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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, 2023
☐ | 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, 2023, the Registrant had 7,545,094 shares of common stock outstanding.

Table of Contents

|  | Page
PART I. | FINANCIAL INFORMATION | 3
Item 1. | Financial Statements | 3
| Consolidated Balance Sheets | 3
| Consolidated Statements Of Income | 4
| Consolidated Statements Of Comprehensive Income (Loss) | 6
| Consolidated Statements Of Changes In Shareholders’ Equity | 7
| Consolidated Statements Of Cash Flows | 9
| Notes To Interim Consolidated Financial Statements | 11
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 43
Item 4. | Controls and Procedures | 55
PART II. | OTHER INFORMATION | 56
Item 1. | Legal Proceedings | 56
Item 1A. | Risk Factors | 56
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 56
Item 5. | Other Information | 56
Item 6. | Exhibits | 57
Signatures |  | 58

PART I. FINAN CIAL INFORMATION

Item 1. Fina ncial Statements.

ChoiceOne Financial Services, Inc.
CONSOLIDAT ED BALANCE SHEETS

| September 30, |  |  | December 31, |
(Dollars in thousands, except share data) | 2023 |  |  | 2022 |
| (Unaudited) |  |  | (Audited) |
Assets |  |  |  |  |
Cash and due from banks | $ | 144,323 |  |  | $ | 43,593 |
Time deposits in other financial institutions |  | 350 |  |  |  | 350 |
Cash and cash equivalents |  | 144,673 |  |  |  | 43,943 |
Equity securities, at fair value (Note 2) |  | 7,262 |  |  |  | 8,566 |
Securities available for sale, at fair value (Note 2) |  | 490,804 |  |  |  | 529,749 |
Securities held to maturity, at amortized cost net of credit losses (Note 2) |  | 414,743 |  |  |  | 425,906 |
Federal Home Loan Bank stock |  | 4,449 |  |  |  | 3,517 |
Federal Reserve Bank stock |  | 5,065 |  |  |  | 5,064 |
Loans held for sale |  | 5,222 |  |  |  | 4,834 |
Loans to other financial institutions (Note 3) |  | 23,763 |  |  |  | — |
Core loans (Note 3) |  | 1,286,037 |  |  |  | 1,189,782 |
Total loans (Note 3) |  | 1,309,800 |  |  |  | 1,189,782 |
Allowance for credit losses (Note 3) |  | (14,872 | ) |  |  | (7,619 | )
Loans, net |  | 1,294,928 |  |  |  | 1,182,163 |
Premises and equipment, net |  | 29,628 |  |  |  | 28,232 |
Other real estate owned, net |  | 122 |  |  |  | — |
Cash value of life insurance policies |  | 44,788 |  |  |  | 43,978 |
Goodwill |  | 59,946 |  |  |  | 59,946 |
Core deposit intangible |  | 2,057 |  |  |  | 2,809 |
Other assets |  | 70,509 |  |  |  | 47,208 |
Total assets | $ | 2,574,196 |  |  | $ | 2,385,915 |
Liabilities |  |  |  |  |
Deposits – noninterest-bearing | $ | 531,962 |  |  | $ | 599,579 |
Deposits – interest-bearing |  | 1,551,995 |  |  |  | 1,518,424 |
Brokered deposits |  | 49,238 |  |  |  | - |
Total deposits |  | 2,133,195 |  |  |  | 2,118,003 |
Borrowings |  | 180,000 |  |  |  | 50,000 |
Subordinated debentures |  | 35,446 |  |  |  | 35,262 |
Other liabilities |  | 44,394 |  |  |  | 13,776 |
Total liabilities |  | 2,393,035 |  |  |  | 2,217,041 |
Shareholders' Equity |  |  |  |  |
Preferred stock; shares authorized: 100,000; shares outstanding: none |  | — |  |  |  | — |
Common stock and paid-in capital, no par value; shares authorized: 15,000,000; shares outstanding: 7,541,187 at September 30, 2023 and 7,516,098 at December 31, 2022 |  | 173,187 |  |  |  | 172,277 |
Retained earnings |  | 70,444 |  |  |  | 68,394 |
Accumulated other comprehensive loss, net |  | (62,470 | ) |  |  | (71,797 | )
Total shareholders’ equity |  | 181,161 |  |  |  | 168,874 |
Total liabilities and shareholders’ equity | $ | 2,574,196 |  |  | $ | 2,385,915 |

See accompanying notes to interim consolidated financial statements.

3

ChoiceOne Financial Services, Inc.

CONSOLIDATED STA TEMENTS OF INCOME (Unaudited)

4

| Three Months Ended |  |  | Nine Months Ended |
(Dollars in thousands, except share data) | September 30, |  |  | September 30, |
| 2023 |  |  | 2022 |  |  | 2023 |  |  | 2022 |
Interest income |  |  |  |  |  |  |  |  |  |  |
Loans, including fees | $ | 17,774 |  |  | $ | 13,611 |  |  | $ | 48,625 |  |  | $ | 38,432 |
Securities: |  |  |  |  |  |  |  |  |  |  |
Taxable |  | 5,346 |  |  |  | 3,972 |  |  |  | 15,637 |  |  |  | 11,001 |
Tax exempt |  | 1,420 |  |  |  | 1,464 |  |  |  | 4,244 |  |  |  | 4,678 |
Other |  | 1,764 |  |  |  | 238 |  |  |  | 2,512 |  |  |  | 314 |
Total interest income |  | 26,304 |  |  |  | 19,285 |  |  |  | 71,018 |  |  |  | 54,425 |
Interest expense |  |  |  |  |  |  |  |  |  |  |
Deposits |  | 7,237 |  |  |  | 1,563 |  |  |  | 15,569 |  |  |  | 3,342 |
Advances from Federal Home Loan Bank |  | 272 |  |  |  | 5 |  |  |  | 1,498 |  |  |  | 8 |
Other |  | 2,569 |  |  |  | 379 |  |  |  | 4,622 |  |  |  | 1,127 |
Total interest expense |  | 10,078 |  |  |  | 1,947 |  |  |  | 21,689 |  |  |  | 4,477 |
Net interest income |  | 16,226 |  |  |  | 17,338 |  |  |  | 49,329 |  |  |  | 49,948 |
Provision for (reversal of) credit losses on loans |  | 438 |  |  |  | 100 |  |  |  | 332 |  |  |  | 100 |
Provision for (reversal of) credit losses on unfunded commitments |  | (438 | ) |  |  | — |  |  |  | (557 | ) |  |  | — |
Net Provision for (reversal of) credit losses expense |  | - |  |  |  | 100 |  |  |  | (225 | ) |  |  | 100 |
Net interest income after provision |  | 16,226 |  |  |  | 17,238 |  |  |  | 49,554 |  |  |  | 49,848 |
Noninterest income |  |  |  |  |  |  |  |  |  |  |
Customer service charges |  | 2,382 |  |  |  | 2,458 |  |  |  | 6,920 |  |  |  | 7,000 |
Insurance and investment commissions |  | 173 |  |  |  | 158 |  |  |  | 541 |  |  |  | 596 |
Gains on sales of loans |  | 536 |  |  |  | 432 |  |  |  | 1,479 |  |  |  | 2,123 |
Net gains (losses) on sales of securities |  | (71 | ) |  |  | (378 | ) |  |  | (71 | ) |  |  | (805 | )
Net gains on sales and write downs of other assets |  | 13 |  |  |  | — |  |  |  | 149 |  |  |  | 172 |
Earnings on life insurance policies |  | 278 |  |  |  | 259 |  |  |  | 810 |  |  |  | 793 |
Trust income |  | 197 |  |  |  | 174 |  |  |  | 577 |  |  |  | 528 |
Change in market value of equity securities |  | (134 | ) |  |  | (323 | ) |  |  | (456 | ) |  |  | (1,006 | )
Other |  | 330 |  |  |  | 267 |  |  |  | 911 |  |  |  | 922 |
Total noninterest income |  | 3,704 |  |  |  | 3,047 |  |  |  | 10,860 |  |  |  | 10,323 |
Noninterest expense |  |  |  |  |  |  |  |  |  |  |
Salaries and benefits |  | 8,038 |  |  |  | 7,668 |  |  |  | 23,958 |  |  |  | 22,811 |
Occupancy and equipment |  | 1,427 |  |  |  | 1,545 |  |  |  | 4,577 |  |  |  | 4,688 |
Data processing |  | 1,724 |  |  |  | 1,734 |  |  |  | 5,087 |  |  |  | 5,056 |
Professional fees |  | 435 |  |  |  | 559 |  |  |  | 1,675 |  |  |  | 1,628 |
Supplies and postage |  | 192 |  |  |  | 184 |  |  |  | 580 |  |  |  | 541 |
Advertising and promotional |  | 269 |  |  |  | 199 |  |  |  | 573 |  |  |  | 478 |
Intangible amortization |  | 247 |  |  |  | 297 |  |  |  | 752 |  |  |  | 901 |
FDIC insurance |  | 270 |  |  |  | 195 |  |  |  | 790 |  |  |  | 645 |
Other |  | 1,126 |  |  |  | 1,035 |  |  |  | 3,304 |  |  |  | 3,515 |
Total noninterest expense |  | 13,728 |  |  |  | 13,416 |  |  |  | 41,296 |  |  |  | 40,263 |
Income before income tax |  | 6,202 |  |  |  | 6,869 |  |  |  | 19,118 |  |  |  | 19,908 |
Income tax expense |  | 1,080 |  |  |  | 1,056 |  |  |  | 3,150 |  |  |  | 2,952 |
Net income | $ | 5,122 |  |  | $ | 5,813 |  |  | $ | 15,968 |  |  | $ | 16,956 |
Basic earnings per share (Note 4) | $ | 0.68 |  |  | $ | 0.77 |  |  | $ | 2.12 |  |  | $ | 2.26 |
Diluted earnings per share (Note 4) | $ | 0.68 |  |  | $ | 0.77 |  |  | $ | 2.12 |  |  | $ | 2.26 |
Dividends declared per share | $ | 0.26 |  |  | $ | 0.25 |  |  | $ | 0.78 |  |  | $ | 0.75 |

See accompanying notes to interim consolidated financial statements.

5

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

| Three Months Ended |  |  | Nine Months Ended |
(Dollars in thousands) | September 30, |  |  | September 30, |
| 2023 |  |  | 2022 |  |  | 2023 |  |  | 2022 |
Net income | $ | 5,122 |  |  | $ | 5,813 |  |  | $ | 15,968 |  |  | $ | 16,956 |
Other comprehensive income: |  |  |  |  |  |  |  |  |  |  |
Change in net unrealized gain (loss) on available-for-sale securities |  | (21,739 | ) |  |  | (25,073 | ) |  |  | (13,063 | ) |  |  | (99,584 | )
Income tax benefit (expense) |  | 4,565 |  |  |  | 5,265 |  |  |  | 2,743 |  |  |  | 20,913 |
Less: reclassification adjustment for net (gain) loss included in net income |  | - |  |  |  | 378 |  |  |  | - |  |  |  | 805 |
Income tax benefit (expense) |  | - |  |  |  | (79 | ) |  |  | - |  |  |  | (169 | )
Less: reclassification adjustment for net (gain) loss for fair value hedge |  | 9,189 |  |  |  | - |  |  |  | 9,920 |  |  |  | - |
Income tax benefit (expense) |  | (1,930 | ) |  |  | - |  |  |  | (2,083 | ) |  |  | - |
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 |  | (9,915 | ) |  |  | (19,509 | ) |  |  | (2,483 | ) |  |  | (75,346 | )
Reclassification of unrealized gain (loss) upon transfer of securities from available-for-sale to held-to-maturity |  | - |  |  |  | - |  |  |  | - |  |  |  | (3,404 | )
Income tax benefit (expense) |  | - |  |  |  | - |  |  |  | - |  |  |  | 715 |
Amortization of net unrealized (gains) losses on securities transferred from available-for-sale to held-to-maturity |  | 67 |  |  |  | 53 |  |  |  | 261 |  |  |  | 297 |
Income tax benefit (expense) |  | (14 | ) |  |  | (11 | ) |  |  | (55 | ) |  |  | (62 | )
Unrealized loss on held to maturity securities, net of tax |  | 53 |  |  |  | 42 |  |  |  | 206 |  |  |  | (2,454 | )
Change in net unrealized gain (loss) on cash flow hedge |  | 9,625 |  |  |  | 6,618 |  |  |  | 12,748 |  |  |  | 1,042 |
Income tax benefit (expense) |  | (2,021 | ) |  |  | (1,390 | ) |  |  | (2,677 | ) |  |  | (219 | )
Less: reclassification adjustment for net (gain) loss on cash flow hedge |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Income tax benefit (expense) |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Less: amortization of net unrealized (gains) losses included in net income |  | 897 |  |  |  | 416 |  |  |  | 1,940 |  |  |  | 723 |
Income tax benefit (expense) |  | (188 | ) |  |  | (87 | ) |  |  | (407 | ) |  |  | (152 | )
Unrealized gain (loss) on cash flow hedge instruments, net of tax |  | 8,313 |  |  |  | 5,557 |  |  |  | 11,604 |  |  |  | 1,394 |
Other comprehensive income (loss), net of tax |  | (1,549 | ) |  |  | (13,910 | ) |  |  | 9,327 |  |  |  | (76,406 | )
Comprehensive income (loss) | $ | 3,573 |  |  | $ | (8,097 | ) |  | $ | 25,295 |  |  | $ | (59,450 | )

See accompanying notes to interim consolidated financial statements.

6

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, 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 |
Balance, July 1, 2023 |  |  | 7,534,658 |  |  | $ | 172,880 |  |  | $ | 67,281 |  |  | $ | (60,921 | ) |  | $ | 179,240 |
Net income |  |  |  |  |  |  |  |  | 5,122 |  |  |  |  |  |  | 5,122 |
Other comprehensive income (loss) |  |  |  |  |  |  |  |  |  |  |  | (1,549 | ) |  |  | (1,549 | )
Shares issued |  |  | 6,529 |  |  |  | 131 |  |  |  |  |  |  |  |  |  | 131 |
Effect of employee stock purchases |  |  |  |  |  | 9 |  |  |  |  |  |  |  |  |  | 9 |
Stock-based compensation expense |  |  |  |  |  | 167 |  |  |  |  |  |  |  |  |  | 167 |
Cash dividends declared ($0.26 per share) |  |  |  |  |  |  |  |  | (1,959 | ) |  |  |  |  |  | (1,959 | )
Balance, September 30, 2023 |  |  | 7,541,187 |  |  | $ | 173,187 |  |  | $ | 70,444 |  |  | $ | (62,470 | ) |  | $ | 181,161 |

7

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, 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 options exercised and issued |  |  |  |  |  | 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 |
Balance, January 1, 2023 |  |  | 7,516,098 |  |  | $ | 172,277 |  |  | $ | 68,394 |  |  | $ | (71,797 | ) |  | $ | 168,874 |
Adoption of ASU 2016-13 (CECL) on January 1, 2023 |  |  |  |  |  |  |  |  | (8,046 | ) |  |  |  |  |  | (8,046 | )
Balance, January 1, 2023 |  |  | 7,516,098 |  |  | $ | 172,277 |  |  | $ | 60,348 |  |  | $ | (71,797 | ) |  | $ | 160,828 |
Net income |  |  |  |  |  |  |  |  | 15,968 |  |  |  |  |  |  | 15,968 |
Other comprehensive income (loss) |  |  |  |  |  |  |  |  |  |  |  | 9,327 |  |  |  | 9,327 |
Shares issued |  |  | 25,089 |  |  |  | 428 |  |  |  |  |  |  |  |  |  | 428 |
Effect of employee stock purchases |  |  |  |  |  | 23 |  |  |  |  |  |  |  |  |  | 23 |
Stock-based compensation expense |  |  |  |  |  | 459 |  |  |  |  |  |  |  |  |  | 459 |
Cash dividends declared ($0.78 per share) |  |  |  |  |  |  |  |  | (5,872 | ) |  |  |  |  |  | (5,872 | )
Balance, September 30, 2023 |  |  | 7,541,187 |  |  | $ | 173,187 |  |  | $ | 70,444 |  |  | $ | (62,470 | ) |  | $ | 181,161 |

