<PAGE>
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, 1998
[ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from _______________ to _______________
Commission File Number: 1-9202
CHOICEONE FINANCIAL SERVICES, 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 Registrant: (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 July 31, 1998, the Registrant had outstanding 1,077,466 shares of
Common Stock.
Transitional Small Business Disclosure Format (check one): Yes _____
No __X__
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.
<TABLE>
ChoiceOne Financial Services, Inc.
CONSOLIDATED BALANCE SHEETS
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 3,393,000 $ 3,769,000
Securities available for sale 20,838,000 19,942,000
Loans, net 131,672,000 126,209,000
Premises and equipment, net 3,753,000 3,663,000
Other assets 2,689,000 2,746,000
------------ ------------
Total assets $162,345,000 $156,329,000
============ ============
LIABILITIES
Deposits - noninterest-bearing $ 14,653,000 $ 13,464,000
Deposits - interest-bearing 98,008,000 94,028,000
Federal funds purchased and repurchase agreements 4,632,000 2,060,000
Federal Home Loan Bank advances 26,156,000 26,114,000
Secured loan borrowings 790,000 878,000
Other liabilities 2,012,000 4,248,000
------------ ------------
Total liabilities 146,251,000 140,792,000
SHAREHOLDERS' EQUITY
Preferred stock; shares authorized: 100,000; shares
outstanding: none 0 0
Common stock and paid-in capital, no par value;
shares authorized: 2,000,000; shares outstanding:
1,077,466 at June 30, 1998 and 537,015 at
December 31, 1997 12,444,000 12,375,000
Retained earnings 3,475,000 2,994,000
Unrealized gains and losses on securities 175,000 168,000
------------ ------------
2
<PAGE>
Total shareholders' equity 16,094,000 15,537,000
------------ ------------
Total liabilities and shareholders' equity $162,345,000 $156,329,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
<TABLE>
ChoiceOne Financial Services, Inc.
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- ----------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $3,133,000 $2,707,000 $6,194,000 $5,269,000
Securities
Taxable 195,000 210,000 385,000 427,000
Nontaxable 99,000 124,000 201,000 252,000
Other 13,000 1,000 16,000 1,000
---------- ---------- ---------- ----------
Total interest income 3,440,000 3,042,000 6,796,000 5,949,000
INTEREST EXPENSE
Deposits 1,203,000 1,024,000 2,376,000 1,971,000
Federal Home Loan Bank
advances 416,000 403,000 835,000 798,000
Other 55,000 97,000 108,000 178,000
---------- ---------- ---------- ----------
Total interest expense 1,674,000 1,524,000 3,319,000 2,947,000
---------- ---------- ---------- ----------
NET INTEREST INCOME 1,766,000 1,518,000 3,477,000 3,002,000
PROVISION FOR LOAN LOSSES 180,000 156,000 455,000 314,000
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,586,000 1,362,000 3,022,000 2,688,000
NONINTEREST INCOME
Customer service fees 131,000 104,000 251,000 208,000
Insurance commission income 228,000 206,000 447,000 431,000
Mortgage loan sales
and servicing 76,000 36,000 186,000 55,000
Other income 39,000 27,000 134,000 69,000
---------- ---------- ---------- ----------
Total noninterest income 474,000 373,000 1,018,000 763,000
4
<PAGE>
NONINTEREST EXPENSE
Salaries and benefits 732,000 483,000 1,494,000 1,106,000
Occupancy expense 221,000 200,000 443,000 386,000
Other expense 455,000 421,000 828,000 783,000
---------- ---------- ---------- ----------
Total noninterest expense 1,408,000 1,104,000 2,765,000 2,275,000
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAX 652,000 631,000 1,275,000 1,176,000
INCOME TAX EXPENSE 191,000 208,000 374,000 351,000
---------- ---------- ---------- ----------
NET INCOME $ 461,000 $ 423,000 $ 901,000 $ 825,000
========== ========== ========== ==========
BASIC EARNINGS PER SHARE AND
EARNINGS PER COMMON SHARE
ASSUMING DILUTION $ .43 $ .39 $ .84 $ .77
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
<TABLE>
ChoiceOne Financial Services, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- ----------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income $ 461,000 $ 423,000 $ 901,000 $ 825,000
Other comprehensive income,
net of tax
Change in unrealized gains
and losses on securities 28,000 85,000 7,000 (28,000)
---------- ---------- ---------- ----------
Comprehensive income $ 489,000 $ 508,000 $ 908,000 $ 797,000
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
<TABLE>
ChoiceOne Financial Services, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 901,000 $ 825,000
Reconciling items:
Net amortization on securities 72,000 39,000
Net gain on sales of loans (125,000) (6,000)
Loans originated for sale (9,700,000) (1,020,000)
Proceeds from loan sales 10,521,000 983,000
Provision for loan losses 455,000 314,000
Depreciation 192,000 164,000
Other non-cash credits (24,000) 0
Deferred income tax expense/(benefit) (36,000) 39,000
Changes in:
Interest receivable and other assets 65,000 (403,000)
Interest payable and other liabilities (2,236,000) (99,000)
----------- -----------
Net cash provided by operating activities 85,000 836,000
Cash flows from investing activities:
Securities available for sale:
Purchases (3,881,000) (569,000)
Principal payments 2,929,000 1,520,000
Net change in loans (7,456,000) (10,206,000)
Loans sold 1,510,000 1,390,000
Loans purchased (625,000) 0
Premises and equipment expenditures, net (282,000) (908,000)
----------- -----------
Net cash used in investing activities (7,805,000) (8,773,000)
7
<PAGE>
Cash flows from financing activities:
Net change in deposits 5,169,000 8,158,000
Change in federal funds purchased and repurchase
agreements 2,572,000 (2,881,000)
Proceeds from Federal Home Loan Bank advances 3,500,000 0
Payments on Federal Home Loan Bank advances (3,458,000) 0
Payments on secured loan borrowings (88,000) 1,672,000
Sale of common stock 80,000 0
Cash dividends and fractional shares from stock dividends (431,000) (384,000)
----------- -----------
Net cash provided by financing activities 7,344,000 6,565,000
----------- -----------
Net change in cash and cash equivalents 376,000 (1,372,000)
Beginning cash and cash equivalents 3,769,000 4,952,000
----------- -----------
Ending cash and cash equivalents $ 3,393,000 $ 3,580,000
=========== ===========
Cash paid for interest $ 3,317,000 $ 2,908,000
Cash paid for income taxes 470,000 300,000
Loans transferred to other real estate 0 50,000
</TABLE>
See accompanying notes to the consolidated financial statements.
8<PAGE>
<PAGE>
ChoiceOne Financial Services, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of
ChoiceOne Financial Services, Inc. (the "Registrant") and its direct
and indirect wholly owned subsidiaries, ChoiceOne Bank (the "Bank"),
ChoiceOne Insurance Agencies, Inc. (the "Insurance Agency") and
ChoiceOne Travel, Inc. (the "Travel Agency") after elimination of
significant intercompany transactions and accounts. The financial
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, 1998 and December 31, 1997, the
Consolidated Statements of Income for the three- and six-month periods
ended June 30, 1998 and June 30, 1997, and the Consolidated Statements
of Cash Flows for the six-month periods ended June 30, 1998 and June
30, 1997. Operating results for the six months ended June 30, 1998
are not necessarily indicative of the results that may be expected for
the year ending December 31, 1998.
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, 1997.
STOCK TRANSACTIONS, EARNINGS AND CASH DIVIDENDS PER SHARE
A 5% stock dividend was declared on February 11, 1998. The stock
dividend was paid on March 31, 1998 to shareholders of record on March
16, 1998. The Registrant also declared a two-for-one stock split on
February 11, 1998. The stock split was paid on May 22, 1998 to
shareholders of record on April 30, 1998. Approximately 1,882 shares
of common stock were sold by the Registrant to the Bank's 401(k)
9
<PAGE>
savings and retirement plan on March 16, 1998. A 6% stock dividend
was declared by the Registrant on April 16, 1997. The stock dividend
was paid on May 16, 1997 to shareholders of record on April 29, 1997.
