UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

 

☒	Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the quarterly period ended March 31, 2015
☐	Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the transition period from                 to

 

Commission File Number: 000-19202

 

ChoiceOne Financial Services, Inc.
(Exact Name of Registrant as Specified in its Charter)

Michigan (State or Other Jurisdiction of Incorporation or Organization)		38-2659066 (I.R.S. Employer Identification No.)
109 East Division Sparta, Michigan (Address of Principal Executive Offices)		49345 (Zip Code)
(616) 887-7366 (Registrant's Telephone Number, including Area Code)

 

Indicate by checkmark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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  ☒           No   ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  ☒          No   ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☐	Smaller reporting company ☒

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐  No ☒   

 

As of April 30, 2015, the Registrant had outstanding 3,284,977 shares of common stock.

 

 

PART I. FINANCIAL INFORMATION

 

Item 1.  Financial Statements.

ChoiceOne Financial Services, Inc.
CONSOLIDATED BALANCE SHEETS

 

		March 31,				December 31,
(Dollars in thousands)		2015				2014
		(Unaudited)				(Audited)
Assets
Cash and due from banks		$	9,748			$	16,650
Securities available for sale (Note 2)			150,607				142,521
Federal Home Loan Bank stock			1,913				1,913
Federal Reserve Bank stock			1,272				1,272
Loans held for sale			2,061				2,170
Loans (Note 3)			338,293				346,113
Allowance for loan losses (Note 3)			(4,321	)			(4,173	)
Loans, net			333,973				341,940
Premises and equipment, net			11,698				11,795
Other real estate owned, net			249				150
Cash value of life insurance policies			11,997				12,071
Intangible assets, net			655				827
Goodwill			13,728				13,728
Other assets			5,033				4,603
Total assets		$	542,935			$	549,640
Liabilities
Deposits – noninterest-bearing		$	110,025			$	113,006
Deposits – interest-bearing			319,057				321,822
Total deposits			429,082				434,828
Repurchase agreements			21,153				26,743
Advances from Federal Home Loan Bank			20,880				18,363
Other liabilities			4,029				3,516
Total liabilities			475,144				483,450
Shareholders' Equity
Common stock and paid in capital, no par value;
shares authorized: 7,000,000;  shares outstanding:
3,283,146 at March 31, 2015 and 3,295,831 at December 31, 2014			46,255				46,552
Retained earnings			19,715				18,565
Accumulated other comprehensive income, net			1,821				1,073
Total shareholders’ equity			67,791				66,190
Total liabilities and shareholders’ equity		$	542,935			$	549,640

 

See accompanying notes to interim consolidated financial statements.

 

 

ChoiceOne Financial Services, Inc.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

		Three Months Ended March 31,
(Dollars in thousands, except per share data)
		2015				2014
Interest income
Loans, including fees		$	3,942			$	3,824
Securities:
Taxable			452				482
Tax exempt			349				347
Other			3				3
Total interest income			4,746				4,656
Interest expense
Deposits			225				279
Advances from Federal Home Loan Bank			19				11
Other			12				13
Total interest expense			256				303
Net interest income			4,490				4,353
Provision for loan losses			100				100
Net interest income after provision for loan losses			4,390				4,253
Noninterest income
Customer service charges			983				859
Insurance and investment commissions			341				231
Gains on sales of loans			503				146
Gains on sales of securities			8				65
Losses on sales and write-downs of other assets			(21	)			(1	)
Earnings on life insurance policies			387				71
Other			91				115
Total noninterest income			2,294				1,486
Noninterest expense
Salaries and benefits			2,299				2,084
Occupancy and equipment			596				617
Data processing			553				426
Professional fees			277				197
Supplies and postage			105				113
Advertising and promotional			67				42
Intangible amortization			112				112
Loan and collection expense			44				26
FDIC insurance			78				80
Other			429				359
Total noninterest expense			4,561				4,056
Income before income tax			2,124				1,683
Income tax expense			482				435
Net income		$	1,642			$	1,248
Basic earnings per share (Note 4)		$	0.50			$	0.38
Diluted earnings per share (Note 4)		$	0.50			$	0.38
Dividends declared per share		$	0.15			$	0.14

 

See accompanying notes to interim consolidated financial statements.

 

ChoiceOne Financial Services, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

 

 

		Three Months Ended March 31,
(Dollars in thousands)
		2015				2014
Net income		$	1,642			$	1,248
Other comprehensive income:
Unrealized holding gains on available for sale securities			1,141				243
Less: Reclassification adjustment for gain recognized in net income			(8	)			(65	)
Net unrealized gain			1,133				178
Less tax effect			(385	)			(60	)
Other comprehensive income/(loss), net of tax			748				118
Comprehensive income		$	2,390			$	1,366

 

See accompanying notes to interim consolidated financial statements

 

 

ChoiceOne Financial Services, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

 

(Dollars in thousands)		Number of Shares				Common Stock and Paid in Capital				Retained Earnings				Accumulated Other Comprehensive Income, Net				Total
Balance, January 1, 2014			3,295,463			$	46,595			$	14,815			$	148			$	61,558
Net income											1,248								1,248
Other comprehensive income															118				118
Shares issued			2,210				32												32
Effect of employee stock purchases							3												3
Stock-based compensation							5												5
Cash dividends declared ($0.14 per share)											(461	)							(461	)
Balance, March 31, 2014			3,297,673			$	46,635			$	15,602			$	266			$	62,503
Balance, January 1, 2015			3,295,831			$	46,552			$	18,565			$	1,073			$	66,190
Net income											1,642								1,642
Other comprehensive income															748				748
Shares issued			2,315				35												35
Change in ESOP repurchase obligation							(4	)											(4	)
Shares repurchased			(15,000	)			(343	)											(343	)
Effect of employee stock purchases							3												3
Stock-based compensation							12												12
Cash dividends declared ($0.15 per share)											(492	)							(492	)
Balance, March 31, 2015			3,283,146			$	46,255			$	19,715			$	1,821			$	67,791

  

See accompanying notes to interim consolidated financial statements.

 

 

ChoiceOne Financial Services, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

(Dollars in thousands)		Three Months Ended March 31,
		2015				2014
Cash flows from operating activities:
Net income		$	1,642			$	1,248
Adjustments to reconcile net income to net cash from
operating activities:
Provision for loan losses			100				100
Depreciation			244				245
Amortization			385				381
Compensation expense on stock purchases and
restricted stock units			15				8
Gains on sales of securities			(8	)			(65	)
Gains on sales of loans			(503	)			(146	)
Loans originated for sale			(6,772	)			(4,107	)
Proceeds from loan sales			7,364				4,444
Earnings on bank-owned life insurance			(387	)			(71	)
Proceeds on bank-owned life insurance			461				—
(Gains)/losses on sales of other real estate owned			(2	)			2
Write-downs of other real estate owned			23				—
Proceeds from sales of other real estate owned			58				204
Deferred federal income tax benefit			(175	)			(77	)
Net changes in other assets			(408	)			(148	)
Net changes in other liabilities			298				134
Net cash from operating activities			2,335				2,152
Cash flows from investing activities:
Securities available for sale:
Sales			1,123				4,769
Maturities, prepayments and calls			1,157				2,016
Purchases			(9,441	)			(13,940	)
Loan originations and payments, net			7,690				(4,996	)
Additions to premises and equipment			(147	)			(197	)
Net cash from investing activities			382				(12,348	)
Cash flows from financing activities:
Net change in deposits			(5,746	)			10,309
Net change in repurchase agreements			(5,590	)			(5,727	)
Proceeds from Federal Home Loan Bank advances			38,550				6,000
Payments on Federal Home Loan Bank advances			(36,033	)			(6,007	)
Issuance of common stock			35				32
Repurchase of common stock			(343	)			—
Cash dividends			(492	)			(461	)
Net cash from financing activities			(9,619	)			4,146
Net change in cash and cash equivalents			(6,902	)			(6,050	)
Beginning cash and cash equivalents			16,650				20,479
Ending cash and cash equivalents		$	9,748			$	14,429
Supplemental disclosures of cash flow information:
Cash paid for interest		$	257			$	307
Cash paid for taxes		$	320			$	—
Loans transferred to other real estate owned		$	320			$	246

 

See accompanying notes to interim consolidated financial statements.