8

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

| Nine Months Ended |
(Dollars in thousands) | September 30, |
| 2023 |  |  | 2022 |
Cash flows from operating activities: |  |  |  |  |
Net income | $ | 15,968 |  |  | $ | 16,956 |
Adjustments to reconcile net income to net cash from operating activities: |  |  |  |  |
(Reversal of) provision for credit losses |  | (225 | ) |  |  | 100 |
Depreciation |  | 1,854 |  |  |  | 2,041 |
Amortization |  | 7,495 |  |  |  | 8,145 |
Compensation expense on employee and director stock purchases, stock options, and restricted stock units |  | 741 |  |  |  | 726 |
Net losses (gains) on sales of available for sale securities |  | 71 |  |  |  | 805 |
Net change in market value of equity securities |  | 456 |  |  |  | 1,006 |
Gains on sales of loans |  | (1,479 | ) |  |  | (2,123 | )
Loans originated for sale |  | (37,845 | ) |  |  | (68,434 | )
Proceeds from loan sales |  | 38,330 |  |  |  | 70,155 |
Earnings on bank-owned life insurance |  | (810 | ) |  |  | (793 | )
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 | )
Proceeds from sales of other real estate owned |  | 144 |  |  |  | 235 |
Deferred federal income tax (benefit)/expense |  | 138 |  |  |  | 169 |
Net change in: |  |  |  |  |
Other assets |  | 4,443 |  |  |  | (4,461 | )
Other liabilities |  | 28,049 |  |  |  | 7,423 |
Net cash provided by operating activities |  | 57,330 |  |  |  | 32,025 |
Cash flows from investing activities: |  |  |  |  |
Sales of securities available for sale |  | - |  |  |  | 47,167 |
Sales of equity securities |  | 887 |  |  |  | - |
Maturities, prepayments and calls of securities available for sale |  | 21,981 |  |  |  | 39,024 |
Maturities, prepayments and calls of securities held to maturity |  | 10,218 |  |  |  | 6,277 |
Purchases of securities available for sale |  | (110 | ) |  |  | (54,347 | )
Purchases of securities held to maturity |  | (597 | ) |  |  | (7,505 | )
Purchase of Federal Home Loan Bank stock |  | (4,849 | ) |  |  | - |
Proceeds from redemption of Federal Home Loan Bank stock |  | 3,916 |  |  |  | - |
Loan originations and payments, net |  | (120,271 | ) |  |  | (73,321 | )
Additions to premises and equipment |  | (3,454 | ) |  |  | (1,238 | )
Proceeds from (payments for) derivative contracts, net |  | 382 |  |  |  | (16,547 | )
Payments for derivative contracts settlements |  | (4,191 | ) |  |  | - |
Net cash flows from investing activities |  | (96,088 | ) |  |  | (60,490 | )
Cash flows from financing activities: |  |  |  |  |
Net change in deposits |  | 15,192 |  |  |  | 104,360 |
Net change in short term borrowings |  | 130,000 |  |  |  | (50,000 | )
Issuance of common stock |  | 168 |  |  |  | 80 |
Repurchase of common stock |  | - |  |  |  | (682 | )
Share based compensation withholding obligation |  | - |  |  |  | (62 | )
Cash dividends |  | (5,872 | ) |  |  | (5,624 | )
Cash related to equity issuance for merger |  | - |  |  |  | - |
Net cash provided by financing activities |  | 139,488 |  |  |  | 48,072 |
Net change in cash and cash equivalents |  | 100,730 |  |  |  | 19,607 |
Beginning cash and cash equivalents |  | 43,943 |  |  |  | 31,887 |
Ending cash and cash equivalents | $ | 144,673 |  |  | $ | 51,494 |
Supplemental disclosures of cash flow information: |  |  |  |  |
Cash paid for interest | $ | 18,393 |  |  | $ | 4,738 |
Cash paid for income taxes |  | 3,900 |  |  |  | 200 |
Loans transferred to other real estate owned |  | 266 |  |  |  | - |

9

See accompanying notes to interim consolidated financial statements.

10

ChoiceOne Financial Services, Inc.

NOTES TO INTERIM CONSOLID ATED 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, 2023, are not necessarily indicative of the results that may be expected for the year ending December 31, 2023.

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, 2022.

Use of Estimates

To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, 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, and actual results may differ from these estimates. Estimates associated with the allowance for credit losses and the unrealized gains and losses on securities available for sale and held to maturity 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 classified as available for sale 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. Additions to securities held to maturity consist mostly of local issue municipals.

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.

Stock Transactions

A total of 3,340 shares of common stock were issued to ChoiceOne’s Board of Directors for a cash price of $76,000 under the terms of the Directors’ Stock Purchase Plan in the third quarter of 2023. A total of 3,189 shares for a cash price of $53,000 were issued under the Employee Stock Purchase Plan in the third quarter of 2023. ChoiceOne's common stock repurchase program announced in April 2021 and amended in 2022, authorizes repurchases of up to 375,388 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 third quarter of 2023.

Reclassifications

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

Recently Issued Accounting Pronouncements

Allowance for Credit Losses ("ACL")

In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. This ASU (as subsequently amended by ASU 2018-19) significantly changed how entities measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard replaced the former “incurred loss” approach with an “expected loss” model. The new model, referred to as the CECL model, applies to financial assets subject to credit losses and measured at amortized cost, and certain off-balance sheet credit exposures. The standard also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the ACL. In addition, entities need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. A reasonable and supportable economic forecast is a key component of the CECL methodology.

ChoiceOne adopted CECL effective January 1, 2023 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with the incurred loss accounting standards. The transition adjustment of the CECL adoption included an increase in the ACL of $7.2 million, which included a $5.5 million decrease to the retained earnings account to reflect the cumulative effect of adopting CECL on our Consolidated Balance Sheet, with the $1.5 million tax impact portion being recorded as part of the deferred tax asset in other assets on our Consolidated Balance Sheet. The transition adjustment of the CECL adoption included an additional ACL on unfunded commitments of $3.3 million, which included a $2.6 million decrease to the retained earnings account to reflect the cumulative effect of adopting CECL on our Consolidated Balance Sheet, with the $688,000 tax impact portion being recorded as part of the deferred tax asset in other assets on our Consolidated Balance Sheet.

The ACL is a valuation allowance for expected credit losses. The ACL is increased by the provision for credit losses and decreased by loans charged off less any recoveries of charged off loans. As ChoiceOne has had very limited loss experience since 2011, management elected to utilize benchmark peer loss history data to estimate historical loss rates. ChoiceOne worked with a third party advisory firm to identify an appropriate peer group for each loan cohort which shared similar characteristics. Management estimates the ACL required based on the selected peer group loan loss experience, the nature and volume of the loan portfolio, information about specific borrower situations and estimated collateral values, a reasonable and supportable economic forecast, and other factors. Allocations of the ACL may be made for specific loans, but the entire ACL is available for any loan that, in management’s judgment, should be charged off. Loan losses are charged against the ACL when management believes that collection of a loan balance is not possible.

The ACL consists of general and specific components. The general component covers loans collectively evaluated for credit losses and is based on peer historical loss experience adjusted for current and forecasted factors. Management's adjustment for current and forecasted 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, the experience and ability of lending staff, and a reasonable and supportable economic forecast described further below.

The discounted cash flow methodology is utilized for all loan pools. This methodology is supported by our CECL software provider and allows management to automatically calculate contractual life by factoring in all cash flows and adjusting them for behavioral and credit-related aspects.

Reasonable and supportable economic forecasts have to be incorporated in determining expected credit losses. The forecast period represents the time frame from the current period end through the point in time that we can reasonably forecast and support entity and environmental factors that are expected to impact the performance of our loan portfolio. Ideally, the economic forecast period would encompass the contractual terms of all loans; however, the ability to produce a forecast that is considered reasonable and supportable becomes more difficult or may not be possible in later periods. Subsequent to the end of the forecast period, we revert to historical loan data based on an ongoing evaluation of each economic forecast in relation to then current economic conditions as well as any developing loan loss activity and resulting historical data. As of September 30, 2023, we used a one-year reasonable and supportable economic forecast period, with a two year straight-line reversion period.

We are not required to develop and use our own economic forecast model, and we elected to utilize economic forecasts from third-party providers that analyze and develop forecasts of the economy for the entire United States at least quarterly.

Other inputs to the calculation are also updated or reviewed quarterly. Prepayment speeds are updated on a one quarter lag based on the asset liability model from the previous quarter. This model is performed at the loan level by a third party. Curtailment is updated quarterly within the ACL model based on our peer group average. The reversion period is reviewed by management quarterly with

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consideration of the current economic climate. Prepayment speeds and curtailment were updated during the third quarter of 2023; however, the effect was insignificant.

We are also required to consider expected credit losses associated with loan commitments over the contractual period in which we are exposed to credit risk on the underlying commitments unless the obligation is unconditionally cancellable by us. Any allowance for off-balance sheet credit exposures is reported as an other liability on our Consolidated Balance Sheet and is increased or decreased via the provision for credit losses account on our Consolidated Statement of Income. The calculation includes consideration of the likelihood that funding will occur and forecasted credit losses on commitments expected to be funded over their estimated lives. The allowance is calculated using the same aggregate reserve rates calculated for the funded portion of loans at the portfolio level applied to the amount of commitments expected to be funded.

Securities Available for Sale - For securities AFS in an unrealized loss position, management determines whether they intend to sell or if it is more likely than not that ChoiceOne will be required to sell the security before recovery of the amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income with an allowance being established under CECL. For securities AFS with unrealized losses not meeting these criteria, management evaluates whether any decline in fair value is due to credit loss factors. In making this assessment, management considers any changes to the rating of the security by rating agencies and adverse conditions specifically related to the issuer of the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses (“ACL”) is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Changes in the ACL under ASC 326-30 are recorded as provisions for (or reversal of) credit loss expense. Losses are charged against the allowance when the collectability of a debt security AFS is confirmed or when either of the criteria regarding intent or requirement to sell is met. Any impairment that has not been recorded through an ACL is recognized in other comprehensive income, net of income taxes. At September 30, 2023 and at adoption of CECL on January 1, 2023, there was no ACL related to debt securities AFS. Accrued interest receivable on debt securities was excluded from the estimate of credit losses.

Securities Held to Maturity - Since the adoption of CECL, ChoiceOne measures credit losses on HTM securities on a collective basis by major security type with each type sharing similar risk characteristics, and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. The ACL on securities HTM is a contra asset valuation account that is deducted from the carrying amount of HTM securities to present the net amount expected to be collected. HTM securities are charged off against the ACL when deemed uncollectible. Adjustments to the ACL are reported in ChoiceOne’s Consolidated Statements of Income in the provision for credit losses. Accrued interest receivable on HTM securities is excluded from the estimate of credit losses. With regard to US Treasury securities, these have an explicit government guarantee; therefore, no ACL is recorded for these securities. With regard to obligations of states and political subdivisions and other HTM securities, management considers (1) issuer bond ratings, (2) historical loss rates for given bond ratings, (3) the financial condition of the issuer, and (4) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities. At September 30, 2023, the ACL related to securities HTM is insignificant.

Loans that do not share risk characteristics are evaluated on an individual basis and are excluded from the collective evaluation. ChoiceOne has determined that any loans which have been placed on non-performing status, loans with a risk rating of 6 or higher, and loans past due more than 60 days will be assessed individually for evaluation. Management's judgment will be used to determine if the loan should be migrated back to pool on an individual basis. Individual analysis will establish a specific reserve for loans in scope. Specific reserves on non-performing loans are typically based on management’s best estimate of the fair value of collateral securing these loans, adjusted for selling costs as appropriate or based on the present value of the expected cash flows from that loan.

Troubled Loan Modifications

FASB also issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. This standard eliminated the previous accounting guidance for troubled debt restructurings and added additional disclosure requirements for gross chargeoffs by year of origination. It also prescribes guidance for reporting modifications of loans to borrowers experiencing financial difficulty.

Investment in Equity Method and Joint Ventures

In March 2023, the FASB issued ASU 2023-02, Investments - Equity Method and Joint Venture (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. The amendments in this ASU permit reporting entities to account for the tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method. This update will be effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2023. Early adoption is permitted. ChoiceOne is currently evaluating the impact of this standard on the consolidated financial statements.

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14

NOTE 2 – SECURITIES

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

| September 30, 2023 |
|  |  |  | Gross |  |  | Gross |  |  |  |
(Dollars in thousands) | Amortized |  |  | Unrealized |  |  | Unrealized |  |  | Fair |
| Cost |  |  | Gains |  |  | Losses |  |  | Value |
Equity securities | $ | 7,928 |  |  | $ | 208 |  |  | $ | (874 | ) |  | $ | 7,262 |

| December 31, 2022 |
|  |  |  | Gross |  |  | Gross |  |  |  |
(Dollars in thousands) | Amortized |  |  | Unrealized |  |  | Unrealized |  |  | Fair |
| Cost |  |  | Gains |  |  | Losses |  |  | Value |
Equity securities | $ | 8,982 |  |  | $ | 305 |  |  | $ | (721 | ) |  | $ | 8,566 |

The following tables present the amortized cost and fair value of securities available for sale and the gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) and the amortized cost and fair value of securities held to maturity and the related gross unrealized gains and losses. Mortgage backed security and collateralized mortgage obligation maturities are based on the average life at the prepayment speed and all other security types are based on the pre-refund date, call date, or maturity date:

| September 30, 2023 |
|  |  |  | Gross |  |  | Gross |  |  |  |
(Dollars in thousands) | Amortized |  |  | Unrealized |  |  | Unrealized |  |  | Fair |
Available for Sale: | Cost |  |  | Gains |  |  | Losses |  |  | Value |
U.S. Treasury notes and bonds | $ | 90,463 |  |  | $ | - |  |  | $ | (13,431 | ) |  | $ | 77,032 |
State and municipal |  | 260,976 |  |  |  | - |  |  |  | (48,262 | ) |  |  | 212,714 |
Mortgage-backed |  | 219,113 |  |  |  | 9 |  |  |  | (30,058 | ) |  |  | 189,064 |
Corporate |  | 760 |  |  |  | - |  |  |  | (51 | ) |  |  | 709 |
Asset-backed securities |  | 11,675 |  |  |  | - |  |  |  | (390 | ) |  |  | 11,285 |
Total | $ | 582,987 |  |  | $ | 9 |  |  | $ | (92,192 | ) |  | $ | 490,804 |
Held to Maturity: |  |  |  |  |  |  |  |  |  |  |
U.S. Government and federal agency | $ | 2,971 |  |  | $ | - |  |  | $ | (396 | ) |  | $ | 2,575 |
State and municipal |  | 196,580 |  |  |  | 3 |  |  |  | (42,986 | ) |  |  | 153,597 |
Mortgage-backed |  | 194,545 |  |  |  | - |  |  |  | (33,599 | ) |  |  | 160,946 |
Corporate |  | 20,005 |  |  |  | 16 |  |  |  | (3,117 | ) |  |  | 16,904 |
Asset-backed securities |  | 642 |  |  |  | - |  |  |  | (39 | ) |  |  | 603 |
Total | $ | 414,743 |  |  | $ | 19 |  |  | $ | (80,137 | ) |  | $ | 334,625 |

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| December 31, 2022 |
|  |  |  | Gross |  |  | Gross |  |  |  |
(Dollars in thousands) | Amortized |  |  | Unrealized |  |  | Unrealized |  |  | Fair |
Available for Sale: | Cost |  |  | Gains |  |  | Losses |  |  | Value |
U.S. Treasury notes and bonds | $ | 90,810 |  |  | $ | - |  |  | $ | (12,606 | ) |  | $ | 78,204 |
State and municipal |  | 277,489 |  |  |  | - |  |  |  | (47,551 | ) |  |  | 229,938 |
Mortgage-backed |  | 236,703 |  |  |  | - |  |  |  | (28,140 | ) |  |  | 208,563 |
Corporate |  | 757 |  |  |  | - |  |  |  | (46 | ) |  |  | 711 |
Asset-backed securities |  | 13,031 |  |  |  | - |  |  |  | (698 | ) |  |  | 12,333 |
Total | $ | 618,790 |  |  | $ | - |  |  | $ | (89,041 | ) |  | $ | 529,749 |
Held to Maturity: |  |  |  |  |  |  |  |  |  |  |
U.S. Government and federal agency | $ | 2,966 |  |  | $ | - |  |  | $ | (421 | ) |  | $ | 2,545 |
State and municipal |  | 201,890 |  |  |  | 1 |  |  |  | (39,355 | ) |  |  | 162,536 |
Mortgage-backed |  | 200,473 |  |  |  | - |  |  |  | (29,868 | ) |  |  | 170,605 |
Corporate |  | 19,603 |  |  |  | - |  |  |  | (2,285 | ) |  |  | 17,318 |
Asset-backed securities |  | 974 |  |  |  | - |  |  |  | (77 | ) |  |  | 897 |
Total | $ | 425,906 |  |  | $ | 1 |  |  | $ | (72,006 | ) |  | $ | 353,901 |