Earnings per share are based on the weighted average number of shares
outstanding during the period. The weighted average number of shares
has been adjusted for the 6% stock dividend paid in May 1997, the 5%
stock dividend paid in March 1998, the sale of stock in March 1998,
and the two-for-one stock split paid in May 1998. The weighted
average number of shares outstanding was 1,077,466 for the second
quarter of 1998, 1,074,030 for the first six months of 1998, 1,074,030
for the second quarter of 1997, and 1,074,512 for the first six months
of 1997.
Cash dividends per share are based on the number of shares outstanding
at the time the dividend was paid and have been adjusted for the 6%
stock dividend paid in May 1997, the 5% stock dividend paid in March
1998, and the two-for-one stock split paid in May 1998. The number of
shares outstanding for purposes of computing cash dividends per share
was 1,077,983 for the first quarter of 1998, 1,077,466 for the second
quarter of 1998, 1,074,512 for the first quarter of 1997, and
1,074,030 for the second quarter of 1997.
COMPREHENSIVE INCOME
The Registrant implemented Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("Statement No. 130"), in
the first quarter of 1998. Statement No. 130 requires that
comprehensive income be reported for all accounting periods.
Comprehensive income includes net income and other comprehensive
income. Other comprehensive income includes the change in unrealized
gains and losses on securities available for sale, foreign currency
translation adjustments, and additional minimum pension liability
adjustments. The change in unrealized gains and losses on securities
available for sale is the only item of comprehensive income that the
Registrant has at this time.
10
<PAGE>
NOTE 2 - SECURITIES
The amortized cost and fair value of securities as of June 30, 1998
and December 31, 1997 were as follows:
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
JUNE 30, 1998
U.S. Treasuries and
U.S. Government agencies $ 2,755,000 $ 6,000 $ (3,000) $ 2,758,000
States and municipalities 8,721,000 275,000 (1,000) 8,995,000
Mortgage-backed securities 6,130,000 36,000 (50,000) 6,116,000
Other securities 2,968,000 1,000 0 2,969,000
----------- -------- -------- -----------
Total $20,574,000 $318,000 $(54,000) $20,838,000
=========== ======== ======== ===========
DECEMBER 31, 1997
U.S. Treasuries and
U.S. Government agencies $ 3,259,000 $ 7,000 $ (2,000) $ 3,264,000
States and municipalities 7,458,000 232,000 (4,000) 7,686,000
Mortgage-backed securities 6,005,000 32,000 (12,000) 6,025,000
Other securities 2,966,000 1,000 0 2,967,000
----------- -------- -------- -----------
Total $19,688,000 $272,000 $(18,000) $19,942,000
=========== ======== ======== ===========
</TABLE>
There were no securities classified as held to maturity as of June 30,
1998 or December 31, 1997.
There were no sales of securities for the six months ended June 30,
1998 and 1997.
For the six months ended June 30, 1998, the net unrealized holding
gain on securities available for sale increased by $10,000 resulting
in a net unrealized gain of $264,000 on securities available for sale
as of June 30, 1998, before any deferred tax effect.
11
<PAGE>
The fair values of securities pledged as collateral at June 30, 1998
and December 31, 1997 were as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
---------- ----------
<S> <C> <C>
Securities sold under agreements to repurchase $3,299,000 $2,259,000
Public deposits 504,000 505,000
---------- ----------
Total $3,803,000 $2,764,000
========== ==========
</TABLE>
NOTE 3 - LOANS
Loans at June 30, 1998 and December 31, 1997 were classified as
follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Commercial $ 48,820,000 $ 43,546,000
Agricultural 8,641,000 9,350,000
Real estate mortgage - construction 1,969,000 2,499,000
Real estate mortgage - residential 44,337,000 43,715,000
Consumer 29,659,000 28,666,000
------------ ------------
Total loans before allowance for loan losses 133,426,000 127,776,000
Less allowance for loan losses 1,754,000 1,567,000
------------ ------------
Loans, net $131,672,000 $126,209,000
============ ============
</TABLE>
Loans pledged for borrowings at June 30, 1998 and December 31, 1997
were as follows:
12
<PAGE>
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- -----------
<S> <C> <C>
Residential real estate mortgages pledged for
Federal Home Loan Bank advances $40,168,000 $39,505,000
Commercial loans pledged for secured loan borrowings 790,000 878,000
----------- -----------
Total $40,958,000 $40,383,000
=========== ===========
</TABLE>
Loans held for sale included $167,000 of residential real estate
mortgage loans at June 30, 1998. Loans held for sale were accounted
for at the lower of aggregate cost or market value.
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
An analysis of changes in the allowance for loan losses follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------
1998 1997
---------- ----------
<S> <C> <C>
Balance at beginning of period $1,567,000 $1,487,000
Provision charged to operating expense 455,000 314,000
Recoveries credited to the allowance 44,000 30,000
Loans charged-off (312,000) (181,000)
---------- ----------
Balance at end of period $1,754,000 $1,650,000
========== ==========
</TABLE>
Information regarding impaired loans as of June 30, 1998 and December
31, 1997 follows:
13
<PAGE>
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
---------- ------------
<S> <C> <C>
Loans with no allowance allocated $2,194,000 $780,000
Loans with allowance allocated 527,000 152,000
Amount of allowance for loan losses allocated 153,000 86,000
</TABLE>
Information regarding impaired loans for the six months ended June 30,
1998 and 1997 follows:
<TABLE>
<CAPTION>
1998 1997
---------- --------
<S> <C> <C>
Average balance during the period $2,280,000 $881,000
Interest income recognized thereon 137,000 15,000
Cash-basis interest income recognized 132,000 11,000
</TABLE>
NOTE 5 - CERTIFICATES OF DEPOSIT
As of June 30, 1998, certificates of deposit included $4,359,000
obtained from a national time deposit rate service. The weighted
average interest rate on these deposits was 5.98%. Approximately
$4,259,000 of the deposits had maturities of one year or less, while
the remainder had a maximum maturity of two years.
NOTE 6 - NONINTEREST EXPENSE
Noninterest expense for the six months ended June 30, 1998 and 1997
was as follows:
14
<PAGE>
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Supplies and postage $124,000 $117,000
Legal and professional 94,000 118,000
Computer processing 74,000 80,000
Advertising and marketing 65,000 46,000
State single business tax expense 64,000 40,000
Telephone 51,000 34,000
Training and seminars 27,000 49,000
Other 329,000 299,000
-------- --------
Total $828,000 $783,000
======== ========
</TABLE>
NOTE 7 - INCOME TAX EXPENSE
The components of income tax expense for the six months ended June 30,
1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Current income tax expense $410,000 $312,000
Deferred income tax expense (39,000) 53,000
-------- --------
Total expense attributable to operations 371,000 365,000
Deferred expense allocated to other comprehensive
income items:
Unrealized gains and losses on securities 3,000 (14,000)
-------- --------
Total income tax expense $374,000 $351,000
======== ========
</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.
15
<PAGE>
The components of deferred tax assets and liabilities at June 30, 1998
and December 31, 1997 were as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------- ------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $492,000 $456,000
Deferred compensation 55,000 60,000
Postretirement benefits obligation 52,000 50,000
Deferred loan fees 30,000 49,000
Other 79,000 65,000
-------- --------
Total deferred tax assets 708,000 680,000
Deferred tax liabilities:
Depreciation 215,000 185,000
Unrealized appreciation on securities available
for sale 90,000 43,000
Other 49,000 195,000
-------- --------
Total deferred tax liabilities 354,000 423,000
-------- --------
Net deferred tax asset $354,000 $257,000
======== ========
</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, 1998 or December 31,
1997.
NOTE 8 - COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF CREDIT
RISK
Noninterest-bearing deposits totaling approximately $2,440,000 were
held at NBD Bank, N.A. at June 30, 1998.
16
<PAGE>
As of June 30, 1998, the Registrant had outstanding commitments to
make loans totaling $21,550,000, the majority of which have variable
interest rates. The Registrant had available approximately $4,187,000
in unused lines of credit and $33,000 in letters of credit at June 30,
1998.
