ChoiceOne Financial Form 10-Q - 11/14/06

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

FORM 10-Q

[X]

Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

 

 

For the quarterly period ended September 30, 2006

 

 

[   ]

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    X             No        

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.

Large accelerated filer             Accelerated filer             Non-accelerated filer    X   

Indicate by checkmark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes                   No     X   

As of October 31, 2006, the Registrant had outstanding 1,665,333 shares of common stock.



1


PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements

ChoiceOne Financial Services, Inc.
CONSOLIDATED BALANCE SHEETS


(Dollars in thousands)


 

September 30,
2006


 

December 31,
2005


 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

   Cash and due from banks

$

4,255

$

4,990

 

   Securities available for sale

 

53,603

 

44,212

 

   Federal Home Loan Bank stock

 

2,312

 

2,623

 

   Federal Reserve Bank stock

 

376

 

376

 

   Loans held for sale

 

-

 

264

 

 

 

 

 

 

 

   Loans

 

186,296

 

185,568

 

   Allowance for loan losses


 

(1,862


)


(1,963


)


      Loans, net

 

184,434

 

183,605

 

 

 

 

 

 

 

   Premises and equipment, net

 

5,426

 

5,596

 

   Other real estate owned, net

 

1,142

 

1,255

 

   Loan servicing rights, net

 

414

 

445

 

   Cash value of life insurance policies

 

2,298

 

2,237

 

   Other assets

 

3,098


 

2,507


 

      Total assets


$


257,358


$


248,110


 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

   Deposits - noninterest-bearing

$

18,661

$

22,180

 

   Deposits - interest-bearing

 

182,015


 

159,932


 

      Total deposits

 

200,676

 

182,112

 

 

 

 

 

 

 

   Securities sold under agreement to repurchase

 

5,369

 

7,139

 

   Federal funds purchased

 

2,344

 

4,399

 

   Advances from Federal Home Loan Bank

 

24,000

 

30,750

 

   Other liabilities

 

2,236


 

1,993


 

      Total liabilities

 

234,625

 

226,393

 

 

 

 

 

 

 

Shareholders' Equity

 

 

 

 

 

   Preferred stock; shares authorized: 100,000;
      shares outstanding: none

 


-

 


-

 

   Common stock and paid in capital, no par value;
      shares authorized: 4,000,000;  shares outstanding:  1,664,240
      at September 30, 2006 and 1,649,940 at December 31, 2005

 



17,685

 



17,422

 

   Retained earnings

 

5,279

 

4,594

 

   Accumulated other comprehensive income (loss), net


 

(231


)


(299


)


      Total shareholders' equity

 

22,733


 

21,717


 

      Total liabilities and shareholders' equity


$


257,358


$


248,110


 

See accompanying notes to consolidated financial statements.


2


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


(Dollars in thousands, except per share data)


 

Three Months Ended
September 30,


 

Nine Months Ended
September 30,


 

 

 

2006


 

2005


 

2006


 

2005


 

Interest income

 

 

 

 

 

 

 

 

 

   Loans, including fees

$

3,326

$

3,034

$

9,688

$

8,533

 

   Securities:

 

 

 

 

 

 

 

 

 

      Taxable

 

366

 

245

 

1,010

 

744

 

      Tax exempt

 

209

 

168

 

601

 

511

 

   Other

 

1


 

1


 

5


 

3


 

         Total interest income

 

3,902


 

3,448


 

11,304


 

9,791


 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 

 

 

 

 

   Deposits

 

1,738

 

1,065

 

4,599

 

2,887

 

   Advances from Federal Home Loan Bank

 

293

 

257

 

851

 

705

 

   Other

 

73


 

55


 

195


 

149


 

         Total interest expense

 

2,104


 

1,377


 

5,645


 

3,741


 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

1,798

 

2,071

 

5,659

 

6,050

 

Provision for loan losses

 

75


 

130


 

110


 

380


 

 

 

 

 

 

 

 

 

 

 

Net interest income after provision for loan losses

 

1,723

 

1,941

 

5,549

 

5,670

 

 

 

 

 

 

 

 

 

 

 

Noninterest income

 

 

 

 

 

 

 

 

 

   Customer service charges

 

319

 

303

 

928

 

804

 

   Insurance and investment commissions

 

192

 

192

 

630

 

685

 

   Gains on sales of loans

 

47

 

74

 

151

 

182

 

   Gains (losses) on sales of securities

 

41

 

(4

)

96

 

(5

)

   Loan servicing fees, net

 

19

 

1

 

61

 

41

 

   Profit-sharing income

 

15

 

15

 

114

 

54

 

   Other

 

33


 

60


 

83


 

131


 

         Total noninterest income

 

666

 

641

 

2,063

 

1,892

 

 

 

 

 

 

 

 

 

 

 

Noninterest expense

 

 

 

 

 

 

 

 

 

   Compensation and benefits

 

943

 

958

 

2,951

 

2,912

 

   Occupancy and equipment

 

288

 

280

 

843

 

839

 

   Data processing

 

157

 

137

 

479

 

418

 

   Professional fees

 

79

 

100

 

287

 

343

 

   Supplies and postage

 

53

 

52

 

166

 

166

 

   Advertising and promotional

 

39

 

44

 

106

 

118

 

   Other

 

242


 

228


 

748


 

552


 

         Total noninterest expense

 

1,801


 

1,799


 

5,580


 

5,348


 

 

 

 

 

 

 

 

 

 

 

Income before income tax

 

588

 

783

 

2,032

 

2,214

 

Income tax expense

 

138


 

213


 

502


 

583


 

 

 

 

 

 

 

 

 

 

 

Net income


$


450


$


570


$


1,530


$


1,631


 

 

 

 

 

 

 

 

 

 

 

Comprehensive income


$


850


$


440


$


1,598


$


1,411


 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share


$


0.27


$


0.35


$


0.92


$


0.99


 

Diluted earnings per share


$


0.27


$


0.35


$


0.92


$


0.99


 

Dividends declared per share


$


0.17


$


0.17


$


0.51


$


0.50


 

See accompanying notes to consolidated financial statements.


