CHOICEONE FINANCIAL SERVICES INC - 10-Q Quarterly Report

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 March 31, 2005

[ ]	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 checkmark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes No X

As of April 30, 2005, the Registrant had outstanding 1,647,249 shares of common stock.

CHOICEONE FINANCIAL SERVICES, INC.
INDEX TO FORM 10-Q

			Page Number(s)
PART I. FINANCIAL INFORMATION

	Item 1.	Financial Statements:
		Consolidated Balance Sheets at March 31, 2005 and December 31, 2004	3
		Consolidated Statements of Income and Comprehensive Income for the three months ended March 31, 2005 and 2004	4
		Consolidated Statements of Changes in Shareholders' Equity for the three months ended March 31, 2005 and 2004	5
		Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2004	6
		Notes to Interim Consolidated Financial Statements	7-9

	Item 2.	Management's Discussion and Analysis of Financial
		Condition and Results of Operations	10-15

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	16

	Item 4.	Controls and Procedures	16


PART II. OTHER INFORMATION

	Item 1.	Legal Proceedings	16

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	16

	Item 3.	Defaults Upon Senior Securities	17

	Item 4.	Submission of Matters to a Vote of Security Holders	17

	Item 5.	Other Information	17

	Item 6.	Exhibits	17


SIGNATURES			18

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

ChoiceOne Financial Services, Inc.
CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)		March 31, 2005		December 31, 2004
		(Unaudited)
Assets
Cash and due from banks	$	3,443	$	3,619
Securities available for sale		41,809		44,913
Federal Home Loan Bank stock		2,596		2,569
Federal Reserve Bank stock		376		376
Loans held for sale		-		281
Loans, net (of allowance of $1,783 and $1,739)		175,958		171,539
Premises and equipment, net		4,929		4,906
Other real estate owned, net		1,082		981
Loan servicing rights, net		465		472
Cash value of life insurance policies		2,173		159
Other assets		2,566		2,470
Total assets	$	235,397	$	232,285

Liabilities
Deposits - noninterest-bearing	$	19,834	$	17,086
Deposits - interest-bearing		149,324		149,980
Total deposits		169,158		167,066

Repurchase agreements		4,771		6,338
Federal funds purchased		4,545		1,281
Advances from Federal Home Loan Bank		34,250		34,250
Other liabilities		1,777		2,281
Total liabilities		214,501		211,216

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: 1,646,234 at March 31, 2005 and 1,649,484 at December 31, 2004		15,843		15,913
Unallocated shares held by Employee Stock Ownership Plan		(9	)	(9	)
Retained earnings		5,302		5,053
Accumulated other comprehensive income (loss), net		(240	)	112
Total shareholders' equity		20,896		21,069
Total liabilities and shareholders' equity	$	235,397	$	232,285

See accompanying notes to consolidated financial statements.

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

(Dollars in thousands)		Three Months Ended March 31,
		2005		2004
Interest income
Loans, including fees	$	2,658	$	2,488
Securities:
Taxable		254		249
Tax exempt		172		137
Other		1		-
Total interest income		3,085		2,874

Interest expense
Deposits		857		719
Advances from Federal Home Loan Bank		207		219
Federal funds purchased and repurchase agreements		43		26
Total interest expense		1,107		964

Net interest income		1,978		1,910
Provision for loan losses		100		80

Net interest income after
provision for loan losses		1,878		1,830

Noninterest income
Insurance and investment commissions		272		280
Customer service charges		233		222
Loan servicing fees, net		22		22
Gains on sales of loans		61		60
Gains (losses) on sales of securities		(1	)	29
Other		42		75
Total noninterest income		629		688

Noninterest expense
Salaries and benefits		974		978
Occupancy and equipment		285		241
Professional fees		118		105
Supplies and postage		55		63
Data processing		141		128
Advertising and promotional		27		26
Other		211		259
Total noninterest expense		1,811		1,800

Income before income tax		696		718
Income tax expense		181		206

Net income	$	515	$	512

Comprehensive income	$	163	$	689

Basic and diluted earnings per share	$	0.31	$	0.31

Dividends declared per share	$	0.16	$	0.16

See accompanying notes to consolidated financial statements.

