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 ~~March 31,~~September 30, 2019

☐	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)~~

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

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

Yes ☒ 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”~~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	OTC Pink Market

As of ~~April 30,~~October 31, 2019, the Registrant had outstanding ~~3,628,541~~7,246,068 shares of common stock.

PART I. FINANCIAL INFORMATION

Item 1.Financial Statements.

ChoiceOne Financial Services, Inc.
CONSOLIDATED BALANCE SHEETS

March 31, December 31,
(Dollars in thousands) 2019 2018
(Unaudited) (Audited)
Assets
Cash and due from banks $ 16,296 $ 19,690

Equity securities at fair value (Note 2) 3,034 2,847
Securities available for sale (Note 2) 168,254 166,602
Federal Home Loan Bank stock 1,994 1,994
Federal Reserve Bank stock 1,573 1,573

Loans held for sale 1,524 831
Loans to other financial institutions 28,119 20,644
Loans (Note 3) 402,044 409,073
Allowance for loan losses (Note 3) (4,730 ) (4,673 )
Loans, net 397,314 404,400

Premises and equipment, net 16,125 15,879
Cash surrender value of life insurance policies 14,995 14,899
Goodwill 13,728 13,728
Other assets 7,464 7,457
Total assets $ 670,420 $ 670,544

Liabilities
Deposits – noninterest-bearing $ 155,047 $ 153,542
Deposits – interest-bearing 409,404 423,473
Total deposits 564,451 577,015

Federal funds purchased — 4,800
Advances from Federal Home Loan Bank 20,225 5,233
Other liabilities 3,042 3,019
Total liabilities 587,718 590,067

Shareholders’ Equity
Preferred stock; shares authorized: 100,000; shares outstanding: none — —
Common stock and paid in capital, no par value;
shares authorized: 7,000,000; shares outstanding:
3,619,510 at March 31, 2019 and 3,616,483 at December 31, 2018 54,621 54,523
Retained earnings 27,599 26,686
Accumulated other comprehensive income (loss), net 482 (732 )
Total shareholders’ equity 82,702 80,477
Total liabilities and shareholders’ equity $ 670,420 $ 670,544

	September 30,			December 31,
(Dollars in thousands)	2019			2018
	(Unaudited)			(Audited)
Assets
Cash and due from banks	$	16,574		$	19,690

Equity securities at fair value (Note 2)		2,499			2,847
Securities available for sale (Note 2)		154,778			166,602
Federal Home Loan Bank stock		1,994			1,994
Federal Reserve Bank stock		1,574			1,573

Loans held for sale		1,202			831
Loans to other financial institutions		29,992			20,644
Loans (Note 3)		406,806			409,073
Allowance for loan losses (Note 3)		(4,096	)		(4,673	)
Loans, net		402,710			404,400

Premises and equipment, net		15,282			15,879
Cash surrender value of life insurance policies		15,189			14,899
Goodwill		13,728			13,728
Other assets		8,067			7,457
Total assets	$	663,589		$	670,544

Liabilities
Deposits – noninterest-bearing	$	152,579		$	153,542
Deposits – interest-bearing		421,496			423,473
Total deposits		574,075			577,015

Federal funds purchased		—			4,800
Advances from Federal Home Loan Bank		207			5,233
Other liabilities		4,681			3,019
Total liabilities		578,963			590,067

Shareholders’ Equity
Preferred stock; shares authorized: 100,000; shares outstanding: none		—			—
Common stock and paid in capital, no par value;
shares authorized: 7,000,000; shares outstanding:
3,634,388 at September 30, 2019 and 3,616,483 at December 31, 2018		55,058			54,523
Retained earnings		26,474			26,686
Accumulated other comprehensive income (loss), net		3,094			(732	)
Total shareholders’ equity		84,626			80,477
Total liabilities and shareholders’ equity	$	663,589		$	670,544

See accompanying notes to interim consolidated financial statements.

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

(Dollars in thousands, except per share data)	Three Months Ended September 30,					Nine Months Ended September 30,
	2019			2018		2019		2018
Interest income
Loans, including fees	$	5,394		$	5,111	$	16,064	$	14,735
Securities:
Taxable		728			736		2,255		2,134
Tax exempt		352			374		1,079		1,097
Other		87			40		194		109
Total interest income		6,561			6,261		19,592		18,075

Interest expense
Deposits		973			619		2,748		1,428
Advances from Federal Home Loan Bank		8			63		238		165
Other		10			8		39		34
Total interest expense		991			690		3,025		1,627

Net interest income		5,570			5,571		16,567		16,448
Provision for loan losses		—			—		—		35

Net interest income after provision for loan losses		5,570			5,571		16,567		16,413

Noninterest income
Customer service charges		1,094			1,165		3,275		3,340
Insurance and investment commissions		88			97		225		231
Gains on sales of loans		638			223		1,373		772
Gains on sales of securities available for sale		19			—		22		25
Gains on sales of other assets		8			61		23		69
Earnings on life insurance policies		99			97		290		289
Change in market value of equity securities		(146	)		113		119		161
Other		135			96		394		334
Total noninterest income		1,935			1,852		5,721		5,221

Noninterest expense
Salaries and benefits		3,268			2,780		8,915		8,308
Occupancy and equipment		755			661		2,267		2,005
Data processing		676			555		1,814		1,644
Professional fees		836			310		2,031		838
Supplies and postage		91			84		266		297
Advertising and promotional		145			58		297		235
Other		606			611		1,883		1,810
Total noninterest expense		6,377			5,059		17,473		15,137

Income before income tax		1,128			2,364		4,815		6,497
Income tax expense		106			350		671		992

Net income	$	1,021		$	2,014	$	4,144	$	5,505

Basic earnings per share (Note 4)	$	0.28		$	0.55	$	1.14	$	1.52
Diluted earnings per share (Note 4)	$	0.28		$	0.55	$	1.14	$	1.52
Dividends declared per share	$	0.80		$	0.18	$	1.20	$	0.53

See accompanying notes to interim consolidated financial statements.

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

(Dollars in thousands)	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Net income	$	1,021		$	2,014		$	4,144		$	5,505

Other comprehensive income:
Changes in net unrealized gains (losses) on investment securities available for sale, net of tax (benefit) of $149 and $(198) for the three months ended September 30, 2019 and September 30, 2018 respectively. Changes in net unrealized gains (losses) on investment securities available for sale, net of tax (benefit) expense of $1,022 and $(767) for the nine months ended September 30, 2019 and September 30, 2018 respectively.		561			(745	)		3,844			(2,885	)

Less: Reclassification adjustment for realized gain on sale of investment securities available for sale included in net income, net of tax expense which was $4 for the three months ended September 30, 2019 and $0 for the three months ended September 30, 2018. Reclassification adjustment for realized gain on sale of investment securities available for sale included in net income, net of tax expense of $5 and $5 for the nine months ended September 30, 2019 and September 30, 2018 respectively.		(15	)		—			(18	)		(20	)

Other comprehensive income (loss), net of tax		546			(745	)		3,826			(2,905	)

Comprehensive income	$	1,567		$	1,269		$	7,970		$	2,600

See accompanying notes to interim consolidated financial statements.

ChoiceOne Financial Services, Inc.
CONSOLIDATED STATEMENTS OF ~~INCOME~~CHANGES IN SHAREHOLDERS’ EQUITY

THREE MONTHS ENDED SEPTEMBER 30, 2019(Unaudited)

(Dollars in thousands, except per share data) Three Months Ended
March 31,
2019 2018
Interest income
Loans, including fees $ 5,280 $ 4,653
Securities:
Taxable 760 628
Tax exempt 369 361
Other 68 57
Total interest income 6,477 5,699

Interest expense
Deposits 851 346
Advances from Federal Home Loan Bank 116 45
Other 14 1
Total interest expense 981 392

Net interest income 5,496 5,307
Provision for loan losses — 35

Net interest income after provision for loan losses 5,496 5,272

Noninterest income
Customer service charges 1,033 1,055
Insurance and investment commissions 63 62
Gains on sales of loans 246 261
Gains on sales of securities 1 9
Gains on sales of other assets 13 8
Earnings on life insurance policies 96 94
Change in market value of equity securities 187 23
Other 118 136
Total noninterest income 1,758 1,648

Noninterest expense
Salaries and benefits 2,777 2,749
Occupancy and equipment 771 680
Data processing 556 534
Professional fees 517 217
Supplies and postage 100 116
Advertising and promotional 44 92
Other 569 576
Total noninterest expense 5,334 4,964

Income before income tax 1,920 1,956
Income tax expense 283 298

Net income $ 1,637 $ 1,658

Basic earnings per share (Note 4) $ 0.45 $ 0.46
Diluted earnings per share (Note 4) $ 0.45 $ 0.46
Dividends declared per share $ 0.20 $ 0.17
(Dollars in thousands) Number of
Shares Common
Stock and
Paid in
Capital Retained
Earnings Accumulated
Other
Comprehensive
Income (Loss),
Net Total

Balance, July 1, 2018 3,613,080 $ 54,289 $ 24,146 $ (2,167 ) $ 76,268

Net income — — 2,014 — 2,014
Other comprehensive loss — — — (745 ) (745 )
Shares issued 1,590 33 — — 33
Shares repurchased (400 ) — — — —
Effect of employee stock purchases — 3 — — 3
Stock options exercised and issued 431 — — — —
Stock-based compensation expense — 67 — — 67
Cash dividends declared ($0.18 per share) — — (651 ) — (651 )

Balance, September 30, 2018 3,614,701 $ 54,392 $ 25,509 $ (2,912 ) $ 76,989

Balance, July 1, 2019 3,632,917 $ 54,756 $ 28,359 $ 2,548 $ 85,663

Net income — — 1,021 — 1,021
Other comprehensive income — — — 546 546
Shares issued 1,471 40 — — 40
Effect of employee stock purchases — 4 — — 4
Stock-based compensation expense — 258 — — 258
Special cash dividends declared ($0.60 per share) — — (2,180 ) — (2,180 )
Cash dividends declared ($0.20 per share) — — (726 ) — (726 )

Balance, September 30, 2019 3,634,388 55,058 $ 26,474 $ 3,094 $ 84,626

~~See accompanying notes to interim consolidated financial statements.~~

ChoiceOne Financial Services, ~~Inc.~~
~~CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)~~ ~~(Unaudited)~~Inc
(Dollars in thousands) Three Months Ended
March 31,
2019 2018
Net income $ 1,637 $ 1,658

Other comprehensive income:
Changes in net unrealized gains (losses) on investment securities available for sale, net of tax expense (benefit) of $323 and  $(484)  for the periods ended March 31, 2019 and 2018, respectively 1,215 (1,817 )

Reclassification adjustment for realized gain on sale of investment securities available for sale included in net income, net of tax expense of $0 and $2 for the periods ended March 31, 2019 and 2018, respectively (1 ) (7 )

Other comprehensive income (loss), net of tax 1,214 (1,824 )

Comprehensive income (loss) $ 2,851 $ (166 )
~~See accompanying notes to interim consolidated financial statements.~~

~~ChoiceOne Financial Services, Inc.~~
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2019(Unaudited)

Accumulated
Common Other
Stock and Comprehensive
Number of Paid in Retained Income (Loss),
(Dollars in thousands) Shares Capital Earnings Net Total

Balance, January 1, 2018 3,448,569 $ 50,290 $ 26,023 $ 237 $ 76,550

Net income 1,658 1,658
Other comprehensive loss (1,824 ) (1,824 )
Shares issued 1,496 33 33
Shares repurchased (10,228 ) (252 ) (252 )
Effect of employee stock purchases 3 3
Stock-based compensation expense 65 65
Adoption effect of ASU 2016-01 (1) 244 (244 ) —
Cash dividends declared ($0.17 per share) (619 ) (619 )

Balance, March 31, 2018 3,439,837 $ 50,139 $ 27,306 $ (1,831 ) $ 75,614

Balance, January 1, 2019 3,616,483 $ 54,523 $ 26,686 $ (732 ) $ 80,477

Net income 1,637 1,637
Other comprehensive income 1,214 1,214
Shares issued 2,004 47 47
Effect of employee stock purchases 4 4
Stock-based compensation expense 57 57
Restricted stock units issued 1,023 (10 ) (10 )
Cash dividends declared ($0.20 per share) (724 ) (724 )

Balance, March 31, 2019 3,619,510 54,621 $ 27,599 $ 482 $ 82,702
(Dollars in thousands) Number of
Shares Common
Stock and
Paid in
Capital Retained
Earnings Accumulated
Other
Comprehensive
Income (Loss),
Net Total

Balance, January 1, 2018 3,448,569 $ 50,290 $ 26,023 $ 237 $ 76,550

Net income — — 5,505 — 5,505
Other comprehensive loss — — — (2,905 ) (2,905 )
Shares issued 6,122 83 — — 83
Shares repurchased (20,628 ) (523 ) — — (523 )
Effect of employee stock purchases — 9 — — 9
Stock options exercised and issued 1,241 — — — —
Stock-based compensation expense 198 — — 198
Restricted stock units vested 7,303 — — — —
Adoption effect of ASU 2016-01 (1) — — 244 (244 ) —
Stock dividend declared (5%) 172,094 4,335 (4,342 ) — (7 )
Cash dividends declared ($0.53 per share) — — (1,921 ) — (1,921 )

Balance, September 30, 2018 3,614,701 $ 54,392 $ 25,509 $ (2,912 ) $ 76,989

Balance, January 1, 2019 3,616,483 $ 54,523 $ 26,686 $ (732 ) $ 80,477

Net income — — 4,144 — 4,144
Other comprehensive income — — — 3,826 3,826
Shares issued 6,728 99 — — 99
Effect of employee stock purchases — 11 — — 11
Stock options exercised and issued 3,390 46 — — 46
Stock-based compensation expense — 379 — — 379
Restricted stock units issued 7,787 — — — —
Special cash dividend declared ($0.60 per share) — — (2,180 ) — (2,180 )
Cash dividends declared ($0.60 per share) — — (2,176 ) — (2,176 )

Balance, September 30, 2019 3,634,388 55,058 $ 26,474 $ 3,094 $ 84,626

(1) ASU 2016-01 is further addressed in Note 1 to the financial statements.

See accompanying notes to interim consolidated financial statements.

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

(Dollars in thousands) Three Months Ended
March 31,
2019 2018
Cash flows from operating activities:
Net income $ 1,637 $ 1,658
Adjustments to reconcile net income to net cash from operating activities:
Provision for loan losses — 35
Depreciation 351 294
Amortization 216 213
Compensation expense on employee and director stock purchases, stock options, and restricted stock units 79 83
Gains on sales of securities (1 ) (9 )
Net change in market value of equity securities (187 ) (23 )
Gains on sales of loans (246 ) (261 )
Loans originated for sale (6,944 ) (9,737 )
Proceeds from loan sales 6,279 10,229
Earnings on bank-owned life insurance (96 ) (94 )
Gains on sales of other real estate owned (8 ) (8 )
Proceeds from sales of other real estate owned 53 114
Deferred federal income tax benefit 6 62
Net changes in other assets (314 ) (773 )
Net changes in other liabilities (99 ) (99 )
Net cash from operating activities 727 1,684

Cash flows from investing activities:
Securities available for sale:
Sales — 91
Maturities, prepayments and calls 4,547 909
Purchases (4,789 ) (15,352 )
Loan originations and payments, net (318 ) 13,563
Additions to premises and equipment (484 ) (619 )
Net cash used in investing activities (1,044 ) (1,408 )

Cash flows from financing activities:
Net change in deposits (12,564 ) (7,579 )
Net change in repurchase agreements — (4,687 )
Net change in federal funds purchased (4,800 ) —
Proceeds from Federal Home Loan Bank advances 30,000 —
Payments on Federal Home Loan Bank advances (15,008 ) (10,009 )
Issuance of common stock 19 18
Repurchase of common stock — (252 )
Cash dividends and fractional shares from stock dividend (724 ) (619 )
Net cash used in financing activities (3,077 ) (23,128 )

Net change in cash and cash equivalents (3,394 ) (22,852 )
Beginning cash and cash equivalents 19,690 36,837
Ending cash and cash equivalents $ 16,296 $ 13,985

Supplemental disclosures of cash flow information:
Cash paid for interest $ 1,015 $ 386
Cash paid for income taxes $ — $ 300
Loans transferred to other real estate owned $ 64 $ 179
(Dollars in thousands) Nine Months Ended
September 30,
2019 2018
Cash flows from operating activities:
Net income $ 4,144 $ 5,505
Adjustments to reconcile net income to net cash from operating activities:
Provision for loan losses — 35
Depreciation 1,054 853
Amortization 672 701
Compensation expense on employee and director stock purchases, stock options, and restricted stock units 428 234
Gains on sales of securities (22 ) (25 )
Net change in market value of equity securities (119 ) (161 )
Gains on sales of loans (1,373 ) (772 )
Loans originated for sale (40,215 ) (19,837 )
Proceeds from loan sales 40,527 21,174
Earnings on bank-owned life insurance (290 ) (289 )
Gains on sales of other real estate owned (22 ) (69 )
Proceeds from sales of other real estate owned 187 308
Deferred federal income tax benefit 94 40
Net changes in other assets (290 ) (1,321 )
Net changes in other liabilities 645 622
Net cash from operating activities 5,420 6,998

Cash flows from investing activities:
Securities available for sale:
Sales 1,233 2,716
Maturities, prepayments and calls 29,478 10,635
Purchases (13,904 ) (27,476 )
Purchase of Federal Reserve Bank stock (1 ) —
Loan originations and payments, net (7,870 ) (12,799 )
Additions to premises and equipment (457 ) (2,810 )
Net cash used in investing activities 8,479 (29,734 )

Cash flows from financing activities:
Net change in deposits (2,940 ) 4,494
Net change in repurchase agreements — (7,148 )
Net change in federal funds purchased (4,800 ) 9,400
Proceeds from Federal Home Loan Bank advances 85,000 93,500
Payments on Federal Home Loan Bank advances (90,026 ) (97,526 )
Issuance of common stock 107 57
Repurchase of common stock — (523 )
Cash dividends and fractional shares from stock dividend (4,356 ) (1,928 )
Net cash used in financing activities (17,015 ) 326

Net change in cash and cash equivalents (3,116 ) (22,410 )
Beginning cash and cash equivalents 19,690 36,837
Ending cash and cash equivalents $ 16,574 $ 14,427

Supplemental disclosures of cash flow information:
Cash paid for interest $ 3,000 $ 1,532
Cash paid for income taxes $ 350 $ 850
Loans transferred to other real estate owned $ 325 $ 377

See accompanying notes to interim consolidated financial statements.