3


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






(Dollars in thousands)





Number of
Shares


 


Common
Stock and
Paid in
Capital


 



Unallocated
Shares held
by ESOP


 

 




Retained
Earnings


 

Accumulated
Other
Comprehensive
Income (Loss),
Net


 

 





Total


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2005

1,570,937

$

15,913

$

(9

)

$

5,053

$

112

 

$

21,069

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Net income

 

 

 

 

 

 

 

1,631

 

 

 

 

1,631

 

   Net change in unrealized gain (loss)


 

 

 

 

 

 

 

 

 

(220


)


 

(220


)


     Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

1,411

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares issued

11,145

 

218

 

 

 

 

 

 

 

 

 

218

 

Shares repurchased

(11,769

)

(249

)

 

 

 

 

 

 

 

 

(249

)

Shares committed to be released under
   Employee Stock Ownership Plan

 

 




9

 

 

 

 

 

 

 


9

 

Cash dividends declared ($0.50 per share)

 

 

 

 

 

 

 

(825

)

 

 

 

(825

)

Stock dividend


78,439


 

1,516


 

 


 

 

(1,520


)


 


 

 

(4


)


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, September 30, 2005


1,648,752


$


17,398


$


-


 

$


4,339


$


(108


)


$


21,629


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2006

1,649,940

$

17,422

$

-

 

$

4,594

$

(299

)

$

21,717

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Net income

 

 

 

 

 

 

 

1,530

 

 

 

 

1,530

 

   Net change in unrealized gain (loss)


 

 

 

 

 

 

 

 

 

68


 

 

68


 

     Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

1,598

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares issued

14,300

 

245

 

 

 

 

 

 

 

 

 

245

 

Effect of stock options granted

 

 

18

 

 

 

 

 

 

 

 

 

18

 

Cash dividends declared ($0.51 per share)


 


 

 


 

 


 

 

(845


)


 


 

 

(845


)


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, September 30, 2006


1,664,240


$


17,685


$


-


 

$


5,279


$


(231


)


$


22,733


 


See accompanying notes to consolidated financial statements.


4


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


(Dollars in thousands)


 

Nine Months Ended
September 30,


 

 

 

2006


 

 

2005


 

Cash flows from operating activities:

 

 

 

 

 

 

   Net income

$

1,530

 

$

1,631

 

   Adjustments to reconcile net income to net cash from
      operating activities:

 

 

 

 

 

 

      Provision for loan losses

 

110

 

 

380

 

      Depreciation

 

391

 

 

407

 

      Amortization

 

324

 

 

438

 

      Expense related to employee stock options granted

 

18

 

 

-

 

      Stock dividends on Federal Home Loan Bank stock

 

-

 

 

(55

)

      (Gains) losses on sales of securities

 

(96

)

 

5

 

      Gains on sales of loans

 

(151

)

 

(182

)

      Loans originated for sale

 

(10,054

)

 

(10,373

)

      Proceeds from loan sales

 

10,426

 

 

10,757

 

      Earning on bank-owned life insurance

 

(61

)

 

(56

)

      Net changes in:

 

 

 

 

 

 

         Other assets

 

(125

)

 

284

 

         Other liabilities

 

208


 

 

825


 

            Net cash from operating activities

 

2,520

 

 

4,061

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

   Securities available for sale:

 

 

 

 

 

 

      Sales

 

2,100

 

 

1,730

 

      Maturities, prepayments and calls

 

3,676

 

 

5,788

 

      Purchases

 

(14,866

)

 

(4,122

)

   Loan originations and payments, net

 

(1,333

)

 

(10,876

)

   Additions to premises and equipment, net of disposals

 

(221

)

 

(1,185

)

   Purchase of bank-owned life insurance


 

-


 

 

(2,000


)


            Net cash used in investing activities

 

(10,644

)

 

(10,665

)

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

   Net change in deposits

 

18,564

 

 

9,103

 

   Net change in securities sold under agreements to repurchase

 

(1,770

)

 

421

 

   Net change in federal funds purchased

 

(2,055

)

 

2,004

 

   Proceeds from Federal Home Loan Bank advances

 

56,000

 

 

32,000

 

   Payments on Federal Home Loan Bank advances

 

(62,750

)

 

(34,500

)

   Issuance of common stock

 

245

 

 

218

 

   Repurchase of common stock

 

-

 

 

(249

)

   Cash dividends


 

(845


)


 

(829


)


            Net cash from financing activities


 

7,389


 

 

8,168


 

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

(735

)

 

1,564

 

Beginning cash and cash equivalents


 

4,990


 

 

3,619


 

 

 

 

 

 

 

 

Ending cash and cash equivalents


$


4,255


 

$


5,183


 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

   Cash paid for interest

$

5,172

 

$

3,596

 

   Cash paid for income taxes

$

685

 

$

315

 

   Loans transferred to other real estate

$

394

 

$

688

 

See accompanying notes to consolidated financial statements.


5


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. (the "Registrant") and its wholly-owned subsidiary, ChoiceOne Bank (the "Bank"), and the Bank's wholly-owned subsidiaries ChoiceOne Insurance Agencies, Inc. (the "Insurance Agency"), and ChoiceOne Mortgage Company of Michigan (the "Mortgage Company"). 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 September 30, 2006 and December 31, 2005, the Consolidated Statements of Income for the three- and nine-month periods ended September 30, 2006 and September 30, 2005, the Consolidated Statements of Changes in Shareholders' Equity for the nine-month periods ended September 30, 2006 and September 30, 2005, and the Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2006 and September 30, 2005. Operating results for the nine months ended September 30, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006.

