<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(X) ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
( ) 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. (FORMERLY 1ST COMMUNITY BANCORP, INC.)
(Name of Small Business Issuer in its Charter)
MICHIGAN 38-2659066
(State or Other Jurisdiction of (I.R.S. Employer Identifica-
Incorporation or Organization) tion No.)
109 EAST DIVISION STREET, SPARTA, MICHIGAN 49345
(Address of Principal Executive Offices) (Zip Code)
(616) 887-7366
(Issuer's Telephone Number, Including Area Code)
Securities Registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $10 PAR VALUE PER SHARE
(Title of Class)
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 _____
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. ( )
State issuer's revenues for its most recent fiscal year. The issuer's
revenues for the year ended December 31, 1997 were $14,336,000.
<PAGE>
As of February 28, 1998, the aggregate market value of the common
stock held by non-affiliates of the issuer was approximately $22,120,000.
This amount is based on the average of the bid and asked price of $43.25
per share for the registrant's stock as of such date.
As of February 28, 1998, the issuer had outstanding 513,325 shares of
Common Stock.
Transitional Small Business Disclosure Format (check one) Yes _____
No __X__
DOCUMENTS INCORPORATED BY REFERENCE
Part I, Item 1, and Part II, Items 5, 6 and 7, incorporate by reference
portions of the Registrant's Annual Report to Shareholders for the year
ended December 31, 1997.
Part III, Items 9, 10, 11 and 12, incorporate by reference portions of the
Registrant's Definitive Proxy Statement for the Registrant's Annual Meeting
of Shareholders to be held April 30, 1998.
2
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
ChoiceOne Financial Services, Inc. (the "Registrant") is a one-bank holding
company registered under the Bank Holding Company Act of 1956, as amended.
The Registrant was incorporated on February 24, 1986. The Registrant was
formed to create a bank holding company for the purpose of acquiring all of
the capital stock of ChoiceOne Bank (formerly Sparta State Bank), which
became a wholly owned subsidiary of the Registrant on April 6, 1987. The
Registrant's only significant asset as of December 31, 1997, was ChoiceOne
Bank (the "Bank"). Effective January 1, 1996, the Bank acquired all of
the outstanding common stock of ChoiceOne Insurance Agencies, Inc. (formerly
Bradford Insurance Centre, Ltd.), an independent insurance agency
headquartered in Sparta, Michigan. Effective August 1, 1997, the Bank
acquired all of the outstanding common stock of Alpine Travel, Inc., a
travel agency with one location in Walker, Michigan.
The Registrant's business is primarily concentrated in a single industry
segment - commercial banking. The Bank is a full-service banking
institution that offers a variety of deposit, payment, credit and other
financial services to all types of customers. These services include time,
savings, and demand deposits, safe deposit services, and automated
transaction machine services. Loans, both commercial and consumer, are
extended primarily on a secured basis to corporations, partnerships and
individuals. Commercial lending covers such categories as business,
industry, agricultural, construction, inventory and real estate. The
Bank's consumer loan and residential mortgage loan departments make direct
loans to consumers and purchasers of residential property. No material
part of the business of the Registrant or the Bank is dependent upon a
single customer or very few customers, the loss of which would have a
materially adverse effect on the Registrant.
The Bank's primary market area consists of portions of Kent, Muskegon,
Newaygo and Ottawa counties in Michigan in the communities where the Bank's
offices are located and the areas immediately surrounding these
communities. Currently the Bank serves these markets through four full-
service offices and one off-premises automated transaction machine. The
Registrant and the Bank have no foreign assets or income.
The principal source of revenue for the Registrant and the Bank is interest
and fees on loans. On a consolidated basis, interest and fees on loans
accounted for 78% of total revenues in 1997, 76% in 1996 and 75% in 1995.
Interest on investment securities accounted for 9% of total revenues in
1997, 11% in 1996 and 18% in 1995.
3
<PAGE>
COMPETITION
The business of banking is highly competitive. The Bank's competition
primarily comes from other financial institutions located within Sparta,
Michigan, and the Kent County, Michigan area. There are a number of larger
commercial banks in the Bank's primary market area.
The Bank also competes with a large number of other financial institutions,
such as savings and loan associations, insurance companies, consumer
finance companies, credit unions and commercial finance and leasing
companies for deposits, loans and service business. Money market mutual
funds, brokerage houses and nonfinancial institutions provide many of the
financial services offered by the Bank. Many of these competitors have
substantially greater resources than the Bank. The principal methods of
competition for financial services are price (the rates of interest charged
for loans, the rates of interest paid for deposits, and the fees charged
for services) and the convenience and quality of services rendered to
customers.
SUPERVISION AND REGULATION
Banks and bank holding companies are extensively regulated. The Registrant
is subject to supervision and regulation by the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board"). The Registrant's
activities are generally limited to owning or controlling banks and
engaging in such other activities as the Federal Reserve Board may
determine to be closely related to banking. Prior approval of the Federal
Reserve Board, and in some cases various other government agencies, is
required for the Registrant to acquire control of any additional banks or
other operating subsidiaries.
The Bank is chartered under state law and is subject to regulation by the
Financial Institutions Bureau of the Michigan Department of Consumer and
Industry Services. State banking laws place restrictions on various aspects
of banking, including permitted activities, loan interest rates, branching,
payment of dividends and capital and surplus requirements. The Bank is a
member of the Federal Reserve System and is also subject to regulation by the
Federal Reserve Board. The Bank's deposits are insured by the Federal Deposit
Insurance Corporation (the "FDIC") to the extent provided by law. The Bank
became a member of the Federal Home Loan Bank system in March 1993. This
provides certain advantages to the Bank, including favorable borrowing rates
for certain funds.
The Registrant is a legal entity separate and distinct from the Bank.
There are legal limitations on the extent to which the Bank can lend or
otherwise supply funds to the Registrant. In addition, payment of
dividends to the Registrant by the Bank is subject to various state and
federal regulatory limitations.
4
<PAGE>
Under Federal Reserve Board policy, the Registrant is expected to act as a
source of financial strength to the Bank and to commit resources to support
it. Under federal law, the FDIC also has authority to impose special
assessments on insured depository institutions to repay FDIC borrowings
from the United States Treasury or other sources and to establish
semiannual assessment rates on Bank Insurance Fund ("BIF") member banks to
maintain the BIF at the designated reserve ratio required by law.
Banks are subject to a number of federal and state laws and regulations
which have a material impact on their business. These include, among
others, state usury laws, state laws relating to fiduciaries, the Truth in
Lending Act, the Truth in Savings Act, the Equal Credit Opportunity Act,
the Fair Credit Reporting Act, the Expedited Funds Availability Act, the
Community Reinvestment Act, electronic funds transfer laws, redlining laws,
antitrust laws, environmental laws and privacy laws. The instruments of
monetary policy of authorities such as the Federal Reserve Board may
influence the growth and distribution of bank loans, investments and
deposits, and may also affect interest rates on loans and deposits. These
policies may have a significant effect on the operating results of banks.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Riegle-Neal Act") substantially changed the geographic constraints
applicable to the banking industry. The Riegle-Neal Act allows bank holding
companies to acquire banks located in any state in the United States without
regard to geographic restrictions or reciprocity requirements imposed by state
law. The Riegle-Neal Act also allows banks to establish interstate branch
networks through acquisitions of other banks. The establishment of DE NOVO
interstate branches or the acquisition of individual branches of a bank in
another state (rather than the acquisition of an out-of-state bank in its
entirety) is allowed by the Riegle-Neal Act only if specifically authorized
by state law. The legislation allowed individual states to "opt-out" of
certain provisions of the Riegle-Neal Act by enacting appropriate
legislation prior to June 1, 1997.
Michigan permits both U.S. and non-U.S. banks to establish branch offices in
Michigan. The Michigan Banking Code permits, in appropriate circumstances and
with the approval of the Commissioner of the Financial Institutions Bureau,
(1) acquisition of Michigan banks by FDIC-insured banks, savings banks or
savings and loan associations located in other states, (2) sale by a Michigan
bank of branches to an FDIC-insured bank, savings bank or savings and loan
association located in a state in which a Michigan bank could purchase branches
of the purchasing entity, (3)consolidation of Michigan banks and FDIC-insured
banks, savings banks or savings and loan associations located in other states
having laws permitting such consolidation, (4) establishment of branches in
Michigan by FDIC-insured banks located in other states, the District of Columbia
or U.S. territories or protectorates having laws permitting a Michigan bank to
establish a branch in such jurisdiction, and (5) establishment by foreign
banks of branches located in Michigan.
5
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EFFECTS OF COMPLIANCE WITH ENVIRONMENTAL REGULATIONS
The nature of the business of the Bank is such that it holds title, on a
temporary or permanent basis, to a number of parcels of real property.
These include properties owned for branch offices and other business
purposes as well as properties taken in or in lieu of foreclosure to
satisfy loans in default. Under current state and federal laws, present
and past owners of real property may be exposed to liability for the cost
of clean up of contamination on or originating from those properties, even
if they are wholly innocent of the actions that caused the contamination.
These liabilities can be material and can exceed the value of the
contaminated property. Management is not presently aware of any instances
where compliance with these provisions will have a material effect on the
capital expenditures, earnings or competitive position of the Registrant or
the Bank, or where compliance with these provisions will adversely affect a
borrower's ability to comply with the terms of loan contracts.
EMPLOYEES
As of February 28, 1998, the Bank employed fifty-three persons on a full-
time basis and fifteen persons on a part-time basis. The Insurance Agency
employed fourteen persons on a full-time basis and two persons on a part-
time basis. The Travel Agency employed two persons on a full-time basis
and four persons on a part-time basis. The Registrant's only employees as
of the same date were its four executive officers. The Registrant, Bank,
Insurance Agency, and Travel Agency believe their relations with their
employees are good.
STATISTICAL INFORMATION
Additional statistical information describing the business of the
Registrant appears on the following pages and in Management's Discussion
and Analysis or Plan of Operation incorporated by reference in Item 6 of
this report and in the Consolidated Financial Statements and the notes
thereto incorporated by reference in Item 7 of this report.
The following statistical information should be read in conjunction with
Management's Discussion and Analysis or Plan of Operation and the
Consolidated Financial Statements and notes thereto incorporated by
reference in this report.
6
<PAGE>
INVESTMENT PORTFOLIO
Presented below is the amortized cost of investment securities as of
December 31, 1997 and 1996, a schedule of maturities of investment
securities as of December 31, 1997, and the weighted average yield of
investment securities as of December 31, 1997.
<TABLE>
<CAPTION>
AMORTIZED
1 YEAR 1 YEAR- 5 YEARS- AFTER TOTAL COST AT
OR LESS 5 YEARS 10 YEARS 10 YEARS <F1> DEC. 31,
------- ------- ------- ------- ----- 1996
MATURITY DISTRIBUTION AS OF DECEMBER 31, 1997 ---------
---------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
U.S. Treasuries and U.S.
Government agencies <F2> $2,250 $ 6,501 $ 513 $ -- $ 9,264 $ 9,700
Obligations of states and
political subdivisions 530 4,433 510 1,985 7,458 10,276
Other securities <F3> -- 261 -- -- 2,966 2,859
------ ------- ------ ------ ------- -------
Totals $2,780 $11,195 $1,023 $1,985 $19,688 $22,835
====== ======= ====== ====== ======= =======
WEIGHTED AVERAGE INTEREST RATES AS OF DECEMBER 31, 1997
-------------------------------------------------------
SECURITIES AVAILABLE FOR SALE
U.S. Treasuries and U.S.
Government agencies 6.17% 6.40% 6.56% -- % 6.35%
Obligations of states and
political subdivisions <F4> 8.50 7.85 8.28 8.15 8.00
Other securities -- 6.10 -- -- 7.40
- ----------------
<FN>
<F1> This column represents the total of the maturity distribution and the
amortized cost at December 31, 1997.
7
<PAGE>
<F2> Maturities of mortgage-backed securities are classified according to
their estimated average maturity. Approximately two-thirds of mortgage-
backed securities were classified in the 1 year to 5 years category.
<F3> The total column includes securities which have no stated maturity.
<F4> The interest rate is computed on a fully tax-equivalent basis at an
incremental tax rate of 34%.
</FN>
</TABLE>
The Bank had no holdings of investment securities from any one issuer at
December 31, 1997, which were greater than 10% of the Registrant's
shareholders' equity, exclusive of U.S. Treasury securities and U.S.
Government agency securities.
LOAN PORTFOLIO
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
The following schedule presents the maturities of loans (excluding real
estate mortgage loans and installment loans). Also presented are loans
over one year in maturity, classified according to the sensitivity to
changes in interest rates.
<TABLE>
<CAPTION>
1 YEAR 1 YEAR- AFTER
OR LESS 5 YEARS 5 YEARS TOTAL
------- ------- ------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
LOAN MATURITIES AS OF DECEMBER 31, 1997 <F1>
Commercial $15,366 $21,347 $6,833 $43,546
Agricultural 4,088 4,205 1,057 9,350
Real estate - construction 2,499 -- -- 2,499
------- ------- ------ -------
Totals $21,953 $25,552 $7,890 $55,395
======= ======= ====== =======
</TABLE>
8
<PAGE>
<TABLE>
LOAN SENSITIVITY TO CHANGES IN INTEREST RATES AS OF DECEMBER 31, 1997
<CAPTION>
<S> <C> <C> <C>
Loans which have predetermined interest rates $17,549 $6,268 $23,817
Loans which have floating or adjustable interest rates 8,003 1,622 9,625
------- ------ -------
Totals $25,552 $7,890 $33,442
======= ====== =======
<FN>
<F1> Loan maturities are classified according to the contractual maturity
date or the anticipated amortization period, whichever is appropriate. The
anticipated amortization period is used in the case of loans where a
balloon payment is due before the end of the loan's normal amortization
period. At the time the balloon payment is due, the loan can either be
rewritten or payment in full can be requested. The decision as to whether
the loan will be rewritten or a payment in full will be requested will be
based upon the loan's payment history, the borrower's current financial
condition, and other relevant factors.
</FN>
</TABLE>
RISK ELEMENTS
The following loans were classified as nonperforming as of December 31:
<TABLE>
<CAPTION>
1997 1996
-------- ----------
<S> <C> <C>
Loans accounted for on a non-accrual basis $753,000 $ 288,000
Accruing loans which are contractually past due 90
days or more as to principal or interest payments 195,000 686,000
Loans not included above which are "troubled debt
restructurings" 27,000 26,000
-------- ----------
Totals $975,000 $1,000,000
======== ==========
</TABLE>
Interest on the above loans which would have been earned had the loans
been in an accrual or performing status was approximately $101,000 and
$128,000 for 1997 and 1996, respectively. The interest that was
actually recorded when received was approximately $65,000 and $107,000 for
1997 and 1996, respectively. In addition to the above loans, a holding of
other real estate of $229,000 was also considered to be nonperforming as of
December 31, 1997. There was no nonperforming other real estate as of
December 31, 1996.
9
<PAGE>
A loan is placed on nonaccrual status at the point in time at which the
collectibility of principal or interest is considered doubtful.
POTENTIAL PROBLEM LOANS
At December 31, 1997, there were $1,915,000 of loans not disclosed above
where some concern existed as to the borrowers' ability to comply with
original loan terms. Approximately $8,000 of the allowance for loan losses
had been specifically allocated to these loans at December 31, 1997.
LOAN CONCENTRATIONS
As of December 31, 1997, there was no concentration of loans exceeding 10%
of total loans that are not otherwise disclosed as a category of loans in
the loan portfolio listing in Note 6 to the Consolidated Financial
Statements incorporated by reference in Item 7 of this report.
OTHER INTEREST-BEARING ASSETS
As of December 31, 1997, there were no other interest-bearing assets that
would be required to be disclosed if such assets were loans.
SUMMARY OF LOAN LOSS EXPERIENCE
The following schedule presents a summary of activity in the allowance for
loan losses for the periods shown and the percentage of net charge-offs
during each period to average gross loans outstanding during the period.
10
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<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------
1997 1996
------- -------
(Dollars in thousands)
<S> <C> <C>
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
Balance at beginning of period $ 1,487 $ 1,121
------- -------
Charge-offs:
Commercial 199 37
Agricultural 7 --
Real estate - construction -- --
Real estate - mortgage 6 --
Consumer 315 184
------- -------
527 221
------- -------
Recoveries:
Commercial 13 10
Agricultural -- 10
Real estate - construction -- --
Real estate - mortgage -- --
Consumer 55 44
------- -------
68 64
------- -------
Net charge-offs 459 157
Additions charged to operations<F1> 539 523
------- -------
Balance at end of period $ 1,567 $ 1,487
======= =======
Ratio of net charge-offs during the period to average
loans outstanding during the period .39% .17%
======= =======
11
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<FN>
<F1> The amount of additions to the allowance for loan losses charged to
operations during the periods shown was based on management's judgment
after considering factors such as loan loss experience, evaluation of the
loan portfolio, and prevailing and anticipated economic conditions. The
evaluation of the loan portfolio is based upon various risk factors such as
the financial condition of the borrower, the value of collateral and other
considerations which, in the opinion of management, deserve current
recognition in estimating possible loan losses.
</FN>
</TABLE>
The following schedule presents an allocation of the allowance for loan
losses to the various loan categories as of the dates indicated.
<TABLE>
<CAPTION>
ALLOCATION OF THE
ALLOWANCE FOR LOAN LOSSES
AS OF DECEMBER 31,
-----------------------------------------------
1997 1996
-------------------- --------------------
PERCENT PERCENT
OF LOANS OF LOANS
IN EACH IN EACH
ALLOW- CATEGORY ALLOW- CATEGORY
ANCE TO TOTAL ANCE TO TOTAL
AMOUNT LOANS AMOUNT LOANS
------ -------- ------ ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commercial $ 425 34.08% $ 329 31.52%
Agricultural 75 7.32 68 9.09
Real estate - construction 6 1.96 6 2.01
Real estate - mortgage 121 34.21 110 33.76
Consumer 685 22.43 594 23.62
Unallocated 255 N/A 380 N/A
------ ------ ------ ------
Totals $1,567 100.00% $1,487 100.00%
====== ====== ====== ======
</TABLE>
Charge-offs in both commercial and consumer loans increased significantly
in 1997 compared to 1996. Approximately $155,000 of the commercial
increase in 1997 resulted from one loan customer. The consumer loan
12
<PAGE>
increase was due to a higher level of indirect auto loan charge-offs in
1997 than in 1996. Management believes this is a result of a higher level
of personal bankruptcies in 1997 than in the prior year as well as a larger
balance of indirect auto loans in the consumer loans portfolio. Charge-offs
and recoveries did not change significantly in 1996 as compared to 1995.
The increases from the end of 1996 to the end of 1997 in the allowance for
loan losses allocated to both commercial and consumer loans was believed
prudent by management. This was based on the higher level of charge-offs
experienced in these two loan categories in 1997 than in the prior year.
There were no significant allocation changes from the end of 1995 to the
end of 1996.
DEPOSITS
The following schedule presents daily average balances and the average
interest rate paid by the deposit category for 1997 and 1996. It also
presents the maturities of time certificates of deposit issued in
denominations of $100,000 or more as of December 31, 1997.
<TABLE>
<CAPTION>
DAILY AVERAGE
AVERAGE BALANCES RATE PAID
---------------------- ----------------
1997 1996 1997 1996
-------- ------- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
AVERAGE BALANCES AND RATES
Demand deposits $ 11,479 $11,010 -- % -- %
Interest-bearing
transaction accounts 22,242 24,711 3.23 3.23
Savings deposits 8,836 9,363 1.83 1.86
Time deposits 58,258 50,126 5.83 5.88
-------- -------
Total deposits $100,815 $95,210
======== =======
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<PAGE>
MATURITIES OF TIME CERTIFICATES
OF DEPOSIT ISSUED IN
DENOMINATIONS OF
$100,000 OR MORE
Maturities of 3 months or less $ 2,899
Maturities over 3 months
through 6 months 5,013
Maturities over 6 months
through 12 months 3,392
Maturities over 12 months 3,447
--------
Total $ 14,751
========
</TABLE>
RETURN ON EQUITY AND ASSETS
The following schedule presents the ratios indicated for 1997, 1996 and
1995.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Return on assets (net income divided by average
total assets) 1.17% 1.38% 1.36%
Return on equity (net income divided by average
equity) 11.58 12.00 11.09
Dividend payout ratio (dividends declared per
share divided by net income per share) 45.08 39.12 37.64
Equity to assets ratio (average equity divided
by average total assets) 10.09 11.47 12.27
</TABLE>
SHORT-TERM BORROWINGS
There were no categories of short-term borrowings whose average balance
outstanding exceeded 30% of shareholders' equity in 1997 or 1996.
14
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY.
The offices of the Bank, Insurance Agency, and Travel Agency as of February
28, 1998, were as follows:
Registrant's and Bank's main office
109 East Division, Sparta, Michigan
Office is owned by the Bank and comprises 24,000 square feet.
Bank's branch office and Insurance Agency's main office
416 and 440 West Division, Sparta, Michigan
Office is owned by the Bank. Office comprises 7,000 square feet, of
which 3,000 feet are occupied by the Bank and 4,000 feet are occupied by
the Insurance Agency.
Bank's branch office and Insurance Agency's branch office
4170 Seventeen Mile Road, Cedar Springs, Michigan
Office is owned by the Bank. Office comprises 3,000 square feet, of
which 2,000 feet are occupied by the Bank and 1,000 feet are occupied by
the Insurance Agency.
Bank's branch office and Insurance Agency's branch office
4949 Plainfield Avenue, NE, Grand Rapids, Michigan
Office is leased by the Bank and the Insurance Agency. Approximately
3,000 square feet are occupied by the Bank and 3,000 feet are occupied by
the Insurance Agency.
Travel Agency's main office
3527 Alpine Avenue, NW, Grand Rapids, Michigan
Office is leased by the Travel Agency and comprises 2,000 square feet.
The Registrant operates its business at the main office of the Bank. No
properties were owned by the Registrant as of February 28, 1998. The
Registrant, Bank, Insurance Agency, and Travel Agency believe that their
offices are suitable and adequate for their future needs and are in good
condition and repair. The Registrant's management believes the offices are
adequately covered by insurance.
As part of its business, the Bank generates all types of mortgages. The
Bank generally does not purchase mortgages as part of its business.
ITEM 3. LEGAL PROCEEDINGS.
There are no material pending legal proceedings to which the Registrant or
the Bank is a party or to which any of their property is subject, except
for proceedings which arose in the ordinary course of business. In the
opinion of management, pending legal proceedings will not have a material
effect on the consolidated financial condition of the Registrant.
15
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders during the
quarter ended December 31, 1997.
16
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information under the caption "Common Stock Information" on page
A-1 of the Registrant's Annual Report to Shareholders for the year
ended December 31, 1997, is incorporated herein by reference.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The information under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations," including all subheadings,
on pages A-23 through A-31, inclusive, of the Registrant's Annual Report to
Shareholders for the year ended December 31, 1997, is incorporated herein by
reference.
ITEM 7. FINANCIAL STATEMENTS.
The Consolidated Financial Statements, Notes to Consolidated Financial
Statements, and Independent Auditors' Report on pages A-3 through A-22,
inclusive, of the Registrant's Annual Report to Shareholders for the year
ended December 31, 1997, are incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
17
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The information under the captions "Directors and Executive Officers" and
"Section 16(a) Beneficial Ownership Reporting Compliance" in the
Registrant's Definitive Proxy Statement for the Annual Meeting of
Shareholders to be held April 30, 1998, is incorporated herein by
reference.
ITEM 10. EXECUTIVE COMPENSATION.
The information under the caption "Compensation of Executive Officers and
Directors" in the Registrant's Definitive Proxy Statement for the Annual
Meeting of Shareholders to be held April 30, 1998, is incorporated herein
by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information under the caption "Voting Securities" in the Registrant's
Definitive Proxy Statement for the Annual Meeting of Shareholders to be
held April 30, 1998, is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information under the caption "Certain Relationships and Related
Transactions" in the Registrant's Definitive Proxy Statement for the Annual
Meeting of Shareholders to be held April 30, 1998, is incorporated herein
by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
1. EXHIBITS
The following exhibits are filed as part of this report:
18
<PAGE>
EXHIBIT DOCUMENTS
------- ---------
3.1 Amended and Restated Articles of Incorporation of the
Registrant. Previously filed as Appendix A to the
Registrant's Definitive Proxy Statement with respect to its
Annual Meeting of Shareholders held on April 29, 1997. Here
incorporated by reference.
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.
4. Advances, Pledge and Security Agreement between ChoiceOne Bank
and the Federal Home Loan Bank of Indianapolis.
