COFS 10-Q Quarterly Report Sept. 30, 2021

CHOICEONE FINANCIAL SERVICES INC

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cofs20210930_10q.htm

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, 2021

☐	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, 2021, the Registra nt had outstanding 7,574,235 shares of common stock.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements .

ChoiceOne Financial Services, Inc.
CONSOLIDATED BALANCE SHEETS

	September 30,			December 31,
(Dollars in thousands)	2021			2020
	(Unaudited)			(Audited)
Assets
Cash and due from banks	$	59,430		$	79,169
Time deposits in other financial institutions		350			350
Cash and cash equivalents		59,780			79,519

Equity securities at fair value (Note 2)		8,419			2,896
Securities available for sale (Note 2)		1,028,115			574,787
Federal Home Loan Bank stock		3,824			3,824
Federal Reserve Bank stock		4,180			4,180
Loans held for sale		7,505			12,921
Loans to other financial institutions		38,728			35,209
Loans (Note 3)		988,357			1,069,668
Allowance for loan losses (Note 3)		( 7,755	)		( 7,593	)
Loans, net		980,602			1,062,075

Premises and equipment, net		30,014			29,489
Other real estate owned, net		162			266
Cash value of life insurance policies		33,322			32,751
Goodwill		59,946			60,506
Core deposit intangible		4,264			5,269
Other assets		18,319			15,650
Total assets	$	2,277,180		$	1,919,342

Liabilities
Deposits – noninterest-bearing	$	543,165		$	477,654
Deposits – interest-bearing		1,468,985			1,196,924
Total deposits		2,012,150			1,674,578
Borrowings		-			9,327
Subordinated debentures		34,956			3,089
Other liabilities		5,019			5,080
Total liabilities		2,052,125			1,692,074

Shareholders' Equity
Preferred stock; shares authorized: 100,000 ; shares outstanding: none		-			-
Common stock and paid-in capital, no par value; shares authorized: 12,000,000 ; shares outstanding: 7,591,221 at September 30, 2021 and 7,796,352 at December 31, 2020		173,888			178,750
Retained earnings		49,198			37,490
Accumulated other comprehensive income, net		1,969			11,028
Total shareholders’ equity		225,055			227,268
Total liabilities and shareholders’ equity	$	2,277,180		$	1,919,342

See accompanying notes to interim consolidated financial statements.

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

	Three Months Ended						Nine Months Ended
(Dollars in thousands, except per share data)	September 30,						September 30,
	2021			2020			2021		2020
Interest income
Loans, including fees	$	12,408		$	13,047		$	36,655	$	34,110
Securities:
Taxable		2,821			1,150			7,073		4,564
Tax exempt		1,459			914			4,002		1,760
Other		38			40			70		241
Total interest income		16,726			15,151			47,800		40,675

Interest expense
Deposits		837			946			2,556		3,229
Advances from Federal Home Loan Bank		18			1			21		218
Other		171			142			327		149
Total interest expense		1,026			1,089			2,904		3,596

Net interest income		15,700			14,062			44,896		37,079
Provision for loan losses		-			1,225			416		3,000
Net interest income after provision for loan losses		15,700			12,837			44,480		34,079

Noninterest income
Customer service charges		2,255			2,059			6,309		5,306
Insurance and investment commissions		153			137			624		416
Gains on sales of loans		1,798			3,617			5,715		8,356
Net gains (losses) on sales of securities		-			( 35	)		3		1,308
Earnings on life insurance policies		194			193			570		577
Trust income		187			197			612		569
Change in market value of equity securities		( 28	)		( 238	)		461		( 184	)
Other		159			396			756		661
Total noninterest income		4,718			6,326			15,050		17,009

Noninterest expense
Salaries and benefits		7,552			8,058			21,719		19,545
Occupancy and equipment		1,538			1,556			4,591		4,185
Data processing		1,471			1,585			4,573		4,637
Professional fees		754			1,221			2,426		2,897
Supplies and postage		171			178			395		685
Advertising and promotional		183			148			535		440
Intangible amortization		346			395			1,005		1,102
FDIC insurance		225			154			533		291
Other		1,266			1,254			3,386		3,333
Total noninterest expense		13,506			14,549			39,163		37,115

Income before income tax		6,912			4,614			20,367		13,973
Income tax expense		1,163			785			3,337		2,460

Net income	$	5,749		$	3,829		$	17,029	$	11,513

Basic earnings per share (Note 4)	$	0.75		$	0.49		$	2.20	$	1.55
Diluted earnings per share (Note 4)	$	0.75		$	0.49		$	2.20	$	1.55
Dividends declared per share	$	0.25		$	0.20		$	0.69	$	0.60

See accompanying notes to interim consolidated financial statements.

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

	Three Months Ended					Nine Months Ended
(Dollars in thousands)	September 30,					September 30,
	2021			2020		2021			2020
Net income	$	5,749		$	3,829	$	17,029		$	11,513

Other comprehensive income:
Changes in net unrealized gains on investment securities available for sale, net of tax (benefit)/expense of ($ 1,296 ) and $ 616 for the three months ended September 30, 2021 and September 30, 2020, respectively. Changes in net unrealized gains (losses) on investment securities available for sale, net of tax (benefit)/expense of ($ 2,407 ) and $ 2,346 for the nine months ended September 30, 2021 and September 30, 2020, respectively.		( 4,877	)		2,316		( 9,057	)		8,825

Reclassification adjustment for realized (gain) loss on sale of investment securities available for sale included in net income, net of tax expense (benefit) of $ 0 and ($ 7 ) for the three months ended September 30, 2021 and September 30, 2020, respectively. Reclassification adjustment for realized gain on sale of investment securities available for sale included in net income, net of tax expense of $ 1 and $ 275 for the nine months ended September 30, 2021 and September 30, 2020, respectively.		-			28		( 2	)		( 1,033	)

Other comprehensive income (loss), net of tax		( 4,877	)		2,343		( 9,059	)		7,791

Comprehensive income	$	872		$	6,173	$	7,971		$	19,305

See accompanying notes to interim consolidated financial statements.

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, 2020		7,261,605		$	162,862		$	32,835		$	6,926		$	202,623

Net income								3,829						3,829
Other comprehensive income											2,343			2,343
Shares issued		5,169			143									143
Effect of employee stock purchases					4									4
Stock options exercised and issued (1)		231												-
Stock-based compensation expense					48									48
Merger with Community Shores Bank Corporation		524,055			15,493									15,493
Cash dividends declared ($ 0.20 per share)								( 1,558	)					( 1,558	)

Balance, September 30, 2020		7,791,060		$	178,550		$	35,106		$	9,269		$	222,925


Balance, July 1, 2021		7,692,537		$	176,323		$	45,352		$	6,846		$	228,521

Net income								5,749						5,749
Other comprehensive income											( 4,877	)		( 4,877	)
Shares issued		5,924			139									139
Effect of employee stock purchases					6									6
Stock-based compensation expense					84									84
Shares repurchased		( 107,240	)		( 2,664	)								( 2,664	)
Cash dividends declared ($ 0.25 per share)								( 1,903	)					( 1,903	)

Balance, September 30, 2021		7,591,221		$	173,888		$	49,198		$	1,969		$	225,055

(1) The amount shown represents the number of shares issued upon exercise of options, net of shares withheld for payment of certain taxes.

See accompanying notes to interim consolidated financial statements.

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, 2020		7,245,088		$	162,610		$	28,051		$	1,478		$	192,139

Net income								11,513						11,513
Other comprehensive income											7,791			7,791
Shares issued		14,291			304									304
Effect of employee stock purchases					11									11
Stock options exercised and issued (1)		7,261			9									9
Stock-based compensation expense					123									123
Restricted stock units issued		365												-
Merger with Community Shores Bank Corporation		524,055			15,494									15,494
Cash dividends declared ($ 0.60 per share)								( 4,459	)					( 4,459	)

Balance, September 30, 2020		7,791,060		$	178,551		$	35,106		$	9,269		$	222,925


Balance, January 1, 2021		7,796,352		$	178,750		$	37,490		$	11,028		$	227,268

Net income								17,029						17,029
Other comprehensive income											( 9,059	)		( 9,059	)
Shares issued		17,810			420									420
Effect of employee stock purchases					19									19
Stock-based compensation expense					260									260
Shares repurchased		( 222,941	)		( 5,561	)								( 5,561	)
Cash dividends declared ($ 0.69 per share)								( 5,322	)					( 5,322	)

Balance, September 30, 2021		7,591,221		$	173,888		$	49,198		$	1,969		$	225,055

(1) The amount shown represents the number of shares issued upon exercise of options, net of shares withheld for payment of certain taxes.

See accompanying notes to interim consolidated financial statements.

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

	Nine Months Ended
(Dollars in thousands)	September 30,
	2021			2020
Cash flows from operating activities:
Net income	$	17,029		$	11,513
Adjustments to reconcile net income to net cash from operating activities:
Provision for loan losses		416			3,000
Depreciation		1,949			2,026
Amortization		6,989			3,377
Compensation expense on employee and director stock purchases, stock options, and restricted stock units		596			337
Net gains on sales of securities		( 3	)		( 1,308	)
Net change in market value of equity securities		( 461	)		184
Gains on sales of loans		( 5,715	)		( 8,356	)
Loans originated for sale		( 162,579	)		( 277,281	)
Proceeds from loan sales		171,882			251,554
Earnings on bank-owned life insurance		( 570	)		( 577	)
(Gains)/losses on sales of other real estate owned		( 4	)		7
Proceeds from sales of other real estate owned		407			983
Costs capitalized to other real estate		-			( 19	)
Deferred federal income tax (benefit)/expense		634			( 1,257	)
Net change in:
Other assets		( 2,805	)		( 4,323	)
Other liabilities		1,797			( 116	)
Net cash provided by (used in) operating activities		29,562			( 20,256	)

Cash flows from investing activities:
Sales of securities available for sale		-			121,944
Maturities, prepayments and calls of securities available for sale		39,772			37,587
Purchases of securities available for sale		( 514,204	)		( 183,109	)
Loan originations and payments, net		78,067			( 108,485	)
Additions to premises and equipment		( 2,193	)		( 1,552	)
Cash received from merger with Community Shores Bank Corporation,
net of cash paid		-			35,636
Net cash (used in) investing activities		( 398,558	)		( 97,979	)

Cash flows from financing activities:
Net change in deposits		337,572			203,937
Proceeds from borrowings		34,291			10,000
Payments on borrowings and subordinated debentures		( 11,827	)		( 33,028	)
Issuance of common stock		104			110
Repurchase of common stock		( 5,561	)		-
Cash dividends		( 5,322	)		( 4,459	)
Net cash provided by financing activities		349,257			176,560

Net change in cash and cash equivalents		( 19,739	)		58,325
Beginning cash and cash equivalents		79,519			59,558

Ending cash and cash equivalents	$	59,780		$	117,883

Supplemental disclosures of cash flow information:
Cash paid for interest	$	2,885		$	3,778
Cash paid for income taxes		2,501			3,608
Loans transferred to other real estate owned		298			372

See accompanying notes to interim consolidated financial statements.

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

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Explanatory Note

On July 1, 2020, ChoiceOne Financial Services, Inc. (“ChoiceOne” or the “Company”) completed the merger of Community Shores Bank Corporation ("Community Shores") with and into ChoiceOne with ChoiceOne surviving the merger. Accordingly, the reported consolidated financial condition and operating results as of and for periods ending after July 1, 2020 include the impact of the merger.

