN LOSSES 75,000 30,000 165,000 60,000
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,346,000 1,190,000 2,580,000 2,334,000
OTHER INCOME
Service charges on deposit
accounts 79,000 83,000 157,000 148,000
Other service charges
and fees 25,000 22,000 59,000 53,000
Net security gains 0 11,000 0 11,000
Mortgage loan sales
and servicing 23,000 25,000 42,000 48,000
Insurance commissions
income 180,000 0 382,000 0
Other income 34,000 38,000 73,000 75,000
Total other income 341,000 179,000 713,000 335,000
-3-
OTHER EXPENSES
Salaries and wages 530,000 361,000 1,015,000 713,000
Pension and other employee
benefits 95,000 66,000 204,000 150,000
Occupancy expense 60,000 50,000 127,000 100,000
Furniture and equipment
expense 90,000 68,000 180,000 135,000
Other expenses (Note 6) 336,000 335,000 640,000 631,000
Total other expenses 1,111,000 880,000 2,166,000 1,729,000
INCOME BEFORE INCOME TAX 576,000 489,000 1,127,000 940,000
INCOME TAX EXPENSE (NOTE 7) 154,000 121,000 311,000 232,000
NET INCOME $ 422,000 $ 368,000 $ 816,000 $ 708,000
EARNINGS PER SHARE (NOTE 1) $ .87 $ .78 $ 1.68 $ 1.48
</TABLE>
See accompanying notes to the consolidated financial statements.
-4-
<TABLE>
1ST COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1996 1995
<S> <C> <C>
Cash flows from operating activities
Net income $ 816,000 $ 708,000
Adjustments to reconcile net income to net cash
from operating activities
Net gain on sale of securities 0 (11,000)
Net amortization on securities 42,000 76,000
Net gain (loss) on sale of loans (7,000) 7,000
Loans originated for sale (3,851,000) (949,000)
Proceeds from loan sales 1,026,000 1,000,000
Provision for loan losses 165,000 60,000
Depreciation 139,000 111,000
Deferred income tax benefit (54,000) (1,000)
Changes in:
Interest receivable and other assets (382,000) 2,000
Interest payable and other liabilities 9,000 43,000
Net cash provided by (used in)
operating activities (2,097,000) 1,046,000
Cash flows from investing activities
Securities available for sale:
Proceeds from sales of securities 0 1,171,000
Proceeds from maturities of securities 1,009,000 1,636,000
Purchase of securities (180,000) (588,000)
Securities held to maturity:
Proceeds from maturities of securities 0 1,094,000
Purchase of securities 0 (350,000)
Net customer loan activity (11,589,000) (5,983,000)
Loans sold 110,000 302,000
Loans purchased (231,000) (34,000)
Net expenditures for premises and equipment (235,000) (125,000)
Net cash used in investing activities (11,116,000) (2,877,000)
-5-
Cash flows from financing activities
Net increase in deposits 4,968,000 822,000
Increase (decrease) in federal funds purchased and
securities sold under agreements to repurchase 1,728,000 2,000,000
Purchase and retirement of stock 0 (811,000)
Increase in Federal Home Loan Bank advances 5,000,000 0
Cash dividends paid (326,000) (238,000)
Net cash provided by financing activities 11,370,000 1,773,000
Net change in cash and cash equivalents (1,843,000) (58,000)
Cash and cash equivalents at beginning of period 4,806,000 2,948,000
Cash and cash equivalents at end of period $ 2,963,000 $ 2,890,000
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 2,059,000 $ 1,815,000
Income taxes $ 394,000 $ 200,000
</TABLE>
During 1995, $1,795,000 of securities were transferred from available
for sale to held to maturity and, subsequently, securities with a carrying
value of $8,124,000 and a fair value of $8,354,000 were transferred from
held to maturity to available for sale.
See accompanying notes to the consolidated financial statements.
-6-
1ST COMMUNITY BANCORP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
On January 1, 1996, ChoiceOne Bank acquired Bradford Insurance Centre,
Ltd. ("Bradford Insurance") in a tax-free exchange of stock. Under the
terms of the merger agreement, 20,610 shares of 1st Community Bancorp, Inc.
common stock were exchanged for all of the outstanding shares of Bradford
Insurance. The transaction was accounted for as a pooling of interests.
To account for the effect of the transaction, prior periods' consolidated
balance sheets have been retroactively restated for the assets, liabilities
and shareholders' equity of Bradford Insurance.
The consolidated financial statements include the accounts of the
Registrant and its direct and indirect wholly owned subsidiaries, ChoiceOne
Bank and ChoiceOne Insurance Agencies, Inc. after elimination of
significant intercompany transactions and accounts. The name of Sparta
State Bank was changed to ChoiceOne Bank effective in the second quarter of
1996. A name change of Bradford Insurance Centre, Ltd., to ChoiceOne
Insurance Agencies, Inc. also occurred in the second quarter. The
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information, prevailing
practices within the banking industry and the instructions to Form 10-QSB
and Item 310 of Regulation S-B. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements.
The accompanying consolidated financial statements reflect all adjustments
ordinary in nature which are, in the opinion of management, necessary for a
fair presentation of the Consolidated Balance Sheets as of June 30, 1996,
and December 31, 1995, the Consolidated Statements of Income for the three-
and six-month periods ended June 30, 1996, and June 30, 1995, and the
Consolidated Statements of Cash Flows for the six-month periods ended June
30, 1996, and June 30, 1995. Operating results for the six-months ended
June 30, 1996, are not necessarily indicative of the results that may be
expected for the year ending December 31, 1996.
The accompanying consolidated financial statements should be read in
conjunction with the consolidated financial statements and footnotes
thereto included in the Registrant's Annual Report on Form 10-KSB for the
year ended December 31, 1995.
-7-
STOCK TRANSACTIONS, EARNINGS AND CASH DIVIDENDS PER SHARE
Effective January 1, 1996, the Registrant issued 20,610 shares of 1st
Community Bancorp, Inc. common stock to acquire Bradford Insurance Centre,
Ltd.
Earnings per share are based on the weighted average number of shares
outstanding during the year. The weighted average number of shares has
been adjusted for the issuance of 20,610 shares in January 1996, the 20%
stock split paid in December 1995 and the repurchase of stock in April
1995. The weighted average number of shares outstanding was 485,413 for
the second quarter and first six months of 1996, 471,447 for the second
quarter of 1995 and 479,137 for the first six months of 1995.