The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Registrant's Annual Report on Form 10-K for the year ended December 31, 2005.

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 and anticipated economic conditions on the portfolio and historical loss experience of seasoned loan portfolios. See Note 2 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 anticipated 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 sheet as well as its net income.

Stock Transactions
A total of 4,148 shares of common stock were issued to the Registrant's Board of Directors for a cash price of $77,000 under the terms of the Directors' Stock Purchase Plan in the first nine months of 2006. A total of 7,406 shares of common stock were issued to shareholders for a cash price of $128,000 under the Dividend Reinvestment Plan in the nine months ended September 30, 2006. A total of 2,746 shares were issued to employees for a cash price of $40,000 under the Employee Stock Purchase Plan for the nine months ended September 30, 2006. The Registrant did not repurchase any shares from shareholders in the first nine months of 2006.

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


6


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

NOTE 2 - ALLOWANCE FOR LOAN LOSSES

An analysis of changes in the allowance for loan losses follows:


(Dollars in thousands)


 

Three Months Ended
September 30,


 

 

Nine Months Ended
September 30,


 

 

 

2006


 

 

2005


 

 

2006


 

 

2005


 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

$

1,861

 

$

1,813

 

$

1,963

 

$

1,739

 

Provision charged to expense

 

75

 

 

130

 

 

110

 

 

380

 

Loans charged off

 

(114

)

 

(117

)

 

(342

)

 

(351

)

Recoveries of charged-off loans


 

40


 

 

29


 

 

131


 

 

87


 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at end of period


$


1,862


 

$


1,855


 

$


1,862


 

$


1,855


 

Information regarding impaired loans follows:


(Dollars in thousands)


 

September 30,
2006


 

December 31,
2005


 

Loans with no specific allowance allocated

$

1,386

$

306

 

Loans with a specific allowance allocated

 

758

 

1,157

 

Amount of allowance for loan losses allocated

 

286

 

465

 




(Dollars in thousands)


 

Three Months Ended
September 30,


 

 

 

2006


 

2005


 

Average balance during the period

$

1,752

$

779

 

Interest income recognized thereon

 

25

 

7

 

Cash basis interest income recognized

 

31

 

30

 



(Dollars in thousands)


 

Nine Months Ended
September 30,


 

 

 

2006


 

2005


 

Average balance during the period

$

1,575

$

844

 

Interest income recognized thereon

 

84

 

29

 

Cash basis interest income recognized

 

106

 

52

 



7


NOTE 3 - 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:


(Dollars in thousands, except per share data)


 

Three Months Ended
September 30,


 

Nine Months Ended
September 30,


 

 

 

2006


 

2005


 

2006


 

2005


 

Basic Earnings Per Share

 

 

 

 

 

 

 

 

 

   Net income available to common shareholders


$


450


$


570


$


1,530


$


1,631


 

 

 

 

 

 

 

 

 

 

 

   Weighted average common shares outstanding


 

1,661,429


 

1,647,427


 

1,656,425


 

1,646,996


 

 

 

 

 

 

 

 

 

 

 

   Basic earnings per share


$


0.27


$


0.35


$


0.92


$


0.99


 

 

 

 

 

 

 

 

 

 

 

Diluted Earnings Per Share

 

 

 

 

 

 

 

 

 

   Net income available to common shareholders


$


450


$


570


$


1,530


$


1,631


 

 

 

 

 

 

 

 

 

 

 

   Weighted average common shares outstanding

 

1,661,429

 

1,647,427

 

1,656,425

 

1,646,996

 

   Plus dilutive stock options


 

2,965


 

4,021


 

3,109


 

4,591


 

 

 

 

 

 

 

 

 

 

 

   Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

     and potentially dilutive shares


 

1,664,394


 

1,651,448


 

1,659,534


 

1,651,587


 

 

 

 

 

 

 

 

 

 

 

   Diluted earnings per share


$


0.27


$


0.35


$


0.92


$


0.99


 

There were 14,365 stock options as of September 30, 2006 that are considered to be anti-dilutive to earnings per share and thus have been excluded from the calculation above. All shares have been adjusted for the 5% stock dividend paid in May 2005.

NOTE 4 - SUBSEQUENT EVENT

On November 1, 2006, ChoiceOne completed its merger with Valley Ridge Financial Corp. ("Valley Ridge"). Valley Ridge is a bank holding company headquartered in nearby Kent City, Michigan, with 9 offices located in Kent, Muskegon, Newaygo and Ottawa Counties in Michigan. ChoiceOne acquired 100% of the common stock of Valley Ridge. ChoiceOne's board of directors and Valley Ridge's board of directors determined that merging the two corporations provided an excellent opportunity for enhancing shareholder value while preserving involvement within the communities served by Valley Ridge and ChoiceOne. The purchase price will be based on the net assets acquired on November 1, 2006. Securities, loans, bank premises, loan servicing rights, deposits and borrowings will be adjusted to their market value as of November 1, 2006. The excess purchase price over the carrying value of the net assets acquired will result in goodwill. Goodwill cannot be amortized; however, it will be reviewed on a periodic basis for impairment. Results of operations for Valley Ridge will be included with the results of operations of ChoiceOne beginning November 1, 2006. Due to the timing of the acquisition, ChoiceOne is currently in the process of calculating the final purchase accounting adjustments, including the allocation of the purchase price to identifiable intangible assets and goodwill.

Approximately 1.6 million shares of ChoiceOne common stock will be issued to shareholders of Valley Ridge. Shareholders of Valley Ridge will receive 8.5 shares of ChoiceOne common stock in exchange for each share of Valley Ridge common stock. The 8.5 conversion ratio was determined by Valley Ridge after arms-length negotiations with ChoiceOne. Valley Ridge shareholders will receive cash in lieu of fractional shares of ChoiceOne's common stock at the rate of $18.00 per share.

