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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, 2022
☐ | 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 check mark 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, every Interactive Data File required to be submitted 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 such files).

Yes ☒ No ☐

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

Large accelerated filer ☐ | Accelerated filer ☐
Non-accelerated filer ☒ | Smaller reporting company ☒
Emerging growth company ☐ |

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class | Trading symbol(s) | Name of each exchange on which registered
Common stock | COFS | NASDAQ Capital Market

As of October 31, 2022, the Registrant had outstanding 7,514,076 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, except per share data) |  | 2022 |  |  | 2021 |
|  | (Unaudited) |  |  | (Audited) |
Assets |  |  |  |  |  |  |  |
Cash and due from banks |  | $ | 51,144 |  |  | $ | 31,537 |
Time deposits in other financial institutions |  |  | 350 |  |  |  | 350 |
Cash and cash equivalents |  |  | 51,494 |  |  |  | 31,887 |
Equity securities, at fair value (Note 2) |  |  | 7,977 |  |  |  | 8,492 |
Securities available for sale, at fair value (Note 2) |  |  | 530,093 |  |  |  | 1,098,885 |
Securities held to maturity, at amortized cost (Note 2) |  |  | 428,205 |  |  |  | - |
Federal Home Loan Bank stock |  |  | 3,493 |  |  |  | 3,824 |
Federal Reserve Bank stock |  |  | 5,064 |  |  |  | 5,064 |
Loans held for sale |  |  | 8,848 |  |  |  | 9,351 |
Loans to other financial institutions |  |  | 70 |  |  |  | 42,632 |
Loans (Note 3) |  |  | 1,132,401 |  |  |  | 1,016,848 |
Allowance for loan losses (Note 3) |  |  | (7,457 | ) |  |  | (7,688 | )
Loans, net |  |  | 1,124,944 |  |  |  | 1,009,160 |
Premises and equipment, net |  |  | 28,947 |  |  |  | 29,880 |
Other real estate owned, net |  |  | - |  |  |  | 194 |
Cash value of life insurance policies |  |  | 44,033 |  |  |  | 43,356 |
Goodwill |  |  | 59,946 |  |  |  | 59,946 |
Core deposit intangible |  |  | 3,062 |  |  |  | 3,962 |
Other assets |  |  | 67,353 |  |  |  | 20,049 |
Total assets |  | $ | 2,363,529 |  |  | $ | 2,366,682 |
Liabilities |  |  |  |  |  |  |  |
Deposits – noninterest-bearing |  | $ | 599,360 |  |  | $ | 560,931 |
Deposits – interest-bearing |  |  | 1,557,294 |  |  |  | 1,491,363 |
Total deposits |  |  | 2,156,654 |  |  |  | 2,052,294 |
Borrowings |  |  | - |  |  |  | 50,000 |
Subordinated debentures |  |  | 35,201 |  |  |  | 35,017 |
Other liabilities |  |  | 15,017 |  |  |  | 7,702 |
Total liabilities |  |  | 2,206,872 |  |  |  | 2,145,013 |
Shareholders' Equity |  |  |  |  |  |  |  |
Preferred stock; shares authorized: 100,000; shares outstanding: none |  |  | - |  |  |  | - |
Common stock and paid-in capital, no par value; shares authorized: 12,000,000; shares outstanding: 7,510,036 at September 30, 2022 and 7,510,379 at December 31, 2021 |  |  | 171,975 |  |  |  | 171,913 |
Retained earnings |  |  | 63,664 |  |  |  | 52,332 |
Accumulated other comprehensive loss, net |  |  | (78,982 | ) |  |  | (2,576 | )
Total shareholders’ equity |  |  | 156,657 |  |  |  | 221,669 |
Total liabilities and shareholders’ equity |  | $ | 2,363,529 |  |  | $ | 2,366,682 |

See accompanying notes to interim consolidated financial statements.

2

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

|  | Three Months Ended |  |  | Nine Months Ended |
(Dollars in thousands, except per share data) |  | September 30, |  |  | September 30, |
|  | 2022 |  |  | 2021 |  |  | 2022 |  |  | 2021 |
Interest income |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loans, including fees |  | $ | 13,611 |  |  | $ | 12,408 |  |  | $ | 38,432 |  |  | $ | 36,655 |
Securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Taxable |  |  | 3,972 |  |  |  | 2,821 |  |  |  | 11,001 |  |  |  | 7,073 |
Tax exempt |  |  | 1,464 |  |  |  | 1,459 |  |  |  | 4,678 |  |  |  | 4,002 |
Other |  |  | 238 |  |  |  | 38 |  |  |  | 314 |  |  |  | 70 |
Total interest income |  |  | 19,285 |  |  |  | 16,726 |  |  |  | 54,425 |  |  |  | 47,800 |
Interest expense |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  |  | 1,563 |  |  |  | 837 |  |  |  | 3,342 |  |  |  | 2,556 |
Advances from Federal Home Loan Bank |  |  | 5 |  |  |  | 18 |  |  |  | 8 |  |  |  | 21 |
Other |  |  | 379 |  |  |  | 171 |  |  |  | 1,127 |  |  |  | 327 |
Total interest expense |  |  | 1,947 |  |  |  | 1,026 |  |  |  | 4,477 |  |  |  | 2,904 |
Net interest income |  |  | 17,338 |  |  |  | 15,700 |  |  |  | 49,948 |  |  |  | 44,896 |
Provision for loan losses |  |  | 100 |  |  |  | - |  |  |  | 100 |  |  |  | 416 |
Net interest income after provision for loan losses |  |  | 17,238 |  |  |  | 15,700 |  |  |  | 49,848 |  |  |  | 44,480 |
Noninterest income |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Customer service charges |  |  | 2,458 |  |  |  | 2,255 |  |  |  | 7,000 |  |  |  | 6,309 |
Insurance and investment commissions |  |  | 158 |  |  |  | 153 |  |  |  | 596 |  |  |  | 624 |
Gains on sales of loans |  |  | 432 |  |  |  | 1,798 |  |  |  | 2,123 |  |  |  | 5,715 |
Net gains (losses) on sales of securities |  |  | (378 | ) |  |  | — |  |  |  | (805 | ) |  |  | 3 |
Net gains on sales and write downs of other assets |  |  | — |  |  |  | — |  |  |  | 172 |  |  |  | — |
Earnings on life insurance policies |  |  | 259 |  |  |  | 194 |  |  |  | 793 |  |  |  | 570 |
Trust income |  |  | 174 |  |  |  | 187 |  |  |  | 528 |  |  |  | 612 |
Change in market value of equity securities |  |  | (323 | ) |  |  | (28 | ) |  |  | (1,006 | ) |  |  | 461 |
Other |  |  | 267 |  |  |  | 159 |  |  |  | 922 |  |  |  | 756 |
Total noninterest income |  |  | 3,047 |  |  |  | 4,718 |  |  |  | 10,323 |  |  |  | 15,050 |
Noninterest expense |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Salaries and benefits |  |  | 7,668 |  |  |  | 7,552 |  |  |  | 22,811 |  |  |  | 21,719 |
Occupancy and equipment |  |  | 1,545 |  |  |  | 1,538 |  |  |  | 4,688 |  |  |  | 4,591 |
Data processing |  |  | 1,734 |  |  |  | 1,471 |  |  |  | 5,056 |  |  |  | 4,573 |
Professional fees |  |  | 559 |  |  |  | 754 |  |  |  | 1,628 |  |  |  | 2,426 |
Supplies and postage |  |  | 184 |  |  |  | 171 |  |  |  | 541 |  |  |  | 395 |
Advertising and promotional |  |  | 199 |  |  |  | 183 |  |  |  | 478 |  |  |  | 535 |
Intangible amortization |  |  | 297 |  |  |  | 346 |  |  |  | 901 |  |  |  | 1,005 |
FDIC insurance |  |  | 195 |  |  |  | 225 |  |  |  | 645 |  |  |  | 533 |
Other |  |  | 1,035 |  |  |  | 1,266 |  |  |  | 3,515 |  |  |  | 3,386 |
Total noninterest expense |  |  | 13,416 |  |  |  | 13,506 |  |  |  | 40,263 |  |  |  | 39,163 |
Income before income tax |  |  | 6,869 |  |  |  | 6,912 |  |  |  | 19,908 |  |  |  | 20,367 |
Income tax expense |  |  | 1,056 |  |  |  | 1,163 |  |  |  | 2,952 |  |  |  | 3,337 |
Net income |  | $ | 5,813 |  |  | $ | 5,749 |  |  | $ | 16,956 |  |  | $ | 17,029 |
Basic earnings per share (Note 4) |  | $ | 0.77 |  |  | $ | 0.75 |  |  | $ | 2.26 |  |  | $ | 2.20 |
Diluted earnings per share (Note 4) |  | $ | 0.77 |  |  | $ | 0.75 |  |  | $ | 2.26 |  |  | $ | 2.20 |
Dividends declared per share |  | $ | 0.25 |  |  | $ | 0.25 |  |  | $ | 0.75 |  |  | $ | 0.69 |

See accompanying notes to interim consolidated financial statements.

3

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

|  | Three Months Ended |  |  | Nine Months Ended |
(Dollars in thousands) |  | September 30, |  |  | September 30, |
|  | 2022 |  |  | 2021 |  |  | 2022 |  |  | 2021 |
Net income |  | $ | 5,813 |  |  | $ | 5,749 |  |  | $ | 16,956 |  |  | $ | 17,029 |
Other comprehensive income: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Change in net unrealized gain (loss) on available-for-sale securities |  |  | (25,073 | ) |  |  | (6,173 | ) |  |  | (99,584 | ) |  |  | (11,464 | )
Income tax benefit (expense) |  |  | 5,265 |  |  |  | 1,296 |  |  |  | 20,913 |  |  |  | 2,407 |
Less: reclassification adjustment for net (gain) loss included in net income |  |  | 378 |  |  |  | - |  |  |  | 805 |  |  |  | (3 | )
Income tax benefit (expense) |  |  | (79 | ) |  |  | - |  |  |  | (169 | ) |  |  | 1 |
Less: net unrealized (gains) losses on securities transferred from available-for-sale to held-to-maturity |  |  | - |  |  |  | - |  |  |  | 3,404 |  |  |  | - |
Income tax benefit (expense) |  |  | - |  |  |  | - |  |  |  | (715 | ) |  |  | - |
Unrealized gain (loss) on available-for-sale securities, net of tax |  |  | (19,509 | ) |  |  | (4,877 | ) |  |  | (75,346 | ) |  |  | (9,059 | )
Reclassification of unrealized gain (loss) upon transfer of securities from available-for-sale to held-to-maturity |  |  | - |  |  |  | - |  |  |  | (3,404 | ) |  |  | - |
Income tax benefit (expense) |  |  | - |  |  |  | - |  |  |  | 715 |  |  |  | - |
Less: amortization of net unrealized (gains) losses on securities transferred from available-for-sale to held-to-maturity |  |  | 53 |  |  |  | - |  |  |  | 297 |  |  |  | - |
Income tax benefit (expense) |  |  | (11 | ) |  |  | - |  |  |  | (62 | ) |  |  | - |
Unrealized loss on held to maturity securities, net of tax |  |  | 42 |  |  |  | - |  |  |  | (2,454 | ) |  |  | - |
Change in net unrealized gain (loss) on derivatives |  |  | 6,618 |  |  |  | - |  |  |  | 1,042 |  |  |  | - |
Income tax benefit (expense) |  |  | (1,390 | ) |  |  | - |  |  |  | (219 | ) |  |  | - |
Less: amortization of net unrealized (gains) losses included in net income |  |  | 416 |  |  |  | - |  |  |  | 723 |  |  |  | - |
Income tax benefit (expense) |  |  | (87 | ) |  |  | - |  |  |  | (152 | ) |  |  | - |
Unrealized gain (loss) on derivative instruments, net of tax |  |  | 5,557 |  |  |  | - |  |  |  | 1,394 |  |  |  | - |
Other comprehensive income (loss), net of tax |  |  | (13,910 | ) |  |  | (4,877 | ) |  |  | (76,406 | ) |  |  | (9,059 | )
Comprehensive income (loss) |  | $ | (8,097 | ) |  | $ | 872 |  |  | $ | (59,450 | ) |  | $ | 7,970 |

See accompanying notes to interim consolidated financial statements.

4

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

For the three months ended September 30,

|  |  |  |  |  |  |  |  |  |  |  |  |  | Accumulated |  |  |  |  |
|  |  |  |  |  | Common |  |  |  |  |  |  | Other |  |  |  |  |
|  |  |  |  |  | Stock and |  |  |  |  |  |  | Comprehensive |  |  |  |  |
|  | Number of |  |  | Paid in |  |  | Retained |  |  | Income/(Loss), |  |  |  |  |
(Dollars in thousands, except per share data) |  | Shares |  |  | Capital |  |  | Earnings |  |  | Net |  |  | Total |
Balance, July 1, 2021 |  |  | 7,692,537 |  |  | $ | 176,323 |  |  | $ | 45,352 |  |  | $ | 6,846 |  |  | $ | 228,521 |
Net income |  |  |  |  |  |  |  |  |  |  | 5,749 |  |  |  |  |  |  |  | 5,749 |
Other comprehensive income |  |  |  |  |  |  |  |  |  |  |  |  |  |  | (4,877 | ) |  |  | (4,877 | )
Shares issued |  |  | 5,924 |  |  |  | 139 |  |  |  |  |  |  |  |  |  |  |  | 139 |
Effect of employee stock purchases |  |  |  |  |  |  | 6 |  |  |  |  |  |  |  |  |  |  |  | 6 |
Stock-based compensation expense |  |  |  |  |  |  | 84 |  |  |  |  |  |  |  |  |  |  |  | 84 |
Shares repurchased |  |  | (107,240 | ) |  |  | (2,664 | ) |  |  |  |  |  |  |  |  |  |  | (2,664 | )
Cash dividends declared ($0.25 per share) |  |  |  |  |  |  |  |  |  |  | (1,903 | ) |  |  |  |  |  |  | (1,903 | )
Balance, September 30, 2021 |  |  | 7,591,221 |  |  | $ | 173,888 |  |  | $ | 49,198 |  |  | $ | 1,969 |  |  | $ | 225,055 |
Balance, July 1, 2022 |  |  | 7,503,072 |  |  | $ | 171,804 |  |  | $ | 59,728 |  |  | $ | (65,072 | ) |  | $ | 166,460 |
Net income |  |  |  |  |  |  |  |  |  |  | 5,813 |  |  |  |  |  |  |  | 5,813 |
Other comprehensive income (loss) |  |  |  |  |  |  |  |  |  |  |  |  |  |  | (13,910 | ) |  |  | (13,910 | )
Shares issued |  |  | 6,964 |  |  |  | 32 |  |  |  |  |  |  |  |  |  |  |  | 32 |
Effect of employee stock purchases |  |  |  |  |  |  | 6 |  |  |  |  |  |  |  |  |  |  |  | 6 |
Stock-based compensation expense |  |  |  |  |  |  | 133 |  |  |  |  |  |  |  |  |  |  |  | 133 |
Cash dividends declared ($0.25 per share) |  |  |  |  |  |  |  |  |  |  | (1,877 | ) |  |  |  |  |  |  | (1,877 | )
Balance, September 30, 2022 |  |  | 7,510,036 |  |  | $ | 171,975 |  |  | $ | 63,664 |  |  | $ | (78,982 | ) |  | $ | 156,657 |

5

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

For the nine months ended September 30,

|  |  |  |  |  |  |  |  |  |  |  |  |  | Accumulated |  |  |  |  |
|  |  |  |  |  | Common |  |  |  |  |  |  | Other |  |  |  |  |
|  |  |  |  |  | Stock and |  |  |  |  |  |  | Comprehensive |  |  |  |  |
|  | Number of |  |  | Paid in |  |  | Retained |  |  | Income/(Loss), |  |  |  |  |
(Dollars in thousands, except per share data) |  | Shares |  |  | Capital |  |  | Earnings |  |  | Net |  |  | Total |
Balance, January 1, 2021 |  |  | 7,796,352 |  |  | $ | 178,750 |  |  | $ | 37,490 |  |  | $ | 11,028 |  |  | $ | 227,268 |
Net income |  |  |  |  |  |  |  |  |  |  | 17,029 |  |  |  |  |  |  |  | 17,029 |
Other comprehensive loss |  |  |  |  |  |  |  |  |  |  |  |  |  |  | (9,059 | ) |  |  | (9,059 | )
Shares issued |  |  | 17,810 |  |  |  | 420 |  |  |  |  |  |  |  |  |  |  |  | 420 |
Effect of employee stock purchases |  |  |  |  |  |  | 19 |  |  |  |  |  |  |  |  |  |  |  | 19 |
Stock-based compensation expense |  |  |  |  |  |  | 260 |  |  |  |  |  |  |  |  |  |  |  | 260 |
Shares repurchased |  |  | (222,941 | ) |  |  | (5,561 | ) |  |  |  |  |  |  |  |  |  |  | (5,561 | )
Cash dividends declared ($0.69 per share) |  |  | - |  |  |  | - |  |  |  | (5,322 | ) |  |  |  |  |  |  | (5,322 | )
Balance, September 30, 2021 |  |  | 7,591,221 |  |  | $ | 173,888 |  |  | $ | 49,198 |  |  | $ | 1,969 |  |  | $ | 225,055 |
Balance, January 1, 2022 |  |  | 7,510,379 |  |  | $ | 171,913 |  |  | $ | 52,332 |  |  | $ | (2,576 | ) |  | $ | 221,669 |
Net income |  |  |  |  |  |  |  |  |  |  | 16,956 |  |  |  |  |  |  |  | 16,956 |
Other comprehensive income (loss) |  |  |  |  |  |  |  |  |  |  |  |  |  |  | (76,406 | ) |  |  | (76,406 | )
Shares issued |  |  | 25,556 |  |  |  | 304 |  |  |  |  |  |  |  |  |  |  |  | 304 |
Effect of employee stock purchases |  |  |  |  |  |  | 19 |  |  |  |  |  |  |  |  |  |  |  | 19 |
Stock-based compensation expense |  |  |  |  |  |  | 421 |  |  |  |  |  |  |  |  |  |  |  | 421 |
Shares repurchased |  |  | (25,899 | ) |  |  | (682 | ) |  |  |  |  |  |  |  |  |  |  | (682 | )
Cash dividends declared ($0.75 per share) |  |  |  |  |  |  |  |  |  |  | (5,624 | ) |  |  |  |  |  |  | (5,624 | )
Balance, September 30, 2022 |  |  | 7,510,036 |  |  | $ | 171,975 |  |  | $ | 63,664 |  |  | $ | (78,982 | ) |  | $ | 156,657 |

See accompanying notes to interim consolidated financial statements.