NOTE 2 - SECURITIES
Securities have been classified in the Consolidated Balance Sheets
according to management's intent. The amortized cost and approximate fair
value of securities at June 30, 1996, and December 31, 1995, were as
follows:
<TABLE>
<CAPTION>
GROSS GROSS APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
JUNE 30, 1996
U.S. Treasury and
U.S. Government agencies $ 4,076,000 $ 32,000 $ (26,000) $ 4,082,000
Obligations of states and
political subdivisions 11,274,000 126,000 (129,000) 11,271,000
U.S. Government agencies
backed by mortgages 5,516,000 24,000 (110,000) 5,430,000
Other 307,000 0 (8,000) 299,000
Total $21,173,000 $182,000 $(273,000) $21,082,000
DECEMBER 31, 1995
U.S. Treasury and
U.S. Government agencies $ 4,523,000 $ 97,000 $ (2,000) $ 4,618,000
Obligations of states and
political subdivisions 11,481,000 278,000 (29,000) 11,730,000
U.S. Government agencies
backed by mortgages 5,912,000 70,000 (35,000) 5,947,000
Other 305,000 2,000 0 307,000
Total $22,221,000 $447,000 $ (66,000) $22,602,000
</TABLE>
-8-
<TABLE>
<CAPTION>
GROSS GROSS APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
OTHER SECURITIES
JUNE 30, 1996
Federal Reserve Bank stock $ 210,000 $ 0 $ 0 $ 210,000
Federal Home Loan Bank stock 551,000 0 0 551,000
Total $ 761,000 $ 0 $ 0 $ 761,000
DECEMBER 31, 1995
Federal Reserve Bank stock $ 210,000 $ 0 $ 0 $ 210,000
Federal Home Loan Bank stock 375,000 0 0 375,000
Total $ 585,000 $ 0 $ 0 $ 585,000
</TABLE>
The following sets forth information regarding sales of securities
available for sale for the six months ended June 30, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Proceeds from sales of securities $ 0 $1,171,000
Gross realized gains 0 11,000
Gross realized losses 0 0
</TABLE>
For the six months ended June 30, 1996, the change in net unrealized
holding gain or loss on securities available for sale decreased to
$472,000 resulting in an unrealized loss on securities available for
sale of $91,000. There were no sales or transfers of securities
classified as held to maturity.
Securities with a book value of approximately $253,000 and $260,000 were
pledged as collateral for public deposits at June 30, 1996, and December
31, 1995, respectively. Securities with a book value of approximately
$278,000 were pledged as collateral for securities sold under agreements to
repurchase at June 30, 1996. There were no securities sold under
agreements to repurchase at December 31, 1995.
-9-
NOTE 3 - LOANS
Loans at June 30, 1996, and December 31, 1995, were classified as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
<S> <C> <C>
Commercial $27,551,000 $23,174,000
Agricultural 9,012,000 9,513,000
Real estate mortgage - construction 1,123,000 805,000
Real estate mortgage - residential 34,668,000 28,843,000
Consumer 21,236,000 16,747,000
Total $93,590,000 $79,082,000
</TABLE>
Loans held for sale included $53,000 of residential real estate mortgages
and $17,000 of consumer loans at June 30, 1996. Loans held for sale were
accounted for at the lower of aggregate cost or market.
The Registrant implemented Statement of Financial Accounting Standards No.
114, "Accounting by Creditors for Impairment of a Loan," on January 1,
1995. Information regarding impaired loans as of June 30, 1996, and
December 31, 1995, is as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
<S> <C> <C>
Loans classified as impaired $235,000 $409,000
Less impaired loans for which no allowance for
credit losses had been established 159,000 57,000
Impaired loans for which an allowance for credit
losses had been determined $ 76,000 $352,000
Allowance determined for above impaired loans $ 35,000 $ 5,000
</TABLE>
-10-
Information regarding impaired loans for the six months ended June 30, 1996
and 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Average balance of impaired loans $350,000 $363,000
Interest income recognized on impaired loans 18,000 10,000
Interest income recognized on a cash-basis on
impaired loans 15,000 10,000
</TABLE>
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
An analysis of changes in the allowance for loan losses for the six months
ended June 30, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Balance at beginning of period $1,121,000 $1,039,000
Provision charged to operating expense 165,000 60,000
Recoveries credited to the allowance 38,000 29,000
Loans charged-off (72,000) (40,000)
Balance at end of period $1,252,000 $1,088,000
</TABLE>
NOTE 5 - COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF CREDIT RISK
Noninterest-bearing deposits totaling approximately $2,055,000 were held at
NBD Bank at June 30, 1996.
As of June 30, 1996, the Registrant had outstanding commitments to make
loans totaling $11,564,000, the majority of which have variable interest
rates. The Registrant had approximately $1,971,000 of unused lines of
credit and $155,000 in letters of credit at June 30, 1996.
NOTE 6 - OTHER EXPENSES
Other expenses for the six months ended June 30, 1996 and 1995 were as
follows:
-11-
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Supplies and postage $100,000 $ 73,000
Computer processing 79,000 78,000
Legal and professional 68,000 84,000
State single business tax expense 59,000 47,000
Advertising and marketing 37,000 28,000
FDIC insurance 1,000 103,000
Other 296,000 218,000
Total $640,000 $631,000
</TABLE>
NOTE 7 - INCOME TAX EXPENSE
The components of income tax expense for the six months ended June 30, 1996
and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Current income tax expense $365,000 $233,000
Deferred income tax benefit (54,000) (1,000)
Income tax expense $311,000 $232,000
</TABLE>
The difference between the financial statement tax provision and amounts
computed by applying the federal income tax rate to pre-tax income is
principally attributable to tax-exempt interest income.
The components of deferred tax assets and liabilities at June 30, 1996, and
December 31, 1995, were as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $321,000 $276,000
Postretirement benefits obligation 96,000 95,000
Deferred compensation 63,000 60,000
Deferred loan fees 59,000 68,000
Unrealized depreciation on securities available
for sale 31,000 0
Other 65,000 59,000
-12-
Total deferred tax assets 635,000 558,000
Deferred tax liabilities:
Depreciation 168,000 177,000
Pension fund asset 90,000 93,000
Unrealized appreciation on securities available
for sale 0 130,000
Other 14,000 11,000
Total deferred tax liabilities 272,000 411,000
Net deferred tax asset $363,000 $147,000
</TABLE>
A valuation allowance related to a deferred tax asset is recognized when it
is considered more likely than not that part or all of the deferred tax
benefits will not be realized. Management has determined that no such
allowance was required at June 30, 1996, or December 31, 1995.
-13-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion is designed to provide a review of the financial
condition and results of operations of 1st Community Bancorp, Inc. (the
"Registrant") and its direct and indirect wholly owned subsidiaries,
ChoiceOne Bank (the "Bank") and ChoiceOne Insurance Agencies, Inc. This
discussion should be read in conjunction with the consolidated financial
statements and related footnotes.
NET INCOME AND RETURN ON AVERAGE ASSETS AND SHAREHOLDERS' EQUITY
The Registrant's net income increased $54,000 or 16% in the second quarter
of 1996 compared to 1995 and has risen $108,000 or 15% in the first six
months of 1996 compared to the prior year. The improvement in both the
second quarter and first half of 1996 resulted from higher net interest
income and other income, the effect of which was partially offset by growth
in the provision for loan losses and other expenses.
