ChoiceOne Financial Services Inc.

08/12/2022 | Press release | Distributed by Public on 08/12/2022 06:52

Quarterly Report for Quarter Ending June 30, 2022 (Form 10-Q)

cofs20220630_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 June 30, 2022

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

For the transition period from to

Commission File Number: 000-19202

ChoiceOne Financial Services, Inc.

(Exact Name of Registrant as Specified in its Charter)

Michigan
(State or Other Jurisdiction of
Incorporation or Organization)

38-2659066
(I.R.S. Employer Identification No.)

109 East Division
Sparta, Michigan

(Address of Principal Executive Offices)


49345
(Zip Code)

(616) 887-7366
(Registrant's Telephone Number, including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒ No ☐

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

Large accelerated filer ☐

Accelerated filer ☐

Non-accelerated filer ☒

Smaller reporting company ☒

Emerging growth company ☐

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

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

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

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Common stock

COFS

NASDAQ Capital Market

As of July 31, 2022, the Registrant had outstanding 7,507,769 shares of common stock.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

ChoiceOne Financial Services, Inc.
CONSOLIDATED BALANCE SHEETS

June 30,

December 31,

(Dollars in thousands, except per share data)

2022

2021

(Unaudited)

(Audited)

Assets

Cash and due from banks

$ 39,946 $ 31,537

Time deposits in other financial institutions

350 350

Cash and cash equivalents

40,296 31,887

Equity securities, at fair value (Note 2)

8,288 8,492

Securities available for sale, at fair value (Note 2)

566,142 1,098,885

Securities held to maturity, at amortized cost (Note 2)

429,675 -

Federal Home Loan Bank stock

3,493 3,824

Federal Reserve Bank stock

5,064 5,064

Loans held for sale

10,628 9,351

Loans to other financial institutions

37,422 42,632

Loans (Note 3)

1,081,389 1,016,848

Allowance for loan losses (Note 3)

(7,416 ) (7,688 )

Loans, net

1,073,973 1,009,160

Premises and equipment, net

29,122 29,880

Other real estate owned, net

- 194

Cash value of life insurance policies

43,774 43,356

Goodwill

59,946 59,946

Core deposit intangible

3,358 3,962

Other assets

49,024 20,049

Total assets

$ 2,360,205 $ 2,366,682

Liabilities

Deposits - noninterest-bearing

$ 578,927 $ 560,931

Deposits - interest-bearing

1,559,577 1,491,363

Total deposits

2,138,504 2,052,294

Borrowings

7,000 50,000

Subordinated debentures

35,140 35,017

Other liabilities

13,101 7,702

Total liabilities

2,193,745 2,145,013

Shareholders' Equity

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

- -

Common stock and paid-in capital, nopar value; shares authorized: 12,000,000; shares outstanding: 7,503,072at June 30, 2022 and 7,510,379at December 31, 2021

171,804 171,913

Retained earnings

59,728 52,332

Accumulated other comprehensive loss, net

(65,072 ) (2,576 )

Total shareholders' equity

166,460 221,669

Total liabilities and shareholders' equity

$ 2,360,205 $ 2,366,682

See accompanying notes to interim consolidated financial statements.

2

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

Three Months Ended

Six Months Ended

(Dollars in thousands, except per share data)

June 30,

June 30,

2022

2021

2022

2021

Interest income

Loans, including fees

$ 12,523 $ 11,565 $ 24,821 $ 24,247

Securities:

Taxable

3,522 2,396 7,029 4,252

Tax exempt

1,559 1,446 3,214 2,543

Other

62 12 76 32

Total interest income

17,666 15,419 35,140 31,074

Interest expense

Deposits

996 839 1,779 1,719

Advances from Federal Home Loan Bank

2 2 3 3

Other

379 70 748 156

Total interest expense

1,377 911 2,530 1,878

Net interest income

16,289 14,508 32,610 29,196

Provision for loan losses

- 166 - 416

Net interest income after provision for loan losses

16,289 14,342 32,610 28,780

Noninterest income

Customer service charges

2,353 2,134 4,542 4,054

Insurance and investment commissions

233 198 438 471

Gains on sales of loans

887 1,771 1,691 3,917

Net gains (losses) on sales of securities

(427 ) 2 (427 ) 3

Net gains on sales and write downs of other assets

1 (4 ) 172 1

Earnings on life insurance policies

254 191 534 377

Trust income

176 253 354 425

Change in market value of equity securities

(327 ) (119 ) (683 ) 489

Other

280 306 655 595

Total noninterest income

3,430 4,732 7,276 10,332

Noninterest expense

Salaries and benefits

7,537 6,999 15,143 14,167

Occupancy and equipment

1,518 1,498 3,143 3,053

Data processing

1,578 1,673 3,322 3,102

Professional fees

559 943 1,069 1,672

Supplies and postage

166 124 357 224

Advertising and promotional

147 207 279 352

Intangible amortization

322 352 604 659

FDIC insurance

225 156 450 308

Other

1,105 1,177 2,480 2,120

Total noninterest expense

13,157 13,129 26,847 25,657

Income before income tax

6,562 5,945 13,039 13,455

Income tax expense

947 902 1,896 2,174

Net income

$ 5,615 $ 5,043 $ 11,143 $ 11,281

Basic earnings per share (Note 4)

$ 0.75 $ 0.65 $ 1.49 $ 1.45

Diluted earnings per share (Note 4)

$ 0.75 $ 0.65 $ 1.49 $ 1.45

Dividends declared per share

$ 0.25 $ 0.22 $ 0.50 $ 0.44

See accompanying notes to interim consolidated financial statements.

3

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

Three Months Ended

Six Months Ended

(Dollars in thousands)

June 30,

June 30,

2022

2021

2022

2021

Net income

$ 5,615 $ 5,043 $ 11,143 $ 11,281

Other comprehensive income:

Change in net unrealized gain (loss) on available-for-sale securities

(31,574 ) 11,662 (74,512 ) (5,291 )

Income tax benefit (expense)

6,631 (2,449 ) 15,648 1,111

Less: reclassification adjustment for net (gain) loss included in net income

427 (1 ) 427 (3 )

Income tax benefit (expense)

(90 ) - (90 ) 1

Less: net unrealized (gains) losses on securities transferred from available-for-sale to held-to-maturity

- - 3,404 -

Income tax benefit (expense)

- - (715 ) -

Unrealized gain (loss) on available-for-sale securities, net of tax

(24,606 ) 9,212 (55,838 ) (4,182 )

Reclassification of unrealized gain (loss) upon transfer of securities from available-for-sale to held-to-maturity

- - (3,404 ) -

Income tax benefit (expense)

- - 715 -

Less: amortization of net unrealized (gains) losses on securities transferred from available-for-sale to held-to-maturity

74 - 244 -

Income tax benefit (expense)

(16 ) - (51 ) -

Unrealized loss on held to maturity securities, net of tax

58 - (2,496 ) -

Change in net unrealized gain (loss) on derivatives

(5,576 ) - (5,576 ) -

Income tax benefit (expense)

1,171 - 1,171 -

Less: amortization of net unrealized (gains) losses included in net income

307 - 307 -

Income tax benefit (expense)

(64 ) - (64 ) -

Unrealized gain (loss) on derivative instruments, net of tax

(4,162 ) - (4,162 ) -

Other comprehensive income (loss), net of tax

(28,710 ) 9,212 (62,496 ) (4,182 )

Comprehensive income (loss)

$ (23,095 ) $ 14,255 $ (51,353 ) $ 7,099

See accompanying notes to interim consolidated financial statements.

4

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

For the three months ended June 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, April 1, 2021

7,802,285 $ 178,993 $ 42,012 $ (2,366 ) $ 218,639

Net income

5,043 5,043

Other comprehensive income

9,212 9,212

Shares issued

5,953 106 106

Effect of employee stock purchases

- 9 9

Stock-based compensation expense

- 112 112

Shares repurchased

(115,701 ) (2,897 ) (2,897 )

Cash dividends declared ($0.22per share)

(1,703 ) (1,703 )

Balance, June 30, 2021

7,692,537 $ 176,323 $ 45,352 $ 6,846 $ 228,521

Balance, April 1, 2022

7,489,812 $ 171,492 $ 55,988 $ (36,362 ) $ 191,118

Net income

5,615 5,615

Other comprehensive income (loss)

(28,710 ) (28,710 )

Shares issued

13,260 139 139

Effect of employee stock purchases

6 6

Stock-based compensation expense

167 167

Cash dividends declared ($0.25per share)

(1,875 ) (1,875 )

Balance, June 30, 2022

7,503,072 $ 171,804 $ 59,728 $ (65,072 ) $ 166,460
5

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

For the six months ended June 30,

Accumulated

Common

Other

Stock and

Comprehensive

Number of

Paid in

Retained

Income/(Loss),

(Dollars in thousands, except per share data)

Shares

Capital

Earnings

Net

Total

Balance, January 1, 2021

7,796,352 $ 178,750 $ 37,490 $ 11,028 $ 227,268

Net income

11,281 11,281

Other comprehensive loss

(4,182 ) (4,182 )

Shares issued

11,886 281 281

Effect of employee stock purchases

- 13 13

Stock-based compensation expense

- 176 176

Shares repurchased

(115,701 ) (2,897 ) (2,897 )

Cash dividends declared ($0.44per share)

(3,419 ) (3,419 )

Balance, June 30, 2021

7,692,537 $ 176,323 $ 45,352 $ 6,846 $ 228,521

Balance, January 1, 2022

7,510,379 $ 171,913 $ 52,332 $ (2,576 ) $ 221,669

Net income

11,143 11,143

Other comprehensive income (loss)

(62,496 ) (62,496 )

Shares issued

18,592 272 272

Effect of employee stock purchases

13 13

Stock-based compensation expense

288 288

Shares repurchased

(25,899 ) (682 ) (682 )

Cash dividends declared ($0.50per share)

(3,747 ) (3,747 )

Balance, June 30, 2022

7,503,072 $ 171,804 $ 59,728 $ (65,072 ) $ 166,460

See accompanying notes to interim consolidated financial statements.

