-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, V3O0DoIPY8MgFe9MUVzoTh9oTy+vfX7fyBOKgc3RVy8Y5lkYdQ2dyZSNuGa3US+z NtymiHyF84V2e9MFYvMxDw== 0000905729-98-000081.txt : 19980401 0000905729-98-000081.hdr.sgml : 19980401 ACCESSION NUMBER: 0000905729-98-000081 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: 1ST COMMUNITY BANCORP INC CENTRAL INDEX KEY: 0000803164 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 382659066 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-19202 FILM NUMBER: 98580389 BUSINESS ADDRESS: STREET 1: 109 E DIVISION STREET 2: P O BOX 186 CITY: SPARTA STATE: MI ZIP: 49345-0186 BUSINESS PHONE: 6168877366 MAIL ADDRESS: STREET 1: 109 EAST DIVISION STREET 2: P O BOX 186 CITY: SPARTA STATE: MI ZIP: 49345-0186 10-K 1 U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB (X) ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 ( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________________ to __________________ COMMISSION FILE NUMBER: 1-9202 CHOICEONE FINANCIAL SERVICES, INC. (FORMERLY 1ST COMMUNITY BANCORP, INC.) (Name of Small Business Issuer in its Charter) MICHIGAN 38-2659066 (State or Other Jurisdiction of (I.R.S. Employer Identifica- Incorporation or Organization) tion No.) 109 EAST DIVISION STREET, SPARTA, MICHIGAN 49345 (Address of Principal Executive Offices) (Zip Code) (616) 887-7366 (Issuer's Telephone Number, Including Area Code) Securities Registered under Section 12(g) of the Exchange Act: COMMON STOCK, $10 PAR VALUE PER SHARE (Title of Class) Check whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No _____ Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. ( ) State issuer's revenues for its most recent fiscal year. The issuer's revenues for the year ended December 31, 1997 were $14,336,000. As of February 28, 1998, the aggregate market value of the common stock held by non-affiliates of the issuer was approximately $22,120,000. This amount is based on the average of the bid and asked price of $43.25 per share for the registrant's stock as of such date. As of February 28, 1998, the issuer had outstanding 513,325 shares of Common Stock. Transitional Small Business Disclosure Format (check one) Yes _____ No __X__ DOCUMENTS INCORPORATED BY REFERENCE Part I, Item 1, and Part II, Items 5, 6 and 7, incorporate by reference portions of the Registrant's Annual Report to Shareholders for the year ended December 31, 1997. Part III, Items 9, 10, 11 and 12, incorporate by reference portions of the Registrant's Definitive Proxy Statement for the Registrant's Annual Meeting of Shareholders to be held April 30, 1998. 2 PART I ITEM 1. DESCRIPTION OF BUSINESS. GENERAL ChoiceOne Financial Services, Inc. (the "Registrant") is a one-bank holding company registered under the Bank Holding Company Act of 1956, as amended. The Registrant was incorporated on February 24, 1986. The Registrant was formed to create a bank holding company for the purpose of acquiring all of the capital stock of ChoiceOne Bank (formerly Sparta State Bank), which became a wholly owned subsidiary of the Registrant on April 6, 1987. The Registrant's only significant asset as of December 31, 1997, was ChoiceOne Bank (the "Bank"). Effective January 1, 1996, the Bank acquired all of the outstanding common stock of ChoiceOne Insurance Agencies, Inc. (formerly Bradford Insurance Centre, Ltd.), an independent insurance agency headquartered in Sparta, Michigan. Effective August 1, 1997, the Bank acquired all of the outstanding common stock of Alpine Travel, Inc., a travel agency with one location in Walker, Michigan. The Registrant's business is primarily concentrated in a single industry segment - commercial banking. The Bank is a full-service banking institution that offers a variety of deposit, payment, credit and other financial services to all types of customers. These services include time, savings, and demand deposits, safe deposit services, and automated transaction machine services. Loans, both commercial and consumer, are extended primarily on a secured basis to corporations, partnerships and individuals. Commercial lending covers such categories as business, industry, agricultural, construction, inventory and real estate. The Bank's consumer loan and residential mortgage loan departments make direct loans to consumers and purchasers of residential property. No material part of the business of the Registrant or the Bank is dependent upon a single customer or very few customers, the loss of which would have a materially adverse effect on the Registrant. The Bank's primary market area consists of portions of Kent, Muskegon, Newaygo and Ottawa counties in Michigan in the communities where the Bank's offices are located and the areas immediately surrounding these communities. Currently the Bank serves these markets through four full- service offices and one off-premises automated transaction machine. The Registrant and the Bank have no foreign assets or income. The principal source of revenue for the Registrant and the Bank is interest and fees on loans. On a consolidated basis, interest and fees on loans accounted for 78% of total revenues in 1997, 76% in 1996 and 75% in 1995. Interest on investment securities accounted for 9% of total revenues in 1997, 11% in 1996 and 18% in 1995. 3 COMPETITION The business of banking is highly competitive. The Bank's competition primarily comes from other financial institutions located within Sparta, Michigan, and the Kent County, Michigan area. There are a number of larger commercial banks in the Bank's primary market area. The Bank also competes with a large number of other financial institutions, such as savings and loan associations, insurance companies, consumer finance companies, credit unions and commercial finance and leasing companies for deposits, loans and service business. Money market mutual funds, brokerage houses and nonfinancial institutions provide many of the financial services offered by the Bank. Many of these competitors have substantially greater resources than the Bank. The principal methods of competition for financial services are price (the rates of interest charged for loans, the rates of interest paid for deposits, and the fees charged for services) and the convenience and quality of services rendered to customers. SUPERVISION AND REGULATION Banks and bank holding companies are extensively regulated. The Registrant is subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). The Registrant's activities are generally limited to owning or controlling banks and engaging in such other activities as the Federal Reserve Board may determine to be closely related to banking. Prior approval of the Federal Reserve Board, and in some cases various other government agencies, is required for the Registrant to acquire control of any additional banks or other operating subsidiaries. The Bank is chartered under state law and is subject to regulation by the Financial Institutions Bureau of the Michigan Department of Consumer and Industry Services. State banking laws place restrictions on various aspects of banking, including permitted activities, loan interest rates, branching, payment of dividends and capital and surplus requirements. The Bank is a member of the Federal Reserve System and is also subject to regulation by the Federal Reserve Board. The Bank's deposits are insured by the Federal Deposit Insurance Corporation (the "FDIC") to the extent provided by law. The Bank became a member of the Federal Home Loan Bank system in March 1993. This provides certain advantages to the Bank, including favorable borrowing rates for certain funds. The Registrant is a legal entity separate and distinct from the Bank. There are legal limitations on the extent to which the Bank can lend or otherwise supply funds to the Registrant. In addition, payment of dividends to the Registrant by the Bank is subject to various state and federal regulatory limitations. 4 Under Federal Reserve Board policy, the Registrant is expected to act as a source of financial strength to the Bank and to commit resources to support it. Under federal law, the FDIC also has authority to impose special assessments on insured depository institutions to repay FDIC borrowings from the United States Treasury or other sources and to establish semiannual assessment rates on Bank Insurance Fund ("BIF") member banks to maintain the BIF at the designated reserve ratio required by law. Banks are subject to a number of federal and state laws and regulations which have a material impact on their business. These include, among others, state usury laws, state laws relating to fiduciaries, the Truth in Lending Act, the Truth in Savings Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Expedited Funds Availability Act, the Community Reinvestment Act, electronic funds transfer laws, redlining laws, antitrust laws, environmental laws and privacy laws. The instruments of monetary policy of authorities such as the Federal Reserve Board may influence the growth and distribution of bank loans, investments and deposits, and may also affect interest rates on loans and deposits. These policies may have a significant effect on the operating results of banks. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act") substantially changed the geographic constraints applicable to the banking industry. The Riegle-Neal Act allows bank holding companies to acquire banks located in any state in the United States without regard to geographic restrictions or reciprocity requirements imposed by state law. The Riegle-Neal Act also allows banks to establish interstate branch networks through acquisitions of other banks. The establishment of DE NOVO interstate branches or the acquisition of individual branches of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) is allowed by the Riegle-Neal Act only if specifically authorized by state law. The legislation allowed individual states to "opt-out" of certain provisions of the Riegle-Neal Act by enacting appropriate legislation prior to June 1, 1997. Michigan permits both U.S. and non-U.S. banks to establish branch offices in Michigan. The Michigan Banking Code permits, in appropriate circumstances and with the approval of the Commissioner of the Financial Institutions Bureau, (1) acquisition of Michigan banks by FDIC-insured banks, savings banks or savings and loan associations located in other states, (2) sale by a Michigan bank of branches to an FDIC-insured bank, savings bank or savings and loan association located in a state in which a Michigan bank could purchase branches of the purchasing entity, (3)consolidation of Michigan banks and FDIC-insured banks, savings banks or savings and loan associations located in other states having laws permitting such consolidation, (4) establishment of branches in Michigan by FDIC-insured banks located in other states, the District of Columbia or U.S. territories or protectorates having laws permitting a Michigan bank to establish a branch in such jurisdiction, and (5) establishment by foreign banks of branches located in Michigan. 5 EFFECTS OF COMPLIANCE WITH ENVIRONMENTAL REGULATIONS The nature of the business of the Bank is such that it holds title, on a temporary or permanent basis, to a number of parcels of real property. These include properties owned for branch offices and other business purposes as well as properties taken in or in lieu of foreclosure to satisfy loans in default. Under current state and federal laws, present and past owners of real property may be exposed to liability for the cost of clean up of contamination on or originating from those properties, even if they are wholly innocent of the actions that caused the contamination. These liabilities can be material and can exceed the value of the contaminated property. Management is not presently aware of any instances where compliance with these provisions will have a material effect on the capital expenditures, earnings or competitive position of the Registrant or the Bank, or where compliance with these provisions will adversely affect a borrower's ability to comply with the terms of loan contracts. EMPLOYEES As of February 28, 1998, the Bank employed fifty-three persons on a full- time basis and fifteen persons on a part-time basis. The Insurance Agency employed fourteen persons on a full-time basis and two persons on a part- time basis. The Travel Agency employed two persons on a full-time basis and four persons on a part-time basis. The Registrant's only employees as of the same date were its four executive officers. The Registrant, Bank, Insurance Agency, and Travel Agency believe their relations with their employees are good. STATISTICAL INFORMATION Additional statistical information describing the business of the Registrant appears on the following pages and in Management's Discussion and Analysis or Plan of Operation incorporated by reference in Item 6 of this report and in the Consolidated Financial Statements and the notes thereto incorporated by reference in Item 7 of this report. The following statistical information should be read in conjunction with Management's Discussion and Analysis or Plan of Operation and the Consolidated Financial Statements and notes thereto incorporated by reference in this report. 6 INVESTMENT PORTFOLIO Presented below is the amortized cost of investment securities as of December 31, 1997 and 1996, a schedule of maturities of investment securities as of December 31, 1997, and the weighted average yield of investment securities as of December 31, 1997.
AMORTIZED 1 YEAR 1 YEAR- 5 YEARS- AFTER TOTAL COST AT OR LESS 5 YEARS 10 YEARS 10 YEARS DEC. 31, ------- ------- ------- ------- ----- 1996 MATURITY DISTRIBUTION AS OF DECEMBER 31, 1997 --------- --------------------------------------------- (Dollars in thousands) SECURITIES AVAILABLE FOR SALE U.S. Treasuries and U.S. Government agencies $2,250 $ 6,501 $ 513 $ -- $ 9,264 $ 9,700 Obligations of states and political subdivisions 530 4,433 510 1,985 7,458 10,276 Other securities -- 261 -- -- 2,966 2,859 ------ ------- ------ ------ ------- ------- Totals $2,780 $11,195 $1,023 $1,985 $19,688 $22,835 ====== ======= ====== ====== ======= ======= WEIGHTED AVERAGE INTEREST RATES AS OF DECEMBER 31, 1997 ------------------------------------------------------- SECURITIES AVAILABLE FOR SALE U.S. Treasuries and U.S. Government agencies 6.17% 6.40% 6.56% -- % 6.35% Obligations of states and political subdivisions 8.50 7.85 8.28 8.15 8.00 Other securities -- 6.10 -- -- 7.40 - ---------------- This column represents the total of the maturity distribution and the amortized cost at December 31, 1997. 7 Maturities of mortgage-backed securities are classified according to their estimated average maturity. Approximately two-thirds of mortgage- backed securities were classified in the 1 year to 5 years category. The total column includes securities which have no stated maturity. The interest rate is computed on a fully tax-equivalent basis at an incremental tax rate of 34%.
The Bank had no holdings of investment securities from any one issuer at December 31, 1997, which were greater than 10% of the Registrant's shareholders' equity, exclusive of U.S. Treasury securities and U.S. Government agency securities. LOAN PORTFOLIO MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES The following schedule presents the maturities of loans (excluding real estate mortgage loans and installment loans). Also presented are loans over one year in maturity, classified according to the sensitivity to changes in interest rates.
1 YEAR 1 YEAR- AFTER OR LESS 5 YEARS 5 YEARS TOTAL ------- ------- ------- ----- (Dollars in thousands) LOAN MATURITIES AS OF DECEMBER 31, 1997 Commercial $15,366 $21,347 $6,833 $43,546 Agricultural 4,088 4,205 1,057 9,350 Real estate - construction 2,499 -- -- 2,499 ------- ------- ------ ------- Totals $21,953 $25,552 $7,890 $55,395 ======= ======= ====== =======
8 LOAN SENSITIVITY TO CHANGES IN INTEREST RATES AS OF DECEMBER 31, 1997
Loans which have predetermined interest rates $17,549 $6,268 $23,817 Loans which have floating or adjustable interest rates 8,003 1,622 9,625 ------- ------ ------- Totals $25,552 $7,890 $33,442 ======= ====== ======= Loan maturities are classified according to the contractual maturity date or the anticipated amortization period, whichever is appropriate. The anticipated amortization period is used in the case of loans where a balloon payment is due before the end of the loan's normal amortization period. At the time the balloon payment is due, the loan can either be rewritten or payment in full can be requested. The decision as to whether the loan will be rewritten or a payment in full will be requested will be based upon the loan's payment history, the borrower's current financial condition, and other relevant factors.
RISK ELEMENTS The following loans were classified as nonperforming as of December 31:
1997 1996 -------- ---------- Loans accounted for on a non-accrual basis $753,000 $ 288,000 Accruing loans which are contractually past due 90 days or more as to principal or interest payments 195,000 686,000 Loans not included above which are "troubled debt restructurings" 27,000 26,000 -------- ---------- Totals $975,000 $1,000,000 ======== ==========
Interest on the above loans which would have been earned had the loans been in an accrual or performing status was approximately $101,000 and $128,000 for 1997 and 1996, respectively. The interest that was actually recorded when received was approximately $65,000 and $107,000 for 1997 and 1996, respectively. In addition to the above loans, a holding of other real estate of $229,000 was also considered to be nonperforming as of December 31, 1997. There was no nonperforming other real estate as of December 31, 1996. 9 A loan is placed on nonaccrual status at the point in time at which the collectibility of principal or interest is considered doubtful. POTENTIAL PROBLEM LOANS At December 31, 1997, there were $1,915,000 of loans not disclosed above where some concern existed as to the borrowers' ability to comply with original loan terms. Approximately $8,000 of the allowance for loan losses had been specifically allocated to these loans at December 31, 1997. LOAN CONCENTRATIONS As of December 31, 1997, there was no concentration of loans exceeding 10% of total loans that are not otherwise disclosed as a category of loans in the loan portfolio listing in Note 6 to the Consolidated Financial Statements incorporated by reference in Item 7 of this report. OTHER INTEREST-BEARING ASSETS As of December 31, 1997, there were no other interest-bearing assets that would be required to be disclosed if such assets were loans. SUMMARY OF LOAN LOSS EXPERIENCE The following schedule presents a summary of activity in the allowance for loan losses for the periods shown and the percentage of net charge-offs during each period to average gross loans outstanding during the period. 10
YEAR ENDED DECEMBER 31, -------------------- 1997 1996 ------- ------- (Dollars in thousands) ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES Balance at beginning of period $ 1,487 $ 1,121 ------- ------- Charge-offs: Commercial 199 37 Agricultural 7 -- Real estate - construction -- -- Real estate - mortgage 6 -- Consumer 315 184 ------- ------- 527 221 ------- ------- Recoveries: Commercial 13 10 Agricultural -- 10 Real estate - construction -- -- Real estate - mortgage -- -- Consumer 55 44 ------- ------- 68 64 ------- ------- Net charge-offs 459 157 Additions charged to operations 539 523 ------- ------- Balance at end of period $ 1,567 $ 1,487 ======= ======= Ratio of net charge-offs during the period to average loans outstanding during the period .39% .17% ======= ======= 11 The amount of additions to the allowance for loan losses charged to operations during the periods shown was based on management's judgment after considering factors such as loan loss experience, evaluation of the loan portfolio, and prevailing and anticipated economic conditions. The evaluation of the loan portfolio is based upon various risk factors such as the financial condition of the borrower, the value of collateral and other considerations which, in the opinion of management, deserve current recognition in estimating possible loan losses.
The following schedule presents an allocation of the allowance for loan losses to the various loan categories as of the dates indicated.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES AS OF DECEMBER 31, ----------------------------------------------- 1997 1996 -------------------- -------------------- PERCENT PERCENT OF LOANS OF LOANS IN EACH IN EACH ALLOW- CATEGORY ALLOW- CATEGORY ANCE TO TOTAL ANCE TO TOTAL AMOUNT LOANS AMOUNT LOANS ------ -------- ------ --------- (Dollars in thousands) Commercial $ 425 34.08% $ 329 31.52% Agricultural 75 7.32 68 9.09 Real estate - construction 6 1.96 6 2.01 Real estate - mortgage 121 34.21 110 33.76 Consumer 685 22.43 594 23.62 Unallocated 255 N/A 380 N/A ------ ------ ------ ------ Totals $1,567 100.00% $1,487 100.00% ====== ====== ====== ======
Charge-offs in both commercial and consumer loans increased significantly in 1997 compared to 1996. Approximately $155,000 of the commercial increase in 1997 resulted from one loan customer. The consumer loan 12 increase was due to a higher level of indirect auto loan charge-offs in 1997 than in 1996. Management believes this is a result of a higher level of personal bankruptcies in 1997 than in the prior year as well as a larger balance of indirect auto loans in the consumer loans portfolio. Charge-offs and recoveries did not change significantly in 1996 as compared to 1995. The increases from the end of 1996 to the end of 1997 in the allowance for loan losses allocated to both commercial and consumer loans was believed prudent by management. This was based on the higher level of charge-offs experienced in these two loan categories in 1997 than in the prior year. There were no significant allocation changes from the end of 1995 to the end of 1996. DEPOSITS The following schedule presents daily average balances and the average interest rate paid by the deposit category for 1997 and 1996. It also presents the maturities of time certificates of deposit issued in denominations of $100,000 or more as of December 31, 1997.
DAILY AVERAGE AVERAGE BALANCES RATE PAID ---------------------- ---------------- 1997 1996 1997 1996 -------- ------- ---- ---- (Dollars in thousands) AVERAGE BALANCES AND RATES Demand deposits $ 11,479 $11,010 -- % -- % Interest-bearing transaction accounts 22,242 24,711 3.23 3.23 Savings deposits 8,836 9,363 1.83 1.86 Time deposits 58,258 50,126 5.83 5.88 -------- ------- Total deposits $100,815 $95,210 ======== ======= 13 MATURITIES OF TIME CERTIFICATES OF DEPOSIT ISSUED IN DENOMINATIONS OF $100,000 OR MORE Maturities of 3 months or less $ 2,899 Maturities over 3 months through 6 months 5,013 Maturities over 6 months through 12 months 3,392 Maturities over 12 months 3,447 -------- Total $ 14,751 ========
RETURN ON EQUITY AND ASSETS The following schedule presents the ratios indicated for 1997, 1996 and 1995.