Available for sale securities with unrealized losses as of September 30, 2023 and December 31, 2022, aggregated by investment category and length of time the individual securities have been in an unrealized loss position, were as follows:

| September 30, 2023 |
| 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. Treasury notes and bonds | $ | - |  |  | $ | - |  |  | $ | 77,032 |  |  | $ | 13,431 |  |  | $ | 77,032 |  |  | $ | 13,431 |
State and municipal |  | 529 |  |  |  | 35 |  |  |  | 212,185 |  |  |  | 48,227 |  |  |  | 212,714 |  |  |  | 48,262 |
Mortgage-backed |  | 4,099 |  |  |  | 160 |  |  |  | 174,956 |  |  |  | 29,898 |  |  |  | 179,055 |  |  |  | 30,058 |
Corporate |  | - |  |  |  | - |  |  |  | 709 |  |  |  | 51 |  |  |  | 709 |  |  |  | 51 |
Asset-backed securities |  | - |  |  |  | - |  |  |  | 11,285 |  |  |  | 390 |  |  |  | 11,285 |  |  |  | 390 |
Total temporarily impaired | $ | 4,628 |  |  | $ | 195 |  |  | $ | 476,167 |  |  | $ | 91,997 |  |  | $ | 480,795 |  |  | $ | 92,192 |

| December 31, 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. Treasury notes and bonds | $ | - |  |  | $ | - |  |  | $ | 78,204 |  |  | $ | 12,606 |  |  | $ | 78,204 |  |  | $ | 12,606 |
State and municipal |  | 89,158 |  |  |  | 12,612 |  |  |  | 140,390 |  |  |  | 34,939 |  |  |  | 229,548 |  |  |  | 47,551 |
Mortgage-backed |  | 63,249 |  |  |  | 3,093 |  |  |  | 144,318 |  |  |  | 25,047 |  |  |  | 207,567 |  |  |  | 28,140 |
Corporate |  | 711 |  |  |  | 46 |  |  |  | - |  |  |  | - |  |  |  | 711 |  |  |  | 46 |
Asset-backed securities |  | - |  |  |  | - |  |  |  | 12,333 |  |  |  | 698 |  |  |  | 12,333 |  |  |  | 698 |
Total temporarily impaired | $ | 153,118 |  |  | $ | 15,751 |  |  | $ | 375,245 |  |  | $ | 73,290 |  |  | $ | 528,363 |  |  | $ | 89,041 |

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Held to maturity securities with unrealized losses as of September 30, 2023 and December 31, 2022, aggregated by investment category and length of time the individual securities have been in an unrealized loss position, were as follows:

| September 30, 2023 |
| 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 | $ | - |  |  | $ | - |  |  | $ | 2,575 |  |  | $ | 396 |  |  | $ | 2,575 |  |  | $ | 396 |
State and municipal |  | 125 |  |  |  | 6 |  |  |  | 153,293 |  |  |  | 42,980 |  |  |  | 153,418 |  |  |  | 42,986 |
Mortgage-backed |  | - |  |  |  | - |  |  |  | 160,946 |  |  |  | 33,599 |  |  |  | 160,946 |  |  |  | 33,599 |
Corporate |  | - |  |  |  | - |  |  |  | 15,251 |  |  |  | 3,117 |  |  |  | 15,251 |  |  |  | 3,117 |
Asset-backed securities |  | - |  |  |  | - |  |  |  | 603 |  |  |  | 39 |  |  |  | 603 |  |  |  | 39 |
Total temporarily impaired | $ | 125 |  |  | $ | 6 |  |  | $ | 332,668 |  |  | $ | 80,131 |  |  | $ | 332,793 |  |  | $ | 80,137 |

| December 31, 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 | $ | - |  |  | $ | - |  |  | $ | 2,545 |  |  | $ | 421 |  |  | $ | 2,545 |  |  | $ | 421 |
State and municipal |  | 13,457 |  |  |  | 1,899 |  |  |  | 149,016 |  |  |  | 37,456 |  |  |  | 162,473 |  |  |  | 39,355 |
Mortgage-backed |  | 25,582 |  |  |  | 822 |  |  |  | 145,024 |  |  |  | 29,046 |  |  |  | 170,606 |  |  |  | 29,868 |
Corporate |  | 5,296 |  |  |  | 603 |  |  |  | 10,771 |  |  |  | 1,682 |  |  |  | 16,067 |  |  |  | 2,285 |
Asset-backed securities |  | - |  |  |  | - |  |  |  | 897 |  |  |  | 77 |  |  |  | 897 |  |  |  | 77 |
Total temporarily impaired | $ | 44,335 |  |  | $ | 3,324 |  |  | $ | 308,253 |  |  | $ | 68,682 |  |  | $ | 352,588 |  |  | $ | 72,006 |

17

ChoiceOne evaluates all securities on a quarterly basis to determine if an ACL and corresponding impairment charge should be recorded. Consideration is given to the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of ChoiceOne to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value of amortized cost basis. ChoiceOne believes that unrealized losses on securities were temporary in nature and were caused primarily by changes in interest rates, increased credit spreads, and reduced market liquidity and were not caused by the credit status of the issuer. No ACL was recorded in the three and nine months ended September 30, 2023, and no other-than-temporary impairment charges were recorded in the same periods in 2022.

At September 30, 2023 and December 31, 2022, there were 591 and 611 securities with an unrealized loss, respectively. Unrealized losses have not been recognized into income because the issuers’ bonds are of high credit quality, and management does not intend to sell prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions. The issuers continue to make timely principal and interest payments on the bonds. The fair value is expected to recover as the bonds approach maturity.

The majority of unrealized losses at September 30, 2023, are related to U.S. Treasury notes and bonds, state and municipal bonds and mortgage backed securities. The U.S. Treasury notes are guaranteed by the U.S. government and 100% of the notes are rated AA or better. State and municipal bonds are backed by the taxing authority of the bond issuer or the revenues from the bond. On September 30, 2023, 86% of state and municipal bonds held are rated AA or better, 11% are A rated and 3% are not rated. Of the mortgage-backed securities held on September 30, 2023, 38% were issued by US government sponsored entities and agencies, and rated AA, 39% are AAA rated private issue and collateralized mortgage obligation, and 23% are unrated privately issued mortgage-backed securities with structured credit enhancement and collateralized mortgage obligation.

18

Presented below is a schedule of maturities of securities as of September 30, 2023. Available for sale securities are reported at fair value and held to maturity securities are reported at amortized cost. 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 |  |  | 2023 |
U.S. Government and federal agency | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |
U.S. Treasury notes and bonds |  | - |  |  |  | 55,662 |  |  |  | 21,370 |  |  |  | - |  |  |  | 77,032 |
State and municipal |  | 1,854 |  |  |  | 9,677 |  |  |  | 36,082 |  |  |  | 165,101 |  |  |  | 212,714 |
Corporate |  | 509 |  |  |  | - |  |  |  | 200 |  |  |  | — |  |  |  | 709 |
Asset-backed securities |  | — |  |  |  | 8,195 |  |  |  | 3,090 |  |  |  | — |  |  |  | 11,285 |
Total debt securities |  | 2,363 |  |  |  | 73,534 |  |  |  | 60,742 |  |  |  | 165,101 |  |  |  | 301,740 |
Mortgage-backed securities |  | 14,001 |  |  |  | 59,091 |  |  |  | 109,991 |  |  |  | 5,981 |  |  |  | 189,064 |
Total Available for Sale | $ | 16,364 |  |  | $ | 132,625 |  |  | $ | 170,733 |  |  | $ | 171,082 |  |  | $ | 490,804 |

| 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 |  |  | 2023 |
U.S. Government and federal agency | $ | — |  |  | $ | 2,971 |  |  | $ | - |  |  | $ | — |  |  | $ | 2,971 |
State and municipal |  | 1,056 |  |  |  | 9,425 |  |  |  | 80,002 |  |  |  | 106,097 |  |  |  | 196,580 |
Corporate |  | — |  |  |  | - |  |  |  | 20,005 |  |  |  | - |  |  |  | 20,005 |
Asset-backed securities |  | — |  |  |  | 642 |  |  |  | — |  |  |  | — |  |  |  | 642 |
Total debt securities |  | 1,056 |  |  |  | 13,038 |  |  |  | 100,007 |  |  |  | 106,097 |  |  |  | 220,198 |
Mortgage-backed securities |  | 14,753 |  |  |  | 30,664 |  |  |  | 149,128 |  |  |  | — |  |  |  | 194,545 |
Total Held to Maturity | $ | 15,809 |  |  | $ | 43,702 |  |  | $ | 249,135 |  |  | $ | 106,097 |  |  | $ | 414,743 |

Following is information regarding unrealized gains and losses on equity securities for the three and nine months ended September 30, 2023 and 2022:

|  | Three Months Ended |  |  | Nine Months Ended |
|  | September 30, |  |  | September 30, |
|  | 2023 |  |  | 2022 |  |  | 2023 |  |  | 2022 |
Net gains and (losses) recognized during the period |  | $ | (205 | ) |  | $ | (323 | ) |  | $ | (527 | ) |  | $ | (1,006 | )
Less: Net gains and (losses) recognized during the period on securities sold |  |  | (71 | ) |  | — |  |  |  | (71 | ) |  |  | — |
Unrealized gains and (losses) recognized during the reporting period on securities still held at the reporting date |  | $ | (134 | ) |  | $ | (323 | ) |  | $ | (456 | ) |  | $ | (1,006 | )

19

NOTE 3 – LOANS AND ALLOWANCE FOR CREDIT LOSSES

Loans by type as a percentage of the portfolio were as follows:

| September 30, 2023 |  |  | December 31, 2022 |  |  |  |  |
(Dollars in thousands) | Balance |  | % |  |  | Balance |  | % |  |  | Percent Increase (Decrease)
Agricultural | $ | 43,290 |  |  | 3.31 | % |  | $ | 64,159 |  |  | 5.39 | % |  |  | (32.53 | ) | %
Commercial and Industrial |  | 222,357 |  |  | 16.98 | % |  |  | 210,210 |  |  | 17.67 | % |  |  | 5.78 |  | %
Commercial Real Estate |  | 709,960 |  |  | 54.20 | % |  |  | 630,953 |  |  | 53.03 | % |  |  | 12.52 |  | %
Consumer |  | 37,605 |  |  | 2.87 | % |  |  | 39,808 |  |  | 3.35 | % |  |  | (5.53 | ) | %
Construction Real Estate |  | 16,477 |  |  | 1.26 | % |  |  | 14,736 |  |  | 1.24 | % |  |  | 11.81 |  | %
Residential Real Estate |  | 256,348 |  |  | 19.57 | % |  |  | 229,916 |  |  | 19.32 | % |  |  | 11.50 |  | %
Loans to Other Financial Institutions |  | 23,763 |  |  | 1.81 | % |  |  | - |  |  | 0.00 | % |  |  | 100.00 |  | %
Gross Loans | $ | 1,309,800 |  |  |  |  | $ | 1,189,782 |  |  |  |  |  |  |
Allowance for credit losses |  | 14,872 |  |  | 1.14 | % |  |  | 7,619 |  |  | 0.64 | % |  |  |  |
Net loans | $ | 1,294,928 |  |  |  |  | $ | 1,182,163 |  |  |  |  |  |  |

20

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

|  |  |  |  | Commercial |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Loans to Other |  |  |  |  |  |  |
(Dollars in thousands) |  |  |  |  | and |  |  |  |  |  | Commercial |  |  | Construction |  |  | Residential |  |  | Financial |  |  |  |  |  |  |
|  | Agricultural |  |  | Industrial |  |  | Consumer |  |  | Real Estate |  |  | Real Estate |  |  | Real Estate |  |  | Institutions |  |  | Unallocated |  |  | Total |
Allowance for Credit Losses Three Months Ended September 30, 2023 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance |  | $ | 78 |  |  | $ | 2,896 |  |  | $ | 885 |  |  | $ | 7,237 |  |  | $ | 70 |  |  | $ | 3,376 |  |  | $ | 40 |  |  | $ | — |  |  | $ | 14,582 |
Charge-offs |  |  | — |  |  |  | (73 | ) |  |  | (161 | ) |  |  | — |  |  |  | — |  |  |  | (27 | ) |  |  | — |  |  |  | — |  |  |  | (261 | )
Recoveries |  |  | — |  |  |  | 28 |  |  |  | 80 |  |  |  | — |  |  |  | — |  |  |  | 5 |  |  |  | — |  |  |  | — |  |  |  | 113 |
Provision |  |  | 5 |  |  |  | (328 | ) |  |  | 22 |  |  |  | 908 |  |  |  | (19 | ) |  |  | (150 | ) |  |  | — |  |  |  | — |  |  |  | 438 |
Ending balance |  | $ | 83 |  |  | $ | 2,523 |  |  | $ | 826 |  |  | $ | 8,145 |  |  | $ | 51 |  |  | $ | 3,204 |  |  | $ | 40 |  |  | $ | — |  |  | $ | 14,872 |
Allowance for Credit Losses Nine Months Ended September 30, 2023 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance |  | $ | 144 |  |  | $ | 1,361 |  |  | $ | 310 |  |  | $ | 4,822 |  |  | $ | 63 |  |  | $ | 906 |  |  | $ | — |  |  | $ | 13 |  |  | $ | 7,619 |
Cumulative effect of change in accounting principle |  |  | 14 |  |  |  | 1,587 |  |  |  | 541 |  |  |  | 3,006 |  |  |  | 20 |  |  |  | 2,010 |  |  |  | — |  |  |  | (13 | ) |  |  | 7,165 |
Charge-offs |  |  | — |  |  |  | (73 | ) |  |  | (432 | ) |  |  | — |  |  |  | — |  |  |  | (27 | ) |  |  | — |  |  |  | — |  |  |  | (532 | )
Recoveries |  |  | — |  |  |  | 57 |  |  |  | 208 |  |  |  | 13 |  |  |  | — |  |  |  | 10 |  |  |  | — |  |  |  | — |  |  |  | 288 |
Provision |  |  | (75 | ) |  |  | (409 | ) |  |  | 199 |  |  |  | 304 |  |  |  | (32 | ) |  |  | 305 |  |  |  | 40 |  |  |  | — |  |  |  | 332 |
Ending balance |  | $ | 83 |  |  | $ | 2,523 |  |  | $ | 826 |  |  | $ | 8,145 |  |  | $ | 51 |  |  | $ | 3,204 |  |  | $ | 40 |  |  | $ | — |  |  | $ | 14,872 |
Individually evaluated for credit loss |  | $ | 3 |  |  | $ | 89 |  |  | $ | — |  |  | $ | 347 |  |  | $ | — |  |  | $ | 45 |  |  | $ | — |  |  | $ | — |  |  | $ | 484 |
Collectively evaluated for credit loss |  | $ | 80 |  |  | $ | 2,434 |  |  | $ | 826 |  |  | $ | 7,798 |  |  | $ | 51 |  |  | $ | 3,159 |  |  | $ | 40 |  |  | $ | — |  |  | $ | 14,388 |
Loans |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
September 30, 2023 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for credit loss |  | $ | 65 |  |  | $ | 269 |  |  | $ | 6 |  |  | $ | 1,070 |  |  | $ | — |  |  | $ | 1,738 |  |  | $ | — |  |  |  |  |  | $ | 3,148 |
Collectively evaluated for credit loss |  |  | 43,225 |  |  |  | 222,088 |  |  |  | 37,599 |  |  |  | 708,890 |  |  |  | 16,477 |  |  |  | 254,610 |  |  |  | 23,763 |  |  |  |  |  |  | 1,306,652 |
Ending balance |  | $ | 43,290 |  |  | $ | 222,357 |  |  | $ | 37,605 |  |  | $ | 709,960 |  |  | $ | 16,477 |  |  | $ | 256,348 |  |  | $ | 23,763 |  |  |  |  |  | $ | 1,309,800 |

21

|  |  |  | 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 |

|  |  |  | 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, 2022 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment | $ | 2 |  |  | $ | 14 |  |  | $ | 1 |  |  | $ | 5 |  |  | $ | — |  |  | $ | 131 |  |  | $ | — |  |  | $ | 153 |
Collectively evaluated for impairment | $ | 142 |  |  | $ | 1,347 |  |  | $ | 309 |  |  | $ | 4,817 |  |  | $ | 63 |  |  | $ | 775 |  |  | $ | 13 |  |  | $ | 7,466 |
Loans |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
December 31, 2022 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment | $ | 23 |  |  | $ | 177 |  |  | $ | 7 |  |  | $ | 165 |  |  | $— |  |  | $ | 2,474 |  |  |  |  |  | $ | 2,846 |
Collectively evaluated for impairment |  | 64,136 |  |  |  | 206,074 |  |  |  | 39,793 |  |  |  | 622,131 |  |  |  | 14,736 |  |  |  | 225,792 |  |  |  |  |  |  | 1,172,662 |
Acquired with deteriorated credit quality | — |  |  |  | 3,959 |  |  |  | 8 |  |  |  | 8,657 |  |  | — |  |  |  | 1,650 |  |  |  |  |  |  | 14,274 |
Ending balance | $ | 64,159 |  |  | $ | 210,210 |  |  | $ | 39,808 |  |  | $ | 630,953 |  |  | $ | 14,736 |  |  | $ | 229,916 |  |  |  |  |  | $ | 1,189,782 |

22

The provision for credit losses on loans was an expense of $438,000 and an expense of $332,000 in the third quarter and first nine months of 2023 respectively, compared to an expense of $100,000 in the same periods in the prior year. The provision expense was deemed necessary due to third quarter 2023 core loan growth of $60.6 million offset by the impact of improvements in the Federal Open Market Committee ("FOMC") forecast for unemployment and Gross Domestic Product ("GDP"). The FOMC forecast for change in real GDP improved from 1.0% in June 2023 to 2.1% in September 2023, while the unemployment rate forecast improved from 4.1% in June 2023 to 3.8% in September 2023.