10.1 Employment Agreement With Jae M. Maxfield.<F1> Previously
filed as an exhibit to the Registrant's Form 10-KSB Annual
Report for its fiscal year ended December 31, 1995. Here
incorporated by reference.
10.2 Employment Agreement With Lawrence D. Bradford.<F1>
Previously filed as an exhibit to the Registrant's Form 10-KSB
Annual Report for its fiscal year ended December 31, 1995.
Here incorporated by reference.
10.3 Executive Stock Incentive Plan of 1997.<F1> Previously filed as
Appendix B to the Registrant's Definitive Proxy Statement with
respect to its Annual Meeting of Shareholders held on April 29,
1997. Here incorporated by reference.
13 Annual Report to Shareholders for the year ended December 31,
1997.
21 Subsidiaries of the Registrant.
24 Powers of Attorney.
27.1 Financial Data Schedule for Year Ended December 31, 1997.
27.2 Restated Financial Data Schedule for Quarter Ended September 30,
1997.
27.3 Restated Financial Data Schedule for Quarter Ended June 30, 1997.
- -------------------
[FN]
<F1> These agreements are management contracts or compensation plans or
arrangements required to be filed as exhibits to this Form 10-KSB.
</FN>
19
<PAGE>
Copies of any exhibits will be furnished to shareholders without charge upon
written request. Requests should be directed to Tom Lampen, Treasurer, ChoiceOne
Financial Services, Inc., 109 East Division, Sparta, Michigan 49345.
2. REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the fourth quarter of the period
covered by this report.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ChoiceOne Financial Services, Inc.
/S/ JAE M. MAXFIELD March 11, 1998
Jae M. Maxfield
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
/S/ JAE M. MAXFIELD President and Chief Executive March 11, 1998
Jae M. Maxfield Officer and Director
(Principal Executive Officer)
*/S/ FRANK G. BERRIS Director March 11, 1998
Frank G. Berris
*/S/ LAWRENCE D. BRADFORD Director March 11, 1998
Lawrence D. Bradford
*/S/ WILLIAM F. CUTLER, JR. Director March 11, 1998
William F. Cutler, Jr.
*/S/ LEWIS G. EMMONS Director March 11, 1998
Lewis G. Emmons
*/S/ L. EDMOND EARY, JR., M.D. Chairman of the Board March 11, 1998
L. Edmond Eary, Jr., M.D. and Director
20
<PAGE>
*/S/ STUART GOODFELLOW Director March 11, 1998
Stuart Goodfellow
*/S/ JON E. PIKE Director March 11, 1998
Jon E. Pike
*/S/ LINDA R. PITSCH Secretary and Director March 11, 1998
Linda R. Pitsch
*/S/ ANDREW W. ZAMIARA Director March 11, 1998
Andrew W. Zamiara
*/S/ THOMAS L. LAMPEN Treasurer (Principal Financial March 11, 1998
Thomas L. Lampen and Accounting Officer)
*By /S/ JAE M. MAXFIELD
Jae M. Maxfield
ATTORNEY-IN-FACT
21
<PAGE>
EXHIBIT INDEX
EXHIBIT DOCUMENTS
------- ---------
3.1 Amended and Restated Articles of Incorporation of the
Registrant. Previously filed as Appendix A to the
Registrant's Definitive Proxy Statement with respect to its
Annual Meeting of Shareholders held on April 29, 1997. Here
incorporated by reference.
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.
4. Advances, Pledge and Security Agreement between ChoiceOne Bank
and the Federal Home Loan Bank of Indianapolis.
10.1 Employment Agreement With Jae M. Maxfield.<F1> Previously
filed as an exhibit to the Registrant's Form 10-KSB Annual
Report for its fiscal year ended December 31, 1995. Here
incorporated by reference.
10.2 Employment Agreement With Lawrence D. Bradford.<F1>
Previously filed as an exhibit to the Registrant's Form 10-KSB
Annual Report for its fiscal year ended December 31, 1995.
Here incorporated by reference.
10.3 Executive Stock Incentive Plan of 1997.<1> Previously filed as
Appendix B to the Registrant's Definitive Proxy Statement with
respect to its Annual Meeting of Shareholders held on April 29,
1997. Here incorporated by reference.
13 Annual Report to Shareholders for the year ended December 31,
1997.
21 Subsidiaries of the Registrant.
24 Powers of Attorney.
27.1 Financial Data Schedule for Year Ended December 31, 1997.
27.2 Restated Financial Data Schedule for Quarter Ended September 30,
1997.
27.3 Restated Financial Data Schedule for Quarter Ended June 30, 1997.
- -------------------
22
<PAGE>
[FN]
<F1> These agreements are management contracts or compensation plans or
arrangements required to be filed as exhibits to this Form 10-KSB.
</FN>
23
<PAGE>
EXHIBIT 4
INSTRUMENTS DEFINING THE RIGHTS OF HOLDERS OF LONG-TERM DEBT
ADVANCES, PLEDGE, AND SECURITY AGREEMENT
This Advances, Pledge and Security Agreement (the "Advances Agreement"),
dated as of this 24th Day of March, 1997, is between ChoiceOne State Bank,
with its principal place of business at 109 East Division, P.O. Box 186,
Sparta, Michigan 49345-0186, (the "Member") and the Federal Home Loan Bank
of Indianapolis, with its principal place of business at 8250 Woodfield
Crossing Boulevard, Indianapolis, Indiana 46240, and mailing address at
P.O. Box 60, Indianapolis, Indiana 46206 (the "Bank").
WHEREAS, the Bank, subject to the provisions of the Federal Home Loan Bank
Act ("Bank Act"), the Rules and Regulations of the Federal Housing Finance
Board or its legal successor ("FHFB Regulations"), the policies of the FHFB
and the Bank's Credit Policies (as hereinafter defined) is authorized to
make available Advances and Other Credit Products to its members; and
WHEREAS, Member desires from time to time to apply for such Advances and
Other Credit Products that may be available to it; and
WHEREAS, the Bank requires that such Advances and Other Credit Products
provided by the Bank be secured pursuant to this Advances Agreement, and
Member agrees to provide such security as requested by the Bank by the
means set forth in this Advances Agreement.
NOW THEREFORE, intending to be legally bound, the Member and the Bank agree
as follows:
1. GENERAL.
SECTION 1.01. DEFINITIONS.
As used herein, the following terms shall have the following meanings:
"ADVANCES" means any and all loans or other extensions of credit now or
hereafter granted by the Bank to the Member, including all loans or
extensions of credit by the Bank to the Member prior to the date hereof.
"ADVICE OF CREDIT" means one or more written confirmations to be executed
by the Member and the Bank specifying the type or category of advance made,
the terms of repayment, the interest rate (which may be fixed or variable),
and any other pertinent terms and conditions, which shall evidence an
advance.
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"APPLICATION FOR ADVANCE" means one or more written or telephonic requests
for an advance, in such form or forms as shall be specified by the Bank
from time to time, and which is executed by the Bank shall evidence an
Advance.
"BANK DEPOSITS" shall mean all deposit accounts maintained by the Member
with the Bank (excluding safekeeping accounts expressly held for the
benefit of a third-party), all money, cash and checks, drafts, notices,
bills, bills of exchange and bonds deposited therein or credited thereto,
including any increases, renewals, extensions, substitutions and
replacements, whether or not such instruments have been posted to any such
deposit account, and all statements, certificates, passbooks and
instruments representing any such deposit account.
"CAPITAL STOCK" means all of the capital stock of the Bank owned by the
Member, and all payments which have been or hereafter are made on account
of subscriptions to, and all unpaid dividends on, such Capital Stock.
"COLLATERAL" means all assets of the Member of any kind or nature
whatsoever, whether tangible or intangible, including without limitation,
all Capital Stock, Bank Deposits, Mortgage Collateral, Securities
Collateral, and Other Collateral, all cash and cash equivalents, all
insurance proceeds, all tax refunds, all proceeds of any of the foregoing,
and all collections on any and all of the foregoing, which are now or
hereafter pledged to the Bank pursuant to Section 3.01 hereof. It also
means, including without limitation, any of the foregoing which have
previously been assigned, transferred or pledged to the Bank by the Member
as collateral for loans or other extensions of credit prior to the date
hereof, all of such assets in which a security interest is granted pursuant
to the terms hereof or in which a security interest is hereafter assigned,
transferred, granted, or pledged pursuant to the terms hereof.
"COLLATERAL POLICY" shall mean the Bank's Collateral Policy as stated in
the Credit Policy Manual, policy statement or operating circulars of the
Bank, as in effect from time to time.
"COLLATERAL REQUIREMENT" means such aggregate Market Value (or unpaid
principal balance) of Eligible Collateral as is specified in the Bank's
Collateral Policy or as may be otherwise specified in writing by the Bank
from time to time as being the collateral maintenance level the Member must
maintain hereunder. The Bank may increase or decrease the Collateral
Requirement at any time for, including without limitation, specific
collateral listings, physical possession requirements, and where
applicable, blanket collateral requirements.
"CREDIT POLICIES" shall mean the Bank's Credit Policy Manual, policy
statements, or operating circulars relating to Advances and Other Credit
Products offered by the Bank, all as in effect from time to time.
2
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"ELIGIBLE COLLATERAL" means Collateral other than Capital Stock which: (I)
meets the definition of Eligible Collateral under the Bank's Collateral
Policy, including without limitation one-to-four family whole mortgage
loans, government and agency securities, private mortgage-backed
securities, and Bank Deposits; (II) is owned by the Member free and clear
of any liens, encumbrances or other interests other than the assignment to
the Bank hereunder; (III) has not been in default within the most recent
12-month period provided that in the case of Mortgage Collateral, mortgage
payments that are overdue by more than sixty (60) days shall not be
included within Eligible Collateral; (IV) in the case of Mortgage
Collateral, relates to residential real property which is covered by fire,
hazard, and where applicable, flood insurance in an amount at least
sufficient to discharge the mortgage loan in full in case of loss and as to
which all real estate taxes are current; and (V) in the case of Mortgage
Collateral, does not secure an indebtedness on which any director, officer,
employee, attorney or agent of the Member or of any Federal Home Loan Bank
is personally liable. The Bank may change the definition of Eligible
Collateral from time to time, and the Bank's determination of Eligible
Collateral shall be conclusive.
"INDEBTEDNESS" means all obligations, liabilities or indebtedness of the
Member to the Bank, due or to become due, direct or indirect, absolute or
contingent, joint or several, now existing or hereafter at any time
created, arising or incurred under this Advances Agreement, or any Advice
of Credit, Application for Advance, Other Credit Product Agreements,
Advances, Other Credit Products, Bank Deposits, including any overdrafts or
other charges in connection therewith. Indebtedness also means any
obligations for any other services (including without limitation,
safekeeping, operating and other correspondence services) provided by the
Bank, including any applications, commitments, other agreements or
documents relating to the foregoing, any amendments to any of the foregoing
agreements or documents and any obligations under indemnification
provisions in any such agreements or documents, and any renewal, extension
or substitution of any such obligations, liabilities and indebtedness,
including attorneys' fees of the Bank in the collection thereof and the
enforcement of any remedies with respect to any Collateral.
"MARKET VALUE" means the market value of Collateral determined in a manner
as specified by the Bank from time to time. The Bank may change the method
of determining Market Value at any time which shall be consistently applied
to substantially all borrowers. The Bank's determination of Market Value
shall be conclusive.
"MORTGAGE COLLATERAL" means whole mortgage loans, Mortgage Documents and
all security agreements, guaranties, insurance policies, certificates,
binders, commitments or reports relating thereto, including title
insurance, private mortgage insurance and hazard and liability insurance,
surveys, bonds, participations, purchase commitments, hedge contracts or
3
<PAGE>
other agreements to purchase, guaranty or insure any mortgage loans or
securities to be issued by the Member. Mortgage Collateral also means any
other agreement, instrument or document pertaining to, affecting or
obtained by the Member in connection with the loans covered by the Mortgage
Documents, financing statements perfecting the Member's security interest
in any of the foregoing, certificates, evidences of recordation,
applications, underwriting materials, appraisals, notices, opinions of
counsel, loan servicing data, files, correspondence, computer programs,
tapes, discs, cards, account records and all other electronically stored or
written records or materials relating to the loans covered by the Mortgage
Documents, including any and all rights, claims, and choses in action
against or with respect to any person or entity which has provided services
to the member in connection with any other Mortgage Collateral, including
without limitation, surveyors, appraisers, environmental engineers,
environmental assessment firms, contractors, and architects. Unless
otherwise authorized by the Bank, Mortgage Collateral shall not include
mortgage securities or loan participations.
"MORTGAGE DOCUMENTS" means mortgages, deeds of trust or other security
deeds in land and interests in real property and the improvements and
fixtures located thereon (herein "mortgages") and all notes, bonds or other
instruments evidencing loans secured thereby (herein "mortgage notes") and
any endorsement and assignments thereof to the Member.
"OTHER COLLATERAL" means such items of tangible and intangible property,
other than Capital Stock, Bank Deposits, Mortgage Collateral, and
Securities Collateral, which are offered as collateral by the Member to the
Bank and which the Bank in its discretion expressly accepts by written
notice delivered to the Member as collateral for Advances and Other Credit
Products.
"OTHER CREDIT PRODUCT AGREEMENT" means a writing or electronic transmission
in such form as shall be specified by the Bank, executed by the Bank and
the Member and setting forth the obligations of the Bank and Member,
including without limitation, any Community Investment or Affordable
Housing Program transaction, any service confirmation, service contract,
reimbursement agreement, interest rate swap agreement, transaction,
confirmation, applications, notices, advice or other instruments between
the Bank and the Member.
"OTHER CREDIT PRODUCTS" means any and all commitments or obligations under
which the Bank agrees to make Advances to the Member or payments on behalf
of or for the account of the Member, including without limitation, letters
of credit, guarantees, demand or CMS account transactions, check
processing, deposit overdrafts, item processing services, coin and currency
services, safekeeping services (including security lending programs),
Community Investment or Affordable Housing Program transactions,
correspondent banking service debits or services charges, or other
4
<PAGE>
arrangements intended to facilitate transactions between or among the Bank,
the Member and third parties, or under which the Bank enters into a credit
or financial accommodation agreement or other arrangement with the Member,
including without limitation, repurchase agreements and interest rate
exchange transactions (such as interest rate swap agreements, cap, collar
and floor agreements) and such other products or services as may be offered
by the Bank from time to time pursuant to its Credit Policies and
irrespective of whether the Bank's obligation is contingent or conditional.
"OUTSTANDING COMMITMENTS" means, at any point in time, the maximum
aggregate principal amount of Advances or payments which the Bank may be
obligated to make to the Member (or other parties) under Advance
Applications or Other Credit Product Agreements then in effect.
"SECURITIES COLLATERAL" means all securities or certificates evidencing a
direct or indirect interest in a loan or a group of loans secured by
mortgages, including without limitation, mortgage-backed securities,
collateralized mortgage obligations and real estate mortgage investment
conduits, including Federal Home Loan Mortgage Corporation mortgage
participation certificates, Federal National Mortgage Association mortgage
pass-through mortgage-backed certificates and Government National Mortgage
Association modified pass-through mortgage-backed certificates, and all
Mortgage Documents and items of Mortgage Collateral owned or otherwise
acquired by the Member relating to the loans underlying such securities or
certificates; consolidated obligations of the Federal Home Loan Bank
System; obligations of or guaranteed by the United States; and obligations
of or guaranteed by agencies or instrumentalities of the United States.
2. ADVANCES DOCUMENTATION.
SECTION 2.01. APPLICATION FOR ADVANCES.
The Member may apply for Advances or commitments by completing and
submitting an Application for Advance or requesting Other Credit Product
services. The preceding sentence notwithstanding, the Bank may in its
discretion make an Advance, make a commitment, or deliver Other Credit
Products to the Member pursuant to the Bank Act, FHFB Regulations, Credit
Policies, and other Bank procedures in effect from time to time, and by
either (I) the receipt of an oral or written application which is executed
by the Bank without change, or (II) in the case of an application received,
completed or modified by the Bank pursuant to a telephonic or other
unsigned communication by the Member, by an Advice of Credit writing
generated by the Bank. The Member shall be estopped from asserting any
claim or defense with respect to the terms applicable to an Advance,
commitment, or Other Credit Product entered into pursuant to a telephone
application or other unsigned communication unless, within two (2) business
days of receipt of the Bank's advice, the Member delivers to the Bank a
written notice specifying the disputed term(s) or condition(s). The Bank
5
<PAGE>
shall have the absolute right to rely upon the procedures established
hereby or pursuant to the terms hereof and shall have no liability to the
Member for any actions taken or omitted to be taken in connection with such
procedures. The member agrees that it will hold the Bank and each of its
employees, officers, directors, agents, and representatives harmless from
any loss, liability or damage which the Member may suffer, including
without limitation, lost profits and attorneys' fees and disbursements,
arising out of or in connection with such procedures, absent fraud, willful
misconduct, or recklessness on the part of the Bank.
SECTION 2.02. BANK'S RECEIPT OF WRITTEN CONFIRMATION AND FINDINGS.
Within five (5) business days of receipt, Member agrees to execute and
return any Advice of Credit, confirmation, or Other Credit Product
Agreement to the Bank. Upon request of the Bank, the Member shall sign and
deliver to the Bank a promissory note or notes in such form as the Bank may
reasonably require evidencing any Advance. Unless otherwise requested by
the Member and approved by the Bank, each Advance shall be funded by
crediting the Member's CMS account(s) with the Bank.
SECTION 2.03. INTEREST COMPUTATIONS AND REPAYMENT OF ADVANCES AND OTHER
CREDIT PRODUCTS.
The Member agrees to repay each Advance or Other Credit Product in
accordance with this Advances Agreement and the terms and conditions of the
Advice of Credit or Other Credit Product Agreement. Each Advance, Advice
of Credit, Application for Advance, Other Credit Product and Other Credit
Product Agreement shall be subject to the terms of the Credit Policies and
applicable laws, regulations, and limitations, all as in effect from time
to time, including the Bank Act, the FHFB Regulations and the statements of
policy and guidelines of the FHFB, which shall be deemed to be incorporated
by reference into this Advances Agreement. Unless otherwise specified in
the Bank's Credit Policies or as may be otherwise specified in writing by
the Bank from time to time, interest shall be paid at the time of each
payment of all of the principal of each Advance on the amount of principal
so repaid, and shall be paid on the fifteenth (15th) day of each month (or
the Bank's next business day if the Bank is not open for business on the
fifteenth (15th)) on the daily outstanding principal amount of each Advance
since the previous interest payment date (other than principal amounts
which have been repaid in full since such interest payment date), in each
case at the rate applicable to such Advance as stated in the related Advice
of Credit. The Member shall pay to the Bank, immediately and without
demand, interest on any past due amount owing on any Advance or Other
Credit Product at the rate in effect and being charged by the Bank from
time to time on defaults. The default rate on past due payments of
principal and interest may, at the option of the Bank, be at a rate of five
percent (5%) per annum in addition to the then highest current rate being
charged by the Bank for advances, not to exceed the highest legal interest
6
<PAGE>
rate allowed under Indiana law. The Member shall maintain in the Member's
CMS account with the Bank an amount at least equal to the amounts then
currently due and payable to the Bank on outstanding Advances and Other
Credit Products. The Member hereby authorizes the Bank to debit the
Member's CMS account with the Bank for all amounts due and payable on any
Advance or Other Credit Product and for all other amounts due and payable
hereunder. In the event that the amount in the Member's CMS account is, at
any time, insufficient to pay such due and payable amounts, the Banks may
without notice to the Member apply any Bank Deposits then in the possession
of the Bank to the payment of such due and payable amounts.
SECTION 2.04. PAYMENT OF PREPAYMENT CHARGES.
Any prepayment fees or charges for which provision is made, whether under
the Advice of Credit, Other Credit Product Agreement, or otherwise, shall
be payable at the time of any voluntary or involuntary payment of the
principal of such Advance or Other Credit Product prior to the originally
scheduled maturity thereof, including without limitation, payments that are
made as a part of a liquidation of the Member or that become due as a
result of an acceleration pursuant to Section 4.01 hereof, and whether such
payment is made by the Member, by a conservator, receiver, liquidator or
trustee of or for the Member, or by any successor to or any assignee of the
Member. The method of computation for the prepayment fee, unless expressly
provided for in the applicable credit documentation, is set forth in the
Credit Policies of the Bank and may be subject to change from time to time
with advance notice to the Member.
SECTION 2.05. RIGHT OF BANK TO MAKE PAYMENTS WITH RESPECT TO OUTSTANDING
COMMITMENTS.
In the event that there are one or more Outstanding Commitments at the time
of an Event of Default under Section 4.01 hereof, the Bank may, at its
option, make any payments due thereunder from time to time by crediting a
special account with the Bank over which the Bank has sole dominion and
control. Amounts credited to such special accounts shall be deemed to have
satisfied the Bank's obligations under the Outstanding Commitments. When
all such obligations have been satisfied, the Bank shall disburse the
balance, if any, in such account first to the satisfaction of any amounts
then due and owing by the Member to the Bank and then to the Member or its
successors in interest. Payments made pursuant to this section shall be
payable on demand and shall bear interest at the rate specified for each
applicable Advance (or if such rate is not specified, at the rate in effect
and being charged by the Bank from time to time on variable rate advances),
and shall include applicable prepayment fees.
The Bank shall not fund outstanding commitments previously made to the
Member whose access to advances is restricted by its primary federal
regulator. In addition, the Bank shall not fund outstanding commitments
7
<PAGE>
previously made to the Member whose access to advances is subsequently
restricted because it does not have positive tangible capital or if the
Bank deems itself insecure for any reason as determined by the Bank in its
sole discretion. The Bank shall not honor any outstanding commitments to
the Member if the Member is a savings association that fails to maintain
its status as a Qualified Thrift Lender as such rule is defined under the
applicable federal law and federal regulations as may be in effect from
time to time.
3. SECURITY AGREEMENT.
SECTION 3.01. CREATION OF SECURITY INTEREST.
As security for all indebtedness, including without limitation, all
Advances and Other Credit Products, the Member hereby assigns, transfers,
and pledges to the Bank and grants to the Bank a security interest in all
Collateral, now or hereafter owned by the Member, and all proceeds thereof,
provided, however, that Collateral that is encumbered or disposed of by the
Member in conformity with the requirements of Section 3.03(a) hereof shall
not be subject to the security interest created hereunder. Without
limitation of the foregoing, all tangible and intangible property
heretofore assigned, transferred or pledged by the Member to the Bank as
Collateral for Advances and Other Credit Products prior to the date hereof
is hereby assigned, transferred and pledged to Bank as Collateral
hereunder.
SECTION 3.02. MEMBER'S REPRESENTATIONS AND WARRANTIES CONCERNING
COLLATERAL.
The Member represents and warrants to the Bank, as of the date hereof and
as of the date of all future Advances or Other Credit Products secured
hereunder, the following:
(a) The Member owns and has marketable title to the Collateral and has the
right and authority to grant a security interest in the Collateral and to
subject all of the Collateral to this Advances Agreement;
(b) The information contained in any certification, status report,
schedule, or other information given from time to time by the Member as to
each item of Collateral is true, accurate and complete in all material
respects;
(c) The Member maintains Eligible Collateral which has a Market Value (or
unpaid principal balance) that is at least equal to the then current
Collateral Requirement and which meets the standards and requirements from
time to time established by the Bank's Collateral Policy, the Bank Act and
the FHFB Regulations, and all other applicable laws and regulations;
8
<PAGE>
(d) The Member has not conveyed or otherwise created, and there does not
otherwise exist, any participation interest or other direct, indirect,
legal, or beneficial interest in any Collateral pledged under Sections
3.01, 3.03(a), and 3.04 on the part of any person or entity other than the
Bank and the Member;
(e) Except as may be approved in writing by the Bank, no account debtor or
other obligor owing any obligation to the Member with respect to any item
of Mortgage Collateral or Other Collateral has or will have any defenses,
offsetting claims, or other rights affecting the right of the Member or the
Bank to enforce such mortgage, mortgage note or promissory obligation, and
no defaults (or conditions that, with the passage of time or the giving of
notice or both, would constitute a default) exist under any such writings;
and
(f) No part of any real property or interest in real property that is the
subject of Collateral contains or is subject to the effects of toxins or
hazardous materials or other hazardous substances (including those defined
in any applicable state or local law; or applicable federal law, including
the Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended, 42 USC 9601 et seq.; the Hazardous Materials
Transportation Act, 49 USC 1801 et seq.; the Resource Conservation and
Recovery Act, 42 USC 6901 et seq.; and in the regulations adopted and
publications promulgated pursuant to said laws), the presence of which
could subject the Bank to any liability under applicable state or Federal
law or local ordinance either at any time that such property is pledged to
the Bank or upon the enforcement by the Bank of its security interest
therein.