YEAR ENDED DECEMBER 31, ------------------------------ 1997 1996 1995 ------ ------ ------ Return on assets (net income divided by average total assets) 1.17% 1.38% 1.36% Return on equity (net income divided by average equity) 11.58 12.00 11.09 Dividend payout ratio (dividends declared per share divided by net income per share) 45.08 39.12 37.64 Equity to assets ratio (average equity divided by average total assets) 10.09 11.47 12.27
SHORT-TERM BORROWINGS There were no categories of short-term borrowings whose average balance outstanding exceeded 30% of shareholders' equity in 1997 or 1996. 14 ITEM 2. DESCRIPTION OF PROPERTY. The offices of the Bank, Insurance Agency, and Travel Agency as of February 28, 1998, were as follows: Registrant's and Bank's main office 109 East Division, Sparta, Michigan Office is owned by the Bank and comprises 24,000 square feet. Bank's branch office and Insurance Agency's main office 416 and 440 West Division, Sparta, Michigan Office is owned by the Bank. Office comprises 7,000 square feet, of which 3,000 feet are occupied by the Bank and 4,000 feet are occupied by the Insurance Agency. Bank's branch office and Insurance Agency's branch office 4170 Seventeen Mile Road, Cedar Springs, Michigan Office is owned by the Bank. Office comprises 3,000 square feet, of which 2,000 feet are occupied by the Bank and 1,000 feet are occupied by the Insurance Agency. Bank's branch office and Insurance Agency's branch office 4949 Plainfield Avenue, NE, Grand Rapids, Michigan Office is leased by the Bank and the Insurance Agency. Approximately 3,000 square feet are occupied by the Bank and 3,000 feet are occupied by the Insurance Agency. Travel Agency's main office 3527 Alpine Avenue, NW, Grand Rapids, Michigan Office is leased by the Travel Agency and comprises 2,000 square feet. The Registrant operates its business at the main office of the Bank. No properties were owned by the Registrant as of February 28, 1998. The Registrant, Bank, Insurance Agency, and Travel Agency believe that their offices are suitable and adequate for their future needs and are in good condition and repair. The Registrant's management believes the offices are adequately covered by insurance. As part of its business, the Bank generates all types of mortgages. The Bank generally does not purchase mortgages as part of its business. ITEM 3. LEGAL PROCEEDINGS. There are no material pending legal proceedings to which the Registrant or the Bank is a party or to which any of their property is subject, except for proceedings which arose in the ordinary course of business. In the opinion of management, pending legal proceedings will not have a material effect on the consolidated financial condition of the Registrant. 15 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There were no matters submitted to a vote of security holders during the quarter ended December 31, 1997. 16 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The information under the caption "Common Stock Information" on page A-1 of the Registrant's Annual Report to Shareholders for the year ended December 31, 1997, is incorporated herein by reference. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. The information under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations," including all subheadings, on pages A-23 through A-31, inclusive, of the Registrant's Annual Report to Shareholders for the year ended December 31, 1997, is incorporated herein by reference. ITEM 7. FINANCIAL STATEMENTS. The Consolidated Financial Statements, Notes to Consolidated Financial Statements, and Independent Auditors' Report on pages A-3 through A-22, inclusive, of the Registrant's Annual Report to Shareholders for the year ended December 31, 1997, are incorporated herein by reference. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. 17 PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT. The information under the captions "Directors and Executive Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Registrant's Definitive Proxy Statement for the Annual Meeting of Shareholders to be held April 30, 1998, is incorporated herein by reference. ITEM 10. EXECUTIVE COMPENSATION. The information under the caption "Compensation of Executive Officers and Directors" in the Registrant's Definitive Proxy Statement for the Annual Meeting of Shareholders to be held April 30, 1998, is incorporated herein by reference. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information under the caption "Voting Securities" in the Registrant's Definitive Proxy Statement for the Annual Meeting of Shareholders to be held April 30, 1998, is incorporated herein by reference. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information under the caption "Certain Relationships and Related Transactions" in the Registrant's Definitive Proxy Statement for the Annual Meeting of Shareholders to be held April 30, 1998, is incorporated herein by reference. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. 1. EXHIBITS The following exhibits are filed as part of this report: 18 EXHIBIT DOCUMENTS ------- --------- 3.1 Amended and Restated Articles of Incorporation of the Registrant. Previously filed as Appendix A to the Registrant's Definitive Proxy Statement with respect to its Annual Meeting of Shareholders held on April 29, 1997. Here incorporated by reference. 3.2 Bylaws of the Registrant as currently in effect and any amendments thereto. Previously filed as an exhibit to the Registrant's Form 10-KSB Annual Report for its fiscal year ended December 31, 1993. Here incorporated by reference. 4. Advances, Pledge and Security Agreement between ChoiceOne Bank and the Federal Home Loan Bank of Indianapolis. 10.1 Employment Agreement With Jae M. Maxfield. Previously filed as an exhibit to the Registrant's Form 10-KSB Annual Report for its fiscal year ended December 31, 1995. Here incorporated by reference. 10.2 Employment Agreement With Lawrence D. Bradford. Previously filed as an exhibit to the Registrant's Form 10-KSB Annual Report for its fiscal year ended December 31, 1995. Here incorporated by reference. 10.3 Executive Stock Incentive Plan of 1997. Previously filed as Appendix B to the Registrant's Definitive Proxy Statement with respect to its Annual Meeting of Shareholders held on April 29, 1997. Here incorporated by reference. 13 Annual Report to Shareholders for the year ended December 31, 1997. 21 Subsidiaries of the Registrant. 24 Powers of Attorney. 27.1 Financial Data Schedule for Year Ended December 31, 1997. 27.2 Restated Financial Data Schedule for Quarter Ended September 30, 1997. 27.3 Restated Financial Data Schedule for Quarter Ended June 30, 1997. - ------------------- [FN] These agreements are management contracts or compensation plans or arrangements required to be filed as exhibits to this Form 10-KSB. 19 Copies of any exhibits will be furnished to shareholders without charge upon written request. Requests should be directed to Tom Lampen, Treasurer, ChoiceOne Financial Services, Inc., 109 East Division, Sparta, Michigan 49345. 2. REPORTS ON FORM 8-K No reports on Form 8-K were filed during the fourth quarter of the period covered by this report. SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ChoiceOne Financial Services, Inc. /S/ JAE M. MAXFIELD March 11, 1998 Jae M. Maxfield President and Chief Executive Officer In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /S/ JAE M. MAXFIELD President and Chief Executive March 11, 1998 Jae M. Maxfield Officer and Director (Principal Executive Officer) */S/ FRANK G. BERRIS Director March 11, 1998 Frank G. Berris */S/ LAWRENCE D. BRADFORD Director March 11, 1998 Lawrence D. Bradford */S/ WILLIAM F. CUTLER, JR. Director March 11, 1998 William F. Cutler, Jr. */S/ LEWIS G. EMMONS Director March 11, 1998 Lewis G. Emmons */S/ L. EDMOND EARY, JR., M.D. Chairman of the Board March 11, 1998 L. Edmond Eary, Jr., M.D. and Director 20 */S/ STUART GOODFELLOW Director March 11, 1998 Stuart Goodfellow */S/ JON E. PIKE Director March 11, 1998 Jon E. Pike */S/ LINDA R. PITSCH Secretary and Director March 11, 1998 Linda R. Pitsch */S/ ANDREW W. ZAMIARA Director March 11, 1998 Andrew W. Zamiara */S/ THOMAS L. LAMPEN Treasurer (Principal Financial March 11, 1998 Thomas L. Lampen and Accounting Officer) *By /S/ JAE M. MAXFIELD Jae M. Maxfield ATTORNEY-IN-FACT 21 EXHIBIT INDEX EXHIBIT DOCUMENTS ------- --------- 3.1 Amended and Restated Articles of Incorporation of the Registrant. Previously filed as Appendix A to the Registrant's Definitive Proxy Statement with respect to its Annual Meeting of Shareholders held on April 29, 1997. Here incorporated by reference. 3.2 Bylaws of the Registrant as currently in effect and any amendments thereto. Previously filed as an exhibit to the Registrant's Form 10-KSB Annual Report for its fiscal year ended December 31, 1993. Here incorporated by reference. 4. Advances, Pledge and Security Agreement between ChoiceOne Bank and the Federal Home Loan Bank of Indianapolis. 10.1 Employment Agreement With Jae M. Maxfield. Previously filed as an exhibit to the Registrant's Form 10-KSB Annual Report for its fiscal year ended December 31, 1995. Here incorporated by reference. 10.2 Employment Agreement With Lawrence D. Bradford. Previously filed as an exhibit to the Registrant's Form 10-KSB Annual Report for its fiscal year ended December 31, 1995. Here incorporated by reference. 10.3 Executive Stock Incentive Plan of 1997.<1> Previously filed as Appendix B to the Registrant's Definitive Proxy Statement with respect to its Annual Meeting of Shareholders held on April 29, 1997. Here incorporated by reference. 13 Annual Report to Shareholders for the year ended December 31, 1997. 21 Subsidiaries of the Registrant. 24 Powers of Attorney. 27.1 Financial Data Schedule for Year Ended December 31, 1997. 27.2 Restated Financial Data Schedule for Quarter Ended September 30, 1997. 27.3 Restated Financial Data Schedule for Quarter Ended June 30, 1997. - ------------------- 22 [FN] These agreements are management contracts or compensation plans or arrangements required to be filed as exhibits to this Form 10-KSB. 23 EX-4 2 EXHIBIT 4 INSTRUMENTS DEFINING THE RIGHTS OF HOLDERS OF LONG-TERM DEBT ADVANCES, PLEDGE, AND SECURITY AGREEMENT This Advances, Pledge and Security Agreement (the "Advances Agreement"), dated as of this 24th Day of March, 1997, is between ChoiceOne State Bank, with its principal place of business at 109 East Division, P.O. Box 186, Sparta, Michigan 49345-0186, (the "Member") and the Federal Home Loan Bank of Indianapolis, with its principal place of business at 8250 Woodfield Crossing Boulevard, Indianapolis, Indiana 46240, and mailing address at P.O. Box 60, Indianapolis, Indiana 46206 (the "Bank"). WHEREAS, the Bank, subject to the provisions of the Federal Home Loan Bank Act ("Bank Act"), the Rules and Regulations of the Federal Housing Finance Board or its legal successor ("FHFB Regulations"), the policies of the FHFB and the Bank's Credit Policies (as hereinafter defined) is authorized to make available Advances and Other Credit Products to its members; and WHEREAS, Member desires from time to time to apply for such Advances and Other Credit Products that may be available to it; and WHEREAS, the Bank requires that such Advances and Other Credit Products provided by the Bank be secured pursuant to this Advances Agreement, and Member agrees to provide such security as requested by the Bank by the means set forth in this Advances Agreement. NOW THEREFORE, intending to be legally bound, the Member and the Bank agree as follows: 1. GENERAL. SECTION 1.01. DEFINITIONS. As used herein, the following terms shall have the following meanings: "ADVANCES" means any and all loans or other extensions of credit now or hereafter granted by the Bank to the Member, including all loans or extensions of credit by the Bank to the Member prior to the date hereof. "ADVICE OF CREDIT" means one or more written confirmations to be executed by the Member and the Bank specifying the type or category of advance made, the terms of repayment, the interest rate (which may be fixed or variable), and any other pertinent terms and conditions, which shall evidence an advance. 1 "APPLICATION FOR ADVANCE" means one or more written or telephonic requests for an advance, in such form or forms as shall be specified by the Bank from time to time, and which is executed by the Bank shall evidence an Advance. "BANK DEPOSITS" shall mean all deposit accounts maintained by the Member with the Bank (excluding safekeeping accounts expressly held for the benefit of a third-party), all money, cash and checks, drafts, notices, bills, bills of exchange and bonds deposited therein or credited thereto, including any increases, renewals, extensions, substitutions and replacements, whether or not such instruments have been posted to any such deposit account, and all statements, certificates, passbooks and instruments representing any such deposit account. "CAPITAL STOCK" means all of the capital stock of the Bank owned by the Member, and all payments which have been or hereafter are made on account of subscriptions to, and all unpaid dividends on, such Capital Stock. "COLLATERAL" means all assets of the Member of any kind or nature whatsoever, whether tangible or intangible, including without limitation, all Capital Stock, Bank Deposits, Mortgage Collateral, Securities Collateral, and Other Collateral, all cash and cash equivalents, all insurance proceeds, all tax refunds, all proceeds of any of the foregoing, and all collections on any and all of the foregoing, which are now or hereafter pledged to the Bank pursuant to Section 3.01 hereof. It also means, including without limitation, any of the foregoing which have previously been assigned, transferred or pledged to the Bank by the Member as collateral for loans or other extensions of credit prior to the date hereof, all of such assets in which a security interest is granted pursuant to the terms hereof or in which a security interest is hereafter assigned, transferred, granted, or pledged pursuant to the terms hereof. "COLLATERAL POLICY" shall mean the Bank's Collateral Policy as stated in the Credit Policy Manual, policy statement or operating circulars of the Bank, as in effect from time to time. "COLLATERAL REQUIREMENT" means such aggregate Market Value (or unpaid principal balance) of Eligible Collateral as is specified in the Bank's Collateral Policy or as may be otherwise specified in writing by the Bank from time to time as being the collateral maintenance level the Member must maintain hereunder. The Bank may increase or decrease the Collateral Requirement at any time for, including without limitation, specific collateral listings, physical possession requirements, and where applicable, blanket collateral requirements. "CREDIT POLICIES" shall mean the Bank's Credit Policy Manual, policy statements, or operating circulars relating to Advances and Other Credit Products offered by the Bank, all as in effect from time to time. 2 "ELIGIBLE COLLATERAL" means Collateral other than Capital Stock which: (I) meets the definition of Eligible Collateral under the Bank's Collateral Policy, including without limitation one-to-four family whole mortgage loans, government and agency securities, private mortgage-backed securities, and Bank Deposits; (II) is owned by the Member free and clear of any liens, encumbrances or other interests other than the assignment to the Bank hereunder; (III) has not been in default within the most recent 12-month period provided that in the case of Mortgage Collateral, mortgage payments that are overdue by more than sixty (60) days shall not be included within Eligible Collateral; (IV) in the case of Mortgage Collateral, relates to residential real property which is covered by fire, hazard, and where applicable, flood insurance in an amount at least sufficient to discharge the mortgage loan in full in case of loss and as to which all real estate taxes are current; and (V) in the case of Mortgage Collateral, does not secure an indebtedness on which any director, officer, employee, attorney or agent of the Member or of any Federal Home Loan Bank is personally liable. The Bank may change the definition of Eligible Collateral from time to time, and the Bank's determination of Eligible Collateral shall be conclusive. "INDEBTEDNESS" means all obligations, liabilities or indebtedness of the Member to the Bank, due or to become due, direct or indirect, absolute or contingent, joint or several, now existing or hereafter at any time created, arising or incurred under this Advances Agreement, or any Advice of Credit, Application for Advance, Other Credit Product Agreements, Advances, Other Credit Products, Bank Deposits, including any overdrafts or other charges in connection therewith. Indebtedness also means any obligations for any other services (including without limitation, safekeeping, operating and other correspondence services) provided by the Bank, including any applications, commitments, other agreements or documents relating to the foregoing, any amendments to any of the foregoing agreements or documents and any obligations under indemnification provisions in any such agreements or documents, and any renewal, extension or substitution of any such obligations, liabilities and indebtedness, including attorneys' fees of the Bank in the collection thereof and the enforcement of any remedies with respect to any Collateral. "MARKET VALUE" means the market value of Collateral determined in a manner as specified by the Bank from time to time. The Bank may change the method of determining Market Value at any time which shall be consistently applied to substantially all borrowers. The Bank's determination of Market Value shall be conclusive. "MORTGAGE COLLATERAL" means whole mortgage loans, Mortgage Documents and all security agreements, guaranties, insurance policies, certificates, binders, commitments or reports relating thereto, including title insurance, private mortgage insurance and hazard and liability insurance, surveys, bonds, participations, purchase commitments, hedge contracts or 3 other agreements to purchase, guaranty or insure any mortgage loans or securities to be issued by the Member. Mortgage Collateral also means any other agreement, instrument or document pertaining to, affecting or obtained by the Member in connection with the loans covered by the Mortgage Documents, financing statements perfecting the Member's security interest in any of the foregoing, certificates, evidences of recordation, applications, underwriting materials, appraisals, notices, opinions of counsel, loan servicing data, files, correspondence, computer programs, tapes, discs, cards, account records and all other electronically stored or written records or materials relating to the loans covered by the Mortgage Documents, including any and all rights, claims, and choses in action against or with respect to any person or entity which has provided services to the member in connection with any other Mortgage Collateral, including without limitation, surveyors, appraisers, environmental engineers, environmental assessment firms, contractors, and architects. Unless otherwise authorized by the Bank, Mortgage Collateral shall not include mortgage securities or loan participations. "MORTGAGE DOCUMENTS" means mortgages, deeds of trust or other security deeds in land and interests in real property and the improvements and fixtures located thereon (herein "mortgages") and all notes, bonds or other instruments evidencing loans secured thereby (herein "mortgage notes") and any endorsement and assignments thereof to the Member. "OTHER COLLATERAL" means such items of tangible and intangible property, other than Capital Stock, Bank Deposits, Mortgage Collateral, and Securities Collateral, which are offered as collateral by the Member to the Bank and which the Bank in its discretion expressly accepts by written notice delivered to the Member as collateral for Advances and Other Credit Products. "OTHER CREDIT PRODUCT AGREEMENT" means a writing or electronic transmission in such form as shall be specified by the Bank, executed by the Bank and the Member and setting forth the obligations of the Bank and Member, including without limitation, any Community Investment or Affordable Housing Program transaction, any service confirmation, service contract, reimbursement agreement, interest rate swap agreement, transaction, confirmation, applications, notices, advice or other instruments between the Bank and the Member. "OTHER CREDIT PRODUCTS" means any and all commitments or obligations under which the Bank agrees to make Advances to the Member or payments on behalf of or for the account of the Member, including without limitation, letters of credit, guarantees, demand or CMS account transactions, check processing, deposit overdrafts, item processing services, coin and currency services, safekeeping services (including security lending programs), Community Investment or Affordable Housing Program transactions, correspondent banking service debits or services charges, or other 4 arrangements intended to facilitate transactions between or among the Bank, the Member and third parties, or under which the Bank enters into a credit or financial accommodation agreement or other arrangement with the Member, including without limitation, repurchase agreements and interest rate exchange transactions (such as interest rate swap agreements, cap, collar and floor agreements) and such other products or services as may be offered by the Bank from time to time pursuant to its Credit Policies and irrespective of whether the Bank's obligation is contingent or conditional. "OUTSTANDING COMMITMENTS" means, at any point in time, the maximum aggregate principal amount of Advances or payments which the Bank may be obligated to make to the Member (or other parties) under Advance Applications or Other Credit Product Agreements then in effect. "SECURITIES COLLATERAL" means all securities or certificates evidencing a direct or indirect interest in a loan or a group of loans secured by mortgages, including without limitation, mortgage-backed securities, collateralized mortgage obligations and real estate mortgage investment conduits, including Federal Home Loan Mortgage Corporation mortgage participation certificates, Federal National Mortgage Association mortgage pass-through mortgage-backed certificates and Government National Mortgage Association modified pass-through mortgage-backed certificates, and all Mortgage Documents and items of Mortgage Collateral owned or otherwise acquired by the Member relating to the loans underlying such securities or certificates; consolidated obligations of the Federal Home Loan Bank System; obligations of or guaranteed by the United States; and obligations of or guaranteed by agencies or instrumentalities of the United States. 2. ADVANCES DOCUMENTATION. SECTION 2.01. APPLICATION FOR ADVANCES. The Member may apply for Advances or commitments by completing and submitting an Application for Advance or requesting Other Credit Product services. The preceding sentence notwithstanding, the Bank may in its discretion make an Advance, make a commitment, or deliver Other Credit Products to the Member pursuant to the Bank Act, FHFB Regulations, Credit Policies, and other Bank procedures in effect from time to time, and by either (I) the receipt of an oral or written application which is executed by the Bank without change, or (II) in the case of an application received, completed or modified by the Bank pursuant to a telephonic or other unsigned communication by the Member, by an Advice of Credit writing generated by the Bank. The Member shall be estopped from asserting any claim or defense with respect to the terms applicable to an Advance, commitment, or Other Credit Product entered into pursuant to a telephone application or other unsigned communication unless, within two (2) business days of receipt of the Bank's advice, the Member delivers to the Bank a written notice specifying the disputed term(s) or condition(s). The Bank 5 shall have the absolute right to rely upon the procedures established hereby or pursuant to the terms hereof and shall have no liability to the Member for any actions taken or omitted to be taken in connection with such procedures. The member agrees that it will hold the Bank and each of its employees, officers, directors, agents, and representatives harmless from any loss, liability or damage which the Member may suffer, including without limitation, lost profits and attorneys' fees and disbursements, arising out of or in connection with such procedures, absent fraud, willful misconduct, or recklessness on the part of the Bank. SECTION 2.02. BANK'S RECEIPT OF WRITTEN CONFIRMATION AND FINDINGS. Within five (5) business days of receipt, Member agrees to execute and return any Advice of Credit, confirmation, or Other Credit Product Agreement to the Bank. Upon request of the Bank, the Member shall sign and deliver to the Bank a promissory note or notes in such form as the Bank may reasonably require evidencing any Advance. Unless otherwise requested by the Member and approved by the Bank, each Advance shall be funded by crediting the Member's CMS account(s) with the Bank. SECTION 2.03. INTEREST COMPUTATIONS AND REPAYMENT OF ADVANCES AND OTHER CREDIT PRODUCTS. The Member agrees to repay each Advance or Other Credit Product in accordance with this Advances Agreement and the terms and conditions of the Advice of Credit or Other Credit Product Agreement. Each Advance, Advice of Credit, Application for Advance, Other Credit Product and Other Credit Product Agreement shall be subject to the terms of the Credit Policies and applicable laws, regulations, and limitations, all as in effect from time to time, including the Bank Act, the FHFB Regulations and the statements of policy and guidelines of the FHFB, which shall be deemed to be incorporated by reference into this Advances Agreement. Unless otherwise specified in the Bank's Credit Policies or as may be otherwise specified in writing by the Bank from time to time, interest shall be paid at the time of each payment of all of the principal of each Advance on the amount of principal so repaid, and shall be paid on the fifteenth (15th) day of each month (or the Bank's next business day if the Bank is not open for business on the fifteenth (15th)) on the daily outstanding principal amount of each Advance since the previous interest payment date (other than principal amounts which have been repaid in full since such interest payment date), in each case at the rate applicable to such Advance as stated in the related Advice of Credit. The Member shall pay to the Bank, immediately and without demand, interest on any past due amount owing on any Advance or Other Credit Product at the rate in effect and being charged by the Bank from time to time on defaults. The default rate on past due payments of principal and interest may, at the option of the Bank, be at a rate of five percent (5%) per annum in addition to the then highest current rate being charged by the Bank for advances, not to exceed the highest legal interest 6 rate allowed under Indiana law. The Member shall maintain in the Member's CMS account with the Bank an amount at least equal to the amounts then currently due and payable to the Bank on outstanding Advances and Other Credit Products. The Member hereby authorizes the Bank to debit the Member's CMS account with the Bank for all amounts due and payable on any Advance or Other Credit Product and for all other amounts due and payable hereunder. In the event that the amount in the Member's CMS account is, at any time, insufficient to pay such due and payable amounts, the Banks may without notice to the Member apply any Bank Deposits then in the possession of the Bank to the payment of such due and payable amounts. SECTION 2.04. PAYMENT OF PREPAYMENT CHARGES. Any prepayment fees or charges for which provision is made, whether under the Advice of Credit, Other Credit Product Agreement, or otherwise, shall be payable at the time of any voluntary or involuntary payment of the principal of such Advance or Other Credit Product prior to the originally scheduled maturity thereof, including without limitation, payments that are made as a part of a liquidation of the Member or that become due as a result of an acceleration pursuant to Section 4.01 hereof, and whether such payment is made by the Member, by a conservator, receiver, liquidator or trustee of or for the Member, or by any successor to or any assignee of the Member. The method of computation for the prepayment fee, unless expressly provided for in the applicable credit documentation, is set forth in the Credit Policies of the Bank and may be subject to change from time to time with advance notice to the Member. SECTION 2.05. RIGHT OF BANK TO MAKE PAYMENTS WITH RESPECT TO OUTSTANDING COMMITMENTS. In the event that there are one or more Outstanding Commitments at the time of an Event of Default under Section 4.01 hereof, the Bank may, at its option, make any payments due thereunder from time to time by crediting a special account with the Bank over which the Bank has sole dominion and control. Amounts credited to such special accounts shall be deemed to have satisfied the Bank's obligations under the Outstanding Commitments. When