6

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

Six Months Ended

(Dollars in thousands)

June 30,

2022

2021

Cash flows from operating activities:

Net income

$ 11,143 $ 11,281

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

Provision for loan losses

- 416

Depreciation

1,356 1,299

Amortization

5,506 4,336

Compensation expense on employee and director stock purchases, stock options, and restricted stock units

493 404

Net losses (gains) on sales of available for sale securities

427 (3 )

Net change in market value of equity securities

683 (489 )

Gains on sales of loans

(1,691 ) (3,917 )

Loans originated for sale

(53,750 ) (122,993 )

Proceeds from loan sales

53,480 125,714

Earnings on bank-owned life insurance

(534 ) (377 )

Proceeds from BOLI policy

130 -

Earnings on death benefit from bank-owned life insurance

(14 ) -

(Gains)/losses on sales of other real estate owned

(41 ) (4 )

Proceeds from sales of other real estate owned

235 270

Deferred federal income tax (benefit)/expense

169 506

Net change in:

Other assets

(768 ) (992 )

Other liabilities

5,480 1,693

Net cash provided by operating activities

22,304 17,144

Cash flows from investing activities:

Sales of securities available for sale

31,828 -

Maturities, prepayments and calls of securities available for sale

27,404 28,104

Maturities, prepayments and calls of securities held to maturity

3,485 -

Purchases of securities available for sale

(32,676 ) (322,009 )

Purchases of securities held to maturity

(5,748 ) -

Loan originations and payments, net

(59,602 ) 100,799

Additions to premises and equipment

(701 ) (1,461 )

Proceeds from (payments for) derivative contracts, net

(16,745 ) -

Net cash provided by (used in) investing activities

(52,755 ) (194,567 )

Cash flows from financing activities:

Net change in deposits

86,210 206,157

Net change in short term borrowings

(43,000 ) (6,685 )

Issuance of common stock

80 66

Repurchase of common stock

(682 ) (2,897 )

Cash dividends

(3,747 ) (3,419 )

Net cash provided by financing activities

38,861 193,222

Net change in cash and cash equivalents

8,409 15,799

Beginning cash and cash equivalents

31,887 79,519

Ending cash and cash equivalents

$ 40,296 $ 95,318

Supplemental disclosures of cash flow information:

Cash paid for interest

$ 2,182 $ 1,965

Cash paid for income taxes

- 901

Loans transferred to other real estate owned

- 260

See accompanying notes to interim consolidated financial statements.

7

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

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include ChoiceOne Financial Services, Inc. ("ChoiceOne"), its wholly-owned subsidiary, ChoiceOne Bank, and ChoiceOne Bank's wholly-owned subsidiary, ChoiceOne Insurance Agencies, Inc. Intercompany transactions and balances have been eliminated in consolidation.

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

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

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

Use of Estimates

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

Investment Securities

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

Loans to Other Financial Institutions

Loans to other financial institutions are made for the purpose of providing a warehouse line of credit to facilitate funding of residential mortgage loan originations at other financial institutions. The loans are short-term in nature and are designed to provide funding for the time period between the loan origination and its subsequent sale in the secondary market. Loans to other financial institutions earn a share of interest income, determined by the contract, from when the loan is funded to when the loan is sold on the secondary market. Loans to other financial institutions are excluded from Note 3.No loans to other financial institutions were impaired, nonaccrual, or past due greater than 30 days as of June 30, 2022.

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).

Goodwill

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

Core Deposit Intangible

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

8

Stock Transactions

A total of 7,407shares of common stock were issued to ChoiceOne's Board of Directors for a cash price of $192,000 under the terms of the Directors' Stock Purchase Plan in the first halfof 2022. A total of 4,257shares for a cash price of $80,000 were issued under the Employee Stock Purchase Plan in the firstsix monthsof 2022. ChoiceOne repurchased 25,899 shares for $682,000, or a weighted average all-in cost per share of $26.35, during the first quarter of 2022. This was part of the common stock repurchase program announced in April 2021 which authorized repurchases of up to 390,114 shares, representing 5% of the total outstanding shares of common stock as of the date the program was adopted. No shares were repurchased under this program in the second quarter of 2022.

Allowance for Loan Losses

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

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

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

Reclassifications

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

Recent Accounting Pronouncements

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

9

NOTE 2 - SECURITIES

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

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

June 30, 2022

Gross

Gross

(Dollars in thousands)

Amortized

Unrealized

Unrealized

Fair

Cost

Gains

Losses

Value

Equity securities

$ 8,432 $ 405 $ (549 ) $ 8,288

December 31, 2021

Gross

Gross

(Dollars in thousands)

Amortized

Unrealized

Unrealized

Fair

Cost

Gains

Losses

Value

Equity securities

$ 7,953 $ 665 $ (126 ) $ 8,492

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

June 30, 2022

Gross

Gross

(Dollars in thousands)

Amortized

Unrealized

Unrealized

Fair

Available for Sale:

Cost Gains Losses Value

U.S. Treasury notes and bonds

$ 93,040 $ - $ (9,397 ) $ 83,643

State and municipal

300,824 34 (44,197 ) 256,661

Mortgage-backed

230,842 5 (19,719 ) 211,128

Corporate

1,256 - (18 ) 1,238

Asset-backed securities

14,122 - (650 ) 13,472

Total

$ 640,084 $ 39 $ (73,981 ) $ 566,142

Held to Maturity:

U.S. Government and federal agency

$ 2,963 $ - $ (283 ) $ 2,680

State and municipal

203,267 - (32,638 ) 170,629

Mortgage-backed

202,595 - (23,007 ) 179,588

Corporate

19,593 - (1,013 ) 18,580

Asset-backed securities

1,257 - (67 ) 1,190

Total

$ 429,675 $ - $ (57,008 ) $ 372,667

December 31, 2021

Gross

Gross

(Dollars in thousands)

Amortized

Unrealized

Unrealized

Fair

Available for Sale:

Cost Gains Losses Value

U.S. Government and federal agency

$ 2,001 $ 7 $ - $ 2,008

U.S. Treasury notes and bonds

93,267 23 (1,311 ) 91,979

State and municipal

528,252 10,704 (4,109 ) 534,847

Mortgage-backed

441,383 781 (9,049 ) 433,115

Corporate

20,856 19 (233 ) 20,642

Asset-backed securities

16,387 - (93 ) 16,294

Total

$ 1,102,146 $ 11,534 $ (14,795 ) $ 1,098,885

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 six months ended June 30, 2022or in the same periods in2021. 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.

10

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

Available for Sale Securities maturing within:

Fair Value

Less than

1 Year -

5 Years -

More than

at June 30,

(Dollars in thousands)

1 Year

5 Years

10 Years

10 Years

2022

U.S. Treasury notes and bonds

$ 2,000 $ - $ 81,643 $ - $ 83,643

State and municipal

16,426 8,873 75,501 155,861 256,661

Corporate

500 505 233 - 1,238

Asset-backed securities

- 9,741 3,731 - 13,472

Total debt securities

18,926 19,119 161,108 155,861 355,014

Mortgage-backed securities

18,793 101,454 90,244 637 211,128

Total Available for Sale

$ 37,719 $ 120,573 $ 251,352 $ 156,498 $ 566,142

Held to Maturity Securities maturing within:

Amortized Cost

Less than

1 Year -

5 Years -

More than

at June 30,

(Dollars in thousands)

1 Year

5 Years

10 Years

10 Years

2022

U.S. Government and federal agency

$ - $ - $ 2,963 $ - $ 2,963

State and municipal

2,724 5,112 89,248 106,183 203,267

Corporate

- 250 18,343 1,000 19,593

Asset-backed securities

- 1,257 - - 1,257

Total debt securities

2,724 6,619 110,554 107,183 227,080

Mortgage-backed securities

6,525 45,672 150,398 - 202,595

Total Held to Maturity

$ 9,249 $ 52,291 $ 260,952 $ 107,183 $ 429,675

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

Three Months Ended

Six Months Ended

June 30,

June 30,

2022

2021

2022

2021

Net gains and (losses) recognized during the period

$ (327 ) $ (119 ) $ (683 ) $ 489

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

$ (327 ) $ (119 ) $ (683 ) $ 489
11

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 June 30, 2022

Beginning balance

$ 387 $ 1,752 $ 304 $ 3,690 $ 37 $ 589 $ 842 $ 7,601

Charge-offs

- (100 ) (144 ) - - - - (244 )