6

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

|  | Nine Months Ended |
(Dollars in thousands) |  | September 30, |
|  | 2022 |  |  | 2021 |
Cash flows from operating activities: |  |  |  |  |  |  |  |
Net income |  | $ | 16,956 |  |  | $ | 17,029 |
Adjustments to reconcile net income to net cash from operating activities: |  |  |  |  |  |  |  |
Provision for loan losses |  |  | 100 |  |  |  | 416 |
Depreciation |  |  | 2,041 |  |  |  | 1,949 |
Amortization |  |  | 8,145 |  |  |  | 6,989 |
Compensation expense on employee and director stock purchases, stock options, and restricted stock units |  |  | 726 |  |  |  | 596 |
Net losses (gains) on sales of available for sale securities |  |  | 805 |  |  |  | (3 | )
Net change in market value of equity securities |  |  | 1,006 |  |  |  | (461 | )
Gains on sales of loans |  |  | (2,123 | ) |  |  | (5,715 | )
Loans originated for sale |  |  | (68,434 | ) |  |  | (162,579 | )
Proceeds from loan sales |  |  | 70,155 |  |  |  | 171,882 |
Earnings on bank-owned life insurance |  |  | (793 | ) |  |  | (570 | )
Proceeds from BOLI policy |  |  | 130 |  |  |  | - |
Earnings on death benefit from bank-owned life insurance |  |  | (14 | ) |  |  | - |
(Gains)/losses on sales of other real estate owned |  |  | (41 | ) |  |  | (4 | )
Proceeds from sales of other real estate owned |  |  | 235 |  |  |  | 407 |
Deferred federal income tax (benefit)/expense |  |  | 169 |  |  |  | 634 |
Net change in: |  |  |  |  |  |  |  |
Other assets |  |  | (4,461 | ) |  |  | (2,805 | )
Other liabilities |  |  | 7,423 |  |  |  | 1,797 |
Net cash provided by operating activities |  |  | 32,025 |  |  |  | 29,562 |
Cash flows from investing activities: |  |  |  |  |  |  |  |
Sales of securities available for sale |  |  | 47,167 |  |  |  | - |
Maturities, prepayments and calls of securities available for sale |  |  | 39,024 |  |  |  | 39,772 |
Maturities, prepayments and calls of securities held to maturity |  |  | 6,277 |  |  |  | - |
Purchases of securities available for sale |  |  | (54,347 | ) |  |  | (514,204 | )
Purchases of securities held to maturity |  |  | (7,505 | ) |  |  | - |
Loan originations and payments, net |  |  | (73,321 | ) |  |  | 78,067 |
Additions to premises and equipment |  |  | (1,238 | ) |  |  | (2,193 | )
Proceeds from (payments for) derivative contracts, net |  |  | (16,547 | ) |  |  | - |
Net cash provided by (used in) investing activities |  |  | (60,490 | ) |  |  | (398,558 | )
Cash flows from financing activities: |  |  |  |  |  |  |  |
Net change in deposits |  |  | 104,360 |  |  |  | 337,572 |
Net change in short term borrowings |  |  | (50,000 | ) |  |  | 22,464 |
Issuance of common stock |  |  | 80 |  |  |  | 104 |
Repurchase of common stock |  |  | (682 | ) |  |  | (5,561 | )
Share based compensation withholding obligation |  |  | (62 | ) |  |  | - |
Cash dividends |  |  | (5,624 | ) |  |  | (5,322 | )
Net cash provided by financing activities |  |  | 48,072 |  |  |  | 349,257 |
Net change in cash and cash equivalents |  |  | 19,607 |  |  |  | (19,739 | )
Beginning cash and cash equivalents |  |  | 31,887 |  |  |  | 79,519 |
Ending cash and cash equivalents |  | $ | 51,494 |  |  | $ | 59,780 |
Supplemental disclosures of cash flow information: |  |  |  |  |  |  |  |
Cash paid for interest |  | $ | 4,738 |  |  | $ | 2,885 |
Cash paid for income taxes |  |  | 200 |  |  |  | 2,501 |
Loans transferred to other real estate owned |  |  | - |  |  |  | 298 |

See accompanying notes to interim consolidated financial statements.

7

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"), its wholly-owned subsidiary, ChoiceOne Bank, and ChoiceOne Bank’s wholly-owned subsidiary, ChoiceOne Insurance Agencies, Inc. Intercompany transactions and balances have been eliminated in consolidation.

ChoiceOne owns all of the common securities of Community Shores Capital Trust I (the “Capital Trust”). Under U.S. generally accepted accounting principles ("GAAP"), the Capital Trust is not consolidated because it is a variable interest entity and ChoiceOne is not the primary beneficiary.

The accompanying unaudited consolidated financial statements and notes thereto reflect all adjustments ordinary in nature which are, in the opinion of management, necessary for a fair presentation of such financial statements. Operating results for the nine months ended September 30, 2022, are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.

The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in ChoiceOne’s Annual Report on Form 10-K for the year ended December 31, 2021.

Use of Estimates

To prepare financial statements in conformity with GAAP, ChoiceOne’s management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided. These estimates and assumptions are subject to many risks and uncertainties, including changes in interest rates and other general economic, business and political conditions, including the effects of the COVID-19 pandemic, and its potential effects on the economic environment, our customers and our operations, as well as any changes to federal, state and local government laws, regulations and orders in connection with the pandemic. Actual results may differ from these estimates. Estimates associated with the allowance for loan losses are particularly susceptible to change.

Investment Securities

Investment securities for which ChoiceOne has the intent and ability to hold to maturity are classified as held to maturity and are carried at amortized cost. Investment securities not classified as held to maturity are classified as available for sale and are reported at fair value with unrealized gains and losses, net of income taxes, as a separate component of other comprehensive income. ChoiceOne determines the appropriate classification of investment securities at the time of purchase and reassesses the classification at each reporting date.

Loans to Other Financial Institutions

Loans to other financial institutions are made for the purpose of providing a warehouse line of credit to facilitate funding of residential mortgage loan originations at other financial institutions. The loans are short-term in nature and are designed to provide funding for the time period between the loan origination and its subsequent sale in the secondary market. Loans to other financial institutions earn a share of interest income, determined by the contract, from when the loan is funded to when the loan is sold on the secondary market. Loans to other financial institutions are excluded from Note 3. Management has elected to suspend the warehouse line of credit program as of the end of the third quarter of 2022. A small balance of loans remains in the pipeline from prior to the suspension; however, these are expected to be paid off quickly, with no losses, and are immaterial.

Goodwill

Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of the acquired tangible assets and liabilities and identifiable intangible assets. Goodwill and intangible assets acquired in a purchase or business combination and determined to have an indefinite useful life are not amortized but tested for impairment at least annually or more frequently if events and circumstances exist that indicate that a goodwill impairment test should be performed.

Core Deposit Intangible

Core deposit intangible represents the value of the acquired customer core deposit bases and is included as an asset on the consolidated balance sheets. The core deposit intangible has an estimated finite life, is amortized on an accelerated basis over a 120 month period and is subject to periodic impairment evaluation.

8

Stock Transactions

A total of 12,104 shares of common stock were issued to ChoiceOne’s Board of Directors for a cash price of $286,000 under the terms of the Directors’ Stock Purchase Plan in the first nine months of 2022. A total of 6,524 shares for a cash price of $80,000 were issued under the Employee Stock Purchase Plan in the first nine months of 2022. ChoiceOne repurchased 25,899 shares for $682,000, or a weighted average all-in cost per share of $26.35, during the first quarter of 2022. This was part of the common stock repurchase program announced in April 2021 which authorized repurchases of up to 390,114 shares, representing 5% of the total outstanding shares of common stock as of the date the program was adopted. No shares were repurchased under this program in the second or third quarter of 2022.

Allowance for Loan Losses

The allowance for loan losses is a valuation allowance for probable incurred credit losses. The allowance for loan losses is increased by the provision for loan losses and decreased by loans charged off less any recoveries of charged off loans. Management estimates the allowance for loan losses required based on past loan loss experience, the nature and volume of the loan portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance for loan losses may be made for specific loans, but the entire allowance for loan losses is available for any loan that, in management’s judgment, should be charged off. Loan losses are charged against the allowance for loan losses when management believes that collection of a loan balance is not possible.

The allowance for loan losses consists of general and specific components. The general component covers non-impaired loans and is based on historical loss experience adjusted for current factors. Management's adjustment for current factors is based on trends in delinquencies, trends in charge-offs and recoveries, trends in the volume of loans, changes in underwriting standards, trends in loan review findings, experience and ability of lending staff, national and economic trends and conditions, industry conditions, trends in real estate values, and other conditions. The specific component relates to loans that are individually classified as impaired.

A loan is impaired when full payment under the loan terms is not expected. Troubled debt restructuring of loans is undertaken to improve the likelihood that the loan will be repaid in full under the modified terms in accordance with a reasonable repayment schedule. All modified loans are evaluated to determine whether the loans should be reported as Troubled Debt Restructurings ("TDR"). A loan is a TDR when ChoiceOne Bank, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower by modifying a loan. To make this determination, ChoiceOne Bank must determine whether (a) the borrower is experiencing financial difficulties and (b) ChoiceOne Bank granted the borrower a concession. This determination requires consideration of all facts and circumstances surrounding the modification. An overall general decline in the economy or some deterioration in a borrower’s financial condition does not automatically mean the borrower is experiencing financial difficulties. Commercial loans are evaluated for impairment on an individual loan basis. If a loan is considered impaired or if a loan has been classified as a TDR, a portion of the allowance for loan losses is allocated to the loan so that it is reported, at the net present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of smaller-balance homogeneous loans such as consumer and residential real estate mortgage loans are collectively evaluated for impairment and, accordingly, they are not separately identified for impairment disclosures.

Reclassifications

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

Recent Accounting Pronouncements

The Financial Accounting Standards Board (FASB) issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU provides financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date by replacing the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The new guidance attempts to reflect an entity’s current estimate of all expected credit losses and broadens the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually to include forecasted information, as well as past events and current conditions. There is no specified method for measuring expected credit losses, and an entity may apply methods that reasonably reflect its expectations of the credit loss estimate. Although an entity may still use its current systems and methods for recording the allowance for credit losses, under the new rules, the inputs used to record the allowance for credit losses generally will need to change to appropriately reflect an estimate of all expected credit losses and the use of reasonable and supportable forecasts. Additionally, credit losses on available-for-sale debt securities will have to be presented as an allowance rather than as a write-down. This ASU is effective for fiscal years beginning after December 15, 2022, and for interim periods within those years for companies considered smaller reporting companies with the Securities and Exchange Commission. ChoiceOne was classified as a smaller reporting company as of the measurement date. Management is currently evaluating the impact of this new ASU on its consolidated financial statements which may be significant. Management has selected representative peer groups for each loan type and determined economic factors which have a strong correlation with our historical loss data.

9

NOTE 2 – SECURITIES

On January 1, 2022, ChoiceOne reassessed and transferred, at fair value $428.4 million of securities classified as available for sale to the held to maturity classification. The net unrealized after-tax loss of $2.7 million as of the transfer date remained in accumulated other comprehensive income to be amortized over the remaining life of the securities, offsetting the related amortization of discount or premium on the transferred securities. No gains or losses were recognized at the time of the transfer. The remaining net unamortized unrealized loss on transferred securities included in accumulated other comprehensive income was $2.5 million after tax as of September 30, 2022.

The fair value of equity securities and the related gross unrealized gains and (losses) recognized in noninterest income were as follows:

|  | September 30, 2022 |
|  |  |  |  |  | Gross |  |  | Gross |  |  |  |  |
(Dollars in thousands) |  | Amortized |  |  | Unrealized |  |  | Unrealized |  |  | Fair |
|  | Cost |  |  | Gains |  |  | Losses |  |  | Value |
Equity securities |  | $ | 8,445 |  |  | $ | 272 |  |  | $ | (740 | ) |  | $ | 7,977 |

|  | December 31, 2021 |
|  |  |  |  |  | Gross |  |  | Gross |  |  |  |  |
(Dollars in thousands) |  | Amortized |  |  | Unrealized |  |  | Unrealized |  |  | Fair |
|  | Cost |  |  | Gains |  |  | Losses |  |  | Value |
Equity securities |  | $ | 7,953 |  |  | $ | 665 |  |  | $ | (126 | ) |  | $ | 8,492 |

The following tables present the amortized cost and fair value of investment securities at the dates indicated and the corresponding amounts of gross unrealized gains and losses, including the corresponding amounts of gross unrealized gains and losses on investment securities available for sale recognized in accumulated other comprehensive income:

|  | September 30, 2022 |
|  |  |  |  |  | Gross |  |  | Gross |  |  |  |  |
(Dollars in thousands) |  | Amortized |  |  | Unrealized |  |  | Unrealized |  |  | Fair |
Available for Sale: |  | Cost |  |  | Gains |  |  | Losses |  |  | Value |
U.S. Treasury notes and bonds |  | $ | 90,926 |  |  | $ | - |  |  | $ | (13,372 | ) |  | $ | 77,554 |
State and municipal |  |  | 281,298 |  |  |  | - |  |  |  | (57,311 | ) |  |  | 223,987 |
Mortgage-backed |  |  | 242,095 |  |  |  | - |  |  |  | (27,404 | ) |  |  | 214,691 |
Corporate |  |  | 757 |  |  |  | - |  |  |  | (41 | ) |  |  | 716 |
Asset-backed securities |  |  | 13,653 |  |  |  | - |  |  |  | (508 | ) |  |  | 13,145 |
Total |  | $ | 628,729 |  |  | $ | - |  |  | $ | (98,636 | ) |  | $ | 530,093 |
Held to Maturity: |  |  |  |  |  |  |  |  |  |  |  |
U.S. Government and federal agency |  | $ | 2,965 |  |  | $ | - |  |  | $ | (415 | ) |  | $ | 2,550 |
State and municipal |  |  | 202,406 |  |  |  | - |  |  |  | (42,485 | ) |  |  | 159,921 |
Mortgage-backed |  |  | 202,131 |  |  |  | - |  |  |  | (31,296 | ) |  |  | 170,835 |
Corporate |  |  | 19,597 |  |  |  | - |  |  |  | (2,068 | ) |  |  | 17,529 |
Asset-backed securities |  |  | 1,106 |  |  |  | - |  |  |  | (83 | ) |  |  | 1,023 |
Total |  | $ | 428,205 |  |  | $ | - |  |  | $ | (76,347 | ) |  | $ | 351,858 |

|  | December 31, 2021 |
|  |  |  |  |  | Gross |  |  | Gross |  |  |  |  |
(Dollars in thousands) |  | Amortized |  |  | Unrealized |  |  | Unrealized |  |  | Fair |
Available for Sale: |  | Cost |  |  | Gains |  |  | Losses |  |  | Value |
U.S. Government and federal agency |  | $ | 2,001 |  |  | $ | 7 |  |  | $ | - |  |  | $ | 2,008 |
U.S. Treasury notes and bonds |  |  | 93,267 |  |  |  | 23 |  |  |  | (1,311 | ) |  |  | 91,979 |
State and municipal |  |  | 528,252 |  |  |  | 10,704 |  |  |  | (4,109 | ) |  |  | 534,847 |
Mortgage-backed |  |  | 441,383 |  |  |  | 781 |  |  |  | (9,049 | ) |  |  | 433,115 |
Corporate |  |  | 20,856 |  |  |  | 19 |  |  |  | (233 | ) |  |  | 20,642 |
Asset-backed securities |  |  | 16,387 |  |  |  | - |  |  |  | (93 | ) |  |  | 16,294 |
Total |  | $ | 1,102,146 |  |  | $ | 11,534 |  |  | $ | (14,795 | ) |  | $ | 1,098,885 |