all such obligations have been satisfied, the Bank shall disburse the balance, if any, in such account first to the satisfaction of any amounts then due and owing by the Member to the Bank and then to the Member or its successors in interest. Payments made pursuant to this section shall be payable on demand and shall bear interest at the rate specified for each applicable Advance (or if such rate is not specified, at the rate in effect and being charged by the Bank from time to time on variable rate advances), and shall include applicable prepayment fees. The Bank shall not fund outstanding commitments previously made to the Member whose access to advances is restricted by its primary federal regulator. In addition, the Bank shall not fund outstanding commitments 7 previously made to the Member whose access to advances is subsequently restricted because it does not have positive tangible capital or if the Bank deems itself insecure for any reason as determined by the Bank in its sole discretion. The Bank shall not honor any outstanding commitments to the Member if the Member is a savings association that fails to maintain its status as a Qualified Thrift Lender as such rule is defined under the applicable federal law and federal regulations as may be in effect from time to time. 3. SECURITY AGREEMENT. SECTION 3.01. CREATION OF SECURITY INTEREST. As security for all indebtedness, including without limitation, all Advances and Other Credit Products, the Member hereby assigns, transfers, and pledges to the Bank and grants to the Bank a security interest in all Collateral, now or hereafter owned by the Member, and all proceeds thereof, provided, however, that Collateral that is encumbered or disposed of by the Member in conformity with the requirements of Section 3.03(a) hereof shall not be subject to the security interest created hereunder. Without limitation of the foregoing, all tangible and intangible property heretofore assigned, transferred or pledged by the Member to the Bank as Collateral for Advances and Other Credit Products prior to the date hereof is hereby assigned, transferred and pledged to Bank as Collateral hereunder. SECTION 3.02. MEMBER'S REPRESENTATIONS AND WARRANTIES CONCERNING COLLATERAL. The Member represents and warrants to the Bank, as of the date hereof and as of the date of all future Advances or Other Credit Products secured hereunder, the following: (a) The Member owns and has marketable title to the Collateral and has the right and authority to grant a security interest in the Collateral and to subject all of the Collateral to this Advances Agreement; (b) The information contained in any certification, status report, schedule, or other information given from time to time by the Member as to each item of Collateral is true, accurate and complete in all material respects; (c) The Member maintains Eligible Collateral which has a Market Value (or unpaid principal balance) that is at least equal to the then current Collateral Requirement and which meets the standards and requirements from time to time established by the Bank's Collateral Policy, the Bank Act and the FHFB Regulations, and all other applicable laws and regulations; 8 (d) The Member has not conveyed or otherwise created, and there does not otherwise exist, any participation interest or other direct, indirect, legal, or beneficial interest in any Collateral pledged under Sections 3.01, 3.03(a), and 3.04 on the part of any person or entity other than the Bank and the Member; (e) Except as may be approved in writing by the Bank, no account debtor or other obligor owing any obligation to the Member with respect to any item of Mortgage Collateral or Other Collateral has or will have any defenses, offsetting claims, or other rights affecting the right of the Member or the Bank to enforce such mortgage, mortgage note or promissory obligation, and no defaults (or conditions that, with the passage of time or the giving of notice or both, would constitute a default) exist under any such writings; and (f) No part of any real property or interest in real property that is the subject of Collateral contains or is subject to the effects of toxins or hazardous materials or other hazardous substances (including those defined in any applicable state or local law; or applicable federal law, including the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 USC 9601 et seq.; the Hazardous Materials Transportation Act, 49 USC 1801 et seq.; the Resource Conservation and Recovery Act, 42 USC 6901 et seq.; and in the regulations adopted and publications promulgated pursuant to said laws), the presence of which could subject the Bank to any liability under applicable state or Federal law or local ordinance either at any time that such property is pledged to the Bank or upon the enforcement by the Bank of its security interest therein. SECTION 3.03. COLLATERAL MAINTENANCE REQUIREMENT FOR BLANKET LIENS AND SPECIFIC LISTINGS. (a) The Member shall at all times maintain an amount of Eligible Collateral which has a Market Value (or unpaid principal balance, if so required by the Bank) that is at least equal to the then current Collateral Requirement. The Member shall not assign, pledge, transfer, create any security interest in, sell, or otherwise dispose of any Collateral if (I) such Collateral is held by or on behalf of the Bank pursuant to Section 3.04 hereof, (II) such Collateral has been provided in a specific listing of Eligible Collateral pursuant to Section 3.03(e), (III) the Bank has otherwise perfected its security interest in such Collateral, or (IV) at the time of or immediately after such action, Member is not or would not be in compliance with the collateral maintenance requirements of the first sentence of this Section 3.03(a) or is or would be otherwise in default under this Advances Agreement. So long as Member is not in default under this Agreement, Member shall be at liberty to sell, use, commingle, and dispose of the Collateral or the proceeds of such Collateral without being required to account for the proceeds or replace the Collateral, subject only to its obligation to maintain the Collateral as herein provided. 9 (b) Collateral shall be held by the Member in trust for the benefit of the Bank and subject to the Bank's direction and control, will not be commingled with assets of the Member which are not Collateral, and will be physically safeguarded by the Member in accordance with usual, customary and prudent commercial practices but in any event with not less than the same degree of care which the Member uses in physically safeguarding its other property and assets of like kind and nature. Without limitation of the foregoing, Member shall take all action necessary or desirable to protect and preserve the Collateral and the Bank's interest therein, including without limitation, the maintaining of insurance on property securing mortgages constituting Collateral (such policies and certificates or guaranty relating to such mortgages are herein called "insurance"), the collection of payments under all mortgages and under all insurance, and otherwise assuring that the loans comprising the Mortgage Collateral are serviced in accordance with the standards of a reasonable and prudent mortgagee. The Member (or its agent), acting on behalf of the Bank, shall collect all payments when due on all Collateral. If the Bank requires under Section 3.12, the Member shall hold such collections separate from its other monies and apply them to the reduction of Indebtedness as it becomes due; otherwise, the Member shall be entitled to use and dispose of all such collections in the ordinary course of its business and in compliance with all laws, rules, and regulations. (c) If any Collateral that was Eligible Collateral ceases to be Eligible Collateral, the Member shall promptly notify the Bank in writing of that fact and, if so requested by the Bank of the reason that the Collateral has ceased to be Eligible Collateral. The Member shall promptly specify, or deliver, as the case may be, other Eligible Collateral having at least the same Market Value as the Collateral so requested to be withdrawn. (d) The Bank may review the form and sufficiency of all documents pertaining to the Collateral. Such documents must be satisfactory to the Bank and, if not, such Collateral may not be acceptable as Eligible Collateral or may have a Market Value applied thereto that is less than the Market Value otherwise applicable under the Bank's Collateral Policy, or as the Bank may specify. The Bank may require that the Member make any or all documents pertaining to the Collateral available to the Bank for its inspection and approval. (e) If so requested by the Bank, Member agrees to (I) provide a specific listing of the Eligible Collateral to Bank, (II) physically segregate Mortgage Documents and Other Collateral which are a part of such specified Collateral from all other property of the Member in a manner satisfactory to the Bank, and/or (III) hold each Mortgage Document which is a part of Mortgage Collateral in a separate file folder with each file folder clearly labeled with the loan identification number and the name of the borrower(s). Immediately upon the written request of the Bank, the Member further agrees to clearly and legibly mark or stamp each Mortgage Document 10 and each file folder containing Mortgage Documents with the following statement (or a substantially similar statement which has been approved in writing by the Bank): "The Mortgage/Deed Of Trust And Note Relating To This Loan Have Been Assigned To And Represent Collateral Of The Federal Home Loan Bank Of Indianapolis And Its Successors And Assigns" and such other statement as may be required by the Bank from time to time. SECTION 3.04. DELIVERY OF COLLATERAL; PHYSICAL POSSESSION REQUIREMENTS. (a) At any time upon the Bank's oral or written request, or at any time that the Member becomes subject to any mandatory collateral delivery requirements pursuant to the Collateral Policy or that may be otherwise established in writing by the Bank, the Member shall promptly on a schedule acceptable to the Bank deliver to the Bank, or to a custodian designated by the Bank, all Collateral including such Eligible Collateral as may be necessary so that the Market Value of Eligible Collateral held by the Bank, or such custodian, meets or exceeds the Collateral Requirement at all times, and take any and all other action as may be specified by the Bank to further evidence the perfection of the Bank's security interest in the Collateral and to otherwise effectuate the transactions contemplated hereby, including the signature and filing of financing statements. Collateral delivered to the Bank shall be endorsed or assigned in recordable form by the Member to the Bank as directed by the Bank. With respect to Mortgage Collateral that is to be delivered hereunder, the Member shall deliver the Mortgage Documents with necessary endorsements and assignments relating thereto unless otherwise directed by the Bank. Concurrently with the initial delivery of Collateral and at such other times as provided in the Collateral Policy or as the Bank may otherwise request, the Member will deliver to the Bank a status report and accompanying schedules, all in form and substance satisfactory to the Bank and dated as of the then most recent valuation date, describing the Collateral held by the Bank or its custodian. (b) The Member authorizes the Bank to execute and file one or more financing statements, this Agreement, and any other documents, instruments, or statements of any kind on its behalf and without the signature of the Member in those public offices deemed necessary by the Bank in its sole discretion to perfect and continue the perfection of its security interest in the Collateral and to protect, defend and further assure the grant, validity and perfection thereof. In addition, the Member will, at its expense, deliver or cause to be delivered such other documents as the Bank may request to secure the indebtedness referred to herein or to further perfect, protect, and defend the security interest granted herein. (c) With respect to uncertificated securities or securities entitlements pledged to the Bank as Securities Collateral or Other Collateral hereunder, the delivery requirements and the agreement to give control contained in this Advances Agreement shall be satisfied by the transfer of such 11 securities to the Bank, such transfer to be effected in such manner and to be evidenced by such documents as shall be specified by the Bank. (d) The Member agrees to pay to the Bank such reasonable fees and charges as may be assessed by the Bank to cover the Bank's overhead and other costs relating to the receipt, holding, redelivery and reassignment of Collateral and to reimburse the Bank upon request for all recording fees and advances incurred or made by the Bank in connection therewith (including the reasonable compensation and the expenses and disbursements of any custodian that may be appointed by the Bank hereunder, and the agents and legal counsel of the Bank and of such custodian). (e) The Member shall, upon request of the Bank, immediately take such other actions as the Bank shall deem necessary or appropriate to perfect the Bank's security interest in the Collateral or otherwise to obtain, preserve, protect, enforce or collect the Collateral. SECTION 3.05. WITHDRAWAL OR REASSIGNMENT OF COLLATERAL. Upon receipt by the Bank of writings in form and substance satisfactory to the Bank constituting (I) a request from the Member for the withdrawal or reassignment of Collateral which has been delivered pursuant to Section 3.04 hereof, or as to which the Bank has otherwise perfected its security interest, and (II) a detailed listing of the Collateral to be withdrawn or reassigned, provided that the Bank's valuation of such delivered Collateral confirms that the Member's Collateral Requirement will be satisfied after such withdrawal or reassignment, then the Bank shall redeliver or reassign to the Member the Collateral specified in Member's request. Notwithstanding anything to the contrary herein contained, while an Event of Default hereunder shall have occurred and be continuing, or at any time that the Bank in good faith deems itself insecure, the Member may not obtain any such withdrawal or reassignment. Further, Member agrees for specific listings provided under Section 3.03(e) to follow the withdrawal procedures provided for under this Section 3.05 or as otherwise specified by the Bank. SECTION 3.06. ADDITIONAL COLLATERAL. The Bank may at any time require the Member to maintain and deliver to the Bank additional Collateral over that amount of Eligible Collateral required to meet the Member's Collateral Requirement or substitutions of Collateral. The Member expressly agrees to maintain and deliver such additional Collateral or substitutions of Collateral as the Bank shall require. SECTION 3.07. REPORTS; COLLATERAL AUDIT; ACCESS. (a) In accordance with the Collateral Policy and at such other times as the Bank may request, the Member shall furnish to the Bank, in a format 12 satisfactory to the Bank, a report so that the Bank may verify that the Member maintains Eligible Collateral with a Market Value (or unpaid principal balance, if so required by the Bank) sufficient to meet the Collateral Requirement. If the Market Value or unpaid principal balance of Eligible Collateral owned by the Member, free and clear of any liens or encumbrances, shall at any time fall below the Collateral Requirement, the Member shall immediately notify the Bank. (b) The Member shall provide annually an audit report prepared by the Member's external independent auditor in accordance with generally accepted auditing standards (and in a format acceptable to the Bank) certifying that the Member owns, free and clear of any liens or encumbrances (except for Bank's), Eligible Collateral with a Market Value (or unpaid principal balance, if so required by the Bank) at least equal to the Collateral Requirement, and deliver such report to the Bank within ninety (90) days of each fiscal year-end of the Member, including an explanation for any exceptions or qualifications in the report or any failure to obtain such report. The Bank reserves the right to waive the audit report requirement if Member's Collateral is in the physical possession of the Bank or in the Bank's sole discretion based on particular circumstances. (c) The Member agrees that the Bank shall have access at all reasonable times to the Collateral in the Member's possession or control and to the Member's books and records of account relating to such Collateral. The Member shall permit the Bank to examine, inspect, audit, and take copies or make extracts from its books and records and to discuss its affairs with its independent auditor (or other representatives) as often as the Bank may reasonably request. (d) The Member agrees that examination reports prepared by local, state or federal authorities may be furnished by such authorities to the Bank upon its request, and by this Agreement, the Member authorizes and directs such authorities to deliver such reports to the Bank and waives any objections or restrictions thereto which it may lawfully waive. Member agrees that upon request of the Bank, it will take any and all steps necessary to assist the Bank in obtaining such reports from such authorities. The Bank agrees that to the extent such reports or the information contained therein are confidential, the Bank will use its same degree of care in keeping such reports confidential as it applies to the Bank's own confidential information and will not knowingly disclose any confidential information contained therein unless required to do so by law, rules, regulations, or judicial or regulatory process applicable to the Bank. (e) If requested by the Bank, the Member shall furnish to the Bank a written report covering such matters regarding the Collateral as the Bank may require, including listing of mortgages, securities, and unpaid principal balances thereof, and certifications concerning the status of payments on mortgages and of taxes and insurance on property securing mortgages. 13 (f) The Member agrees to promptly report to the Bank any event which reduces the principal balance of any mortgage or security by ten percent (10%) or more, whether by prepayment, foreclosure sale, property-casualty insurance or guaranty payment or otherwise. (g) All Collateral and the satisfaction by the Member of the Collateral Requirement shall be subject to audit and verification by or on behalf of the Bank. Such audits and verifications may occur without notice during the Member's normal business hours or upon reasonable notice at such other times as the Bank may reasonably request. The Member shall provide to the representatives or agents of the Bank for purposes of such audits and verifications, access to all books and records related to transactions whether made or contemplated under this Agreement. Further, Member shall provide adequate working facilities, at Member's expense for a Bank to conduct such audits or verifications. The Member agrees to pay to the Bank such reasonable fees and charges as may be assessed by the Bank to cover overhead and other costs relating to such audit and verification. The Member further agrees that it will prepare and deliver promptly upon request of the Bank inquiries to Member's outside auditors, outside counsel, customers (including depositors or borrowers), and any other person that the bank may reasonably request, to provide such information to the Bank as it may reasonably request in connection with such audit and verification. SECTION 3.08. ADDITIONAL DOCUMENTATION AND STATUS REPORTS. The Member shall at its expense make, execute, record and deliver to the Bank such financing statements, assignments, listings, powers, notices and other documents with respect to the Collateral and the Bank's security interest therein as directed by the Bank and in form and substance satisfactory to the Bank. Upon request, Member agrees to give Bank verbal or written reports concerning the financial condition or status of any regulatory action maintained against the Member, its holding company, or any affiliated entity or affiliated person. SECTION 3.09. BANK'S RESPONSIBILITIES AS TO COLLATERAL. The Bank's duty as to the Collateral shall be solely to use reasonable care in the custody and preservation of the Collateral in its possession, which shall not include any steps necessary to preserve rights against prior parties nor the duty to send notices, perform services, or take any action in connection with the management of the Collateral. The Bank shall not have any responsibility or liability for the form, sufficiency, correctness, genuineness or legal effect of any instrument or document constituting a part of the Collateral, or any signature thereon or the description or misdescription, or value of property represented, or purported to be represented, by any such document or instrument. The 14 Member agrees that any and all Collateral may be removed by the Bank from the state or location where situated, and may there be dealt with by the Bank as provided in this Advances Agreement. SECTION 3.10. BANK'S RIGHTS AS TO COLLATERAL; POWER OF ATTORNEY. At any time or times, at the expense of the Member, the Bank may, at its discretion, before or after the occurrence of an Event of Default as defined in Section 4.01 hereof, in its own name or in the name of its nominee or of the Member, do any or all things and take any and all actions that are pertinent to the protection of the Bank's interests hereunder and which are lawful under the laws of the State of Indiana, or the laws of any jurisdiction under which the Bank may be exercising its rights hereunder, including the following: (a) Terminate any consent given hereunder; (b) With advance notice to Member (or its legal successor), notify obligors on any Collateral to make payments thereon directly to the Bank; (c) Endorse any Collateral in the Member's name; (d) Enter into any extension, compromise, settlement, or other agreement relating to or affecting any Collateral; (e) Take any action the Member is required to take or which is otherwise necessary to: (I) sign and record a financing statement or otherwise perfect a security interest in any or all of the collateral; or (II) obtain, preserve, protect, enforce or collect the Collateral; (f) Take control of any funds or other proceeds generated by the Collateral and use the same to reduce indebtedness as it becomes due; and (g) Cause the Collateral to be transferred to its name or the name of its nominee. The Member hereby appoints the Bank as its true and lawful attorney, with full power of substitution, for and on behalf of the Member and in its name, place and stead, to prepare, execute and record endorsements and assignments to the Bank of all or any item of Collateral, giving or granting to the Bank, as such attorney, full power and authority to do or perform every lawful act necessary or proper in connection therewith as fully as the Member might or could do. The Member hereby ratifies and confirms all that the Bank shall lawfully do or cause to be done by virtue of this special power of attorney. This special power of attorney is granted for a period commencing on the date hereof and continuing until the discharge of all indebtedness and all obligations of the Member hereunder regardless of any default by the Member, is coupled with an interest and is irrevocable for the period granted. 15 SECTION 3.11. SUBORDINATION OF OTHER LOANS TO MORTGAGE COLLATERAL. The Member hereby agrees that all mortgage notes which are part of the Mortgage Collateral and any notes secured by personal property ("personalty notes") which may become part of the Other Collateral shall have priority in right and remedy over any claims, however evidenced, for other loans, whether made before or after the date of such mortgage or personalty notes which are secured by the mortgages or security agreements securing such mortgage or personalty notes but are not part of the Collateral, and shall be satisfied out of the property covered by such mortgages or security agreements before recourse to such property may be obtained for the repayment of such other loans. To this end, the Member hereby subordinates the lien of such mortgages and security agreements with respect to such other loans to the lien of such mortgages and security agreements with respect to such mortgage and personalty notes. The Member further agrees to retain possession of any promissory notes evidencing such other loans and not to pledge, assign or transfer the same, except that the same may be pledged to the Bank as part of the Collateral. The Member, for itself and for any other person or entity claiming by or through the Member, waives any and all rights which it or such other person or entity may have to require the Bank to marshal the assets of the Member or to otherwise prioritize or sequence any class or category of Collateral with respect to which the Bank may pursue its rights and remedies. SECTION 3.12. PROCEEDS OF COLLATERAL. The Member shall collect all payments when due on all Collateral. If the Bank so requires, the Member, as the Bank's agent, shall hold such collections separate from its other monies in one or more designated cash collateral accounts maintained at the Bank and apply them to the reduction of indebtedness as it becomes due; otherwise, the Member shall be entitled to use and dispose of all such collections in the ordinary course of business and in compliance with all laws, rules, and regulations. 