UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

	For the quarterly period ended September 30, ~~2019~~2020

☐	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,” 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~~ NASDAQ Capital Market

As of October 31, ~~2019,~~2020, the Registrant had outstanding ~~7,246,068~~7,795,099 shares of common stock.

PART I. FINANCIAL INFORMATION

Item 1.Financial Statements.

ChoiceOne Financial Services, Inc.

CONSOLIDATED BALANCE SHEETS

	September 30,			December 31,
(Dollars in thousands)	2020			2019
	(Unaudited)			(Audited)
Assets
Cash and due from banks	$	117,533		$	59,308
Time deposits in other financial institutions		350			250
Cash and cash equivalents		117,883			59,558

Equity securities at fair value (Note 2)		2,667			2,851
Securities available for sale (Note 2)		393,338			339,579
Federal Home Loan Bank stock		3,824			3,524
Federal Reserve Bank stock		2,947			2,934
Loans held for sale		35,826			3,095
Loans to other financial institutions		55,064			51,048
Loans (Note 3)		1,078,796			802,048
Allowance for loan losses (Note 3)		(6,685	)		(4,057	)
Loans, net		1,072,111			797,991

Premises and equipment, net		29,927			24,265
Other real estate owned, net		676			929
Cash value of life insurance policies		32,556			31,979
Goodwill		60,506			52,870
Core deposit intangible		5,664			6,006
Other assets		15,994			9,499
Total assets	$	1,828,984		$	1,386,128

Liabilities
Deposits – noninterest-bearing	$	447,548		$	287,460
Deposits – interest-bearing		1,138,822			867,142
Total deposits		1,586,370			1,154,602

Borrowings		13,234			33,198
Other liabilities		6,454			6,189
Total liabilities		1,606,058			1,193,989

Shareholders' Equity
Preferred stock; shares authorized: 100,000; shares outstanding: none		0			0
Common stock and paid-in capital, no par value; shares authorized: 12,000,000; shares outstanding: 7,791,060 at September 30, 2020 and 7,245,088 at December 31, 2019		178,551			162,610
Retained earnings		35,106			28,051
Accumulated other comprehensive income, net		9,269			1,478
Total shareholders’ equity		222,926			192,139
Total liabilities and shareholders’ equity	$	1,828,984		$	1,386,128

See accompanying notes to interim consolidated financial statements.

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

	Three Months Ended						Nine Months Ended
(Dollars in thousands, except per share data)	September 30,						September 30,
	2020			2019			2020			2019
Interest income
Loans, including fees	$	13,047		$	5,394		$	34,110		$	16,064
Securities:
Taxable		1,150			728			4,564			2,255
Tax exempt		914			352			1,760			1,079
Other		40			87			241			194
Total interest income		15,151			6,561			40,675			19,592

Interest expense
Deposits		946			973			3,229			2,748
Advances from Federal Home Loan Bank		1			8			218			238
Other		142			10			149			39
Total interest expense		1,089			991			3,596			3,025

Net interest income		14,062			5,570			37,079			16,567
Provision for loan losses		1,225			0			3,000			0
Net interest income after provision for loan losses		12,837			5,570			34,079			16,567

Noninterest income
Customer service charges		2,059			1,094			5,306			3,275
Insurance and investment commissions		137			88			416			225
Gains on sales of loans		3,617			638			8,356			1,373
Net gains (losses) on sales of securities		(35	)		19			1,308			22
Earnings on life insurance policies		193			99			577			290
Trust income		197			0			569			0
Change in market value of equity securities		(238	)		(146	)		(184	)		119
Other		396			143			661			417
Total noninterest income		6,326			1,935			17,009			5,721

Noninterest expense
Salaries and benefits		8,058			3,268			19,545			8,915
Occupancy and equipment		1,556			755			4,185			2,267
Data processing		1,585			676			4,637			1,814
Professional fees		1,221			836			2,897			2,031
Supplies and postage		178			91			685			266
Advertising and promotional		148			145			440			297
Intangible amortization		395			0			1,102			0
FDIC insurance		154			5			291			93
Other		1,254			601			3,333			1,790
Total noninterest expense		14,549			6,377			37,115			17,473

Income before income tax		4,614			1,127			13,973			4,815
Income tax expense		785			106			2,460			671

Net income	$	3,829		$	1,021		$	11,513		$	4,144

Basic earnings per share (Note 4)	$	0.49		$	0.28		$	1.55		$	1.14
Diluted earnings per share (Note 4)	$	0.49		$	0.28		$	1.55		$	1.14
Dividends declared per share	$	0.20		$	0.80		$	0.60		$	1.20

See accompanying notes to interim consolidated financial statements.

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

	Three Months Ended					Nine Months Ended
(Dollars in thousands)	September 30,					September 30,
	2020		2019			2020			2019
Net income	$	3,829	$	1,021		$	11,513		$	4,144

Other comprehensive income:
Changes in net unrealized gains on investment securities available for sale, net of tax expense of $616 and $149 for the three months ended September 30, 2020 and September 30, 2019, respectively. Changes in net unrealized gains (losses) on investment securities available for sale, net of tax expense of $2,346 and $1,022 for the nine months ended September 30, 2020 and September 30, 2019, respectively		2,316		561			8,825			3,844

Reclassification adjustment for realized (gain) loss on sale of investment securities available for sale included in net income, net of tax expense (benefit) of $(7) and $4 for the three months ended September 30, 2020 and September 30, 2019, respectively. Reclassification adjustment for realized gain on sale of investment securities available for sale included in net income, net of tax expense of $275 and $5 for the nine months ended September 30, 2020 and September 30, 2019, respectively		28		(15	)		(1,033	)		(18	)

Other comprehensive income, net of tax		2,343		546			7,791			3,826

Comprehensive income	$	6,173	$	1,567		$	19,305		$	7,970

See accompanying notes to interim consolidated financial statements.

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

For the nine months ended September 30

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

Balance, January 1, 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 (1)		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


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

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

Balance, September 30, 2020		7,791,060	$	178,551	$	35,106		$	9,269		$	222,926

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

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

For the three months ended September 30

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

Balance, July 1, 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 options exercised and issued (1)											-
Stock-based compensation expense				258							258
Restricted stock units issued											-
Special cash dividend 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


Balance, July 1, 2020		7,261,605	$	162,862	$	32,835		$	6,926	$	202,623

Net income						3,829					3,829
Other comprehensive income									2,343		2,343
Shares issued		5,169		143							143
Effect of employee stock purchases				4							4
Stock options exercised and issued (1)		231									-
Stock-based compensation expense				48							48
Merger with Community Shores Bank Corporation		524,055		15,494							15,494
Cash dividends declared ($0.20 per share)						(1,558	)				(1,558	)

Balance, September 30, 2020		7,791,060	$	178,551	$	35,106		$	9,269	$	222,926

(1) The amount shown represents the number of shares issued in cashless transactions where some taxes are netted on a portion of the exercises.

See accompanying notes to interim consolidated financial statements.

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

	Nine Months Ended
(Dollars in thousands)	September 30,
	2020			2019
Cash flows from operating activities:
Net income	$	11,513		$	4,144
Adjustments to reconcile net income to net cash from operating activities:
Provision for loan losses		3,000			0
Depreciation		2,026			1,054
Amortization		3,377			672
Compensation expense on employee and director stock purchases, stock options, and restricted stock units		337			428
Net gains on sales of securities		(1,308	)		(22	)
Net change in market value of equity securities		184			(119	)
Gains on sales of loans		(8,356	)		(1,373	)
Loans originated for sale		(277,281	)		(40,215	)
Proceeds from loan sales		251,554			40,527
Earnings on bank-owned life insurance		(577	)		(290	)
(Gains)/losses on sales of other real estate owned		7			(22	)
Proceeds from sales of other real estate owned		983			187
Costs capitalized to other real estate		(19	)		0
Deferred federal income tax (benefit)/expense		(1,257	)		94
Net change in:
Other assets		(4,323	)		(290	)
Other liabilities		(116	)		645
Net cash (used in)/provided by operating activities		(20,256	)		5,420

Cash flows from investing activities:
Sales of securities available for sale		121,944			1,233
Maturities, prepayments and calls of securities available for sale		37,587			29,478
Purchases of securities available for sale		(183,109	)		(13,904	)
Purchase of Federal Reserve Bank stock		0			(1	)
Loan originations and payments, net		(108,485	)		(7,870	)
Additions to premises and equipment		(1,552	)		(457	)
Cash received from merger with Community Shores Bank Corporation,
net of cash paid		35,636			0
Net cash (used in)/provided by investing activities		(97,979	)		8,479

Cash flows from financing activities:
Net change in deposits		203,937			(2,940	)
Net change in fed funds purchased		0			(4,800	)
Proceeds from borrowings		10,000			85,000
Payments on borrowings		(33,028	)		(90,026	)
Issuance of common stock		110			107
Cash dividends		(4,459	)		(4,356	)
Net cash provided by/(used in) financing activities		176,560			(17,015	)

Net change in cash and cash equivalents		58,325			(3,116	)
Beginning cash and cash equivalents		59,558			19,690

Ending cash and cash equivalents	$	117,883		$	16,574

Supplemental disclosures of cash flow information:
Cash paid for interest	$	3,778		$	3,000
Cash paid for income taxes		3,608			350
Loans transferred to other real estate owned		372			325

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 CHANGES IN SHAREHOLDERS’ EQUITY~~

~~THREE MONTHS ENDED SEPTEMBER 30, 2019~~ ~~(Unaudited)~~

(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

~~ChoiceOne Financial Services, Inc~~

~~CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY~~

~~NINE MONTHS ENDED SEPTEMBER 30, 2019~~ ~~(Unaudited)~~

(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) 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

Explanatory Note

On July 1, 2020, ChoiceOne Financial Services, Inc. ("ChoiceOne") completed the merger of Community Shores Bank Corporation ("Community Shores") with and into ChoiceOne, with ChoiceOne surviving the merger. Community Shores Bank was consolidated with and into ChoiceOne Bank effective October 16, 2020. For additional details regarding the merger with Community Shores, see Note 8 (Business Combinations).

Principles of Consolidation

The consolidated financial statements include ChoiceOne Financial Services, Inc. ~~(“ChoiceOne”~~("ChoiceOne") ~~and~~, its wholly-owned ~~subsidiary,~~subsidiaries, ChoiceOne Bank ~~(the “Bank”~~and Community Shores Bank (together referred to as the “Banks”), ~~and the~~ChoiceOne Bank’s wholly-owned ~~subsidiary,~~subsidiaries, ChoiceOne Insurance Agencies, Inc. and Lakestone Financial Services, Inc., and Community Shores' wholly-owned subsidiary, Community Shores Financial Services, Inc. Intercompany transactions and balances have been eliminated in consolidation. Community Shores Bank was consolidated with and into ChoiceOne Bank effective October 16, 2020.

The consolidated unaudited financial statements and notes thereto 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.~~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 unaudited consolidated financial statements and notes thereto reflect all adjustments ordinary in nature which are, in the opinion of management, necessary for a fair presentation of the Consolidated Balance Sheets as of September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the Consolidated Statements of Income for the ~~three-~~three- and ~~nine-month~~nine-month periods ended September 30, 2020 and September 30, 2019 ~~and September 30, 2018,~~, the Consolidated Statements of Comprehensive Income for the ~~three-~~three- and ~~nine-month~~nine-month periods ended September 30, 2020 and September 30, 2019 ~~and September 30, 2018,~~, the Consolidated Statements of Changes in Shareholders’ Equity for the ~~three-~~three- and ~~nine-month~~nine-month periods ended September 30, 2020 and September 30, 2019 ~~and September 30, 2018,~~, and the Consolidated Statements of Cash Flows for the nine ~~months~~ month periods ended September 30, 2020 and September 30, 2019 ~~and September 30, 2018.~~. Operating results for the nine months ended September 30, ~~2019~~2020 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2019.~~2020.

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~~10-K for the year ended December 31, ~~2018.~~2019.

Use of Estimates

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

Loans to Other Financial Institutions

~~The~~ChoiceOne Bank entered into an agreement with another financial institution to fund mortgage loans. Loans to other financial institutions are purchased participating interests in individual advances made to mortgage bankers nation-wide from an unaffiliated originating bank. The originating bank services these loans and cash flows on the individual advances (principal, interest, and fees) which are allocated pro-rata based on ownership in the participating interest, less fees paid for the servicing activity. The underlying collateral is generally made up of ~~1-4~~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~~ChoiceOne Bank’s participating interest. If the advance (in which ~~the~~ChoiceOne Bank has a participating interest) is outstanding over 90 days, the originating bank has the right to request the participating interest be paid off by the mortgage banker.The participating interests are subject to concentration risk to 1317 different mortgage bankers, with the largest creditor outstanding representing ~~19%~~13% of the total at September 30, ~~2019.~~2020.

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~~ChoiceOne Bank reviews the ~~portfolio~~portfolios of participating interests for potential losses including any participating interest that is outstanding over 90 days (even if the advance and participating interest is current).At September 30, ~~2019, 17~~2020, 44 of the ~~184~~326 participating interests with principal balances totaling ~~$4.8~~$9.1 million had balances outstanding over 30 days. At December 31, 2019, 26 of the 222 participating interests with principal balances totaling $6.4 million had balances outstanding over 30 days. During the firstnine months of ~~2019 and 2018,~~2020, there were no0 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)~~(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)~~(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 ~~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~~10,132 shares of common stock were issued to ChoiceOne’s Board of Directors for a cash price of ~~$110,000~~$289,000 under the terms of the Directors’ Stock Purchase Plan in the firstnine months of ~~2019.~~2020. A total of ~~2,589~~4,159 shares for a cash price of ~~$61,000~~$101,000 were issued under the Employee Stock Purchase Plan in the firstnine months of ~~2019.~~2020. Shares ~~of common stock~~ issued upon the ~~vesting~~exercise of ~~restricted~~ stock ~~units,~~options, net of shares withheld for payment ~~of related taxes,~~for the options, totaled ~~7,787~~7,261 in the firstnine months of ~~2019.~~2020. A total of 365 restricted stock units vested in the firstnine months of 2020.

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~~ years after the grant date. Certain additional vesting provisions apply. Each unit, once vested, is settled by delivery of one share of ChoiceOne common stock.

~~Reclassifications~~

Reclassifications

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

Recent Accounting Pronouncements

The ~~FASB~~Financial Accounting Standards Board ("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. 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 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 was not significant.