For additional details regarding the merger with Community Shores and the merger of County Bank Corp. ("County") with and into ChoiceOne, see Note 8 (Business Combinations) to the interim consolidated financial statements.

Principles of Consolidation

The consolidated financial statements include ChoiceOne Financial Services, Inc. ("ChoiceOne"), its wholly-owned subsidiary, ChoiceOne Bank (the "Bank"), and ChoiceOne Bank’s wholly-owned subsidiary ChoiceOne Insurance Agencies, Inc. (the "Insurance Agency"). 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 the Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020 , the Consolidated Statements of Income for the three and nine month periods ended September 30, 2021 and September 30, 2020 , the Consolidated Statements of Comprehensive Income for the three and nine month periods ended September 30, 2021 and September 30, 2020 , the Consolidated Statements of Changes in Shareholders’ Equity for the three and nine month periods ended September 30, 2021 and September 30, 2020 , and the Consolidated Statements of Cash Flows for the nine -month periods ended September 30, 2021 and September 30, 2020 . Operating results for the nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021 .

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, 2020 .

Use of Estimates

To prepare financial statem ents in conformity with GAAP, 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; therefore, future results could differ. These estimates and assumptions are subject to many risks and uncertainties, including changes in interest rates and other general economic, business and political conditions, including the effects of the COVID- 19 pandemic, and its potential effects on the economic environment, our customers and our operations, as well as any changes to federal, state and local government laws, regulations and orders in connection with the COVID- 19 pandemic. Actual results may differ from those estimates.

Loans to Other Financial Institutions

ChoiceOne Bank entered into an agreement with another financial institution to fund mortgage loans. Loans to other financial institutions are purchased participating interests in individual advances made to mortgage bankers nation-wide from an unaffiliated originating bank. The originating bank services these loans and cash flows on the individual advances (principal, interest, and fees) which are allocated pro-rata based on ownership in the participating interest, less fees paid for the servicing activity. The underlying collateral is generally made up of 1 - 4 family first residential mortgages owned by the mortgage banker and held for sale in the secondary market and have been underwritten using secondary market underwriting standards prior to purchasing the participating interest. Once the mortgage banker delivers the loan to the secondary market, the advance is required to be paid off, including ChoiceOne Bank’s participating interest. If the advance (in which ChoiceOne Bank has a participating interest) is outstanding over 90 days, the originating bank has the right to request the participating interest be paid off by the mortgage banker. The participating interests are held by 11 different mortgage bankers, with the largest creditor outstanding representing 17 % of the total at September 30, 2021.

Credit risk associated with the participating interest is measured as an allowance for loan losses when necessary. Losses are charged off against the allowance when incurred and recoveries of loan charge-offs are recorded when received. At least quarterly, ChoiceOne Bank reviews the portfolios of participating interests for potential losses including any participating interest that is outstanding over 90 days (even if the advance and participating interest is current). Loans to other financial institutions are excluded from the loans described in Note 3 to the interim consolidated financial statements. At September 30, 2021, there were no participating interests outstanding over 30 days. At December 31, 2020, 26 of the 218 participating interests with principal balances totaling $ 7.9 million had balances outstanding over 30 days. During the first nine months of 2020 and 2021, there were no losses or charge-offs of participating interests.

Allowance for Loan Losses

The allowance for loan losses is maintained at a level believed adequate by management to absorb probable incurred losses inherent in the consolidated loan portfolio. Management’s evaluation of the adequacy of the allowance for loan losses is an estimate based on known and inherent risks in the portfolio, past loan loss experience, information about specific borrower situations and estimated collateral values, economic conditions and other relevant factors (including both qualitative and quantitative factors). Allocations of the allowance may be made for specific loans, but the entire allowance for loan losses is available for any loan that, in management’s judgment, should be charged-off. Loan losses are charged against the allowance when management believes the a loan balance is uncollectible. Management continues its collection efforts on previously charged-off loan balances and applies recoveries as additions to the allowance for loan losses.

The allowance for loan losses consists of specific allocations for loans that are classified as impaired and pooled allocations for groups of homogeneous loans that are not impaired. A loan is considered impaired when, based on current information and events, management beleives it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement or if the loan is classified as a troubled debt restructuring. Loans for which the terms have been modified and a concession has been made, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired. Groups of homogeneous loans receive allowance allocations based on historical loss experienced over a selected period.

Management believes the accounting estimate related to the allowance for loan losses is a “critical accounting estimate” because ( 1 ) the estimate is highly susceptible to change from period to period because of assumptions concerning the changes in the types and volumes of the portfolios and economic conditions and ( 2 ) the impact of recognizing an impairment or loan loss could have a material effect on ChoiceOne’s assets reported on its balance sheet and its net income.

Stock Transactions

A total of 13,092 shares of common stock were issued to ChoiceOne’s Board of Directors for a cash price of $ 348,000 under the terms of the Directors’ Stock Purchase Plan in the first nine months of 2021 . A total of 4,718 shares for a cash price of $ 104,000 were issued under the Employee Stock Purchase Plan in the first nine months of 2021 . ChoiceOne repurchased approximately 223,000 shares for $ 5.6 million, or a weighted average all-in cost per share of $ 24.94 , during the first nine months of 2021. This was part of the common stock repurchase program announced in April 2021 which authorized repurchases of up to 390,114 shares, representing 5 % of the total outstanding shares of common stock as of the date the plan was adopted.

Stock-Based Compensation

ChoiceOne grants restricted stock units to a select group of employees under the Stock Incentive Plan of 2012. All of the restricted stock units are initially unvested and vest three years after the grant date. Certain additional vesting provisions apply. Each unit, once vested, is settled by delivery of one share of ChoiceOne common stock.

Reclassifications

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

Recent Accounting Pronouncements

The Financial Accounting Standards Board ("FASB") issued ASU No. 2016 - 13 , Financial Instruments—Credit Losses (Topic 326 ): Measurement of Credit Losses on Financial Instruments . This ASU provides financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date by replacing the incurred loss impairment methodology in GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The new guidance attempts to reflect an entity’s current estimate of all expected credit losses and broadens the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually to include forecasted information, as well as past events and current conditions. There is no specified method for measuring expected credit losses, and an entity may apply methods that reasonably reflect its expectations of the credit loss estimate. Although an entity may still use its current systems and methods for recording the allowance for credit losses, under the new rules, the inputs used to record the allowance for credit losses generally will need to change to appropriately reflect an estimate of all expected credit losses and the use of reasonable and supportable forecasts. Additionally, credit losses on available-for-sale debt securities will have to be presented as an allowance rather than as a write-down. This ASU is effective for fiscal years beginning after December 15, 2022, and for interim periods within those years for companies considered a smaller reporting company with the Securities and Exchange Commission. ChoiceOne was classified as a smaller reporting company as of the determination date of November 15, 2019. Management is currently evaluating the impact of this new ASU on its consolidated financial statements which may be significant.

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 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.

Management performed its annual qualitative assessment of goodwill as of June 30, 2021. In evaluating whether it is more likely than not that the fair value of ChoiceOne's operations was less than the carrying amount, management assessed the relevant events and circumstances such as the ones noted in ASC 350 - 20 - 35 - 3c. The analysis consisted of a review of ChoiceOne’s current and expected future financial performance, the potential impact of the COVID- 19 pandemic on the ability of ChoiceOne’s borrowers to comply with loan terms, and the impact that reductions in both short-term and long-term interest rates have had and may continue to have on net interest margin and mortgage sales activity. The share price and book value of ChoiceOne’s stock were also compared to the prior year. Management also compared average deal values for recent closed bank transactions to ChoiceOne transactions. Despite ChoiceOne's market capitalization declining slightly from November 30, 2020 to June 30, 2021, ChoiceOne's financial performance remained positive. In assessing the totality of the events and circumstances, management determined that it was more likely than not that the fair value of ChoiceOne’s operations, from a qualitative perspective, exceeded the carrying value as of June 30, 2021 and impairment of goodwill was not necessary.

ChoiceOne’s stock price per share was less than its book value as of September 30, 2021. This indicated that goodwill may be impaired and resulted in management performing another qualitative goodwill impairment assessment as of the end of the third quarter of 2021. As a result of the analysis, management concluded that it was more-likely-than- not that the fair value of the reporting unit was greater than the carrying value. This was evidenced by the strong financial indicators, solid credit quality ratios, as well as the strong capital position of ChoiceOne. In addition, revenue in the first nine months of 2021 reflected significant and continuing growth in ChoiceOne's interest income, as well as net Small Business Administration fees related to Paycheck Protection Program loans. Based on the results of the qualitative analysis, management believed that a quantitative analysis was not necessary as of September 30, 2021.

NOTE 2 – SECURITIES

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

	September 30, 2021
			Gross		Gross
(Dollars in thousands)	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Equity securities	$	7,898	$	600	$	( 79	)	$	8,419

December 31, 2020

Gross

(Dollars in thousands)

Amortized

Unrealized

Fair

Cost

Gains

Losses

Value

Equity securities

2,836

2,896

The fair value of securities available for sale and the related unrealized gains and losses recognized in accumulated other comprehensive income were as follows:

	September 30, 2021
			Gross		Gross
(Dollars in thousands)	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
U.S. Government and federal agency	$	2,002	$	18	$	-		$	2,020
U.S. Treasury notes and bonds		93,381		58		( 653	)		92,786
State and municipal		488,858		10,584		( 2,704	)		496,738
Mortgage-backed		411,376		1,207		( 5,887	)		406,696
Corporate		13,107		31		( 125	)		13,013
Asset-backed securities		16,897		3		( 38	)		16,862
Total	$	1,025,621	$	11,901	$	( 9,407	)	$	1,028,115

	December 31, 2020
			Gross		Gross
(Dollars in thousands)	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
U.S. Government and federal agency	$	2,007	$	44	$	-		$	2,051
U.S. Treasury notes and bonds		1,996		60		-			2,056
State and municipal		307,201		13,191		( 24	)		320,368
Mortgage-backed		246,085		1,510		( 872	)		246,723
Corporate		3,539		51		( 1	)		3,589
Total	$	560,828	$	14,856	$	( 897	)	$	574,787

ChoiceOne reviews its securities portfolio on a quarterly basis to determine whether unrealized losses are considered to be temporary or other-than-temporary. No other-than-temporary impairment charges were recorded in the three and nine months ended September 30, 2021 or in the same periods in 2020 . ChoiceOne believes that unrealized losses on securities were temporary in nature and were due to changes in interest rates and reduced market liquidity and not as a result of credit quality issues.

Presented below is a schedule of maturities of securities as of September 30, 2021 , the fair value of securities as of September 30, 2021 and December 31, 2020 , and the weighted average yields of securities as of September 30, 2021 . Callable securities in the money are presumed called and matured at the callable date.

