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 September 30, 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 October 31, 2015, the Registrant had outstanding 3,292,716 shares of common stock.

 

 
 

 

 

PART I. FINANCIAL INFORMATION

 

Item 1.  Financial Statements.

ChoiceOne Financial Services, Inc.
CONSOLIDATED BALANCE SHEETS

 

   September 30,  December 31,
(Dollars in thousands)  2015  2014
   (Unaudited)  (Audited)
Assets      
Cash and due from banks  $12,387   $16,650 
           
Securities available for sale (Note 2)   154,329    142,521 
Federal Home Loan Bank stock   1,614    1,913 
Federal Reserve Bank stock   1,573    1,272 
           
Loans held for sale   2,559    2,170 
Loans (Note 3)   343,046    346,113 
Allowance for loan losses (Note 3)   (4,317)   (4,173)
Loans, net   338,729    341,940 
           
   Premises and equipment, net   11,885    11,795 
   Cash value of life insurance policies   12,172    12,071 
   Intangible assets, net   491    827 
   Goodwill   13,728    13,728 
   Other assets   5,324    4,753 
      Total assets  $554,791   $549,640 
           
Liabilities          
   Deposits – noninterest-bearing  $114,805   $113,006 
   Deposits – interest-bearing   352,291    321,822 
      Total deposits   467,096    434,828 
           
Federal funds purchased   1,171    —   
Repurchase agreements   7,038    26,743 
Advances from Federal Home Loan Bank   6,840    18,363 
    Other liabilities   3,145    3,516 
      Total liabilities   485,290    483,450 
           
Shareholders' Equity          
   Common stock and paid in capital, no par value;          
      shares authorized: 7,000,000;  shares outstanding:          
      3,291,928 at September 30, 2015 and 3,295,834 at December 31, 2014   46,399    46,552 
   Retained earnings   21,478    18,565 
   Accumulated other comprehensive income, net   1,624    1,073 
      Total shareholders’ equity   69,501    66,190 
      Total liabilities and shareholders’ equity  $554,791   $549,640 

 

See accompanying notes to interim consolidated financial statements.

 

2 
 

 

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

 

(Dollars in thousands, except per share data)  Three Months Ended
September 30,
  Nine Months Ended
September 30,
   2015  2014  2015  2014
Interest income            
   Loans, including fees  $4,015   $4,008   $11,945   $11,772 
   Securities:                    
      Taxable   489    458    1,427    1,394 
      Tax exempt   361    349    1,067    1,039 
   Other   6    2    10    6 
         Total interest income   4,871    4,817    14,449    14,211 
                     
Interest expense                    
   Deposits   222    258    663    800 
   Advances from Federal Home Loan Bank   17    15    64    41 
   Other   7    9    28    33 
         Total interest expense   246    282    755    874 
                     
Net interest income   4,625    4,535    13,694    13,337 
Provision for loan losses   —      —      100    100 
                     
Net interest income after provision for loan losses   4,625    4,535    13,594    13,237 
                     
Noninterest income                    
   Customer service charges   1,092    1,056    3,137    2,878 
   Insurance and investment commissions   219    242    852    678 
   Gains on sales of loans   308    276    1,120    726 
   Gains on sales of securities   155    89    208    182 
   Losses on sales and write-downs of other assets   (21)   (32)   (97)   (142)
   Earnings on life insurance policies   87    75    562    219 
   Other   120    130    322    362 
         Total noninterest income   1,960    1,836    6,104    4,903 
                     
Noninterest expense                    
   Salaries and benefits   2,323    2,127    6,835    6,288 
   Occupancy and equipment   598    599    1,786    1,812 
   Data processing   558    473    1,689    1,360 
   Professional fees   263    250    776    683 
   Supplies and postage   100    100    278    317 
   Advertising and promotional   54    57    179    191 
   Intangible amortization   112    112    336    336 
   Loan and collection expense   53    37    104    103 
   FDIC insurance   72    86    222    257 
   Other   469    388    1,441    1,151 
         Total noninterest expense   4,602    4,229    13,646    12,498 
                     
Income before income tax   1,983    2,142    6,052    5,642 
Income tax expense   533    588    1,529    1,503 
                     
Net income  $1,450   $1,554   $4,523   $4,139 
                     
Basic earnings per share (Note 4)  $0.44   $0.47   $1.37   $1.25 
Diluted earnings per share (Note 4)  $0.44   $0.47   $1.37   $1.25 
Dividends declared per share  $0.17   $0.15   $0.49   $0.44 

 

See accompanying notes to interim consolidated financial statements.

 

3 
 

 

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

 

(Dollars in thousands)  Three Months Ended
September 30,
  Nine Months Ended
September 30,
   2015  2014  2015  2014
Net income  $1,450   $1,554   $4,523   $4,139 
                     
Other comprehensive income:                    
Unrealized holding gains on available for sale securities   852    230    1,043    1,420 
Less: Reclassification adjustment for gain recognized in net income   (155)   (89)   (208)   (182)
Net unrealized gain    697    141    835    1,238 
Less tax effect   (237)   (48)   (284)   (420)
Other comprehensive income, net of tax   460    93    551    818 
                     
Comprehensive income  $1,910   $1,647   $5,074   $4,957 

 

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             4,139         4,139 
Other comprehensive income                  818    818 
Shares repurchased   (3,437)   (69)             (69)
Shares issued   7,137    101              101 
Change in ESOP repurchase obligation        (18)             (18)
Effect of employee stock purchases        9              9 
Stock-based compensation   942    18              18 
Cash dividends declared ($0.44 per share)             (1,451)        (1,451)
                          
