<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number: 1-9202
CHOICEONE FINANCIAL SERVICES, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
MICHIGAN 38-2659066
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
109 EAST DIVISION
SPARTA, MICHIGAN 49345
(Address of Principal Executive Offices)
(616) 887-7366
(Issuer's Telephone Number, Including Area Code)
Check whether the Registrant: (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past
90 days. Yes __X__ No _____
As of October 31, 1998, the Registrant had outstanding 1,054,310 shares of
Common Stock.
Transitional Small Business Disclosure Format (check one): Yes ____ No _ X_
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.
ChoiceOne Financial Services, Inc.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
---------------- ----------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 3,518,000 $ 3,769,000
Securities available for sale 20,819,000 19,942,000
Loans, net 138,093,000 126,209,000
Premises and equipment, net 3,843,000 3,663,000
Other assets 2,416,000 2,746,000
---------------- ----------------
Total assets $ 168,689,000 $ 156,329,000
================ ================
LIABILITIES
Deposits - noninterest-bearing $ 14,382,000 $ 13,464,000
Deposits - interest-bearing 105,114,000 94,028,000
Federal funds purchased and repurchase agreements 4,902,000 2,060,000
Federal Home Loan Bank advances 25,761,000 26,114,000
Secured loan borrowings 733,000 878,000
Other liabilities 1,511,000 4,248,000
---------------- ----------------
Total liabilities 152,403,000 140,792,000
SHAREHOLDERS' EQUITY
Preferred stock; shares authorized: 100,000; shares
outstanding: none 0 0
Common stock and paid-in capital;
shares authorized: 2,000,000; shares outstanding:
1,070,558 at September 30, 1998 and 537,015 at
December 31, 1997 12,272,000 12,375,000
Retained earnings 3,733,000 2,994,000
Unrealized gains and losses on securities 281,000 168,000
---------------- ----------------
Total shareholders' equity 16,286,000 15,537,000
---------------- ----------------
Total liabilities and shareholders' equity $ 168,689,000 $ 156,329,000
================ ================
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
ChoiceOne Financial Services, Inc.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
1998 1997 1998 1997
-------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 3,294,000 $ 2,922,000 $ 9,488,000 $ 8,191,000
Securities
Taxable 178,000 209,000 563,000 636,000
Nontaxable 117,000 118,000 318,000 370,000
Other 1,000 6,000 17,000 7,000
-------------- ------------- ------------- --------------
Total interest income 3,590,000 3,255,000 10,386,000 9,204,000
INTEREST EXPENSE
Deposits 1,244,000 1,152,000 3,620,000 3,123,000
Federal Home Loan Bank
advances 418,000 406,000 1,253,000 1,204,000
Other 89,000 77,000 197,000 255,000
-------------- ------------- ------------- --------------
Total interest expense 1,751,000 1,635,000 5,070,000 4,582,000
-------------- ------------- ------------- --------------
NET INTEREST INCOME 1,839,000 1,620,000 5,316,000 4,622,000
PROVISION FOR LOAN LOSSES 150,000 90,000 605,000 404,000
-------------- ------------- ------------- --------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,689,000 1,530,000 4,711,000 4,218,000
NONINTEREST INCOME
Customer service fees 125,000 115,000 376,000 323,000
Insurance commission income 212,000 242,000 650,000 673,000
Mortgage loan sales
and servicing 80,000 42,000 266,000 97,000
Other income 21,000 65,000 167,000 134,000
-------------- ------------- ------------- --------------
Total noninterest income 438,000 464,000 1,459,000 1,227,000
NONINTEREST EXPENSE
Salaries and benefits 747,000 757,000 2,241,000 1,863,000
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<PAGE>
Occupancy expense 240,000 241,000 683,000 627,000
Other expense 480,000 421,000 1,311,000 1,204,000
-------------- ------------- ------------- --------------
Total noninterest expense 1,467,000 1,419,000 4,235,000 3,694,000
-------------- ------------- ------------- --------------
INCOME BEFORE INCOME TAX 660,000 575,000 1,935,000 1,751,000
INCOME TAX EXPENSE 186,000 131,000 560,000 482,000
-------------- ------------- ------------- --------------
NET INCOME $ 474,000 $ 444,000 $ 1,375,000 $ 1,269,000
============== ============= ============= ==============
BASIC EARNINGS PER SHARE AND
EARNINGS PER COMMON SHARE
ASSUMING DILUTION $ .44 $ .41 $ 1.28 $ 1.18
============== ============= ============= ==============
</TABLE>
See accompanying notes to consolidated financial statements.
-4-
<PAGE>
ChoiceOne Financial Services, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
1998 1997 1998 1997
-------------- ------------- ------------ --------------
<S> <C> <C> <C> <C>
Net income $ 474,000 $ 444,000 $ 1,375,000 $ 1,269,000
Other comprehensive income,
net of tax
Change in unrealized gains
and losses on securities 106,000 72,000 113,000 44,000
-------------- ------------- ------------- --------------
Comprehensive income $ 580,000 $ 516,000 $ 1,488,000 $ 1,313,000
============== ============= ============= ==============
</TABLE>
See accompanying notes to consolidated financial statements.
-5-
<PAGE>
ChoiceOne Financial Services, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,375,000 $ 1,269,000
Reconciling items:
Net amortization on securities 112,000 56,000
Net gain on sales of loans (166,000) (22,000)
Loans originated for sale (13,817,000) (2,634,000)
Proceeds from loan sales 14,988,000 2,632,000
Provision for loan losses 605,000 404,000
Depreciation 297,000 290,000
Other non-cash credits (40,000) 0
Deferred income tax expense/(benefit) (50,000) 41,000
Changes in:
Interest receivable and other assets 287,000 (728,000)
Interest payable and other liabilities (2,737,000) (85,000)
-------------- --------------
Net cash provided by operating activities 854,000 1,223,000
Cash flows from investing activities:
Securities available for sale:
Purchases (4,923,000) (569,000)
Principal payments 4,130,000 1,897,000
Net change in loans (14,937,000) (16,454,000)
Loans sold 2,885,000 1,490,000
Loans purchased (1,392,000) 0
Premises and equipment expenditures, net (477,000) (932,000)
-------------- --------------
Net cash used in investing activities (14,714,000) (14,568,000)
Cash flows from financing activities:
Net change in deposits 12,004,000 10,040,000
Change in federal funds purchased and repurchase
agreements 2,842,000 2,305,000
Proceeds from Federal Home Loan Bank advances 7,500,000 0
Payments on Federal Home Loan Bank advances (7,853,000) (453,000)
Proceeds from secured loan borrowings 0 1,656,000
-6-
<PAGE>
Payments on secured loan borrowings (145,000) (490,000)
Sale of common stock 80,000 0
Purchase of common stock (173,000) (9,000)
Cash dividends and fractional shares from stock dividends (646,000) (579,000)
-------------- --------------
Net cash provided by financing activities 13,609,000 12,470,000
-------------- --------------
Net change in cash and cash equivalents (251,000) (875,000)
Beginning cash and cash equivalents 3,769,000 4,952,000
-------------- --------------
Ending cash and cash equivalents $ 3,518,000 $ 4,077,000
============== ==============
Cash paid for interest $ 5,019,000 $ 4,489,000
Cash paid for income taxes 690,000 460,000
Loans transferred to other real estate 0 338,000
</TABLE>
See accompanying notes to the consolidated financial statements.
-7-
<PAGE>
ChoiceOne Financial Services, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of
ChoiceOne Financial Services, Inc. (the "Registrant") and its direct
and indirect wholly owned subsidiaries, ChoiceOne Bank (the "Bank"),
ChoiceOne Insurance Agencies, Inc. (the "Insurance Agency") and
ChoiceOne Travel, Inc. (the "Travel Agency") after elimination of
significant intercompany transactions and accounts. The financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information, prevailing
practices within the banking industry and the instructions to Form 10-
QSB and Item 310 of Regulation S-B. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
The accompanying consolidated financial statements reflect all
adjustments ordinary in nature which are, in the opinion of
management, necessary for a fair presentation of the Consolidated
Balance Sheets as of September 30, 1998 and December 31, 1997, the
Consolidated Statements of Income for the three- and nine-month
periods ended September 30, 1998 and September 30, 1997, and the
Consolidated Statements of Cash Flows for the nine-month periods ended
September 30, 1998 and September 30, 1997. Operating results for the
nine months ended September 30, 1998 are not necessarily indicative of
the results that may be expected for the year ending December 31,
1998.
The accompanying consolidated financial statements should be read in
conjunction with the consolidated financial statements and footnotes
thereto included in the Registrant's Annual Report on Form 10-KSB for
the year ended December 31, 1997.
STOCK TRANSACTIONS, EARNINGS AND CASH DIVIDENDS PER SHARE
A 5% stock dividend was declared on February 11, 1998. The stock
dividend was paid on March 31, 1998 to shareholders of record on March
16, 1998. The Registrant also declared a two-for-one stock split on
February 11, 1998. The stock split was paid on May 22, 1998 to
shareholders of record on April 30, 1998. Approximately 1,882 shares
of common stock were sold by the Registrant to the Bank's 401(k)
savings and retirement plan on March 16, 1998. The Registrant's Board
-8-
<PAGE>
of Directors approved a stock repurchase plan at its July 1998
meeting. A maximum of 50,000 shares can be purchased under the terms
of the plan. A total of 6,908 shares were purchased in the third
quarter of 1998. A 6% stock dividend was declared by the Registrant
on April 16, 1997. The stock dividend was paid on May 16, 1997 to
shareholders of record on April 29, 1997.
Earnings per share are based on the weighted average number of shares
outstanding during the period. The weighted average number of shares
has been adjusted for the 6% stock dividend paid in May 1997, the 5%
stock dividend paid in March 1998, and the two-for-one stock split
paid in May 1998. The weighted average number of shares outstanding
was 1,076,474 for the third quarter of 1998, 1,076,229 for the first
nine months of 1998, 1,074,030 for the third quarter of 1997, and
1,074,190 for the first nine months of 1997.
Cash dividends per share are based on the number of shares outstanding
at the time the dividend was paid and have been adjusted for the 6%
stock dividend paid in May 1997, the 5% stock dividend paid in March
1998, and the two-for-one stock split paid in May 1998.
COMPREHENSIVE INCOME
The Registrant implemented Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("Statement No. 130"), in
the first quarter of 1998. Statement No. 130 requires that
comprehensive income be reported for all accounting periods.
Comprehensive income includes net income and other comprehensive
income. Other comprehensive income includes the change in unrealized
gains and losses on securities available for sale, foreign currency
translation adjustments, and additional minimum pension liability
adjustments. The change in unrealized gains and losses on securities
available for sale is the only item of comprehensive income that the
Registrant has at this time.
NOTE 2 - SECURITIES
The amortized cost and fair value of securities as of September 30,
1998 and December 31, 1997 were as follows:
-9-
<PAGE>
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------------- ------------ ------------ ---------------
SECURITIES AVAILABLE FOR SALE
<S> <C> <C> <C> <C>
SEPTEMBER 30, 1998
U.S. Treasuries and
U.S. Government agencies $ 2,754,000 $ 16,000 $ 0 $ 2,770,000
States and municipalities 9,504,000 411,000 0 9,915,000
Mortgage-backed securities 5,155,000 33,000 (38,000) 5,150,000
Other securities 2,982,000 2,000 0 2,984,000
--------------- ----------- ------------ ---------------
Total $ 20,395,000 $ 462,000 $ (38,000) $ 20,819,000
=============== =========== ============ ===============
</TABLE>
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
U.S. Treasuries and
U.S. Government agencies $ 3,259,000 $ 7,000 $ (2,000) $ 3,264,000
States and municipalities 7,458,000 232,000 (4,000) 7,686,000
Mortgage-backed securities 6,005,000 32,000 (12,000) 6,025,000
Other securities 2,966,000 1,000 0 2,967,000
--------------- ----------- ------------ ---------------
Total $ 19,688,000 $ 272,000 $ (18,000) $ 19,942,000
=============== =========== ============ ===============
</TABLE>
There were no securities classified as held to maturity as of
September 30, 1998 or December 31, 1997.
There were no sales of securities for the nine months ended September
30, 1998 and 1997.
For the nine months ended September 30, 1998, the net unrealized
holding gain on securities available for sale increased by $171,000
resulting in a net unrealized gain of $424,000 on securities available
for sale as of September 30, 1998, before any deferred tax effect.
The fair values of securities pledged as collateral at September 30,
1998 and December 31, 1997 were as follows:
-10-
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
--------------- --------------
<S> <C> <C>
Securities sold under agreements to repurchase $ 2,302,000 $ 2,259,000
Public deposits 504,000 505,000
-------------- --------------
Total $ 2,806,000 $ 2,764,000
============== ==============
</TABLE>
NOTE 3 - LOANS
Loans at June 30, 1998 and December 31, 1997 were classified as
follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
---------------- ----------------
<S> <C> <C>
Commercial $ 53,123,000 $ 43,546,000
Agricultural 8,774,000 9,350,000
Real estate mortgage - construction 2,719,000 2,499,000
Real estate mortgage - residential 44,678,000 43,715,000
Consumer 30,606,000 28,666,000
---------------- ----------------
Total loans before allowance for loan losses 139,900,000 127,776,000
Less allowance for loan losses 1,807,000 1,567,000
---------------- ----------------
Loans, net $ 138,093,000 $ 126,209,000
================ ================
</TABLE>
Loans pledged for borrowings at September 30, 1998 and December 31, 1997 were
as follows:
-11-
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
---------------- ----------------
<S> <C> <C>
Residential real estate mortgages pledged for
Federal Home Loan Bank advances $ 41,617,000 $ 39,505,000
Commercial loans pledged for secured loan borrowings 733,000 878,000
---------------- ----------------
Total $ 42,350,000 $ 40,383,000
================ ================
</TABLE>
Loans held for sale included $3,266,000 of residential real estate
mortgage loans at September 30, 1998. Loans held for sale were
accounted for at the lower of aggregate cost or market value.