Recoveries

- 2 55 1 - 1 - 59

Provision

(255 ) (41 ) 94 533 8 101 (440 ) -

Ending balance

$ 132 $ 1,613 $ 309 $ 4,224 $ 45 $ 691 $ 402 $ 7,416

Allowance for Loan Losses Six Months Ended June 30, 2022

Beginning balance

$ 448 $ 1,454 $ 290 $ 3,705 $ 110 $ 671 $ 1,010 $ 7,688

Charge-offs

(131 ) (255 ) - - - - (386 )

Recoveries

4 106 2 - 2 - 114

Provision

(316 ) 286 168 517 (65 ) 18 (608 ) -

Ending balance

$ 132 $ 1,613 $ 309 $ 4,224 $ 45 $ 691 $ 402 $ 7,416

Individually evaluated for impairment

$ 1 $ 52 $ 1 $ 7 $ - $ 154 $ - $ 215

Collectively evaluated for impairment

$ 131 $ 1,561 $ 308 $ 4,217 $ 45 $ 537 $ 402 $ 7,201

Loans

June 30, 2022

Individually evaluated for impairment

$ 320 $ 159 $ 7 $ 149 $ - $ 2,052 $ 2,687

Collectively evaluated for impairment

58,743 204,149 38,359 555,787 17,950 188,257 1,063,245

Acquired with deteriorated credit quality

- 4,549 10 9,227 - 1,671 15,457

Ending balance

$ 59,063 $ 208,857 $ 38,376 $ 565,163 $ 17,950 $ 191,980 $ 1,081,389

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 June 30, 2021

Beginning balance

$ 342 $ 1,599 $ 247 $ 4,345 $ 74 $ 1,024 $ 109 $ 7,740

Charge-offs

- (24 ) (76 ) - - - - (100 )

Recoveries

- 64 35 42 - 3 - 144

Provision

32 (116 ) 37 (10 ) - (167 ) 390 166

Ending balance

$ 374 $ 1,523 $ 243 $ 4,377 $ 74 $ 860 $ 499 $ 7,950

Allowance for Loan Losses Six Months Ended June 30, 2021

Beginning balance

$ 257 $ 1,327 $ 317 $ 4,178 $ 97 $ 1,300 $ 117 $ 7,593

Charge-offs

- (98 ) (147 ) (48 ) - - - (293 )

Recoveries

- 73 113 43 - 5 - 234

Provision

117 221 (40 ) 204 (23 ) (445 ) 382 416

Ending balance

$ 374 $ 1,523 $ 243 $ 4,377 $ 74 $ 860 $ 499 $ 7,950

Individually evaluated for impairment

$ 138 $ 20 $ - $ 56 $ - $ 148 $ - $ 362

Collectively evaluated for impairment

$ 236 $ 1,503 $ 243 $ 4,321 $ 74 $ 712 $ 499 $ 7,588

Loans

June 30, 2021

Individually evaluated for impairment

$ 3,167 $ 184 $ - $ 1,140 $ - $ 2,333 $ 6,824

Collectively evaluated for impairment

43,400 259,034 33,354 461,941 15,440 165,318 978,487

Acquired with deteriorated credit quality

- 5,814 16 10,906 - 2,540 19,276

Ending balance

$ 46,567 $ 265,032 $ 33,370 $ 473,987 $ 15,440 $ 170,191 $ 1,004,587
12

Commercial

(Dollars in thousands)

and

Commercial

Construction

Residential

Agricultural

Industrial

Consumer

Real Estate

Real Estate

Real Estate

Unallocated

Total

Allowance for Loan Losses

December 31, 2021

Individually evaluated for impairment

$ 251 $ 95 $ 2 $ 9 $ - $ 146 $ - $ 503

Collectively evaluated for impairment

$ 197 $ 1,359 $ 288 $ 3,696 $ 110 $ 525 $ 1,010 $ 7,185

Loans

December 31, 2021

Individually evaluated for impairment

$ 2,616 $ 339 $ 14 $ 273 $ - $ 2,191 $ 5,433

Collectively evaluated for impairment

62,203 197,656 35,148 515,528 19,066 164,647 994,248

Acquired with deteriorated credit quality

- 5,029 12 10,083 - 2,043 17,167

Ending balance

$ 64,819 $ 203,024 $ 35,174 $ 525,884 $ 19,066 $ 168,881 $ 1,016,848

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

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

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

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

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

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

13

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

June 30,

December 31,

June 30,

December 31,

June 30,

December 31,

2022

2021

2022

2021

2022

2021

Pass

$ 58,429 $ 61,864 $ 206,399 $ 201,202 $ 559,653 $ 519,537

Special Mention

313 339 1,342 300 739 778

Substandard

321 2,616 1,116 1,266 4,771 5,569

Doubtful

- - - 256 - -
$ 59,063 $ 64,819 $ 208,857 $ 203,024 $ 565,163 $ 525,884

Consumer Credit Exposure - Credit Risk Profile Based On Payment Activity

(Dollars in thousands)

Consumer

Construction Real Estate

Residential Real Estate

June 30,

December 31,

June 30,

December 31,

June 30,

December 31,

2022

2021

2022

2021

2022

2021

Performing

$ 38,368 $ 35,174 $ 17,950 $ 19,066 $ 191,152 $ 168,031

Nonperforming

- - - - - -

Nonaccrual

8 - - - 828 850
$ 38,376 $ 35,174 $ 17,950 $ 19,066 $ 191,980 $ 168,881

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

Three Months Ended June 30, 2022

Six Months Ended June 30, 2022

Pre-

Post-

Pre-

Post-

Modification

Modification

Modification

Modification

Outstanding

Outstanding

Outstanding

Outstanding

(Dollars in thousands)

Number of

Recorded

Recorded

Number of

Recorded

Recorded

Loans

Investment

Investment

Loans

Investment

Investment

Agricultural

- $ - $ - 1 $ 258 $ 258

Commercial and industrial

1 19 19 1 19 19

Total

1 $ 19 $ 19 2 $ 277 $ 277

Three Months Ended June 30, 2021

Six Months Ended June 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 $ 2,320 $ 2,320

Commercial Real Estate

- - - 2 1,210 1,210

Total

- $ - $ - 8 $ 3,530 $ 3,530

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

Three Months Ended

Six Months Ended

June 30, 2021

June 30, 2021

(Dollars in thousands)

Number

Recorded

Number

Recorded

of Loans

Investment

of Loans

Investment

Commercial and industrial

1 $ 52 1 $ 52

Commercial Real Estate

1 184 1 184

Total

2 $ 236 2 $ 236
14

Impaired loans by loan category follow:

Unpaid

(Dollars in thousands)

Recorded

Principal

Related

Investment

Balance

Allowance

June 30, 2022

With no related allowance recorded

Agricultural

$ 314 $ 428 $ -

Commercial and industrial

- - -

Consumer

- - -

Construction real estate

- - -

Commercial real estate

- - -

Residential real estate

439 469 -

Subtotal

753 897 -

With an allowance recorded

Agricultural

6 7 1

Commercial and industrial

159 190 52

Consumer

7 8 1

Construction real estate

149 149 -

Commercial real estate

- - 7

Residential real estate

1,613 1,644 154

Subtotal

1,934 1,998 215

Total

Agricultural

320 435 1

Commercial and industrial

159 190 52

Consumer

7 8 1

Construction real estate

149 149 -

Commercial real estate

- - 7

Residential real estate

2,052 2,113 154

Total

$ 2,687 $ 2,895 $ 215

Unpaid

(Dollars in thousands)

Recorded

Principal

Related

Investment

Balance

Allowance

December 31, 2021

With no related allowance recorded

Agricultural

$ 314 $ 428 $ -

Commercial and industrial

- - -

Consumer

- - -

Construction real estate

- - -

Commercial real estate

94 94 -

Residential real estate

164 172 -

Subtotal

572 694 -

With an allowance recorded

Agricultural

2,302 2,302 251

Commercial and industrial

339 363 95

Consumer

14 15 2

Construction real estate

- - -

Commercial real estate

179 179 9

Residential real estate

2,027 2,084 146

Subtotal

4,861 4,943 503

Total

Agricultural

2,616 2,730 251

Commercial and industrial

339 363 95

Consumer

14 15 2

Construction real estate

- - -

Commercial real estate

273 273 9

Residential real estate

2,191 2,256 146

Total

$ 5,433 $ 5,637 $ 503
15

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

Average

Interest

(Dollars in thousands)

Recorded

Income

Investment

Recognized

Three Months Ended June 30, 2022

With no related allowance recorded

Agricultural

$ 314 $ -

Commercial and industrial

46 -

Consumer

- -

Construction real estate

- -

Commercial real estate

- -

Residential real estate

220 -

Subtotal

580 -

With an allowance recorded

Agricultural

1,117 -

Commercial and industrial

211 1

Consumer

20 -

Construction real estate

- -

Commercial real estate

153 2

Residential real estate

1,733 12

Subtotal

3,234 15

Total

Agricultural

1,431 -

Commercial and industrial

257 1

Consumer

20 -

Construction real estate

- -

Commercial real estate

153 2

Residential real estate

1,953 12

Total

$ 3,814 $ 15

Average

Interest

(Dollars in thousands)