 

 

ChoiceOne Financial Services, Inc.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

The consolidated financial statements include ChoiceOne Financial Services, Inc. (“ChoiceOne”) and its wholly-owned subsidiary, ChoiceOne Bank (the “Bank”), and the Bank’s wholly-owned subsidiary, ChoiceOne Insurance Agencies, Inc. Intercompany transactions and balances have been eliminated in consolidation.

 

The consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information, prevailing practices within the banking industry and the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

 

The accompanying consolidated financial statements reflect all adjustments ordinary in nature which are, in the opinion of management, necessary for a fair presentation of the Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014, the Consolidated Statements of Income for the three-month periods ended March 31, 2015 and March 31, 2014, the Consolidated Statements of Comprehensive Income for the three-month periods ended March 31, 2015 and March 31, 2014, the Consolidated Statements of Changes in Shareholders' Equity for the three-month periods ended March 31, 2015 and March 31, 2014, and the Consolidated Statements of Cash Flows for the three-month periods ended March 31, 2015 and March 31, 2014. Operating results for the three months ended March 31, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.

 

The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in ChoiceOne’s Annual Report on Form 10-K for the year ended December 31, 2014.

 

Allowance for Loan Losses

The allowance for loan losses is maintained at a level believed adequate by management to absorb probable incurred losses inherent in the consolidated loan portfolio. Management’s evaluation of the adequacy of the allowance is an estimate based on reviews of individual loans, assessments of the impact of current economic conditions on the portfolio and historical loss experience of seasoned loan portfolios. See Note 3 to the interim consolidated financial statements for additional information.

 

Management believes the accounting estimate related to the allowance for loan losses is a “critical accounting estimate” because (1) the estimate is highly susceptible to change from period to period because of assumptions concerning the changes in the types and volumes of the portfolios and economic conditions and (2) the impact of recognizing an impairment or loan loss could have a material effect on ChoiceOne’s assets reported on the balance sheets as well as its net income.

 

Stock Transactions

A total of 512 shares of common stock were issued to ChoiceOne’s Board of Directors for a cash price of $12,000 under the terms of the Directors’ Stock Purchase Plan in the first quarter of 2015. A total of 1,703 shares were issued upon the exercise of stock options in the first quarter of 2015. A total of 15,000 shares of common stock were repurchased in the first three months of 2015. A total of 100 shares were issued upon vesting of Restricted Stock Units in the first quarter of 2015.

 

Stock-Based Compensation

Effective July 1, 2013, ChoiceOne began granting Restricted Stock Units to a select group of employees under the Stock Incentive Plan of 2012. All of the Restricted Stock Units are initially unvested and vest in three annual installments on each of the next three anniversaries of the grant date. Certain additional vesting provisions apply. Each unit, once vested, is settled by delivery of one share of ChoiceOne common stock.

 

Reclassifications

Certain amounts presented in prior periods have been reclassified to conform to the current presentation.

 

 

NOTE 2 - SECURITIES

 

The fair value of securities available for sale and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows:

 

		March 31, 2015
(Dollars in thousands)		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
U.S. Government and federal agency		$	49,521			$	240			$	(14	)		$	49,747
U.S. Treasury			8,071				62				(12	)			8,121
State and municipal			70,864				2,159				(78	)			72,945
Mortgage-backed			8,470				89				(5	)			8,554
Corporate			7,517				69				(4	)			7,582
Foreign debt			1,000				1				—				1,001
Equity securities			2,280				28				—				2,308
Asset-backed securities			350				—				(1	)			349
Total		$	148,073			$	2,648			$	(114	)		$	150,607

		December 31, 2014
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
U.S. Government and federal agency		$	44,584			$	77			$	(158	)		$	44,503
U.S. Treasury			8,077				11				(30	)			8,058
State and municipal			68,376				1,697				(238	)			69,835
Mortgage-backed			8,896				68				(22	)			8,942
Corporate			7,529				25				(16	)			7,538
Foreign debt			1,000				—				(6	)			994
Equity securities			2,280				—				(5	)			2,275
Asset-backed securities			378				—				(2	)			376
Total		$	141,120			$	1,878			$	(477	)		$	142,521

ChoiceOne reviews its securities portfolio on a quarterly basis to determine whether unrealized losses are considered to be temporary or other-than-temporary. No other-than-temporary impairment charges were recorded in the first quarter of 2015. ChoiceOne believed that unrealized losses on securities were temporary in nature and were due to changes in interest rates and reduced market liquidity and not as a result of credit quality issues.

 

 

NOTE 3 – LOANS AND ALLOWANCE FOR LOAN LOSSES

 

Activity in the allowance for loan losses and balances in the loan portfolio were as follows:

 

(Dollars in thousands)
		Agricultural				Commercial and Industrial				Consumer				Commercial Real Estate				Construction Real Estate				Residential Real Estate				Unallocated				Total
Allowance for Loan Losses
Three Months Ended
March 31, 2015
Beginning balance		$	186			$	527			$	184			$	1,641			$	9			$	1,193			$	433			$	4,173
Charge-offs			—				—				(51	)			—				—				(1	)			—				(52	)
Recoveries			—				28				36				6				—				30				—				100
Provision			13				58				25				(149	)			30				261				(138	)			100
Ending balance		$	199			$	613			$	194			$	1,498			$	39			$	1,483			$	295			$	4,321
Individually evaluated for
impairment		$	1			$	—			$	2			$	414			$	—			$	384			$	—			$	801
Collectively evaluated for
impairment		$	198			$	613			$	192			$	1,084			$	39			$	1,099			$	295			$	3,520
Three Months Ended
March 31, 2014
Beginning balance		$	179			$	562			$	191			$	1,842			$	12			$	1,626			$	323			$	4,735
Charge-offs			—				(1	)			(53	)			(185	)			—				(90	)			—				(329	)
Recoveries			1				20				50				14				—				4				—				89
Provision			7				4				(1	)			(7	)			(5	)			24				78				100
Ending balance		$	187			$	585			$	187			$	1,664			$	7			$	1,564			$	401			$	4,595
Individually evaluated for
impairment		$	29			$	57			$	2			$	744			$	—			$	332			$	—			$	1,164
Collectively evaluated for
impairment		$	158			$	528			$	185			$	920			$	7			$	1,232			$	401			$	3,431
Loans
March 31, 2015
Individually evaluated for
impairment		$	210			$	5			$	26			$	3,031			$	—			$	2,684							$	5,956
Collectively evaluated for
impairment			35,329				88,284				19,731				97,321				3,242				88,430								332,337
Ending balance		$	35,539			$	88,289			$	19,757			$	100,352			$	3,242			$	91,114							$	338,293
December 31, 2014
Individually evaluated for
impairment		$	—			$	38			$	36			$	3,853			$	—			$	2,958							$	6,885
Collectively evaluated for
impairment			41,098				88,024				20,716				95,954				2,691				90,745								339,228
Ending balance		$	41,098			$	88,062			$	20,752			$	99,807			$	2,691			$	93,703							$	346,113

 

The process to monitor the credit quality of ChoiceOne’s loan portfolio includes tracking (1) the risk ratings of business loans, (2) the level of classified business loans, and (3) delinquent and nonperforming consumer loans. Business loans are risk rated on a scale of 1 to 8. A description of the characteristics of the ratings follows:

 

Risk ratings 1 and 2: These loans are considered pass credits. They exhibit good to exceptional credit risk and demonstrate the ability to repay the loan from normal business operations.