10

Available for sale securities with unrealize losses as of September 30, 2022 and 2021, aggregated by investment category and length of time the individual securities have been in an unrealized loss position, were as follows:

|  | September 30, 2022 |
|  | Less than 12 months |  |  | More than 12 months |  |  | Total |
(Dollars in thousands) |  | Fair |  |  | Unrealized |  |  | Fair |  |  | Unrealized |  |  | Fair |  |  | Unrealized |
Available for Sale: |  | Value |  |  | Losses |  |  | Value |  |  | Losses |  |  | Value |  |  | Losses |
U.S. Government and federal agency |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |
U.S. Treasury notes and bonds |  |  | - |  |  |  | - |  |  |  | 77,554 |  |  |  | 13,372 |  |  |  | 77,554 |  |  |  | 13,372 |
State and municipal |  |  | 181,857 |  |  |  | 44,576 |  |  |  | 40,756 |  |  |  | 12,735 |  |  |  | 222,613 |  |  |  | 57,311 |
Mortgage-backed |  |  | 86,499 |  |  |  | 4,410 |  |  |  | 125,765 |  |  |  | 22,994 |  |  |  | 212,264 |  |  |  | 27,404 |
Corporate |  |  | 716 |  |  |  | 41 |  |  |  | - |  |  |  | - |  |  |  | 716 |  |  |  | 41 |
Asset-backed securities |  |  | - |  |  |  | - |  |  |  | 13,145 |  |  |  | 508 |  |  |  | 13,145 |  |  |  | 508 |
Total temporarily impaired |  | $ | 269,072 |  |  | $ | 49,027 |  |  | $ | 257,220 |  |  | $ | 49,609 |  |  | $ | 526,292 |  |  | $ | 98,636 |

|  | December 31, 2021 |
|  | Less than 12 months |  |  | More than 12 months |  |  | Total |
(Dollars in thousands) |  | Fair |  |  | Unrealized |  |  | Fair |  |  | Unrealized |  |  | Fair |  |  | Unrealized |
Available for Sale: |  | Value |  |  | Losses |  |  | Value |  |  | Losses |  |  | Value |  |  | Losses |
U.S. Government and federal agency |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |
U.S. Treasury notes and bonds |  |  | 89,958 |  |  |  | 1,311 |  |  |  | - |  |  |  | - |  |  |  | 89,958 |  |  |  | 1,311 |
State and municipal |  |  | 130,001 |  |  |  | 3,253 |  |  |  | 15,237 |  |  |  | 856 |  |  |  | 145,238 |  |  |  | 4,109 |
Mortgage-backed |  |  | 261,560 |  |  |  | 5,709 |  |  |  | 86,974 |  |  |  | 3,340 |  |  |  | 348,534 |  |  |  | 9,049 |
Corporate |  |  | 17,369 |  |  |  | 233 |  |  |  | - |  |  |  | - |  |  |  | 17,369 |  |  |  | 233 |
Asset-backed securities |  |  | 16,294 |  |  |  | 93 |  |  |  | - |  |  |  | - |  |  |  | 16,294 |  |  |  | 93 |
Total temporarily impaired |  | $ | 515,182 |  |  | $ | 10,599 |  |  | $ | 102,211 |  |  | $ | 4,196 |  |  | $ | 617,393 |  |  | $ | 14,795 |

Held to maturity securities with unrealize losses as of September 30, 2022, aggregated by investment category and length of time the individual securities have been in an unrealized loss position, in the table below. There were no held to maturity securities as of December 31, 2021.

|  | September 30, 2022 |
|  | Less than 12 months |  |  | More than 12 months |  |  | Total |
(Dollars in thousands) |  | Fair |  |  | Unrealized |  |  | Fair |  |  | Unrealized |  |  | Fair |  |  | Unrealized |
Held to Maturity: |  | Value |  |  | Losses |  |  | Value |  |  | Losses |  |  | Value |  |  | Losses |
U.S. Government and federal agency |  | $ | - |  |  | $ | - |  |  | $ | 2,550 |  |  | $ | 415 |  |  | $ | 2,550 |  |  | $ | 415 |
U.S. Treasury notes and bonds |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
State and municipal |  |  | 105,390 |  |  |  | 25,177 |  |  |  | 54,531 |  |  |  | 17,308 |  |  |  | 159,921 |  |  |  | 42,485 |
Mortgage-backed |  |  | 59,007 |  |  |  | 6,495 |  |  |  | 111,828 |  |  |  | 24,801 |  |  |  | 170,835 |  |  |  | 31,296 |
Corporate |  |  | 11,371 |  |  |  | 1,512 |  |  |  | 4,909 |  |  |  | 556 |  |  |  | 16,280 |  |  |  | 2,068 |
Asset-backed securities |  |  | - |  |  |  | - |  |  |  | 1,023 |  |  |  | 83 |  |  |  | 1,023 |  |  |  | 83 |
Total temporarily impaired |  | $ | 175,768 |  |  | $ | 33,184 |  |  | $ | 174,841 |  |  | $ | 43,163 |  |  | $ | 350,609 |  |  | $ | 76,347 |

ChoiceOne reviews its securities portfolio on a quarterly basis to determine whether unrealized losses are considered to be temporary or other-than-temporary. No other-than-temporary impairment charges were recorded in the three and nine months ended September 30, 2022, or in the same periods in 2021. ChoiceOne believes 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.

11

Presented below is a schedule of maturities of securities as of September 30, 2022, and the fair value of securities available for sale and the amortized cost of securities held to maturity as of September 30, 2022. Callable securities in the money are presumed called and matured at the callable date.

|  | Available for Sale Securities maturing within: |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Fair Value |
|  | Less than |  |  | 1 Year - |  |  | 5 Years - |  |  | More than |  |  | at September 30, |
(Dollars in thousands) |  | 1 Year |  |  | 5 Years |  |  | 10 Years |  |  | 10 Years |  |  | 2022 |
U.S. Treasury notes and bonds |  | $ | - |  |  | $ | - |  |  | $ | 77,554 |  |  | $ | - |  |  | $ | 77,554 |
State and municipal |  |  | 9,609 |  |  |  | 7,929 |  |  |  | 38,202 |  |  |  | 168,247 |  |  |  | 223,987 |
Corporate |  |  | - |  |  |  | 497 |  |  |  | 219 |  |  |  | - |  |  |  | 716 |
Asset-backed securities |  |  | - |  |  |  | 9,481 |  |  |  | 3,664 |  |  |  | - |  |  |  | 13,145 |
Total debt securities |  |  | 9,609 |  |  |  | 17,907 |  |  |  | 119,639 |  |  |  | 168,247 |  |  |  | 315,402 |
Mortgage-backed securities |  |  | 19,362 |  |  |  | 98,970 |  |  |  | 90,161 |  |  |  | 6,198 |  |  |  | 214,691 |
Total Available for Sale |  | $ | 28,971 |  |  | $ | 116,877 |  |  | $ | 209,800 |  |  | $ | 174,445 |  |  | $ | 530,093 |

|  | Held to Maturity Securities maturing within: |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Amortized Cost |
|  | Less than |  |  | 1 Year - |  |  | 5 Years - |  |  | More than |  |  | at September 30, |
(Dollars in thousands) |  | 1 Year |  |  | 5 Years |  |  | 10 Years |  |  | 10 Years |  |  | 2022 |
U.S. Government and federal agency |  | $ | - |  |  | $ | - |  |  | $ | 2,965 |  |  | $ | - |  |  | $ | 2,965 |
State and municipal |  |  | 2,348 |  |  |  | 5,180 |  |  |  | 68,447 |  |  |  | 126,431 |  |  |  | 202,406 |
Corporate |  |  | - |  |  |  | 250 |  |  |  | 18,347 |  |  |  | 1,000 |  |  |  | 19,597 |
Asset-backed securities |  |  | - |  |  |  | 1,106 |  |  |  | - |  |  |  | - |  |  |  | 1,106 |
Total debt securities |  |  | 2,348 |  |  |  | 6,536 |  |  |  | 89,759 |  |  |  | 127,431 |  |  |  | 226,074 |
Mortgage-backed securities |  |  | - |  |  |  | 56,033 |  |  |  | 146,098 |  |  |  | - |  |  |  | 202,131 |
Total Held to Maturity |  | $ | 2,348 |  |  | $ | 62,569 |  |  | $ | 235,857 |  |  | $ | 127,431 |  |  | $ | 428,205 |

Following is information regarding unrealized gains and losses on equity securities for the three and nine months ended September 30, 2022 and 2021:

|  | Three Months Ended |  |  | Nine Months Ended |
|  | September 30, |  |  | September 30, |
|  | 2022 |  |  | 2021 |  |  | 2022 |  |  | 2021 |
Net gains and (losses) recognized during the period |  | $ | (323 | ) |  | $ | (28 | ) |  | $ | (1,006 | ) |  | $ | 461 |
Less: Net gains and (losses) recognized during the period on securities sold |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Unrealized gains and (losses) recognized during the reporting period on securities still held at the reporting date |  | $ | (323 | ) |  | $ | (28 | ) |  | $ | (1,006 | ) |  | $ | 461 |

12

NOTE 3 – LOANS AND ALLOWANCE FOR LOAN LOSSES

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

|  |  |  |  |  | Commercial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
(Dollars in thousands) |  |  |  |  |  | and |  |  |  |  |  |  | Commercial |  |  | Construction |  |  | Residential |  |  |  |  |  |  |  |  |
|  | Agricultural |  |  | Industrial |  |  | Consumer |  |  | Real Estate |  |  | Real Estate |  |  | Real Estate |  |  | Unallocated |  |  | Total |
Allowance for Loan Losses Three Months Ended September 30, 2022 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance |  | $ | 132 |  |  | $ | 1,613 |  |  | $ | 309 |  |  | $ | 4,224 |  |  | $ | 45 |  |  | $ | 691 |  |  | $ | 402 |  |  | $ | 7,416 |
Charge-offs |  |  | — |  |  |  | (47 | ) |  |  | (128 | ) |  |  | - |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (175 | )
Recoveries |  |  | — |  |  |  | 59 |  |  |  | 56 |  |  |  | 1 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 116 |
Provision |  |  | 8 |  |  |  | (252 | ) |  |  | 66 |  |  |  | 384 |  |  |  | 14 |  |  |  | 178 |  |  |  | (298 | ) |  |  | 100 |
Ending balance |  | $ | 140 |  |  | $ | 1,373 |  |  | $ | 303 |  |  | $ | 4,609 |  |  | $ | 59 |  |  | $ | 869 |  |  | $ | 104 |  |  | $ | 7,457 |
Allowance for Loan Losses Nine Months Ended September 30, 2022 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance |  | $ | 448 |  |  | $ | 1,454 |  |  | $ | 290 |  |  | $ | 3,705 |  |  | $ | 110 |  |  | $ | 671 |  |  | $ | 1,010 |  |  | $ | 7,688 |
Charge-offs |  |  | — |  |  |  | (177 | ) |  |  | (383 | ) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (560 | )
Recoveries |  |  | — |  |  |  | 62 |  |  |  | 162 |  |  |  | 3 |  |  |  | — |  |  |  | 2 |  |  |  | — |  |  |  | 229 |
Provision |  |  | (308 | ) |  |  | 34 |  |  |  | 234 |  |  |  | 901 |  |  |  | (51 | ) |  |  | 196 |  |  |  | (906 | ) |  |  | 100 |
Ending balance |  | $ | 140 |  |  | $ | 1,373 |  |  | $ | 303 |  |  | $ | 4,609 |  |  | $ | 59 |  |  | $ | 869 |  |  | $ | 104 |  |  | $ | 7,457 |
Individually evaluated for impairment |  | $ | 1 |  |  | $ | 6 |  |  | $ | 1 |  |  | $ | 6 |  |  | $ | — |  |  | $ | 143 |  |  | $ | — |  |  | $ | 157 |
Collectively evaluated for impairment |  | $ | 139 |  |  | $ | 1,367 |  |  | $ | 302 |  |  | $ | 4,603 |  |  | $ | 59 |  |  | $ | 726 |  |  | $ | 104 |  |  | $ | 7,300 |
Loans |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
September 30, 2022 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment |  | $ | 312 |  |  | $ | 108 |  |  | $ | 7 |  |  | $ | 140 |  |  | $ | — |  |  | $ | 2,070 |  |  | $ | — |  |  | $ | 2,637 |
Collectively evaluated for impairment |  |  | 63,035 |  |  |  | 204,686 |  |  |  | 38,340 |  |  |  | 584,274 |  |  |  | 14,299 |  |  |  | 210,867 |  |  |  | — |  |  |  | 1,115,501 |
Acquired with deteriorated credit quality |  |  | — |  |  |  | 3,796 |  |  |  | 9 |  |  |  | 8,781 |  |  |  | — |  |  |  | 1,677 |  |  |  | — |  |  |  | 14,263 |
Ending balance |  | $ | 63,347 |  |  | $ | 208,590 |  |  | $ | 38,356 |  |  | $ | 593,195 |  |  | $ | 14,299 |  |  | $ | 214,614 |  |  |  |  |  |  | $ | 1,132,401 |

|  |  |  |  |  | Commercial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
(Dollars in thousands) |  |  |  |  |  | and |  |  |  |  |  |  | Commercial |  |  | Construction |  |  | Residential |  |  |  |  |  |  |  |  |
|  | Agricultural |  |  | Industrial |  |  | Consumer |  |  | Real Estate |  |  | Real Estate |  |  | Real Estate |  |  | Unallocated |  |  | Total |
Allowance for Loan Losses Three Months Ended September 30, 2021 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance |  | $ | 374 |  |  | $ | 1,523 |  |  | $ | 243 |  |  | $ | 4,377 |  |  | $ | 74 |  |  | $ | 860 |  |  | $ | 499 |  |  | $ | 7,950 |
Charge-offs |  |  | — |  |  |  | (96 | ) |  |  | (98 | ) |  |  | (63 | ) |  |  | — |  |  |  | - |  |  |  | — |  |  |  | (257 | )
Recoveries |  |  | — |  |  |  | 7 |  |  |  | 54 |  |  |  | — |  |  |  | — |  |  |  | 1 |  |  |  | — |  |  |  | 62 |
Provision |  |  | 144 |  |  |  | 168 |  |  |  | 33 |  |  |  | (154 | ) |  |  | 39 |  |  |  | 80 |  |  |  | (310 | ) |  |  | - |
Ending balance |  | $ | 518 |  |  | $ | 1,602 |  |  | $ | 232 |  |  | $ | 4,160 |  |  | $ | 113 |  |  | $ | 941 |  |  | $ | 189 |  |  | $ | 7,755 |
Allowance for Loan Losses Nine Months Ended September 30, 2021 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance |  | $ | 257 |  |  | $ | 1,327 |  |  | $ | 317 |  |  | $ | 4,178 |  |  | $ | 97 |  |  | $ | 1,300 |  |  | $ | 117 |  |  | $ | 7,593 |
Charge-offs |  |  | — |  |  |  | (195 | ) |  |  | (244 | ) |  |  | (111 | ) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (550 | )
Recoveries |  |  | — |  |  |  | 80 |  |  |  | 168 |  |  |  | 43 |  |  |  | — |  |  |  | 5 |  |  |  | — |  |  |  | 296 |
Provision |  |  | 261 |  |  |  | 390 |  |  |  | (9 | ) |  |  | 50 |  |  |  | 16 |  |  |  | (364 | ) |  |  | 72 |  |  |  | 416 |
Ending balance |  | $ | 518 |  |  | $ | 1,602 |  |  | $ | 232 |  |  | $ | 4,160 |  |  | $ | 113 |  |  | $ | 941 |  |  | $ | 189 |  |  | $ | 7,755 |
Individually evaluated for impairment |  | $ | 124 |  |  | $ | 174 |  |  | $ | - |  |  | $ | 8 |  |  | $ | - |  |  | $ | 177 |  |  | $ | - |  |  | $ | 483 |
Collectively evaluated for impairment |  | $ | 394 |  |  | $ | 1,428 |  |  | $ | 232 |  |  | $ | 4,152 |  |  | $ | 113 |  |  | $ | 764 |  |  | $ | 189 |  |  | $ | 7,272 |
Loans |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
September 30, 2021 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment |  | $ | 3,051 |  |  | $ | 296 |  |  | $ | - |  |  | $ | 418 |  |  | $ | - |  |  | $ | 2,191 |  |  |  |  |  |  | $ | 5,956 |
Collectively evaluated for impairment |  |  | 60,394 |  |  |  | 211,695 |  |  |  | 33,793 |  |  |  | 474,425 |  |  |  | 18,238 |  |  |  | 165,913 |  |  |  |  |  |  |  | 964,458 |
Acquired with deteriorated credit quality |  |  | — |  |  |  | 5,251 |  |  |  | 13 |  |  |  | 10,489 |  |  |  | — |  |  |  | 2,190 |  |  |  |  |  |  |  | 17,943 |
Ending balance |  | $ | 63,445 |  |  | $ | 217,242 |  |  | $ | 33,806 |  |  | $ | 485,332 |  |  | $ | 18,238 |  |  | $ | 170,294 |  |  |  |  |  |  | $ | 988,357 |

13

|  |  |  |  |  | Commercial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
(Dollars in thousands) |  |  |  |  |  | and |  |  |  |  |  |  | Commercial |  |  | Construction |  |  | Residential |  |  |  |  |  |  |  |  |
|  | Agricultural |  |  | Industrial |  |  | Consumer |  |  | Real Estate |  |  | Real Estate |  |  | Real Estate |  |  | Unallocated |  |  | Total |
Allowance for Loan Losses |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
December 31, 2021 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment |  | $ | 251 |  |  | $ | 95 |  |  | $ | 2 |  |  | $ | 9 |  |  | $ | - |  |  | $ | 146 |  |  | $ | - |  |  | $ | 503 |
Collectively evaluated for impairment |  | $ | 197 |  |  | $ | 1,359 |  |  | $ | 288 |  |  | $ | 3,696 |  |  | $ | 110 |  |  | $ | 525 |  |  | $ | 1,010 |  |  | $ | 7,185 |
Loans |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
December 31, 2021 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment |  | $ | 2,616 |  |  | $ | 339 |  |  | $ | 14 |  |  | $ | 273 |  |  | $ | - |  |  | $ | 2,191 |  |  |  |  |  |  | $ | 5,433 |
Collectively evaluated for impairment |  |  | 62,203 |  |  |  | 197,656 |  |  |  | 35,148 |  |  |  | 515,528 |  |  |  | 19,066 |  |  |  | 164,647 |  |  |  |  |  |  |  | 994,248 |
Acquired with deteriorated credit quality |  |  | - |  |  |  | 5,029 |  |  |  | 12 |  |  |  | 10,083 |  |  |  | - |  |  |  | 2,043 |  |  |  |  |  |  |  | 17,167 |
Ending balance |  | $ | 64,819 |  |  | $ | 203,024 |  |  | $ | 35,174 |  |  | $ | 525,884 |  |  | $ | 19,066 |  |  | $ | 168,881 |  |  |  |  |  |  | $ | 1,016,848 |

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 9. A description of the characteristics of the ratings follows:

Risk Rating 1 through 5 or pass: 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 6 or special mention: Loans and other credit extensions bearing this grade are considered to be inadequately protected by the current sound worth and debt service capacity of the borrower or of any pledged collateral. These obligations, even if apparently protected by collateral value, have well-defined weaknesses related to adverse financial, managerial, economic, market, or political conditions that have clearly jeopardized repayment of principal and interest as originally intended. Furthermore, there is the possibility that ChoiceOne Bank will sustain some future loss if such weaknesses are not corrected. Clear loss potential, however, does not have to exist in any individual assets classified as substandard. Loans falling into this category should have clear action plans and timelines with benchmarks to determine which direction the relationship will move.