	Securities maturing within:
									Fair Value
	Less than		1 Year -		5 Years -		More than		at September 30,		Fair Value at Dec. 31,
(Dollars in thousands)	1 Year		5 Years		10 Years		10 Years		2021		2020

U.S. Government and federal agency	$	2,020	$	-	$	-	$	-	$	2,020	$	2,051
U.S. Treasury notes and bonds		2,033		-		90,753		-		92,786		2,056
State and municipal		18,807		58,342		337,206		82,383		496,738		320,368
Corporate		507		828		10,678		1,000		13,013		3,589
Asset-backed securities		-		12,691		4,171		-		16,862		-
Total debt securities		23,367		71,861		442,808		83,383		621,419		328,064

Mortgage-backed securities		17,061		148,397		240,579		659		406,696		246,723
Equity securities		-		1,000		-		7,419		8,419		2,896
Total	$	40,428	$	221,258	$	683,387	$	91,461	$	1,036,534	$	577,683

	Weighted average yields:
	Less than			1 Year -			5 Years -			More than
	1 Year			5 Years			10 Years			10 Years			Total
U.S. Government and federal agency		1.98	%		-	%		-	%		-	%		1.98	%
U.S. Treasury notes and bonds		1.85			-			1.16			-			1.18
State and municipal		2.80			2.86			2.50			2.33			2.52
Corporate		2.50			3.50			2.80			3.75			2.90
Asset-backed securities		-			0.64			0.76			-			0.67
Mortgage-backed securities		1.69			1.58			1.38			2.90			1.47
Equity securities		-			3.69			-			-			0.44

Following is information regarding unrealized gains and losses on equity securities for the three and nine month periods ended September 30, 2021 and 2020:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2021			2020			2021		2020

Net gains and (losses) recognized during the period	$	( 28	)	$	( 238	)	$	461	$	( 184	)
Less: Net gains and (losses) recognized during the period on securities sold		-			-			-		-

Unrealized gains and losses recognized during the reporting period on securities still held at the reporting date	$	( 28	)	$	( 238	)	$	461	$	( 184	)

NOTE 3 – LOANS AND ALLOWANCE FOR LOAN LOSSES

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

			Commercial
(Dollars in thousands)			and						Commercial			Construction		Residential
	Agricultural		Industrial			Consumer			Real Estate			Real Estate		Real Estate			Unallocated			Total
Allowance for Loan Losses Three Months Ended September 30, 2021
Beginning balance	$	374	$	1,523		$	243		$	4,377		$	74	$	860		$	499		$	7,950
Charge-offs		-		( 96	)		( 98	)		( 63	)		-		-			-			( 257	)
Recoveries		-		7			54			-			-		1			-			62
Provision		144		168			33			( 154	)		39		80			( 310	)		-
Ending balance	$	518	$	1,602		$	232		$	4,160		$	113	$	941		$	189		$	7,755



Allowance for Loan Losses Nine Months Ended September 30, 2021
Beginning balance	$	257	$	1,327		$	317		$	4,178		$	97	$	1,300		$	117		$	7,593
Charge-offs		-		( 195	)		( 244	)		( 111	)		-		-			-			( 550	)
Recoveries		-		80			168			43			-		5			-			296
Provision		261		390			( 9	)		50			16		( 364	)		72			416
Ending balance	$	518	$	1,602		$	232		$	4,160		$	113	$	941		$	189		$	7,755

Individually evaluated for impairment	$	124	$	174		$	-		$	8		$	-	$	177		$	-		$	483

Collectively evaluated for impairment	$	394	$	1,428		$	232		$	4,152		$	113	$	764		$	189		$	7,272

Loans
September 30, 2021
Individually evaluated for impairment	$	3,051	$	296		$	-		$	418		$	-	$	2,191					$	5,956
Collectively evaluated for impairment		60,394		211,695			33,793			474,425			18,238		165,913						964,458
Acquired with deteriorated credit quality		-		5,251			13			10,489			-		2,190						17,943
Ending balance	$	63,445	$	217,242		$	33,806		$	485,332		$	18,238	$	170,294					$	988,357

				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, 2020
Beginning balance	$	252		$	1,398		$	243		$	2,833		$	79	$	945		$	-	$	5,750
Charge-offs		-			( 29	)		( 58	)		( 255	)		-		( 1	)		-		( 343	)
Recoveries		-			1			46			4			-		2			-		53
Provision		17			( 285	)		48			961			31		122			331		1,225
Ending balance	$	269		$	1,085		$	279		$	3,543		$	110	$	1,068		$	331	$	6,685

Allowance for Loan Losses Nine Months Ended September 30, 2020
Beginning balance	$	471		$	655		$	270		$	1,663		$	76	$	640		$	282	$	4,057
Charge-offs		-			( 46	)		( 242	)		( 255	)		-		( 8	)		-		( 551	)
Recoveries		-			2			156			4			-		17			-		179
Provision		( 202	)		474			95			2,131			34		419			49		3,000
Ending balance	$	269		$	1,085		$	279		$	3,543		$	110	$	1,068		$	331	$	6,685

Individually evaluated for impairment	$	-		$	1		$	1		$	13		$	-	$	218		$	-	$	233

Collectively evaluated for impairment	$	269		$	1,084		$	278		$	3,530		$	110	$	850		$	331	$	6,452


Loans
September 30, 2020
Individually evaluated for impairment	$	373		$	345		$	19		$	2,149		$	-	$	2,203				$	5,089
Collectively evaluated for impairment		53,130			297,886			34,104			449,041			16,489		199,930					1,050,580
Acquired with deteriorated credit quality		-			7,889			30			12,116			-		3,092					23,127
Ending balance	$	53,503		$	306,120		$	34,153		$	463,306		$	16,489	$	205,225				$	1,078,796

			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, 2020
Individually evaluated for impairment	$	-	$	19	$	1	$	157	$	-	$	254	$	-	$	431

Collectively evaluated for impairment	$	257	$	1,308	$	316	$	4,021	$	97	$	1,046	$	117	$	7,162


Loans
December 31, 2020
Individually evaluated for impairment	$	348	$	1,663	$	8	$	3,032	$	80	$	2,720			$	7,851
Collectively evaluated for impairment		53,387		295,154		33,982		453,681		16,559		186,982				1,039,745
Acquired with deteriorated credit quality		-		6,710		24		12,534		-		2,804				22,072
Ending balance	$	53,735	$	303,527	$	34,014	$	469,247	$	16,639	$	192,506			$	1,069,668

The process to monitor the credit quality of ChoiceOne’s loan portfolio includes tracking ( 1 ) the risk ratings of business loans, ( 2 ) the level of classified business loans, and ( 3 ) delinquent and nonperforming consumer loans. Business loans are risk rated on a scale of 1 to 9. A description of the characteristics of the ratings follows:

Risk Rating 1 through 5 or pass: These loans are considered pass credits. They exhibit acceptable credit risk and demonstrate the ability to repay the loan from normal business operations.

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

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

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

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

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

Corporate Credit Exposure - Credit Risk Profile By Creditworthiness Category

(Dollars in thousands)	Agricultural				Commercial and Industrial				Commercial Real Estate
	September 30,		December 31,		September 30,		December 31,		September 30,		December 31,
	2021		2020		2021		2020		2021		2020
Pass	$	60,042	$	50,185	$	214,493	$	294,614	$	477,227	$	453,080
Special Mention		352		3,202		1,133		4,101		2,105		6,006
Substandard		3,051		348		1,320		4,812		5,758		8,925
Doubtful		-		-		296		-		242		1,236
	$	63,445	$	53,735	$	217,242	$	303,527	$	485,332	$	469,247

Consumer Credit Exposure - Credit Risk Profile Based On Payment Activity

(Dollars in thousands)	Consumer				Construction Real Estate				Residential Real Estate
	September 30,		December 31,		September 30,		December 31,		September 30,		December 31,
	2021		2020		2021		2020		2021		2020
Performing	$	33,806	$	34,006	$	18,238	$	16,559	$	169,443	$	191,125
Nonperforming		-		-		-		-		-		-
Nonaccrual		-		8		-		80		851		1,381
	$	33,806	$	34,014	$	18,238	$	16,639	$	170,294	$	192,506

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, 2021 and September 30, 2020 .

	Three Months Ended September 30, 2021						Nine Months Ended September 30, 2021
			Pre-		Post-				Pre-		Post-
			Modification		Modification				Modification		Modification
			Outstanding		Outstanding				Outstanding		Outstanding
(Dollars in thousands)	Number of		Recorded		Recorded		Number of		Recorded		Recorded
	Loans		Investment		Investment		Loans		Investment		Investment
Agricultural		-	$	-	$	-		6	$	2,210	$	2,210
Commercial Real Estate		1		493		493		2		931		931
Total		1	$	493	$	493		8	$	3,141	$	3,141

	Three Months Ended September 30, 2020						Nine Months Ended September 30, 2020
			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	$	67	$	67
Commercial Real Estate		-		-		-		2		1,666		1,666
Total		-	$	-	$	-		3	$	1,733	$	1,733

There were no TDRs as of September 30, 2021 where the borrower was past due with respect to principal and/or interest for 30 days or more during the three and nine months ended September 30, 2021, which loans had been modified and classified as TDRs during the year prior to the default. The following schedule provides information on TDRs as of September 30, 2020 where the borrower was past due with respect to principal and/or interest for 30 days or more during the three and nine months ended September 30, 2020, which loans had been modified and classified as TDRs during the year prior to the default.

	Three Months Ended				Nine Months Ended
	September 30, 2020				September 30, 2020
(Dollars in thousands)	Number		Recorded		Number		Recorded
	of Loans		Investment		of Loans		Investment
Agricultural		1	$	67		1	$	67
Commercial Real Estate		2		1,666		2		1,666
Total		3	$	1,733		3	$	1,733

In March of 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was passed into law. Among other things, the CARES Act provides that certain loans subject to modifications related to the COVID- 19 pandemic need not be classified as TDRs. Further, the federal banking agencies issued an “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” on March 22, 2020, followed by a revised statement on April 7, 2020, providing in part that short-term modifications to loans made on a good faith basis to borrowers who were current as of the implementation date of the statements are not considered TDRs. As a result of the pandemic, ChoiceOne provided a modification program to borrowers that included certain concessions such as interest only payments or payment deferrals. As of September 30, 2021, all deferments had resumed payments in accordance with loan terms.

Impaired loans by loan category follow:

			Unpaid
(Dollars in thousands)	Recorded		Principal		Related
	Investment		Balance		Allowance
September 30, 2021
With no related allowance recorded
Agricultural	$	341	$	434	$	-
Commercial and industrial		-		-		-
Consumer		-		-		-
Construction real estate		-		-		-
Commercial real estate		242		242		-
Residential real estate		171		175		-
Subtotal		754		851		-
With an allowance recorded
Agricultural		2,710		2,709		124
Commercial and industrial		296		312		174
Consumer		-		-		-
Construction real estate		-		176		-
Commercial real estate		176		-		8
Residential real estate		2,020		2,075		177
Subtotal		5,202		5,272		483
Total
Agricultural		3,051		3,143		124
Commercial and industrial		296		312		174
Consumer		-		-		-
Construction real estate		-		176		-
Commercial real estate		418		242		8
Residential real estate		2,191		2,250		177
Total	$	5,956	$	6,123	$	483

			Unpaid
(Dollars in thousands)	Recorded		Principal		Related
	Investment		Balance		Allowance
December 31, 2020
With no related allowance recorded
Agricultural	$	348	$	434	$	-
Commercial and industrial		1,516		1,629		-
Consumer		-		-		-
Construction real estate		80		80		-
Commercial real estate		1,852		2,664		-
Residential real estate		162		162		-
Subtotal		3,958		4,969		-
With an allowance recorded
Agricultural		-		-		-
Commercial and industrial		147		147		19
Consumer		8		8		1
Construction real estate		-		-		-
Commercial real estate		1,180		1,180		157
Residential real estate		2,558		2,651		254
Subtotal		3,893		3,986		431
Total
Agricultural		348		434		-
Commercial and industrial		1,663		1,776		19
Consumer		9		8		1
Construction real estate		80		80		-
Commercial real estate		3,031		3,844		157
Residential real estate		2,720		2,813		254
Total	$	7,851	$	8,955	$	431