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
An analysis of changes in the allowance for loan losses follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Balance at beginning of period $ 1,567,000 $ 1,487,000
Provision charged to operating expense 605,000 404,000
Recoveries credited to the allowance 56,000 51,000
Loans charged-off (421,000) (399,000)
-------------- --------------
Balance at end of period $ 1,807,000 $ 1,543,000
============== ==============
</TABLE>
Information regarding impaired loans as of September 30, 1998 and
December 31, 1997 follows:
-12-
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------------- ------------
<S> <C> <C>
Loans with no allowance allocated $ 2,040,000 $ 780,000
Loans with allowance allocated 513,000 152,000
Amount of allowance for loan losses allocated 200,000 86,000
</TABLE>
Information regarding impaired loans for the nine months ended
September 30, 1998 and 1997 follows:
<TABLE>
<CAPTION>
1998 1997
-------------- -------------
<S> <C> <C>
Average balance during the period $ 2,264,000 $ 760,000
Interest income recognized thereon 213,000 21,000
Cash-basis interest income recognized 210,000 17,000
</TABLE>
NOTE 5 - CERTIFICATES OF DEPOSIT
As of September 30, 1998, certificates of deposit included $7,524,000
obtained from a national time deposit rate service. The weighted
average interest rate on these deposits was 5.88%. Approximately
$6,630,000 of the deposits had maturities of one year or less, while
the remainder had a maximum maturity of two years.
NOTE 6 - NONINTEREST EXPENSE
Noninterest expense for the nine months ended September 30, 1998 and
1997 was as follows:
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<PAGE>
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
Supplies and postage $ 193,000 $ 171,000
Legal and professional 143,000 176,000
Advertising and marketing 117,000 74,000
Computer processing 114,000 117,000
State single business tax expense 95,000 71,000
Telephone 73,000 55,000
Training and seminars 38,000 62,000
Other 538,000 478,000
-------------- --------------
Total $ 1,311,000 $ 1,204,000
============== ==============
</TABLE>
NOTE 7 - INCOME TAX EXPENSE
The components of income tax expense for the nine months ended
September 30, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Current income tax expense $ 610,000 $ 441,000
Deferred income tax expense (108,000) 18,000
------------ ------------
Total expense attributable to operations 502,000 459,000
Deferred expense allocated to other comprehensive
income items:
Unrealized gains and losses on securities 58,000 23,000
------------ ------------
Total income tax expense $ 560,000 $ 482,000
============ ============
</TABLE>
The difference between the financial statement tax provision and
amounts computed by applying the federal income tax rate to pre-tax
income is principally attributable to tax-exempt interest income.
The components of deferred tax assets and liabilities at September 30,
1998 and December 31, 1997 were as follows:
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<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 510,000 $ 456,000
Deferred compensation 54,000 60,000
Postretirement benefits obligation 53,000 50,000
Deferred loan fees 24,000 49,000
Other 85,000 65,000
------------ ------------
Total deferred tax assets 726,000 680,000
Deferred tax liabilities:
Depreciation 215,000 185,000
Unrealized appreciation on securities available
for sale 144,000 43,000
Other 53,000 195,000
------------ ------------
Total deferred tax liabilities 412,000 423,000
------------ ------------
Net deferred tax asset $ 314,000 $ 257,000
============ ============
</TABLE>
A valuation allowance related to a deferred tax asset is recognized
when it is considered more likely than not that part or all of the
deferred tax benefits will not be realized. Management has determined
that no such allowance was required at September 30, 1998 or December
31, 1997.
NOTE 8 - COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF CREDIT
RISK
Noninterest-bearing deposits totaling approximately $2,285,000 were
held at NBD Bank, N.A. at September 30, 1998.
As of September 30, 1998, the Registrant had outstanding commitments
to make loans totaling $20,595,000, the majority of which have
variable interest rates. The Registrant had outstanding approximately
$3,906,000 in unused lines of credit and $63,000 in letters of credit
at September 30, 1998.
-15-
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion is designed to provide a review of the
financial condition and results of operations of ChoiceOne Financial
Services, Inc. (the "Registrant") and its direct and indirect wholly
owned subsidiaries, ChoiceOne Bank (the "Bank"), ChoiceOne Insurance
Agencies, Inc. (the "Insurance Agency") and ChoiceOne Travel, Inc.
(the "Travel Agency"). This discussion should be read in conjunction
with the consolidated financial statements and related footnotes.
FORWARD-LOOKING STATEMENTS
This discussion and other sections of this report contain forward-
looking statements that are based on management's beliefs,
assumptions, current expectations, estimates, and projections about
the financial services industry, the economy, and about the Registrant
itself. Words such as "anticipates," "believes," "estimates,"
"expects," "forecasts," "intends," "is likely," "plans," "predicts,"
"projects," and variations of such words and similar expressions are
intended to identify such forward-looking statements. In addition,
the statements under the caption "Year 2000 Readiness Disclosure" are
forward-looking statements. These statements are not guarantees of
future performance and involve certain risks, uncertainties, and
assumptions ("Future Factors") that are difficult to predict with
regard to timing, extent, likelihood, and degree of occurrence.
Therefore, actual results and outcomes may materially differ from what
may be expressed or forecasted in such forward-looking statements.
Future Factors include, but are not limited to, changes in interest
rates and interest rate relationships; demand for products and
services; the degree of competition by traditional and non-traditional
competitors; changes in banking regulations; changes in tax laws;
changes in prices, levies, and assessments; the impact of
technological advances and issues, including Year 2000 issues;
governmental and regulatory policy changes; the outcomes of pending
and future litigation and contingencies; trends in customer behavior
as well as their ability to repay loans; and changes in the national
economy. These are representative of the Future Factors that could
cause a difference between an ultimate actual outcome and a preceding
forward-looking statement. Furthermore, the Registrant undertakes no
obligation to update, amend, or clarify forward-looking statements,
whether as a result of new information, future events, or otherwise.
NET INCOME AND RETURN ON AVERAGE ASSETS AND SHAREHOLDERS' EQUITY
The Registrant's net income increased $30,000 or 7% in the third
quarter of 1998 compared to the same period in 1997 and has risen
$106,000 or 8% in the first nine months of 1998 compared to the first
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<PAGE>
nine months of the prior year. The increase in net income was due to
higher net interest income and noninterest income, the effect of which
was offset by growth in the provision for loan losses and noninterest
expense.
Comprehensive income is a new disclosure that appears in the
Consolidated Statements of Comprehensive Income. Net income is
adjusted by other comprehensive income to arrive at comprehensive
income. In the Registrant's case, other comprehensive income includes
only the change in unrealized gains and losses on securities. This
change was previously disclosed only in the Consolidated Statement of
Changes in Shareholders' Equity.
Approximately 80% of the increase in net interest income in 1998 was
caused by growth in average interest-earning assets. A larger spread
between interest rates earned on interest-earning assets and interest
rates paid on interest-bearing liabilities also contributed to growth
in net interest income. The change in noninterest income was
primarily caused by a significant increase in mortgage loan sales and
servicing income. Gains on sales of mortgages have been higher in
1998 due to a greater amount of mortgage refinancings occurring in the
first three quarters of 1998 than in the same period in the prior
year. The increase in the Registrant's loan portfolio caused the
Registrant's management to believe a larger provision for loan losses
was prudent in 1998. Most of the change in noninterest expense in the
first nine months of 1998 compared to the same period in 1997 was
primarily due to higher salaries and benefits. The growth in salaries
and benefits was caused in part by higher commissions paid to
commission-based personnel and higher incentive bonus expense.
The return on average assets was 1.14% for the first nine months of
1998, compared to 1.17% for the same period in 1997. The return on
average shareholders' equity was 11.52% for the first three quarters
of 1998, compared to 11.45% for the comparable period of the prior
year.
CASH AND STOCK DIVIDENDS
Cash dividends declared in the third quarter of 1998 were $215,000, or
$.20 per common share, which represents a $.01 per share or 5%
increase compared to the dividend paid in the same period of the prior
year. The cash dividends paid in the first nine months of 1998 were
$636,000 or $.59 per share, which was $.05 per share or 9% greater
than the dividends paid in the same period in 1997. The cash dividend
payout percentage in the first nine months of 1998 was 46.29%,
compared to 45.55% in the same period of 1997. The Registrant
declared a 6% stock dividend on April 16, 1997, a 5% stock dividend on
February 11, 1998 and a two-for-one stock split on February 11, 1998.
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<PAGE>
The stock dividends were paid on May 16, 1997 and March 31, 1998,
respectively. The two-for-one stock split was paid on May 22, 1998.
The cash dividend per share amounts for both 1998 and 1997 have been
adjusted for the effect of the stock dividends and stock split.
INTEREST INCOME AND EXPENSE
Tables 1 and 2 on the following pages provide information regarding
interest income and expense for the nine-month periods ended September
30, 1998 and September 30, 1997. Table 1 documents average balances
and interest income and expense, as well as the average rates earned
or paid on assets and liabilities. Table 2 documents the effect on
interest income and expense of changes in volume (average balance) and
interest rates. These tables are referred to in the discussion of
interest income, interest expense and net interest income below.
-18-
<PAGE>
Table 1 - Average Balances and Tax Equivalent Interest Rates
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------------------
1998 1997
---------------------------------------- -------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- -------- ------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets
Loans <F1> $ 130,413 $ 9,504 9.72% $ 115,944 $ 8,213 9.44%
Taxable securities <F2> 12,486 563 6.01 12,859 636 6.59
Nontaxable securities <F1><F2> 8,574 481 7.48 9,496 560 7.86
Other 464 17 4.89 218 7 4.28
---------- -------- ----------- --------
Interest-earning assets 151,937 10,565 9.27 138,517 9,416 9.06
-------- --------
Noninterest-earning assets 9,241 6,891
---------- -----------
Total assets $ 161,178 $ 145,408
========== ===========
Liabilities and shareholders' equity
Interest-bearing transaction
accounts $ 23,745 605 3.40 $ 22,065 527 3.18
Savings deposits 8,283 111 1.79 8,973 123 1.83
Time deposits 66,456 2,904 5.83 56,665 2,473 5.82
Federal Home Loan Bank advances 26,362 1,253 6.34 25,260 1,204 6.36
Other 4,543 197 5.78 6,212 255 5.47
---------- -------- ----------- --------
Interest-bearing liabilities 129,389 5,070 5.22 119,175 4,582 5.13
-------- ---- -------- ----
Demand deposits 13,336 11,157
Other noninterest-bearing
liabilities 2,496 217
Shareholders' equity 15,957 14,859
---------- -----------
Total liabilities and
shareholders' equity $ 161,178 $ 145,408
========== ===========
Net interest income (tax-equivalent
basis) - interest spread 5,495 4.05% 4,834 3.93%
==== ====
Tax equivalent adjustment <F1> (179) (212)
-------- --------
Net interest income $ 5,316 $ 4,622
======== ========
-19-
<PAGE>
Net interest income as a percentage
of earning assets (tax-equivalent
basis) 4.82% 4.65%
==== ====
<FN>
<F1> Interest on nontaxable securities and loans has been adjusted to a fully tax-equivalent basis to facilitate comparison
to the taxable interest-earning assets. The adjustment uses an incremental tax rate of 34% for the periods presented.
<F2> The average balance includes the effect of unrealized appreciation/depreciation on securities, while the average rate
was computed on the average amortized cost of the securities.
</FN>
</TABLE>
-20-
<PAGE>
Table 2 - Changes in Tax Equivalent Net Interest Income
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1998 OVER 1997
--------------
TOTAL VOLUME RATE
----- ------ ----
(Dollars in Thousands)
<S> <C> <C> <C>
Increase (decrease) in interest income <F1>
Loans <F2> $ 1,291 $ 1,045 $ 246
Taxable securities (73) (18) (55)
Nontaxable securities <F2> (79) (53) (26)
Other 10 9 1
--------- -------- --------
Net change in tax-equivalent income 1,149 983 166
Increase (decrease) in interest expense <F1>
Interest-bearing transaction accounts 78 41 37
Savings deposits (12) (9) (3)
Time deposits 431 428 3
Federal Home Loan Bank advances 49 53 (4)
Other (58) (72) 14
--------- -------- --------
Net change in interest expense 488 441 47
--------- -------- --------
Net change in tax-equivalent
net interest income $ 661 $ 542 $ 119
========= ======== ========
<FN>
<F1> The volume variance is computed as the change in volume (average balance) multiplied by the previous year's interest
rate. The rate variance is computed as the change in interest rate multiplied by the previous year's volume (average balance).
The change in interest due to both volume and rate has been allocated to the volume and rate changes in proportion to the
relationship of the absolute dollar amounts of the change in each.
<F2> Interest on nontaxable investment securities and loans has been adjusted to a fully tax-equivalent basis using an
incremental tax rate of 34% for the periods presented.
</FN>
</TABLE>
-21-
<PAGE>
NET INTEREST INCOME
As shown in Tables 1 and 2, tax equivalent net interest income
increased $661,000 in the first nine months of 1998 compared to the
same period of 1997. The increase was primarily caused by growth in
the Registrant's loan portfolio. A smaller portion of the increase in
net interest income was due to a widening of the Registrant's interest
rate spread. Average loans were $14,469,000 higher in the first nine
months of 1998 than the comparable period in the prior year. This
growth caused interest income from loans to be $1,045,000 higher in
the first three quarters of 1998. The other interest-earning asset
categories did not experience significant changes between 1998 and
1997.