Risk rating 7 or substandard: Loans and other credit extensions graded “7” have all the weaknesses inherent in those graded “6”, with the added characteristic that the severity of the weaknesses makes collection or liquidation in full highly questionable or improbable based upon currently existing facts, conditions, and values. Loans in this classification should be evaluated for non-accrual status. All nonaccrual commercial and Retail loans must be at a minimum graded a risk code “7”.

Risk rating 8 or doubtful: Loans and other credit extensions bearing this grade have been determined to have the extreme probability of some loss, but because of certain important and reasonably specific factors, the amount of loss cannot be determined. Such pending factors could include merger or liquidation, additional capital injection, refinancing plans, or perfection of liens on additional collateral.

Risk rating 9 or loss: Loans in this classification are considered uncollectible and cannot be justified as a viable asset of ChoiceOne Bank. This classification does not mean the loan has absolutely no recovery value, but that it is neither practical nor desirable to defer writing off this loan even though partial recovery may be obtained in the future.

14

Information regarding ChoiceOne Bank's credit exposure was as follows:

Corporate Credit Exposure - Credit Risk Profile By Creditworthiness Category

(Dollars in thousands) |  | Agricultural |  |  | Commercial and Industrial |  |  | Commercial Real Estate |
|  | September 30, |  |  | December 31, |  |  | September 30, |  |  | December 31, |  |  | September 30, |  |  | December 31, |
|  | 2022 |  |  | 2021 |  |  | 2022 |  |  | 2021 |  |  | 2022 |  |  | 2021 |
Pass |  | $ | 62,733 |  |  | $ | 61,864 |  |  | $ | 208,087 |  |  | $ | 201,202 |  |  | $ | 588,066 |  |  | $ | 519,537 |
Special Mention |  |  | 302 |  |  |  | 339 |  |  |  | 344 |  |  |  | 300 |  |  |  | 729 |  |  |  | 778 |
Substandard |  |  | 312 |  |  |  | 2,616 |  |  |  | 159 |  |  |  | 1,266 |  |  |  | 4,400 |  |  |  | 5,569 |
Doubtful |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 256 |  |  |  | - |  |  |  | - |
|  | $ | 63,347 |  |  | $ | 64,819 |  |  | $ | 208,590 |  |  | $ | 203,024 |  |  | $ | 593,195 |  |  | $ | 525,884 |

Consumer Credit Exposure - Credit Risk Profile Based On Payment Activity

(Dollars in thousands) |  | Consumer |  |  | Construction Real Estate |  |  | Residential Real Estate |
|  | September 30, |  |  | December 31, |  |  | September 30, |  |  | December 31, |  |  | September 30, |  |  | December 31, |
|  | 2022 |  |  | 2021 |  |  | 2022 |  |  | 2021 |  |  | 2022 |  |  | 2021 |
Performing |  | $ | 38,349 |  |  | $ | 35,174 |  |  | $ | 14,299 |  |  | $ | 19,066 |  |  | $ | 213,777 |  |  | $ | 168,031 |
Nonperforming |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Nonaccrual |  |  | 7 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 837 |  |  |  | 850 |
|  | $ | 38,356 |  |  | $ | 35,174 |  |  | $ | 14,299 |  |  | $ | 19,066 |  |  | $ | 214,614 |  |  | $ | 168,881 |

The following table provides information on loans that were considered troubled debt restructurings ("TDRs") that were modified during the three and nine months ended September 30, 2022 and September 30, 2021.

|  | Three Months Ended September 30, 2022 |  |  | Nine Months Ended September 30, 2022 |
|  |  |  |  |  | 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 |
Agricultural |  |  | - |  |  | $ | - |  |  | $ | - |  |  |  | 1 |  |  | $ | 253 |  |  | $ | 253 |
Commercial and industrial |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 1 |  |  |  | 18 |  |  |  | 18 |
Total |  |  | - |  |  | $ | - |  |  | $ | - |  |  |  | 2 |  |  | $ | 271 |  |  | $ | 271 |

|  | Three Months Ended September 30, 2021 |  |  | Nine Months Ended September 30, 2021 |
|  |  |  |  |  | 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 |
Agricultural |  |  | - |  |  | $ | - |  |  | $ | - |  |  |  | 6 |  |  | $ | 2,210 |  |  | $ | 2,210 |
Commercial Real Estate |  |  | 1 |  |  |  | 493 |  |  |  | 493 |  |  |  | 2 |  |  |  | 931 |  |  |  | 931 |
Total |  |  | 1 |  |  | $ | 493 |  |  | $ | 493 |  |  |  | 8 |  |  | $ | 3,141 |  |  | $ | 3,141 |

There were no TDRs where the borrower was past due with respect to principal and/or interest for 30 days or more during the three and nine months ended September 30, 2022, or September 30, 2021, which loans had been modified and classified as TDRs during the year prior to the default.

15

Impaired loans by loan category follow:

|  |  |  |  |  | Unpaid |  |  |  |  |
(Dollars in thousands) |  | Recorded |  |  | Principal |  |  | Related |
|  | Investment |  |  | Balance |  |  | Allowance |
September 30, 2022 |  |  |  |  |  |  |  |  |  |  |  |
With no related allowance recorded |  |  |  |  |  |  |  |  |  |  |  |
Agricultural |  | $ | 307 |  |  | $ | 428 |  |  | $ | - |
Commercial and industrial |  |  | - |  |  |  | - |  |  |  | - |
Consumer |  |  | - |  |  |  | - |  |  |  | - |
Construction real estate |  |  | - |  |  |  | - |  |  |  | - |
Commercial real estate |  |  | - |  |  |  | - |  |  |  | - |
Residential real estate |  |  | - |  |  |  | - |  |  |  | - |
Subtotal |  |  | 307 |  |  |  | 428 |  |  |  | - |
With an allowance recorded |  |  |  |  |  |  |  |  |  |  |  |
Agricultural |  |  | 5 |  |  |  | 5 |  |  |  | 1 |
Commercial and industrial |  |  | 108 |  |  |  | 185 |  |  |  | 6 |
Consumer |  |  | 7 |  |  |  | 7 |  |  |  | 1 |
Construction real estate |  |  | - |  |  |  | - |  |  |  | - |
Commercial real estate |  |  | 140 |  |  |  | 140 |  |  |  | 6 |
Residential real estate |  |  | 2,070 |  |  |  | 2,149 |  |  |  | 143 |
Subtotal |  |  | 2,330 |  |  |  | 2,486 |  |  |  | 157 |
Total |  |  |  |  |  |  |  |  |  |  |  |
Agricultural |  |  | 312 |  |  |  | 433 |  |  |  | 1 |
Commercial and industrial |  |  | 108 |  |  |  | 185 |  |  |  | 6 |
Consumer |  |  | 7 |  |  |  | 7 |  |  |  | 1 |
Construction real estate |  |  | - |  |  |  | - |  |  |  | - |
Commercial real estate |  |  | 140 |  |  |  | 140 |  |  |  | 6 |
Residential real estate |  |  | 2,070 |  |  |  | 2,149 |  |  |  | 143 |
Total |  | $ | 2,637 |  |  | $ | 2,914 |  |  | $ | 157 |

|  |  |  |  |  | Unpaid |  |  |  |  |
(Dollars in thousands) |  | Recorded |  |  | Principal |  |  | Related |
|  | Investment |  |  | Balance |  |  | Allowance |
December 31, 2021 |  |  |  |  |  |  |  |  |  |  |  |
With no related allowance recorded |  |  |  |  |  |  |  |  |  |  |  |
Agricultural |  | $ | 314 |  |  | $ | 428 |  |  | $ | - |
Commercial and industrial |  |  | - |  |  |  | - |  |  |  | - |
Consumer |  |  | - |  |  |  | - |  |  |  | - |
Construction real estate |  |  | - |  |  |  | - |  |  |  | - |
Commercial real estate |  |  | 94 |  |  |  | 94 |  |  |  | - |
Residential real estate |  |  | 164 |  |  |  | 172 |  |  |  | - |
Subtotal |  |  | 572 |  |  |  | 694 |  |  |  | - |
With an allowance recorded |  |  |  |  |  |  |  |  |  |  |  |
Agricultural |  |  | 2,302 |  |  |  | 2,302 |  |  |  | 251 |
Commercial and industrial |  |  | 339 |  |  |  | 363 |  |  |  | 95 |
Consumer |  |  | 14 |  |  |  | 15 |  |  |  | 2 |
Construction real estate |  |  | - |  |  |  | - |  |  |  | - |
Commercial real estate |  |  | 179 |  |  |  | 179 |  |  |  | 9 |
Residential real estate |  |  | 2,027 |  |  |  | 2,084 |  |  |  | 146 |
Subtotal |  |  | 4,861 |  |  |  | 4,943 |  |  |  | 503 |
Total |  |  |  |  |  |  |  |  |  |  |  |
Agricultural |  |  | 2,616 |  |  |  | 2,730 |  |  |  | 251 |
Commercial and industrial |  |  | 339 |  |  |  | 363 |  |  |  | 95 |
Consumer |  |  | 14 |  |  |  | 15 |  |  |  | 2 |
Construction real estate |  |  | - |  |  |  | - |  |  |  | - |
Commercial real estate |  |  | 273 |  |  |  | 273 |  |  |  | 9 |
Residential real estate |  |  | 2,191 |  |  |  | 2,256 |  |  |  | 146 |
Total |  | $ | 5,433 |  |  | $ | 5,637 |  |  | $ | 503 |

16

The following schedule provides information regarding average balances of impaired loans and interest recognized on impaired loans for the three and nine months ended September 30, 2022 and September 30, 2021:

|  | Average |  |  | Interest |
(Dollars in thousands) |  | Recorded |  |  | Income |
|  | Investment |  |  | Recognized |
Three Months Ended September 30, 2022 |  |  |  |  |  |  |  |
With no related allowance recorded |  |  |  |  |  |  |  |
Agricultural |  | $ | 310 |  |  | $ | - |
Commercial and industrial |  |  | - |  |  |  | - |
Consumer |  |  | - |  |  |  | - |
Construction real estate |  |  | - |  |  |  | - |
Commercial real estate |  |  | - |  |  |  | - |
Residential real estate |  |  | 220 |  |  |  | - |
Subtotal |  |  | 530 |  |  |  | - |
With an allowance recorded |  |  |  |  |  |  |  |
Agricultural |  |  | 6 |  |  |  | - |
Commercial and industrial |  |  | 134 |  |  |  | 1 |
Consumer |  |  | 7 |  |  |  | - |
Construction real estate |  |  | - |  |  |  | - |
Commercial real estate |  |  | 145 |  |  |  | 2 |
Residential real estate |  |  | 1,842 |  |  |  | 16 |
Subtotal |  |  | 2,134 |  |  |  | 19 |
Total |  |  |  |  |  |  |  |
Agricultural |  |  | 316 |  |  |  | - |
Commercial and industrial |  |  | 134 |  |  |  | 1 |
Consumer |  |  | 7 |  |  |  | - |
Construction real estate |  |  | - |  |  |  | - |
Commercial real estate |  |  | 145 |  |  |  | 2 |
Residential real estate |  |  | 2,062 |  |  |  | 16 |
Total |  | $ | 2,664 |  |  | $ | 19 |

|  | Average |  |  | Interest |
(Dollars in thousands) |  | Recorded |  |  | Income |
|  | Investment |  |  | Recognized |
Three Months Ended September 30, 2021 |  |  |  |  |  |  |  |
With no related allowance recorded |  |  |  |  |  |  |  |
Agricultural |  | $ | 989 |  |  | $ | - |
Commercial and industrial |  |  | - |  |  |  | - |
Consumer |  |  | - |  |  |  | - |
Construction real estate |  |  | - |  |  |  | - |
Commercial real estate |  |  | 507 |  |  |  | 2 |
Residential real estate |  |  | 320 |  |  |  | - |
Subtotal |  |  | 1,816 |  |  |  | 2 |
With an allowance recorded |  |  |  |  |  |  |  |
Agricultural |  |  | 2,119 |  |  |  | 36 |
Commercial and industrial |  |  | 240 |  |  |  | 2 |
Consumer |  |  | - |  |  |  | - |
Construction real estate |  |  | - |  |  |  | - |
Commercial real estate |  |  | 272 |  |  |  | 2 |
Residential real estate |  |  | 1,943 |  |  |  | 14 |
Subtotal |  |  | 4,574 |  |  |  | 54 |
Total |  |  |  |  |  |  |  |
Agricultural |  |  | 3,108 |  |  |  | 36 |
Commercial and industrial |  |  | 240 |  |  |  | 2 |
Consumer |  |  | - |  |  |  | - |
Construction real estate |  |  | - |  |  |  | - |
Commercial real estate |  |  | 779 |  |  |  | 4 |
Residential real estate |  |  | 2,263 |  |  |  | 14 |
Total |  | $ | 6,390 |  |  | $ | 56 |

17

|  | Average |  |  | Interest |
(Dollars in thousands) |  | Recorded |  |  | Income |
|  | Investment |  |  | Recognized |
Nine Months Ended September 30, 2022 |  |  |  |  |  |  |  |
With no related allowance recorded |  |  |  |  |  |  |  |
Agricultural |  | $ | 312 |  |  | $ | - |
Commercial and industrial |  |  | 23 |  |  |  | - |
Consumer |  |  | - |  |  |  | - |
Construction real estate |  |  | - |  |  |  | - |
Commercial real estate |  |  | 23 |  |  |  | - |
Residential real estate |  |  | 151 |  |  |  | - |
Subtotal |  |  | 509 |  |  |  | - |
With an allowance recorded |  |  |  |  |  |  |  |
Agricultural |  |  | 1,136 |  |  |  | - |
Commercial and industrial |  |  | 217 |  |  |  | 3 |
Consumer |  |  | 15 |  |  |  | - |
Construction real estate |  |  | - |  |  |  | - |
Commercial real estate |  |  | 156 |  |  |  | 7 |
Residential real estate |  |  | 1,891 |  |  |  | 49 |
Subtotal |  |  | 3,415 |  |  |  | 59 |
Total |  |  |  |  |  |  |  |
Agricultural |  |  | 1,448 |  |  |  | - |
Commercial and industrial |  |  | 240 |  |  |  | 3 |
Consumer |  |  | 15 |  |  |  | - |
Construction real estate |  |  | - |  |  |  | - |
Commercial real estate |  |  | 179 |  |  |  | 7 |
Residential real estate |  |  | 2,042 |  |  |  | 49 |
Total |  | $ | 3,924 |  |  | $ | 59 |

|  | Average |  |  | Interest |
(Dollars in thousands) |  | Recorded |  |  | Income |
|  | Investment |  |  | Recognized |
Nine Months Ended September 30, 2021 |  |  |  |  |  |  |  |
With no related allowance recorded |  |  |  |  |  |  |  |
Agricultural |  | $ | 669 |  |  | $ | 52 |
Commercial and industrial |  |  | 745 |  |  |  | - |
Consumer |  |  | - |  |  |  | - |
Construction real estate |  |  | 20 |  |  |  | - |
Commercial real estate |  |  | 1,372 |  |  |  | 34 |
Residential real estate |  |  | 243 |  |  |  | - |
Subtotal |  |  | 3,049 |  |  |  | 86 |
With an allowance recorded |  |  |  |  |  |  |  |
Agricultural |  |  | 1,766 |  |  |  | 71 |
Commercial and industrial |  |  | 198 |  |  |  | 3 |
Consumer |  |  | 2 |  |  |  | - |
Construction real estate |  |  | - |  |  |  | - |
Commercial real estate |  |  | 525 |  |  |  | 8 |
Residential real estate |  |  | 2,215 |  |  |  | 47 |
Subtotal |  |  | 4,706 |  |  |  | 129 |
Total |  |  |  |  |  |  |  |
Agricultural |  |  | 2,435 |  |  |  | 123 |
Commercial and industrial |  |  | 943 |  |  |  | 3 |
Consumer |  |  | 2 |  |  |  | - |
Construction real estate |  |  | 20 |  |  |  | - |
Commercial real estate |  |  | 1,897 |  |  |  | 42 |
Residential real estate |  |  | 2,458 |  |  |  | 47 |
Total |  | $ | 7,755 |  |  | $ | 215 |

18

An aging analysis of loans by loan category follows:

|  |  |  |  |  |  |  |  |  | Loans |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | Loans |  |  | Loans |  |  | Past Due |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Loans |
|  | Past Due |  |  | Past Due |  |  | Greater |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 90 Days Past |
(Dollars in thousands) |  | 30 to 59 |  |  | 60 to 89 |  |  | Than 90 |  |  |  |  |  |  | Loans Not |  |  | Total |  |  | Due and |
|  | Days (1) |  |  | Days (1) |  |  | Days (1) |  |  | Total (1) |  |  | Past Due |  |  | Loans |  |  | Accruing |
September 30, 2022 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Agricultural |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | 63,347 |  |  | $ | 63,347 |  |  | $ | - |
Commercial and industrial |  |  | 1,065 |  |  |  | - |  |  |  | 46 |  |  |  | 1,111 |  |  |  | 207,479 |  |  |  | 208,590 |  |  |  | - |
Consumer |  |  | 17 |  |  |  | - |  |  |  | - |  |  |  | 17 |  |  |  | 38,339 |  |  |  | 38,356 |  |  |  | - |
Commercial real estate |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 593,195 |  |  |  | 593,195 |  |  |  | - |
Construction real estate |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 14,299 |  |  |  | 14,299 |  |  |  | - |
Residential real estate |  |  | 48 |  |  |  | 615 |  |  |  | 31 |  |  |  | 694 |  |  |  | 213,920 |  |  |  | 214,614 |  |  |  |  |
|  | $ | 1,130 |  |  | $ | 615 |  |  | $ | 77 |  |  | $ | 1,822 |  |  | $ | 1,130,579 |  |  | $ | 1,132,401 |  |  | $ | - |
December 31, 2021 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Agricultural |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | 64,819 |  |  | $ | 64,819 |  |  | $ | - |
Commercial and industrial |  |  | 21 |  |  |  | - |  |  |  | 88 |  |  |  | 109 |  |  |  | 202,915 |  |  |  | 203,024 |  |  |  | - |
Consumer |  |  | 70 |  |  |  | 15 |  |  |  | - |  |  |  | 85 |  |  |  | 35,089 |  |  |  | 35,174 |  |  |  | - |
Commercial real estate |  |  | 422 |  |  |  | 13 |  |  |  | 279 |  |  |  | 714 |  |  |  | 525,170 |  |  |  | 525,884 |  |  |  | - |
Construction real estate |  |  | 1,149 |  |  |  | 1,235 |  |  |  | - |  |  |  | 2,384 |  |  |  | 16,682 |  |  |  | 19,066 |  |  |  | - |
Residential real estate |  |  | 1,489 |  |  |  | 306 |  |  |  | 454 |  |  |  | 2,249 |  |  |  | 166,632 |  |  |  | 168,881 |  |  |  | - |
|  | $ | 3,151 |  |  | $ | 1,569 |  |  | $ | 821 |  |  | $ | 5,541 |  |  | $ | 1,011,307 |  |  | $ | 1,016,848 |  |  | $ | - |

(1) Includes nonaccrual loans.