SECTION 3.03. COLLATERAL MAINTENANCE REQUIREMENT FOR BLANKET LIENS AND
SPECIFIC LISTINGS.
(a) The Member shall at all times maintain an amount of Eligible
Collateral which has a Market Value (or unpaid principal balance, if so
required by the Bank) that is at least equal to the then current Collateral
Requirement. The Member shall not assign, pledge, transfer, create any
security interest in, sell, or otherwise dispose of any Collateral if (I)
such Collateral is held by or on behalf of the Bank pursuant to Section
3.04 hereof, (II) such Collateral has been provided in a specific listing
of Eligible Collateral pursuant to Section 3.03(e), (III) the Bank has
otherwise perfected its security interest in such Collateral, or (IV) at
the time of or immediately after such action, Member is not or would not be
in compliance with the collateral maintenance requirements of the first
sentence of this Section 3.03(a) or is or would be otherwise in default
under this Advances Agreement. So long as Member is not in default under
this Agreement, Member shall be at liberty to sell, use, commingle, and
dispose of the Collateral or the proceeds of such Collateral without being
required to account for the proceeds or replace the Collateral, subject
only to its obligation to maintain the Collateral as herein provided.
9
<PAGE>
(b) Collateral shall be held by the Member in trust for the benefit of the
Bank and subject to the Bank's direction and control, will not be
commingled with assets of the Member which are not Collateral, and will be
physically safeguarded by the Member in accordance with usual, customary
and prudent commercial practices but in any event with not less than the
same degree of care which the Member uses in physically safeguarding its
other property and assets of like kind and nature. Without limitation of
the foregoing, Member shall take all action necessary or desirable to
protect and preserve the Collateral and the Bank's interest therein,
including without limitation, the maintaining of insurance on property
securing mortgages constituting Collateral (such policies and certificates
or guaranty relating to such mortgages are herein called "insurance"), the
collection of payments under all mortgages and under all insurance, and
otherwise assuring that the loans comprising the Mortgage Collateral are
serviced in accordance with the standards of a reasonable and prudent
mortgagee. The Member (or its agent), acting on behalf of the Bank, shall
collect all payments when due on all Collateral. If the Bank requires
under Section 3.12, the Member shall hold such collections separate from
its other monies and apply them to the reduction of Indebtedness as it
becomes due; otherwise, the Member shall be entitled to use and dispose of
all such collections in the ordinary course of its business and in
compliance with all laws, rules, and regulations.
(c) If any Collateral that was Eligible Collateral ceases to be Eligible
Collateral, the Member shall promptly notify the Bank in writing of that
fact and, if so requested by the Bank of the reason that the Collateral has
ceased to be Eligible Collateral. The Member shall promptly specify, or
deliver, as the case may be, other Eligible Collateral having at least the
same Market Value as the Collateral so requested to be withdrawn.
(d) The Bank may review the form and sufficiency of all documents
pertaining to the Collateral. Such documents must be satisfactory to the
Bank and, if not, such Collateral may not be acceptable as Eligible
Collateral or may have a Market Value applied thereto that is less than the
Market Value otherwise applicable under the Bank's Collateral Policy, or as
the Bank may specify. The Bank may require that the Member make any or all
documents pertaining to the Collateral available to the Bank for its
inspection and approval.
(e) If so requested by the Bank, Member agrees to (I) provide a specific
listing of the Eligible Collateral to Bank, (II) physically segregate
Mortgage Documents and Other Collateral which are a part of such specified
Collateral from all other property of the Member in a manner satisfactory
to the Bank, and/or (III) hold each Mortgage Document which is a part of
Mortgage Collateral in a separate file folder with each file folder clearly
labeled with the loan identification number and the name of the
borrower(s). Immediately upon the written request of the Bank, the Member
further agrees to clearly and legibly mark or stamp each Mortgage Document
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and each file folder containing Mortgage Documents with the following
statement (or a substantially similar statement which has been approved in
writing by the Bank): "The Mortgage/Deed Of Trust And Note Relating To This
Loan Have Been Assigned To And Represent Collateral Of The Federal Home
Loan Bank Of Indianapolis And Its Successors And Assigns" and such other
statement as may be required by the Bank from time to time.
SECTION 3.04. DELIVERY OF COLLATERAL; PHYSICAL POSSESSION REQUIREMENTS.
(a) At any time upon the Bank's oral or written request, or at any time
that the Member becomes subject to any mandatory collateral delivery
requirements pursuant to the Collateral Policy or that may be otherwise
established in writing by the Bank, the Member shall promptly on a schedule
acceptable to the Bank deliver to the Bank, or to a custodian designated by
the Bank, all Collateral including such Eligible Collateral as may be
necessary so that the Market Value of Eligible Collateral held by the Bank,
or such custodian, meets or exceeds the Collateral Requirement at all
times, and take any and all other action as may be specified by the Bank to
further evidence the perfection of the Bank's security interest in the
Collateral and to otherwise effectuate the transactions contemplated
hereby, including the signature and filing of financing statements.
Collateral delivered to the Bank shall be endorsed or assigned in
recordable form by the Member to the Bank as directed by the Bank. With
respect to Mortgage Collateral that is to be delivered hereunder, the
Member shall deliver the Mortgage Documents with necessary endorsements and
assignments relating thereto unless otherwise directed by the Bank.
Concurrently with the initial delivery of Collateral and at such other
times as provided in the Collateral Policy or as the Bank may otherwise
request, the Member will deliver to the Bank a status report and
accompanying schedules, all in form and substance satisfactory to the Bank
and dated as of the then most recent valuation date, describing the
Collateral held by the Bank or its custodian.
(b) The Member authorizes the Bank to execute and file one or more
financing statements, this Agreement, and any other documents, instruments,
or statements of any kind on its behalf and without the signature of the
Member in those public offices deemed necessary by the Bank in its sole
discretion to perfect and continue the perfection of its security interest
in the Collateral and to protect, defend and further assure the grant,
validity and perfection thereof. In addition, the Member will, at its
expense, deliver or cause to be delivered such other documents as the Bank
may request to secure the indebtedness referred to herein or to further
perfect, protect, and defend the security interest granted herein.
(c) With respect to uncertificated securities or securities entitlements
pledged to the Bank as Securities Collateral or Other Collateral hereunder,
the delivery requirements and the agreement to give control contained in
this Advances Agreement shall be satisfied by the transfer of such
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securities to the Bank, such transfer to be effected in such manner and to
be evidenced by such documents as shall be specified by the Bank.
(d) The Member agrees to pay to the Bank such reasonable fees and charges
as may be assessed by the Bank to cover the Bank's overhead and other costs
relating to the receipt, holding, redelivery and reassignment of Collateral
and to reimburse the Bank upon request for all recording fees and advances
incurred or made by the Bank in connection therewith (including the
reasonable compensation and the expenses and disbursements of any custodian
that may be appointed by the Bank hereunder, and the agents and legal
counsel of the Bank and of such custodian).
(e) The Member shall, upon request of the Bank, immediately take such
other actions as the Bank shall deem necessary or appropriate to perfect
the Bank's security interest in the Collateral or otherwise to obtain,
preserve, protect, enforce or collect the Collateral.
SECTION 3.05. WITHDRAWAL OR REASSIGNMENT OF COLLATERAL.
Upon receipt by the Bank of writings in form and substance satisfactory to
the Bank constituting (I) a request from the Member for the withdrawal or
reassignment of Collateral which has been delivered pursuant to Section
3.04 hereof, or as to which the Bank has otherwise perfected its security
interest, and (II) a detailed listing of the Collateral to be withdrawn or
reassigned, provided that the Bank's valuation of such delivered Collateral
confirms that the Member's Collateral Requirement will be satisfied after
such withdrawal or reassignment, then the Bank shall redeliver or reassign
to the Member the Collateral specified in Member's request.
Notwithstanding anything to the contrary herein contained, while an Event
of Default hereunder shall have occurred and be continuing, or at any time
that the Bank in good faith deems itself insecure, the Member may not
obtain any such withdrawal or reassignment. Further, Member agrees for
specific listings provided under Section 3.03(e) to follow the withdrawal
procedures provided for under this Section 3.05 or as otherwise specified
by the Bank.
SECTION 3.06. ADDITIONAL COLLATERAL.
The Bank may at any time require the Member to maintain and deliver to the
Bank additional Collateral over that amount of Eligible Collateral required
to meet the Member's Collateral Requirement or substitutions of Collateral.
The Member expressly agrees to maintain and deliver such additional
Collateral or substitutions of Collateral as the Bank shall require.
SECTION 3.07. REPORTS; COLLATERAL AUDIT; ACCESS.
(a) In accordance with the Collateral Policy and at such other times as
the Bank may request, the Member shall furnish to the Bank, in a format
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satisfactory to the Bank, a report so that the Bank may verify that the
Member maintains Eligible Collateral with a Market Value (or unpaid
principal balance, if so required by the Bank) sufficient to meet the
Collateral Requirement. If the Market Value or unpaid principal balance of
Eligible Collateral owned by the Member, free and clear of any liens or
encumbrances, shall at any time fall below the Collateral Requirement, the
Member shall immediately notify the Bank.
(b) The Member shall provide annually an audit report prepared by the
Member's external independent auditor in accordance with generally accepted
auditing standards (and in a format acceptable to the Bank) certifying that
the Member owns, free and clear of any liens or encumbrances (except for
Bank's), Eligible Collateral with a Market Value (or unpaid principal
balance, if so required by the Bank) at least equal to the Collateral
Requirement, and deliver such report to the Bank within ninety (90) days of
each fiscal year-end of the Member, including an explanation for any
exceptions or qualifications in the report or any failure to obtain such
report. The Bank reserves the right to waive the audit report requirement
if Member's Collateral is in the physical possession of the Bank or in the
Bank's sole discretion based on particular circumstances.
(c) The Member agrees that the Bank shall have access at all reasonable
times to the Collateral in the Member's possession or control and to the
Member's books and records of account relating to such Collateral. The
Member shall permit the Bank to examine, inspect, audit, and take copies or
make extracts from its books and records and to discuss its affairs with
its independent auditor (or other representatives) as often as the Bank may
reasonably request.
(d) The Member agrees that examination reports prepared by local, state or
federal authorities may be furnished by such authorities to the Bank upon
its request, and by this Agreement, the Member authorizes and directs such
authorities to deliver such reports to the Bank and waives any objections
or restrictions thereto which it may lawfully waive. Member agrees that
upon request of the Bank, it will take any and all steps necessary to
assist the Bank in obtaining such reports from such authorities. The Bank
agrees that to the extent such reports or the information contained therein
are confidential, the Bank will use its same degree of care in keeping such
reports confidential as it applies to the Bank's own confidential
information and will not knowingly disclose any confidential information
contained therein unless required to do so by law, rules, regulations, or
judicial or regulatory process applicable to the Bank.
(e) If requested by the Bank, the Member shall furnish to the Bank a
written report covering such matters regarding the Collateral as the Bank
may require, including listing of mortgages, securities, and unpaid
principal balances thereof, and certifications concerning the status of
payments on mortgages and of taxes and insurance on property securing
mortgages.
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(f) The Member agrees to promptly report to the Bank any event which
reduces the principal balance of any mortgage or security by ten percent
(10%) or more, whether by prepayment, foreclosure sale, property-casualty
insurance or guaranty payment or otherwise.
(g) All Collateral and the satisfaction by the Member of the Collateral
Requirement shall be subject to audit and verification by or on behalf of
the Bank. Such audits and verifications may occur without notice during the
Member's normal business hours or upon reasonable notice at such other
times as the Bank may reasonably request. The Member shall provide to the
representatives or agents of the Bank for purposes of such audits and
verifications, access to all books and records related to transactions
whether made or contemplated under this Agreement. Further, Member shall
provide adequate working facilities, at Member's expense for a Bank to
conduct such audits or verifications. The Member agrees to pay to the Bank
such reasonable fees and charges as may be assessed by the Bank to cover
overhead and other costs relating to such audit and verification. The
Member further agrees that it will prepare and deliver promptly upon
request of the Bank inquiries to Member's outside auditors, outside
counsel, customers (including depositors or borrowers), and any other
person that the bank may reasonably request, to provide such information to
the Bank as it may reasonably request in connection with such audit and
verification.
SECTION 3.08. ADDITIONAL DOCUMENTATION AND STATUS REPORTS.
The Member shall at its expense make, execute, record and deliver to the
Bank such financing statements, assignments, listings, powers, notices and
other documents with respect to the Collateral and the Bank's security
interest therein as directed by the Bank and in form and substance
satisfactory to the Bank. Upon request, Member agrees to give Bank verbal
or written reports concerning the financial condition or status of any
regulatory action maintained against the Member, its holding company, or
any affiliated entity or affiliated person.
SECTION 3.09. BANK'S RESPONSIBILITIES AS TO COLLATERAL.
The Bank's duty as to the Collateral shall be solely to use reasonable care
in the custody and preservation of the Collateral in its possession, which
shall not include any steps necessary to preserve rights against prior
parties nor the duty to send notices, perform services, or take any action
in connection with the management of the Collateral. The Bank shall not
have any responsibility or liability for the form, sufficiency,
correctness, genuineness or legal effect of any instrument or document
constituting a part of the Collateral, or any signature thereon or the
description or misdescription, or value of property represented, or
purported to be represented, by any such document or instrument. The
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Member agrees that any and all Collateral may be removed by the Bank from
the state or location where situated, and may there be dealt with by the
Bank as provided in this Advances Agreement.
SECTION 3.10. BANK'S RIGHTS AS TO COLLATERAL; POWER OF ATTORNEY.
At any time or times, at the expense of the Member, the Bank may, at its
discretion, before or after the occurrence of an Event of Default as
defined in Section 4.01 hereof, in its own name or in the name of its
nominee or of the Member, do any or all things and take any and all actions
that are pertinent to the protection of the Bank's interests hereunder and
which are lawful under the laws of the State of Indiana, or the laws of any
jurisdiction under which the Bank may be exercising its rights hereunder,
including the following:
(a) Terminate any consent given hereunder;
(b) With advance notice to Member (or its legal successor), notify
obligors on any Collateral to make payments thereon directly to the Bank;
(c) Endorse any Collateral in the Member's name;
(d) Enter into any extension, compromise, settlement, or other agreement
relating to or affecting any Collateral;
(e) Take any action the Member is required to take or which is otherwise
necessary to: (I) sign and record a financing statement or otherwise
perfect a security interest in any or all of the collateral; or (II)
obtain, preserve, protect, enforce or collect the Collateral;
(f) Take control of any funds or other proceeds generated by the
Collateral and use the same to reduce indebtedness as it becomes due; and
(g) Cause the Collateral to be transferred to its name or the name of its
nominee.
The Member hereby appoints the Bank as its true and lawful attorney, with
full power of substitution, for and on behalf of the Member and in its
name, place and stead, to prepare, execute and record endorsements and
assignments to the Bank of all or any item of Collateral, giving or
granting to the Bank, as such attorney, full power and authority to do or
perform every lawful act necessary or proper in connection therewith as
fully as the Member might or could do. The Member hereby ratifies and
confirms all that the Bank shall lawfully do or cause to be done by virtue
of this special power of attorney. This special power of attorney is
granted for a period commencing on the date hereof and continuing until the
discharge of all indebtedness and all obligations of the Member hereunder
regardless of any default by the Member, is coupled with an interest and is
irrevocable for the period granted.
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SECTION 3.11. SUBORDINATION OF OTHER LOANS TO MORTGAGE COLLATERAL.
The Member hereby agrees that all mortgage notes which are part of the
Mortgage Collateral and any notes secured by personal property ("personalty
notes") which may become part of the Other Collateral shall have priority
in right and remedy over any claims, however evidenced, for other loans,
whether made before or after the date of such mortgage or personalty notes
which are secured by the mortgages or security agreements securing such
mortgage or personalty notes but are not part of the Collateral, and shall
be satisfied out of the property covered by such mortgages or security
agreements before recourse to such property may be obtained for the
repayment of such other loans. To this end, the Member hereby subordinates
the lien of such mortgages and security agreements with respect to such
other loans to the lien of such mortgages and security agreements with
respect to such mortgage and personalty notes. The Member further agrees to
retain possession of any promissory notes evidencing such other loans and
not to pledge, assign or transfer the same, except that the same may be
pledged to the Bank as part of the Collateral. The Member, for itself and
for any other person or entity claiming by or through the Member, waives
any and all rights which it or such other person or entity may have to
require the Bank to marshal the assets of the Member or to otherwise
prioritize or sequence any class or category of Collateral with respect to
which the Bank may pursue its rights and remedies.
SECTION 3.12. PROCEEDS OF COLLATERAL.
The Member shall collect all payments when due on all Collateral. If the
Bank so requires, the Member, as the Bank's agent, shall hold such
collections separate from its other monies in one or more designated cash
collateral accounts maintained at the Bank and apply them to the reduction
of indebtedness as it becomes due; otherwise, the Member shall be entitled
to use and dispose of all such collections in the ordinary course of
business and in compliance with all laws, rules, and regulations.
4. DEFAULT; REMEDIES.
SECTION 4.01. EVENTS OF DEFAULT; ACCELERATION.
In the event of the occurrence of any of the following events or conditions
of default ("Event of Default"), the Bank may at its option, by a notice to
the Member, declare all indebtedness and accrued interest thereon,
including any prepayment fees (including without limitation, those fees
charged pursuant to Section 2.03 and 2.04), or charges which are payable in
connection with the payment prior to the originally scheduled maturity of
any indebtedness, to be immediately due and payable without presentment,
demand, protest or any further notice:
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(a) Failure of the Member to pay when due any interest on, or principal
of, any Advance or any amount payable in connection with any Other Credit
Product; or
(b) Failure of the Member to timely perform any promise or obligation or
to satisfy any condition or liability contained herein, in an Application
for Advance, Advice of Credit, or in any Other Credit Product Agreement to
which the Member and the Bank are parties; or
(c) Any representation, statement, or warranty made or furnished in any
manner to the Bank by or on behalf of the Member in connection with any
Advance or Other Credit Product or any certification of the Market Value
(or unpaid principal balance, if so required by the Bank) of Eligible
Collateral shall have been false or misleading in any material respect when
made or furnished; or
(d) Failure of the Member to maintain Eligible Collateral which has a
Market Value (or unpaid principal balance, if so required by the Bank) that
is at least equal to the then current Collateral Requirement under the
applicable blanket lien/specific listing requirements of Section 3.03 or
physical possession requirements of Section 3.04, free of any encumbrances
or claims as required herein; or
(e) The issuance of any tax levy, seizure, attachment, garnishment, levy
of execution, or other process with respect to the Collateral; or
(f) Any failure to pay or suspension of payment by the Member to any
creditor of sums due or the occurrence of any event which results in
another creditor having the right to accelerate the maturity of any
indebtedness of the Member under any security agreement, indenture, loan
agreement, or comparable undertaking; or
(g) Application for or appointment of a conservator, receiver, or trustee
for the Member or of any affiliate or subsidiary of the Member or the
Member's property, entry of a judgment or decree adjudicating the Member or
any affiliate or subsidiary of Member insolvent or bankrupt, or an
assignment by the Member or any affiliate or subsidiary of the Member for
the benefit of creditors; or
(h) Sale by the Member of all or a material part of the Member's assets or
the taking of any other action by the Member to liquidate or dissolve; or
(i) Termination of the Member's membership in the Bank, or the Member's
ceasing to be a type of financial institution that is eligible under the
Bank Act to borrow or apply for membership in the Bank; or
(j) Merger, consolidation or other combination of the Member with an
entity which is not a member of the Bank if the nonmember entity is the
surviving entity; or
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(k) With respect to Advances made pursuant to Section 11(g)(4) of the Bank
Act (12 USC 1431(g)), if the creditor liabilities of the Member, excepting
liabilities to the Bank, are increased in any manner to an amount exceeding
five percent (5%) of the Member's net assets; or
(l) Member threatens or initiates legal action to challenge an otherwise
legally enforceable provision under this Advances Agreement in an attempt
to make the Bank insecure under this Advances Agreement; or
(m) The Bank in good faith determines that a material adverse change has
occurred in the financial condition of the Member (including its holding
company or other affiliates), or the Member fails to comply with the Bank's
Credit Policies or other applicable policies including the requirement of
creditworthiness as determined by the Bank at its sole discretion.
SECTION 4.02. REMEDIES; SET OFF; SPECIFIC PERFORMANCE.
(a) Upon the occurrence of any Event of Default, the Bank shall have all
of the rights and remedies provided by applicable law, which shall include,
but not be limited to, all of the remedies of a secured party under the
Uniform Commercial Code as in effect in the State of Indiana, Section 10 of
the Bank Act (12 USC 1430), and other applicable federal law. In addition,
the Bank may take immediate possession of any of the Collateral or any part
thereof wherever the same may be found without judicial process. The Bank
may require the Member to assemble the Collateral and make it available to
the Bank at a place designated by the Bank which is reasonably convenient
to both parties. The Bank may sell, assign and deliver the Collateral or
any part thereof at public or private sale for such price as the Bank deems
appropriate without any liability for any loss due to decrease in the
market value of the Collateral during the period held. The Bank shall have
the right to purchase all or part of the Collateral at such sale. If the
Collateral includes insurance or securities which will be redeemed by the
issuer upon surrender, or any accounts or deposits in the possession of the
Bank, the Bank may realize upon such Collateral without notice to the
Member. If any notification of intended disposition of any of the
Collateral is required by applicable law, such notification shall be deemed
reasonable and properly given if mailed, postage prepaid, at least five (5)
days before any such disposition to the address of the Member appearing on
the records of the Bank. The proceeds of any sale shall be applied in the
order that the Bank, in its sole discretion, may choose. The Member agrees
to pay all the costs and expenses of the Bank in the collection of the
indebtedness and enforcement of the Bank's rights and remedies in case of
default, including, without limitation, reasonable attorneys' fees. The
Bank shall, to the extent required by law, apply any surplus after (I)
payment of the indebtedness, (II) provision for repayment to the Bank of
any amounts to be paid or advanced under Outstanding Commitments, and (III)
all costs of collection and enforcement, to third parties claiming a
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secondary or other security interest in the Collateral, with any remaining
surplus paid to the Member. The Member shall be liable to the Bank for any
deficiency remaining.
(b) If the indebtedness, accrued interest thereon and other amounts or
charges owing by the Member shall have become due and payable (by
acceleration or otherwise), the Bank shall have the right, at any time or
from time to time to the fullest extent permitted by law, in addition to
all other rights and remedies available to it, without prior notice to the
Member, to set off against and to appropriate and apply to such due and
payable amounts any debt owing to, and any other funds held in any manner
for the account of, the Member by the Bank, including without limitation,
all Bank Deposits now or hereafter maintained by the Member with the Bank.
Such right shall exist whether or not such debt owing to, or funds held for
the account of, the Member is matured or unmatured, and regardless of the
existence or adequacy of any collateral, guaranty or any other security,
right or remedy available to the Bank. The Member hereby consents to and
confirms the foregoing arrangements and confirms the Bank's rights of
banker's lien and set off. Nothing in this Advances Agreement shall be
deemed a waiver or prohibition of or restriction on the Bank's rights of
banker's lien or set off.
(c) The Member acknowledges that the breach by the Member of the
provisions of this Agreement and in particular Section 3.04 hereof would
cause irreparable injury to the Bank and that remedies at law for any such
breach will be inadequate, and consents and agrees that the Bank shall be
entitled, without the necessity of proof of actual damage, to specific
performance of the terms of this Agreement and to injunctive relief in any
proceedings which may be brought to enforce the provisions of this
Agreement. The Member waives the right to assert the defense that such
breach or violation can be compensated adequately in damages in an action
of law.
SECTION 4.03. PAYMENT OF PREPAYMENT CHARGES
Any prepayment fees or charges applicable to an advance shall be payable at
the time of any voluntary or involuntary payment of all or part of the
principal of such Advance prior to the originally scheduled maturity
thereof, including without limitation payments that are made as a part of a
liquidation of the Borrower or that become due by operation of law or as a
result of an acceleration pursuant to Section 4.01 hereof, whether such
payment is made by the Borrower, by a conservator, receiver, liquidator or
trustee of or for the Borrower, or by any successor to or any assignee of
the Borrower.
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5. MISCELLANEOUS.
SECTION 5.01. GENERAL REPRESENTATIONS, QTL REPORTING, WARRANTIES AND
INDEMNIFICATIONS BY THE MEMBER.