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" or the "Registrant") and its wholly-owned subsidiary, ChoiceOne Bank (the "Bank"), and its wholly-owned subsidiaries, ChoiceOne Insurance Agencies, Inc. (the "Insurance Agency"), and ChoiceOne Mortgage Company of Michigan (the "Mortgage Company"). This discussion should be read in conjunction with the consolidated financial statements and related notes.


8


FORWARD-LOOKING STATEMENTS

This discussion and other sections of this report contain forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates, and projections about the financial services industry, the economy, and the Registrant itself. Words such as "anticipates," "believes," "estimates," "expects," "forecasts," "intends," "is likely," "plans," "predicts," "projects," variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions ("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, the Registrant 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 disclosed in Item 1A of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2005; changes in interest rates and interest rate relationships; demand for products and services; the degree of competition by traditional and non-traditional competitors; changes in banking laws and regulations; changes in tax laws; changes in prices, levies, and assessments; the impact of technological advances; governmental and regulatory policy changes; the outcomes of pending and future litigation and contingencies; trends in customer behavior as well as their ability to repay loans; changes in the national and local economies, the level and timing of asset growth; and the possibility that anticipated cost savings and revenue enhancements from the merger with Valley Ridge Financial Corp. (Valley Ridge) may not be fully realized at all or within the expected time frames. In addition, events relating to the ongoing war on terrorism, other potential terrorist acts, and military actions including the war in Iraq have created significant global economic and political uncertainties that may have material and adverse effects on financial markets, the economy, and demand for financial services and products. 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 decreased $120,000 or 21% in the third quarter of 2006 compared to the third quarter of 2005. This significant decrease is largely attributable to compression of ChoiceOne's net interest margin. However, lower net interest income was offset by a lower provision for loan losses and higher noninterest income. Net interest income was down $273,000 for the third quarter of 2006 compared to the third quarter of 2005. Earning assets increased 6%; however, ChoiceOne's net interest spread dropped 80 basis points for the third quarter of 2006 versus the third quarter of 2005. The lower provision to the allowance for loan losses for the quarter was based on a lower level of loan growth and lower specific loss reserves compared to the third quarter of 2005. Noninterest income was up slightly in the third quarter of 2006 due to increased customer service charges, gains from the sale of securities, and loan servicing fees. Noninterest expense rose less than 1% for the third quarter of 2006 compared to the same period in 2005 due to higher data processing charges offset by lower compensation and benefits and professional fees.

Net income for the nine-month period ended September 30, 2006 decreased $101,000 or 6%, compared to the same period in 2005. This decrease in net income was due to lower net interest income and higher noninterest expense, offset by a lower provision for loan losses and higher noninterest income. Net interest income was down $391,000 for the nine months ended September 30, 2006 compared to the same period in 2005. Earning assets increased 5%; however, net interest spread dropped 55 basis points for the first nine months of 2006 versus the first nine months of 2005. The lower provision to the allowance for loan losses for the first nine months of 2006 was based on a significantly lower level of loan growth and lower net charge-offs in 2006 compared to the same period in the prior year. Noninterest income was up in the first nine months of 2006 due to increased customer service charges, gains from the sale of securities and higher profit sharing income compared to the same period in 2005. Noninterest expense was higher in the first nine months of 2006 due to increased compensation and benefits, higher data processing charges, and higher single business taxes to the State of Michigan versus the first nine months of 2005.

Return on average assets and return on average shareholders' equity was 0.71% and 8.01%, respectively, for the third quarter of 2006, compared to 0.95% and 10.61%, respectively, for the third quarter of 2005. The return on average assets was 0.82% for the first nine months of 2006, compared to 0.92% for the same period a year ago. The return on average shareholders' equity was 9.20% for the first nine months of 2006, compared to 10.23% for the first nine months of 2005.


9


Dividends
Cash dividends of $283,000, or $0.17 per share were declared in the third quarter of 2006, compared to $280,000 or $0.17 per share in the third quarter of 2005. The cash dividends declared in the first nine months of 2006 were $845,000 or $0.51 per share, compared to $829,000 or $0.50 per share declared in 2005. The cash dividend payout percentage was 55% for the first nine months of 2005, compared to 51% in the same period a year ago.

On April 20, 2005, the Registrant's Board of Directors declared a 5% stock dividend payable on the Registrant's common stock. The dividend was paid May 31, 2005 to shareholders of record as of May 9, 2005. Earnings per share data and outstanding shares of common stock for all periods presented have been adjusted for this stock dividend.

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, 2006 and 2005, respectively. Table 1 documents ChoiceOne's average balances and interest income and expense, as well as the average rates earned or paid on assets and liabilities. Table 2 documents the effect on interest income and expense of changes in volume (average balance) and interest rates. These tables are referred to in the discussion of interest income, interest expense and net interest income.

Table 1 - Average Balances and Tax-Equivalent Interest Rates

(Dollars in thousands)

Nine Months Ended September 30,

 

2006


2005


 

Average
Balance



Interest



 



Rate


Average
Balance



Interest



 



Rate


Assets:

 

 

 

 

 

 

 

 

   Loans (1)

$ 183,701

$ 9,710

 

7.05%

$ 178,373

$ 8,544

 

6.39%

   Taxable securities (2) (3)

31,333

1,010

 

4.30

26,902

744

 

3.69

   Nontaxable securities (1) (2)

20,358

910

 

5.96

17,838

774

 

5.79

   Other


107


5


 


6.23


150


3


 


2.67


      Interest-earning assets

235,499

11,635

 

6.59

223,263

10,065

 

6.01

   Noninterest-earning assets


12,938


 

 

 

12,758


 

 

 

      Total assets


$ 248,437


 

 

 

$ 236,021


 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders' Equity:

 

 

 

 

 

 

 

 

   Interest-bearing demand deposits

$   50,576

$ 1,024

 

2.70%

$   57,627

$ 867

 

2.01%

   Savings deposits

8,250

31

 