Recorded

Income

Investment

Recognized

Three Months Ended June 30, 2021

With no related allowance recorded

Agricultural

$ 778 $ 24

Commercial and industrial

993 -

Consumer

- -

Construction real estate

27 -

Commercial real estate

1,749 13

Residential real estate

267 -

Subtotal

3,814 37

With an allowance recorded

Agricultural

1,451 16

Commercial and industrial

165 -

Consumer

3 -

Construction real estate

- -

Commercial real estate

642 3

Residential real estate

2,280 15

Subtotal

4,541 34

Total

Agricultural

2,229 40

Commercial and industrial

1,158 -

Consumer

3 -

Construction real estate

27 -

Commercial real estate

2,391 16

Residential real estate

2,547 15

Total

$ 8,355 $ 71
16

Average

Interest

(Dollars in thousands)

Recorded

Income

Investment

Recognized

Six Months Ended June 30, 2022

With no related allowance recorded

Agricultural

$ 314 $ -

Commercial and industrial

31 -

Consumer

- -

Construction real estate

- -

Commercial real estate

31 -

Residential real estate

201 -

Subtotal

577 -

With an allowance recorded

Agricultural

1,512 -

Commercial and industrial

254 2

Consumer

18 -

Construction real estate

- -

Commercial real estate

162 5

Residential real estate

1,831 29

Subtotal

3,777 36

Total

Agricultural

1,826 -

Commercial and industrial

285 2

Consumer

18 -

Construction real estate

- -

Commercial real estate

193 5

Residential real estate

2,032 29

Total

$ 4,354 $ 36

Average

Interest

(Dollars in thousands)

Recorded

Income

Investment

Recognized

Six Months Ended June 30, 2021

With no related allowance recorded

Agricultural

$ 993 $ 52

Commercial and industrial

731 -

Consumer

- -

Construction real estate

- -

Commercial real estate

1,698 32

Residential real estate

320 -

Subtotal

3,742 84

With an allowance recorded

Agricultural

2,177 35

Commercial and industrial

174 1

Consumer

- -

Construction real estate

- -

Commercial real estate

372 6

Residential real estate

2,141 33

Subtotal

4,864 75

Total

Agricultural

3,170 87

Commercial and industrial

905 1

Consumer

- -

Construction real estate

- -

Commercial real estate

2,070 38

Residential real estate

2,461 33

Total

$ 8,606 $ 159
17

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

June 30, 2022

Agricultural

$ - $ - $ - $ - $ 59,063 $ 59,063 $ -

Commercial and industrial

142 - 93 235 208,622 208,857 -

Consumer

- - - - 38,376 38,376 -

Commercial real estate

- - - - 565,163 565,163 -

Construction real estate

- - - - 17,950 17,950 -

Residential real estate

29 197 580 806 191,174 191,980 -
$ 171 $ 197 $ 673 $ 1,041 $ 1,080,348 $ 1,081,389 $ -

December 31, 2021

Agricultural

$ - $ - $ - $ - $ 64,819 $ 64,819 $ -

Commercial and industrial

21 - 88 109 202,915 203,024 -

Consumer

70 15 - 85 35,089 35,174 -

Commercial real estate

422 13 279 714 525,170 525,884 -

Construction real estate

1,149 1,235 - 2,384 16,682 19,066 -

Residential real estate

1,489 306 454 2,249 166,632 168,881 -
$ 3,151 $ 1,569 $ 821 $ 5,541 $ 1,011,307 $ 1,016,848 $ -

(1) Includes nonaccrual loans.

Nonaccrual loans by loan category follow:

(Dollars in thousands)

June 30,

December 31,

2022

2021

Agricultural

$ 314 $ 313

Commercial and industrial

92 285

Consumer

8 -

Commercial real estate

- 279

Residential real estate

828 850
$ 1,242 $ 1,727
18

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

Acquired Acquired Acquired

Impaired

Non-impaired

Total

Loans acquired - contractual payments

$ 7,729 $ 387,394 $ 395,123

Nonaccretable difference

(2,928 ) - (2,928 )

Expected cash flows

4,801 387,394 392,195

Accretable yield

(185 ) (1,894 ) (2,079 )

Carrying balance at acquisition date

$ 4,616 $ 385,500 $ 390,116

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

(Dollars in thousands)

Acquired

Acquired

Acquired

Impaired

Non-impaired

Total

Balance, January 1, 2019

$ - $ - $ -

Merger with County Bank Corp. on October 1, 2019

185 1,894 2,079

Accretion October 1, 2019 through December 31, 2019

- (75 ) (75 )

Balance January 1, 2020

185 1,819 2,004

Accretion January 1, 2020 through December 31, 2020

(50 ) (295 ) (345 )

Balance January 1, 2021

135 1,524 1,659

Accretion January 1, 2021 through December 31, 2021

(247 ) (348 ) (595 )

Transfer from non-accretable to accretable yield

400 - 400

Balance January 1, 2022

288 1,176 1,464

Transfer from non-accretable to accretable yield

1,150 - 1,150

Accretion January 1, 2022 through June 30, 2022

(222 ) 34 (188 )

Balance, June 30, 2022

$ 1,216 $ 1,210 $ 2,426

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

Acquired

Acquired

Acquired

Impaired

Non-impaired

Total

Loans acquired - contractual payments

$ 20,491 $ 158,495 $ 178,986

Nonaccretable difference

(2,719 ) - (2,719 )

Expected cash flows

17,772 158,495 176,267

Accretable yield

(869 ) (596 ) (1,465 )

Carrying balance at acquisition date

$ 16,903 $ 157,899 $ 174,802

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

Acquired

Acquired

Acquired

Impaired

Non-impaired

Total

Balance January 1, 2020

$ - $ - $ -

Merger with Community Shores Bank Corporation on July 1, 2020

869 596 1,465

Accretion July 1, 2020 through December 31, 2020

(26 ) (141 ) (167 )

Balance, January 1, 2021

843 455 1,298

Accretion January 1, 2021 through December 31, 2021

(321 ) (258 ) (579 )

Balance January 1, 2022

522 197 719

Transfer from non-accretable to accretable yield

874 - 874

Accretion January 1, 2022 through June 30, 2022

(578 ) (197 ) (775 )

Balance, June 30, 2022

$ 818 $ - $ 818
19

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

Six Months Ended

(Dollars in thousands, except share data)

June 30,

June 30,

2022

2021

2022

2021

Basic

Net income

$ 5,615 $ 5,043 $ 11,143 $ 11,281

Weighted average common shares outstanding

7,499,497 7,769,485 7,497,492 7,785,098

Basic earnings per common shares

$ 0.75 $ 0.65 $ 1.49 $ 1.45

Diluted

Net income

$ 5,615 $ 5,043 $ 11,143 $ 11,281

Weighted average common shares outstanding

7,499,497 7,769,485 7,497,492 7,785,098

Plus dilutive stock options and restricted stock units

11,027 9,600 13,766 10,577

Weighted average common shares outstanding and potentially dilutive shares

7,510,524 7,779,085 7,511,258 7,795,675

Diluted earnings per common share

$ 0.75 $ 0.65 $ 1.49 $ 1.45

There were 15,000 stock options that were considered anti-dilutive to earnings per share for the three and six months ended June 30, 2022. There were 15,000 stock options that were considered anti-dilutive to earnings per share for the three months ended June 30, 2021 and 12,000 stock options that were considered anti-dilutive to earnings per share for the six months ended June 30, 2021. There were 6,396 performance awards and 27,592 restricted stock units that were considered anti-dilutive for the three months ended June 30, 2022. There were no performance awards or restricted stock units that were considered anti-dilutive for the six months ended June 30, 2022. There were 18,985 restricted stock units that were considered anti-dilutive for the three months ended June 30, 2021. There were no restricted stock units that were considered anti-dilutive for the six months ended June 30, 2021. There were no performance awards issued prior to 2022.