Over 75% of the increase in net interest income in 1996 was caused by
growth in average interest-earning assets. The remainder was attributable
to a slightly wider spread between interest rates earned on interest-earning
assets and interest rates paid on interest-bearing liabilities than
in the comparable period of the prior year. Most of the increase in the
provision for loan losses was due to loan growth. The majority of the
change in other income and other expenses resulted from the inclusion of
income and expense from ChoiceOne Insurance Agencies, Inc. effective
January 1, 1996.
The return on average assets was 1.44% for the first six months of 1996,
compared to 1.35% for the same period in 1995. The return on average
shareholders' equity was 11.73% for the first half of 1996, compared to
10.95% in the comparable period of the prior year.
CASH DIVIDENDS
Cash dividends declared in the second quarter of 1996 were $170,000 or $.35
per common share, which represents a $.08 per share or 30% increase
compared to the dividend paid in the same period of the prior year. The
cash dividends paid in the first six months of 1996 were $326,000 or $.67
per share, which was $.17 per share or 34% more than the dividends paid in
the same period in 1995. Cash dividends per share in 1995 have been
adjusted for the 6-for-5 stock split paid in December 1995. The cash
dividend payout percentage in the first half of 1996 was 39.86%, compared
to 33.57% in 1995.
-14-
INTEREST INCOME AND EXPENSE
Tables 1 and 2 on the following two pages provide information regarding
interest income and expense for the six-month periods ended June 30, 1996,
and June 30, 1995. Table 1 documents average balances and interest income
and expense, as well as the average rates earned or paid on assets and
liabilities. Table 2 documents the effect on interest income and expense
of changes in volume (average balance) and interest rates. These tables
are referred to in the discussion of interest income, interest expense and
net interest income below.
<TABLE>
Table 1 - Average Balances and Tax Equivalent Interest Rates
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
1996 1995
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets
Loans <F1> $ 85,376 $4,162 9.75% $ 70,623 $3,344 9.47%
Taxable securities <F2> 14,584 465 6.38 19,691 636 6.30
Nontaxable securities <F1><F2> 8,291 322 7.77 9,714 414 8.48
Other 59 2 6.78 102 3 5.88
Interest-earning assets 108,310 4,951 9.14 100,130 4,397 8.78
Noninterest-earning assets 6,253 6,194
Total assets $114,563 $106,324
Liabilities and Shareholders' Equity
Interest-bearing transaction
accounts $ 25,150 408 3.24 $ 26,572 482 3.63
Savings deposits 9,333 87 1.86 10,206 122 2.39
Time deposits 49,148 1,439 5.86 43,539 1,188 5.46
Other 4,936 142 5.75 1,656 54 6.52
Interest-bearing liabilities 88,567 2,076 4.69 81,973 1,846 4.50
Noninterest-bearing liabilities 12,044 11,317
Shareholders' equity 13,952 13,034
Total liabilities and
shareholders' equity $114,563 $106,324
Net interest income (tax-equivalent
basis) - interest spread 2,875 4.45% 2,551 4.28%
Tax equivalent adjustment <F1> (130) (157)
-15-
Net interest income $2,745 $2,394
Net interest income as a percentage
of earning assets (tax-equivalent
basis) 5.31% 5.10%
<FN>
<F1> Interest on nontaxable securities and loans has been adjusted to a
fully tax-equivalent basis to facilitate comparison to the taxable
interest-earning assets. The adjustment uses an incremental tax rate of
34% for the years presented.
<F2> The average balance includes the effect of unrealized
appreciation/depreciation on securities, while the average rate was
computed on the average amortized cost of the securities.
</FN>
</TABLE>
-16-
<TABLE>
Table 2 - Changes in Tax Equivalent Net Interest Income
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
1996 OVER 1995
TOTAL VOLUME RATE
(Dollars in Thousands)
<S> <C> <C> <C>
Increase (decrease) in interest income <F1>
Loans <F2> $818 $717 $101
Taxable securities (171) (178) 7
Nontaxable securities <F2> (92) (58) (34)
Other (1) (1) 0
Net change in tax-equivalent income 554 480 74
Increase (decrease) in interest expense <F1>
Interest-bearing transaction accounts (74) (25) (49)
Savings deposits (35) (10) (25)
Time deposits 251 161 90
Other 88 95 (7)
Net change in interest expense 230 221 9
Net change in tax-equivalent
net interest income $324 $259 $ 65
<FN>
<F1> The volume variance is computed as the change in volume (average
balance) multiplied by the previous year's interest rate. The rate
variance is computed as the change in interest rate multiplied by the
previous year's volume (average balance). The change in interest due to
both volume and rate has been allocated to the volume and rate changes in
proportion to the relationship of the absolute dollar amounts of the change
in each.
<F2> Interest on nontaxable investment securities and loans has been
adjusted to a fully tax-equivalent basis using an incremental tax rate of
34% for the periods presented.
</FN>
</TABLE>
NET INTEREST INCOME
As shown in Tables 1 and 2, tax equivalent net interest income increased
$324,000 in the first six months of 1996 compared to 1995. The increase
resulted from growth in the Registrant's loan portfolio from 1995 to 1996.
Average loans increased $14,753,000 from the first half of 1995 to the same
-17-
period in 1996. This growth caused interest income from loans to be
$717,000 higher in 1996. Loan interest income was also affected by a
$64,000 increase in loan fees in 1996 compared to 1995. Half of the fee
increase resulted from the Bank's new accounts receivable financing
program. The increase in loan income was offset by declines in interest
income from both taxable and nontaxable securities. The average balance
decreased in both of these categories as amounts received from maturing
securities were used to fund loan growth both in 1995 and 1996.
The deposit mix has changed significantly from 1995 to 1996 as the average
balance of time deposits has increased $5,609,000, while interest-bearing
transaction accounts and savings deposits declined $2,295,000. The
transfer of balances into the time deposits category reflected depositors'
preference for the higher interest rates offered by this type of account.
However, movement into time deposits slowed in the second quarter of 1996
as interest rates paid by the Bank on time deposits have remained
relatively stable since February 1996.
Table 1 documents that the net interest income spread was 4.45% for the
first six months of 1996, compared to 4.28% for the prior year. The gain
was caused by a 36-basis-point increase in the average rate earned on
interest-earning assets, while the average rate paid on interest-bearing
liabilities went up 19 basis points. The 28 basis point increase in the
average interest rate on loans was the only interest-earning assets
category that contributed significantly to interest income in 1996. The
increase in the average loan rate resulted from higher rates earned on
consumer and residential real estate mortgage loans. The increase in
consumer loan rates was caused by growth in the Registrant's indirect
automobile portfolio, which earned a higher rate of interest than its
direct loans. Higher mortgage loan rates were attributable to rising
mortgage rates in 1995, which particularly affected adjustable rate
mortgages. The increases in the average rate earned on consumer and
mortgage loans was partly offset by a 18-basis-point drop in the average
rate earned on commercial and agricultural loans. This was due to
decreases in the Bank's prime lending rate in December 1995 and February
1996. The decreases in the average rates earned on nontaxable securities
categories was due to maturities of higher-yielding securities.