Nonaccrual loans by loan category follow:

(Dollars in thousands) |  | September 30, |  |  | December 31, |
|  | 2022 |  |  | 2021 |
Agricultural |  | $ | 307 |  |  | $ | 313 |
Commercial and industrial |  |  | 46 |  |  |  | 285 |
Consumer |  |  | 7 |  |  |  | - |
Commercial real estate |  |  | - |  |  |  | 279 |
Residential real estate |  |  | 837 |  |  |  | 850 |
|  | $ | 1,197 |  |  | $ | 1,727 |

19

The table below details the outstanding balances of the County Bank Corp. acquired loan portfolio and the acquisition fair value adjustments at acquisition date of October 1, 2019 (dollars in thousands):

|  | Acquired |  |  | Acquired |  |  | Acquired |
|  | Impaired |  |  | Non-impaired |  |  | Total |
Loans acquired - contractual payments |  | $ | 7,729 |  |  | $ | 387,394 |  |  | $ | 395,123 |
Nonaccretable difference |  |  | (2,928 | ) |  |  | - |  |  |  | (2,928 | )
Expected cash flows |  |  | 4,801 |  |  |  | 387,394 |  |  |  | 392,195 |
Accretable yield |  |  | (185 | ) |  |  | (1,894 | ) |  |  | (2,079 | )
Carrying balance at acquisition date |  | $ | 4,616 |  |  | $ | 385,500 |  |  | $ | 390,116 |

The table below presents a roll forward of the accretable yield on the County Bank Corp. acquired loan portfolio for the years ended December 31, 2019, December 31, 2020, and December 31, 2021 and the nine months ended September 30, 2022 (dollars in thousands):

(Dollars in thousands) |  | Acquired |  |  | Acquired |  |  | Acquired |
|  | Impaired |  |  | Non-impaired |  |  | Total |
Balance, January 1, 2019 |  | $ | - |  |  | $ | - |  |  | $ | - |
Merger with County Bank Corp. on October 1, 2019 |  |  | 185 |  |  |  | 1,894 |  |  |  | 2,079 |
Accretion October 1, 2019 through December 31, 2019 |  |  | - |  |  |  | (75 | ) |  |  | (75 | )
Balance January 1, 2020 |  |  | 185 |  |  |  | 1,819 |  |  |  | 2,004 |
Accretion January 1, 2020 through December 31, 2020 |  |  | (50 | ) |  |  | (295 | ) |  |  | (345 | )
Balance January 1, 2021 |  |  | 135 |  |  |  | 1,524 |  |  |  | 1,659 |
Accretion January 1, 2021 through December 31, 2021 |  |  | (247 | ) |  |  | (348 | ) |  |  | (595 | )
Transfer from non-accretable to accretable yield |  |  | 400 |  |  |  | - |  |  |  | 400 |
Balance January 1, 2022 |  |  | 288 |  |  |  | 1,176 |  |  |  | 1,464 |
Transfer from non-accretable to accretable yield |  |  | 2,192 |  |  |  | - |  |  |  | 2,192 |
Accretion January 1, 2022 through September 30, 2022 |  |  | (396 | ) |  |  | (32 | ) |  |  | (428 | )
Balance, September 30, 2022 |  | $ | 2,084 |  |  | $ | 1,144 |  |  | $ | 3,228 |

The table below details the outstanding balances of the Community Shores Bank Corporation acquired loan portfolio and the acquisition fair value adjustments at acquisition date of July 1, 2020 (dollars in thousands):

|  | Acquired |  |  | Acquired |  |  | Acquired |
|  | Impaired |  |  | Non-impaired |  |  | Total |
Loans acquired - contractual payments |  | $ | 20,491 |  |  | $ | 158,495 |  |  | $ | 178,986 |
Nonaccretable difference |  |  | (2,719 | ) |  |  | - |  |  |  | (2,719 | )
Expected cash flows |  |  | 17,772 |  |  |  | 158,495 |  |  |  | 176,267 |
Accretable yield |  |  | (869 | ) |  |  | (596 | ) |  |  | (1,465 | )
Carrying balance at acquisition date |  | $ | 16,903 |  |  | $ | 157,899 |  |  | $ | 174,802 |

The table below presents a roll forward of the accretable yield on Community Shores Bank Corporation acquired loan portfolio for the years ended December 31, 2020 and December 31, 2021 and the nine months ended September 30, 2022 (dollars in thousands):

|  | Acquired |  |  | Acquired |  |  | Acquired |
|  | Impaired |  |  | Non-impaired |  |  | Total |
Balance January 1, 2020 |  | $ | - |  |  | $ | - |  |  | $ | - |
Merger with Community Shores Bank Corporation on July 1, 2020 |  |  | 869 |  |  |  | 596 |  |  |  | 1,465 |
Accretion July 1, 2020 through December 31, 2020 |  |  | (26 | ) |  |  | (141 | ) |  |  | (167 | )
Balance, January 1, 2021 |  |  | 843 |  |  |  | 455 |  |  |  | 1,298 |
Accretion January 1, 2021 through December 31, 2021 |  |  | (321 | ) |  |  | (258 | ) |  |  | (579 | )
Balance January 1, 2022 |  |  | 522 |  |  |  | 197 |  |  |  | 719 |
Transfer from non-accretable to accretable yield |  |  | 1,086 |  |  |  | - |  |  |  | 1,086 |
Accretion January 1, 2022 through September 30, 2022 |  |  | (837 | ) |  |  | (197 | ) |  |  | (1,034 | )
Balance, September 30, 2022 |  | $ | 771 |  |  | $ | - |  |  | $ | 771 |

20

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 share data) |  | September 30, |  |  | September 30, |
|  | 2022 |  |  | 2021 |  |  | 2022 |  |  | 2021 |
Basic |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net income |  | $ | 5,813 |  |  | $ | 5,749 |  |  | $ | 16,956 |  |  | $ | 17,029 |
Weighted average common shares outstanding |  |  | 7,507,538 |  |  |  | 7,621,423 |  |  |  | 7,500,877 |  |  |  | 7,730,135 |
Basic earnings per common shares |  | $ | 0.77 |  |  | $ | 0.75 |  |  | $ | 2.26 |  |  | $ | 2.20 |
Diluted |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net income |  | $ | 5,813 |  |  | $ | 5,749 |  |  | $ | 16,956 |  |  | $ | 17,029 |
Weighted average common shares outstanding |  |  | 7,507,538 |  |  |  | 7,621,423 |  |  |  | 7,500,877 |  |  |  | 7,730,135 |
Plus dilutive stock options and restricted stock units |  |  | 12,820 |  |  |  | 12,644 |  |  |  | 17,279 |  |  |  | 13,766 |
Weighted average common shares outstanding and potentially dilutive shares |  |  | 7,520,358 |  |  |  | 7,634,067 |  |  |  | 7,518,156 |  |  |  | 7,743,901 |
Diluted earnings per common share |  | $ | 0.77 |  |  | $ | 0.75 |  |  | $ | 2.26 |  |  | $ | 2.20 |

There were 15,000 stock options that were considered anti-dilutive to earnings per share for the three and nine months ended September 30, 2022 and September 30, 2021. There were no performance awards or restricted stock units that were considered anti-dilutive for the three and nine months ended September 30, 2022 and September 30, 2021.

21

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, 2022 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 51,494 |  |  | $ | 51,494 |  |  | $ | 51,494 |  |  | $ | - |  |  | $ | - |
Equity securities at fair value |  |  | 7,977 |  |  |  | 7,977 |  |  |  | 6,116 |  |  |  | - |  |  |  | 1,861 |
Securities available for sale |  |  | 530,093 |  |  |  | 530,093 |  |  |  | - |  |  |  | 530,093 |  |  |  | - |
Securities held to maturity |  |  | 428,205 |  |  |  | 351,858 |  |  |  | - |  |  |  | 336,795 |  |  |  | 15,063 |
Federal Home Loan Bank and Federal |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Reserve Bank stock |  |  | 8,557 |  |  |  | 8,557 |  |  |  | - |  |  |  | 8,557 |  |  |  | - |
Loans held for sale |  |  | 8,848 |  |  |  | 9,113 |  |  |  | - |  |  |  | 9,113 |  |  |  | - |
Loans to other financial institutions |  |  | 70 |  |  |  | 70 |  |  |  | - |  |  |  | 70 |  |  |  | - |
Loans, net |  |  | 1,124,944 |  |  |  | 1,063,833 |  |  |  | - |  |  |  | - |  |  |  | 1,063,833 |
Accrued interest receivable |  |  | 9,273 |  |  |  | 9,273 |  |  |  | - |  |  |  | 9,273 |  |  |  | - |
Interest rate lock commitments |  |  | 51 |  |  |  | 51 |  |  |  | - |  |  |  | 51 |  |  |  | - |
Mortgage loan servicing rights |  |  | 4,537 |  |  |  | 5,853 |  |  |  | - |  |  |  | 5,853 |  |  |  | - |
Interest rate derivative contracts |  |  | 28,185 |  |  |  | 28,185 |  |  |  | - |  |  |  | 28,185 |  |  |  | - |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Noninterest-bearing deposits |  |  | 599,360 |  |  |  | 599,360 |  |  |  | - |  |  |  | 599,360 |  |  |  | - |
Interest-bearing deposits |  |  | 1,557,294 |  |  |  | 1,553,133 |  |  |  | - |  |  |  | 1,553,133 |  |  |  | - |
Borrowings |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Subordinated debentures |  |  | 35,201 |  |  |  | 29,836 |  |  |  | - |  |  |  | 29,836 |  |  |  | - |
Accrued interest payable |  |  | 180 |  |  |  | 180 |  |  |  | - |  |  |  | 180 |  |  |  | - |
Interest rate derivative contracts |  |  | 5,524 |  |  |  | 5,524 |  |  |  | - |  |  |  | 5,524 |  |  |  | - |
December 31, 2021 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 31,887 |  |  | $ | 31,887 |  |  | $ | 31,887 |  |  | $ | - |  |  | $ | - |
Equity securities at fair value |  |  | 8,492 |  |  |  | 8,492 |  |  |  | 6,724 |  |  |  | - |  |  |  | 1,768 |
Securities available for sale |  |  | 1,098,885 |  |  |  | 1,098,885 |  |  |  | - |  |  |  | 1,077,835 |  |  |  | 21,050 |
Federal Home Loan Bank and Federal |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Reserve Bank stock |  |  | 8,888 |  |  |  | 8,888 |  |  |  | - |  |  |  | 8,888 |  |  |  | - |
Loans held for sale |  |  | 9,351 |  |  |  | 9,632 |  |  |  | - |  |  |  | 9,632 |  |  |  | - |
Loans to other financial institutions |  |  | 42,632 |  |  |  | 42,632 |  |  |  | - |  |  |  | 42,632 |  |  |  | - |
Loans, net |  |  | 1,009,160 |  |  |  | 999,393 |  |  |  | - |  |  |  | - |  |  |  | 999,393 |
Accrued interest receivable |  |  | 8,211 |  |  |  | 8,211 |  |  |  | - |  |  |  | 8,211 |  |  |  | - |
Interest rate lock commitments |  |  | 172 |  |  |  | 172 |  |  |  | - |  |  |  | 172 |  |  |  | - |
Mortgage loan servicing rights |  |  | 4,666 |  |  |  | 5,522 |  |  |  | - |  |  |  | 5,522 |  |  |  | - |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Noninterest-bearing deposits |  |  | 560,931 |  |  |  | 560,931 |  |  |  | - |  |  |  | 560,931 |  |  |  | - |
Interest-bearing deposits |  |  | 1,491,363 |  |  |  | 1,491,135 |  |  |  | - |  |  |  | 1,491,135 |  |  |  | - |
Borrowings |  |  | 50,000 |  |  |  | 50,000 |  |  |  | - |  |  |  | 50,000 |  |  |  | - |
Subordinated debentures |  |  | 35,017 |  |  |  | 33,414 |  |  |  | - |  |  |  | 33,414 |  |  |  | - |
Accrued interest payable |  |  | 441 |  |  |  | 441 |  |  |  | - |  |  |  | 441 |  |  |  | - |

22

NOTE 6 – FAIR VALUE MEASUREMENTS

The following tables present information about assets and liabilities measured at fair value on a recurring basis and the valuation techniques used 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 ChoiceOne 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. ChoiceOne 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.

Disclosures concerning assets and liabilities measured at fair value are as follows:

Assets and Liabilities Measured at Fair Value on a Recurring Basis

|  | Quoted Prices |  |  |  |  |  |  |  |  |  |  |  |  |
|  | In Active |  |  | Significant |  |  |  |  |  |  |  |  |
|  | Markets for |  |  | Other |  |  | Significant |  |  |  |  |
|  | Identical |  |  | Observable |  |  | Unobservable |  |  | Balance |
(Dollars in thousands) |  | Assets |  |  | Inputs |  |  | Inputs |  |  | at Date |
|  | (Level 1) |  |  | (Level 2) |  |  | (Level 3) |  |  | Indicated |
Equity Securities Held at Fair Value - September 30, 2022 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Equity securities |  | $ | 6,116 |  |  | $ | - |  |  | $ | 1,861 |  |  | $ | 7,977 |
Investment Securities, Available for Sale - September 30, 2022 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U. S. Treasury notes and bonds |  | $ | - |  |  | $ | 77,554 |  |  | $ | - |  |  | $ | 77,554 |
State and municipal |  |  | - |  |  |  | 223,987 |  |  |  | - |  |  |  | 223,987 |
Mortgage-backed |  |  | - |  |  |  | 214,691 |  |  |  | - |  |  |  | 214,691 |
Corporate |  |  | - |  |  |  | 716 |  |  |  | - |  |  |  | 716 |
Asset-backed securities |  |  | - |  |  |  | 13,145 |  |  |  | - |  |  |  | 13,145 |
Total |  | $ | - |  |  | $ | 530,093 |  |  | $ | - |  |  | $ | 530,093 |
Derivative Instruments - September 30, 2022 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate derivative contracts - assets |  | $ | - |  |  | $ | 28,185 |  |  | $ | - |  |  | $ | 28,185 |
Interest rate derivative contracts - liabilities |  | $ | - |  |  | $ | 5,524 |  |  | $ | - |  |  | $ | 5,524 |
Equity Securities Held at Fair Value - December 31, 2021 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Equity securities |  | $ | 6,724 |  |  | $ | - |  |  | $ | 1,768 |  |  | $ | 8,492 |
Investment Securities, Available for Sale - December 31, 2021 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U. S. Government and federal agency |  | $ | - |  |  | $ | 2,008 |  |  | $ | - |  |  | $ | 2,008 |
U. S. Treasury notes and bonds |  |  | - |  |  |  | 91,979 |  |  |  | - |  |  |  | 91,979 |
State and municipal |  |  | - |  |  |  | 514,797 |  |  |  | 20,050 |  |  |  | 534,847 |
Mortgage-backed |  |  | - |  |  |  | 433,115 |  |  |  | - |  |  |  | 433,115 |
Corporate |  |  | - |  |  |  | 19,642 |  |  |  | 1,000 |  |  |  | 20,642 |
Asset-backed securities |  |  | - |  |  |  | 16,294 |  |  |  | - |  |  |  | 16,294 |
Total |  | $ | - |  |  | $ | 1,077,835 |  |  | $ | 21,050 |  |  | $ | 1,098,885 |

23

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

|  | Nine Months Ended |
(Dollars in thousands) |  | September 30, |
|  | 2022 |  |  | 2021 |
Equity Securities Held at Fair Value |  |  |  |  |  |  |  |
Balance, January 1 |  | $ | 1,768 |  |  | $ | 1,485 |
Total realized and unrealized gains included in noninterest income |  |  | 18 |  |  |  | (51 | )
Net purchases, sales, calls, and maturities |  |  | 75 |  |  |  | 262 |
Net transfers into Level 3 |  |  | - |  |  |  | - |
Balance, September 30, |  | $ | 1,861 |  |  | $ | 1,696 |
Amount of total losses for the period included in earning attributable to the change in unrealized gains (losses) relating to assets and liabilities still held at September 30, |  | $ | 18 |  |  | $ | (51 | )
Investment Securities, Available for Sale |  |  |  |  |  |  |  |
Balance, January 1 |  | $ | 21,050 |  |  | $ | 11,423 |
Total unrealized gains included in other comprehensive income |  |  | - |  |  |  | (369 | )
Net purchases, sales, calls, and maturities |  |  | - |  |  |  | 7,979 |
Net transfers into Level 3 |  |  | - |  |  |  | - |
Transfer to held to maturity |  |  | (21,050 | ) |  |  | - |
Balance, September 30, |  | $ | - |  |  | $ | 19,033 |
Amount of total losses for the period included in earning attributable to the change in unrealized gains (losses) relating to assets and liabilities still held at September 30, |  | $ | - |  |  | $ | (366 | )

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.