NOTE 9 - STOCK SPLIT
A stock split was paid on May 22, 1998 to shareholders of record as of
April 30, 1998. The stock split was declared by the Registrant's
Board of Directors on February 11, 1998. The stock split, to be
effected in the form of a share dividend, caused one additional share
of common stock to be issued for each share outstanding. The stock
split was conditioned upon and subject to approval by the Registrant's
shareholders at the April 30, 1998 annual meeting of a proposed
amendment to the Registrant's Restated Articles of Incorporation to
increase the number of authorized shares of common stock of the
Registrant from 1,000,000 shares to 2,000,000 shares. The amendment
was approved by a vote of the shareholders at the annual meeting.
17
<PAGE>
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 ChoiceOne Financial
Services, Inc. (the "Registrant") and its direct and indirect wholly
owned subsidiaries, ChoiceOne Bank (the "Bank"), ChoiceOne Insurance
Agencies, Inc. (the "Insurance Agency") and ChoiceOne Travel, Inc.
(the "Travel Agency"). This discussion should be read in conjunction
with the consolidated financial statements and related footnotes.
FORWARD-LOOKING STATEMENTS
This discussion and other sections of this 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 about the Registrant
itself. Words such as "anticipates," "believes," "estimates,"
"expects," "forecasts," "intends," "is likely," "plans," "predicts,"
"projects," and 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 ("Future 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 or forecasted in such
forward-looking statements. Future Factors include, but are not
limited to, 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
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; and changes in the national economy.
These are representative of the Future Factors that could cause a
difference between an ultimate actual outcome and a preceding forward-
looking statement. Furthermore, the Registrant undertakes no
obligation to update, amend, or clarify forward-looking statements,
whether as a result of new information, future events, or otherwise.
NET INCOME AND RETURN ON AVERAGE ASSETS AND SHAREHOLDERS' EQUITY
The Registrant's net income increased $38,000 or 9% in the second
quarter of 1998 compared to the same period in 1997 and has risen
$76,000 or 9% in the first six months of 1998 compared to the first
half of the prior year. The increase in net income was due to higher
18
<PAGE>
net interest income and noninterest income, the effect of which was
offset by growth in the provision for loan losses and noninterest
expense.
Comprehensive income is a new disclosure that appears in the
Consolidated Statements of Comprehensive Income. Net income is
adjusted by other comprehensive income to arrive at comprehensive
income. In the Registrant's case, other comprehensive income includes
only the change in unrealized gains and losses on securities. This
change was previously disclosed only in the Consolidated Statement of
Changes in Shareholders' Equity.
Approximately 75% of the increase in net interest income in 1998 was
caused by growth in average interest-earning assets. A larger spread
between interest rates earned on interest-earning assets and interest
rates paid on interest-bearing liabilities also contributed to growth
in net interest income. The change in noninterest income was
primarily caused by a significant increase in mortgage loan sales and
servicing income. Gains on sales of mortgages were higher in 1998 due
to a greater amount of mortgage refinancings occurring in the first
two quarters of 1998 than in the same periods in the prior year. The
increase in the provision for loan losses was due to a higher level of
loan chargeoffs in the first six months of 1998 than in the same
period in 1997. The change in noninterest expense was primarily due
to higher salaries and benefits in the first two quarters of 1998 than
in the same period in 1997. Approximately $170,000 of the salaries
and benefits increase was caused by a gain that was recognized in 1997
upon the curtailment of the Bank's pension plan which was offset by
the funding of 401(k) plan expense from operations. Noninterest
expense has also been affected in 1998 by higher commissions paid to
commission-based personnel and expenses related to the Travel Agency.
The return on average assets was 1.15% for the first six months of
1998, compared to 1.17% for the same period in 1997. The return on
average shareholders' equity was 11.48% for the first half of 1998,
compared to 11.32% for the comparable period of the prior year.
CASH AND STOCK DIVIDENDS
Cash dividends declared in the second quarter of 1998 were $215,000,
or $.20 per common share, which represents a $.01 per share or 5%
increase compared to the dividend paid in the same period of the prior
year. The cash dividends paid in the first six months of 1998 were
$421,000 or $.39 per share, which was $.04 per share or 11% greater
than the dividends paid in the same period in 1997. The cash dividend
payout percentage in the first six months of 1998 was 46.69%, compared
to 45.30% in the same period of 1997. The Registrant declared a 6%
19
<PAGE>
stock dividend on April 16, 1997, a 5% stock dividend on February 11,
1998 and a two-for-one stock split on February 11, 1998. The stock
dividends were paid on May 16, 1997 and March 31, 1998, respectively.
The two-for-one stock split was paid on May 22, 1998. The cash
dividend per share amounts for both 1998 and 1997 have been adjusted
for the effect of the stock dividends.
INTEREST INCOME AND EXPENSE
Tables 1 and 2 on the following pages provide information regarding
interest income and expense for the six-month periods ended June 30,
1998 and June 30, 1997. 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 1 - Average Balances and Tax Equivalent Interest Rates
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------------------
1998 1997
-------------------------------- -------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- ------- ------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets
Loans <F1> $127,456 $6,205 9.74% $112,269 $5,285 9.41%
Taxable securities <F2> 12,991 384 5.92 12,957 427 6.59
Nontaxable securities <F1><F2> 8,097 305 7.78 9,664 381 7.88
Other 668 17 5.09 88 1 2.27
-------- ------ -------- ------
Interest-earning assets 149,212 6,911 9.26 134,978 6,094 9.03
------ ------
Noninterest-earning assets 9,258 7,458
-------- --------
Total assets $158,470 $142,436
======== ========
20
<PAGE>
Liabilities and shareholders' equity
Interest-bearing transaction
accounts $ 23,098 386 3.34 $ 22,211 352 3.17
Savings deposits 8,128 74 1.82 8,996 82 1.82
Time deposits 65,654 1,915 5.83 53,296 1,537 5.77
Federal Home Loan Bank advances 26,425 835 6.32 25,246 798 6.32
Other 3,719 109 5.86 6,057 178 5.88
-------- ------ -------- ------
Interest-bearing liabilities 127,024 3,319 5.23 115,806 2,947 5.09
------ ---- ------ ----
Demand deposits 12,974 11,009
Other noninterest-bearing liabilities 2,640 896
Shareholders' equity 15,832 14,725
-------- --------
Total liabilities and
shareholders' equity $158,470 $142,436
======== ========
Net interest income (tax-equivalent
basis) - interest spread 3,592 4.03% 3,147 3.94%
==== ====
Tax equivalent adjustment <F1> (115) (145)
------ ------
Net interest income $3,477 $3,002
====== ======
Net interest income as a percentage
of earning assets (tax-equivalent
basis) 4.81% 4.66%
==== ====
<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 periods 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>
21
<PAGE>
Table 2 - Changes in Tax Equivalent Net Interest Income
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1998 OVER 1997
--------------
TOTAL VOLUME RATE
----- ------ ----
(Dollars in Thousands)
<S> <C> <C> <C>
Increase (decrease) in interest income <F1>
Loans <F2> $920 $732 $188
Taxable securities (43) 1 (44)
Nontaxable securities <F2> (76) (71) (5)
Other 16 13 3
---- ---- ----
Net change in tax-equivalent income 817 675 142
Increase (decrease) in interest expense <F1>
Interest-bearing transaction accounts 34 14 20
Savings deposits (8) (8) 0
Time deposits 378 361 17
Federal Home Loan Bank advances 37 37 0
Other (69) (68) (1)
---- ---- ----
Net change in interest expense 372 336 36
---- ---- ----
Net change in tax-equivalent
net interest income $445 $339 $106
==== ==== ====
<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>
22
<PAGE>
NET INTEREST INCOME
As shown in Tables 1 and 2, tax equivalent net interest income
increased $445,000 in the first six months of 1998 compared to the
same period of 1997. The majority of the increase resulted from
growth in the Registrant's loan portfolio. A smaller portion of the
increase in net interest income was due to a widening of the
Registrant's interest rate spread. Average loans increased
$15,187,000 in the first half of 1998 compared to the same period in
1997. This growth caused interest income from loans to be $732,000
higher in the first six months of 1998. The average balance of
nontaxable securities was $1,567,000 lower in the first six months of
1998 than in the same period in 1997. This was caused by sales of
nontaxable securities in the fourth quarter of 1997. The other interest-
earning asset categories experienced small differences between 1998
and 1997.