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

NOTE 1 -– SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation
The consolidated financial statements include ChoiceOne Financial Services, Inc. (“ChoiceOne”) and its wholly-owned subsidiary, ChoiceOne Bank (the “Bank”), and the Bank’s wholly-owned subsidiary, ChoiceOne Insurance Agencies, Inc. Intercompany transactions and balances have been eliminated in consolidation.

The consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information, prevailing practices within the banking industry and the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

The accompanying consolidated financial statements reflect all adjustments ordinary in nature which are, in the opinion of management, necessary for a fair presentation of the Consolidated Balance Sheets as of ~~March 31,~~September 30, 2019 and December 31, 2018, the Consolidated Statements of Income for the ~~three-month~~three- and nine-month periods ended ~~March 31,~~September 30, 2019 and ~~March 31,~~September 30, 2018, the Consolidated Statements of Comprehensive Income for the ~~three-month~~three- and nine-month periods ended ~~March 31,~~September 30, 2019 and ~~March 31,~~September 30, 2018, the Consolidated Statements of Changes in ~~Shareholders'~~Shareholders’ Equity for the ~~three-month~~three- and nine-month periods ended ~~March 31,~~September 30, 2019 and ~~March 31,~~September 30, 2018, and the Consolidated Statements of Cash Flows for the ~~three-month periods~~nine months ended ~~March 31,~~September 30, 2019 and ~~March 31,~~September 30, 2018. Operating results for the ~~three~~nine months ended ~~March 31,~~September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.

The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in ChoiceOne’s Annual Report on Form 10-K for the year ended December 31, 2018.

Loans to Other Financial Institutions
The Bank entered into an agreement with another financial institution to fund mortgage loans. Loans to other financial institutions are purchased participating interests in individual advances made to mortgage bankers nation-wide from an unaffiliated originating bank. The originating bank services these loans and cash flows on the individual advances (principal, interest, and fees) which are allocated pro-rata based on ownership in the participating interest, less fees paid for the servicing activity. The underlying collateral is generally made up of 1-4 family first residential mortgages owned by the mortgage banker and held for sale in the secondary market and have been underwritten using secondary market underwriting standards prior to purchasing the participating interest. Once the mortgage banker delivers the loan to the secondary market, the advance is required to be paid off, including the Bank’s participating interest. If the advance (in which the Bank has a participating interest) is outstanding over 90 days, the originating bank has the right to request the participating interest be paid off by the mortgage banker.The participating interests are subject to concentration risk to 13 different mortgage bankers, with the largest creditor outstanding representing ~~25%~~19% of the total at ~~March 31,~~September 30, 2019.

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, the Bank reviews the portfolio 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).At ~~March 31,~~September 30, 2019, 1217 of the ~~178~~184 participating interests with principal balances totaling ~~$2.6~~$4.8 million had balances outstanding over 30 days. During the first ~~three~~nine months of 2019 and 2018, there were no losses or charge-offs of participating interests.

Allowance for Loan Losses
The allowance for loan losses is maintained at a level believed adequate by management to absorb probable incurred losses inherent in the consolidated loan portfolio. Management’s evaluation of the adequacy of the allowance is an estimate based on reviews of individual loans, assessments of the impact of current economic conditions on the portfolio and historical loss experience of seasoned loan portfolios. See Note 3 to the interim consolidated financial statements for additional information.

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

Stock Transactions
A total of ~~1,146~~3,390 shares of common stock were issued upon the exercise of stock options for a cash price of $46,000 in the first nine months of 2019. A total of 4,139 shares of common stock were issued to ChoiceOne’s Board of Directors for a cash price of ~~$28,000~~$110,000 under the terms of the Directors’ Stock Purchase Plan in the first ~~quarter~~nine months of 2019. A total of ~~858~~2,589 shares for a cash price of ~~$19,000~~$61,000 were issued under the Employee Stock Purchase Plan in the first ~~quarter~~nine months of 2019. Shares of common stock issued upon the vesting of restricted stock units, net of shares withheld for payment of related taxes, totaled ~~1,023~~7,787 in the first ~~quarter~~nine months of 2019.

Stock-Based Compensation
ChoiceOne grants restricted stock units to a select group of employees under the Stock Incentive Plan of 2012. All of the restricted stock units are initially unvested and vest in three annual installments on each of the next three anniversaries of the grant date. Certain additional vesting provisions apply. Each unit, once vested, is settled by delivery of one share of ChoiceOne common stock.

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

Recent Accounting Pronouncements
The FASB issued ASU 2016-01,Recognition and Measurement of Financial Assets and Financial Liabilities. The ASU covers various changes to the accounting, measurement, and disclosure related to certain financial instruments. The most significant change included in the update is the requirement for certain equity investments (excluding investments that are consolidated or accounted for under the equity method of accounting) to be measured at fair value with changes in fair value recognized in net income. An entity may choose to measure equity investments that do not have readily determinable fair values at cost, minus impairment. When a qualitative assessment of equity investments without readily determinable fair values indicates that impairment exists, an entity is required to measure the investment at fair value. The update also eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. ~~The company~~ChoiceOne implemented ASU 2016-01 effective January1, 2018. A cumulative-effect adjustment was recorded as of January 1, 2018 to reclassify $244,000 of unrealized gains on equity securities from accumulated other comprehensive income to retained earnings. Equity securities have also been presented separately from available for sale debt securities on the ~~March 31, 2018~~ balance sheet and the fair value of loans has been estimated using an exit price notion in Note 5.

The FASB issued ASU 2016-02,Leases. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. Implementation of the new standard caused ChoiceOne to recognize $105,000 of a lease asset and liability as of January 1, 2019. The lease asset was included in premises and equipment and the lease liability in other liabilities in the consolidated balance sheet. The impact on ChoiceOne’s expense ~~will~~was not be significant.

The 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 generally accepted accounting principles (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~~In October 2019, FASB delayed the effective date for the credit loss standard to January 2023 for certain entities, including certain Securities and Exchange Commission filers, public business entities and private companies. As a smaller reporting company, ChoiceOne is ~~effective~~eligible for ~~fiscal years beginning after December 15, 2019, and for interim periods within those years. Management is currently evaluating~~ the ~~impact of this new ASU on its consolidated financial statements.~~proposed delay under the updated language in the standard.

NOTE 2 -– SECURITIES
The fair value of equity securities at fair value and the related gross unrealized gains recognized in noninterest income were as follows:
September 30, 2019
Gross Gross
Amortized Unrealized Unrealized Fair
(Dollars in thousands) Cost Gains Losses Value
Equity securities $ 2,164 $ 335 $ — $ 2,499
December 31, 2018
Gross Gross
Amortized Unrealized Unrealized Fair
(Dollars in thousands) Cost Gains Losses Value
Equity securities $ 2,502 $ 459 $ (114 ) $ 2,847

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

September 30, 2019
Gross Gross
Amortized Unrealized Unrealized Fair
(Dollars in thousands) Cost �� Gains Losses Value
U.S. Government and federal agency $ 23,035 $ 23 $ (9 ) $ 23,049
U.S. Treasury 1,994 18 — 2,012
State and municipal 97,824 2,932 (4 ) 100,752
Mortgage-backed 24,542 747 (3 ) 25,286
Corporate 2,648 34 (3 ) 2,679
Foreign debt 500 — — 500
Trust preferred securities 500 — — 500
Total $ 151,043 $ 3,754 $ (19 ) $ 154,778
~~The fair value of equity securities at fair value and the related gross unrealized gains recognized in noninterest income were as follows:~~
December 31, 2018
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Government and federal agency $ 34,079 $ 1 $ (551 ) $ 33,529
U.S. Treasury 1,992 — (45 ) 1,947
State and municipal 104,317 544 (933 ) 103,928
Mortgage-backed 21,654 126 (205 ) 21,575
Corporate 5,147 1 (46 ) 5,102
Trust preferred securities 500 — — 500
Asset-backed securities 21 — — 21
Total $ 167,710 $ 672 $ (1,780 ) $ 166,602

March 31, 2019
Gross Gross
(Dollars in thousands) Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Equity securities $ 2,502 $ 569 $ (37 ) $ 3,034

December 31, 2018
Gross Gross
(Dollars in thousands) Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Equity securities $ 2,502 $ 459 $ (114 ) $ 2,847
~~The fair value of securities available for sale and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows:~~
March 31, 2019
Gross Gross
(Dollars in thousands) Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Government and federal agency $ 34,071 $ — $ (307 ) $ 33,764
U.S. Treasury 1,993 — (34 ) 1,959
State and municipal 103,185 1,073 (371 ) 103,887
Mortgage-backed 22,927 208 (111 ) 23,024
Corporate 5,146 4 (33 ) 5,117
Trust preferred securities 500 — — 500
Asset-backed securities 3 — — 3
  Total $ 167,825 $ 1,285 $ (856 ) $ 168,254
December 31, 2018
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Government and federal agency $ 34,079 $ 1 $ (551 ) $ 33,529
U.S. Treasury 1,992 — (45 ) 1,947
State and municipal 104,317 544 (933 ) 103,928
Mortgage-backed 21,654 126 (205 ) 21,575
Corporate 5,147 1 (46 ) 5,102
Trust preferred securities 500 — — 500
Asset-backed securities 21 — — 21
  Total $ 167,710 $ 672 $ (1,780 ) $ 166,602

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 ~~first quarter of 2019.~~three and nine months ended September 30, 2019 or in the same periods in 2018. ChoiceOne ~~believed~~believes that unrealized losses on securities were temporary in nature and were due to changes in interest rates and reduced market liquidity and not as a result of credit quality issues.

Presented below is a schedule of maturities of securities as of ~~March 31,~~September 30, 2019, the fair value of securities as of ~~March 31,~~September 30, 2019 and December 31, 2018, and the weighted average yields of securities as of ~~March 31,~~September 30, 2019:

Securities maturing within:
Fair Value Fair Value
Less than 1 Year - 5 Years - More than at March 31, at Dec. 31,
(Dollars in thousands) 1 Year 5 Years 10 Years 10 Years 2019 2018

U.S. Government and federal agency $ 18,846 $ 10,940 $ 3,978 $ — $ 33,764 $ 33,529
U.S. Treasury notes and bonds — 1,959 — — 1,959 1,947
State and municipal 9,186 53,891 38,840 1,970 103,887 103,928
Corporate 2,498 2,619 — — 5,117 5,102
Trust preferred securities 500 — — — 500 500
Asset-backed securities 3 — — — 3 21
     Total debt securities 31,033 69,409 42,818 1,970 145,230 145,027

Mortgage-backed securities — 5,897 17,080 47 23,024 21,575
Equity securities (1) — — 963 2,071 3,034 2,847
Total $ 31,033 $ 75,306 $ 60,861 $ 4,088 $ 171,288 $ 169,449
Securities maturing within:
Fair Value Fair Value
Less than 1 Year - 5 Years - More at September 30, at December 31,
(Dollars in thousands) 1 Year 5 Years 10 Years 10 Years 2019 2018
U.S. Government and federal agency $ 21,017 $ 2,032 $ — $ — $ 23,049 $ 33,529
U.S. Treasury notes and bonds — 2,012 — — 2,012 1,947
State and municipal 13,709 49,671 35,367 2,005 100,752 103,928
Corporate — 2,679 — — 2,679 5,102
Foreign debt 500 — — — 500 —
Trust preferred securities 500 — — — 500 500
Asset-backed securities — — — — — 21
Total debt securities 35,726 56,394 35,367 2,005 129,492 145,027

Mortgage-backed securities — 19,164 6,122 — 25,286 21,575
Equity securities (1) — — 1,000 1,499 2,499 2,847
Total $ 35,726 $ 75,558 $ 42,489 $ 3,504 $ 157,277 $ 169,449

Weighted average yields: Weighted average yields:
Less than 1 Year - 5 Years - More than Less than 1 Year - 5 Years - More
1 Year 5 Years 10 Years 10 Years Total 1 Year 5 Years 10 Years 10 Years Total
U.S. Government and federal agency 2.30 % 1.91 % 2.71 % — % 2.22 % 1.99 % 1.98 % — % — % 1.99 %
U.S. Treasury notes and bonds — 1.85 — — 1.85 — 1.85 — — 1.85
State and municipal (2) 2.95 2.83 3.21 0.89 2.95 2.73 2.85 3.21 0.64 2.91
Corporate 0.46 2.66 — — 1.58 — 2.66 — — 2.66
Foreign debt 2.27 — — — 2.27
Trust preferred securities 5.50 — — — 5.50 6.00 — — — 6.00
Asset-backed securities 2.85 — — — 2.85
Mortgage-backed securities — 3.13 2.84 4.75 2.92 — 3.24 2.97 — 3.18
Equity securities (1) — — 4.51 — 1.23 — — 4.61 — 1.54
(1) Equity securities are preferred and common stock that may or may not have a stated maturity.
(2) The yield is computed for tax-exempt securities on a fully tax-equivalent basis at an incremental rate of 21%.

Following is information regarding unrealized gains and losses on equity securities for the ~~three month~~three- and nine-month periods ending ~~March 31, 2019 and March 31, 2018:~~
September 30:

2019 2018

Net gains and losses recognized during the period $ 187 $ 23
Less: Net gains and losses recognized during the period on securities sold — 9

Unrealized gains and losses recognized during the reporting period on securities still held at the reporting date $ 187 $ 14
Three Months Ended
September 30, Nine Months Ended
September 30,
2019 2018 2019 2018

Net gains and losses recognized during the period $ (146 ) $ 113 $ 119 $ 161
Less: Net gains and losses recognized during the period on securities sold (2 ) — 4 9
Unrealized gains and losses recognized during the reporting period on securities still held at the reporting date $ (144 ) $ 113 $ 115 $ 152

1011
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
March 31, 2019
Beginning balance $ 481 $ 892 $ 254 $ 1,926 $ 38 $ 537 $ 545 $ 4,673
Charge-offs — — (106 ) — — 0 — (106 )
Recoveries — 17 143 2 — 1 — 163
Provision (57 ) (52 ) 45 (65 ) 2 20 107 —
Ending balance $ 424 $ 857 $ 336 $ 1,863 $ 40 $ 558 $ 652 $ 4,730

Individually evaluated for impairment $ 85 $ 4 $ 12 $ 19 $ — $ 179 $ — $ 299

Collectively evaluated for impairment $ 339 $ 853 $ 324 $ 1,844 $ 40 $ 379 $ 652 $ 4,431

December 31, 2018
Individually evaluated for impairment $ 94 $ 3 $ 13 $ 20 $ — $ 167 $ — $ 297
Collectively evaluated for impairment $ 387 $ 889 $ 241 $ 1,906 $ 38 $ 370 $ 545 $ 4,376

Three Months Ended
March 31, 2018
Beginning balance $ 506 $ 1,001 $ 262 $ 1,761 $ 35 $ 726 $ 286 $ 4,577
Charge-offs — — (69 ) — — (3 ) — (72 )
Recoveries — 53 37 55 — 24 — 169
Provision (156 ) (49 ) 15 (30 ) (17 ) (122 ) 394 35
Ending balance $ 350 $ 1,005 $ 245 $ 1,786 $ 18 $ 625 $ 680 $ 4,709

Individually evaluated for impairment $ — $ 93 $ 9 $ 46 $ — $ 217 $ — $ 365

Collectively evaluated for impairment $ 350 $ 912 $ 236 $ 1,740 $ 18 $ 408 $ 680 $ 4,344

Loans
March 31, 2019
Individually evaluated for impairment $ 389 $ 25 $ 63 $ 605 $ — $ 2,691 $ 3,773
Collectively evaluated for impairment 41,656 92,575 24,130 136,442 9,294 94,174 398,271
Ending balance $ 42,045 $ 92,600 $ 24,193 $ 137,047 $ 9,294 $ 96,865 $ 402,044

December 31, 2018
Individually evaluated for impairment $ 578 $ 21 $ 90 $ 623 $ — $ 2,712 $ 4,024
Collectively evaluated for impairment 48,531 91,385 24,292 138,830 8,843 93,168 405,049
Ending balance $ 49,109 $ 91,406 $ 24,382 $ 139,453 $ 8,843 $ 95,880 $ 409,073 ��
Commercial
(Dollars in thousands) and Commercial Construction Residential
Agricultural Industrial Consumer Real Estate Real Estate Real Estate Unallocated Total
Allowance for Loan Losses
Three Months Ended September 30, 2019
Beginning balance $ 362 $ 818 $ 335 $ 2,398 $ 43 $ 522 $ 323 $ 4,801
Charge-offs — (81 ) (71 ) (589 ) — (11 ) — (752 )
Recoveries — 1 25 16 — 5 — 47
Provision 111 (87 ) (27 ) (182 ) 5 (80 ) 260 —
Ending balance $ 473 $ 651 $ 262 $ 1,643 $ 48 $ 436 $ 583 $ 4,096

Nine Months Ended September 30, 2019
Beginning balance $ 481 $ 892 $ 254 $ 1,926 $ 38 $ 537 $ 545 $ 4,673
Charge-offs — (83 ) (222 ) (589 ) — (25 ) — (919 )
Recoveries 65 21 113 22 — 121 — 342
Provision (73 ) (179 ) 117 284 10 (197 ) 38 —
Ending balance $ 473 $ 651 $ 262 $ 1,643 $ 48 $ 436 $ 583 $ 4,096

Individually evaluated for impairment $ 85 $ 2 $ 4 $ 14 $ — $ 186 $ — $ 291

Collectively evaluated for impairment $ 388 $ 649 $ 258 $ 1,629 $ 48 $ 250 $ 583 $ 3,805

Three Months Ended September 30, 2018
Beginning balance $ 359 $ 970 $ 205 $ 1,911 $ 16 $ 620 $ 578 $ 4,659
Charge-offs — — (62 ) — — (13 ) — (75 )
Recoveries — 4 22 2 — 10 — 38
Provision 5 (25 ) 59 37 15 — (91 ) —
Ending balance $ 364 $ 949 $ 224 $ 1,950 $ 31 $ 617 $ 487 $ 4,622

Nine Months Ended September 30, 2018
Beginning balance $ 506 $ 1,001 $ 262 $ 1,761 $ 35 $ 726 $ 286 $ 4,577
Charge-offs — (58 ) (180 ) — — (25 ) — (263 )
Recoveries — 57 73 61 — 82 — 273
Provision (142 ) (51 ) 69 128 (4 ) (166 ) 201 35
Ending balance $ 364 $ 949 $ 224 $ 1,950 $ 31 $ 617 $ 487 $ 4,622

Individually evaluated for impairment $ 13 $ 18 $ 19 $ 27 $ — $ 180 $ — $ 257

Collectively evaluated for impairment $ 351 $ 931 $ 205 $ 1,923 $ 31 $ 437 $ 487 $ 4,365

Loans
September 30, 2019
Individually evaluated for impairment $ 389 $ 279 $ 20 $ 2,331 $ — $ 2,646 $ 5,665
Collectively evaluated for impairment 49,668 81,252 24,388 141,975 11,188 92,670 401,141
Ending balance $ 50,057 $ 81,531 $ 24,408 $ 144,306 $ 11,188 $ 95,316 $ 406,806

December 31, 2018
Individually evaluated for impairment $ 578 $ 21 $ 90 $ 623 $ — $ 2,712 $ 4,024
Collectively evaluated for impairment 48,531 91,385 24,292 138,830 8,843 93,168 405,049
Ending balance $ 49,109 $ 91,406 $ 24,382 $ 139,453 $ 8,843 $ 95,880 $ 409,073

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

Risk ratings 1 and 2: These loans are considered pass credits. They exhibit good to exceptional credit risk and demonstrate the ability to repay the loan from normal business operations.