Balance, September 30, 2014   3,300,105   $46,636   $17,503   $966   $65,105 
                          
                          
Balance, January 1, 2015   3,295,834   $46,552   $18,565   $1,073   $66,190 
                          
Net income             4,523         4,523 
Other comprehensive income                  551    551 
Shares repurchased   (16,200)   (371)             (371)
Shares issued   10,010    153              153 
Change in ESOP repurchase obligation        (4)             (4)
Effect of employee stock purchases        9              9 
Stock-based compensation   2,284    60              60 
Cash dividends declared ($0.49 per share)             (1,610)        (1,610)
                          
Balance, September 30, 2015   3,291,928   $46,399   $21,478   $1,624   $69,501 

 

See accompanying notes to interim consolidated financial statements.

 

5 
 

 

 

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

 

   Nine Months Ended
September 30,
(Dollars in thousands)      
   2015  2014
Cash flows from operating activities:      
   Net income  $4,523   $4,139 
   Adjustments to reconcile net income to net cash from          
      operating activities:          
      Provision for loan losses   100    100 
      Depreciation   736    746 
      Amortization   1,111    1,156 
      Compensation expense on stock purchases and          
restricted stock units   69    27 
      Gains on sales of securities   (208)   (182)
      Gains on sales of loans   (1,120)   (726)
      Loans originated for sale   (36,402)   (20,892)
      Proceeds from loan sales   37,093    20,506 
      Earnings on bank-owned life insurance   (562)   (219)
      Proceeds on bank-owned life insurance   461    —   
      Gains on sales of other real estate owned   (11)   (22)
      Write-downs of other real estate owned   108    154 
      Proceeds from sales of other real estate owned   299    761 
      Deferred federal income tax benefit   (209)   (250)
      Net changes in other assets   (716)   (724)
      Net changes in other liabilities   (452)   937 
            Net cash from operating activities   4,820    5,511 
           
Cash flows from investing activities:          
   Securities available for sale:          
      Sales   23,329    17,386 
      Maturities, prepayments and calls   12,469    8,637 
      Purchases   (47,171)   (30,211)
   Loan originations and payments, net   2,733    (23,146)
   Additions to premises and equipment   (826)   (615)
            Net cash from investing activities   (9,466)   (27,949)
           
Cash flows from financing activities:          
   Net change in deposits   32,268    4,423 
   Net change in repurchase agreements   (19,705)   (6,379)
   Net change in federal funds purchased   1,171    2,149 
   Proceeds from Federal Home Loan Bank advances   116,575    56,700 
   Payments on Federal Home Loan Bank advances   (128,098)   (42,722)
   Issuance of common stock   153    101 
   Repurchase of common stock   (371)   (69)
   Cash dividends   (1,610)   (1,451)
            Net cash from financing activities   383    12,752 
           
Net change in cash and cash equivalents   (4,263)   (9,686)
Beginning cash and cash equivalents   16,650    20,479 
           
Ending cash and cash equivalents  $12,387   $10,793 
           
Supplemental disclosures of cash flow information:          
   Cash paid for interest  $766   $980 
   Cash paid for taxes  $2,395   $884 
   Loans transferred to other real estate owned  $378   $521 

 

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 following unaudited condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the company believes that the disclosures made are adequate to make the information not misleading.

 

The accompanying consolidated financial statements reflect all adjustments ordinary in nature which are, in the opinion of management, necessary for a fair presentation of the Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014, the Consolidated Statements of Income for the three- and nine-month periods ended September 30, 2015 and September 30, 2014, the Consolidated Statements of Comprehensive Income for the three- and nine-month periods ended September 30, 2015 and September 30, 2014, the Consolidated Statements of Changes in Shareholders’ Equity for the nine-month periods ended September 30, 2015 and September 30, 2014, and the Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2015 and September 30, 2014. Operating results for the nine months ended September 30, 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 3,907 shares of common stock were issued to ChoiceOne’s Board of Directors for a cash price of $85,000 under the terms of the Directors’ Stock Purchase Plan in the first nine months of 2015. A total of 2,733 shares were issued upon the exercise of stock options in the first three quarters of 2015. A total of 3,370 shares of common stock were issued to employees for a cash price of $44,000 under the Employee Stock Purchase Plan in the first nine months of 2015. A total of 2,284 shares were issued to employees for Restricted Stock Units that vested during the first three quarters of 2015. A total of 16,200 shares of common stock were repurchased by ChoiceOne in the first nine months 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:

 

     September 30, 2015   
    Gross  Gross   
(Dollars in thousands)  Amortized  Unrealized  Unrealized  Fair
  Cost  Gains  Losses  Value
U.S. Government and federal agency  $55,333   $274   $(7)  $55,600 
U.S. Treasury   6,142    35    (1)   6,176 
State and municipal   71,136    1,846    (101)   72,881 
Mortgage-backed   7,476    62    (9)   7,529 
Corporate   8,428    24    (17)   8,435 
Foreign debt   1,000    1    —      1,001 
Equity securities   2,280    132    —      2,412 
Asset-backed securities   298    —      (3)   295 
  Total  $152,093   $2,374   $(138)  $154,329 
                     
       December 31, 2014    
       Gross  Gross 
  Amortized  Unrealized  Unrealized  Fair
  Cost  Gains  Losses  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 during the nine months ended September 30, 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
September 30, 2015
                                        