~~The FASB issued ASU~~ No. ~~2016-13~~2016-13, Financial Instruments—Credit Losses (Topic ~~326)~~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. ~~In October 2019, FASB delayed the~~This ASU is effective ~~date~~ for ~~the credit loss standard to January 2023~~fiscal years beginning after December 15, 2022, and for ~~certain entities, including certain Securities and Exchange Commission filers, public business entities and private companies. As~~interim periods within those years for companies considered a smaller reporting company with the Securities and Exchange Commission. ChoiceOne was classified as a smaller reporting company as of December 31, 2019. Management is ~~eligible~~currently evaluating the impact of this new ASU on its consolidated financial statements which may be significant.

Goodwill

Goodwill is not amortized, but is evaluated annually for impairment and on an interim basis if events or changes in circumstances indicate that goodwill might be impaired. ChoiceOne evaluates goodwill annually for impairment. Accounting pronouncements allow a company to first perform a qualitative assessment for goodwill prior to a quantitative assessment (Step 1 assessment). If the ~~proposed delay under~~results of the ~~updated language~~qualitative assessment indicate that it is more likely than not that goodwill is impaired, then a quantitative assessment must be performed. If not, there is no further assessment required.

Management performed its annual qualitative assessment of goodwill as of June 30, 2020. In evaluating whether it is more likely than not that the fair value of ChoiceOne's operations was less than the carrying amount, management assessed the relevant events and circumstances such as the ones noted in ASC 350-20-35-3c. The analysis consisted of a review of ChoiceOne’s current and expected future financial performance, the ~~standard.~~potential impact of COVID-19 on the ability of ChoiceOne’s borrowers to comply with loan terms, and the impact that reductions in both short-term and long-term interest rates have had and may continue to have on net interest margin and mortgage sales activity. The share price and book value of ChoiceOne’s stock were also compared to the prior year. Management also compared average values for recently closed bank merger and acquisition transactions to ChoiceOne's recently completed merger and acquisition transactions. Despite ChoiceOne's market capitalization declining slightly from December 2019 to June 2020, ChoiceOne's financial performance has remained positive. ChoiceOne believes this is evidenced by the strong financial indicators, solid credit quality ratios, as well as the strong capital position of ChoiceOne. In assessing the totality of the events and circumstances, management determined that it is more likely than not that the fair value of ChoiceOne Bank’s operations, from a qualitative perspective, exceeded the carrying value as of June 30, 2020 and there was no further quantitative assessment necessary.

NOTE 2 – SECURITIES

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

			September 30, 2019
			Gross		Gross				September 30, 2020
	Amortized		Unrealized		Unrealized		Fair				Gross		Gross
(Dollars in thousands)	Cost		Gains		Losses		Value		Amortized		Unrealized		Unrealized		Fair
									Cost		Gains		Losses		Value
Equity securities	$	2,164	$	335	$	—	$	2,499	$	2,636	$	31	$	0	$	2,667

			December 31, 2018
			Gross		Gross					December 31, 2019
	Amortized		Unrealized		Unrealized			Fair				Gross		Gross
(Dollars in thousands)	Cost		Gains		Losses			Value		Amortized		Unrealized		Unrealized		Fair
										Cost		Gains		Losses		Value
Equity securities	$	2,502	$	459	$	(114	)	$	2,847	$	2,636	$	215	$	0	$	2,851

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

			December 31, 2018							September 30, 2020
			Gross		Gross							Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
(Dollars in thousands)										Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value		Cost		Gains		Losses			Value
U.S. Government and federal agency	$	34,079	$	1	$	(551	)	$	33,529	$	2,008	$	53	$	0		$	2,061
U.S. Treasury		1,992		—		(45	)		1,947
U.S. Treasury notes and bonds											1,996		69		0			2,065
State and municipal		104,317		544		(933	)		103,928		258,226		10,324		0			268,550
Mortgage-backed		21,654		126		(205	)		21,575		115,695		1,565		(487	)		116,773
Corporate		5,147		1		(46	)		5,102		2,838		51		0			2,889
Trust preferred securities		500		—		—			500		1,000		0		0			1,000
Asset-backed securities		21		—		—			21
Total	$	167,710	$	672	$	(1,780	)	$	166,602	$	381,763	$	12,062	$	(487	)	$	393,338

	December 31, 2019
			Gross		Gross
(Dollars in thousands)	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
U.S. Government and federal agency	$	17,231	$	23	$	(39	)	$	17,215
U.S. Treasury notes and bonds		1,994		14		0			2,008
State and municipal		172,487		2,694		(1,257	)		173,924
Mortgage-backed		142,504		585		(329	)		142,760
Corporate		2,649		24		(1	)		2,672
Trust preferred securities		1,000		0		0			1,000
Total	$	337,865	$	3,340	$	(1,626	)	$	339,579

ChoiceOne reviews its securities portfolio on a quarterly basis to determine whether unrealized losses are considered to be temporary or other-than-temporary. NoNaN other-than-temporary impairment charges were recorded in the three and nine months ended September 30, ~~2019~~2020 or in the same periods in ~~2018.~~2019. ChoiceOne believes that unrealized losses on securities were temporary in nature and were due to changes in interest rates and reduced market liquidity and not as a result of credit quality issues.

Presented below is a schedule of maturities of securities as of September 30, ~~2019,~~2020, the fair value of securities as of September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, and the weighted average yields of securities as of September 30, ~~2019:~~2020:

	Securities maturing within:												Securities maturing within:
									Fair Value		Fair Value										Fair Value		Fair Value
	Less than		1 Year -		5 Years -		More		at September 30,		at December 31,		Less than		1 Year -		5 Years -		More than		at September 30,		at Dec. 31,
(Dollars in thousands)	1 Year		5 Years		10 Years		10 Years		2019		2018		1 Year		5 Years		10 Years		10 Years		2020		2019

U.S. Government and federal agency	$	21,017	$	2,032	$	—	$	—	$	23,049	$	33,529	$	0	$	2,061	$	0	$	0	$	2,061	$	17,215
U.S. Treasury notes and bonds		—		2,012		—		—		2,012		1,947		0		2,065		0		0		2,065		2,008
State and municipal		13,709		49,671		35,367		2,005		100,752		103,928		14,534		53,241		187,171		13,604		268,550		173,924
Corporate		—		2,679		—		—		2,679		5,102		1,856		1,033		0		0		2,889		2,672
Foreign debt		500		—		—		—		500		—
Trust preferred securities		500		—		—		—		500		500		0		0		1,000		0		1,000		1,000
Asset-backed securities		—		—		—		—		—		21
Total debt securities		35,726		56,394		35,367		2,005		129,492		145,027		16,390		58,400		188,171		13,604		276,565		196,819

Mortgage-backed securities		—		19,164		6,122		—		25,286		21,575		4,305		30,667		79,727		2,074		116,773		142,760
Equity securities (1)		—		—		1,000		1,499		2,499		2,847
Equity securities														0		0		1,000		1,667		2,667		2,851
Total	$	35,726	$	75,558	$	42,489	$	3,504	$	157,277	$	169,449	$	20,695	$	89,067	$	268,898	$	17,345	$	396,005	$	342,430

Weighted average yields:
Less than 1 Year - 5 Years - More
1 Year 5 Years 10 Years 10 Years Total
U.S. Government and federal agency 1.99 % 1.98 % — % — % 1.99 %
U.S. Treasury notes and bonds — 1.85 — — 1.85
State and municipal (2) 2.73 2.85 3.21 0.64 2.91
Corporate — 2.66 — — 2.66
Foreign debt 2.27 — — — 2.27
Trust preferred securities 6.00 — — — 6.00
Mortgage-backed securities — 3.24 2.97 — 3.18
Equity securities (1) — — 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%.~~

	Weighted average yields:
	Less than			1 Year -			5 Years -			More than
	1 Year			5 Years			10 Years			10 Years			Total
U.S. Government and federal agency		0	%		1.98	%		0	%		0	%		1.98	%
U.S. Treasury notes and bonds		0			1.85			0			0			1.85
State and municipal		1.78			2.88			2.72			3.02			2.72
Corporate		1.37			2.86			0			0			1.90
Trust preferred securities		0			0			4.66			0			4.66
Mortgage-backed securities		4.93			2.24			0.79			3.06			1.36
Equity securities		0			0			4.61			0			1.27

Following is information regarding unrealized gains and losses on equity securities for the ~~three-~~three- and ~~nine-month~~nine-month periods ~~ending~~ ended September ~~30:~~ 30, 2020 and 2019:

										Three Months Ended						Nine Months Ended
	Three Months Ended September 30,					Nine Months Ended September 30,				September 30,						September 30,
	2019			2018		2019		2018		2020			2019			2020			2019

Net gains and losses recognized during the period	$	(146	)	$	113	$	119	$	161	$	(238	)	$	(146	)	$	(184	)	$	119
Less: Net gains and losses recognized during the period on securities sold		(2	)		—		4		9		0			(3	)		0			4

Unrealized gains and losses recognized during the reporting period on securities still held at the reporting date	$	(144	)	$	113	$	115	$	152	$	(238	)	$	(143	)	$	(184	)	$	115

NOTE 3 – LOANS AND ALLOWANCE FOR LOAN LOSSES

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

				Commercial
(Dollars in thousands)				and						Commercial			Construction		Residential
	Agricultural			Industrial			Consumer			Real Estate			Real Estate		Real Estate			Unallocated		Total
Allowance for Loan Losses Three Months Ended September 30, 2020
Beginning balance	$	252		$	1,398		$	243		$	2,833		$	79	$	945		$	0	$	5,750
Charge-offs		0			(29	)		(58	)		(255	)		0		(1	)		0		(343	)
Recoveries		0			1			46			4			0		2			0		53
Provision		17			(285	)		48			961			31		122			331		1,225
Ending balance	$	269		$	1,085		$	279		$	3,543		$	110	$	1,068		$	331	$	6,685


Allowance for Loan Losses Nine Months Ended September 30, 2020
Beginning balance	$	471		$	655		$	270		$	1,663		$	76	$	640		$	282	$	4,057
Charge-offs		0			(46	)		(242	)		(255	)		0		(8	)		0		(551	)
Recoveries		0			2			156			4			0		17			0		179
Provision		(202	)		474			95			2,131			34		419			49		3,000
Ending balance	$	269		$	1,085		$	279		$	3,543		$	110	$	1,068		$	331	$	6,685

Individually evaluated for impairment	$	0		$	1		$	1		$	13		$	0	$	218		$	0	$	233

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

Loans
September 30, 2020
Individually evaluated for impairment	$	373		$	345		$	19		$	2,149		$	0	$	2,203				$	5,089
Collectively evaluated for impairment		53,130			297,886			34,104			449,041			16,489		199,930					1,050,580
Acquired with deteriorated credit quality		0			7,889			30			12,116			0		3,092					23,127
Ending balance	$	53,503		$	306,120		$	34,153		$	463,306		$	16,489	$	205,225				$	1,078,796

Commercial
(Dollars in thousands) and Commercial Construction Residential
Agricultural Industrial Consumer Real Estate Real Estate Real Estate Unallocated Total
Allowance for Loan Losses
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

				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		0			(81	)		(71	)		(589	)		0		(11	)		0		(752	)
Recoveries		0			1			25			16			0		5			0		47
Provision		111			(87	)		(27	)		(182	)		5		(80	)		260		0
Ending balance	$	473		$	651		$	262		$	1,643		$	48	$	436		$	583	$	4,096

Allowance for Loan Losses Nine Months Ended September 30, 2019
Beginning balance	$	481		$	892		$	254		$	1,926		$	38	$	537		$	545	$	4,673
Charge-offs		0			(83	)		(222	)		(589	)		0		(25	)		0		(919	)
Recoveries		65			21			113			22			0		121			0		342
Provision		(73	)		(179	)		117			284			10		(197	)		38		0
Ending balance	$	473		$	651		$	262		$	1,643		$	48	$	436		$	583	$	4,096

Individually evaluated for impairment	$	85		$	2		$	4		$	14		$	0	$	186		$	0	$	291

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


Loans
September 30, 2019
Individually evaluated for impairment	$	389		$	279		$	20		$	2,331		$	0	$	2,646				$	5,665
Collectively evaluated for impairment		49,668			81,252			24,388			141,975			11,188		92,670					401,141
Acquired with deteriorated credit quality		0			0			0			0			0		0					0
Ending balance	$	50,057		$	81,531		$	24,408		$	144,306		$	11,188	$	95,316				$	406,806

			Commercial
(Dollars in thousands)			and				Commercial		Construction		Residential
	Agricultural		Industrial		Consumer		Real Estate		Real Estate		Real Estate		Unallocated		Total
Allowance for Loan Losses
December 31, 2019
Individually evaluated for impairment	$	103	$	0	$	4	$	13	$	0	$	235	$	0	$	355

Collectively evaluated for impairment	$	368	$	655	$	266	$	1,650	$	76	$	405	$	282	$	3,702


Loans
December 31, 2019
Individually evaluated for impairment	$	924	$	259	$	17	$	2,288	$	0	$	2,434			$	5,922
Collectively evaluated for impairment		56,415		141,583		38,524		323,358		13,411		215,106				788,397
Acquired with deteriorated credit quality		0		6,241		313		733		0		442				7,729
Ending balance	$	57,339	$	148,083	$	38,854	$	326,379	$	13,411	$	217,982			$	802,048

The provision for loan losses was $1,225,000 in the third quarter of 2020, compared to $0 in the same period in the prior year. The third quarter of 2020 provision was deemed prudent due to growth in ChoiceOne’s loan portfolio and the uncertainty of the impact of the global coronavirus (COVID-19) pandemic upon ChoiceOne’s borrowers and their ability to repay loans. While it is difficult to predict the impact that COVID-19 will have in future quarters, ChoiceOne estimates these losses have been incurred as of September 30, 2020, and expects increased levels of past due loans, nonperforming loans and loan losses.

The process to monitor the credit quality of ChoiceOne’s loan portfolio includes tracking ~~(1)~~(1) the risk ratings of business loans, ~~(2)~~(2) the level of classified business loans, and ~~(3)~~(3) delinquent and nonperforming consumer loans. Business loans are risk rated on a scale of 1 to 8.9. A description of the characteristics of the ratings follows:

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

Risk rating 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 with6 or special mention: Loans and other credit extensions bearing this ~~rating, it is not anticipated.~~

~~Risk rating 5: These loans are considered special mention credits. Loans in this risk rating~~grade are considered to be inadequately protected by the ~~net~~current sound worth and debt service ~~coverage~~capacity of the borrower or of any pledged collateral. These ~~loans~~obligations, even if apparently protected by collateral value, have ~~well defined~~well-defined weaknesses related to adverse financial, managerial, economic, market, or political conditions that ~~may jeopardize the borrower’s ability to repay the loan. If the weaknesses are not corrected, loss~~have clearly jeopardized repayment of principal and interest ~~could be probable.~~as originally intended. Furthermore, there is the possibility that ChoiceOne Bank will sustain some future loss if such weaknesses are not corrected. Clear loss potential, however, does not have to exist in any individual assets classified as substandard. Loans falling into this category should have clear action plans and timelines with benchmarks to determine which direction the relationship will move.