The average interest rate on time deposits was the only interest-bearing
liability interest rate that increased from 1995 to 1996. The higher rate
for time deposits was attributable to rising rates in 1994 and the first
quarter of 1995. As time deposits with origination dates prior to 1995
matured in the last three quarters of 1995, they matured at higher interest
rates than they had carried in the first quarter of 1995. Steady time
deposit rates through the end of 1995 continued this trend. After the Bank
decreased rates paid on new and renewing time deposits in February 1996,
the Bank has not changed time deposit rates significantly through the end
of the second quarter. The lower average rate paid in 1996 on interest-
-18-
bearing transaction accounts and savings deposits was caused by decreases
in the rates the Bank paid on these accounts in the second half of 1995 and
the first quarter of 1996.
ALLOWANCE AND PROVISION FOR LOAN LOSSES
The allowance for loan losses has increased $131,000 from December 31,
1995, to June 30, 1996. The allowance was 1.34% of total loans at June 30,
1996, compared to 1.42% at December 31, 1995. The provision for loan
losses was higher in both the second quarter and first six months of 1996
than 1995. Only $23,000 of the increase in the first half of 1996 was
attributable to higher net chargeoffs than the prior year. The remainder
of the increase was due to a greater amount of loan growth in 1996 than in
1995.
Chargeoffs and recoveries for those loan categories with activity in the
periods ended June 30, 1996 and 1995 were as follows. There were no
chargeoffs or recoveries in the construction real estate mortgage loan
category in the first six months of 1996 or 1995.
<TABLE>
<CAPTION>
1996 1995
CHARGEOFFS RECOVERIES CHARGEOFFS RECOVERIES
<S> <C> <C> <C> <C>
Commercial $ 0 $ 3,000 $ 2,000 $ 6,000
Agricultural 0 10,000 0 0
Real estate mortgage -
residential 0 0 3,000 0
Consumer 72,000 25,000 35,000 23,000
$72,000 $38,000 $40,000 $29,000
</TABLE>
The amount of chargeoffs which the Bank will experience in the remainder of
1996 will be dependent on the extent to which business and consumer
borrowers are affected by the local economy. As chargeoffs, changes in the
level of nonperforming loans, and loan growth occur in the remainder of
1996, the provision and allowance for loan losses will be reviewed by the
Bank's management and adjusted as believed necessary.
OTHER INCOME
Total other income increased $162,000 in the second quarter of 1996 and
$378,000 in the first six months of 1996 compared to 1995. This was
attributable to insurance commissions income from the Registrant's new
insurance subsidiary.
-19-
OTHER EXPENSES
Total other expenses increased $437,000 in the first six months of 1996
compared to 1995. Of the growth, $396,000 of the increase was caused by
expenses of the Registrant's new insurance subsidiary. These additional
subsidiary expenses will continue for the rest of 1996. The remaining
$41,000 difference was the net of $143,000 of general growth in expenses
less $102,000 in lower FDIC insurance costs.
The Bank opened its Plainfield branch in one of the insurance subsidiary's
existing locations in June 1996. The Cedar Springs branch opened in a
temporary facility in July 1996. Expenses related to the new branch
locations were insignificant in the second quarter of 1996. Branch related
expenses will be higher in the second half of 1996 as the two branches
become fully functional and the permanent facility for the Cedar Springs
branch is constructed.
SECURITIES
There were only $180,000 of securities purchased in the first six months of
1996. There have been no significant purchases of securities since the
middle of 1995 because amounts received from maturing securities have been
used to fund the Registrant's loan growth. Beginning in the third quarter
of 1996, the Registrant may begin to purchase securities. Purchases will
occur to the extent believed prudent to provide sufficient liquidity for
loan and deposit needs and to provide eligible collateral for securities
sold under agreements to repurchase.
LOANS
Total loans grew $8,199,000 in the second quarter of 1996 after
experiencing an increase of $6,309,000 in the first quarter. Commercial,
residential real estate mortgage and consumer loans experienced increases
of $1,478,000, $3,657,000 and $3,051,000, respectively in the second
quarter. The growth in commercial loans resulted from a continued strong
local economy which has increased loan demand and the Bank's customer
calling program which has concentrated on business customers. The increase
in residential real estate mortgages was due to aggressive marketing and a
calling program focused on area realtors and builders. The higher consumer
loan balance was caused by strong demand in indirect automobile lending.
Loan growth in the remainder of 1996 will be affected primarily by interest
rates and by competition within the Bank's local market area. The calling
programs will continue to be used in all loan areas to attempt to continue
and stimulate demand. New marketing strategies will continue to be used to
enhance the Bank's effectiveness in remaining competitive in residential
real estate mortgage lending. FHA mortgage lending is being investigated
and may be added to the Bank's product line. In the consumer loan
-20-
category, direct mail advertising and telemarketing may be used to
stimulate demand for direct loans while management will continue to
emphasize development of its indirect loan portfolio.
The Registrant implemented Statement of Financial Accounting Standards No.
114, "Accounting by Creditors for Impairment of a Loan," on January 1,
1995. The statement requires that management review the loan portfolio for
possible impaired loans. In addition to this requirement, management also
monitors the portfolio for 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 loans past due 90 days or more, which are considered troubled
debt restructurings. The balances of the three nonperforming categories as
of June 30, 1996, and December 31, 1995, were as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
<S> <C> <C>
Loans accounted for on a nonaccrual basis $180,000 $624,000
Loans, not included in nonaccrual loans, which are
contractually past due 90 days or more as to
interest or principal payments 559,000 26,000
Loans, not included in nonaccrual or loans past due
90 days or more, which are considered troubled
debt restructurings 31,000 106,000
Total $770,000 $756,000
</TABLE>
DEPOSITS
Total deposits grew $3,389,000 in the second quarter of 1996, which more
than doubled the increase of $1,579,000 in the first quarter of 1996.
Savings deposits was the only category that did not experience growth in
the second quarter. The trend of movement of deposits in the time deposits
category slowed somewhat in the second quarter as the increase in demand
and interest-bearing transaction accounts was greater than the growth in
time deposits. Management believes this can be attributed to steady time
deposit rates as well as the Bank's call program which has begun to
emphasize commercial deposit growth.
The Bank's management will continue to emphasize deposit growth in the
remainder of 1996. Part of the officer call program will focus on the
generation of new commercial deposits.
-21-
SHAREHOLDERS' EQUITY
Total shareholders' equity increased $59,000 in the second quarter of 1996,
which was slightly less than the $120,000 increase experienced in the first
quarter. The increase in both quarters was caused by retained earnings and
was offset by a decrease in net unrealized gain or loss on securities
available for sale. The decrease in the market value adjustment for
securities was attributable to higher medium- and long-term interest rates,
the effect of which caused a decline in the market value of portfolio
securities.