 

Risk rating 3: These loans are considered pass credits. They exhibit acceptable credit risk and demonstrate the ability to repay the loan from normal business operations.

 

Risk rating 4: These loans are considered pass credits. However, they have potential developing weaknesses that, if not corrected, may cause deterioration in the ability of the borrower to repay the loan. While a loss is possible for a loan with this rating, it is not anticipated.

 

Risk rating 5: These loans are considered special mention credits. Loans in this risk rating are considered to be inadequately protected by the net worth and debt service coverage of the borrower or of any pledged collateral. These loans have well defined weaknesses that may jeopardize the borrower’s ability to repay the loan. If the weaknesses are not corrected, loss of principal and interest could be probable.

 

Risk rating 6: These loans are considered substandard credits. These loans have well defined weaknesses, the severity of which makes collection of principal and interest in full questionable. Loans in this category may be placed on nonaccrual status.

 

Risk rating 7: These loans are considered doubtful credits. Some loss of principal and interest has been determined to be probable. The estimate of the amount of loss could be affected by factors such as the borrower’s ability to provide additional capital or collateral. Loans in this category are on nonaccrual status.

 

Risk rating 8: These loans are considered loss credits. They are considered uncollectible and will be charged off against the allowance for loan losses.

 

 

Information regarding the Bank’s credit exposure is as follows:

 

Corporate Credit Exposure - Credit Risk Profile By Creditworthiness Category

 

		Agricultural								Commercial and Industrial								Commercial Real Estate
(Dollars in thousands)			March 31, 2015				December 31, 2014				March 31, 2015				December 31, 2014				March 31, 2015				December 31, 2014
Risk ratings 1 and 2		$	6,631			$	9,596			$	11,427			$	11,590			$	3,346			$	3,576
Risk rating 3			21,732				24,294				59,873				59,470				59,543				58,600
Risk rating 4			6,452				6,462				15,978				15,764				28,643				28,557
Risk rating 5			662				683				793				976				5,106				4,490
Risk rating 6			62				63				218				262				3,714				4,584
Risk rating 7			—				—				—				—				—				—
		$	35,539			$	41,098			$	88,289			$	88,062			$	100,352			$	99,807

  

Corporate Credit Exposure - Credit Risk Profile Based On Payment Activity

 

		Consumer								Construction Real Estate								Residential Real Estate
			March 31,				December 31,				March 31,				December 31,				March 31,				December 31,
			2015				2014				2015				2014				2015				2014
Performing		$	19,732			$	20,752			$	3,242			$	2,691			$	88,465			$	92,974
Nonperforming			25				—				—				—				2,649				58
Nonaccrual			—				—				—				—				—				671
		$	19,757			$	20,752			$	3,242			$	2,691			$	91,114			$	93,703

 

The following schedule provides information on loans that were considered TDRs that were modified during the three months ended March 31, 2015 and March 31, 2014:

		March 31, 2015												March 31, 2014
(Dollars in thousands)			Number of				Pre- Modification Outstanding Recorded				Post- Modification Outstanding Recorded				Number of				Pre- Modification Outstanding Recorded				Post- Modification Outstanding Recorded
			Loans				Investment				Investment				Loans				Investment				Investment
Commercial real estate			3			$	669			$	669				3			$	440			$	448
Residential real estate			1				111				111				1				89				90
			4			$	780			$	780				4			$	529			$	538

 

The following schedule provides information on TDRs as of March 31, 2015 and 2014 where the borrower was past due with respect to principal and/or interest for 30 days or more during the three-month periods ended March 31, 2015 and March 31, 2014 that had been modified during the year prior to the default:

 

		Three Months Ended								Three Months Ended
		March 31, 2015								March 31, 2015
(Dollars in thousands)			Number				Recorded				Number				Recorded
			of Loans				Investment				of Loans				Investment
Commercial and industrial			—			$	—				—			$	—
Commercial real estate			3				615				3				680
			3			$	615				3			$	680

 

The pre-modification and post-modification outstanding recorded investment represents amounts as of the date of loan modification. If a difference exists between the pre-modification and post-modification outstanding recorded investment, it represents impairment recognized through the provision for loan losses computed based on a loan’s post-modification present value of expected future cash flows discounted at the loan’s original effective interest rate. If no difference exists, a loss is not expected to be incurred based on an assessment of the borrower’s expected cash flows.

 

Loans are classified as performing when they are current as to principal and interest payments or are past due on payments less than 90 days. Loans are classified as nonperforming when they are past due 90 days or more as to principal and interest payments or are considered a troubled debt restructuring.

 

Impaired loans by loan category follow:

 

						Unpaid
(Dollars in thousands)		Recorded				Principal				Related
		Investment				Balance				Allowance
March 31, 2015
With no related allowance recorded
Agricultural		$	—			$	—			$	—
Commercial and industrial			5				8				—
Consumer			—				—				—
Commercial real estate			819				874				—
Residential real estate			222				222				—
Subtotal			1,046				1,104				—
With an allowance recorded
Agricultural			210				210				1
Commercial and industrial			—				—				—
Consumer			26				26				2
Commercial real estate			2,212				2,740				414
Residential real estate			2,462				2,485				384
Subtotal			4,910				5,461				801
Total
Agricultural			210				210				1
Commercial and industrial			5				8				—
Consumer			26				26				2
Commercial real estate			3,031				3,614				414
Residential real estate			2,684				2,707				384
Total		$	5,956			$	6,565			$	801
December 31, 2014
With no related allowance recorded
Agricultural		$	—			$	—			$	—
Commercial and industrial			38				43				—
Consumer			8				8				—
Commercial real estate			413				419				—
Residential real estate			502				502				—
Subtotal			961				972				—
With an allowance recorded
Agricultural			—				—				—
Commercial and industrial			—				—				—
Consumer			28				28				4
Commercial real estate			3,440				4,498				745
Residential real estate			2,456				2,474				365
Subtotal			5,924				7,000				1,114
Total
Agricultural			—				—				—
Commercial and industrial			38				43				—
Consumer			36				36				4
Commercial real estate			3,853				4,917				745
Residential real estate			2,958				2,976				365
Total		$	6,885			$	7,972			$	1,114

 

The following schedule provides information regarding average balances of impaired loans and interest recognized on impaired loans for the three months ended March 31, 2015 and 2014:

 