4. DEFAULT; REMEDIES. SECTION 4.01. EVENTS OF DEFAULT; ACCELERATION. In the event of the occurrence of any of the following events or conditions of default ("Event of Default"), the Bank may at its option, by a notice to the Member, declare all indebtedness and accrued interest thereon, including any prepayment fees (including without limitation, those fees charged pursuant to Section 2.03 and 2.04), or charges which are payable in connection with the payment prior to the originally scheduled maturity of any indebtedness, to be immediately due and payable without presentment, demand, protest or any further notice: 16 (a) Failure of the Member to pay when due any interest on, or principal of, any Advance or any amount payable in connection with any Other Credit Product; or (b) Failure of the Member to timely perform any promise or obligation or to satisfy any condition or liability contained herein, in an Application for Advance, Advice of Credit, or in any Other Credit Product Agreement to which the Member and the Bank are parties; or (c) Any representation, statement, or warranty made or furnished in any manner to the Bank by or on behalf of the Member in connection with any Advance or Other Credit Product or any certification of the Market Value (or unpaid principal balance, if so required by the Bank) of Eligible Collateral shall have been false or misleading in any material respect when made or furnished; or (d) Failure of the Member to maintain Eligible Collateral which has a Market Value (or unpaid principal balance, if so required by the Bank) that is at least equal to the then current Collateral Requirement under the applicable blanket lien/specific listing requirements of Section 3.03 or physical possession requirements of Section 3.04, free of any encumbrances or claims as required herein; or (e) The issuance of any tax levy, seizure, attachment, garnishment, levy of execution, or other process with respect to the Collateral; or (f) Any failure to pay or suspension of payment by the Member to any creditor of sums due or the occurrence of any event which results in another creditor having the right to accelerate the maturity of any indebtedness of the Member under any security agreement, indenture, loan agreement, or comparable undertaking; or (g) Application for or appointment of a conservator, receiver, or trustee for the Member or of any affiliate or subsidiary of the Member or the Member's property, entry of a judgment or decree adjudicating the Member or any affiliate or subsidiary of Member insolvent or bankrupt, or an assignment by the Member or any affiliate or subsidiary of the Member for the benefit of creditors; or (h) Sale by the Member of all or a material part of the Member's assets or the taking of any other action by the Member to liquidate or dissolve; or (i) Termination of the Member's membership in the Bank, or the Member's ceasing to be a type of financial institution that is eligible under the Bank Act to borrow or apply for membership in the Bank; or (j) Merger, consolidation or other combination of the Member with an entity which is not a member of the Bank if the nonmember entity is the surviving entity; or 17 (k) With respect to Advances made pursuant to Section 11(g)(4) of the Bank Act (12 USC 1431(g)), if the creditor liabilities of the Member, excepting liabilities to the Bank, are increased in any manner to an amount exceeding five percent (5%) of the Member's net assets; or (l) Member threatens or initiates legal action to challenge an otherwise legally enforceable provision under this Advances Agreement in an attempt to make the Bank insecure under this Advances Agreement; or (m) The Bank in good faith determines that a material adverse change has occurred in the financial condition of the Member (including its holding company or other affiliates), or the Member fails to comply with the Bank's Credit Policies or other applicable policies including the requirement of creditworthiness as determined by the Bank at its sole discretion. SECTION 4.02. REMEDIES; SET OFF; SPECIFIC PERFORMANCE. (a) Upon the occurrence of any Event of Default, the Bank shall have all of the rights and remedies provided by applicable law, which shall include, but not be limited to, all of the remedies of a secured party under the Uniform Commercial Code as in effect in the State of Indiana, Section 10 of the Bank Act (12 USC 1430), and other applicable federal law. In addition, the Bank may take immediate possession of any of the Collateral or any part thereof wherever the same may be found without judicial process. The Bank may require the Member to assemble the Collateral and make it available to the Bank at a place designated by the Bank which is reasonably convenient to both parties. The Bank may sell, assign and deliver the Collateral or any part thereof at public or private sale for such price as the Bank deems appropriate without any liability for any loss due to decrease in the market value of the Collateral during the period held. The Bank shall have the right to purchase all or part of the Collateral at such sale. If the Collateral includes insurance or securities which will be redeemed by the issuer upon surrender, or any accounts or deposits in the possession of the Bank, the Bank may realize upon such Collateral without notice to the Member. If any notification of intended disposition of any of the Collateral is required by applicable law, such notification shall be deemed reasonable and properly given if mailed, postage prepaid, at least five (5) days before any such disposition to the address of the Member appearing on the records of the Bank. The proceeds of any sale shall be applied in the order that the Bank, in its sole discretion, may choose. The Member agrees to pay all the costs and expenses of the Bank in the collection of the indebtedness and enforcement of the Bank's rights and remedies in case of default, including, without limitation, reasonable attorneys' fees. The Bank shall, to the extent required by law, apply any surplus after (I) payment of the indebtedness, (II) provision for repayment to the Bank of any amounts to be paid or advanced under Outstanding Commitments, and (III) all costs of collection and enforcement, to third parties claiming a 18 secondary or other security interest in the Collateral, with any remaining surplus paid to the Member. The Member shall be liable to the Bank for any deficiency remaining. (b) If the indebtedness, accrued interest thereon and other amounts or charges owing by the Member shall have become due and payable (by acceleration or otherwise), the Bank shall have the right, at any time or from time to time to the fullest extent permitted by law, in addition to all other rights and remedies available to it, without prior notice to the Member, to set off against and to appropriate and apply to such due and payable amounts any debt owing to, and any other funds held in any manner for the account of, the Member by the Bank, including without limitation, all Bank Deposits now or hereafter maintained by the Member with the Bank. Such right shall exist whether or not such debt owing to, or funds held for the account of, the Member is matured or unmatured, and regardless of the existence or adequacy of any collateral, guaranty or any other security, right or remedy available to the Bank. The Member hereby consents to and confirms the foregoing arrangements and confirms the Bank's rights of banker's lien and set off. Nothing in this Advances Agreement shall be deemed a waiver or prohibition of or restriction on the Bank's rights of banker's lien or set off. (c) The Member acknowledges that the breach by the Member of the provisions of this Agreement and in particular Section 3.04 hereof would cause irreparable injury to the Bank and that remedies at law for any such breach will be inadequate, and consents and agrees that the Bank shall be entitled, without the necessity of proof of actual damage, to specific performance of the terms of this Agreement and to injunctive relief in any proceedings which may be brought to enforce the provisions of this Agreement. The Member waives the right to assert the defense that such breach or violation can be compensated adequately in damages in an action of law. SECTION 4.03. PAYMENT OF PREPAYMENT CHARGES Any prepayment fees or charges applicable to an advance shall be payable at the time of any voluntary or involuntary payment of all or part of the principal of such Advance prior to the originally scheduled maturity thereof, including without limitation payments that are made as a part of a liquidation of the Borrower or that become due by operation of law or as a result of an acceleration pursuant to Section 4.01 hereof, whether such payment is made by the Borrower, by a conservator, receiver, liquidator or trustee of or for the Borrower, or by any successor to or any assignee of the Borrower. 19 5. MISCELLANEOUS. SECTION 5.01. GENERAL REPRESENTATIONS, QTL REPORTING, WARRANTIES AND INDEMNIFICATIONS BY THE MEMBER. The Member hereby represents and warrants that, as of the date hereof and the date of each Advance or Other Credit Product hereunder: (a) The Member, if a savings association, will truly and accurately represent and warrant its status as a Qualified Thrift Lender ("QTL") as defined by applicable federal law on any Application for Advance or Other Credit Product Agreement between Member and the Bank. If the Member is a savings association and it fails the QTL test as set forth by the Office of Thrift Supervision Regulations now in effect or as amended, and becomes ineligible under applicable federal law for Bank advances, the savings association Member shall immediately provide the Bank with written notification of its ineligibility for Bank advances. If a non-QTL member, the Member warrants that Advances made under Section 10(a) of the Bank Act (12 USC 1430 (a)), shall be for the purposes of housing finance. (b) The Member will truly and accurately represent and warrant the purpose of any Advance or Other Credit Product on any Application for Advance or Other Credit Product Agreement between Member and the Bank. (c) The Member will promptly furnish any financial, collateral or other information requested by the Bank in connection with any Advance or Other Credit Product. (d) The Member is not, and neither the execution of nor the performance of any transactions or obligations of the Member under any Advice of Credit, Application for Advance, Other Credit Product Agreement or this Advances Agreement shall, with the passage of time, the giving of notice or otherwise, cause the Member to be: (i) in violation of its charter or articles of incorporation, bylaws, the Bank Act, the FHFB Regulations, any other law or administrative regulation, agreement, or any court decree; or (ii) in default or in breach of any indenture, contract, or other instrument or agreement to which the Member is a party or by which it or any of its property is bound or any default under, breach of, or failure to comply with any judgment, order, decree, regulatory directive, or other process of any court or agency having jurisdiction of or which is binding upon the Member. (e) The Member is not in default under any Advice of Credit or Other Credit Product Agreement with the Bank. (f) The Member has full power and authority and has received all corporate and governmental authorizations and approvals (including without limitation, those required under the Bank Act and the FHFB Regulations) as 20 may be required to enter into and perform its obligations under any Advice of Credit, Application for Advance, Other Credit Product Agreement or this Advances Agreement, and to obtain Advances and Other Credit Products. (g) The information given by the Member in any writing provided, electronic transmission or in any oral statement made, in connection with any Application for Advance or Other Credit Product Agreement, is at all relevant times true, accurate and complete in all material respects. (h) The Member will at all times maintain and accurately reflect the terms of this Advances Agreement (including the Bank's security interest in the Collateral) and all Advances and Other Credit Products hereunder on its books and records, including evidence of necessary authorizations to effectuate transactions under this Agreement. (i) The Member and its successors and assigns (collectively referred to in this Section 5.01(i) as "Member") shall indemnify and hold the Bank harmless from and against any and all costs, claims, expenses, damages and liabilities with respect to any action which may be instituted by any person or entity against the Bank as a result of any transaction, including without limitation, Bank credit extensions, services, and Other Credit Products contemplated by this Advances Agreement or action or nonaction arising from this Advances Agreement, except where the same results solely from the recklessness or willful misconduct of the Bank. In addition, the Member shall indemnify and hold the Bank harmless from and against any and all costs, claims, expenses, damages, and liabilities resulting in any way from the presence or effects of any toxic or hazardous substances or materials in, on, or under any real property or interest in real property that is subject to or included in the Collateral. The Member also agrees to reimburse the Bank for such reasonable fees and charges as may be assessed by the Bank to cover overhead and other cost, including reasonable attorneys' fees, incurred either under this indemnification provision or in the administration of this Advances Agreement, any Advice of Credit or Other Credit Product Agreement. SECTION 5.02. ASSIGNMENT. The Bank may assign or negotiate to any other Federal Home Loan Bank or to any other person or entity, with or without recourse, any Indebtedness of the Member or participations therein, and the Bank may assign or transfer all or any part of the Bank's right, title, and interest in and to this Advances Agreement and may assign and deliver the whole or any part of the Collateral to the transferee, which shall succeed to all the powers and rights and duties of the Bank in respect thereof, and the Bank shall thereafter be forever relieved and fully discharged from any liability or responsibility with respect to the transferred Collateral. The Member may not assign or transfer any of its rights or obligations hereunder (by operation of law, the appointment of a receivership, or otherwise) without the express prior written consent of the Bank. 21 SECTION 5.03. DISCRETION OF BANK TO GRANT OR DENY ADVANCES AND OTHER CREDIT PRODUCTS. Nothing contained herein or in any documents or oral representations describing or setting forth the Bank's credit programs or Credit Policies shall be construed as an agreement or commitment on the part of the Bank to grant Advances or extend Other Credit Products hereunder, the right and power of the Bank in its discretion to either grant or deny any Advance or Other Credit Product requested hereunder being expressly reserved. SECTION 5.04. AMENDMENT; WAIVERS. No modification, amendment or waiver of any provision of this Advances Agreement or consent to any departure therefrom shall be effective unless executed by the party against whom such change is asserted and shall be effective only in the specific instance and for the purpose for which given. No notice to or demand on the Member in any case shall entitle the Member to any other or further notice or demand in the same, or similar or other circumstances. Any forbearance, failure or delay by the Bank in exercising any right, power or remedy hereunder shall not be deemed to be a waiver thereof, and any single or partial exercise by the Bank of any right, power or remedy hereunder shall not preclude the further exercise thereof. Every right, power and remedy of the Bank shall continue in full force and effect until specifically waived by the Bank in writing. SECTION 5.05. JURISDICTION; LEGAL FEES. In any action or proceeding brought by the Bank or the Member in order to enforce any right or remedy under this Advances Agreement, the parties hereby consent to, and agree that they will submit to, the jurisdiction of the United States District Court for the Southern District of Indiana or, if such action or proceeding may not be brought in federal court, the jurisdiction of the courts of the State of Indiana located in Marion County. The Member agrees that, if any action or proceeding is brought by the Member seeking to obtain any legal or equitable relief against the Bank under or arising out of this Advances Agreement or any transaction contemplated hereby, and such relief is not granted by the final decision, after any and all appeals, of a court of competent jurisdiction, the Member shall promptly pay upon demand all attorneys' fees and other costs incurred by the Bank in connection therewith. Further, the Member agrees that if any action or proceeding is brought by the Bank in connection with the successful enforcement of any of the Bank's rights or remedies hereunder or otherwise or if the services of legal counsel are required in connection with the administration of the credit facilities contemplated hereby, the Member shall pay promptly upon demand all attorneys' fees and other costs incurred by the Bank in connection therewith. 22 SECTION 5.06. WAIVER OF JURY TRIAL. To the extent allowed by law, the Member hereby waives the right to a jury trial in any action or proceeding brought by or against the Member regarding this Agreement, the Collateral, Other Credit Products, or the credit facilities contemplated hereby. SECTION 5.07. NOTICES. Except as provided in the last sentence of this Section 5.07, any written notice, advice, request, consent or direction given, made or withdrawn pursuant to this Agreement shall be either in writing or transmitted electronically and reproduced mechanically by the addressee and shall be given by first class mail, postage prepaid, or by telecopy or other facsimile transmission, or by private courier or delivery service. Except for notices made under Section 4.02, all non-oral notices shall be deemed given when actually received at the principal office of the Bank or the Member, as appropriate. All notices shall be designated to the attention of an office or section of the Bank or of the Member if the Bank or the Member has made a request for the notice to be so addressed. Any notice by the Bank to the Member pursuant to Sections 2.01, 3.03, 3.04 or 3.05 hereof may be oral and shall be deemed to have been duly given to and received by the Member at the time of the oral communication. SECTION 5.08. SIGNATURES OF MEMBER; ACCEPTANCE BY BANK. (a) For purposes of this Advances Agreement, documents shall be deemed signed by the Member when a signature of an authorized signatory or an authorized facsimile thereof appears on the document. The Bank may rely on any signature or facsimile thereof which reasonably appears to the Bank to be the signature of an authorized person, including signatures appearing on documents transmitted electronically to and reproduced mechanically at the Bank. The Secretary, the Cashier, the Assistant Secretaries, or the Assistant Cashiers of the Member shall from time to time certify to the Bank on forms provided by the Bank the names and titles of the persons authorized to apply on behalf of the Member to the Bank for Advances and Other Credit Products. Such certifications are incorporated herein and made a part of this Advances Agreement and shall continue in effect until expressly revoked by the Member notwithstanding that subsequent certifications may authorize additional persons to act for and on behalf of Member. (b) This Agreement shall only be binding upon the Bank when accepted and executed by the Bank by two duly authorized officers and shall be deemed accepted by and delivered to the Bank at its home office in Indianapolis, Indiana. 23 SECTION 5.09. APPLICABLE LAW; SEVERABILITY. In addition to the terms and conditions specifically set forth herein and in any Advice of Credit or Other Credit Product Agreement between the Bank and the Member, this Advances Agreement and all Advances and Other Credit Products extended hereunder shall be governed by the statutory and common law of the United States and, to the extent federal law incorporates or defers to state law, the laws (exclusive of the choice of law provisions) of the State of Indiana, including the Uniform Commercial Code as in effect in the State of Indiana. In the event that any portion of this Advances Agreement conflicts with applicable law or the Credit Policies, such conflict shall not affect other provisions of this Advances Agreement which can be given effect without the conflicting provisions, and to this end and the provisions of this Advances Agreement are declared to be severable. SECTION 5.10. INTEREST RATE LIMITATIONS. Notwithstanding anything contained herein to the contrary, the obligation of the Member to make payments of interest shall be subject to the limitation that payments of interest shall not be required to be made to the Bank to the extent that its receipt thereof would not be permissible under the law or laws applicable to the Bank limiting rates of interest which may be charged or collected by the Bank. Any such payments of interest which are not made as a result of the limitation referred to in the preceding sentence shall be made by the Member to the Bank on the earliest interest payment date or dates on which the receipt thereof would be permissible under the laws applicable to the Bank limiting rates of interest which may be charged or collected by the Bank. SECTION 5.11. SUCCESSORS AND ASSIGNS. This Advances Agreement shall be binding upon and inure to the benefit of the successors and assigns of the Member and the Bank, providing that the Member may not assign any of its rights or obligations hereunder (by operation of law, the appointment of a receivership, or other) without the prior written consent of the Bank. The Bank may sell, transfer or assign or grant participation in Advances or Other Credit Products. SECTION 5.12. REMEDIES CUMULATIVE. All rights and remedies provided herein or otherwise at law or in equity shall be cumulative, and are in addition to, and not exclusive of, any rights or remedies provided by law, including without limitation, the rights and remedies of a secured party under federal law and the Uniform Commercial Code as it is in effect from time to time in Indiana, including the right of the Bank to retain the Collateral in satisfaction of the Indebtedness. The exercise of one or more thereof shall not preclude, or 24 be deemed an election of remedies against, any other remedy, right or privilege contained herein or provided to the Bank by law, rule, or regulation or at equity. SECTION 5.13. RECORDS OF BANK PRESUMED ACCURATE. The books and records of the Bank with respect to the Indebtedness, the Member's accounts or any other obligations of the Member hereunder or otherwise owing to the Bank shall be presumed to be accurate, complete, and binding upon the Member, absent fraud or willful misconduct on the part of the Bank with respect to such account or obligation. SECTION 5.14. ENTIRE AGREEMENT. This Advances Agreement and the other documents referenced herein relating to Advances and Other Credit Products embody the entire Agreement and understanding between the parties hereto relating to the subject matter hereof. This Advances Agreement amends, restates and supersedes all prior agreements between such parties which relate to such subject matter, and all Advances and Other Credit Products made by the Bank to the Member prior to the execution of this Advances Agreement shall be governed by the terms of this Advances Agreement and not by the terms of the prior agreement. The Agreement and the other documents contemplated hereby or delivered in connection herewith shall be construed consistently with each other in order to best effectuate the intent of the Member and the Bank in entering into the relationships contemplated by all these agreements. The agreements referenced herein constitute the sole and entire agreement of the parties and no statement or promise has been made with respect to the subject matter of these agreements other than as expressed herein. In the event of a conflict between the terms of this Agreement and any of the other such documents, the provisions of this Agreement shall control, except with respect to any note, whose respective terms shall control. 25 IN WITNESS WHEREOF, the Member and the Bank have caused this Advances Agreement to be signed in their names by their duly authorized officers as of the date first above mentioned. ChoiceOne Bank FEDERAL HOME LOAN BANK OF INDIANAPOLIS (Full Name of Member) By: /S/ JAE M. MAXFIELD By: /S/ BRUCE MOORE Typed Name: JAE M. MAXFIELD Typed Name: BRUCE MOORE Its: PRESIDENT & CEO Its: VICE PRESIDENT (Title of Signer) (Title of Signer) By: /S/ THOMAS L. LAMPEN By: /S/ TIM ZAPF Typed Name: Thomas L. Lampen Typed Name: Tim Zapf Its: VICE PRESIDENT & CFO Its: VICE PRESIDENT (Title of Signer) (Title of Signer) 26 FEDERAL HOME LOAN BANK OF INDIANAPOLIS MEMBER ACKNOWLEDGMENT AND NOTARIZATION State of MICHIGAN ) ) ss. County of KENT ) On this 24th day of March, 1997, before me personally came Jae M. Maxfield and Thomas L. Lampen, to me known, who, being by me duly sworn, did depose and state that they are the President & CEO and Vice President & CFO of said Member; and that they signed their names on the Agreement by order of the Board of Directors or other authorized governing body of said Member; and that said Jae M. Maxfield and Thomas L. Lampen are duly authorized and acknowledge the execution of said instrument to be the voluntary act and deed of said Member. /S/ LINDA S. PECK (SEAL) Notary Public Signature LINDA S. PECK Printed Name My Commission Expires: 3-27-98 My County of Residence: KENT COUNTY, MI 27 EX-13 3 EXHIBIT 13 [CHOICEONE LOGO] CHOICEONE FINANCIAL SERVICES, INC. 1997 ANNUAL REPORT TO SHAREHOLDERS CHOICEONE FINANCIAL SERVICES, INC. 1997 Annual Report to Shareholders CONTENTS PAGE To Our Shareholders . . . . . . . . . . . . . . . . . . . . . . . . A-1 ChoiceOne Financial Services, Inc. . . . . . . . . . . . . . . . . . A-1 Common Stock Information . . . . . . . . . . . . . . . . . . . . . . A-1 Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . A-2 Consolidated Financial Statements . . . . . . . . . . . . . . . . . A-3 Notes to Consolidated Financial Statements . . . . . . . . . . . . . A-7 Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . A-22 Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . A-23 Corporate Information . . . . . . . . . . . . . . . . . . . . . . . A-32 Directors and Officers . . . . . . . . . . . . . . . . . . . . . . . A-33 -i- CHOICEONE FINANCIAL SERVICES, INC. ChoiceOne Financial Services, Inc. is a single-bank holding company. Its principal banking subsidiary, ChoiceOne Bank (Sparta, Michigan) primarily serves communities in portions of Kent, Muskegon, Newaygo, and Ottawa counties in Michigan where the Bank's offices are located and the areas immediately surrounding those communities. Currently the Bank serves those markets through four full-service offices and one off-premises automated transaction machine. The Bank provides a variety of banking and other financial services to all types of customers. TO OUR SHAREHOLDERS This 1997 Annual Report to Shareholders contains our audited financial statements, detailed financial review and all of the information that regulations of the Securities and Exchange Commission (the "SEC") require to be presented in annual reports to shareholders. For legal purposes, this is the ChoiceOne Financial Services, Inc. 1997 annual report to shareholders. Although attached to our proxy statement, this report is not part of our proxy statement, is not considered to be soliciting material and is not considered to be filed with the SEC except to the extent that it is expressly incorporated by reference in a document filed with the SEC. Shareholders who would like to receive even more detailed information than that contained in this 1997 Annual Report to Shareholders are invited to request our Annual Report on Form 10-KSB. OUR ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 1997, INCLUDING THE FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES, WILL BE PROVIDED TO ANY SHAREHOLDER, WITHOUT CHARGE, UPON WRITTEN REQUEST TO MR. THOMAS LAMPEN, TREASURER, CHOICEONE FINANCIAL SERVICES, INC., 109 EAST DIVISION STREET, SPARTA, MICHIGAN 49345. COMMON STOCK INFORMATION ChoiceOne's shares are traded in the over-the-counter market by several brokers. There is no well established public trading market for the shares, trading activity is infrequent, and price information is not regularly published. The range of high and low bid information for shares of common stock for each quarterly period during the past two years is as follows:
1997 1996 ------------------------------ LOW HIGH LOW HIGH ------------------------------ First Quarter. . . . . . . $36 $38 $32 $37 Second Quarter . . . . . . 36 42 34 39 Third Quarter. . . . . . . 37 42 34 39 Fourth Quarter . . . . . . 38 42 35 38
The above market prices have been adjusted where necessary to reflect the stock dividends declared in 1998 and 1997. The prices listed above are over- the-counter market quotations reported to ChoiceOne by its market makers listed in this annual report. The over-the-counter market quotations reflect inter-dealer prices without retail markup, markdown or commission and may not necessarily represent actual transactions. As of February 28, 1998, there were 513,325 shares of ChoiceOne Financial Services, Inc. common stock issued and outstanding. These shares were held of record by 586 shareholders. The following table summarizes cash dividends paid per share of common stock during 1997 and 1996:
1997 1996 --------------- First Quarter. . . . . . . . . $ .32 $ .29 Second Quarter . . . . . . . . .38 .31 Third Quarter. . . . . . . . . .38 .31 Fourth Quarter . . . . . . . . .38 .32 --------------- Totals. . . . . . . . . . . . $1.46 $1.23 ===============
The above dividend per share amounts have been adjusted where necessary to reflect the stock dividends declared in 1998 and 1997. ChoiceOne's principal source of funds to pay cash dividends are the earnings and dividends paid by ChoiceOne Bank. ChoiceOne Bank is restricted in its ability to pay cash dividends under current regulations (Note 14). Based on information presently available, management expects ChoiceOne to declare and pay regular quarterly cash dividends in 1998. FINANCIAL HIGHLIGHTS CHOICEONE FINANCIAL SERVICES, INC.
1997 1996 1995 1994 1993 ------------------------------------------------------------ FOR THE YEAR (IN THOUSANDS) Net interest income . . . . . . . . . . . . . $ 6,315 $ 5,754 $ 4,931 $ 4,468 $ 4,264 Provision for loan losses . . . . . . . . . . 539 523 164 126 121 Noninterest income. . . . . . . . . . . . . . 1,769 1,555 656 597 710 Noninterest expense . . . . . . . . . . . . . 5,176 4,436 3,448 3,340 3,225 Income before income taxes. . . . . . . . . . 2,369 2,350 1,975 1,599 1,628 Income tax expense. . . . . . . . . . . . . . 632 655 511 356 372 Net income. . . . . . . . . . . . . . . . . . 1,737 1,695 1,464 1,243 1,256 Cash dividends declared . . . . . . . . . . . 783 663 551 469 429 PER SHARE Net income. . . . . . . . . . . . . . . . . . $ 3.23 $ 3.14 $ 2.79 $ 2.29 $ 2.32 Cash dividends. . . . . . . . . . . . . . . . 1.46 1.23 1.06 .87 .79 Shareholders' equity. . . . . . . . . . . . . 28.93 27.06 26.64 23.76 23.90 AVERAGE FOR THE YEAR (IN THOUSANDS) Securities. . . . . . . . . . . . . . . . . . $ 22,189 $ 22,547 $ 27,609 $ 31,122 $ 31,079 Gross loans . . . . . . . . . . . . . . . . . 118,369 94,461 74,223 68,077 64,705 Deposits. . . . . . . . . . . . . . . . . . . 100,815 95,210 91,446 90,772 89,448 Shareholders' equity. . . . . . . . . . . . . 14,998 14,129 13,200 12,922 12,325 Assets. . . . . . . . . . . . . . . . . . . . 148,652 123,134 107,552 105,445 103,155 AT YEAR END (IN THOUSANDS) Securities. . . . . . . . . . . . . . . . . . $ 19,942 $ 23,006 $ 23,187 $ 30,410 $ 32,315 Gross loans . . . . . . . . . . . . . . . . . 127,776 110,079 79,082 69,410 66,844 Deposits. . . . . . . . . . . . . . . . . . . 107,492 95,606 92,902 91,236 88,630 Shareholders' equity. . . . . . . . . . . . . 15,537 14,537 13,784 12,876 12,954 Assets. . . . . . . . . . . . . . . . . . . . 156,329 141,731 109,916 106,137 104,542 RATIOS Return on average assets. . . . . . . . . . . 1.17% 1.38% 1.36% 1.18% 1.22% Return on average shareholders' equity. . . . 11.58 12.00 11.09 9.62 10.19 Dividend payout Cash (based on net income). . . . . . . . . 45.08 39.12 37.64 37.73 34.16 Stock (based on shares outstanding) . . . . 6.00 None 20.00 25.00 None Shareholders' equity to assets (at year end) . . . . . . . . . . . . . . . . . 9.94 10.26 12.54 12.13 12.39 Per share amounts are retroactively adjusted for the effect of stock dividends and stock splits.