Shareholders' equity as a percentage of assets was 11.42% as of June 30,
1996, compared to 12.49% as of December 31, 1995. The minimum regulatory
capital percentages are 3% for the leverage ratio, 4% for the Tier 1
capital ratio and 8% for the total risk-based capital ratio. The
Registrant's regulatory capital levels as of June 30, 1996, were as
follows:
<TABLE>
<CAPTION>
CAPITAL CAPITAL AS % OF
AMOUNT RISK ADJUSTED ASSETS
<S> <C> <C>
Leverage capital $13,632,000 11.16%
Tier 1 capital $13,631,000 14.30%
Total risk-based capital $14,884,000 15.61%
</TABLE>
CAPITAL RESOURCES
The Registrant issued 20,610 shares of its common stock effective January
1, 1996, for the Bank's acquisition of Bradford Insurance (now ChoiceOne
Insurance Agencies, Inc.). The Bank plans to construct a new branch office
in Cedar Springs beginning in the third quarter of 1996. The expected cost
of land, building and equipment approximates $750,000.
Management believes that the current level of capital is adequate to take
advantage of potential opportunities that may arise for the Registrant or
the Bank.
LIQUIDITY AND RATE SENSITIVITY
Cash and cash equivalents increased $958,000 in the second quarter of 1996
and has decreased $1,843,000 in the first six months of 1996. The
Registrant's management believes that the current level of liquidity is
sufficient to meet the Bank's normal operating needs. This belief is based
-22-
upon the availability of deposit growth, maturities of securities, normal
loan repayments, income retention, federal funds which can be purchased
from correspondent banks and advances available from the Federal Home Loan
Bank of Indianapolis.
Table 3 presents the maturity and repricing schedule for the Registrant's
rate-sensitive assets and liabilities for selected time periods. The
Registrant's cumulative rate-sensitive liabilities exceeded its cumulative
rate-sensitive assets by $17,992,000 at the 0-to-3-month repricing period
as of June 30, 1996. The negative amount was due primarily to the
classification of all interest-bearing transaction accounts and savings
deposits in the 0-to-3-month repricing category. The rates paid on these
deposit types can be immediately repriced. Management believes that these
types of accounts are not as sensitive to changes in interest rates in the
short term as this presentation would indicate and that the positive
funding gap in the 1 to 5 year period is more reflective of the
Registrant's experience. Management will determine the rates necessary
based on competitive rates and the need for deposited funds.
The Registrant's management is aware of the inherent interest rate risk
associated with gap management. As interest rate fluctuations occur, the
relationship between rate-sensitive assets and liabilities will be
monitored by management and changes in assets and liabilities will be made
when deemed necessary. It is the goal of the Registrant's Asset/Liability
Management Committee to maintain a desired interest rate spread through its
pricing of both loans and deposits.
-23-
<TABLE>
Table 3 - Maturities and Repricing Schedule
<CAPTION>
AS OF JUNE 30, 1996
0 - 3 3 - 12 1 - 5 OVER
MONTHS MONTHS YEARS 5 YEARS TOTAL
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Assets
Loans $ 28,130 $ 20,929 $30,018 $14,513 $ 93,590
Interest-bearing deposits
with banks 21 0 0 0 21
Taxable securities 2,071 2,716 7,906 1,222 13,915
Nontaxable securities 0 269 4,332 3,327 7,928
Rate-sensitive assets 30,222 23,914 42,256 19,062 115,454
Liabilities
Interest-bearing transaction
accounts 26,618 0 0 0 26,618
Savings deposits 9,406 0 0 0 9,406
Time deposits 9,462 21,599 18,919 144 50,124
Repurchase agreements 278 0 0 0 278
Federal Home Loan Bank
advance 0 0 6,000 0 6,000
Federal funds purchased 2,450 0 0 0 2,450
Rate-sensitive liabilities 48,214 21,599 24,919 144 94,876
Rate-sensitive assets
less rate-sensitive
liabilities
Asset (liability) gap
for the period $(17,992) $ 2,315 $17,337 $18,918 $ 20,578
Cumulative asset
(liability) gap $(17,992) $(15,677) $ 1,660 $20,578
Cumulative rate-
sensitive assets as
a percentage of
cumulative rate-
sensitive
liabilities 62.68% 77.54% 101.75% 121.69%
</TABLE>
-24-
PART II. OTHER INFORMATION
Item 2. CHANGES IN SECURITIES.
On April 30, 1996, the Registrant held its 1996 annual meeting of
shareholders. At the meeting, the shareholders voted to approve an
amendment to the Registrant's Articles of Incorporation to increase
the Registrant's authorized capital from 500,000 shares of Common
Stock, $10.00 par value per share ("Common Stock"), to 1,000,000
shares of Common Stock.
All of the additional shares resulting from the increase in the
Registrant's authorized Common Stock are of the same class, with the
same dividend, voting and liquidation rights, as shares of Common Stock
previously outstanding.
The newly authorized shares of Common Stock are unreserved and available
for issuance. No further shareholder authorization is required prior to
the issuance of such shares by the Registrant. Shareholders have no
preemptive rights to acquire shares issued by the Registrant under its
Articles of Incorporation, and shareholders did not acquire any such
rights with respect to such additional shares of Common Stock under the
amendment to the Registrant's Articles of Incorporation. Under some
circumstances, the issuance of additional shares of Common Stock could
dilute the voting rights, equity and earnings per share of existing
shareholders.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On April 30, 1996, the annual meeting of the Registrant was held. The
following directors were elected by the shareholders to serve for three-
year terms to expire at the 1999 annual meeting:
<TABLE>
<CAPTION>
VOTES FOR VOTES WITHHELD
<S> <C> <C>
Jae M. Maxfield 378,963 5,045
Jon E. Pike 375,258 10,910
Linda R. Pitsch 381,123 5,045
</TABLE>
Directors William F. Cutler, Jr., L. Edmond Eary, Jr., M.D., Walter Hill
and Andrew Zamiara have terms of office that continue until the 1997
annual meeting. The terms of directors Frank G. Berris, Lawrence D.
Bradford, Lewis G. Emmons and Stuart Goodfellow run through the 1998
annual meeting.
-25-
The shareholders passed a proposal to approve an amendment to the
Registrant's Articles of Incorporation to increase the number of
authorized shares of common stock from 500,000 to 1,000,000 shares.
A total of 385,177 shares were voted for the proposal, 6,101 shares
were voted against the proposal, 368 shares abstained from voting and
there were 11,511 shares not voted by brokers.
Item 5. OTHER INFORMATION.
Name changes for both Sparta State Bank and Bradford Insurance Centre, Ltd.
became effective in the second quarter of 1996. The new name for Sparta
State Bank is ChoiceOne Bank. The new name for Bradford Insurance Centre,
Ltd. is ChoiceOne Insurance Agencies, Inc.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
1. Exhibits required by Item 601 of Regulation S-B. The following
exhibits are filed or incorporated by reference as part of this report:
EXHIBIT
NUMBER DOCUMENTS
3.1 Articles of Incorporation of the Registrant as currently
in effect and any amendments thereto.