Risk rating 3: 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 4: These loans are considered pass credits. However, they have potential developing weaknesses that, if not corrected, may cause deterioration in the ability of the borrower to repay the loan. While a loss is possible for a loan with this rating, it is not anticipated.

Risk rating 5: These loans are considered special mention credits. Loans in this risk rating are considered to be inadequately protected by the net worth and debt service coverage of the borrower or of any pledged collateral. These loans have well defined weaknesses that may jeopardize the borrower’s ability to repay the loan. If the weaknesses are not corrected, loss of principal and interest could be probable.

Risk rating 6: These loans are considered substandard credits. These loans have well defined weaknesses, the severity of which makes collection of principal and interest in full questionable. Loans in this category may be placed on nonaccrual status.

Risk rating 7: These loans are considered doubtful credits. Some loss of principal and interest has been determined to be probable. The estimate of the amount of loss could be affected by factors such as the borrower’s ability to provide additional capital or collateral. Loans in this category are on nonaccrual status.

Risk rating 8: These loans are considered loss credits. They are considered uncollectible and will be charged off against the allowance for loan losses.

Information regarding the Bank’s credit exposure is as follows:

Corporate Credit Exposure - Credit Risk Profile By Creditworthiness Category

Agricultural Commercial and Industrial Commercial Real Estate
(Dollars in thousands) March 31, December 31, March 31, December 31, March 31, December 31,
2019 2018 2019 2018 2019 2018
Risk ratings 1 and 2 $ 11,638 $ 15,300 $ 12,278 $ 11,972 $ 7,577 $ 7,962
Risk rating 3 20,031 23,938 47,063 50,266 87,791 89,173
Risk rating 4 9,761 9,082 28,856 23,961 36,353 36,193
Risk rating 5 227 211 4,393 5,204 4,116 4,850
Risk rating 6 388 578 10 3 1,210 1,275
$ 42,045 $ 49,109 $ 92,600 $ 91,406 $ 137,047 $ 139,453
Agricultural Commercial and Industrial Commercial Real Estate
(Dollars in thousands) September 30, December 31, September 30, December 31, September 30, December 31,
2019 2018 2019 2018 2019 2018
Risk ratings 1 and 2 $ 14,214 $ 15,300 $ 7,138 $ 11,972 $ 9,137 $ 7,962
Risk rating 3 16,376 23,938 39,317 50,266 89,117 89,173
Risk rating 4 18,074 9,082 32,002 23,961 40,952 36,193
Risk rating 5 1,004 211 2,795 5,204 2,156 4,850
Risk rating 6 389 578 279 3 2,944 1,275
$ 50,057 $ 49,109 $ 81,531 $ 91,406 $ 144,306 $ 139,453

Corporate Credit Exposure - Credit Risk Profile Based On Payment Activity

Consumer Construction Real Estate Residential Real Estate
(Dollars in thousands) March 31, December 31, March 31, December 31, March 31, December 31,
2019 2018 2019 2018 2019 2018
Performing $ 24,143 $ 24,320 $ 9,294 $ 8,843 $ 95,840 $ 94,925
Nonperforming — — — — — —
Nonaccrual 50 62 — — 1,025 955
$ 24,193 $ 24,382 $ 9,294 $ 8,843 $ 96,865 $ 95,880
Consumer Construction Real Estate Residential Real Estate
(Dollars in thousands) September 30, December 31, September 30, December 31, September 30, December 31,
2019 2018 2019 2018 2019 2018
Performing $ 24,400 $ 24,320 $ 11,188 $ 8,843 $ 94,343 $ 94,925
Nonperforming — — — — — —
Nonaccrual 8 62 — — 973 955
$ 24,408 $ 24,382 $ 11,188 $ 8,843 $ 95,316 $ 95,880

The following schedule provides information on loans that were considered TDRs that were modified during the ~~three months~~nine-month periods ended ~~March 31,~~September 30, 2019 and ~~March 31,~~September 30, 2018:

Three Months Ended September 30, 2019 Nine Months Ended September 30, 2019
Pre- Post- Pre- Post-
Modification Modification Modification Modification
Three Months Ended March 31, 2019 Three Months Ended March 31, 2018 Outstanding Outstanding Outstanding Outstanding
(Dollars in thousands)

Number of
Loans Pre-
Modification
Outstanding
Recorded
Investment Post-
Modification
Outstanding
Recorded
Investment Number of
Loans Pre-
Modification
Outstanding
Recorded
Investment Post-
Modification
Outstanding
Recorded
Investment Number of Recorded Recorded Number of Recorded Recorded
Loans Investment Investment Loans Investment Investment
Commercial real estate — $ — $ — 1 $ 58 $ 58 — $ — $ — 2 $ 1,882 $ 1,882
Commercial and industrial — — — 2 97 97
Total — $ — $ — 3 $ 155 $ 155
Residential real estate — — — 1 17 17
— $ — $ — 3 $ 1,899 $ 1,899
Three Months Ended September 30, 2018 Nine Months Ended September 30, 2018
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
Commercial and industrial — $ — $ — — $ — $ —

The pre-modification and post-modification outstanding recorded investments represent amounts as of the date of loan modification. If a difference exists between the pre-modification and post-modification outstanding recorded investment, it represents impairment recognized through the provision for loan losses computed based on a loan’s post-modification present value of expected future cash flows discounted at the loan’s original effective interest rate. If no difference exists, a loss is not expected to be incurred based on an assessment of the borrower’s expected cash flows.

The following schedule provides information on TDRs as of ~~March 31,~~September 30, 2019 and 2018 where the borrower was past due with respect to principal and/or interest for 30 days or more during the ~~three-month~~three- and nine-month periods ended ~~March 31,~~September 30, 2019 and ~~March 31,~~September 30, 2018 that had been modified during the year prior to the default:

Three Months Ended Three Months Ended
March 31, 2019 March 31, 2018
(Dollars in thousands) Number Recorded Number Recorded
of Loans Investment of Loans Investment
Commercial and industrial — $ — 2 $ 97
Commercial real estate — — 1 58
— $ — 3 $ 155
Three Months Ended Nine Months Ended
September 30, 2019 September 30, 2019
(Dollars in thousands) Number Recorded Number Recorded
of Loans Investment of Loans Investment
Commercial real estate 2 $ 1,882 2 $ 1,882
Three Months Ended Nine Months Ended
September 30, 2018 September 30, 2018
(Dollars in thousands) Number Recorded Number Recorded
of Loans Investment of Loans Investment
Commercial and industrial — $ — — $ —

Impaired loans by loan category follow:

Unpaid
(Dollars in thousands) Recorded Principal Related
Investment Balance Allowance
September 30, 2019
With no related allowance recorded
Agricultural $ — $ — $ —
Commercial and industrial 259 259 —
Consumer — — —
Commercial real estate 1,882 1,882 —
Construction real estate — — —
Residential real estate 103 103 —
Total 2,244 2,244 —
With an allowance recorded
Agricultural 389 474 85
Commercial and industrial 20 22 2
Consumer 20 24 4
Commercial real estate 449 462 14
Construction real estate — — —
Residential real estate 2,543 2,729 186
Total 3,421 3,711 291
Total
Agricultural 389 474 85
Commercial and industrial 279 281 2
Consumer 20 24 4
Commercial real estate 2,331 2,344 14
Construction real estate — — —
Residential real estate 2,646 2,832 186
Total $ 5,665 $ 5,955 $ 291

December 31, 2018
With no related allowance recorded
Agricultural $ 185 $ 185 $ —
Commercial and industrial — — —
Consumer 1 1 —
Construction real estate — — —
Commercial real estate 73 109 —
Residential real estate 250 261 —
Total 509 556 —
With an allowance recorded
Agricultural 393 440 94
Commercial and industrial 21 21 3
Consumer 89 89 13
Construction real estate — — —
Commercial real estate 550 609 20
Residential real estate 2,462 2,494 167
Total 3,515 3,653 297
Total
Agricultural 578 625 94
Commercial and industrial 21 21 3
Consumer 90 90 13
Construction real estate — — —
Commercial real estate 623 718 20
Residential real estate 2,712 2,755 167
Total $ 4,024 $ 4,209 $ 297

Unpaid
(Dollars in thousands) Recorded Principal Related
Investment Balance Allowance
March 31, 2019
With no related allowance recorded
  Agricultural $ — $ — $ —
  Commercial and industrial — — —
  Consumer — — —
  Commercial real estate 72 108 —
  Construction real estate — — —
  Residential real estate 156 171 —
Total 228 279 —
With an allowance recorded
  Agricultural 389 440 85
  Commercial and industrial 25 25 4
  Consumer 63 63 12
  Commercial real estate 533 538 19
  Construction real estate — — —
  Residential real estate 2,535 2,582 179
Total 3,545 3,648 299
Total
  Agricultural 389 440 85
  Commercial and industrial 25 25 4
  Consumer 63 63 12
  Commercial real estate 605 646 19
  Construction real estate — — —
  Residential real estate 2,691 2,753 179
Total $ 3,773 $ 3,927 $ 299

December 31, 2018
With no related allowance recorded
  Agricultural $ 185 $ 185 $ —
  Commercial and industrial — — —
  Consumer 1 1 —
  Construction real estate — — —
  Commercial real estate 73 109 —
  Residential real estate 250 261 —
Total 509 556 —
With an allowance recorded
  Agricultural 393 440 94
  Commercial and industrial 21 21 3
  Consumer 89 89 13
  Construction real estate — — —
  Commercial real estate 550 609 20
  Residential real estate 2,462 2,494 167
Total 3,515 3,653 297
Total
  Agricultural 578 625 94
  Commercial and industrial 21 21 3
  Consumer 90 90 13
  Construction real estate — — —
  Commercial real estate 623 718 20
  Residential real estate 2,712 2,755 167
Total $ 4,024 $ 4,209 $ 297

The following schedule provides information regarding average balances of impaired loans and interest recognized on impaired loans for ~~the three months~~three- and nine-month periods ended ~~March 31,~~September 30, 2019 and 2018:

Average Interest Average Interest
(Dollars in thousands) Recorded Income Recorded Income
Investment Recognized Investment Recognized
March 31, 2019
Three months ended September 30, 2019
With no related allowance recorded
Agricultural $ 92 $ — $ — $ —
Commercial and industrial — — 129 —
Consumer 1 — — —
Commercial real estate 73 7 941 —
Residential real estate 203 23 109 1
Total 369 30 1,179 1
With an allowance recorded
Agricultural 391 — 389 —
Commercial and industrial 23 — 191 —
Consumer 76 — 37 1
Commercial real estate 541 — 1,693 13
Residential real estate 2,499 1 2,521 48
Total 3,530 1 4,831 62
Total
Agricultural 483 — 389 —
Commercial and industrial 23 — 320 —
Consumer 77 — 37 1
Commercial real estate 614 7 2,634 13
Residential real estate 2,702 24 2,630 49
Total $ 3,899 $ 31 $ 6,010 $ 63

Average Interest
(Dollars in thousands) Recorded Income
Investment Recognized
March 31, 2018
With no related allowance recorded
  Agricultural $ 428 $ —
  Commercial and industrial 59 —
  Consumer 2 —
  Commercial real estate 99 —
  Residential real estate 152 —
Total 740 —
With an allowance recorded
  Agricultural — —
  Commercial and industrial 170 8
  Consumer 34 —
  Commercial real estate 762 —
  Residential real estate 2,549 26
Total 3,515 34
Total
  Agricultural 428 —
  Commercial and industrial 229 8
  Consumer 36 —
  Commercial real estate 861 —
  Residential real estate 2,701 26
Total $ 4,255 $ 34
Average Interest
(Dollars in thousands) Recorded Income
Investment Recognized
Three months ended September 30, 2018
With no related allowance recorded
Agricultural $ 211 $ —
Commercial and industrial 73 3
Consumer — —
Commercial real estate 134 —
Construction real estate 65 —
Residential real estate 168 —
Total 651 3
With an allowance recorded
Agricultural 206 —
Commercial and industrial 521 8
Consumer 68 3
Commercial real estate 739 20
Construction real estate — —
Residential real estate 2,418 52
Total 3,952 83
Total
Agricultural 417 —
Commercial and industrial 594 11
Consumer 68 3
Commercial real estate 873 20
Construction real estate 65 —
Residential real estate 2,586 52
Total $ 4,603 $ 86

Average Interest
(Dollars in thousands) Recorded Income
Investment Recognized
Nine months ended September 30, 2019
With no related allowance recorded
Agricultural $ 46 $ —
Commercial and industrial 65 9
Consumer — —
Commercial real estate 507 61
Residential real estate 156 4
Total 774 74
With an allowance recorded
Agricultural 390 —
Commercial and industrial 107 2
Consumer 56 1
Commercial real estate 1,117 27
Residential real estate 2,510 112
Total 4,180 142
Total
Agricultural 436 —
Commercial and industrial 172 11
Consumer 56 1
Commercial real estate 1,624 88
Residential real estate 2,666 116
Total $ 4,954 $ 216
Average Interest
(Dollars in thousands) Recorded Income
Investment Recognized
Nine months ended September 30, 2018
With no related allowance recorded
Agricultural $ 317 $ —
Commercial and industrial 37 6
Consumer 2 —
Commercial real estate 67 —
Construction real estate 79 —
Residential real estate 159 2
Total 661 8
With an allowance recorded
Agricultural 103 —
Commercial and industrial 364 23
Consumer 52 2
Commercial real estate 728 42
Construction real estate — —
Residential real estate 2,539 112
Total 3,786 179
Total
Agricultural 420 —
Commercial and industrial 401 29
Consumer 54 2
Commercial real estate 795 42
Construction real estate 79 —
Residential real estate 2,698 114
Total $ 4,447 $ 187

An aging analysis of loans by loan category follows:

Greater 90 Days Past
(Dollars in thousands) 30 to 59 60 to 89 Than 90 Loans Not Due and
Days Days Days (1) Total Past Due Total Loans Accruing
March 31, 2019
Agricultural $ — $ — $ — $ — $ 42,045 $ 42,045 $ —
Commercial and industrial 353 — 2 355 92,245 92,600 —
Consumer 39 3 45 87 24,106 24,193 —
Commercial real estate 96 — 72 168 136,879 137,047 —
Construction real estate — — — — 9,294 9,294 —
Residential real estate 742 209 99 1,050 95,815 96,865 —
$ 1,230 $ 212 $ 218 $ 1,660 $ 400,384 $ 402,044 $ —

December 31, 2018
Agricultural $ — $ — $ — $ — $ 49,109 $ 49,109 $ —
Commercial and industrial 5 — — 5 91,401 91,406 —
Consumer 149 40 11 200 24,182 24,382 —
Commercial real estate — — 73 73 139,380 139,453 —
Construction real estate — — — — 8,843 8,843 —
Residential real estate 1,493 486 648 2,627 93,253 95,880 —
$ 1,647 $ 526 $ 732 $ 2,905 $ 406,168 $ 409,073 $ —
Greater 90 Days Past
(Dollars in thousands) 30 to 59 60 to 89 Than 90 Loans Not Due and
Days Days Days (1) Total Past Due Total Loans Accruing
September 30, 2019
Agricultural $ — $ — $ — $ — $ 50,057 $ 50,057 $ —
Commercial and industrial 284 — 259 543 80,988 81,531 —
Consumer 43 3 2 48 24,360 24,408 —
Commercial real estate — — 1,882 1,882 142,424 144,306 —
Construction real estate — — — — 11,188 11,188 —
Residential real estate 102 644 201 947 94,369 95,316 —
$ 429 $ 647 $ 2,344 $ 3,420 $ 403,386 $ 406,806 $ —

December 31, 2018
Agricultural $ — $ — $ — $ — $ 49,109 $ 49,109 $ —
Commercial and industrial 5 — — 5 91,401 91,406 —
Consumer 149 40 11 200 24,182 24,382 —
Commercial real estate — — 73 73 139,380 139,453 —
Construction real estate — — — — 8,843 8,843 —
Residential real estate 1,493 486 648 2,627 93,253 95,880 —
$ 1,647 $ 526 $ 732 $ 2,905 $ 406,168 $ 409,073 $ —

(1) Includes nonaccrual loans.

Nonaccrual loans by loan category follow:

(Dollars in thousands) March 31, December 31,
2019 2018
Agricultural $ 389 $ 393
Commercial and industrial 1 —
Consumer 50 62
Commercial real estate 119 123
Construction real estate — —
Residential real estate 1,025 954
$ 1,584 $ 1,532
(Dollars in thousands) September 30, December 31,
2019 2018
Agricultural $ 389 $ 393
Commercial and industrial 279 —
Consumer 7 62
Commercial real estate 1,925 123
Construction real estate — —
Residential real estate 973 954
$ 3,573 $ 1,532

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
(Dollars in thousands, except per share data) March 31,
2019 2018
Basic Earnings Per Share
Net income available to common shareholders $ 1,637 $ 1,658

Weighted average common shares outstanding 3,618,328 3,615,005

Basic earnings per share $ 0.45 $ 0.46

Diluted Earnings Per Share
Net income available to common shareholders $ 1,637 $ 1,658

Weighted average common shares outstanding 3,618,328 3,615,005
Plus dilutive stock options and restricted stock units 15,720 13,944

Weighted average common shares outstanding and potentially dilutive shares 3,634,048 3,628,949

Diluted earnings per share $ 0.45 $ 0.46
Three Months Ended Nine Months Ended
(Dollars in thousands, except per share data) September 30, September 30,
2019 2018 2019 2018
Basic Earnings Per Share
Net income available to common shareholders $ 1,021 $ 2,014 $ 4,144 $ 5,505

Weighted average common shares outstanding 3,633,474 3,613,516 3,626,961 3,613,891

Basic earnings per share $ 0.28 $ 0.55 $ 1.14 $ 1.52

Diluted Earnings Per Share
Net income available to common shareholders $ 1,021 $ 2,014 $ 4,144 $ 5,505

Weighted average common shares outstanding 3,633,474 3,613,516 3,626,961 3,613,891
Plus dilutive stock options and restricted stock units 23,964 16,535 19,870 13,497

Weighted average common shares outstanding and potentially dilutive shares 3,657,438 3,630,051 3,646,831 3,627,388

Diluted earnings per share $ 0.28 $ 0.55 $ 1.14 $ 1.52

There were ~~15,000~~no stock options that were considered to be anti-dilutive to earnings ~~as of March 31,~~for the three months ended September 30, 2019 and 13,500 that were considered to be anti-dilutive to earnings for the nine months ended September 30, 2019 and were excluded from the calculation above. There were no stock options that were considered to be anti-dilutive to earnings per share ~~as of March~~for the three or nine months ended September 30, 2018.
All share and per share amounts have been adjusted for the 5% stock dividend issued on May 31, ~~2018.~~2018 and the 5% stock dividend issued on May 31, 2017, where applicable.