The Member hereby represents and warrants that, as of the date hereof and
the date of each Advance or Other Credit Product hereunder:
(a) The Member, if a savings association, will truly and accurately
represent and warrant its status as a Qualified Thrift Lender ("QTL") as
defined by applicable federal law on any Application for Advance or Other
Credit Product Agreement between Member and the Bank. If the Member is a
savings association and it fails the QTL test as set forth by the Office
of Thrift Supervision Regulations now in effect or as amended, and becomes
ineligible under applicable federal law for Bank advances, the savings
association Member shall immediately provide the Bank with written
notification of its ineligibility for Bank advances. If a non-QTL member,
the Member warrants that Advances made under Section 10(a) of the Bank Act
(12 USC 1430 (a)), shall be for the purposes of housing finance.
(b) The Member will truly and accurately represent and warrant the purpose
of any Advance or Other Credit Product on any Application for Advance or
Other Credit Product Agreement between Member and the Bank.
(c) The Member will promptly furnish any financial, collateral or other
information requested by the Bank in connection with any Advance or Other
Credit Product.
(d) The Member is not, and neither the execution of nor the performance of
any transactions or obligations of the Member under any Advice of Credit,
Application for Advance, Other Credit Product Agreement or this Advances
Agreement shall, with the passage of time, the giving of notice or
otherwise, cause the Member to be: (i) in violation of its charter or
articles of incorporation, bylaws, the Bank Act, the FHFB Regulations, any
other law or administrative regulation, agreement, or any court decree; or
(ii) in default or in breach of any indenture, contract, or other
instrument or agreement to which the Member is a party or by which it or
any of its property is bound or any default under, breach of, or failure to
comply with any judgment, order, decree, regulatory directive, or other
process of any court or agency having jurisdiction of or which is binding
upon the Member.
(e) The Member is not in default under any Advice of Credit or Other
Credit Product Agreement with the Bank.
(f) The Member has full power and authority and has received all corporate
and governmental authorizations and approvals (including without
limitation, those required under the Bank Act and the FHFB Regulations) as
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may be required to enter into and perform its obligations under any Advice
of Credit, Application for Advance, Other Credit Product Agreement or this
Advances Agreement, and to obtain Advances and Other Credit Products.
(g) The information given by the Member in any writing provided,
electronic transmission or in any oral statement made, in connection with
any Application for Advance or Other Credit Product Agreement, is at all
relevant times true, accurate and complete in all material respects.
(h) The Member will at all times maintain and accurately reflect the terms
of this Advances Agreement (including the Bank's security interest in the
Collateral) and all Advances and Other Credit Products hereunder on its
books and records, including evidence of necessary authorizations to
effectuate transactions under this Agreement.
(i) The Member and its successors and assigns (collectively referred to in
this Section 5.01(i) as "Member") shall indemnify and hold the Bank
harmless from and against any and all costs, claims, expenses, damages and
liabilities with respect to any action which may be instituted by any
person or entity against the Bank as a result of any transaction, including
without limitation, Bank credit extensions, services, and Other Credit
Products contemplated by this Advances Agreement or action or nonaction
arising from this Advances Agreement, except where the same results solely
from the recklessness or willful misconduct of the Bank. In addition, the
Member shall indemnify and hold the Bank harmless from and against any and
all costs, claims, expenses, damages, and liabilities resulting in any way
from the presence or effects of any toxic or hazardous substances or
materials in, on, or under any real property or interest in real property
that is subject to or included in the Collateral. The Member also agrees
to reimburse the Bank for such reasonable fees and charges as may be
assessed by the Bank to cover overhead and other cost, including reasonable
attorneys' fees, incurred either under this indemnification provision or in
the administration of this Advances Agreement, any Advice of Credit or
Other Credit Product Agreement.
SECTION 5.02. ASSIGNMENT.
The Bank may assign or negotiate to any other Federal Home Loan Bank or to
any other person or entity, with or without recourse, any Indebtedness of
the Member or participations therein, and the Bank may assign or transfer
all or any part of the Bank's right, title, and interest in and to this
Advances Agreement and may assign and deliver the whole or any part of the
Collateral to the transferee, which shall succeed to all the powers and
rights and duties of the Bank in respect thereof, and the Bank shall
thereafter be forever relieved and fully discharged from any liability or
responsibility with respect to the transferred Collateral. The Member may
not assign or transfer any of its rights or obligations hereunder (by
operation of law, the appointment of a receivership, or otherwise) without
the express prior written consent of the Bank.
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SECTION 5.03. DISCRETION OF BANK TO GRANT OR DENY ADVANCES AND OTHER
CREDIT PRODUCTS.
Nothing contained herein or in any documents or oral representations
describing or setting forth the Bank's credit programs or Credit Policies
shall be construed as an agreement or commitment on the part of the Bank to
grant Advances or extend Other Credit Products hereunder, the right and
power of the Bank in its discretion to either grant or deny any Advance or
Other Credit Product requested hereunder being expressly reserved.
SECTION 5.04. AMENDMENT; WAIVERS.
No modification, amendment or waiver of any provision of this Advances
Agreement or consent to any departure therefrom shall be effective unless
executed by the party against whom such change is asserted and shall be
effective only in the specific instance and for the purpose for which
given. No notice to or demand on the Member in any case shall entitle the
Member to any other or further notice or demand in the same, or similar or
other circumstances. Any forbearance, failure or delay by the Bank in
exercising any right, power or remedy hereunder shall not be deemed to be a
waiver thereof, and any single or partial exercise by the Bank of any
right, power or remedy hereunder shall not preclude the further exercise
thereof. Every right, power and remedy of the Bank shall continue in full
force and effect until specifically waived by the Bank in writing.
SECTION 5.05. JURISDICTION; LEGAL FEES.
In any action or proceeding brought by the Bank or the Member in order to
enforce any right or remedy under this Advances Agreement, the parties
hereby consent to, and agree that they will submit to, the jurisdiction of
the United States District Court for the Southern District of Indiana or,
if such action or proceeding may not be brought in federal court, the
jurisdiction of the courts of the State of Indiana located in Marion
County. The Member agrees that, if any action or proceeding is brought by
the Member seeking to obtain any legal or equitable relief against the Bank
under or arising out of this Advances Agreement or any transaction
contemplated hereby, and such relief is not granted by the final decision,
after any and all appeals, of a court of competent jurisdiction, the Member
shall promptly pay upon demand all attorneys' fees and other costs incurred
by the Bank in connection therewith. Further, the Member agrees that if
any action or proceeding is brought by the Bank in connection with the
successful enforcement of any of the Bank's rights or remedies hereunder or
otherwise or if the services of legal counsel are required in connection
with the administration of the credit facilities contemplated hereby, the
Member shall pay promptly upon demand all attorneys' fees and other costs
incurred by the Bank in connection therewith.
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SECTION 5.06. WAIVER OF JURY TRIAL.
To the extent allowed by law, the Member hereby waives the right to a jury
trial in any action or proceeding brought by or against the Member
regarding this Agreement, the Collateral, Other Credit Products, or the
credit facilities contemplated hereby.
SECTION 5.07. NOTICES.
Except as provided in the last sentence of this Section 5.07, any written
notice, advice, request, consent or direction given, made or withdrawn
pursuant to this Agreement shall be either in writing or transmitted
electronically and reproduced mechanically by the addressee and shall be
given by first class mail, postage prepaid, or by telecopy or other
facsimile transmission, or by private courier or delivery service. Except
for notices made under Section 4.02, all non-oral notices shall be deemed
given when actually received at the principal office of the Bank or the
Member, as appropriate. All notices shall be designated to the attention
of an office or section of the Bank or of the Member if the Bank or the
Member has made a request for the notice to be so addressed. Any notice by
the Bank to the Member pursuant to Sections 2.01, 3.03, 3.04 or 3.05 hereof
may be oral and shall be deemed to have been duly given to and received by
the Member at the time of the oral communication.
SECTION 5.08. SIGNATURES OF MEMBER; ACCEPTANCE BY BANK.
(a) For purposes of this Advances Agreement, documents shall be deemed
signed by the Member when a signature of an authorized signatory or an
authorized facsimile thereof appears on the document. The Bank may rely on
any signature or facsimile thereof which reasonably appears to the Bank to
be the signature of an authorized person, including signatures appearing on
documents transmitted electronically to and reproduced mechanically at the
Bank. The Secretary, the Cashier, the Assistant Secretaries, or the
Assistant Cashiers of the Member shall from time to time certify to the
Bank on forms provided by the Bank the names and titles of the persons
authorized to apply on behalf of the Member to the Bank for Advances and
Other Credit Products. Such certifications are incorporated herein and
made a part of this Advances Agreement and shall continue in effect until
expressly revoked by the Member notwithstanding that subsequent
certifications may authorize additional persons to act for and on behalf of
Member.
(b) This Agreement shall only be binding upon the Bank when accepted and
executed by the Bank by two duly authorized officers and shall be deemed
accepted by and delivered to the Bank at its home office in Indianapolis,
Indiana.
23
<PAGE>
SECTION 5.09. APPLICABLE LAW; SEVERABILITY.
In addition to the terms and conditions specifically set forth herein and
in any Advice of Credit or Other Credit Product Agreement between the Bank
and the Member, this Advances Agreement and all Advances and Other Credit
Products extended hereunder shall be governed by the statutory and common
law of the United States and, to the extent federal law incorporates or
defers to state law, the laws (exclusive of the choice of law provisions)
of the State of Indiana, including the Uniform Commercial Code as in effect
in the State of Indiana. In the event that any portion of this Advances
Agreement conflicts with applicable law or the Credit Policies, such
conflict shall not affect other provisions of this Advances Agreement which
can be given effect without the conflicting provisions, and to this end and
the provisions of this Advances Agreement are declared to be severable.
SECTION 5.10. INTEREST RATE LIMITATIONS.
Notwithstanding anything contained herein to the contrary, the obligation
of the Member to make payments of interest shall be subject to the
limitation that payments of interest shall not be required to be made to
the Bank to the extent that its receipt thereof would not be permissible
under the law or laws applicable to the Bank limiting rates of interest
which may be charged or collected by the Bank. Any such payments of
interest which are not made as a result of the limitation referred to in
the preceding sentence shall be made by the Member to the Bank on the
earliest interest payment date or dates on which the receipt thereof would
be permissible under the laws applicable to the Bank limiting rates of
interest which may be charged or collected by the Bank.
SECTION 5.11. SUCCESSORS AND ASSIGNS.
This Advances Agreement shall be binding upon and inure to the benefit of
the successors and assigns of the Member and the Bank, providing that the
Member may not assign any of its rights or obligations hereunder (by
operation of law, the appointment of a receivership, or other) without the
prior written consent of the Bank. The Bank may sell, transfer or assign
or grant participation in Advances or Other Credit Products.
SECTION 5.12. REMEDIES CUMULATIVE.
All rights and remedies provided herein or otherwise at law or in equity
shall be cumulative, and are in addition to, and not exclusive of, any
rights or remedies provided by law, including without limitation, the
rights and remedies of a secured party under federal law and the Uniform
Commercial Code as it is in effect from time to time in Indiana, including
the right of the Bank to retain the Collateral in satisfaction of the
Indebtedness. The exercise of one or more thereof shall not preclude, or
24
<PAGE>
be deemed an election of remedies against, any other remedy, right or
privilege contained herein or provided to the Bank by law, rule, or
regulation or at equity.
SECTION 5.13. RECORDS OF BANK PRESUMED ACCURATE.
The books and records of the Bank with respect to the Indebtedness, the
Member's accounts or any other obligations of the Member hereunder or
otherwise owing to the Bank shall be presumed to be accurate, complete, and
binding upon the Member, absent fraud or willful misconduct on the part of
the Bank with respect to such account or obligation.
SECTION 5.14. ENTIRE AGREEMENT.
This Advances Agreement and the other documents referenced herein relating
to Advances and Other Credit Products embody the entire Agreement and
understanding between the parties hereto relating to the subject matter
hereof. This Advances Agreement amends, restates and supersedes all prior
agreements between such parties which relate to such subject matter, and
all Advances and Other Credit Products made by the Bank to the Member prior
to the execution of this Advances Agreement shall be governed by the terms
of this Advances Agreement and not by the terms of the prior agreement.
The Agreement and the other documents contemplated hereby or delivered in
connection herewith shall be construed consistently with each other in
order to best effectuate the intent of the Member and the Bank in entering
into the relationships contemplated by all these agreements. The
agreements referenced herein constitute the sole and entire agreement of
the parties and no statement or promise has been made with respect to the
subject matter of these agreements other than as expressed herein. In the
event of a conflict between the terms of this Agreement and any of the
other such documents, the provisions of this Agreement shall control,
except with respect to any note, whose respective terms shall control.
25
<PAGE>
IN WITNESS WHEREOF, the Member and the Bank have caused this Advances
Agreement to be signed in their names by their duly authorized officers as
of the date first above mentioned.
ChoiceOne Bank FEDERAL HOME LOAN BANK OF INDIANAPOLIS
(Full Name of Member)
By: /S/ JAE M. MAXFIELD By: /S/ BRUCE MOORE
Typed Name: JAE M. MAXFIELD Typed Name: BRUCE MOORE
Its: PRESIDENT & CEO Its: VICE PRESIDENT
(Title of Signer) (Title of Signer)
By: /S/ THOMAS L. LAMPEN By: /S/ TIM ZAPF
Typed Name: Thomas L. Lampen Typed Name: Tim Zapf
Its: VICE PRESIDENT & CFO Its: VICE PRESIDENT
(Title of Signer) (Title of Signer)
26
<PAGE>
FEDERAL HOME LOAN BANK OF INDIANAPOLIS
MEMBER ACKNOWLEDGMENT
AND NOTARIZATION
State of MICHIGAN )
) ss.
County of KENT )
On this 24th day of March, 1997, before me personally came Jae M. Maxfield
and Thomas L. Lampen, to me known, who, being by me duly sworn, did depose
and state that they are the President & CEO and Vice President & CFO of
said Member; and that they signed their names on the Agreement by order of
the Board of Directors or other authorized governing body of said Member;
and that said Jae M. Maxfield and Thomas L. Lampen are duly authorized and
acknowledge the execution of said instrument to be the voluntary act and
deed of said Member.
/S/ LINDA S. PECK (SEAL)
Notary Public Signature
LINDA S. PECK
Printed Name
My Commission Expires: 3-27-98
My County of Residence: KENT COUNTY, MI
27
<PAGE>
EXHIBIT 13
[CHOICEONE LOGO]
CHOICEONE FINANCIAL SERVICES, INC.
1997
ANNUAL REPORT TO SHAREHOLDERS
<PAGE>
CHOICEONE FINANCIAL SERVICES, INC.
1997 Annual Report to Shareholders
CONTENTS PAGE
To Our Shareholders . . . . . . . . . . . . . . . . . . . . . . . . A-1
ChoiceOne Financial Services, Inc. . . . . . . . . . . . . . . . . . A-1
Common Stock Information . . . . . . . . . . . . . . . . . . . . . . A-1
Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . A-2
Consolidated Financial Statements . . . . . . . . . . . . . . . . . A-3
Notes to Consolidated Financial Statements . . . . . . . . . . . . . A-7
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . A-22
Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . A-23
Corporate Information . . . . . . . . . . . . . . . . . . . . . . . A-32
Directors and Officers . . . . . . . . . . . . . . . . . . . . . . . A-33
-i-
<PAGE>
CHOICEONE FINANCIAL SERVICES, INC.
ChoiceOne Financial Services, Inc. is a single-bank holding company. Its
principal banking subsidiary, ChoiceOne Bank (Sparta, Michigan) primarily
serves communities in portions of Kent, Muskegon, Newaygo, and Ottawa counties
in Michigan where the Bank's offices are located and the areas immediately
surrounding those communities. Currently the Bank serves those markets through
four full-service offices and one off-premises automated transaction machine.
The Bank provides a variety of banking and other financial services to all
types of customers.
TO OUR SHAREHOLDERS
This 1997 Annual Report to Shareholders contains our audited financial
statements, detailed financial review and all of the information that
regulations of the Securities and Exchange Commission (the "SEC") require to
be presented in annual reports to shareholders. For legal purposes, this is
the ChoiceOne Financial Services, Inc. 1997 annual report to shareholders.
Although attached to our proxy statement, this report is not part of our proxy
statement, is not considered to be soliciting material and is not considered
to be filed with the SEC except to the extent that it is expressly incorporated
by reference in a document filed with the SEC. Shareholders who would like to
receive even more detailed information than that contained in this 1997 Annual
Report to Shareholders are invited to request our Annual Report on Form 10-KSB.
OUR ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 1997,
INCLUDING THE FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES, WILL BE
PROVIDED TO ANY SHAREHOLDER, WITHOUT CHARGE, UPON WRITTEN REQUEST TO MR. THOMAS
LAMPEN, TREASURER, CHOICEONE FINANCIAL SERVICES, INC., 109 EAST DIVISION STREET,
SPARTA, MICHIGAN 49345.
COMMON STOCK INFORMATION
ChoiceOne's shares are traded in the over-the-counter market by several
brokers. There is no well established public trading market for the shares,
trading activity is infrequent, and price information is not regularly
published.
The range of high and low bid information for shares of common stock for each
quarterly period during the past two years is as follows:
<PAGE>
<TABLE>
<CAPTION>
1997 1996
------------------------------
LOW HIGH LOW HIGH
------------------------------
<S> <C> <C> <C> <C>
First Quarter. . . . . . . $36 $38 $32 $37
Second Quarter . . . . . . 36 42 34 39
Third Quarter. . . . . . . 37 42 34 39
Fourth Quarter . . . . . . 38 42 35 38
</TABLE>
The above market prices have been adjusted where necessary to reflect the
stock dividends declared in 1998 and 1997. The prices listed above are over-
the-counter market quotations reported to ChoiceOne by its market makers
listed in this annual report. The over-the-counter market quotations reflect
inter-dealer prices without retail markup, markdown or commission and may not
necessarily represent actual transactions.
As of February 28, 1998, there were 513,325 shares of ChoiceOne Financial
Services, Inc. common stock issued and outstanding. These shares were held
of record by 586 shareholders.
The following table summarizes cash dividends paid per share of common stock
during 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---------------
<S> <C> <C>
First Quarter. . . . . . . . . $ .32 $ .29
Second Quarter . . . . . . . . .38 .31
Third Quarter. . . . . . . . . .38 .31
Fourth Quarter . . . . . . . . .38 .32
---------------
Totals. . . . . . . . . . . . $1.46 $1.23
===============
</TABLE>
The above dividend per share amounts have been adjusted where necessary to
reflect the stock dividends declared in 1998 and 1997.
ChoiceOne's principal source of funds to pay cash dividends are the earnings
and dividends paid by ChoiceOne Bank. ChoiceOne Bank is restricted in its
ability to pay cash dividends under current regulations (Note 14). Based on
information presently available, management expects ChoiceOne to declare and
pay regular quarterly cash dividends in 1998.
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
CHOICEONE FINANCIAL SERVICES, INC.
<CAPTION>
1997 1996 1995 1994 1993
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR (IN THOUSANDS)
Net interest income . . . . . . . . . . . . . $ 6,315 $ 5,754 $ 4,931 $ 4,468 $ 4,264
Provision for loan losses . . . . . . . . . . 539 523 164 126 121
Noninterest income. . . . . . . . . . . . . . 1,769 1,555 656 597 710
Noninterest expense . . . . . . . . . . . . . 5,176 4,436 3,448 3,340 3,225
Income before income taxes. . . . . . . . . . 2,369 2,350 1,975 1,599 1,628
Income tax expense. . . . . . . . . . . . . . 632 655 511 356 372
Net income. . . . . . . . . . . . . . . . . . 1,737 1,695 1,464 1,243 1,256
Cash dividends declared . . . . . . . . . . . 783 663 551 469 429
PER SHARE<F*>
Net income. . . . . . . . . . . . . . . . . . $ 3.23 $ 3.14 $ 2.79 $ 2.29 $ 2.32
Cash dividends. . . . . . . . . . . . . . . . 1.46 1.23 1.06 .87 .79
Shareholders' equity. . . . . . . . . . . . . 28.93 27.06 26.64 23.76 23.90
AVERAGE FOR THE YEAR (IN THOUSANDS)
Securities. . . . . . . . . . . . . . . . . . $ 22,189 $ 22,547 $ 27,609 $ 31,122 $ 31,079
Gross loans . . . . . . . . . . . . . . . . . 118,369 94,461 74,223 68,077 64,705
Deposits. . . . . . . . . . . . . . . . . . . 100,815 95,210 91,446 90,772 89,448
Shareholders' equity. . . . . . . . . . . . . 14,998 14,129 13,200 12,922 12,325
Assets. . . . . . . . . . . . . . . . . . . . 148,652 123,134 107,552 105,445 103,155
AT YEAR END (IN THOUSANDS)
Securities. . . . . . . . . . . . . . . . . . $ 19,942 $ 23,006 $ 23,187 $ 30,410 $ 32,315
Gross loans . . . . . . . . . . . . . . . . . 127,776 110,079 79,082 69,410 66,844
Deposits. . . . . . . . . . . . . . . . . . . 107,492 95,606 92,902 91,236 88,630
Shareholders' equity. . . . . . . . . . . . . 15,537 14,537 13,784 12,876 12,954
Assets. . . . . . . . . . . . . . . . . . . . 156,329 141,731 109,916 106,137 104,542
RATIOS
Return on average assets. . . . . . . . . . . 1.17% 1.38% 1.36% 1.18% 1.22%
Return on average shareholders' equity. . . . 11.58 12.00 11.09 9.62 10.19
Dividend payout
Cash (based on net income). . . . . . . . . 45.08 39.12 37.64 37.73 34.16
Stock (based on shares outstanding) . . . . 6.00 None 20.00 25.00 None
Shareholders' equity to assets (at
year end) . . . . . . . . . . . . . . . . . 9.94 10.26 12.54 12.13 12.39
<FN>
<F*> Per share amounts are retroactively adjusted for the effect of stock
dividends and stock splits.
</FN>
</TABLE>
A-2
<PAGE>
<TABLE>
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
ChoiceOne Financial Services, Inc.
December 31
<CAPTION>
1997 1996
--------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . $ 3,769,000 $ 4,952,000
Securities available for sale . . . . . . . . . . . . . . . . . . 19,942,000 23,006,000
Loans, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . 126,209,000 108,592,000
Premises and equipment, net . . . . . . . . . . . . . . . . . . . 3,663,000 2,987,000
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,746,000 2,194,000
--------------------------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . $156,329,000 $141,731,000
================================
LIABILITIES
Deposits - noninterest bearing. . . . . . . . . . . . . . . . . . $ 13,464,000 $ 13,188,000
Deposits - interest bearing . . . . . . . . . . . . . . . . . . . 94,028,000 82,418,000
Federal funds purchased and repurchase agreements . . . . . . . . 2,060,000 4,731,000
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . 4,248,000 1,657,000
Long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . 26,992,000 25,200,000
--------------------------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . 140,792,000 127,194,000
SHAREHOLDERS' EQUITY
Preferred stock; shares authorized: 100,000; shares
outstanding: none . . . . . . . . . . . . . . . . . . . . . . . - -
Common stock, $10 par value; shares authorized:
1,000,000; shares outstanding: 537,015 in 1997
and 482,710 in 1996 . . . . . . . . . . . . . . . . . . . . . . 5,370,000 4,827,000
Paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . 7,005,000 5,292,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . 2,994,000 4,305,000
Unrealized gains and losses on securities . . . . . . . . . . . . 168,000 113,000
--------------------------------
Total shareholders' equity. . . . . . . . . . . . . . . . . . 15,537,000 14,537,000
--------------------------------
Total liabilities and shareholders' equity. . . . . . . . . . $156,329,000 $141,731,000
================================
</TABLE>
See accompanying notes to consolidated financial statements.
A-3
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
ChoiceOne Financial Services, Inc.