Beginning balance  $279   $498   $193   $1,284   $28   $1,375   $695   $4,352 
Charge-offs   —      —      (65)   —      —      (25)   —      (90)
Recoveries   —      11    25    15    —      4    —      55 
Provision   10    (14)   57    (179)   15    (2)   113    —   
Ending balance  $289   $495   $210   $1,120   $43   $1,352   $808   $4,317 
                                         

Nine Months Ended

September 30, 2015

                         
Beginning balance  $187   $527   $183   $1,641   $9   $1,193   $433   $4,173 
Charge-offs   —      —      (172)   —      —      (46)   —      (218)
Recoveries   1    59    104    36    —      62    —      262 
Provision   101    (91)   95    (557)   34    143    375    100 
Ending balance  $289   $495   $210   $1,120   $43   $1,352   $808   $4,317 
                                         
Individually evaluated for impairment  $3   $1   $29   $296   $—     $355   $—     $684 
                                         
Collectively evaluated for  impairment  $286   $494   $181   $824   $43   $997   $808   $3,633 
                                         

Three Months Ended

September 30, 2014

                                        
Beginning balance  $180   $677   $195   $1,743   $5   $1,269   $587   $4,656 
Charge-offs   —      —      (82)   —      —      (7)   —      (89)
Recoveries   6    23    39    16    —      9    —      93 
Provision   (47)   (78)   42    325    1    (120)   (123)   —   
Ending balance  $139   $622   $194   $2,084   $6   $1,151   $464   $4,660 
                                         

Nine Months Ended

September 30, 2014

                                        
Beginning balance  $179   $562   $192   $1,842   $12   $1,625   $323   $4,735 
Charge-offs   —      —      (199)   (185)   —      (117)   —      (501)
Recoveries   10    90    146    39    —      41    —      326 
Provision   (50)   (30)   55    388    (6)   (398)   141    100 
Ending balance  $139   $622   $194   $2,084   $6   $1,151   $464   $4,660 
                                         
Individually evaluated for impairment  $6   $18   $3   $1,053   $—     $301   $—     $1,381 
                                         
Collectively evaluated for impairment  $133   $604   $191   $1,031   $6   $850   $464   $3,279 
                                         

Loans

September 30, 2015

                                        
Individually evaluated for impairment  $51   $107   $69   $3,325   $—     $2,473        $6,025 
Collectively evaluated for impairment   37,626    88,658    20,504    95,879    4,701    89,653         337,021 
Ending balance  $37,677   $88,765   $20,573   $99,204   $4,701   $92,126        $343,046 
                                         
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.

 

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)  September 30,  December 31,  September 30,  December 31,  September 30,  December 31,
   2015  2014  2015  2014  2015  2014
Risk ratings 1 and 2  $7,576   $9,596   $9,149   $11,590   $3,322   $3,576 
Risk rating 3   23,957    24,294    63,839    59,470    58,634    58,600 
Risk rating 4   4,252    6,462    14,899    15,764    29,904    28,557 
Risk rating 5   1,841    683    862    976    4,955    4,490 
Risk rating 6   51    63    16    262    2,389    4,584 
Risk rating 7   —      —      —      —      —      —   
   $37,677   $41,098   $88,765   $88,062   $99,204   $99,807 

 

Corporate Credit Exposure - Credit Risk Profile Based On Payment Activity:

 

   Consumer  Construction Real Estate  Residential Real Estate
(Dollars in thousands)  September 30,  December 31,  September 30,  December 31,  September 30,  December 31,
   2015  2014  2015  2014  2015  2014
Performing  $20,544   $20,752   $4,701   $2,691   $89,619   $92,974 
Nonperforming   29    —      —      —      2,059    58 
Nonaccrual   —      —      —      —      448    671 
   $20,573   $20,752   $4,701   $2,691   $92,126   $93,703 

 

 

10 
 

 

The following schedule provides information on loans that were considered TDRs that were modified during the three- and nine-month periods ended September 30, 2015:

 

   Three Months Ended September 30, 2015  Nine Months Ended September 30, 2015
      Pre-  Post-     Pre-  Post-
      Modification  Modification     Modification  Modification
      Outstanding  Outstanding     Outstanding  Outstanding
(Dollars in thousands)  Number of  Recorded  Recorded  Number of  Recorded  Recorded
   Loans  Investment  Investment  Loans  Investment  Investment
Commercial real estate   —     $—     $—      4   $448   $448 
Residential real estate   1    85    85    2    193    193 
    1   $85   $85    6   $641   $641 

 

The following schedule provides information on loans that were considered TDRs that were modified during the three- and nine-month periods ended September 30, 2014:

 

   Three Months Ended September 30, 2014  Nine Months Ended September 30, 2014
      Pre-  Post-     Pre-  Post-
      Modification  Modification     Modification  Modification
      Outstanding  Outstanding     Outstanding  Outstanding
(Dollars in thousands)  Number of  Recorded  Recorded  Number of  Recorded  Recorded
   Loans  Investment  Investment  Loans  Investment  Investment
Commercial real estate   2   $731   $731    5   $1,165   $1,167 
Residential real estate   1    197    193    2    286    281 
    3   $928   $924    7   $1,451   $1,448 

 

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.

 

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

 

   Three Months Ended  Nine Months Ended
   September 30, 2015  September 30, 2015
(Dollars in thousands)  Number  Recorded  Number  Recorded
   of Loans  Investment  of Loans  Investment
Commercial real estate   2   $293    3   $409 

 

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

 

   Three Months Ended  Nine Months Ended
   September 30, 2014  September 30, 2014
(Dollars in thousands)  Number  Recorded  Number  Recorded
   of Loans  Investment  of Loans  Investment
Commercial and industrial   6   $1,315    6   $1,315 
Commercial real estate   2    111    2    111 
    8   $1,426    8   $1,426 

 

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.