0.50

9,249

35

 

0.50

   Certificates of deposit

110,624

3,544

 

4.27

84,672

1,985

 

3.13

   Advances from Federal Home Loan Bank

26,007

851

 

4.36

33,609

705

 

2.80

   Other


8,237


195


 


3.16


8,588


149


 


2.31


      Interest-bearing liabilities


203,694


5,645


 


3.70


193,745


3,741


 


2.57


   Noninterest-bearing demand deposits

21,152

 

 

 

19,471

 

 

 

   Other noninterest-bearing liabilities

1,429

 

 

 

1,554

 

 

 

   Shareholders' equity


22,162


 

 

 

21,251


 

 

 

      Total liabilities and
         shareholders' equity



$ 248,437


 

 

 


$ 236,021


 

 

 

 

 

 

 

 

 

 

 

 

Net interest income (tax-equivalent basis) -
   interest spread


 


5,990


 


2.89%


 


6,324


 


3.44%


Tax-equivalent adjustment (1)


 

(331


)


 

 

(274


)


 

Net interest income


 

$ 5,659


 

 

 

$ 6,050


 

 

Net interest income as a percentage of earning
   assets (tax-equivalent basis)


 

 

 


3.39%


 

 

 


3.78%


______________

 

(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.


10


Table 2 - Changes in Tax-Equivalent Net Interest Income


(Dollars in thousands)


Nine Months Ended September 30,
2006 Over 2005


 

 

Total


 


 


Volume


 


 


Rate


 

Increase (decrease) in interest income (1)

 

 

 

 

 

 

 

 

 

     Loans (2)

$

1,166

 

$

261

 

$

905

 

     Taxable securities

 

266

 

 

133

 

 

133

 

     Nontaxable securities (2)

 

136

 

 

112

 

 

24

 

     Other


 


2


 


 


(2


)


 


4


 

          Net change in tax-equivalent income


 


1,570


 


 


504


 


 


1,066


 

 

 

 

 

 

 

 

 

 

 

Increase (decrease) in interest expense (1)

 

 

 

 

 

 

 

 

 

     Interest-bearing demand deposits

 

157

 

 

(168

)

 

325

 

     Savings deposits

 

(4

)

 

(4

)

 

-

 

     Certificates of deposit

 

1,559

 

 

710

 

 

849

 

     Advances from Federal Home Loan Bank

 

146

 

 

(261

)

 

407

 

     Other


 


46


 


 


(10


)


 


56


 

          Net change in interest expense


 


1,904


 


 


267


 


 


1,637


 

          Net change in tax-equivalent
               net interest income



$



(334



)



$



237



 



$



(571



)


_______________

 

(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
As shown in Tables 1 and 2, tax-equivalent net interest income decreased $334,000 in the first nine months of 2006 compared to the same period in 2005. While ChoiceOne's earning assets have grown 5%, deposits and borrowings have repriced upward to a greater extent than its loans and securities. ChoiceOne also experienced migration from lower cost interest-bearing demand deposits and savings deposits to higher cost certificates of deposit. This change in the mix of interest-bearing deposits has negatively impacted net interest income in the third quarter and first nine months of 2006 compared to 2005.

The average balance of loans increased $5.3 million in the nine months ended September 30, 2006 compared to the first nine months of 2005. Increased loan balances since September 30, 2005 and a 150 basis point increase in the prime rate since September 30, 2005 increased interest income from loans (on a tax equivalent basis) by $1,166,000 for the first nine months of 2006 compared to the same period in 2005. The average balance of total securities increased $7.0 million for the first nine months of 2006 versus the first nine months of 2005. New securities purchased since September 30, 2005 at higher yields has increased interest income from securities by $402,000 for the first nine months of 2006 compared to the first nine months of 2005.

Higher rates paid on money market accounts and municipal accounts drove a 69 basis point rise in the rate paid on interest-bearing demand deposit accounts in the first nine months of 2006 versus the same period in 2005. The average balance of interest-bearing demand deposits dropped $7.1 million during the first nine months of 2006 compared to the first nine months of 2005 as customers shifted from low cost checking and money market accounts into higher cost certificates of deposit. Higher rates paid on interest-bearing demand deposit accounts was partially offset by lower average balances, which caused interest expense to rise by $157,000 for the nine months ended


11


September 30, 2006 compared to the nine months ended September 30, 2005. The average rate paid on certificates of deposit was 114 basis points higher in the first nine months of 2006 compared to the same period in 2005. The higher rates paid on local certificates of deposit were driven by the Bank's local competitors. The higher rates paid on brokered certificates of deposit were caused by the Federal Reserve Bank raising short-term interest rates 150 basis points since September 30, 2005. The average balance of certificates of deposits surged $26.0 million in the first nine months of 2006 compared to the same period in 2005. Approximately $17.3 million of the increase was local certificates and $8.7 million of the increase was brokered certificates. Higher rates and significantly higher average balances caused interest expense on certificates of deposit to increase by $1,559,000 in the first nine months of 2006 compared to the first nine months of 2005. The average balance of advances from the Federal Home Loan Bank fell $7.6 million; however, repricing of variable rate advances caused interest expense to increase by $146,000 in the first nine months of 2006 versus the first nine months of 2005. Interest expense on other funding sources increased by $46,000 reflecting the higher rates paid on securities sold under agreements to repurchase and on federal funds purchased during 2006.

Net interest spread was 2.89% (shown in Table 1) for the first nine months of 2006, compared to 3.44% for the first nine months of 2005. The average yield received on interest-earning assets was up 58 basis points to 6.59%, and the average rate paid on interest-bearing liabilities was up 113 basis points to 3.70% for the nine months ended September 30, 2006 when compared to the same period in the prior year. For the first nine months of 2006, funding costs on interest-bearing liabilities have increased significantly faster than the rates earned on loans and securities. The upward repricing of certificates of deposit and advances from the Federal Home Loan Bank (FHLB) has occurred faster on these instruments as their terms were shorter than those for securities and fixed rate loans. While the recent increases to the prime rate have benefited yields on variable rate commercial and consumer loans, it has negatively impacted rates paid on certificates of deposit and advances from the FHLB. Continued growth in core deposits at the Bank's offices will enable management to reduce the dependency on brokered certificates of deposit and advances from the FHLB.