Years ended December 31
<CAPTION>
1997 1996 1995
-----------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Loans, including fees . . . . . . . . . . . . . . . . . . . $11,230,000 $ 9,050,000 $ 7,099,000
Securities
Taxable . . . . . . . . . . . . . . . . . . . . . . . . . 845,000 916,000 1,181,000
Nontaxable. . . . . . . . . . . . . . . . . . . . . . . . 484,000 450,000 511,000
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,000 3,000 8,000
-----------------------------------------------
Total interest income . . . . . . . . . . . . . . . . . 12,567,000 10,419,000 8,799,000
INTEREST EXPENSE
Deposits. . . . . . . . . . . . . . . . . . . . . . . . . . 4,279,000 3,919,000 3,760,000
Short-term borrowings . . . . . . . . . . . . . . . . . . . 264,000 154,000 106,000
Long-term debt. . . . . . . . . . . . . . . . . . . . . . . 1,709,000 592,000 2,000
-----------------------------------------------
Total interest expense. . . . . . . . . . . . . . . . . 6,252,000 4,665,000 3,868,000
-----------------------------------------------
NET INTEREST INCOME. . . . . . . . . . . . . . . . . . . . . 6,315,000 5,754,000 4,931,000
PROVISION FOR LOAN LOSSES. . . . . . . . . . . . . . . . . . 539,000 523,000 164,000
-----------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES. . . . . 5,776,000 5,231,000 4,767,000
NONINTEREST INCOME
Customer service fees . . . . . . . . . . . . . . . . . . . 448,000 428,000 420,000
Security gains or losses. . . . . . . . . . . . . . . . . . 28,000 - -
Insurance commission income . . . . . . . . . . . . . . . . 895,000 811,000 -
Mortgage loan sales and servicing . . . . . . . . . . . . . 152,000 105,000 93,000
Other income. . . . . . . . . . . . . . . . . . . . . . . . 246,000 211,000 143,000
-----------------------------------------------
Total noninterest income. . . . . . . . . . . . . . . . 1,769,000 1,555,000 656,000
NONINTEREST EXPENSE
Salaries and benefits . . . . . . . . . . . . . . . . . . . 2,829,000 2,366,000 1,740,000
Occupancy expense . . . . . . . . . . . . . . . . . . . . . 761,000 657,000 475,000
Computer processing . . . . . . . . . . . . . . . . . . . . 156,000 162,000 156,000
Other expense . . . . . . . . . . . . . . . . . . . . . . . 1,430,000 1,251,000 1,077,000
-----------------------------------------------
Total noninterest expense . . . . . . . . . . . . . . . 5,176,000 4,436,000 3,448,000
-----------------------------------------------
<PAGE>
INCOME BEFORE INCOME TAX . . . . . . . . . . . . . . . . . . 2,369,000 2,350,000 1,975,000
INCOME TAX EXPENSE . . . . . . . . . . . . . . . . . . . . . 632,000 655,000 511,000
-----------------------------------------------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,737,000 $ 1,695,000 $ 1,464,000
===============================================
BASIC EARNINGS PER COMMON SHARE AND EARNINGS PER COMMON
SHARE ASSUMING DILUTION. . . . . . . . . . . . . . . . . . $ 3.23 $ 3.14 $ 2.79
===============================================
</TABLE>
See accompanying notes to consolidated financial statements.
A-4
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
ChoiceOne Financial Services, Inc.
Years ended December 31
<CAPTION>
COMMON
STOCK AND UNREALIZED
PAID-IN RETAINED GAINS AND LOSSES
CAPITAL EARNINGS ON SECURITIES TOTAL
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, start of 1995 . . . . . . . . . . . . . . $ 8,169,000 $ 5,266,000 $(559,000) $12,876,000
Net income. . . . . . . . . . . . . . . . . . . . - 1,464,000 - 1,464,000
Repurchase of 18,324 shares of stock. . . . . . . (810,000) - - (810,000)
Change in unrealized gains and losses . . . . . . - - 810,000 810,000
20% stock dividend paid in May 1995 . . . . . . . 2,901,000 (2,906,000) - (5,000)
Cash dividends ($1.06 per share). . . . . . . . . - (551,000) - (551,000)
----------------------------------------------------------------
Balance, end of 1995 . . . . . . . . . . . . . . . 10,260,000 3,273,000 251,000 13,784,000
Issuance of 20,610 shares of stock to
effect a business combination of
insurance subsidiary. . . . . . . . . . . . . . (26,000) - - (26,000)
Net income. . . . . . . . . . . . . . . . . . . . - 1,695,000 - 1,695,000
Repurchase of 2,703 shares of stock . . . . . . . (115,000) - - (115,000)
Change in unrealized gains and losses . . . . . . - - (138,000) (138,000)
Cash dividends ($1.23 per share). . . . . . . . . - (663,000) - (663,000)
----------------------------------------------------------------
Balance, end of 1996 . . . . . . . . . . . . . . . 10,119,000 4,305,000 113,000 14,537,000
Net income. . . . . . . . . . . . . . . . . . . . - 1,737,000 - 1,737,000
Change in unrealized gains and losses . . . . . . - - 55,000 55,000
6% stock dividend paid in May 1997. . . . . . . . 1,178,000 (1,187,000) - (9,000)
<PAGE>
5% stock dividend to be paid in March
1998. . . . . . . . . . . . . . . . . . . . . . 1,078,000 (1,078,000) - -
Cash dividends ($1.46 per share). . . . . . . . . - (783,000) - (783,000)
----------------------------------------------------------------
BALANCE, END OF 1997 . . . . . . . . . . . . . . . $12,375,000 $ 2,994,000 $ 168,000 $15,537,000
================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
A-5
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
ChoiceOne Financial Services, Inc.
Years ended December 31
<CAPTION>
1997 1996 1995
-----------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 1,737,000 $ 1,695,000 $ 1,464,000
Reconciling items:
Security gains. . . . . . . . . . . . . . . . . . . . . . (28,000) - -
Net amortization on securities. . . . . . . . . . . . . . 74,000 65,000 144,000
Net gain on sales of loans. . . . . . . . . . . . . . . . (42,000) (70,000) (31,000)
Provision for loan losses . . . . . . . . . . . . . . . . 539,000 523,000 164,000
Depreciation. . . . . . . . . . . . . . . . . . . . . . . 320,000 288,000 233,000
Other non-cash charges and credits. . . . . . . . . . . . (13,000) (139,000) (103,000)
Deferred income tax benefit . . . . . . . . . . . . . . . (69,000) (61,000) (42,000)
Changes in assets and liabilities:
Interest receivable . . . . . . . . . . . . . . . . . . (85,000) (86,000) 78,000
Other assets. . . . . . . . . . . . . . . . . . . . . . (419,000) (558,000) (5,000)
Interest payable. . . . . . . . . . . . . . . . . . . . 88,000 96,000 48,000
Other liabilities . . . . . . . . . . . . . . . . . . . 2,503,000 331,000 157,000
-----------------------------------------------
Net cash from operating activities. . . . . . . . . . 4,605,000 2,084,000 2,107,000
-----------------------------------------------
Cash flows from investing activities:
Securities available for sale:
Purchases . . . . . . . . . . . . . . . . . . . . . . . . (4,219,000) (5,472,000) (595,000)
Sales proceeds. . . . . . . . . . . . . . . . . . . . . . 4,618,000 1,874,000 2,179,000
Principal payments. . . . . . . . . . . . . . . . . . . . 2,764,000 3,504,000 4,894,000
Securities held to maturity:
Purchases . . . . . . . . . . . . . . . . . . . . . . . . - - (350,000)
Principal payments. . . . . . . . . . . . . . . . . . . . - - 2,179,000
Net change in loans . . . . . . . . . . . . . . . . . . . . (18,120,000) (30,913,000) (9,620,000)
Purchase of travel agency . . . . . . . . . . . . . . . . . (50,000) - -
Premises and equipment expenditures, net. . . . . . . . . . (996,000) (762,000) (236,000)
-----------------------------------------------
Net cash used in investing activities . . . . . . . . (16,003,000) (31,769,000) (1,549,000)
-----------------------------------------------
Cash flows from financing activities:
Net change in deposits. . . . . . . . . . . . . . . . . . . 11,886,000 2,704,000 1,666,000
Net change in short-term borrowings . . . . . . . . . . . . (2,671,000) 3,731,000 -
Proceeds from long-term debt. . . . . . . . . . . . . . . . 3,731,000 24,200,000 1,000,000
Payments on long-term debt. . . . . . . . . . . . . . . . . (1,939,000) - -
<PAGE>
Effect of business combination of insurance
subsidiary. . . . . . . . . . . . . . . . . . . . . . . . - (26,000) -
Repurchase of common stock. . . . . . . . . . . . . . . . . - (115,000) (810,000)
Cash dividends and fractional shares from stock
dividends . . . . . . . . . . . . . . . . . . . . . . . . (792,000) (663,000) (556,000)
-----------------------------------------------
Net cash from financing activities. . . . . . . . . . 10,215,000 29,831,000 1,300,000
-----------------------------------------------
Net change in cash and cash equivalents. . . . . . . . . . . (1,183,000) 146,000 1,858,000
Beginning cash and cash equivalents. . . . . . . . . . . . . 4,952,000 4,806,000 2,948,000
-----------------------------------------------
Ending cash and cash equivalents . . . . . . . . . . . . . . $ 3,769,000 $ 4,952,000 $ 4,806,000
===============================================
Cash paid for interest . . . . . . . . . . . . . . . . . . . $ 6,165,000 $ 4,569,000 $ 3,820,000
Cash paid for income taxes . . . . . . . . . . . . . . . . . 605,000 774,000 515,000
Loans transferred to other real estate . . . . . . . . . . . 279,000 - -
Securities transferred to available for sale . . . . . . . . - - 8,354,000
Securities transferred to held to maturity . . . . . . . . . - - 1,795,000
</TABLE>
See accompanying notes to consolidated financial statements.
A-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ChoiceOne Financial Services, Inc.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include ChoiceOne Financial Services,
Inc., its wholly-owned subsidiary, ChoiceOne Bank, and ChoiceOne Bank's
wholly-owned subsidiaries, ChoiceOne Insurance Agencies, Inc., and Alpine
Travel, Inc. (together referred to as "ChoiceOne"). Intercompany
transactions and balances have been eliminated in consolidation.
NATURE OF OPERATIONS
ChoiceOne Financial Services, Inc. was formerly 1st Community Bancorp, Inc.
The company's name change was approved by the shareholders at the April 29,
1997, annual meeting. The name change was made to more easily identify the
bank holding company with ChoiceOne Bank and ChoiceOne Insurance Agencies,
Inc.
ChoiceOne Bank (the "Bank") is a full-service community bank that offers
commercial, consumer, and real estate loans as well as both traditional
deposit and alternative investment products to both commercial and consumer
clients in portions of Kent, Muskegon, Newaygo, and Ottawa counties in
Michigan. Substantially all loans are secured by specific items of
collateral including business assets, consumer assets, and real estate.
Commercial loans are expected to be repaid from the cash flows from
operations of businesses. Real estate loans are secured by both
residential and commercial real estate.
ChoiceOne Insurance Agencies, Inc. (the "Insurance Agency") became a
wholly-owned subsidiary of the Bank on January 1, 1996. The Insurance
Agency sells a full line of insurance products. Alpine Travel, Inc. (the
"Travel Agency") was acquired by the Bank effective August 1, 1997. The
Travel Agency primarily sells travel-related products such as airline
tickets and trips.
Together, the Bank, the Insurance Agency, and the Travel Agency account for
substantially all of ChoiceOne's assets, revenues, and operating income.
USE OF ESTIMATES
To prepare financial statements in conformity with generally accepted
accounting principles, ChoiceOne's management makes estimates and
assumptions based on available information. These estimates and
assumptions affect the amounts reported in the financial statements and the
disclosures provided. Actual results may differ from these estimates.
Estimates associated with the allowance for loan losses and fair values of
certain financial instruments are particularly susceptible to change.
<PAGE>
CASH FLOW REPORTING
Cash and cash equivalents is defined to include cash on hand, demand
deposits with other banks, and federal funds sold. Cash flows are reported
on a net basis for customer loan and deposit transactions, deposits with
other financial institutions, and short-term borrowings.
SECURITIES
Securities are classified as held to maturity and carried at amortized cost
when ChoiceOne's management has the positive intent and ability to hold
them to maturity. Securities are classified as available for sale when
they might be sold before maturity. Securities classified as available for
sale are carried at fair value, with unrealized holding gains and losses
reported separately in shareholders' equity, net of tax effect. Realized
gains or losses are based on specific identification of amortized cost.
Securities are written down to fair value when a decline in fair value is
not considered to be temporary. Interest income includes amortization of
purchase premium or discount. Other securities, such as Federal Reserve
Bank stock or Federal Home Loan Bank stock, are carried at cost. A
transfer of securities from held to maturity to available for sale was made
in 1995 in accordance with new interpretive guidance.
LOANS
Loans are reported at the principal balance outstanding, net of deferred
loan fees and costs and an allowance for loan losses. Loans held for sale
are reported at the lower of cost or market, on an aggregate basis. When
loans are sold, they are removed from the loans balance if the tests for
loan sales are met. If the accounting tests for loan sales are not met,
sales of loans are accounted for as secured loan borrowings.
A-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ChoiceOne Financial Services, Inc.
LOAN INCOME
Interest income is reported on the interest method and includes
amortization of net deferred loan fees and costs over the estimated loan
term. Interest on loans is accrued based upon the principal balance
outstanding. The accrual of interest is discontinued at the point in time
at which the collectibility of principal or interest is considered
doubtful. Each loan is evaluated on its own merits; therefore, loans are
not automatically classified as non-accrual based upon standardized
criteria.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is a valuation allowance for probable credit
losses. The allowance is increased by the provision for loan losses and
decreased by charge-offs less recoveries. Management estimates the
allowance balance required based on past loan loss experience, known and
inherent risks in the portfolio, information about specific borrower
situations and estimated collateral values, economic conditions, and other
factors. Allocations of the allowance may be made for specific loans, but
the entire allowance is available for any loan that, in management's
judgment, should be charged-off.
Loans are classified as impaired when full payment under the loan terms is
not expected. Impairment is evaluated in total for smaller-balance loans
of similar nature. Construction real estate mortgages, residential real
estate mortgages, and consumer loans have been classified in this category.
Impairment is evaluated on an individual loan basis for commercial and
agricultural loans. If a loan is considered impaired, a portion of the
allowance for loan losses is allocated to the loan so that it is reported,
net, at the present value of estimated future cash flows using the loan's
existing rate or at the fair value of collateral if repayment is expected
solely from the collateral. Loans are evaluated for impairment when
payments are delayed or when it is probable that all principal and interest
amounts will not be collected according to the original terms of the loan.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed over the assets' useful lives on the straight-line
method.
OTHER REAL ESTATE OWNED
Real estate properties acquired in collection of a loan are recorded at
estimated fair value at acquisition. Any reduction to fair value from the
carrying value of the related loan is accounted for as a loan loss. After
<PAGE>
acquisition, a valuation allowance reduces the reported amount to the lower
of the initial amount or fair value less costs to sell. Expenses, gains
and losses on disposition, and changes in the valuation allowance are
reported in other expenses.
LOAN SERVICING RIGHTS
Servicing rights represent the allocated value of servicing rights on loans
sold. Servicing rights are expensed in proportion to, and over the period
of, estimated net servicing revenues. Impairment is evaluated based on the
fair value of the rights, using groupings of the underlying loans as to
interest rates and then, secondarily, as to geographic and prepayment
characteristics. Any impairment of a grouping is reported as a valuation
allowance.
LONG-TERM ASSETS
Long-term assets are reviewed for impairment when events indicate their
carrying amount may not be recoverable from future undiscounted cash flows.
If impaired, the assets are recorded at discounted amounts.
REPURCHASE AGREEMENTS
Substantially all repurchase agreement liabilities represent amounts
advanced by deposit clients that are not covered by federal deposit
insurance and are secured by securities owned by ChoiceOne.
A-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ChoiceOne Financial Services, Inc.
BENEFIT PLANS
The incentive bonus plan pays an annual bonus based on average return on
equity goals set by the Board of Directors. The Bank's 401(k) savings and
retirement plan allows participant contributions of up to 15% of
compensation. Contributions to the 401(k) savings and retirement plan by
the Bank are discretionary. The Bank provides certain health insurance
benefits to retired employees. These postretirement benefits are accrued
during the years in which the employee provides services. The Bank
previously offered a defined benefit pension plan to qualifying employees.
The defined benefit pension plan was terminated in 1997 and vested benefits
were distributed to participants.
STOCK BASED COMPENSATION
Expense for employee compensation under ChoiceOne's stock option plan is
based on Accounting Principles Board Opinion No. 25, with expense reported
only if options are granted below market price at the grant date. Pro forma
disclosures of net income and earnings per share are provided as if the fair
value method of Statement of Financial Accounting Standards No. 123 was used
for stock based compensation.
INCOME TAXES
Income tax expense is the sum of the current year income tax due and the
change in deferred tax assets and liabilities. Deferred tax assets and
liabilities are the expected future tax consequences of temporary
differences between the carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if
needed, reduces deferred tax assets to the amount expected to be realized.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
Off-balance sheet financial instruments represent credit instruments, such
as loan commitments, lines of credit, and standby letters of credit. The
face amount of credit instruments represents the exposure to loss assuming
customer collateral or ability to repay is worthless.
LEASE COMMITMENTS
Expense is recognized as payments are made on operating leases. Leasing
arrangements are typically for 5 years and contain renewal options.
LOSS CONTINGENCIES
Loss contingencies, including claims and legal actions arising in the
ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be
reasonably estimated.
<PAGE>
SHAREHOLDERS' EQUITY
As of December 31, 1997, ChoiceOne's common stock had a par value of $10
and 1,000,000 shares were authorized. The par value of common stock was
changed from $10 to no par by ChoiceOne's Board of Directors at its
February 1998 meeting. ChoiceOne also has 100,000 shares of preferred
stock authorized. Transfers at fair value from retained earnings are made
for stock dividends.
DIVIDEND RESTRICTIONS
Banking regulations require the maintenance of certain capital levels and
may limit the amount of dividends which may be paid by the Bank to
ChoiceOne or by ChoiceOne to its shareholders.
EARNINGS PER SHARE
Earnings per common share ("EPS") is based on weighted-average common
shares outstanding. Diluted EPS further assumes issue of any dilutive
potential common shares. The accounting standard for computing EPS was
revised for 1997, and requires previously reported EPS to be restated for
comparability. Adoption of the new standard had no effect on ChoiceOne's
EPS data for the current or prior years. EPS has been restated for stock
dividends and splits.
A-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ChoiceOne Financial Services, Inc.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair values of financial instruments are estimated using relevant market
information and other assumptions, which are more fully documented in Note
15 to the financial statements. Fair value estimates involve uncertainties
and matters of significant judgment regarding interest rates, credit risk,
prepayments, and other factors, especially in the absence of broad markets
for particular items. Changes in assumptions or in market conditions could
significantly affect the estimates.
FUTURE ACCOUNTING CHANGES
New accounting standards have been issued which will require future
reporting of comprehensive income (net income plus changes in holding gains
or losses on available for sale securities) and may require redetermination
of industry segment financial information. These standards are not
expected to have a material impact on the consolidated financial
statements.
NOTE 2 - ACQUISITION OF SUBSIDIARIES
On January 1, 1996, the Bank completed a business combination with
the Insurance Agency in a tax-free exchange of stock. Under the terms of
the agreement, 20,610 shares of ChoiceOne Financial Services, Inc. common
stock were exchanged for all of the outstanding shares of the Insurance
Agency. The transaction was accounted for as a pooling of interests. The
operations of the Insurance Agency were not material to ChoiceOne's
consolidated financial position or results of operations.
Effective August 1, 1997, the Bank purchased the Travel Agency. Cash was
paid for all of the outstanding shares of the Travel Agency. The
transaction was accounted for as a purchase.
<PAGE>
NOTE 3 - SECURITIES
Information at year-end or for the year:
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------------------------------------------------------
SECURITIES AVAILABLE FOR SALE DECEMBER 31, 1997
<S> <C> <C> <C> <C>
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 - 2,967,000
------------------------------------------------------------
Total. . . . . . . . . . . . . . . . . . . . . $19,688,000 $272,000 $(18,000) $19,942,000
============================================================
December 31, 1996
U.S. Treasuries and U.S. Government
agencies . . . . . . . . . . . . . . . . . . . $ 4,831,000 $ 36,000 $(14,000) $ 4,853,000
States and municipalities. . . . . . . . . . . . 10,276,000 191,000 (39,000) 10,428,000
Mortgage-backed securities . . . . . . . . . . . 4,869,000 32,000 (35,000) 4,866,000
Other securities . . . . . . . . . . . . . . . . 2,859,000 - - 2,859,000
------------------------------------------------------------
Total. . . . . . . . . . . . . . . . . . . . . $22,835,000 $259,000 $(88,000) $23,006,000
============================================================
</TABLE>
SECURITIES HELD TO MATURITY
There were no securities classified as held to maturity as of December 31,
1997, or December 31, 1996.
A-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ChoiceOne Financial Services, Inc.
Contractual maturities of securities available for sale at December 31,
1997, follows:
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
-----------------------------
<S> <C> <C>
Due within one year. . . . . . . . . . . . . . . . . . . . . . $ 1,782,000 $ 1,788,000
Due after one year through five years. . . . . . . . . . . . . 6,701,000 6,801,000
Due after five years through ten years . . . . . . . . . . . . 510,000 535,000
Due after ten years. . . . . . . . . . . . . . . . . . . . . . 1,985,000 2,088,000
-----------------------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,978,000 11,212,000
Mortgage-backed securities not due at a specific date. . . . . 6,005,000 6,025,000
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,705,000 2,705,000
-----------------------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $19,688,000 $19,942,000
=============================
</TABLE>
Information regarding sales of available for sale securities follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------------
<S> <C> <C> <C>
Proceeds from sales of securities. . . . . . . . . $4,618,000 $1,874,000 $2,179,000
Gross realized gains . . . . . . . . . . . . . . . 38,000 7,000 11,000
Gross realized losses. . . . . . . . . . . . . . . 10,000 7,000 11,000
</TABLE>
There were no sales of securities held to maturity in 1997, 1996, or 1995.
Various securities were pledged as collateral for the purposes below. In
the case of repurchase agreements and public deposits, the balance of the
repurchase agreements or public deposits was less than the collateral
balance as of the end of the years presented. The fair value of securities
pledged as collateral at December 31 was as follows:
<PAGE>
<TABLE>
<CAPTION>
1997 1996
---------------------------
<S> <C> <C>
Securities sold under agreements to repurchase . . . . . . $2,259,000 $2,028,000
Public deposits. . . . . . . . . . . . . . . . . . . . . . 505,000 252,000
Federal Home Loan Bank advances. . . . . . . . . . . . . . - 5,079,000
---------------------------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . $2,764,000 $7,359,000
===========================
</TABLE>
NOTE 4 - LOANS
Loan information at year-end or for the year follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------------
<S> <C> <C>
LOAN COMPONENTS
Commercial . . . . . . . . . . . . . . . . . . . . . . . . $ 43,546,000 $ 34,696,000
Agricultural . . . . . . . . . . . . . . . . . . . . . . . 9,350,000 9,996,000
Real estate mortgage - construction. . . . . . . . . . . . 2,499,000 2,215,000
Real estate mortgage - residential . . . . . . . . . . . . 43,715,000 37,168,000
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . 28,666,000 26,000,000
-------------------------------
Total loans before allowance for loan losses . . . . . . 127,776,000 110,079,000
Less allowance for loan losses . . . . . . . . . . . . . . 1,567,000 1,487,000
-------------------------------
Loans, net . . . . . . . . . . . . . . . . . . . . . . . $126,209,000 $108,592,000
===============================
</TABLE>
A-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ChoiceOne Financial Services, Inc.