The average balance of time deposits experienced the most significant
change among the interest-bearing liability categories from 1997 to
1998. The average balance of time deposits increased $12,358,000 from
the first six months in 1997 to the same period in 1998.
Approximately $4,700,000 of the growth was caused by deposits obtained
from a national rate service. The Bank began using the national rate
service in the second quarter of 1997. The remainder of the time
deposit growth was obtained from customers within the Bank's local
market areas. The decrease in other interest-bearing liabilities was
due to a lower average balance of federal funds purchased in the first
six months of 1998 than in the same period in 1997.
Table 1 shows that the net interest income spread was 4.03% for the
first six months of 1998, compared to 3.94% for the same period of the
prior year. The increase in the net interest income spread was caused
by a 23-basis-point increase in the average rate earned on interest-
earning assets, while the average rate paid on interest-bearing
liabilities went up only 14 basis points. The increase in the average
rate earned on interest-earning assets was caused by a 33-basis-point
increase in the average rate earned on loans. Approximately 20 basis
points of the loan increase was caused by a $140,000 increase in loan
fees in the first half of 1998 compared to the same period in 1997.
The growth in loan fees was primarily caused by a higher level of
mortgage refinancings occurring in 1998 than in 1997. The level of
mortgage refinancings began to slow in the second quarter of 1998
compared to the first quarter of that year. The Registrant's
management believes that the level of mortgage refinancings will be
lower in the remainder of 1998, which may cause loan fees to have a
lesser impact in the remainder of 1998 than they did in the first half
of the year. As a result, management anticipates that the average
23
<PAGE>
rate earned on interest-bearing assets may decrease somewhat in the
remainder of 1998. The increase in the average rate paid on interest-
bearing liabilities was attributable to the higher average rates paid
on interest-bearing transaction accounts and time deposits. Both
account types were affected by the competitive interest rate
environment that existed in the Bank's market areas.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses increased $187,000 from December 31,
1997 to June 30, 1998. The allowance was 1.31% of total loans at June
30, 1998, compared to 1.23% at December 31, 1997. The allowance for
loan losses as a percentage of nonperforming loans was 173% as of June
30, 1998, compared to 130% as of the end of 1997. The provision for
loan losses was $24,000 greater in the second quarter of 1998 than in
the same period of 1997 and $141,000 greater in the first half of 1998
compared to the same period in 1997. The increase in the provision
for loan losses in the first six months of 1998 was due to the funding
for higher net chargeoffs experienced in 1998 than in the prior year.
Chargeoffs and recoveries for those loan categories with activity in
the six-month periods ended June 30, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------------- ---------------------------
CHARGEOFFS RECOVERIES CHARGEOFFS RECOVERIES
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Commercial $119,000 $ 1,000 $ 13,000 $ 1,000
Agricultural 0 0 7,000 0
Real estate mortgage -
residential 0 0 5,000 0
Consumer 193,000 43,000 156,000 29,000
-------- ------- -------- -------
$312,000 $44,000 $181,000 $30,000
======== ======= ======== =======
</TABLE>
The increase in commercial loan chargeoffs was due to a chargeoff of
one commercial loan. The increase in consumer loan chargeoffs
resulted from a combination of small chargeoffs. The amount of
chargeoffs that the Bank will experience in the remainder of 1998 will
be dependent on the extent to which business and consumer borrowers
are affected by the local economy and on many other economic factors.
24
<PAGE>
As growth in the loan portfolio occurs, management believes chargeoffs
may increase as a result of the higher total balance of loans. The
provision and allowance for loan losses will be reviewed by the Bank's
management and adjusted as believed necessary as chargeoffs, changes
in the level of nonperforming loans and loan growth occur in the
remainder of 1998.
NONINTEREST INCOME
Total noninterest income increased $101,000 in the second quarter of
1998 and has grown $255,000 in the first six months of 1998 compared
to the same period in 1997. Approximately $40,000 of the increase in
the second quarter and $131,000 of the increase in the first six
months of 1998 resulted from a higher level of mortgage loan sales and
servicing income. Gains on sales of mortgage loans increased
significantly in 1998 due to the high level of mortgage refinancing
that occurred. This was caused by relatively low long-term interest
rates in late 1997 and early 1998. The amount of mortgage
applications had started to decrease by March 1998 and the lower level
continued through the second quarter of 1998. Management anticipates
that the level of refinancings will be lower in the second half of
1998 than in the first half of the year and that resultant gains on
sales of mortgage loans will also decrease from the level experienced
in the first half of 1998. The increase in other noninterest income
from the second quarter and first six months of 1997 to the same
periods in 1998 was primarily due to commission income from the Travel
Agency.
NONINTEREST EXPENSE
Total noninterest expense increased $304,000 in the second quarter of
1998 compared to the same quarter in 1997 and has grown $490,000 in
the first six months of 1998 compared to the same period in 1997.
Approximately $249,000 of the increase in the second quarter and
$388,000 of the increase in the first six months of 1998 resulted from
higher salaries and benefits expense. Expenses related to the Bank's
pension plan and 401(k) savings plan were $170,000 lower in the first
half of 1997 than in 1998. This was caused by the recognition of a
$261,000 gain on the curtailment of the pension plan which was offset
by the funding of $91,000 of 401(k) plan expense from operations.
Pension and 401(k) plan expense has not been recorded in 1998 as the
Bank plans to use excess pension plan assets to fund the 1998 company
contribution to the 401(k) plan. Increased salaries and wages of
$192,000 in the first half of 1998 also contributed to the increase in
salaries and benefits expense. Travel Agency salaries and wages and
increases in commissions paid to mortgage originators comprised
$105,000 of the growth in salaries, wages and commissions. The
25
<PAGE>
increase in salaries and wages due to the Travel Agency is expected to
continue somewhat through the third quarter of 1998, since the Bank
did not purchase the Travel Agency until August 1, 1997. The increase
in commissions paid to mortgage originators may decrease in the second
half of 1998 as mortgage refinancing activity is expected to slow.
Approximately $57,000 of the increase in total noninterest expense in
the first half of 1998 was caused by higher occupancy expense. This
was due to the new building housing the Bank and Insurance Agency's
Cedar Springs office, which opened in the second quarter of 1997, and
the expanded building that contains the Grand Rapids office. A higher
level of expenses from these offices is expected to continue through
the remainder of 1998.
The Bank currently plans to open two new branch offices later in 1998.
Anticipated expenses related to these new offices would also cause
increases in noninterest expense.
SECURITIES
The balance of total securities decreased $626,000 in the second
quarter of 1998 and has increased $896,000 since the end of 1997.
Securities issued by states and municipalities has been the only
security category to experience significant growth in 1998. These
securities have been purchased because of their higher yield over
other security categories. The Bank used certain of its securities as
collateral for public funds and repurchase agreements in the first two
quarters of 1998 and plans to continue to do so in the remainder of
1998. The securities portfolio may also serve as a source of
liquidity for deposit needs and as collateral for additional advances
from the Federal Home Loan Bank.
LOANS
Total loans grew $7,268,000 in the second quarter of 1998 after
decreasing $1,618,000 in the first quarter. Commercial loans grew
$5,377,000 in the second quarter of 1998, in contrast to a decrease of
$103,000 in the first quarter of 1998. The Registrant's management
believes that the growth in the second quarter of 1998 was achieved by
its officer calling program and adjustments in its interest rates to
make them more competitive. Commercial loan growth in the first
quarter of 1998 was affected by the sale of more than $1,500,000 of
loans. The balance of residential real estate mortgage loans
increased $1,230,000 in the second quarter of 1998, compared to a
decline of $608,000 in the first quarter of that year. The change
between the two quarters reflects the greater impact that mortgage
refinancings had on the first quarter than the second quarter of 1998.
The majority of borrowers who refinanced their mortgages in the first
26
<PAGE>
quarter of 1998 obtained 15 to 30 year fixed rate mortgages. The Bank
did not retain this type of mortgage in its portfolio and instead sold
them into the secondary market. Since some of the mortgages that were
refinanced had previously been in the Bank's loan portfolio, the
refinancings of the mortgages and subsequent sales caused the decrease
that occurred in the mortgage portfolio. The lower level of
refinancings in the second quarter of 1998 caused the fixed rate
mortgage runoff to have a lesser impact than in the previous quarter.