20

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)

June 30, 2022

Assets

Cash and cash equivalents

$ 40,296 $ 40,296 $ 40,296 $ - $ -

Equity securities at fair value

8,288 8,288 6,462 - 1,826

Securities available for sale

566,142 566,142 - 566,142 -

Securities held to maturity

429,675 372,667 - 357,723 14,944

Federal Home Loan Bank and Federal

Reserve Bank stock

8,557 8,557 - 8,557 -

Loans held for sale

10,628 10,947 - 10,947 -

Loans to other financial institutions

37,422 37,422 - 37,422 -

Loans, net

1,073,973 1,037,946 - - 1,037,946

Accrued interest receivable

8,239 8,239 - 8,239 -

Interest rate lock commitments

140 140 - 140 -

Mortgage loan servicing rights

4,679 5,932 - 5,932 -

Interest rate derivative contracts

14,209 14,209 - 14,209 -

Liabilities

Noninterest-bearing deposits

578,927 578,927 - 578,927 -

Interest-bearing deposits

1,559,577 1,556,523 - 1,556,523 -

Borrowings

7,000 6,995 - 6,995 -

Subordinated debentures

35,140 30,785 - 30,785 -

Accrued interest payable

418 418 - 418 -

Interest rate derivative contracts

2,393 2,393 - 2,393 -

December 31, 2021

Assets

Cash and cash equivalents

$ 31,887 $ 31,887 $ 31,887 $ - $ -

Equity securities at fair value

8,492 8,492 6,724 - 1,768

Securities available for sale

1,098,885 1,098,885 - 1,077,835 21,050

Federal Home Loan Bank and Federal

Reserve Bank stock

8,888 8,888 - 8,888 -

Loans held for sale

9,351 9,632 - 9,632 -

Loans to other financial institutions

42,632 42,632 - 42,632 -

Loans, net

1,009,160 999,393 - - 999,393

Accrued interest receivable

8,211 8,211 - 8,211 -

Interest rate lock commitments

172 172 - 172 -

Mortgage loan servicing rights

4,666 5,522 - 5,522 -

Liabilities

Noninterest-bearing deposits

560,931 560,931 - 560,931 -

Interest-bearing deposits

1,491,363 1,491,135 - 1,491,135 -

Borrowings

50,000 50,000 - 50,000 -

Subordinated debentures

35,017 33,414 - 33,414 -

Accrued interest payable

441 441 - 441 -
21

NOTE 6 - FAIR VALUE MEASUREMENTS

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

In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities that ChoiceOne Bank has the ability to access.

Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset or liability.

In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. ChoiceOne Bank's assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability.

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

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Quoted Prices

In Active

Significant

Markets for

Other

Significant

Identical

Observable

Unobservable

Balance

(Dollars in thousands)

Assets

Inputs

Inputs

at Date

(Level 1)

(Level 2)

(Level 3)

Indicated

Equity Securities Held at Fair Value - June 30, 2022

Equity securities

$ 6,462 $ - $ 1,826 $ 8,288

Investment Securities, Available for Sale - June 30, 2022

U. S. Treasury notes and bonds

$ - $ 83,643 $ - $ 83,643

State and municipal

- 256,661 - 256,661

Mortgage-backed

- 211,128 - 211,128

Corporate

- 1,238 - 1,238

Asset-backed securities

- 13,472 - 13,472

Total

$ - $ 566,142 $ - $ 566,142

Derivative Instruments - June 30, 2022

Interest rate derivative contracts - assets

$ - $ 14,209 $ - $ 14,209

Interest rate derivative contracts - liabilities

$ - $ 2,393 $ - $ 2,393

Equity Securities Held at Fair Value - December 31, 2021

Equity securities

$ 6,724 $ - $ 1,768 $ 8,492

Investment Securities, Available for Sale - December 31, 2021

U. S. Government and federal agency

$ - $ 2,008 $ - $ 2,008

U. S. Treasury notes and bonds

- 91,979 - 91,979

State and municipal

- 514,797 20,050 534,847

Mortgage-backed

- 433,115 - 433,115

Corporate

- 19,642 1,000 20,642

Asset-backed securities

- 16,294 - 16,294

Total

$ - $ 1,077,835 $ 21,050 $ 1,098,885
22

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

Six Months Ended

(Dollars in thousands)

June 30,

2022

2021

Equity Securities Held at Fair Value

Balance, January 1

$ 1,768 $ 1,485

Total realized and unrealized gains included in noninterest income

(5 ) (39 )

Net purchases, sales, calls, and maturities

63 220

Net transfers into Level 3

- -

Balance, June 30

$ 1,826 $ 1,666

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 June 30

$ (5 ) $ (39 )

Investment Securities, Available for Sale

Balance, January 1

$ 21,050 $ 11,423

Total unrealized gains included in other comprehensive income

- (264 )

Net purchases, sales, calls, and maturities

- 1,966

Net transfers into Level 3

- -

Transfer to held to maturity

(21,050 ) -

Balance, June 30

$ - $ 13,125

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 June 30

$ - $ (250 )

Both observable and unobservable inputs may be used to determine the fair value of positions classified as Level 3 investment securities and liabilities. As a result, the unrealized gains and losses for these assets and liabilities presented in the tables above may include changes in fair value that were attributable to both observable and unobservable inputs.

Securities categorized as Level 3 assets as of June 30, 2022 primarily consist of common and preferred equity securities of community banks. As of December 31, 2021, bonds issued by local municipalities and corporate issuers were classified as available for sale and were included as Level 3 securities. ChoiceOne estimates the fair value of these bonds and equity securities based on the present value of expected future cash flows using management's best estimate of key assumptions, including forecasted interest yield and payment rates, credit quality and a discount rate commensurate with the current market and other risks involved.

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

Assets Measured at Fair Value on a Non-recurring Basis

Quoted Prices

In Active

Significant

Markets for

Other

Significant

Balances at

Identical

Observable

Unobservable

(Dollars in thousands)

Dates

Assets

Inputs

Inputs

Indicated

(Level 1)

(Level 2)

(Level 3)

Impaired Loans

June 30, 2022

$ 2,687 $ - $ - $ 2,687

December 31, 2021

$ 5,433 $ - $ - $ 5,433

Other Real Estate

June 30, 2022

$ - $ - $ - $ -

December 31, 2021

$ 194 $ - $ - $ 194

Mortgage Loan Servicing Rights

June 30, 2022

$ 4,679 $ - $ 4,679 $ -

December 31, 2021

$ 4,666 $ - $ 4,666 $ -

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

23

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

Six Months Ended

June 30,

June 30,

(Dollars in thousands)

2022

2021

2022

2021

Service charges and fees on deposit accounts

$ 1,036 $ 822 $ 2,067 $ 1,608

Interchange income

1,317 1,312 2,475 2,446

Investment commission income

233 198 438 471

Trust fee income

176 253 354 425

Other charges and fees for customer services

125 138 274 304

Noninterest income from contracts with customers within the scope of ASC 606

2,887 2,723 5,608 5,254

Noninterest income within the scope of other GAAP topics

543 2,009 1,668 5,078

Total noninterest income

$ 3,430 $ 4,732 $ 7,276 $ 10,332

NOTE 8 - DERIVATIVE AND HEDGING ACTIVITIES

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

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

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

Interest rate swaps

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

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

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

Interest rate caps

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

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

June 30, 2022

December 31, 2021

(Dollars in thousands)

Balance Sheet Location

Fair Value

Balance Sheet Location

Fair Value

Derivatives designated as hedging instruments

Interest rate contracts

Other Assets

$ 14,209

Other Assets

$ -

Interest rate contracts

Other Liabilities

$ 2,393

Other Liabilities

$ -

Location and Amount of Gain or (Loss)

Location and Amount of Gain or (Loss)

Recognized in Income on Fair Value and Cash Flow Hedging Relationships

Recognized in Income on Fair Value and Cash Flow Hedging Relationships

Three months ended June 30, 2022

Six months ended June 30, 2022

Interest Income

Interest Expense

Interest Income

Interest Expense

Total amounts of income and expense line items presented in the consolidated statements of income in which the effects of fair value or cash flow hedges are recorded

$ 422 $ (155 ) $ 422 $ (155 )

Gain or (loss) on fair value hedging relationships:

Interest rate contracts:

Hedged items

$ (71 ) $ - $ - $ -

Derivatives designated as hedging instruments

$ 71 $ - $ - $ -

Amount excluded from effectiveness testing recognized in earnings based on amortization approach

$ (153 ) $ - $ (153 ) $ -

Gain or (loss) on cash flow hedging relationships:

Interest rate contracts:

Amount of gain or (loss) reclassified from accumulated other comprehensive income into income

$ - $ - $ - $ -

Amount excluded from effectiveness testing recognized in earnings based on amortization approach

$ - $ (155 ) $ - $ (155 )
24

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

The following discussion is designed to provide a review of the consolidated financial condition and results of operations of ChoiceOne Financial Services, Inc. ("ChoiceOne"), its wholly-owned subsidiary ChoiceOne Bank, and ChoiceOne Bank's wholly-owned subsidiary, ChoiceOne Insurance Agencies, Inc. This discussion should be read in conjunction with the interim consolidated financial statements and related notes.

FORWARD-LOOKING STATEMENTS

This discussion and other sections of this quarterly report contain forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and ChoiceOne. Words such as "anticipates," "believes," "estimates," "expects," "forecasts," "intends," "is likely," "plans," "predicts," "projects," "may," "could," "look forward," "continue", "future", and variations of such words and similar expressions are intended to identify such forward-looking statements. Management's determination of the provision and allowance for loan losses, the carrying value of goodwill, loan servicing rights, other real estate owned, and the fair value of investment securities (including whether any impairment on any investment security is temporary or other-than-temporary and the amount of any impairment) and management's assumptions that are inherently forward-looking. 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, 2021and 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.