A-2 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS ChoiceOne Financial Services, Inc. December 31
1997 1996 -------------------------------- ASSETS Cash and due from banks . . . . . . . . . . . . . . . . . . . . . $ 3,769,000 $ 4,952,000 Securities available for sale . . . . . . . . . . . . . . . . . . 19,942,000 23,006,000 Loans, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . 126,209,000 108,592,000 Premises and equipment, net . . . . . . . . . . . . . . . . . . . 3,663,000 2,987,000 Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,746,000 2,194,000 -------------------------------- Total assets. . . . . . . . . . . . . . . . . . . . . . . . . $156,329,000 $141,731,000 ================================ LIABILITIES Deposits - noninterest bearing. . . . . . . . . . . . . . . . . . $ 13,464,000 $ 13,188,000 Deposits - interest bearing . . . . . . . . . . . . . . . . . . . 94,028,000 82,418,000 Federal funds purchased and repurchase agreements . . . . . . . . 2,060,000 4,731,000 Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . 4,248,000 1,657,000 Long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . 26,992,000 25,200,000 -------------------------------- Total liabilities . . . . . . . . . . . . . . . . . . . . . . 140,792,000 127,194,000 SHAREHOLDERS' EQUITY Preferred stock; shares authorized: 100,000; shares outstanding: none . . . . . . . . . . . . . . . . . . . . . . . - - Common stock, $10 par value; shares authorized: 1,000,000; shares outstanding: 537,015 in 1997 and 482,710 in 1996 . . . . . . . . . . . . . . . . . . . . . . 5,370,000 4,827,000 Paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . 7,005,000 5,292,000 Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . 2,994,000 4,305,000 Unrealized gains and losses on securities . . . . . . . . . . . . 168,000 113,000 -------------------------------- Total shareholders' equity. . . . . . . . . . . . . . . . . . 15,537,000 14,537,000 -------------------------------- Total liabilities and shareholders' equity. . . . . . . . . . $156,329,000 $141,731,000 ================================
See accompanying notes to consolidated financial statements. A-3 CONSOLIDATED STATEMENTS OF INCOME ChoiceOne Financial Services, Inc. Years ended December 31
1997 1996 1995 ----------------------------------------------- INTEREST INCOME Loans, including fees . . . . . . . . . . . . . . . . . . . $11,230,000 $ 9,050,000 $ 7,099,000 Securities Taxable . . . . . . . . . . . . . . . . . . . . . . . . . 845,000 916,000 1,181,000 Nontaxable. . . . . . . . . . . . . . . . . . . . . . . . 484,000 450,000 511,000 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,000 3,000 8,000 ----------------------------------------------- Total interest income . . . . . . . . . . . . . . . . . 12,567,000 10,419,000 8,799,000 INTEREST EXPENSE Deposits. . . . . . . . . . . . . . . . . . . . . . . . . . 4,279,000 3,919,000 3,760,000 Short-term borrowings . . . . . . . . . . . . . . . . . . . 264,000 154,000 106,000 Long-term debt. . . . . . . . . . . . . . . . . . . . . . . 1,709,000 592,000 2,000 ----------------------------------------------- Total interest expense. . . . . . . . . . . . . . . . . 6,252,000 4,665,000 3,868,000 ----------------------------------------------- NET INTEREST INCOME. . . . . . . . . . . . . . . . . . . . . 6,315,000 5,754,000 4,931,000 PROVISION FOR LOAN LOSSES. . . . . . . . . . . . . . . . . . 539,000 523,000 164,000 ----------------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES. . . . . 5,776,000 5,231,000 4,767,000 NONINTEREST INCOME Customer service fees . . . . . . . . . . . . . . . . . . . 448,000 428,000 420,000 Security gains or losses. . . . . . . . . . . . . . . . . . 28,000 - - Insurance commission income . . . . . . . . . . . . . . . . 895,000 811,000 - Mortgage loan sales and servicing . . . . . . . . . . . . . 152,000 105,000 93,000 Other income. . . . . . . . . . . . . . . . . . . . . . . . 246,000 211,000 143,000 ----------------------------------------------- Total noninterest income. . . . . . . . . . . . . . . . 1,769,000 1,555,000 656,000 NONINTEREST EXPENSE Salaries and benefits . . . . . . . . . . . . . . . . . . . 2,829,000 2,366,000 1,740,000 Occupancy expense . . . . . . . . . . . . . . . . . . . . . 761,000 657,000 475,000 Computer processing . . . . . . . . . . . . . . . . . . . . 156,000 162,000 156,000 Other expense . . . . . . . . . . . . . . . . . . . . . . . 1,430,000 1,251,000 1,077,000 ----------------------------------------------- Total noninterest expense . . . . . . . . . . . . . . . 5,176,000 4,436,000 3,448,000 ----------------------------------------------- INCOME BEFORE INCOME TAX . . . . . . . . . . . . . . . . . . 2,369,000 2,350,000 1,975,000 INCOME TAX EXPENSE . . . . . . . . . . . . . . . . . . . . . 632,000 655,000 511,000 ----------------------------------------------- NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,737,000 $ 1,695,000 $ 1,464,000 =============================================== BASIC EARNINGS PER COMMON SHARE AND EARNINGS PER COMMON SHARE ASSUMING DILUTION. . . . . . . . . . . . . . . . . . $ 3.23 $ 3.14 $ 2.79 ===============================================
See accompanying notes to consolidated financial statements. A-4 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY ChoiceOne Financial Services, Inc. Years ended December 31
COMMON STOCK AND UNREALIZED PAID-IN RETAINED GAINS AND LOSSES CAPITAL EARNINGS ON SECURITIES TOTAL ---------------------------------------------------------------- Balance, start of 1995 . . . . . . . . . . . . . . $ 8,169,000 $ 5,266,000 $(559,000) $12,876,000 Net income. . . . . . . . . . . . . . . . . . . . - 1,464,000 - 1,464,000 Repurchase of 18,324 shares of stock. . . . . . . (810,000) - - (810,000) Change in unrealized gains and losses . . . . . . - - 810,000 810,000 20% stock dividend paid in May 1995 . . . . . . . 2,901,000 (2,906,000) - (5,000) Cash dividends ($1.06 per share). . . . . . . . . - (551,000) - (551,000) ---------------------------------------------------------------- Balance, end of 1995 . . . . . . . . . . . . . . . 10,260,000 3,273,000 251,000 13,784,000 Issuance of 20,610 shares of stock to effect a business combination of insurance subsidiary. . . . . . . . . . . . . . (26,000) - - (26,000) Net income. . . . . . . . . . . . . . . . . . . . - 1,695,000 - 1,695,000 Repurchase of 2,703 shares of stock . . . . . . . (115,000) - - (115,000) Change in unrealized gains and losses . . . . . . - - (138,000) (138,000) Cash dividends ($1.23 per share). . . . . . . . . - (663,000) - (663,000) ---------------------------------------------------------------- Balance, end of 1996 . . . . . . . . . . . . . . . 10,119,000 4,305,000 113,000 14,537,000 Net income. . . . . . . . . . . . . . . . . . . . - 1,737,000 - 1,737,000 Change in unrealized gains and losses . . . . . . - - 55,000 55,000 6% stock dividend paid in May 1997. . . . . . . . 1,178,000 (1,187,000) - (9,000) 5% stock dividend to be paid in March 1998. . . . . . . . . . . . . . . . . . . . . . 1,078,000 (1,078,000) - - Cash dividends ($1.46 per share). . . . . . . . . - (783,000) - (783,000) ---------------------------------------------------------------- BALANCE, END OF 1997 . . . . . . . . . . . . . . . $12,375,000 $ 2,994,000 $ 168,000 $15,537,000 ================================================================
See accompanying notes to consolidated financial statements. A-5 CONSOLIDATED STATEMENTS OF CASH FLOWS ChoiceOne Financial Services, Inc. Years ended December 31
1997 1996 1995 ----------------------------------------------- Cash flows from operating activities: Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 1,737,000 $ 1,695,000 $ 1,464,000 Reconciling items: Security gains. . . . . . . . . . . . . . . . . . . . . . (28,000) - - Net amortization on securities. . . . . . . . . . . . . . 74,000 65,000 144,000 Net gain on sales of loans. . . . . . . . . . . . . . . . (42,000) (70,000) (31,000) Provision for loan losses . . . . . . . . . . . . . . . . 539,000 523,000 164,000 Depreciation. . . . . . . . . . . . . . . . . . . . . . . 320,000 288,000 233,000 Other non-cash charges and credits. . . . . . . . . . . . (13,000) (139,000) (103,000) Deferred income tax benefit . . . . . . . . . . . . . . . (69,000) (61,000) (42,000) Changes in assets and liabilities: Interest receivable . . . . . . . . . . . . . . . . . . (85,000) (86,000) 78,000 Other assets. . . . . . . . . . . . . . . . . . . . . . (419,000) (558,000) (5,000) Interest payable. . . . . . . . . . . . . . . . . . . . 88,000 96,000 48,000 Other liabilities . . . . . . . . . . . . . . . . . . . 2,503,000 331,000 157,000 ----------------------------------------------- Net cash from operating activities. . . . . . . . . . 4,605,000 2,084,000 2,107,000 ----------------------------------------------- Cash flows from investing activities: Securities available for sale: Purchases . . . . . . . . . . . . . . . . . . . . . . . . (4,219,000) (5,472,000) (595,000) Sales proceeds. . . . . . . . . . . . . . . . . . . . . . 4,618,000 1,874,000 2,179,000 Principal payments. . . . . . . . . . . . . . . . . . . . 2,764,000 3,504,000 4,894,000 Securities held to maturity: Purchases . . . . . . . . . . . . . . . . . . . . . . . . - - (350,000) Principal payments. . . . . . . . . . . . . . . . . . . . - - 2,179,000 Net change in loans . . . . . . . . . . . . . . . . . . . . (18,120,000) (30,913,000) (9,620,000) Purchase of travel agency . . . . . . . . . . . . . . . . . (50,000) - - Premises and equipment expenditures, net. . . . . . . . . . (996,000) (762,000) (236,000) ----------------------------------------------- Net cash used in investing activities . . . . . . . . (16,003,000) (31,769,000) (1,549,000) ----------------------------------------------- Cash flows from financing activities: Net change in deposits. . . . . . . . . . . . . . . . . . . 11,886,000 2,704,000 1,666,000 Net change in short-term borrowings . . . . . . . . . . . . (2,671,000) 3,731,000 - Proceeds from long-term debt. . . . . . . . . . . . . . . . 3,731,000 24,200,000 1,000,000 Payments on long-term debt. . . . . . . . . . . . . . . . . (1,939,000) - - Effect of business combination of insurance subsidiary. . . . . . . . . . . . . . . . . . . . . . . . - (26,000) - Repurchase of common stock. . . . . . . . . . . . . . . . . - (115,000) (810,000) Cash dividends and fractional shares from stock dividends . . . . . . . . . . . . . . . . . . . . . . . . (792,000) (663,000) (556,000) ----------------------------------------------- Net cash from financing activities. . . . . . . . . . 10,215,000 29,831,000 1,300,000 ----------------------------------------------- Net change in cash and cash equivalents. . . . . . . . . . . (1,183,000) 146,000 1,858,000 Beginning cash and cash equivalents. . . . . . . . . . . . . 4,952,000 4,806,000 2,948,000 ----------------------------------------------- Ending cash and cash equivalents . . . . . . . . . . . . . . $ 3,769,000 $ 4,952,000 $ 4,806,000 =============================================== Cash paid for interest . . . . . . . . . . . . . . . . . . . $ 6,165,000 $ 4,569,000 $ 3,820,000 Cash paid for income taxes . . . . . . . . . . . . . . . . . 605,000 774,000 515,000 Loans transferred to other real estate . . . . . . . . . . . 279,000 - - Securities transferred to available for sale . . . . . . . . - - 8,354,000 Securities transferred to held to maturity . . . . . . . . . - - 1,795,000
See accompanying notes to consolidated financial statements. A-6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ChoiceOne Financial Services, Inc. NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include ChoiceOne Financial Services, Inc., its wholly-owned subsidiary, ChoiceOne Bank, and ChoiceOne Bank's wholly-owned subsidiaries, ChoiceOne Insurance Agencies, Inc., and Alpine Travel, Inc. (together referred to as "ChoiceOne"). Intercompany transactions and balances have been eliminated in consolidation. NATURE OF OPERATIONS ChoiceOne Financial Services, Inc. was formerly 1st Community Bancorp, Inc. The company's name change was approved by the shareholders at the April 29, 1997, annual meeting. The name change was made to more easily identify the bank holding company with ChoiceOne Bank and ChoiceOne Insurance Agencies, Inc. ChoiceOne Bank (the "Bank") is a full-service community bank that offers commercial, consumer, and real estate loans as well as both traditional deposit and alternative investment products to both commercial and consumer clients in portions of Kent, Muskegon, Newaygo, and Ottawa counties in Michigan. Substantially all loans are secured by specific items of collateral including business assets, consumer assets, and real estate. Commercial loans are expected to be repaid from the cash flows from operations of businesses. Real estate loans are secured by both residential and commercial real estate. ChoiceOne Insurance Agencies, Inc. (the "Insurance Agency") became a wholly-owned subsidiary of the Bank on January 1, 1996. The Insurance Agency sells a full line of insurance products. Alpine Travel, Inc. (the "Travel Agency") was acquired by the Bank effective August 1, 1997. The Travel Agency primarily sells travel-related products such as airline tickets and trips. Together, the Bank, the Insurance Agency, and the Travel Agency account for substantially all of ChoiceOne's assets, revenues, and operating income. USE OF ESTIMATES To prepare financial statements in conformity with generally accepted accounting principles, ChoiceOne's management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided. Actual results may differ from these estimates. Estimates associated with the allowance for loan losses and fair values of certain financial instruments are particularly susceptible to change. CASH FLOW REPORTING Cash and cash equivalents is defined to include cash on hand, demand deposits with other banks, and federal funds sold. Cash flows are reported on a net basis for customer loan and deposit transactions, deposits with other financial institutions, and short-term borrowings. SECURITIES Securities are classified as held to maturity and carried at amortized cost when ChoiceOne's management has the positive intent and ability to hold them to maturity. Securities are classified as available for sale when they might be sold before maturity. Securities classified as available for sale are carried at fair value, with unrealized holding gains and losses reported separately in shareholders' equity, net of tax effect. Realized gains or losses are based on specific identification of amortized cost. Securities are written down to fair value when a decline in fair value is not considered to be temporary. Interest income includes amortization of purchase premium or discount. Other securities, such as Federal Reserve Bank stock or Federal Home Loan Bank stock, are carried at cost. A transfer of securities from held to maturity to available for sale was made in 1995 in accordance with new interpretive guidance. LOANS Loans are reported at the principal balance outstanding, net of deferred loan fees and costs and an allowance for loan losses. Loans held for sale are reported at the lower of cost or market, on an aggregate basis. When loans are sold, they are removed from the loans balance if the tests for loan sales are met. If the accounting tests for loan sales are not met, sales of loans are accounted for as secured loan borrowings. A-7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ChoiceOne Financial Services, Inc. LOAN INCOME Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the estimated loan term. Interest on loans is accrued based upon the principal balance outstanding. The accrual of interest is discontinued at the point in time at which the collectibility of principal or interest is considered doubtful. Each loan is evaluated on its own merits; therefore, loans are not automatically classified as non-accrual based upon standardized criteria. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is a valuation allowance for probable credit losses. The allowance is increased by the provision for loan losses and decreased by charge-offs less recoveries. Management estimates the allowance balance required based on past loan loss experience, known and inherent risks in the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, should be charged-off. Loans are classified as impaired when full payment under the loan terms is not expected. Impairment is evaluated in total for smaller-balance loans of similar nature. Construction real estate mortgages, residential real estate mortgages, and consumer loans have been classified in this category. Impairment is evaluated on an individual loan basis for commercial and agricultural loans. If a loan is considered impaired, a portion of the allowance for loan losses is allocated to the loan so that it is reported, net, at the present value of estimated future cash flows using the loan's existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Loans are evaluated for impairment when payments are delayed or when it is probable that all principal and interest amounts will not be collected according to the original terms of the loan. PREMISES AND EQUIPMENT Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed over the assets' useful lives on the straight-line method. OTHER REAL ESTATE OWNED Real estate properties acquired in collection of a loan are recorded at estimated fair value at acquisition. Any reduction to fair value from the carrying value of the related loan is accounted for as a loan loss. After acquisition, a valuation allowance reduces the reported amount to the lower of the initial amount or fair value less costs to sell. Expenses, gains and losses on disposition, and changes in the valuation allowance are reported in other expenses. LOAN SERVICING RIGHTS Servicing rights represent the allocated value of servicing rights on loans sold. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the rights, using groupings of the underlying loans as to interest rates and then, secondarily, as to geographic and prepayment characteristics. Any impairment of a grouping is reported as a valuation allowance. LONG-TERM ASSETS Long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at discounted amounts. REPURCHASE AGREEMENTS Substantially all repurchase agreement liabilities represent amounts advanced by deposit clients that are not covered by federal deposit insurance and are secured by securities owned by ChoiceOne. A-8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ChoiceOne Financial Services, Inc. BENEFIT PLANS The incentive bonus plan pays an annual bonus based on average return on equity goals set by the Board of Directors. The Bank's 401(k) savings and retirement plan allows participant contributions of up to 15% of compensation. Contributions to the 401(k) savings and retirement plan by the Bank are discretionary. The Bank provides certain health insurance benefits to retired employees. These postretirement benefits are accrued during the years in which the employee provides services. The Bank previously offered a defined benefit pension plan to qualifying employees. The defined benefit pension plan was terminated in 1997 and vested benefits were distributed to participants. STOCK BASED COMPENSATION Expense for employee compensation under ChoiceOne's stock option plan is based on Accounting Principles Board Opinion No. 25, with expense reported only if options are granted below market price at the grant date. Pro forma disclosures of net income and earnings per share are provided as if the fair value method of Statement of Financial Accounting Standards No. 123 was used for stock based compensation. INCOME TAXES Income tax expense is the sum of the current year income tax due and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS Off-balance sheet financial instruments represent credit instruments, such as loan commitments, lines of credit, and standby letters of credit. The face amount of credit instruments represents the exposure to loss assuming customer collateral or ability to repay is worthless. LEASE COMMITMENTS Expense is recognized as payments are made on operating leases. Leasing arrangements are typically for 5 years and contain renewal options. LOSS CONTINGENCIES Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. SHAREHOLDERS' EQUITY As of December 31, 1997, ChoiceOne's common stock had a par value of $10 and 1,000,000 shares were authorized. The par value of common stock was changed from $10 to no par by ChoiceOne's Board of Directors at its February 1998 meeting. ChoiceOne also has 100,000 shares of preferred stock authorized. Transfers at fair value from retained earnings are made for stock dividends. DIVIDEND RESTRICTIONS Banking regulations require the maintenance of certain capital levels and may limit the amount of dividends which may be paid by the Bank to ChoiceOne or by ChoiceOne to its shareholders. EARNINGS PER SHARE Earnings per common share ("EPS") is based on weighted-average common shares outstanding. Diluted EPS further assumes issue of any dilutive potential common shares. The accounting standard for computing EPS was revised for 1997, and requires previously reported EPS to be restated for comparability. Adoption of the new standard had no effect on ChoiceOne's EPS data for the current or prior years. EPS has been restated for stock dividends and splits. A-9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ChoiceOne Financial Services, Inc. FAIR VALUE OF FINANCIAL INSTRUMENTS Fair values of financial instruments are estimated using relevant market information and other assumptions, which are more fully documented in Note 15 to the financial statements. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. FUTURE ACCOUNTING CHANGES New accounting standards have been issued which will require future reporting of comprehensive income (net income plus changes in holding gains or losses on available for sale securities) and may require redetermination of industry segment financial information. These standards are not expected to have a material impact on the consolidated financial statements. NOTE 2 - ACQUISITION OF SUBSIDIARIES On January 1, 1996, the Bank completed a business combination with the Insurance Agency in a tax-free exchange of stock. Under the terms of the agreement, 20,610 shares of ChoiceOne Financial Services, Inc. common stock were exchanged for all of the outstanding shares of the Insurance Agency. The transaction was accounted for as a pooling of interests. The operations of the Insurance Agency were not material to ChoiceOne's consolidated financial position or results of operations. Effective August 1, 1997, the Bank purchased the Travel Agency. Cash was paid for all of the outstanding shares of the Travel Agency. The transaction was accounted for as a purchase. NOTE 3 - SECURITIES Information at year-end or for the year:
AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ------------------------------------------------------------ SECURITIES AVAILABLE FOR SALE 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 - 2,967,000 ------------------------------------------------------------ Total. . . . . . . . . . . . . . . . . . . . . $19,688,000 $272,000 $(18,000) $19,942,000 ============================================================ December 31, 1996 U.S. Treasuries and U.S. Government agencies . . . . . . . . . . . . . . . . . . . $ 4,831,000 $ 36,000 $(14,000) $ 4,853,000 States and municipalities. . . . . . . . . . . . 10,276,000 191,000 (39,000) 10,428,000 Mortgage-backed securities . . . . . . . . . . . 4,869,000 32,000 (35,000) 4,866,000 Other securities . . . . . . . . . . . . . . . . 2,859,000 - - 2,859,000 ------------------------------------------------------------ Total. . . . . . . . . . . . . . . . . . . . . $22,835,000 $259,000 $(88,000) $23,006,000 ============================================================
SECURITIES HELD TO MATURITY There were no securities classified as held to maturity as of December 31, 1997, or December 31, 1996. A-10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ChoiceOne Financial Services, Inc. Contractual maturities of securities available for sale at December 31, 1997, follows:
AMORTIZED FAIR COST VALUE ----------------------------- Due within one year. . . . . . . . . . . . . . . . . . . . . . $ 1,782,000 $ 1,788,000 Due after one year through five years. . . . . . . . . . . . . 6,701,000 6,801,000 Due after five years through ten years . . . . . . . . . . . . 510,000 535,000 Due after ten years. . . . . . . . . . . . . . . . . . . . . . 1,985,000 2,088,000 ----------------------------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,978,000 11,212,000 Mortgage-backed securities not due at a specific date. . . . . 6,005,000 6,025,000 Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,705,000 2,705,000 ----------------------------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $19,688,000 $19,942,000 =============================
Information regarding sales of available for sale securities follows:
1997 1996 1995 -------------------------------------------- Proceeds from sales of securities. . . . . . . . . $4,618,000 $1,874,000 $2,179,000 Gross realized gains . . . . . . . . . . . . . . . 38,000 7,000 11,000 Gross realized losses. . . . . . . . . . . . . . . 10,000 7,000 11,000
There were no sales of securities held to maturity in 1997, 1996, or 1995. Various securities were pledged as collateral for the purposes below. In the case of repurchase agreements and public deposits, the balance of the repurchase agreements or public deposits was less than the collateral balance as of the end of the years presented. The fair value of securities pledged as collateral at December 31 was as follows:
1997 1996 --------------------------- Securities sold under agreements to repurchase . . . . . . $2,259,000 $2,028,000 Public deposits. . . . . . . . . . . . . . . . . . . . . . 505,000 252,000 Federal Home Loan Bank advances. . . . . . . . . . . . . . - 5,079,000 --------------------------- Total. . . . . . . . . . . . . . . . . . . . . . . . . . $2,764,000 $7,359,000 ===========================
NOTE 4 - LOANS Loan information at year-end or for the year follows:
1997 1996 ------------------------------- LOAN COMPONENTS Commercial . . . . . . . . . . . . . . . . . . . . . . . . $ 43,546,000 $ 34,696,000 Agricultural . . . . . . . . . . . . . . . . . . . . . . . 9,350,000 9,996,000 Real estate mortgage - construction. . . . . . . . . . . . 2,499,000 2,215,000 Real estate mortgage - residential . . . . . . . . . . . . 43,715,000 37,168,000 Consumer . . . . . . . . . . . . . . . . . . . . . . . . . 28,666,000 26,000,000 ------------------------------- Total loans before allowance for loan losses . . . . . . 127,776,000 110,079,000 Less allowance for loan losses . . . . . . . . . . . . . . 1,567,000 1,487,000 ------------------------------- Loans, net . . . . . . . . . . . . . . . . . . . . . . . $126,209,000 $108,592,000 ===============================
A-11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ChoiceOne Financial Services, Inc.