In addition, applications for mortgage types that would be retained in
the Bank's portfolio comprised a higher percentage of mortgage
applications in the second quarter of 1998 than in the first quarter
of that year. The other loan categories experienced smaller
fluctuations in the first and second quarters of 1998.
Loan growth in the remainder of 1998 will continue to be affected by
interest rates and by competition within the Bank's market areas.
Management anticipates that interest rate competition for all types of
loans will continue to be very strong. The Bank's loan officers plan
to continue to periodically review the pricing structure for loans to
make sure that the Bank's rates are competitive. The continued use of
the officer calling program is planned for all loan areas. The Bank's
mortgage department management believes that the level of mortgage
refinancings will continue to decline from the 1998 first quarter
level. Mortgage department management expects its attention to be
more focused on new mortgages and plans to continue to call on
realtors and other mortgage professionals. In the consumer loan area,
management plans to use direct mail advertising and referrals from
other departments within the Bank to stimulate demand for direct
consumer loans. Special consumer loan promotions related to the
Bank's 100th Anniversary in August 1998 are planned. Management will
also investigate expansion of its base of contacts for indirect
consumer loans.
Information regarding impaired loans can be found in Note 4 to the
consolidated financial statements included in this report. In
addition to its review of the loan portfolio for impaired loans,
management also monitors the various loan categories 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, 1998 and December 31, 1997 were as follows:
27
<PAGE>
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
---------- ------------
<S> <C> <C>
Loans accounted for on a nonaccrual basis $ 604,000 $753,000
Loans, not included in nonaccrual loans, which are
contractually past due 90 days or more as to
interest or principal payments 325,000 195,000
Loans, not included in nonaccrual or loans past due
90 days or more, which are considered troubled
debt restructurings 87,000 27,000
---------- --------
Total $1,016,000 $975,000
========== ========
Nonperforming other real estate $ 0 $229,000
========== ========
</TABLE>
Management 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. The total balance
of these loans were $4,085,000 as of June 30, 1998, compared to
$1,915,000 as of December 31, 1997. The increase was caused by three
large commercial loans that were added to the list in the first
quarter of 1998. Approximately $208,000 of the allowance for loan
losses had been specifically allocated to these loans at June 30,
1998.
DEPOSITS AND OTHER FUNDING SOURCES
Total deposits grew $2,188,000 in the second quarter of 1998 after
experiencing an increase of $2,981,000 in the first quarter of 1998.
The growth in the second quarter of 1998 was due to almost $2,992,000
of growth in noninterest-bearing and interest-bearing demand deposit
accounts, in contrast to the first quarter of 1998 when these two
deposit types decreased $1,274,000. Certificates of deposit also
experienced a change between the first two quarters of 1998 as total
certificates declined $914,000 in the second quarter of 1998 after
increasing $4,154,000 in the prior quarter. The Registrant's
management believes that the demand deposit growth in the second
quarter of 1998 resulted in part from emphasis of development of
commercial checking relationships along with growth in new demand
deposit account types introduced in early 1998. Part of the reason
28
<PAGE>
for the decline in certificate of deposit growth was a reduction of
$2,279,000 in national market certificates from March 31, 1998 to June
30, 1998. This was caused by the maturation of a greater number of
certificates in May of 1998 that were not renewed. Growth in large
local market certificates of deposit was also lower in the second
quarter of 1998 than in the previous quarter.
The Bank's management plans to continue to emphasize growth in core
deposits (deposits obtained in its local market areas) in the
remainder of 1998. Management plans to use interest rate promotions
and new products to attempt to stimulate the growth. Management
anticipates it will use federal funds purchased, repurchase
agreements, national market certificates of deposit, and Federal Home
Loan Bank advances to supplement core deposit growth.
SHAREHOLDERS' EQUITY
Total shareholders' equity increased $273,000 in the second quarter of
1998 and has increased $557,000 since the end of 1997. Equity growth
in 1998 resulted from retained earnings and proceeds from the sale of
stock to the Bank's 401(k) and Employee Stock Ownership Plan. There
was also a small increase in the balance of unrealized gains and
losses on securities.
Total shareholders' equity as a percentage of assets was 9.91% as of
June 30, 1998, compared to 10.06% as of March 31, 1998 and 9.94% as of
December 31, 1997. The limited amount of change in this percentage in
1998 documents that shareholders' equity and assets have grown at
approximately the same rate. The Registrant's management plans to
decrease the equity to assets ratio to more effectively use
shareholders' equity. This can be accomplished through asset growth
or by capital reduction. At its July 1998 meeting, the Registrant's
Board of Directors authorized management to purchase up to 50,000
shares of the Registrant's common stock. The Registrant may use some
of the purchased shares to decrease its equity to asset ratio. The
Registrant also plans to use purchased shares for its employee benefit
plans and stock dividends.
Based on risk-based capital guidelines established by the Bank's
regulators, the Registrant's risk-based capital was categorized as
well capitalized at June 30, 1998.
CAPITAL RESOURCES
The Bank plans to open two new branches in the late third quarter or
early fourth quarter of 1998. The facilities for the two branches
will be leased. However, equipment and leasehold improvements will be
29
<PAGE>
needed for these branches. The Bank's management anticipates that the
cost of this equipment and improvements will range between $250,000
and $300,000. As was stated above, the Registrant may use some of its
capital resources to purchase its common stock. The Bank's management
is not currently aware of any other significant uses of capital
resources.
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 decreased $1,565,000 in the second quarter
of 1998 after increasing $1,189,000 in the first quarter of 1998. 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 upon the availability of deposit growth from both the local
and national markets, 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 $28,286,000 at the
one-year repricing point as of June 30, 1998. This placed the ratio
of rate-sensitive assets to rate-sensitive liabilities at such
repricing point at 69% as of June 30, 1998, compared to 77% at March
31, 1998 and 76% as of December 31, 1997. The decrease in the ratio
from March 31, 1998 to June 30, 1998 resulted from asset growth in the
1-to-5 year repricing category that was funded by shorter-term
liabilities. In July 1998, $4,000,000 of maturing Federal Home Loan
Bank advances were replaced by an equal amount in the 1-to-5 year
repricing category. If this had occurred prior to June 30, 1998, the
ratio as of June 30, 1998 would have been 72%.
The negative cumulative gap as of the dates indicated 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.
However, the Bank's management believes that these types of accounts
may not be as sensitive to changes in interest rates in the short term
as Table 3 indicates since management can control the timing or extent
of the change in rates on these deposits. For the remainder of 1998,
management will determine the rates it will pay on deposits based on
rates paid by competitors and the Bank's need for deposited funds.
30
<PAGE>
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.
Table 3 - Maturities and Repricing Schedule
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
---------------------------------------------------------------
0 - 3 3 - 12 1 - 5 OVER
MONTHS MONTHS YEARS 5 YEARS TOTAL
------ ------ ----- ------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Assets
Loans $ 37,973 $ 18,790 $ 66,456 $ 10,207 $133,426
Interest-bearing deposits
with banks 5 0 0 0 5
Taxable securities 3,188 2,109 6,341 354 11,992
Nontaxable securities 296 658 3,050 4,842 8,846
-------- -------- -------- -------- --------
Rate-sensitive assets 41,462 21,557 75,847 15,403 154,269
Liabilities
Interest-bearing transaction
accounts 23,608 0 0 0 23,608
Savings deposits 8,354 0 0 0 8,354
Time deposits 15,676 30,124 20,108 138 66,046
Federal funds purchased and
repurchase agreements 4,632 0 0 0 4,632
Federal Home Loan Bank
advances 4,395 4,291 16,441 1,029 26,156
Secured loan borrowings 33 192 565 0 790
-------- -------- -------- -------- --------
Rate-sensitive liabilities 56,698 34,607 37,114 1,167 129,586
-------- -------- -------- -------- --------
31
<PAGE>
Rate-sensitive assets less
rate-sensitive liabilities:
Asset (liability) gap
for the period $(15,236) $(13,050) $ 38,733 $ 14,236 $ 24,683
======== ======== ======== ======== ========
Cumulative asset
(liability) gap $(15,236) $(28,286) $ 10,447 $ 24,683
======== ======== ======== ========
Cumulative rate-
sensitive assets as a
percentage of
cumulative rate-
sensitive liabilities 73.13% 69.02% 108.13% 119.05%
======== ======== ======== ========
</TABLE>
32
<PAGE>
PART II. OTHER INFORMATION
Item 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
On April 30, 1998, the Registrant's shareholders approved an amendment
to the Registrant's Restated Articles of Incorporation increasing the
number of authorized shares of Common Stock, no par value per share
("Common Stock"), from 1 million to 2 million shares.