NOTE 5 – FINANCIAL INSTRUMENTS

Financial instruments as of the dates indicated were as follows:

Quoted
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)
March 31, 2019
Assets:
Cash and due from banks $ 16,296 $ 16,296 $ 16,296 $ — $ —
Equity securities at fair value 3,034 3,034 2,071 — 963
Securities available for sale 168,254 168,254 — 159,659 8,595
Federal Home Loan Bank and Federal Reserve Bank stock 3,567 3,567 — 3,567 —
Loans held for sale 1,524 1,570 — 1,570 —
Loans to other financial institutions 28,119 28,119 — 28,119 —
Loans, net 397,314 388,091 — — 388,091
Accrued interest receivable 2,787 2,787 — 2,787 —

Liabilities:
Noninterest-bearing deposits 155,047 155,047 — 155,047 —
Interest-bearing deposits 409,404 408,699 — 408,699 —
Federal funds purchased — — — — —
Federal Home Loan Bank advances 20,225 20,244 — 20,244 —
Accrued interest payable 176 176 — 176 —

December 31, 2018
Assets:
Cash and due from banks $ 19,690 $ 19,690 $ 19,690 $ — $ —
Equity securities at fair value 2,847 2,847 1,961 — 886
Securities available for sale 166,602 166,602 — 158,104 8,498
Federal Home Loan Bank and Federal Reserve Bank stock 3,567 3,567 — 3,567 —
Loans held for sale 831 856 — 856 —
Loans to other financial institutions 20,644 20,644 — 20,644 —
Loans, net 404,400 399,091 — — 399,091
Accrued interest receivable 2,267 2,267 — 2,267 —

Liabilities:
Noninterest-bearing deposits 153,542 153,542 — 153,542 —
Interest-bearing deposits 423,473 422,381 — 422,381 —
Federal funds purchased 4,800 4,800 — 4,800 —
Federal Home Loan Bank advances 5,233 5,241 — 5,241 —
Accrued interest payable 210 210 — 210 —
Quoted Prices
in Active Significant
Markets for Other Significant
Identical Observable Unobservable
(Dollars in thousands) Carrying Estimated Assets Inputs Inputs
Amount Fair Value (Level 1) (Level 2) (Level 3)
September 30, 2019
Assets:
  Cash and due from banks $ 16,574 $ 16,574 $ 16,574 $ —   $ —
  Equity securities at fair value 2,499 2,499 1,499 —   1,000
  Securities available for sale 154,778 154,778 —   144,501 10,277
  Federal Home Loan Bank and Federal
    Reserve Bank stock 3,568 3,568 —   3,568 —
  Loans held for sale 1,202 1,202 —   1,202 —
  Loans to other financial
    institutions 29,992 29,992 —   29,992 —
  Loans, net 402,710 398,450 —   —   398,450
  Accrued interest receivable 2,663 2,663 —   2,663 —

Liabilities:
  Noninterest-bearing deposits 152,579 152,579 —   152,579 —
  Interest-bearing deposits 421,496 421,611 —   421,611 —
  Federal Home Loan Bank advances 207 220 —   220 —
  Accrued interest payable 235 235 —   235 —

December 31, 2018
Assets:
  Cash and due from banks $ 19,690 $ 19,690 $ 19,690 $ —   $ —
  Equity securities at fair value 2,847 2,847 1,961 —   886
  Securities available for sale 166,602 166,602 —   158,104 8,498
  Federal Home Loan Bank and Federal
    Reserve Bank stock 3,567 3,567 —   3,567 —
  Loans held for sale 831 856 —   856 —
  Loans to other financial institutions 20,644 20,644 —   20,644 —
  Loans, net 404,400 399,091 —   —   399,091
  Accrued interest receivable 2,267 2,267 —   2,267 —

Liabilities:
  Noninterest-bearing deposits 153,542 153,542 —   153,542 —
  Interest-bearing deposits 423,473 422,381 —   422,381 —
  Federal funds purchased 4,800 4,800 —   4,800 —
  Federal Home Loan Bank advances 5,233 5,241 —   5,241 —
  Accrued interest payable 210 210 —   210 —

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 the 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. The Bank’s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability.

There were no liabilities measured at fair value as of ~~March 31,~~September 30, 2019 or December 31, 2018. Disclosures concerning assets measured at fair value are as follows:

Assets Measured at Fair Value on a Recurring Basis

Quoted Prices Significant
in Active Other Significant
Markets for Identical Observable Unobservable
(Dollars in thousands) Assets Inputs Inputs Balance at
(Level 1) (Level 2) (Level 3) Date Indicated
Equity Securities Held at Fair Value - March 31, 2019
Equity securities $ 2,071 $ — $ 963 $ 3,034

Investment Securities, Available for Sale - March 31, 2019
U.S. Treasury notes and bonds $ — $ 1,959 $ — $ 1,959
U.S. Government and federal agency — 33,764 — 33,764
State and municipal — 95,792 8,095 103,887
Mortgage-backed — 23,024 — 23,024
Corporate — 5,117 — 5,117
Trust preferred securities — — 500 500
Asset backed securities — 3 — 3
     Total $ — $ 159,659 $ 8,595 $ 168,254

Equity Securities Held at Fair Value - December 31, 2018
Equity securities $ 1,961 $ — $ 886 $ 2,847

Investment Securities, Available for Sale - December 31, 2018
U.S. Treasury notes and bonds $ — $ 1,947 $ — $ 1,947
U.S. Government and federal agency — 33,529 — 33,529
State and municipal — 95,930 7,998 103,928
Mortgage-backed — 21,575 — 21,575
Corporate — 5,102 — 5,102
Trust preferred securities — — 500 500
Asset backed securities — 21 — 21
     Total $ — $ 158,104 $ 8,498 $ 166,602
(Dollars in thousands) Quoted Prices
in Active
Markets for
Identical
Assets Significant
Other
Observable
Inputs Significant
Unobservable
Inputs Balance at Date
(Level 1) (Level 2) (Level 3) Indicated
Equity Securities Held at Fair Value - September 30, 2019
Equity securities $ 1,499 $ — $ 1,000 $ 2,499

Investment Securities, Available for Sale – September 30, 2019
U.S. Treasury notes and bonds $ — $ 2,012 $ — $ 2,012
U.S. Government and federal agency — 23,049 — 23,049
State and municipal — 90,975 9,777 100,752
Mortgage-backed — 25,286 — 25,286
Corporate — 2,679 — 2,679
Foreign debt — 500 — 500
Trust preferred securities — — 500 500
     Total $ — $ 144,501 $ 10,277 $ 154,778

Equity Securities Held at Fair Value - December 31, 2018
Equity securities $ 1,961 $ — $ 886 $ 2,847

Investment Securities, Available for Sale - December 31, 2018
U.S. Treasury notes and bonds $ — $ 1,947 $ — $ 1,947
U.S. Government and federal agency — 33,529 — 33,529
State and municipal — 95,930 7,998 103,928
Mortgage-backed — 21,575 — 21,575
Corporate — 5,102 — 5,102
Trust preferred securities — — 500 500
Asset backed securities — 21 — 21
     Total $ — $ 158,104 $ 8,498 $ 166,602

22
Changes in Level 3 Assets Measured at Fair Value on a Recurring Basis

(Dollars in thousands)
2019 2018
Equity Securities Held at Fair Value
Balance, January 1 $ 886 $ —
Reclassification due to implementation of ASU 2016-01 — 1,000
Total realized and unrealized gains included in noninterest income 77 —
Net purchases, sales, calls, and maturities — —
Net transfers into Level 3 — —
Balance, March 31 $ 963 $ 1,000

Investment Securities, Available for Sale
Balance, January 1 $ 8,498 $ 13,398
Reclassification due to implementation of ASU 2016-01 — (1,000 )
Total unrealized gains (losses) included in other comprehensive income 97 (230 )
Net purchases, sales, calls, and maturities — —
Net transfers into Level 3 — —
Balance, March 31 $ 8,595 $ 12,168
Nine months ended
(Dollars in thousands) September 30,
2019 2018
Equity Securities Held at Fair Value
Balance, January 1 $ 886 $ —
Reclassification due to implementation of ASU 2016-01 — 1,000
Total realized and unrealized gains included in noninterest income 114 —
Net purchases, sales, calls, and maturities — —
Net transfers into Level 3 — —
Balance, September 30 $ 1,000 $ 1,000

Investment Securities, Available for Sale
Balance, January 1 $ 8,498 $ 13,398
Reclassification due to implementation of ASU 2016-01 — (1,000 )
Total unrealized gains (losses) included in other comprehensive income 350 (347 )
Net purchases, sales, calls, and maturities 1,429 (3,656 )
Net transfers into Level 3 — —
Balance, September 30 $ 10,277 $ 8,395

Of the available for sale Level 3 assets that were held by ~~the company~~ChoiceOne at ~~March 31,~~September 30, 2019, the net unrealized gain as of ~~March 31,~~September 30, 2019 was ~~$206,000,~~$495,000, which iswas recognized in accumulated other comprehensive income in the consolidated balance sheet. ~~There~~Of the equity securities classified as Level 3 assets that were ~~no purchases or sales~~held by ChoiceOne at September 30, 2019, the fair value was consistent with par as of September 30, 2019. ChoiceOne purchased two bonds from municipalities in our market area at a purchase price of $2.1 million that are considered Level 3 securities in the ~~first quarter of 2019 or in the first quarter of 2018.~~nine months ended September 30, 2019.

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

Securities categorized as Level 3 assets primarily consist of bonds issued by local municipalities and equity securities of community banks. ~~The company~~ChoiceOne estimates the fair value of these bonds 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.

~~The company~~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 Significant
in Active Other Significant
Markets for Observable Unobservable
(Dollars in thousands) Balance at Identical Assets Inputs Inputs Balance at Dates Quoted Prices
in Active
Markets for
Identical Assets Significant
Other
Observable
Inputs Significant
Unobservable
Inputs
Dates Indicated (Level 1) (Level 2) (Level 3) Indicated (Level 1) (Level 2) (Level 3)
Impaired Loans
March 31, 2019 $ 3,773 $ — $ — $ 3,773
September 30, 2019 $ 5,665 $ — $ — $ 5,665
December 31, 2018 $ 4,024 $ — $ — $ 4,024 $ 4,024 $ — $ — $ 4,024

Other Real Estate
March 31, 2019 $ 121 $ — $ — $ 121
September 30, 2019 $ 284 $ — $ — $ 284
December 31, 2018 $ 102 $ — $ — $ 102 $ 102 $ — $ — $ 102

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

NOTE 7 – REVENUE FROM CONTRACTS WITH CUSTOMERS

ChoiceOne has a variety of sources of revenue, which include interest and fees from customers as well as revenue from non-customers. ASC Topic 606, Revenue from Contracts With Customers, covers certain sources of revenue that are classified within noninterest income in the Consolidated Statements of Income. Sources of revenue that are included in the scope of ACS 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 services 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 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.

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

Three months ended Nine months ended
Three Months Ended March 31, September 30, September 30,
(Dollars in thousands) 2019 2018 2019 2018 2019 2018

Service charges and fees on deposit accounts $ 628 $ 622 $ 690 $ 715 $ 1,987 $ 2,007
Interchange income 405 433 404 449 1,288 1,333
Investment commission income 50 50 72 80 177 187
Other charges and fees for customer services 63 65 57 46 177 158
Noninterest income from contracts with customers within the scope of ASC 606 1,146 1,170 1,223 1,290 3,629 3,685
Noninterest income within the scope of other GAAP topics 613 478 712 562 2,092 1,536
Total noninterest income $ 1,758 $ 1,648 $ 1,935 $ 1,852 $ 5,721 $ 5,221

NOTE 8 – BUSINESS COMBINATION

On ~~March 22,~~October 1, 2019, ChoiceOne ~~entered into an Agreement and Plan~~completed the merger of ~~Merger With~~ County Bank Corp (“County”), the holding company for Lakestone Bank ~~& Trust. Under the terms of the merger agreement, County will be merged~~and Trust, with and into ChoiceOne ~~with~~pursuant to an Agreement and Plan of Merger dated March 22, 2019. Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger, each share of County common stock was converted into the right to receive 2.0632 shares of ChoiceOne common stock plus cash in lieu of any fractional shares. As a result of the Merger, a total of 3,603,872 shares of ChoiceOne common stock were identified that would be issued to County shareholders. The consolidated financial statements as of and for the ~~surviving corporation. Completion~~nine months ended September 30, 2019 do not include financial results for County. As of the merger is subject to receipt of shareholder approval of both ChoiceOne and County, receipt of regulatory approval, and the satisfaction of other customary closing conditions. Management expects the merger to become effective in the second half of 2019. As of December 31, 2018,date, County had total assets of approximately ~~$620~~$673 million, total loans of approximately ~~$360~~$428 million, and total deposits of approximately ~~$540~~$574 million. The initial accounting for the merger is not yet complete.

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”) and its wholly-owned subsidiary, ChoiceOne Bank (the “Bank”), and the 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 itself. Words such as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “intends,” “is likely,” “plans,” “predicts,” “projects,” “may,” “could,” “look forward,” “continue”, “future”, and variations of such words and similar expressions are intended to identify such forward-looking statements. Management’s determination of the provision and allowance for loan losses, the carrying value of goodwill, loan servicing rights, other real estate owned, and the fair value of investment securities (including whether any impairment on any investment security is temporary or other-than-temporary and the amount of any impairment) and management’s assumptions concerning pension and other postretirement benefit plans involve judgments that are inherently forward-looking. Examples of forward-looking statements also include, but are not limited to, statements regarding the outlook and expectations of ChoiceOne and County Bank Corp (“County”) with respect to their planned merger, the strategic benefits and financial benefits of the merger, including the expected impact of the transaction on the combined company’s future financial performance (including anticipated accretion of earnings per share, cost savings, the tangible book value earn-back period and other operating and return metrics), and the timing of the closing of the transaction. 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. ~~Such risks, uncertainties, and assumptions include, among others, the following:~~

● the failure to obtain necessary regulatory approvals when expected or at all (and the risk that such approvals may result in the imposition of conditions that could adversely affect the combined company or the expected benefits of the transaction);
● ~~the failure of either ChoiceOne or County to obtain shareholder approval, or to satisfy any of the other closing conditions to the transaction on a timely basis or at all;~~
● ~~the occurrence of any event, change or other circumstances that could give rise to the right of one or both of the parties to terminate the merger agreement;~~
● the possibility that the anticipated benefits of the transaction, including anticipated cost savings and strategic gains, are not realized when expected or at all, including as a result of the impact of, or problems arising from, the integration of the two companies or as a result of the strength of the economy, competitive factors in the areas where ChoiceOne and County do business, or as a result of other unexpected factors or events;
● ~~the impact of purchase accounting with respect to the transaction, or any change in the assumptions used regarding the assets purchased and liabilities assumed to determine their fair value;~~
● ~~diversion of management’s attention from ongoing business operations and opportunities;~~
● ~~potential adverse reactions or changes to business or employee relationships, including those resulting from the announcement or completion of the transaction; and~~
● ~~the outcome of any legal proceedings that may be instituted against ChoiceOne or County.~~
~~Additional risk~~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, 2018. These are representative of the risk factors that could cause a difference between an ultimate actual outcome and a preceding forward-looking statement.

RESULTS OF OPERATIONS

Summary
Net income for the ~~first~~third quarter of 2019 was ~~$1,637,000,~~$1,021,000, which represented a decrease of ~~$21,000~~$993,000 or 1%49% compared to the same period in 2018. Net income for the first nine months of 2019 was $4,144,000, which represented a decrease of $1,361,000 or 25% compared to the first nine months of the prior year. Growth in noninterest expense in both the third quarter and first nine months of 2019 compared to the same periods in 2018 was partially offset by higher noninterest income in the third quarter and higher net interest income and noninterest income ~~was offset by higher noninterest expense~~ in the first ~~quarter~~three quarters of 2019 compared to the ~~first quarter of~~same period in the prior year. Noninterest expense for the first nine months of 2019 was impacted by ~~$238,000~~$1.4 million of expense related to the ~~proposed~~ merger of County Bank Corp (“County”) with and into ChoiceOne, ~~and County.~~completed on October 1, 2019. The federal income tax effect of the merger expenses ~~was~~for the first nine months of 2019 is estimated to be ~~$15,000~~$157,000 as only a portion ~~but not all,~~ of the expenses are expected to be tax deductible. Net income adjusted to exclude tax-effected merger expenses of ~~$223,000, would have been $1,860,000~~$1,194,000 was $5,338,000 in the first ~~quarter~~nine months of 2019.

Basic and diluted earnings per common share were ~~both $0.45~~$0.28 for the third quarter and $1.14 for the first ~~quarter~~nine months of 2019, compared to ~~$0.46~~$0.55 for ~~both in~~ the ~~same period in 2018. Basic~~third quarter and ~~diluted~~$1.52 for the first three quarters of the prior year. Diluted earnings per ~~common~~ share, adjusted to exclude the tax-effected merger expenses, would have been ~~$0.51~~$0.45 in the third quarter and $1.46 in the first ~~quarter~~nine months of 2019. Earnings per share for 2018 was adjusted for the 5% stock dividend paid in May 2018. The return on average assets and return on average shareholders’ equity ~~percentages~~ were ~~0.98%~~0.83% and ~~8.03%~~6.62%, respectively, for the first ~~quarter~~nine months of 2019, compared to ~~1.06%~~1.16% and ~~8.74%~~9.63%, respectively, for the same period in 2018.