 

11 
 

 

Impaired loans by loan category follow:

 

      Unpaid   
(Dollars in thousands)  Recorded  Principal  Related
   Investment  Balance  Allowance
September 30, 2015         
With no related allowance recorded         
  Agricultural  $—     $—     $—   
  Commercial and industrial   4    7    —   
  Consumer   —      —      —   
  Commercial real estate   1,790    1,833    —   
  Residential real estate   42    42    —   
Subtotal   1,836    1,882    —   
With an allowance recorded               
  Agricultural   51    51    3 
  Commercial and industrial   103    103    1 
  Consumer   69    69    29 
  Commercial real estate   1,535    2,069    296 
  Residential real estate   2,431    2,444    355 
Subtotal   4,189    4,736    684 
Total               
  Agricultural   51    51    3 
  Commercial and industrial   107    110    1 
  Consumer   69    69    29 
  Commercial real estate   3,325    3,902    296 
  Residential real estate   2,473    2,486    355 
Total  $6,025   $6,618   $684 
                
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 

 

 

12 
 

 

The following schedule provides information regarding average balances of impaired loans and interest recognized on impaired loans for the nine months ended September 30, 2015 and 2014:

 

   Average  Interest
(Dollars in thousands)  Recorded  Income
   Investment  Recognized
September 30, 2015      
With no related allowance recorded          
  Agricultural  $—     $—   
  Commercial and industrial   13    —   
  Consumer   2    —   
  Commercial real estate   941    23 
  Residential real estate   236    (1)
Subtotal   1,192    22 
With an allowance recorded          
  Agricultural   65    (6)
  Commercial and industrial   26    1 
  Consumer   37    2 
  Commercial real estate   2,190    53 
  Residential real estate   2,402    64 
Subtotal   4,720    114 
Total          
  Agricultural   65    (6)
  Commercial and industrial   39    1 
  Consumer   39    2 
  Commercial real estate   3,131    76 
  Residential real estate   2,638    63 
Total  $5,912   $136 
           
September 30, 2014          
With no related allowance recorded          
  Agricultural  $113   $—   
  Commercial and industrial   91    —   
  Consumer   1    —   
  Commercial real estate   338    5 
  Residential real estate   490    5 
Subtotal   1,033    10 
With an allowance recorded          
  Agricultural   162    —   
  Commercial and industrial   365    4 
  Consumer   32    2 
  Commercial real estate   4,055    71 
  Residential real estate   2,289    69 
Subtotal   6,903    146 
Total          
  Agricultural   275    —   
  Commercial and industrial   457    4 
  Consumer   33    2 
  Commercial real estate   4,392    76 
  Residential real estate   2,779    74 
Total  $7,936   $156 

 

13 
 

 

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     Due and
   Days  Days  Days (1)  Total  Past Due  Total Loans  Accruing
September 30, 2015                     
  Agricultural  $—     $—     $51   $51   $37,626   $37,677   $—   
  Commercial and industrial   163    103    4    270    88,495    88,765    —   
  Consumer   135    20    5    160    20,413    20,573    5 
  Commercial real estate   909    1,096    480    2,485    96,719    99,204    —   
  Construction real estate   —      —      —      —      4,701    4,701    —   
  Residential real estate   1,244    183    73    1,500    90,626    92,126    58 
   $2,451   $1,402   $613   $4,466   $338,580   $343,046   $63 
                                    
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)  September 30,  December 31,
   2015  2014
  Agricultural  $51   $—   
  Commercial and industrial   4    38 
  Consumer   —      —   
  Commercial real estate   897    2,652 
  Construction real estate   —      —   
  Residential real estate   448    671 
   $1,400   $3,361 

 

 

14 
 

 

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  Nine Months Ended
(Dollars in thousands, except per share data)  September 30,  September 30,
   2015  2014  2015  2014
Basic Earnings Per Share            
   Net income available to common shareholders  $1,450   $1,554   $4,523   $4,139 
                     
  Weighted average common shares outstanding   3,289,146    3,300,139    3,287,765    3,298,321 
                     
  Basic earnings per share  $0.44   $0.47   $1.37   $1.25 
                     
Diluted Earnings Per Share                    
   Net income available to common shareholders  $1,450   $1,554   $4,523   $4,139 
                     
  Weighted average common shares outstanding   3,289,146    3,300,139    3,287,765    3,298,321 
  Plus dilutive stock options and restricted stock units   6,686    9,129    6,841    8,662 
                     
  Weighted average common shares outstanding                    
    and potentially dilutive shares   3,295,832    3,309,268    3,294,606    3,306,983 
                     
  Diluted earnings per share  $0.44   $0.47   $1.37   $1.25 

 

There were zero stock options as of September 30, 2015 and 6,038 stock options as of September 30, 2014, that are considered to be anti-dilutive to earnings per share for the three-month and nine-month periods ended September 30, 2015 and 2014. These stock options have been excluded from the calculation above.