		Average				Interest
(Dollars in thousands)		Recorded				Income
		Investment				Recognized
March 31, 2015
With no related allowance recorded
Agricultural		$	—			$	—
Commercial and industrial			21				—
Consumer			4				—
Commercial real estate			631				1
Residential real estate			362				—
Subtotal			1,018				1
With an allowance recorded
Agricultural			105				(6	)
Commercial and industrial			—				—
Consumer			27				1
Commercial real estate			2,826				24
Residential real estate			2,460				22
Subtotal			5,418				41
Total
Agricultural			105				(6	)
Commercial and industrial			21				—
Consumer			31				1
Commercial real estate			3,457				25
Residential real estate			2,822				22
Total		$	6,436			$	42
March 31, 2014
With no related allowance recorded
Agricultural		$	226			$	—
Commercial and industrial			145				—
Consumer			1				—
Commercial real estate			607				5
Residential real estate			747				5
Subtotal			1,726				10
With an allowance recorded
Agricultural			182				1
Commercial and industrial			465				1
Consumer			33				1
Commercial real estate			3,792				31
Residential real estate			2,123				23
Subtotal			6,595				57
Total
Agricultural			408				1
Commercial and industrial			610				1
Consumer			34				1
Commercial real estate			4,399				36
Residential real estate			2,870				28
Total		$	8,321			$	67

 

 

An aging analysis of loans by loan category follows:

 

										Greater																90 Days Past
(Dollars in thousands)		30 to 59				60 to 89				Than 90								Loans Not				Total				Due and
		Days				Days				Days (1)				Total				Past Due				Loans				Accruing
March 31, 2015
Agricultural		$	—			$	—			$	210			$	210			$	35,329			$	35,539			$	—
Commercial and industrial			309				247				—				555				87,734				88,289				—
Consumer			40				3				—				43				19,714				19,757				—
Commercial real estate			1,097				—				356				1,453				98,899				100,352				—
Construction real estate			—				—				—				—				3,242				3,242				—
Residential real estate			417				19				186				622				90,492				91,114				—
		$	1,863			$	269			$	752			$	2,883			$	335,410			$	338,293			$	—
December 31, 2014
Agricultural		$	—			$	—			$	—			$	—			$	41,098			$	41,098			$	—
Commercial and industrial			33				260				—				293				87,769				88,062				—
Consumer			66				10				—				76				20,676				20,752				—
Commercial real estate			172				51				699				922				98,885				99,807				—
Construction real estate			—				—				—				—				2,691				2,691				—
Residential real estate			1,376				404				363				2,143				91,560				93,703				58
		$	1,647			$	725			$	1,062			$	3,434			$	342,679			$	346,113			$	58

 

(1) Includes nonaccrual loans.

 

Nonaccrual loans by loan category follow:

 

(Dollars in thousands)			March 31,				December 31,
			2015				2014
Agricultural		$	210			$	—
Commercial and industrial			5				38
Consumer			—				—
Commercial real estate			1,238				2,652
Construction real estate			—				—
Residential real estate			710				671
		$	2,163			$	3,361

 

NOTE 4 - EARNINGS PER SHARE

 

Earnings per share are based on the weighted average number of shares outstanding during the period. A computation of basic earnings per share and diluted earnings per share follows:

 

		Three Months Ended
(Dollars in thousands, except per share data)		March 31,
		2015				2014
Basic Earnings Per Share
Net income available to common
shareholders		$	1,642			$	1,248
Weighted average common shares outstanding			3,297,022				3,296,350
Basic earnings per share		$	0.50			$	0.38
Diluted Earnings Per Share
Net income available to common
shareholders		$	1,642			$	1,248
Weighted average common shares outstanding			3,297,022				3,296,350
Plus dilutive stock options and restricted stock units			11,913				6,458
Weighted average common shares outstanding
and potentially dilutive shares			3,308,935				3,302,808
Diluted earnings per share		$	0.50			$	0.38

There were 16,250 stock options as of March 31, 2015 and 28,625 as of March 31, 2014 that are considered to be anti-dilutive to earnings per share for the three-month periods ended March 31, 2015 and March 31, 2014. These stock options have been excluded from the calculation above.

 

 

NOTE 5 – FINANCIAL INSTRUMENTS

 

Financial instruments as of the dates indicated were as follows:

 

										Quoted Prices
										in Active				Significant
										Markets for				Other				Significant
										Identical				Observable				Unobservable
(Dollars in thousands)		Carrying				Estimated				Assets				Inputs				Inputs
		Amount				Fair Value				(Level 1)				(Level 2)				(Level 3)
March 31, 2015
Assets:
Cash and due from banks		$	9,748			$	9,748			$	9,748			$	—			$	—
Securities available for sale			150,607				150,607				808				137,121				12,678
Federal Home Loan Bank and Federal
Reserve Bank stock			3,185				3,185				—				3,185				—
Loans held for sale			2,061				2,114				—				—				2,114
Loans, net			333,973				338,568				—				—				338,568
Liabilities:
Noninterest-bearing deposits			110,025				110,025				—				110,025				—
Interest-bearing deposits			319,057				319,121				—				319,121				—
Repurchase agreements			21,153				21,153				—				21,153				—
Federal Home Loan Bank advances			20,880				20,921				—				20,921				—
December 31, 2014
Assets:
Cash and due from banks		$	16,650			$	16,650			$	16,650			$	—			$	—
Securities available for sale			142,521				142,521				775				130,104				11,642
Federal Home Loan Bank and Federal
Reserve Bank stock			3,185				3,185				—				3,185				—
Loans held for sale			2,170				2,237				—				—				2,237
Loans, net			341,940				345,656				—				—				345,656
Liabilities:
Noninterest-bearing deposits			113,006				113,006				—				113,006				—
Interest-bearing deposits			321,822				321,757				—				321,757				—
Repurchase agreements			26,743				26,743				—				26,743				—
Federal Home Loan Bank advances			18,363				18,402				—				18,402				—

 

The estimated fair values approximate the carrying amounts for all assets and liabilities except those described later in this paragraph. The methodology for determining the estimated fair value for securities available for sale is described in Note 6. The estimated fair value for loans is based on the rates charged at March 31, 2015 and December 31, 2014 for new loans with similar maturities, applied until the loan is assumed to reprice or be paid. The allowance for loan losses is considered to be a reasonable estimate of discount for credit quality concerns. The estimated fair values for time deposits and Federal Home Loan Bank (“FHLB”) advances are based on the rates paid at March 31, 2015 and December 31, 2014 for new deposits or FHLB advances, applied until maturity. The estimated fair values for other financial instruments and off-balance sheet loan commitments are considered nominal.

 

 

NOTE 6 – FAIR VALUE MEASUREMENTS

 

The following tables present information about the Bank’s assets and liabilities measured at fair value on a recurring basis and the valuation techniques used by the Bank to determine those fair values.

In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities that the Bank has the ability to access.

Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset or liability.

In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Bank’s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability.

