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.

 

2
 

 

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.

 

3
 


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

 

4
 

 

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.

 

5
 

 

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.

 

6
 

 

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.

 

7
 

 

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.

 

8
 

 

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 

9
 

 

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.

 

10
 

 

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 

11
 

 

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.

 

12
 

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 

13
 

 

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 

 

 

14
 

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 

15
 

 

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.

 

16
 

 

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.

 

17
 

 

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 

18
 

 

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.

 

19
 

 

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.

 

20
 

 

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.

21
 

 

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.

 

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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.

 

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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.

 

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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.

 

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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.

 

26
 

 

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.

 

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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.

 

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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)

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