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

(Dollars in thousands)

Number of
Shares

Common
Stock and
Paid in
Capital

Unallocated
Shares held
by ESOP

Retained
Earnings

Accumulated
Other
Comprehensive
Income (Loss),
Net

Total



Balance, January 1, 2004	1,641,586	$	15,815	$	(27	)	$	4,264	$	516		$	20,568

Comprehensive income
Net income								512					512
Net change in unrealized gain										177			177
Total comprehensive income													689

Shares issued	3,666		59										59
Shares repurchased	(1,715	)	(29	)									(29	)
Cash dividends declared ($0.16 per share)								(265	)				(265	)

Balance, March 31, 2004	1,643,537	$	15,845	$	(27	)	$	4,511	$	693		$	21,022


Balance, January 1, 2005	1,649,484	$	15,913	$	(9	)	$	5,053	$	112		$	21,069

Comprehensive income
Net income								515					515
Net change in unrealized gain (loss)										(352	)		(352	)
Total comprehensive income													163

Shares issued	3,454		71										71
Shares repurchased	(6,704	)	(145	)									(145	)
Change in the fair market value of shares allocated to Employee Stock Ownership Plan			4										4
Cash dividends declared ($0.16 per share)								(266	)				(266	)

Balance, March 31, 2005	1,646,234	$	15,843	$	(9	)	$	5,302	$	(240	)	$	20,896

See accompanying notes to consolidated financial statements.

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

(Dollars in thousands)		Three Months Ended March 31,
		2005			2004
Cash flows from operating activities:
Net income	$	515		$	512
Adjustments to reconcile net income to net cash from operating activities:
Depreciation		148			118
Amortization		146			157
Provision for loan losses		100			80
Stock dividends on Federal Home Loan Bank stock		(27	)		(30	)
Losses (gains) on sales of securities		1			(29	)
Gains on sales of loans		(61	)		(60	)
Loans originated for sale		(2,952	)		(2,121	)
Proceeds from loan sales		3,268			1,901
Earnings, net of cost on life insurance		(14	)		-
Net changes in:
Other assets		(119	)		625
Other liabilities		(318	)		702
Net cash from operating activities		687			1,855

Cash flows from investing activities:
Securities available for sale:
Sales		1,376			3,560
Maturities, prepayments and calls		1,596			795
Purchases		(499	)		(6,411	)
Purchase of life insurance policies		(2,000	)		-
Loan originations and payments, net		(4,614	)		(543	)
Additions to premises and equipment, net of disposals		(171	)		(429	)
Net cash used in investing activities		(4,312	)		(3,028	)

Cash flows from financing activities:
Net change in deposits		2,092			3,979
Net change in repurchase agreements		(1,567	)		(1,360	)
Net change in federal funds purchased		3,264			(5,781	)
Proceeds from Federal Home Loan Bank advances		7,000			10,750
Payments on Federal Home Loan Bank advances		(7,000	)		(7,250	)
Issuance of common stock		71			59
Repurchase of common stock		(145	)		(29	)
Cash dividends		(266	)		(265	)
Net cash from financing activities		3,449			103

Net change in cash and cash equivalents		(176	)		(1,070	)
Beginning cash and cash equivalents		3,619			4,722

Ending cash and cash equivalents	$	3,443		$	3,652

Supplemental disclosures of cash flow information:
Cash paid for interest	$	1,090		$	981
Loans transferred to other real estate	$	95		$	51

See accompanying notes to consolidated financial statements.

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

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation
The consolidated financial statements include ChoiceOne Financial Services, Inc. (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 March 31, 2005 and December 31, 2004, and the Consolidated Statements of Income and Comprehensive Income, Consolidated Statements of Changes in Shareholders' Equity, and Consolidated Statements of Cash Flows for the three-month periods ended March 31, 2005 and March 31, 2004. Operating results for the three months ended March 31, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005.