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 net worth and debt service capacity of the borrower or of any pledged collateral. These loans, even if apparently protected by collateral value, have well-defined weaknesses related to adverse financial, managerial, economic, market, or political conditions that have jeopardized repayment of principal and interest as originally intended. Furthermore, there is the possibility that ChoiceOne will sustain some future loss if such weaknesses are not corrected. Clear loss potential, however, does not have to exist in any individual credit classified as substandard. Loans falling into this category should have clear action plans and timelines with benchmarks to return to a pass grade.

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 graded a risk rating “7” or worse.

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. 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.

23

The following table reflects the amortized cost basis of loans as of September 30, 2023 based on year of origination (dollars in thousands):

Commercial: | 2023 |  |  | 2022 |  |  | 2021 |  |  | 2020 |  |  | 2019 |  |  | Prior |  |  | Term Loans Total |  |  | Revolving Loans |  |  | Grand Total |
Agricultural |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | $ | 1,963 |  |  | $ | 4,129 |  |  | $ | 3,134 |  |  | $ | 1,813 |  |  | $ | 7,184 |  |  | $ | 18,311 |  |  | $ | 36,534 |  |  | $ | 6,512 |  |  | $ | 43,046 |
Special mention |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 176 |  |  |  | 68 |  |  |  | 244 |  |  |  | - |  |  |  | 244 |
Substandard |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Doubtful |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Loss |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Total | $ | 1,963 |  |  | $ | 4,129 |  |  | $ | 3,134 |  |  | $ | 1,813 |  |  | $ | 7,360 |  |  | $ | 18,379 |  |  | $ | 36,778 |  |  | $ | 6,512 |  |  | $ | 43,290 |
Current year-to-date gross write-offs | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |
Commercial and Industrial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | $ | 17,445 |  |  | $ | 47,330 |  |  | $ | 25,078 |  |  | $ | 11,584 |  |  | $ | 11,077 |  |  | $ | 12,891 |  |  | $ | 125,405 |  |  | $ | 96,604 |  |  | $ | 222,009 |
Special mention |  | - |  |  |  | - |  |  |  | 31 |  |  |  | 39 |  |  |  | 83 |  |  |  | 82 |  |  |  | 235 |  |  |  | 7 |  |  |  | 242 |
Substandard |  | - |  |  |  | 60 |  |  |  | 30 |  |  |  | - |  |  |  | - |  |  |  | 16 |  |  |  | 106 |  |  |  | - |  |  |  | 106 |
Doubtful |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Loss |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Total | $ | 17,445 |  |  | $ | 47,390 |  |  | $ | 25,139 |  |  | $ | 11,623 |  |  | $ | 11,160 |  |  | $ | 12,989 |  |  | $ | 125,746 |  |  | $ | 96,611 |  |  | $ | 222,357 |
Current year-to-date gross write-offs | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | 71 |  |  | $ | - |  |  | $ | - |  |  | $ | 71 |  |  | $ | - |  |  | $ | 71 |
Commercial Real Estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | $ | 72,271 |  |  | $ | 137,771 |  |  | $ | 109,265 |  |  | $ | 73,112 |  |  | $ | 45,074 |  |  | $ | 141,265 |  |  | $ | 578,758 |  |  | $ | 129,070 |  |  | $ | 707,828 |
Special mention |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 572 |  |  |  | 572 |  |  |  | - |  |  |  | 572 |
Substandard |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 1,560 |  |  |  | 1,560 |  |  |  | - |  |  |  | 1,560 |
Doubtful |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Loss |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Total | $ | 72,271 |  |  | $ | 137,771 |  |  | $ | 109,265 |  |  | $ | 73,112 |  |  | $ | 45,074 |  |  | $ | 143,397 |  |  | $ | 580,890 |  |  | $ | 129,070 |  |  | $ | 709,960 |

24

Retail: | 2023 |  |  | 2022 |  |  | 2021 |  |  | 2020 |  |  | 2019 |  |  | Prior |  |  | Term Loans Total |  |  | Revolving Loans |  |  | Grand Total |
Consumer |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Performing | $ | 8,246 |  |  | $ | 14,922 |  |  | $ | 7,421 |  |  | $ | 3,332 |  |  | $ | 1,472 |  |  | $ | 1,404 |  |  | $ | 36,797 |  |  | $ | 808 |  |  | $ | 37,605 |
Nonperforming |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Nonaccrual |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Total | $ | 8,246 |  |  | $ | 14,922 |  |  | $ | 7,421 |  |  | $ | 3,332 |  |  | $ | 1,472 |  |  | $ | 1,404 |  |  | $ | 36,797 |  |  | $ | 808 |  |  | $ | 37,605 |
Current year-to-date gross write-offs | $ | 1 |  |  | $ | 13 |  |  | $ | 11 |  |  | $ | 28 |  |  | $ | - |  |  | $ | 1 |  |  | $ | 54 |  |  | $ | - |  |  | $ | 54 |
Construction real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Performing | $ | 777 |  |  | $ | 1,089 |  |  | $ | 557 |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | 2,423 |  |  | $ | 14,054 |  |  | $ | 16,477 |
Nonperforming |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Nonaccrual |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Total | $ | 777 |  |  | $ | 1,089 |  |  | $ | 557 |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | 2,423 |  |  | $ | 14,054 |  |  | $ | 16,477 |
Current year-to-date gross write-offs | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |
Residential real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Performing | $ | 38,656 |  |  | $ | 66,921 |  |  | $ | 29,360 |  |  | $ | 17,023 |  |  | $ | 13,292 |  |  | $ | 41,778 |  |  | $ | 207,030 |  |  | $ | 47,751 |  |  | $ | 254,781 |
Nonperforming |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Nonaccrual |  | - |  |  |  | 464 |  |  |  | 70 |  |  |  | - |  |  |  | - |  |  |  | 541 |  |  |  | 1,075 |  |  |  | 492 |  |  |  | 1,567 |
Total | $ | 38,656 |  |  | $ | 67,385 |  |  | $ | 29,430 |  |  | $ | 17,023 |  |  | $ | 13,292 |  |  | $ | 42,319 |  |  | $ | 208,105 |  |  | $ | 48,243 |  |  | $ | 256,348 |
Current year-to-date gross write-offs | $ | - |  |  | $ | 27 |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | 1 |  |  | $ | 28 |  |  | $ | - |  |  | $ | 28 |
Loans to Other Financial Institutions |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Performing | $ | 23,763 |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | 23,763 |  |  | $ | - |  |  | $ | 23,763 |
Nonperforming |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Nonaccrual |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Total | $ | 23,763 |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | 23,763 |  |  | $ | - |  |  | $ | 23,763 |
Current year-to-date gross write-offs | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |
Grand Total | $ | 71,442 |  |  | $ | 83,396 |  |  | $ | 37,408 |  |  | $ | 20,355 |  |  | $ | 14,764 |  |  | $ | 43,723 |  |  | $ | 271,088 |  |  | $ | 63,105 |  |  | $ | 334,193 |

Corporate Credit Exposure - Credit risk profile by credit worthiness category

(Dollars in thousands) | Agricultural |  |  | Commercial and Industrial |  |  | Commercial Real Estate |
| December 31, |  |  | December 31, |  |  | December 31, |
| 2022 |  |  | 2022 |  |  | 2022 |
Pass | $ | 63,867 |  |  | $ | 209,700 |  |  | $ | 624,555 |
Special Mention |  | 289 |  |  |  | 400 |  |  |  | 2,048 |
Substandard |  | 3 |  |  |  | 110 |  |  |  | 4,350 |
Doubtful |  | — |  |  |  | - |  |  |  | — |
Loss |  | - |  |  |  | - |  |  |  | - |
| $ | 64,159 |  |  | $ | 210,210 |  |  | $ | 630,953 |

Consumer Credit Exposure - Credit risk profile based on payment activity

25

(Dollars in thousands) | Consumer |  |  | Construction Real Estate |  |  | Residential Real Estate |
| December 31, |  |  | December 31, |  |  | December 31, |
| 2022 |  |  | 2022 |  |  | 2022 |
Performing | $ | 39,808 |  |  | $ | 14,736 |  |  | $ | 228,653 |
Nonperforming |  | — |  |  |  | — |  |  |  | — |
Nonaccrual |  | — |  |  |  | — |  |  |  | 1,263 |
| $ | 39,808 |  |  | $ | 14,736 |  |  | $ | 229,916 |

The following table presents the amortized cost basis as of September 30, 2023 of the loans modified to borrowers experiencing financial difficulty disaggregated by class of financing receivable and type of concession granted during the reporting period.

For the period ended: | September 30, 2023 |  |
| Term Extension |  |
|  |  |  | % of Total |  |
|  |  |  | Class of |  |
(Dollars in thousands) | Amortized |  |  | Financing |  |
| Cost Basis |  |  | Receivable |  |
Commercial and industrial | $ | 70 |  |  |  | 0 | % |
Residential real estate |  | 129 |  |  |  | 0 | % |
Total | $ | 199 |  |  |  |  |

26

The following table presents the financial effect by type of modification made to borrowers experiencing financial difficulty and class of financing receivable.

For the period ended: | September 30, 2023 |
| Term Extension |
Commercial and industrial | Termed out line of credit & termed out draw note |
Residential real estate | Provided with new twelve month payment plan to catch up on past due balance. |

The following table presents the period-end amortized cost basis of financing receivables that had a payment default during the period and were modified in the 12 months before default to borrowers experiencing financial difficulty.

For the period ended: | September 30, 2023 |
(Dollars in thousands) | Term extension |
Commercial and industrial |  | 70 |
Residential real estate |  | 129 |
Total | $ | 199 |

The following table presents the period-end amortized cost basis of loans that have been modified in the past 12 months to borrowers experiencing financial difficulty by payment status and class of financing receivable.

For the period ended: | September 30, 2023 |
(Dollars in thousands) | Current |  |  | 30-89 days |  |  | Greater than 90 days |  |  | Total |
Commercial and industrial |  | 62 |  |  |  | 8 |  |  |  | — |  |  |  | 70 |
Residential real estate |  | — |  |  |  | — |  |  |  | 129 |  |  |  | 129 |
Total | $ | 62 |  |  | $ | 8 |  |  | $ | 129 |  |  | $ | 199 |

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.

| 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 |

27

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 months ended September 30, 2022, which loans had been modified and classified as TDRs during the year prior to the default.

Nonaccrual loans by loan category as of September 30, 2023 were as follows:

(Dollars in thousands) | Nonaccrual loans with no ACL |  |  | Total nonaccrual loans |  |  | Interest income recognized during the period on nonaccrual loans |  |  | Interest income recognized during the period on nonaccrual loans |  |
Commercial and industrial | $ | — |  |  | $ | 103 |  |  | $ | — |  |  | $ | 5 |  |
Residential real estate |  | 457 |  |  |  | 1,567 |  |  |  | - |  |  |  | 10 |  |
Total nonaccrual loans | $ | 457 |  |  | $ | 1,670 |  |  | $ | — |  |  | $ | 15 |  |

Nonaccrual loans by loan category as of December 31, 2022 were as follows:

(Dollars in thousands) | Total nonaccrual loans |
Residential real estate | $ | 1,263 |
| $ | 1,263 |

28

The following schedule provides information regarding average balances of loans evaluated for impairment at December 31, 2022 and September 30, 2022 and interest recognized on impaired loans for the three months and nine months ended September 30, 2022:

|  |  |  | Unpaid |  |  |  |  |
(Dollars in thousands) | Recorded |  |  | Principal |  |  | Related |  |
| Investment |  |  | Balance |  |  | Allowance |  |
December 31, 2022 |  |  |  |  |  |  |  |  |
With no related allowance recorded |  |  |  |  |  |  |  |  |
Agricultural | $ | — |  |  | $ | — |  |  | $ | — |  |
Commercial and industrial |  | — |  |  |  | — |  |  |  | — |  |
Consumer |  | — |  |  |  | — |  |  |  | — |  |
Construction real estate |  | — |  |  |  | — |  |  |  | — |  |
Commercial real estate |  | — |  |  |  | — |  |  |  | — |  |
Residential real estate |  | 550 |  |  |  | 595 |  |  |  | — |  |
Subtotal |  | 550 |  |  |  | 595 |  |  |  | — |  |
With an allowance recorded |  |  |  |  |  |  |  |  |
Agricultural |  | 23 |  |  |  | 27 |  |  |  | 2 |  |
Commercial and industrial |  | 177 |  |  |  | 177 |  |  |  | 14 |  |
Consumer |  | 7 |  |  |  | 7 |  |  |  | 1 |  |
Construction real estate |  | — |  |  |  | — |  |  |  | — |  |
Commercial real estate |  | 165 |  |  |  | 165 |  |  |  | 5 |  |
Residential real estate |  | 1,924 |  |  |  | 1,954 |  |  |  | 131 |  |
Subtotal |  | 2,296 |  |  |  | 2,330 |  |  |  | 153 |  |
Total |  |  |  |  |  |  |  |  |
Agricultural |  | 23 |  |  |  | 27 |  |  |  | 2 |  |
Commercial and industrial |  | 177 |  |  |  | 177 |  |  |  | 14 |  |
Consumer |  | 7 |  |  |  | 7 |  |  |  | 1 |  |
Construction real estate |  | — |  |  |  | — |  |  |  | — |  |
Commercial real estate |  | 165 |  |  |  | 165 |  |  |  | 5 |  |
Residential real estate |  | 2,474 |  |  |  | 2,549 |  |  |  | 131 |  |
Total | $ | 2,846 |  |  | $ | 2,925 |  |  | $ | 153 |  |

|  |  |  | 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 |  |

29

Residential real estate |  | 2,070 |  |  |  | 2,149 |  |  |  | 143 |  |
Total | $ | 2,637 |  |  | $ | 2,914 |  |  | $ | 157 |  |

30

| 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 |
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 |  | 159 |  |  |  | 7 |
Residential real estate |  | 1,891 |  |  |  | 49 |
Subtotal |  | 3,418 |  |  |  | 59 |
Total |  |  |  |  |
Agricultural |  | 1,448 |  |  |  | - |
Commercial and industrial |  | 240 |  |  |  | 3 |
Consumer |  | 15 |  |  |  | - |
Construction real estate |  | - |  |  |  | - |
Commercial real estate |  | 182 |  |  |  | 7 |
Residential real estate |  | 2,042 |  |  |  | 49 |
Total | $ | 3,927 |  |  | $ | 59 |

31

An aging analysis of loans by loan category follows:

|  |  |  |  |  |  | Loans |  |  |  |  |  |  |  |  |  |  |  | Loans |
| Loans |  |  | Loans |  |  | Past Due |  |  |  |  |  |  |  |  |  |  |  | 90 Days |
| Past Due |  |  | Past Due |  |  | Greater |  |  |  |  |  |  |  |  |  |  |  | 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, 2023 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Agricultural | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 43,290 |  |  | $ | 43,290 |  |  | $ | — |
Commercial and industrial |  | 101 |  |  |  | — |  |  |  | 90 |  |  |  | 191 |  |  |  | 222,166 |  |  |  | 222,357 |  |  |  | — |
Consumer |  | 30 |  |  |  | 6 |  |  |  | — |  |  |  | 36 |  |  |  | 37,569 |  |  |  | 37,605 |  |  |  | — |
Commercial real estate |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 709,960 |  |  |  | 709,960 |  |  |  | — |
Construction real estate |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 16,477 |  |  |  | 16,477 |  |  |  | — |
Residential real estate |  | 1,320 |  |  |  | 30 |  |  |  | 702 |  |  |  | 2,052 |  |  |  | 254,296 |  |  |  | 256,348 |  |  |  |
Loans to Other Financial Institutions |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 23,763 |  |  |  | 23,763 |  |  |  |
| $ | 1,451 |  |  | $ | 36 |  |  | $ | 792 |  |  | $ | 2,279 |  |  | $ | 1,307,521 |  |  | $ | 1,309,800 |  |  | $ | — |

December 31, 2022 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Agricultural | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 64,159 |  |  | $ | 64,159 |  |  | $ | — |
Commercial and industrial |  | — |  |  |  | 171 |  |  |  | — |  |  |  | 171 |  |  |  | 210,039 |  |  |  | 210,210 |  |  |  | — |
Consumer |  | 39 |  |  |  | 7 |  |  |  | — |  |  |  | 46 |  |  |  | 39,762 |  |  |  | 39,808 |  |  |  | — |
Commercial real estate |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 630,953 |  |  |  | 630,953 |  |  |  | — |
Construction real estate |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 14,736 |  |  |  | 14,736 |  |  |  | — |
Residential real estate |  | 682 |  |  |  | — |  |  |  | 842 |  |  |  | 1,524 |  |  |  | 228,392 |  |  |  | 229,916 |  |  |  | — |
| $ | 721 |  |  | $ | 178 |  |  | $ | 842 |  |  | $ | 1,741 |  |  | $ | 1,188,041 |  |  | $ | 1,189,782 |  |  | $ | — |

(1) Includes nonaccrual loans.