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 the shares of Common
Stock previously outstanding.
The newly authorized shares 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 Restated
Articles of Incorporation, and shareholders did not acquire any such
rights with respect to such additional shares under the amendment to
the Registrant's Restated 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, 1998, the Annual Meeting of Shareholders of the
Registrant was held. The following directors were elected by the
shareholders to serve for three-year terms to expire at the Annual
Meeting to be held in the year 2001:
<TABLE>
<CAPTION>
BROKER
VOTES FOR VOTES WITHHELD NON-VOTES
--------- -------------- ---------
<S> <C> <C> <C>
Frank G. Berris 408,652 2,281 0
Lawrence D. Bradford 407,652 2,281 0
Lewis G. Emmons 401,114 9,819 0
Stuart Goodfellow 409,587 1,346 0
</TABLE>
Directors Jae M. Maxfield, Jon E. Pike, and Linda R. Pitsch have terms
of office that continue until the 1999 Annual Meeting. The terms of
33
<PAGE>
directors William F. Cutler, Jr., L. Edmond Eary, Jr., M.D., and
Andrew W. Zamiara continue through the 2000 Annual Meeting, although
Dr. Eary subsequently retired from the Board on July 15, 1998.
At that meeting, the shareholders also approved and adopted an
amendment to the Restated Articles of Incorporation. The Restated
Articles of Incorporation were amended to increase the authorized
shares of the Registrant's common stock from 1,000,000 shares to
2,000,000 shares. A total of 405,978 shares were voted for the
proposal, 768 shares were voted against the proposal, 4,187 shares
abstained from voting and there were 0 broker non-votes.
Item 5. OTHER INFORMATION
At a meeting held on July 15, 1998, the Registrant's Board of
Directors authorized management, in its discretion, to purchase up to
50,000 shares of the Registrant's Common Stock. The Registrant
anticipates that these shares will be purchased in a systematic
program of open market or privately negotiated purchases. The
purchased shares will be reserved for later reissue in connection with
potential future stock dividends, employee benefit plans, and other
general corporate purposes.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
1. EXHIBITS. The following exhibits are filed or incorporated
by reference as part of this report:
EXHIBIT
NUMBER DOCUMENTS
------ ---------
3.1 Amended and Restated Articles of Incorporation of the
Registrant.
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. Here incorporated
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, 1998.
34
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the
Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CHOICEONE FINANCIAL SERVICES, INC.
Date August 13, 1998 /S/ JAE M. MAXFIELD
Jae M. Maxfield
President and Chief Executive Officer
Date August 13, 1998 /S/ THOMAS L. LAMPEN
Thomas L. Lampen
Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
35
<PAGE>
INDEX TO EXHIBITS
The following exhibits are filed or incorporated by reference as part
of this report:
EXHIBIT
NUMBER DOCUMENTS
------ ---------
3.1 Amended and Restated Articles of Incorporation of the
Registrant.
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. Here incorporated
by reference.
27 Financial Data Schedule.
<PAGE>
EXHIBIT 3.1
RESTATED ARTICLES OF INCORPORATION
OF
CHOICEONE FINANCIAL SERVICES, INC.
1. These Restated Articles of Incorporation are executed pursuant to
the provisions of Sections 641-643, Act 284, Public Acts of 1972, as
amended.
2. The corporation identification number (CID) assigned by the
Bureau is 323-667.
3. The present name of the corporation is:
CHOICEONE FINANCIAL SERVICES, INC.
4. The corporation's former name was 1ST COMMUNITY BANCORP, INC.
5. The date of filing the original Articles of Incorporation was
February 24, 1986.
6. The following Restated Articles of Incorporation supersede the
original Articles of Incorporation as amended and shall be the Articles of
Incorporation of the corporation:
ARTICLE I
NAME
The name of the corporation is:
CHOICEONE FINANCIAL SERVICES, 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.
<PAGE>
ARTICLE III
AUTHORIZED CAPITAL
The total authorized capital stock of the corporation is Two
Million One Hundred Thousand (2,100,000) shares of stock divided into two
classes, as follows:
A. Two Million (2,000,000) shares of common stock, which shall
be called "Common Stock."
B. One Hundred Thousand (100,000) shares of preferred stock, which
shall be called "Preferred Stock."
The following provisions shall apply to the authorized stock of
the corporation:
1. PROVISIONS APPLICABLE TO COMMON STOCK.
a. NO PREFERENCE. None of the shares of Common Stock
shall be entitled to any preferences, and each share of Common
Stock shall be equal to every other share of said Common Stock in
every respect.
b. DIVIDENDS. After payment or declaration of full
dividends on all shares having a priority over the Common Stock
as to dividends, and after making all required sinking or
retirement fund payments, if any, on all classes of Preferred
Stock and on any other stock of the corporation ranking as to
dividends or assets prior to the Common Stock, dividends on the
shares of Common Stock may be declared and paid, but only when
and as determined by the Board of Directors.
c. RIGHTS ON LIQUIDATION. On any liquidation, dissolution
or winding up of the affairs of the corporation, after there
shall have been paid to or set aside for the holders of all
shares having priority over the Common Stock the full
preferential amounts to which they are respectively entitled, the
holders of the Common Stock shall be entitled to receive pro rata
all the remaining assets of the corporation available for
distribution to shareholders. The Board of Directors may
distribute in kind to the holders of Common Stock such remaining
assets of the corporation or may sell, transfer or otherwise
dispose of all or any part of such remaining assets to any person
and may sell all or any part of the consideration so received and
distribute any balance thereof in kind to holders of Common
Stock. The merger or consolidation of the corporation into or
with any other corporation, or the merger or consolidation of any
other corporation into it, or any purchase or redemption of
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shares of stock of the corporation of any class, shall not be
deemed to be a dissolution, liquidation or winding up of the
corporation for the purposes of this paragraph.
d. VOTING. At all meetings of shareholders of the
corporation, the holders of the Common Stock shall be entitled to
one (1) vote for each share of Common Stock held by them
respectively.
2. PROVISIONS APPLICABLE TO PREFERRED STOCK.
a. PROVISIONS TO BE FIXED BY THE BOARD OF DIRECTORS.
The Board of Directors is expressly authorized at any time,
and from time to time, to provide for the issuance of shares of
Preferred Stock in one or more series, each with such voting
powers, full or limited, or without voting powers, and with such
designations, preferences and relative, participating,
conversion, optional or other rights, and such qualifications,
limitations or restrictions thereof, as shall be stated in the
resolution or resolutions providing for the issue thereof adopted
by the Board of Directors, and as are not stated in these
Restated Articles of Incorporation, or any amendments thereto,
including (without limiting the generality of the foregoing) the
following:
(1) The distinctive designation and number of shares
comprising such series, which number may (except where
otherwise provided by the Board of Directors in creating
such series) be increased or decreased (but not below the
number of shares then outstanding) from time to time by
action of the Board of Directors.
(2) The stated value of the shares of such
series.
(3) The dividend rate or rates on the shares of such
series and the relation which such dividends shall bear to
the dividends payable on any other class of capital stock or
on any other series of Preferred Stock, the terms and
conditions upon which and the periods in respect of which
dividends shall be payable, whether and upon what conditions
such dividends shall be cumulative and, if cumulative, the
date or dates from which dividends shall accumulate.
(4) Whether the shares of such series shall be
redeemable and, if redeemable, whether redeemable for cash,
property or rights, including securities of any other
corporation, and whether redeemable at the option of the
holder or the corporation or upon the happening of a
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specified event, the limitations and restrictions with
respect to such redemption, the time or times when, the
price or prices or rate or rates at which, the adjustments
with which and the manner in which such shares shall be
redeemable, including the manner of selecting shares of such
series for redemption if less than all shares are to be
redeemed.