The following schedule provides information regarding average balances of impaired loans and interest recognized on impaired loans for the three and nine month periods ended September 30, 2021 and 2020:

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

	Average		Interest
(Dollars in thousands)	Recorded		Income
	Investment		Recognized
Three Months Ended September 30, 2020
With no related allowance recorded
Agricultural	$	376	$	-
Commercial and industrial		142		-
Consumer		2		-
Construction real estate		-		-
Commercial real estate		929		3
Residential real estate		109		1
Subtotal		1,558		4
With an allowance recorded
Agricultural		-		-
Commercial and industrial		191		-
Consumer		20		-
Construction real estate		-		-
Commercial real estate		1,268		4
Residential real estate		2,163		17
Subtotal		3,642		21
Total
Agricultural		376		-
Commercial and industrial		333		-
Consumer		22		-
Construction real estate		-		-
Commercial real estate		2,197		7
Residential real estate		2,272		18
Total	$	5,200	$	25

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

	Average		Interest
(Dollars in thousands)	Recorded		Income
	Investment		Recognized
Nine Months Ended September 30, 2020
With no related allowance recorded
Agricultural	$	324	$	-
Commercial and industrial		201		-
Consumer		1		-
Construction real estate		-		-
Commercial real estate		1,405		11
Residential real estate		84		5
Subtotal		2,015		16
With an allowance recorded
Agricultural		190		-
Commercial and industrial		102		-
Consumer		18		-
Construction real estate		-		-
Commercial real estate		826		16
Residential real estate		2,273		71
Subtotal		3,409		87
Total
Agricultural		514		-
Commercial and industrial		303		-
Consumer		19		-
Construction real estate		-		-
Commercial real estate		2,231		27
Residential real estate		2,357		76
Total	$	5,424	$	103

An aging analysis of loans by loan category follows:

					Loans
	Loans		Loans		Past Due								Loans
	Past Due		Past Due		Greater								90 Days Past
(Dollars in thousands)	30 to 59		60 to 89		Than 90				Loans Not		Total		Due and
	Days (1)		Days (1)		Days (1)		Total (1)		Past Due		Loans		Accruing
September 30, 2021
Agricultural	$	-	$	-	$	-	$	-	$	63,445	$	63,445	$	-
Commercial and industrial		83		305		296		684		216,558		217,242		-
Consumer		5		-		-		5		33,801		33,806		-
Commercial real estate		94		-		243		337		484,995		485,332		-
Construction real estate		-		-		-		-		18,238		18,238		-
Residential real estate		12		276		182		470		169,824		170,294		-
	$	194	$	581	$	721	$	1,496	$	986,861	$	988,357	$	-

December 31, 2020
Agricultural	$	-	$	-	$	-	$	-	$	53,735	$	53,735	$	-
Commercial and industrial		-		109		515		624		302,903		303,527		-
Consumer		39		-		-		39		33,975		34,014		-
Commercial real estate		532		44		1,744		2,320		466,927		469,247		-
Construction real estate		1,076		180		80		1,336		15,303		16,639		-
Residential real estate		1,563		256		352		2,171		190,335		192,506		-
	$	3,210	$	589	$	2,691	$	6,490	$	1,063,178	$	1,069,668	$	-

( 1 ) Includes nonaccrual loans.

Nonaccrual loans by loan category follow:

(Dollars in thousands)	September 30,		December 31,
	2021		2020
Agricultural	$	342	$	348
Commercial and industrial		296		1,802
Consumer		-		8
Commercial real estate		242		3,088
Construction real estate		-		80
Residential real estate		851		1,381
	$	1,731	$	6,707

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

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

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

(Dollars in thousands)	*Acquired*			*Acquired*			*Acquired*
	*Impaired*			*Non-impaired*			*Total*
Balance, January 1, 2020	$	185		$	1,819		$	2,004
Accretion January 1, 2020 through December 31, 2020		( 50	)		( 295	)		( 345	)
Balance, December 31, 2020		135			1,524			1,659
Accretion January 1, 2021 through September 30, 2021		-			( 233	)		( 233	)
Transfer from non-accretable to accretable yield		400			-			400
Balance, September 30, 2021	$	535		$	1,291		$	1,826

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

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

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

	Acquired			Acquired			Acquired
	*Impaired*			*Non-impaired*			*Total*
Balance, January 1, 2020	$	-		$	-		$	-
Merger with Community Shores Bank Corporation on July 1, 2020		869			596			1,465
Accretion July 1, 2020 through December 31, 2020		( 26	)		( 141	)		( 167	)
Balance, December 31, 2020		843			455			1,298
Accretion January 1, 2021 through September 30, 2021		( 298	)		( 258	)		( 556	)
Balance, September 30, 2021	$	545		$	197		$	742

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,
	2021		2020		2021		2020
Basic
Net income	$	5,749	$	3,829	$	17,029	$	11,513

Weighted average common shares outstanding		7,621,423		7,783,005		7,730,135		7,429,765

Basic earnings per common shares	$	0.75	$	0.49	$	2.20	$	1.55

Diluted
Net income	$	5,749	$	3,829	$	17,029	$	11,513

Weighted average common shares outstanding		7,621,423		7,783,005		7,730,135		7,429,765
Plus dilutive stock options and restricted stock units		12,644		7,460		13,766		7,888

Weighted average common shares outstanding and potentially dilutive shares		7,634,067		7,790,465		7,743,901		7,437,653

Diluted earnings per common share	$	0.75	$	0.49	$	2.20	$	1.55

There were 15,000 stock options that were considered anti-dilutive to earnings per share for the three and nine months ended September 30, 2021. There were no stock options that were considered to be anti-dilutive to earnings per share for the three and nine months ended September 30, 2020. There were no restricted stock units that were considered anti-dilutive to earnings per share during either the three months or nine months ended September 30, 2021 or September 30, 2020.

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, 2021
Assets
Cash and cash equivalents	$	59,780	$	59,780	$	59,780	$	-	$	-
Equity securities at fair value		8,419		8,419		6,723		-		1,696
Securities available for sale		1,028,115		1,028,115		-		1,009,082		19,033
Federal Home Loan Bank and Federal
Reserve Bank stock		8,004		8,004		-		8,004		-
Loans held for sale		7,505		7,730		-		7,730		-
Loans to other financial institutions		38,728		38,728		-		38,728		-
Loans, net		980,602		978,685		-		-		978,685
Accrued interest receivable		8,969		8,969		-		8,969		-
Interest rate lock commitments		438		438		-		438		-

Liabilities
Noninterest-bearing deposits		543,165		543,165		-		543,165		-
Interest-bearing deposits		1,468,985		1,469,300		-		1,469,300		-
Subordinated debentures		34,956		34,415		-		34,415		-
Accrued interest payable		202		202		-		202		-

December 31, 2020
Assets
Cash and due from banks	$	79,519	$	79,519	$	79,519	$	-	$	-
Equity securities at fair value		2,896		2,896		1,411		-		1,485
Securities available for sale		574,787		574,787		-		563,364		11,423
Federal Home Loan Bank and Federal
Reserve Bank stock		8,004		8,004		-		8,004		-
Loans held for sale		12,921		13,350		-		13,350		-
Loans to other financial institutions		35,209		35,209		-		35,209		-
Loans, net		1,062,075		1,057,786		-		-		1,057,786
Accrued interest receivable		6,521		6,521		-		6,521		-
Interest rate lock commitments		842		842		-		842		-

Liabilities
Noninterest-bearing deposits		477,654		477,654		-		477,654		-
Interest-bearing deposits		1,196,924		1,197,964		-		1,197,964		-
Borrowings		9,327		9,143		-		9,143		-
Subordinated debentures		3,089		3,089		-		3,089		-
Accrued interest payable		183		183		-		183		-

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.

There were no liabilities measured at fair value as of September 30, 2021 or December 31, 2020 . Disclosures concerning assets measured at fair value are as follows:

Assets 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, 2021
Equity securities	$	6,723	$	-	$	1,696	$	8,419

Investment Securities, Available for Sale - September 30, 2021
U. S. Government and federal agency	$	-	$	2,020	$	-	$	2,020
U. S. Treasury notes and bonds		-		92,786		-		92,786
State and municipal		-		478,705		18,033		496,738
Mortgage-backed		-		406,696		-		406,696
Corporate		-		12,013		1,000		13,013
Asset-backed securities		-		16,862		-		16,862
Total	$	-	$	1,009,082	$	19,033	$	1,028,115

Equity Securities Held at Fair Value - December 31, 2020
Equity securities	$	1,411	$	-	$	1,485	$	2,896

Investment Securities, Available for Sale - December 31, 2020
U. S. Government and federal agency	$	-	$	2,051	$	-	$	2,051
U. S. Treasury notes and bonds		-		2,056		-		2,056
State and municipal		-		309,945		10,423		320,368
Mortgage-backed		-		246,723		-		246,723
Corporate		-		2,589		1,000		3,589
Total	$	-	$	563,364	$	11,423	$	574,787

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

	Nine Months Ended
(Dollars in thousands)	September 30,
	2021			2020
Equity Securities Held at Fair Value
Balance, January 1	$	1,485		$	1,472
Total realized and unrealized gains included in noninterest income		( 51	)		8
Net purchases, sales, calls, and maturities		262			-
Net transfers into Level 3		-			-
Balance, September 30	$	1,696		$	1,480

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	$	( 51	)	$	8

Investment Securities, Available for Sale
Balance, January 1	$	11,423		$	12,367
Total unrealized gains included in other comprehensive income		( 369	)		452
Net purchases, sales, calls, and maturities		7,979			(1,506)
Net transfers into Level 3		-			-
Balance, September 30	$	19,033		$	11,313

Amount of total losses for the period included in earning attributable to the
change in unrealized gains (losses) relating to assets and liabilities still held
at September 30	$	( 366	)	$	477

Of the available for sale Level 3 assets that were held by ChoiceOne at September 30, 2021 , the net unrealized gain as of September 30, 2021 was $ 420,000 , which was recognized in accumulated other comprehensive income in the consolidated balance sheet.

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 primarily consist of bonds issued by local municipalities and common and preferred equity securities of community banks. ChoiceOne estimates the fair value of these bonds and equity securities based on the present value of expected future cash flows using management’s best estimate of key assumptions, including forecasted interest yield and payment rates, credit quality and a discount rate commensurate with the current market and other risks involved.

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

Assets Measured at Fair Value on a Non-recurring Basis

			Quoted Prices
			In Active		Significant
			Markets for		Other		Significant
	Balances at		Identical		Observable		Unobservable
(Dollars in thousands)	Dates		Assets		Inputs		Inputs
	Indicated		(Level 1)		(Level 2)		(Level 3)
Impaired Loans
September 30, 2021	$	5,956	$	-	$	-	$	5,956
December 31, 2020	$	7,851	$	-	$	-	$	7,851

Other Real Estate
September 30, 2021	$	162	$	-	$	-	$	162
December 31, 2020	$	266	$	-	$	-	$	266

Mortgage Loan Servicing Rights
September 30, 2021	$	4,556	$	-	$	-	$	4,556
December 31, 2020	$	3,967	$	-	$	-	$	3,967

Impaired loans categorized as Level 3 assets consist of non-homogeneous loans that are considered impaired. ChoiceOne estimates the fair value of the loans based on the present value of expected future cash flows using management’s estimate of key assumptions. These assumptions include future payment ability, timing of payment streams, and estimated realizable values of available collateral (typically based on outside appraisals). The changes in fair value consisted of charge-downs of impaired loans that were posted to the allowance for loan losses and write-downs of other real estate that were posted to a valuation account.