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

Risk rating ~~7: These loans are considered doubtful credits. Some loss of principal~~8 or doubtful: Loans and ~~interest has~~other credit extensions bearing this grade have been determined to ~~be probable. The estimate~~have the extreme probability of some loss, but because of certain important and reasonably specific factors, the amount of loss cannot be determined. Such pending factors could ~~be affected by factors such as the borrower’s ability to provide~~include merger or liquidation, additional capital injection, refinancing plans, or ~~collateral. Loans in this category are~~perfection of liens on ~~nonaccrual status.~~additional collateral.

Risk rating ~~8: These loans are considered loss credits. They~~9 or loss: Loans in this classification are considered uncollectible and ~~will~~cannot be ~~charged~~justified as a viable asset of ChoiceOne Bank. This classification does not mean the loan has absolutely no recovery value, but that it is neither practical nor desirable to defer writing off ~~against~~this loan even though partial recovery may be obtained in the ~~allowance for loan losses.~~future.

Information regarding ~~the Bank’s~~ChoiceOne Bank's credit exposure iswas as follows:

Corporate Credit Exposure - Credit Risk Profile By Creditworthiness Category

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

(Dollars in thousands)	Agricultural				Commercial and Industrial				Commercial Real Estate
	September 30,		December 31,		September 30,		December 31,		September 30,		December 31,
	2020		2019		2020		2019		2020		2019
Pass	$	49,855	$	55,866	$	293,858	$	146,728	$	448,053	$	322,105
Special Mention		3,275		1,094		4,526		1,081		5,275		1,332
Substandard		373		379		7,736		274		8,505		2,942
Doubtful		0		0		0		0		1,473		0
	$	53,503	$	57,339	$	306,120	$	148,083	$	463,306	$	326,379

~~Corporate~~Consumer Credit Exposure - Credit Risk Profile Based On Payment Activity

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

(Dollars in thousands)	Consumer				Construction Real Estate				Residential Real Estate
	September 30,		December 31,		September 30,		December 31,		September 30,		December 31,
	2020		2019		2020		2019		2020		2019
Performing	$	34,134	$	38,838	$	16,489	$	13,411	$	204,293	$	216,651
Nonperforming		0		0		0		0		157		0
Nonaccrual		19		16		0		0		775		1,331
	$	34,153	$	38,854	$	16,489	$	13,411	$	205,225	$	217,982

The following ~~schedule~~table provides information on loans that were considered ~~TDRs~~troubled debt restructurings ("TDRs") that were modified during the ~~nine-month periods~~three and nine months ended September 30, ~~2019 and September 30, 2018:~~

Three Months Ended September 30, 2019 Nine Months Ended September 30, 2019
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 real estate — $ — $ — 2 $ 1,882 $ 1,882
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~~ — $ — $ — — $ — $ —

2020. There were 0 new TDRs in 2019.

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.

	Three Months Ended September 30, 2020						Nine Months Ended September 30, 2020
			Pre-		Post-				Pre-		Post-
			Modification		Modification				Modification		Modification
			Outstanding		Outstanding				Outstanding		Outstanding
(Dollars in thousands)	Number of		Recorded		Recorded		Number of		Recorded		Recorded
	Loans		Investment		Investment		Loans		Investment		Investment
Agricultural		0	$	0	$	0		1	$	67	$	67
Commercial Real Estate		0		0		0		2		1,666		1,666
Total		0	$	0	$	0		3	$	1,733	$	1,733

The following schedule provides information on TDRs as of September 30, ~~2019 and 2018~~2020 where the borrower was past due with respect to principal and/or interest for 30 days or more during the ~~three-~~three and ~~nine-month periods~~nine months ended September 30, ~~2019 and September 30, 2018 that~~2020, which loans had been modified and classified as TDRs during the year prior to the ~~default:~~default. There were no TDRs as of September 30, 2019 where the borrower was past due with respect to principal and/or interest for 30 days or more during the three and nine months ended September 30, 2019, which loans had been modified and classified as TDRs during the year prior to the default.

	Three Months Ended				Nine Months Ended				Three Months Ended				Nine Months Ended
	September 30, 2019				September 30, 2019				September 30, 2020				September 30, 2020
(Dollars in thousands)	Number		Recorded		Number		Recorded		Number		Recorded		Number		Recorded
	of Loans		Investment		of Loans		Investment		of Loans		Investment		of Loans		Investment
Commercial real estate		2	$	1,882		2	$	1,882
Agricultural										1	$	67		1	$	67
Commercial Real Estate										2		1,666		2		1,666
Total										3	$	1,733		3	$	1,733

~~Three Months Ended~~

~~Nine Months Ended~~

~~September 30, 2018~~

~~(Dollars in thousands)~~

~~Number~~

~~Recorded~~

~~Number~~

~~Recorded~~

~~of Loans~~

~~Investment~~

~~of Loans~~

~~Investment~~

~~Commercial and industrial~~

—

The federal banking agencies issued an “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” on March 22, 2020 and subsequently issued a revised statement on April 7, 2020. These statements encourage financial institutions to work constructively with borrowers affected by COVID-19, and provide that short-term modifications to loans made on a good faith basis to borrowers who were current as of the implementation date of the statements are not considered TDRs. Further, Section 4013 of the Coronavirus Aid, Relief and Economic Security (“CARES”) Act, passed by Congress on March 27, 2020, states that COVID-19 related modifications on loans that were current as of December 31, 2019 are not TDRs. ChoiceOne offered an initial 90-day deferment beginning in March 2020 to both commercial and retail borrowers where the borrower could defer either the principal portion of their payments or both the principal and interest portions. As of September 30, 2020, ChoiceOne had granted deferments on approximately 750 loans with loan balances totaling $148 million which, in reliance on the statements of federal banking agencies and the CARES Act, are not reflected as TDRs in this report. Following the initial 90 day deferment period, ChoiceOne offered a second round of deferments in accordance with the CARES act; however, significantly fewer customers requested further deferment. Less than 50 deferments remained active with loan balances totaling $10.3 million at September 30, 2020 with all other previous deferments resuming their payments in accordance with loan terms. ChoiceOne will continue to attempt to assist borrowers as needed in the remainder of 2020.

Impaired loans by loan category follow:


			Unpaid						Unpaid
(Dollars in thousands)	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		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
September 30, 2020
With no related allowance recorded
Agricultural	$	185	$	185	$	—	$	373	$	440	$	-
Commercial and industrial		—		—		—		284		395		-
Consumer		1		1		—		4		5		-
Construction real estate		—		—		—		0		0		-
Commercial real estate		73		109		—		1,859		2,664		-
Residential real estate		250		261		—		196		200		-
Total		509		556		—
Subtotal								2,716		3,704		-
With an allowance recorded
Agricultural		393		440		94		0		0		0
Commercial and industrial		21		21		3		61		64		1
Consumer		89		89		13		15		16		1
Construction real estate		—		—		—		0		0		0
Commercial real estate		550		609		20		290		290		13
Residential real estate		2,462		2,494		167		2,007		2,068		218
Total		3,515		3,653		297
Subtotal								2,373		2,438		233
Total
Agricultural		578		625		94		373		440		0
Commercial and industrial		21		21		3		345		459		1
Consumer		90		90		13		19		21		1
Construction real estate		—		—		—		0		0		0
Commercial real estate		623		718		20		2,149		2,954		13
Residential real estate		2,712		2,755		167		2,203		2,268		218
Total	$	4,024	$	4,209	$	297	$	5,089	$	6,142	$	233

			Unpaid
(Dollars in thousands)	Recorded		Principal		Related
	Investment		Balance		Allowance
December 31, 2019
With no related allowance recorded
Agricultural	$	545	$	545	$	-
Commercial and industrial		259		340		-
Consumer		0		0		-
Construction real estate		0		0		-
Commercial real estate		1,882		2,471		-
Residential real estate		42		42		-
Subtotal		2,728		3,398		-
With an allowance recorded
Agricultural		379		439		103
Commercial and industrial		0		0		0
Consumer		17		18		4
Construction real estate		0		0		0
Commercial real estate		406		406		13
Residential real estate		2,392		2,460		235
Subtotal		3,194		3,323		355
Total
Agricultural		924		984		103
Commercial and industrial		259		340		0
Consumer		18		18		4
Construction real estate		0		0		0
Commercial real estate		2,287		2,877		13
Residential real estate		2,434		2,502		235
Total	$	5,922	$	6,721	$	355

The following schedule provides information regarding average balances of impaired loans and interest recognized on impaired loans for ~~three-~~the three- and ~~nine-month~~nine-month periods ended September 30, ~~2019~~ 2020 and ~~2018:~~2019:


	Average		Interest		Average		��	Interest
(Dollars in thousands)	Recorded		Income		Recorded			Income
	Investment		Recognized		Investment			Recognized
Three months ended September 30, 2019
Three Months Ended September 30, 2020
With no related allowance recorded
Agricultural	$	—	$	—	$	376		$	0
Commercial and industrial		129		—		142			0
Consumer		—		—		2			0
Construction real estate						0			0
Commercial real estate		941		—		929			3
Residential real estate		109		1		109			1
Total		1,179		1
Subtotal						1,558			4
With an allowance recorded
Agricultural		389		—		0			0
Commercial and industrial		191		—		191			0
Consumer		37		1		20			0
Construction real estate						0			0
Commercial real estate		1,693		13		1,268			4
Residential real estate		2,521		48		2,163			17
Total		4,831		62
Subtotal						3,642			21
Total
Agricultural		389		—		376			0
Commercial and industrial		320		—		333			0
Consumer		37		1		22			0
Construction real estate						0			0
Commercial real estate		2,634		13		2,197			7
Residential real estate		2,630		49		2,272			18
Total	$	6,010	$	63	$	5,200		$	25

	Average		Interest		Average		Interest
(Dollars in thousands)	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
Three months ended September 30, 2018
Three Months Ended September 30, 2019
With no related allowance recorded
Agricultural	$	211	$	—	$	0	$	0
Commercial and industrial		73		3		129		0
Consumer		—		—		0		0
Construction real estate						0		0
Commercial real estate		134		—		941		0
Construction real estate		65		—
Residential real estate		168		—		109		1
Total		651		3
Subtotal						1,179		1
With an allowance recorded
Agricultural		206		—		389		0
Commercial and industrial		521		8		191		0
Consumer		68		3		37		1
Construction real estate						0		0
Commercial real estate		739		20		1,693		13
Construction real estate		—		—
Residential real estate		2,418		52		2,521		48
Total		3,952		83
Subtotal						4,831		62
Total
Agricultural		417		—		389		0
Commercial and industrial		594		11		320		0
Consumer		68		3		37		1
Construction real estate						0		0
Commercial real estate		873		20		2,634		13
Construction real estate		65		—
Residential real estate		2,586		52		2,630		49
Total	$	4,603	$	86	$	6,010	$	63

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, 2020
With no related allowance recorded
Agricultural	$	324	$	0
Commercial and industrial		201		0
Consumer		1		0
Construction real estate		0		0
Commercial real estate		1,405		11
Residential real estate		84		5
Subtotal		2,015		16
With an allowance recorded
Agricultural		190		0
Commercial and industrial		102		0
Consumer		18		0
Construction real estate		0		0
Commercial real estate		826		16
Residential real estate		2,273		71
Subtotal		3,409		87
Total
Agricultural		514		0
Commercial and industrial		303		0
Consumer		19		0
Construction real estate		0		0
Commercial real estate		2,231		27
Residential real estate		2,357		76
Total	$	5,424	$	103

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

	Average		Interest
(Dollars in thousands)	Recorded		Income
	Investment		Recognized
Nine Months Ended September 30, 2019
With no related allowance recorded
Agricultural	$	46	$	0
Commercial and industrial		65		9
Consumer		0		0
Construction real estate		0		0
Commercial real estate		507		61
Residential real estate		156		4
Subtotal		774		74
With an allowance recorded
Agricultural		390		0
Commercial and industrial		107		2
Consumer		56		1
Construction real estate		0		0
Commercial real estate		1,117		27
Residential real estate		2,510		112
Subtotal		4,180		142
Total
Agricultural		436		0
Commercial and industrial		172		11
Consumer		56		1
Construction real estate		0		0
Commercial real estate		1,624		88
Residential real estate		2,666		116
Total	$	4,954	$	216

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
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 $ —

					Loans
	Loans		Loans		Past Due								Loans
	Past Due		Past Due		Greater								90 Days Past
(Dollars in thousands)	30 to 59		60 to 89		Than 90				Loans Not		Total		Due and
	Days (1)		Days (1)		Days (1)		Total (1)		Past Due		Loans		Accruing
September 30, 2020
Agricultural	$	0	$	0	$	373	$	373	$	53,130	$	53,503	$	0
Commercial and industrial		369		0		666		1,035		305,085		306,120		0
Consumer		75		0		0		75		34,078		34,153		0
Commercial real estate		1,164		16		1,884		3,064		460,242		463,306		0
Construction real estate		0		663		0		663		15,826		16,489		0
Residential real estate		152		609		235		996		204,229		205,225		157
	$	1,760	$	1,288	$	3,158	$	6,206	$	1,072,590	$	1,078,796	$	157

December 31, 2019
Agricultural	$	0	$	68	$	0	$	68	$	57,271	$	57,339	$	0
Commercial and industrial		542		15		259		816		147,267		148,083		0
Consumer		121		19		11		151		38,703		38,854		0
Commercial real estate		0		0		1,882		1,882		324,497		326,379		0
Construction real estate		0		0		0		0		13,411		13,411		0
Residential real estate		2,466		582		393		3,441		214,541		217,982		0
	$	3,129	$	684	$	2,545	$	6,358	$	795,690	$	802,048	$	0

~~(1)~~(1) Includes nonaccrual loans.