Net income, basic earnings ~~and~~per share, diluted earnings per share, return on average assets and return on average shareholders’ equity, excluding tax-effected merger expenses are non-GAAP financial measures. Please refer to the section below titled “Non-GAAP Financial Measures” for a reconciliation to the most directly-comparable GAAP financial measures.

Business Combination
On October 1, 2019, ChoiceOne completed the merger of County, the holding company for Lakestone Bank and Trust, with and into ChoiceOne pursuant to an Agreement and Plan of Merger dated March 22, 2019. Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger, each share of County common stock was converted into the right to receive 2.0632 shares of ChoiceOne common stock plus cash in lieu of any fractional shares. The consolidated financial statements as of and for the nine months ended September 30, 2019 do not include financial results for County.
Dividends
Cash dividends of ~~$724,000~~$2,906,000 or ~~$0.20~~$0.80 per share were declared in the ~~first~~third quarter of 2019, compared to ~~$619,000~~$651,000 or ~~$0.17~~$0.18 per share in the ~~first~~third quarter of 2018. Cash dividends declared in the first nine months of 2019 were $4,356,000 or $1.20 per share, compared to $1,921,000 or an adjusted $0.53 per share in the same period in the prior year. The per share amount for the first nine months of 2018 was adjusted for the 5% stock dividend paid in May 2018. Cash dividends in the third quarter and first nine months of 2019 included a special dividend of $2,180,000 or $0.60 per share, paid in connection with the merger of County with and into ChoiceOne. The cash dividend payout percentage was ~~44%~~105% for the first ~~three~~nine months of 2019, compared to ~~37%~~35% in the same period in the prior year. The cash dividend percentage for the first nine months of 2019, if adjusted for the special dividend, would have been 53%.

Interest Income and Expense
Tables 1 and 2 on the following pages provide information regarding interest income and expense for the ~~three-month~~three month and nine month periods ended ~~March 31,~~September 30, 2019 and 2018. Table 1 documents ChoiceOne’s average balances and interest income and expense, as well as the average rates earned or paid on assets and liabilities. Table 2 documents the effect on interest income and expense of changes in volume (average balance) and interest rates. These tables are referred to in the discussion of interest income, interest expense and net interest income.

Table 1 – Average Balances and Tax-Equivalent Interest Rates

Three Months Ended March 31, Three Months Ended September 30,
2019 2018 2019 2018
(Dollars in thousands) Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate Balance Interest Rate
Assets:
Loans (1) $ 425,144 $ 5,283 4.97 % $ 394,910 $ 4,597 4.66 % $ 429,448 $ 5,396 5.03 % $ 407,157 $ 5,111 5.02 %
Taxable securities (2) (3) 117,438 760 2.59 109,614 685 2.50 107,689 728 2.70 115,662 736 2.55
Nontaxable securities (1) (2) 55,297 468 3.38 55,680 458 3.29 53,581 447 3.33 56,823 475 3.34
Other 10,603 68 2.57 12,312 57 1.86 17,471 87 2.00 8,639 40 1.85
Interest-earning assets 608,482 6,579 4.32 572,516 5,797 4.05 608,189 6,658 4.38 588,281 6,362 4.33
Noninterest-earning assets 59,204 55,766 64,757 55,738
Total assets $ 667,686 $ 628,282 $ 672,946 $ 644,019

Liabilities and Shareholders’ Equity:
Interest-bearing demand deposits $ 219,354 268 0.49 % $ 217,311 116 0.21 % $ 217,717 274 0.50 % $ 214,629 190 0.35 %
Savings deposits 74,480 9 0.05 76,687 4 0.02 75,471 12 0.06 75,091 4 0.02
Certificates of deposit 124,045 574 1.85 95,350 226 0.95 131,989 687 2.08 115,409 425 1.48
Advances from Federal Home Loan Bank 17,396 116 2.66 12,820 45 1.42 1,027 8 3.02 11,095 63 2.27
Other 1,917 14 2.95 4,578 1 0.10 1,360 10 3.05 1,521 8 2.10
Interest-bearing liabilities 437,192 981 0.90 406,746 392 0.39 427,564 991 0.93 417,745 690 0.66
Noninterest-bearing demand deposits 147,882 144,028 157,182 147,863
Other noninterest-bearing liabilities 1,114 1,645 2,812 1,522
Total liabilities 586,188 552,419 587,558 567,130
Shareholders’ equity 81,498 75,863 85,388 76,889
Total liabilities and shareholders’ equity $ 667,686 $ 628,282 $ 672,946 $ 644,019

Net interest income (tax-equivalent basis)-interest spread (Non-GAAP) $ 5,598 3.43 % $ 5,405 3.66 %
Net interest income as a percentage of earning assets (tax-equivalent basis) (Non-GAAP) 3.68 % 3.78 %
Net interest income (tax-equivalent basis)- interest spread (Non-GAAP) (1) $ 5,667 3.46 % $ 5,672 3.66 %
Net interest income as a percentage of earning assets (tax-equivalent basis) (Non-GAAP) (1) 3.73 % 3.86 %

Reconciliation to Reported Net Interest Income
Net interest income (tax-equivalent basis) (Non-GAAP) $ 5,598 $ 5,405
Adjustment for taxable equivalent interest (1) (102 ) (98 )
Net interest income (tax-equivalent basis) (Non-GAAP) (1) $ 5,667 $ 5,672
Adjustment for taxable equivalent interest (97 ) (101 )
Net interest income (GAAP) $ 5,496 $ 5,307 $ 5,570 $ 5,571

Net interest margin (GAAP) 3.61 % 3.71 % 3.66 % 3.79 %

Nine Months Ended September 30,
2019 2018
(Dollars in thousands) Average Average
Balance Interest Rate Balance Interest Rate
Assets:
Loans (1) $ 426,444 $ 16,072 5.03 % $ 399,729 $ 14,737 4.92 %
Taxable securities (2) (3) 114,004 2,255 2.64 113,213 2,134 2.51
Nontaxable securities (1) (2) 54,356 1,368 3.36 56,113 1,392 3.31
Other 11,551 194 2.24 7,723 109 1.88
Interest-earning assets 606,355 19,889 4.37 576,778 18,372 4.25
Noninterest-earning assets 61,710 55,132
Total assets $ 668,065 $ 631,910

Liabilities and Shareholders’ Equity:
Interest-bearing demand deposits $ 213,295 809 0.51 % $ 209,865 442 0.28 %
Savings deposits 74,760 31 0.06 76,333 11 0.02
Certificates of deposit 128,077 1,908 1.99 105,776 975 1.23
Advances from Federal Home Loan Bank 11,576 238 2.74 11,970 165 1.84
Other 1,797 39 2.92 3,909 34 1.16
Interest-bearing liabilities 429,505 3,025 0.94 407,853 1,627 0.53
Noninterest-bearing demand deposits 153,097 146,598
Other noninterest-bearing liabilities 1,963 1,207
Total liabilities 584,565 555,658
Shareholders’ equity 83,500 76,252
Total liabilities and shareholders’ equity $ 668,065 $ 631,910

Net interest income (tax-equivalent basis)-interest spread (Non-GAAP) (1) $ 16,864 3.43 % $ 16,745 3.72 %
Net interest income as a percentage of earning assets (tax-equivalent basis) (Non-GAAP) (1) 3.71 % 3.87 %

Reconciliation to Reported Net Interest Income
Net interest income (tax-equivalent basis) (Non-GAAP) (1) $ 16,864 $ 16,745
Adjustment for taxable equivalent interest (297 ) (297 )
Net interest income (GAAP) $ 16,567 $ 16,448

Net interest margin (GAAP) 3.64 % 3.87 %

(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 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) Includes the effect of unrealized gains or losses on securities.
(3) Taxable securities include dividend income from Federal Home Loan Bank and Federal Reserve Bank stock.

28
Table 2 – Changes in Tax-Equivalent Net Interest Income

Three Months Ended March 31, Three Months Ended September 30,
(Dollars in thousands) 2019 Over 2018 2019 Over 2018
Total Volume Rate Total Volume Rate
Increase (decrease) in interest income (1)
Loans (2) $ 686 $ 365 $ 321 $ 285 $ 280 $ 5
Taxable securities 75 50 25 (8 ) (197 ) 189
Nontaxable securities (2) 10 (18 ) 28 (28 ) (27 ) (1 )
Other 11 (44 ) 55 47 44 3
Net change in tax-equivalent interest income 782 353 429 296 100 196

Increase (decrease) in interest expense (1)
Interest-bearing demand deposits 152 1 151 84 3 81
Savings deposits 5 (1 ) 6 8 — 8
Certificates of deposit 348 84 264 261 68 193
Advances from Federal Home Loan Bank 71 20 51 (55 ) (162 ) 107
Other 13 (4 ) 17 2 (5 ) 7
Net change in interest expense 589 100 489 300 (96 ) 396
Net change in tax-equivalentnet interest income $ 193 $ 253 $ (60 )

Net change in tax-equivalent net interest income $ (4 ) $ 196 $ (200 )
~~______________~~
Nine Months Ended September 30,
(Dollars in thousands) 2019 Over 2018
Total Volume Rate
Increase (decrease) in interest income (1)
Loans (2) $ 1,335 $ 1,001 $ 334
Taxable securities 121 15 106
Nontaxable securities (2) (24 ) (54 ) 30
Other 85 61 24
Net change in tax-equivalent interest income 1,517 1,023 494

Increase (decrease) in interest expense (1)
Interest-bearing demand deposits 367 8 359
Savings deposits 20 — 20
Certificates of deposit 933 238 695
Advances from Federal Home Loan Bank 73 (9 ) 82
Other 5 (35 ) 40
Net change in interest expense 1,398 202 1,196

Net change in tax-equivalent net interest income $ 119 $ 821 $ (702 )

(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 ~~$193,000~~$119,000 in the first ~~three~~nine months of 2019 compared to the same period in 2018. The benefit from growth in average interest-earning assets was ~~partially~~mostly offset by ~~increases~~a decline in the ~~average balance of certificates of deposit and advances from the Federal Home Loan Bank.~~net interest spread in 2019 compared to 2018. The net interest spread on a tax-equivalent basis declined by 2329 basis points from ~~3.66%~~3.72% in the first ~~quarter~~nine months of 2018 to 3.43% in the same ~~quarter~~period in 2019, which had a ~~$62,000~~$702,000 negative impact on tax-equivalent net interest income in the first ~~quarter~~nine months of 2019 compared to the same period in the prior year.

The average balance of loans increased ~~$30.2~~$26.7 million in the first ~~quarter~~nine months of 2019 compared to the same period in 2018. Loans to other financial institutions provided ~~$15.7~~$16.6 million of the growth. Average residential ~~mortgage~~real estate loans increased ~~$7.4~~$7.8 million, while average commercial and industrial loans and commercial real estate loans were ~~$7.1~~$2.2 million higher in the first ~~quarter~~nine months of 2019 than the first ~~quarter~~nine months of the prior ~~year. The average balance of consumer loans was virtually unchanged from the first quarter of 2018 to the same period in the current~~ year. The increase in the average loans balance was bolstered by ~~a 31~~an 11 basis point increase in the average rate earned. This caused tax-equivalent interest income from loans to increase ~~$686,000~~$1.3 million in the first ~~quarter~~three quarters of 2019 compared to the same period in the prior year. The average balance of total securities ~~increased $6.9~~decreased $1.0 million in the first ~~three~~nine months of 2019 compared to the same period in 2018. The effect of the average balance ~~growth, reinforced~~decline, offset by ~~an 8~~a 9 basis point increase in the average rate earned on securities, caused tax-equivalent securities income to increase ~~$85,000~~$97,000 in the first ~~quarter of 2019 compared to the same quarter in 2018.~~

~~The average balance of interest-bearing demand deposits increased $2.0 million in the first three~~nine months of 2019 compared to the same period in 2018. ~~In addition~~
The average balance of interest-bearing demand deposits increased $3.4 million in the first nine months of 2019 compared to the ~~higher average balance,~~same period in 2018. The growth plus the impact of an increase of 2823 basis points in the average rate paid on interest-bearing demand deposits caused interest expense to increase ~~$152,000~~$367,000 in the first ~~quarter~~nine months of 2019 compared to the same ~~quarter~~period in 2018. The average balance of certificates of deposit was up ~~$28.7~~$22.3 million in the first ~~quarter~~nine months of 2019 compared to the same period in 2018. Brokered certificates of deposit provided $10.5 million of the average balance increase in 2019. The growth in certificates of deposit plus a 9076 basis point increase in the average rate paid on certificates caused interest expense to increase ~~$348,000~~$933,000 in the first ~~quarter~~nine months of 2019 compared to the same period in 2018. The ~~effect of a $4.6 million increase in the average balance of Federal Home Loan Bank advances and the~~ impact of a ~~124~~90 basis point increase in the average rate paid on Federal Home Loan Bank advances caused interest expense to increase ~~$71,000~~$73,000 in the first ~~quarter~~nine months of 2019 compared to the ~~same quarter in~~first nine months of 2018.

ChoiceOne’s net interest income spread on a tax-equivalent basis was 3.43% in the first ~~quarter~~nine months of 2019, compared to ~~3.66%~~3.72% for the ~~first quarter of~~same period in 2018. The decline in the interest spread was due to an increase of 5141 basis points in the average rate paid on interest-bearing liabilities, which was partially offset by growth of 2812 basis points in the average rate earned on interest earning assets. Increases in short-term interest rates that ~~occurred during~~began in 2018 ~~were~~and continued in early 2019 was the primary factor for the higher average rates ~~for~~in both interest earning assets and interest-bearing liabilities. The rate earned on ChoiceOne’s floating rate loans was also impacted by decreases in the federal funds rate of 25 basis points on July 31, 2019 and September 18, 2019. Competition in ChoiceOne’s market areas for loans and deposits caused the ~~increase in~~ interest rates that could be obtained on new loan originations to be less than the ~~higher rate~~increase in rates necessary to retain local deposits and to grow wholesale funding.

Provision and Allowance for Loan Losses
Total loans decreased ~~$7.0~~$2.3 million in the first ~~quarter~~nine months of 2019, while the allowance for loan losses ~~increased $57,000~~decreased $577,000 during the same period. ~~The~~No provision ~~for loan losses~~expense was $0recorded in the first nine months of 2019 due to the small decline in loans that occurred since the end of 2018. Nonperforming loans were $5.6 million as of September 30, 2019, compared to $6.3 million as of June 30, 2019 and $3.8 million as of December 31, 2018. The decline in nonperforming loans in the third quarter of 2019 ~~compared~~was due to ~~$35,000~~a $670,000 charge-off of a portion of a large loan relationship. A specific reserve had been allocated to this relationship in the ~~same period in the prior year. Nonperforming loans were $3.7 million as~~second quarter of ~~March 31, 2019, compared to $3.8 million as December 31, 2018 and $4.1 million as of March 31, 2018.~~2019. The allowance for loan losses was ~~1.18%~~1.01% of total loans at ~~March 31,~~September 30, 2019, compared to 1.21% at June 30, 2019 and 1.14% at December ~~31, 2018 and 1.22% at March~~ 31, 2018.

Charge-offs and recoveries for respective loan categories for the ~~three~~nine months ended ~~March 31~~September 30 were as follows:

(Dollars in thousands) 2019 2018
Charge-offs Recoveries Charge-offs Recoveries
Agricultural $ — $ 65 $ — $ —
Commercial and industrial 83 21 58 57
Consumer 222 113 180 73
Commercial real estate 589 22 — 61
Construction real estate — — — —
Residential real estate 25 121 25 82
$ 919 $ 342 $ 263 $ 273
(Dollars in thousands) 2019 2018
Charge-offs Recoveries Charge-offs Recoveries
Agricultural $ — $ — $ — $ —
Commercial and industrial — 17 — 53
Consumer 106 143 69 37
Commercial real estate — 2 — 55
Construction real estate — — — —
Residential real estate — 1 3 24
$ 106 $ 163 $ 72 $ 169

Net ~~recoveries~~charge-offs of $705,000 and $577,000 were ~~$57,000~~recorded in the third quarter and first ~~quarter~~nine months of 2019, respectively, compared to net charge-offs of $37,000 and net recoveries of ~~$97,000~~$10,000 during the same ~~time period~~periods in ~~2018.~~2018, respectively. Net ~~recoveries~~charge-offs on an annualized basis as a percentage of average loans were ~~0.05%~~0.18% in the first ~~three~~nine months of 2019 and ~~0.10%~~0.00% for the same period in the prior year. Management is aware that the economic climate in Michigan will continue to affect business and individual borrowers. Management 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 2019, the provision and allowance for loan losses will be reviewed by the Bank’s management and adjusted as determined to be necessary.

Noninterest Income
Total noninterest income increased ~~$110,000~~$83,000 in the third quarter and $500,000 in the first ~~quarter~~nine months of 2019 compared to the same ~~period~~periods in 2018. As a result of lower long-term interest rates, gains on sales of loans increased $415,000 in the third quarter and $601,000 in the first three quarters of 2019 compared to the same periods in the prior year. The ~~positive~~negative change in the market value of equity securities ~~was $164,000 higher~~in the third quarter of 2019 compared to a positive change in the third quarter of 2018 represented a reversal of market value appreciation that occurred in the first ~~quarter~~two quarters of ~~the current year than the same quarter~~2019.
Noninterest Expense
Total noninterest expense increased $1.3 million in the ~~prior year. Small declines were experienced in customer service charges~~third quarter and gains on sales of loans due to lower activity levels. The reduction in other noninterest income was primarily due to a lower level of net servicing fee income on residential mortgage loans sold and serviced$2.3 million in the first ~~quarter~~nine months of 2019 compared to the same ~~quarter~~periods in 2018.
~~Noninterest Expense~~
~~Total noninterest expense increased $370,000~~ Growth in professional fees of $526,000 and $1.2 million in the third quarter and first ~~quarter~~nine months of 2019, respectively, was primarily due to the merger of County with and into ChoiceOne. Part of the increase in data processing expenses in 2019 compared to ~~the same period in 2018. The increase in professional fees in the first quarter of 2019 compared to the same period in the prior year~~2018 was ~~due in part to $238,000~~also related to the ~~proposed merger of ChoiceOne~~merger. ChoiceOne’s two new offices contributed to the growth in salaries and ~~County. An increase of $91,000 in~~benefits and occupancy and equipment expense in ~~the first quarter of~~ 2019 compared to the first quarter of 2018 was caused by higher depreciation expense related to ChoiceOne’s two new offices opened in late 2018 and higher repairs and maintenance costs. The decline in advertising and promotional expense in the first quarter of 2019 compared to the same quarter in the prior year resulted from different timing of marketing campaigns in the two years.2018.