Tax-equivalent net interest income for the three months ended September 30, 2006 was $251,000 lower than the quarter ended September 30, 2005 due to a reduced net interest income spread offset by a higher average balance of earning assets. The net interest spread was 2.67% for the three months ended September 30, 2006 versus 3.47% for the quarter ended September 30, 2005. Earning assets for the third quarter of 2006 were 6% higher than the third quarter of 2005.

Management believes that net interest margin may continue to compress in the fourth quarter of 2006 as certificates of deposit continue to reprice upward more than loan rates. The merger with Valley Ridge is expected to decrease ChoiceOne's dependency on its wholesale funding, which typically has a higher interest cost than local retail funding. Growth of earning assets may be a challenge for the remainder of 2006 given the current interest rate environment and sluggish loan demand in ChoiceOne's market area.

Provision and Allowance for Loan Losses
The allowance for loan losses has decreased $101,000 from December 31, 2005 to September 30, 2006. The provision for loan losses was $270,000 lower in the first nine months of 2006 compared to 2005, due to a significantly lower level of loan growth in 2006 and lower net charge-offs in 2006. The allowance was 1.00% of total loans at September 30, 2006 compared to 1.06% at December 31, 2005. Charge-offs and recoveries for respective loan categories for the nine months ended September 30 were as follows:

(Dollars in thousands)


2006


 


2005


 

Charge-offs


 


Recoveries


 


Charge-offs


 


Recoveries


Commercial

$

169

 

$

40

 

$

64

 

$

18

Consumer

 

124

 

 

91

 

 

127

 

 

69

Real estate, commercial

 

-

 

 

-

 

 

25

 

 

-

Real estate, residential


 


49


 


 


-


 


 


135


 


 


-


 

$


342


 


$


131


 


$


351


 


$


87



12


Net charge-offs for the first nine months of 2006 were down $53,000 or 20% compared to 2005. Total charge-offs in the first nine months of 2006 were fairly consistent with the first nine months of 2005. Charge-offs of commercial loans are up $105,000 in 2006 due primarily to losses from one large commercial borrower that filed for bankruptcy protection in 2006. Consumer loan recoveries increased in 2006 versus 2005 reflecting improved collection efforts by the Bank. While nonperforming loans have more than doubled since December 31, 2005, management believes these credits are well-secured and do not require significant specific loss allocations as of September 30, 2006. Additional provision to the allowance was not considered necessary for the third quarter of 2006 based on management's review of the underlying collateral.

As charge-offs, changes in the level of nonperforming loans, and changes within the composition of the loan portfolio occur throughout 2006, the provision and allowance for loan losses will be reviewed by the Bank's management and adjusted as necessary.

Noninterest Income
Total noninterest income increased $25,000 or 4% in the third quarter of 2006 compared to the same period in 2005. For the nine months ended September 30, 2006, total noninterest income increased $171,000 or 9% compared to the same period in 2005. Customer service charges were up due to higher returned check fees and debit card fees. Gains on sales of securities were a non-recurring benefit resulting primarily from the sale of equity securities. Profit-sharing income was $60,000 higher for the first nine months of 2006 as compared to the similar period in 2005. Profit-sharing income is contingency-based income from insurance carriers that underwrite the Insurance Agency's customers and is based on the loss ratio of the Insurance Agency's book of customers. Insurance and investment commissions were lower for the first nine months of 2006 due to reduced sales of annuity products and a softening of premiums in the insurance market. Gains on the sale of loans were lower as refinancing activity has slowed within the Mortgage Company in 2006. Also, for the first nine months of 2006, ChoiceOne has realized $42,000 in additional losses on the sale of foreclosed real estate, which has reduced noninterest income as compared to the same period in 2005.

Management believes that additional profit-sharing income for the remainder of 2006 will depend on the loss ratio for fiscal 2006. Management estimates that noninterest income may be difficult to grow for the fourth quarter of 2006.

Noninterest Expense
Total noninterest expense increased $2,000 or less than 1% in the third quarter of 2006 compared to the third quarter of 2005. For the nine months ended September 30, 2006, total noninterest expense increased $232,000 or 4% compared to the same period in 2005. Compensation and benefits were lower for the third quarter of 2006 due to a reduction in employee bonuses compared to the third quarter of 2005. Compensation and benefits were higher in the first nine months of 2006 due to normal pay raises and the addition of employees in the Insurance Agency. Data processing charges were higher in the third quarter and first nine months of 2006 due to growing network and software support costs as compared to similar periods in 2005. Professional fees were lower in the third quarter and first nine months of 2006 due to lower legal, audit, and consulting fees charged compared to 2005. Other noninterest expenses were $196,000 higher for the first nine months of 2006 primarily due to an $86,000 credit adjustment in 2005 for the Bank's single business taxes. Also, directors' fees, recruiting costs, and employee training costs were higher in the first nine months of 2006 versus the same period in 2005.

Management believes that noninterest expense may increase in the fourth quarter of 2006 due to higher marketing and advertising costs and other costs associated with the merger with Valley Ridge. Professional fees incurred in connection with the Valley Ridge merger will be capitalized as part of the direct costs for the transaction.

Income Tax Expense
Income tax expense decreased $75,000 and $81,000, respectively, in the third quarter and first nine months of 2006 compared to the same periods in 2005. ChoiceOne's effective tax rate was 23.5% for the third quarter of 2006 compared to 27.2% for the third quarter of 2005. The effective tax rate was 24.7% for the first nine months of 2006 compared to 26.3% for the same period in 2005. Taxable income was lower in 2006 due to higher tax-exempt income from securities, loans, and bank-owned life insurance and lower net income as compared to 2005.