The average balance of time deposits experienced the most significant
change among the interest-bearing liability categories from 1997 to
1998. The average balance of time deposits increased $9,791,000 from
the first nine months in 1997 to the same period in 1998.
Approximately $2,600,000 of the growth was caused by deposits obtained
from a national rate service. The Bank began using the national rate
service in the second quarter of 1997. The remainder of the time
deposit growth was obtained from customers within the Bank's local
market areas. The increase in the average balance of interest-bearing
transaction accounts was caused by deposit growth and the introduction
of new types of accounts. The decrease in other interest-bearing
liabilities was due to a lower average balance of federal funds
purchased in the first nine months of 1998 than in the same period in
1997.
Table 1 shows that the net interest income spread was 4.05% for the
first nine months of 1998, compared to 3.93% for the same period of
the prior year. The increase in the net interest income spread was
caused by a 21-basis-point increase in the average rate earned on
interest-earning assets, while the average rate paid on interest-
bearing liabilities went up only 9 basis points. The increase in the
average rate earned on interest-earning assets was caused by a 28-
basis-point increase in the average rate earned on loans.
Approximately 17 basis points of the loan increase was caused by a
$194,000 increase in loan fees in the first three quarters of 1998
compared to the same period in 1997. The growth in loan fees was
primarily caused by a higher level of mortgage refinancings occurring
in 1998 than in 1997. The level of mortgage refinancings was lower in
the second and third quarters of 1998 than in the first quarter of the
year. However, decreases in long-term mortgage rates in late
September and early October of 1998 appear to have stimulated further
mortgage activity. Therefore, management anticipates that the higher
level of loan fees will continue through the end of 1998. The
-22-
<PAGE>
increase in the average rate paid on interest-bearing liabilities
resulted from a higher proportion of time deposits to total deposits
and a higher rate paid on interest-bearing transaction accounts. The
higher proportion of time deposits to total deposits would cause the
overall rate on liabilities to rise since time deposits carry one of
the higher average interest rates. The higher rate paid on
transaction accounts in 1998 was caused by the competitive interest
rate environment on this type of account and the Bank's introduction
of new accounts in this category in 1998 that carried higher interest
rates.
Short-term interest rates decreased in late September and mid-October
of 1998. This will cause the interest rate that the Bank would earn
on variable rate loans to decrease, which would negatively impact
interest income. The Bank's management believes the Bank is
positioned to be able to lower the rates it pays on certain of its
deposit accounts to lessen the impact on net interest income. While
this decrease in short-term market interest rates may impact net
interest income in the fourth quarter of 1998, it is not anticipated
that the decrease will be significant.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses increased $264,000 from December 31,
1997 to September 30, 1998. The allowance was 1.29% of total loans at
September 30, 1998, compared to 1.23% at December 31, 1997. The
allowance for loan losses as a percentage of nonperforming loans was
210% as of September 30, 1998, compared to 130% as of the end of 1997.
The provision for loan losses was $60,000 greater in the third quarter
of 1998 than in the same period of 1997 and $201,000 greater in the
first nine months of 1998 compared to the same period in 1997. The
higher provision for loan losses was believed prudent in the first
three quarters of 1998 due to the increase in the Registrant's loan
portfolio since the end of 1997.
Chargeoffs and recoveries for those loan categories with activity in
the nine-month periods ended September 30, 1998 and 1997 were as
follows:
-23-
<PAGE>
<TABLE>
<CAPTION>
1998 1997
----------------------------- ------------------------------
CHARGEOFFS RECOVERIES CHARGEOFFS RECOVERIES
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Commercial $ 172,000 $ 1,000 $ 180,000 $ 13,000
Agricultural 0 0 7,000 0
Real estate mortgage -
residential 0 0 5,000 0
Consumer 249,000 55,000 207,000 38,000
---------- --------- ---------- ----------
$ 421,000 $ 56,000 $ 399,000 $ 51,000
========== ========= ========== ==========
</TABLE>
The increase in consumer loan chargeoffs from the first nine months of
1997 to the same period in 1998 resulted from a combination of small
chargeoffs. The amount of chargeoffs that the Bank will experience in
the remainder of 1998 will be dependent on the extent to which
business and consumer borrowers are affected by the local economy and
on many other economic factors. As growth in the loan portfolio
occurs, management believes chargeoffs may increase as a result of the
higher total balance of loans. The provision and allowance for loan
losses will be reviewed by the Bank's management and adjusted as
believed necessary as chargeoffs, changes in the level of
nonperforming loans and loan growth occur in the remainder of 1998.
NONINTEREST INCOME
Total noninterest income decreased $26,000 in the third quarter of
1998 and has grown $232,000 in the first nine months of 1998 compared
to the same periods in 1997. Mortgage loan sales and servicing income
has increased significantly in 1998 compared to 1997. Most of the
increase was due to higher gains on sales of fixed-rate mortgages.
The level of gains on sales was higher in 1998 because more
refinancing activity occurred in 1998 than in 1997. A decrease of 50
to 75 basis points in long-term mortgage rates from October 1, 1997 to
September 30, 1998 caused the high level of refinancing activity in
1998. Most borrowers have refinanced into long-term fixed rate
mortgages. The Bank has sold almost all of these in the secondary
market. The increase in mortgage loans sales and servicing activity
was offset in the third quarter of 1998 by lower commission income
from the Bank's Insurance Agency and Travel Agency and from sales of
investment products.
-24-
<PAGE>
NONINTEREST EXPENSE
Total noninterest expense increased $48,000 in the third quarter of
1998 compared to the same quarter in 1997 and has grown $541,000 in
the first nine months of 1998 compared to the same period in 1997.
Salaries and benefits expense decreased $10,000 in the third quarter
of 1998 compared to the same quarter in 1997. Approximately $114,000
of retirement expenses were recorded in the third quarter of 1997; no
expense was recorded in the third quarter of 1998 since the Bank plans
to use excess plan assets from its terminated pension plan to fund
retirement benefits in 1998. The decrease in retirement expenses was
partially offset by an increase in incentive bonus expense. Salaries
and benefits expense increased $378,000 in the first nine months of
1998 compared to the same period in 1997. Approximately one half of
the increase resulted from higher commissions paid to commission-based
personnel and higher incentive bonus expense in 1998 than in 1997. In
addition, the results of the first nine months of 1997 included a
$152,000 gain recognized on the curtailment of the pension plan which
was partially offset by $96,000 of funding of the Bank's 401(k) plan
expense from operations.
Occupancy expense decreased $1,000 in the third quarter of 1998
compared to the same quarter in 1997 and has increased $56,000 in the
first nine months of 1998 compared to the same period in 1997. The
growth in 1998 was primarily due to increased expense from rental of
leased facilities. Other noninterest expense increased $59,000 in the
third quarter of 1998 compared to the same quarter in 1997 and has
grown $107,000 in the first nine months of 1998 compared to the same
period in 1997. Advertising, marketing and customer relations
expenses rose $78,000 in the third quarter of 1998 and $89,000 in the
first nine months of 1998 when compared to the same periods in the
prior year. Increases in these expenses in 1998 were due to more
advertising and marketing of the Bank and its subsidiaries and their
products and expenses related to the Bank's 100th Anniversary
celebrated in August 1998.
The Bank opened a new branch office in September 1998 and plans to
open one more new branch office before the end of 1998. Anticipated
expenses related to these new offices would also cause increases in
noninterest expense.
SECURITIES
The balance of total securities decreased $19,000 in the third quarter
of 1998 and has increased $877,000 since the end of 1997. Securities
issued by states and municipalities has been the only security
category to experience significant growth in 1998. These securities
-25-
<PAGE>
were purchased because of their higher yield over other security
categories. The Bank used certain of its securities as collateral for
public funds and repurchase agreements in the first three quarters of
1998 and plans to continue to do so in the remainder of 1998. The
securities portfolio may also serve as a source of liquidity for
deposit needs and as collateral for additional advances from the
Federal Home Loan Bank.
LOANS
Total loans grew $6,474,000 in the third quarter of 1998, which
continued the growth experienced in the second quarter of 1998.
Commercial loans grew $4,303,000 in the third quarter of 1998 after
increasing $5,274,000 in the first two quarters of 1998. The
Registrant's management believes that the continued growth in the
third quarter of 1998 was achieved by its officer calling program and
by competitive interest rates. The balance of residential real estate
mortgage loans has experienced little change in the third quarter and
first nine months of 1998. However, this does not reflect the
significant increase in mortgage loan activity in 1998 compared to
1997. As a result of declines in long-term interest rates in 1998,
the level of mortgage refinancings has increased greatly in 1998 over
1997. The Bank received mortgage applications for almost $38,000,000
in the first nine months of 1998, compared to just over $19,000,000 in
the same period in 1997. The majority of borrowers who refinanced
their mortgages in 1998 obtained long-term fixed rate mortgages. The
Bank retained a limited number of this type of mortgage in its
portfolio; most long-term fixed rate mortgages were sold into the
secondary market. Consumer loans grew $947,000 in the third quarter
of 1998 and have increased $1,940,000 in the first nine months of
1998. Part of the growth in the third quarter of 1998 was due to a
loan promotion held as part of the Bank's anniversary celebration.
The other loan categories have experienced small fluctuations in the
first three quarters of 1998.
Loan growth in the remainder of 1998 will continue to be affected by
interest rates and by competition within the Bank's market areas.
Management anticipates that interest rate competition for all types of
loans will continue to be very strong. The Bank's loan officers plan
to continue to periodically review the pricing structure for loans to
make sure that the Bank's rates are competitive. The continued use of
the officer calling program is planned for all loan areas. Based on
current long-term interest rates and activity levels in October 1998,
the Bank's mortgage department management believes that the level of
mortgage refinancings will continue at a high level through the end of
1998. In addition, mortgage department management expects its
attention to be focused on new mortgages and plans to continue to call
on realtors and other mortgage professionals. In the consumer loan
-26-
<PAGE>
area, management plans to use direct mail advertising and referrals
from other departments within the Bank to stimulate demand for direct
consumer loans. Management will also investigate expansion of its
base of contacts for indirect consumer loans.
Information regarding impaired loans can be found in Note 4 to the
consolidated financial statements included in this report. In
addition to its review of the loan portfolio for impaired loans,
management also monitors the various loan categories for nonperforming
loans. Nonperforming loans are comprised of: (1) loans accounted for
on a nonaccrual basis; (2) loans, not included in nonaccrual loans,
which are contractually past due 90 days or more as to interest or
principal payments; and (3) loans, not included in nonaccrual or loans
past due 90 days or more, which are considered troubled debt
restructurings. The balances of the three nonperforming categories as
of September 30, 1998 and December 31, 1997 were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- -------------
<S> <C> <C>
Loans accounted for on a nonaccrual basis $ 590,000 $ 753,000
Loans, not included in nonaccrual loans, which are
contractually past due 90 days or more as to
interest or principal payments 198,000 195,000
Loans, not included in nonaccrual or loans past due
90 days or more, which are considered troubled
debt restructurings 71,000 27,000
------------- -------------
Total $ 859,000 $ 975,000
============= =============
Nonperforming other real estate $ 0 $ 229,000
============= =============
</TABLE>
Management maintains a list of loans that are not classified as
nonperforming loans but where some concern exists as to the borrowers'
abilities to comply with the original loan terms. The total balance
of these loans was $4,218,000 as of September 30, 1998, compared to
$4,085,000 as of June 30, 1998 and $1,915,000 as of December 31, 1997.
The increase since the end of 1997 was caused by three large
commercial loans that were added to the list in the first quarter of
1998. Approximately $200,000 of the allowance for loan losses had
been specifically allocated to these loans at September 30, 1998.
-27-
<PAGE>
DEPOSITS AND OTHER FUNDING SOURCES
Total deposits grew $6,835,000 in the third quarter of 1998 after
increasing $5,169,000 in the first six months of 1998. Most of the
third quarter growth was caused by certificates of deposit, which
increased $5,561,000 from June 30, 1998 to September 30, 1998.
Approximately $3,165,000 of the certificate of deposit increase
resulted from growth in national market certificates in the third
quarter of 1998. The national market certificate growth offset the
decrease in this deposit type which occurred in the second quarter of
1998. The remainder of the certificate of deposit growth was obtained
from the Registrant's local market areas. Part of the local growth
was due to interest rate promotions for certain certificate of deposit
maturities. Interest-bearing transaction accounts increased
$1,161,000 in the third quarter of 1998. This was due to growth in
new deposit account types introduced in 1998 as well as general
deposit growth.
The Bank's management plans to continue to emphasize growth in core
deposits (deposits obtained in its local market areas) in the
remainder of 1998. Management plans to use interest rate promotions
and new products to attempt to stimulate the growth. Management
anticipates it will use federal funds purchased, repurchase
agreements, national market certificates of deposit, and Federal Home
Loan Bank advances to supplement core deposit growth.
SHAREHOLDERS' EQUITY
Total shareholders' equity increased $192,000 in the third quarter of
1998 and has increased $749,000 since the end of 1997. Equity growth
in 1998 resulted from retained earnings and proceeds from the sale of
stock to the Bank's 401(k) and Employee Stock Ownership Plan. There
was also an increase in the balance of unrealized gains and losses on
securities. These increases were partially offset by the repurchase
of $173,000 of stock.