1997 1996 ----------------------------- LOANS SERVICED FOR OTHERS Commercial and agricultural loans. . . . . . . . . . . . . . . $ 2,739,000 $ 1,589,000 Residential real estate mortgage loans . . . . . . . . . . . . 19,460,000 18,151,000 ----------------------------- Total loans serviced for others. . . . . . . . . . . . . . . $22,199,000 $19,740,000 ============================= MORTGAGE SERVICING RIGHTS Beginning of year. . . . . . . . . . . . . . . . . . . . . . . $ 19,000 $ - Originations . . . . . . . . . . . . . . . . . . . . . . . . . 46,000 20,000 Amortization . . . . . . . . . . . . . . . . . . . . . . . . . (7,000) (1,000) ----------------------------- End of year. . . . . . . . . . . . . . . . . . . . . . . . . . $ 58,000 $ 19,000 ============================= LOANS TO RELATED PARTIES Beginning of year. . . . . . . . . . . . . . . . . . . . . . . $ 1,603,000 New loans. . . . . . . . . . . . . . . . . . . . . . . . . . . 512,000 Repayments . . . . . . . . . . . . . . . . . . . . . . . . . . (701,000) Change in persons included . . . . . . . . . . . . . . . . . . (61,000) ----------- End of year. . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,353,000 =========== COST OF LOANS PLEDGED FOR BORROWINGS Residential real estate mortgage loans pledged for Federal Home Loan Bank advances. . . . . . . . . . . . . $39,505,000 $35,241,000 Commercial loans pledged for secured loan borrowings . . . . . 878,000 - ----------------------------- Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . $40,383,000 $35,241,000 ============================= LOANS HELD FOR SALE Agricultural loans . . . . . . . . . . . . . . . . . . . . . . $ 1,276,000 $ 1,386,000 Residential real estate mortgage loans . . . . . . . . . . . . 381,000 52,000 ----------------------------- Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,657,000 $ 1,438,000 =============================
NOTE 5 - ALLOWANCE FOR LOAN LOSSES An analysis of changes in the allowance for loan losses follows:
1997 1996 1995 -------------------------------------------- Beginning of year balance. . . . . . . . . . . . . . . $1,487,000 $1,121,000 $1,039,000 Provision charged to expense . . . . . . . . . . . . . 539,000 523,000 164,000 Recoveries credited to the allowance . . . . . . . . . 70,000 64,000 43,000 Loans charged off. . . . . . . . . . . . . . . . . . . (529,000) (221,000) (125,000) -------------------------------------------- End of year balance. . . . . . . . . . . . . . . . . . $1,567,000 $1,487,000 $1,121,000 ============================================
Information regarding impaired loans as of and for the year ended December 31 follows:
Loans with no allowance allocated. . . . . . . . . . . $ 780,000 $ 450,000 Loans with allowance allocated . . . . . . . . . . . . 152,000 149,000 Amount of allowance for loan losses allocated. . . . . 86,000 6,000
A-12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ChoiceOne Financial Services, Inc.
1997 1996 1995 -------------------------------------- IMPAIRED LOANS Average balance during the year. . . . . . . . . . . $759,000 $477,000 $432,000 Interest income recognized thereon . . . . . . . . . 43,000 39,000 41,000 Cash-basis interest income recognized. . . . . . . . 33,000 29,000 40,000
NOTE 6 - OTHER BALANCE SHEET INFORMATION
1997 1996 ----------------------------- RESTRICTIONS ON CASH BALANCES Cash subject to restrictions for reserve requirements. . . . . . . $ 745,000 $ 707,000 ============================= PREMISES AND EQUIPMENT Land and land improvements . . . . . . . . . . . . . . . . . . . . $ 626,000 $ 500,000 Buildings and improvements . . . . . . . . . . . . . . . . . . . . 3,105,000 2,573,000 Construction in progress . . . . . . . . . . . . . . . . . . . . . 47,000 47,000 Equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,494,000 2,128,000 ----------------------------- Total cost . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,272,000 5,248,000 Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . (2,609,000) (2,261,000) ----------------------------- Premises and equipment, net. . . . . . . . . . . . . . . . . . . $ 3,663,000 $ 2,987,000 ============================= OTHER REAL ESTATE Balance as of end of year. . . . . . . . . . . . . . . . . . . . . $ 246,000 $ 18,000 =============================
NOTE 7 - DEPOSITS Deposit information as of year-end follows:
1997 1996 ----------------------------- Certificates of deposit issued in denominations of $100,000 or more. . . . . . . . . . . . . . . . . . . . . . . $14,751,000 $ 9,693,000 ============================= Related party deposits . . . . . . . . . . . . . . . . . . . . . . $ 2,417,000 $ 2,006,000 ============================= Maturities of certificates of deposit 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $27,094,000 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $41,712,000 12,443,000 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,245,000 5,714,000 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,726,000 3,025,000 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,935,000 2,128,000 2002 (and after for 1996). . . . . . . . . . . . . . . . . . . . 2,059,000 124,000 2003 and after . . . . . . . . . . . . . . . . . . . . . . . . . 129,000 ----------------------------- Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $62,806,000 $50,528,000 =============================
Certificates of deposit included $6,738,000 at December 31, 1997, of deposits that were acquired through a national rate service. The deposits mature through 1999 and bear an average interest rate of 6.35%. A-13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ChoiceOne Financial Services, Inc. NOTE 8 - INCOME TAXES Information as of year-end and for the year follows:
1997 1996 1995 ----------------------------------------- PROVISION FOR INCOME TAXES Current federal income tax expense . . . . . . . . . . . . . . . . $ 701,000 $ 716,000 $ 553,000 Deferred federal income tax benefit. . . . . . . . . . . . . . . . (69,000) (61,000) (42,000) ----------------------------------------- Income tax expense . . . . . . . . . . . . . . . . . . . . . . . $ 632,000 $ 655,000 $ 511,000 ========================================= RECONCILIATION OF INCOME TAX PROVISION TO STATUTORY RATE Income tax computed at statutory federal rate of 34% . . . . . . . $ 805,000 $ 799,000 $ 672,000 Tax exempt interest income . . . . . . . . . . . . . . . . . . . . (182,000) (175,000) (197,000) Nondeductible interest expense . . . . . . . . . . . . . . . . . . 29,000 24,000 25,000 Other items. . . . . . . . . . . . . . . . . . . . . . . . . . . . (20,000) 7,000 11,000 ----------------------------------------- Income tax expense . . . . . . . . . . . . . . . . . . . . . . . $ 632,000 $ 655,000 $ 511,000 ========================================= COMPONENTS OF DEFERRED TAX ASSETS AND LIABILITIES Deferred tax assets: Allowance for loan losses. . . . . . . . . . . . . . . . . . . . $ 428,000 $ 401,000 Deferred compensation. . . . . . . . . . . . . . . . . . . . . . 59,000 62,000 Postretirement benefits obligation . . . . . . . . . . . . . . . 46,000 50,000 Deferred loan fees . . . . . . . . . . . . . . . . . . . . . . . 39,000 53,000 Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79,000 68,000 ------------------------- Total deferred tax assets. . . . . . . . . . . . . . . . . . . 651,000 634,000 Deferred tax liabilities: Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . 215,000 188,000 Unrealized appreciation on securities available for sale . . . . 86,000 58,000 Pension fund asset . . . . . . . . . . . . . . . . . . . . . . . - 96,000 Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,000 12,000 ------------------------- Total deferred tax liabilities . . . . . . . . . . . . . . . . 329,000 354,000 ------------------------- Net deferred tax asset . . . . . . . . . . . . . . . . . . . . $ 322,000 $ 280,000 =========================
A valuation allowance related to a deferred tax asset is recognized when it is considered more likely than not that part or all of the deferred tax benefits will not be realized. Management has determined that no such allowance was required at December 31, 1997 and 1996. NOTE 9 - EMPLOYEE BENEFIT PLANS PENSION PLAN The Board of Directors approved the termination of the Bank's defined benefit pension plan in January 1997. Benefit accruals for plan participants were frozen as of March 31, 1997. As a result of the plan's curtailment in April 1997, ChoiceOne recognized a curtailment gain of $249,000 in the second quarter of 1997. Vested plan benefits were paid to plan participants in the third and fourth quarters of 1997. The benefit payments caused a settlement loss of $259,000 to be recognized in these two quarters. After participant benefits had been paid, the remaining plan assets in excess of benefit payments totaled $323,000. The Bank has filed a request with the Internal Revenue Service to transfer the excess plan assets to the ChoiceOne Bank 401(k) savings and retirement plan. The Bank has not yet received a written ruling on its request. A-14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ChoiceOne Financial Services, Inc. Net pension cost included the following for the years ended December 31:
1997 1996 1995 ------------------------------------------ Service cost/benefits earned during the year . . . . . . $ 17,000 $ 86,000 $ 70,000 Interest cost on projected benefit obligation. . . . . . 129,000 130,000 122,000 Actual return on plan assets . . . . . . . . . . . . . . (112,000) (122,000) (368,000) Net amortization and deferral. . . . . . . . . . . . . . (82,000) (69,000) 199,000 ------------------------------------------ Net pension cost/(income). . . . . . . . . . . . . . . . $ (48,000) $ 25,000 $ 23,000 ==========================================
POSTRETIREMENT BENEFITS PLAN Information regarding the postretirement benefits plan as of year-end and for the year follows:
1997 1996 1995 --------------------------------------- Retirees . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 39,000 $ 36,000 Employees not yet eligible to receive benefits . . . . . . . . 39,000 36,000 Employees eligible to receive benefits . . . . . . . . . . . . 56,000 34,000 ------------------------ Total accumulated benefit obligation . . . . . . . . . . . . 134,000 106,000 Unrecognized net gain. . . . . . . . . . . . . . . . . . . . . 15,000 42,000 ------------------------ Accrued postretirement benefit cost. . . . . . . . . . . . . $149,000 $ 148,000 ======================== Service cost/benefits attributed to service during the year . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,000 $ 8,000 $ 7,000 Interest cost on accumulated postretirement benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . 8,000 16,000 18,000 Recognized gain. . . . . . . . . . . . . . . . . . . . . . . . (3,000) (3,000) (5,000) Settlement gain from discontinuance of life insurance plan . . . . . . . . . . . . . . . . . . . . . . . - (139,000) - --------------------------------------- Postretirement benefit cost/(credit) . . . . . . . . . . . . $ 9,000 $(118,000) $ 20,000 =======================================
The trend for annual increases in health care costs was assumed to be 11.5% for 3 years beginning January 1, 1998, dropping to 5.5% after 3 years and remaining at that level thereafter. The effect of a 1% increase in the assumed health care cost trend rate would have an immaterial impact on the combined service and interest cost components of net periodic postretirement health care benefits cost and the accumulated benefit obligation for health care benefits. A weighted average discount rate of 7% was used in determining the actuarial present value of the accumulated postretirement benefit obligation for 1997, 1996, and 1995.
1997 1996 1995 ---------------------------------------- OTHER EMPLOYEE BENEFIT PLAN EXPENSES 401(k) savings and retirement plan . . . . . . . . . . . . . . $323,000 $ 17,000 $ 13,000 Incentive bonus plan . . . . . . . . . . . . . . . . . . . . . 100,000 232,000 194,000
The 401(k) expense recorded in 1997 represents the amount of defined benefit pension plan assets remaining at December 31, 1997, after payment of vested benefits to plan participants. The Bank intends to contribute these excess assets to the 401(k) savings and retirement plan (the "401(k) plan") in 1998. Approximately 25% of the total was contributed to the 401(k) plan and allocated to plan participants in early 1998 as the Bank's contribution for the 1997 plan year. The remaining amount will be contributed to the 401(k) plan upon receipt of a determination letter from the Internal Revenue Service as to whether the pension plan excess assets can be transferred to the 401(k) plan. This remaining amount will be allocated to participants in the 401(k) plan as the Bank's contribution over a period not to exceed seven years. A-15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ChoiceOne Financial Services, Inc. NOTE 10 STOCK OPTIONS Statement of Financial Accounting Standards No. 123 ("Statement No. 123"), "Accounting for Stock-Based Compensation," became effective in 1996 and requires pro forma disclosures for companies that do not adopt its fair value accounting method for stock based employee compensation. Accordingly, the following pro forma information presents net income and earnings per share for 1997 had the fair value method of Statement No. 123 been used to measure compensation cost for stock option plans. Compensation cost actually recognized for stock options was $0 for 1997. There were no stock options granted prior to 1997.
Net income as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,737,000 Pro forma net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,733,000 Basic earnings per common share and diluted earnings per common share as reported . . . . . . . 3.23 Pro forma basic earnings per common share and diluted earnings per common share . . . . . . . . 3.23
In future years, the pro forma effect of not applying Statement No. 123 may increase if additional options are granted. ChoiceOne's stock option plan is used to reward key employees and provide them with an additional equity interest in ChoiceOne. The options issued in 1997 were issued for 10-year periods with vesting occurring over a three-year period. At December 31, 1997, 20,000 shares were authorized for stock option grants, of which 15,000 were available for future grants. Information about option grants follows:
NUMBER WEIGHTED-AVERAGE WEIGHTED-AVERAGE OF OPTIONS EXERCISE PRICE FAIR VALUE OF GRANTS ---------- ---------------- -------------------- Granted during 1997 and outstanding at end of year . . . . . 5,000 $ 40.00 $ 7.08 Options exercisable at end of 1997 . . . . . . . . . . . . . 1,250 $ 40.00
The fair value of options granted during 1997 was estimated using the following weighted-average information: risk-free interest rate of 6.53%, expected life of 8.5 years, expected annual volatility of stock price of 10.0%, and expected cash dividends of 3.5% per year. NOTE 11 - LONG-TERM DEBT Long-term debt as of year-end was comprised as follows:
1997 1996 ----------------------------- Federal Home Loan Bank advances. . . . . . . . . . . . . $26,114,000 $25,200,000 Secured loan borrowings. . . . . . . . . . . . . . . . . 878,000 - ----------------------------- Total. . . . . . . . . . . . . . . . . . . . . . . . . $26,992,000 $25,200,000 =============================
Interest rates on Federal Home Loan Bank advances range from 5.27% to 6.66% and are fixed. Advances are secured by mortgage loans. Penalties are charged on advances that are paid prior to maturity. No advances were paid prior to maturity in 1997 or 1996. Secured loan borrowings consist of five commercial loans of which participations were sold in 1997. The participations carry an interest rate of 7.60% and are secured by the related commercial loans. A-16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ChoiceOne Financial Services, Inc. The maturities of Federal Home Loan Bank advances and secured loan borrowings at December 31, 1997, follow:
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,586,000 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,323,000 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,501,000 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,590,000 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,966,000 2003 and after . . . . . . . . . . . . . . . . . . . . . . . . . 1,026,000 ----------- Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $26,992,000 ===========
NOTE 12 - LEASES AND OTHER COMMITMENTS Following is lease and other commitment information:
1997 1996 1995 -------------------------------------- Lease rental expense. . . . . . . . . . . . . . $ 70,000 $ 45,000 $ 10,000 ====================================== Future minimum operating lease commitments 1998. . . . . . . . . . . . . . . . . . . . . $ 80,000 1999. . . . . . . . . . . . . . . . . . . . . 77,000 2000. . . . . . . . . . . . . . . . . . . . . 74,000 2001. . . . . . . . . . . . . . . . . . . . . 63,000 2002. . . . . . . . . . . . . . . . . . . . . 63,000 -------- Total . . . . . . . . . . . . . . . . . . . $357,000 ========
Lease commitments include $63,000 to a related party in the years 1998 through 2002.
Future minimum computer processing commitments 1998. . . . . . . . . . . . . . . . . . . . . $ 120,000 1999. . . . . . . . . . . . . . . . . . . . . 120,000 ----------- Total . . . . . . . . . . . . . . . . . . . $ 240,000 =========== Credit commitments Loan commitments. . . . . . . . . . . . . . . $16,830,000 $12,749,000 Unused lines of credit. . . . . . . . . . . . 3,002,000 2,562,000 Letters of credit . . . . . . . . . . . . . . 33,000 165,000 ----------------------------- Total . . . . . . . . . . . . . . . . . . . $19,865,000 $15,476,000 =============================
A-17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ChoiceOne Financial Services, Inc. NOTE 13 - SHAREHOLDERS' EQUITY AND EARNINGS PER SHARE Information regarding shareholders' equity as of year-end and for the year follows:
1997 1996 1995 -------------------------------------------- COMMON STOCK Shares authorized. . . . . . . . . . . . . . . . 1,000,000 500,000 500,000 Shares outstanding . . . . . . . . . . . . . . . 537,015 482,710 464,803 Issued during the year . . . . . . . . . . . . . 28,733 20,610 77,367 Repurchased during the year. . . . . . . . . . . - 2,703 18,324 BASIC EARNINGS PER COMMON SHARE AND EARNINGS PER SHARE ASSUMING DILUTION Net income available for common stock. . . . . . $1,737,000 $1,695,000 $1,464,000 Average shares outstanding . . . . . . . . . . . 537,075 539,229 525,303
Stock options granted in 1997 did not have an impact on earnings per share as the effect of the options was antidilutive. NOTE 14 - CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY CONDENSED BALANCE SHEETS December 31
1997 1996 -------------------------------- Assets Cash . . . . . . . . . . . . . . . . . . . . . . . . $ 32,000 $ 20,000 Securities available for sale. . . . . . . . . . . . 8,000 8,000 Other assets . . . . . . . . . . . . . . . . . . . . 2,000 2,000 Investment in ChoiceOne Bank and subsidiaries. . . . 15,495,000 14,507,000 -------------------------------- Total assets . . . . . . . . . . . . . . . . . . . $15,537,000 $14,537,000 ================================ Shareholders' equity . . . . . . . . . . . . . . . . . $15,537,000 $14,537,000 ================================
CONDENSED STATEMENTS OF INCOME Years Ended December 31
1997 1996 1995 -------------------------------------------- Dividends from ChoiceOne Bank. . . . . . . . . . . . . $ 838,000 $ 824,000 $1,409,000 Other expenses . . . . . . . . . . . . . . . . . . . . 51,000 50,000 66,000 -------------------------------------------- Income before income tax and equity in undistributed net income of subsidiary . . . . . . . 787,000 774,000 1,343,000 Income tax benefit . . . . . . . . . . . . . . . . . . 17,000 17,000 22,000 -------------------------------------------- Income before equity in undistributed net income of subsidiary . . . . . . . . . . . . . . . . 804,000 791,000 1,365,000 Equity in undistributed net income of subsidiary . . . . . . . . . . . . . . . . . . . . . 933,000 904,000 99,000 -------------------------------------------- Net income . . . . . . . . . . . . . . . . . . . . . . $1,737,000 $1,695,000 $1,464,000 ============================================
A-18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ChoiceOne Financial Services, Inc. CONDENSED STATEMENTS OF CASH FLOWS Years Ended December 31
1997 1996 1995 -------------------------------------------- Cash flows from operating activities: Net income . . . . . . . . . . . . . . . . . . . . . . . . $1,737,000 $1,695,000 $1,464,000 Reconciling items: Equity in undistributed net subsidiary income. . . . . . (933,000) (904,000) (99,000) Changes in other assets. . . . . . . . . . . . . . . . . - (1,000) 3,000 Changes in liabilities . . . . . . . . . . . . . . . . . - (2,000) (1,000) -------------------------------------------- Net cash from operating activities . . . . . . . . . . 804,000 788,000 1,367,000 -------------------------------------------- Cash flows from investing activities: Purchase of securities . . . . . . . . . . . . . . . . . . - - (8,000) -------------------------------------------- Net cash used in investing activities . . . . . . . . . . - - (8,000) -------------------------------------------- Cash flows from financing activities: Dividends paid . . . . . . . . . . . . . . . . . . . . . . (783,000) (663,000) (551,000) Repurchase of stock. . . . . . . . . . . . . . . . . . . . (9,000) (115,000) (815,000) -------------------------------------------- Net cash used in financing activities. . . . . . . . . . (792,000) (778,000) (1,366,000) -------------------------------------------- Net change in cash and cash equivalents. . . . . . . . . . . 12,000 10,000 (7,000) Beginning cash and cash equivalents. . . . . . . . . . . . . 20,000 10,000 17,000 -------------------------------------------- Ending cash and cash equivalents . . . . . . . . . . . . . . $ 32,000 $ 20,000 $ 10,000 ============================================ Amount of dividends that could be paid from ChoiceOne Bank without regulatory approval . . . . . . . . $2,774,000 ==========
NOTE 15 - FINANCIAL INSTRUMENTS Financial instruments as of year-end were as follows:
1997 1996 --------------------------------------------------------------------- ESTIMATED ESTIMATED CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE --------------------------------------------------------------------- Assets: Cash and cash equivalents. . . . . . . . $ 3,763,000 $ 3,763,000 $ 4,887,000 $ 4,887,000 Interest-bearing deposits. . . . . . . . 6,000 6,000 65,000 65,000 Securities available for sale. . . . . . 19,942,000 19,942,000 23,006,000 23,006,000 Loans, net . . . . . . . . . . . . . . . 126,209,000 129,870,000 108,592,000 112,179,000 Accrued interest receivable. . . . . . . 944,000 944,000 860,000 860,000 Liabilities: Demand, savings and money market deposit accounts . . . . . . . . . . . 44,686,000 44,686,000 45,078,000 45,078,000 Time deposits. . . . . . . . . . . . . . 62,806,000 63,276,000 50,528,000 50,874,000 Federal funds purchased and repurchase agreements. . . . . . . . . 2,060,000 2,060,000 4,731,000 4,731,000 Accrued interest payable . . . . . . . . 523,000 523,000 435,000 435,000 Long-term debt . . . . . . . . . . . . . 26,992,000 27,170,000 25,200,000 25,328,000
A-19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ChoiceOne Financial Services, Inc. The estimated fair values approximate the carrying amounts for all assets and liabilities except those described below. The estimated fair value for securities is based on quoted market values for the individual securities or for equivalent securities. The estimated fair value for loans is based on the rates charged at year end for new loans with similar maturities, applied until the loan is assumed to reprice or be paid. The estimated fair value for time deposits is based on the rates paid at year end for new deposits, applied until maturity. The estimated fair value for other financial instruments and off-balance-sheet loan commitments are considered nominal. NOTE 16 - REGULATORY CAPITAL ChoiceOne Financial Services, Inc. and ChoiceOne Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If only adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as are asset growth and expansion, and plans for capital restoration are required. At year-end, the capital requirements were met. Actual capital levels and minimum required levels were as follows:
MINIMUM REQUIRED TO BE WELL MINIMUM REQUIRED CAPITALIZED UNDER FOR CAPITAL PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION REGULATIONS --------------------------------------------------------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO --------------------------------------------------------------------- (Dollars in thousands) DECEMBER 31, 1997 Total capital (to risk weighted assets) Consolidated. . . . . . . . . . . . . . $16,409 14.2% $9,212 8.0% $11,515 10.0% Bank. . . . . . . . . . . . . . . . . . 16,368 14.2 9,211 8.0 11,514 10.0 Tier 1 capital (to risk weighted assets) Consolidated. . . . . . . . . . . . . . 14,968 13.0 4,606 4.0 6,909 6.0 Bank. . . . . . . . . . . . . . . . . . 14,927 13.0 4,606 4.0 6,908 6.0 Tier 1 capital (to average assets) Consolidated. . . . . . . . . . . . . . 14,968 9.6 6,213 4.0 7,766 5.0 Bank. . . . . . . . . . . . . . . . . . 14,927 9.6 6,213 4.0 7,766 5.0 December 31, 1996 Total capital (to risk weighted assets) Consolidated. . . . . . . . . . . . . . $15,313 15.0% $8,169 8.0% $10,211 10.0% Bank. . . . . . . . . . . . . . . . . . 15,284 15.0 8,168 8.0 10,210 10.0 Tier 1 capital (to risk weighted assets) Consolidated. . . . . . . . . . . . . . 14,034 13.7 4,084 4.0 6,127 6.0 Bank. . . . . . . . . . . . . . . . . . 14,005 13.7 4,084 4.0 6,126 6.0 Tier 1 capital (to average assets) Consolidated. . . . . . . . . . . . . . 14,034 10.4 5,403 4.0 6,754 5.0 Bank. . . . . . . . . . . . . . . . . . 14,005 10.4 5,403 4.0 6,754 5.0
A-20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ChoiceOne Financial Services, Inc. NOTE 17 - SUBSEQUENT EVENTS On February 11, 1998, ChoiceOne's Board of Directors declared a 5% stock dividend on ChoiceOne's common stock. The record date of the dividend is March 16, 1998, and the payable date is March 31, 1998. The dividend has been reflected in shareholders' equity as of December 31, 1997 and all per share amounts have been retroactively restated for the estimated effect of the stock dividend. ChoiceOne's Board of Directors also declared a conditional two-for-one stock split at its February 1998 meeting. The stock split, to be effected in the form of a share dividend, will cause one additional share of common stock to be issued for each share outstanding. The stock split will be payable to shareholders of record as of April 30, 1998, and will be paid on May 22, 1998. The stock split is conditioned upon and subject to approval by ChoiceOne's shareholders at the April 30, 1998, annual meeting. The shareholders will be asked to approve a proposed amendment to ChoiceOne's Restated Articles of Incorporation to increase the authorized capital stock of ChoiceOne from 1,000,000 shares to 2,000,000 shares. Earnings per share amounts, after giving retroactive effect to the two- for-one stock split on a pro forma basis, are presented below. Because the stock split is contingent upon shareholder approval of an amendment to increase the authorized capital stock, financial information contained elsewhere in these financial statements has not been adjusted to reflect the impact of the proposed stock split.