<TABLE>
<CAPTION>
1997 1996
-----------------------------
<S> <C> <C>
LOANS SERVICED FOR OTHERS
Commercial and agricultural loans. . . . . . . . . . . . . . . $ 2,739,000 $ 1,589,000
Residential real estate mortgage loans . . . . . . . . . . . . 19,460,000 18,151,000
-----------------------------
Total loans serviced for others. . . . . . . . . . . . . . . $22,199,000 $19,740,000
=============================
MORTGAGE SERVICING RIGHTS
Beginning of year. . . . . . . . . . . . . . . . . . . . . . . $ 19,000 $ -
Originations . . . . . . . . . . . . . . . . . . . . . . . . . 46,000 20,000
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . (7,000) (1,000)
-----------------------------
End of year. . . . . . . . . . . . . . . . . . . . . . . . . . $ 58,000 $ 19,000
=============================
LOANS TO RELATED PARTIES
Beginning of year. . . . . . . . . . . . . . . . . . . . . . . $ 1,603,000
New loans. . . . . . . . . . . . . . . . . . . . . . . . . . . 512,000
Repayments . . . . . . . . . . . . . . . . . . . . . . . . . . (701,000)
Change in persons included . . . . . . . . . . . . . . . . . . (61,000)
-----------
End of year. . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,353,000
===========
COST OF LOANS PLEDGED FOR BORROWINGS
Residential real estate mortgage loans pledged
for Federal Home Loan Bank advances. . . . . . . . . . . . . $39,505,000 $35,241,000
Commercial loans pledged for secured loan borrowings . . . . . 878,000 -
-----------------------------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . $40,383,000 $35,241,000
=============================
LOANS HELD FOR SALE
Agricultural loans . . . . . . . . . . . . . . . . . . . . . . $ 1,276,000 $ 1,386,000
Residential real estate mortgage loans . . . . . . . . . . . . 381,000 52,000
-----------------------------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,657,000 $ 1,438,000
=============================
</TABLE>
<PAGE>
NOTE 5 - ALLOWANCE FOR LOAN LOSSES
An analysis of changes in the allowance for loan losses follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------------
<S> <C> <C> <C>
Beginning of year balance. . . . . . . . . . . . . . . $1,487,000 $1,121,000 $1,039,000
Provision charged to expense . . . . . . . . . . . . . 539,000 523,000 164,000
Recoveries credited to the allowance . . . . . . . . . 70,000 64,000 43,000
Loans charged off. . . . . . . . . . . . . . . . . . . (529,000) (221,000) (125,000)
--------------------------------------------
End of year balance. . . . . . . . . . . . . . . . . . $1,567,000 $1,487,000 $1,121,000
============================================
</TABLE>
Information regarding impaired loans as of and for the year ended December
31 follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Loans with no allowance allocated. . . . . . . . . . . $ 780,000 $ 450,000
Loans with allowance allocated . . . . . . . . . . . . 152,000 149,000
Amount of allowance for loan losses allocated. . . . . 86,000 6,000
</TABLE>
A-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ChoiceOne Financial Services, Inc.
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------
<S> <C> <C> <C>
IMPAIRED LOANS
Average balance during the year. . . . . . . . . . . $759,000 $477,000 $432,000
Interest income recognized thereon . . . . . . . . . 43,000 39,000 41,000
Cash-basis interest income recognized. . . . . . . . 33,000 29,000 40,000
</TABLE>
NOTE 6 - OTHER BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
1997 1996
-----------------------------
<S> <C> <C>
RESTRICTIONS ON CASH BALANCES
Cash subject to restrictions for reserve requirements. . . . . . . $ 745,000 $ 707,000
=============================
PREMISES AND EQUIPMENT
Land and land improvements . . . . . . . . . . . . . . . . . . . . $ 626,000 $ 500,000
Buildings and improvements . . . . . . . . . . . . . . . . . . . . 3,105,000 2,573,000
Construction in progress . . . . . . . . . . . . . . . . . . . . . 47,000 47,000
Equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,494,000 2,128,000
-----------------------------
Total cost . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,272,000 5,248,000
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . (2,609,000) (2,261,000)
-----------------------------
Premises and equipment, net. . . . . . . . . . . . . . . . . . . $ 3,663,000 $ 2,987,000
=============================
OTHER REAL ESTATE
Balance as of end of year. . . . . . . . . . . . . . . . . . . . . $ 246,000 $ 18,000
=============================
</TABLE>
NOTE 7 - DEPOSITS
Deposit information as of year-end follows:
<PAGE>
<TABLE>
<CAPTION>
1997 1996
-----------------------------
<S> <C> <C>
Certificates of deposit issued in denominations
of $100,000 or more. . . . . . . . . . . . . . . . . . . . . . . $14,751,000 $ 9,693,000
=============================
Related party deposits . . . . . . . . . . . . . . . . . . . . . . $ 2,417,000 $ 2,006,000
=============================
Maturities of certificates of deposit
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $27,094,000
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $41,712,000 12,443,000
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,245,000 5,714,000
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,726,000 3,025,000
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,935,000 2,128,000
2002 (and after for 1996). . . . . . . . . . . . . . . . . . . . 2,059,000 124,000
2003 and after . . . . . . . . . . . . . . . . . . . . . . . . . 129,000
-----------------------------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $62,806,000 $50,528,000
=============================
</TABLE>
Certificates of deposit included $6,738,000 at December 31, 1997, of
deposits that were acquired through a national rate service. The deposits
mature through 1999 and bear an average interest rate of 6.35%.
A-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ChoiceOne Financial Services, Inc.
NOTE 8 - INCOME TAXES
Information as of year-end and for the year follows:
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------
<S> <C> <C> <C>
PROVISION FOR INCOME TAXES
Current federal income tax expense . . . . . . . . . . . . . . . . $ 701,000 $ 716,000 $ 553,000
Deferred federal income tax benefit. . . . . . . . . . . . . . . . (69,000) (61,000) (42,000)
-----------------------------------------
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . $ 632,000 $ 655,000 $ 511,000
=========================================
RECONCILIATION OF INCOME TAX PROVISION TO STATUTORY RATE
Income tax computed at statutory federal rate of 34% . . . . . . . $ 805,000 $ 799,000 $ 672,000
Tax exempt interest income . . . . . . . . . . . . . . . . . . . . (182,000) (175,000) (197,000)
Nondeductible interest expense . . . . . . . . . . . . . . . . . . 29,000 24,000 25,000
Other items. . . . . . . . . . . . . . . . . . . . . . . . . . . . (20,000) 7,000 11,000
-----------------------------------------
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . $ 632,000 $ 655,000 $ 511,000
=========================================
COMPONENTS OF DEFERRED TAX ASSETS AND LIABILITIES
Deferred tax assets:
Allowance for loan losses. . . . . . . . . . . . . . . . . . . . $ 428,000 $ 401,000
Deferred compensation. . . . . . . . . . . . . . . . . . . . . . 59,000 62,000
Postretirement benefits obligation . . . . . . . . . . . . . . . 46,000 50,000
Deferred loan fees . . . . . . . . . . . . . . . . . . . . . . . 39,000 53,000
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79,000 68,000
-------------------------
Total deferred tax assets. . . . . . . . . . . . . . . . . . . 651,000 634,000
Deferred tax liabilities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . 215,000 188,000
Unrealized appreciation on securities available for sale . . . . 86,000 58,000
Pension fund asset . . . . . . . . . . . . . . . . . . . . . . . - 96,000
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,000 12,000
-------------------------
<PAGE>
Total deferred tax liabilities . . . . . . . . . . . . . . . . 329,000 354,000
-------------------------
Net deferred tax asset . . . . . . . . . . . . . . . . . . . . $ 322,000 $ 280,000
=========================
</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 December 31, 1997 and 1996.
NOTE 9 - EMPLOYEE BENEFIT PLANS
PENSION PLAN
The Board of Directors approved the termination of the Bank's defined
benefit pension plan in January 1997. Benefit accruals for plan
participants were frozen as of March 31, 1997. As a result of the plan's
curtailment in April 1997, ChoiceOne recognized a curtailment gain of
$249,000 in the second quarter of 1997. Vested plan benefits were paid to
plan participants in the third and fourth quarters of 1997. The benefit
payments caused a settlement loss of $259,000 to be recognized in these two
quarters. After participant benefits had been paid, the remaining plan
assets in excess of benefit payments totaled $323,000. The Bank has filed
a request with the Internal Revenue Service to transfer the excess plan
assets to the ChoiceOne Bank 401(k) savings and retirement plan. The Bank
has not yet received a written ruling on its request.
A-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ChoiceOne Financial Services, Inc.
Net pension cost included the following for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------
<S> <C> <C> <C>
Service cost/benefits earned during the year . . . . . . $ 17,000 $ 86,000 $ 70,000
Interest cost on projected benefit obligation. . . . . . 129,000 130,000 122,000
Actual return on plan assets . . . . . . . . . . . . . . (112,000) (122,000) (368,000)
Net amortization and deferral. . . . . . . . . . . . . . (82,000) (69,000) 199,000
------------------------------------------
Net pension cost/(income). . . . . . . . . . . . . . . . $ (48,000) $ 25,000 $ 23,000
==========================================
</TABLE>
POSTRETIREMENT BENEFITS PLAN
Information regarding the postretirement benefits plan as of year-end and
for the year follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------------------
<S> <C> <C> <C>
Retirees . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 39,000 $ 36,000
Employees not yet eligible to receive benefits . . . . . . . . 39,000 36,000
Employees eligible to receive benefits . . . . . . . . . . . . 56,000 34,000
------------------------
Total accumulated benefit obligation . . . . . . . . . . . . 134,000 106,000
Unrecognized net gain. . . . . . . . . . . . . . . . . . . . . 15,000 42,000
------------------------
Accrued postretirement benefit cost. . . . . . . . . . . . . $149,000 $ 148,000
========================
Service cost/benefits attributed to service during
the year . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,000 $ 8,000 $ 7,000
Interest cost on accumulated postretirement benefit
obligation . . . . . . . . . . . . . . . . . . . . . . . . . 8,000 16,000 18,000
Recognized gain. . . . . . . . . . . . . . . . . . . . . . . . (3,000) (3,000) (5,000)
Settlement gain from discontinuance of life
insurance plan . . . . . . . . . . . . . . . . . . . . . . . - (139,000) -
---------------------------------------
Postretirement benefit cost/(credit) . . . . . . . . . . . . $ 9,000 $(118,000) $ 20,000
=======================================
</TABLE>
<PAGE>
The trend for annual increases in health care costs was assumed to be 11.5%
for 3 years beginning January 1, 1998, dropping to 5.5% after 3 years and
remaining at that level thereafter. The effect of a 1% increase in the
assumed health care cost trend rate would have an immaterial impact on the
combined service and interest cost components of net periodic
postretirement health care benefits cost and the accumulated benefit
obligation for health care benefits. A weighted average discount rate of
7% was used in determining the actuarial present value of the accumulated
postretirement benefit obligation for 1997, 1996, and 1995.
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------------------
<S> <C> <C> <C>
OTHER EMPLOYEE BENEFIT PLAN EXPENSES
401(k) savings and retirement plan . . . . . . . . . . . . . . $323,000 $ 17,000 $ 13,000
Incentive bonus plan . . . . . . . . . . . . . . . . . . . . . 100,000 232,000 194,000
</TABLE>
The 401(k) expense recorded in 1997 represents the amount of defined
benefit pension plan assets remaining at December 31, 1997, after payment
of vested benefits to plan participants. The Bank intends to contribute
these excess assets to the 401(k) savings and retirement plan (the "401(k)
plan") in 1998. Approximately 25% of the total was contributed to the
401(k) plan and allocated to plan participants in early 1998 as the Bank's
contribution for the 1997 plan year. The remaining amount will be
contributed to the 401(k) plan upon receipt of a determination letter from
the Internal Revenue Service as to whether the pension plan excess assets
can be transferred to the 401(k) plan. This remaining amount will be
allocated to participants in the 401(k) plan as the Bank's contribution
over a period not to exceed seven years.
A-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ChoiceOne Financial Services, Inc.
NOTE 10 STOCK OPTIONS
Statement of Financial Accounting Standards No. 123 ("Statement No. 123"),
"Accounting for Stock-Based Compensation," became effective in 1996 and
requires pro forma disclosures for companies that do not adopt its fair value
accounting method for stock based employee compensation. Accordingly, the
following pro forma information presents net income and earnings per share
for 1997 had the fair value method of Statement No. 123 been used to measure
compensation cost for stock option plans. Compensation cost actually
recognized for stock options was $0 for 1997. There were no stock options
granted prior to 1997.
<TABLE>
<CAPTION>
<S> <C>
Net income as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,737,000
Pro forma net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,733,000
Basic earnings per common share and diluted earnings per common share as reported . . . . . . . 3.23
Pro forma basic earnings per common share and diluted earnings per common share . . . . . . . . 3.23
</TABLE>
In future years, the pro forma effect of not applying Statement No. 123 may
increase if additional options are granted.
ChoiceOne's stock option plan is used to reward key employees and provide them
with an additional equity interest in ChoiceOne. The options issued in 1997
were issued for 10-year periods with vesting occurring over a three-year period.
At December 31, 1997, 20,000 shares were authorized for stock option grants, of
which 15,000 were available for future grants. Information about option grants
follows:
<TABLE>
<CAPTION>
NUMBER WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OF OPTIONS EXERCISE PRICE FAIR VALUE OF GRANTS
---------- ---------------- --------------------
<S> <C> <C> <C>
Granted during 1997 and outstanding at end of year . . . . . 5,000 $ 40.00 $ 7.08
Options exercisable at end of 1997 . . . . . . . . . . . . . 1,250 $ 40.00
</TABLE>
The fair value of options granted during 1997 was estimated using the
following weighted-average information: risk-free interest rate of 6.53%,
expected life of 8.5 years, expected annual volatility of stock price of
10.0%, and expected cash dividends of 3.5% per year.
<PAGE>
NOTE 11 - LONG-TERM DEBT
Long-term debt as of year-end was comprised as follows:
<TABLE>
<CAPTION>
1997 1996
-----------------------------
<S> <C> <C>
Federal Home Loan Bank advances. . . . . . . . . . . . . $26,114,000 $25,200,000
Secured loan borrowings. . . . . . . . . . . . . . . . . 878,000 -
-----------------------------
Total. . . . . . . . . . . . . . . . . . . . . . . . . $26,992,000 $25,200,000
=============================
</TABLE>
Interest rates on Federal Home Loan Bank advances range from 5.27% to 6.66%
and are fixed. Advances are secured by mortgage loans. Penalties are
charged on advances that are paid prior to maturity. No advances were paid
prior to maturity in 1997 or 1996. Secured loan borrowings consist of five
commercial loans of which participations were sold in 1997. The
participations carry an interest rate of 7.60% and are secured by the
related commercial loans.
A-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ChoiceOne Financial Services, Inc.
The maturities of Federal Home Loan Bank advances and secured loan
borrowings at December 31, 1997, follow:
<TABLE>
<CAPTION>
<S> <C>
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,586,000
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,323,000
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,501,000
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,590,000
2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,966,000
2003 and after . . . . . . . . . . . . . . . . . . . . . . . . . 1,026,000
-----------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $26,992,000
===========
</TABLE>
NOTE 12 - LEASES AND OTHER COMMITMENTS
Following is lease and other commitment information:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------
<S> <C> <C> <C>
Lease rental expense. . . . . . . . . . . . . . $ 70,000 $ 45,000 $ 10,000
======================================
Future minimum operating lease commitments
1998. . . . . . . . . . . . . . . . . . . . . $ 80,000
1999. . . . . . . . . . . . . . . . . . . . . 77,000
2000. . . . . . . . . . . . . . . . . . . . . 74,000
2001. . . . . . . . . . . . . . . . . . . . . 63,000
2002. . . . . . . . . . . . . . . . . . . . . 63,000
--------
Total . . . . . . . . . . . . . . . . . . . $357,000
========
</TABLE>
Lease commitments include $63,000 to a related party in the years 1998
through 2002.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Future minimum computer processing commitments
1998. . . . . . . . . . . . . . . . . . . . . $ 120,000
1999. . . . . . . . . . . . . . . . . . . . . 120,000
-----------
Total . . . . . . . . . . . . . . . . . . . $ 240,000
===========
Credit commitments
Loan commitments. . . . . . . . . . . . . . . $16,830,000 $12,749,000
Unused lines of credit. . . . . . . . . . . . 3,002,000 2,562,000
Letters of credit . . . . . . . . . . . . . . 33,000 165,000
-----------------------------
Total . . . . . . . . . . . . . . . . . . . $19,865,000 $15,476,000
=============================
</TABLE>
A-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ChoiceOne Financial Services, Inc.
NOTE 13 - SHAREHOLDERS' EQUITY AND EARNINGS PER SHARE
Information regarding shareholders' equity as of year-end and for the year
follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------------
<S> <C> <C> <C>
COMMON STOCK
Shares authorized. . . . . . . . . . . . . . . . 1,000,000 500,000 500,000
Shares outstanding . . . . . . . . . . . . . . . 537,015 482,710 464,803
Issued during the year . . . . . . . . . . . . . 28,733 20,610 77,367
Repurchased during the year. . . . . . . . . . . - 2,703 18,324
BASIC EARNINGS PER COMMON SHARE AND EARNINGS
PER SHARE ASSUMING DILUTION
Net income available for common stock. . . . . . $1,737,000 $1,695,000 $1,464,000
Average shares outstanding . . . . . . . . . . . 537,075 539,229 525,303
</TABLE>
Stock options granted in 1997 did not have an impact on earnings per share
as the effect of the options was antidilutive.
NOTE 14 - CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY
<TABLE>
CONDENSED BALANCE SHEETS
December 31
<CAPTION>
1997 1996
--------------------------------
<S> <C> <C>
Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . $ 32,000 $ 20,000
Securities available for sale. . . . . . . . . . . . 8,000 8,000
Other assets . . . . . . . . . . . . . . . . . . . . 2,000 2,000
Investment in ChoiceOne Bank and subsidiaries. . . . 15,495,000 14,507,000
--------------------------------
Total assets . . . . . . . . . . . . . . . . . . . $15,537,000 $14,537,000
================================
Shareholders' equity . . . . . . . . . . . . . . . . . $15,537,000 $14,537,000
================================
</TABLE>
<PAGE>
<TABLE>
CONDENSED STATEMENTS OF INCOME
Years Ended December 31
<CAPTION>
1997 1996 1995
--------------------------------------------
<S> <C> <C> <C>
Dividends from ChoiceOne Bank. . . . . . . . . . . . . $ 838,000 $ 824,000 $1,409,000
Other expenses . . . . . . . . . . . . . . . . . . . . 51,000 50,000 66,000
--------------------------------------------
Income before income tax and equity in
undistributed net income of subsidiary . . . . . . . 787,000 774,000 1,343,000
Income tax benefit . . . . . . . . . . . . . . . . . . 17,000 17,000 22,000
--------------------------------------------
Income before equity in undistributed net
income of subsidiary . . . . . . . . . . . . . . . . 804,000 791,000 1,365,000
Equity in undistributed net income of
subsidiary . . . . . . . . . . . . . . . . . . . . . 933,000 904,000 99,000
--------------------------------------------
Net income . . . . . . . . . . . . . . . . . . . . . . $1,737,000 $1,695,000 $1,464,000
============================================
</TABLE>
A-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ChoiceOne Financial Services, Inc.
<TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31
<CAPTION>
1997 1996 1995
--------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . $1,737,000 $1,695,000 $1,464,000
Reconciling items:
Equity in undistributed net subsidiary income. . . . . . (933,000) (904,000) (99,000)
Changes in other assets. . . . . . . . . . . . . . . . . - (1,000) 3,000
Changes in liabilities . . . . . . . . . . . . . . . . . - (2,000) (1,000)
--------------------------------------------
Net cash from operating activities . . . . . . . . . . 804,000 788,000 1,367,000
--------------------------------------------
Cash flows from investing activities:
Purchase of securities . . . . . . . . . . . . . . . . . . - - (8,000)
--------------------------------------------
Net cash used in investing activities . . . . . . . . . . - - (8,000)
--------------------------------------------
Cash flows from financing activities:
Dividends paid . . . . . . . . . . . . . . . . . . . . . . (783,000) (663,000) (551,000)
Repurchase of stock. . . . . . . . . . . . . . . . . . . . (9,000) (115,000) (815,000)
--------------------------------------------
Net cash used in financing activities. . . . . . . . . . (792,000) (778,000) (1,366,000)
--------------------------------------------
Net change in cash and cash equivalents. . . . . . . . . . . 12,000 10,000 (7,000)
Beginning cash and cash equivalents. . . . . . . . . . . . . 20,000 10,000 17,000
--------------------------------------------
Ending cash and cash equivalents . . . . . . . . . . . . . . $ 32,000 $ 20,000 $ 10,000
============================================
Amount of dividends that could be paid from
ChoiceOne Bank without regulatory approval . . . . . . . . $2,774,000
==========
</TABLE>
<PAGE>
NOTE 15 - FINANCIAL INSTRUMENTS
Financial instruments as of year-end were as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------------------------------------------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents. . . . . . . . $ 3,763,000 $ 3,763,000 $ 4,887,000 $ 4,887,000
Interest-bearing deposits. . . . . . . . 6,000 6,000 65,000 65,000
Securities available for sale. . . . . . 19,942,000 19,942,000 23,006,000 23,006,000
Loans, net . . . . . . . . . . . . . . . 126,209,000 129,870,000 108,592,000 112,179,000
Accrued interest receivable. . . . . . . 944,000 944,000 860,000 860,000
Liabilities:
Demand, savings and money market
deposit accounts . . . . . . . . . . . 44,686,000 44,686,000 45,078,000 45,078,000
Time deposits. . . . . . . . . . . . . . 62,806,000 63,276,000 50,528,000 50,874,000
Federal funds purchased and
repurchase agreements. . . . . . . . . 2,060,000 2,060,000 4,731,000 4,731,000
Accrued interest payable . . . . . . . . 523,000 523,000 435,000 435,000
Long-term debt . . . . . . . . . . . . . 26,992,000 27,170,000 25,200,000 25,328,000
</TABLE>
A-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ChoiceOne Financial Services, Inc.
The estimated fair values approximate the carrying amounts for all assets
and liabilities except those described below. The estimated fair value for
securities is based on quoted market values for the individual securities
or for equivalent securities. The estimated fair value for loans is based
on the rates charged at year end for new loans with similar maturities,
applied until the loan is assumed to reprice or be paid. The estimated
fair value for time deposits is based on the rates paid at year end for new
deposits, applied until maturity. The estimated fair value for other
financial instruments and off-balance-sheet loan commitments are considered
nominal.
NOTE 16 - REGULATORY CAPITAL
ChoiceOne Financial Services, Inc. and ChoiceOne Bank are subject to
regulatory capital requirements administered by federal banking agencies.
Capital adequacy guidelines and prompt corrective action regulations
involve quantitative measures of assets, liabilities, and certain
off-balance-sheet items calculated under regulatory accounting practices.
The prompt corrective action regulations provide five classifications,
including well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized, although
these terms are not used to represent overall financial condition. If only
adequately capitalized, regulatory approval is required to accept brokered
deposits. If undercapitalized, capital distributions are limited, as are
asset growth and expansion, and plans for capital restoration are required.
At year-end, the capital requirements were met. Actual capital levels and
minimum required levels were as follows:
<PAGE>
<TABLE>
<CAPTION>
MINIMUM REQUIRED
TO BE WELL
MINIMUM REQUIRED CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION REGULATIONS
---------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------------------------------------------------------------------
(Dollars in thousands)
DECEMBER 31, 1997
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk weighted assets)
Consolidated. . . . . . . . . . . . . . $16,409 14.2% $9,212 8.0% $11,515 10.0%
Bank. . . . . . . . . . . . . . . . . . 16,368 14.2 9,211 8.0 11,514 10.0
Tier 1 capital (to risk weighted assets)
Consolidated. . . . . . . . . . . . . . 14,968 13.0 4,606 4.0 6,909 6.0
Bank. . . . . . . . . . . . . . . . . . 14,927 13.0 4,606 4.0 6,908 6.0
Tier 1 capital (to average assets)
Consolidated. . . . . . . . . . . . . . 14,968 9.6 6,213 4.0 7,766 5.0
Bank. . . . . . . . . . . . . . . . . . 14,927 9.6 6,213 4.0 7,766 5.0
December 31, 1996
Total capital (to risk weighted assets)
Consolidated. . . . . . . . . . . . . . $15,313 15.0% $8,169 8.0% $10,211 10.0%
Bank. . . . . . . . . . . . . . . . . . 15,284 15.0 8,168 8.0 10,210 10.0
Tier 1 capital (to risk weighted assets)
Consolidated. . . . . . . . . . . . . . 14,034 13.7 4,084 4.0 6,127 6.0
Bank. . . . . . . . . . . . . . . . . . 14,005 13.7 4,084 4.0 6,126 6.0
Tier 1 capital (to average assets)
Consolidated. . . . . . . . . . . . . . 14,034 10.4 5,403 4.0 6,754 5.0
Bank. . . . . . . . . . . . . . . . . . 14,005 10.4 5,403 4.0 6,754 5.0
</TABLE>
A-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ChoiceOne Financial Services, Inc.
NOTE 17 - SUBSEQUENT EVENTS
On February 11, 1998, ChoiceOne's Board of Directors declared a 5% stock
dividend on ChoiceOne's common stock. The record date of the dividend is
March 16, 1998, and the payable date is March 31, 1998. The dividend has
been reflected in shareholders' equity as of December 31, 1997 and all per
share amounts have been retroactively restated for the estimated effect of
the stock dividend.