Total shareholders' equity as a percentage of assets was 9.65% as of
September 30, 1998, compared to 9.91% as of June 30, 1998 and 9.94% as
of December 31, 1997. The small decrease in this percentage in 1998
documents that total assets have grown slightly more than
shareholders' equity. The Registrant's management plans to decrease
the equity to assets ratio to more effectively use shareholders'
equity. At its July 1998 meeting, the Registrant's Board of Directors
authorized management to purchase up to 50,000 shares of the
Registrant's common stock. Approximately 7,000 shares have been
purchased through September 30, 1998. The Registrant plans to use
purchased shares for its employee benefit plans and stock dividends.
-28-
<PAGE>
Based on risk-based capital guidelines established by the Bank's
regulators, the Registrant's risk-based capital was categorized as
well capitalized at September 30, 1998.
CAPITAL RESOURCES
The Bank opened a new branch in September 1998 and plans to open one
additional branch in the fourth quarter of 1998. The facilities for
the two branches will be leased. However, equipment and leasehold
improvements will be needed for these branches. The Bank's management
anticipates that the cost of this equipment and improvements will
range between $250,000 and $300,000. As was stated in the
Shareholders' Equity section above, the Registrant has already used
some of its capital resources to repurchase shares of its common
stock. The Registrant plans to continue using capital resources to
repurchase shares of its stock in the fourth quarter of 1998. The
Bank's management is not currently aware of any other significant uses
of capital resources.
Management believes that the current level of capital is adequate to
take advantage of potential opportunities that may arise for the
Registrant or the Bank.
LIQUIDITY AND RATE SENSITIVITY
Cash and cash equivalents increased $125,000 in the third quarter of
1998 after decreasing $376,000 in the first six months of 1998. The
Registrant's management believes that the current level of liquidity
is sufficient to meet the Bank's normal operating needs. This belief
is based upon the availability of deposit growth from both the local
and national markets, maturities of securities, normal loan
repayments, income retention, federal funds which can be purchased
from correspondent banks, and advances available from the Federal Home
Loan Bank of Indianapolis. The Registrant is beginning preliminary
planning for special liquidity needs that may arise in late 1999 as a
result of depositor concerns with the Year 2000.
Table 3 presents the maturity and repricing schedule for the
Registrant's rate-sensitive assets and liabilities for selected time
periods. The Registrant's cumulative rate-sensitive liabilities
exceeded its cumulative rate-sensitive assets by $32,227,000 at the
one-year repricing point as of September 30, 1998. This placed the
ratio of rate-sensitive assets to rate-sensitive liabilities at such
repricing point at 68% as of September 30, 1998, compared to 69% as of
June 30, 1998 and 76% as of December 31, 1997. The decrease in the
ratio since the end of 1997 resulted from asset growth in the 1-to-5
year repricing category that was funded by shorter-term liabilities.
-29-
<PAGE>
The negative cumulative gap as of the dates indicated was due
primarily to the classification of all interest-bearing transaction
accounts and savings deposits in the 0-to-3-month repricing category.
The rates paid on these deposit types can be immediately repriced.
However, the Bank's management can control the timing or extent of the
change in rates on these deposits. For the remainder of 1998,
management will determine the rates it will pay on deposits based on
rates paid by competitors and the Bank's need for deposited funds.
The Registrant's management is aware of the inherent interest rate
risk associated with gap management. As interest rate fluctuations
occur, the relationship between rate-sensitive assets and liabilities
will be monitored by management and changes in assets and liabilities
will be made when deemed necessary. It is the goal of the
Registrant's Asset/Liability Management Committee to maintain a
desired interest rate spread through its pricing of both loans and
deposits.
-30-
<PAGE>
Table 3 - Maturities and Repricing Schedule
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1998
-------------------------------------------------------------------
0 - 3 3 - 12 1 - 5 OVER
MONTHS MONTHS YEARS 5 YEARS TOTAL
------- ------- ----- -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Assets
Loans $ 41,316 $ 19,577 $ 67,088 $ 11,919 $ 139,900
Interest-bearing deposits
with banks 9 0 0 0 9
Taxable securities 3,174 2,822 4,688 371 11,055
Nontaxable securities 45 917 2,807 5,995 9,764
----------- ----------- ----------- ---------- -----------
Rate-sensitive assets 44,544 23,316 74,583 18,285 160,728
Liabilities
Interest-bearing transaction
accounts 24,769 0 0 0 24,769
Savings deposits 8,739 0 0 0 8,739
Time deposits 16,916 36,448 17,508 734 71,606
Federal funds purchased and
repurchase agreements 4,902 0 0 0 4,902
Federal Home Loan Bank
advances 1,611 6,522 17,628 0 25,761
Secured loan borrowings 12 168 553 0 733
----------- ----------- ----------- ---------- -----------
Rate-sensitive liabilities 56,949 43,138 35,689 734 136,510
----------- ----------- ----------- ---------- -----------
Rate-sensitive assets less
rate-sensitive liabilities:
Asset (liability) gap
for the period $ (12,405) $ (19,822) $ 38,894 $ 17,551 $ 24,218
=========== =========== =========== ========== ===========
Cumulative asset
(liability) gap $ (12,405) $ (32,227) $ 6,667 $ 24,218
=========== =========== =========== ==========
Cumulative rate-
sensitive assets as a
percentage of
cumulative rate-
sensitive liabilities 78.22% 67.80% 104.91% 117.74%
=========== =========== =========== ==========
</TABLE>
-31-
<PAGE>
YEAR 2000 READINESS DISCLOSURE
The Year 2000 ("Y2K") is significant to the Registrant since its
computers and computer-based applications and like items in other
businesses may be affected upon the arrival of January 1, 2000. Some
computers and computer-based applications store the year as a two
digit number. This may cause Y2K to be interpreted as the year 1900
and could cause computers to work improperly or cease to function.
The Registrant began to prepare for Y2K in 1997. The Registrant's
management implemented a strategic plan for Y2K readiness. The
strategic plan contains five phases: awareness, assessment,
renovation, validation and implementation. A Y2K committee (the
"Committee") was formed with representatives from each major area of
the Bank. The Committee was given the responsibility for development
and implementation of the strategic plan. The awareness, assessment,
and renovation phases are complete as of September 30, 1998.
Validation is considered 25% complete as of September 30, 1998 with an
estimated completion date of December 31, 1998. The implementation
phase is also considered to be 25% complete as of the end of the third
quarter of 1998 with an estimated completion date of June 30, 1999.
The Committee provides monthly updates to the Registrant's Board of
Directors on its progress.
The Bank's primary application processing is provided by a data
center. The data center is currently engaged in Y2K readiness testing
and is estimated to be 70% complete as of September 30, 1998. The
estimated completion date for all testing is December 31, 1998. The
Committee has identified what it considers to be critical internal
systems. Testing of internal systems is estimated to be 80% complete
as of September 30, 1998 with an estimated final completion date of
December 31, 1998. External resources and systems, such as heating
and air conditioning, security, electrical, telephone, and other
systems deemed of major importance to the Bank's operations, have been
reviewed. These resources as well as major vendors have been surveyed
regarding their Y2K readiness. Monitoring and testing will continue
through the middle of 1999.
Letters were mailed to all business customers informing them of the
Y2K issue. Surveys were done of all significant commercial loan
borrowers as to their Y2K knowledge and preparation. A discussion of
the Y2K issue was contained in a newsletter mailed by the Bank to all
customers. Education of the Registrant's employees has occurred and
will continue to occur in the form of training meetings and seminars.
Approximately $75,000 has been spent through September 30, 1998 on new
hardware, new software, and software changes to ready the Registrant's
systems for Y2K. It is estimated approximately $10,000 in staff time
-32-
<PAGE>
has been spent to prepare for Y2K. The Registrant's management
anticipates that an additional $20,000 in hardware and software costs
and $10,000 in staff time may be necessary by the middle of 1999. In
addition, there may be costs that arise that are not anticipated at
this time. However, these unanticipated costs are not expected to be
significant.
The Registrant is very dependent on technology and is aware that
problems could arise if this technology does not function properly.
These problems could potentially include operational issues, lost
income, and loan losses from borrowers which could materially and
adversely affect the Registrant's financial condition and results of
operations. The Committee has followed its strategic plan to attempt
to assure readiness of computers and related items in the Registrant's
offices. However, the Registrant will also be dependent on the
readiness of third parties. The Registrant has identified the most
important areas as being its data center and telephone and electric
services. The Committee has contacted these parties and will continue
to monitor their progress with Y2K compliance. In anticipation of the
possibility that certain internal or external systems may not function
properly in January 2000, the Committee has established contingency
plans for all critical areas. The Committee has in place or is
developing backup plans for these areas. A time line has been
established to insure that appropriate plan development and testing of
the plans will occur prior to December 31, 1999.
-33-
<PAGE>
PART II. OTHER INFORMATION
Item 5. OTHER INFORMATION
All information with respect to Year 2000 issues provided by the
Registrant in this Quarterly Report and in other reports and materials
previously filed with the Securities and Exchange Commission, as set
forth on Exhibit 99.1 to this Quarterly Report, are "Year 2000
Readiness Disclosures" under the Year 2000 Information and Readiness
Disclosure Act.
The Bylaws of the Registrant provide that no matter submitted by a
shareholder may be presented for shareholder action at an annual or
special meeting of shareholders unless written notice of the matter is
delivered to the Corporation before a designated deadline prior to the
applicable meeting of shareholders. The deadline for submitting
shareholder proposals for consideration at the next annual meeting of
shareholders is December 10, 1998.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
1. EXHIBITS. The following exhibits are filed or incorporated
by reference as part of this report:
EXHIBIT
NUMBER DOCUMENTS
3.1 Amended and Restated Articles of Incorporation of the
Registrant. Previously filed as an exhibit to the
Registrant's Form 10-QSB Quarterly Report for the
quarter ended June 30, 1998. Here incorporated by
reference.
3.2 Bylaws of the Registrant.
10.1 Directors' Stock Purchase Plan.
27 Financial Data Schedule.
99.1 Prior Year 2000 Readiness Disclosures
2. REPORTS ON FORM 8-K. No reports on Form 8-K were filed
during the three months ended September 30, 1998.
-34-
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the
Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CHOICEONE FINANCIAL SERVICES, INC.
Date: November 16, 1998 /S/ JAE M. MAXFIELD
Jae M. Maxfield
President and Chief Executive Officer
Date: November 16, 1998 /S/ THOMAS L. LAMPEN
Thomas L. Lampen
Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
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INDEX TO EXHIBITS
The following exhibits are filed or incorporated by reference as part
of this report:
EXHIBIT
NUMBER DOCUMENTS
3.1 Amended and Restated Articles of Incorporation of the
Registrant. Previously filed as an exhibit to the
Registrant's Form 10-QSB Quarterly Report for the
quarter ended June 30, 1998. Here incorporated by
reference.
3.2 Bylaws of the Registrant.
10.1 Directors' Stock Purchase Plan.
27 Financial Data Schedule.
99.1 Prior Year 2000 Readiness Disclosures.
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EXHIBIT 3.2
BYLAWS
OF
CHOICEONE FINANCIAL SERVICES, INC.
(AS AMENDED THROUGH AUGUST 12, 1998)
ARTICLE I
SHAREHOLDERS
SECTION 1. TIME AND PLACE OF MEETINGS. Shareholder meetings shall be
held at the Corporation's principal executive office during regular
business hours or at such other time and place as the Board of Directors
determines.
SECTION 2. ANNUAL MEETINGS OF SHAREHOLDERS. An annual meeting of
shareholders shall, unless action to be taken at the meeting is instead
taken by written consent as permitted by law, be held on the fourth Tuesday
of April (or the next business day if that Tuesday is a holiday) after the
end of the Corporation's fiscal year at the time designated in the notice
of the meeting or at such other date and time as the Board of Directors
determines.
SECTION 3. SPECIAL MEETINGS. A special meeting of shareholders may
be called by the Board of Directors, the Chairperson of the Board, the
President or by shareholders holding, in the aggregate, not less than 10%
of all shares entitled to vote at a meeting. Upon delivery to the
President or the Secretary of a written instrument setting forth the date
and purposes of the meeting, signed by an officer or director on behalf of
the Board of Directors, the Chairperson, or the President, or by holders of
a sufficient number of shares, notice of the meeting shall be given to each
shareholder entitled to vote at the meeting.
SECTION 4. NOTICE OF MEETINGS. Written notice of the date, time,
place, and purposes of a shareholder meeting shall be given not less than
10 nor more than 60 days before the date of the meeting, either personally
or by mail, to each shareholder of record entitled to vote at the meeting.
Notice of the purposes of the meeting shall include notice of any
shareholder proposals that are proper subjects for shareholder action and
are intended to be presented by shareholders who have notified the
Corporation in writing of their intention to present the proposals at the
meeting in accordance with these Bylaws.
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SECTION 5. SHAREHOLDER PROPOSALS. Except as otherwise provided by
statute, the Articles of Incorporation, or these Bylaws:
(a) No matter may be presented for shareholder action at an
annual or special meeting of shareholders unless such matter is: (i)
specified in the notice of the meeting (or any supplement to the
notice) given by or at the direction of the Board of Directors; (ii)
otherwise presented at the meeting by or at the direction of the Board
of Directors; (iii) properly presented for action at the meeting by a
shareholder in accordance with the notice provisions set forth in this
Section and any other applicable requirements; or (iv) a procedural
matter presented, or accepted for presentation, by the chairperson of
the meeting in his or her sole discretion.