NOTE 7 – REVENUE FROM CONTRACTS WITH CUSTOMERS

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

Service Charges and Fees on Deposit Accounts

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

Interchange Income

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

Investment Commission Income

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

Trust Fee Income

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

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(Dollars in thousands)	2021		2020		2021		2020

Service charges and fees on deposit accounts	$	977	$	842	$	2,585	$	2,498
Interchange income		1,278		1,217		3,724		2,808
Investment commission income		153		123		624		384
Trust fee income		187		197		612		569
Other charges and fees for customer services		153		111		458		342
Noninterest income from contracts with customers within the scope of ASC 606		2,748		2,490		8,003		6,601
Noninterest income within the scope of other GAAP topics		1,970		3,835		7,047		10,408
Total noninterest income	$	4,718	$	6,326	$	15,050	$	17,009

N OTE 8 – BUSINESS COMBINATIONS

Community Shores Bank Corporation

ChoiceOne completed the acquisition of Community Shores Bank Corporation (“Community Shores”) with and into ChoiceOne, with ChoiceOne as the surviving entity, effective on July 1, 2020. Community Shores had 4 branch offices as of the date of the merger. Total assets of Community Shores as of July 1, 2020 were $ 244.5 million, including total loans of $ 174.8 million. Deposits acquired in the merger, the majority of which were core deposits, totaled $ 227.8 million. The impact of the merger has been included in ChoiceOne’s results of operations since the effective date of the merger. As consideration in the merger, ChoiceOne issued 524,139 shares of ChoiceOne common stock, which was net of 84 fractional shares not issued, and cash in the amount of $ 5,390,000 with an approximate total value of $ 20.9 million.

The table below presents the allocation of purchase price for the merger with Community Shores (dollars in thousands):

*Purchase Price*

Consideration	$	20,881

*Net assets acquired:*
Cash and cash equivalents		41,023
Securities available for sale		20,023
Federal Home Loan Bank and Federal Reserve Bank stock		300
Originated loans		174,802
Premises and equipment		6,204
Other real estate owned		346
Deposit based intangible		760
Other assets		1,077
Total assets		244,535

Non-interest bearing deposits		65,499
Interest bearing deposits		162,333
Total deposits		227,832
Subordinated debentures		3,039
Other liabilities		136
Total liabilities		231,007

Net assets acquired		13,528

Goodwill	$	7,353

County Bank Corp

ChoiceOne completed the merger of County Bank Corp (“County”) with and into ChoiceOne effective on October 1, 2019. County had 14 branch offices and one loan production office as of the date of the merger. Total assets of County as of October 1, 2019 were $ 673 million, including total loans of $ 424 million. Deposits acquired in the merger, the majority of which were core deposits, totaled $ 574 million. The impact of the merger has been included in ChoiceOne’s results of operations since the effective date of the merger. As consideration in the merger, ChoiceOne issued 3,603,872 shares of ChoiceOne common stock, which was net of 299 fractional shares not issued, with an approximate value of $ 108 million.

The table below presents the allocation of purchase price for the merger with County (dollars in thousands):

Purchase Price

Consideration	$	107,945

*Net assets acquired:*
Cash and cash equivalents		20,638
Equity securities at fair value		474
Securities available for sale		187,230
Federal Home Loan Bank and Federal Reserve Bank stock		2,915
Loans to other financial institutions		33,481
Originated loans		390,116
Premises and equipment		9,271
Other real estate owned		1,364
Deposit based intangible		6,359
Bank owned life insurance		16,912
Other assets		4,002
Total assets		672,762

Non-interest bearing deposits		124,113
Interest bearing deposits		449,488
Total deposits		573,601
Federal funds purchased		3,800
Advances from Federal Home Loan Bank		23,000
Other liabilities		3,282
Total liabilities		603,683

Net assets acquired		69,079

Goodwill	$	38,866

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations .

The following discussion is designed to provide a review of the consolidated financial condition and results of operations of ChoiceOne Financial Services, Inc. (“ChoiceOne”), its wholly-owned subsidiary ChoiceOne Bank, and ChoiceOne Bank’s wholly-owned subsidiaries, ChoiceOne Insurance Agencies, Inc., Lakestone Financial Services, Inc., and Community Shores’ Financial Services, 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”, and variations of such words and similar expressions are intended to identify such forward-looking statements. Management’s determination of the provision and allowance for loan losses, the carrying value of goodwill, loan servicing rights, other real estate owned, and the fair value of investment securities (including whether any impairment on any investment security is temporary or other-than-temporary and the amount of any impairment) and management’s assumptions concerning pension and other postretirement benefit plans involve judgments that are inherently forward-looking. Examples of forward-looking statements also include, but are not limited to, statements related to risks and uncertainties related to, and the impact of, the COVID-19 pandemic on the businesses, financial condition and results of operations of ChoiceOne and its customers and statements regarding the outlook and expectations of ChoiceOne and its customers. 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, 2020 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

Net income for the third quarter of 2021 was $ 5,749,000 , which represented an increase of $ 1,920,000 or 50% compared to the third quarter of 2020 . Basic and diluted earnings per common share were $0.75 for the third quarter of 2021 compared to $0.49 for the third quarter of the prior year. Net income for the first nine months of 2021 was $17,029,000 or $2.20 per diluted share, compared to $11,513,000 or $1.55 per diluted share in the first nine months of 2020. Growth in net income in the first nine months of 2021 compared to the same period in the prior year resulted in part from the effects of the Coronavirus Aid, Relief, and Economic Security ("CARES") Act and Paycheck Protection Program ("PPP") fees and deposit dollars resulting from the CARES Act. The merger with Community Shores Bank Corporation ("Community Shores") that was effective on July 1, 2020 also had an impact on ChoiceOne's financial results. There were no merger expenses in the first nine months of 2021. Net income for the third quarter and first nine months of 2020, excluding $1,423,000 and $2,167,000 of tax-effected merger expenses, respectively was $5,252,000 or $0.67 per diluted share and $13,680,000 or $1.84 per diluted share, respectively.

The return on average assets and return on average shareholders’ equity were 1.08% and 10.01%, respectively, for the first nine months of 2021 , compared to 0.87% and 7.50%, respectively, for the same period in 2020 .

Net income and diluted earnings per share excluding tax-effected merger-related expenses are non-GAAP financial measures. Please refer to the section below titled “Non-GAAP Financial Measures” for a reconciliation to the most directly comparable GAAP financial measures.

Private Placement Subordinated Debt Offering

During the third quarter of 2021, ChoiceOne used a portion of the proceeds from this private placement to pay off $2.6 million of other outstanding debt and an additional $5.0 million of proceeds was downstreamed to the Bank. The notes will initially bear interest at a fixed interest rate of 3.25% per annum until September 3, 2026, after which time the interest rate will reset quarterly to a floating rate equal to a benchmark rate, which is expected to be the then current three-month term Secured Overnight Financing Rate (SOFR) plus 255 basis points until the notes’ maturity on September 3, 2031. The notes are redeemable by ChoiceOne, in whole or in part, on or after September 3, 2026, and at any time upon the occurrence of certain events. The notes have been structured to qualify as Tier 2 capital for ChoiceOne for regulatory capital purposes.

Acquisition of Community Shores Bank Corporation

ChoiceOne completed the acquisition of Community Shores Bank Corporation (“Community Shores”) with and into ChoiceOne effective on July 1, 2020. Community Shores had 4 branch offices as of the date of the acquisition. Total assets of Community Shores as of July 1, 2020 were $244.5 million, including total loans of $174.8 million. Deposits acquired in the merger, the majority of which were core deposits, totaled $227.8 million. The impact of the merger has been included in ChoiceOne’s results of operations since the effective date of the merger. As consideration in the merger, ChoiceOne issued 524,139 shares of ChoiceOne common stock and cash in the amount of $5,390,000 with an approximate total value of $20.9 million. The consolidation of Community Shores Bank with and into ChoiceOne Bank was completed on October 16, 2020.

The COVID-19 Pandemic

Consistent with federal banking agencies' “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus,” ChoiceOne is working with its borrowers affected by the COVID-19 pandemic. ChoiceOne granted deferrals on numerous loans to borrowers affected by the pandemic; however, as of September 30, 2021, all deferments had resumed payments in accordance with loan terms.

In addition, ChoiceOne processed over $126 million in PPP loans in 2020 and acquired an additional $37 million in PPP loans in the merger with Community Shores. ChoiceOne originated $89.1 million in PPP loans in the first nine months of 2021. PPP loans are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP. PPP loans carry a fixed rate of 1.00% and a term of two years (loans made before June 5, 2020) or five years (loans made on or after June 5, 2020), if not forgiven in whole or in part. Payments are deferred until either the date on which the Small Business Administration ("SBA") remits the amount of forgiveness proceeds to the lender or the date that is ten months after the last day of the covered period if the borrower does not apply for forgiveness within that ten-month period. The loans are 100% guaranteed by the SBA. The SBA pays the originating bank a processing fee ranging from 1% to 5%, based on the size of the loan. Upon SBA forgiveness, unrecognized fees are recognized into interest income. In the third quarter and first nine months of 2021, $48.7 million and $164.5 million of PPP loans were forgiven resulting in $1.6 million and $4.0 million of fee income, respectively. $2.4 million in PPP fee income remained deferred as of September 30, 2021. $61.2 million in PPP loans remain on ChoiceOne's balance sheet at September 30, 2021.

Dividends

Cash dividends of $1,903,000 or $0.25 per share were declared in the third quarter of 2021 , compared to $1,558,000 or $0.20 per share declared in the third quarter of 2020 . Cash dividends declared in the first nine months of 2021 were $5,322,000 or $0.69 per share, compared to $4,459,000 or $0.60 per share in the prior year. The cash dividend payout percentage was 31% for the first nine months of 2021 , compared to 39% in the same period in the prior year.

Interest Income and Expense

Tables 1 and 2 on the following pages provide information regarding interest income and expense for the three and nine month periods ended September 30, 2021 and 2020. Table 1 documents ChoiceOne’s average balances and interest income and expense, as well as the average rates earned or paid on assets and liabilities. Table 2 documents the effect on interest income and expense of changes in volume (average balance) and interest rates. These tables are referred to in the discussion of interest income, interest expense and net interest income.

Table 1 – Average Balances and Tax-Equivalent Interest Rates

	Three Months Ended September 30,
	2021								2020
(Dollars in thousands)	Average								Average
	Balance		Interest			Rate			Balance		Interest			Rate
Assets:
Loans (1)(3)	$	1,021,326	$	12,412			4.86	%	$	1,139,634	$	13,052			4.58	%
Taxable securities (2)		641,430		2,821			1.76			214,382		1,149			2.14
Nontaxable securities (1)		281,223		1,850			2.63			158,982		1,159			2.92
Other		106,831		38			0.14			125,991		40			0.13
Interest-earning assets		2,050,810		17,121			3.34			1,638,989		15,400			3.76
Noninterest-earning assets		183,418								200,062
Total assets	$	2,234,228							$	1,839,051

Liabilities and Shareholders' Equity:
Interest-bearing demand deposits	$	850,963	$	485			0.23	%	$	626,920	$	428			0.27	%
Savings deposits		407,765		144			0.14			306,198		116			0.15
Certificates of deposit		183,103		208			0.45			194,967		402			0.83
Borrowings		2,667		38			5.70			10,176		80			3.14
Subordinated debentures		9,154		151			6.60			3,064		63			8.22
Interest-bearing liabilities		1,453,652		1,026			0.28			1,141,325		1,089			0.38
Demand deposits		545,251								467,709
Other noninterest-bearing liabilities		5,956								7,415
Total liabilities		2,004,859								1,616,449
Shareholders' equity		229,369								222,602
Total liabilities and shareholders' equity	$	2,234,228							$	1,839,051

Net interest income (tax-equivalent basis) (Non-GAAP) (1)			$	16,095							$	14,311

Net interest margin (tax-equivalent basis) (Non-GAAP) (1)							3.06	%							3.38	%

Reconciliation to Reported Net Interest Income
Net interest income (tax-equivalent basis) (Non-GAAP) (1)			$	16,095							$	14,311
Adjustment for taxable equivalent interest				(395	)							(249	)
Net interest income (GAAP)			$	15,700							$	14,062
Net interest margin (GAAP)							3.14	%							3.49	%


	(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.