Income Tax Expense
Income tax expense was ~~$283,000~~$671,000 in the first ~~quarter~~nine months of 2019 compared to ~~$298,000~~$992,000 for the same period in 2018. The effective tax rate was ~~14.7%~~13.9% for the first ~~quarter~~nine months of 2019 and ~~15.2%~~15.3% for the first ~~quarter~~nine months of 2018.

FINANCIAL CONDITION

Securities
The securities available for sale portfolio ~~increased $1.6~~decreased $11.8 million from December 31, 2018 to ~~March 31,~~September 30, 2019. ~~The small increase~~Due to current market rates available for securities, management limited securities purchases in the ~~securities portfolio resulted from ChoiceOne’s desire to supplement growth in earning assets.~~first three quarters of 2019. Various securities totaling ~~$4.8~~$13.9 million were purchased in the first ~~three~~nine months of 2019 and were offset by approximately ~~$3.8~~$26.1 million of securities called or matured during that same time period. Principal repayments on securities totaled ~~$0.7~~$3.4 million in the first ~~three~~nine months of 2019. Approximately $1.2 million of securities were sold in the first nine months of 2019 for a net gain of $22,000. Due to lower interest rates in the first nine months of 2019, the Bank’s market value adjustment on securities available for sale improved from a net unrealized loss of $1.1 million as of December 31, 2018 to a net unrealized gain of $3.7 million as of September 30, 2019.

Loans
~~Loans~~
The balance of loans to other financial institutions ~~were $7.5~~was $9.3 million higher at ~~March 31,~~September 30, 2019 than at December 31, 2018. The increase resulted from more activity in this loan program ~~as of the end of~~during the first ~~quarter~~three quarters of 2019. Loans, excluding loans held for sale and loans to other financial institutions, declined ~~$7.0~~$2.3 million from December 31, 2018 to ~~March 31,~~September 30, 2019. Decreases of ~~$7.1 million, $2.4~~$9.9 million and ~~$0.2~~$0.6 million in ~~agricultural loans,~~ commercial ~~real estate~~and industrial loans and ~~consumer~~residential real estate loans, respectively, were partially offset by growth of ~~$1.1 million, $1.0 million, and $0.5~~$4.9 million in commercial ~~and industrial~~real estate loans, ~~residential~~$2.3 million in construction real estate loans, and ~~construction real estate loans, respectively. The decrease~~$0.9 million in agricultural ~~loans was primarily due to seasonal pay downs by borrowers.~~loans. The ~~other~~balance 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 ~~$3.8~~$5.7 million at ~~March 31,~~September 30, 2019, compared to $6.4 million as of June 30, 2019 and $4.0 million as of December 31, 2018. The change from the end of 2018 to June 30, 2019 was primarily comprised of a ~~decrease of $189,000~~single relationship that was placed in ~~impaired agricultural loans~~nonaccrual status in the ~~first~~second quarter of 2019. A charge-off of approximately $670,000 of this loan relationship was recorded in the third quarter of 2019. An allowance of the same amount was allocated to the loan as of June 30, 2019.

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.

The balances of these nonperforming loans were as follows:

(Dollars in thousands) March 31, December 31, September 30, December 31,
2019 2018 2019 2018
Loans accounted for on a nonaccrual basis $ 1,584 $ 1,532 $ 3,573 $ 1,532
Accruing loans contractually past due 90 days or more as to principal or interest payments — — — —
Loans considered troubled debt restructurings 2,165 2,254 2,062 2,254
Total $ 3,749 $ 3,786 $ 5,635 $ 3,786

At ~~March 31,~~September 30, 2019, nonaccrual loans included $389,000 in agricultural loans, ~~$1,000~~$279,000 in commercial and industrial loans, ~~$50,000~~$7,000 in consumer loans, ~~$119,000~~$1.9 million in commercial real estate loans, and ~~$1,025,000~~$973,000 in residential real estate loans. At December 31, 2018,nonaccrual loans included $393,000 in agricultural loans, $62,000 in consumer loans, $123,000 in commercial real estate loans, and $954,000 in residential real estate loans. Approximately ~~91%~~51% of the balance ofloans considered troubled debt restructurings ~~was~~were performing according to their restructured terms as of ~~March 31,~~September 30, 2019. Management believes the allowance allocated to its nonperforming loans is sufficient at ~~March 31,~~September 30, 2019.

Deposits and Borrowings
Total deposits ~~decreased $12.6~~increased $12.3 million in the third quarter and declined $2.9 million in the first ~~quarter~~nine months of 2019. ~~Checking and savings~~Interest-bearing deposits decreased ~~$10.2~~$1.9 million ~~while certificates of deposit declined $2.4~~and noninterest-bearing deposits decreased $1.0 million in the first ~~three~~nine months of ~~2019. The decline in checking and savings accounts was~~2019 primarily due to seasonal fluctuations for ChoiceOne’s depositors. The ~~change~~total of demand deposits, money market deposits, and savings deposits decreased $2.6 million in the ~~balance~~first three quarters of ~~certificates~~2019 while growth of ~~deposit was primarily comprised of growth~~$13.8 million in local certificates of ~~$2.6 million and~~deposit virtually offset a reduction of $14.1 million in brokered certificates of ~~$5.0 million.~~deposit.

A decrease of $4.8 million in federal funds purchased during the first quarter of 2019 represented a normal fluctuation in ChoiceOne’s funding. Federal Home Loan Bank advances grew $15.0 million in the first quarter of 2019 as advances were used to replace maturing brokered certificates of deposit and to supplement the decline in local deposit balances.
~~Shareholders'~~Shareholders’ Equity
Total ~~shareholders'~~shareholders’ equity increased ~~$2.2~~$4.1 million from December 31, 2018 to ~~March 31,~~September 30, 2019. ~~Other~~A change in accumulated other comprehensive income of ~~$1.2~~$3.8 million resulted from improvement in the market value of ChoiceOne’s available for sale securities. The improvement was caused by a reduction in the first ~~quarter~~nine months of 2019 in mid- to long-term interest rates. Net income for the first ~~quarter~~nine months of 2019 ~~net of~~was slightly lower than cash dividends declared ~~also contributed $914,000~~during the same time period due to the ~~equity balance growth.~~special dividend paid in connection with the merger of County with and into ChoiceOne.

Following is information regarding the Bank’s compliance with regulatory capital requirements:

Minimum Required Minimum Required
to be Well to be Well
Minimum Required Capitalized Under Minimum Required Capitalized Under
for Capital Prompt Corrective for Capital Prompt Corrective
(Dollars in thousands) Actual Adequacy Purposes Action Regulations Actual Adequacy Purposes Action Regulations
Amount Ratio Amount Ratio Amount Ratio Amount Ratio Amount Ratio Amount Ratio
March 31, 2019
September 30, 2019
ChoiceOne Financial Services Inc.
Total capital (to risk weighted assets) $ 73,214 13.9 % $ 42,101 8.0 % N/A N/A $ 71,891 13.6 % $ 42,197 8.0 % N/A N/A
Common Equity Tier 1 Capital (to risk weighted assets) 68,492 13.0 23,682 4.5 N/A N/A 67,803 12.9 23,736 4.5 N/A N/A
Tier 1 capital (to risk weighted assets) 68,492 13.0 21,050 6.0 N/A N/A 67,803 12.9 21,099 6.0 N/A N/A
Tier 1 capital (to average assets) 68,492 10.5 26,185 4.0 N/A N/A 67,803 10.3 26,396 4.0 N/A N/A

ChoiceOne Bank
Total capital (to risk weighted assets) $ 67,696 12.9 % $ 41,879 8.0 % $ 52,349 10.0 % $ 68,371 13.0 % $ 42,010 8.0 % $ 52,513 10.0 %
Common Equity Tier 1 Capital (to risk weighted assets) 62,974 12.0 23,557 4.5 34,027 6.5 64,283 12.2 23,631 4.5 34,133 6.5
Tier 1 capital (to risk weighted assets) 62,974 12.0 20,940 6.0 31,409 8.0 64,283 12.2 21,005 6.0 31,508 8.0
Tier 1 capital (to average assets) 62,974 9.7 26,035 4.0 32,544 5.0 64,283 9.8 26,253 4.0 32,816 5.0

December 31, 2018
ChoiceOne Financial Services Inc.
Total capital (to risk weighted assets) $ 72,148 13.8 % $ 41,811 8.0 % N/A N/A $ 72,148 13.8 % $ 41,811 8.0 % N/A N/A
Common Equity Tier 1 Capital (to risk weighted assets) 67,481 12.9 23,519 4.5 N/A N/A 67,481 12.9 23,519 4.5 N/A N/A
Tier 1 capital (to risk weighted assets) 67,481 12.9 31,359 6.0 N/A N/A 67,481 12.9 31,359 6.0 N/A N/A
Tier 1 capital (to average assets) 67,481 10.5 25,658 4.0 N/A N/A 67,481 10.5 25,658 4.0 N/A N/A

ChoiceOne Bank
Total capital (to risk weighted assets) $ 66,976 12.9 % $ 41,599 8.0 % $ 51,999 10.0 % $ 66,976 12.9 % $ 41,599 8.0 % $ 51,999 10.0 %
Common Equity Tier 1 Capital (to risk weighted assets) 62,309 12.0 23,399 4.5 33,799 6.5 62,309 12.0 23,399 4.5 33,799 6.5
Tier 1 capital (to risk weighted assets) 62,309 12.0 31,199 6.0 41,599 8.0 62,309 12.0 31,199 6.0 41,599 8.0
Tier 1 capital (to average assets) 62,309 9.8 25,512 4.0 31,890 5.0 62,309 9.8 25,512 4.0 31,890 5.0

Management reviews the capital levels of ChoiceOne and the Bank on a regular basis. The Board of Directors ~~(the “Board”)~~ and management believe that the capital levels as of ~~March 31,~~September 30, 2019 are adequate for the foreseeable future. The ~~Board’s~~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 from operating activities was ~~$0.7~~$5.4 million for the ~~three~~nine months ended ~~March 31,~~September 30, 2019 compared to ~~$1.7~~$7.0 million provided in the same period a year ago. The decrease was caused by ~~$1.2~~$1.4 million ~~less~~decrease in net ~~proceeds from loan sales in~~income during the first ~~quarter~~nine months of 2019 as compared to the same period in the prior year. Net cash ~~used in~~provided by investing activities was ~~$1.0~~$8.5 million for the first ~~three~~nine months of 2019 compared to ~~$1.4~~$29.7 million used in the same period in 2018. The ~~effect~~change was primarily due to a net reduction in securities in the first nine months of ~~less net purchases of securities was offset by a smaller decline in total loans in~~ 2019 compared to ~~2018.~~net purchases in the same period in the prior year. Net cash used in financing activities was ~~$3.1~~$17.0 million in the ~~three~~nine months ended ~~March 31,~~September 30, 2019, compared to ~~$23.1 million~~$326,000 provided in the same period in the prior year. The change was ~~primarily~~ due to ~~growth of $15.0 million~~the net changes in ~~Federal Home Loan Bank~~federal funds purchased, a decrease in proceeds from FHLB advances, and deposits, which were partially offset by the net change in repurchase agreements and a decrease in payments on FHLB advances in ~~the first quarter of~~ 2019 ~~in contrast~~compared to ~~a reduction of $10.0 million in the same quarter in~~ 2018.

Management believes that the current level of liquidity is sufficient to meet the ~~Bank's~~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, and advances available from the Federal Home Loan Bank. The Bank also has a secured line of credit available from the Federal Reserve Bank.
NON-GAAP FINANCIAL MEASURES

This report contains references to net income, basic earnings per share, and diluted earnings per share excluding tax-effected merger expenses, each of which is a financial measure that is not defined in U.S. generally accepted accounting principles ~~("GAAP"~~(“GAAP”). Management believes this non-GAAP financial measure provides additional information that is useful to investors in helping to understand the underlying financial performance of ChoiceOne.

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

A reconciliation of these non-GAAP financial measures follows:
Non-GAAP Reconciliation
(Unaudited)
In addition to analyzing the Company’s results on a reported basis, management reviews the Company’s results on an adjusted basis. The non-GAAP measures presented in the table below reflect the adjustments of the reported U.S. GAAP results for significant items that management does not believe are reflective of the Company’s current and ongoing operations.

Non-GAAP Reconciliation
(Unaudited)

In addition to analyzing the Company's results on a reported basis, management reviews the Company's results on an adjusted basis. The non-GAAP measures presented in the table below reflect the adjustments of the reported U.S. GAAP results for significant items that management does not believe are reflective of the Company's current and ongoing operations.

Quarter Ended
(In Thousands, Except Per Share Data) 3/31/2019 3/31/2018

Income before income tax $ 1,920 $ 1,956
Adjustment for pre-tax merger expenses 238 —
Adjusted income before income tax $ 2,158 $ 1,956

Income tax expense $ 283 $ 298
Tax impact of adjustment for pre-tax merger expenses 15 —
Adjusted income tax expense $ 298 $ 298

Net income $ 1,637 $ 1,658
Adjustment for pre-tax merger expenses, net of tax impact 223 —
Adjusted net income $ 1,860 $ 1,658

Basic earnings per share $ 0.45 $ 0.46
Effect of merger expenses, net of tax impact 0.06 —
Adjusted basic earnings per share $ 0.51 $ 0.46

Basic diluted per share $ 0.45 $ 0.46
Effect of merger expenses, net of tax impact 0.06 —
Adjusted diluted earnings per share $ 0.51 $ 0.46
Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands, Except Per Share Data) 2019 2018 2019 2018

Income before income tax $ 1,128 $ 2,364 $ 4,815 $ 6,497
Adjustment for pre-tax merger expenses 763 — 1,351 —
Adjusted income before income tax $ 1,891 $ 2,364 $ 6,166 $ 6,497

Income tax expense $ 106 $ 350 $ 671 $ 992
Tax impact of adjustment for pre-tax merger expenses 142 — 157 —
Adjusted income tax expense $ 248 $ 350 $ 828 $ 992

Net income $ 1,021 $ 2,014 $ 4,144 $ 5,505
Adjustment for pre-tax merger expenses, net of tax impact 621 1,194
Adjusted net income $ 1,642 $ 2,014 $ 5,338 $ 5,505

Basic earnings per share $ 0.28 $ 0.55 $ 1.14 $ 1.52
Effect of merger expenses, net of tax impact 0.17 — 0.33 —
Adjusted basic earnings per share $ 0.45 $ 0.55 $ 1.47 $ 1.52

Diluted earnings per share $ 0.28 $ 0.55 $ 1.14 $ 1.52
Effect of merger expenses, net of tax impact 0.17 — 0.32 —
Adjusted diluted earnings per share $ 0.45 $ 0.55 $ 1.46 $ 1.52

Item 4.Controls and Procedures.

An evaluation was performed under the supervision and with the participation of ChoiceOne’s management, including the Chief Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of ChoiceOne’s disclosure controls and procedures as of ~~March 31,~~September 30, 2019. Based on and as of the time of that evaluation, ChoiceOne’s management, including the Chief Executive Officer and Principal Financial Officer, concluded that ChoiceOne’s disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that material information required to be disclosed in the reports that ChoiceOne files or submits under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange ~~Commission's~~Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that ChoiceOne files or submits under the Exchange Act is accumulated and communicated to management, including ChoiceOne’s principal executive and principal financial officers, as appropriate to allow for timely decisions regarding required disclosure. There was no change in ChoiceOne’s internal control over financial reporting that occurred during the ~~three~~nine months ended ~~March 31,~~September 30, 2019 that has materially affected, or that is reasonably likely to materially affect, ChoiceOne’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.Legal Proceedings.

There are no material pending legal proceedings to which ChoiceOne or the 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, 2018. As of the date of this report, ChoiceOne does not believe that there has been a material change in the nature or categories of ~~ChoiceOne's~~ChoiceOne’s risk factors, as compared to the information disclosed in ChoiceOne’s Annual Report on Form 10-K for the year ended December 31, 2018.

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

On ~~January 23,~~July 24, 2019, ChoiceOne issued ~~1,146~~720 shares of common stock, without par value, to the directors of ChoiceOne pursuant to the Directors’ Stock Purchase Plan for an aggregate cash price of ~~$28,000.~~$21,000. ChoiceOne relied on the exemption contained in Section 4(a)(5) of the Securities Act of 1933 in connection with these sales.

ISSUER PURCHASES OF EQUITY SECURITIES

There were no issuer purchases of equity securities during the ~~first~~second quarter of 2019.

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
2.1 Agreement andPlan of Mergerbetween CountyBankCorp,and ChoiceOne Financial Services,Inc. datedMarch 22,2019. Previouslyfiledas an exhibitto ChoiceOne’sForm8-K filed March 25,2019.Here incorporatedbyreference.
3.1 Amended and Restated Articles of Incorporation of ChoiceOne.
3.2
Bylawsof ChoiceOne ascurrently ineffect and any amendmentsthereto. Previously filed as an exhibit to ChoiceOne‘s Form 8-K filed October1,2019. Hereincorporated by reference.

~~2.1~~10.1 Employment Agreement ~~and Plan of Merger~~ between ~~County Bank Corp, and~~ ChoiceOne Financial Services, Inc. and Kelly J. Potes, dated ~~March 22,~~as of September 30, 2019. Previously filed as an exhibit to ChoiceOne’s Form 8-K filed ~~March 25,~~October 1, 2019. Here incorporated by reference.

~~3.1~~10.2 ~~Amended~~Employment Agreement between ChoiceOne Financial Services, Inc. and ~~Restated Articles~~Michael J. Burke, Jr., dated as of ~~Incorporation of ChoiceOne.~~March 22, 2019. Previously filed as ~~an exhibit~~Exhibit 10.7 to ChoiceOne’s Pre-Effective Amendment No. 2 to Form ~~10-K Annual Report for the year ended December 31, 2013.~~S-4 filed August 5, 2019. Here incorporated by reference.

~~3.2~~10.3
~~Bylaws~~Transition Agreement between ChoiceOne Financial Services, Inc. and Bruce J. Cady, dated as of ~~ChoiceOne as currently in effect and any amendments thereto.~~March 22, 2019. Previously filed as ~~an exhibit~~Exhibit 10.8 to ChoiceOne’s Pre-Effective Amendment No. 2 to Form ~~10-K Annual Report for the year ended December 31, 2013.~~S-4 filed August 5, 2019. Here incorporated by reference.