The table below presents a roll forward of the accretable yield on the County Bank Corp. acquired loan portfolio for the year ended December 31, 2022 and the nine months ended September 30, 2023 (dollars in thousands):

(Dollars in thousands) |  | Purchased with credit deterioration |  |  | Purchased without credit deterioration |  |  | Acquired |
|  |  |  |  |  |  |  | Total |
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 December 31, 2022 |  |  | (553 | ) |  |  | (98 | ) |  |  | (651 | )
Balance January 1, 2023 |  |  | 1,927 |  |  |  | 1,078 |  |  |  | 3,005 |
Transfer from non-accretable to accretable yield |  |  | — |  |  |  | — |  |  |  | — |
Accretion January 1, 2023 through September 30, 2023 |  |  | (402 | ) |  |  | (405 | ) |  |  | (807 | )
Balance, September 30, 2023 |  | $ | 1,525 |  |  | $ | 673 |  |  | $ | 2,198 |

The table below presents a roll forward of the accretable yield on the Community Shores Bank Corporation acquired loan portfolio for the year ended December 31, 2022 and the nine months ended September 30, 2023 (dollars in thousands):

|  | Purchased with credit deterioration |  |  | Purchased without credit deterioration |  |  | Acquired |
|  |  |  |  |  |  |  | Total |
Balance January 1, 2022 |  | $ | 522 |  |  | $ | 197 |  |  | $ | 719 |
Transfer from non-accretable to accretable yield |  |  | 1,086 |  |  |  | — |  |  |  | 1,086 |
Accretion January 1, 2022 through December 31, 2022 |  |  | (993 | ) |  |  | (197 | ) |  |  | (1,190 | )
Balance January 1, 2023 |  |  | 615 |  |  |  | — |  |  |  | 615 |
Transfer from non-accretable to accretable yield |  |  | 622 |  |  |  | — |  |  |  | 622 |
Accretion January 1, 2023 through September 30, 2023 |  |  | (470 | ) |  |  | — |  |  |  | (470 | )
Balance, September 30, 2023 |  | $ | 767 |  |  |  | — |  |  | $ | 767 |

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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, |
| 2023 |  |  | 2022 |  |  | 2023 |  |  | 2022 |
Basic |  |  |  |  |  |  |  |  |  |  |
Net income | $ | 5,122 |  |  | $ | 5,813 |  |  | $ | 15,968 |  |  | $ | 16,956 |
Weighted average common shares outstanding |  | 7,537,996 |  |  |  | 7,507,538 |  |  |  | 7,528,887 |  |  |  | 7,500,877 |
Basic earnings per common shares | $ | 0.68 |  |  | $ | 0.77 |  |  | $ | 2.12 |  |  | $ | 2.26 |
Diluted |  |  |  |  |  |  |  |  |  |  |
Net income | $ | 5,122 |  |  | $ | 5,813 |  |  | $ | 15,968 |  |  | $ | 16,956 |
Weighted average common shares outstanding |  | 7,537,996 |  |  |  | 7,507,538 |  |  |  | 7,528,887 |  |  |  | 7,500,877 |
Plus dilutive stock options and restricted stock units |  | 30,038 |  |  |  | 12,820 |  |  |  | 33,273 |  |  |  | 17,279 |
Weighted average common shares outstanding and potentially dilutive shares |  | 7,568,034 |  |  |  | 7,520,358 |  |  |  | 7,562,160 |  |  |  | 7,518,156 |
Diluted earnings per common share | $ | 0.68 |  |  | $ | 0.77 |  |  | $ | 2.12 |  |  | $ | 2.26 |

There were 15,000 stock options that were considered anti-dilutive to earnings per share for the three and nine months ended September 30, 2023. 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. There were no restricted stock units that were considered anti-dilutive for the three and nine months ended September 30, 2023 and September 30, 2022.

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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, 2023 |  |  |  |  |  |  |  |  |  |  |  |  |  |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents | $ | 144,673 |  |  | $ | 144,673 |  |  | $ | 144,673 |  |  | $ | - |  |  | $ | - |
Equity securities at fair value |  | 7,262 |  |  |  | 7,262 |  |  |  | 4,543 |  |  |  | - |  |  |  | 2,719 |
Securities available for sale |  | 490,804 |  |  |  | 490,804 |  |  |  | 77,032 |  |  |  | 413,772 |  |  |  | - |
Securities held to maturity |  | 414,743 |  |  |  | 334,625 |  |  |  | - |  |  |  | 322,107 |  |  |  | 12,518 |
Federal Home Loan Bank and Federal |  |  |  |  |  |  |  |  |  |  |  |  |  |
Reserve Bank stock |  | 9,514 |  |  |  | 9,514 |  |  |  | - |  |  |  | 9,514 |  |  |  | - |
Loans held for sale |  | 5,222 |  |  |  | 5,378 |  |  |  | - |  |  |  | 5,378 |  |  |  | - |
Loans, net |  | 1,294,928 |  |  |  | 1,258,262 |  |  |  | - |  |  |  | - |  |  |  | 1,258,262 |
Accrued interest receivable |  | 10,491 |  |  |  | 10,491 |  |  |  | - |  |  |  | 10,491 |  |  |  | - |
Interest rate lock commitments |  | 60 |  |  |  | 60 |  |  |  | - |  |  |  | 60 |  |  |  | - |
Mortgage loan servicing rights |  | 3,944 |  |  |  | 6,050 |  |  |  | - |  |  |  | 6,050 |  |  |  | - |
Interest rate derivative contracts |  | 29,900 |  |  |  | 29,900 |  |  |  | - |  |  |  | 29,900 |  |  |  | - |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |
Noninterest-bearing deposits |  | 531,962 |  |  |  | 531,962 |  |  |  | 531,962 |  |  |  | - |  |  |  | - |
Interest-bearing deposits |  | 1,551,995 |  |  |  | 1,549,272 |  |  |  | - |  |  |  | 1,549,272 |  |  |  | - |
Brokered deposits |  | 49,238 |  |  |  | 49,137 |  |  |  | - |  |  |  | 49,137 |  |  |  | - |
Borrowings |  | 180,000 |  |  |  | 179,041 |  |  |  | - |  |  |  | 179,041 |  |  |  | - |
Subordinated debentures |  | 35,446 |  |  |  | 30,751 |  |  |  | - |  |  |  | 30,751 |  |  |  | - |
Accrued interest payable |  | 3,906 |  |  |  | 3,906 |  |  |  | - |  |  |  | 3,906 |  |  |  | - |
Interest rate derivative contracts |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
December 31, 2022 |  |  |  |  |  |  |  |  |  |  |  |  |  |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents | $ | 43,943 |  |  | $ | 43,943 |  |  | $ | 43,943 |  |  | $ | - |  |  | $ | - |
Equity securities at fair value |  | 8,566 |  |  |  | 8,566 |  |  |  | 6,024 |  |  |  | - |  |  |  | 2,542 |
Securities available for sale |  | 529,749 |  |  |  | 529,749 |  |  |  | 78,204 |  |  |  | 451,545 |  |  |  | - |
Securities held to maturity |  | 425,906 |  |  |  | 353,901 |  |  |  | - |  |  |  | 338,583 |  |  |  | 15,318 |
Federal Home Loan Bank and Federal |  |  |  |  |  |  |  |  |  |  |  |  |  |
Reserve Bank stock |  | 8,581 |  |  |  | 8,581 |  |  |  | - |  |  |  | 8,581 |  |  |  | - |
Loans held for sale |  | 4,834 |  |  |  | 4,979 |  |  |  | - |  |  |  | 4,979 |  |  |  | - |
Core loans, net |  | 1,182,163 |  |  |  | 1,123,198 |  |  |  | - |  |  |  | - |  |  |  | 1,123,198 |
Accrued interest receivable |  | 8,949 |  |  |  | 8,949 |  |  |  | - |  |  |  | 8,949 |  |  |  | - |
Interest rate lock commitments |  | 28 |  |  |  | 28 |  |  |  | - |  |  |  | 28 |  |  |  | - |
Mortgage loan servicing rights |  | 4,322 |  |  |  | 5,855 |  |  |  | - |  |  |  | 5,855 |  |  |  | - |
Interest rate derivative contracts |  | 9,204 |  |  |  | 9,204 |  |  |  | - |  |  |  | 9,204 |  |  |  | - |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |
Noninterest-bearing deposits |  | 599,579 |  |  |  | 599,579 |  |  |  | 599,579 |  |  |  | - |  |  |  | - |
Interest-bearing deposits |  | 1,518,424 |  |  |  | 1,514,294 |  |  |  | - |  |  |  | 1,514,294 |  |  |  | - |
Borrowings |  | 50,000 |  |  |  | 50,000 |  |  |  | - |  |  |  | 50,000 |  |  |  | - |
Subordinated debentures |  | 35,262 |  |  |  | 30,304 |  |  |  | - |  |  |  | 30,304 |  |  |  | - |
Accrued interest payable |  | 610 |  |  |  | 610 |  |  |  | - |  |  |  | 610 |  |  |  | - |
Interest rate derivative contracts |  | 5,823 |  |  |  | 5,823 |  |  |  | - |  |  |  | 5,823 |  |  |  | - |

34

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.

35

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, 2023 |  |  |  |  |  |  |  |  |  |  |
Equity securities | $ | 4,543 |  |  | $ | - |  |  | $ | 2,719 |  |  | $ | 7,262 |
Investment Securities, Available for Sale - September 30, 2023 |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury notes and bonds | $ | 77,032 |  |  | $ | - |  |  | $ | - |  |  | $ | 77,032 |
State and municipal |  | - |  |  |  | 212,714 |  |  |  | - |  |  |  | 212,714 |
Mortgage-backed |  | - |  |  |  | 189,064 |  |  |  | - |  |  |  | 189,064 |
Corporate |  | - |  |  |  | 709 |  |  |  | - |  |  |  | 709 |
Asset-backed securities |  | - |  |  |  | 11,285 |  |  |  | - |  |  |  | 11,285 |
Total | $ | 77,032 |  |  | $ | 413,772 |  |  | $ | - |  |  | $ | 490,804 |
Derivative Instruments - September 30, 2023 |  |  |  |  |  |  |  |  |  |  |
Interest rate derivative contracts - assets | $ | - |  |  | $ | 29,900 |  |  | $ | - |  |  | $ | 29,900 |
Interest rate derivative contracts - liabilities | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |
Equity Securities Held at Fair Value - December 31, 2022 |  |  |  |  |  |  |  |  |  |  |
Equity securities | $ | 6,024 |  |  | $ | - |  |  | $ | 2,542 |  |  | $ | 8,566 |
Investment Securities, Available for Sale - December 31, 2022 |  |  |  |  |  |  |  |  |  |  |
U. S. Government and federal agency | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |
U. S. Treasury notes and bonds |  | 78,204 |  |  |  | - |  |  |  | - |  |  |  | 78,204 |
State and municipal |  | - |  |  |  | 229,938 |  |  |  | - |  |  |  | 229,938 |
Mortgage-backed |  | - |  |  |  | 208,563 |  |  |  | - |  |  |  | 208,563 |
Corporate |  | - |  |  |  | 711 |  |  |  | - |  |  |  | 711 |
Asset-backed securities |  | - |  |  |  | 12,333 |  |  |  | - |  |  |  | 12,333 |
Total | $ | 78,204 |  |  | $ | 451,545 |  |  | $ | - |  |  | $ | 529,749 |
Derivative Instruments - December 31, 2022 |  |  |  |  |  |  |  |  |  |  |
Interest rate derivative contracts - assets | $ | - |  |  | $ | 9,204 |  |  | $ | - |  |  | $ | 9,204 |
Interest rate derivative contracts - liabilities | $ | - |  |  | $ | 5,823 |  |  | $ | - |  |  | $ | 5,823 |

36

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

| Nine Months Ended |
(Dollars in thousands) | September 30, |
| 2023 |  |  | 2022 |
Equity Securities Held at Fair Value |  |  |  |  |
Balance, January 1 | $ | 2,542 |  |  | $ | 1,768 |
Total realized and unrealized gains included in noninterest income |  | 67 |  |  |  | 18 |
Net purchases, sales, calls, and maturities |  | 110 |  |  |  | 75 |
Net transfers into Level 3 |  | - |  |  |  | - |
Balance, September 30, | $ | 2,719 |  |  | $ | 1,861 |
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, | $ | 67 |  |  | $ | 18 |
Investment Securities, Available for Sale |  |  |  |  |
Balance, January 1 | $ | - |  |  | $ | 21,050 |
Total unrealized gains included in other comprehensive income |  | - |  |  |  | - |
Net purchases, sales, calls, and maturities |  | - |  |  |  | - |
Net transfers into Level 3 |  | - |  |  |  | - |
Transfer to held to maturity |  | - |  |  |  | (21,050 | )
Balance, September 30, | $ | - |  |  | $ | - |
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, | $ | - |  |  | $ | - |

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, 2023 and December 31, 2022 primarily consist of common and preferred equity securities of community banks. ChoiceOne estimates the fair value of these 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:

37

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) |
Collateral Dependent Loans |  |  |  |  |  |  |  |  |  |  |
September 30, 2023 | $ | 1,896 |  |  | $ | - |  |  | $ | - |  |  | $ | 1,896 |
December 31, 2022 | $ | 2,846 |  |  | $ | - |  |  | $ | - |  |  | $ | 2,846 |
Other Real Estate |  |  |  |  |  |  |  |  |  |  |
September 30, 2023 | $ | 122 |  |  | $ | - |  |  | $ | - |  |  | $ | 122 |
December 31, 2022 | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |

Collateral dependent loans categorized as Level 3 assets consist of non-homogeneous loans that are considered non-accrual or higher risk. 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 collateral dependent loans that were posted to the allowance for credit losses and write-downs of other real estate that were posted to a valuation account.

38

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.

39

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) | 2023 |  |  | 2022 |  |  | 2023 |  |  | 2022 |
Service charges and fees on deposit accounts | $ | 1,176 |  |  | $ | 1,152 |  |  | $ | 3,307 |  |  | $ | 3,218 |
Interchange income |  | 1,206 |  |  |  | 1,306 |  |  |  | 3,613 |  |  |  | 3,782 |
Investment commission income |  | 173 |  |  |  | 158 |  |  |  | 541 |  |  |  | 596 |
Trust fee income |  | 197 |  |  |  | 174 |  |  |  | 577 |  |  |  | 528 |
Other charges and fees for customer services |  | 184 |  |  |  | 113 |  |  |  | 476 |  |  |  | 387 |
Noninterest income from contracts with customers within the scope of ASC 606 |  | 2,936 |  |  |  | 2,903 |  |  |  | 8,514 |  |  |  | 8,511 |
Noninterest income within the scope of other GAAP topics |  | 768 |  |  |  | 144 |  |  |  | 2,346 |  |  |  | 1,812 |
Total noninterest income | $ | 3,704 |  |  | $ | 3,047 |  |  | $ | 10,860 |  |  | $ | 10,323 |

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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 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 pay a coupon rate equal to SOFR while receiving a fixed coupon rate of 2.41%. In March 2023, ChoiceOne terminated all Pay Floating Swap Agreements for a cash payment of $4.2 million. The loss will be amortized into interest income over 13 months, which was the remaining period of the swap agreements.

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.