	Nine Months Ended September 30,
	2021								2020
(Dollars in thousands)	Average								Average
	Balance		Interest			Rate			Balance		Interest			Rate
Assets:
Loans (1)(3)	$	1,047,326	$	36,666			4.67	%	$	973,334	$	34,125			4.67	%
Taxable securities (2)		542,216		7,073			1.74			267,577		4,563			2.27
Nontaxable securities (1)		253,565		5,070			2.67			97,076		2,231			3.06
Other		81,912		70			0.11			69,061		241			0.46
Interest-earning assets		1,925,019		48,879			3.39			1,407,048		41,160			3.90
Noninterest-earning assets		180,522								349,281
Total assets	$	2,105,541							$	1,756,329

Liabilities and Shareholders' Equity:
Interest-bearing demand deposits	$	772,950	$	1,379			0.24	%	$	550,385	$	1,409			0.34	%
Savings deposits		385,160		391			0.14			247,485		181			0.10
Certificates of deposit		187,873		786			0.56			180,762		1,639			1.21
Borrowings		4,608		95			2.76			22,947		304			1.77
Subordinated debentures		5,147		253			6.55			1,021		63			8.23
Interest-bearing liabilities		1,355,738		2,904			0.29			1,002,600		3,596			0.48
Demand deposits		518,327								370,032
Other noninterest-bearing liabilities		4,745								179,033
Total liabilities		1,878,810								1,551,665
Shareholders' equity		226,731								204,664
Total liabilities and shareholders' equity	$	2,105,541							$	1,756,329

Net interest income (tax-equivalent basis) (Non-GAAP) (1)			$	45,975							$	37,564

Net interest margin (tax-equivalent basis) (Non-GAAP) (1)							3.10	%							3.42	%

Reconciliation to Reported Net Interest Income
Net interest income (tax-equivalent basis) (Non-GAAP) (1)			$	45,975							$	37,564
Adjustment for taxable equivalent interest				(1,079	)							(485	)
Net interest income (GAAP)			$	44,896							$	37,079
Net interest margin (GAAP)							3.18	%							3.56	%


	(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.

Table 2 – Changes in Tax-Equivalent Net Interest Income

	Three Months Ended September 30,
(Dollars in thousands)	2021 Over 2020
	Total			Volume			Rate
Increase (decrease) in interest income (1)
Loans (2)	$	(640	)	$	(4,428	)	$	3,788
Taxable securities		1,672			3,034			(1,362	)
Nontaxable securities (2)		691			1,427			(736	)
Other		(2	)		(22	)		20
Net change in interest income		1,721			11			1,710

Increase (decrease) in interest expense (1)
Interest-bearing demand deposits		57			407			(350	)
Savings deposits		28			69			(41	)
Certificates of deposit		(194	)		(23	)		(171	)
Borrowings		(42	)		(267	)		225
Subordinated debentures		88			170			(82	)
Net change in interest expense		(63	)		356			(419	)
Net change in tax-equivalent net interest income	$	1,784		$	(345	)	$	2,129

	Nine Months Ended September 30,
(Dollars in thousands)	2021 Over 2020
	Total			Volume			Rate
Increase (decrease) in interest income (1)
Loans (2)	$	2,541		$	2,567		$	(26	)
Taxable securities		2,510			4,358			(1,848	)
Nontaxable securities (2)		2,839			3,337			(498	)
Other		(171	)		61			(232	)
Net change in interest income		7,719			10,323			(2,604	)

Increase (decrease) in interest expense (1)
Interest-bearing demand deposits		(30	)		628			(658	)
Savings deposits		210			128			82
Certificates of deposit		(853	)		103			(956	)
Borrowings		(209	)		(390	)		181
Subordinated debentures		190			214			(24	)
Net change in interest expense		(692	)		683			(1,375	)
Net change in tax-equivalent net interest income	$	8,411		$	9,640		$	(1,229	)

	(1)	The volume variance is computed as the change in volume (average balance) multiplied by the previous year’s interest rate. The rate variance is computed as the change in interest rate multiplied by the previous year’s volume (average balance). The change in interest due to both volume and rate has been allocated to the volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.
	(2)	Interest on nontaxable investment securities and loans has been adjusted to a fully tax-equivalent basis using an incremental tax rate of 21%.

Net Interest Income

Tax-equivalent net interest income increased $1.8 million in the third quarter and $8.4 million in the first nine months of 2021 compared to the same periods in 2020 . This was partially due to $1.6 million in PPP loan fees recognized during the third quarter and $4.0 million in PPP loan fees recognized in the first nine months of 2021 and the impact of the Community Shores merger. Net interest margin on a tax-equivalent basis declined by 32 basis points in both the three and nine months ended September 30, 2021, to 3.06% and 3.10% respectively, compared to the same periods in the prior year due to a lower interest rate environment and a higher percentage of securities to total assets.

The average balance of loans increased $74.0 million in the first nine months of 2021 compared to the same period in 2020 . Much of the increase was due to $173.9 million of loan growth related to the merger with Community Shores which closed on July 1, 2020. This was offset by PPP balances declining $76.8 million in the first nine months of 2021. The increase in average loan balance caused tax-equivalent interest income from loans to increase $2.5 million in the first nine months of 2021 compared to the same period in the prior year. The average balance of total securities increased $431.1 million in the first nine months of 2021 compared to the same period in 2020 . The securities portfolio has grown as ChoiceOne has deployed excess deposit dollars into sufficiently short-term securities to allow loans to grow organically as good credits become available. The effect of the average balance growth, partially offset by a combined 45 basis point reduction in the average rate earned on securities, caused tax-equivalent securities income to increase $5.3 million in the first nine months of 2021 compared to the same period in 2020 .

Growth of $360.2 million in the average balance of interest-bearing demand deposits and savings deposits, partially offset by a combined 7 basis point decrease in the average rate paid, caused interest expense to be $180,000 higher in the first nine months of 2021 compared to the first nine months of the prior year. The average balance of certificates of deposit increased $7.1 million in the first nine months of 2021 compared to the same period in 2020 . The growth was offset by a reduction of 65 basis points in the average rate paid on certificates which caused interest expense to decrease $853,000 in the first nine months of 2021 compared to the same period in 2020 . Part of the increase in the average balance of deposits was due to the merger with Community Shores which closed on July 1, 2020 and created interest bearing deposit growth of $162.3 million. 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 used a portion of the proceeds from the private placement to payoff $2.6 million of other outstanding debt during the third quarter of 2021. 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. A reduction of $18.3 million in the average balance of borrowings in the first nine months of 2021 compared to the same period in the prior year caused interest expense to decline $209,000.

Provision and Allowance for Loan Losses

The provision for loan losses was $0 in the third quarter and $416,000 in the first nine months of 2021, compared to $1,225,000 and $3,000,000 in the same periods in the prior year. The provision in the third quarter and first nine months of 2021 was deemed prudent based on our assessment of the probable estimated losses inherent in the loan portfolio. Our methodology for measuring the appropriate level of allowance for loan losses and related provision for loan losses involves specific allocations for loans considered impaired, and general allocations for homogeneous loans based on historical loss experience.

Loans classified as impaired loans declined by $868,000 and $1.9 million during the three and nine months ended September 30, 2021, respectively. The specific allowance for loan losses for impaired loans increased by $121,000 and $52,000 during the three and nine months ended September 30, 2021 as the loans being evaluated had a higher risk of loss based on management's judgement than impaired loans at June 30, 2021 and December 31, 2020.

Loans that were collectively analyzed for impairment decreased by $14.0 million and $75.3 million during the three and nine months ended September 30, 2021 as a result of forgiveness of PPP loans of $48.7 million and $76.8 million during the same time periods. As PPP loans are 100% government guaranteed and carry no allowance, the general allocation for loan losses not considered impaired decreased by $316,000 and increased by $110,000 during the three and nine months ended September 30, 2021 as a result of loan growth excluding PPP loans during that time.

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

Nonperforming loans were $6.3 million as of September 30, 2021 , compared to $6.9 million as of June 30, 2021 and $8.2 million as of December 31, 2020 . The allowance for loan losses was 0.78% of total loans at September 30, 2021 , compared to 0.79% at June 30, 2021 and 0.71% at December 31, 2020 . Loans acquired in the mergers with County and Community Shores were recorded at fair value and as a result do not have an allowance for loan losses allocated to them unless credit deteriorates subsequent to acquisition. ChoiceOne has $7.1 million in credit mark remaining on loans acquired in the mergers. If the credit mark associated with the loans acquired in the mergers were added to the allowance for loan losses, the total allowance for loan losses would have represented 1.50% of total loans at September 30, 2021 , 1.53% at June 30, 2021 and 1.60% at December 31, 2020.

Charge-offs and recoveries for respective loan categories for the nine months ended September 30, 2021 and 2020 were as follows:

(Dollars in thousands)	2021				2020
	Charge-offs		Recoveries		Charge-offs		Recoveries
Agricultural	$	-	$	-	$	-	$	-
Commercial and industrial		195		80		46		2
Consumer		244		168		242		156
Commercial real estate		111		43		255		4
Construction real estate		-		-		-		-
Residential real estate		-		5		8		17
	$	550	$	296	$	551	$	179

Net charge-offs were $195,000 and $254,000 in the third quarter and first nine months of 2021, respectively, compared to net charge-offs of $290,000 and $372,000 during the same periods in 2020. Net charge-offs on an annualized basis as a percentage of average loans were 0.03% in the first nine months of 2021 compared to 0.05% of average loans in the same period in the prior year. Management is aware that the economic climate in Michigan will continue to affect business and individual borrowers. Management believes that the COVID-19 pandemic will also have an impact in the remainder of 2021 and beyond and, accordingly, has maintained a qualitative allocation related to the COVID-19 pandemic in evaluating its allowance for loan losses. Management has worked and intends to continue to work with delinquent borrowers in an attempt to lessen the impact of the COVID-19 pandemic on ChoiceOne.

ChoiceOne has allocated approximately $1.4 million of its allowance for loan losses at September 30, 2021 compared to $2.2 million at December 31, 2020 to borrowers falling into industry classification codes that management believes to be highly or moderately affected by the pandemic, as follows:

Highly Affected	Moderately Affected
Accommodation	Ambulatory Health Care Services
Amusement, Gambling, and Recreation Industries	Educational Services
Food Services and Drinking Places	Merchant Wholesalers, Durable Goods
Performing Arts, Spectator Sports, and Related Industries	Merchant Wholesalers, Nondurable Goods
Rental and Leasing Services	Miscellaneous Store Retailers
Scenic and Sightseeing Transportation	Motion Picture and Sound Recording Industries
Transit and Ground Passenger Transportation	Real Estate

Loans highly affected and moderately affected based on their commercial industry category have been allocated an additional 25 basis points and 15 basis points, respectively. ChoiceOne has also allocated 15 basis points to all retail loan categories. It is noted that this allowance amount is in addition to the regularly calculated allowance based on risk rating and qualitative factors. These allocations have declined from their highest levels at December 31, 2020, as ChoiceOne has seen improvements in customer, industry, and economic conditions related to the effects of the pandemic. ChoiceOne will continue to monitor concentrations as part of its analysis on an ongoing basis. Management will continue to monitor charge-offs, changes in the level of nonperforming loans, changes within the composition of the loan portfolio and the impact of the COVID-19 pandemic, and it will adjust the provision and allowance for loan losses as determined to be necessary.