(b) For a matter to be properly presented by a shareholder, the
shareholder must have given timely notice of the matter in writing to
the Secretary of the Corporation. To be timely, the notice must be
delivered to or mailed to and received at the principal executive
offices of the Corporation not less than 120 calendar days prior to
the date corresponding to the date of the Corporation's proxy
statement or notice of meeting released to shareholders in connection
with the last preceding annual meeting of shareholders in the case of
an annual meeting (unless the Corporation did not hold an annual
meeting within the last year, or if the date of the upcoming annual
meeting changed by more than 30 days from the date of the last
preceding meeting, then the notice must be delivered or mailed and
received not more than seven days after the earlier of the date of the
notice of the meeting or public disclosure of the date of the
meeting), and not more than seven days after the earlier of the date
of the notice of the meeting or public disclosure of the date of the
meeting in the case of a special meeting. The notice by the
shareholder must set forth: (i) a brief description of the matter the
shareholder desires to present for shareholder action; (ii) the name
and record address of the shareholder proposing the matter for
shareholder action; (iii) the class and number of shares of capital
stock of the Corporation that are beneficially owned by the
shareholder; and (iv) any material interest of the shareholder in the
matter proposed for shareholder action.
(c) The shareholder proposal, together with any accompanying
supporting statement, shall not in the aggregate exceed 500 words.
Except to the extent that a shareholder proposal submitted pursuant to
this Section is not made available at the time of mailing, the notice
of the purposes of the meeting shall include the name and address of
and the number of shares of the voting security held by the proponent
of each shareholder proposal.
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(d) A shareholder may submit matters and proposals for
shareholder action at any annual or special shareholder meeting if the
matters and proposals are of general concern to, and are proper
subjects for action by, the shareholders. A submitted proposal or
matter may not be presented for shareholder action if it: (i) relates
to the enforcement of a personal claim or the redress of a personal
grievance against the Corporation, its management or any other person;
(ii) consists of a recommendation, request or mandate that action be
taken with respect to a matter, including a general economic,
political, racial, religious, social or similar cause, that is not
significantly related to the Corporation's business or is not within
the Corporation's power to effectuate; (iii) has, at the shareholder's
request, previously been submitted in either of the last two annual
shareholder meetings and the shareholder has failed to present the
proposal, in person or by proxy, for action at the meeting; (iv) is
substantially similar to a matter or proposal presented within the
preceding five calendar years: (x) if it was submitted once during the
past five annual meetings and it received less than 3% of the total
votes cast, or (y) if it was submitted twice during the past five
annual meetings and it received less than 6% of the total votes cast
at the time of its second submission, or (z) if it was submitted three
times during such period and it received less than 10% of the votes
cast at the time of its third submission (if any of (x), (y) or (z)
apply, the proposal may not be submitted for three years after the
latest previous submission); or (v) consists of a recommendation or
request that the management take action with respect to a matter
relating to the conduct of the Corporation's ordinary business
operations.
(e) Notwithstanding the above, if the Corporation is subject to
the solicitation rules and regulations of the Securities Exchange Act
of 1934, as amended, and the shareholder desires to require the
Corporation to include the shareholder's proposal in the Corporation's
proxy materials, matters and proposals submitted for inclusion in the
Corporation's proxy materials shall be governed by those rules and
regulations.
SECTION 6. ADJOURNMENTS. If a meeting is adjourned, it is not
necessary to give notice of the adjourned meeting if (i) the date, time,
and place to which the meeting is adjourned are announced at the meeting at
which the adjournment is taken, and (ii) at the adjourned meeting only such
business is transacted as might have been transacted at the original
meeting. If after the adjournment the Board of Directors fixes a new
record date for the adjourned meeting, a notice of the adjourned meeting
shall be given in accordance with Section 4 above.
SECTION 7. WAIVER OF NOTICE. A shareholder or a shareholder's
attorney-in-fact may waive the shareholder's right to notice before or
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after a meeting by a signed waiver of notice. A shareholder's attendance
at a meeting will result in a waiver of objection to:
(a) lack of notice or defective notice of the meeting,
unless the shareholder at the beginning of the meeting objects to
holding the meeting or transacting business at the meeting; and
(b) consideration of a particular matter at the meeting
that is not within the purposes described in the meeting notice,
unless the shareholder objects to considering the matter when it
is presented.
SECTION 8. LIST OF SHAREHOLDERS ENTITLED TO VOTE. The officer or
agent having charge of the stock transfer books for shares of the
Corporation shall make and certify a complete list of the shareholders
entitled to vote at a shareholder meeting or any adjournment thereof. The
list shall be:
(a) arranged alphabetically within each class and series,
with the address of, and the number of shares held by, each
shareholder;
(b) produced at the time and place of the meeting;
(c) subject to inspection by any shareholder at any time
during the meeting; and
(d) prima facie evidence as to who are the shareholders
entitled to examine the list or to vote at the meeting.
Failure to comply with the requirements of this Section shall not affect
the validity of an action taken at the meeting before a shareholder makes a
demand to comply with the requirements.
SECTION 9. QUORUM. Unless a greater quorum is required by the
Articles of Incorporation, these Bylaws or statute, shares entitled to cast
a majority of the votes at a shareholder meeting constitute a quorum at the
meeting. The shareholders present in person or by proxy at the meeting are
counted for the purpose of determining a quorum. Once a quorum is present,
business may be conducted until adjournment, notwithstanding the withdrawal
of enough shareholders to leave less than a quorum. Whether or not a
quorum is present, the meeting may be adjourned by a vote of the shares
present. When the holders of a class or series of shares are entitled to
vote separately on an item of business, each class or series must have a
quorum, as determined by this Section, for the purpose of transacting the
item of business.
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SECTION 10. VOTING RIGHTS. Except as otherwise provided by statute
or the Articles of Incorporation, each share is entitled to one vote on
each matter submitted to a vote.
SECTION 11. VOTE REQUIRED. An action, other than the election of
directors, to be taken by shareholder vote shall be authorized by a
majority of the votes cast by shareholders entitled to vote on the action,
unless a greater vote is required by statute, the Articles of
Incorporation, or these Bylaws. Unless the Articles of Incorporation
provide otherwise, directors shall be elected by a plurality of votes cast.
Shareholders may not cumulate their votes.
SECTION 12. CLASS VOTING. If the Articles of Incorporation provide
that a class of shares or a series of a class shall vote as a class, either
generally or to authorize one or more specified actions, such voting as a
class or series shall be in addition to any other required vote. Where
voting as a class or series is required on an action other than the
election of directors, the action shall be authorized by a majority of the
votes cast by the holders of the class or series entitled to vote on
the action, unless a greater vote is required by statute or the Articles of
Incorporation.
SECTION 13. ELECTRONIC PARTICIPATION IN MEETING. A shareholder may
participate in a shareholder meeting by a conference telephone or by other
similar communications equipment through which all persons participating in
the meeting may communicate with the other participants, if all
participants are advised of the communications equipment and the names of
the participants in the meeting are disclosed to all participants. Such
participation in a meeting constitutes presence in person at the meeting.
SECTION 14. CONDUCT OF MEETINGS. Shareholder meetings shall be
conducted as follows:
(a) The chairperson of the meeting shall determine the
order of business and shall have the authority to establish rules
for the conduct of the meeting. Any rules adopted for, and the
conduct of, the meeting shall be fair to shareholders.
(b) The chairperson of the meeting shall announce at the
meeting when the polls close for each matter voted upon. If no
announcement is made, the polls shall close upon the final
adjournment of the meeting. After the polls close, no ballots,
proxies, or votes nor any revocations or changes to ballots,
proxies, or votes may be accepted.
(c) If disorder arises that prevents the continuation of
the business of the meeting, the chairperson may adjourn the
meeting.
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(d) The chairperson may require any person who is not a
shareholder of record or holding a proxy to leave the meeting.
SECTION 15. BUSINESS TRANSACTED. The business effectively transacted
at a shareholder meeting shall be confined to the following:
(a) any matter specified in the notice or reasonably
related to a matter specified in the notice; and
(b) any matter (i) the consideration of which is not
objected to by any shareholder attending the meeting, and
(ii) notice of which is waived by all shareholders not attending
the meeting.
SECTION 16. ACTION WITHOUT A MEETING. Any action required or
permitted to be taken at a shareholder meeting may be taken without a
meeting, without prior notice, and without a vote if, before or after the
action, all the shareholders entitled to vote at the meeting consent in
writing.
SECTION 17. RECORD DATE.
(a) For the purpose of determining shareholders entitled to
notice of and to vote at a shareholder meeting or an adjournment
of a meeting, the Board of Directors may fix a record date, which
may not precede the date on which the Board adopts the resolution
fixing the record date. The date may not be more than 60 nor
less than 10 days before the date of the meeting. If a record
date is not fixed, the record date for determination
of shareholders entitled to notice of or to vote at a shareholder
meeting shall be the close of business on the day next preceding
the day on which notice is given or, if no notice is given, the
day next preceding the day on which the meeting is held. When a
determination of shareholders of record entitled to notice of or
to vote at a shareholder meeting is made as provided in this
Section, the determination applies to any adjournment of the
meeting, unless the Board of Directors fixes a new record date
under this Section for the adjourned meeting.
(b) For the purpose of determining shareholders entitled to
express consent to or to dissent from a proposal without a
meeting, the Board of Directors may fix a record date, which may
not be more than 60 days before effectuation of the action
proposed to be taken. If a record date is not fixed and prior
action by the Board of Directors is required with respect to the
corporate action to be taken without a meeting, the record date
is the close of business on the day on which the Board resolution
is adopted. If a record date is not fixed and prior Board action
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is not required, the record date is the first date on which a
signed written consent is delivered to the Corporation as
provided in these Bylaws.
(c) For the purpose of determining shareholders entitled to
receive payment of a share dividend or distribution, or allotment
of a right, or for the purpose of any other action, the Board of
Directors may fix a record date, which may not precede the date
on which the Board adopts the resolution fixing the record date.
The date may not be more than 60 days before the payment of the
share dividend or distribution, allotment of a right, or other
action. If a record date is not fixed, the record date is the
close of business on the day on which the Board resolution
relating to the corporate action is adopted.
SECTION 18. PROXIES. A shareholder entitled to vote at a shareholder
meeting or to express consent or dissent without a meeting may authorize
one or more other persons to act for the shareholder by proxy only by the
following methods:
(a) The execution of a writing authorizing another person
or persons to act for the shareholder as proxy. Execution may be
accomplished by the shareholder or by an authorized officer,
director, employee, or agent of the shareholder by either signing
the writing or causing his or her signature to be affixed to the
writing by any reasonable means including, without limitation,
facsimile signature;
(b) Transmitting or authorizing the transmission of a
telegram, cablegram, or other means of electronic transmission to
the person who will hold the proxy or to a proxy solicitation
firm, proxy support service organization, or similar agent fully
authorized by the person who will hold the proxy to receive that
transmission. Any telegram, cablegram, or other means of
electronic transmission must either set forth or be submitted
with information from which it can be determined that the
telegram, cablegram, or other electronic transmission was
authorized by the shareholder. If a telegram, cablegram, or
other electronic transmission is determined to be valid, the
inspectors, or, if there are no inspectors, the persons making
the determination shall specify the information upon which they
relied.
A copy, facsimile telecommunication, or other reliable
reproduction of the writing or transmission created pursuant to subsections
(a) or (b) may be substituted or used in lieu of the original writing or
transmission for any purpose for which the original writing or transmission
could be used, if the copy, facsimile telecommunication, or other
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reproduction is a complete reproduction of the entire original writing or
transmission.
A proxy is not valid after the expiration of three years from its
date unless otherwise provided in the proxy. A proxy must be filed with
the Corporation at or before the meeting.
ARTICLE II
DIRECTORS
SECTION 1. NUMBER AND TERM OF DIRECTORS. Except as otherwise
provided in the Articles of Incorporation, the Board of Directors shall
consist of one or more directors as determined initially by the
incorporator(s) and, thereafter, from time to time by the Board of
Directors. Except as otherwise provided in the Articles of Incorporation,
a number of directors equal to the number whose term expires at the time of
the meeting shall be elected at each annual shareholder meeting and each
director shall hold office until the third succeeding annual shareholder
meeting and until a successor is elected and qualified. If shareholders of
any class or series of shares have the exclusive right to elect one or more
directors, those directors may be elected only by the vote of those
shareholders.
SECTION 2. MANDATORY RETIREMENT. No director may continue to serve
on the Board of Directors after reaching 70 years of age.
SECTION 3. RESIGNATION. A director may resign by written notice to
the Corporation. A resignation is effective upon its receipt by the
Corporation or at a later time specified in the notice.
SECTION 4. POWERS. The Corporation's business and affairs shall be
managed by or under the direction of the Board of Directors, except as
otherwise provided by statute or the Articles of Incorporation.
SECTION 5. DIRECTORS' COMPENSATION. The Board of Directors, by
affirmative vote of a majority of directors in office and irrespective of
any personal interest of any of them, may establish reasonable compensation
for a director's services to the Corporation as a director or officer.
Directors may also be reimbursed for their expenses, if any, of attendance
at each meeting of the Board or a committee.
SECTION 6. REGULAR MEETINGS. Regular meetings of the Board of
Directors shall be held at the date, time, and place that the Board
determines. A notice to directors is not required for a regular meeting,
except that, when the Board establishes or thereafter changes the schedule
of regular meetings, or changes the date, time, or place of a previously
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scheduled regular meeting, notice of the action shall be given to each
director who was absent from the meeting at which the action was taken.
SECTION 7. SPECIAL MEETINGS. The Chairperson, the President, or
directors constituting at least one-third of the directors then in office
may call a special meeting of the Board of Directors by giving notice to
each director.