Securities categorized as Level 3 assets as of September 30, 2022 primarily consist of common and preferred equity securities of community banks. As of December 31, 2021, bonds issued by local municipalities and corporate issuers were classified as available for sale and were included as Level 3 securities. ChoiceOne estimates the fair value of these bonds and equity securities 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.

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

Assets Measured at Fair Value on a Non-recurring Basis

|  |  |  |  |  | Quoted Prices |  |  |  |  |  |  |  |  |
|  |  |  |  |  | In Active |  |  | Significant |  |  |  |  |
|  |  |  |  |  | Markets for |  |  | Other |  |  | Significant |
|  | Balances at |  |  | Identical |  |  | Observable |  |  | Unobservable |
(Dollars in thousands) |  | Dates |  |  | Assets |  |  | Inputs |  |  | Inputs |
|  | Indicated |  |  | (Level 1) |  |  | (Level 2) |  |  | (Level 3) |
Impaired Loans |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
September 30, 2022 |  | $ | 2,637 |  |  | $ | - |  |  | $ | - |  |  | $ | 2,637 |
December 31, 2021 |  | $ | 5,433 |  |  | $ | - |  |  | $ | - |  |  | $ | 5,433 |
Other Real Estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
September 30, 2022 |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |
December 31, 2021 |  | $ | 194 |  |  | $ | - |  |  | $ | - |  |  | $ | 194 |
Mortgage Loan Servicing Rights |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
September 30, 2022 |  | $ | 4,537 |  |  | $ | - |  |  | $ | 4,537 |  |  | $ | - |
December 31, 2021 |  | $ | 4,666 |  |  | $ | - |  |  | $ | 4,666 |  |  | $ | - |

Impaired loans categorized as Level 3 assets consist of non-homogeneous loans that are considered impaired. ChoiceOne 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.

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NOTE 7 – REVENUE FROM CONTRACTS WITH CUSTOMERS

ChoiceOne has a variety of sources of revenue, which include interest and fees from customers as well as revenue from non-customers. ASC Topic 606, Revenue from Contracts With Customers, covers certain sources of revenue that are classified within noninterest income in the Consolidated Statements of Income. Sources of revenue that are included in the scope of ASC Topic 606 include service charges and fees on deposit accounts, interchange income, investment asset management income and transaction-based revenue, and other charges and fees for customer services.

Service Charges and Fees on Deposit Accounts

Revenue includes charges and fees to provide account maintenance, overdraft services, wire transfers, funds transfer, and other deposit-related services. Account maintenance fees such as monthly service charges are recognized over the period of time that the service is provided. Transaction fees such as wire transfer charges are recognized when the service is provided to the customer.

Interchange Income

Revenue includes debit card interchange and network revenues. This revenue is earned on debit card transactions that are conducted through payment networks such as MasterCard. The revenue is recorded as services are delivered and is presented net of interchange expenses.

Investment Commission Income

Revenue includes fees from the investment management advisory services and revenue is recognized when services are rendered. Revenue also includes commissions received from the placement of brokerage transactions for purchase or sale of stocks or other investments. Commission income is recognized when the transaction has been completed.

Trust Fee Income

Revenue includes fees from the management of trust assets and from other related advisory services. Revenue is recognized when services are rendered.

Following is noninterest income separated by revenue within the scope of ASC 606 and revenue within the scope of other GAAP topics:

|  | Three Months Ended |  |  | Nine Months Ended |
|  | September 30, |  |  | September 30, |
(Dollars in thousands) |  | 2022 |  |  | 2021 |  |  | 2022 |  |  | 2021 |
Service charges and fees on deposit accounts |  | $ | 1,152 |  |  | $ | 977 |  |  | $ | 3,218 |  |  | $ | 2,585 |
Interchange income |  |  | 1,306 |  |  |  | 1,278 |  |  |  | 3,782 |  |  |  | 3,724 |
Investment commission income |  |  | 158 |  |  |  | 153 |  |  |  | 596 |  |  |  | 624 |
Trust fee income |  |  | 174 |  |  |  | 187 |  |  |  | 528 |  |  |  | 612 |
Other charges and fees for customer services |  |  | 113 |  |  |  | 153 |  |  |  | 387 |  |  |  | 458 |
Noninterest income from contracts with customers within the scope of ASC 606 |  |  | 2,903 |  |  |  | 2,748 |  |  |  | 8,511 |  |  |  | 8,003 |
Noninterest income within the scope of other GAAP topics |  |  | 144 |  |  |  | 1,970 |  |  |  | 1,812 |  |  |  | 7,047 |
Total noninterest income |  | $ | 3,047 |  |  | $ | 4,718 |  |  | $ | 10,323 |  |  | $ | 15,050 |

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NOTE 8 – DERIVATIVE AND HEDGING ACTIVITIES

ChoiceOne is exposed to certain risks relating to its ongoing business operations. ChoiceOne utilizes interest rate derivatives as part of its asset liability management strategy to help manage its interest rate risk position. Derivative instruments represent contracts between parties that result in one party delivering cash to the other party based on a notional amount and an underlying term (such as a rate, security price or price index) as specified in the contract. The amount of cash delivered from one party to the other is determined based on the interaction of the notional amount of the contract with the underlying term. Derivatives are also implicit in certain contracts and commitments.

ChoiceOne currently uses interest rate swaps and interest rate caps to manage its exposure to certain fixed and variable rate assets and variable rate liabilities.

ChoiceOne recognizes derivative financial instruments in the consolidated financial statements at fair value regardless of the purpose or intent for holding the instrument. ChoiceOne records derivative assets and derivative liabilities on the balance sheet within other assets and other liabilities, respectively. Changes in the fair value of derivative financial instruments are either recognized in income or in shareholders’ equity as a component of accumulated other comprehensive income or loss depending on whether the derivative financial instrument qualifies for hedge accounting and, if so, whether it qualifies as a fair value hedge or cash flow hedge.

Interest rate swaps

ChoiceOne uses interest rate swaps as part of its interest rate risk management strategy to add stability to net interest income and to manage its exposure to interest rate movements. Interest rate swaps designated as hedges involve the receipt of variable-rate amounts from a counterparty in exchange for ChoiceOne making fixed-rate payments or the receipt of fixed-rate amounts from a counterparty in exchange for ChoiceOne making variable rate payments, over the life of the agreements without the exchange of the underlying notional amount.

In the second quarter of 2022, ChoiceOne entered into two pay-floating/receive-fixed interest rate swaps (the “Pay Floating Swap Agreements”) for a total notional amount of $200.0 million that were designated as cash flow hedges. These derivatives hedge the variable cash flows of specifically identified available-for-sale securities, cash and loans. The Pay Floating Swap Agreements were determined to be highly effective during the periods presented and therefore no amount of ineffectiveness has been included in net income. The Pay Floating Swap Agreements will pay a coupon rate equal to SOFR while receiving a fixed coupon rate of 2.41%. Net cash settlements received YTD on pay-floating/ received-fixed swaps were $773,000 as of September 30, 2022, which were included in interest income.

In the second quarter of 2022, ChoiceOne entered into one forward starting pay-fixed/receive-floating interest rate swap (the “Pay Fixed Swap Agreement”) for a notional amount of $200.0 million that was designated as a cash flow hedge. This derivative hedges the risk of variability in cash flows attributable to forecasted payments on future deposits or floating rate borrowings indexed to the SOFR Rate. The Pay Fixed Swap Agreement is two years forward starting with an eight-year term set to expire in 2032. The Pay Fixed Swap Agreements will pay a fixed coupon rate of 2.75% while receiving the SOFR Rate.

Interest rate caps

ChoiceOne also uses interest rate caps to provide stability to net interest income and to manage its exposure to interest rate movements. Interest rate caps designated as hedges involve the payment of a fixed premium by ChoiceOne who will then receive payment equivalent to the spread between the current rate and the strike rate until the conclusion of the term from the counterparty.

In the second quarter of 2022, ChoiceOne entered into four forward starting interest rate cap agreements with a total notional amount of $200.0 million (“SOFR Cap Agreements”). Three of the SOFR Cap Agreements with a total notional amount of $100.0 million are designated as fair value hedges and hedge against changes in the fair value of certain fixed rate tax-exempt municipal bonds. ChoiceOne utilizes the interest rate caps as hedges against adverse changes in interest rates on the designated securities attributable to fluctuations in the SOFR rate above 2.68%, as applicable. An increase in the benchmark interest rate hedged reduces the fair value of these assets. The remaining SOFR Cap Agreement with a notional amount of $100.0 million is designated as a cash flow hedge and hedges against the risk of variability in cash flows attributable to fluctuations in the SOFR rate above 2.68% for forecasted payments on future deposits or borrowings indexed to the SOFR Rate. All of the SOFR Cap Agreements are two-year forward starting with an eight-year term set to expire in 2032. The initial amount excluded from hedge effectiveness testing and amortized into earnings over the life of the interest rate cap derivatives is $16.5 million.

| September 30, 2022 |  | December 31, 2021 |
(Dollars in thousands) | Balance Sheet Location |  | Fair Value |  | Balance Sheet Location |  | Fair Value |
Derivatives designated as hedging instruments |  |  |  |  |  |  |  |  |  |
Interest rate contracts | Other Assets |  | $ | 28,185 |  | Other Assets |  | $ | - |
Interest rate contracts | Other Liabilities |  | $ | 5,524 |  | Other Liabilities |  | $ | - |

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|  | Location and Amount of Gain or (Loss) |  |  | Location and Amount of Gain or (Loss) |
|  | Recognized in Income on Fair Value and Cash Flow Hedging Relationships |  |  | Recognized in Income on Fair Value and Cash Flow Hedging Relationships |
|  | Three months ended September 30, 2022 |  |  | Nine months ended September 30, 2022 |
|  | Interest Income |  |  | Interest Expense |  |  | Interest Income |  |  | Interest Expense |
Total amounts of income and expense line items presented in the consolidated statements of income in which the effects of fair value or cash flow hedges are recorded |  | $ | (8 | ) |  | $ | (209 | ) |  | $ | 414 |  |  | $ | (364 | )
Gain or (loss) on fair value hedging relationships: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate contracts: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Hedged items |  | $ | (4,229 | ) |  | $ | - |  |  | $ | (4,300 | ) |  | $ | - |
Derivatives designated as hedging instruments |  | $ | 4,229 |  |  | $ | - |  |  | $ | 4,300 |  |  | $ | - |
Amount excluded from effectiveness testing recognized in earnings based on amortization approach |  | $ | (206 | ) |  | $ | - |  |  | $ | (359 | ) |  | $ | - |
Gain or (loss) on cash flow hedging relationships: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate contracts: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |
Amount excluded from effectiveness testing recognized in earnings based on amortization approach |  | $ | - |  |  | $ | (209 | ) |  | $ | - |  |  | $ | (364 | )

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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”), its wholly-owned subsidiary ChoiceOne Bank, and ChoiceOne 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. Words such as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “intends,” “is likely,” “plans,” “predicts,” “projects,” “may,” “could,” “look forward,” “continue”, “future”, “will” 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, loan servicing rights, other real estate owned, and 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 that are inherently forward-looking. All of the information concerning interest rate sensitivity is forward-looking. All statements with references to future time periods are 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.

Additional 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, 2021 and in Part II, Item 1A of this Quarterly Report on Form 10-Q. These are representative of the risk factors that could cause a difference between an ultimate actual outcome and a preceding forward-looking statement.

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RESULTS OF OPERATIONS

Net income for the third quarter of 2022 was $5,813,000, which represented an increase of $64,000 or 1% compared to the third quarter of 2021. Basic and diluted earnings per common share were $0.77 for the third quarter of 2022 compared to $0.75 for the third quarter of the prior year. The increase in the third quarter of 2022 is largely related to the increase in interest income due to strong loan growth. Net income for the first nine months of 2022 was $16,956,000, which represented a decline of $74,000 or less than 1% compared to the first three quarters of 2021. Basic and diluted earnings per common share were $2.26 for the first three quarters of 2022 compared to $2.20 for the first three quarters of the prior year. The modest decline in net income in the first nine months of 2022 compared to the same period in the prior year resulted in part from a decline of refinancing activity within ChoiceOne's mortgage portfolio due to a rise in mortgage rates since the first quarter of the prior year. Net income also declined as interest expense increased mostly due to expense from a private placement of $32.5 million of fixed-to-floating rate subordinated notes late in the third quarter of the prior year and organic deposit interest expense. These factors were largely offset by an increase of $6.6 million in interest income as the balance of both core loans and securities continued to grow. Core loans (defined as loans excluding loans held for sale, loans to other financial institutions, and Paycheck Protection Program (“PPP”) loans) increased by $52.8 million or 19.6% on an annualized basis in the third quarter of 2022 and $205.2 million or 22.1% since the end of the third quarter in 2021.

The return on average assets and return on average shareholders’ equity were 0.98% and 12.67%, respectively, for the third quarter of 2022, compared to 1.03% and 10.03%, respectively, for the same period in 2021. The return on average assets and return on average shareholders’ equity were 0.97% and 14.11%, respectively, for the first nine months of 2022, compared to 1.08% and 10.01%, respectively, for the same period in 2021. The increase in the return on average shareholders' equity is related to the decline in equity caused by the increase in unrealized losses on available-for-sale securities during the first nine months of 2022.

Paycheck Protection Program

ChoiceOne processed over $126 million in PPP loans in 2020, acquired an additional $37 million in PPP loans in the merger with Community Shores Bank Corporation ("Community Shores"), and originated $89.1 million in PPP loans in 2021. In the third quarter of 2022, the remaining $1.8 million of PPP loans were forgiven resulting in $68,000 of fee income. For the nine months ended September 30, 2022, $33.1 million of PPP loans were forgiven resulting in $1.2 million of fee income. At September 30, 2022, no PPP loans remain in ChoiceOne’s loan portfolio.

Dividends

Cash dividends of $1.9 million or $0.25 per share were declared in the third quarter of 2022, and the third quarter of 2021. Cash dividends declared in the first nine months of 2022 were $5.6 million or $0.75 per share, compared to $5.3 million or $0.69 per share in the same period during the prior year. The cash dividend payout percentage was 33.2% for the first nine months of 2022, compared to 31.3% in the same period in the prior year.

Interest Income and Expense

Tables 1 and 2 on the following pages provide information regarding interest income and expense for the three- and nine-month periods ended September 30, 2022 and 2021. 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.

29

Table 1 – Average Balances and Tax-Equivalent Interest Rates

|  | Three Months Ended September 30, |
|  | 2022 |  |  | 2021 |
(Dollars in thousands) |  | Average |  |  |  |  |  |  |  |  |  |  | Average |  |  |  |  |  |  |  |  |
|  | Balance |  |  | Interest |  |  | Rate |  |  | Balance |  |  | Interest |  |  | Rate |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loans (1)(3)(4)(5) |  | $ | 1,128,679 |  |  | $ | 13,622 |  |  |  | 4.83 | % |  | $ | 1,021,326 |  |  | $ | 12,412 |  |  |  | 4.86 | %
Taxable securities (2) |  |  | 774,040 |  |  |  | 3,943 |  |  |  | 2.04 |  |  |  | 641,430 |  |  |  | 2,821 |  |  |  | 1.76 |
Nontaxable securities (1) |  |  | 305,661 |  |  |  | 1,853 |  |  |  | 2.43 |  |  |  | 281,223 |  |  |  | 1,850 |  |  |  | 2.63 |
Other |  |  | 43,418 |  |  |  | 238 |  |  |  | 2.19 |  |  |  | 106,831 |  |  |  | 38 |  |  |  | 0.14 |
Interest-earning assets |  |  | 2,251,798 |  |  |  | 19,656 |  |  |  | 3.49 |  |  |  | 2,050,810 |  |  |  | 17,121 |  |  |  | 3.34 |
Noninterest-earning assets |  |  | 137,752 |  |  |  |  |  |  |  |  |  |  |  | 183,418 |  |  |  |  |  |  |  |  |
Total assets |  | $ | 2,389,550 |  |  |  |  |  |  |  |  |  |  | $ | 2,234,228 |  |  |  |  |  |  |  |  |
Liabilities and Shareholders' Equity: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-bearing demand deposits |  | $ | 915,698 |  |  | $ | 972 |  |  |  | 0.42 | % |  | $ | 850,963 |  |  | $ | 485 |  |  |  | 0.23 | %
Savings deposits |  |  | 464,382 |  |  |  | 182 |  |  |  | 0.16 |  |  |  | 407,765 |  |  |  | 144 |  |  |  | 0.14 |
Certificates of deposit |  |  | 196,160 |  |  |  | 410 |  |  |  | 0.84 |  |  |  | 183,103 |  |  |  | 208 |  |  |  | 0.45 |
Borrowings |  |  | 2,414 |  |  |  | 8 |  |  |  | 1.40 |  |  |  | 2,667 |  |  |  | 38 |  |  |  | 5.70 |
Subordinated debentures |  |  | 35,168 |  |  |  | 375 |  |  |  | 4.27 |  |  |  | 9,154 |  |  |  | 151 |  |  |  | 6.60 |
Interest-bearing liabilities |  |  | 1,613,822 |  |  |  | 1,947 |  |  |  | 0.48 |  |  |  | 1,453,652 |  |  |  | 1,026 |  |  |  | 0.28 |
Demand deposits |  |  | 593,793 |  |  |  |  |  |  |  |  |  |  |  | 545,251 |  |  |  |  |  |  |  |  |
Other noninterest-bearing liabilities |  |  | 17,177 |  |  |  |  |  |  |  |  |  |  |  | 5,956 |  |  |  |  |  |  |  |  |
Total liabilities |  |  | 2,224,792 |  |  |  |  |  |  |  |  |  |  |  | 2,004,859 |  |  |  |  |  |  |  |  |
Shareholders' equity |  |  | 164,758 |  |  |  |  |  |  |  |  |  |  |  | 229,369 |  |  |  |  |  |  |  |  |
Total liabilities and shareholders' equity |  | $ | 2,389,550 |  |  |  |  |  |  |  |  |  |  | $ | 2,234,228 |  |  |  |  |  |  |  |  |
Net interest income (tax-equivalent basis) (Non-GAAP) (1) |  |  |  |  |  | $ | 17,709 |  |  |  |  |  |  |  |  |  |  | $ | 16,095 |  |  |  |  |
Net interest margin (tax-equivalent basis) (Non-GAAP) (1) |  |  |  |  |  |  |  |  |  |  | 3.15 | % |  |  |  |  |  |  |  |  |  |  | 3.14 | %
Reconciliation to Reported Net Interest Income |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net interest income (tax-equivalent basis) (Non-GAAP) (1) |  |  |  |  |  | $ | 17,709 |  |  |  |  |  |  |  |  |  |  | $ | 16,095 |  |  |  |  |
Adjustment for taxable equivalent interest |  |  |  |  |  |  | (371 | ) |  |  |  |  |  |  |  |  |  |  | (395 | ) |  |  |  |
Net interest income (GAAP) |  |  |  |  |  | $ | 17,338 |  |  |  |  |  |  |  |  |  |  | $ | 15,700 |  |  |  |  |
Net interest margin (GAAP) |  |  |  |  |  |  |  |  |  |  | 3.08 | % |  |  |  |  |  |  |  |  |  |  | 3.06 | %