 

There were no liabilities measured at fair value as of March 31, 2015 or December 31, 2014. Disclosures concerning assets measured at fair value are as follows:

 

Assets Measured at Fair Value on a Recurring Basis

		Quoted Prices
		in Active				Significant
		Markets for Identical				Other Observable				Significant Unobservable
(Dollars in thousands)		Assets				Inputs				Inputs				Balance at
		(Level 1)				(Level 2)				(Level 3)				Date Indicated
Investment Securities, Available for
Sale – March 31, 2015
U.S. Treasury notes and bonds		$	—			$	8,121			$	—			$	8,121
U.S. Government and federal agency			—				49,747				—				49,747
State and municipal			—				62,164				10,781				72,945
Mortgage-backed			—				8,554				—				8,554
Corporate			—				7,185				397				7,582
Foreign debt			—				1,001				—				1,001
Equity securities			808				—				1,500				2,308
Asset backed securities			—				349				—				349
Total		$	808			$	137,121			$	12,678			$	150,607
Investment Securities, Available for
Sale - December 31, 2014
U.S. Treasury notes and bonds		$	—			$	8,058			$	—			$	8,058
U.S. Government and federal agency			—				44,503				—				44,503
State and municipal			—				60,091				9,744				69,835
Mortgage-backed			—				8,942				—				8,942
Corporate			—				7,140				398				7,538
Foreign debt			—				994				—				994
Equity securities			775				—				1,500				2,275
Asset backed securities			—				376				—				376
Total		$	775			$	130,104			$	11,642			$	142,521

 

Changes in Level 3 Assets Measured at Fair Value on a Recurring Basis

(Dollars in thousands)
			2015				2014
Investment Securities, Available for Sale
Balance, January 1		$	11,641			$	11,328
Total realized and unrealized gains included in income			—				—
Total unrealized gains (losses) included in other comprehensive income			60				(261	)
Net purchases, sales, calls, and maturities			977				(17	)
Net transfers into Level 3			—				74
Balance, March 31		$	12,678			$	11,124

Of the Level 3 assets that were held by the Bank at March 31, 2015, the net unrealized loss for the three months ended March 31, 2015 was $59,000, which is recognized in other comprehensive income in the consolidated balance sheet. $995,000 of Level 3 securities were purchased during the first quarter of 2015. There were no purchases of Level 3 securities in the first quarter of 2014. There were no sales of Level 3 securities during the first quarter of 2015 or 2014.

 

Both observable and unobservable inputs may be used to determine the fair value of positions classified as Level 3 investment securities and liabilities. As a result, the unrealized gains and losses for these assets and liabilities presented in the tables above may include changes in fair value that were attributable to both observable and unobservable inputs.

Available for sale investment securities categorized as Level 3 assets primarily consist of bonds issued by local municipalities. The Bank estimates the fair value of these bonds based on the present value of expected future cash flows using management’s best estimate of key assumptions, including forecasted interest yield and payment rates, credit quality and a discount rate commensurate with the current market and other risks involved.

The Bank also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis. These assets are not normally measured at fair value, but can be subject to fair value adjustments in certain circumstances, such as impairment. Disclosures concerning assets measured at fair value on a non-recurring basis are as follows:

 

Assets Measured at Fair Value on a Non-recurring Basis 

						Quoted Prices
						in Active				Significant
						Markets for Identical				Other Observable				Significant Unobservable
(Dollars in thousands)		Balance at				Assets				Inputs				Inputs
		Dates Indicated				(Level 1)				(Level 2)				(Level 3)
Impaired Loans
March 31, 2015		$	5,986			$	—			$	—			$	5,986
December 31, 2014		$	6,885			$	—			$	—			$	6,885
Other Real Estate
March 31, 2015		$	249			$	—			$	—			$	249
December 31, 2014		$	150			$	—			$	—			$	150

Impaired loans categorized as Level 3 assets consist of non-homogeneous loans that are considered impaired. The Bank estimates the fair value of the loans based on the present value of expected future cash flows using management’s estimate of key assumptions. These assumptions include future payment ability, timing of payment streams, and estimated realizable values of available collateral (typically based on outside appraisals). The changes in fair value consisted of charge-downs of impaired loans that were posted to the allowance for loan losses and write-downs of other real estate that were posted to a valuation account.

 

 

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations.

 

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 subsidiary, ChoiceOne Bank (the "Bank"), and the Bank’s wholly-owned subsidiary, ChoiceOne Insurance Agencies, Inc. This discussion should be read in conjunction with the interim consolidated financial statements and related notes.

 

FORWARD-LOOKING STATEMENTS

 

This discussion and other sections of this quarterly 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 ChoiceOne itself. Words such as "anticipates," "believes," "estimates," "expects," "forecasts," "intends," "is likely," "plans," "predicts," "projects," "may," "could," and variations of such words and similar expressions are intended to identify such forward-looking statements. Management’s determination of the provision and allowance for loan losses, the carrying value of goodwill and loan servicing rights, the fair value of investment securities (including whether any impairment on any investment security is temporary or other-than-temporary) and management’s assumptions concerning pension and other postretirement benefit plans involve judgments that are inherently forward-looking. All of the information concerning interest rate sensitivity is forward-looking. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions ("risk 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, implied 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.

 

Risk factors include, but are not limited to, the risk factors discussed in Item 1A of ChoiceOne’s Annual Report on Form 10-K for the year ended December 31, 2014. These are representative of the risk factors that could cause a difference between an ultimate actual outcome and a preceding forward-looking statement.

 

RESULTS OF OPERATIONS

Summary

Net income for the first quarter of 2015 was $1,642,000, which represented an increase of $394,000 or 32% compared to the same period in 2014. Growth in net interest income and noninterest income were partially offset by an increase in noninterest expense for the first quarter of 2015 compared to the first quarter of 2014. Basic and diluted earnings per common share were both $0.50 for the first quarter of 2015 compared to $0.38 for both in the same period in 2014. The return on average assets and return on average shareholders’ equity percentages were 1.21% and 9.80%, respectively, for the first quarter of 2015, compared to 0.97% and 8.13%, respectively, for the same period in 2014.

 

Dividends

Cash dividends of $492,000 or $0.15 per share were declared in the first quarter of 2015, compared to $461,000 or $0.14 per share in the first quarter of 2014. The cash dividend payout percentage was 30% for the first three months of 2015, compared to 37% in the same period a year ago.

 

Interest Income and Expense

Tables 1 and 2 on the following pages provide information regarding interest income and expense for the three-month periods ended March 31, 2015 and 2014. Table 1 documents ChoiceOne’s average balances and interest income and expense, as well as the average rates earned or paid on assets and liabilities. Table 2 documents the effect on interest income and expense of changes in volume (average balance) and interest rates. These tables are referred to in the discussion of interest income, interest expense and net interest income.