31.1 Certification of President and Chief Executive Officer

31.2 Certification of Treasurer

32.1

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

101.1

Interactive Data File.
33

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:~~May 10,~~November 12, 2019 /s/ Kelly J. Potes
Kelly J. Potes
Chief Executive Officer
(Principal Executive Officer)

Date:~~May 10,~~November 12, 2019 /s/ Thomas L. Lampen
Thomas L. Lampen
Treasurer
(Principal Financial and Accounting Officer)
34

	March 31,			December 31,
(Dollars in thousands)	2019			2018
	(Unaudited)			(Audited)
Assets
Cash and due from banks	$	16,296		$	19,690

Equity securities at fair value (Note 2)		3,034			2,847
Securities available for sale (Note 2)		168,254			166,602
Federal Home Loan Bank stock		1,994			1,994
Federal Reserve Bank stock		1,573			1,573

Loans held for sale		1,524			831
Loans to other financial institutions		28,119			20,644
Loans (Note 3)		402,044			409,073
Allowance for loan losses (Note 3)		(4,730	)		(4,673	)
Loans, net		397,314			404,400

Premises and equipment, net		16,125			15,879
Cash surrender value of life insurance policies		14,995			14,899
Goodwill		13,728			13,728
Other assets		7,464			7,457
Total assets	$	670,420		$	670,544

Liabilities
Deposits – noninterest-bearing	$	155,047		$	153,542
Deposits – interest-bearing		409,404			423,473
Total deposits		564,451			577,015

Federal funds purchased		—			4,800
Advances from Federal Home Loan Bank		20,225			5,233
Other liabilities		3,042			3,019
Total liabilities		587,718			590,067

Shareholders’ Equity
Preferred stock; shares authorized: 100,000; shares outstanding: none		—			—
Common stock and paid in capital, no par value;
shares authorized: 7,000,000; shares outstanding:
3,619,510 at March 31, 2019 and 3,616,483 at December 31, 2018		54,621			54,523
Retained earnings		27,599			26,686
Accumulated other comprehensive income (loss), net		482			(732	)
Total shareholders’ equity		82,702			80,477
Total liabilities and shareholders’ equity	$	670,420		$	670,544

(Dollars in thousands, except per share data)	Three Months Ended March 31,
	2019		2018
Interest income
Loans, including fees	$	5,280	$	4,653
Securities:
Taxable		760		628
Tax exempt		369		361
Other		68		57
Total interest income		6,477		5,699

Interest expense
Deposits		851		346
Advances from Federal Home Loan Bank		116		45
Other		14		1
Total interest expense		981		392

Net interest income		5,496		5,307
Provision for loan losses		—		35

Net interest income after provision for loan losses		5,496		5,272

Noninterest income
Customer service charges		1,033		1,055
Insurance and investment commissions		63		62
Gains on sales of loans		246		261
Gains on sales of securities		1		9
Gains on sales of other assets		13		8
Earnings on life insurance policies		96		94
Change in market value of equity securities		187		23
Other		118		136
Total noninterest income		1,758		1,648

Noninterest expense
Salaries and benefits		2,777		2,749
Occupancy and equipment		771		680
Data processing		556		534
Professional fees		517		217
Supplies and postage		100		116
Advertising and promotional		44		92
Other		569		576
Total noninterest expense		5,334		4,964

Income before income tax		1,920		1,956
Income tax expense		283		298

Net income	$	1,637	$	1,658

Basic earnings per share (Note 4)	$	0.45	$	0.46
Diluted earnings per share (Note 4)	$	0.45	$	0.46
Dividends declared per share	$	0.20	$	0.17

(Dollars in thousands)	Number of Shares			Common Stock and Paid in Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss), Net			Total

Balance, July 1, 2018		3,613,080		$	54,289	$	24,146		$	(2,167	)	$	76,268

Net income		—			—		2,014			—			2,014
Other comprehensive loss		—			—		—			(745	)		(745	)
Shares issued		1,590			33		—			—			33
Shares repurchased		(400	)		—		—			—			—
Effect of employee stock purchases		—			3		—			—			3
Stock options exercised and issued		431			—		—			—			—
Stock-based compensation expense		—			67		—			—			67
Cash dividends declared ($0.18 per share)		—			—		(651	)		—			(651	)

Balance, September 30, 2018		3,614,701		$	54,392	$	25,509		$	(2,912	)	$	76,989

Balance, July 1, 2019		3,632,917		$	54,756	$	28,359		$	2,548		$	85,663

Net income		—			—		1,021			—			1,021
Other comprehensive income		—			—		—			546			546
Shares issued		1,471			40		—			—			40
Effect of employee stock purchases		—			4		—			—			4
Stock-based compensation expense		—			258		—			—			258
Special cash dividends declared ($0.60 per share)		—			—		(2,180	)		—			(2,180	)
Cash dividends declared ($0.20 per share)		—			—		(726	)		—			(726	)

Balance, September 30, 2019		3,634,388			55,058	$	26,474		$	3,094		$	84,626

										Accumulated
				Common						Other
				Stock and						Comprehensive
	Number of			Paid in			Retained			Income (Loss),
(Dollars in thousands)	Shares			Capital			Earnings			Net			Total

Balance, January 1, 2018		3,448,569		$	50,290		$	26,023		$	237		$	76,550

Net income								1,658						1,658
Other comprehensive loss											(1,824	)		(1,824	)
Shares issued		1,496			33									33
Shares repurchased		(10,228	)		(252	)								(252	)
Effect of employee stock purchases					3									3
Stock-based compensation expense					65									65
Adoption effect of ASU 2016-01 (1)								244			(244	)		—
Cash dividends declared ($0.17 per share)								(619	)					(619	)

Balance, March 31, 2018		3,439,837		$	50,139		$	27,306		$	(1,831	)	$	75,614


Balance, January 1, 2019		3,616,483		$	54,523		$	26,686		$	(732	)	$	80,477

Net income								1,637						1,637
Other comprehensive income											1,214			1,214
Shares issued		2,004			47									47
Effect of employee stock purchases					4									4
Stock-based compensation expense					57									57
Restricted stock units issued		1,023			(10	)								(10	)
Cash dividends declared ($0.20 per share)								(724	)					(724	)

Balance, March 31, 2019		3,619,510			54,621		$	27,599		$	482		$	82,702

			December 31, 2018
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
(Dollars in thousands)	Cost		Gains		Losses			Value
Equity securities	$	2,502	$	459	$	(114	)	$	2,847


				September 30, 2019
				Gross		Gross
	Amortized			Unrealized		Unrealized			Fair
(Dollars in thousands)	Cost		��	Gains		Losses			Value
U.S. Government and federal agency	$	23,035		$	23	$	(9	)	$	23,049
U.S. Treasury		1,994			18		—			2,012
State and municipal		97,824			2,932		(4	)		100,752
Mortgage-backed		24,542			747		(3	)		25,286
Corporate		2,648			34		(3	)		2,679
Foreign debt		500			—		—			500
Trust preferred securities		500			—		—			500
Total	$	151,043		$	3,754	$	(19	)	$	154,778

			March 31, 2019
			Gross		Gross
(Dollars in thousands)	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Equity securities	$	2,502	$	569	$	(37	)	$	3,034

		Securities maturing within:
										Fair Value		Fair Value
		Less than		1 Year -		5 Years -		More than		at March 31,		at Dec. 31,
(Dollars in thousands)		1 Year		5 Years		10 Years		10 Years		2019		2018

U.S. Government and federal agency	$	18,846	$	10,940	$	3,978	$	—	$	33,764	$	33,529
U.S. Treasury notes and bonds		—		1,959		—		—		1,959		1,947
State and municipal		9,186		53,891		38,840		1,970		103,887		103,928
Corporate		2,498		2,619		—		—		5,117		5,102
Trust preferred securities		500		—		—		—		500		500
Asset-backed securities		3		—		—		—		3		21
Total debt securities		31,033		69,409		42,818		1,970		145,230		145,027

Mortgage-backed securities		—		5,897		17,080		47		23,024		21,575
Equity securities (1)		—		—		963		2,071		3,034		2,847
Total	$	31,033	$	75,306	$	60,861	$	4,088	$	171,288	$	169,449

	Weighted average yields:															Weighted average yields:
	Less than			1 Year -			5 Years -			More than						Less than			1 Year -			5 Years -			More
	1 Year			5 Years			10 Years			10 Years			Total			1 Year			5 Years			10 Years			10 Years			Total
U.S. Government and federal agency		2.30	%		1.91	%		2.71	%		—	%		2.22	%		1.99	%		1.98	%		—	%		—	%		1.99	%
U.S. Treasury notes and bonds		—			1.85			—			—			1.85			—			1.85			—			—			1.85
State and municipal (2)		2.95			2.83			3.21			0.89			2.95			2.73			2.85			3.21			0.64			2.91
Corporate		0.46			2.66			—			—			1.58			—			2.66			—			—			2.66
Foreign debt																	2.27			—			—			—			2.27
Trust preferred securities		5.50			—			—			—			5.50			6.00			—			—			—			6.00
Asset-backed securities		2.85			—			—			—			2.85
Mortgage-backed securities		—			3.13			2.84			4.75			2.92			—			3.24			2.97			—			3.18
Equity securities (1)		—			—			4.51			—			1.23			—			—			4.61			—			1.54

	2019		2018

Net gains and losses recognized during the period	$	187	$	23
Less: Net gains and losses recognized during the period on securities sold		—		9

Unrealized gains and losses recognized during the reporting period on securities still held at the reporting date	$	187	$	14

				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
March 31, 2019
Beginning balance	$	481		$	892		$	254		$	1,926		$	38		$	537		$	545	$	4,673
Charge-offs		—			—			(106	)		—			—			0			—		(106	)
Recoveries		—			17			143			2			—			1			—		163
Provision		(57	)		(52	)		45			(65	)		2			20			107		—
Ending balance	$	424		$	857		$	336		$	1,863		$	40		$	558		$	652	$	4,730

Individually evaluated for impairment	$	85		$	4		$	12		$	19		$	—		$	179		$	—	$	299

Collectively evaluated for impairment	$	339		$	853		$	324		$	1,844		$	40		$	379		$	652	$	4,431

December 31, 2018
Individually evaluated for impairment	$	94		$	3		$	13		$	20		$	—		$	167		$	—	$	297
Collectively evaluated for impairment	$	387		$	889		$	241		$	1,906		$	38		$	370		$	545	$	4,376

Three Months Ended
March 31, 2018
Beginning balance	$	506		$	1,001		$	262		$	1,761		$	35		$	726		$	286	$	4,577
Charge-offs		—			—			(69	)		—			—			(3	)		—		(72	)
Recoveries		—			53			37			55			—			24			—		169
Provision		(156	)		(49	)		15			(30	)		(17	)		(122	)		394		35
Ending balance	$	350		$	1,005		$	245		$	1,786		$	18		$	625		$	680	$	4,709

Individually evaluated for impairment	$	—		$	93		$	9		$	46		$	—		$	217		$	—	$	365

Collectively evaluated for impairment	$	350		$	912		$	236		$	1,740		$	18		$	408		$	680	$	4,344

Loans
March 31, 2019
Individually evaluated for impairment	$	389		$	25		$	63		$	605		$	—		$	2,691				$	3,773
Collectively evaluated for impairment		41,656			92,575			24,130			136,442			9,294			94,174					398,271
Ending balance	$	42,045		$	92,600		$	24,193		$	137,047		$	9,294		$	96,865				$	402,044

December 31, 2018
Individually evaluated for impairment	$	578		$	21		$	90		$	623		$	—		$	2,712				$	4,024
Collectively evaluated for impairment		48,531			91,385			24,292			138,830			8,843			93,168					405,049
Ending balance	$	49,109		$	91,406		$	24,382		$	139,453		$	8,843		$	95,880				$	409,073	��

	Agricultural				Commercial and Industrial				Commercial Real Estate
(Dollars in thousands)	March 31,		December 31,		March 31,		December 31,		March 31,		December 31,
	2019		2018		2019		2018		2019		2018
Risk ratings 1 and 2	$	11,638	$	15,300	$	12,278	$	11,972	$	7,577	$	7,962
Risk rating 3		20,031		23,938		47,063		50,266		87,791		89,173
Risk rating 4		9,761		9,082		28,856		23,961		36,353		36,193
Risk rating 5		227		211		4,393		5,204		4,116		4,850
Risk rating 6		388		578		10		3		1,210		1,275
	$	42,045	$	49,109	$	92,600	$	91,406	$	137,047	$	139,453

	Consumer				Construction Real Estate				Residential Real Estate
(Dollars in thousands)	March 31,		December 31,		March 31,		December 31,		March 31,		December 31,
	2019		2018		2019		2018		2019		2018
Performing	$	24,143	$	24,320	$	9,294	$	8,843	$	95,840	$	94,925
Nonperforming		—		—		—		—		—		—
Nonaccrual		50		62		—		—		1,025		955
	$	24,193	$	24,382	$	9,294	$	8,843	$	96,865	$	95,880


													Three Months Ended September 30, 2019						Nine Months Ended September 30, 2019
															Pre-		Post-				Pre-		Post-
															Modification		Modification				Modification		Modification
	Three Months Ended March 31, 2019						Three Months Ended March 31, 2018								Outstanding		Outstanding				Outstanding		Outstanding
(Dollars in thousands)	Number of Loans		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Loans		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of		Recorded		Recorded		Number of		Recorded		Recorded
													Loans		Investment		Investment		Loans		Investment		Investment
Commercial real estate		—	$	—	$	—		1	$	58	$	58		—	$	—	$	—		2	$	1,882	$	1,882
Commercial and industrial		—		—		—		2		97		97
Total		—	$	—	$	—		3	$	155	$	155
Residential real estate														—		—		—		1		17		17
														—	$	—	$	—		3	$	1,899	$	1,899


			Unpaid
(Dollars in thousands)	Recorded		Principal		Related
	Investment		Balance		Allowance
September 30, 2019
With no related allowance recorded
Agricultural	$	—	$	—	$	—
Commercial and industrial		259		259		—
Consumer		—		—		—
Commercial real estate		1,882		1,882		—
Construction real estate		—		—		—
Residential real estate		103		103		—
Total		2,244		2,244		—
With an allowance recorded
Agricultural		389		474		85
Commercial and industrial		20		22		2
Consumer		20		24		4
Commercial real estate		449		462		14
Construction real estate		—		—		—
Residential real estate		2,543		2,729		186
Total		3,421		3,711		291
Total
Agricultural		389		474		85
Commercial and industrial		279		281		2
Consumer		20		24		4
Commercial real estate		2,331		2,344		14
Construction real estate		—		—		—
Residential real estate		2,646		2,832		186
Total	$	5,665	$	5,955	$	291

December 31, 2018
With no related allowance recorded
Agricultural	$	185	$	185	$	—
Commercial and industrial		—		—		—
Consumer		1		1		—
Construction real estate		—		—		—
Commercial real estate		73		109		—
Residential real estate		250		261		—
Total		509		556		—
With an allowance recorded
Agricultural		393		440		94
Commercial and industrial		21		21		3
Consumer		89		89		13
Construction real estate		—		—		—
Commercial real estate		550		609		20
Residential real estate		2,462		2,494		167
Total		3,515		3,653		297
Total
Agricultural		578		625		94
Commercial and industrial		21		21		3
Consumer		90		90		13
Construction real estate		—		—		—
Commercial real estate		623		718		20
Residential real estate		2,712		2,755		167
Total	$	4,024	$	4,209	$	297


	Average		Interest		Average		Interest
(Dollars in thousands)	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
March 31, 2019
Three months ended September 30, 2019
With no related allowance recorded
Agricultural	$	92	$	—	$	—	$	—
Commercial and industrial		—		—		129		—
Consumer		1		—		—		—
Commercial real estate		73		7		941		—
Residential real estate		203		23		109		1
Total		369		30		1,179		1
With an allowance recorded
Agricultural		391		—		389		—
Commercial and industrial		23		—		191		—
Consumer		76		—		37		1
Commercial real estate		541		—		1,693		13
Residential real estate		2,499		1		2,521		48
Total		3,530		1		4,831		62
Total
Agricultural		483		—		389		—
Commercial and industrial		23		—		320		—
Consumer		77		—		37		1
Commercial real estate		614		7		2,634		13
Residential real estate		2,702		24		2,630		49
Total	$	3,899	$	31	$	6,010	$	63

					Greater								90 Days Past
(Dollars in thousands)	30 to 59		60 to 89		Than 90				Loans Not				Due and
	Days		Days		Days (1)		Total		Past Due		Total Loans		Accruing
March 31, 2019
Agricultural	$	—	$	—	$	—	$	—	$	42,045	$	42,045	$	—
Commercial and industrial		353		—		2		355		92,245		92,600		—
Consumer		39		3		45		87		24,106		24,193		—
Commercial real estate		96		—		72		168		136,879		137,047		—
Construction real estate		—		—		—		—		9,294		9,294		—
Residential real estate		742		209		99		1,050		95,815		96,865		—
	$	1,230	$	212	$	218	$	1,660	$	400,384	$	402,044	$	—

December 31, 2018
Agricultural	$	—	$	—	$	—	$	—	$	49,109	$	49,109	$	—
Commercial and industrial		5		—		—		5		91,401		91,406		—
Consumer		149		40		11		200		24,182		24,382		—
Commercial real estate		—		—		73		73		139,380		139,453		—
Construction real estate		—		—		—		—		8,843		8,843		—
Residential real estate		1,493		486		648		2,627		93,253		95,880		—
	$	1,647	$	526	$	732	$	2,905	$	406,168	$	409,073	$	—

	Three Months Ended				Nine Months Ended
(Dollars in thousands, except per share data)	September 30,				September 30,
	2019		2018		2019		2018
Basic Earnings Per Share
Net income available to common shareholders	$	1,021	$	2,014	$	4,144	$	5,505

Weighted average common shares outstanding		3,633,474		3,613,516		3,626,961		3,613,891

Basic earnings per share	$	0.28	$	0.55	$	1.14	$	1.52

Diluted Earnings Per Share
Net income available to common shareholders	$	1,021	$	2,014	$	4,144	$	5,505

Weighted average common shares outstanding		3,633,474		3,613,516		3,626,961		3,613,891
Plus dilutive stock options and restricted stock units		23,964		16,535		19,870		13,497

Weighted average common shares outstanding and potentially dilutive shares		3,657,438		3,630,051		3,646,831		3,627,388

Diluted earnings per share	$	0.28	$	0.55	$	1.14	$	1.52

					Quoted
					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)
March 31, 2019
Assets:
Cash and due from banks	$	16,296	$	16,296	$	16,296	$	—	$	—
Equity securities at fair value		3,034		3,034		2,071		—		963
Securities available for sale		168,254		168,254		—		159,659		8,595
Federal Home Loan Bank and Federal Reserve Bank stock		3,567		3,567		—		3,567		—
Loans held for sale		1,524		1,570		—		1,570		—
Loans to other financial institutions		28,119		28,119		—		28,119		—
Loans, net		397,314		388,091		—		—		388,091
Accrued interest receivable		2,787		2,787		—		2,787		—