Nonaccrual loans by loan category follow:

(Dollars in thousands)	September 30,		December 31,
	2020		2019
Agricultural	$	373	$	379
Commercial and industrial		727		776
Consumer		20		16
Commercial real estate		3,186		2,185
Construction real estate		0		0
Residential real estate		775		1,331
	$	5,081	$	4,687

(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

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

	Acquired			Acquired			Acquired
	*Impaired*			*Non-impaired*			*Total*
Loans acquired - contractual payments	$	7,729		$	387,394		$	395,123
Nonaccretable difference		(2,928	)		0			(2,928	)
Expected cash flows		4,801			387,394			392,195
Accretable yield		(185	)		(1,894	)		(2,079	)
Carrying balance at acquisition date	$	4,616		$	385,500		$	390,116

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

(Dollars in thousands)	*Acquired*			*Acquired*			*Acquired*
	*Impaired*			*Non-impaired*			*Total*
Balance, January 1, 2020	$	(185	)	$	(1,819	)	$	(2,004	)
Accretion January 1, 2020 through June 30, 2020		45			61			106
Balance, June 30, 2020		(140	)		(1,758	)		(1,898	)
Accretion July 1, 2020 through September 30, 2020		2			194			196
Balance, September 30, 2020	$	(138	)	$	(1,564	)	$	(1,702	)

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

	Acquired			Acquired			Acquired
	Impaired			Non-impaired			Total
Loans acquired - contractual payments	$	20,491		$	158,495		$	178,986
Nonaccretable difference		(3,547	)		0			(3,547	)
Expected cash flows		16,944			158,495			175,439
Accretable yield		(869	)		(596	)		(1,465	)
Carrying balance at acquisition date	$	16,075		$	157,899		$	173,974

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

	Acquired			Acquired			Acquired
	Impaired			Non-impaired			Total
Balance, July 1, 2020	$	(869	)	$	(596	)	$	(1,465	)
Accretion July 1, 2020 through September 30, 2020		20			82			102
Balance, September 30, 2020	$	(849	)	$	(514	)	$	(1,363	)

NOTE 4 – EARNINGS PER SHARE

Earnings per share are based on the weighted average number of shares outstanding during the period. A computation of basic earnings per share and diluted earnings per share follows:

Three Months Ended Nine Months Ended
(Dollars in thousands, except 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

	Three Months Ended				Nine Months Ended
(Dollars in thousands, except share data)	September 30,				September 30,
	2020		2019		2020		2019
Basic
Net income	$	3,829	$	1,021	$	11,513	$	4,144

Weighted average common shares outstanding		7,783,005		3,633,474		7,429,765		3,626,961

Basic earnings per common shares	$	0.49	$	0.28	$	1.55	$	1.14

Diluted
Net income	$	3,829	$	1,021	$	11,513	$	4,144

Weighted average common shares outstanding		7,783,005		3,633,474		7,429,765		3,626,961
Plus dilutive stock options and restricted stock units		7,460		23,964		7,888		19,870

Weighted average common shares outstanding and potentially dilutive shares		7,790,465		3,657,438		7,437,653		3,646,831

Diluted earnings per common share	$	0.49	$	0.28	$	1.55	$	1.14

There were no stock options that were considered to be anti-dilutive to earnings 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 no0 stock options that were considered to be anti-dilutive to earnings per share for the three or and nine months ended September 30, ~~2018.~~2020. There were 0 stock options that were considered to be anti-dilutive to earnings 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.

~~All share and per share amounts have been adjusted for the 5% stock dividend issued on May 31, 2018 and the 5% stock dividend issued on May 31, 2017, where applicable.~~

~~NOTE~~ Note 5 – ~~FINANCIAL INSTRUMENTS~~Financial Instruments

Financial instruments as of the dates indicated were as follows:

Quoted Prices
in Active Significant
Markets for Other Significant
Identical Observable Unobservable
(Dollars in thousands) Carrying Estimated Assets Inputs Inputs
Amount Fair Value (Level 1) (Level 2) (Level 3)
September 30, 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 —

					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, 2020
Assets
Cash and cash equivalents	$	117,883	$	117,883	$	117,883	$	0	$	0
Equity securities at fair value		2,667		2,667		1,187		0		1,480
Securities available for sale		393,338		393,338		0		382,025		11,313
Federal Home Loan Bank and Federal
Reserve Bank stock		6,771		6,771		0		6,771		0
Loans held for sale		35,826		36,901		0		36,901		0
Loans to other financial institutions		55,064		55,064		0		55,064		0
Loans, net		1,072,111		1,069,641		0		0		1,069,641
Accrued interest receivable		6,610		6,610		0		6,610		0
Interest rate lock commitments		1,756		1,756		0		1,756		0

Liabilities
Noninterest-bearing deposits		447,548		447,548		0		447,548		0
Interest-bearing deposits		1,138,822		1,140,084		0		1,140,084		0
Borrowings		13,234		13,284		0		13,284		0
Accrued interest payable		229		229		0		229		0

December 31, 2019
Assets
Cash and due from banks	$	59,558	$	59,558	$	59,558	$	0	$	0
Equity securities at fair value		2,851		2,851		1,379		0		1,472
Securities available for sale		339,579		339,579		0		327,212		12,367
Federal Home Loan Bank and Federal
Reserve Bank stock		6,458		6,458		0		6,458		0
Loans held for sale		3,095		3,134		0		3,134		0
Loans to other financial institutions		51,048		51,048		0		51,048		0
Loans, net		797,991		793,270		0		0		793,270
Accrued interest receivable		3,965		3,965		0		3,965		0
Interest rate lock commitments		68		68		0		68		0

Liabilities
Noninterest-bearing deposits		287,460		287,460		0		287,460		0
Interest-bearing deposits		867,142		867,154		0		867,154		0
Federal Home Loan Bank advances		33,198		33,243		0		33,243		0
Accrued interest payable		411		411		0		411		0

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~~ChoiceOne Bank has the ability to access.

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

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

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

There were no liabilities measured at fair value as of September 30, ~~2019~~2020 or December 31, ~~2018.~~2019. Disclosures concerning assets measured at fair value are as follows:

Assets Measured at Fair Value on a Recurring Basis

(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

	Quoted Prices
	In Active		Significant
	Markets for		Other		Significant
	Identical		Observable		Unobservable		Balance
(Dollars in thousands)	Assets		Inputs		Inputs		at Date
	(Level 1)		(Level 2)		(Level 3)		Indicated
Equity Securities Held at Fair Value - September 30, 2020
Equity securities	$	1,187	$	0	$	1,480	$	2,667

Investment Securities, Available for Sale - September 30, 2020
U. S. Government and federal agency	$	0	$	2,061	$	0	$	2,061
U. S. Treasury notes and bonds		0		2,065		0		2,065
State and municipal		0		258,237		10,313		268,550
Mortgage-backed		0		116,773		0		116,773
Corporate		0		2,889		0		2,889
Trust preferred securities		0		0		1,000		1,000
Total	$	0	$	382,025	$	11,313	$	393,338

Interest Rate Lock Commitments - September 30, 2020
Interest rate lock commitments	$	0	$	0	$	1,756	$	1,756

Equity Securities Held at Fair Value - December 31, 2019
Equity securities	$	1,379	$	0	$	1,472	$	2,851

Investment Securities, Available for Sale - December 31, 2019
U. S. Government and federal agency	$	0	$	17,215	$	0	$	17,215
U. S. Treasury notes and bonds		0		2,008		0		2,008
State and municipal		0		162,557		11,367		173,924
Mortgage-backed		0		142,760		0		142,760
Corporate		0		2,672		0		2,672
Trust preferred securities		0		0		1,000		1,000
Total	$	0	$	327,212	$	12,367	$	339,579

Interest Rate Lock Commitments - December 31, 2019
Interest rate lock commitments	$	0	$	0	$	68	$	68

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

	Nine months ended					Nine Months Ended
(Dollars in thousands)	September 30,					September 30,
	2019		2018			2020			2019
Equity Securities Held at Fair Value
Balance, January 1	$	886	$	—		$	1,472		$	886
Reclassification due to implementation of ASU 2016-01		—		1,000
Total realized and unrealized gains included in noninterest income		114		—			8			114
Net purchases, sales, calls, and maturities		—		—			0			0
Net transfers into Level 3		—		—			0			0
Balance, September 30	$	1,000	$	1,000		$	1,480		$	1,000

Investment Securities, Available for Sale
Balance, January 1	$	8,498	$	13,398		$	12,367		$	8,498
Reclassification due to implementation of ASU 2016-01		—		(1,000	)
Total unrealized gains (losses) included in other comprehensive income		350		(347	)
Total unrealized gains included in other comprehensive income							452			350
Net purchases, sales, calls, and maturities		1,429		(3,656	)		(1,506	)		1,429
Net transfers into Level 3		—		—			0			0
Balance, September 30	$	10,277	$	8,395		$	11,313		$	10,277

Of the available for sale Level 3 assets that were held by ChoiceOne at September 30, ~~2019,~~2020, the net unrealized gain as of September 30, ~~2019~~2020 was ~~$495,000,~~$826,000, which was recognized in accumulated other comprehensive income in the consolidated balance sheet. Of the equity securities classified as Level 3 assets that were 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 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 common and preferred equity securities of community banks. ChoiceOne estimates the fair value of these bonds and equity securities based on the present value of expected future cash flows using management’s best estimate of key assumptions, including forecasted interest yield and payment rates, credit quality and a discount rate commensurate with the current market and other risks involved.

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

Assets Measured at Fair Value on a Non-recurring Basis

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

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

			Quoted Prices
			In Active		Significant
			Markets for		Other		Significant
	Balances at		Identical		Observable		Unobservable
(Dollars in thousands)	Dates		Assets		Inputs		Inputs
	Indicated		(Level 1)		(Level 2)		(Level 3)
Impaired Loans
September 30, 2020	$	5,089	$	0	$	0	$	5,089
December 31, 2019	$	5,922	$	0	$	0	$	5,922

Other Real Estate
September 30, 2020	$	676	$	0	$	0	$	676
December 31, 2019	$	929	$	0	$	0	$	929

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

NOTE 7 – REVENUE FROM CONTRACTS WITH CUSTOMERS

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

Service Charges and Fees on Deposit Accounts

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

Interchange Income

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

Investment Commission Income

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

Trust Fee Income

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

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(Dollars in thousands)	2020		2019		2020		2019

Service charges and fees on deposit accounts	$	842	$	690	$	2,498	$	1,987
Interchange income		1,217		404		2,808		1,288
Investment commission income		123		72		384		177
Trust fee income		197		0		569		0
Other charges and fees for customer services		111		57		342		177
Noninterest income from contracts with customers within the scope of ASC 606		2,490		1,223		6,601		3,629
Noninterest income within the scope of other GAAP topics		3,835		712		10,408		2,092
Total noninterest income	$	6,326	$	1,935	$	17,009	$	5,721

Three months ended Nine months ended
September 30, September 30,
(Dollars in thousands) 2019 2018 2019 2018

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

NOTE 8 – BUSINESS COMBINATION

~~NOTE 8 – BUSINESS COMBINATION~~Community Shores Bank Corporation

ChoiceOne completed the acquisition of Community Shores Bank Corporation (“Community Shores”) with and into ChoiceOne, with ChoiceOne as the surviving entity, effective on July 1, 2020. Community Shores had 4 branch offices as of the date of the merger. Total assets of Community Shores as of July 1,2020 were $244 million, including total loans of $174 million. Deposits acquired in the merger, the majority of which were core deposits, totaled $228 million. The impact of the merger has been included in ChoiceOne’s results of operations since the effective date of the merger. As consideration in the merger, ChoiceOne issued 524,139 shares of ChoiceOne common stock, which was net of 84 fractional shares not issued, and cash in the amount of $5,390,000 with an approximate total value of $20.9 million. The initial accounting for the business combination has been determined provisionally for the fair value of certain assets and liabilities, including loans, core deposit intangible, and deferred taxes. Management expects to finalize calculations supporting the fair value of these assets and liabilities during the measurement period.

~~On October 1, 2019,~~ The table below presents the allocation of purchase price for the merger with Community Shores (dollars in thousands):

*Purchase Price*

Consideration	$	20,881

*Net assets acquired:*
Cash and cash equivalents		41,023
Securities available for sale		20,023
Federal Home Loan Bank and Federal Reserve Bank stock		300
Originated loans		173,974
Premises and equipment		6,204
Other real estate owned		346
Deposit based intangible		760
Other assets		1,345
Total assets		243,975

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

Net assets acquired		12,968

Goodwill	$	7,913

County Bank Corp

ChoiceOne completed the merger of County Bank Corp (“County”)~~, the holding company for Lakestone Bank and Trust,~~ with and into ChoiceOne ~~pursuant to an Agreement~~effective on October 1, 2019. County had 14 branch offices and ~~Plan of Merger dated March 22, 2019. Subject to the terms and conditions~~1 loan production office as of the ~~Merger Agreement, at~~date of the merger. Total assets of County as of October 1, 2019 were $673 million, including total loans of $424 million. Deposits acquired in the merger, the majority of which were core deposits, totaled $574 million. The impact of the merger has been included in ChoiceOne’s results of operations since the effective ~~time~~date of the ~~Merger, each share of County common stock was converted into~~merger. As consideration in the ~~right to receive 2.0632 shares of~~merger, ChoiceOne ~~common stock plus cash in lieu of any fractional shares. As a result of the Merger, a total of~~issued 3,603,872 shares of ChoiceOne common stock, ~~were identified that would be~~which was net of 299 fractional shares not issued, ~~to County shareholders.~~ with an approximate value of $108 million.

The ~~consolidated financial statements as~~table below presents the allocation of and for the nine months ended September 30, 2019 do not include financial results for County. As of the merger date, County had total assets of approximately $673 million, total loans of approximately $428 million, and total deposits of approximately $574 million. The initial accountingpurchase price for the merger ~~is not yet complete.~~with County (dollars in thousands):

Purchase Price

Consideration	$	107,945

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

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

Net assets acquired		69,079

Goodwill	$	38,866

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

The following discussion is designed to provide a review of the consolidated financial condition and results of operations of ChoiceOne Financial Services, Inc. (“ChoiceOne”) ~~and~~, its wholly-owned ~~subsidiary,~~subsidiaries ChoiceOne Bank ~~(the “Bank”),~~ and ~~the~~Community Shores Bank, and ChoiceOne Bank’s wholly-owned ~~subsidiary,~~subsidiaries, ChoiceOne Insurance Agencies, Inc. and Lakestone Financial Services, Inc., and Community Shores’ wholly-owned subsidiary, Community Shores Financial Services, Inc.. Community Shores Bank was consolidated with and into ChoiceOne Bank effective October 16, 2020. 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.~~ChoiceOne. Words such as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “intends,” “is likely,” “plans,” “predicts,” “projects,” “may,” “could,” “look forward,” “continue”, “future”, and variations of such words and similar expressions are intended to identify such forward-looking statements. Management’s determination of the provision and allowance for loan losses, the carrying value of goodwill, loan servicing rights, other real estate owned, and the fair value of investment securities (including whether any impairment on any investment security is temporary or other-than-temporary and the amount of any impairment) and management’s assumptions concerning pension and other postretirement benefit plans involve judgments that are inherently forward-looking. Examples of forward-looking statements also include, but are not limited to, statements related to risks and uncertainties related to, and the impact of, the global coronavirus (COVID-19) pandemic on the businesses, financial condition and results of operations of ChoiceOne and its customers and statements regarding the outlook and expectations of ChoiceOne and its customers. The COVID-19 pandemic is adversely affecting ChoiceOne and its customers, counterparties, employees, and third-party service providers. The ultimate extent of the impacts on ChoiceOne's business, financial position, results of operations, liquidity, and prospects is uncertain. 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.