 

 

Table 1 – Average Balances and Tax-Equivalent Interest Rates

 

		Three Months Ended March 31,
		2015												2014
(Dollars in thousands)		Average												Average
		Balance				Interest				Rate				Balance				Interest				Rate
Assets:
Loans (1)		$	340,581			$	3,944				4.63	%		$	318,646			$	3,827				4.81	%
Taxable securities (2) (3)			97,665				452				1.85				97,710				482				1.97
Nontaxable securities (1) (2)			48,017				527				4.39				43,611				525				4.82
Other			4,827				3				0.25				4,246				3				0.19
Interest-earning assets			491,090				4,926				4.01				464,213				4,837				4.17
Noninterest-earning assets			51,976												49,615
Total assets		$	543,066											$	513,828
Liabilities and Shareholders' Equity:
Interest-bearing demand deposits		$	152,299				49				0.13	%		$	141,112				64				0.18	%
Savings deposits			68,068				8				0.05				66,201				10				0.06
Certificates of deposit			100,541				168				0.67				110,646				205				0.74
Advances from Federal Home Loan Bank			18,451				19				0.41				7,889				11				0.56
Other			25,675				12				0.19				21,204				13				0.23
Interest-bearing liabilities			365,034				256				0.28				347,052				303				0.35
Noninterest-bearing demand deposits			108,481												101,605
Other noninterest-bearing liabilities			2,530												3,854
Total liabilities			476,045												452,511
Shareholders' equity			67,021												61,317
Total liabilities and
shareholders' equity		$	543,066											$	513,828
Net interest income (tax-equivalent basis)-
interest spread							4,670				3.73	%							4,534				3.82	%
Tax-equivalent adjustment (1)							(180	)											(181	)
Net interest income						$	4,490											$	4,353
Net interest income as a percentage of earning
assets (tax-equivalent basis)											3.80	%											3.91	%

_____________

 

	(1)	Adjusted to a fully tax-equivalent basis to facilitate comparison to the taxable interest-earning assets. The adjustment uses an incremental tax rate of 34% for the periods presented.
	(2)	Includes the effect of unrealized gains or losses on securities.
	(3)	Taxable securities include dividend income from Federal Home Loan Bank and Federal Reserve Bank stock.

 

Table 2 – Changes in Tax-Equivalent Net Interest Income

 

(Dollars in thousands)		Three Months Ended March 31,
		2015 Over 2014
Increase (decrease) in interest income (1)			Total				Volume				Rate
Loans (2)		$	116			$	801			$	(685	)
Taxable securities			(30	)			—				(30	)
Nontaxable securities (2)			2				198				(196	)
Other			1				—				1
Net change in tax-equivalent interest income			90				999				(910	)
Increase (decrease) in interest expense (1)
Interest-bearing demand deposits			(15	)			29				(44	)
Savings deposits			(2	)			2				(4	)
Certificates of deposit			(37	)			(18	)			(19	)
Advances from Federal Home Loan Bank			8				26				(18	)
Other			—				9				(9	)
Net change in interest expense			(46	)			48				(94	)
Net change in tax-equivalent
net interest income		$	136			$	951			$	(816	)

_______________

 

	(1)	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.
	(2)	Interest on nontaxable investment securities and loans has been adjusted to a fully tax-equivalent basis using an incremental tax rate of 34% for the periods presented.

 

Net Interest Income

The presentation of net interest income on a tax-equivalent basis is not in accordance with generally accepted accounting principles (“GAAP”), but is customary in the banking industry. This non-GAAP measure ensures comparability of net interest income arising from both taxable and tax-exempt loans and investment securities. The adjustments to determine net interest income on a tax-equivalent basis were $180,000 and $182,000 for the three months ended March 31, 2015 and 2014, respectively. These adjustments were computed using a 34% federal income tax rate.

 

As shown in Tables 1 and 2, tax-equivalent net interest income increased $136,000 in the first three months of 2015 compared to the same period in 2014. The effect of growth in average interest-earning assets was partially offset by an increase in average interest-bearing liabilities, which caused net interest income to increase $951,000 in the first quarter of 2015 compared to the same quarter in the prior year. A reduction of 9 basis points in the net interest spread from 3.82% in the first quarter of 2014 to 3.73% in the same quarter in 2015, resulted in an $816,000 decrease in net interest income.

 

The average balance of loans increased $21.9 million in the first quarter of 2015 compared to the same period in 2014. Average commercial and industrial and commercial real estate loans were $19.6 million higher, while average consumer and residential mortgage loans grew $0.5 million and $1.8 million, respectively, in the same time period. The increase in the average loans balance was offset by an 18 basis point decrease in the average rate earned. This caused tax-equivalent interest income from loans to increase $116,000 in the first quarter of 2015 compared to the same period in the prior year. The average balance of total securities grew $4.4 million in the first three months of 2015 compared to the same period in 2014. Additional securities were purchased in 2014 and in the first quarter of 2015 to provide added liquidity and to provide earning asset growth. The growth in securities, which was more than offset by the effect of lower interest rates earned, caused interest income to decrease $28,000 in the first quarter of 2015 compared to the same quarter in 2014.

 

 

The average balance of interest-bearing demand deposits increased $11.2 million in the first three months of 2015 compared to the same period in 2014. The effect of the higher average balance was offset by a 5 basis point decline in the average rate paid, which caused interest expense to decrease $15,000 in the first quarter of 2015 compared to the same quarter in 2014. The average balance of savings deposits increased $1.9 million in the first quarter of 2015 compared to the same quarter in the prior year. The impact of the savings deposit growth was offset by a 1 basis point drop in the average rate paid, resulting in a decrease in interest expense of $2,000 in the first three months of 2015 compared to the same period in 2014. The average balance of certificates of deposit was down $10.1 million in the first quarter of 2015 compared to the same period in 2014. The decline in certificates of deposit plus a 7 basis point reduction in the average rate paid on certificates caused interest expense to fall $37,000 in the first quarter of 2015 compared to the same period in 2014. The effect of $10.6 million of growth in the average balance of Federal Home Loan Bank advances was partially offset by a 15 basis point decrease in the average rate paid causing interest expense to increase $8,000 in the first quarter of 2015 compared to the same quarter in 2014.

 

ChoiceOne’s net interest income spread was 3.73% in the first quarter of 2015, compared to 3.82% for the first quarter of 2014. The decline in the interest spread was due to a 16 basis point decrease in the average rate earned on interest earning assets in the first quarter of 2015 compared to the same quarter in 2014, which was partially offset by a 7 basis point decrease in the average rate paid on interest-bearing liabilities. The reduction in the average rate earned on interest-earning assets was caused by relatively low general market rates on new loan originations and securities purchased in 2014 and the first quarter of 2015. Interest rates on loans are also being impacted by rate pressure from some of ChoiceOne’s competing financial institutions. The lower rate paid on interest-bearing liabilities resulted from repricing of local deposits as general market interest rates remained low during 2014 and the first quarter of 2015.

 

Provision and Allowance for Loan Losses

Total loans declined $7.8 million since the end of 2014, while the allowance for loan losses increased $148,000 during the same period. The provision for loan losses was $100,000 in both the first quarter of 2015 and the first quarter of 2014. Nonperforming loans were $5.9 million as of March 31, 2015, compared to $6.6 million as of December 31, 2014. The decrease in nonperforming loans in the first quarter of 2015 was comprised primarily of a reduction of $1.2 million in nonaccrual loans, which was partially offset by an increase in loans considered troubled debt restructurings of $0.6 million. The allowance for loan losses was 1.28% of total loans at March 31, 2015, compared to 1.21% at December 31, 2013 and 1.43% at March 31, 2014.

 

Charge-offs and recoveries for respective loan categories for the three months ended March 31 were as follows:

 

(Dollars in thousands)		2015								2014
			Charge-offs				Recoveries				Charge-offs				Recoveries
Agricultural		$	—			$	—			$	—			$	1
Commercial and industrial			—				28				1				20
Consumer			51				36				53				50
Real estate, commercial			—				6				185				14
Real estate, residential			1				30				90				4
		$	52			$	100			$	329			$	89

 

Net recoveries were $49,000 in the first quarter of 2015, compared to net charge-offs of $240,000 in the first quarter of 2014. Net charge-offs on an annualized basis as a percentage of average loans were a negative 0.06% in the first three months of 2015 compared to 0.30% for the same period in the prior year. Management is aware that the economic climate in Michigan will continue to affect business and individual borrowers. Management has worked and intends to continue to work with delinquent borrowers in an attempt to lessen the negative impact to ChoiceOne. As charge-offs, changes in the level of nonperforming loans, and changes within the composition of the loan portfolio occur throughout 2015, the provision and allowance for loan losses will be reviewed by the Bank's management and adjusted as determined to be necessary.