| (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 21%. The presentation of these measures on a tax-equivalent basis is not in accordance with GAAP, but is customary in the banking industry. These non-GAAP measures ensure comparability with respect to both taxable and tax-exempt loans and securities.
| (2) | Taxable securities include dividend income from Federal Home Loan Bank and Federal Reserve Bank stock.
| (3) | Loans include both loans to other financial institutions and loans held for sale.
| (4) | Non-accruing loan and PPP loan balances are included in the balances of average loans. Non-accruing loan average balances were $1.2 million and $1.5 million in the third quarter of 2022 and 2021, respectively. PPP loan average balances were $879,000 and $85.5 million in the third quarter of 2022 and 2021, respectively. At September 30, 2022 no PPP loans remain in ChoiceOne’s loan portfolio.
| (5) | Interest on loans included net origination fees, accretion income, and PPP fees. Accretion income was $440,000 and $253,000 in the third quarter of 2022 and 2021, respectively. PPP fees were approximately $68,000 and $1.6 million in the third quarter of 2022 and 2021, respectively.

30

|  | Nine Months Ended September 30, |
|  | 2022 |  |  | 2021 |
(Dollars in thousands) |  | Average |  |  |  |  |  |  |  |  |  |  | Average |  |  |  |  |  |  |  |  |
|  | Balance |  |  | Interest |  |  | Rate |  |  | Balance |  |  | Interest |  |  | Rate |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loans (1)(3) |  | $ | 1,081,943 |  |  | $ | 38,454 |  |  |  | 4.74 | % |  | $ | 1,047,326 |  |  | $ | 36,666 |  |  |  | 4.67 | %
Taxable securities (2) |  |  | 782,378 |  |  |  | 11,001 |  |  |  | 1.87 |  |  |  | 542,216 |  |  |  | 7,073 |  |  |  | 1.74 |
Nontaxable securities (1) |  |  | 319,381 |  |  |  | 5,921 |  |  |  | 2.47 |  |  |  | 253,565 |  |  |  | 5,070 |  |  |  | 2.67 |
Other |  |  | 40,217 |  |  |  | 314 |  |  |  | 1.04 |  |  |  | 81,912 |  |  |  | 70 |  |  |  | 0.11 |
Interest-earning assets |  |  | 2,223,919 |  |  |  | 55,691 |  |  |  | 3.34 |  |  |  | 1,925,019 |  |  |  | 48,879 |  |  |  | 3.39 |
Noninterest-earning assets |  |  | 149,813 |  |  |  |  |  |  |  |  |  |  |  | 180,522 |  |  |  |  |  |  |  |  |
Total assets |  | $ | 2,373,732 |  |  |  |  |  |  |  |  |  |  | $ | 2,105,541 |  |  |  |  |  |  |  |  |
Liabilities and Shareholders' Equity: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-bearing demand deposits |  | $ | 918,644 |  |  | $ | 2,034 |  |  |  | 0.30 | % |  | $ | 772,950 |  |  | $ | 1,379 |  |  |  | 0.24 | %
Savings deposits |  |  | 455,816 |  |  |  | 485 |  |  |  | 0.14 |  |  |  | 385,160 |  |  |  | 391 |  |  |  | 0.14 |
Certificates of deposit |  |  | 185,857 |  |  |  | 823 |  |  |  | 0.59 |  |  |  | 187,873 |  |  |  | 786 |  |  |  | 0.56 |
Borrowings |  |  | 5,708 |  |  |  | 35 |  |  |  | 0.83 |  |  |  | 4,608 |  |  |  | 95 |  |  |  | 2.76 |
Subordinated debentures |  |  | 35,205 |  |  |  | 1,099 |  |  |  | 4.16 |  |  |  | 5,147 |  |  |  | 253 |  |  |  | 6.55 |
Interest-bearing liabilities |  |  | 1,601,230 |  |  |  | 4,477 |  |  |  | 0.37 |  |  |  | 1,355,738 |  |  |  | 2,904 |  |  |  | 0.29 |
Demand deposits |  |  | 575,483 |  |  |  |  |  |  |  |  |  |  |  | 518,327 |  |  |  |  |  |  |  |  |
Other noninterest-bearing liabilities |  |  | 13,528 |  |  |  |  |  |  |  |  |  |  |  | 4,745 |  |  |  |  |  |  |  |  |
Total liabilities |  |  | 2,190,241 |  |  |  |  |  |  |  |  |  |  |  | 1,878,810 |  |  |  |  |  |  |  |  |
Shareholders' equity |  |  | 183,491 |  |  |  |  |  |  |  |  |  |  |  | 226,731 |  |  |  |  |  |  |  |  |
Total liabilities and shareholders' equity |  | $ | 2,373,732 |  |  |  |  |  |  |  |  |  |  | $ | 2,105,541 |  |  |  |  |  |  |  |  |
Net interest income (tax-equivalent basis) (Non-GAAP) (1) |  |  |  |  |  | $ | 51,214 |  |  |  |  |  |  |  |  |  |  | $ | 45,975 |  |  |  |  |
Net interest margin (tax-equivalent basis) (Non-GAAP) (1) |  |  |  |  |  |  |  |  |  |  | 3.07 | % |  |  |  |  |  |  |  |  |  |  | 3.18 | %
Reconciliation to Reported Net Interest Income |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net interest income (tax-equivalent basis) (Non-GAAP) (1) |  |  |  |  |  | $ | 51,214 |  |  |  |  |  |  |  |  |  |  | $ | 45,975 |  |  |  |  |
Adjustment for taxable equivalent interest |  |  |  |  |  |  | (1,265 | ) |  |  |  |  |  |  |  |  |  |  | (1079 | ) |  |  |  |
Net interest income (GAAP) |  |  |  |  |  | $ | 49,948 |  |  |  |  |  |  |  |  |  |  | $ | 44,896 |  |  |  |  |
Net interest margin (GAAP) |  |  |  |  |  |  |  |  |  |  | 2.99 | % |  |  |  |  |  |  |  |  |  |  | 3.11 | %

| (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 21%. The presentation of these measures on a tax-equivalent basis is not in accordance with GAAP, but is customary in the banking industry. These non-GAAP measures ensure comparability with respect to both taxable and tax-exempt loans and securities.
| (2) | Taxable securities include dividend income from Federal Home Loan Bank and Federal Reserve Bank stock.
| (3) | Loans include both loans to other financial institutions and loans held for sale.
| (4) | Non-accruing loan and PPP loan balances are included in the balances of average loans. Non-accruing loan average balances were $1.3 million and $3.7 million in the first nine months of 2022 and 2021, respectively. PPP loan average balances were $10.8 million and $111.6 million in the first nine months of 2022 and 2021, respectively. At September 30, 2022 no PPP loans remain in ChoiceOne’s loan portfolio.
| (5) | Interest on loans included net origination fees, accretion income, and PPP fees. Accretion income was $1.7 million and $924,000 in the first nine months of 2022 and 2021, respectively. PPP fees were approximately $1.2 million and $4.0 million in the first nine months of 2022 and 2021, respectively.

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Table 2 – Changes in Tax-Equivalent Net Interest Income

|  | Three Months Ended September 30, |
(Dollars in thousands) |  | 2022 Over 2021 |
|  | Total |  |  | Volume |  |  | Rate |
Increase (decrease) in interest income (1) |  |  |  |  |  |  |  |  |  |  |  |
Loans (2) |  | $ | 1,210 |  |  | $ | 1,354 |  |  | $ | (144 | )
Taxable securities |  |  | 1,122 |  |  |  | 942 |  |  | $ | 180 |
Nontaxable securities (2) |  |  | 3 |  |  |  | 238 |  |  | $ | (235 | )
Other |  |  | 200 |  |  |  | (125 | ) |  | $ | 325 |
Net change in interest income |  |  | 2,535 |  |  |  | 2,409 |  |  |  | 126 |
Increase (decrease) in interest expense (1) |  |  |  |  |  |  |  |  |  |  |  |
Interest-bearing demand deposits |  |  | 487 |  |  |  | 129 |  |  |  | 358 |
Savings deposits |  |  | 38 |  |  |  | 31 |  |  |  | 7 |
Certificates of deposit |  |  | 202 |  |  |  | 50 |  |  |  | 152 |
Borrowings |  |  | (30 | ) |  |  | (10 | ) |  |  | (20 | )
Subordinated debentures |  |  | 224 |  |  |  | 321 |  |  |  | (97 | )
Net change in interest expense |  |  | 921 |  |  |  | 521 |  |  |  | 400 |
Net change in tax-equivalent net interest income |  | $ | 1,614 |  |  | $ | 1,888 |  |  | $ | (274 | )

|  | Nine Months Ended September 30, |
(Dollars in thousands) |  | 2022 Over 2021 |
|  | Total |  |  | Volume |  |  | Rate |
Increase (decrease) in interest income (1) |  |  |  |  |  |  |  |  |  |  |  |
Loans (2) |  | $ | 1,789 |  |  | $ | 1,329 |  |  | $ | 460 |
Taxable securities |  |  | 3,928 |  |  |  | 3,470 |  |  |  | 458 |
Nontaxable securities (2) |  |  | 851 |  |  |  | 1,313 |  |  |  | (462 | )
Other |  |  | 244 |  |  |  | (69 | ) |  |  | 313 |
Net change in interest income |  |  | 6,812 |  |  |  | 6,043 |  |  |  | 769 |
Increase (decrease) in interest expense (1) |  |  |  |  |  |  |  |  |  |  |  |
Interest-bearing demand deposits |  |  | 655 |  |  |  | 334 |  |  |  | 321 |
Savings deposits |  |  | 94 |  |  |  | 79 |  |  |  | 15 |
Certificates of deposit |  |  | 37 |  |  |  | (11 | ) |  |  | 48 |
Borrowings |  |  | (60 | ) |  |  | 23 |  |  |  | (83 | )
Subordinated debentures |  |  | 847 |  |  |  | 985 |  |  |  | (138 | )
Net change in interest expense |  |  | 1,573 |  |  |  | 1,410 |  |  |  | 163 |
Net change in tax-equivalent net interest income |  | $ | 5,239 |  |  | $ | 4,633 |  |  | $ | 606 |

| (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 21%.

Net Interest Income

Tax-equivalent net interest income increased $1.6 million and $5.2 million in the third quarter and first nine months of 2022, respectively, compared to the same periods in 2021. Growth in the three months ended and nine months ended September 30, 2022 compared to the same time periods in 2021 were affected by an increased average balance of securities as ChoiceOne deployed excess deposit dollars into securities with the intent to transition to loans as good credits become available. ChoiceOne has also experienced core loan growth during 2022 leading to growth in interest income from loans of $1.2 million and $1.8 million during the three and nine months ended September 30, 2022, respectively, compared to the same periods in the prior year. Core loans exclude PPP loans, loans held for sale, and loans to other financial institutions. Net interest margin on a tax-equivalent basis increased by 1 basis points and declined by 11 basis points in the third quarter and first nine months of 2022, respectively, compared to the same periods in 2021. The Federal Reserve increased the federal funds rate by 3.00% during the first nine months of 2022 in response to published inflation rates, causing interest rates to increase on all new loan originations. This led to the modest increase in net interest margin in the third quarter of 2022 compared to the third quarter of 2021. The decline in net interest margin on a tax-equivalent basis for the nine months ended September 30, 2022 compared to the same time period in the prior year, is due the asset mix as ChoiceOne grew securities faster than it grew loans.

The average balance of loans increased $107.4 million in the third quarter of 2022 and $34.6 million in the first nine months of 2022 compared to the same periods in 2021, as core loans grew offset by a decline in PPP loans. Average core loans increased $195.1 million in the third quarter of 2022 and $140.9 million in the first nine months of 2022 compared to the same periods in 2021. Average PPP loans declined $84.7 million in the third quarter of 2022 and $100.8 million in the first nine months of 2022 compared to the same periods in 2021. The rate earned on loans in the third quarter of 2022 declined slightly due to a reduction in PPP fees which declined $1.6 million in the third quarter of 2022 compared to the third quarter of 2021. The rate earned on loans increased by 7 basis points during the nine months ended September 30, 2022 compared to the same time period in 2021 as new loan originations have been at higher rates due to market conditions offset by a $2.8 million decline in PPP fees earned during nine months ended September 30, 2022 compared to the same period in 2021.

The average balance of total securities increased $157.0 million, and the average rate earned increased 12 basis points in the third quarter of 2022 compared to the same period in 2021. The average balance of total securities increased $306.0 million and the average rate earned increased 1 basis point in the first nine months of 2022 compared to the same period in 2021.

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Growth of $121.4 million in the average balance of interest-bearing demand deposits and savings deposits and a combined 13 basis point increase in the average rate paid, caused interest expense to increase $525,000 in the third quarter of 2022 compared to the third quarter of the prior year. Growth of $216.4 million in the average balance of interest-bearing demand deposits and savings deposits and a combined 4 basis point increase in the average rate paid, caused interest expense to increase $749,000 in the first nine months of 2022 compared to the first nine months of the prior year. The average balance of certificates of deposit increased $13.1 million and declined $2.0 million in the third quarter and first nine months of 2022, respectively, compared to the same period in 2021. The increase in balances and a 39 basis points increase in the average rate paid on certificates of deposit caused interest expense to increase $202,000 in the third quarter 2022, compared to the same periods in 2021. The decline in balances offset by a 3 basis points increase in the average rate paid on certificates of deposit caused interest expense to increase $37,000 in the first nine months of 2022, compared to the same periods in 2021. In September 2021, ChoiceOne completed a private placement of $32.5 million in aggregate principal amount of 3.25% fixed-to-floating rate subordinated notes due 2031. In addition, ChoiceOne holds certain subordinated debentures issued in connection with a trust preferred securities offering that were obtained as part of the merger with Community Shores. These increased the average balance of subordinated debentures by $26.0 million and $30.0 million in the third quarter and first nine months of 2022, respectively, compared to the same period in the prior year and caused interest expense to increase by $224,000 and $847,000 in the third quarter and first nine months of 2022, respectively, compared to the same periods in 2021.

Provision and Allowance for Loan Losses

The provision for loan losses was $100,000 in the first nine months of 2022, compared to $416,000 in the same period in the prior year. Provision expense was deemed necessary to reserve for core loan growth of $52.8 million in the third quarter of 2022. Based on our assessment of the probable estimated losses inherent in the loan portfolio no additional provision was necessary for existing loans. Our methodology for measuring the appropriate level of allowance for loan losses and related provision for loan losses involves specific allocations for loans considered impaired, and general allocations for homogeneous loans based on historical loss experience.

Loans classified as impaired loans declined by $2.8 million during the nine months ended September 30, 2022. The specific allowance for loan losses for impaired loans decreased by $346,000 during the nine months ended September 30, 2022 largely due to the decrease in balance of impaired loans compared to December 31, 2021.

The determination of our loss factors is based, in part, upon our actual loss history adjusted for significant qualitative factors that, in management's judgment, affect the collectability of the portfolio as of the analysis date. ChoiceOne uses a rolling 20 quarter actual net charge-off history as the basis for the computation.

Nonperforming loans were $2.6 million as of September 30, 2022, compared to $5.5 million as of December 31, 2021. The allowance for loan losses was 0.66% of total loans at September 30, 2022, compared to 0.76% at December 31, 2021. Loans acquired in the mergers with County Bank Corp. and Community Shores were recorded at fair value and as a result do not have an allowance for loan losses allocated to them unless credit deteriorates subsequent to acquisition. ChoiceOne has $1.8 million in credit mark remaining on loans acquired in the mergers.