~~Risk~~Additional risk factors include, but are not limited to, the risk factors discussed in Item 1A of ChoiceOne’s Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019 and in Part II, Item 1A of this Quarterly Report on Form 10-Q and the Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020. 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 third quarter of ~~2019~~2020 was ~~$1,021,000,~~$3,829,000, which represented ~~a decrease~~an increase of ~~$993,000~~$2,808,000 or ~~49%~~275% compared to the ~~same~~third quarter period in ~~2018.~~2019. Net income for the first nine months of ~~2019~~2020 was ~~$4,144,000,~~$11,513,000, which represented ~~a decrease~~an increase of ~~$1,361,000~~$7,369,000 or ~~25%~~178% 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 in the first three quarters of 20192020 compared to the same period in the prior ~~year.~~year primarily resulted from the impact of the merger with County Bank Corp. ("County") that was effective on October 1, 2019 and the impact of the merger with Community Shores Bank Corporation ("Community Shores") that was effective on July 1, 2020. Noninterest expense ~~for~~was impacted by $2,526,000 and $1,351,000 of costs related to the merger with County and the merger with Community Shores in the first nine months of 2020 and 2019, was impacted by $1.4 million of expense related to the merger of County Bank Corp (“County”) with and into ChoiceOne, completed on October 1, 2019. The federal income tax effect of the merger expenses for the first nine months of 2019 is estimated to be $157,000 as only a portion of the expenses are expected to be tax deductible.respectively. Net income, adjusted to exclude tax-effected ~~merger~~merger-related expenses, would have been $13,680,000 in the first nine months of ~~$1,194,000 was~~2020 compared to $5,338,000 in the first nine months of 2019.

Basic and diluted earnings per common share were ~~$0.28~~$0.49 for the third quarter and ~~$1.14~~$1.55 for the first nine months of ~~2019,~~2020 compared to ~~$0.55~~$0.28 and $1.14, respectively, for the ~~third quarter~~same periods in 2019. Basic and ~~$1.52 for the first three quarters of the prior year. Diluted~~diluted earnings per common share, adjusted to exclude the tax-effected ~~merger~~merger-related expenses, would have been ~~$0.45 in the third quarter and $1.46~~$1.84 in the first nine months of ~~2019. Earnings~~2020 compared to adjusted basic and diluted earnings per common share ~~for 2018 was adjusted for~~of $1.47 and $1.46 respectively, in the ~~5% stock dividend paid in May 2018.~~first nine months of the prior year. The return on average assets and return on average shareholders’ equity percentages were ~~0.83%~~0.87% and ~~6.62%~~7.50%, respectively, for the first nine months of ~~2019,~~2020, compared to ~~1.16%~~0.83% and ~~9.63%~~6.62%, respectively, for the same period in ~~2018.~~2019.

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

~~Business Combination~~Acquisition of Community Shores Bank Corporation

~~On October 1, 2019,~~ ChoiceOne completed the ~~merger~~acquisition of ~~County, the holding company for Lakestone~~Community Shores Bank ~~and Trust,~~Corporation (“Community Shores”) with and into ChoiceOne ~~pursuant to an Agreement and Plan of Merger dated March 22, 2019. Subject to the terms and conditions~~effective on July 1, 2020. Community Shores had 4 branch offices as of the ~~Merger Agreement, at~~date of the acquisition. Total assets of Community Shores as of July 1, 2020 were $244 million, including total loans of $174 million. Deposits acquired in the merger, the majority of which were core deposits, totaled $228 million. The impact of the merger has been included in ChoiceOne’s results of operations since the effective ~~time~~date of the ~~Merger, each share of County common stock was converted into~~merger. As consideration in the ~~right to receive 2.0632~~merger, ChoiceOne issued 524,139 shares of ChoiceOne common stock, ~~plus~~which was net of 84 fractional shares not issued, and cash in ~~lieu~~the amount of ~~any fractional shares.~~$5,390,000 with an approximate total value of $20.9 million. The ~~consolidated financial statements as~~consolidation of Community Shores Bank with and into ChoiceOne Bank was completed on October 16, 2020.

The Coronavirus (COVID-19) Outbreak

The coronavirus outbreak (COVID-19) was declared a pandemic by the World Health Organization in March 2020. Since first being reported in China, the coronavirus has spread globally, including in the United States. The coronavirus has had a substantial impact on numerous aspects of life in the United States, including threats to public health, increased volatility in markets, and severe effects on national and local economies.

COVID-19 has already had numerous effects on ChoiceOne. To protect the health of customers, employees, and others in its communities, ChoiceOne closed the lobbies of its branches from late March 2020 to mid-June 2020. During the period that lobbies were closed, ChoiceOne continued to provide its full scope of services to its customers through drive-up branch service, in-person meetings by appointment, and mobile banking.

COVID-19 has also affected ChoiceOne's customers. Although there were no material increases in delinquencies or net charge-offs in the third quarter of 2020, ChoiceOne increased its provision for loan losses to $1,225,000 in anticipation of an expected increase in levels of delinquencies and loan losses related to the impact of COVID-19. Consistent with federal banking agencies' “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus,” ChoiceOne is working with its borrowers affected by COVID-19 and has granted approximately 750 payment deferrals on numerous loans to borrowers affected by the pandemic. Following the initial 90 day deferment period, ChoiceOne offered a second round of deferment in accordance with the CARES act; however, significantly fewer customers requested further deferment. Less than 50 deferments remained active with loan balances totaling just $10.3 million at September 30, 2020 with all other previous deferments resuming their payments in accordance with loan terms. ChoiceOne will continue to attempt to assist borrowers using various means through the remainder of 2020.

In addition, ChoiceOne processed over $126 million in Paycheck Protection Program ("PPP") loans through September 30, 2020 and acquired an additional $37 million in PPP loans in the merger with Community Shores. PPP loans are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP. PPP loans carry a fixed rate of 1.00% and a term of two years (loans made before June 5, 2020) or five years (loans made on or after June 5, 2020), if not forgiven in whole or in part. Payments are deferred until either the date on which the Small Business Administration ("SBA") remits the amount of forgiveness proceeds to the lender or the date that is ten months after the last day of the covered period if the borrower does not apply for forgiveness within that ten-month period. The loans are 100% guaranteed by the SBA. The SBA pays the originating bank a processing fee ranging from 1% to 5%, based on the size of the loan. The PPP expired on August 8, 2020. Gross fees associated with PPP loans originated through September 30, 2020 totaled $4.7 million. Costs associated with these loans were approximately $0.2 million and the net of $4.5 million is being recognized over the term of the loans. Upon the SBA forgiveness, unrecognized fees are then recognized into interest income. Fee income, which was included in interest income, recognized in the three months and nine months ended September 30, ~~2019 do not include financial results for County.~~2020 was $1.0 million and $1.8 million, respectively.

Dividends

Cash dividends of ~~$2,906,000~~$1,558,000 or ~~$0.80~~$0.20 per share were declared in the third quarter of ~~2019,~~2020, compared to ~~$651,000~~$2,906,000 or ~~$0.18~~$0.80 per share declared in the third quarter of ~~2018.~~2019. Cash dividends declared in the first nine months of ~~2019~~2020 were $4,459,000 or $0.60 per share, compared to $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~~of the ~~first nine months of 2018 was adjusted for the 5% stock dividend paid in May 2018. Cash~~cash dividends declared in the third quarter and first nine months of 2019 included athe special cash dividend of $2,180,000 or $0.60 per share declared and paid in the third quarter of 2019 in connection with the merger of County with and into ChoiceOne. The cash dividend payout percentage was ~~105%~~39% for the first nine months of ~~2019, compared to 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%.~~2020.

Interest Income and Expense

Tables 1 and 2 on the following pages provide information regarding interest income and expense for the ~~three month~~three- and ~~nine month~~nine-month periods ended September 30, ~~2019~~2020 and ~~2018.~~2019. Table 1 documents ChoiceOne’s average balances and interest income and expense, as well as the average rates earned or paid on assets and liabilities. Table 2 documents the effect on interest income and expense of changes in volume (average balance) and interest rates. These tables are referred to in the discussion of interest income, interest expense and net interest income.

Table 1 – Average Balances and Tax-Equivalent Interest Rates

Three Months Ended September 30,
2019 2018
(Dollars in thousands) Average Average
Balance Interest Rate Balance Interest Rate
Assets:
Loans (1) $ 429,448 $ 5,396 5.03 % $ 407,157 $ 5,111 5.02 %
Taxable securities (2) (3) 107,689 728 2.70 115,662 736 2.55
Nontaxable securities (1) (2) 53,581 447 3.33 56,823 475 3.34
Other 17,471 87 2.00 8,639 40 1.85
Interest-earning assets 608,189 6,658 4.38 588,281 6,362 4.33
Noninterest-earning assets 64,757 55,738
Total assets $ 672,946 $ 644,019

Liabilities and Shareholders’ Equity:
Interest-bearing demand deposits $ 217,717 274 0.50 % $ 214,629 190 0.35 %
Savings deposits 75,471 12 0.06 75,091 4 0.02
Certificates of deposit 131,989 687 2.08 115,409 425 1.48
Advances from Federal Home Loan Bank 1,027 8 3.02 11,095 63 2.27
Other 1,360 10 3.05 1,521 8 2.10
Interest-bearing liabilities 427,564 991 0.93 417,745 690 0.66
Noninterest-bearing demand deposits 157,182 147,863
Other noninterest-bearing liabilities 2,812 1,522
Total liabilities 587,558 567,130
Shareholders’ equity 85,388 76,889
Total liabilities and shareholders’ equity $ 672,946 $ 644,019

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) (1) $ 5,667 $ 5,672
Adjustment for taxable equivalent interest (97 ) (101 )
Net interest income (GAAP) $ 5,570 $ 5,571

Net interest margin (GAAP) 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 %

	Three Months Ended September 30,
	2020								2019
(Dollars in thousands)	Average								Average
	Balance		Interest			Rate			Balance		Interest			Rate
Assets:
Loans (1)	$	1,139,634	$	13,052			4.58	%	$	429,448	$	5,396			5.03	%
Taxable securities (2)		214,382		1,149			2.14			107,689		728			2.70
Nontaxable securities (1)		158,982		1,159			2.92			53,581		447			3.33
Other		125,991		40			0.13			17,471		87			2.00
Interest-earning assets		1,638,989		15,400			3.76			608,189		6,658			4.38
Noninterest-earning assets		200,062								64,757
Total assets	$	1,839,051							$	672,946

Liabilities and Shareholders' Equity:
Interest-bearing demand deposits	$	626,920	$	428			0.27	%	$	217,717	$	274			0.50	%
Savings deposits		306,198		116			0.15			75,471		12			0.06
Certificates of deposit		194,967		402			0.83			131,989		687			2.08
Advances from Federal Home Loan Bank		176		1			2.42			1,027		8			3.02
Other		13,064		142			4.34			1,360		10			3.05
Interest-bearing liabilities		1,141,325		1,089			0.38			427,564		991			0.93
Demand deposits		467,709								157,182
Other noninterest-bearing liabilities		7,415								2,812
Total liabilities		1,616,449								587,558
Shareholders' equity		222,602								85,388
Total liabilities and shareholders' equity	$	1,839,051							$	672,946

Net interest income (tax-equivalent basis) (Non-GAAP) (1)			$	14,311							$	5,667

Net interest margin (tax-equivalent basis) (Non-GAAP) (1)							3.38	%							3.46	%

Reconciliation to Reported Net Interest Income
Net interest income (tax-equivalent basis) (Non-GAAP) (1)			$	14,311							$	5,667
Adjustment for taxable equivalent interest				(249	)							(97	)
Net interest income (GAAP)			$	14,062							$	5,570
Net interest margin (GAAP)							3.49	%							3.66	%

	(1)	Adjusted to a fully tax-equivalent basis to facilitate comparison to the taxable interest-earning assets. The adjustment uses an incremental tax rate of 21%. The presentation of these measures on a tax-equivalent basis is not in accordance with GAAP, but is customary in the banking industry. These non-GAAP measures ensure comparability with respect to both taxable and tax-exempt loans and securities.
	(2)	~~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,
	2020								2019
(Dollars in thousands)	Average								Average
	Balance		Interest			Rate			Balance			Interest			Rate
Assets:
Loans (1)	$	973,334	$	34,125			4.67	%	$	426,444		$	16,072			5.03	%
Taxable securities (2)		267,577		4,563			2.27			114,004			2,255			2.64
Nontaxable securities (1)		97,076		2,231			3.06			54,356			1,368			3.36
Other		69,061		241			0.46			11,551			194			2.24
Interest-earning assets		1,407,048		41,160			3.90			606,355			19,889			4.37
Noninterest-earning assets		349,281								61,710
Total assets	$	1,756,329							$	668,065

Liabilities and Shareholders' Equity:											��
Interest-bearing demand deposits	$	550,385	$	1,409			0.34	%	$	213,295		$	809			0.51	%
Savings deposits		247,485		181			0.10			74,760			31			0.06
Certificates of deposit		180,762		1,639			1.21			128,077			1,908			1.99
Advances from Federal Home Loan Bank		12,316		218			2.36			11,576			238			2.74
Other		11,652		149			1.70			1,797			39			2.92
Interest-bearing liabilities		1,002,600		3,596			0.48			429,505			3,025			0.94
Demand deposits		370,032								153,097
Other noninterest-bearing liabilities		179,033								1,963
Total liabilities		1,551,665								584,565
Shareholders' equity		204,664								83,500
Total liabilities and shareholders' equity	$	1,756,329							$	668,065

Net interest income (tax-equivalent basis) (Non-GAAP) (1)			$	37,564								$	16,864

Net interest margin (tax-equivalent basis) (Non-GAAP) (1)							3.42	%								3.43	%

Reconciliation to Reported Net Interest Income
Net interest income (tax-equivalent basis) (Non-GAAP) (1)			$	37,564								$	16,864
Adjustment for taxable equivalent interest				(485	)								(297	)
Net interest income (GAAP)			$	37,079								$	16,567
Net interest margin (GAAP)							3.56	%								3.64	%

	(1)	Adjusted to a fully tax-equivalent basis to facilitate comparison to the taxable interest-earning assets. The adjustment uses an incremental tax rate of 21%. The presentation of these measures on a tax-equivalent basis is not in accordance with GAAP, but is customary in the banking industry. These non-GAAP measures ensure comparability with respect to both taxable and tax-exempt loans and securities.
	(2)	Taxable securities include dividend income from Federal Home Loan Bank and Federal Reserve Bank stock.