SECTION 8. NOTICE OF MEETINGS. Except as otherwise provided by these
Bylaws, notice of the date, time, and place of each meeting of the Board of
Directors shall be given to each director by either of the following
methods:
(a) by mailing a written notice of the meeting to the
address that the director designates or, in the absence of
designation, to the last known address of the director, at least
five days before the date of the meeting; or
(b) by delivering a written notice of the meeting to the
director at least one full business day before the meeting,
personally or by telecopier or telex, to the director's last
known office or home.
SECTION 9. WAIVER OF NOTICE. A director's attendance at or
participation in a meeting waives any required notice to the director of
the meeting, unless, at the beginning of the meeting or promptly upon the
director's arrival, the director objects to holding the meeting or
transacting business at the meeting and does not thereafter vote for or
assent to any action taken at the meeting. A director may waive notice in
writing before or after a meeting.
SECTION 10. PURPOSE OF MEETINGS. Neither the business to be
transacted nor the purpose of a regular or special meeting need be
specified in the notice or waiver of notice of the meeting. If the purpose
is stated in the notice, the business transacted at the meeting is not
limited to the purpose stated.
SECTION 11. QUORUM AND REQUIRED VOTE. A majority of the directors
then in office, or of the members of a committee of the Board of Directors,
constitutes a quorum for the transaction of business, unless the Articles
of Incorporation, these Bylaws or, in the case of a committee, the Board
resolution establishing the committee, provide for a larger or smaller
number. The vote of the majority of members present at a meeting at which
a quorum is present constitutes the action of the Board or of the
committee, unless the vote of a larger number is required by statute, the
Articles of Incorporation, these Bylaws, or, in the case of a committee,
the Board resolution establishing the committee.
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SECTION 12. ACTION BY WRITTEN CONSENT. Action required or permitted
to be taken under authorization voted at a meeting of the Board of
Directors or a committee of the Board may be taken without a meeting if,
before or after the action, all members of the Board then in office or of
the committee consent to the action in writing. The written consents shall
be filed with the minutes of the Board or committee. The consent has the
same effect as a vote of the Board or committee for all purposes.
SECTION 13. ELECTRONIC PARTICIPATION IN MEETING. A member of the
Board of Directors or of a committee of the Board may participate in a
meeting by means of conference telephone or similar communications
equipment through which all persons participating in the meeting can
communicate with each other. Such participation in a meeting constitutes
presence in person at the meeting. A director must be permitted to
participate in a meeting by such means if the director so requests.
SECTION 14. COMMITTEES OF DIRECTORS. The Board of Directors may
designate one or more committees consisting of one or more directors. The
Board may designate one or more directors as alternate members of a
committee, who may replace an absent or disqualified member at a meeting of
the committee. Unless prohibited by the Board resolution creating the
committee, in the absence or disqualification of a committee member, the
committee members present at a meeting and not disqualified from voting,
whether or not they constitute a quorum, may unanimously appoint another
director to act at the meeting in the place of the absent or disqualified
member. A committee, to the extent provided in the Board resolution
creating the committee, may exercise all of the Board's power and authority
in the management of the business and affairs of the Corporation, except
that a committee may not: (i) amend the Articles of Incorporation, except
that a committee may prescribe the relative rights and preferences of a
series of a class of shares for which the Board of Directors has such
authority under the Articles of Incorporation; (ii) adopt an agreement of
merger or consolidation; (iii) recommend to shareholders the sale, lease,
or exchange of all or substantially all of the Corporation's property and
assets; (iv) recommend to the shareholders a dissolution of the Corporation
or a revocation of a dissolution; (v) amend the Bylaws of the Corporation;
or (vi) fill vacancies in the Board of Directors. Unless a resolution of
the Board of Directors expressly so provides, a committee may not declare a
distribution or dividend or authorize the issuance of stock. A committee
exists, and each member serves, at the pleasure of the Board. A committee
may establish a time and place for regular meetings, for which no notice is
required, except that, if the committee changes the date, time, or place of
a regular meeting, notice of the change shall be given to each member who
was absent from the meeting at which the change was made. Otherwise, a
notice of a committee meeting shall be given in the same manner as a notice
of a Board meeting.
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SECTION 16. MISCELLANEOUS POWERS OF THE DIRECTORS. Unless the
Articles of Incorporation provide otherwise, the Board of Directors may
adopt one or more of the following amendments to the Corporation's Articles
of Incorporation without shareholder action:
(a) Extend the duration of the Corporation if it was
incorporated at a time when limited duration was required by law;
(b) Delete the names and addresses of the initial
directors;
(c) Delete the name and address of the initial resident
agent or registered office, if a statement of change is on file
with the administrator;
(d) Change each issued and unissued authorized share of an
outstanding class into a greater number of whole shares if the
Corporation has only shares of that class outstanding;
(e) Adopt and file an amendment of the Articles of
Incorporation eliminating a series of shares if there are no
outstanding shares of the series, no outstanding shares or bonds
convertible into shares of the series, or other rights, options,
or warrants issued by the Corporation that could require issuing
shares of the series;
(f) Change the Corporation name by substituting the word
"corporation," "incorporation," "company," "limited," or the
abbreviation "corp.," "inc.," "co.," or "ltd.," for a similar
word or abbreviation in the corporate name, or by adding,
deleting, or changing a geographical attribution for the
Corporation name.
(g) Any other change that the Michigan Business Corporation
Act expressly permits the Board of Directors to make without
shareholder action.
ARTICLE III
OFFICERS
SECTION 1. APPOINTMENT. The Board of Directors, at its first meeting
following the annual shareholder meeting, shall appoint a Chairperson,
President, Secretary, and Treasurer and may elect from their number one or
more Vice Chairpersons. The Chairperson and the President shall be members
of the Board. The Board may also appoint one or more Vice Presidents,
Assistant Secretaries, Assistant Treasurers and other officers and agents
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that it deems necessary. The Board of Directors need not appoint or elect
an officer to an office that is already filled and whose specified term has
not expired. The same person may hold two or more offices, but an officer
may not execute, acknowledge or verify an instrument in more than one
capacity if the instrument is required by law, the Articles of
Incorporation, or these Bylaws to be executed, acknowledged, or verified by
two or more officers.
SECTION 2. TERM, REMOVAL, AND VACANCIES. An officer shall hold
office for the term the Board specifies upon election or appointment and
until a successor is elected or appointed and qualified, or until the
officer's death, resignation, or removal. The Board may remove an officer
with or without cause. An officer may resign by written notice to the
Corporation. The resignation is effective upon its receipt by the
Corporation or at a later date specified in the notice.
SECTION 3. CHAIRPERSON OF THE BOARD. The Chairperson of the Board
shall preside when present at all meetings of the shareholders and the
Board of Directors. The Chairperson shall perform any other duties and
exercise any other authority that the Board prescribes and, unless
otherwise provided by Board resolution, is an EX OFFICIO member of all
committees. Except where by law the signature of the President is
required, the Chairperson possesses the same power and authority as the
President to make and execute contracts, instruments, papers, and documents
of every kind in the name of and on behalf of the Corporation.
SECTION 4. VICE CHAIRPERSON OF THE BOARD. During the unavailability
or disability of the Chairperson, or while that office is vacant, the Vice
Chairpersons, in the order the Board designates, may exercise all of the
powers and discharge all of the duties of the Chairperson. A Vice
Chairperson shall perform any other duties that the Board prescribes.
SECTION 5. PRESIDENT. The President shall be the Corporation's chief
executive officer and have the general control and management of its
business, under the direction of the Board. The President shall ensure
that all orders and resolutions of the Board are carried into effect.
Unless the Board specifically provides otherwise, the President shall be an
EX OFFICIO member of all committees. The President shall perform all
duties incident to the office of President and other duties that the Board
prescribes. The President may make and execute contracts, instruments,
papers, and documents of every kind in the name and on behalf of the
Corporation, except when the Board specifies the same to be done by another
officer or agent. During the absence or disability of the Chairperson and
the Vice Chairpersons, or while those offices are vacant, the President
shall preside over all meetings of the Board of Directors and the
shareholders and perform all of the duties and have all of the power and
authority of the Chairperson.
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SECTION 6. VICE PRESIDENTS. The Board may designate one or more Vice
Presidents to perform the duties and exercise the authority of the
President during the President's absence or disability. Each Vice
President shall perform other duties that the President assigns or the
Board prescribes.
SECTION 7. SECRETARY. The Secretary shall cause to be recorded and
maintained minutes of all meetings of the Board, Board committees, and
shareholders. The Secretary shall cause to be given all notices required
by law, these Bylaws, or resolution of the Board and shall perform other
duties that the President assigns or the Board prescribes.
SECTION 8. TREASURER. The Treasurer shall cause to be kept in books
belonging to the Corporation a full and accurate account of all receipts,
disbursements, and other financial transactions of the Corporation. The
Treasurer shall perform other duties that the President assigns or the
Board prescribes.
SECTION 9. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. An
Assistant Secretary or an Assistant Treasurer may perform any duty or
exercise any authority of the Secretary or Treasurer, respectively. An
Assistant Secretary or Assistant Treasurer also shall perform duties that
the Secretary or the Treasurer, respectively, or the President assigns or
that the Board prescribes.
SECTION 10. OTHER OFFICERS. The Board of Directors may appoint other
officers to perform duties and exercise authority that the President
assigns or the Board prescribes.
ARTICLE IV
SUBSIDIARIES AND DIVISIONS
SECTION 1. DIVISIONAL OFFICERS. The Board of Directors or the
President may appoint divisional officers. The Board of Directors or the
President may withdraw a divisional officer's title at any time and without
cause. A divisional officer may, but need not, be a director or an
executive officer of the Corporation. A divisional officer shall perform
duties and exercise authority that the President assigns or the Board
prescribes.
SECTION 2. SUBSIDIARY DIRECTORS. The Corporation may cause to be
elected to the board of directors of a subsidiary corporation such persons
as it determines, any of whom may, but need not, be directors, executive
officers, or other employees or agents of the Corporation. The Board of
Directors or the President may instruct the directors of a subsidiary
corporation as to the manner in which they are to vote upon any issue
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properly coming before them as the directors of the subsidiary corporation,
and such directors shall have no liability to the Corporation as the result
of any action taken in accordance with those instructions.
SECTION 3. DIVISIONAL AND SUBSIDIARY OFFICERS NOT EXECUTIVE
OFFICERS. A divisional officer or officer of a subsidiary corporation
shall not, by virtue of holding office, be deemed to be an executive
officer of the Corporation, nor shall a divisional officer or officer of a
subsidiary corporation (unless also a director or executive officer of the
Corporation) be entitled to have access to any files, records, or other
information relating to the Corporation or its business and finances or to
attend or receive the minutes of meetings of the Board of Directors or a
committee of the Corporation, except as and to the extent that the Board of
Directors or the President expressly authorize.
ARTICLE V
INDEMNIFICATION
SECTION 1. INDEMNIFICATION IN ACTION BY THIRD PARTY. The Corporation
may indemnify any person who was or is a party or is threatened to be made
a party to any threatened, pending, or completed action, suit, or
proceeding (other than an action by or in the right of the Corporation),
whether civil, criminal, administrative, or investigative and whether
formal or informal, by reason of the fact that the person is or was a
director, officer, employee, or agent of the Corporation or is or was
serving at the request of the Corporation as a director, officer, partner,
trustee, employee, or agent of another foreign or domestic corporation,
partnership, joint venture, trust, or other enterprise, whether for profit
or not for profit, against expenses (including attorney fees), judgments,
penalties, fines, and amounts paid in settlement actually and reasonably
incurred by the person in connection with such action, suit, or proceeding
if the person acted in good faith and in a manner the person reasonably
believed to be in or not opposed to the best interests of the Corporation
or its shareholders and, with respect to a criminal action or proceeding,
the person had no reasonable cause to believe his or her conduct was
unlawful. The termination of an action, suit, or proceeding by judgment,
order, settlement, conviction, or upon a plea of nolo contendere or its
equivalent, does not, of itself, create a presumption that the person did
not act in good faith and in a manner that the person reasonably believed
to be in or not opposed to the best interests of the Corporation or its
shareholders and, with respect to a criminal action or proceeding, had
reasonable cause to believe that his or her conduct was unlawful.
SECTION 2. INDEMNIFICATION IN ACTION BY OR IN RIGHT OF THE
CORPORATION. The Corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending, or
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completed action or suit by or in the right of the Corporation to procure a
judgment in its favor by reason of the fact that the person is or was a
director, officer, employee, or agent of the Corporation or is or was
serving at the request of the Corporation as a director, officer, partner,
trustee, employee, or agent of another foreign or domestic corporation,
partnership, joint venture, trust, or other enterprise, whether for profit
or not for profit, against expenses, including attorney fees and amounts
paid in settlement actually and reasonably incurred by the person in
connection with the action or suit, if the person acted in good faith and
in a manner the person reasonably believed to be in or not opposed to the
best interests of the Corporation or its shareholders. Indemnification
shall not be made for a claim, issue, or matter in which the person shall
have been found liable to the Corporation except to the extent authorized
by statute.
SECTION 3. EXPENSES. To the extent that a director, officer,
employee, or agent of the Corporation has been successful on the merits or
otherwise in defense of an action, suit, or proceeding referred to in
Section 1 or 2 of this Article, or in defense of a claim, issue, or matter
in the action, suit, or proceeding, the Corporation shall indemnify that
person against actual and reasonable expenses, including attorney fees that
person incurred in connection with the action, suit, or proceeding and an
action, suit, or proceeding brought to enforce the mandatory
indemnification provided in this Section.