 

15 
 

 

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)
September 30, 2015               
Assets:               
  Cash and due from banks  $12,387   $12,387   $12,387   $—     $—   
  Securities available for sale   154,329    154,329    912    142,904    10,513 
  Federal Home Loan Bank and Federal                         
    Reserve Bank stock   3,187    3,187    —      3,187    —   
  Loans held for sale   2,559    2,639    —      —      2,639 
  Loans, net   338,729    345,497    —      —      345,497 
                          
Liabilities:                         
  Noninterest-bearing deposits   114,805    114,805    —      114,805    —   
  Interest-bearing deposits   352,291    352,355    —      352,355    —   
  Federal funds purchased   1,171    1,171    —      1,171    —   
  Repurchase agreements   7,038    7,038    —      7,038    —   
  Federal Home Loan Bank advances   6,840    6,880    —      6,880    —   
                          
                          
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 September 30, 2015 and December 31, 2014 for new loans with similar maturities, applied until the loan is assumed to reprice or be paid off. 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 September 30, 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.

 

 

16 
 

 

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 September 30, 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   Significant        
  in Active Other Significant  
  Markets for Identical Observable Unobservable  
(Dollars in thousands) Assets Inputs Inputs Balance at
  (Level 1) (Level 2) (Level 3) Date Indicated
Investment Securities, Available for            
    Sale – September 30, 2015            
U.S. Treasury notes and bonds  $—     $6,176   $—     $6,176 
U.S. Government and federal agency   —      55,600    —      55,600 
State and municipal   —      64,266    8,615    72,881 
Mortgage-backed   —      7,529    —      7,529 
Corporate   —      8,037    398    8,435 
Foreign debt   —      1,001    —      1,001 
Equity securities   912    —      1,500    2,412 
Asset backed securities   —      295    —      295 
     Total  $912   $142,904   $10,513   $154,329 
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 

 

 

17 
 

 

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  $11,642   $11,328 
Total realized and unrealized gains included in income   —      (11)
Total unrealized gains (losses) included in other comprehensive income   946    (115)
Net purchases, sales, calls, and maturities   (2,075)   (84)
Net transfers into Level 3   —      74 
Balance, September 30  $10,513   $11,192 

 

Of the Level 3 assets that were held by the Bank at September 30, 2015, the net unrealized gain for the nine months ended September 30, 2015 was $946,000, which is recognized in other comprehensive income in the consolidated balance sheet. Purchases of level 3 securities during the first three quarters of 2015 and 2014 consisted of local municipal issues. During the first nine months of 2015, a $1.75 million Level 3 bond was purchased. There were no sales of Level 3 securities in the first nine months of 2015.

 

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  Significant   
      in Active  Other  Significant
      Markets for Identical  Observable  Unobservable
(Dollars in thousands)  Balance at  Assets  Inputs  Inputs
   Dates Indicated  (Level 1)  (Level 2)  (Level 3)
Impaired Loans                    
September 30, 2015  $6,025   $—     $—     $6,025 
December 31, 2014  $6,885   $—     $—     $6,885 
                     
Other Real Estate                    
September 30, 2015  $132   $—     $—     $132 
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.

 

 

18 
 

 

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 the amount of any impairment) 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 third quarter of 2015 was $1,450,000, which represented a decrease of $104,000 or 6.7% compared to the same period in 2014. Net income for the first nine months of 2015 was $4,523,000, which represented an increase of $384,000 or 9.3% over the same period in 2014. Increases in net interest income and noninterest income were offset by an increase in noninterest expense for the third quarter of 2015 compared to the third quarter of 2014. Basic earnings per common share were $0.44 for the third quarter and $1.37 for the first nine months of 2015, compared to $0.47 and $1.25, respectively, for the same periods in 2014. Diluted earnings per common share were $0.44 for the third quarter and $1.37 for the first nine months of 2015, compared to $0.47 and $1.25, respectively, for the same periods in 2014. The return on average assets and return on average shareholders’ equity percentages were 1.10% and 8.86%, respectively, for the first three quarters of 2015, compared to 1.06% and 8.68%, respectively, for the same periods in 2014.

 

Dividends

Cash dividends of $559,000 or $0.17 per share were declared in the third quarter of 2015, compared to $495,000 or $0.15 per share in the third quarter of 2014. The cash dividends declared in the first nine months of 2015 were $1,610,000 or $0.49 per share, compared to $1,451,000 or $0.44 per share declared in the same period in 2014. The cash dividend payout percentage was 36% for the first nine months of 2015 and 35% for the first nine months of 2014.

 

Interest Income and Expense

Tables 1 and 2 on the following pages provide information regarding interest income and expense for the nine-month periods ended September 30, 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.

 

 

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Table 1 – Average Balances and Tax-Equivalent Interest Rates

 

   Nine Months Ended September 30,
   2015  2014
(Dollars in thousands)  Average        Average      
   Balance  Interest  Rate  Balance  Interest  Rate
Assets:                  
  Loans (1)  $339,157   $11,953    4.70%  $324,145   $11,782    4.85%
  Taxable securities (2) (3)   101,884    1,427    1.87    98,082    1,394    1.90 
  Nontaxable securities (1) (2)   49,513    1,613    4.34    44,025    1,569    4.75 
  Other   5,857    10    0.23    3,734    6    0.21 
    Interest-earning assets   496,411    15,003    4.03    469,986    14,751    4.18 
  Noninterest-earning assets   51,820              52,041           
    Total assets  $548,231             $522,027           
                               