 

 

Noninterest Income

Total noninterest income increased $808,000 in the first quarter of 2015 compared to the same period in 2014. An increase in customer service charges of $124,000 in the first quarter of 2015 compared to the same period in the prior year was due to service charges from ChoiceOne’s new checking accounts and income from additional debit card activity. Insurance and investment commissions increased $110,000 in the first quarter of 2015 compared to the same period in 2014 due to a higher level of investment sale and increased advisory fee income. Gains on loan sales grew $357,000 in the first quarter of 2015 compared to the same period in 2014 as low interest rates for long-term fixed-rate residential mortgages has stimulated a higher level of activity. A decrease of $57,000 in the first quarter of 2015 in gains on sales of securities when compared to the same period in 2014 resulted from lower sales activity in the current year. A larger loss on sales of other assets in the first quarter of 2015 compared to the same period in 2014 resulted from a write down of an other real estate owned property in the current year. A death benefit of $308,000 received on a bank owned life insurance policy in the first quarter of 2015 provided most of the increase in earnings on life insurance policies. The decrease in other noninterest income in the first quarter of 2015 compared to the first quarter in the prior year was caused by a $34,000 loss from ChoiceOne’s investment in its data processing center. The data processing center experienced additional expenses related to ChoiceOne’s core data processing conversion that is scheduled for October 2015.

 

Noninterest Expense

Total noninterest expense increased $504,000 in the first quarter of 2015 compared to the same period in 2014. The increase of $215,000 in salaries and benefits in the first quarter of 2015 compared to the same period in 2014 resulted from higher commission expense related to mortgage and investment sales, salaries, bonus accruals, and health insurance costs. Approximately $60,000 of the increase in data processing expenses in 2015 compared to 2014 was related to ChoiceOne’s core data processing conversion scheduled for October 2015 with most of the remainder caused by higher costs for electronic banking services. Professional fees increased $80,000 in the first quarter of 2015 compared to the same period in 2014 as a result of more use of outside consultants. Approximately $41,000 of the growth in other noninterest expense in 2015 compared to 2014 was caused by higher donation expenses.

 

Income Tax Expense

Income tax expense was $482,000 in the first quarter of 2015 compared to $435,000 for the same period in 2014. The effective tax rate was 22.7% for 2015 and 25.9% for 2014. The decrease in the effective tax rate in 2015 compared to 2014 was due to the effect of the $308,000 death benefit received in the first quarter of 2015 from a bank owned life insurance policy.

 

FINANCIAL CONDITION

Securities

The securities available for sale portfolio increased $8.1 million from December 31, 2014 to March 31, 2015. The increase in the securities portfolio resulted from ChoiceOne’s desire to grow earning assets and to offset part of the decline in total loans in the first quarter of 2015. Various securities totaling $9.4 million were purchased in the first three months of 2015 to provide earning assets and to replace maturities, principal repayments, and calls within the securities portfolio. Approximately $0.7 million in various securities were called or matured during the first quarter of 2015. Principal repayments on securities totaled $0.5 million in the first three months of 2015. Approximately $1.1 million of securities were sold in the first three months of 2015 for a net gain of $8,000.

 

Loans

The loan portfolio (excluding loans held for sale) declined $7.8 million from December 31, 2014 to March 31, 2015. Reductions of $5.6 million, $2.6 million, and $1.0 million in agricultural loans, residential mortgage loans, and consumer loans were offset partially by increases of less than $1.0 million each in commercial and industrial loans, commercial real estate loans, and construction real estate loans. The decrease in agricultural loans was caused in part by seasonal pay downs by borrowers. The decline in residential mortgage loans was due to the sale of the majority of loan volume into the secondary market.

 

Asset Quality

Information regarding impaired loans can be found in Note 3 to the consolidated financial statements included in this report. The total balance of loans classified as impaired was $6.0 million at March 31, 2015, compared to $6.9 million as of December 31, 2014. The balance of commercial real estate loans and residential real estate loans classified as impaired declined $822,000 and $273,000, respectively, in the first quarter 2015 while impaired agricultural loans grew $210,000 since the end of 2014.

 

As part of its review of the loan portfolio, management also monitors the various nonperforming loans. Nonperforming loans are comprised of: (1) loans accounted for on a nonaccrual basis; (2) loans, not included in nonaccrual loans, which are contractually past due 90 days or more as to interest or principal payments; and (3) loans, not included in nonaccrual or loans past due 90 days or more, which are considered troubled debt restructurings.

 

 

The balances of these nonperforming loans were as follows:

 

(Dollars in thousands)		March 31,				December 31,
		2015				2014
Loans accounted for on a nonaccrual basis		$	2,163			$	3,361
Accruing loans contractually past due 90 days
or more as to principal or interest payments			—				58
Loans considered troubled debt restructurings			3,757				3,175
Total		$	5,920			$	6,594

 

At March 31, 2015, nonaccrual loans included $1,238,000 in commercial estate loans, $710,000 in residential real estate loans, $210,000 in agricultural loans, and $5,000 in commercial and industrial loans. At December 31, 2014, nonaccrual loans included $2,652,000 in commercial real estate loans, $671,000 in residential real estate loans, and $38,000 in commercial and industrial loans. The decrease in nonaccrual loans was primarily due to credits placed back on an accrual status once they became performing loans. The increase in loans considered troubled debt restructurings was caused by three loans moved into this category in the first quarter of 2015. Management believes the allowance allocated to its nonperforming loans is sufficient at March 31, 2015.

 

Deposits and Borrowings

Total deposits decreased $5.7 million in the first quarter of 2015. Checking and savings deposits increased $3.5 million, while certificates of deposit decreased $9.2 million in the first three months of 2015.

 

A decrease of $5.6 million in repurchase agreements in the first three months of 2015 was due to normal fluctuations in funds provided by bank customers. Certain securities are sold under agreements to repurchase them the following day. Management plans to continue this practice as a low-cost source of funding. Federal Home Loan Bank advances grew $2.5 million in the first quarter of 2015 as advances were used to replace some of the decline in deposits.

 

Shareholders' Equity

Total shareholders' equity increased $1,601,000 from December 31, 2014 to March 31, 2015. Growth in equity resulted from current year’s net income, increases in accumulated other comprehensive income and proceeds from the issuance of ChoiceOne stock, which was partially offset by cash dividends paid and a repurchase of stock. The $748,000 increase in accumulated other comprehensive income since the end of 2014 was caused by an increase in net unrealized gains on available for sale securities. The change in unrealized gains resulted from decreases in certain interest rate terms in the first quarter of 2015, which increased the market value of the Bank’s securities.