Charge-offs and recoveries for respective loan categories for the nine months ended September 30, 2022 and 2021 were as follows:

(Dollars in thousands) |  | 2022 |  |  | 2021 |
|  | Charge-offs |  |  | Recoveries |  |  | Charge-offs |  |  | Recoveries |
Agricultural |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |
Commercial and industrial |  |  | 177 |  |  |  | 62 |  |  |  | 195 |  |  |  | 80 |
Consumer |  |  | 383 |  |  |  | 162 |  |  |  | 244 |  |  |  | 168 |
Commercial real estate |  |  | - |  |  |  | 3 |  |  |  | 111 |  |  |  | 43 |
Construction real estate |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Residential real estate |  |  | - |  |  |  | 2 |  |  |  | - |  |  |  | 5 |
|  | $ | 560 |  |  | $ | 229 |  |  | $ | 550 |  |  | $ | 296 |

Net charge-offs were $331,000 in the first nine months of 2022, compared to net charge-offs of $254,000 during the same period in 2021. Checking account charge-off and recovery activity is included in the consumer charge-off activity above. Net charge-offs for checking accounts for the third quarter and first nine months of 2022 were $73,000 and $186,000, respectively, compared to $49,000 and $90,000 for the same periods in the prior year. Net charge-offs on an annualized basis as a percentage of average loans were 0.04% in the first nine months of 2022 compared to annualized net charge-offs of 0.03% of average loans in the same period in the prior year. Management is aware that the economic climate in Michigan will continue to affect businesses and individual borrowers. Management has worked and intends to continue to work with delinquent borrowers in an attempt to lessen the negative impact to ChoiceOne. As charge-offs, changes in the level of nonperforming loans, and changes within the composition of the loan portfolio occur throughout 2022, the provision and allowance for loan losses will be reviewed by ChoiceOne’s management and adjusted as determined to be necessary.

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Noninterest Income

Total noninterest income declined $1.7 million and $4.7 million in the third quarter and first nine months of 2022 compared to the same periods in the prior year. Total noninterest income in 2021 was bolstered by heightened levels of refinancing activity within ChoiceOne's mortgage portfolio, with gains on sales of loans $1.4 million and $3.6 million larger than in the third quarter and first nine months of 2022. Customer service charges increased $203,000 and $691,000 in the third quarter and first nine months of 2022 compared to the same periods in the prior year. Service charges were depressed by the effects of the COVID 19 pandemic. The change in the market value of equity securities declined $295,000 and $1.5 million during the third quarter and first nine months of 2022 compared to the same periods in the prior year consistent with general market conditions. Equity securities include local community bank stocks and Community Reinvestment Act bond mutual funds. During the third quarter and first nine months of 2022, ChoiceOne has liquidated $15.3 million and $47.2 million in securities respectively, resulting in $378,000 and $805,000 of realized loss, respectively, in order to redeploy the funds into higher yielding loans and reduce the risk of extension on certain fixed income securities which include a call option.

Noninterest Expense

Total noninterest expense decreased $90,000 and increased $1.1 million in the third quarter and first nine months of 2022, respectively, compared to the same time periods in 2021. The increase during the first nine months of 2022 is related to an increase in salaries and wages due to annual wage increases and the addition of new commercial loan production and wealth management staff. This investment in people will increase expenses in the short term but is expected to drive long term value to ChoiceOne through the building of new relationships. Other expenses have also increased in the first nine months of 2022 compared to the same period in the prior year due to an increase to our FDIC insurance related expenses, business travel expenses which were still being affected by the pandemic last year. ChoiceOne continues to monitor expenses and looks to improve our efficiency through automation and use of digital tools.

Income Tax Expense

Income tax expense was $3.0 million in the first nine months of 2022 compared to $3.3 million for the same period in 2021. The decrease was due to a higher level of income before income tax in 2021 and a $65.8 million dollar increase in the average balance of nontaxable securities in the first nine months of 2022 compared to the same period in 2021. The effective tax rate was 14.8% for the first nine months of 2022 compared to 16.4% for the first nine months of 2021.

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FINANCIAL CONDITION

Securities

In the last two years ChoiceOne has grown its securities portfolio substantially. Total available for sale securities on December 31, 2020, amounted to $577.7 million and grew steadily to an available for sale balance on December 31, 2021, of $1.1 billion. Many of the securities making up this balance include local municipals and other securities ChoiceOne has no intent to sell prior to maturity. During the first quarter of 2022, ChoiceOne elected to move $428.4 million of the portfolio into a held to maturity status. Management believes the $530.1 million in available for sale securities at September 30, 2022 to be sufficient for any future liquidity needs.

$47.2 million of securities were sold in the nine months ended September 30, 2022 to be replaced with higher yielding assets. $13.7 million of securities were called or matured during that same period. Principal repayments on securities totaled $31.6 million in the nine months ended September 30, 2022.

Loans

Core loans, which exclude PPP loans, held for sale loans, and loans to other financial institutions, grew organically by $205.2 million from September 30, 2021 to September 30, 2022. Excluding PPP loans, ChoiceOne saw growth of $160.2 million in commercial loans and $40.4 million in retail loans from September 30, 2021 to September 30, 2022. Additions to our commercial lending staff in 2021 and investments in the automation of our commercial loan process have helped drive our pipeline of commercial loans and corresponding growth. ChoiceOne has ample on balance sheet liquidity to fund future loan growth, including an expected $183.1 million of cash flow from securities over the next two years.

Loans to other financial institutions declined $38.8 million from September 30, 2021 to September 30, 2022 as management chose to suspend the program at the end of the third quarter 2022. During the nine months ended September 30, 2022, the remaining $33.1 million of PPP loans were forgiven resulting in $1.2 million of fee income. At September 30, 2022 all PPP loans have been fully forgiven, and the associated fee income has been recognized.

During the first nine months of 2022, ChoiceOne recorded accretion income related to acquired loans in the amount of $1.7 million. The remaining credit mark on acquired loans from the recent mergers with County Bank Corp. and Community Shores totaled $1.8 million as of September 30, 2022.

Asset Quality

Information regarding impaired loans can be found in Note 3 to the consolidated financial statements included in this report. The total balance of loans classified as impaired was $2.6 million on September 30, 2022, compared to $5.5 million as of December 31, 2021. The change in the first nine months of 2022 was primarily comprised of a decrease of $2.3 million in impaired agricultural loans.

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 ("TDRs").

The balances of these nonperforming loans were as follows:

(Dollars in thousands) |  | September 30, |  |  | December 31, |
|  | 2022 |  |  | 2021 |
Loans accounted for on a nonaccrual basis |  | $ | 1,197 |  |  | $ | 1,727 |
Accruing loans which are contractually past due 90 days or more as to principal or interest payments |  |  | - |  |  |  | - |
Loans defined as "troubled debt restructurings " which are not included above |  |  | 1,431 |  |  |  | 3,816 |
Total |  | $ | 2,628 |  |  | $ | 5,543 |

The reduction in the balance of nonaccrual loans in the first nine months of 2022 was primarily due to loans that were paid off. It is also noted that 82% of loans considered TDRs were performing according to their restructured terms as of September 30, 2022. Management believes the allowance for loan losses allocated to its nonperforming loans is sufficient at September 30, 2022.

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Goodwill

Goodwill is not amortized but is evaluated annually for impairment and on an interim basis if events or changes in circumstances indicate that goodwill might be impaired. The goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount, and an impairment charge would be recognized for any amount by which the carrying amount exceeds the reporting unit's fair value. Accounting pronouncements allow a company to first perform a qualitative assessment for goodwill prior to a quantitative assessment (Step 1 assessment). If the results of the qualitative assessment indicate that it is more likely than not that goodwill is impaired, then a quantitative assessment must be performed. If not, there is no further assessment required. ChoiceOne acquired Valley Ridge Financial Corp. in 2006, County Bank Corp. in 2019, and Community Shores in 2020, which resulted in the recognition of goodwill of $13.7 million, $38.9 million and $7.3 million, respectively.

ChoiceOne management performs an annual qualitative assessment and periodically performs a quantitative assessment. Management will perform a quantitative assessment of goodwill during the fourth quarter of 2022.

Deposits and Borrowings

Deposits in the third quarter of 2022 continue to hold strong with an increase of $18.1 million compared to the second quarter of 2022, which is attributed to organic growth of new relationships, seasonal fluctuations in our municipal clients and some modest deposit runoff as ChoiceOne has held deposit rates. Despite the rapidly rising rate environment, deposit costs have only increased 12 basis points since the third quarter of 2021, as ChoiceOne is actively managing these costs and will continue to lag the expected increases in the federal funds rate.

In September 2021, ChoiceOne completed a private placement of $32.5 million in aggregate principal amount of 3.25% fixed-to-floating rate subordinated notes due 2031. ChoiceOne also holds $3.2 million in subordinated debentures issued in connection with a $4.5 million trust preferred securities offering, which were obtained in the merger with Community Shores, offset by the merger mark-to-market adjustment. ChoiceOne may use Federal Home Loan Bank advances and advances from the Federal Reserve Bank Discount Window to meet short-term funding needs in the remainder of 2022.

Shareholders' Equity

Total shareholders' equity declined $65.0 million in the first nine months of 2022. As previously referenced the Federal Reserve increased the federal funds rate by 3.00% during the first nine months of 2022 in response to published inflation rates, causing interest rates to increase. This change in interest rates increased ChoiceOne's unrealized pre-tax loss on the available for sale securities portfolio from $3.3 million on December 31, 2021 to $102.9 million on September 30, 2022. Additionally, meeting minutes from the Federal Open Market Committee indicated that additional increases in the federal funds rate are expected in order to combat inflation in the coming quarters. As such, ChoiceOne elected to utilize interest rate derivatives in order to better manage its interest rate risk position. On April 21, 2022, ChoiceOne purchased four 2-year forward-starting interest rate caps with a total notional amount of $200.0 million and entered into a $200.0 million 2-year forward-starting pay-fixed interest rate swap. All forward starting instruments have an 8-year term expiring in 2032. These strategies provide $400 million of notional value protection and also create accounting symmetry between available for sale securities and other comprehensive income (equity), thus protecting tangible capital from further increases in interest rates. ChoiceOne also entered into multiple received-fixed interest rate swaps with a total notional amount of $200.0 million with a 2-year term, which, in the current environment, offsets the cost of the rising rate protection. These three strategies, in the aggregate, are expected to be neutral to net income in 2022 and better position ChoiceOne Bank should rates continue to rise and remain elevated. Importantly, the transactions were structured to qualify for hedge accounting, which means that changes in the fair value of certain instruments flow through other comprehensive income (equity). Refer to further details in Note 8 to the consolidated financial statements included in this report.

A reduction in common stock and paid in capital resulted from ChoiceOne's repurchase of 25,899 shares for $682,000, or a weighted average all-in cost per share of $26.35, during the first quarter of 2022. No shares of common stock were repurchased during the second or third quarters of 2022; however, ChoiceOne may strategically repurchase shares of common stock in the future depending on market and other conditions.

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Regulatory Capital Requirements

Following is information regarding compliance of ChoiceOne and ChoiceOne Bank 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, 2022 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
ChoiceOne Financial Services Inc. |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Total capital (to risk weighted assets) |  | $ | 216,524 |  |  |  | 13.7 | % |  | $ | 126,267 |  |  |  | 8.0 | % |  |  | N/A |  |  |  | N/A |
Common equity Tier 1 capital (to risk weighted assets) |  |  | 172,632 |  |  |  | 10.9 |  |  |  | 71,025 |  |  |  | 4.5 |  |  |  | N/A |  |  |  | N/A |
Tier 1 capital (to risk weighted assets) |  |  | 177,132 |  |  |  | 11.2 |  |  |  | 94,700 |  |  |  | 6.0 |  |  |  | N/A |  |  |  | N/A |
Tier 1 capital (to average assets) |  |  | 177,132 |  |  |  | 7.6 |  |  |  | 93,179 |  |  |  | 4.0 |  |  |  | N/A |  |  |  | N/A |
ChoiceOne Bank |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Total capital (to risk weighted assets) |  | $ | 201,500 |  |  |  | 12.8 | % |  | $ | 126,071 |  |  |  | 8.0 | % |  | $ | 157,589 |  |  |  | 10.0 | %
Common equity Tier 1 capital (to risk weighted assets) |  |  | 194,043 |  |  |  | 12.3 |  |  |  | 70,915 |  |  |  | 4.5 |  |  |  | 102,433 |  |  |  | 6.5 |
Tier 1 capital (to risk weighted assets) |  |  | 194,043 |  |  |  | 12.3 |  |  |  | 94,553 |  |  |  | 6.0 |  |  |  | 126,071 |  |  |  | 8.0 |
Tier 1 capital (to average assets) |  |  | 194,043 |  |  |  | 8.3 |  |  |  | 93,081 |  |  |  | 4.0 |  |  |  | 116,351 |  |  |  | 5.0 |
December 31, 2021 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
ChoiceOne Financial Services Inc. |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Total capital (to risk weighted assets) |  | $ | 204,353 |  |  |  | 14.4 | % |  | $ | 113,604 |  |  |  | 8.0 | % |  |  | N/A |  |  |  | N/A |
Common equity Tier 1 capital (to risk weighted assets) |  |  | 160,338 |  |  |  | 11.3 |  |  |  | 63,902 |  |  |  | 4.5 |  |  |  | N/A |  |  |  | N/A |
Tier 1 capital (to risk weighted assets) |  |  | 164,838 |  |  |  | 11.6 |  |  |  | 85,203 |  |  |  | 6.0 |  |  |  | N/A |  |  |  | N/A |
Tier 1 capital (to average assets) |  |  | 164,838 |  |  |  | 7.4 |  |  |  | 89,415 |  |  |  | 4.0 |  |  |  | N/A |  |  |  | N/A |
ChoiceOne Bank |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Total capital (to risk weighted assets) |  | $ | 182,275 |  |  |  | 12.9 | % |  | $ | 113,444 |  |  |  | 8.0 | % |  | $ | 141,806 |  |  |  | 10.0 | %
Common equity Tier 1 capital (to risk weighted assets) |  |  | 174,587 |  |  |  | 12.3 |  |  |  | 63,813 |  |  |  | 4.5 |  |  |  | 92,174 |  |  |  | 6.5 |
Tier 1 capital (to risk weighted assets) |  |  | 174,587 |  |  |  | 12.3 |  |  |  | 85,083 |  |  |  | 6.0 |  |  |  | 113,444 |  |  |  | 8.0 |
Tier 1 capital (to average assets) |  |  | 174,587 |  |  |  | 7.8 |  |  |  | 89,289 |  |  |  | 4.0 |  |  |  | 111,611 |  |  |  | 5.0 |

Management reviews the capital levels of ChoiceOne and ChoiceOne Bank on a regular basis. The Board of Directors and management believe that the capital levels as of September 30, 2022 are adequate for the foreseeable future. The Board of Directors’ 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 by operating activities was $32.0 million for the nine months ended September 30, 2022 compared to $29.6 million in the same period a year ago. The change was due to lower net proceeds from loan sales in 2022 compared to 2021, which was offset by the change in other assets and liabilities. Net cash used in investing activities was $60.5 million for the nine months ended September 30, 2022 compared to $398.6 million in the same period in 2021. ChoiceOne purchased $61.9 million of securities and had maturities or sales of securities of $92.5 million in the first nine months of 2022 compared to $514.2 million and $39.8 million in the same periods in 2021, respectively. An increase in net loan originations led to cash used of $73.3 million in the first nine months of 2022 compared to cash provided of $78.1 million in the same period during the prior year. Net cash provided by financing activities was $48.1 million for the first nine months of 2022, compared to $349.3 million in the same period in the prior year. ChoiceOne experienced growth of $104.4 million in deposits in the first nine months of 2022 compared to $337.6 million in 2021, while also seeing a $72.5 million decrease in borrowings, which led to the change.

ChoiceOne believes that the current level of liquidity is sufficient to meet ChoiceOne 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, advances available from the Federal Home Loan Bank, and secured lines of credit available from the Federal Reserve Bank.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

There are no material pending legal proceedings to which ChoiceOne or ChoiceOne 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, 2021.

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

There were no unregistered sales of equity securities in the third quarter of 2022.

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ISSUER PURCHASES OF EQUITY SECURITIES

There were no issuer purchases of equity securities during the third quarter of 2022.

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 as of September 30, 2022. 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, 2022 that has materially affected, or that is reasonably likely to materially affect, ChoiceOne’s internal control over financial reporting.

Item 5. Other Information

None.

Item 6. Exhibits

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

Exhibit Number |  | Document |
3.1 |  | Restated Articles of Incorporation of ChoiceOne Financial Services, Inc. Previously filed as an exhibit to ChoiceOne’s Form 8-A filed February 4, 2020. Here incorporated by reference. |
3.2 |  | Bylaws of ChoiceOne as currently in effect and any amendments thereto. Previously filed as an exhibit to ChoiceOne’s Form 8-K filed April 21, 2021. Here incorporated by reference. |
4.1 |  | Advances, Pledge and Security Agreement between ChoiceOne Bank and the Federal Home Loan Bank of Indianapolis. Previously filed as an exhibit to ChoiceOne Financial Services, Inc.’s Form 10-K Annual Report for the year ended December 31, 2013. Here incorporated by reference. |
4.2 |  | Form of 3.25% Fixed-to-Floating Rate Subordinated Note due September 3, 2031. Previously filed as an exhibit to ChoiceOne Financial Services, Inc.'s Form 8-K filed September 7, 2021. Here incorporated by reference. |
4.3 |  | Form of 3.25% Fixed-to-Floating Rate Global Subordinated Note due September 3, 2031. Previously filed as an exhibit to ChoiceOne Financial Services, Inc.'s Form 8-K filed September 7, 2021. 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 |  | Inline XBRL Instance Document |
101.SCH |  | Inline XBRL Taxonomy Extension Schema Document |
101.CAL |  | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF |  | Inline XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB |  | Inline XBRL Taxonomy Extension Label Linkbase Document |
101.PRE |  | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
104 |  | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |

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SIGNATURES

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

| CHOICEONE FINANCIAL SERVICES, INC. |
Date: November 10, 2022 | /s/ Kelly J. Potes |
| Kelly J. Potes Chief Executive Officer (Principal Executive Officer) |
Date: November 10, 2022 | /s/ Adom J. Greenland |
| Adom J. Greenland Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) |

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