Table 2 – Changes in Tax-Equivalent Net Interest Income

Three Months Ended September 30,
(Dollars in thousands) 2019 Over 2018
Total Volume Rate
Increase (decrease) in interest income (1)
Loans (2) $ 285 $ 280 $ 5
Taxable securities (8 ) (197 ) 189
Nontaxable securities (2) (28 ) (27 ) (1 )
Other 47 44 3
Net change in tax-equivalent interest income 296 100 196

Increase (decrease) in interest expense (1)
Interest-bearing demand deposits 84 3 81
Savings deposits 8 — 8
Certificates of deposit 261 68 193
Advances from Federal Home Loan Bank (55 ) (162 ) 107
Other 2 (5 ) 7
Net change in interest expense 300 (96 ) 396

Net change in tax-equivalent net interest income $ (4 ) $ 196 $ (200 )

	Three Months Ended September 30,
(Dollars in thousands)	2020 Over 2019
	Total			Volume			Rate
Increase (decrease) in interest income (1)
Loans (2)	$	7,656		$	10,922		$	(3,266	)
Taxable securities		421			1,339			(918	)
Nontaxable securities (2)		712			1,087			(375	)
Other		(47	)		528			(575	)
Net change in interest income		8,742			13,876			(5,134	)

Increase (decrease) in interest expense (1)
Interest-bearing demand deposits		154			920			(766	)
Savings deposits		104			69			35
Certificates of deposit		(285	)		1,337			(1,622	)
Advances from Federal Home Loan Bank		(7	)		(6	)		(1	)
Other		132			125			7
Net change in interest expense		98			2,445			(2,347	)
Net change in tax-equivalent net interest income	$	8,644		$	11,431		$	(2,787	)

	Nine Months Ended September 30,
(Dollars in thousands)	2020 Over 2019
	Total			Volume		Rate
Increase (decrease) in interest income (1)
Loans (2)	$	18,053		$	19,983	$	(1,930	)
Taxable securities		2,308			2,849		(541	)
Nontaxable securities (2)		863			1,065		(202	)
Other		47			396		(349	)
Net change in interest income		21,271			24,293		(3,023	)

Increase (decrease) in interest expense (1)
Interest-bearing demand deposits		600			1,091		(491	)
Savings deposits		150			118		32
Certificates of deposit		(269	)		886		(1,155	)
Advances from Federal Home Loan Bank		(20	)		21		(41	)
Other		110			143		(33	)
Net change in interest expense		571			2,259		(1,688	)
Net change in tax-equivalent net interest income	$	20,700		$	22,034	$	(1,334	)

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 ~~$119,000~~$20.7 million in the first nine months of 2020 compared to the same period in 2019 primarily due to the impact of the merger with County that was effective on October 1, 2019 and the merger with Community Shores that was effective July 1, 2020, partially offset by a reduction in ChoiceOne’s net interest margin. Net interest margin on a tax-equivalent basis declined by 1 basis point from 3.43% in the first nine months of 2019 ~~compared~~ to the same period in 2018. The benefit from growth in average interest-earning assets was mostly offset by a decline in the net interest spread in 2019 compared to 2018. The net interest spread on a tax-equivalent basis declined by 29 basis points from 3.72% in the first nine months of 2018 to 3.43%3.42% in the same period in ~~2019, which had a $702,000 negative impact on tax-equivalent net interest~~2020. Interest income was aided in the ~~first~~ nine months ended September 30, 2020 by $1.8 million of ~~2019 compared to~~loan fees recognized from loans originated under the ~~same period in the prior year.~~Paycheck Protection Program.

The average balance of loans increased ~~$26.7~~$546.9 million in the first nine months of ~~2019~~2020 compared to the same period in ~~2018. Loans~~2019, the majority of which was due to the impact of the mergers with County and Community Shores. The average balance in all loan categories, including loans to other financial institutions, ~~provided $16.6 million~~were higher in 2020 than in 2019 as a result of the growth. Average residential real estate loans increased $7.8 million, while average commercial and industrial loans and commercial real estate loans were $2.2 million higher in the first nine months of 2019 than the first nine months of the prior year.mergers. The increase in the average loans balance was ~~bolstered~~partially offset by ~~an 11~~a 36 basis ~~point increase~~points decline in the average rate earned. ~~This~~Part of the decrease was caused by short-term market interest rates which were reduced 150 basis points by the Federal Open Market Committee in March 2020. The combination of these factors caused tax-equivalent interest income from loans to increase ~~$1.3~~$18.1 million in the first ~~three quarters~~nine months of ~~2019~~2020 compared to the same period in the prior year. The average balance of total securities ~~decreased $1.0~~increased $196.3 million in the first nine months of ~~2019~~2020 compared to the same period in ~~2018.~~2019. The increase in the securities portfolio resulted primarily from the mergers with County and Community Shores. The effect of the average balance ~~decline,~~growth, partially offset by a 9combined 38 basis point ~~increase~~reduction in the average rate earned on securities, caused tax-equivalent securities income to increase ~~$97,000 in the first nine months of 2019 compared to the same period in 2018.~~

~~The average balance of interest-bearing demand deposits increased $3.4~~$3.2 million in the first nine months of ~~2019~~2020 compared to the same quarter in 2019. Growth in other interest-earning assets as a result of the mergers with County and Community Shores caused interest income to grow $47,000 in the first nine months of 2020 compared to the same period in ~~2018.~~ the prior year.

The ~~growth plus~~average balance in all interest-bearing liabilities categories were higher in the ~~impact~~third quarter and first nine months of ~~an increase~~2020 compared to the same periods in 2019 as a result of 23the mergers with County and Community Shores. Growth of $337.1 million in the average balance of interest-bearing demand deposits, partially offset by a 17 basis ~~points~~point decrease in the average rate paid, ~~on interest-bearing demand deposits~~ caused interest expense to ~~increase $367,000~~be $600,000 higher in the first nine months of ~~2019~~2020 compared to the ~~same period in 2018.~~first nine months of the prior year. The average balance of certificates of deposit was up ~~$22.3~~$52.7 million in the first nine months of ~~2019~~2020 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~~was overshadowed by a reduction of deposit plus a 76 basis point increase in the average rate paid on certificates caused interest expense to increase $933,000 in the first nine months of 2019 compared to the same period in 2018. The impact of a 90 basis point increase in the average rate paid on Federal Home Loan Bank advances caused interest expense to increase $73,000 in the first nine months of 2019 compared to the first nine months of 2018.

ChoiceOne’s net interest income spread on a tax-equivalent basis was 3.43% in the first nine months of 2019, compared to 3.72% for the same period in 2018. The decline in the interest spread was due to an increase of 4178 basis points in the average rate paid on ~~interest-bearing liabilities,~~certificates which ~~was partially offset by growth of 12 basis points in the average rate earned on~~caused interest earning assets. Increases in short-term interest rates that began in 2018 and continued in early 2019 was the primary factor for the higher average rates 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 interest rates that could be obtained on new loan originationsexpense to ~~be less than the increase in rates necessary to retain local deposits and to grow wholesale funding.~~

~~Provision and Allowance for Loan Losses~~

~~Total loans decreased $2.3 million~~decrease $269,000 in the first nine months of ~~2019, while~~2020 compared to the ~~allowance~~same period in 2019.

Provision and Allowance for Loan Losses

The provision for loan losses ~~decreased $577,000 during~~was $1,225,000 in the ~~same period. No provision expense was recorded~~third quarter and $3,000,000 in the first nine months of ~~2019~~2020, compared to $0 in both periods in the prior year. The provision in the third quarter and first nine months of 2020 was deemed prudent due to growth in ChoiceOne’s loan portfolio and the ~~small decline~~economic impact on ChoiceOne's local market areas and the national economy resulting from the COVID-19 pandemic. While it is difficult to predict the impact that COVID-19 will have in future quarters, ChoiceOne estimates these losses have been incurred as of September 30, 2020, and expects increased levels of past due loans, ~~that occurred since the end of 2018.~~nonperforming loans and loan losses may occur. Nonperforming loans were $7.0 million as of September 30, 2020, compared to $6.4 million as of December 31, 2019, and $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 was due to a $670,000 charge-off of a portion of a large loan relationship. A specific reserve had been allocated to this relationship in the second quarter of 2019. The allowance for loan losses was ~~1.01%~~0.62% of total loans at September 30, ~~2019,~~2020, compared to ~~1.21% at June 30, 2019 and 1.14%~~0.51% at December 31, ~~2018.~~2019 and 1.01% at September 30, 2019. Loans acquired in the mergers with County and Community Shores were recorded at fair value and as a result do not have an allowance for loan losses allocated to them unless credit deteriorates subsequent to acquisition. If the credit mark associated with the loans acquired in the mergers were added to the allowance for loan losses, the total would have represented 1.52% of total loans at September 30, 2020.

Charge-offs and recoveries for respective loan categories for the nine months ended September 30, 2020 and 2019 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)	2020				2019
	Charge-offs		Recoveries		Charge-offs		Recoveries
Agricultural	$	-	$	-	$	-	$	65
Commercial and industrial		46		2		83		21
Consumer		242		156		222		113
Commercial real estate		255		4		589		22
Construction real estate		-		-		-		-
Residential real estate		8		17		25		121
	$	551	$	179	$	919	$	342

Net charge-offs were $290,000 in the third quarter and $372,000 in the first nine months of 2020, compared to net charge-offs of $705,000 and $577,000 ~~were recorded in the third quarter and first nine months of 2019, respectively, compared to net charge-offs of $37,000 and net recoveries of $10,000~~ during the same time periods in ~~2018, respectively.~~2019. Net charge-offs on an annualized basis as a percentage of average loans were ~~0.18%~~0.05% in the first nine months of ~~2019 and 0.00% for~~2020 compared to annualized net charge-offs of 0.18% of average loans in the same period in the prior year. Management is aware that the economic climate in Michigan will continue to affect business and individual borrowers. Management believes that COVID-19 will also have a significant impact in the remainder of 2020 and beyond. Management has worked and intends to continue to work with delinquent borrowers in an attempt to lessen the negative impact of COVID-19 on ChoiceOne. ChoiceOne offered an initial 90-day deferment beginning in March 2020 to ~~ChoiceOne.~~both commercial and retail borrowers where the borrower could defer either the principal portion of their payment or both the principal and interest portions. Management processed approximately 750 payment deferrals with loan balances totaling $148 million for commercial and retail borrowers through September 30, 2020. Following the initial 90 day deferment period, ChoiceOne offered a second round of deferments in accordance with the CARES act; however, significantly fewer customers requested further deferment. Less than 50 deferments remained active with loan balances totaling just $10.3 million at September 30, 2020 with all other previous deferments resuming their payment in accordance with loan terms. ChoiceOne will continue to attempt to assist borrowers using various means through the remainder of 2020.

ChoiceOne has allocated approximately $1.4 million in the allowance for loan losses to borrowers falling into industry classification codes that management believes to be highly or moderately affected by the pandemic and from which a higher concentration of deferral requests have been received during the past nine months. ChoiceOne understands that a deferral request does not automatically mean a borrower is at a risk of loss, but assumes this to be a possible indicator.

The following chart indicates industries management believes to be moderately or highly effected by the pandemic:

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

All loans which have requested a second deferment have an additional 300 basis points of allowance allocated to them. Loans highly affected and moderately affected based on their commercial industry category have allocated to them an additional 25 basis points and 15 basis points, respectively. ChoiceOne has also allocated 15 basis points to all retail loan categories. It is noted that this allowance amount is in addition to the regularly calculated allowance based on risk rating and qualitative factors. ChoiceOne will continue to monitor concentrations as part of its analysis on an ongoing basis. As charge-offs, changes in the level of nonperforming loans, and changes within the composition of the loan portfolio occur ~~throughout 2019,~~in the future and the impact of COVID-19 becomes more apparent, the provision and allowance for loan losses will be reviewed by ~~the Bank’s~~ChoiceOne's management and adjusted as determined to be necessary.

Noninterest Income

Total noninterest income increased ~~$83,000~~$4.4 million in the third quarter and ~~$500,000~~$11.3 million in the first nine months of ~~2019~~2020 compared to the same periods in ~~2018. As a result~~2019. Growth in many of the income categories resulted from the merger with County that was effective on October 1, 2019 and the merger with Community Shores that was effective on July 1, 2020. Gains on sales of loans were also impacted by lower ~~long-term~~ interest rates for residential real estate loans in 2020 than in 2019, which caused loan refinancing origination activity to grow significantly. The increase in net gains on sales of ~~loans increased $415,000~~securities in 2020 compared to 2019 was caused by a restructuring of ChoiceOne's securities portfolio in the ~~third~~second quarter ~~and $601,000 in~~of 2020 to take advantage of the ~~first three quarters~~low market interest rates. Trust income was a result of ~~2019 compared to~~activity from trust services added from the ~~same periods in the prior year.~~merger with County. The negative change in the market value of equity securities in the ~~third quarter~~first three quarters of ~~2019~~2020 compared to athe positive change in the ~~third quarter of 2018 represented a reversal of market value appreciation that occurred~~same period in the ~~first two quarters~~prior year was due primarily to the effect of ~~2019.~~the COVID-19 pandemic on equity market values in 2020.