1997 1996 1995 ----------------------------- Earnings per common share (pro forma). . . . . . . . . . $1.62 $1.58 $1.40
On January 14, 1998, ChoiceOne's Board of Directors approved a resolution to issue approximately 1,900 shares of its common stock, with an estimated fair value of $81,000, to the 401(k) plan. The issuance of the stock represents the payment of the Bank's contribution to the 401(k) plan for the 1997 plan year. A-21 INDEPENDENT AUDITORS' REPORT ChoiceOne Financial Services, Inc. [CROWE CHIZEK LOGO] To the Shareholders and Board of Directors of ChoiceOne Financial Services, Inc., Sparta, Michigan We have audited the accompanying consolidated balance sheets of ChoiceOne Financial Services, Inc. as of December 31, 1997 and 1996 and the related statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ChoiceOne Financial Services, Inc. as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/Crowe, Chizek and Company LLP Crowe, Chizek and Company LLP Grand Rapids, Michigan February 20, 1998, except for Note 17 as to which the date is March 17, 1998 CROWE, CHIZEK AND COMPANY LLP 400 RIVERFRONT PLAZA BUILDING 55 CAMPAU AVENUE NW GRAND RAPIDS, MICHIGAN 49503 616.774.0774 FAX 616.752.4226 A member of Horwath International A-22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ChoiceOne Financial Services, Inc. The following discussion is designed to provide a review of the consolidated financial condition and results of operations of ChoiceOne Financial Services, Inc. ("ChoiceOne") and its wholly-owned subsidiaries, ChoiceOne Bank (the "Bank"), ChoiceOne Insurance Agencies, Inc. (the "Insurance Agency"), and Alpine Travel, Inc. (the "Travel Agency"). This discussion should be read in conjunction with the consolidated financial statements and related footnotes. This discussion and other sections of this annual report contain forward- looking statements that are based on management's beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and about ChoiceOne itself. Words such as "anticipates," "believes," "estimates," "expects," "forecasts," "intends," "is likely," "plans," "predicts," "projects," and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions ("future factors") that are difficult to predict with regard to timing, extent, likelihood, and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed or forecasted in such forward- looking statements. Furthermore, ChoiceOne undertakes no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events, or otherwise. Future factors include, but are not limited to, changes in interest rates and interest rate relationships; demand for products and services; the degree of competition by traditional and non-traditional competitors; changes in banking regulations; changes in tax laws; changes in prices, levies, and assessments; the impact of technological advances; governmental and regulatory policy changes; the outcomes of pending and future litigation and contingencies; trends in customer behavior as well as their ability to repay loans; and changes in the national economy. These are representative of the future factors that could cause a difference between an ultimate actual outcome and a preceding forward-looking statement. SUMMARY OF OPERATING RESULTS Net income for 1997 was $1,737,000, which represented a $42,000 or 2% increase over 1996. The increase in ChoiceOne's net income in 1997 was attributable to higher net interest income and noninterest income, which was virtually offset by growth in noninterest expense. The growth in net interest income was due to an increase in ChoiceOne's loan portfolio. The rise in noninterest income resulted in part from higher commission income from the Insurance Agency. The majority of the increase in noninterest expense was caused by higher salaries and benefits in 1997 than in 1996. Increases in 401(k) savings and retirement plan expense and postretirement benefit expense comprised most of the increase in salaries and benefits expense in 1997.
YEAR ENDED DECEMBER 31, 1997 1996 1995 ----------------------------------------------- Net interest income. . . . . . . . . . . . . . . . $ 6,315,000 $ 5,754,000 $ 4,931,000 Provision for loan losses. . . . . . . . . . . . . (539,000) (523,000) (164,000) Noninterest income . . . . . . . . . . . . . . . . 1,769,000 1,555,000 656,000 Noninterest expense. . . . . . . . . . . . . . . . (5,176,000) (4,436,000) (3,448,000) Income tax expense . . . . . . . . . . . . . . . . (632,000) (655,000) (511,000) Net income . . . . . . . . . . . . . . . . . . . . $ 1,737,000 $ 1,695,000 $ 1,464,000
Increased net income in 1996 was due to higher net interest income and noninterest expense, which was partially offset by increases in the provision for loan losses and noninterest expense. Net interest income growth was due primarily to loan growth. The increase in noninterest income was caused by commission income from the Insurance Agency. The higher provision for loan losses resulted from both higher loan growth and net charge-offs in 1996 than in 1995. Most of the increase in 1996's noninterest expense was due to the inclusion of the Insurance Agency's expenses. RETURN ON AVERAGE ASSETS AND AVERAGE SHAREHOLDERS' EQUITY The return on average assets and return on average shareholders' equity are key performance indices that measure how effectively ChoiceOne is using its assets and its shareholders' invested capital. ChoiceOne's return on average assets for 1997 was 1.17%, compared to 1.38% for 1996 and 1.36% for 1995. The return on average shareholders' equity was 11.58%, 12.00%, and 11.09% for 1997, 1996, and 1995, respectively. A-29 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ChoiceOne Financial Services, Inc. DIVIDENDS Cash dividends declared by ChoiceOne in 1997 of $783,000 or $1.46 per share represent the sixteenth consecutive year that ChoiceOne has increased cash dividends paid to shareholders. The total cash dividends paid in 1997 represented a $120,000 or 18% increase over 1996. The cash dividend payout percentage (total cash dividends divided by net income) was 45% in 1997, compared to 39% in 1996. In addition to the cash dividends declared, ChoiceOne declared a 6% stock dividend in 1997 and a 20% stock dividend in 1995. A stock dividend was also declared in February 1998. Cash dividends per share were adjusted for the stock dividends declared in 1995, 1997, and 1998. Cash dividends paid in 1995 through 1997 were consistent with management's objectives regarding the capital structure of ChoiceOne. A primary objective is to continue the per share and total dollar increase in cash dividend payments to shareholders, which ChoiceOne achieved in all three years. However, management will not raise dividends above a level which it considers to be reasonable and prudent. ChoiceOne's principal source of funds to pay cash dividends is the earnings of the Bank. The availability of these earnings is dependent upon the capital needs, regulatory constraints and other factors involving the Bank. Regulatory constraints include the maintenance of minimum capital ratios and limits based on net income and retained earnings of the Bank for the past three years. Based on projected earnings for the Bank, management currently expects ChoiceOne to pay regular quarterly cash dividends to its shareholders in 1998. RESULTS OF OPERATIONS Table 1 documents average balances and interest income and expense, as well as the average rates earned or paid on assets and liabilities. Table 2 documents the effect on interest income and expense of changes in volume (average balance) and interest rates. Management will refer to these tables in its discussion of interest income, interest expense and net interest income. A-24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ChoiceOne Financial Services, Inc. TABLE 1 - AVERAGE BALANCES AND TAX-EQUIVALENT INTEREST RATES
YEAR ENDED DECEMBER 31, 1997 1996 1995 ------------------------------------------------------------------------------------------- AVERAGE AVERAGE AVERAGE BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE ------------------------------------------------------------------------------------------- (Dollars in thousands) ASSETS Loans . . . . . . . . . $117,582 $11,259 9.58% $ 94,077 $ 9,087 9.66% $ 73,742 $7,135 9.68% Taxable securities . . . . . 12,781 845 6.61 14,147 916 6.47 18,403 1,181 6.42 Nontaxable securities . 9,370 733 7.82 8,365 681 8.14 9,181 774 8.43 Other . . . . . . . . . . . . . . 178 8 4.49 65 3 4.62 160 8 5.00 -------- ------- -------- ------- -------- ------ Interest-earning assets . . . . 139,911 12,845 9.18 116,654 10,687 9.16 101,486 9,098 8.96 Noninterest-earning assets . 8,741 6,480 6,066 -------- -------- -------- Total assets. . . . . . . . . . $148,652 $123,134 $107,552 ======== ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing transaction accounts. . . . . . $ 22,242 718 3.23 $ 24,711 798 3.23 $ 25,522 912 3.57 Savings deposits. . . . . . . . . 8,836 162 1.83 9,363 174 1.86 9,845 229 2.33 Time deposits . . . . . . . . . . 58,258 3,399 5.83 50,126 2,947 5.88 45,930 2,619 5.70 FHLB advances . . . . . . . . . . 25,425 1,619 6.37 9,385 592 6.31 77 2 3.04 Other . . . . . . . . . . . . . . 5,584 354 6.34 2,785 154 5.53 1,722 106 6.11 -------- ------- -------- ------- -------- ------ Interest-bearing liabilities. . 120,345 6,252 5.20 96,370 4,665 4.84 83,096 3,868 4.65 ------- ---- ------- ---- ------ ---- Demand deposits . . . . . . . . . 11,479 11,010 10,149 Other noninterest-bearing liabilities . . . . . . . . . . 1,830 1,625 1,107 Shareholders' equity. . . . . . . 14,998 14,129 13,200 -------- -------- -------- Total liabilities and shareholders' equity. . . . . $148,652 $123,134 $107,552 ======== ======== ======== Net interest income (tax- equivalent basis) - interest spread. . . . . . . . . . . . . . 6,593 3.98% 6,022 4.32% 5,230 4.31% ==== ==== ==== Tax-equivalent adjustment . . . (278) (268) (299) ------- ------- ------ Net interest income . . . . . . . . $ 6,315 $ 5,754 $4,931 ======= ======= ====== Net interest income as a percentage of earning assets (tax-equivalent basis). . . . . . 4.71% 5.16% 5.15% ==== ==== ==== Interest on nontaxable securities and loans has been adjusted to a fully tax-equivalent basis to facilitate comparison to the taxable interest-earning assets. The adjustment uses an incremental tax rate of 34% for the years presented. Interest on loans included net origination fees charged on loans of approximately $352,000, $363,000, and $253,000 in 1997, 1996, and 1995, respectively. The average balance includes the effect of unrealized gains or losses on securities, while the average rate was computed on the average amortized cost of the securities. Noninterest-earning assets includes loans on a nonaccrual status which averaged approximately $787,000, $383,000, and $482,000 in 1997, 1996, and 1995, respectively.
A-25 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ChoiceOne Financial Services, Inc. TABLE 2 - CHANGES IN TAX-EQUIVALENT NET INTEREST INCOME
YEAR ENDED DECEMBER 31, 1997 OVER 1996 1996 OVER 1995 -------------------------------------------------------------------- TOTAL VOLUME RATE TOTAL VOLUME RATE -------------------------------------------------------------------- (Dollars in thousands) INCREASE (DECREASE) IN INTEREST INCOME Loans . . . . . . . . . . . . . . . . . . . $2,172 $2,252 $(80) $1,952 $1,967 $(15) Taxable securities. . . . . . . . . . . . . . . (71) (91) 20 (265) (275) 10 Nontaxable securities . . . . . . . . . . . 52 79 (27) (93) (67) (26) Other . . . . . . . . . . . . . . . . . . . . . 5 5 - (5) (4) (1) -------------------------------------------------------------------- Net change in tax-equivalent income . . . . . 2,158 2,245 (87) 1,589 1,621 (32) -------------------------------------------------------------------- INCREASE (DECREASE) IN INTEREST EXPENSE Interest-bearing transaction accounts . . . . . (80) (80) - (114) (28) (86) Savings deposits. . . . . . . . . . . . . . . . (12) (10) (2) (55) (11) (44) Time deposits . . . . . . . . . . . . . . . . . 452 475 (23) 328 244 84 Federal Home Loan Bank advances . . . . . . . . 1,027 1,021 6 590 585 5 Other . . . . . . . . . . . . . . . . . . . . . 200 175 25 48 59 (11) -------------------------------------------------------------------- Net change in interest expense. . . . . . . . 1,587 1,581 6 797 849 (52) -------------------------------------------------------------------- Net change in tax-equivalent net interest income . . . . . . . . . . . . $ 571 $ 664 $(93) $ 792 $ 772 $ 20 ==================================================================== 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. Interest on nontaxable securities and loans has been adjusted to a fully tax-equivalent basis using an incremental tax rate of 34% for the years presented.
NET INTEREST INCOME Tax-equivalent net interest income ("net margin") increased $571,000 in 1997, compared to an increase of $792,000 in 1996. The increase in net margin in both years was due to loan growth. Table 2 shows that the smaller increase in 1997 was due to both changes in volume and rate. Although the growth in average interest-earning assets was $8,089,000 more in 1997 than in 1996, the increase in average interest-bearing liabilities in 1997 was $10,701,000 greater than the prior year. The higher level of growth in interest-bearing liabilities contributed to the slowing in additional net margin due to volume. The lower level of growth in net margin was also affected by the funding method that ChoiceOne used for its loan growth in 1997. Core deposits in the form of deposits obtained in ChoiceOne's market area were insufficient to fund loan growth in 1997. Therefore, ChoiceOne turned to other sources of funding such as Federal Home Loan Bank advances ("FHLB advances") and certificates of deposit from a national rate service ("national CDS"). Table 1 shows that the average balance of FHLB advances grew $16,040,000 in 1997, compared to $9,308,000 of growth in 1996. The average balance of national CDS, which are included in the time deposits balance in Table 1, increased $4,263,000 in 1997. FHLB advances carried the highest average interest rate of the interest- bearing liabilities in both 1997 and 1996. National CDS also bear one of the higher interest rates among interest-bearing liabilities. The use of FHLB advances and national CDS as a major funding source for loan growth caused the loan growth to generate less additional net margin dollars in 1997 than in 1996. As set forth in Table 2, the change in net margin due to changes in the average interest rate was a decrease in 1997 of $93,000 compared to an increase of $20,000 in 1996. The average rate earned on loans decreased more in 1997 than it had in the previous year. The lower rate in 1997 was a result of the higher level in average loan growth in 1997 than in 1996. The change in net margin due to rate was also affected by interest-bearing transaction accounts. The average rate paid on interest-bearing transaction accounts was unchanged in 1997, in contrast to 1996 when the rate declined 34 basis points. A-26 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ChoiceOne Financial Services, Inc. Based on the current estimates of ChoiceOne's management, net margin is expected to increase in 1998. However, the rate of growth in net margin may slow in 1998 compared to 1997 as it did in 1997. Management anticipates that loan growth will exceed the amount of funds that can be obtained through local market deposit growth. This will cause the need for funds from Federal Home Loan Bank advances, certificates of deposit from the national rate service, and other sources. The interest cost from these types of sources is higher than the rate on deposits from local markets. This higher cost of funds may cause a decrease in the margin dollars obtained from loan growth. Management expects general market interest rates to be steady to slightly falling in 1998. ChoiceOne's management does not anticipate that changes in interest rates will have a material impact on net margin in 1998. ALLOWANCE AND PROVISION FOR LOAN LOSSES Information regarding the allowance and provision for loan losses can be found in Table 3 and in Note 5 to the Consolidated Financial Statements. As indicated in Table 3, the provision for loan losses and allowance for loan losses increased slightly in 1997 in contrast to 1996 when the increases were much more significant. The provision in 1997 was affected by higher net charge-offs than in the prior year. This effect was offset by a lower level of loan growth from the end of 1996 to the end of 1997 than had occurred in the prior year. The increased provision in 1996 resulted from both increased net charge-offs over 1995 and a significantly higher level of loan growth. Net charge-offs by loan category are shown in Table 3. The increase in commercial loan charge-offs was primarily due to one commercial loan. The rise in consumer loan charge-offs was comprised of a number of loans. Consumer lending was affected in 1997 by an increasingly high level of personal bankruptcies. TABLE 3 - PROVISION AND ALLOWANCE FOR LOAN LOSSES
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1997 1996 1995 -------------------------------------------- Provision for loan losses. . . . . . . . . . . . . . . . . . $ 539,000 $ 523,000 $ 164,000 ============================================ Net charge-offs Commercial loans . . . . . . . . . . . . . . . . . . . . . $ 186,000 $ 26,000 $ (4,000) Agricultural loans . . . . . . . . . . . . . . . . . . . . 7,000 (10,000) - Real estate mortgage - residential . . . . . . . . . . . . 6,000 - 3,000 Consumer . . . . . . . . . . . . . . . . . . . . . . . . . 260,000 141,000 83,000 -------------------------------------------- Total. . . . . . . . . . . . . . . . . . . . . . . . . . $ 459,000 $ 157,000 $ 82,000 ============================================ Allowance for loan losses at year end. . . . . . . . . . . . $1,567,000 $1,487,000 $1,121,000 ============================================ Allowance for loan losses as a percentage of: Total loans as of year end . . . . . . . . . . . . . . . . 1.23% 1.35% 1.42% Nonaccrual loans, accrual loans past due 90 days or more and troubled debt restructurings . . . . . . . . 130.17 148.65 148.23 Ratio of net charge-offs to average total loans outstanding during the year. . . . . . . . . . . . . . . . .39 .17 .11 Loan recoveries as a percentage of prior year's charge-offs. . . . . . . . . . . . . . . . . . . . . . . . 31.84 51.60 36.13
Based on the current state of the economy and reviews of the loan portfolio by ChoiceOne's management, management believes that the allowance for loan losses as of December 31, 1997, is adequate to absorb possible charge-offs. Management continues to be concerned that relatively high levels of consumer debt and increasing levels of personal bankruptcies may cause consumer loan charge-offs to increase in the future. As loan growth and charge-offs occur in 1998, the allowance and provision for loan losses will be reviewed and changes will be made to maintain the allowance at a level that management considers adequate. A-27 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ChoiceOne Financial Services, Inc. NONINTEREST INCOME Noninterest income increased $214,000 in 1997, compared to an increase of $899,000 in 1996. Almost 40% of the growth in 1997 came from increased insurance commission income with the remainder resulting from the other noninterest income categories. Most of the increase in 1996 was due to insurance commission income as the business combination with the Insurance Agency was effective January 1, 1996. Management anticipates that noninterest income will increase somewhat in 1998 as a result of a full year of commission income from the Travel Agency. NONINTEREST EXPENSE Noninterest expense grew $740,000 in 1997. An increase in salaries and benefits expense of $463,000 comprised over 60% of the total expense growth in 1997. Expense of the 401(k) savings and retirement plan (the "401(k) plan") contributed approximately $305,000 of the increase in salaries and benefits in 1997. This was caused by the accrual of $323,000 of expense for the 401(k) plan in 1997, which represented the amount of assets left in the pension plan after all vested benefits had been paid to plan participants. ChoiceOne intends to transfer the excess assets from the pension plan to the 401(k) plan and use the funds to cover company contributions in future years. The transfer of the excess assets is subject to approval by the Internal Revenue Service. Salaries and benefits expense was also affected by a $119,000 increase in postretirement benefits expense in 1997 compared to the prior year. The increase in 1997's expense was due to a settlement gain of $139,000 that decreased the expense recorded in 1996. The gain resulted from the discontinuance of postretirement life insurance coverage. Wages and commissions paid to employees grew $223,000 in 1997. This was due to a higher activity level for commissioned employees, increases in staff size, a full year of wages expense for the Bank's two new branches, and a partial year of wages for the Travel Agency. The effect of the wages and commissions increase was partially offset by decreases of $132,000 in incentive bonus expense and $76,000 in expense related to the pension plan. Increases in occupancy expense and other expense in 1997 were due to a full year of operations for the Bank's two new branches, increased expenses related to the Bank's computer network, and general growth in expenses. Noninterest expense grew $988,000 in 1996. Approximately 80% of the higher expenses in 1996 resulted from the Insurance Agency, whose operations were included for the first time in 1996. The remainder of the expense growth in 1996 was due to expenses related to the Bank's two new branches, expenses related to the name changes of the Bank and the Insurance Agency and general growth in expenses. Expense growth was offset in 1996 by the settlement gain from the termination of the postretirement life insurance benefits plan. Management anticipates that noninterest expense will continue to grow in 1998. Factors causing the increase will be a full year of operations for the Travel Agency, expenses related to the new buildings for the Bank's two new branches, additional advertising and marketing of ChoiceOne's products and services, and other factors. YEAR 2000 ChoiceOne's management is aware of the issues associated with the programming code in existing computer systems as the year 2000 approaches. The year 2000 will affect virtually every computer operation by the rollover of the two digit year value to "00." The issue is whether computer systems will properly recognize date sensitive information when the year changes to 2000. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. ChoiceOne formed an internal committee in 1997 to address the year 2000 issue. The committee has studied ChoiceOne's internal operating systems and will begin to make necessary changes in 1998. The committee has also communicated with the vendors that provide software for ChoiceOne. Almost all of ChoiceOne's vendors have already indicated that they are year 2000 compliant or are making necessary modifications to make their software comply. ChoiceOne's management estimates that the cost to convert existing systems to make them able to process in the year 2000 will approximate $50,000 to $75,000 in 1998. Additional costs, at this time undetermined, may be necessary in 1998 or 1999 to fully covert all of ChoiceOne's computer systems. In addition, ChoiceOne's operations may be materially affected if the computer systems of third parties are not converted in a timely fashion to be able to process properly in the year 2000. A-28 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ChoiceOne Financial Services, Inc. INSURANCE AND TRAVEL SUBSIDIARIES The business combination with the Insurance Agency was effective January 1, 1996. The business combination was accounted for as a pooling-of-interests. The Insurance Agency's balance sheets and results of operations were not material to ChoiceOne's prior years' consolidated financial statements. Therefore, consolidated financial statements for prior years were not restated for the Insurance Agency. The acquisition of the Travel Agency was effective August 1, 1997. The acquisition was accounted for as a purchase transaction. The operations of the Travel Agency beginning August 1, 1997, are included in ChoiceOne's consolidated financial statements. SECURITIES Total securities available for sale decreased $3,064,000 in 1997, compared to a decrease of $181,000 in 1996. The larger decrease in 1997 was due in part to the sale of approximately $4,600,000 of securities in the last quarter of 1997, part of which were replaced by securities purchases. Proceeds from maturing securities will be used as necessary in 1998 to fund growth in the loan portfolio. Securities will also be used as collateral for public deposits and repurchase agreements as well as serve as a source of liquidity for ChoiceOne. Management expects that the balance of total securities will not change significantly in 1998. LOANS Total loans grew $17,697,000 in 1997, compared to $30,997,000 of growth in 1996. ChoiceOne's management believes that stronger competition for loans impacted loan growth in 1997. The slowing of growth occurred in all loan categories. It had the largest impact on consumer loans, which increased $2,666,000 in 1997 compared to $9,253,000 in 1996, and commercial loans, which experienced $7,817,000 of growth in 1997 compared to $11,409,000 in the prior year. ChoiceOne's management intends to focus on growth in all loan areas in 1998. Management intends to use business development activities to attempt to generate demand in the commercial and agricultural loan categories. Management intends to use contacts with real estate agents and other methods to attempt to capture a larger share of the residential real estate financing market. Management also intends to continue to use special promotions and target marketing to encourage demand in direct consumer loans. Management also intends to emphasize indirect consumer loans for automobiles and other items in 1998. Advertising and promotion of ChoiceOne Bank and of specific loan products is intended to be used to stimulate ChoiceOne's loan demand. DEPOSITS The balance of total deposits increased $11,886,000 in 1997, compared to an increase of $2,704,000 in 1996. The growth in deposits was caused by certificates of deposit in both years. The balance of certificates of deposit grew $12,278,000 in 1997 and $2,645,000 in 1996. Approximately $6,738,000 of the certificate of deposit increase in 1997 resulted from deposits obtained through a national rate service. ChoiceOne began using this rate service in March 1997 because funds available from core deposit growth and other internal sources were insufficient to meet loan demand. Management believes that the lack of growth in the other deposit categories in 1997 and 1996 was caused by a high level of competition for these no-cost or lower-cost deposits. ChoiceOne intends to continue to emphasize the attraction and retention of deposits from its local market areas. Management believes that certificates of deposit may comprise most of the deposit growth in 1998. Management intends to emphasize its non-certificate products in 1998 in an attempt to lower ChoiceOne's cost of funds for deposit products. However, competition involving interest rates paid and fees charged will continue to affect ChoiceOne's ability to generate deposit growth in any of the deposit categories. To the extent that local market deposit growth is not sufficient to meet loan demand, ChoiceOne may use the national rate service for certificates of deposit in 1998. A-29 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ChoiceOne Financial Services, Inc. OTHER LIABILITIES The balance of other liabilities increased $2,591,000 from December 31, 1996 to December 31, 1997. Virtually all of the increase was caused by $2,385,000 of securities purchase commitments at the end of 1997. The trades for the securities purchases settled in January 1998. LONG-TERM DEBT The majority of the long-term debt balance as of December 31, 1997 and the total balance as of December 31, 1996 was comprised of FHLB advances. Although the balance of FHLB advances increased only $914,000 in 1997, the growth in the balance in 1996 was slightly over $24,000,000. FHLB advances provided a significant portion of the funding for loan growth in 1996. The decrease in the level of growth in FHLB advances in 1997 was due to the maximum on allowable advances based on available collateral. ChoiceOne pledged certain residential real estate mortgages as collateral during 1997 and the amount of advances available was limited to growth in the collateral base. ChoiceOne plans to use FHLB advances in 1998 to fund loan growth to the extent allowed by mortgage growth. SHAREHOLDERS' EQUITY ChoiceOne's shareholders' equity increased $1,000,000 in 1997, compared to an increase of $753,000 in the prior year. The change in both years was caused primarily by retention of earnings. Shareholders' equity was affected to a lesser extent by issuances and repurchases of stock and by changes in unrealized gains and losses on securities. Note 16 to the Consolidated Financial Statements presents regulatory capital information as of the end of 1997 and 1996. The percentage declined slightly in 1997 as ChoiceOne's assets grew slightly more than its capital. This relationship is consistent with management's desire to decrease capital as a percentage of assets to better leverage shareholders' investment. However, management does not desire to decrease ChoiceOne's capital below those levels considered to be well capitalized. LIQUIDITY AND RATE SENSITIVITY The concept of liquidity addresses the measurement of ChoiceOne's ability to meet its cash flow requirements. These requirements include depositors desiring to withdraw funds and borrowers seeking credit. Relatively short- term liquid funds exist in the form of lines of credit to purchase federal funds at three of the Bank's correspondent banks. The total amount of federal funds that were available for purchase at the Bank's correspondent banks was $11,200,000 at December 31, 1997, while the Bank's actual federal funds purchased balance was $200,000 as of the same date. Longer-term liquidity needs may be met through deposit growth, maturities of securities, normal loan repayments, advances from the Federal Home Loan Bank and income retention. Approximately $3,600,000 of additional Federal Home Loan Bank advances were available at the end of 1997 based on ChoiceOne's collateral at the Federal Home Loan Bank. The Bank also began using a national rate service in 1997 for certificates of deposit to help meet cash flow requirements. The level of loan growth experienced by ChoiceOne in 1996 and 1997 has caused liquidity to become a very important issue. The Bank's Asset/Liability Management Committee (the "Committee") monitored and worked with liquidity and loan growth funding issues in the past two years and will continue to do so in 1998. Interest sensitivity is related to liquidity because each is affected by maturing assets and sources of funds. The Committee attempts to stabilize the interest rate spread and avoid possible adverse effects when unusual or rapid changes in interest rates occur. One method it uses of measuring interest rate sensitivity is the ratio of rate-sensitive assets to rate-sensitive liabilities. An asset or liability is said to be rate- sensitive if it matures or otherwise reprices within a given time frame. Table 4 documents the maturity or repricing schedule for ChoiceOne's rate-sensitive assets and liabilities for selected time periods. The time frame that the Committee used in 1997 to measure its interest rate sensitivity was one year. ChoiceOne's ratio of rate-sensitive assets to rate-sensitive liabilities which matured or repriced within a one year time frame was 76% as of December 31, 1997, compared to 92% as of December 31, 1996. The change was primarily due to longer-term assets which were funded by shorter-term liabilities in 1997. It is the Committee's and management's goal to have the rate-sensitive assets to rate-sensitive liabilities ratio in a range of 80% to 120% at the one year maturity or repricing point. Management believes that the percentage at the end of 1997 is low because interest-bearing transaction accounts and savings deposits have been classified in the 0 to 3 month repricing category. While these deposits can reprice within this time frame, management can control the timing or extent of the change in interest rates on these deposits. Therefore, ChoiceOne may not be as liability-sensitive as Table 4 indicates. A-30 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ChoiceOne Financial Services, Inc. TABLE 4 - MATURITIES AND REPRICING SCHEDULE
DECEMBER 31, 1997 0-3 3-12 1-5 OVER MONTHS MONTHS YEARS 5 YEARS TOTAL ----------------------------------------------------------------- (DOLLARS IN THOUSANDS) ASSETS Loans . . . . . . . . . . . . . . . . . $37,097 $ 21,054 $55,729 $13,896 $127,776 Interest-bearing deposits with banks. . 6 - - - 6 Taxable securities. . . . . . . . . . . 2,476 3,480 6,106 341 12,403 Nontaxable securities . . . . . . . . . - 533 3,682 3,324 7,539 ----------------------------------------------------------------- Rate-sensitive assets . . . . . . . . 39,579 25,067 65,517 17,561 147,724 LIABILITIES Interest-bearing transaction accounts . 23,079 - - - 23,079 Savings deposits. . . . . . . . . . . . 8,143 - - - 8,143 Time deposits . . . . . . . . . . . . . 10,657 31,055 20,965 129 62,806 Federal Home Loan Bank advances . . . . 3,457 6,006 15,621 1,030 26,114 Other . . . . . . . . . . . . . . . . . 2,082 100 756 - 2,938 ----------------------------------------------------------------- Rate-sensitive liabilities. . . . . . 47,418 37,161 37,342 1,159 123,080 ----------------------------------------------------------------- Rate-sensitive assets less rate- sensitive liabilities Asset(liability) gap for the period. . . . . . . . . . . . . . . $(7,839) $(12,094) $28,175 $16,402 $ 24,644 ================================================================= Cumulative asset (liability) gap. . $(7,839) $(19,933) $ 8,242 $24,644 ==================================================
Another method ChoiceOne uses to monitor its interest rate sensitivity is to subject rate-sensitive assets and liabilities to interest rate shocks. Assets and liabilities are subjected to immediate 200 basis point increases and decreases in interest rates and the effect on net income and shareholders' equity is measured. ChoiceOne's Interest Rate Risk Policy states that the changes in interest rates cannot cause net income to increase or decrease more than 10% and cannot cause the value of shareholders' equity to increase or decrease more than 2% of total assets. The 200 basis point interest rate shock as of December 31, 1997 caused net income to decrease 4.1% if rates increased and to increase 2.9% if rates decreased. The shock computation caused the value of shareholders' equity to decrease by .6% if rates increased and to increase by .3% if rates decreased. The Committee will continue to monitor the effect of interest rate shocks on a periodic basis. A-31 CORPORATE INFORMATION ChoiceOne Financial Services, Inc. CORPORATE HEADQUARTERS ChoiceOne Financial Services, Inc. 109 East Division Street P.O. Box 186 Sparta, Michigan 49345 Phone: (616) 887-7366 Fax: (616) 887-5566 MARKET MAKERS IN CHOICEONE FINANCIAL SERVICES, INC. STOCK Robert W. Baird & Company, Inc. Grand Rapids, Michigan (616) 459-4491 (800) 888-6200 D. H. Brush & Associates Grand Rapids, Michigan (616) 285-3700 Dean Witter Reynolds, Inc. Grand Rapids, Michigan (616) 454-8998 (800) 788-9640 McDonald & Co. Grand Rapids, Michigan (616) 732-3383 (800) 548-6011 Paine Webber, Inc. Grand Rapids, Michigan (616) 459-4231 (800) 333-4231 Roney & Company Grand Rapids, Michigan (616) 456-8691 (800) 553-2249 Stifel Nicolaus & Company, Inc. Grand Rapids, Michigan (616) 942-1717 (800) 676-0477 STOCK REGISTRAR AND TRANSFER AGENT ChaseMellon Shareholder Services 85 Challenger Road Ridgefield Park, New Jersey 07660 (800) 288-9541 ANNUAL MEETING The annual meeting of shareholders of ChoiceOne Financial Services, Inc. will be held at 7:30 p.m. EST on Thursday, April 30, 1998 at Sparta Ridgeview Elementary School, Sparta, Michigan. SUBSIDIARY INFORMATION CHOICEONE BANK Main Office 109 East Division Street P.O. Box 186 Sparta, Michigan 49345 Appletree Office 416 West Division Street Sparta, Michigan 49345 Cedar Springs Office 4170 Seventeen Mile Road Cedar Springs, Michigan 49319 Plainfield Office 4949 Plainfield Avenue, NE Grand Rapids, Michigan 49505 ChoiceOne Bank is a member of the Federal Deposit Insurance Corporation and is an Equal Opportunity and Housing Lender. [HOUSING LOGO] CHOICEONE INSURANCE AGENCIES, INC. Sparta Office 440 West Division Street Sparta, Michigan 49345 Cedar Springs Office 17 North Main Street Cedar Springs, Michigan 49319 Plainfield Office 4949 Plainfield Avenue, NE Grand Rapids, Michigan 49505 ALPINE TRAVEL, INC. Alpine Office 3527 Alpine Avenue, NW Walker, Michigan 49544 A-32 DIRECTORS AND OFFICERS ChoiceOne Financial Services, Inc. DIRECTORS CHOICEONE FINANCIAL SERVICES, INC. FRANK G. BERRIS Owner, American Gas & Oil Co., Inc. (Distributor of Petroleum Products) LAWRENCE D. BRADFORD President, ChoiceOne Insurance Agencies, Inc. WILLIAM F. CUTLER, JR. Former Vice President, H. H. Cutler Co. (Apparel Manufacturer) L. EDMOND EARY, JR., M.D. Chairman, ChoiceOne Financial Services, Inc.; Retired, Private Medical Practice LEWIS G. EMMONS Special Projects Manager, Great Day Foods, Inc. (Grocery Retailer) STUART GOODFELLOW Owner, Goodfellow Vending Services (Vending Company) and Goodfellow Blueberry Farms JAE M. MAXFIELD President and Chief Executive Officer, ChoiceOne Financial Services, Inc. and ChoiceOne Bank JON E. PIKE C.P.A., Managing Partner, Beene Garter LLP (Certified Public Accountants) LINDA R. PITSCH Secretary, ChoiceOne Financial Services, Inc. and Senior Vice President and Cashier, ChoiceOne Bank ANDREW W. ZAMIARA, R.PH. President and Manager, Momber Pharmacy and Gift Shop OFFICERS CHOICEONE FINANCIAL SERVICES, INC. L. EDMOND EARY, JR., M.D. Chairman of the Board JAE M. MAXFIELD President and Chief Executive Officer DENIS L. CROSBY Vice President LINDA R. PITSCH Secretary TOM LAMPEN Treasurer OFFICERS CHOICEONE BANK L. EDMOND EARY, JR., M.D. Chairman of the Board JAE M. MAXFIELD President and Chief Executive Officer DENIS L. CROSBY Senior Vice President - Loans GERALD P. DAVID Senior Vice President - Commercial Services LINDA R. PITSCH Senior Vice President - Cashier DEAN ANDERSON Vice President - Commercial Loans JAMES R. BECKMAN Vice President - Consumer Loans TOM LAMPEN Vice President - Chief Financial Officer KELLY POTES, CFP Vice President - Retail Financial Services KECIA A. FLYNN Assistant Vice President - Commercial Loans KAREN M. GILBERT Assistant Vice President - Mortgage Loans MARY JOHNSON Assistant Vice President - Compliance Officer AUDREY STILES Assistant Vice President - Human Resources SHERRY CONKLIN Branch Sales Manager - Cedar Springs Office RACHEL VANIN MILLER Branch Sales Manager - Plainfield Office OFFICERS CHOICEONE INSURANCE AGENCIES, INC. JAE M. MAXFIELD Chairman of the Board LAWRENCE D. BRADFORD President JEFFREY S. BRADFORD, CIC Vice President TAB M. BRADFORD, CIC Vice President KELLY POTES, CFP Vice President LINDA DEVRIES Assistant Vice President CARLO VANIN Plainfield Office President TOM LAMPEN Secretary/Treasurer OFFICERS ALPINE TRAVEL, INC. JAE M. MAXFIELD Chairman of the Board THOMAS R. WIERENGA President LINDA R. PITSCH Secretary TOM LAMPEN Treasurer A-33 EX-21 4 EXHIBIT 21 SUBSIDIARIES OF THE SMALL BUSINESS ISSUER The following lists the subsidiaries of the Registrant and the state or jurisdiction of incorporation. NAME AND ADDRESS OF SUBSIDIARY INCORPORATED 1. ChoiceOne Bank Michigan 109 East Division Sparta, Michigan 49345 2. ChoiceOne Insurance Agencies, Inc. Michigan 440 West Division Sparta, Michigan 49345 3. Alpine Travel, Inc. Michigan 3527 Alpine Avenue NW Grand Rapids, Michigan 49544 4. ChoiceOne Travel Agencies, Inc. Michigan (Inactive) EX-24 5 EXHIBIT 24 LIMITED POWER OF ATTORNEY The undersigned, in his or her capacity as a director or officer, or both, as the case may be, of ChoiceOne Financial Services, Inc. does hereby appoint Jae M. Maxfield, Linda R. Pitsch and Thomas Lampen, and each of them severally, his or her attorneys or attorney, with full power of substitution, to execute in his or her name an Annual Report of ChoiceOne Financial Services, Inc. on Form 10-KSB for its fiscal year ended December 31, 1997, and any and all amendments thereto, and to file it and them with the Securities and Exchange Commission. DATE FEBRUARY 10, 1998 S/ LAWRENCE D. BRADFORD (Signature) LAWRENCE D. BRADFORD (Please print name) -1- LIMITED POWER OF ATTORNEY The undersigned, in his or her capacity as a director or officer, or both, as the case may be, of ChoiceOne Financial Services, Inc. does hereby appoint Jae M. Maxfield, Linda R. Pitsch and Thomas Lampen, and each of them severally, his or her attorneys or attorney, with full power of substitution, to execute in his or her name an Annual Report of ChoiceOne Financial Services, Inc. on Form 10-KSB for its fiscal year ended December 31, 1997, and any and all amendments thereto, and to file it and them with the Securities and Exchange Commission. DATE FEBRUARY 9, 1998 S/ WILLIAM F. CUTLER, JR. (Signature) WILLIAM F. CUTLER, JR. (Please print name) -2- LIMITED POWER OF ATTORNEY The undersigned, in his or her capacity as a director or officer, or both, as the case may be, of ChoiceOne Financial Services, Inc. does hereby appoint Jae M. Maxfield, Linda R. Pitsch and Thomas Lampen, and each of them severally, his or her attorneys or attorney, with full power of substitution, to execute in his or her name an Annual Report of ChoiceOne Financial Services, Inc. on Form 10-KSB for its fiscal year ended December 31, 1997, and any and all amendments thereto, and to file it and them with the Securities and Exchange Commission. DATE FEBRUARY 6, 1998 S/ L. EDMOND EARY, JR. M.D. (Signature) L. EDMOND EARY, JR. M.D. (Please print name) -3- LIMITED POWER OF ATTORNEY The undersigned, in his or her capacity as a director or officer, or both, as the case may be, of ChoiceOne Financial Services, Inc. does hereby appoint Jae M. Maxfield, Linda R. Pitsch and Thomas Lampen, and each of them severally, his or her attorneys or attorney, with full power of substitution, to execute in his or her name an Annual Report of ChoiceOne Financial Services, Inc. on Form 10-KSB for its fiscal year ended December 31, 1997, and any and all amendments thereto, and to file it and them with the Securities and Exchange Commission. DATE FEBRUARY 9, 1998 S/ LEWIS EMMONS (Signature) LEWIS EMMONS (Please print name) -4- LIMITED POWER OF ATTORNEY The undersigned, in his or her capacity as a director or officer, or both, as the case may be, of ChoiceOne Financial Services, Inc. does hereby appoint Jae M. Maxfield, Linda R. Pitsch and Thomas Lampen, and each of them severally, his or her attorneys or attorney, with full power of substitution, to execute in his or her name an Annual Report of ChoiceOne Financial Services, Inc. on Form 10-KSB for its fiscal year ended December 31, 1997, and any and all amendments thereto, and to file it and them with the Securities and Exchange Commission. DATE FEBRUARY 6, 1998 S/ STEWART GOODFELLOW (Signature) STEWART GOODFELLOW (Please print name) -5- LIMITED POWER OF ATTORNEY The undersigned, in his or her capacity as a director or officer, or both, as the case may be, of ChoiceOne Financial Services, Inc. does hereby appoint Jae M. Maxfield, Linda R. Pitsch and Thomas Lampen, and each of them severally, his or her attorneys or attorney, with full power of substitution, to execute in his or her name an Annual Report of ChoiceOne Financial Services, Inc. on Form 10-KSB for its fiscal year ended December 31, 1997, and any and all amendments thereto, and to file it and them with the Securities and Exchange Commission. DATE FEBRUARY 10, 1998 S/ JON E. PIKE (Signature) JON E. PIKE (Please print name) -6- LIMITED POWER OF ATTORNEY The undersigned, in his or her capacity as a director or officer, or both, as the case may be, of ChoiceOne Financial Services, Inc. does hereby appoint Jae M. Maxfield, Linda R. Pitsch and Thomas Lampen, and each of them severally, his or her attorneys or attorney, with full power of substitution, to execute in his or her name an Annual Report of ChoiceOne Financial Services, Inc. on Form 10-KSB for its fiscal year ended December 31, 1997, and any and all amendments thereto, and to file it and them with the Securities and Exchange Commission. DATE FEBRUARY 9, 1998 S/ LINDA R. PITSCH (Signature) LINDA R. PITSCH (Please print name) -7- LIMITED POWER OF ATTORNEY The undersigned, in his or her capacity as a director or officer, or both, as the case may be, of ChoiceOne Financial Services, Inc. does hereby appoint Jae M. Maxfield, Linda R. Pitsch and Thomas Lampen, and each of them severally, his or her attorneys or attorney, with full power of substitution, to execute in his or her name an Annual Report of ChoiceOne Financial Services, Inc. on Form 10-KSB for its fiscal year ended December 31, 1997, and any and all amendments thereto, and to file it and them with the Securities and Exchange Commission. DATE FEBRUARY 11, 1998 S/ ANDREW ZAMAIRA (Signature) ANDREW ZAMIARA (Please print name) -8- LIMITED POWER OF ATTORNEY The undersigned, in his or her capacity as a director or officer, or both, as the case may be, of ChoiceOne Financial Services, Inc. does hereby appoint Jae M. Maxfield, Linda R. Pitsch and Thomas Lampen, and each of them severally, his or her attorneys or attorney, with full power of substitution, to execute in his or her name an Annual Report of ChoiceOne Financial Services, Inc. on Form 10-KSB for its fiscal year ended December 31, 1997, and any and all amendments thereto, and to file it and them with the Securities and Exchange Commission. DATE FEBRUARY 6, 1998 S/ FRANK G. BERRIS (Signature) FRANK G. BERRIS (Please print name) -9- EX-27 6 ART. 9 FDS FOR 1997 FORM 10-KSB
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT OF CHOICEONE FINANCIAL SERVICES, INC., INCLUDED IN THE DECEMBER 31, 1997, FORM 10-KSB FILING AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 3,769 0 0 0 19,942 0 0 127,776 1,567 156,329 107,492 2,060 4,248 26,992 5,370 0 0 10,167 156,329 11,230 1,329 8 12,567 4,279 6,252 6,315 539 28 5,176 2,369 2,369 0 0 1,737 3.23 3.23 4.71 753 195 27 1,915 1,487 527 68 1,567 1,312 0 255
EX-27 7 ART. 9 FDS FOR 1997 3RD QUARTER FORM 10-QSB
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT OF CHOICEONE FINANCIAL SERVICES, INC. INCLUDED IN THE SEPTEMBER 30, 1997, FORM 10-QSB FILING AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 4,077 0 0 0 21,688 0 0 124,719 1,543 155,429 105,646 7,036 1,572 25,913 5,114 0 0 10,148 155,429 8,191 1,006 7 9,204 3,123 4,582 4,622 404 0 3,689 1,751 1,269 0 0 1,269 2.48 2.48 4.65 787 179 4 789 1,487 399 51 1,543 1,267 0 278
EX-27 8 ART. 9 FDS FOR 1997 2ND QUARTER FORM 10-QSB
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT OF CHOICEONE FINANCIAL SERVICES, INC. INCLUDED IN THE JUNE 30, 1997, FORM 10-QSB FILING AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 3,580 0 0 0 21,972 0 0 118,787 1,650 148,994 103,764 1,850 1,558 26,872 5,114 0 0 9,836 148,994 5,269 679 1 5,949 1,971 2,947 3,002 314 0 2,275 1,176 825 0 0 825 1.61 1.61 4.66 1,133 149 29 691 1,487 181 30 1,650 1,267 0 383
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