3.2 Bylaws of the Registrant as currently in effect and
any amendments thereto - previously filed as an exhibit
to the Registrant's Form 10-KSB Annual Report for its
fiscal year ended December 31, 1993. Incorporated
herein by reference.
27 Financial Data Schedule.
2. Reports on Form 8-K. No reports on Form 8-K were filed during
the three months ended June 30, 1996.
-26-
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has
duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
1ST COMMUNITY BANCORP, INC.
Date August 12, 1996 /S/ JAE M. MAXFIELD
President and Chief Executive Officer
Date August 12, 1996 /S/ THOMAS L. LAMPEN
Chief Financial Officer and Treasurer
(principal financial and accounting
officer)
-27-
INDEX TO EXHIBITS
The following exhibits are filed or incorporated by reference as part of
this report:
EXHIBIT
NUMBER DOCUMENTS
3.1 Articles of Incorporation of the Registrant as currently in
effect and any amendments thereto.
3.2 Bylaws of the Registrant as currently in effect and any
amendments thereto - previously filed as an exhibit to the
Registrant's Form 10-KSB Annual Report for its fiscal year
ended December 31, 1993. Incorporated herein by reference.
27 Financial Data Schedule.
-28-
EXHIBIT 3.1
CERTIFICATE OF INCORPORATOR
The undersigned acknowledges that he acted as the Incorporator of
1st Community Bancorp, Inc., a Michigan corporation, and adopted the
Articles of Incorporation, a copy of which is attached, under the
provisions of Act No. 284 of the Public Acts of 1972, as amended, known as
the Michigan Business Corporation Act, on the 12 day of February, 1986.
The following persons were selected as the initial members of the Board of
Directors of this corporation to serve until the first annual meeting of
the shareholders of this corporation and until their successors are elected
and qualified, or until their resignation or removal:
Warren Schut
Marvin J. Besteman
Lawrence D. Bradford
Mary Jean Chorman
Gordon Paul DeYoung
L. Edmond Eary, Jr.
Lewis G. Emmons
Gerard J. Heyt
Walter Hill
H. Paul McFall
Gordon VanDenHout
Bylaws, as prepared by counsel, to regulate the business affairs
of the corporation were adopted and given immediate effect.
This Certificate is executed by the Incorporator this
12 day of February, 1986.
/S/ WARREN SCHUT
ARTICLES OF INCORPORATION
OF
1ST COMMUNITY BANCORP, INC.
_________________________________
These Articles of Incorporation are signed by the Incorporator
for the purpose of forming a corporation for profit under the provisions of
Act 284 of the Public Acts of 1972, as amended, known as the Michigan
Business Corporation Act.
ARTICLE I
NAME
The name of the corporation is
1st Community Bancorp, Inc.
ARTICLE II
PURPOSES
The purposes of the corporation are to engage in any activity
within the purposes for which corporations may be organized under the
Michigan Business Corporation Act.
ARTICLE III
AUTHORIZED CAPITAL
The total authorized capital stock of the corporation is one
million (1,000,000) shares of common stock , par value $10.00 per share.
The authorized shares of stock are all of one class with equal
voting powers, and each such share shall be equal with every other such
share.
ARTICLE IV
REGISTERED OFFICE AND RESIDENT AGENT
The address of the initial Registered Office is 109 East
Division, Sparta, Michigan 49345.
The name of the initial Resident Agent is Warren Schut.
ARTICLE V
INCORPORATOR
The name and address of the Incorporator is as follows:
NAME ADDRESS
Warren Schut 109 East Division
Sparta, Michigan 49345
-2-
ARTICLE VI
DIRECTORS
A. NUMBER AND TERM OF DIRECTORS. The corporation shall be
managed by a board of directors who will initially be elected in accordance
with this Section. The number of directors shall not be less than nine (9)
or more than fifteen (15). Initially there shall be eleven (11) directors.
The exact number of directors may be increased or decreased from time to
time by the board of directors, pursuant to a resolution adopted by a
majority of the entire board of directors. Effective on January 1,
1987, the members of the board must be shareholders of the corporation.
The board of directors shall be divided into three classes, with the term
of office of one class expiring each year. At the annual meeting of
stockholders in 1986, four (4) directors of Class I shall be elected to
hold office for a term expiring at the 1987 annual meeting, four (4)
directors of Class II shall be elected to hold office for a term expiring
at the 1988 annual meeting and three (3) directors of Class III shall be
elected to hold office for a term expiring at the 1989 annual meeting.
Beginning with the annual meeting of stockholders in 1987, each class of
directors whose term shall then expire shall be elected to hold office for
a three year term and until the election and qualification of their
respective successors.
B. REMOVAL OF DIRECTORS. A director may be removed before the
end of a term only for cause, except that the Bylaws may provide for
mandatory retirement from the Board of Directors at seventy (70) years of
age or older. At any annual meeting of the stockholders, or at a meeting
-3-
of stockholders called expressly for the purpose, the notice of which
shall state that the removal of a director or directors is among the
purposes of the meeting, the holders of a majority of the shares then
entitled to vote at an election of directors, present in person or by
proxy, may remove such director or directors for cause. If the holders
of the shares of any class are entitled to elect one or more directors
by the provisions of these Articles the provisions of this section shall
apply only to the vote of the holders of that class of outstanding shares.
C. VACANCIES. All vacancies in the membership of the board
shall be filled by appointment made by a majority vote of the remaining
directors. Any vacancy resulting from the removal of a director for cause
shall be filled solely by appointment made by a majority of the Continuing
Directors as defined in Article IX. Each person so appointed to fill a
vacancy shall remain a director until the next election of the class for
which that director shall have been chosen and until that director's
successor shall be elected by the shareholders.
ARTICLE VII
NO CUMULATIVE VOTING
The shareholders of the corporation shall not be entitled to use
cumulative voting in the election of directors. For purposes of this
Article, "cumulative voting" refers to any process that allows a
shareholder to vote at an election of directors, in person or by proxy,
the number of shares owned by the shareholder for as many persons as
there are directors to be elected and for whose election the shareholder
-4-
has a right to vote, or to cumulate votes by giving one candidate as
many votes as the number of such directors multiplied by the number
of shares, or by distributing the shareholder's votes on the same
principle among any number of the candidates.
ARTICLE VIII
OPT-OUT PROVISION
Pursuant to M.C.L.A. <Section>450.1784(1)(b), the corporation
elects not to be governed by Chapter 7A of the Michigan Business
Corporation Act, M.C.L.A. <Section><Section>450.1775 ET. SEQ., or any
amended versions of that Chapter.