SECTION 4. DETERMINATION, EVALUATION, AND AUTHORIZATION OF
INDEMNIFICATION.
(a) Except as otherwise provided in Subsection (e) or
unless ordered by a court, the Corporation shall make an
indemnification under Section 1 or 2 of this Article only upon a
determination that indemnification of the director, officer,
employee, or agent is proper in the circumstances because he or
she has met the applicable standard of conduct set forth in
Section 1 or 2 of this Article and upon an evaluation of the
reasonableness of expenses and amounts paid in settlement. This
determination and evaluation may be made in any of the following
ways:
(1) By a majority vote of a quorum of the Board of
Directors consisting of directors who are not parties or
threatened to be made parties to the action, suit, or
proceeding.
(2) If a quorum cannot be obtained under
Subsection (1) above, by majority vote of a committee duly
designated by the Board and consisting solely of two or more
directors not at the time parties or threatened to be made
parties to the action, suit, or proceeding.
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(3) By independent legal counsel in a written opinion,
which counsel shall be selected in one of the following
ways:
(A) By the Board or its committee in the manner
prescribed in Subsections (1) or (2) above.
(B) If a quorum of the Board cannot be obtained
under Subsection (1) above and a committee cannot be
designated under Subsection (2) above, by the Board.
(4) By all independent directors (as that term is
defined in the Michigan Business Corporation Act) who are
not parties or threatened to be made parties to the action,
suit, or proceeding.
(5) By the shareholders, but shares held by directors,
officers, employees, or agents who are parties or threatened
to be made parties to the action, suit, or proceeding may
not be voted.
(b) In the designation of a committee under
Subsection (a)(2) or in the selection of independent legal
counsel under Subsection (a)(3)(B), all directors may
participate.
(c) If a person is entitled to indemnification under
Section 1 or 2 for a portion of expenses, including reasonable
attorney fees, judgments, penalties, fines, and amounts paid in
settlement, but not for the total amount, the Corporation may
indemnify the person for the portion of the expenses, judgments,
penalties, fines, or amounts paid in settlement for which the
person is entitled to be indemnified.
(d) The Corporation shall authorize payment of
indemnification under this Section in one of the following ways:
(1) By the Board in one of the following ways:
(A) If there are two or more directors who are
not parties or threatened to be made parties to the
action, suit, or proceeding, by a majority vote of all
directors who are not parties or threatened to be made
parties, a majority of whom shall constitute a quorum
for this purpose.
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(B) By a majority of the members of a committee
of two or more directors who are not parties or
threatened to be made parties to the action, suit, or
proceeding.
(C) If the Corporation has one or more
independent directors who are not parties or threatened
to be made parties to the action, suit, or proceeding,
by a majority vote of all independent directors who are
not parties or are threatened to be made parties, a
majority of whom shall constitute a quorum for this
purpose.
(D) If there are no independent directors and
less than two directors who are not parties or
threatened to be made parties to the action, suit, or
proceedings, by the vote necessary for action by the
Board in accordance with Section 523 of the Michigan
Business Corporation Act, in which authorization all
directors may participate.
(2) By the shareholders, but shares held by directors,
officers, employees, or agents who are parties or threatened
to be made parties to the action, suit, or proceeding may
not be voted on the authorization.
(e) To the extent that the Articles of Incorporation
include a provision eliminating or limiting the liability of a
director pursuant to Section 209(1)(c) of the Michigan Business
Corporation Act, the Corporation may indemnify a director for the
expenses and liabilities described in this Subsection without a
determination that the director has met the standard of conduct
set forth in Sections 1 or 2 of this Article, but no
indemnification shall be made except to the extent authorized in
Section 564c of the Michigan Business Corporation Act if the
director received a financial benefit to which he or she was not
entitled, intentionally inflicted harm on the Corporation or its
shareholders, violated Section 551 of the Michigan Business
Corporation Act, or intentionally committed a criminal act. In
connection with an action or suit by or in the right of the
Corporation as described in Section 2 of this Article,
indemnification under this Subsection shall be for expenses,
including attorneys' fees, actually and reasonably incurred. In
connection with an action, suit, or proceeding other than an
action, suit, or proceeding by or in the right of the
Corporation, as described in Section 1 of this Article,
indemnification under this Subsection shall be for expenses,
including attorneys' fees, actually and reasonably incurred, and
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for judgments, penalties, fines, and amounts paid in settlement
actually and reasonably incurred.
SECTION 5. ADVANCES.
(a) The Corporation may pay or reimburse the reasonable
expenses incurred by a director, officer, employee, or agent who
is a party or threatened to be made a party to an action, suit,
or proceeding before final disposition of the proceeding if both
of the following apply:
(1) The person furnishes the Corporation a
written affirmation of the person's good faith belief
that he or she has met the applicable standard of
conduct set forth in Section 1 or 2 of this Article.
(2) The person furnishes the Corporation a
written undertaking, executed personally or on the
person's behalf, to repay the advance if it is
ultimately determined that the person did not meet the
standard of conduct set forth in Section 1 or 2 of this
Article.
(b) The undertaking required by Subsection (a)(2) above
must be an unlimited general obligation of the person, but need
not be secured and may be accepted without reference to the
financial ability of the person to make repayment.
(c) Determinations and evaluations under this Section shall
be made in the manner specified in Section 4(a) above, and
authorizations shall be made in the manner specified in Section
4(d) above.
(d) A provision in the Articles of Incorporation or Bylaws,
a resolution of the Board or shareholders, or an agreement making
indemnification mandatory shall also make the advancement of
expenses mandatory unless the provision, resolution, or agreement
specifically provides otherwise.
SECTION 6. OTHER INDEMNIFICATION AGREEMENTS. The indemnification or
advancement of expenses provided by this Article is not exclusive of any
other rights to which a person seeking indemnification or advancement of
expenses may be entitled under the Articles of Incorporation, these Bylaws,
or a contractual agreement. The total amount of expenses advanced or
indemnified from all sources combined may not exceed the amount of actual
expenses incurred by the person seeking indemnification or advancement of
expenses. The indemnification provided in Sections 1 to 6 of this Article
continues as to a person who ceases to be a director, officer, employee, or
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agent and shall inure to the benefit of the person's heirs, executors, and
administrators.
SECTION 7. INSURANCE. The Corporation may purchase and maintain
insurance on behalf of any person who is or was a director, officer,
employee, or agent of the Corporation, or is or was serving at the request
of the Corporation as a director, officer, partner, trustee, employee, or
agent of another corporation, partnership, joint venture, trust, or other
enterprise against any liability asserted against the person and incurred
by the person in any such capacity or arising out of the person's status as
such, whether or not the Corporation would have power to indemnify the
person against the liability under Sections 1 to 6 of this Article. To the
extent that the Articles of Incorporation include a provision eliminating
or limiting the liability of a director pursuant to Section 209(1)(c) of
the Michigan Business Corporation Act, the Corporation may purchase
insurance on behalf of a director from an insurer owned by the Corporation,
but insurance purchased from that insurer may insure a director against
monetary liability to the Corporation or its shareholders only to the
extent that the Corporation could indemnify the director under Section
4(e).
SECTION 8. CONSTITUENT CORPORATION. For the purposes of this
Article, "Corporation" includes all constituent corporations absorbed in a
consolidation or merger and the resulting or surviving corporation, so that
a person who is or was a director, officer, employee, or agent of the
constituent corporation or is or was serving at the request of the
constituent corporation as a director, officer, partner, trustee, employee,
or agent of another foreign or domestic corporation, partnership, joint
venture, trust, or other enterprise whether for profit or not shall stand
in the same position under the provisions of this Article with respect to
the resulting or surviving corporation as the person would if the person
had served the resulting or surviving corporation in the same capacity.
ARTICLE VI
SHARE CERTIFICATES AND TRANSFERS
SECTION 1. SHARE CERTIFICATES: REQUIRED SIGNATURES. Except as
otherwise required by the Articles of Incorporation or these Bylaws and
permitted by statute, shares of the Corporation's stock shall be
represented by certificates. Each certificate must be signed by one of the
following: the Chairperson, a Vice Chairperson, the President, or a Vice
President. Share certificates may be sealed with the seal of the
Corporation or a facsimile of the seal. The signatures of the officers may
be facsimiles if the certificate is countersigned by a transfer agent or
registered by a registrar other than the Corporation itself or its
employee. The Corporation may issue a certificate even though the officer
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who has signed or whose facsimile signature has been placed upon the
certificate ceases to be an officer before the certificate is issued.
SECTION 2. REPLACEMENT OF CERTIFICATES. The Corporation shall issue
a new certificate for shares in place of a certificate alleged to have been
lost or destroyed. The Board of Directors may require the owner of the
lost or destroyed certificate, or his legal representative, to give the
Corporation a bond or other security and/or execute an indemnity agreement
sufficient to indemnify the Corporation against any claim that may be made
against it on account of the lost or destroyed certificate or the issuance
of a replacement certificate.
SECTION 3. REGISTERED SHAREHOLDERS. The Corporation may treat the
registered holder of a share as the absolute owner of the share and shall
not be bound to recognize any equitable interest in or other claim to the
share by any other person, whether or not the Corporation has actual notice
of the interest or claim, except as otherwise provided by law.
SECTION 4. TRANSFER AGENT AND REGISTRAR. The Board of Directors may
appoint a transfer agent and a registrar for the transfer and registration
of its securities.
SECTION 5. TRANSFER OF SHARES. A sale, assignment, exchange,
conveyance, gift, pledge, hypothecation, or other transfer of shares of the
Corporation's stock, whether by operation of law or otherwise, shall not be
effective as to the Corporation until recorded on the Corporation's stock
transfer books.
ARTICLE VII
GENERAL PROVISIONS
SECTION 1. DIVIDENDS OR OTHER DISTRIBUTIONS. By action of the Board
of Directors, the Corporation may declare and pay dividends or make other
distributions as permitted by law.
SECTION 2. VOTING OF SECURITIES. Unless the Board directs otherwise,
the Chairperson or the President, or, during their absence or disability,
the Vice Presidents in the order that the Board designates, may on behalf
of the Corporation attend and vote (or execute in the name or on behalf of
the Corporation a consent in writing in lieu of a meeting of shareholders
or a proxy authorizing an agent or attorney-in-fact for the Corporation to
attend and vote) at any meeting of security holders of any corporation
in which the Corporation holds securities. At such meetings such person
may exercise all rights incident to the ownership of such securities which
the Corporation might exercise if present. The Board may confer this
voting power upon any other person.
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SECTION 3. CHECKS. The Corporation's checks, drafts, and orders for
the payment of money shall be signed in the name of the Corporation in the
manner and by the persons that the Board of Directors designates.
SECTION 4. SIGNING OF INSTRUMENTS. When the Board or these Bylaws
authorize the signing of a contract, conveyance, or other instrument
without specification of the signing officer, the Chairperson, the
President, any Vice President, the Secretary, or the Treasurer may sign in
the name and on behalf of the Corporation and may affix the corporate seal
to the instrument. The Board may authorize other officers and agents to
sign instruments in the name and on behalf of the Corporation.
SECTION 5. CORPORATE BOOKS AND RECORDS. The Corporation shall keep
books and records of account and minutes of the proceedings of its
shareholders, Board of Directors, and executive committee, if any. The
books, records, and minutes may be kept outside the State of Michigan. The
Corporation shall keep at its registered office, or at the office of its
transfer agent within or without the State of Michigan, records containing
the names and addresses of all shareholders, the number, class and series
of shares held by each, and the dates when they respectively became holders
of record. Any of the books, records, or minutes may be in written form or
in any other form capable of being converted into written form within a
reasonable time. The Corporation shall convert into written form without
charge any record not in written form, unless otherwise requested by a
person entitled to inspect the record.
SECTION 6. SEAL. The Corporation may have a seal in the form that
the Board of Directors determines. The seal may be used by causing it or a
facsimile to be affixed, impressed, or reproduced.
ARTICLE VIII
AMENDMENTS
The shareholders or the Board of Directors may amend or repeal
these Bylaws or adopt new bylaws, unless the Articles of Incorporation or
these Bylaws provide that the power to adopt new bylaws is reserved
exclusively to the shareholders or that the Board may not alter or repeal
these Bylaws or any particular bylaw. Amendment of these Bylaws by the
Board requires the vote of a majority of the directors then in office.
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EXHIBIT 10.1
CHOICEONE FINANCIAL SERVICES, INC.
DIRECTORS' STOCK PURCHASE PLAN
Warner Norcross & Judd LLP
900 Old Kent Building
111 Lyon Street, N.W.
Grand Rapids, Michigan 49503-2489
<PAGE>
CHOICEONE FINANCIAL SERVICES, INC.