Noninterest Income

Total noninterest income declined $1.6 million and $2.0 million in the three and nine months ended September 30, 2021, respectively. Total noninterest income in the third quarter and first nine months of 2020 was bolstered by heightened levels of refinancing activity within ChoiceOne's mortgage portfolio, with gains on sales of loans $1.8 million and $2.6 million larger than in the third quarter and first nine months of 2020. Gains on sales of loans were also affected by a lower gain rate in 2021 than in 2020. Future originations will be affected by housing inventory as it continues to be less than demand in ChoiceOne's market areas. Customer service charges increased $196,000 and $1.0 million in the three and nine months ended September 30, 2021, respectively, compared to the same periods in the prior year. Prior year service charges were depressed by stay at home orders during the COVID-19 pandemic. Current year service charges also included the effect of a merger with Community Shores which closed on July 1, 2020.The stock market dipped sharply in March 2020 related to the COVID-19 pandemic which affected securities held by ChoiceOne. Since that time ChoiceOne has seen the value of equity investments held climb to pre-pandemic levels. The change in the market value of equity securities was $210,000 and $645,000 better in the three months and nine months ended September 30, 2021, when compared to the same periods in the prior year. It is also noted that ChoiceOne performed a restructure of its security portfolio in the second quarter of 2020 which provided $1.3 million of additional noninterest income.

Noninterest Expense

Total noninterest expense declined $1.0 million in the third quarter of 2021 and increased $2.0 million in the first nine months of 2021 compared to the same time periods in 2020. The decrease during the third quarter of 2021 was due to savings on salaries of personnel, data processing, and professional fees related to the merger with Community Shores. Much of the increase in the first nine months of 2021 was caused by the increase in scale related to the merger with Community Shores.

Income Tax Expense

Income tax expense was $ 3,337,000 in the first nine months of 2021 compared to $ 2,460,000 for the same period in 2020 . The increase was due to a higher level of income before income tax. The effective tax rate was 16.4% for the first nine months of 2021 and 17.6% for the first nine months of 2020 . The small decline in the effective tax rate resulted from increased interest income from tax-exempt securities in 2021 compared to 2020.

FINANCIAL CONDITION

Securities

In an effort to deploy deposit growth, ChoiceOne grew its securities portfolio $172.6 million in the third quarter of 2021 and $458.9 million in the twelve months ended September 30, 2021. During the third quarter of 2021, ChoiceOne agreed to become a limited partner in Banktech Ventures LP, a venture capital fund that specializes in connecting and accelerating bank technology-focused startups. Management believes its investments are sufficiently short-term to allow loans to grow organically as good credits become available. Various securities totaling $514.2 million were purchased in the first nine months of 2021. There were no sales in the first nine months of 2021; however, $10.5 million of securities were called or matured during that same time period. Principal repayments on securities totaled $29.3 million in the first nine months of 2021.

Loans

Excluding PPP loans forgiven during the quarter, ChoiceOne grew loans organically by $32.5 million during the third quarter of 2021 due in part to new experienced lenders and an emphasis on organic loan growth during 2021. In the third quarter and first nine months of 2021, $48.7 million and $164.5 million of PPP loans were forgiven resulting in $1.6 million and $4.0 million of fee income, respectively. $2.4 million in PPP fee income remained deferred on $61.2 million in PPP loans outstanding at September 30, 2021. During the third quarter and first nine months of 2021, ChoiceOne recorded accretion income in the amount of $253,000 and $924,000, respectively. The remaining credit mark on acquired loans from the recent mergers with County Bank Corp. and Community Shores totaled $7.1 million as of September 30, 2021. ChoiceOne saw declines of $86.3 million in commercial and industrial loans and $22.2 million in residential real estate loans since the end of 2020. ChoiceOne saw an increase to agricultural loans of $9.7 million and commercial real estate loans of $16.1 million during the first nine months of 2021. The other changes resulted from normal fluctuations in borrower activity.

Asset Quality

Information regarding impaired loans can be found in Note 3 to the consolidated financial statements included in this report. The total balance of loans classified as impaired was $6.0 million at September 30, 2021 , compared to $6.8 million as of June 30, 2021 and $7.9 million as of December 31, 2020 . The change in the first nine months of 2021 was primarily comprised of a decrease of $2.8 million in impaired commercial real estate impaired loans and a $1.4 million decline in commercial and industrial impaired loans offset by a $2.7 million increase in agricultural impaired loans.

As part of its review of the loan portfolio, management also monitors the various nonperforming loans. Nonperforming loans are comprised of: (1) loans accounted for on a nonaccrual basis; (2) loans, not included in nonaccrual loans, which are contractually past due 90 days or more as to interest or principal payments; and (3) loans, not included in nonaccrual or loans past due 90 days or more, which are considered troubled debt restructurings ("TDRs").

The balances of these nonperforming loans were as follows:

(Dollars in thousands)	September 30,		December 31,
	2021		2020
Loans accounted for on a nonaccrual basis	$	1,731	$	6,707
Accruing loans which are contractually past due 90 days or more as to principal or interest payments		-		-
Loans defined as "troubled debt restructurings " which are not included above		4,610		1,537
Total	$	6,341	$	8,244

The reduction in the balance of nonaccrual loans in the first nine months of 2021 was primarily due to loans that were paid off. The increase in the TDR loans balance in the first nine months of 2021 was primarily due to a $2.2 million increase in TDR agricultural loans. 97% of loans considered TDRs were performing according to their restructured terms as of September 30, 2021 . Management believes the allowance for loan losses allocated to its nonperforming loans is sufficient at September 30, 2021 .

In March of 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was passed into law. Among other things, the CARES Act provides that certain loans subject to modifications related to the COVID-19 pandemic need not be classified as TDRs. Further, the federal banking agencies issued an “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” on March 22, 2020, followed by a revised statement on April 7, 2020, providing in part that short-term modifications to loans made on a good faith basis to borrowers who were current as of the implementation date of the statements are not considered TDRs. As a result of the pandemic, ChoiceOne provided a modification program to borrowers that included certain concessions such as interest only payments or payment deferrals. As of September 30, 2021, all deferments had resumed payments in accordance with loan terms.

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 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.

Management performed its annual qualitative assessment of goodwill as of June 30, 2021. In evaluating whether it is more likely than not that the fair value of ChoiceOne's operations was less than the carrying amount, management assessed the relevant events and circumstances such as the ones noted in ASC 350-20-35-3c. The analysis consisted of a review of ChoiceOne’s current and expected future financial performance, the potential impact of the COVID-19 pandemic on the ability of ChoiceOne’s borrowers to comply with loan terms, and the impact that reductions in both short-term and long-term interest rates have had and may continue to have on net interest margin and mortgage sales activity. The share price and book value of ChoiceOne’s stock were also compared to the prior year. Management also compared average deal values for recent closed bank transactions to ChoiceOne transactions. Despite ChoiceOne's market capitalization declining slightly from November 30, 2020 to June 30, 2021, ChoiceOne's financial performance remained positive. In assessing the totality of the events and circumstances, management determined that it was more likely than not that the fair value of ChoiceOne’s operations, from a qualitative perspective, exceeded the carrying value as of June 30, 2021 and impairment of goodwill was not necessary.

ChoiceOne’s stock price per share was less than its book value as of September 30, 2021. This indicated that goodwill may be impaired and resulted in management performing another qualitative goodwill impairment assessment as of the end of the third quarter of 2021. As a result of the analysis, management concluded that it was more-likely-than-not that the fair value of the reporting unit was greater than the carrying value. This was evidenced by the strong financial indicators, solid credit quality ratios, as well as the strong capital position of ChoiceOne. In addition, revenue in the first nine months of 2021 reflected significant and continuing growth in ChoiceOne's interest income, as well as net Small Business Administration fees related to Paycheck Protection Program loans. Based on the results of the qualitative analysis, management believed that a quantitative analysis was not necessary as of September 30, 2021.

Deposits and Borrowings

Total deposits increased $131.4 million in the third quarter and $337.6 million in the first nine months of 2021. The change in checking and savings accounts was due in part to funds related to the stimulus package included in the CARES Act as well as funds on deposit from the PPP loans that were not fully utilized as of September 30, 2021.

In September 2021, ChoiceOne completed a private placement of $32.5 million in aggregate principal amount of 3.25% fixed-to-floating rate subordinated notes due 2031. ChoiceOne intends to use net proceeds of the private placement for general corporate purposes, including support for organic growth plans, possible redemption of senior debt, common stock repurchases, and support for bank-level capital ratios. ChoiceOne used a portion of the proceeds from the private placement to pay off $2.6 million other outstanding debt during the third quarter of 2021. ChoiceOne also holds $3.1 million in subordinated debentures issued in connection with a $4.5 million trust preferred securities offering, which were obtained in the merger with Community Shores, offset by the merger mark-to-market adjustment. ChoiceOne may use Federal Home Loan Bank advances and advances from the Federal Reserve Bank Discount Window to meet short-term funding needs if needed in the remainder of 2021.

Shareholders' Equity

Total shareholders' equity declined $2.2 million in the first nine months of 2021. Accumulated other comprehensive income declined $9.1 million in the nine months ended September 30, 2021 as a result of market value declines in ChoiceOne’s available for sale securities. The change was caused by increases in certain general market interest rates since the beginning of 2021. The reduction in common stock and paid in capital resulted from ChoiceOne's repurchase of approximately

223,000 shares for $5.6 million, or a weighted average all-in cost per share of $24.94, during the first nine months of 2021. This was part of the common stock repurchase program announced in April 2021 which authorized repurchases of up to 390,114 shares, representing 5% of the total outstanding shares of common stock as of the date the plan was adopted. This program replaced and superseded all prior repurchase programs for ChoiceOne.