In the fourth quarter of 2022, ChoiceOne entered into four pay-fixed/receive-floating interest rate swaps for a total notional amount of $201.0 million that were designated as fair value hedges. These derivatives hedge the risk of changes in fair value of certain available for sale securities for changes in the SOFR benchmark interest rate component of the fixed rate bonds. All four of these hedges were effective immediately on December 22, 2022. Of the total notional value, $101.9 million has a ten-year term set to expire in 2032, with the benchmark SOFR interest rate risk component of the fixed rate bonds equal to 3.390%. Of the total notional value, $50.0 million has a nine-year term set to expire in 2031, with the benchmark SOFR interest rate risk component of the fixed rate bonds equal to 3.4015%. The remaining notional value of $49.1 million has a nine-year term set to expire in 2031, with the benchmark SOFR interest rate risk component of the fixed rate bond equal to 3.4030%. ChoiceOne adopted ASC2022-01, as of December 20, 2022, to use the portfolio layer method. The fair value basis adjustment associated with available-for-sale fixed rate bonds initially results in an adjustment to AOCI. For available-for-sale securities subject to fair value hedge accounting, the changes in the fair value of the fixed rate bonds related to the hedged risk (the benchmark interest rate component and the partial term) are then reclassed from AOCI to current earnings offsetting the fair value measurement change of the interest rate swap, which is also recorded in current earnings. Net cash settlements are received/paid semi-annually, with the first starting in March 2023, and will be included in interest income.

Net cash settlements received on these four pay-fixed/receive-floating swaps were $959,000 and $2.3 million for the three and nine months ended September 30, 2023, which were included in interest income.

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The table below presents the fair value of derivative financial instruments as well as the classification within the consolidated statements of financial condition:

| September 30, 2023 |  |  | December 31, 2022 |
(Dollars in thousands) | Balance Sheet Location | Fair Value |  |  | Balance Sheet Location | Fair Value |
Derivatives designated as hedging instruments |  |  |  |  |  |  |
Interest rate contracts | Other Assets | $ | 29,900 |  |  | Other Assets | $ | 9,204 |
Interest rate contracts | Other Liabilities | $ | — |  |  | Other Liabilities | $ | 5,823 |

The table below presents the effect of fair value and cash flow hedge accounting on the consolidated statements of operations for the periods presented:

| 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, 2023 |  |  | Three months ended September 30, 2022 |  |  | Nine months ended September 30, 2023 |  |  | Nine months ended September 30, 2022 |
| Interest Income |  | Interest Expense |  |  | Interest Income |  | Interest Expense |  |  | 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 | $ | (30 | ) | $ | - |  |  | $ | (8 | ) | $ | (209 | ) |  | $ | (534 | ) | $ | - |  |  | $ | 414 |  | $ | (364 | )
Gain or (loss) on fair value hedging relationships: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate contracts: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Hedged items | $ | (9,189 | ) | $ | - |  |  | $ | (4,229 | ) | $ | - |  |  | $ | (9,920 | ) | $ | - |  |  | $ | (4,300 | ) | $ | - |
Derivatives designated as hedging instruments | $ | 9,097 |  | $ | - |  |  | $ | 4,229 |  | $ | - |  |  | $ | 9,842 |  | $ | - |  |  | $ | 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 | $ | (897 | ) | $ | - |  |  | $ | - |  | $ | - |  |  | $ | (1,940 | ) | $ | - |  |  | $ | - |  | $ | - |
Amount excluded from effectiveness testing recognized in earnings based on amortization approach | $ | - |  | $ | - |  |  | $ | - |  | $ | (209 | ) |  | $ | - |  | $ | - |  |  | $ | - |  | $ | (364 | )

The table below presents the cumulative basis adjustments on hedged items designated as fair value hedges and the related amortized cost of those items as of the periods presented:

|  |  | September 30, 2023 |
|  |  | Cumulative amount of Fair |
|  |  | Value Hedging Adjustment |
Line Item in the Statement of |  |  | included in the carrying |
Financial Position in which the | Amortized cost of the |  | amount of the Hedged |
Hedged Item is included | Hedged Assets/(Liabilities) |  | Assets/(Liabilities) |
Securities available for sale | $ | 223,667 |  | $ | (11,851 | )

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Item 2. Management’s Discussion and Ana lysis 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 credit 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 concerning pension and other post-retirement benefit plans involve judgments 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, 2022 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.

RESULTS OF OPERATIONS

ChoiceOne reported net income of $5,122,000 and $15,968,000 for the three and nine months ended September 30, 2023, compared to $5,813,000 and $16,956,000 for the same periods in 2022. Diluted earnings per share were $0.68 and $2.12 in the three and nine months ended September 30, 2023, compared to $0.77 and $2.26 per share in the same periods in the prior year. The increase in deposit costs during the first nine months of 2023 has negatively impacted earnings, offset by higher interest income from higher interest rates on loans and organic loan growth.

Total assets as of September 30, 2023, increased $90.5 million as compared to June 30, 2023. The asset growth during the third quarter is due to an increase in cash of $67.9 million and an increase in core loans of $60.6 million offset by a decrease in securities of $41.2 million. Asset growth from September 30, 2022 to September 30, 2023 of $210.7 million is due to an increase in cash of $93.2 million and an increase in core loans of $153.6 million or 13.6% offset by a decrease in securities of $52.5 million. ChoiceOne management has intentionally increased liquidity to fund organic loan growth while shifting earning assets into loans as demonstrated by the growth during the three and nine months ended September 30, 2023.

Deposits, excluding brokered deposits, increased by $48.9 million or an annualized 9.6% in the third quarter of 2023 and decreased $72.7 million or 3.4% as of September 30, 2023 compared to September 30, 2022. The decrease in deposits since September 30, 2022 was largely concentrated in the first quarter of 2023 as a result of a combination of customers using cash on hand for debt payoffs, seasonal tax and municipal bond payments, and customers seeking higher rates in money market securities or other investments. Deposits grew in the third quarter of 2023 due to new business, recapture of deposit losses, and some seasonality in municipal balances. ChoiceOne continues to be proactive in managing its liquidity position by using brokered deposits, the Bank Term Funding Program ("BTFP") and FHLB advances to ensure ample liquidity. At September 30, 2023, total available borrowing capacity from all sources was $796.1 million. Uninsured deposits totaled $724.1 million or 34.7% of deposits at September 30, 2023.

The cost of deposits increased to 1.36% during the three months ended September 30, 2023, compared to 0.98% and 0.29% for the three months ended June 30, 2023 and September 30, 2022, respectively, due to rising short term interest rates and is expected to continue to increase as deposits reprice and customers migrate to CD products. ChoiceOne is actively managing these costs and expects rates paid on deposits to continue to lag the federal funds rate. Interest expense on borrowings for the three and nine months ended September 30, 2023, increased $2.5 million and $5.0 million, respectively, compared to the same periods in the prior year, due to increases in borrowing amounts and interest rates. Borrowings include $160 million from the BTFP with a fixed rate of 4.71% through May 2024 and $20 million of FHLB borrowings with a fixed rate of 4.88% through July of 2025. This funding structure has helped moderate interest

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expense increases in the third quarter as rates have risen. Total cost of funds (annualized interest paid on all interest bearing liabilities over average interest bearing liabilities plus demand deposits) increased to 1.70% in the third quarter of 2023 compared to 1.29% in the second quarter of 2023 and 0.35% in the second quarter of 2022.

The return on average assets and return on average shareholders’ equity were 0.80% and 11.31%, respectively, for the third quarter of 2023, compared to 0.97% and 14.11%, respectively, for the same period in 2022. The return on average assets and return on average shareholders’ equity were 0.87% and 12.26%, respectively, for the first nine months of 2023, compared to 0.95% and 12.32%, respectively, for the same period in 2022. The decrease in the return on average shareholders' equity in the three months ended September 30, 2023, was caused by an increase in shareholders’ equity. The increase in shareholders' equity was related to a decrease in unrealized losses on available for sale securities and an increase in the fair value of derivatives.

Dividends

Cash dividends of $2.0 million or $0.26 per share were declared in the third quarter of 2023, compared to $1.9 million or $0.25 per share in the third quarter of 2022. Cash dividends declared in the first nine months of 2023 were $5.9 million or $0.78 per share, compared to $5.6 million or $0.75 per share in the same period during the prior year. The cash dividend payout percentage was 36.8% for the first nine months of 2023, compared to 33.2% 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 months ended September 30, 2023 and 2022. Table 1 documents ChoiceOne’s average balances and interest income and expense, as well as the average rates earned or paid on assets and liabilities. Table 2 documents the effect on interest income and expense of changes in volume (average balance) and interest rates. These tables are referred to in the discussion of interest income, interest expense and net interest income.

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Table 1 – Average Balances and Tax-Equivalent Interest Rates

| Three Months Ended September 30, |  |
| 2023 |  |  | 2022 |  |
(Dollars in thousands) | Average |  |  |  |  |  |  |  |  | Average |  |  |  |  |  |  |  |
| Balance |  |  | Interest |  |  | Rate |  |  | Balance |  |  | Interest |  |  | Rate |  |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loans (1)(3)(4)(5)(6) | $ | 1,278,421 |  |  | $ | 17,779 |  |  |  | 5.52 |  | % | $ | 1,128,679 |  |  | $ | 13,622 |  |  |  | 4.83 |  | %
Taxable securities (2)(6) |  | 741,287 |  |  |  | 5,345 |  |  |  | 2.86 |  |  |  | 774,040 |  |  |  | 3,943 |  |  |  | 2.04 |  |
Nontaxable securities (1) |  | 294,498 |  |  |  | 1,797 |  |  |  | 2.42 |  |  |  | 305,661 |  |  |  | 1,853 |  |  |  | 2.43 |  |
Other |  | 128,704 |  |  |  | 1,766 |  |  |  | 5.44 |  |  |  | 43,418 |  |  |  | 238 |  |  |  | 2.19 |  |
Interest-earning assets |  | 2,442,910 |  |  |  | 26,687 |  |  |  | 4.33 |  |  |  | 2,251,798 |  |  |  | 19,656 |  |  |  | 3.49 |  |
Noninterest-earning assets |  | 125,330 |  |  |  |  |  |  |  |  |  | 137,752 |  |  |  |  |  |  |  |
Total assets | $ | 2,568,240 |  |  |  |  |  |  |  |  | $ | 2,389,550 |  |  |  |  |  |  |  |
Liabilities and Shareholders' Equity: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-bearing demand deposits | $ | 856,485 |  |  | $ | 2,885 |  |  |  | 1.34 |  | % | $ | 915,698 |  |  | $ | 972 |  |  |  | 0.42 |  | %
Savings deposits |  | 357,687 |  |  |  | 462 |  |  |  | 0.51 |  |  |  | 464,382 |  |  |  | 182 |  |  |  | 0.16 |  |
Certificates of deposit |  | 336,419 |  |  |  | 3,308 |  |  |  | 3.90 |  |  |  | 196,160 |  |  |  | 410 |  |  |  | 0.84 |  |
Brokered deposit |  | 44,868 |  |  |  | 582 |  |  |  | 5.15 |  |  |  | - |  |  |  | - |  |  |  | 0.00 |  |
Borrowings |  | 181,739 |  |  |  | 2,171 |  |  |  | 4.74 |  |  |  | 2,414 |  |  |  | 8 |  |  |  | 1.40 |  |
Subordinated debentures |  | 35,413 |  |  |  | 413 |  |  |  | 4.62 |  |  |  | 35,168 |  |  |  | 375 |  |  |  | 4.27 |  |
Other |  | 20,480 |  |  |  | 257 |  |  |  | 4.97 |  |  |  | - |  |  |  | - |  |  |  | 0.00 |  |
Interest-bearing liabilities |  | 1,833,091 |  |  |  | 10,078 |  |  |  | 2.18 |  |  |  | 1,613,822 |  |  |  | 1,947 |  |  |  | 0.48 |  |
Demand deposits |  | 540,497 |  |  |  |  |  |  |  |  |  | 593,793 |  |  |  |  |  |  |  |
Other noninterest-bearing liabilities |  | 13,433 |  |  |  |  |  |  |  |  |  | 17,177 |  |  |  |  |  |  |  |
Total liabilities |  | 2,387,021 |  |  |  |  |  |  |  |  |  | 2,224,792 |  |  |  |  |  |  |  |
Shareholders' equity |  | 181,219 |  |  |  |  |  |  |  |  |  | 164,758 |  |  |  |  |  |  |  |
Total liabilities and shareholders' equity | $ | 2,568,240 |  |  |  |  |  |  |  |  | $ | 2,389,550 |  |  |  |  |  |  |  |
Net interest income (tax-equivalent basis) (Non-GAAP) (1) |  |  |  | $ | 16,609 |  |  |  |  |  |  |  |  | $ | 17,709 |  |  |  |  |
Net interest margin (tax-equivalent basis) (Non-GAAP) (1) |  |  |  |  |  |  |  | 2.70 |  | % |  |  |  |  |  |  |  | 3.15 |  | %
Reconciliation to Reported Net Interest Income |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net interest income (tax-equivalent basis) (Non-GAAP) (1) |  |  |  | $ | 16,609 |  |  |  |  |  |  |  |  | $ | 17,709 |  |  |  |  |
Adjustment for taxable equivalent interest |  |  |  |  | (383 | ) |  |  |  |  |  |  |  |  | (371 | ) |  |  |  |
Net interest income (GAAP) |  |  |  | $ | 16,226 |  |  |  |  |  |  |  |  | $ | 17,338 |  |  |  |  |
Net interest margin (GAAP) |  |  |  |  |  |  |  | 2.64 |  | % |  |  |  |  |  |  |  | 3.08 |  | %

(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 $1.6 million and $1.2 million in the third quarter of 2023 and 2022, respectively. PPP loan average balances were $0 and $879,000 in the third quarter of 2023 and 2022, respectively.
(5)
Interest on loans included net origination fees, accretion income, and PPP fees. Accretion income was $444,000 and $440,000 in the third quarter of 2023 and 2022, respectively. PPP fees were approximately $0 and $68,000 in the third quarter of 2023 and 2022, respectively.
(6)
Interest on loans and securities included derivative income and expense. Derivative income in securities was $637,000 and derivative expense in securities was $157,000 in the third quarter of 2023 and 2022, respectively. Derivative expense

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in loan interest income was $673,000 and derivative income in loan interest was $149,000 in the third quarter of 2023 and 2022, respectively.