Liabilities and Shareholders' Equity:                              
  Interest-bearing demand deposits  $159,342    163    0.14%  $138,824    174    0.17%
  Savings deposits   67,351    19    0.04    68,179    32    0.06 
  Certificates of deposit   96,343    481    0.67    107,693    594    0.74 
  Advances from Federal Home Loan Bank   21,023    64    0.41    11,472    41    0.48 
  Other   21,475    28    0.17    21,130    33    0.21 
    Interest-bearing liabilities   365,534    755    0.28    347,298    874    0.34 
  Noninterest-bearing demand deposits   112,737              109,238           
  Other noninterest-bearing liabilities   1,932              1,931           
    Total liabilities   480,203              458,467           
  Shareholders' equity   68,028              63,560           
    Total liabilities and                              
      shareholders' equity  $548,231             $522,027           
                               
Net interest income (tax-equivalent basis)-                         
  interest spread        14,248    3.75%        13,877    3.84%
Tax-equivalent adjustment (1)        (554)             (540)     
Net interest income       $13,694             $13,337      
Net interest income as a percentage of earning                         
  assets (tax-equivalent basis)             3.83%             3.94%

______________

 

  (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.

 

 

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Table 2 – Changes in Tax-Equivalent Net Interest Income

 

   Nine Months Ended September 30,
(Dollars in thousands)  2015 Over 2014
   Total  Volume  Rate
Increase (decrease) in interest income (1)         
  Loans (2)  $171   $680   $(509)
  Taxable securities   33    63    (30)
  Nontaxable securities (2)   44    239    (195)
  Other   4    4    —   
    Net change in tax-equivalent interest income   252    986    (734)
                
Increase (decrease) in interest expense (1)               
  Interest-bearing demand deposits   (11)   33    (44)
  Savings deposits   (13)   —      (13)
  Certificates of deposit   (113)   (59)   (54)
  Advances from Federal Home Loan Bank   23    33    (10)
  Other   (5)   1    (6)
    Net change in interest expense   (119)   8    (127)
    Net change in tax-equivalent               
      net interest income  $371   $978   $(607)

_______________

 

  (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 $554,000 and $540,000 for the nine months ended September 30, 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 $371,000 in the first nine months of 2015 compared to the same period in 2014. The relationship between growth in average interest-earning assets and average interest-bearing liabilities caused net interest income to increase $978,000 in the first three quarters of 2015 compared to the same period in the prior year. A decrease of 9 basis points in the net interest spread from 3.84% in the first nine months of 2014 to 3.75% in the first nine months of 2015 resulted in a $607,000 decrease in net interest income.

 

The average balance of loans increased $15.0 million in the first nine months of 2015 compared to the same period in 2014. Average commercial loans increased $13.3 million and average residential mortgage loans increased $1.7 million in the first three quarters of 2015 compared to the same period in 2014. The average interest rate earned on loans declined 15 basis points from the first nine months of 2014 to the same period in 2015 as a result of renewals of existing loans and new loan production at lower rates than in the existing portfolio. The increase in the average loan balance was partially offset by the decrease in the average rate earned caused tax-equivalent interest income from loans to increase $171,000 in the first three quarters of 2015 compared to the same period in the prior year. The average balance of total securities grew $9.3 million in the first nine months of 2015 compared to the same period in 2014. Additional securities were purchased during the first nine months of 2015 to provide earning asset growth. Growth in average securities, partially offset by the effect of a 44 basis point decline in interest rates earned caused tax-equivalent interest income to increase $77,000 in the first nine months of 2015 compared to the same period in 2014.

 

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The average balance of interest-bearing demand deposits increased $20.5 million in the first nine months of 2015 compared to the same period in 2014. The effect of the higher average balance, offset by a 3 basis point decline in the average rate paid, caused interest expense to decrease $11,000 in the first three quarters of 2015 compared to the same period in 2014. The average balance of savings deposits decreased $828,000 in the first nine months of 2015 compared to the same period in the prior year. The impact of the savings deposit decline and a 2 basis point decrease in the average rate paid caused interest expense to decrease $13,000 in the first nine months of 2015 compared to the same period in 2014. The average balance of certificates of deposit was down $11.3 million in the first nine months 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 $113,000 in the first nine months of 2015 compared to the same period in 2014. A $9.6 million increase in the average balance of Federal Home Loan Bank advances was partially offset by a 7 basis point reduction in the average rate paid and caused interest expense to increase $23,000 in the first nine months of 2015 compared to the same period in the prior year. Growth of $345,000 in the average balance of other interest-bearing liabilities in the first nine months of 2015 compared to the first nine months of 2014 and the effect of a 4 basis point decrease in the average rate paid caused a $5,000 decrease in interest expense.

 

ChoiceOne’s net interest income spread was 3.75% in the first nine months of 2015, compared to 3.84% for the first nine months of 2014. The decrease in the interest spread was due to a 15 basis point decrease in the average rate earned on interest-earning assets, which was partially offset by a 6 basis point decrease in the average rate paid on interest-bearing liabilities in the first nine months of 2015 compared to the same period in 2014. The reduction in the average rate earned on interest-earning assets was caused by relatively low general market rates which affected new loan originations and securities purchases in 2014 and the first nine months 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. If market interest rates continue to remain low, ChoiceOne’s net interest spread may decrease in future quarters if reductions in the average rate on interest-earning assets exceed the ability to reprice local deposits.

 

Provision and Allowance for Loan Losses

Total loans decreased $3.1 million while the allowance for loan losses increased $144,000 from December 31, 2014 to September 30, 2015. The provision for loan losses was $0 in the third quarter and $100,000 in the first nine months of 2015, compared to $0 and $100,000, respectively, in the same periods in 2014. Nonperforming loans were $4.8 million as of September 30, 2015, compared to $4.7 million as of June 30, 2015 and $6.6 million as of December 31, 2014. The decrease in nonperforming loans in the first nine months of 2015 was comprised primarily of a reduction of $2.0 million in nonaccrual loans since the end of 2014. The allowance for loan losses was 1.26% of total loans at September 30, 2015, compared to 1.28% at June 30, 2015 and 1.20% at December 31, 2014.