25

RESULTS OF OPERATIONS

Net income for the secondquarter of 2022was $5,615,000, which represented an increase of $572,000or 11%compared to the secondquarter of 2021. Basic and diluted earnings per common share were $0.75 for the secondquarter of 2022compared to $0.65 for the second quarter of the prior year. The increase in the second quarter 2022 is largely related to the increase in interest income due to strong loan growth. Net income for the first half of 2022was $11,143,000, which represented a decline of $138,000or 1%compared to the first halfof 2021. Basic and diluted earnings per common share were $1.49 for the first halfof 2022compared to $1.45 for the first half of the prior year. The decline in net income in the first halfof 2022compared to the same period in the prior year resulted in part froma decline of refinancing activity within ChoiceOne's mortgage portfolio due to a rise in mortgage rates since the first quarter of the prior year. Net income also declined as noninterest expense increased partially related to salaries and wages of new commercial loan production and wealth management staff. These factors were largely offset by an increase of $4.1 million in interest income as the balance of both core loans and securities continued to grow. Core loans (defined as loans excluding loans held for sale, loans to other financial institutions, and Paycheck Protection Program ("PPP") loans) increased by $60.7 million or 23.8% on an annualized basis in the second quarter of 2022 and $184.9 million or 20.7% since the end of the second quarter in 2021.

The return on average assets and return on average shareholders' equity were 0.95% and 12.68%, respectively, for the second quarterof 2022, compared to 0.96% and 8.97%, respectively, for the same period in 2021. The return on average assets and return on average shareholders' equity were 0.94% and 11.62%, respectively, for the first six monthsof 2022, compared to 1.10% and 10.01%, respectively, for the same period in 2021. The increase in the return on average shareholders' equity is related to the decline in equity caused by the increase in unrealized losses on available-for-sale securities during the first six months of 2022.

Paycheck Protection Program

ChoiceOne processed over $126 million in PPP loans in 2020, acquired an additional $37 million in PPP loans in the merger with Community Shores Bank Corporation ("Community Shores"), and originated $89.1 million in PPP loans in 2021. 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 second quarter and first half of 2022, $6.7 million and $31.4 million of PPP loans were forgiven resulting in $283,000 and $1.2 million of fee income, respectively. $1.8 million in PPP loans and $68,000 in deferred PPP fee income remains outstanding as of June 30, 2022. Management expects the remaining PPP loans to be forgiven in the second half of 2022.

Dividends

Cash dividends of $1,875,000 or $0.25 per share were declared in the secondquarter of 2022, compared to $1,703,000 or $0.22 per share declared in the secondquarter of 2021. Cash dividends declared in the first six months of 2022 were $3,747,000 or $0.50 per share, compared to $3,419,000 or $0.44 per share in the same period during the prior year. The cash dividend payout percentage was 33.6% for the first six monthsof 2022, compared to 30.3% in the same period in the prior year.

Interest Income and Expense

Tables 1 and 2 on the following pages provide information regarding interest income and expense for the three- and six-month periods ended June 30, 2022 and 2021. Table 1 documents ChoiceOne's average balances and interest income and expense, as well as the average rates earned or paid on assets and liabilities. Table 2 documents the effect on interest income and expense of changes in volume (average balance) and interest rates. These tables are referred to in the discussion of interest income, interest expense and net interest income.

26

Table 1 - Average Balances and Tax-Equivalent Interest Rates

Three Months Ended June 30,

2022

2021

(Dollars in thousands)

Average

Average

Balance

Interest

Rate

Balance

Interest

Rate

Assets:

Loans (1)(3)(4)(5)

$ 1,076,934 $ 12,529 4.65

%

$ 1,041,118 $ 11,567 4.44

%

Taxable securities (2)

780,689 3,522 1.80 547,388 2,396 1.75

Nontaxable securities (1)

317,730 1,973 2.48 277,365 1,832 2.64

Other

40,728 63 0.61 57,782 12 0.08

Interest-earning assets

2,216,081 18,087 3.26 1,923,653 15,807 3.29

Noninterest-earning assets

145,398 170,684

Total assets

$ 2,361,479 $ 2,094,337

Liabilities and Shareholders' Equity:

Interest-bearing demand deposits

$ 911,936 $ 627 0.27

%

$ 750,535 $ 465 0.25

%

Savings deposits

461,934 157 0.14 391,745 133 0.14

Certificates of deposit

181,851 211 0.47 185,556 241 0.52

Borrowings

5,765 21 1.44 2,758 22 3.13

Subordinated debentures

35,095 361 4.11 3,123 50 6.44

Interest-bearing liabilities

1,596,581 1,377 0.34 1,333,717 911 0.27

Demand deposits

578,943 529,359

Other noninterest-bearing liabilities

8,870 6,268

Total liabilities

2,184,394 1,869,344

Shareholders' equity

177,085 224,993

Total liabilities and shareholders' equity

$ 2,361,479 $ 2,094,337

Net interest income (tax-equivalent basis) (Non-GAAP) (1)

$ 16,711 $ 14,896

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

3.02

%

3.10

%

Reconciliation to Reported Net Interest Income

Net interest income (tax-equivalent basis) (Non-GAAP) (1)

$ 16,711 $ 14,896

Adjustment for taxable equivalent interest

(422 ) (388 )

Net interest income (GAAP)

$ 16,289 $ 14,508

Net interest margin (GAAP)

2.94

%

3.02

%

(1)

Adjusted to a fully tax-equivalent basis to facilitate comparison to the taxable interest-earning assets. The adjustment uses an incremental tax rate of 21%. The presentation of these measures on a tax-equivalent basis is not in accordance with GAAP, but is customary in the banking industry. These non-GAAP measures ensure comparability with respect to both taxable and tax-exempt loans and securities.

(2)

Taxable securities include dividend income from Federal Home Loan Bank and Federal Reserve Bank stock.

(3)

Loans include both loans to other financial institutions and loans held for sale.

(4) Non-accruing loan and PPP loan balances are included in the balances of average loans. Non-accruing loan average balances were $1.3 million and $3.2 million in the second quarter of 2022 and 2021, respectively. PPP loan average balances were $5.1 million and $123.7 million in the second quarter of 2022 and 2021, respectively.
(5) Interest on loans included net origination fees, accretion income, and PPP fees. Accretion income was $408,000 and $320,000 in the first quarter of 2022 and 2021, respectively. PPP fees were approximately $283,000 and $756,000 in the second quarter of 2022 and 2021, respectively.
27

Six Months Ended June 30,

2022

2021

(Dollars in thousands)

Average

Average

Balance

Interest

Rate

Balance

Interest

Rate

Assets:

Loans (1)(3)

$ 1,056,155 $ 24,832 4.70

%

$ 1,060,543 $ 24,254 4.57

%

Taxable securities (2)

786,620 7,029 1.79 492,170 4,252 1.73

Nontaxable securities (1)

326,687 4,068 2.49 239,507 3,221 2.69

Other

38,521 76 0.39 70,188 32 0.09

Interest-earning assets

2,207,983 36,005 3.26 1,862,408 31,759 3.41

Noninterest-earning assets

155,796 179,949

Total assets

$ 2,363,779 $ 2,042,357

Liabilities and Shareholders' Equity:

Interest-bearing demand deposits

$ 920,141 $ 1,062 0.23

%

$ 733,298 $ 894 0.24

%

Savings deposits

451,462 303 0.13 373,671 247 0.13

Certificates of deposit

180,620 413 0.46 190,298 578 0.61

Borrowings

1,872 27 2.85 5,594 57 2.03

Subordinated debentures

36,509 725 3.97 3,111 102 6.58

Interest-bearing liabilities

1,590,604 2,530 0.32 1,305,972 1,878 0.29

Demand deposits

566,177 504,641

Other noninterest-bearing liabilities

15,235 6,265

Total liabilities

2,172,016 1,816,878

Shareholders' equity

191,763 225,479

Total liabilities and shareholders' equity

$ 2,363,779 $ 2,042,357

Net interest income (tax-equivalent basis) (Non-GAAP) (1)

$ 33,476 $ 29,881

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

3.03

%

3.21

%

Reconciliation to Reported Net Interest Income

Net interest income (tax-equivalent basis) (Non-GAAP) (1)

$ 33,476 $ 29,881

Adjustment for taxable equivalent interest

(866 ) (685 )

Net interest income (GAAP)

$ 32,610 $ 29,196

Net interest margin (GAAP)

2.95

%

3.12

%

(1)

Adjusted to a fully tax-equivalent basis to facilitate comparison to the taxable interest-earning assets. The adjustment uses an incremental tax rate of 21%. The presentation of these measures on a tax-equivalent basis is not in accordance with GAAP, but is customary in the banking industry. These non-GAAP measures ensure comparability with respect to both taxable and tax-exempt loans and securities.

(2)

Taxable securities include dividend income from Federal Home Loan Bank and Federal Reserve Bank stock.

(3)

Loans include both loans to other financial institutions and loans held for sale.