Noninterest Expense

Total noninterest expense increased ~~$1.3~~$8.2 million in the third quarter and ~~$2.3~~$19.6 million in the first nine months of ~~2019~~2020 compared to the same periods in ~~2018. Growth in professional fees~~2019. All expense categories grew as a result of ~~$526,000~~the merger with County that was effective on October 1, 2019 and ~~$1.2 million~~the merger with Community Shores that was effective on July 1, 2020. The mergers' impacts on salaries and benefits expense was partially offset by retirements and certain other staffing reductions. Salaries and benefits included a higher level of commission expense in the third quarter and first nine months of ~~2019, respectively, was primarily due~~2020 compared to the ~~merger~~same periods in the prior year as a result of the significant increase in residential mortgage loan originations in 2020. Data processing expense for the first nine months of 2020 included costs related to the consolidation of the core processing systems of ChoiceOne Bank and Lakestone Bank & Trust which occurred in the second quarter of 2020. Merger-related expenses in 2020 and 2019 consisted primarily of professional fees related to the mergers with County ~~with~~ and ~~into ChoiceOne. Part of~~Community Shores, which contributed to the increase in ~~data processing expenses in 2019 compared to 2018 was also related to the merger. ChoiceOne’s two new offices contributed to the growth in salaries and benefits and occupancy and equipment~~ expense ~~in 2019 compared to 2018.~~

~~Income Tax Expense~~

~~Income tax expense was $671,000~~ in the first nine months of ~~2019~~2020 compared to ~~$992,000~~the same period in the prior year. The intangible amortization expense in 2020 represented the amortization of the core deposit intangible that resulted from the mergers with County and Community Shores.

Income Tax Expense

Income tax expense was $2,460,000 in the first nine months of 2020 compared to $671,000 for the same period in ~~2018.~~2019. The increase was due to a higher level of income before income tax. The effective tax rate was 17.6% for the first nine months of 2020 and 13.9% for the first nine months of ~~2019 and 15.3% for~~2019. The higher effective tax rate in the first nine months of ~~2018.~~2020 was primarily due to tax-exempt interest income comprising a smaller percentage of total interest income in 2020 than in same period in the prior year.

FINANCIAL CONDITION

~~FINANCIAL CONDITION~~

Securities

The securities available for sale portfolio ~~decreased $11.8~~increased $53.8 million from December 31, ~~2018~~2019 to September 30, ~~2019. Due to current market rates available for~~2020. The increase in the securities ~~management limited securities~~portfolio primarily resulted from purchases in ~~the first three quarters~~2020 in excess of ~~2019.~~sales and maturities. Various securities totaling ~~$13.9~~$183.1 million were purchased in the first nine months of ~~2019 and~~2020. Purchases were offset by approximately ~~$26.1~~$121.9 million of securities sold and $25.3 million of securities called or matured during that same time period. Principal repayments on securities totaled ~~$3.4~~$12.3 million in the first 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 available2020.

Loans

Loans held 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~~

~~The balance of loans to other financial institutions was $9.3~~were $32.7 million higher at September 30, ~~2019~~2020 than at December 31, ~~2018. The increase resulted from more~~2019. This was caused by a heightened level of refinancing activity of residential mortgage loans due to the low market interest rates that have existed in ~~this loan program during~~ the ~~first three quarters~~majority of ~~2019.~~2020. Loans excluding loans held for sale and loans to other financial institutions ~~declined $2.3~~grew $276.7 million from December 31, ~~2018~~2019 to September 30, ~~2019. Decreases~~2020. A total of ~~$9.9~~$174.0 million ~~and $0.6~~of loans were obtained from the merger with Community Shores. Excluding the loans acquired from the Community Shores merger, growth of $96.2 million in commercial and industrial loans, ~~and residential real estate loans, respectively, were partially offset by growth of $4.9~~$45.7 million in commercial ~~real estate loans, $2.3 million in construction~~ real estate loans, and $0.9 million in construction real estate loans was offset by declines of $30.1 million, $5.6 million, and $3.8 million in residential real estate loans, consumer loans, and agricultural ~~loans.~~loans, respectively. The increase in commercial and industrial loans resulted from the origination of over 1,000 Paycheck Protection Program loans by ChoiceOne Bank in the second and third quarters of 2020, the balance of which was $126.1 million as of September 30, 2020. The decline in the balance of residential real estate loans in the first nine months of 2020 was caused by loans held in ChoiceOne's portfolio that were refinanced and sold into the secondary market. The other changes resulted from normal fluctuations in borrower activity.

Asset Quality

Information regarding impaired loans can be found in Note 3 to the consolidated financial statements included in this report. The total balance of loans classified as impaired was ~~$5.7~~$5.1 million at September 30, ~~2019,~~2020, compared to ~~$6.4~~$5.3 million as of June 30, ~~2019~~2020 and ~~$4.0~~$5.9 million as of December 31, ~~2018.~~2019. The change ~~from~~in the ~~end~~first nine months of ~~2018 to June 30, 2019~~2020 was primarily comprised of a ~~single relationship that was placed~~decrease of $545,000 in ~~nonaccrual status~~impaired agricultural loans in the ~~second~~first 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.~~2020.

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.~~restructurings ("TDRs").

The balances of these nonperforming loans were as follows:

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

(Dollars in thousands)	September 30,		December 31,
	2020		2019
Loans accounted for on a nonaccrual basis	$	5,081	$	4,687
Accruing loans which are contractually past due 90 days or more as to principal or interest payments		157		-
Loans defined as "troubled debt restructurings " which are not included above		1,790		1,726
Total	$	7,028	$	6,413

~~At September 30, 2019,~~The increase in the nonaccrual loans ~~included $389,000~~balance in ~~agricultural loans, $279,000~~the first nine months of 2020 was primarily due to a $1,001,000 increase in ~~commercial and industrial loans, $7,000 in consumer loans, $1.9 million in~~nonaccrual commercial real estate loans, ~~and $973,000~~which was partially offset by a $556,000 reduction 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 51% of the balance of loans considered ~~troubled debt restructurings~~TDRs were performing according to their restructured terms as of September 30, ~~2019.~~2020. Management believes the allowance for loan losses allocated to its nonperforming loans iswas sufficient at September 30, ~~2019.~~2020.

The provision for loan losses was $1,225,000 in the third quarter and $3,000,000 in the first nine months of 2020, compared to $0 in the same periods in the prior year. The provision in the third quarter and first nine months of 2020 was deemed prudent due to growth in ChoiceOne’s loan portfolio and the uncertainty of the impact of the global coronavirus (COVID-19) pandemic upon ChoiceOne’s borrowers and their ability to repay loans. While it is difficult to predict the impact that COVID-19 will have in future quarters, ChoiceOne expects increased levels of past due loans, nonperforming loans and loan losses may occur.

The federal banking agencies issued an “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” on March 22, 2020 and subsequently issued a revised statement on April 7, 2020. These statements encourage financial institutions to work constructively with borrowers affected by COVID-19, and provide that short-term modifications to loans made on a good faith basis to borrowers who were current as of the implementation date of the statements are not considered TDRs. Further, Section 4013 of the Coronavirus Aid, Relief and Economic Security (“CARES”) Act, passed by Congress on March 27, 2020, states that COVID-19 related modifications on loans that were current as of December 31, 2019 are not TDRs. As of September 30, 2020, ChoiceOne had granted modifications on approximately 750 loans which, in reliance on the statements of federal banking agencies and the CARES Act, are not reflected as TDRs in this report. ChoiceOne will continue to assist borrowers through different means, including a second round of deferrals for which management saw significantly fewer requests in the third quarter of 2020 compared to the first round of requests in the second quarter of 2020.

Goodwill

Management performed its annual qualitative assessment of goodwill as of June 30, 2020. In evaluating whether it is more likely than not that the fair value of ChoiceOne's operations was less than the carrying amount, management assessed the relevant events and circumstances such as the ones noted in ASC 350-20-35-3c. The analysis consisted of a review of ChoiceOne’s current and expected future financial performance, the potential impact of COVID-19 on the ability of ChoiceOne’s borrowers to comply with loan terms, and the impact that reductions in both short-term and long-term interest rates have had and may continue to have on net interest margin and mortgage sales activity. The share price and book value of ChoiceOne’s stock were also compared to the prior year. Management also compared average values for recently closed bank merger and acquisition transactions to ChoiceOne’s recently completed merger and acquisition transactions. Despite ChoiceOne's market capitalization declining slightly from December 2019 to June 2020, ChoiceOne's financial performance has remained positive. ChoiceOne believes this is evidenced by the strong financial indicators, solid credit quality ratios, as well as the strong capital position of ChoiceOne. In assessing the totality of the events and circumstances, management determined that it is more likely than not that the fair value of ChoiceOne Bank’s operations, from a qualitative perspective, exceeded the carrying value as of June 30, 2020 and there was no further quantitative assessment necessary. Due to the potential impact of COVID-19 and any long term economic fallout that might occur, ChoiceOne has contracted a third party assessment of goodwill which will take place in the next year.

Deposits and Borrowings

Total deposits increased ~~$12.3~~$262.1 million in the third quarter and ~~declined $2.9~~$431.8 million in the first nine months of ~~2019. Interest-bearing~~2020. $227.8 million of deposits ~~decreased $1.9~~were obtained from the merger with Community Shores. Excluding deposits related to Community Shores in the third quarter of 2020, checking and savings deposits increased $223.6 million, ~~and noninterest-bearing deposits decreased $1.0~~while certificates of deposit declined $19.6 million in the first nine months of ~~2019 primarily~~2020. The change in checking and savings accounts was due in part to ~~seasonal~~funds related to the stimulus package included in the CARES Act as well as funds on deposit from the PPP loans that were not fully utilized as of September 30, 2020. Seasonal fluctuations for ChoiceOne’s ~~depositors. The total of demand deposits, money market deposits,~~depositors also contributed to the growth in 2020.

Total borrowings declined $3.1 million in the third quarter and ~~savings deposits decreased $2.6~~$20.0 million in the first ~~three quarters~~nine months of ~~2019 while~~2020. Borrowings as of September 30, 2020 included a $10.0 million term note obtained by ChoiceOne in the second quarter of 2020 to fund the cash consideration paid in connection with the merger with Community Shores. Borrowings also included $3.1 million obtained in the merger with Community Shores that represented a $4.5 million subordinated debt offering, offset by the merger mark-to-market adjustment. Federal Home Loan Bank advances were reduced $33.0 million during the first nine months of 2020 as growth in local deposits decreased the need for supplemental funding. ChoiceOne may use Federal Home Loan Bank advances and advances from the Federal Reserve Bank Discount Window to meet short-term funding needs if needed in the remainder of ~~$13.8~~2020.

Shareholders' Equity

Total shareholders' equity increased $20.3 million in ~~local certificates~~the third quarter of ~~deposit virtually offset a reduction of $14.1 million in brokered certificates of deposit.~~

~~Shareholders’ Equity~~

~~Total shareholders’ equity increased $4.1~~2020 and $30.8 million from December 31, ~~2018~~2019 to September 30, ~~2019. A change~~2020. $15.5 million of common stock was issued as consideration in ~~accumulated other~~connection with the merger with Community Shores. Other comprehensive income of ~~$3.8~~$7.8 million in the first nine months of 2020 resulted from improvement in the market value of ChoiceOne’s available for sale securities. The improvement was caused by a reduction in general market interest rates in the first nine months of ~~2019 in mid- to long-term interest rates.~~2020. Net income for the first nine months of ~~2019 was slightly lower than~~2020, net of cash dividends declared, ~~during the same time period due~~also contributed $7.1 million to the ~~special dividend paid in connection with the merger of County with and into ChoiceOne.~~equity balance growth.

Regulatory Capital Requirements

Following is information regarding compliance of ChoiceOne and the ~~Bank’s compliance~~banks with regulatory capital requirements:

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

ChoiceOne Bank
Total capital (to risk weighted assets) $ 68,371 13.0 % $ 42,010 8.0 % $ 52,513 10.0 %
Common Equity Tier 1 Capital (to risk weighted assets) 64,283 12.2 23,631 4.5 34,133 6.5
Tier 1 capital (to risk weighted assets) 64,283 12.2 21,005 6.0 31,508 8.0
Tier 1 capital (to average assets) 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
Common Equity Tier 1 Capital (to risk weighted assets) 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
Tier 1 capital (to average assets) 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 %
Common Equity Tier 1 Capital (to risk weighted assets) 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
Tier 1 capital (to average assets) 62,309 9.8 25,512 4.0 31,890 5.0

											Minimum Required
											to be Well
						Minimum Required					Capitalized Under
						for Capital					Prompt Corrective
(Dollars in thousands)	Actual					Adequacy Purposes					Action Regulations
	Amount		Ratio			Amount		Ratio			Amount		Ratio
September 30, 2020
ChoiceOne Financial Services Inc.
Total capital (to risk weighted assets)		158,672		13.4	%		94,897		8.0	%		N/A		N/A
Common equity Tier 1 capital (to risk weighted assets) weighted assets)		147,486		12.4			53,380		4.5			N/A		N/A
Tier 1 capital (to risk weighted assets)		147,486		12.4			71,173		6.0			N/A		N/A
Tier 1 capital (to average assets)		147,486		8.3			70,973		4.0			N/A		N/A

ChoiceOne Bank
Total capital (to risk weighted assets)		142,390		13.7	%		83,405		8.0	%		104,257		10.0	%
Common equity Tier 1 capital (to risk weighted assets) weighted assets)		135,705		13.0			46,915		4.5			67,767		6.5
Tier 1 capital (to risk weighted assets)		135,705		13.0			62,554		6.0			83,405		8.0
Tier 1 capital (to average assets)		135,705		8.9			60,773		4.0			75,966		5.0

Community Shores Bank
Total capital (to risk weighted assets)		15,831		11.2	%		11,319		8.0	%		14,149		10.0	%
Common equity Tier 1 capital (to risk weighted assets) weighted assets)		15,831		11.2			6,367		4.5			9,197		6.5
Tier 1 capital (to risk weighted assets)		15,831		11.2			8,490		6.0			11,319		8.0
Tier 1 capital (to average assets)		15,831		6.4			9,913		4.0			12,392		5.0


December 31, 2019
ChoiceOne Financial Services Inc.
Total capital (to risk weighted assets)	$	135,836		14.2	%	$	76,288		8.0	%		N/A		N/A
Common equity Tier 1 capital (to risk weighted assets) weighted assets)		131,785		13.8			42,912		4.5			N/A		N/A
Tier 1 capital (to risk weighted assets)		131,785		13.8			57,216		6.0			N/A		N/A
Tier 1 capital (to average assets)		131,785		9.6			54,646		4.0			N/A		N/A

ChoiceOne Bank
Total capital (to risk weighted assets)	$	69,412		13.2	%	$	42,039		8.0	%	$	52,549		10.0	%
Common equity Tier 1 capital (to risk weighted assets) weighted assets)		65,362		12.4			23,647		4.5			34,157		6.5
Tier 1 capital (to risk weighted assets)		65,362		12.4			31,530		6.0			42,039		8.0
Tier 1 capital (to average assets)		65,362		10.0			26,179		4.0			32,724		5.0

Lakestone Bank & Trust
Total capital (to risk weighted assets)	$	63,885		15.0	%	$	34,056		8.0	%	$	42,570		10.0	%
Common equity Tier 1 capital (to risk weighted assets)		63,885		15.0			19,156		4.5			27,670		6.5
Tier 1 capital (to risk weighted assets)		63,885		15.0			25,542		6.0			34,056		8.0
Tier 1 capital (to average assets)		63,885		9.0			28,338		4.0			35,423		5.0

Management reviews the capital levels of ChoiceOne and ~~the~~ChoiceOne Bank on a regular basis. The Board of Directors and management believe that the capital levels as of September 30, ~~2019~~2020 are adequate for the foreseeable future. The Board of Directors’ determination of appropriate cash dividends for future periods will be based on, among other things, market conditions and ChoiceOne’s requirements for cash and capital.