Regulatory Capital Requirements

Following is information regarding compliance of ChoiceOne and the 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, 2021
ChoiceOne Financial Services Inc.
Total capital (to risk weighted assets)		203,631		15.4	%		105,925		8.0	%		N/A		N/A
Common equity Tier 1 capital (to risk weighted assets) weighted assets)		158,876		12.0			59,583		4.5			N/A		N/A
Tier 1 capital (to risk weighted assets)		163,376		12.3			79,444		6.0			N/A		N/A
Tier 1 capital (to average assets)		163,376		7.5			86,989		4.0			N/A		N/A

ChoiceOne Bank
Total capital (to risk weighted assets)		177,095		13.4	%		105,716		8.0	%		132,146		10.0	%
Common equity Tier 1 capital (to risk weighted assets) weighted assets)		169,340		12.8			59,465		4.5			85,895		6.5
Tier 1 capital (to risk weighted assets)		169,340		12.8			79,287		6.0			105,716		8.0
Tier 1 capital (to average assets)		169,340		7.8			86,886		4.0			108,608		5.0


December 31, 2020
ChoiceOne Financial Services Inc.
Total capital (to risk weighted assets)	$	162,558		13.2	%	$	98,835		8.0	%		N/A		N/A
Common equity Tier 1 capital (to risk weighted assets) weighted assets)		150,465		12.2			55,595		4.5			N/A		N/A
Tier 1 capital (to risk weighted assets)		150,465		12.2			74,126		6.0			N/A		N/A
Tier 1 capital (to average assets)		150,465		8.3			72,281		4.0			N/A		N/A

ChoiceOne Bank
Total capital (to risk weighted assets)	$	159,684		12.9	%	$	98,683		8.0	%	$	123,353		10.0	%
Common equity Tier 1 capital (to risk weighted assets) weighted assets)		152,091		12.3			55,409		4.5			80,180		6.5
Tier 1 capital (to risk weighted assets)		152,091		12.3			74,012		6.0			98,683		8.0
Tier 1 capital (to average assets)		152,091		8.4			72,208		4.0			90,259		5.0

Management reviews the capital levels of ChoiceOne and ChoiceOne Bank on a regular basis. In addition to paying off $2.6 million of other outstanding debt in the third quarter of 2021, $5.0 million of proceeds from the private placement of subordinated notes was downstreamed to the Bank during the third quarter of 2021 to strengthen its capital levels. The Board of Directors and management believe that the capital levels as of September 30, 2021 are adequate for the foreseeable future. The Board of Directors’ determination of appropriate cash dividends for future periods will be based on, among other things, market conditions and ChoiceOne’s requirements for cash and capital.

Liquidity

Net cash provided by operating activities was $28.9 million for the nine months ended September 30, 2021 compared to net cash used of $20.3 million in the same period a year ago. The change was primarily due to a $5.5 million increase in income and $37.7 million higher net proceeds from loan sales in 2021 compared to 2020. Net cash used in investing activities was $398.6 million for the three quarters of 2021 compared to $98.0 million in the same period in 2020. ChoiceOne had $514.2 million of securities purchases and sold $0 of securities in the first three quarters of 2021 compared to $183.1 and $121.9 in the same period in the last year, respectively. A decline in net loan originations and payments led to cash provided of $78.0 million in the first three quarters of 2021 compared to cash used of $108.5 million in the same period during the prior year. Cash used in the prior year period related to loan originations was largely due to PPP loans. Net cash provided by financing activities was $350.0 million for the nine months ended September 30, 2021, compared to $176.6 million in the same period in the prior year. Higher growth of $133.6 million in deposits in the first three quarters of 2021, a $25.0 million increase in borrowings and $21.2 million less in net payments on borrowings contributed to the change.

ChoiceOne believes that the current level of liquidity is sufficient to meet ChoiceOne Bank's normal operating needs. This belief is based upon the availability of deposits from both the local and national markets, maturities of securities, normal loan repayments, income retention, federal funds purchased from correspondent banks, advances available from the Federal Home Loan Bank, and secured lines of credit available from the Federal Reserve Bank.

NON-GAAP FINANCIAL MEASURES

This report contains references to certain financial measures excluding tax-effected merger expenses, each of which is a financial measure that is not defined in U.S. generally accepted accounting principles (“GAAP”). Management believes these non-GAAP financial measures provide additional information that is useful to investors in helping to understand the underlying financial performance of ChoiceOne.

Non-GAAP financial measures have inherent limitations. Readers should be aware of these limitations and should be cautious with respect to the use of such measures. To compensate for these limitations, we use non-GAAP measures as comparative tools, together with GAAP measures, to assist in the evaluation of our operating performance or financial condition. Also, we ensure that these measures are calculated using the appropriate GAAP or regulatory components in their entirety and that they are computed in a manner intended to facilitate consistent period-to-period comparisons. ChoiceOne’s method of calculating these non-GAAP financial measures may differ from methods used by other companies. These non-GAAP financial measures should not be considered in isolation or as a substitute for those financial measures prepared in accordance with GAAP or in-effect regulatory requirements.

A reconciliation of these non-GAAP financial measures follows:

Non-GAAP Reconciliation

(Unaudited)

The non-GAAP measures presented in the table below reflect the adjustments of the reported U.S. GAAP results for significant items that management does not believe are reflective of ChoiceOne’s current and ongoing operations.

	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands, Except Per Share Data)	2021		2020		2021		2020

Income before income tax	$	6,912	$	4,614	$	20,367	$	13,973
Adjustment for pre-tax merger expenses		-		1,707		-		2,526
Adjusted income before income tax	$	6,912	$	6,321	$	20,367	$	16,499

Income tax expense	$	1,163	$	785	$	3,337	$	2,460
Tax impact of adjustment for pre-tax merger expenses		-		284		-		359
Adjusted income tax expense	$	1,163	$	1,069	$	3,337	$	2,819

Net income	$	5,749	$	3,829	$	17,029	$	11,513
Adjustment for pre-tax merger expenses, net of tax impact		-		1,423		-		2,167
Adjusted net income	$	5,749	$	5,252	$	17,029	$	13,680

Basic earnings per share	$	0.75	$	0.49	$	2.20	$	1.55
Effect of merger expenses, net of tax impact		-		0.18		-		0.29
Adjusted basic earnings per share	$	0.75	$	0.67	$	2.20	$	1.84

Diluted earnings per share	$	0.75	$	0.49	$	2.20	$	1.55
Effect of merger expenses, net of tax impact		-		0.18		-		0.29
Adjusted diluted earnings per share	$	0.75	$	0.67	$	2.20	$	1.84

Item 4. Controls and Procedures .

An evaluation was performed under the supervision and with the participation of ChoiceOne’s management, including the Chief Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of ChoiceOne’s disclosure controls and procedures as of September 30, 2021 . Based on and as of the time of that evaluation, ChoiceOne’s management, including the Chief Executive Officer and Principal Financial Officer, concluded that ChoiceOne’s disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that material information required to be disclosed in the reports that ChoiceOne files or submits under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that ChoiceOne files or submits under the Exchange Act is accumulated and communicated to management, including ChoiceOne’s principal executive and principal financial officers, as appropriate to allow for timely decisions regarding required disclosure. There was no change in ChoiceOne’s internal control over financial reporting that occurred during the three months ended September 30, 2021 that has materially affected, or that is reasonably likely to materially affect, ChoiceOne’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings .

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

Item 1A. Risk Factors .

Information concerning risk factors is contained in the discussion in Item 1A, “Risk Factors,” in ChoiceOne’s Annual Report on Form 10-K for the year ended December 31, 2020.

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

There were no unregistered sales of equity securities in th e third qu arter of 2021.

ISSUER PURCHASES OF EQUITY SECURITIES

The following table provides information regarding ChoiceOne's purchases of its common stock during the quarter ended September 30, 2021.

					Total Number		Maximum
					of Shares		Number of
	Total Number				Purchased as		Shares that
	Number		Average		Part of a		May Yet be
	of Shares		Price Paid		Publicly		Purchased
Period	Purchased		per Share		Announced Plan		Under the Plan (1)

July 1 - July 31, 2021
Employee Transactions		-	$	-		-
Repurchase Plan		75,657	$	24.84		75,657		198,756
August 1 - August 31, 2021
Employee Transactions		-	$	-		-
Repurchase Plan		18,514	$	24.52		18,514		180,242
September 1 - September 30, 2021
Employee Transactions		-	$	-		-
Repurchase Plan		13,069	$	25.23		13,069		167,173

(1) As of September 30, 2021, there are 167,173 shares remaining that may yet be purchased under approved plans. The repurchase plan was adopted and announced in April 2021. There was no stated expiration date. The plan authorized the repurchase of up to 390,114 shares, representing 5% of the total outstanding shares of common stock as of the date the plan was adopted.

Item 5. Other Information

None.

Item 6. Exhibits

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

Exhibit Number		Document

3.1		Restated Articles of Incorporation of ChoiceOne Financial Services, Inc. Previously filed as an exhibit to ChoiceOne’s Form 8-A filed February 4, 2020. Here incorporated by reference.

3.2		Bylaws of ChoiceOne as currently in effect and any amendments thereto. Previously filed as an exhibit to ChoiceOne’s Form 8-K filed April 21, 2021. Here incorporated by reference.

4.1		Advances, Pledge and Security Agreement between ChoiceOne Bank and the Federal Home Loan Bank of Indianapolis. Previously filed as an exhibit to ChoiceOne Financial Services, Inc.’s Form 10-K Annual Report for the year ended December 31, 2013. Here incorporated by reference.

4. 2		Form of 3.25% Fixed-to-Floating Rate Subordinated Note due September 3, 2031. Previously filed as an exhibit to ChoiceOne Financial Services, Inc.'s Form 8-K filed September 7, 2021. Here incorporated by reference.

4. 3		Form of 3.25% Fixed-to-Floating Rate Global Subordinated Note due September 3, 2031. Previously filed as an exhibit to ChoiceOne Financial Services, Inc.'s Form 8-K filed September 7, 2021. Here incorporated by reference.

31.1		Certification of Chief Executive Officer

31.2		Certification of Treasurer

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

101.INS		Inline XBRL Instance Document

101.SCH		Inline XBRL Taxonomy Extension Schema Document

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document

104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

SIGNATURES

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

	CHOICEONE FINANCIAL SERVICES, INC.

Date: November 8, 2021	/s/ Kelly J. Potes
	Kelly J. Potes Chief Executive Officer (Principal Executive Officer)

Date: November 8, 2021	/s/ Thomas L. Lampen
	Thomas L. Lampen Treasurer (Principal Financial and Accounting Officer)

TABLE OF CONTENTS

Part I. Financial Information Item 1. Financial Statements Note 1 Summary Of Significant Accounting Policies Note 2 Securities Note 3 Loans and Allowance For Loan Losses Note 4 Earnings Per Share Note 5 Financial Instruments Note 6 Fair Value Measurements Note 7 Revenue From Contracts with Customers Note 8 Business Combinations Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of Operations Item 4. Controls and Procedures Part II. Other Information Item 1. Legal Proceedings Item 1A. Risk Factors Item 2. Unregistered Sales Of Equity Securities and Use Of Proceeds Item 5. Other Information Item 6. Exhibits

Exhibits

3.1 Restated Articles of Incorporation of ChoiceOne Financial Services, Inc. Previously filed as an exhibit to ChoiceOnes Form 8-A filed February 4, 2020.Here incorporated by reference. 3.2 Bylaws of ChoiceOne as currently in effect and any amendments thereto. Previously filed as an exhibit to ChoiceOnes Form 8-K filed April 21, 2021. Here incorporated by reference. 4.1 Advances, Pledge and Security Agreement between ChoiceOne Bank and the Federal Home Loan Bank of Indianapolis. Previously filed as an exhibit to ChoiceOne Financial Services, Inc.s Form 10-K Annual Report for the year ended December 31, 2013. Here incorporated by reference. 4.2 Form of 3.25% Fixed-to-Floating Rate Subordinated Note due September 3, 2031. Previously filed as an exhibit to ChoiceOne Financial Services, Inc.'s Form 8-K filed September 7, 2021. Here incorporated by reference. 4.3 Form of 3.25% Fixed-to-Floating Rate Global Subordinated Note due September 3, 2031. Previously filed as an exhibit to ChoiceOne Financial Services, Inc.'s Form 8-K filed September 7, 2021. Here incorporated by reference. 31.1 Certification of Chief Executive Officer 31.2 Certification of Treasurer 32.1 Certification pursuant to 18 U.S.C. 1350.

COFS 10-Q Quarter ended Sept. 30, 2021

Exhibits