(4) Non-accruing loan and PPP loan balances are included in the balances of average loans. Non-accruing loan average balances were $1.4 million and $4.4 million in the half quarter of 2022 and 2021, respectively. PPP loan average balances were $14.5 million and $128.5 million in the first half of 2022 and 2021, respectively.
(5) Interest on loans included net origination fees, accretion income, and PPP fees. Accretion income was $1.2 million and $671,000 in the first half of 2022 and 2021, respectively. PPP fees were approximately $1.2 million and $2.4 million in the first half of 2022 and 2021, respectively.
28

Table 2 - Changes in Tax-Equivalent Net Interest Income

Three Months Ended June 30,

(Dollars in thousands)

2022 Over 2021

Total

Volume

Rate

Increase (decrease) in interest income (1)

Loans (2)

$ 962 $ 401 $ 561

Taxable securities

1,126 1,049 77

Nontaxable securities (2)

141 715 (574 )

Other

51 (24 ) 75

Net change in interest income

2,280 2,141 139

Increase (decrease) in interest expense (1)

Interest-bearing demand deposits

162 111 51

Savings deposits

24 46 (22 )

Certificates of deposit

(30 ) (5 ) (25 )

Borrowings

(1 ) 62 (63 )

Subordinated debentures

311 441 (130 )

Net change in interest expense

466 655 (189 )

Net change in tax-equivalent net interest income

$ 1,814 $ 1,486 $ 328

Six Months Ended June 30,

(Dollars in thousands)

2022 Over 2021

Total

Volume

Rate

Increase (decrease) in interest income (1)

Loans (2)

$ 578 $ (279 ) $ 857

Taxable securities

2,777 2,632 145

Nontaxable securities (2)

847 1,497 (650 )

Other

44 (45 ) 89

Net change in interest income

4,246 3,805 441

Increase (decrease) in interest expense (1)

Interest-bearing demand deposits

168 263 (95 )

Savings deposits

56 49 7

Certificates of deposit

(165 ) (28 ) (137 )

Borrowings

(30 ) (76 ) 46

Subordinated debentures

623 757 (134 )

Net change in interest expense

652 965 (313 )

Net change in tax-equivalent net interest income

$ 3,594 $ 2,840 $ 754

(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 and $3.6 million in the second quarter and first half of 2022, respectively, compared to the same periods in 2021. This was largely due to an increase in the average balance of securities of $273.7 million and $381.6 million in the second quarter and first half of 2022, respectively, compared to the same periods in 2021. Net interest margin on a tax-equivalent basis declined by 8 basis points and 18 basis points in the second quarter and first half of 2022, respectively, compared to the same periods in 2021. The decline was due to lower PPP fees and a higher percentage of securities to total assets.

The average balance of loans increased $35.8 million in the second quarter of 2022 and declined $4.4 million in the first half of 2022 compared to the same periods in 2021. The large increase in average loan balance in the second quarter of 2022 compared to the second quarter of 2021 is due to average core loans balance growth of $153.1 million partially offset by a decline in the average PPP loans balance of $118.6 million. The decline in average loan balance in the first half of 2022 compared to the first half of 2021 is due to average PPP loans balance declining $114.0 million and a small decline in the average balance of loans to other financial institutions during that time, partially offset by the average balance of core loans increasing $119.4 million. The average balance of total securities increased $273.7 million in the second quarter of 2022 compared to the same period in 2021 offset by a decline in the average rate earned of 5 basis points. The average balance of total securities increased $381.6 million in the first half of 2022 compared to the same period in 2021 offset by a decline in the average rate earned of 5 basis points. The securities portfolio has grown as ChoiceOne has deployed excess deposit dollars into securities with the intent to transition to loans as good credits become available. The effect of the average balance growth, partially offset by a combined 5 basis point reduction in the average rate earned on securities, caused tax-equivalent securities income to increase $1.3 million in the second quarter of 2022 and $3.6 million in the first half of 2022, respectively, compared to the same period in 2021.

29

Growth of $231.6 million in the average balance of interest-bearing demand deposits and savings deposits and a combined 2 basis point increase in the average rate paid, caused interest expense to be $186,000 higher in the first quarter of 2022 compared to the first quarter of the prior year. Growth of $264.6 million in the average balance of interest-bearing demand deposits and savings deposits, partially offset by a combined 1 basis point decrease in the average rate paid, caused interest expense to be $224,000 higher in the first half of 2022 compared to the first half of the prior year. The average balance of certificates of deposit decreased $3.7 million and $9.7 million in the second quarter and first half of 2022, respectively, compared to the same periods in 2021. The decreased balances and a reduction of 5 basis points and 15 basis points in the average rate paid on certificates of deposit caused interest expense to decrease $30,000 and $165,000 in the second quarter and first half of 2022, respectively, compared to the same periods in 2021. In September 2021, ChoiceOne completed a private placement of $32.5 million in aggregate principal amount of 3.25% fixed-to-floating rate subordinated notes due 2031. In addition, ChoiceOne holds certain subordinated debentures issued in connection with a trust preferred securities offering that were obtained as part of the merger with Community Shores. These increased the average balance of subordinated debentures by $32.0 million and $33.4 million in the second quarter and first half of 2022, respectively, compared to the same period in the prior year and caused interest expense to increase by $311,000 and $623,000 in the second quarter and first half of 2022, respectively, compared to the same periods in 2021.

Provision and Allowance for Loan Losses

The provision for loan losses was $0 in the first six months of 2022, compared to $416,000 in the same period in the prior year. No provision in the second quarter of 2022 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 $2.7 million during the six months ended June 30, 2022. The specific allowance for loan losses for impaired loans decreased by $288,000 during the six months ended June 30, 2022 largely due to the decrease in balance of impaired loans compared to December 31, 2021.

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

Nonperforming loans were $2.7 million as of June 30, 2022, compared to $5.5 million as of December 31, 2021. The allowance for loan losses was 0.69%of total loans at June 30, 2022, compared to 0.76%at December 31, 2021. Loans acquired in the mergers with County Bank Corp. and Community Shores were recorded at fair value and as a result do not have an allowance for loan losses allocated to them unless credit deteriorates subsequent to acquisition. ChoiceOne has $3.1 million in credit mark remaining on loans acquired in the mergers.

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

(Dollars in thousands)

2022

2021

Charge-offs

Recoveries

Charge-offs

Recoveries

Agricultural

$ - $ - $ - $ -

Commercial and industrial

131 4 98 73

Consumer

255 106 147 113

Commercial real estate

- 2 48 43

Residential real estate

- 2 - 5
$ 386 $ 114 $ 293 $ 234

Net charge-offs were $272,000 in the first six months of 2022, compared to net charge-offs of $59,000 during the same period in 2021. Checking account charge-off and recovery activity is included in the consumer charge-off activity above. Net charge-offs for checking accounts for the second quarter and first half of 2022 was $60,000 and $113,000, respectively, compared to $27,000 and $41,000 for the same periods in the prior year. Net charge-offs on an annualized basis as a percentage of average loans were 0.05% in the first six months of 2022 compared to annualized net charge-offs of 0.01% of average loans in the same period in the prior year. Management is aware that the economic climate in Michigan will continue to affect businesses and individual borrowers. Management has worked and intends to continue to work with delinquent borrowers in an attempt to lessen the negative impact to ChoiceOne. As charge-offs, changes in the level of nonperforming loans, and changes within the composition of the loan portfolio occur throughout 2022, the provision and allowance for loan losses will be reviewed by ChoiceOne's management and adjusted as determined to be necessary.

Noninterest Income

Total noninterest income was $3.4 million in the second quarter and $7.3 million in the first half of 2022 compared to $4.7 million and $10.3 million in the same periods in the prior year. Total noninterest income in the first six months of 2021 was bolstered by heightened levels of refinancing activity within ChoiceOne's mortgage portfolio, with gains on sales of loans $2.2 million larger than in the first six months of 2022. Customer service charges increased $488,000 in the first half of 2022 compared to the first half of 2021 as prior year service charges were depressed by the effects of the COVID-19 pandemic. The market value of equity securities declined during the first half of 2022 compared to the first half of 2021 consistent with general market conditions. Equity securities include local community bank stocks and Community Reinvestment Act bond mutual funds. During the second quarter of 2022, ChoiceOne liquidated $31.5 million in securities resulting in a $427,000 realized loss, in order to redeploy the funds into higher yielding loans and reduce the risk of extension on certain fixed income securities which include a call option.

Noninterest Expense

Total noninterest expense increased $28,000 and $1.2 million in the second quarter and first half of 2022, respectively, compared to the same periods in 2021. Salaries and wages increased $538,000 and $976,000 in the second quarter and first half of 2022, respectively, compared to the same periods in 2021. The increase as compared to the first six months of 2022 is related to an increase in salaries and wages due to new commercial loan production staff and wealth management staff. This investment in people will increase expenses short term, but is expected to drive long term value to ChoiceOne through the building of new relationships. Other expenses have also increased in the first halfof 2022 compared to the same period in the prior year due to an increase to our FDIC insurance related expenses and other expenses. ChoiceOne continues to monitor expenses and looks to improve our efficiency through automation and use of digital tools.

Income Tax Expense

Income tax expense was $1.9 million in the first six monthsof 2022compared to $2.2 million for the same period in 2021. The decrease was due to a higher level of income before income tax in 2021. The effective tax rate was 14.5% for the first six months of 2022 compared to 16.2% for the first six months of 2021. The decline in the effective tax rate resulted from increased interest income from tax-exempt securities in the first half of 2022 compared to 2021.

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FINANCIAL CONDITION

Securities

In the last two years ChoiceOne has grown its securities portfolio substantially. Total available for sale securities on December 31, 2020, amounted to $577.7 million and grew steadily to an available for sale balance on December 31, 2021, of $1.1 billion. Many of the securities making up this balance include local municipals and other securities ChoiceOne has no intent to sell prior to maturity. During the first quarter of 2022, ChoiceOne elected to move $428.4 million of the portfolio into a held to maturity status. Management believes the $566.1 million in available for sale securities at June 30, 2022 to be sufficient for any future liquidity needs.