Liquidity

Net cash ~~provided from~~used in operating activities was ~~$5.4~~$20.3 million for the nine months ended September 30, ~~2019~~2020 compared to ~~$7.0~~net cash provided of $5.4 million ~~provided~~ in the same period a year ago. The ~~decrease~~change was ~~caused by $1.4~~primarily due to a $26.0 million ~~decrease~~net negative change in ~~net income during~~the difference between loans originated for sale and proceeds from loan sales in the first nine months of ~~2019~~2020 as compared to the same period in the prior year. Net cash ~~provided by~~used in investing activities was ~~$8.5~~$98.0 million for the first nine months of ~~2019~~2020 compared to ~~$29.7~~$8.5 million ~~used~~provided in the same period in ~~2018. The change~~2019. Cash used for net loan originations and net purchases of securities was ~~primarily due to a net reduction in securities~~$100.6 million and $40.4 million higher, respectively, in the first three quarters of 2020 compared to the same period in 2019. This was partially offset by $35.6 million of net cash received in the merger with Community Shores. Net cash from financing activities was $176.6 million in the nine months ~~of 2019~~ended September 30, 2020, compared to ~~net purchases~~$17.0 million used in the same period in the prior year. ~~Net cash used in financing activities was $17.0~~Higher growth of $206.9 million in deposits in the first nine months ~~ended September 30, 2019,~~of 2020 was partially offset by an $18.0 million larger decline in wholesale funding compared to ~~$326,000 provided in~~ the same period in the prior year. The change was due to the net changes in 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 2019 compared to 2018.2019.

~~Management~~ChoiceOne believes that the current level of liquidity is sufficient to meet ~~the Bank’s~~ChoiceOne Bank's normal operating needs. This belief is based upon the availability of deposits from both the local and national markets, maturities of securities, normal loan repayments, income retention, federal funds purchased from correspondent banks, ~~and~~ advances available from the Federal Home Loan ~~Bank. The~~ Bank, ~~also has a~~and secured ~~line~~lines 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”). Management believes ~~this~~these non-GAAP financial ~~measure provides~~measures provide additional information that is useful to investors in helping to understand the underlying financial performance of ChoiceOne.

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

A reconciliation of these non-GAAP financial measures follows:

~~Non-GAAP Reconciliation~~

~~(Unaudited)~~

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

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

(Unaudited)

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

	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands, Except Per Share Data)	2020		2019		2020		2019

Income before income tax	$	4,614	$	1,127	$	13,973	$	4,815
Adjustment for pre-tax merger expenses		1,707		763		2,526		1,351
Adjusted income before income tax	$	6,321	$	1,890	$	16,499	$	6,166

Income tax expense	$	785	$	106	$	2,460	$	671
Tax impact of adjustment for pre-tax merger expenses		284		142		359		157
Adjusted income tax expense	$	1,069	$	248	$	2,819	$	828

Net income	$	3,829	$	1,021	$	11,513	$	4,144
Adjustment for pre-tax merger expenses, net of tax impact		1,423		621		2,167		1,194
Adjusted net income	$	5,252	$	1,642	$	13,680	$	5,338

Basic earnings per share	$	0.49	$	0.28	$	1.55	$	1.14
Effect of merger expenses, net of tax impact		0.18		0.17		0.29		0.32
Adjusted basic earnings per share	$	0.67	$	0.45	$	1.84	$	1.47

Diluted earnings per share	$	0.49	$	0.28	$	1.55	$	1.14
Effect of merger expenses, net of tax impact		0.18		0.17		0.29		0.32
Adjusted diluted earnings per share	$	0.67	$	0.45	$	1.84	$	1.46

Item 4.Controls and Procedures.

An evaluation was performed under the supervision and with the participation of ChoiceOne’s management, including the Chief Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of ChoiceOne’s disclosure controls and procedures as of September 30, ~~2019.~~2020. Based on and as of the time of that evaluation, ChoiceOne’s management, including the Chief Executive Officer and Principal Financial Officer, concluded that ChoiceOne’s disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that material information required to be disclosed in the reports that ChoiceOne files or submits under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that ChoiceOne files or submits under the Exchange Act is accumulated and communicated to management, including ChoiceOne’s principal executive and principal financial officers, as appropriate to allow for timely decisions regarding required disclosure. There was no change in ChoiceOne’s internal control over financial reporting that occurred during the ~~nine~~three months ended September 30, ~~2019~~2020 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~~ChoiceOne Bank is a party or to which any of their properties are subject, except for proceedings that arose in the ordinary course of business. In the belief of management, pending or current legal proceedings should not have a material effect on the consolidated financial condition of ChoiceOne.

Item 1A.Risk Factors.

Information concerning risk factors is contained in the discussion in Item 1A, “Risk Factors,” in ChoiceOne’s Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019. As of the date of this report, ChoiceOne ~~does not believe~~believes that ~~there~~the following risk factor related to the impact of COVID-19 also applies to ChoiceOne.

The continuing global coronavirus outbreak (COVID-19) and uncertainty related to legal requirements in Michigan could adversely affect the business and results of operations of ChoiceOne.

The coronavirus outbreak (COVID-19) was declared a pandemic by the World Health Organization in March 2020. Since first being reported in China, the coronavirus has ~~been a material change~~spread globally, including in the ~~nature or categories~~United States. The coronavirus has had a substantial impact on numerous aspects of ~~ChoiceOne’s risk factors, as compared~~life in the United States, including threats to public health, increased volatility in markets, and severe effects on national and local economies.

In response to the ~~information disclosed~~coronavirus outbreak, many state and local governments have instituted emergency restrictions that have substantially limited the activities of individuals and the operations of businesses and industries. In Michigan, Governor Gretchen Whitmer issued a series of “stay home, stay safe” executive orders beginning March 24, 2020, which required residents to remain at home "to the maximum extent feasible" and prohibited in-person work that "was not necessary to sustain or protect life." These executive orders significantly limited economic activity in ~~ChoiceOne’s Annual Report~~Michigan, placing restrictions on ~~Form 10-K~~the operations of businesses and requiring businesses not deemed to be essential to limit or cease operations. The Governor's executive orders, along with social distancing guidance issued by the Centers for Disease Control and Prevention, substantially affected many different types of businesses and have resulted in the ~~year ended December 31, 2018.~~temporary or permanent closing of businesses and significant layoffs and furloughs throughout Michigan and the United States. Later executive orders permitted a phased reopening of the Michigan economy. As of September 30, 2020, most businesses and institutions in Michigan were allowed to be open in some capacity, subject to stringent health and safety requirements, social distancing measures and face mask requirements.

In October 2020, the Michigan Supreme Court issued decisions invalidating all of Governor Whitmer’s executive orders effective immediately. Governor Whitmer has sought to substantially re-implement the requirements of the executive orders by way of emergency orders issued by various state agencies. In addition, certain county and municipal governments have issued emergency orders seeking to keep elements of the executive orders in place. Further, the Michigan legislature has passed legislation codifying certain elements of the executive orders. The decentralized implementation of state agency and local government executive orders, together with the possibility of legal challenges to these orders, creates uncertainty as to legal requirements applicable to businesses, institutions and individuals in Michigan. This uncertainty may have a negative impact on the business, financial condition, and results of operations of ChoiceOne and its customers.

The ultimate effect of the coronavirus outbreak on the business of ChoiceOne will depend on numerous factors and future developments that are highly uncertain and cannot be predicted with confidence. At the time of the filing of this report, confirmed positive cases of coronavirus appear to be surging in Michigan and nationally. It is unknown how long the pandemic will last, or when restrictions on individuals and businesses will be fully lifted and businesses and their employees will be able to resume normal activities. Further, additional information may emerge regarding the severity of the pandemic and additional actions may be taken by federal, state, and local governments to contain the coronavirus or mitigate its impact. Changes in the behavior of customers, businesses and their employees as a result of the coronavirus outbreak, including social distancing practices, even after formal restrictions have been lifted, are also unknown. As a result of the coronavirus outbreak and the actions taken to contain it or mitigate its impact, ChoiceOne may experience changes in the value of collateral securing outstanding loans and reductions in the credit quality of borrowers and inability of borrowers to repay loans in accordance with their terms. These and similar factors and events may have substantial negative effects on ChoiceOne, and on its customers, stock price, financial condition, and results of operations.

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

~~On July 24, 2019, ChoiceOne issued 720 shares~~There were no unregistered sales of ~~common stock, without par value, to~~equity securities in the ~~directors~~third quarter of ChoiceOne pursuant to the Directors’ Stock Purchase Plan for an aggregate cash price of $21,000. ChoiceOne relied on the exemption contained in Section 4(a)(5) of the Securities Act of 1933 in connection with these sales.2020.

ISSUER PURCHASES OF EQUITY SECURITIES

There were no issuer purchases of equity securities during the ~~second~~third quarter of ~~2019.~~2020.

Item 5. Other Information

None.

Item 6.Exhibits

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

Exhibit Number	~~Exhibit~~ ~~Number~~		Document

	2.1		Ag~~reement~~ Agreement andPlan of Mergerbetween ~~CountyBankCorp~~,~~and Choic~~e~~One~~ChoiceOne Financial Services,Inc. and County Bank Corp datedMarch 22,,2019. Pre~~viouslyfiledas an e~~x~~hibitto ChoiceOne’sForm8-K filed March 25~~,~~2019~~.~~Here incorporated~~by~~reference~~.

	~~3.1~~		~~Amended and Restated Articles of Incorporation of ChoiceOne.~~

	~~3.2~~		~~Bylawsof ChoiceOne ascurrently ineffect and any amendment~~s~~thereto.~~ Previously filed as an exhibit to ~~ChoiceOne~~‘sChoiceOne’s Form 8-K filed ~~October~~1,March 25, 2019. Hereincorporated by reference.

2.2	~~10.1~~		~~Employment~~ Agreement and Plan of Merger between ChoiceOne Financial Services, Inc. and ~~Kelly J. Potes,~~Community Shores Bank Corporation dated January 6, 2020. Previously filed as an exhibit to ChoiceOne’s Form 8-K filed January 6, 2020. Here incorporated by reference.

3.1		Restated Articles of ~~September 30, 2019.~~Incorporation of ChoiceOne Financial Services, Inc. Previously filed as an exhibit to ChoiceOne’s Form 8-A filed February 4, 2020. Here incorporated by reference.

3.2		Bylaws of ChoiceOne as currently in effect and any amendments thereto. Previously filed as an exhibit to ChoiceOne’s Form 8-K filed October 1, 2019. Here incorporated by reference.
4.1
	~~10.2~~		~~Employment~~ Advances, Pledge and Security Agreement between ChoiceOne ~~Financial Services, Inc.~~Bank and ~~Michael J. Burke, Jr., dated as~~the Federal Home Loan Bank of ~~March 22, 2019.~~Indianapolis. Previously filed as ~~Exhibit 10.7~~an exhibit to ~~ChoiceOne’s Pre-Effective Amendment No. 2 to~~ChoiceOne Financial Services, Inc.’s Form ~~S-4 filed August 5, 2019.~~10-K Annual Report for the year ended December 31, 2013. Here incorporated by reference.

	~~10.3~~		Transition Agreement between ChoiceOne Financial Services, Inc. and Bruce J. Cady, dated as of March 22, 2019. Previously filed as Exhibit 10.8 to ChoiceOne’s Pre-Effective Amendment No. 2 to Form 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.INS		Inline XBRL Instance Document

101.SCH		Inline XBRL Taxonomy Extension Schema Document
	~~101.1~~
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document

104		Cover Page Interactive Data ~~File.~~File

SIGNATURES

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

	CHOICEONE FINANCIAL SERVICES, INC.

Date:November ~~12, 2019~~9, 2020	/s/ Kelly J. Potes
	Kelly J. Potes Chief Executive Officer (Principal Executive Officer)

Date:November ~~12, 2019~~9, 2020	/s/ Thomas L. Lampen
	Thomas L. Lampen Treasurer (Principal Financial and Accounting Officer)

(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

	Weighted average yields:
	Less than			1 Year -			5 Years -			More
	1 Year			5 Years			10 Years			10 Years			Total
U.S. Government and federal agency		1.99	%		1.98	%		—	%		—	%		1.99	%
U.S. Treasury notes and bonds		—			1.85			—			—			1.85
State and municipal (2)		2.73			2.85			3.21			0.64			2.91
Corporate		—			2.66			—			—			2.66
Foreign debt		2.27			—			—			—			2.27
Trust preferred securities		6.00			—			—			—			6.00
Mortgage-backed securities		—			3.24			2.97			—			3.18
Equity securities (1)		—			—			4.61			—			1.54

				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


	Three Months Ended September 30, 2019						Nine Months Ended September 30, 2019
			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 real estate		—	$	—	$	—		2	$	1,882	$	1,882
Residential real estate		—		—		—		1		17		17
		—	$	—	$	—		3	$	1,899	$	1,899

					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	$	—

					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

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

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

	Three Months Ended September 30,
(Dollars in thousands)	2019 Over 2018
	Total			Volume			Rate
Increase (decrease) in interest income (1)
Loans (2)	$	285		$	280		$	5
Taxable securities		(8	)		(197	)		189
Nontaxable securities (2)		(28	)		(27	)		(1	)
Other		47			44			3
Net change in tax-equivalent interest income		296			100			196

Increase (decrease) in interest expense (1)
Interest-bearing demand deposits		84			3			81
Savings deposits		8			—			8
Certificates of deposit		261			68			193
Advances from Federal Home Loan Bank		(55	)		(162	)		107
Other		2			(5	)		7
Net change in interest expense		300			(96	)		396

Net change in tax-equivalent net interest income	$	(4	)	$	196		$	(200	)