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, 2004.

Stock Based Compensation
Employee compensation expense under the Registrant's stock option plan is reported if options are granted below market price at the grant date. Pro forma disclosures of net income and earnings per share are shown using the fair value method to measure expense for options granted using an option pricing model to estimate the fair value.

The following pro forma information presents net income and earnings per share for the three months ended March 31, 2005 and 2004 had the fair value method been used to measure compensation cost for stock option plans. No compensation cost was recognized for stock options in 2005 and 2004. The fair value of stock options granted in the first three months of 2005 and 2004 was $5.10 and $2.90 per share, respectively. Options are subject to a three-year vesting schedule.

(Dollars in thousands)		Three Months Ended March 31,
		2005		2004
Net income as reported	$	515	$	512
Deduct: Stock-based compensation expense determined under fair value based method		20		10
Pro forma net income	$	495	$	502


Basic and diluted earnings per common share as reported	$	0.31	$	0.31

Pro forma basic and diluted earnings per common share	$	0.30	$	0.30

The Registrant's Board of Directors declared a 5% stock dividend payable on the Registrant's common stock on April 20, 2005. The dividend will be paid May 31, 2005 to shareholders of record as of May 9, 2005. Per share data above for all periods presented have been adjusted for this stock dividend.

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

The pro forma effects are computed using an option pricing model and the following weighted average assumptions as of grant date:

	2005		2004
Risk-free interest rate	4.50	%	4.42	%
Expected option life (in years)	7		7
Expected stock price volatility	24.59	%	20.54	%
Dividend yield	3.03	%	3.78	%

In future periods, the pro forma effect of not applying the fair value method may increase if additional options are granted.

Stock Transactions
A total of 849 shares of common stock were issued to the Registrant's Board of Directors for a cash price of $18,000 under the terms of the Directors' Stock Purchase Plan in the first quarter of 2005. A total of 1,840 shares of common stock were issued to shareholders for a cash price of $39,000 under the Dividend Reinvestment Plan in the quarter ended March 31, 2005. A total of 765 shares were issued to employees for a cash price of $14,000 under the Employee Stock Purchase Plan for the quarter ended March 31, 2005. A total of 6,704 shares were repurchased from shareholders at a cash price of $145,000 in the first quarter of 2005.

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

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

NOTE 2 - ALLOWANCE FOR LOAN LOSSES

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

(Dollars in thousands)		Three Months Ended March 31,
		2005			2004
Balance, beginning of period	$	1,739		$	1,974
Provision charged to expense		100			80
Recoveries credited to the allowance		32			65
Loans charged off		(88	)		(406	)
Balance, end of period	$	1,783		$	1,713

Information regarding impaired loans follows:

(Dollars in thousands)		March 31, 2005			December 31, 2004
Loans with no allowance allocated	$	297	$	419
Loans with allowance allocated		853		247
Amount of allowance for loan losses allocated		230		105

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

(Dollars in thousands)		Three Months Ended March 31,
		2005		2004
Average balance during the period	$	879	$	1,524
Interest income recognized thereon		14		0
Cash basis interest income recognized		13		17

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, as restated for the 5% stock dividend declared on April 20, 2005, follows:

(Dollars in thousands)		Three Months Ended March 31,
		2005		2004
Basic Earnings Per Share:
Net income available to common
Shareholders	$	515	$	512

Weighted average common
shares outstanding for basic
earnings per share		1,646,860		1,639,721

Basic earnings per share	$	0.31	$	0.31

Diluted Earnings Per Share:
Net income available to common
Shareholders	$	515	$	512

Weighted average common
shares outstanding for basic
earnings per share		1,646,860		1,639,721
Plus: dilutive effect of assumed
exercise of stock options		4,862		6,642

Weighted average common and
potentially dilutive common
shares outstanding		1,651,722		1,646,363
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