| Nine Months Ended September 30, |  |
| 2023 |  |  | 2022 |  |
(Dollars in thousands) | Average |  |  |  |  |  |  |  |  | Average |  |  |  |  |  |  |  |
| Balance |  |  | Interest |  |  | Rate |  |  | Balance |  |  | Interest |  |  | Rate |  |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loans (1)(3)(4)(5)(6) | $ | 1,233,463 |  |  | $ | 48,655 |  |  |  | 5.26 |  | % | $ | 1,081,943 |  |  | $ | 38,454 |  |  |  | 4.74 |  | %
Taxable securities (2)(6) |  | 753,490 |  |  |  | 15,637 |  |  |  | 2.77 |  |  |  | 782,378 |  |  |  | 11,001 |  |  |  | 1.87 |  |
Nontaxable securities (1) |  | 296,453 |  |  |  | 5,372 |  |  |  | 2.42 |  |  |  | 319,381 |  |  |  | 5,921 |  |  |  | 2.47 |  |
Other |  | 63,478 |  |  |  | 2,514 |  |  |  | 5.28 |  |  |  | 40,217 |  |  |  | 314 |  |  |  | 1.04 |  |
Interest-earning assets |  | 2,346,884 |  |  |  | 72,178 |  |  |  | 4.10 |  |  |  | 2,223,919 |  |  |  | 55,691 |  |  |  | 3.34 |  |
Noninterest-earning assets |  | 114,474 |  |  |  |  |  |  |  |  |  | 149,813 |  |  |  |  |  |  |  |
Total assets | $ | 2,461,358 |  |  |  |  |  |  |  |  | $ | 2,373,732 |  |  |  |  |  |  |  |
Liabilities and Shareholders' Equity: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-bearing demand deposits | $ | 848,964 |  |  | $ | 6,362 |  |  |  | 1.00 |  | % | $ | 918,644 |  |  | $ | 2,034 |  |  |  | 0.30 |  | %
Savings deposits |  | 378,939 |  |  |  | 1,080 |  |  |  | 0.38 |  |  |  | 455,816 |  |  |  | 485 |  |  |  | 0.14 |  |
Certificates of deposit |  | 290,136 |  |  |  | 6,813 |  |  |  | 3.13 |  |  |  | 185,857 |  |  |  | 823 |  |  |  | 0.59 |  |
Brokered deposit |  | 35,887 |  |  |  | 1,315 |  |  |  | 4.89 |  |  |  | - |  |  |  | - |  |  |  | 0.00 |  |
Borrowings |  | 130,133 |  |  |  | 4,597 |  |  |  | 4.71 |  |  |  | 5,708 |  |  |  | 35 |  |  |  | 0.83 |  |
Subordinated debentures |  | 35,352 |  |  |  | 1,222 |  |  |  | 4.61 |  |  |  | 35,205 |  |  |  | 1,099 |  |  |  | 4.16 |  |
Other |  | 7,934 |  |  |  | 302 |  |  |  | 5.07 |  |  |  | - |  |  |  | - |  |  |  | 0.00 |  |
Interest-bearing liabilities |  | 1,727,345 |  |  |  | 21,691 |  |  |  | 1.67 |  |  |  | 1,601,230 |  |  |  | 4,477 |  |  |  | 0.37 |  |
Demand deposits |  | 546,983 |  |  |  |  |  |  |  |  |  | 575,483 |  |  |  |  |  |  |  |
Other noninterest-bearing liabilities |  | 13,392 |  |  |  |  |  |  |  |  |  | 13,528 |  |  |  |  |  |  |  |
Total liabilities |  | 2,287,720 |  |  |  |  |  |  |  |  |  | 2,190,241 |  |  |  |  |  |  |  |
Shareholders' equity |  | 173,638 |  |  |  |  |  |  |  |  |  | 183,491 |  |  |  |  |  |  |  |
Total liabilities and shareholders' equity | $ | 2,461,358 |  |  |  |  |  |  |  |  | $ | 2,373,732 |  |  |  |  |  |  |  |
Net interest income (tax-equivalent basis) (Non-GAAP) (1) |  |  |  | $ | 50,487 |  |  |  |  |  |  |  |  | $ | 51,214 |  |  |  |  |
Net interest margin (tax-equivalent basis) (Non-GAAP) (1) |  |  |  |  |  |  |  | 2.87 |  | % |  |  |  |  |  |  |  | 3.07 |  | %
Reconciliation to Reported Net Interest Income |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net interest income (tax-equivalent basis) (Non-GAAP) (1) |  |  |  | $ | 50,487 |  |  |  |  |  |  |  |  | $ | 51,214 |  |  |  |  |
Adjustment for taxable equivalent interest |  |  |  |  | (1,158 | ) |  |  |  |  |  |  |  |  | (1,265 | ) |  |  |  |
Net interest income (GAAP) |  |  |  | $ | 49,329 |  |  |  |  |  |  |  |  | $ | 49,948 |  |  |  |  |
Net interest margin (GAAP) |  |  |  |  |  |  |  | 2.80 |  | % |  |  |  |  |  |  |  | 2.99 |  | %

(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 $1.5 million and $1.3 million in the nine months ended September 30, 2023 and 2022, respectively. PPP loan average balances were $0 and $10.8 million in the nine months ended September 30, 2023 and 2022, respectively.
(5)
Interest on loans included net origination fees, accretion income, and PPP fees. Accretion income was $1.4 million and $1.7 million in the nine months ended September 30, 2023 and 2022, respectively. PPP fees were approximately $0 and $1.2 million in the nine months ended September 30, 2023 and 2022, respectively.

46

(6)
Interest on loans and securities included derivative income and expense. Derivative income in securities was $1.5 million and derivative expense in securities was $166,000 in the nine months ended September 30, 2023 and 2022, respectively. Derivative expense in loan interest income was $2.1 million and derivative income in loan interest was $580,000 in the nine months ended September 30, 2023and 2022, respectively.

Table 2 – Changes in Tax-Equivalent Net Interest Income

| Three Months Ended September 30, |
(Dollars in thousands) | 2023 Over 2022 |
| Total |  |  | Volume |  |  | Rate |
Increase (decrease) in interest income (1) |  |  |  |  |  |  |  |
Loans (2) | $ | 4,157 |  |  | $ | 2,001 |  |  | $ | 2,156 |
Taxable securities |  | 1,402 |  |  |  | (1,075 | ) |  |  | 2,477 |
Nontaxable securities (2) |  | (56 | ) |  |  | (54 | ) |  |  | (2 | )
Other |  | 1,528 |  |  |  | 870 |  |  |  | 658 |
Net change in interest income |  | 7,031 |  |  |  | 1,742 |  |  |  | 5,289 |
Increase (decrease) in interest expense (1) |  |  |  |  |  |  |  |
Interest-bearing demand deposits |  | 1,913 |  |  |  | (428 | ) |  |  | 2,341 |
Savings deposits |  | 280 |  |  |  | (283 | ) |  |  | 563 |
Certificates of deposit |  | 2,898 |  |  |  | 475 |  |  |  | 2,423 |
Brokered deposit |  | 582 |  |  |  | 582 |  |  |  | - |
Borrowings |  | 2,163 |  |  |  | 2,096 |  |  |  | 67 |
Subordinated debentures |  | 38 |  |  |  | 3 |  |  |  | 35 |
Other |  | 257 |  |  |  | 257 |  |  |  | - |
Net change in interest expense |  | 8,131 |  |  |  | 2,702 |  |  |  | 5,429 |
Net change in tax-equivalent net interest income | $ | (1,100 | ) |  | $ | (960 | ) |  | $ | (140 | )

| Nine Months Ended September 30, |
(Dollars in thousands) | 2023 Over 2022 |
| Total |  |  | Volume |  |  | Rate |
Increase (decrease) in interest income (1) |  |  |  |  |  |  |  |
Loans (2) | $ | 10,201 |  |  | $ | 6,423 |  |  | $ | 3,778 |
Taxable securities |  | 4,635 |  |  |  | (547 | ) |  |  | 5,182 |
Nontaxable securities (2) |  | (549 | ) |  |  | (444 | ) |  |  | (105 | )
Other |  | 2,200 |  |  |  | 350 |  |  |  | 1,850 |
Net change in interest income |  | 16,487 |  |  |  | 5,782 |  |  |  | 10,705 |
Increase (decrease) in interest expense (1) |  |  |  |  |  |  |  |
Interest-bearing demand deposits |  | 4,328 |  |  |  | (221 | ) |  |  | 4,549 |
Savings deposits |  | 595 |  |  |  | (121 | ) |  |  | 716 |
Certificates of deposit |  | 5,990 |  |  |  | 886 |  |  |  | 5,104 |
Brokered deposit |  | 1,315 |  |  |  | 1,315 |  |  |  | 0 |
Borrowings |  | 4,562 |  |  |  | 3,930 |  |  |  | 632 |
Subordinated debentures |  | 123 |  |  |  | 6 |  |  |  | 117 |
Other |  | 302 |  |  |  | 302 |  |  |  | 0 |
Net change in interest expense |  | 17,215 |  |  |  | 6,097 |  |  |  | 11,118 |
Net change in tax-equivalent net interest income | $ | (728 | ) |  | $ | (315 | ) |  | $ | (413 | )

(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%.

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Net Interest Income

Tax-equivalent net interest income decreased $1.1 million and $728,000 in the third quarter and first nine months of 2023, respectively, compared to the same periods in 2022. The Federal Reserve increased the federal funds rate by 5.25% from March 31, 2022 to September 30, 2023 in response to published inflation rates. This increased rates on newly originated loans and increased rates paid on deposits. Tax equivalent net interest margin decreased 45 basis points and 20 basis points in the third quarter and first nine months of 2023 to 2.70% and 2.87%, respectively, compared to the same periods in 2022. GAAP based net interest margin decreased 44 basis points and 19 basis points in the third quarter and first nine months of 2023 to 2.64% and 2.80%, respectively, compared to the same periods in 2022. Tax-equivalent net interest margin during the month of September 2023 was 2.70%.

The following table presents the cost of deposits and the cost of funds for the three and nine months ended September 30, 2023 and 2022.

| Three Months Ended September 30, |  |  | Nine Months Ended September 30, |
| 2023 |  | 2022 |  |  | 2023 |  | 2022 |
Cost of deposits |  | 1.36 | % |  | 0.29 | % |  |  | 0.99 | % |  | 0.21 | %
Cost of funds |  | 1.70 | % |  | 0.35 | % |  |  | 1.27 | % |  | 0.37 | %

ChoiceOne has experienced substantial core loan growth from September 30, 2022 to September 30, 2023, leading to an increase in interest income from loans of $4.2 million and $10.2 million in the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year. Average core loans grew $149.7 million and $174.3 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year. In addition, the average rate earned on loans increased 69 basis points and 52 basis points for the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year. The increase in interest income from loans and the average rate increase on loans was muted by a decline in PPP fees and an increase in derivative expense in the three and nine months ended September 30, 2023, compared to the same periods in 2022. PPP fee income in the first nine months of 2023 was $0 compared to $68,000 and $1.2 million in the three and nine months ended September 30, 2022. Derivative loan expense was $673,000 and $2.1 million during the three and nine months ended September 30, 2023, respectively, compared to derivative loan income in the prior year of $149,000 and $580,000 during the three and nine months ended September 30, 2022.

The average balance of total securities decreased $43.9 million and $51.8 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year. The decrease is due to the liquidation of $31.8 million in securities during the first nine months of 2022, with the remainder attributed to paydowns and a decline in the fair value of available for sale securities. The average rate earned on securities increased 61 basis points and 62 basis points for the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year, which was aided by $637,000 and $1.5 million of income related to derivative instruments for the three and nine months ended September 30, 2023, respectively, compared to a loss of $157,000 and $166,000 in the same periods in the prior year.

Interest expense increased $8.1 million and $17.2 million in the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year. The average rate paid on interest bearing-demand deposits and savings deposits increased 77 basis points and 56 basis points in the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year. This was offset by the decline in the average balance of interest bearing-demand deposits and savings deposits, of $165.9 million and $146.6 million during the respective time periods. The increase in the average balance of certificates of deposit of $140.3 million and $104.3 million in the three and nine months ended September 30, 2023, respectively, combined with a 306 basis point and 254 basis point increase in the rate paid on certificates of deposits in the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year, led to an increase in interest expense of $2.9 million and $6.0 million during the respective time periods.

In order to bolster liquidity, ChoiceOne borrowed $160.0 million from the Bank Term Funding Program ("BTFP") and currently holds $49.2 million in brokered deposits and $20.0 million in FHLB advances at the end of the third quarter of 2023. The net effect of these additional borrowed funds and brokered CDs was an increase in interest expense of $2.7 million and $5.9 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in 2022.

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. The average balance of subordinated debentures was relatively flat in the third quarter of 2023 compared to the same period in the prior year.

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Provision and Allowance for Credit Losses

On January 1, 2023, ChoiceOne adopted ASU 2016-13 CECL which caused an increase in the allowance for credit losses ("ACL") of $7.2 million. The large increase was partially due to the economic environment and the nature of the CECL calculation. Approximately 20% of this increase is related to the migration of purchased loans into the portfolio assessed by the CECL calculation. ChoiceOne also booked a liability for expected credit losses on unfunded loans and other commitments of $3.3 million related to the adoption of CECL. These unfunded loans are open credit lines with current customers and loans approved by ChoiceOne but not funded. The increase in the ACL and the cost of the liability resulted in a decrease in the retained earnings account on our Consolidated Balance Sheet equal to the after-tax impact, with the tax impact portion being recorded in deferred taxes in our Consolidated balance Sheet in accordance with FASB guidance.

The ACL consists of general and specific components. The general component covers loans collectively evaluated for credit loss and is based on peer historical loss experience adjusted for current and forecasted factors. Management's adjustment for current and forecasted 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, the experience and ability of lending staff, and a reasonable and supportable economic forecast described further below.

The determination of our loss factors is based, in part, upon benchmark peer loss history adjusted for qualitative factors that, in management's judgment, affect the collectability of the portfolio as of the analysis date. ChoiceOne's lookback period of benchmark peer net charge-off history was from January 1, 2004 through December 31, 2019 for this analysis.

Loans individually evaluated for credit losses increased by $302,000 to $3.1 million during the nine months ended September 30, 2023, and the ACL related to these individually evaluated loans increased by $331,000 during the nine months ended September 30, 2023 largely due the decline in collateral value of the impaired loans at September 30, 2023, compared to December 31, 2022.

Nonperforming loans, which includes Other Real Estate Owned (OREO) but excludes performing TLM and TDR loans, were $1.8 million as of September 30, 2023, compared to $1.2 million as of December 31, 2022. The ACL was 1.14% of total loans, excluding loans held for sale, at September 30, 2023, compared to 1.24% as of January 1, 2023 (the CECL adoption date) and 0.64% at December 31, 2022. The liability for expected credit losses on unfunded loans and other commitments was $2.7 million on September 30, 2023, compared to $3.3 million as of January 1, 2023 (the CECL adoption date) and did not exist on December 31, 2022.

Net charge-offs were $244,000 in the first nine months of 2023, compared to net charge-offs of $331,000 during the same period in 2022. Checking account charge-off and recovery activity is included in the consumer charge-off activity below. Net charge-offs for checking accounts for the first nine months of 2023 were $178,000 compared to $186,000 for the same period in the prior year. Net charge-offs on an annualized basis as a percentage of average loans were 0.03% in the first nine months of 2023 compared to annualized net charge-offs of 0.04% of average loans in the same period in the prior year.

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Charge-offs and recoveries for respective loan categories for the nine months ended September 30, 2023 and 2022 were as follows:

(Dollars in thousands) | 2023 |  |  | 2022 |
| Charge-offs |  |  | Recoveries |  |  | Charge-offs |  |  | Recoveries |
Agricultural | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Commercial and industrial |  | 73 |  |  |  | 57 |  |  |  | 177 |  |  |  | 62 |
Consumer |  | 432 |  |  |  | 208 |  |  |  | 383 |  |  |  | 162 |
Commercial real estate |  | — |  |  |  | 13 |  |  |  | — |  |  |  | 3 |
Construction real estate |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Residential real estate |  | 27 |  |  |  | 10 |  |  |  | — |  |  |  | 2 |
| $ | 532 |  |  | $ | 288 |  |  | $ | 560 |  |  | $ | 229 |

The provision for credit losses was $438,000 and $333,000 in the third quarter of 2023 and first nine months of 2023, respectively, compared to $100,000 in the same periods in the prior year. The provision expense was deemed necessary due to the impact of core loan growth and the increase in the calculated reserve for individually analyzed loans offset by improvements in the Federal Open Market Committee ("FOMC") forecast for unemployment and GDP growth. The FOMC forecast for change in real GDP improved from 1.0% in June to 2.1% in September while the unemployment rate forecast improved from 4.1% in June to 3.8% in September.

The loan provision expense was offset by the decrease in unfunded commitments provision of $438,000 in the third quarter of 2023 as ChoiceOne saw a decrease in the pipeline for new loans approved but not funded. The total unfunded commitments decreased $32.5 million in the third quarter of 2023 compared to June 30, 2023 and increased $7.5 million compared to January 1, 2023.

Net provision for credit losses was zero in the third quarter of 2023.

Noninterest Income

Total noninterest income increased by $657,000 and $537,000 in the three and nine months ended September 30, 2023, compared to the same periods in the prior year. The increase was largely due to losses in the securities markets which occurred during the prior year. Gains on sales of loans was slightly better in the third quarter of 2023 compared to the third quarter of 2022; however, overall volume remains somewhat depressed due to a competitive housing market and higher mortgage rates. ChoiceOne has also seen steady increases in wealth management income after recent investments in the operation, including the opening of a dedicated wealth management office in Sparta, Michigan during the third quarter of 2023.

Noninterest Expense

Total noninterest expense increased $1.0 million or 2.6%, in the nine months ended September 30, 2023 compared to the same period in 2022. The modest increase in total noninterest expense was largely related to inflationary pressures on employee wages and benefits. ChoiceOne continues to monitor expenses and looks to improve our efficiency through automation and use of digital tools. Management continues to seek out ways to manage costs; however, staying ahead of technological advances and retaining top talent continue to be important in maintaining our competitive advantage.

Income Tax Expense

Income tax expense was $3.2 million in the first nine months of 2023 compared to $3.0 million for the same period in 2022. The effective tax rate was 16.5% for the first nine months of 2023 compared to 14.8% for the same period in 2022. In the nine months ended September 30, 2023, non taxable municipal interest decreased and disallowed interest expense increased compared to the first nine months of 2022.

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FINANCIAL CONDITION

Securities

Total available for sale securities on September 30, 2023, were $490.8 million compared to $529.7 on December 31, 2022, with the decrease caused by $22.0 million of principal repayments, calls or maturities, and a decrease in the fair value of the underlying securities. The unrealized loss on securities available for sale increased by $3.2 million in the first nine months of 2023. ChoiceOne's held to maturity securities declined during the first nine months of 2023, as $3.5 million of securities were called or matured and principal repayments on securities totaled $6.7 million. The securities portfolio is projected to produce approximately $173 million of cashflows over the next two years as securities mature.