 

 

Following is information regarding the Bank’s compliance with regulatory capital requirements:

 

																		Minimum Required
																		to be Well
										Minimum Required								Capitalized Under
										for Capital								Prompt Corrective
(Dollars in thousands)		Actual								Adequacy Purposes								Action Regulations
			Amount				Ratio				Amount				Ratio				Amount				Ratio
March 31, 2015
ChoiceOne Financial Services Inc.
Total capital (to risk weighted assets)		$	55,771				13.1	%		$	34,089				8.0	%			N/A				N/A
Tier 1 capital (to risk weighted assets)			51,527				12.1				17,044				6.0				N/A				N/A
Common Equity Tier 1 Capital (to risk weighted assets)			51,527				12.1				19,175				4.5				N/A				N/A
Tier 1 capital (to average assets)			51,527				9.8				21,130				4.0				N/A				N/A
ChoiceOne Bank
Total capital (to risk weighted assets)		$	54,463				12.8	%		$	34,009				8.0	%		$	42,511				10.0	%
Tier 1 capital (to risk weighted assets)			50,219				11.8				17,004				6.0				25,507				8.0
Common Equity Tier 1 Capital (to risk weighted assets)			50,219				11.8				19,130				4.5				27,632				6.5
Tier 1 capital (to average assets)			50,219				9.5				21,081				4.0				26,351				5.0
December 31, 2014
ChoiceOne Financial Services Inc.
Total capital (to risk weighted assets)		$	55,223				14.3	%		$	30,948				8.0	%			N/A				N/A
Tier 1 capital (to risk weighted assets)			50,562				13.1				15,474				4.0				N/A				N/A
Tier 1 capital (to average assets)			50,562				9.6				21,016				4.0				N/A				N/A
ChoiceOne Bank
Total capital (to risk weighted assets)		$	52,664				13.6	%		$	30,881				8.0	%		$	38,601				10.0	%
Tier 1 capital (to risk weighted assets)			48,665				12.6				15,441				4.0				23,161				6.0
Tier 1 capital (to average assets)			48,665				9.3				20,971				4.0				26,214				5.0

 

Management reviews the capital levels of ChoiceOne and the Bank on a regular basis. The Board of Directors (the “Board”) and management believe that the capital levels as of March 31, 2015 are adequate for the foreseeable future. The Board’s determination of appropriate cash dividends for future periods will be based on, among other things, market conditions and ChoiceOne’s requirements for cash and capital.

 

Liquidity

Net cash provided from operating activities was $2.4 million for the three months ended March 31, 2015 compared to $2.1 million provided in the same period a year ago. Various small fluctuations caused the slight increase. Net cash from investing activities was $0.4 million for the first three months of 2015 compared to net cash used of $12.3 million in the same period in 2014. The change was due to a higher level of cash provided by a decrease in loan balances in the first quarter of 2015 in contrast with an increase in the same quarter in 2014. Net cash used in financing activities was $9.6 million in the three months ended March 31, 2015 compared to net cash from financing activities of $4.1 million in the same period in the prior year. The effect of a decline in deposits in the first quarter of 2015 compared to growth in the same quarter in 2014 was partially offset by a higher level of net proceeds from Federal Home Loan Bank advances.

 

Management believes that the current level of liquidity is sufficient to meet the Bank's normal operating needs. This belief is based upon the availability of deposits from both the local and national markets, maturities of securities, normal loan repayments, income retention, federal funds purchased from correspondent banks, and advances available from the Federal Home Loan Bank. The Bank also has a secured line of credit available from the Federal Reserve Bank.

 

 

Item 4.  Controls and Procedures.

 

An evaluation was performed under the supervision and with the participation of ChoiceOne’s management, including the Chief Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of ChoiceOne’s disclosure controls and procedures. Based on and as of the time of that evaluation, ChoiceOne’s management, including the Chief Executive Officer and Principal Financial Officer, concluded that ChoiceOne’s disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that material information required to be disclosed in the reports that ChoiceOne files or submits under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that ChoiceOne files or submits under the Exchange Act is accumulated and communicated to management, including ChoiceOne’s principal executive and principal financial officers, as appropriate to allow for timely decisions regarding required disclosure. There was no change in ChoiceOne’s internal control over financial reporting that occurred during the three months ended March 31, 2015 that has materially affected, or that is reasonably likely to materially affect, ChoiceOne’s internal control over financial reporting.

 

 PART II.  OTHER INFORMATION

 

Item 1.  Legal Proceedings.

 

There are no material pending legal proceedings to which ChoiceOne or the Bank is a party or to which any of their properties are subject, except for proceedings that arose in the ordinary course of business. In the belief of management, pending or current legal proceedings should not have a material effect on the consolidated financial condition of ChoiceOne.

 

Item 1A.  Risk Factors.

 

Information concerning risk factors is contained in the discussion in Item 1A, “Risk Factors,” in ChoiceOne’s Annual Report on Form 10-K for the year ended December 31, 2014. As of the date of this report, ChoiceOne does not believe that there has been a material change in the nature or categories of ChoiceOne's risk factors, as compared to the information disclosed in ChoiceOne’s Annual Report on Form 10-K for the year ended December 31, 2014.

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

 

On January 22, 2015 ChoiceOne issued 512 shares of common stock, without par value, to the directors of ChoiceOne pursuant to the Directors’ Stock Purchase Plan for an aggregate cash price of $12,000. ChoiceOne relied on the exemption contained in Section 4(a)(5) of the Securities Act of 1933 in connection with these sales.

 

 

ISSUER PURCHASES OF EQUITY SECURITIES

 

The following table provides information regarding ChoiceOne’s purchases of its own common stock during the quarter ended March 31, 2015.

 

										Total Number				Maximum
										of Shares				Number of
										Purchased as				Shares that
(Dollars in thousands, except per share data)		Total Number				Average				Part of a				May Yet be
		of Shares				Price Paid				Publicly				Purchased
Period		Purchased				per Share				Announced Plan				Under the Plan
January 1 - January 31, 2015
Employee Transactions			—			$	—
Repurchase Plan			—			$	—				—				75,424
February 1 - February 28, 2015
Employee Transactions			—			$	—
Repurchase Plan (1)			15,000			$	22.85				15,000				60,424
March 1 - March 31, 2015
Employee Transactions			—			$	—
Repurchase Plan			—			$	—				—				60,424

________________

(1)

On February 10, 2015, ChoiceOne purchased 15,000 shares of common stock for an aggregate cash price of $343,000. As of March 31, 2015, there are 60,424 shares remaining that may yet be purchased under approved plans. The repurchase plan was adopted and announced on July 26, 2007. There is no stated expiration date. The plan authorized the repurchase of up to 100,000 shares.

 

Item 6.  Exhibits

 

The following exhibits are filed or incorporated by reference as part of this report:

 

Exhibit Number	Document
3.1	Amended and Restated Articles of Incorporation of ChoiceOne. Previously filed as an exhibit to ChoiceOne’s Form 10-K Annual Report for the year ended December 31, 2014.  Here incorporated by reference.
3.2	Bylaws of ChoiceOne as currently in effect and any amendments thereto.  Previously filed as an exhibit to ChoiceOne’s Form 10-K Annual Report for the year ended December 31, 2014.  Here incorporated by reference.
31.1	Certification of President and Chief Executive Officer
31.2	Certification of Treasurer
32.1	Certification pursuant to 18 U.S.C. § 1350
101.1	Interactive Data File.

 

 

SIGNATURES

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	CHOICEONE FINANCIAL SERVICES, INC.
Date:   May 13, 2015	/s/ James A. Bosserd
	James A. Bosserd President and Chief Executive Officer (Principal Executive Officer)
Date:   May 13, 2015	/s/ Thomas L. Lampen
	Thomas L. Lampen Treasurer (Principal Financial and Accounting Officer)