(5) The rights to which the holders of shares of such
series shall be entitled, and the preferences, if any, over
any other series (or of any other series over such series),
upon the voluntary or involuntary liquidation, dissolution,
distribution or winding up of the corporation, which rights
may vary depending on whether such liquidation, dissolution,
distribution or winding up is voluntary or involuntary, and,
if voluntary, may vary at different dates.
(6) Whether the shares of such series shall be subject
to the operation of a purchase, retirement or sinking fund
and, if so, whether and upon what conditions such fund shall
be cumulative or noncumulative, the extent to which and the
manner in which such fund shall be applied to the purchase
or redemption of the shares of such series for retirement or
to other corporation purposes and the terms and provisions
relative to the operation thereof.
(7) Whether the shares of such series shall be
convertible into or exchangeable for shares of any other
class or of any other series of any class of capital stock
of the corporation or any other corporation, and, if so
convertible or exchangeable, the price or prices or the rate
or rates of conversion or exchange and the method, if any,
of adjusting the same, and any other terms and conditions of
such conversion or exchange.
(8) The voting powers, if any, of the shares of such
series, and whether and under what conditions the shares of
such series (alone or together with the shares of one or
more of other series having similar provisions) shall be
entitled to vote separately as a single class, for the
election of one or more additional directors of the
corporation in case of dividend arrearages or other
specified events, or upon other matters.
(9) Whether the issuance of any additional shares of
such series, or of any shares of any other series, shall be
subject to restrictions as to issuance, or as to the powers,
preferences or rights of any such other series.
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(10) Any other preferences, privileges and powers and
relative participating, optional or other special rights,
and qualifications, limitations or restrictions of such
series, as the Board of Directors may deem advisable and as
shall not be inconsistent with the provisions of these
Restated Articles of Incorporation.
b. PROVISIONS APPLICABLE TO ALL PREFERRED STOCK.
(1) All Preferred Stock shall rank equally and be
identical in all respects except as to the matters permitted
to be fixed by the Board of Directors, and all shares of any
one series thereof shall be identical in every particular
except as to the date, if any, from which dividends on such
shares shall accumulate.
(2) Shares of Preferred Stock redeemed, converted,
exchanged, purchased, retired or surrendered to the
corporation, or which have been issued and reacquired in any
manner, may, upon compliance with any applicable provisions
of the Michigan Business Corporation Act, be given the
status of authorized and unissued shares of Preferred Stock
and may be reissued by the Board of Directors as part of the
series of which they were originally a part or may be
reclassified into and reissued as part of a new series or as
a part of any other series, all subject to the protective
conditions or restrictions of any outstanding series of
Preferred Stock.
ARTICLE IV
REGISTERED OFFICE AND RESIDENT AGENT
The street address (which is the mailing address) of the current
registered office is 109 East Division, Sparta, Michigan 49345.
The name of the current resident agent is Jae M. Maxfield.
ARTICLE V
POWERS OF BOARD OF DIRECTORS
In furtherance and not in limitation of the powers conferred by
the Michigan Business Corporation Act, the Board of Directors is expressly
authorized:
A. To make, alter or repeal the Bylaws of the corporation.
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B. To authorize and cause to be executed mortgages and liens upon
the real and personal property of the corporation.
C. To set apart out of any of the funds of the corporation available
for dividends a reserve or reserves for any proper purpose and to abolish
any such reserve in the manner in which it was created.
D. By a majority of the whole Board, to designate one or more
committees, each committee to consist of one or more of the directors of
the corporation. The Board may designate one or more directors as
alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee. The Bylaws may
provide that in the absence or disqualification of a member of a committee,
the member or members thereof present at any meeting and not disqualified
from voting, whether or not he or they constitute a quorum, may unanimously
appoint another member of the Board of Directors to act at the meeting in
place of any such absent or disqualified member. Any such committee, to
the extent provided in the resolution of the Board of Directors, or in the
Bylaws of the corporation, shall have and may exercise all the powers and
authority of the Board of Directors in the management of the business and
affairs of the corporation, and may authorize the seal of the corporation
to be affixed to all papers which may require it; but no such committee
shall have the power to authorize amending these Restated Articles of
Incorporation, adopting an agreement of merger or consolidation,
recommending to the shareholders the sale, lease, exchange or other
disposition of all or substantially all of the corporation's property and
assets other than in the usual and regular course of its business,
recommending to the shareholders a dissolution of the corporation or a
revocation of a dissolution or amending the Bylaws of the corporation; and,
unless the resolution or Bylaws expressly so provide, no such committee
shall have the power or authority to declare a dividend or to authorize the
issuance of stock.
E. When and as authorized by the shareholders in accordance with the
Michigan Business Corporation Act, to sell, lease or exchange all or
substantially all of the property and assets of the corporation, including
its goodwill and its corporate franchises, upon such terms and conditions
and for such consideration, which may consist in whole or in part of money
or property including shares of stock in, and/or other securities of, any
other corporation or corporations, as the Board of Directors shall deem
expedient and in the best interests of the corporation.
F. To elect and determine the duties of the officers of the
corporation and to establish the rights, powers, duties, rules and
procedures that (1) govern the Board of Directors, including without
limitation the vote required for any action by the Board of Directors; and
(2) affect the directors' power to manage the affairs of the corporation.
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G. To create and issue, by way of distributions to shareholders, as
dividends or otherwise, rights or options entitling the holders thereof to
purchase from the corporation shares of any class or series of the
corporation's capital stock. Such rights or options shall be evidenced in
such manner as the Board shall approve and shall set forth the terms upon
which, the time within which and the price at which such shares may be
purchased from the corporation upon the exercise of any such right or
option. The terms and conditions of such rights or options may include,
without limitation, provisions which adjust the option price or number of
shares issuable under such rights or options in the event of an acquisition
of shares or a reorganization, merger, consolidation, sale of assets or
other occurrence involving the corporation, and restrictions or conditions
that preclude or limit the entitlement, exercise or transfer of such rights
or options by any person or persons who, after the date of creation or
issuance of such rights or options, acquires, obtains the right to acquire,
or offers to acquire directly or indirectly, beneficial ownership of a
specified number or percentage of the corporation's outstanding voting
shares or other shares of the corporation, or that invalidate or void such
rights or options held by any such person or persons.
H. No Bylaw shall be adopted by shareholders which shall impair or
impede the implementation of the foregoing.
ARTICLE VI
INDEMNIFICATION
The corporation shall indemnify directors and executive officers
of the corporation as of right to the fullest extent now or hereafter
permitted by law in connection with any actual or threatened civil,
criminal, administrative or investigative action, suit or proceeding
(whether brought by or in the name of the corporation, a subsidiary or
otherwise) arising out of their service to the corporation, a subsidiary or
to another organization at the request of the corporation or a subsidiary.
The corporation may indemnify persons who are not directors or executive
officers of the corporation to the extent authorized by Bylaw, resolution
of the Board of Directors or contractual agreement authorized by the Board
of Directors. The corporation may purchase and maintain insurance to
protect itself and any such director, officer or other person against any
liability asserted against the person and incurred by him or her in respect
of such service whether or not the corporation would have the power to
indemnify him or her against such liability by law or under the provisions
of this paragraph. The provisions of this paragraph shall apply to
actions, suits or proceedings, whether arising from acts or omissions
occurring before or after the adoption of this Article VI, and to
directors, officers and other persons who have ceased to render such
service, and shall inure to the benefit of the heirs, executors and
administrators of the directors, officers and other persons referred to in
this Article VI. -7-
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ARTICLE VII
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) nor
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 (3) classes, with the term
of office of one class expiring each year. At the annual meeting of
shareholders 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 shareholders in 1987, each class of
directors whose term shall then expire shall be elected to hold office for
a three (3) year term and until the election and qualification of their
respective successors.
B. NOMINATIONS OF DIRECTOR CANDIDATES.
1. Nominations of candidates for election as directors of the
corporation at any meeting of shareholders called for election of
directors (an "Election Meeting") may be made by the Board of
Directors or by any shareholder entitled to vote at such Election
Meeting.