ChoiceOne's Board of Directors also declared a conditional two-for-one
stock split at its February 1998 meeting. The stock split, to be effected
in the form of a share dividend, will cause one additional share of common
stock to be issued for each share outstanding. The stock split will be
payable to shareholders of record as of April 30, 1998, and will be paid on
May 22, 1998. The stock split is conditioned upon and subject to approval
by ChoiceOne's shareholders at the April 30, 1998, annual meeting. The
shareholders will be asked to approve a proposed amendment to ChoiceOne's
Restated Articles of Incorporation to increase the authorized capital stock
of ChoiceOne from 1,000,000 shares to 2,000,000 shares.
Earnings per share amounts, after giving retroactive effect to the two-
for-one stock split on a pro forma basis, are presented below. Because the
stock split is contingent upon shareholder approval of an amendment to
increase the authorized capital stock, financial information contained
elsewhere in these financial statements has not been adjusted to reflect
the impact of the proposed stock split.
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------
<S> <C> <C> <C>
Earnings per common share (pro forma). . . . . . . . . . $1.62 $1.58 $1.40
</TABLE>
On January 14, 1998, ChoiceOne's Board of Directors approved a resolution
to issue approximately 1,900 shares of its common stock, with an estimated
fair value of $81,000, to the 401(k) plan. The issuance of the stock
represents the payment of the Bank's contribution to the 401(k) plan for
the 1997 plan year.
A-21
<PAGE>
INDEPENDENT AUDITORS' REPORT
ChoiceOne Financial Services, Inc.
[CROWE CHIZEK LOGO]
To the Shareholders and Board of Directors
of ChoiceOne Financial Services, Inc., Sparta, Michigan
We have audited the accompanying consolidated balance sheets of ChoiceOne
Financial Services, Inc. as of December 31, 1997 and 1996 and the related
statements of income, changes in shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
ChoiceOne Financial Services, Inc. as of December 31, 1997 and 1996, and
the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
February 20, 1998, except for Note 17 as to
which the date is March 17, 1998
CROWE, CHIZEK AND COMPANY LLP
400 RIVERFRONT PLAZA BUILDING 55 CAMPAU AVENUE NW GRAND RAPIDS, MICHIGAN
49503 616.774.0774 FAX 616.752.4226 A member of Horwath International
A-22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ChoiceOne Financial Services, Inc.
The following discussion is designed to provide a review of the
consolidated financial condition and results of operations of ChoiceOne
Financial Services, Inc. ("ChoiceOne") and its wholly-owned subsidiaries,
ChoiceOne Bank (the "Bank"), ChoiceOne Insurance Agencies, Inc. (the
"Insurance Agency"), and Alpine Travel, Inc. (the "Travel Agency"). This
discussion should be read in conjunction with the consolidated financial
statements and related footnotes.
This discussion and other sections of this annual report contain forward-
looking statements that are based on management's beliefs, assumptions,
current expectations, estimates and projections about the financial
services industry, the economy, and about ChoiceOne 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. Furthermore, ChoiceOne undertakes no obligation to
update, amend, or clarify forward-looking statements, whether as a result
of new information, future events, or otherwise.
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.
SUMMARY OF OPERATING RESULTS
Net income for 1997 was $1,737,000, which represented a $42,000 or 2%
increase over 1996. The increase in ChoiceOne's net income in 1997 was
attributable to higher net interest income and noninterest income, which
was virtually offset by growth in noninterest expense. The growth in net
interest income was due to an increase in ChoiceOne's loan portfolio. The
rise in noninterest income resulted in part from higher commission income
<PAGE>
from the Insurance Agency. The majority of the increase in noninterest
expense was caused by higher salaries and benefits in 1997 than in 1996.
Increases in 401(k) savings and retirement plan expense and postretirement
benefit expense comprised most of the increase in salaries and benefits
expense in 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
-----------------------------------------------
<S> <C> <C> <C>
Net interest income. . . . . . . . . . . . . . . . $ 6,315,000 $ 5,754,000 $ 4,931,000
Provision for loan losses. . . . . . . . . . . . . (539,000) (523,000) (164,000)
Noninterest income . . . . . . . . . . . . . . . . 1,769,000 1,555,000 656,000
Noninterest expense. . . . . . . . . . . . . . . . (5,176,000) (4,436,000) (3,448,000)
Income tax expense . . . . . . . . . . . . . . . . (632,000) (655,000) (511,000)
Net income . . . . . . . . . . . . . . . . . . . . $ 1,737,000 $ 1,695,000 $ 1,464,000
</TABLE>
Increased net income in 1996 was due to higher net interest income and
noninterest expense, which was partially offset by increases in the
provision for loan losses and noninterest expense. Net interest income
growth was due primarily to loan growth. The increase in noninterest
income was caused by commission income from the Insurance Agency. The
higher provision for loan losses resulted from both higher loan growth and
net charge-offs in 1996 than in 1995. Most of the increase in 1996's
noninterest expense was due to the inclusion of the Insurance Agency's
expenses.
RETURN ON AVERAGE ASSETS AND AVERAGE SHAREHOLDERS' EQUITY
The return on average assets and return on average shareholders' equity are
key performance indices that measure how effectively ChoiceOne is using its
assets and its shareholders' invested capital. ChoiceOne's return on
average assets for 1997 was 1.17%, compared to 1.38% for 1996 and 1.36% for
1995. The return on average shareholders' equity was 11.58%, 12.00%, and
11.09% for 1997, 1996, and 1995, respectively.
A-29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ChoiceOne Financial Services, Inc.
DIVIDENDS
Cash dividends declared by ChoiceOne in 1997 of $783,000 or $1.46 per share
represent the sixteenth consecutive year that ChoiceOne has increased cash
dividends paid to shareholders. The total cash dividends paid in 1997
represented a $120,000 or 18% increase over 1996. The cash dividend payout
percentage (total cash dividends divided by net income) was 45% in 1997,
compared to 39% in 1996. In addition to the cash dividends declared,
ChoiceOne declared a 6% stock dividend in 1997 and a 20% stock dividend in
1995. A stock dividend was also declared in February 1998. Cash dividends
per share were adjusted for the stock dividends declared in 1995, 1997, and
1998.
Cash dividends paid in 1995 through 1997 were consistent with management's
objectives regarding the capital structure of ChoiceOne. A primary
objective is to continue the per share and total dollar increase in cash
dividend payments to shareholders, which ChoiceOne achieved in all three
years. However, management will not raise dividends above a level which it
considers to be reasonable and prudent.
ChoiceOne's principal source of funds to pay cash dividends is the earnings
of the Bank. The availability of these earnings is dependent upon the
capital needs, regulatory constraints and other factors involving the Bank.
Regulatory constraints include the maintenance of minimum capital ratios
and limits based on net income and retained earnings of the Bank for the
past three years. Based on projected earnings for the Bank, management
currently expects ChoiceOne to pay regular quarterly cash dividends to its
shareholders in 1998.
RESULTS OF OPERATIONS
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. Management will refer to these tables
in its discussion of interest income, interest expense and net interest
income.
A-24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ChoiceOne Financial Services, Inc.
<TABLE>
TABLE 1 - AVERAGE BALANCES AND TAX-EQUIVALENT INTEREST RATES
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
-------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
-------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Loans <F1> <F2> . . . . . . . . . $117,582 $11,259 9.58% $ 94,077 $ 9,087 9.66% $ 73,742 $7,135 9.68%
Taxable securities <F3> . . . . . 12,781 845 6.61 14,147 916 6.47 18,403 1,181 6.42
Nontaxable securities <F1> <F3> . 9,370 733 7.82 8,365 681 8.14 9,181 774 8.43
Other . . . . . . . . . . . . . . 178 8 4.49 65 3 4.62 160 8 5.00
-------- ------- -------- ------- -------- ------
Interest-earning assets . . . . 139,911 12,845 9.18 116,654 10,687 9.16 101,486 9,098 8.96
Noninterest-earning assets <F4> . 8,741 6,480 6,066
-------- -------- --------
Total assets. . . . . . . . . . $148,652 $123,134 $107,552
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing
transaction accounts. . . . . . $ 22,242 718 3.23 $ 24,711 798 3.23 $ 25,522 912 3.57
Savings deposits. . . . . . . . . 8,836 162 1.83 9,363 174 1.86 9,845 229 2.33
Time deposits . . . . . . . . . . 58,258 3,399 5.83 50,126 2,947 5.88 45,930 2,619 5.70
FHLB advances . . . . . . . . . . 25,425 1,619 6.37 9,385 592 6.31 77 2 3.04
Other . . . . . . . . . . . . . . 5,584 354 6.34 2,785 154 5.53 1,722 106 6.11
-------- ------- -------- ------- -------- ------
Interest-bearing liabilities. . 120,345 6,252 5.20 96,370 4,665 4.84 83,096 3,868 4.65
------- ---- ------- ---- ------ ----
Demand deposits . . . . . . . . . 11,479 11,010 10,149
Other noninterest-bearing
liabilities . . . . . . . . . . 1,830 1,625 1,107
Shareholders' equity. . . . . . . 14,998 14,129 13,200
-------- -------- --------
Total liabilities and
shareholders' equity. . . . . $148,652 $123,134 $107,552
======== ======== ========
<PAGE>
Net interest income (tax-
equivalent basis) - interest
spread. . . . . . . . . . . . . . 6,593 3.98% 6,022 4.32% 5,230 4.31%
==== ==== ====
Tax-equivalent adjustment <F1>. . . (278) (268) (299)
------- ------- ------
Net interest income . . . . . . . . $ 6,315 $ 5,754 $4,931
======= ======= ======
Net interest income as a
percentage of earning assets
(tax-equivalent basis). . . . . . 4.71% 5.16% 5.15%
==== ==== ====
<FN>
<F1> Interest on nontaxable securities and loans has been adjusted to a
fully tax-equivalent basis to facilitate comparison to the taxable
interest-earning assets. The adjustment uses an incremental tax rate
of 34% for the years presented.
<F2> Interest on loans included net origination fees charged on loans of
approximately $352,000, $363,000, and $253,000 in 1997, 1996, and 1995,
respectively.
<F3> The average balance includes the effect of unrealized gains or losses
on securities, while the average rate was computed on the average
amortized cost of the securities.
<F4> Noninterest-earning assets includes loans on a nonaccrual status
which averaged approximately $787,000, $383,000, and $482,000 in 1997,
1996, and 1995, respectively.
</FN>
</TABLE>
A-25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ChoiceOne Financial Services, Inc.
<TABLE>
TABLE 2 - CHANGES IN TAX-EQUIVALENT NET INTEREST INCOME
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 OVER 1996 1996 OVER 1995
--------------------------------------------------------------------
TOTAL VOLUME RATE TOTAL VOLUME RATE
--------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN INTEREST INCOME <F1>
Loans <F2>. . . . . . . . . . . . . . . . . . . $2,172 $2,252 $(80) $1,952 $1,967 $(15)
Taxable securities. . . . . . . . . . . . . . . (71) (91) 20 (265) (275) 10
Nontaxable securities <F2>. . . . . . . . . . . 52 79 (27) (93) (67) (26)
Other . . . . . . . . . . . . . . . . . . . . . 5 5 - (5) (4) (1)
--------------------------------------------------------------------
Net change in tax-equivalent income . . . . . 2,158 2,245 (87) 1,589 1,621 (32)
--------------------------------------------------------------------
INCREASE (DECREASE) IN INTEREST EXPENSE <F1>
Interest-bearing transaction accounts . . . . . (80) (80) - (114) (28) (86)
Savings deposits. . . . . . . . . . . . . . . . (12) (10) (2) (55) (11) (44)
Time deposits . . . . . . . . . . . . . . . . . 452 475 (23) 328 244 84
Federal Home Loan Bank advances . . . . . . . . 1,027 1,021 6 590 585 5
Other . . . . . . . . . . . . . . . . . . . . . 200 175 25 48 59 (11)
--------------------------------------------------------------------
Net change in interest expense. . . . . . . . 1,587 1,581 6 797 849 (52)
--------------------------------------------------------------------
Net change in tax-equivalent
net interest income . . . . . . . . . . . . $ 571 $ 664 $(93) $ 792 $ 772 $ 20
====================================================================
<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 securities and loans has been adjusted to a
fully tax-equivalent basis using an incremental tax rate of 34% for
the years presented.
</FN>
</TABLE>
<PAGE>
NET INTEREST INCOME
Tax-equivalent net interest income ("net margin") increased $571,000 in
1997, compared to an increase of $792,000 in 1996. The increase in net
margin in both years was due to loan growth. Table 2 shows that the
smaller increase in 1997 was due to both changes in volume and rate.
Although the growth in average interest-earning assets was $8,089,000 more
in 1997 than in 1996, the increase in average interest-bearing liabilities
in 1997 was $10,701,000 greater than the prior year. The higher level of
growth in interest-bearing liabilities contributed to the slowing in
additional net margin due to volume. The lower level of growth in net
margin was also affected by the funding method that ChoiceOne used for its
loan growth in 1997. Core deposits in the form of deposits obtained in
ChoiceOne's market area were insufficient to fund loan growth in 1997.
Therefore, ChoiceOne turned to other sources of funding such as Federal
Home Loan Bank advances ("FHLB advances") and certificates of deposit from
a national rate service ("national CDS"). Table 1 shows that the average
balance of FHLB advances grew $16,040,000 in 1997, compared to $9,308,000
of growth in 1996. The average balance of national CDS, which are included
in the time deposits balance in Table 1, increased $4,263,000 in 1997.
FHLB advances carried the highest average interest rate of the interest-
bearing liabilities in both 1997 and 1996. National CDS also bear one of
the higher interest rates among interest-bearing liabilities. The use of
FHLB advances and national CDS as a major funding source for loan growth
caused the loan growth to generate less additional net margin dollars in
1997 than in 1996.
As set forth in Table 2, the change in net margin due to changes in the
average interest rate was a decrease in 1997 of $93,000 compared to an
increase of $20,000 in 1996. The average rate earned on loans decreased
more in 1997 than it had in the previous year. The lower rate in 1997 was
a result of the higher level in average loan growth in 1997 than in 1996. The
change in net margin due to rate was also affected by interest-bearing
transaction accounts. The average rate paid on interest-bearing transaction
accounts was unchanged in 1997, in contrast to 1996 when the rate declined 34
basis points.
A-26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ChoiceOne Financial Services, Inc.
Based on the current estimates of ChoiceOne's management, net margin is
expected to increase in 1998. However, the rate of growth in net margin
may slow in 1998 compared to 1997 as it did in 1997. Management
anticipates that loan growth will exceed the amount of funds that can be
obtained through local market deposit growth. This will cause the need for
funds from Federal Home Loan Bank advances, certificates of deposit from
the national rate service, and other sources. The interest cost from these
types of sources is higher than the rate on deposits from local markets.
This higher cost of funds may cause a decrease in the margin dollars
obtained from loan growth. Management expects general market interest rates
to be steady to slightly falling in 1998. ChoiceOne's management does not
anticipate that changes in interest rates will have a material impact on
net margin in 1998.
ALLOWANCE AND PROVISION FOR LOAN LOSSES
Information regarding the allowance and provision for loan losses can be
found in Table 3 and in Note 5 to the Consolidated Financial Statements.
As indicated in Table 3, the provision for loan losses and allowance for
loan losses increased slightly in 1997 in contrast to 1996 when the
increases were much more significant. The provision in 1997 was affected
by higher net charge-offs than in the prior year. This effect was offset
by a lower level of loan growth from the end of 1996 to the end of 1997
than had occurred in the prior year. The increased provision in 1996
resulted from both increased net charge-offs over 1995 and a significantly
higher level of loan growth. Net charge-offs by loan category are shown in
Table 3. The increase in commercial loan charge-offs was primarily due to
one commercial loan. The rise in consumer loan charge-offs was comprised
of a number of loans. Consumer lending was affected in 1997 by an
increasingly high level of personal bankruptcies.
<PAGE>
<TABLE>
TABLE 3 - PROVISION AND ALLOWANCE FOR LOAN LOSSES
<CAPTION>
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
1997 1996 1995
--------------------------------------------
<S> <C> <C> <C>
Provision for loan losses. . . . . . . . . . . . . . . . . . $ 539,000 $ 523,000 $ 164,000
============================================
Net charge-offs
Commercial loans . . . . . . . . . . . . . . . . . . . . . $ 186,000 $ 26,000 $ (4,000)
Agricultural loans . . . . . . . . . . . . . . . . . . . . 7,000 (10,000) -
Real estate mortgage - residential . . . . . . . . . . . . 6,000 - 3,000
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . 260,000 141,000 83,000
--------------------------------------------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . $ 459,000 $ 157,000 $ 82,000
============================================
Allowance for loan losses at year end. . . . . . . . . . . . $1,567,000 $1,487,000 $1,121,000
============================================
Allowance for loan losses as a percentage of:
Total loans as of year end . . . . . . . . . . . . . . . . 1.23% 1.35% 1.42%
Nonaccrual loans, accrual loans past due 90 days
or more and troubled debt restructurings . . . . . . . . 130.17 148.65 148.23
Ratio of net charge-offs to average total loans
outstanding during the year. . . . . . . . . . . . . . . . .39 .17 .11
Loan recoveries as a percentage of prior year's
charge-offs. . . . . . . . . . . . . . . . . . . . . . . . 31.84 51.60 36.13
</TABLE>
Based on the current state of the economy and reviews of the loan portfolio
by ChoiceOne's management, management believes that the allowance for loan
losses as of December 31, 1997, is adequate to absorb possible charge-offs.
Management continues to be concerned that relatively high levels of
consumer debt and increasing levels of personal bankruptcies may cause
consumer loan charge-offs to increase in the future. As loan growth and
charge-offs occur in 1998, the allowance and provision for loan losses will
be reviewed and changes will be made to maintain the allowance at a level
that management considers adequate.
A-27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ChoiceOne Financial Services, Inc.
NONINTEREST INCOME
Noninterest income increased $214,000 in 1997, compared to an increase of
$899,000 in 1996. Almost 40% of the growth in 1997 came from increased
insurance commission income with the remainder resulting from the other
noninterest income categories. Most of the increase in 1996 was due to
insurance commission income as the business combination with the Insurance
Agency was effective January 1, 1996. Management anticipates that
noninterest income will increase somewhat in 1998 as a result of a full
year of commission income from the Travel Agency.
NONINTEREST EXPENSE
Noninterest expense grew $740,000 in 1997. An increase in salaries and
benefits expense of $463,000 comprised over 60% of the total expense growth
in 1997. Expense of the 401(k) savings and retirement plan (the "401(k)
plan") contributed approximately $305,000 of the increase in salaries and
benefits in 1997. This was caused by the accrual of $323,000 of expense
for the 401(k) plan in 1997, which represented the amount of assets left in
the pension plan after all vested benefits had been paid to plan
participants. ChoiceOne intends to transfer the excess assets from the
pension plan to the 401(k) plan and use the funds to cover company
contributions in future years. The transfer of the excess assets is
subject to approval by the Internal Revenue Service. Salaries and benefits
expense was also affected by a $119,000 increase in postretirement benefits
expense in 1997 compared to the prior year. The increase in 1997's expense
was due to a settlement gain of $139,000 that decreased the expense recorded
in 1996. The gain resulted from the discontinuance of postretirement life
insurance coverage. Wages and commissions paid to employees grew $223,000
in 1997. This was due to a higher activity level for commissioned
employees, increases in staff size, a full year of wages expense for the
Bank's two new branches, and a partial year of wages for the Travel Agency.
The effect of the wages and commissions increase was partially offset by
decreases of $132,000 in incentive bonus expense and $76,000 in expense
related to the pension plan. Increases in occupancy expense and other
expense in 1997 were due to a full year of operations for the Bank's two
new branches, increased expenses related to the Bank's computer network,
and general growth in expenses.
Noninterest expense grew $988,000 in 1996. Approximately 80% of the higher
expenses in 1996 resulted from the Insurance Agency, whose operations were
included for the first time in 1996. The remainder of the expense growth
in 1996 was due to expenses related to the Bank's two new branches,
<PAGE>
expenses related to the name changes of the Bank and the Insurance Agency
and general growth in expenses. Expense growth was offset in 1996 by the
settlement gain from the termination of the postretirement life insurance
benefits plan.
Management anticipates that noninterest expense will continue to grow in
1998. Factors causing the increase will be a full year of operations for
the Travel Agency, expenses related to the new buildings for the Bank's two
new branches, additional advertising and marketing of ChoiceOne's products
and services, and other factors.
YEAR 2000
ChoiceOne's management is aware of the issues associated with the
programming code in existing computer systems as the year 2000 approaches.
The year 2000 will affect virtually every computer operation by the
rollover of the two digit year value to "00." The issue is whether
computer systems will properly recognize date sensitive information when
the year changes to 2000. Systems that do not properly recognize such
information could generate erroneous data or cause a system to fail.
ChoiceOne formed an internal committee in 1997 to address the year 2000
issue. The committee has studied ChoiceOne's internal operating systems
and will begin to make necessary changes in 1998. The committee has also
communicated with the vendors that provide software for ChoiceOne. Almost
all of ChoiceOne's vendors have already indicated that they are year 2000
compliant or are making necessary modifications to make their software
comply.
ChoiceOne's management estimates that the cost to convert existing systems
to make them able to process in the year 2000 will approximate $50,000 to
$75,000 in 1998. Additional costs, at this time undetermined, may be
necessary in 1998 or 1999 to fully covert all of ChoiceOne's computer
systems. In addition, ChoiceOne's operations may be materially affected if
the computer systems of third parties are not converted in a timely fashion
to be able to process properly in the year 2000.
A-28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ChoiceOne Financial Services, Inc.
INSURANCE AND TRAVEL SUBSIDIARIES
The business combination with the Insurance Agency was effective January 1,
1996. The business combination was accounted for as a pooling-of-interests.
The Insurance Agency's balance sheets and results of operations were not
material to ChoiceOne's prior years' consolidated financial statements.
Therefore, consolidated financial statements for prior years were not
restated for the Insurance Agency.
The acquisition of the Travel Agency was effective August 1, 1997. The
acquisition was accounted for as a purchase transaction. The operations of
the Travel Agency beginning August 1, 1997, are included in ChoiceOne's
consolidated financial statements.
SECURITIES
Total securities available for sale decreased $3,064,000 in 1997, compared
to a decrease of $181,000 in 1996. The larger decrease in 1997 was due in
part to the sale of approximately $4,600,000 of securities in the last
quarter of 1997, part of which were replaced by securities purchases.
Proceeds from maturing securities will be used as necessary in 1998 to fund
growth in the loan portfolio. Securities will also be used as collateral
for public deposits and repurchase agreements as well as serve as a source
of liquidity for ChoiceOne. Management expects that the balance of total
securities will not change significantly in 1998.
LOANS
Total loans grew $17,697,000 in 1997, compared to $30,997,000 of growth in
1996. ChoiceOne's management believes that stronger competition for loans
impacted loan growth in 1997. The slowing of growth occurred in all loan
categories. It had the largest impact on consumer loans, which increased
$2,666,000 in 1997 compared to $9,253,000 in 1996, and commercial loans,
which experienced $7,817,000 of growth in 1997 compared to $11,409,000 in
the prior year.
ChoiceOne's management intends to focus on growth in all loan areas in
1998. Management intends to use business development activities to attempt
to generate demand in the commercial and agricultural loan categories.
Management intends to use contacts with real estate agents and other
methods to attempt to capture a larger share of the residential real estate
financing market. Management also intends to continue to use special
<PAGE>
promotions and target marketing to encourage demand in direct consumer
loans. Management also intends to emphasize indirect consumer loans for
automobiles and other items in 1998. Advertising and promotion of ChoiceOne
Bank and of specific loan products is intended to be used to stimulate
ChoiceOne's loan demand.
DEPOSITS
The balance of total deposits increased $11,886,000 in 1997, compared to
an increase of $2,704,000 in 1996. The growth in deposits was caused by
certificates of deposit in both years. The balance of certificates of
deposit grew $12,278,000 in 1997 and $2,645,000 in 1996. Approximately
$6,738,000 of the certificate of deposit increase in 1997 resulted from
deposits obtained through a national rate service. ChoiceOne began using
this rate service in March 1997 because funds available from core deposit
growth and other internal sources were insufficient to meet loan demand.
Management believes that the lack of growth in the other deposit
categories in 1997 and 1996 was caused by a high level of competition for
these no-cost or lower-cost deposits.
ChoiceOne intends to continue to emphasize the attraction and retention of
deposits from its local market areas. Management believes that
certificates of deposit may comprise most of the deposit growth in 1998.
Management intends to emphasize its non-certificate products in 1998 in an
attempt to lower ChoiceOne's cost of funds for deposit products. However,
competition involving interest rates paid and fees charged will continue to
affect ChoiceOne's ability to generate deposit growth in any of the deposit
categories. To the extent that local market deposit growth is not
sufficient to meet loan demand, ChoiceOne may use the national rate service
for certificates of deposit in 1998.