DIRECTORS' STOCK PURCHASE PLAN
TABLE OF CONTENTS
PAGE
ARTICLE 1
ESTABLISHMENT AND PURPOSES OF PLAN. . . . . . . . . . . . . . . . . .1
1.1 ESTABLISHMENT OF PLAN; PURPOSE OF PLAN . . . . . . . . . . . . .1
1.2 EFFECTIVE DATE . . . . . . . . . . . . . . . . . . . . . . . . .1
1.3 NUMBER OF SHARES OF STOCK. . . . . . . . . . . . . . . . . . . .1
ARTICLE 2
DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
2.1 COMMITTEE. . . . . . . . . . . . . . . . . . . . . . . . . . . .1
2.2 COMMON STOCK . . . . . . . . . . . . . . . . . . . . . . . . . .1
2.3 COMPANY. . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
2.4 DIRECTOR'S FEE . . . . . . . . . . . . . . . . . . . . . . . . .1
2.5 MARKET VALUE . . . . . . . . . . . . . . . . . . . . . . . . . .2
2.6 PARTICIPANT. . . . . . . . . . . . . . . . . . . . . . . . . . .2
2.7 PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
ARTICLE 3
ADMINISTRATION. . . . . . . . . . . . . . . . . . . . . . . . . . . .2
3.1 POWER AND AUTHORITY. . . . . . . . . . . . . . . . . . . . . . .2
3.2 DELEGATION OF POWERS; EMPLOYMENT OF ADVISERS . . . . . . . . . .2
3.3 INDEMNIFICATION OF COMMITTEE MEMBERS . . . . . . . . . . . . . .2
ARTICLE 4
PARTICIPATION . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
4.1 ELIGIBILITY TO PARTICIPATE . . . . . . . . . . . . . . . . . . .3
ARTICLE 5
ELECTIVE PAYMENT OF DIRECTOR'S FEES IN COMMON STOCK . . . . . . . . .3
5.1 PAYMENT OF DIRECTOR'S FEES . . . . . . . . . . . . . . . . . . .3
5.2 PRIOR ELECTION . . . . . . . . . . . . . . . . . . . . . . . . .3
5.3 TIMING OF PAYMENTS . . . . . . . . . . . . . . . . . . . . . . .3
5.4 VESTING. . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
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ARTICLE 6
GENERAL PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . . . .4
6.1 AMENDMENT; TERMINATION . . . . . . . . . . . . . . . . . . . . .4
6.2 RIGHTS NOT ASSIGNABLE. . . . . . . . . . . . . . . . . . . . . .4
6.3 UNSECURED CREDITOR STATUS. . . . . . . . . . . . . . . . . . . .4
6.4 NO TRUST OR FIDUCIARY RELATIONSHIP . . . . . . . . . . . . . . .4
6.5 CONSTRUCTION . . . . . . . . . . . . . . . . . . . . . . . . . .4
6.6 DISPUTES . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
6.7 UNFUNDED PLAN. . . . . . . . . . . . . . . . . . . . . . . . . .5
6.8 SELF-EMPLOYMENT TAXES. . . . . . . . . . . . . . . . . . . . . .5
6.9 RIGHT OF COMPANY TO REPLACE DIRECTORS. . . . . . . . . . . . . .5
6.10 GOVERNING LAW; SEVERABILITY. . . . . . . . . . . . . . . . . . .5
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CHOICEONE FINANCIAL SERVICES, INC.
DIRECTORS' STOCK PURCHASE PLAN
ARTICLE 1
ESTABLISHMENT AND PURPOSES OF PLAN
1.1 ESTABLISHMENT OF PLAN; PURPOSES OF PLAN. The Company hereby
establishes the ChoiceOne Financial Services, Inc. Directors' Stock
Purchase Plan. The purposes of the Plan are to provide an opportunity and
means by which directors can increase their financial interest in the
Company, and thereby increase their personal interest in the Company's
continued success, through the payment of directors' fees in Company Common
Stock.
1.2 EFFECTIVE DATE. The "Effective Date" of the Plan is July 15,
1998. Each Plan provision applies until the effective date of an amendment
of that provision.
1.3 NUMBER OF SHARES OF STOCK. Subject to appropriate adjustment as
required in connection with any change in the capital structure of the
Company, a maximum of 50,000 shares of Common Stock shall be available
under the Plan.
ARTICLE 2
DEFINITIONS
2.1 COMMITTEE. "Committee" means the Personnel and Benefits
Committee of the Board of Directors or such other committee as the Board of
Directors shall designate to administer the Plan. The Committee shall
consist of at least two members of the Board, and all of its members shall
be "non-employee directors" as defined in Rule 16b-3 under the Securities
Exchange Act of 1934, as amended.
2.2 COMMON STOCK. "Common Stock" means the common stock, without par
value, of ChoiceOne Financial Services, Inc.
2.3 COMPANY. "Company" means ChoiceOne Financial Services, Inc.
2.4 DIRECTOR'S FEE. "Director's Fee" means the amount of income
payable to a Participant for service as a director, including payments for
attendance at meetings of the Board of Directors or meetings of committees
of the Board of Directors, and any retainer fee paid to members of the
Board of Directors.
<PAGE>
2.5 MARKET VALUE. "Market Value" means the mean of the bid and asked
prices of shares of Common Stock reported by the Company's market makers on
the applicable date, or if the market is closed on that date, the last
preceding date on which the market was open for trading.
2.6 PARTICIPANT. "Participant" means any individual who is
participating in the Plan.
2.7 PLAN. "Plan" means the ChoiceOne Financial Services, Inc.
Directors' Stock Purchase Plan, as such plan may be amended, administered
or interpreted from time to time.
ARTICLE 3
ADMINISTRATION
3.1 POWER AND AUTHORITY. The Committee shall administer the Plan,
shall have full power and authority to interpret the provisions of the
Plan, and shall have full power and authority to supervise the
administration of the Plan. All determinations, interpretations and
selections made by the Committee regarding the Plan shall be final and
conclusive. The Committee shall hold its meetings at such times and places
as it deems advisable. Action may be taken by a written instrument signed
by a majority of the members of the Committee, and any action so taken
shall be fully as effective as if it had been taken at a meeting duly
called and held. The Committee shall make such rules and regulations for
the conduct of its business as it deems advisable. The members of the
Committee shall not be paid any additional fees for their services.
3.2 DELEGATION OF POWERS; EMPLOYMENT OF ADVISERS. The Committee may
delegate to any agent such duties and powers, both ministerial and
discretionary, as it deems appropriate except those that may not be
delegated by law or regulation. In administering the Plan, the Committee
may employ attorneys, consultants, accountants or other persons, and the
Company and the Committee shall be entitled to rely upon the advice,
opinions or valuation of any such persons. All usual and reasonable
expenses of the Committee shall be paid by the Company.
3.3 INDEMNIFICATION OF COMMITTEE MEMBERS. Each person who is or
shall have been a member of the Committee shall be indemnified and held
harmless by the Company from and against any cost, liability or expense
imposed or incurred in connection with such person's or the Committee's
taking or failing to take any action under the Plan. Each such person
shall be justified in relying on information furnished in connection with
the Plan's administration by any appropriate person or persons.
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ARTICLE 4
PARTICIPATION
4.1 ELIGIBILITY TO PARTICIPATE. A director shall be eligible to
become a Participant in the Plan on the first day of the individual's term
as a director.
ARTICLE 5
ELECTIVE PAYMENT OF DIRECTOR'S FEES IN COMMON STOCK
5.1 PAYMENT OF DIRECTOR'S FEES. A Participant may elect to receive
payment of 25%, 50%, 75% or 100% of Director's Fees in the form of Common
Stock. On each quarterly payment date, the Participant shall receive a
number of shares of Common Stock (rounded to the nearest whole share)
determined by dividing the dollar amount of fees payable that the director
has elected to receive in Common Stock by the Market Value of Common Stock
on the day before the quarterly payment date.
5.2 PRIOR ELECTION. The election to receive Director's Fees in the
form of Common Stock shall be made by the Participant on a form provided
for that purpose prior to a quarterly payment date. The election shall
continue in effect until revoked or modified for a subsequent quarterly
payment date by the Participant.
5.3 TIMING OF PAYMENTS. Payment shall be made to the Participant on
each January 1, April 1, July 1, October 1 or such other dates on which the
Director's Fees would have been payable to the Participant if the
Participant had not made an election to receive Director's Fees in the form
of Common Stock.
5.4 VESTING. The right to receive shares of Common Stock equal to
the quotient of Director's Fees payable divided by the Market Value of
Common Stock on the quarterly payment date shall not be subject to
forfeiture for any reason.
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ARTICLE 6
GENERAL PROVISIONS
6.1 AMENDMENT; TERMINATION. The Company reserves the right to amend
the Plan prospectively or retroactively, in whole or in part, or to
terminate the Plan, provided that no change or amendment may be made more
than once every six months and that an amendment or termination may not
reduce or revoke shares of Common Stock accrued and the amounts represented
by them promised to be paid to Participants as of the later of the date of
adoption of the amendment or the effective date of the amendment or
termination.
6.2 RIGHTS NOT ASSIGNABLE. Amounts promised under the Plan shall not
be subject to assignment, conveyance, transfer, anticipation, pledge,
alienation, sale, encumbrance or charge, whether voluntary or involuntary,
by the Participant, even if directed under a qualified domestic relations
order or other divorce order. An interest in any amount shall not provide
collateral or security for a debt of a Participant or be subject to
garnishment, execution, assignment, levy or to another form of judicial or
administrative process or to the claim of a creditor of a Participant
through legal process or otherwise. Any attempt to anticipate, alienate,
sell, transfer, assign, pledge, encumber, charge or to otherwise dispose of
benefits payable, before actual receipt of the benefits, or a right to
receive benefits, shall be void and shall not be recognized.
6.3 UNSECURED CREDITOR STATUS. A Participant shall be an unsecured
general creditor of the Company as to the payment of any benefit under the
Plan. The right of any Participant to be paid the amount promised in the
Plan shall be no greater than the right of any other general, unsecured
creditor of the Company.
6.4 NO TRUST OR FIDUCIARY RELATIONSHIP. Nothing contained in the
Plan shall be deemed to create a trust or fiduciary relationship of any
kind for the benefit of any Participant.
6.5 CONSTRUCTION. The singular includes the plural, and the plural
includes the singular, unless the context clearly indicates the contrary.
Capitalized terms (except those at the beginning of a sentence or part of a
heading) have the meaning specified in the Plan. If a capitalized term is
not defined in the Plan, the term shall have the general, accepted meaning
of the term.
6.6 DISPUTES. In the event that a dispute arises regarding the
eligibility to participate in the Plan or any other matter relating to Plan
participation, such dispute shall be made to the Committee. The
determination by the Committee with respect to such disputes shall be final
and binding on all parties. In the event that a dispute arises regarding
the amount of any benefit payment under the Plan that is not related to
Participant eligibility disputes, the Committee may appoint a qualified
<PAGE>
independent certified public accountant to determine the amount of payment
and such determination shall be final and binding on all parties.
-4-
<PAGE>
6.7 UNFUNDED PLAN. This shall be an unfunded plan within the meaning
of the Internal Revenue Code of 1986, as amended. Benefits provided in
the Plan constitute only an unsecured contractual promise to pay in
accordance with the terms of the Plan by the Company.
6.8 SELF-EMPLOYMENT TAXES. To the extent that amounts paid under the
Plan are deemed to be net earnings from self-employment, each director
shall be responsible for any taxes payable under federal, state or local
law.
6.9 RIGHT OF COMPANY TO REPLACE DIRECTORS. Neither the action of the
Company in establishing the Plan, nor any provision of the Plan, shall be
construed as giving any director the right to be retained as a director, or
any right to any payment whatsoever except to the extent of the benefits
provided for by the Plan. The Company expressly reserves the right at any
time to replace or fail to renominate any director without any liability
for any claim against the Company for any payment whatsoever except to the
extent provided for in the Plan. The Company has no obligation to create
any other or subsequent deferred compensation plan for directors.
6.10 GOVERNING LAW; SEVERABILITY. The Plan shall be construed,
regulated and administered under the laws of the State of Michigan. If any
provisions of the Plan shall be held invalid or unenforceable for any
reason, such invalidity or unenforceability shall not affect the remaining
provisions of the Plan, and the Plan shall be deemed to be modified to the
least extent possible to make it valid and enforceable in its entirety.
-5-
<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, 1998, FORM 10-QSB
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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 3,518
<INT-BEARING-DEPOSITS> 9
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 20,819
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 139,900
<ALLOWANCE> 1,807
<TOTAL-ASSETS> 168,689
<DEPOSITS> 119,496
<SHORT-TERM> 4,902
<LIABILITIES-OTHER> 1,511
<LONG-TERM> 26,494
<COMMON> 12,272
0
0
<OTHER-SE> 4,014
<TOTAL-LIABILITIES-AND-EQUITY> 168,689
<INTEREST-LOAN> 9,488
<INTEREST-INVEST> 881
<INTEREST-OTHER> 17
<INTEREST-TOTAL> 10,386
<INTEREST-DEPOSIT> 3,620
<INTEREST-EXPENSE> 5,070
<INTEREST-INCOME-NET> 5,316
<LOAN-LOSSES> 605
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,235
<INCOME-PRETAX> 1,935
<INCOME-PRE-EXTRAORDINARY> 1,375
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,375
<EPS-PRIMARY> 1.28
<EPS-DILUTED> 1.28
<YIELD-ACTUAL>
4.82
<LOANS-NON> 590
<LOANS-PAST> 198
<LOANS-TROUBLED> 71
<LOANS-PROBLEM> 4,218
<ALLOWANCE-OPEN> 1,567
<CHARGE-OFFS> 421
<RECOVERIES> 56
<ALLOWANCE-CLOSE> 1,807
<ALLOWANCE-DOMESTIC> 1,483
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 324
</TABLE>
<PAGE>
Exhibit 99.1
PRIOR YEAR 2000 READINESS DISCLOSURES
Each of the following statements previously made by the Registrant is being
designated as a "Year 2000 Readiness Disclosure" under the Year 2000
Information and Readiness Disclosure Act. These prior Year 2000 Readiness
Disclosures were based in part upon and repeated information provided by
the Registrant's customers, suppliers and other third parties without
independent verification by the Registrant. These prior Year 2000
Readiness Disclosures are superseded by the Year 2000 Readiness Disclosure
in the Quarterly Report on Form 10-QSB for the period ended September 30,
1998.
ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 1997
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.