 

Charge-offs and recoveries for respective loan categories for the nine months ended September 30 were as follows:

 

(Dollars in thousands)  2015  2014
   Charge-offs  Recoveries  Charge-offs  Recoveries
Agricultural  $—     $1   $—     $10 
Commercial and industrial   —      59    —      90 
Consumer   172    104    199    146 
Real estate, commercial   —      36    185    39 
Real estate, residential   46    62    117    41 
   $218   $262   $501   $326 

 

Net charge-offs were $35,000 in the third quarter of 2015 and net recoveries of $44,000 were experienced in the first nine months of 2015, compared to net recoveries of $4,000 in the third quarter of 2014 and net charge-offs of $175,000 in the first nine months of 2014. Net recoveries on an annualized basis as a percentage of average loans were 0.02% in the first nine months of 2015 compared to net charge-offs of 0.07% for the same period in the prior year. Management is aware that the economic climate in Michigan will continue to affect business and personal 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 in the remainder of 2015, the provision and allowance for loan losses will be reviewed by the Bank’s management and adjusted as believed to be necessary.

 

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Noninterest Income

Total noninterest income increased $124,000 in the third quarter of 2015 and $1.2 million in the first nine months of 2015 compared to the same periods in 2014. An increase in customer service charges of $36,000 in the third quarter and $259,000 in the first nine months of 2015 compared to the same periods in the prior year was due to changes in pricing and a higher volume of debit card fees. Insurance and investment commissions decreased $23,000 in the third quarter of 2015 and increased $174,000 in the first three quarters of 2015 compared to the same periods in 2014. Gains on loan sales increased $32,000 in the third quarter and $394,000 in the first nine months of 2015 compared to the same periods in 2014. While residential mortgage refinancing activity has slowed in 2015, purchase activity has picked up significantly causing the increase. Increases of $66,000 in the third quarter and $26,000 in the first nine months of 2015 in gains on sales of securities when compared to the same periods in 2014 resulted from higher sales activity in the first nine months of 2015 than in the same period of the prior 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.

 

Noninterest Expense

Total noninterest expense increased $373,000 in the third quarter of 2015 and $1.1 million in the first nine months of 2015 compared to the same periods in 2014. The increase of $196,000 in salaries and benefits in the third quarter of 2015 and $547,000 in the first nine months of 2015 compared to the same periods in 2014 resulted primarily from higher salaries, commissions and health insurance costs. Data processing expense increased $85,000 in the third quarter of 2015 and $329,000 in the first nine months of 2015 compared to the same periods in the prior year. The bank’s data processing center experienced additional expenses related to ChoiceOne’s core data processing conversion that is scheduled for October 2015. Professional fees increased $13,000 in the third quarter of 2015 and $93,000 in the first three quarters of 2015 compared to the same periods in 2014 as a result of increased consulting fees. Other noninterest expense increased $81,000 in the third quarter of 2015 and $290,000 in the first nine months of 2015 due to recruiting, director and customer fraud related expense increases.

 

Income Tax Expense

Income tax expense was $1,529,000 in the first nine months of 2015 compared to $1,503,000 for the same period in 2014. The effective tax rate was 25.3% and 26.6%, respectively for the first nine months of 2015 and 2014. The decrease in the effective tax rate in 2015 compared to 2014 was due to the effect of a $308,000 nontaxable 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 $3.4 million in the third quarter of 2015 and $11.8 million in the first nine months of 2015. The increase in the securities portfolio was made possible with the growth in deposits and the bank’s desire to grow earning assets. Various securities totaling $47.2 million were purchased in the first nine months of 2015 to provide earning assets and to replace maturities, principal repayments, and calls within the securities portfolio. Approximately $10.7 million in various securities were called or matured since the end of 2014. Principal repayments on securities totaled $1.8 million in the first nine months of 2015. Approximately $23.3 million of securities were sold in the first three quarters of 2015 for a net gain of $208,000.

 

Loans

The loan portfolio (excluding loans held for sale) increased $7.1 million in the third quarter of 2015 and decreased $3.1 million in the first nine months of 2015. Commercial and industrial loans and consumer loans increased $3.9 million and $335,000, respectively, in the third quarter of 2015 and increased $703,000 and decreased $179,000, respectively, in the first nine months of 2015. Mortgage loans increased $2.1 million and $1.6 million in the third quarter and first nine months of 2015, respectively. Commercial real estate loans decreased $192,000 in the third quarter and $603,000 in the first three quarters of 2015. Agricultural loans increased $1.2 million in the third quarter, but declined $3.4 million in the first nine months of 2015. Home equity loans increased $98,000 in the third quarter, but declined $845,000 in the first nine months of 2015. The environment for loan originations in ChoiceOne’s market area has become increasingly competitive.