2. Nominations made by the Board of Directors shall be made at
a meeting of the Board of Directors, or by written consent of
directors in lieu of a meeting, not less than thirty (30) days prior
to the date of the Election Meeting, and such nominations shall be
reflected in the minute books of the corporation as of the date made.
At the request of the Secretary of the corporation, each proposed
nominee shall provide the corporation with such information concerning
himself as is required under the rules of the Securities and Exchange
Commission to be included in the corporation's proxy statement
soliciting proxies for such person's election as a director.
3. Any shareholder who intends to make a nomination at an
Election Meeting shall deliver, not less than one hundred twenty (120)
days prior to the date of notice of the Election Meeting in the case
of an annual meeting, and not more than seven (7) days following the
date of notice of the meeting in the case of a special meeting, a
notice to the Secretary of the corporation setting forth: (a) the
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name, age, business address and residence address of each nominee
proposed in such notice; (b) the principal occupation or employment of
each such nominee; (c) the number of shares of capital stock of the
corporation which are beneficially owned by each such nominee; (d) a
statement that each such nominee is willing to be nominated and serve;
and (e) such other information concerning each such nominee as would
be required under the rules of the Securities and Exchange Commission
in a proxy statement soliciting proxies for the election of such
nominees.
4. If the chairman of the Election Meeting determines that a
nomination was not made in accordance with the foregoing procedures,
such nomination shall be void.
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.
D. 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 shareholders, or at a meeting of
shareholders 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 (1) or more directors by the provisions of these
Restated Articles of Incorporation the provisions of this Section shall
apply only to the vote of the holders of that class of outstanding shares.
Except as may be provided otherwise by law, cause for removal
shall be construed to exist only if: (1) the director whose removal is
proposed has been convicted of a felony by a court of competent
jurisdiction and such conviction is no longer subject to direct appeal; (2)
such director has been adjudicated by a court of competent jurisdiction to
be liable for negligence or misconduct in the performance of such person's
duty to the corporation in a matter of substantial importance to the
corporation and such adjudication is no longer subject to a direct appeal;
(3) such director has become mentally incompetent, whether or not so
adjudicated, which mental incompetency directly affects such person's
ability as a director of the corporation; or (4) the director's actions or
failure to act have been in derogation of the director's duties, as
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provided in the Bylaws of the corporation or otherwise provided by law.
Any proposal for removal pursuant to (3) or (4) of this paragraph which is
initiated by the Board of Directors for submission to the shareholders
shall require the affirmative vote of at least sixty-six and 2/3 percent
(66-2/3%) of the total number of directors then in office, exclusive of the
director who is the subject of the removal action and who shall not be
entitled to vote thereon.
ARTICLE VIII
OPT-OUT PROVISION
Pursuant to Section 784(1)(b) of the Michigan Business
Corporation Act, the corporation elects not to be governed by Chapter 7A
of the Michigan Business Corporation Act, 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 Restated
Articles of Incorporation, a Business Combination shall require approval by
an affirmative vote of not less than sixty-six and 2/3 percent (66-2/3%) of
the Voting Stock, other than Voting Stock held by either (1) an Interested
Shareholder who is, or whose Affiliate or Associate is, a party to a
Business Combination, or (2) 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:
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:
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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:
(1) 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.
(2) 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.
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:
(1) 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.
(2) 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.
(3) 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.
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c. OTHER CONDITIONS. Prior to the consummation of a
Business Combination by an Interested Shareholder, all of the
following conditions shall be met:
(1) 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.
(2) 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.
(3) 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.
(4) 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, as amended,
and which complies with the disclosure requirements of the
Michigan Blue Sky Laws, 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.
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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 (1) an officer, director or partner, or
(2) directly or indirectly, the Beneficial Owner of ten
percent (10%) or more of any class of Equity Securities.
b. Any trust or other estate (1) in which the Person has a
beneficial interest of ten percent (10%) or more, or (2) 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:
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:
(1) 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.
(2) The right to vote Voting Stock pursuant to any
agreement.
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(3) 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.
6. "Business Combination" means any one of the following:
a. Any merger or 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 Restated
Articles of Incorporation or changes or converts, in whole or in
part, the outstanding shares of the corporation with either:
(1) Any Interested Shareholder.
(2) 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 (12) 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 of its Consolidated Net Worth measured at the time
the transaction or transactions are approved by the Board of
Directors of the corporation.
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
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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 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.
11. "Determination Date" means the date on which an Interested
Shareholder first became an Interested Shareholder.
-15-
<PAGE>
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 (2) 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.
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-
<PAGE>
16. "Voting Stock" means all outstanding shares of Common Stock
and Preferred Stock of the corporation entitled to vote in an election
of directors.
ARTICLE X
EVALUATION OF OFFERS
The Board of Directors shall not initiate, approve, adopt or
recommend any offer of any party other than the corporation to make a
tender or exchange offer for any equity security of the corporation, or to
engage in any Business Combination as defined in Article IX, unless and
until it shall have first evaluated the proposed offer and determined in
its judgment that the proposed offer would be in compliance with all
applicable laws. In evaluating a proposed offer to determine whether it
would be in compliance with law, the Board of Directors shall consider all
aspects of the proposed offer, including the manner in which the offer is
proposed to be made, the documents proposed for the communication of the
offer and the effects and consequences of the offer if consummated, in the
light of the laws of the United States of America and affected states and
foreign countries. In connection with this evaluation, the Board may seek
and rely upon the opinion of independent legal counsel and it may test the
legality of the proposed offer in any state, federal or foreign court or
before any state, federal or foreign administrative agency which may have
jurisdiction. If the Board of Directors determines in its judgment that a
proposed offer would be in compliance with all applicable laws, the Board
of Directors shall then evaluate the proposed offer and determine whether
the proposed offer is in the best interests of the corporation and its
shareholders. The Board of Directors shall not initiate, approve, adopt or
recommend any such offer which in its judgment would not be in the best
interests of the corporation and its shareholders. In evaluating a
proposed offer to determine whether it would be in the best interests of
the corporation and its shareholders, the Board of Directors shall consider
all factors which it deems relevant including, without limitation:
A. The fairness of the consideration to be received by the
corporation and its shareholders under the proposed offer, taking into
account the trading price of the corporation's stock immediately prior to
the announcement of the proposed offer, the historical trading prices of
the corporation's stock, the price that might be achieved in a negotiated
sale of the corporation as a whole, premiums over the trading price of
their securities which have been proposed or offered to other companies in
the past in connection with similar offers and the future prospects of the
corporation;
B. The possible social and economic impact of the proposed offer and
its consummation on the corporation and its employees, customers and
suppliers;
-17-
<PAGE>
C. The possible social and economic impact of the proposed offer and
its consummation on the communities in which the corporation and its
subsidiaries operate or are located;
D. The business and financial conditions and earnings prospects of
the offering party, including, without limitation, debt service and other
existing or likely financial obligations of the offering party;
E. The competence, experience and integrity of the offering party
and its management; and
F. The intentions of the offering party regarding the use of the
assets of the corporation to finance the transaction.
ARTICLE XI
LIABILITY OF DIRECTORS
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 a 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.
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 Act as
amended.
Any repeal, modification or adoption of any provision in these
Restated Articles of Incorporation inconsistent with this Article XI shall
not adversely affect any right or protection of a director of the
corporation existing at the time of such repeal, modification or adoption.
-18-
<PAGE>
ARTICLE XII
DURATION
The term of this corporation is perpetual.
ARTICLE XIII
AMENDMENTS
These Restated Articles of Incorporation may be amended by the
affirmative vote of a majority of the shares entitled to vote at any regular
or special meeting of shareholders of the corporation if notice of 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 shareholders
of the corporation shall be necessary for any amendment to Articles VII, VIII,
IX, X and this Article XIII.
I, the President and Chief Executive Officer of ChoiceOne
Financial Services, Inc., sign my name this 27th day of May, 1997.
CHOICEONE FINANCIAL SERVICES, INC.
/s/ Jae M. Maxfield
Jae M. Maxfield
President and Chief Executive Officer
-19-
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT OF CHOICEONE
FINANCIAL SERVICES, INC. INCLUDED IN THE JUNE 30, 1998, FORM 10-QSB FILING
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
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<INT-BEARING-DEPOSITS> 5
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