Liabilities:
Noninterest-bearing deposits		155,047		155,047		—		155,047		—
Interest-bearing deposits		409,404		408,699		—		408,699		—
Federal funds purchased		—		—		—		—		—
Federal Home Loan Bank advances		20,225		20,244		—		20,244		—
Accrued interest payable		176		176		—		176		—

December 31, 2018
Assets:
Cash and due from banks	$	19,690	$	19,690	$	19,690	$	—	$	—
Equity securities at fair value		2,847		2,847		1,961		—		886
Securities available for sale		166,602		166,602		—		158,104		8,498
Federal Home Loan Bank and Federal Reserve Bank stock		3,567		3,567		—		3,567		—
Loans held for sale		831		856		—		856		—
Loans to other financial institutions		20,644		20,644		—		20,644		—
Loans, net		404,400		399,091		—		—		399,091
Accrued interest receivable		2,267		2,267		—		2,267		—

Liabilities:
Noninterest-bearing deposits		153,542		153,542		—		153,542		—
Interest-bearing deposits		423,473		422,381		—		422,381		—
Federal funds purchased		4,800		4,800		—		4,800		—
Federal Home Loan Bank advances		5,233		5,241		—		5,241		—
Accrued interest payable		210		210		—		210		—

					Quoted Prices
					in Active		Significant
					Markets for		Other		Significant
					Identical		Observable		Unobservable
(Dollars in thousands)	Carrying		Estimated		Assets		Inputs		Inputs
	Amount		Fair Value		(Level 1)		(Level 2)		(Level 3)
September 30, 2019
Assets:
Cash and due from banks	$	16,574	$	16,574	$	16,574	$	—	$	—
Equity securities at fair value		2,499		2,499		1,499		—		1,000
Securities available for sale		154,778		154,778		—		144,501		10,277
Federal Home Loan Bank and Federal
Reserve Bank stock		3,568		3,568		—		3,568		—
Loans held for sale		1,202		1,202		—		1,202		—
Loans to other financial
institutions		29,992		29,992		—		29,992		—
Loans, net		402,710		398,450		—		—		398,450
Accrued interest receivable		2,663		2,663		—		2,663		—

Liabilities:
Noninterest-bearing deposits		152,579		152,579		—		152,579		—
Interest-bearing deposits		421,496		421,611		—		421,611		—
Federal Home Loan Bank advances		207		220		—		220		—
Accrued interest payable		235		235		—		235		—


December 31, 2018
Assets:
Cash and due from banks	$	19,690	$	19,690	$	19,690	$	—	$	—
Equity securities at fair value		2,847		2,847		1,961		—		886
Securities available for sale		166,602		166,602		—		158,104		8,498
Federal Home Loan Bank and Federal
Reserve Bank stock		3,567		3,567		—		3,567		—
Loans held for sale		831		856		—		856		—
Loans to other financial institutions		20,644		20,644		—		20,644		—
Loans, net		404,400		399,091		—		—		399,091
Accrued interest receivable		2,267		2,267		—		2,267		—

Liabilities:
Noninterest-bearing deposits		153,542		153,542		—		153,542		—
Interest-bearing deposits		423,473		422,381		—		422,381		—
Federal funds purchased		4,800		4,800		—		4,800		—
Federal Home Loan Bank advances		5,233		5,241		—		5,241		—
Accrued interest payable		210		210		—		210		—

(Dollars in thousands)	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs		Balance at Date
	(Level 1)		(Level 2)		(Level 3)		Indicated
Equity Securities Held at Fair Value - September 30, 2019
Equity securities	$	1,499	$	—	$	1,000	$	2,499

Investment Securities, Available for Sale – September 30, 2019
U.S. Treasury notes and bonds	$	—	$	2,012	$	—	$	2,012
U.S. Government and federal agency		—		23,049		—		23,049
State and municipal		—		90,975		9,777		100,752
Mortgage-backed		—		25,286		—		25,286
Corporate		—		2,679		—		2,679
Foreign debt		—		500		—		500
Trust preferred securities		—		—		500		500
Total	$	—	$	144,501	$	10,277	$	154,778

Equity Securities Held at Fair Value - December 31, 2018
Equity securities	$	1,961	$	—	$	886	$	2,847

Investment Securities, Available for Sale - December 31, 2018
U.S. Treasury notes and bonds	$	—	$	1,947	$	—	$	1,947
U.S. Government and federal agency		—		33,529		—		33,529
State and municipal		—		95,930		7,998		103,928
Mortgage-backed		—		21,575		—		21,575
Corporate		—		5,102		—		5,102
Trust preferred securities		—		—		500		500
Asset backed securities		—		21		—		21
Total	$	—	$	158,104	$	8,498	$	166,602

					Three months ended				Nine months ended
	Three Months Ended March 31,				September 30,				September 30,
(Dollars in thousands)	2019		2018		2019		2018		2019		2018

Service charges and fees on deposit accounts	$	628	$	622	$	690	$	715	$	1,987	$	2,007
Interchange income		405		433		404		449		1,288		1,333
Investment commission income		50		50		72		80		177		187
Other charges and fees for customer services		63		65		57		46		177		158
Noninterest income from contracts with customers within the scope of ASC 606		1,146		1,170		1,223		1,290		3,629		3,685
Noninterest income within the scope of other GAAP topics		613		478		712		562		2,092		1,536
Total noninterest income	$	1,758	$	1,648	$	1,935	$	1,852	$	5,721	$	5,221


	Three Months Ended March 31,																Three Months Ended September 30,
	2019								2018								2019								2018
(Dollars in thousands)	Average								Average								Average								Average
	Balance		Interest			Rate			Balance		Interest			Rate			Balance		Interest			Rate			Balance		Interest			Rate
Assets:
Loans (1)	$	425,144	$	5,283			4.97	%	$	394,910	$	4,597			4.66	%	$	429,448	$	5,396			5.03	%	$	407,157	$	5,111			5.02	%
Taxable securities (2) (3)		117,438		760			2.59			109,614		685			2.50			107,689		728			2.70			115,662		736			2.55
Nontaxable securities (1) (2)		55,297		468			3.38			55,680		458			3.29			53,581		447			3.33			56,823		475			3.34
Other		10,603		68			2.57			12,312		57			1.86			17,471		87			2.00			8,639		40			1.85
Interest-earning assets		608,482		6,579			4.32			572,516		5,797			4.05			608,189		6,658			4.38			588,281		6,362			4.33
Noninterest-earning assets		59,204								55,766								64,757								55,738
Total assets	$	667,686							$	628,282							$	672,946							$	644,019

Liabilities and Shareholders’ Equity:
Interest-bearing demand deposits	$	219,354		268			0.49	%	$	217,311		116			0.21	%	$	217,717		274			0.50	%	$	214,629		190			0.35	%
Savings deposits		74,480		9			0.05			76,687		4			0.02			75,471		12			0.06			75,091		4			0.02
Certificates of deposit		124,045		574			1.85			95,350		226			0.95			131,989		687			2.08			115,409		425			1.48
Advances from Federal Home Loan Bank		17,396		116			2.66			12,820		45			1.42			1,027		8			3.02			11,095		63			2.27
Other		1,917		14			2.95			4,578		1			0.10			1,360		10			3.05			1,521		8			2.10
Interest-bearing liabilities		437,192		981			0.90			406,746		392			0.39			427,564		991			0.93			417,745		690			0.66
Noninterest-bearing demand deposits		147,882								144,028								157,182								147,863
Other noninterest-bearing liabilities		1,114								1,645								2,812								1,522
Total liabilities		586,188								552,419								587,558								567,130
Shareholders’ equity		81,498								75,863								85,388								76,889
Total liabilities and shareholders’ equity	$	667,686							$	628,282							$	672,946							$	644,019

Net interest income (tax-equivalent basis)-interest spread (Non-GAAP)			$	5,598			3.43	%			$	5,405			3.66	%
Net interest income as a percentage of earning assets (tax-equivalent basis) (Non-GAAP)							3.68	%							3.78	%
Net interest income (tax-equivalent basis)- interest spread (Non-GAAP) (1)																			$	5,667			3.46	%			$	5,672			3.66	%
Net interest income as a percentage of earning assets (tax-equivalent basis) (Non-GAAP) (1)																							3.73	%							3.86	%

Reconciliation to Reported Net Interest Income
Net interest income (tax-equivalent basis) (Non-GAAP)			$	5,598							$	5,405
Adjustment for taxable equivalent interest (1)				(102	)							(98	)
Net interest income (tax-equivalent basis) (Non-GAAP) (1)																			$	5,667							$	5,672
Adjustment for taxable equivalent interest																				(97	)							(101	)
Net interest income (GAAP)			$	5,496							$	5,307							$	5,570							$	5,571

Net interest margin (GAAP)				3.61	%							3.71	%							3.66	%							3.79	%

	Nine Months Ended September 30,
	2019								2018
(Dollars in thousands)	Average								Average
	Balance		Interest			Rate			Balance		Interest			Rate
Assets:
Loans (1)	$	426,444	$	16,072			5.03	%	$	399,729	$	14,737			4.92	%
Taxable securities (2) (3)		114,004		2,255			2.64			113,213		2,134			2.51
Nontaxable securities (1) (2)		54,356		1,368			3.36			56,113		1,392			3.31
Other		11,551		194			2.24			7,723		109			1.88
Interest-earning assets		606,355		19,889			4.37			576,778		18,372			4.25
Noninterest-earning assets		61,710								55,132
Total assets	$	668,065							$	631,910

Liabilities and Shareholders’ Equity:
Interest-bearing demand deposits	$	213,295		809			0.51	%	$	209,865		442			0.28	%
Savings deposits		74,760		31			0.06			76,333		11			0.02
Certificates of deposit		128,077		1,908			1.99			105,776		975			1.23
Advances from Federal Home Loan Bank		11,576		238			2.74			11,970		165			1.84
Other		1,797		39			2.92			3,909		34			1.16
Interest-bearing liabilities		429,505		3,025			0.94			407,853		1,627			0.53
Noninterest-bearing demand deposits		153,097								146,598
Other noninterest-bearing liabilities		1,963								1,207
Total liabilities		584,565								555,658
Shareholders’ equity		83,500								76,252
Total liabilities and shareholders’ equity	$	668,065							$	631,910

Net interest income (tax-equivalent basis)-interest spread (Non-GAAP) (1)			$	16,864			3.43	%			$	16,745			3.72	%
Net interest income as a percentage of earning assets (tax-equivalent basis) (Non-GAAP) (1)							3.71	%							3.87	%

Reconciliation to Reported Net Interest Income
Net interest income (tax-equivalent basis) (Non-GAAP) (1)			$	16,864							$	16,745
Adjustment for taxable equivalent interest				(297	)							(297	)
Net interest income (GAAP)			$	16,567							$	16,448

Net interest margin (GAAP)				3.64	%							3.87	%

	(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 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)	Includes the effect of unrealized gains or losses on securities.
	(3)	Taxable securities include dividend income from Federal Home Loan Bank and Federal Reserve Bank stock.

	Nine Months Ended September 30,
(Dollars in thousands)	2019 Over 2018
	Total			Volume			Rate
Increase (decrease) in interest income (1)
Loans (2)	$	1,335		$	1,001		$	334
Taxable securities		121			15			106
Nontaxable securities (2)		(24	)		(54	)		30
Other		85			61			24
Net change in tax-equivalent interest income		1,517			1,023			494

Increase (decrease) in interest expense (1)
Interest-bearing demand deposits		367			8			359
Savings deposits		20			—			20
Certificates of deposit		933			238			695
Advances from Federal Home Loan Bank		73			(9	)		82
Other		5			(35	)		40
Net change in interest expense		1,398			202			1,196

Net change in tax-equivalent net interest income	$	119		$	821		$	(702	)

	(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%.

											Minimum Required															Minimum Required
											to be Well															to be Well
						Minimum Required					Capitalized Under										Minimum Required					Capitalized Under
						for Capital					Prompt Corrective										for Capital					Prompt Corrective
(Dollars in thousands)	Actual					Adequacy Purposes					Action Regulations					Actual					Adequacy Purposes					Action Regulations
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
March 31, 2019
September 30, 2019
ChoiceOne Financial Services Inc.
Total capital (to risk weighted assets)	$	73,214		13.9	%	$	42,101		8.0	%		N/A		N/A		$	71,891		13.6	%	$	42,197		8.0	%		N/A		N/A
Common Equity Tier 1 Capital (to risk weighted assets)		68,492		13.0			23,682		4.5			N/A		N/A			67,803		12.9			23,736		4.5			N/A		N/A
Tier 1 capital (to risk weighted assets)		68,492		13.0			21,050		6.0			N/A		N/A			67,803		12.9			21,099		6.0			N/A		N/A
Tier 1 capital (to average assets)		68,492		10.5			26,185		4.0			N/A		N/A			67,803		10.3			26,396		4.0			N/A		N/A

ChoiceOne Bank
Total capital (to risk weighted assets)	$	67,696		12.9	%	$	41,879		8.0	%	$	52,349		10.0	%	$	68,371		13.0	%	$	42,010		8.0	%	$	52,513		10.0	%
Common Equity Tier 1 Capital (to risk weighted assets)		62,974		12.0			23,557		4.5			34,027		6.5			64,283		12.2			23,631		4.5			34,133		6.5
Tier 1 capital (to risk weighted assets)		62,974		12.0			20,940		6.0			31,409		8.0			64,283		12.2			21,005		6.0			31,508		8.0
Tier 1 capital (to average assets)		62,974		9.7			26,035		4.0			32,544		5.0			64,283		9.8			26,253		4.0			32,816		5.0

December 31, 2018
ChoiceOne Financial Services Inc.
Total capital (to risk weighted assets)	$	72,148		13.8	%	$	41,811		8.0	%		N/A		N/A		$	72,148		13.8	%	$	41,811		8.0	%		N/A		N/A
Common Equity Tier 1 Capital (to risk weighted assets)		67,481		12.9			23,519		4.5			N/A		N/A			67,481		12.9			23,519		4.5			N/A		N/A
Tier 1 capital (to risk weighted assets)		67,481		12.9			31,359		6.0			N/A		N/A			67,481		12.9			31,359		6.0			N/A		N/A
Tier 1 capital (to average assets)		67,481		10.5			25,658		4.0			N/A		N/A			67,481		10.5			25,658		4.0			N/A		N/A

ChoiceOne Bank
Total capital (to risk weighted assets)	$	66,976		12.9	%	$	41,599		8.0	%	$	51,999		10.0	%	$	66,976		12.9	%	$	41,599		8.0	%	$	51,999		10.0	%
Common Equity Tier 1 Capital (to risk weighted assets)		62,309		12.0			23,399		4.5			33,799		6.5			62,309		12.0			23,399		4.5			33,799		6.5
Tier 1 capital (to risk weighted assets)		62,309		12.0			31,199		6.0			41,599		8.0			62,309		12.0			31,199		6.0			41,599		8.0
Tier 1 capital (to average assets)		62,309		9.8			25,512		4.0			31,890		5.0			62,309		9.8			25,512		4.0			31,890		5.0

Non-GAAP Reconciliation (Unaudited)

In addition to analyzing the Company's results on a reported basis, management reviews the Company's results on an adjusted basis. The non-GAAP measures presented in the table below reflect the adjustments of the reported U.S. GAAP results for significant items that management does not believe are reflective of the Company's current and ongoing operations.

	Quarter Ended
(In Thousands, Except Per Share Data)	3/31/2019		3/31/2018

Income before income tax	$	1,920	$	1,956
Adjustment for pre-tax merger expenses		238		—
Adjusted income before income tax	$	2,158	$	1,956

Income tax expense	$	283	$	298
Tax impact of adjustment for pre-tax merger expenses		15		—
Adjusted income tax expense	$	298	$	298

Net income	$	1,637	$	1,658
Adjustment for pre-tax merger expenses, net of tax impact		223		—
Adjusted net income	$	1,860	$	1,658

Basic earnings per share	$	0.45	$	0.46
Effect of merger expenses, net of tax impact		0.06		—
Adjusted basic earnings per share	$	0.51	$	0.46

Basic diluted per share	$	0.45	$	0.46
Effect of merger expenses, net of tax impact		0.06		—
Adjusted diluted earnings per share	$	0.51	$	0.46

	Exhibit Number		Document

	2.1		Agreement andPlan of Mergerbetween CountyBankCorp,and ChoiceOne Financial Services,Inc. datedMarch 22,2019. Previouslyfiledas an exhibitto ChoiceOne’sForm8-K filed March 25,2019.Here incorporatedbyreference.

	3.1		Amended and Restated Articles of Incorporation of ChoiceOne.

	3.2		Bylawsof ChoiceOne ascurrently ineffect and any amendmentsthereto. Previously filed as an exhibit to ChoiceOne‘s Form 8-K filed October1,2019. Hereincorporated by reference.

	~~2.1~~10.1		Employment Agreement ~~and Plan of Merger~~ between ~~County Bank Corp, and~~ ChoiceOne Financial Services, Inc. and Kelly J. Potes, dated ~~March 22,~~as of September 30, 2019. Previously filed as an exhibit to ChoiceOne’s Form 8-K filed ~~March 25,~~October 1, 2019. Here incorporated by reference.

	~~3.1~~10.2		~~Amended~~Employment Agreement between ChoiceOne Financial Services, Inc. and ~~Restated Articles~~Michael J. Burke, Jr., dated as of ~~Incorporation of ChoiceOne.~~March 22, 2019. Previously filed as ~~an exhibit~~Exhibit 10.7 to ChoiceOne’s Pre-Effective Amendment No. 2 to Form ~~10-K Annual Report for the year ended December 31, 2013.~~S-4 filed August 5, 2019. Here incorporated by reference.

	~~3.2~~10.3		~~Bylaws~~Transition Agreement between ChoiceOne Financial Services, Inc. and Bruce J. Cady, dated as of ~~ChoiceOne as currently in effect and any amendments thereto.~~March 22, 2019. Previously filed as ~~an exhibit~~Exhibit 10.8 to ChoiceOne’s Pre-Effective Amendment No. 2 to Form ~~10-K Annual Report for the year ended December 31, 2013.~~S-4 filed August 5, 2019. Here incorporated by reference.

	31.1		Certification of President and Chief Executive Officer

	31.2		Certification of Treasurer

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

	101.1		Interactive Data File.