ARTICLE IX
CERTAIN BUSINESS COMBINATIONS
A. HIGHER VOTE REQUIREMENTS FOR CERTAIN BUSINESS COMBINATIONS.
In addition to any vote otherwise required by law or by these Articles of
Incorporation, a Business Combination shall require approval by an
affirmative vote of not less than 2/3 of the Voting Stock, other than
Voting Stock held by either (a) an Interested Shareholder who is, or whose
Affiliate or Associate is, a party to a Business Combination, or (b) an
Affiliate or Associate of the Interested Shareholder.
B. CONDITIONS EXEMPTING HIGHER VOTE REQUIREMENTS. The vote
requirements of Section A of this Article IX shall not
be applicable to a particular Business Combination if the conditions
specified in either one of the following paragraphs are met:
-5-
(1) APPROVAL BY CONTINUING DIRECTORS. The Business
Combination has been approved by a vote of a majority of the
Continuing Directors; or
(2) FAIR PRICE PROVISION. Payment to shareholders in the
Business Combination is exclusively in the form of cash, or cash and
notes at the individual shareholder's option, provided that the option
is available to all shareholders, and all of the following conditions
are met:
(a) COMMON STOCK. The amount of cash to be paid per
share to holders of common stock of the corporation must be at
least equal to the HIGHEST of the following amounts:
(i) The highest per share price, including any
brokerage commissions, transfer taxes, and soliciting
dealers' fees, paid by the Interested Shareholder for any
shares of common stock of the same class or series acquired
by the Interested Shareholder at any time prior to the
Announcement Date of the proposal of the Business
Combination, or in the transaction in which it became an
Interested Shareholder, whichever is higher.
(ii) The fair market value per share of common
stock of the same class or series as determined in good
faith by the Continuing Directors, which determination
may be based upon an appraisal by any investment banking
or similar firm, on the Announcement Date or on the
Determination Date, whichever is higher.
-6-
(b) NON-COMMON STOCK. The amount of the cash to be
paid per share in the Business Combination to holders of shares
of any class or series of outstanding stock other than common
stock shall be at least equal to the HIGHEST of the following
amounts, whether or not the Interested Shareholder has previously
acquired any shares of the particular class or series of stock:
(i) The highest per share price, including any
brokerage commissions, transfer taxes, and soliciting
dealers' fees, paid by the Interested Shareholder for any
shares of the class of stock acquired at any time prior to
the Announcement Date of the proposal of the Business
Combination, or in the transaction in which it became an
Interested Shareholder, whichever is higher.
(ii) The highest preferential amount per share to
which the holders of shares of the class of stock are
entitled in the event of any voluntary or involuntary
liquidation, dissolution, or winding up of the corporation.
(iii) The fair market value per share of the
class of stock as determined in good faith by the Continuing
Directors, which determination may be based upon an appraisal
by any investment banking or similar firm, on the
Announcement Date or on the Determination Date, whichever
is higher.
-7-
(c) OTHER CONDITIONS. Prior to the consummation of a
Business Combination by an Interested Shareholder, all of the
following conditions shall be met:
(i) Any full periodic dividends, whether or not
cumulative, on any outstanding preferred stock of the
corporation shall have been declared and paid at the regular
date therefor.
(ii) The annual rate of dividends paid on any
class or series of stock of the corporation that is not
preferred stock, except as necessary to reflect any
subdivision of the stock, shall not have been reduced, and
the annual rate of dividends shall have increased as
necessary to reflect any reclassification, including any
reverse stock split, recapitalization, reorganization, or
any similar transaction that has the effect of reducing the
number of outstanding shares of the stock.
(iii) The Interested Shareholder may not have
received the benefit, directly or indirectly, except
proportionately as a shareholder, of any loans, advances,
guarantees, pledges, or other financial assistance or any
tax credits or other tax advantages provided by the
corporation or any of its subsidiaries, whether in
anticipation of or in connection with the Business
Combination or otherwise.
-8-
(iv) The Interested Shareholder did not
become the Beneficial Owner of any additional shares of the
corporation except as part of the transaction that created
the Interested Shareholder status or as a result of
proportionate stock splits or stock dividends.
(d) PROXY STATEMENT. A proxy statement describing the
proposed Business Combination that complies with the disclosure
requirements of the Securities Exchange Act of 1934, 15 U.S.C.
<Section><Section>78(a) ET. SEQ., as amended, and which complies
with the disclosure requirements of the Michigan Blue Sky Laws,
M.C.L.A. <Section><Section>451.501 ET. SEQ., as amended, and the
rules and regulations promulgated thereunder (collectively the
"Acts"), must be sent by first class mail to all shareholders of
the corporation at least thirty (30) days prior to the
consummation of the Business Combination. The proxy statement
must be sent regardless of whether it is required by the Acts.
The proxy statement shall prominently display a recommendation of
the Continuing Directors on the advisability or inadvisability of
the Business Combination and a recommendation of any investment
banking or similar firm selected by a majority of the Continuing
Directors, as to the fairness of the Business Combination to the
Shareholders of the corporation.
-9-
C. DEFINITIONS.
(1) "Affiliate" or "Affiliated Person" means a Person who
directly, or indirectly through one or more intermediaries, controls,
is controlled by, or is under common control with a specified Person.
(2) "Announcement Date" means the first general public
announcement or the first communication generally to shareholders of
the corporation, whichever is earlier, of the proposal or intention to
make a proposal concerning a Business Combination.
(3) "Associate", when used to indicate a relationship with
any Person, means any one of the following:
(a) Any corporation, partnership, or other
organization, (except for the corporation or a subsidiary of the
corporation), in which the Person is (i) an officer, director, or
partner, of (ii) is, directly or indirectly, the Beneficial Owner
of ten percent (10%) or more of any class of Equity Securities.
(b) Any trust or other estate (i) in which the Person
has a beneficial interest of ten percent (10%) or more, or (ii)
as to which the Person serves as trustee or in a similar
fiduciary capacity.
(c) Any relative of the Person or the Person's spouse
who has the same residence as the Person or who is a director
or officer of the corporation or any of its Affiliates.
(4) "Beneficial Owner", when used with respect to any
Voting Stock, means a Person who:
-10-
(a) Individually or with any of its Affiliates or
Associates, beneficially owns Voting Stock, directly or
indirectly.
(b) Individually or with any of its Affiliates or
Associates has:
(i) The right to acquire Voting Stock whether the
right is exercisable immediately or only after the passage
of time, pursuant to any agreement, or upon the exercise of
conversion rights, exchange rights, warrants, options or
otherwise.
(ii) The right to vote Voting Stock pursuant to
any agreement.
(iii) Any agreement for the purpose of acquiring,
holding, voting, or disposing of Voting Stock with any other
person who beneficially owns, or whose Affiliates or
Associates beneficially own, directly or indirectly, the
Voting Stock.
(5) "Book Value" means the net amount of an asset or group
of assets shown in the accounting records which record the cost of the
asset less reductions from the cost of the asset, such as depreciation
and amortization, determined in accordance with generally accepted
accounting principles.