13


FINANCIAL CONDITION

Securities
Total securities increased $9.1 million from December 31, 2005 to September 30, 2006. Approximately $14.9 million of various agency, municipal, and corporate bonds were purchased during the first nine months of 2006 to maintain total assets of the Bank and replace the $5.8 million of securities that matured, were called, paid down, or sold. Non-recurring gains of $96,000 were realized primarily from the sale of equity securities in the first nine months of 2006.

The Bank's Investment Committee continues to monitor the portfolio and purchases securities when deemed prudent. Certain securities are also sold under agreements to repurchase and management plans to continue this practice as a low-cost source of funding. Securities also serve as a source of liquidity for funding loan demand.

Loans
The loan portfolio (excluding loans held for sale) grew $728,000 from December 31, 2005 to September 30, 2006. Commercial real estate loans are up $1.5 million since year-end 2005. However, commercial non-real estate loan levels are flat from year-end 2005. Loan demand has been quite soft in 2006 from local businesses. Residential real estate mortgage loan balances are down $0.4 million, as growth in home equity loans has replaced the run-off of construction mortgages held in the portfolio. Consumer loans are down $0.7 million primarily due to payoffs of indirect loans. Management discontinued the origination of indirect automobile and other recreational vehicle loans in the first quarter of 2005. Indirect consumer loans totaled approximately $3.2 million at September 30, 2006 versus $4.2 million at December 31, 2005.

Due to the nature of the economy within the State of Michigan, softness in real estate values, and the recent increases in interest rates, ChoiceOne believes loan growth may be a challenge for the remainder of 2006.

Information regarding impaired loans can be found in Note 2 to the consolidated financial statements included in this report. In addition to its review of the loan portfolio for impaired loans, management also monitors the various 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,
2006


 

December 31,
2005


 

          Loans accounted for on a nonaccrual basis

$   1,962

 

$   934

 

          Accruing loans contractually past due 90 days
             or more as to principal or interest payments


-

 


32

 

          Loans considered troubled debt restructurings

-


 

-


 

                         Total


$  1,962


 

$   966


 

The allowance for loan losses as a percentage of nonperforming loans was 95% at September 30, 2006, compared to 203% at December 31, 2005. The level of nonaccrual loans has more than doubled from December 31, 2005 to September 30, 2006 as commercial loans are up $699,000 and residential real estate loans are up $320,000. Nonaccrual loans as of September 30, 2006 include $1,376,000 of commercial loans, $527,000 of residential real estate loans, and $59,000 in consumer loans. Impaired loans are evaluated on an individual basis and specific allocations are made for loans where collateral is insufficient to support the outstanding principal balances of these loans. Management further believes that the general allocation within the allowance for loan losses is sufficient based on the Bank's loan grading system, past due trends and historical charge-off percentages.


14


Management also maintains a list of loans that are not classified as nonperforming loans but where some concern exists as to the borrowers' abilities to comply with the original loan terms. The total balance of these loans was $9.5 million as of September 30, 2006, compared to $8.5 million as of December 31, 2005.

Deposits and Other Funding Sources
Total deposits have increased approximately $18.6 million since December 31, 2005. Demand and savings deposits dropped $5.6 million due to Bank customers migrating into higher yielding certificates of deposit. Local certificates of deposit increased $13.6 million since year-end 2005. Brokered certificates of deposit rose $10.6 million to replace the $6.8 million decrease in advances from the Federal Home Loan Bank (FHLB). Rates obtained on brokered certificates of deposit were more advantageous than those available from advances from the FHLB. The amount of federal funds purchased at September 30, 2006 was down $2.1 million from year-end 2005, and securities sold under agreements to repurchase declined $1.8 million since December 31, 2005.

Management anticipates that this trend of customers migrating from low rate checking and savings accounts to higher rate certificates of deposit might be over as most customers have reacted to the increased rates available. Maturing certificates of deposit will continue to reprice higher, but possibly to a lower extent. Wholesale funding alternatives will continue to be used when local deposits are insufficient to fund ChoiceOne's asset growth.

Shareholders' Equity
Total shareholders' equity increased $1 million from the year ended December 31, 2005 to September 30, 2006. The increase in equity is attributable to net income for 2006 and a decrease in accumulated other comprehensive loss, offset by dividends declared to shareholders. Total shareholders' equity as a percentage of assets was 8.83% as of September 30, 2006, compared to 8.75% as of December 31, 2005. The increase in this ratio resulted from growth in shareholders' equity being faster than growth in total assets. Based on risk-based capital guidelines established by the Bank's regulators, the Registrant's risk-based capital was categorized as "well capitalized" at September 30, 2006.

ChoiceOne intends to issue common stock in connection with the merger with Valley Ridge during the fourth quarter of 2006. Management believes that the issuance of this stock will not affect the adequacy of its risk-based capital.

Liquidity and Sensitivity to Interest Rates
Net cash provided from operating activities was $2.5 million for the nine months ended September 30, 2006 compared to $4.1 million provided in the period a year ago. A smaller provision for loan losses, fewer proceeds from loan sales and a smaller net change in other liabilities attributed to the drop from a year ago. Net cash used in investing activities was $10.6 million for the first nine months of 2006 compared to $10.7 million used in the first nine months of 2005. ChoiceOne had $7.4 million in net cash provided from financing activities for the period ended September 30, 2006 compared to $8.2 million in the period a year ago. In the first nine months of 2006, ChoiceOne had $6.8 million in net payments towards advances from the FHLB versus $2.5 million in net payments in the first nine months of 2005. Higher growth in deposits during the first nine months of 2006 offset some of the net payments to the FHLB during the same period. The Registrant has not repurchased any of its common stock in 2006.