 

 

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Asset Quality

Information regarding impaired loans can be found in Note 3 to the interim consolidated financial statements included in this report. The total balance of loans classified as impaired was $6.0 million at September 30, 2015, $4.7 million as of June 30, 2015 and $6.9 million as of December 31, 2014. The balance of commercial real estate loans classified as impaired has declined $528,000, the balance of agricultural loans classified as impaired has decreased $485,000, and the other loan categories classified as impaired have increased slightly 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)  September 30,  December 31,
   2015  2014
Loans accounted for on a nonaccrual basis  $1,400   $3,361 
Accruing loans contractually past due 90 days          
or more as to principal or interest payments   63    58 
Loans considered troubled debt restructurings   3,357    3,175 
Total  $4,820   $6,594 

 

At September 30, 2015, nonaccrual loans included $897,000 in commercial real estate loans, $448,000 in residential real estate loans, $51,000 in agricultural loans, and $4,000 in commercial and industrial loans. At December 31, 2014, nonaccrual loans included $2.7 million 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 paid off during the first nine months of 2015. Management believes the allowance allocated to its nonperforming loans was sufficient at September 30, 2015.

 

Deposits and Borrowings

Total deposits increased $44.3 million in the third quarter of 2015 and increased $32.3 million since the end of 2014. Checking and savings deposits increased $44.0 million in the third quarter of 2015 and $35.5 million in the first nine months of 2015. Money market deposits decreased $2.6 million in the third quarter of 2015 but increased $7.3 million in the first nine months of 2015. Local certificates of deposit increased $2.9 million in the third quarter of 2015 but decreased $10.5 million in the first nine months of 2015. ChoiceOne continued to place an emphasis on building its core deposit base in 2015.

 

An increase in federal funds purchased of $1.2 million since December 31, 2014 was used to fund short term liquidity needs of the Bank. A decrease of $19.7 million in repurchase agreements in the first nine months of 2015 was due to normal fluctuations in funds provided by bank customers and transitioning customers into new product offerings. 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 decreased $11.5 million in the first nine months of 2015 as funds were available from deposit growth to pay down advances.

 

Shareholders’ Equity

Total shareholders’ equity increased $3.3 million from December 31, 2014 to September 30, 2015. Growth in equity resulted from current year’s net income, proceeds from the issuance of ChoiceOne stock and an increase in accumulated other comprehensive income offset by cash dividends paid and repurchases of shares. The $551,000 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 mid- and short-term rates in 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
September 30, 2015                  
ChoiceOne Financial Services, Inc.                  
Total capital (to risk weighted assets)  $57,862    14.2%  $32,582    8.0%    N/A     N/A 
Tier 1 capital (to risk weighted assets)   53,657    13.2    16,291    6.0     N/A     N/A 
Common Equity Tier 1 Capital (to risk weighted assets)   53,657    13.2    18,327    4.5     N/A     N/A 
Tier 1 capital (to average assets)   53,657    9.9    21,758    4.0     N/A     N/A 
                               
ChoiceOne Bank                              
Total capital (to risk weighted assets)  $55,687    13.7%  $32,460    8.0%  $40,574    10.0%
Tier 1 capital (to risk weighted assets)   51,370    12.7    16,230    6.0    24,345    8.0 
Common Equity Tier 1 Capital (to risk weighted assets)   51,370    12.7    18,258    4.5    26,373    6.5 
Tier 1 capital (to average assets)   51,370    9.5    21,672    4.0    27,090    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 September 30, 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 $4.8 million for the nine months ended September 30, 2015 compared to $5.5 million provided in the same period a year ago. Higher proceeds from loan sales were partially offset by higher loans originated for sale. Proceeds on bank-owned life insurance and write-downs of other real estate owned (“OREO”) properties also affected operating activities. Net cash used in investing activities was $9.5 million for the first nine months of 2015 compared to $27.9 million in the same period in 2014. The change was due to a decrease in loan balances offset by additional net securities purchases. Net cash provided from financing activities was $383,000 in the nine months ended September 30, 2015, compared to $12.8 million in the same period in the prior year. An increase in deposits was offset by net payments on Federal Home Loan Bank advances and a decrease in repurchase agreements in the first nine months of 2015 compared to the same period of 2014.

 

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.

 

 

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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 September 30, 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 July 22, 2015 ChoiceOne issued 1,371 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 $31,000. 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 common stock during the quarter ended September 30, 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
July 1 - July 31, 2015            
Employee Transactions (1)   295   $23.03           
Repurchase Plan   —     $—      —      59,224 
August 1 - August 31, 2015                    
Employee Transactions (1)   271   $22.75           
Repurchase Plan   —     $—      —      59,224 
September 1 - September 30, 2015                    
Employee Transactions   —     $—             
Repurchase Plan   —     $—      —      59,224 

 

(1)

Shares submitted for cancellation to satisfy tax withholding obligations that occur upon the vesting of restricted units. The value of the shares delivered or withheld is determined by the applicable stock compensation plan.

 

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, 2013.  Here incorporated by reference.
     
3.2   Bylaws of ChoiceOne. Previously filed as an exhibit to ChoiceOne’s Form 10-K Annual Report for the year ended December 31, 2013.  Here incorporated by reference.
     
31.1   Certification of Chief Executive Officer
     
31.2   Certification of Treasurer
     
32.1   Certification pursuant to 18 U.S.C. § 1350.
     
101.INS   XBRL Instance Document
     
101.SCH   XBRL Taxonomy Extension Schema Document
     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
     
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document
     
101.LAB   XBRL Taxonomy Extension Label Linkbase Document
     
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document

 

27 
 

 

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:   November 12, 2015 /s/ James A. Bosserd
  James A. Bosserd
Chief Executive Officer
(Principal Executive Officer)
   
   
   
Date:   November 12, 2015 /s/ Thomas L. Lampen
  Thomas L. Lampen
Treasurer
(Principal Financial and Accounting Officer)

 

 

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