-11-
(6) "Business Combination" means any one of the following:
(a) Any merger on consolidation of the corporation, or
any subsidiary of the corporation, that alters the contract
rights of the Voting Stock as expressly set forth in these
Articles of Incorporation or changes or converts, in whole or in
part, the outstanding shares of the corporation with either:
(i) Any Interested Shareholder.
(ii) Any other corporation, whether or not itself
an Interested Shareholder, which is, or after the merger or
consolidation would be, an Affiliate of an Interested
Shareholder that was an Interested Shareholder prior to the
transaction.
(b) Any sale, lease, transfer, or other disposition,
except in the ordinary course of business, in one transaction or
a series of transactions in any twelve-month period, to any
Interested Shareholder or any Affiliate of any Interested
Shareholder (other than the corporation or any of its
subsidiaries) of any assets of the corporation or any of its
subsidiaries having an aggregate Book Value as of the end of the
corporation's most recently ended fiscal quarter of ten percent
(10%) or more on its Consolidated Net Worth measured at the time
the transaction or transactions are approved by the board of
directors of the corporation.
-12-
(c) The issuance or transfer by the corporation, or
any of its subsidiaries in one transaction or a series of
transactions, of any Equity Securities of the corporation or any
of its subsidiaries that have an aggregate market value of ten
percent (10%) or more of the total fair market value of the
outstanding shares of the corporation to any Interested
Shareholder or any affiliate of any Interested Shareholder (other
than the corporation or any of its subsidiaries) except pursuant
to the exercise of warrants or rights to purchase Equity
Securities offered pro rata to all holders of the corporation's
Voting Stock or any other method affording substantially
proportionate treatment to the holders of Voting Stock.
(d) The adoption of any plan or proposal for the
liquidation or dissolution of the corporation in which anything
other than cash will be received by an Interested Shareholder or
any Affiliate of any Interested Shareholder.
(e) Any reclassification of securities, including any
reverse stock split, or recapitalization of the corporation, or
any merger or consolidation of the corporation with any of its
subsidiaries that has the effect, directly or indirectly, in one
transaction or a series of transactions, of increasing by ten
percent (10%) or more of the total number of outstanding shares,
the proportionate amount of the outstanding
-13-
shares of any class of Equity Securities of the corporation or
any of its subsidiaries which is directly or indirectly owned by
any Interested Shareholder or any Affiliate of any Interested
Shareholder.
(7) "Common Stock" means any stock other than preferred or
preference stock.
(8) "Consolidated Net Worth" means the total assets of the
corporation less its total liabilities determined in accordance with
generally accepted accounting principles.
(9) "Continuing Director" means any member of the board of
directors of the corporation who is not an Affiliate or an Associate
of an Interested Shareholder and either (a) was a member of the board
of directors prior to the time that the Interested Shareholder became
an Interested Shareholder, or (b) is a successor to a Continuing
Director who is not an Affiliate or Associate of an Interested
Shareholder and is recommended to succeed a Continuing Director by a
majority of the Continuing Directors who are then members of the board
of directors.
(10) "Control", "controlling", "controlled by", or "under
common control with" means the possession, directly or indirectly, of
the power to direct or cause the direction of the management and
policies of a Person, whether through the ownership of voting shares,
by contract, or otherwise. The Beneficial Ownership of 10% or more of
the voting shares of a corporation shall create a presumption of
control.
-14-
(11) "Determination Date" means the date on which an
Interested Shareholder first became an Interested Shareholder.
(12) "Equity Security" or "Equity Securities" mean any one
of the following:
(a) Any stock or similar security, certificate of
interest, or participation in any profit sharing agreement,
voting trust certificate, or voting share.
(b) Any security convertible, with or without
consideration, into an equity security, or any warrant or other
security carrying any right to subscribe to or purchase an equity
security.
(c) Any put, call, straddle, or other option or
privilege of buying an equity security from, or selling an equity
security to, another without being bound to do so.
(13) "Interested Shareholder" means any Person (other than
the corporation or any of its subsidiaries) who is either:
(a) The Beneficial Owner, directly or indirectly, of
ten percent (10%) or more of the outstanding Voting Stock of the
corporation.
(b) An Affiliate of the corporation and at any time
within the two-year period immediately prior to the date in
question was the Beneficial Owner, directly or indirectly, of ten
percent (10%) or more of the then outstanding Voting Stock of the
corporation.
-15-
(c) For the purpose of determining whether a Person is
an Interested Shareholder pursuant to subdivision (a) or (b), the
number of shares of Voting Stock considered to be outstanding
shall include all Voting Stock owned by the Person.
(14) "Person" means any entity including, without
limitation, an individual, a corporation, a partnership, a trust, a
bank, a joint stock company, an unincorporated association or similar
organization.
(15) "Valuation Date" means:
(a) In a Business Combination voted upon by
shareholders, the day prior to the date of the shareholders vote
or the day which is twenty (20) calendar days prior to the
consummation of the Business Combination, whichever is later.
(b) In a Business Combination not voted upon by
shareholders, the date of the consummation of the Business
Combination.
(16) "Voting Stock" means all outstanding shares of common
and preferred stock of the corporation entitled to vote in an election
of directors.
ARTICLE X
AMENDMENTS
These Articles may be amended by the affirmative vote of a
majority of the shares entitled to vote at any regular or special meeting
of stockholders of the corporation if notice of
-16-
the proposed amendment is contained in the notice of the meeting, except
that the affirmative vote of not less than sixty-six and 2/3 percent (66-2/3%)
of the shares entitled to vote at any regular or special meeting of
stockholders of the corporation shall be necessary for any amendment to
Articles III, VI, VII, VIII, IX and this Article X.
ARTICLE XI
DURATION
The term of this corporation is perpetual.
ARTICLE XII
A director of the corporation shall not be personally liable to
the corporation or its shareholders for monetary damages for a breach of
the director's fiduciary duty, except for liability:
(a) For any breach of the director's duty of loyalty to the
corporation or its shareholders;
(b) For any acts or omissions not in good faith or that involve
intentional misconduct or knowing violation of law;
(c) For any violation of Section 551(1) of the Michigan Business
Corporation Act;
(d) For any transaction from which the director derived an
improper personal benefit; or
(e) For any acts or omissions occurring before March 1, 1987.
-17-
If the Michigan Business Corporation Act is amended after this
Article has been adopted by the shareholders to authorize corporate action
to further eliminate or limit the personal liability of directors, then the
liability of a director of the corporation shall be eliminated or limited
to the fullest extent permitted by the Michigan Business Corporation At as
amended.
Any repeal, modification or adoption of any provision in these
Articles of Incorporation inconsistent with this Article XII shall not
adversely affect any right or protection of a director of the corporation
existing at the time of such repeal, modification or adoption.
The undersigned Incorporator has signed these Articles of
Incorporation on February 12 , 1986.
/S/ WARREN SCHUT
INFORMATION NOTE:
Amendment to Articles of Incorporation enacted by vote of shareholders at
annual meeting on April 28, 1988 adding a new Article XII - Limited
Liability for Directors.
-18-
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