A-29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ChoiceOne Financial Services, Inc.
OTHER LIABILITIES
The balance of other liabilities increased $2,591,000 from December 31,
1996 to December 31, 1997. Virtually all of the increase was caused by
$2,385,000 of securities purchase commitments at the end of 1997. The
trades for the securities purchases settled in January 1998.
LONG-TERM DEBT
The majority of the long-term debt balance as of December 31, 1997 and the
total balance as of December 31, 1996 was comprised of FHLB advances. Although
the balance of FHLB advances increased only $914,000 in 1997, the growth in
the balance in 1996 was slightly over $24,000,000. FHLB advances provided a
significant portion of the funding for loan growth in 1996.
The decrease in the level of growth in FHLB advances in 1997 was due to the
maximum on allowable advances based on available collateral. ChoiceOne
pledged certain residential real estate mortgages as collateral during 1997
and the amount of advances available was limited to growth in the
collateral base. ChoiceOne plans to use FHLB advances in 1998 to fund loan
growth to the extent allowed by mortgage growth.
SHAREHOLDERS' EQUITY
ChoiceOne's shareholders' equity increased $1,000,000 in 1997, compared to
an increase of $753,000 in the prior year. The change in both years was
caused primarily by retention of earnings. Shareholders' equity was
affected to a lesser extent by issuances and repurchases of stock and by
changes in unrealized gains and losses on securities.
Note 16 to the Consolidated Financial Statements presents regulatory
capital information as of the end of 1997 and 1996. The percentage
declined slightly in 1997 as ChoiceOne's assets grew slightly more than its
capital. This relationship is consistent with management's desire to
decrease capital as a percentage of assets to better leverage shareholders'
investment. However, management does not desire to decrease ChoiceOne's
capital below those levels considered to be well capitalized.
LIQUIDITY AND RATE SENSITIVITY
The concept of liquidity addresses the measurement of ChoiceOne's ability
to meet its cash flow requirements. These requirements include depositors
desiring to withdraw funds and borrowers seeking credit. Relatively short-
term liquid funds exist in the form of lines of credit to purchase federal
funds at three of the Bank's correspondent banks. The total amount of
<PAGE>
federal funds that were available for purchase at the Bank's correspondent
banks was $11,200,000 at December 31, 1997, while the Bank's actual federal
funds purchased balance was $200,000 as of the same date. Longer-term
liquidity needs may be met through deposit growth, maturities of
securities, normal loan repayments, advances from the Federal Home Loan
Bank and income retention. Approximately $3,600,000 of additional Federal
Home Loan Bank advances were available at the end of 1997 based on
ChoiceOne's collateral at the Federal Home Loan Bank. The Bank also began
using a national rate service in 1997 for certificates of deposit to help
meet cash flow requirements.
The level of loan growth experienced by ChoiceOne in 1996 and 1997 has
caused liquidity to become a very important issue. The Bank's
Asset/Liability Management Committee (the "Committee") monitored and worked
with liquidity and loan growth funding issues in the past two years and will
continue to do so in 1998.
Interest sensitivity is related to liquidity because each is affected by
maturing assets and sources of funds. The Committee attempts to stabilize
the interest rate spread and avoid possible adverse effects when unusual or
rapid changes in interest rates occur. One method it uses of measuring
interest rate sensitivity is the ratio of rate-sensitive assets to
rate-sensitive liabilities. An asset or liability is said to be rate-
sensitive if it matures or otherwise reprices within a given time frame.
Table 4 documents the maturity or repricing schedule for ChoiceOne's
rate-sensitive assets and liabilities for selected time periods. The
time frame that the Committee used in 1997 to measure its interest rate
sensitivity was one year. ChoiceOne's ratio of rate-sensitive assets to
rate-sensitive liabilities which matured or repriced within a one year time
frame was 76% as of December 31, 1997, compared to 92% as of December 31,
1996. The change was primarily due to longer-term assets which were funded
by shorter-term liabilities in 1997. It is the Committee's and management's
goal to have the rate-sensitive assets to rate-sensitive liabilities
ratio in a range of 80% to 120% at the one year maturity or repricing
point. Management believes that the percentage at the end of 1997 is
low because interest-bearing transaction accounts and savings deposits
have been classified in the 0 to 3 month repricing category. While these
deposits can reprice within this time frame, management can control the
timing or extent of the change in interest rates on these deposits.
Therefore, ChoiceOne may not be as liability-sensitive as Table 4 indicates.
A-30
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ChoiceOne Financial Services, Inc.
<TABLE>
TABLE 4 - MATURITIES AND REPRICING SCHEDULE
<CAPTION>
DECEMBER 31, 1997
0-3 3-12 1-5 OVER
MONTHS MONTHS YEARS 5 YEARS TOTAL
-----------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Loans . . . . . . . . . . . . . . . . . $37,097 $ 21,054 $55,729 $13,896 $127,776
Interest-bearing deposits with banks. . 6 - - - 6
Taxable securities. . . . . . . . . . . 2,476 3,480 6,106 341 12,403
Nontaxable securities . . . . . . . . . - 533 3,682 3,324 7,539
-----------------------------------------------------------------
Rate-sensitive assets . . . . . . . . 39,579 25,067 65,517 17,561 147,724
LIABILITIES
Interest-bearing transaction accounts . 23,079 - - - 23,079
Savings deposits. . . . . . . . . . . . 8,143 - - - 8,143
Time deposits . . . . . . . . . . . . . 10,657 31,055 20,965 129 62,806
Federal Home Loan Bank advances . . . . 3,457 6,006 15,621 1,030 26,114
Other . . . . . . . . . . . . . . . . . 2,082 100 756 - 2,938
-----------------------------------------------------------------
Rate-sensitive liabilities. . . . . . 47,418 37,161 37,342 1,159 123,080
-----------------------------------------------------------------
Rate-sensitive assets less rate-
sensitive liabilities
Asset(liability) gap for the
period. . . . . . . . . . . . . . . $(7,839) $(12,094) $28,175 $16,402 $ 24,644
=================================================================
Cumulative asset (liability) gap. . $(7,839) $(19,933) $ 8,242 $24,644
==================================================
</TABLE>
Another method ChoiceOne uses to monitor its interest rate sensitivity is to
subject rate-sensitive assets and liabilities to interest rate shocks. Assets
and liabilities are subjected to immediate 200 basis point increases and
decreases in interest rates and the effect on net income and shareholders'
equity is measured. ChoiceOne's Interest Rate Risk Policy states that the
changes in interest rates cannot cause net income to increase or decrease more
than 10% and cannot cause the value of shareholders' equity to increase or
decrease more than 2% of total assets. The 200 basis point interest rate
shock as of December 31, 1997 caused net income to decrease 4.1% if rates
increased and to increase 2.9% if rates decreased. The shock computation
caused the value of shareholders' equity to decrease by .6% if rates
increased and to increase by .3% if rates decreased. The Committee will
continue to monitor the effect of interest rate shocks on a periodic basis.
A-31
<PAGE>
CORPORATE INFORMATION
ChoiceOne Financial Services, Inc.
CORPORATE HEADQUARTERS
ChoiceOne Financial Services, Inc.
109 East Division Street
P.O. Box 186
Sparta, Michigan 49345
Phone: (616) 887-7366
Fax: (616) 887-5566
MARKET MAKERS IN CHOICEONE
FINANCIAL SERVICES, INC. STOCK
Robert W. Baird & Company, Inc.
Grand Rapids, Michigan
(616) 459-4491
(800) 888-6200
D. H. Brush & Associates
Grand Rapids, Michigan
(616) 285-3700
Dean Witter Reynolds, Inc.
Grand Rapids, Michigan
(616) 454-8998
(800) 788-9640
McDonald & Co.
Grand Rapids, Michigan
(616) 732-3383
(800) 548-6011
Paine Webber, Inc.
Grand Rapids, Michigan
(616) 459-4231
(800) 333-4231
Roney & Company
Grand Rapids, Michigan
(616) 456-8691
(800) 553-2249
Stifel Nicolaus & Company, Inc.
Grand Rapids, Michigan
(616) 942-1717
(800) 676-0477
<PAGE>
STOCK REGISTRAR AND TRANSFER AGENT
ChaseMellon Shareholder Services
85 Challenger Road
Ridgefield Park, New Jersey
07660
(800) 288-9541
ANNUAL MEETING
The annual meeting of shareholders of ChoiceOne Financial Services, Inc.
will be held at 7:30 p.m. EST on Thursday, April 30, 1998 at Sparta Ridgeview
Elementary School, Sparta, Michigan.
SUBSIDIARY INFORMATION
CHOICEONE BANK
Main Office
109 East Division Street
P.O. Box 186
Sparta, Michigan 49345
Appletree Office
416 West Division Street
Sparta, Michigan 49345
Cedar Springs Office
4170 Seventeen Mile Road
Cedar Springs, Michigan 49319
Plainfield Office
4949 Plainfield Avenue, NE
Grand Rapids, Michigan 49505
ChoiceOne Bank is a member of the Federal Deposit Insurance Corporation and
is an Equal Opportunity and Housing Lender.
[HOUSING LOGO]
CHOICEONE INSURANCE
AGENCIES, INC.
Sparta Office
440 West Division Street
Sparta, Michigan 49345
Cedar Springs Office
17 North Main Street
Cedar Springs, Michigan 49319
<PAGE>
Plainfield Office
4949 Plainfield Avenue, NE
Grand Rapids, Michigan 49505
ALPINE TRAVEL, INC.
Alpine Office
3527 Alpine Avenue, NW
Walker, Michigan 49544
A-32
<PAGE>
DIRECTORS AND OFFICERS
ChoiceOne Financial Services, Inc.
DIRECTORS
CHOICEONE FINANCIAL SERVICES, INC.
FRANK G. BERRIS
Owner, American Gas & Oil Co., Inc.
(Distributor of Petroleum Products)
LAWRENCE D. BRADFORD
President, ChoiceOne Insurance
Agencies, Inc.
WILLIAM F. CUTLER, JR.
Former Vice President, H. H. Cutler
Co. (Apparel Manufacturer)
L. EDMOND EARY, JR., M.D.
Chairman, ChoiceOne Financial
Services, Inc.; Retired, Private
Medical Practice
LEWIS G. EMMONS
Special Projects Manager, Great Day
Foods, Inc. (Grocery Retailer)
STUART GOODFELLOW
Owner, Goodfellow Vending Services
(Vending Company) and Goodfellow
Blueberry Farms
JAE M. MAXFIELD
President and Chief Executive Officer,
ChoiceOne Financial Services, Inc. and
ChoiceOne Bank
JON E. PIKE
C.P.A., Managing Partner, Beene
Garter LLP (Certified Public
Accountants)
LINDA R. PITSCH
Secretary, ChoiceOne Financial
Services, Inc. and Senior Vice
President and Cashier, ChoiceOne Bank
<PAGE>
ANDREW W. ZAMIARA, R.PH.
President and Manager, Momber
Pharmacy and Gift Shop
OFFICERS
CHOICEONE FINANCIAL SERVICES, INC.
L. EDMOND EARY, JR., M.D.
Chairman of the Board
JAE M. MAXFIELD
President and Chief Executive Officer
DENIS L. CROSBY
Vice President
LINDA R. PITSCH
Secretary
TOM LAMPEN
Treasurer
OFFICERS
CHOICEONE BANK
L. EDMOND EARY, JR., M.D.
Chairman of the Board
JAE M. MAXFIELD
President and Chief Executive Officer
DENIS L. CROSBY
Senior Vice President - Loans
GERALD P. DAVID
Senior Vice President - Commercial
Services
LINDA R. PITSCH
Senior Vice President - Cashier
DEAN ANDERSON
Vice President - Commercial Loans
JAMES R. BECKMAN
Vice President - Consumer Loans
<PAGE>
TOM LAMPEN
Vice President - Chief Financial
Officer
KELLY POTES, CFP
Vice President - Retail Financial
Services
KECIA A. FLYNN
Assistant Vice President - Commercial
Loans
KAREN M. GILBERT
Assistant Vice President - Mortgage
Loans
MARY JOHNSON
Assistant Vice President - Compliance
Officer
AUDREY STILES
Assistant Vice President - Human
Resources
SHERRY CONKLIN
Branch Sales Manager - Cedar Springs
Office
RACHEL VANIN MILLER
Branch Sales Manager - Plainfield
Office
OFFICERS
CHOICEONE INSURANCE AGENCIES, INC.
JAE M. MAXFIELD
Chairman of the Board
LAWRENCE D. BRADFORD
President
JEFFREY S. BRADFORD, CIC
Vice President
TAB M. BRADFORD, CIC
Vice President
<PAGE>
KELLY POTES, CFP
Vice President
LINDA DEVRIES
Assistant Vice President
CARLO VANIN
Plainfield Office President
TOM LAMPEN
Secretary/Treasurer
OFFICERS
ALPINE TRAVEL, INC.
JAE M. MAXFIELD
Chairman of the Board
THOMAS R. WIERENGA
President
LINDA R. PITSCH
Secretary
TOM LAMPEN
Treasurer
A-33
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE SMALL BUSINESS ISSUER
The following lists the subsidiaries of the Registrant and the state or
jurisdiction of incorporation.
NAME AND ADDRESS OF SUBSIDIARY INCORPORATED
1. ChoiceOne Bank Michigan
109 East Division
Sparta, Michigan 49345
2. ChoiceOne Insurance Agencies, Inc. Michigan
440 West Division
Sparta, Michigan 49345
3. Alpine Travel, Inc. Michigan
3527 Alpine Avenue NW
Grand Rapids, Michigan 49544
4. ChoiceOne Travel Agencies, Inc. Michigan
(Inactive)
<PAGE>
EXHIBIT 24
LIMITED POWER OF ATTORNEY
The undersigned, in his or her capacity as a director or officer,
or both, as the case may be, of ChoiceOne Financial Services, Inc. does
hereby appoint Jae M. Maxfield, Linda R. Pitsch and Thomas Lampen, and each
of them severally, his or her attorneys or attorney, with full power of
substitution, to execute in his or her name an Annual Report of ChoiceOne
Financial Services, Inc. on Form 10-KSB for its fiscal year ended December
31, 1997, and any and all amendments thereto, and to file it and them with
the Securities and Exchange Commission.
DATE
FEBRUARY 10, 1998 S/ LAWRENCE D. BRADFORD
(Signature)
LAWRENCE D. BRADFORD
(Please print name)
-1-
<PAGE>
LIMITED POWER OF ATTORNEY
The undersigned, in his or her capacity as a director or officer,
or both, as the case may be, of ChoiceOne Financial Services, Inc. does
hereby appoint Jae M. Maxfield, Linda R. Pitsch and Thomas Lampen, and each
of them severally, his or her attorneys or attorney, with full power of
substitution, to execute in his or her name an Annual Report of ChoiceOne
Financial Services, Inc. on Form 10-KSB for its fiscal year ended December
31, 1997, and any and all amendments thereto, and to file it and them with
the Securities and Exchange Commission.
DATE
FEBRUARY 9, 1998 S/ WILLIAM F. CUTLER, JR.
(Signature)
WILLIAM F. CUTLER, JR.
(Please print name)
-2-
<PAGE>
LIMITED POWER OF ATTORNEY
The undersigned, in his or her capacity as a director or officer,
or both, as the case may be, of ChoiceOne Financial Services, Inc. does
hereby appoint Jae M. Maxfield, Linda R. Pitsch and Thomas Lampen, and each
of them severally, his or her attorneys or attorney, with full power of
substitution, to execute in his or her name an Annual Report of ChoiceOne
Financial Services, Inc. on Form 10-KSB for its fiscal year ended December
31, 1997, and any and all amendments thereto, and to file it and them with
the Securities and Exchange Commission.
DATE
FEBRUARY 6, 1998 S/ L. EDMOND EARY, JR. M.D.
(Signature)
L. EDMOND EARY, JR. M.D.
(Please print name)
-3-
<PAGE>
LIMITED POWER OF ATTORNEY
The undersigned, in his or her capacity as a director or officer,
or both, as the case may be, of ChoiceOne Financial Services, Inc. does
hereby appoint Jae M. Maxfield, Linda R. Pitsch and Thomas Lampen, and each
of them severally, his or her attorneys or attorney, with full power of
substitution, to execute in his or her name an Annual Report of ChoiceOne
Financial Services, Inc. on Form 10-KSB for its fiscal year ended December
31, 1997, and any and all amendments thereto, and to file it and them with
the Securities and Exchange Commission.
DATE
FEBRUARY 9, 1998 S/ LEWIS EMMONS
(Signature)
LEWIS EMMONS
(Please print name)
-4-
<PAGE>
LIMITED POWER OF ATTORNEY
The undersigned, in his or her capacity as a director or officer,
or both, as the case may be, of ChoiceOne Financial Services, Inc. does
hereby appoint Jae M. Maxfield, Linda R. Pitsch and Thomas Lampen, and each
of them severally, his or her attorneys or attorney, with full power of
substitution, to execute in his or her name an Annual Report of ChoiceOne
Financial Services, Inc. on Form 10-KSB for its fiscal year ended December
31, 1997, and any and all amendments thereto, and to file it and them with
the Securities and Exchange Commission.
DATE
FEBRUARY 6, 1998 S/ STEWART GOODFELLOW
(Signature)
STEWART GOODFELLOW
(Please print name)
-5-
<PAGE>
LIMITED POWER OF ATTORNEY
The undersigned, in his or her capacity as a director or officer,
or both, as the case may be, of ChoiceOne Financial Services, Inc. does
hereby appoint Jae M. Maxfield, Linda R. Pitsch and Thomas Lampen, and each
of them severally, his or her attorneys or attorney, with full power of
substitution, to execute in his or her name an Annual Report of ChoiceOne
Financial Services, Inc. on Form 10-KSB for its fiscal year ended December
31, 1997, and any and all amendments thereto, and to file it and them with
the Securities and Exchange Commission.
DATE
FEBRUARY 10, 1998 S/ JON E. PIKE
(Signature)
JON E. PIKE
(Please print name)
-6-
<PAGE>
LIMITED POWER OF ATTORNEY
The undersigned, in his or her capacity as a director or officer,
or both, as the case may be, of ChoiceOne Financial Services, Inc. does
hereby appoint Jae M. Maxfield, Linda R. Pitsch and Thomas Lampen, and each
of them severally, his or her attorneys or attorney, with full power of
substitution, to execute in his or her name an Annual Report of ChoiceOne
Financial Services, Inc. on Form 10-KSB for its fiscal year ended December
31, 1997, and any and all amendments thereto, and to file it and them with
the Securities and Exchange Commission.
DATE
FEBRUARY 9, 1998 S/ LINDA R. PITSCH
(Signature)
LINDA R. PITSCH
(Please print name)
-7-
<PAGE>
LIMITED POWER OF ATTORNEY
The undersigned, in his or her capacity as a director or officer,
or both, as the case may be, of ChoiceOne Financial Services, Inc. does
hereby appoint Jae M. Maxfield, Linda R. Pitsch and Thomas Lampen, and each
of them severally, his or her attorneys or attorney, with full power of
substitution, to execute in his or her name an Annual Report of ChoiceOne
Financial Services, Inc. on Form 10-KSB for its fiscal year ended December
31, 1997, and any and all amendments thereto, and to file it and them with
the Securities and Exchange Commission.
DATE
FEBRUARY 11, 1998 S/ ANDREW ZAMAIRA
(Signature)
ANDREW ZAMIARA
(Please print name)
-8-
<PAGE>
LIMITED POWER OF ATTORNEY
The undersigned, in his or her capacity as a director or officer,
or both, as the case may be, of ChoiceOne Financial Services, Inc. does
hereby appoint Jae M. Maxfield, Linda R. Pitsch and Thomas Lampen, and each
of them severally, his or her attorneys or attorney, with full power of
substitution, to execute in his or her name an Annual Report of ChoiceOne
Financial Services, Inc. on Form 10-KSB for its fiscal year ended December
31, 1997, and any and all amendments thereto, and to file it and them with
the Securities and Exchange Commission.
DATE
FEBRUARY 6, 1998 S/ FRANK G. BERRIS
(Signature)
FRANK G. BERRIS
(Please print name)
-9-
<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 DECEMBER 31, 1997, FORM 10-KSB
FILING AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,769
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 19,942
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 127,776
<ALLOWANCE> 1,567
<TOTAL-ASSETS> 156,329
<DEPOSITS> 107,492
<SHORT-TERM> 2,060
<LIABILITIES-OTHER> 4,248
<LONG-TERM> 26,992
<COMMON> 5,370
0
0
<OTHER-SE> 10,167
<TOTAL-LIABILITIES-AND-EQUITY> 156,329
<INTEREST-LOAN> 11,230
<INTEREST-INVEST> 1,329
<INTEREST-OTHER> 8
<INTEREST-TOTAL> 12,567
<INTEREST-DEPOSIT> 4,279
<INTEREST-EXPENSE> 6,252
<INTEREST-INCOME-NET> 6,315
<LOAN-LOSSES> 539
<SECURITIES-GAINS> 28
<EXPENSE-OTHER> 5,176
<INCOME-PRETAX> 2,369
<INCOME-PRE-EXTRAORDINARY> 2,369
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,737
<EPS-PRIMARY> 3.23
<EPS-DILUTED> 3.23
<YIELD-ACTUAL> 4.71
<LOANS-NON> 753
<LOANS-PAST> 195
<LOANS-TROUBLED> 27
<LOANS-PROBLEM> 1,915
<ALLOWANCE-OPEN> 1,487
<CHARGE-OFFS> 527
<RECOVERIES> 68
<ALLOWANCE-CLOSE> 1,567
<ALLOWANCE-DOMESTIC> 1,312
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 255
</TABLE>
<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 SEPTEMBER 30, 1997, FORM 10-QSB
FILING AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 4,077
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 21,688
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 124,719
<ALLOWANCE> 1,543
<TOTAL-ASSETS> 155,429
<DEPOSITS> 105,646
<SHORT-TERM> 7,036
<LIABILITIES-OTHER> 1,572
<LONG-TERM> 25,913
<COMMON> 5,114
0
0
<OTHER-SE> 10,148
<TOTAL-LIABILITIES-AND-EQUITY> 155,429
<INTEREST-LOAN> 8,191
<INTEREST-INVEST> 1,006
<INTEREST-OTHER> 7
<INTEREST-TOTAL> 9,204
<INTEREST-DEPOSIT> 3,123
<INTEREST-EXPENSE> 4,582
<INTEREST-INCOME-NET> 4,622
<LOAN-LOSSES> 404
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,689
<INCOME-PRETAX> 1,751
<INCOME-PRE-EXTRAORDINARY> 1,269
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,269
<EPS-PRIMARY> 2.48
<EPS-DILUTED> 2.48
<YIELD-ACTUAL> 4.65
<LOANS-NON> 787
<LOANS-PAST> 179
<LOANS-TROUBLED> 4
<LOANS-PROBLEM> 789
<ALLOWANCE-OPEN> 1,487
<CHARGE-OFFS> 399
<RECOVERIES> 51
<ALLOWANCE-CLOSE> 1,543
<ALLOWANCE-DOMESTIC> 1,267
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 278
</TABLE>
<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, 1997, 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 3,580
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 21,972
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 118,787
<ALLOWANCE> 1,650
<TOTAL-ASSETS> 148,994
<DEPOSITS> 103,764
<SHORT-TERM> 1,850
<LIABILITIES-OTHER> 1,558
<LONG-TERM> 26,872
<COMMON> 5,114
0
0
<OTHER-SE> 9,836
<TOTAL-LIABILITIES-AND-EQUITY> 148,994
<INTEREST-LOAN> 5,269
<INTEREST-INVEST> 679
<INTEREST-OTHER> 1
<INTEREST-TOTAL> 5,949
<INTEREST-DEPOSIT> 1,971
<INTEREST-EXPENSE> 2,947
<INTEREST-INCOME-NET> 3,002
<LOAN-LOSSES> 314
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,275
<INCOME-PRETAX> 1,176
<INCOME-PRE-EXTRAORDINARY> 825
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 825
<EPS-PRIMARY> 1.61
<EPS-DILUTED> 1.61
<YIELD-ACTUAL> 4.66
<LOANS-NON> 1,133
<LOANS-PAST> 149
<LOANS-TROUBLED> 29
<LOANS-PROBLEM> 691
<ALLOWANCE-OPEN> 1,487
<CHARGE-OFFS> 181
<RECOVERIES> 30
<ALLOWANCE-CLOSE> 1,650
<ALLOWANCE-DOMESTIC> 1,267
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 383
</TABLE>