$31.8 million of securities were sold in the six months ended June 30, 2022 to be replaced with higher yielding assets. $8.7 million of securities were called or matured during that same period. Principal repayments on securities totaled $22.2 million in the six months ended June 30, 2022.

Loans

Core loans, which exclude PPP loans, held for sale loans, and loans to other financial institutions, grew organically by $184.9 million from June 30, 2021 to June 30, 2022. Additions to our commercial lending staff in 2021 and investments in the automation of our commercial loan process have helped drive our pipeline of commercial loans and corresponding growth. Loans to other financial institutions increased $37.4 million from June 30, 2021 to June 30, 2022. Loans to other financial institutions is comprised of a warehouse line of credit to facilitate mortgage loan originations and fluctuates with the national mortgage market. In the second quarter of 2022, $6.7 million of PPP loans were forgiven, resulting in $283,000 of fee income. $1.8 million in PPP loans and $68,000 in deferred PPP fee income remains outstanding as of June 30, 2022. During the second quarter and first half of 2022, ChoiceOne recorded accretion income related to acquired loans in the amount of $346,000 and $1.2 million, respectively. The remaining credit mark on acquired loans from the recent mergers with County Bank Corp. and Community Shores totaled $3.1 million as of June 30, 2022.

Excluding PPP loans, ChoiceOne saw an increase of $31.4 million of commercial and industrial loans, $37.7 million of commercial real estate loans and $23.3 million of residential real estate during the first six months of 2022. Excluding PPP loans, ChoiceOne saw declines of $6.0 million in agricultural loans and $1.1 million in construction real estate loans in the first six months of 2022. 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 $2.7 million at June 30, 2022, compared to $5.4 million as of December 31, 2021. The change in the first six months of 2022 was primarily comprised of a decrease of $2.3 million in impaired agricultural loans.

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

The balances of these nonperforming loans were as follows:

(Dollars in thousands)

June 30,

December 31,

2022

2021

Loans accounted for on a nonaccrual basis

$ 1,242 $ 1,727

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

- -

Loans defined as "troubled debt restructurings " which are not included above

1,472 3,816

Total

$ 2,714 $ 5,543

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

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Goodwill

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

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

Deposits and Borrowings

Total deposits decreased $7.1 million in the second quarter of 2022 and have increased $257.8 million since June 30, 2021. Deposit remained relatively flat in the second quarter primarily due to the seasonality of ChoiceOne's municipal clients and some modest deposit runoff as ChoiceOne has held deposit rates steady through the rapidly rising rate environment. Despite the 13.7% growth in deposits since June 30, 2021, ChoiceOne has been able to maintain relatively low deposit costs, with an increase in interest expense of only 3.5% for the first six months of 2022 compared to the first six months of 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 also holds $3.2 million in subordinated debentures issued in connection with a $4.5 million trust preferred securities offering, which were obtained in the merger with Community Shores, offset by the merger mark-to-market adjustment. ChoiceOne may use Federal Home Loan Bank advances and advances from the Federal Reserve Bank Discount Window to meet short-term funding needs in the remainder of 2022.

Shareholders' Equity

Total shareholders' equity declined $55.2 million in the first six months of 2022. The Federal Reserve increased the federal funds rate by 2.25% during the first half of 2022 in response to published inflation rates, causing interest rates to increase. This change in interest rates increased ChoiceOne's unrealized pre-tax loss on the available for sale securities portfolio from $3.3 million at December 31, 2021 to $73.9 million at June 30, 2022. Additionally, meeting minutes from the Federal Open Market Committee indicated that additional increases in the federal funds rate are expected in order to combat inflation in the coming quarters. An increase of an additional 75 basis points to the federal funds rate occurred in July 2022. As such, ChoiceOne has elected to utilize interest rate derivatives in order to better manage its interest rate risk position. On April 21, 2022, ChoiceOne purchased four forward-starting interest rate caps with a total notional amount of $200.0 million and entered into a $200.0 million forward-starting pay-fixed interest rate swap. These strategies create accounting symmetry between available for sale securities and other comprehensive income (equity), thus protecting tangible capital from further increases in interest rates. ChoiceOne also entered into two received-fixed interest rate swaps with a total notional amount of $200.0 million, which, in the current environment, offsets the cost of the rising rate protection. These three strategies, in the aggregate, are expected to be neutral to net income in 2022 and better position ChoiceOne Bank should rates continue to rise. Importantly, the transactions were structured to qualify for hedge accounting, which means that changes in the fair value of the instruments flow through other comprehensive income (equity). Refer to further details in Note 8 to the consolidated financial statements included in this report.

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

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Regulatory Capital Requirements

Following is information regarding compliance of ChoiceOne and ChoiceOne Bank with regulatory capital requirements:

Minimum Required

to be Well

Minimum Required

Capitalized Under

for Capital

Prompt Corrective

(Dollars in thousands)

Actual

Adequacy Purposes

Action Regulations

Amount

Ratio

Amount

Ratio

Amount

Ratio

June 30, 2022

ChoiceOne Financial Services Inc.

Total capital (to risk weighted assets)

212,043 13.8

%

122,636 8.0

%

N/A N/A

Common equity Tier 1 capital (to risk weighted assets)

168,228 11.0 68,983 4.5 N/A N/A

Tier 1 capital (to risk weighted assets)

172,728 11.3 91,977 6.0 N/A N/A

Tier 1 capital (to average assets)

172,728 7.5 92,046 4.0 N/A N/A

ChoiceOne Bank

Total capital (to risk weighted assets)

194,686 12.7

%

122,439 8.0

%

153,049 10.0

%

Common equity Tier 1 capital (to risk weighted assets)

187,270 12.2 68,872 4.5 99,482 6.5

Tier 1 capital (to risk weighted assets)

187,270 12.2 91,830 6.0 122,439 8.0

Tier 1 capital (to average assets)

187,270 8.1 91,953 4.0 114,941 5.0

December 31, 2021

ChoiceOne Financial Services Inc.

Total capital (to risk weighted assets)

$ 204,353 14.4

%

$ 113,604 8.0

%

N/A N/A

Common equity Tier 1 capital (to risk weighted assets)

160,338 11.3 63,902 4.5 N/A N/A

Tier 1 capital (to risk weighted assets)

164,838 11.6 85,203 6.0 N/A N/A

Tier 1 capital (to average assets)

164,838 7.4 89,415 4.0 N/A N/A

ChoiceOne Bank

Total capital (to risk weighted assets)

$ 182,275 12.9

%

$ 113,444 8.0

%

$ 141,806 10.0

%

Common equity Tier 1 capital (to risk weighted assets)

174,587 12.3 63,813 4.5 92,174 6.5

Tier 1 capital (to risk weighted assets)

174,587 12.3 85,083 6.0 113,444 8.0

Tier 1 capital (to average assets)

174,587 7.8 89,289 4.0 111,611 5.0

Management reviews the capital levels of ChoiceOne and ChoiceOne Bank on a regular basis. The Board of Directors and management believe that the capital levels as of June 30, 2022are 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 $22.3 million for the six months ended June 30, 2022compared to $17.1 million in the same period a year ago. The change was due to lower net proceeds from loan sales in 2022 compared to 2021, which was offset by the change in other assets and liabilities. Net cash used in investing activities was $52.8 million for the six months ended June 30, 2022 compared to $194.6 million in the same period in 2021. ChoiceOne had $32.7 million of securities purchases and sold $31.8 million of securities in the first half of 2022 compared to $322.0 million and $0 in the same period in 2021, respectively. An increase in net loan originations led to cash used in of $59.6 million in the first six months of 2022 compared to cash provided of $100.8 million in the same period during the prior year. Net cash provided by financing activities was $38.9 million for the first six months ended 2022, compared to $193.2 million in the same period in the prior year. ChoiceOne experienced growth of $86.2 million in deposits in the first six months of 2022 compared to $206.2 million in 2021, with a $36.3 million decrease in borrowings contributing to the change.

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

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

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

Item 1A. Risk Factors.

Information concerning risk factors is contained in the discussion in Item 1A, "Risk Factors," in ChoiceOne's Annual Report on Form 10-K for the year ended December 31, 2021.

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

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

34

ISSUER PURCHASES OF EQUITY SECURITIES

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

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.
10.1 ChoiceOne Financial Services, Inc. Equity Incentive Plan of 2022. Previously filed as an exhibit to ChoiceOne Financial Services, Inc.'s Registration on Form S-8 filed May 27, 2022. Here incorporated by reference.

10.2

ChoiceOne Financial Services, Inc. 2022 Employee Stock Purchase Plan. Previously filed as an exhibit to ChoiceOne Financial Services, Inc.'s Registration Statement on Form S-8 filed May 27, 2022. 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)
35

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: August 12, 2022

/s/ Kelly J. Potes

Kelly J. Potes
Chief Executive Officer
(Principal Executive Officer)

Date: August 12, 2022

/s/ Adom J. Greenland

Adom J. Greenland
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)

36