At September 30, 2023, ChoiceOne had $172.3 million in unrealized losses on its investment securities, including $92.2 million in unrealized losses on available for sale securities and $80.1 in unrealized losses on held to maturity securities. Unrealized losses on corporate and municipal bonds have not been recognized into income because management believes the issuers are of high credit quality, and management does not intend to sell prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions. The issuers continue to make timely principal and interest payments on the bonds. The fair value is expected to recover as the bonds approach maturity.

ChoiceOne utilizes interest rate derivatives as part of its asset liability management strategy to help manage its interest rate risk position. In order to hedge the risk of rising rates and unrealized losses on securities resulting from the rising rates, ChoiceOne currently holds four interest rate swaps with a total notional value of $401.0 million. These derivative instruments increase in value as long-term interest rates rise, which offsets the reduction in shareholders' equity due to unrealized losses on securities available for sale. Refer to footnote 8 for more discussion on ChoiceOne’s derivative position.

Equity securities included a money market preferred security ("MMP") of $1.0 million and common stock of $6.3 million as of September 30, 2023. As of December 31, 2022, equity securities included an MMP of $1.0 million and common stock of $7.6 million. The decline compared to December 31, 2022 was due to the sale of a local bank stock during the quarter.

Per U.S. generally accepted accounting principles, unrealized gains or losses on securities available for sale are reflected on the balance sheet in accumulated other comprehensive income (loss), while unrealized gains or losses on securities held to maturity are not reflected on the balance sheet in accumulated other comprehensive income (loss).

Loans

Core loans grew organically by $60.6 million or 19.8% on an annualized basis during the third quarter of 2023 and $153.6 million or 13.6% since September 30, 2022. Loans to other financial institutions increased to $23.8 million as of September 30, 2023, compared to $70,000 as of September 30, 2022. Loans to other financial institutions is comprised of a warehouse line of credit to facilitate mortgage loan originations and the interest rate fluctuates with the national mortgage market. This balance is short term in nature with an average life of under 30 days. Management believes the short-term structure and low credit risk of this asset is advantageous in the current rate environment. Loan interest income increased $4.2 million and $10.2 million in the third quarter and first nine months of 2023 compared to the same period in 2022, despite being offset by a decline in PPP fees and an increase in derivative expense. PPP fee income for the three and nine months ended September 30, 2023 was $0 compared to $68,000 and $1.2 million in the three and nine months ended September 30, 2022. Derivative expense was $673,000 and $2.1 million during the three and nine months ended September 30, 2023, respectively, compared to derivative income in the prior year of $149,000 and $580,000 during the three and nine months ended September 30, 2022.

Loan growth was concentrated in residential real estate 1-4 family loans which grew $76.5 million and non-owner occupied commercial real estate loans which grew $51.5 million in the trailing twelve months from September 30, 2023. Much of this growth in commercial real estate loans is directly the result of the new loan production offices in both the city of Wyoming, Michigan and Macomb County, Michigan, as well as the newly hired experienced lenders in these locations. Part of the growth in residential real estate loans can be attributed to the 5/1 ARM product, which became popular as a mortgage option and is less salable than more traditional fixed-rate mortgage products.

During the third quarter and first nine months of 2023, ChoiceOne recorded accretion income related to acquired loans in the amount of $444,000 and $1.4 million, respectively. Remaining credit and yield mark on acquired loans from the mergers with County Bank Corp. and Community Shores will accrete into income as the acquired loans mature. The remaining yield mark on acquired loans from the mergers with County Bank Corp. and Community Shores totaled $3.0 million as of September 30, 2023.

Asset Quality

51

Information regarding individually evaluated loans can be found in Note 3 to the consolidated financial statements included in this report. The total balance of individually evaluated loans was $3.1 million on September 30, 2023, compared to $2.8 million of impaired loans as of December 31, 2022. The change in the first nine months of 2023 was primarily due to an increase in non-accrual residential mortgage loans.

As part of its review of the loan portfolio, management also monitors the various nonperforming loans. Nonperforming loans are comprised of loans accounted for on a nonaccrual basis and loans, not included in nonaccrual loans, which are contractually past due 90 days or more as to interest or principal payments.

The balances of these nonperforming loans were as follows:

(Dollars in thousands) | September 30, |  |  | December 31, |
| 2023 |  |  | 2022 |
Loans accounted for on a nonaccrual basis | $ | 1,670 |  |  | $ | 1,263 |
Accruing loans which are contractually past due 90 days or more as to principal or interest payments |  | — |  |  |  | — |
Loans past due defined as "troubled loan modifications" or "troubled debt restructurings " which are not included above |  | 137 |  |  |  | — |
Total | $ | 1,807 |  |  | $ | 1,263 |

The increase in the balance of nonaccrual loans in the first nine months of 2023 was primarily due to the increase in residential mortgage loans. Management believes the ACL allocated to its nonperforming loans was sufficient at September 30, 2023.

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 conducted an annual assessment of goodwill as of June 30, 2023 and no impairment was identified. ChoiceOne used a qualitative assessment to determine goodwill was not impaired.

During the prior year, ChoiceOne engaged a third party valuation firm to assist in performing a quantitative analysis of goodwill as of November 30, 2022 ("the valuation date"). In deriving the fair value of the reporting unit (the Bank), the third-party firm assessed general economic conditions and outlook; industry and market considerations and outlook; the impact of recent events to financial performance; the market price of ChoiceOne’s common stock and other relevant events. In addition, the valuation relied on financial projections through 2027 and growth rates prepared by management. Based on the valuation prepared, it was determined that ChoiceOne's estimated fair value of the reporting unit at the valuation date was greater than its book value and impairment of goodwill was not required.

Management concurred with the conclusion derived from the quantitative goodwill analysis as of the valuation date and determined that there were no material changes and that no triggering events had occurred that indicated impairment from the valuation date through September 30, 2023, and as a result that it is more likely than not that there was no goodwill impairment.

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Deposits and Borrowings

ChoiceOne saw deposits, excluding brokered deposits, grow $48.9 million or an annualized 9.6% in the third quarter of 2023 and decline $34.0 million or an annualized 2.1% in the first nine months of 2023. The decrease in deposits was largely concentrated in the first quarter of 2023 as a result of a combination of customers using cash on hand for debt payoffs, seasonal tax and municipal bond payments, and customers seeking higher rates via money market securities or other investments. ChoiceOne is actively managing deposit costs and expects rates paid on deposits to continue to lag the federal funds rate. The cost of deposits has increased to 1.36% during the three months ended September 30, 2023 compared to 0.29% for the same period in the prior year, due to rising short term interest rates and is expected to continue to increase as deposits reprice.

Uninsured deposits totaled $724.1 million or 34.7% of deposits on September 30, 2023 compared to $823.2 million, or 39% of total deposits at December 31, 2022. At September 30, 2023, total available borrowing capacity from all sources was $796.1 million, which exceeds uninsured deposits.

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 $3.4 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.

During the second quarter of 2023, ChoiceOne borrowed $160 million from the Federal Reserve’s Bank Term Funding Program (BTFP). This program provides a 1-year term at a fixed rate with the ability to prepay at any time without penalty. The interest rate on the BTFP borrowings as of September 30, 2023 was 4.71% and fixed through May of 2024. Collateral pledged is U.S. Treasuries, agency debt and mortgage-backed securities valued at par. During the third quarter of 2023 ChoiceOne borrowed $20 million from the FHLB with a fixed rate of 4.88% through July of 2025. This funding structure has helped moderate interest expense increases in the third quarter as rates have risen. Total cost of funds increased to 1.70% in the third quarter of 2023 compared to 0.35% in the third quarter of 2022.

Shareholders' Equity

Shareholders’ equity totaled $181.2 million as of September 30, 2023, up from $168.9 million as of December 31, 2022. This increase is due to retained earnings increasing $2.1 million due to earnings and a reduction in accumulated other compressive loss (AOCI) of $9.3 million. AOCI has improved compared to December 31, 2022, despite the rise in interest rates, due to the passage of time, the maturity of our securities portfolio, and an offsetting increase in unrealized gain of our pay-fixed swap derivatives. ChoiceOne Bank remains “well-capitalized” with a total risk-based capital ratio of 12.7% as of September 30, 2023.

ChoiceOne uses interest rate swaps to manage interest rate exposure to certain fixed assets and variable rate liabilities. On September 30, 2023, ChoiceOne had pay-fixed interest rate swaps with a total notional value of $401.0 million, a weighted average coupon of 3.07%, and a fair value of $29.9 million and an average contract length of 8 to 9 years. These derivative instruments increase in value as long-term interest rates rise, which offsets the reduction in equity due to unrealized losses on securities available for sale. Included in the total is $200.0 million of forward starting pay-fixed, receive floating interest rate swaps used to hedge interest bearing liabilities. These forward starting swaps will pay a fixed coupon of 2.75% while receiving SOFR starting in late April 2024. At the current SOFR rate of 5.31%, these forward starting swaps would contribute approximately $427,000 monthly starting in May 2024 which will offset interest expense. In addition, in March 2023, ChoiceOne eliminated all receive-fixed, pay floating swap agreements for a cash payment of $4.2 million. The loss is being amortized in interest income with an expense of approximately $285,000 monthly through April 2024, which was the remaining period of the agreements.

On January 1, 2023, ChoiceOne adopted ASU 2016-13 CECL which caused an increase in the ACL of $7.2 million and booked a liability for expected credit losses on unfunded loans and other commitments of $3.3 million. The increase in the ACL and the cost of the liability resulted in a decrease in the retained earnings account on our Consolidated Balance Sheet equal to the after-tax impact, with the tax impact portion being recorded in deferred taxes in our Consolidated balance Sheet in accordance with FASB guidance. This reduction in retained earnings was offset by first quarter 2023 earnings and recovery of accumulated other comprehensive loss.

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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, 2023 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
ChoiceOne Financial Services Inc. |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Total capital (to risk weighted assets) | $ | 229,763 |  |  |  | 13.2 |  | % | $ | 139,121 |  |  |  | 8.0 |  | % | N/A |  |  | N/A |  |
Common equity Tier 1 capital (to risk weighted assets) |  | 181,628 |  |  |  | 10.4 |  |  |  | 78,256 |  |  |  | 4.5 |  |  | N/A |  |  | N/A |  |
Tier 1 capital (to risk weighted assets) |  | 186,128 |  |  |  | 10.7 |  |  |  | 104,341 |  |  |  | 6.0 |  |  | N/A |  |  | N/A |  |
Tier 1 capital (to average assets) |  | 186,128 |  |  |  | 7.4 |  |  |  | 100,482 |  |  |  | 4.0 |  |  | N/A |  |  | N/A |  |
ChoiceOne Bank |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Total capital (to risk weighted assets) | $ | 220,200 |  |  |  | 12.7 |  | % | $ | 138,902 |  |  |  | 8.0 |  | % | $ | 173,628 |  |  |  | 10.0 |  | %
Common equity Tier 1 capital (to risk weighted assets) |  | 208,644 |  |  |  | 12.0 |  |  |  | 78,133 |  |  |  | 4.5 |  |  |  | 112,858 |  |  |  | 6.5 |  |
Tier 1 capital (to risk weighted assets) |  | 208,644 |  |  |  | 12.0 |  |  |  | 104,177 |  |  |  | 6.0 |  |  |  | 138,902 |  |  |  | 8.0 |  |
Tier 1 capital (to average assets) |  | 208,644 |  |  |  | 8.3 |  |  |  | 100,350 |  |  |  | 4.0 |  |  |  | 125,438 |  |  |  | 5.0 |  |
December 31, 2022 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
ChoiceOne Financial Services Inc. |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Total capital (to risk weighted assets) | $ | 222,006 |  |  |  | 13.8 |  | % | $ | 128,545 |  |  |  | 8.0 |  | % | N/A |  |  | N/A |  |
Common equity Tier 1 capital (to risk weighted assets) |  | 177,916 |  |  |  | 11.1 |  |  |  | 72,307 |  |  |  | 4.5 |  |  | N/A |  |  | N/A |  |
Tier 1 capital (to risk weighted assets) |  | 182,416 |  |  |  | 11.4 |  |  |  | 96,409 |  |  |  | 6.0 |  |  | N/A |  |  | N/A |  |
Tier 1 capital (to average assets) |  | 182,416 |  |  |  | 7.9 |  |  |  | 92,558 |  |  |  | 4.0 |  |  | N/A |  |  | N/A |  |
ChoiceOne Bank |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Total capital (to risk weighted assets) | $ | 208,696 |  |  |  | 13.0 |  | % | $ | 128,294 |  |  |  | 8.0 |  | % | $ | 160,367 |  |  |  | 10.0 |  | %
Common equity Tier 1 capital (to risk weighted assets) |  | 201,077 |  |  |  | 12.5 |  |  |  | 72,165 |  |  |  | 4.5 |  |  |  | 104,239 |  |  |  | 6.5 |  |
Tier 1 capital (to risk weighted assets) |  | 201,077 |  |  |  | 12.5 |  |  |  | 96,220 |  |  |  | 6.0 |  |  |  | 128,294 |  |  |  | 8.0 |  |
Tier 1 capital (to average assets) |  | 201,077 |  |  |  | 8.7 |  |  |  | 92,449 |  |  |  | 4.0 |  |  |  | 115,562 |  |  |  | 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, 2023 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.

54

Liquidity

Net cash provided by operating activities was $57.3 million for the nine months ended September 30, 2023 compared to $32.0 million in the same period in 2022. The change was due to lower net proceeds from loan sales in 2023 compared to 2022, which was offset by change in other liabilities. Net cash used in investing activities was $96.1 million for the nine months ended September 30, 2023 compared to $60.5 million used in the same period in 2022. The change was due in part to an increase in net loan originations led to cash used of $120.3 million in the first nine months of 2023 compared to $73.3 million used in the same period during the prior year. Net cash provided by financing activities was $139.5 million for the nine months ended September 30, 2023, compared to $48.1 million in the same period in the prior year. ChoiceOne had $89.2 million less deposit growth in the first nine months of 2023 compared to the same period in 2022. ChoiceOne also increased borrowing by $130.0 million in the first nine months of 2023 compared to a decrease of $50.0 million in the same period during the prior year.

ChoiceOne's market risk exposure occurs in the form of interest rate risk and liquidity risk. ChoiceOne's business is transacted in U.S. dollars with no foreign exchange risk exposure. Agricultural loans comprise a relatively small portion of ChoiceOne's total assets. Management believes that ChoiceOne's exposure to changes in commodity prices is insignificant.

Liquidity risk deals with ChoiceOne's ability to meet its cash flow requirements. These requirements include depositors desiring to withdraw funds and borrowers seeking credit. Longer-term liquidity needs may be met through core deposit growth, maturities of and cash flows from investment securities, normal loan repayments, advances from the FHLB and the Federal Reserve Bank, brokered certificates of deposit, and income retention. ChoiceOne had $160.0 million in outstanding borrowings from the Federal Reserve’s Bank Term Funding Program (BTFP) as of September 30, 2023. ChoiceOne had $20.0 million in outstanding borrowings at the FHLB as of September 30, 2023. The acceptance of brokered certificates of deposit is not limited as long as the Bank is categorized as “well capitalized” under regulatory guidelines. At September 30, 2023, total available borrowing capacity from the FHLB and the Federal Reserve Bank was $796.1 million.

ChoiceOne continues to review its liquidity management and has taken steps in an effort to ensure adequacy. These steps include limiting bond purchases in the first nine months of 2023, pledging securities to FHLB and the Federal Reserve Bank in order to increase borrowing capacity and using alternative funding sources such as brokered deposits.

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 Chief Financial Officer, of the effectiveness of the design and operation of ChoiceOne’s disclosure controls and procedures as of September 30, 2023. Based on and as of the time of that evaluation, ChoiceOne’s management, including the Chief Executive Officer and Chief 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, 2023 that has materially affected, or that is reasonably likely to materially affect, ChoiceOne’s internal control over financial reporting.

55

PART II. OT HER INFORMATION

Item 1. Le gal 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.

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, 2022.

Ite m 2. Unregistered Sales of Equity Securities and Use of Proceeds.

There were no unregistered sales of equity securities in the third quarter of 2023.

There were no issuer purchases of equity securities during the third quarter of 2023.

Ite m 5. Other Information

None.

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It em 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 10-K Annual Report for the year ended December 31, 2022. 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 Chief Financial Officer |
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) |

57

SIGNA TURES

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 13, 2023 | /s/ Kelly J. Potes
| Kelly J. Potes Chief Executive Officer (Principal Executive Officer)
Date: November 13, 2023 | /s/ Adom J. Greenland
| Adom J. Greenland Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)

58