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. The Bank does not anticipate that the secured line of credit will be used for normal operating needs, but could be used for liquidity purposes in special circumstances.

The Bank's sensitivity to changes in interest rates is monitored by the Bank's Asset/Liability Management Committee ("ALCO"). ALCO uses a simulation model to subject rate-sensitive assets and liabilities to interest rate shocks. Assets and liabilities are subjected to an immediate 300 basis point shock up and down and the effect on net income and shareholders' equity is measured. Net interest income decreased 13% if rates immediately rose 300 basis points and increased 2% if rates immediately fell 300 basis points as of September 30, 2006. The economic value of shareholders' equity declined 18% if rates jumped 300 basis points upward and dropped 1% if rates were

15


shocked 300 basis points downward, as of September 30, 2006. The impact of the interest rate shock upward on the economic value of equity is above the allowable policy limits established by ALCO; however, management believes that the likelihood of an immediate increase in rates is highly remote. ALCO will continue to monitor the effect each month of changes in interest rates upon the Registrant's net interest margin and financial condition.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

The information concerning quantitative and qualitative disclosures about market risk contained under the caption "Liquidity and Interest Rate Risk" on pages 11 through 13 of the Registrant's Annual Report to Shareholders for the year ended December 31, 2005 is here incorporated by reference. Such Annual Report was previously filed as Exhibit 13 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2005.

Management does not believe that there has been a material change in the nature or categories of the primary market risk exposures, or the particular markets that present the primary risk of loss to the Bank. As of the date of this report, management does not know of or expect there to be any material change in the general nature of its primary market risk exposure in the near term. The methods by which the Bank manages its primary market risk exposures, as described in the sections of its Annual Report to Shareholders incorporated by reference in response to this item, have not changed materially since the end of 2005. As of the date of this report, management does not expect to make material changes in those methods in the near term. The Registrant may change those methods in the future to adapt to changes in circumstances or to implement new techniques.

The Bank's market risk exposure is mainly comprised of its vulnerability to interest rate risk. Prevailing interest rates and interest rate relationships are primarily determined by market factors that are beyond the Bank's control. All information provided in response to this item consists of forward-looking statements. Reference is made to the section captioned "Forward-Looking Statements" in Item 2 of this report for a discussion of the limitations on the Registrant's responsibility for such statements. In this discussion, "near term" means a period of one year following the date of the most recent balance sheet contained in this report.

Item 4.  Controls and Procedures.

An evaluation was performed under the supervision and with the participation of the Registrant's management, including the Chief Executive Officer and principal financial officer, of the effectiveness of the design and operation of the Registrant's disclosure controls and procedures. Based on and as of the time of that evaluation, the Registrant's management, including the Chief Executive Officer and principal financial officer, concluded that the Registrant's disclosure controls and procedures were effective as of the end of the period covered by this report. There was no change in the Registrant's internal control over financial reporting that occurred during the three months ended September 30, 2006 that has materially affected, or that is reasonably likely to materially affect, the Registrant's internal control over financial reporting.




16


PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings.

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

Item 1A.  Risk Factors.

There has been no material change in the risk factors reported in Item 1A of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2005.

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

On July 26, 2006, the Registrant issued 1,213 shares of common stock, without par value, to the directors of the Registrant pursuant to the Directors' Stock Purchase Plan for an aggregate cash price of $22,000. The Registrant relied on the exemption contained in Section 4(6) of the Securities Act of 1933 in connection with this sale.

ISSUER PURCHASES OF EQUITY SECURITIES







     Period






Total Number
of Shares
Purchased (1)








 





Average
Price
Paid per
Share








 




Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs








 


Maximum Number
(or Approximate
Dollar Value) of
Shares that May Yet
Be Purchased Under
the Plans or
Programs


     July 1, 2006 to July 31, 2006

-

 

-

 

-

 

38,889

     August 1, 2006 to August 31, 2006

-

 

-

 

-

 

38,889

     September 1, 2006 to September 30, 2006


-


 


-


 


-


 


38,889


        Total


-


 


-


 


-


 


38,889


(1) The repurchase plan was adopted and announced on July 21, 2004. There is no stated expiration date. The plan authorized the repurchase of up to 50,000 shares.

Item 3.  Defaults Upon Senior Securities.

None.

Item 4.  Submission of Matters to a Vote of Security Holders.

None.

Item 5.  Other Information.

None.



17


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 the Registrant. Previously filed as an exhibit to the Registrant's Form 10-K Annual Report for the year ended December 31, 2005. Here incorporated by reference.

 

 

 

 

 

3.2

 

Bylaws of the Registrant as currently in effect and any amendments thereto. Previously filed as an exhibit to the Registrant's Form 10-K Annual Report for the year ended December 31, 2003. Here incorporated by reference.

 

 

 

 

 

31.1

 

Certification of President and Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

 

31.2

 

Certification of Treasurer under Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

 

32.1

 

Certification pursuant to 18 U.S.C. § 1350.




18


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 14, 2006

/s/ James A. Bosserd


 

James A. Bosserd
President and Chief Executive Officer
(Principal Executive Officer)

 

 

 

 

 

Date:   November 14, 2006

/s/ Thomas L. Lampen


 

Thomas L. Lampen
Treasurer
(Principal Financial and Accounting Officer)




19


INDEX TO 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 the Registrant. Previously filed as an exhibit to the Registrant's Form 10-K Annual Report for the year ended December 31, 2005. Here incorporated by reference.

 

 

 

 

 

3.2

 

Bylaws of the Registrant as currently in effect and any amendments thereto. Previously filed as an exhibit to the Registrant's Form 10-K Annual Report for the year ended December 31, 2003. Here incorporated by reference.

 

 

 

 

 

31.1

 

Certification of President and Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

 

31.2

 

Certification of Treasurer under Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

 

32.1

 

Certification pursuant to 18 U.S.C. § 1350.