CHOICEONE FINANCIAL SERVICES INC - Quarter Report: 2020 September (Form 10-Q)

cofs20200630_10q.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

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

	For the quarterly period ended September 30, 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)

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	NASDAQ Capital Market

As of October 31, 2020, the Registrant had outstanding 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		-			-
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			-			3,000			-
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			-			569			-
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			-			1,102			-
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)

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			-
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	)		-
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		-			(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			-
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		-			(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.
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"), its wholly-owned subsidiaries, ChoiceOne Bank and Community Shores Bank (together referred to as the “Banks”), ChoiceOne Bank’s wholly-owned 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. 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, 2020 and December 31, 2019, the Consolidated Statements of Income for the three- and nine-month periods ended September 30, 2020 and September 30, 2019, the Consolidated Statements of Comprehensive Income for the three- and nine-month periods ended September 30, 2020 and September 30, 2019, the Consolidated Statements of Changes in Shareholders’ Equity for the three- and nine-month periods ended September 30, 2020 and September 30, 2019, and the Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2020 and September 30, 2019. Operating results for the nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 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 for the year ended December 31, 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

ChoiceOne Bank entered into an agreement with another financial institution to fund mortgage loans. Loans to other financial institutions are purchased participating interests in individual advances made to mortgage bankers nation-wide from an unaffiliated originating bank. The originating bank services these loans and cash flows on the individual advances (principal, interest, and fees) which are allocated pro-rata based on ownership in the participating interest, less fees paid for the servicing activity. The underlying collateral is generally made up of 1-4 family first residential mortgages owned by the mortgage banker and held for sale in the secondary market and have been underwritten using secondary market underwriting standards prior to purchasing the participating interest. Once the mortgage banker delivers the loan to the secondary market, the advance is required to be paid off, including ChoiceOne Bank’s participating interest. If the advance (in which ChoiceOne Bank has a participating interest) is outstanding over 90 days, the originating bank has the right to request the participating interest be paid off by the mortgage banker. The participating interests are subject to concentration risk to 17 different mortgage bankers, with the largest creditor outstanding representing 13% of the total at September 30, 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, ChoiceOne Bank reviews the portfolios of participating interests for potential losses including any participating interest that is outstanding over 90 days (even if the advance and participating interest is current). At September 30, 2020, 44 of the 326 participating interests with principal balances totaling $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 first nine months of 2020, there were no losses or charge-offs of participating interests.

Allowance for Loan Losses

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

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

Stock Transactions

A total of 10,132 shares of common stock were issued to ChoiceOne’s Board of Directors for a cash price of $289,000 under the terms of the Directors’ Stock Purchase Plan in the first nine months of 2020. A total of 4,159 shares for a cash price of $101,000 were issued under the Employee Stock Purchase Plan in the first nine months of 2020. Shares issued upon the exercise of stock options, net of shares withheld for payment for the options, totaled 7,261 in the first nine months of 2020. A total of 365 restricted stock units vested in the first nine 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 three years after the grant date. Certain additional vesting provisions apply. Each unit, once vested, is settled by delivery of one share of ChoiceOne common stock.

Reclassifications

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

Recent Accounting Pronouncements

The Financial Accounting Standards Board ("FASB") issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU provides financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date by replacing the incurred loss impairment methodology in current generally accepted accounting principles (GAAP) with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The new guidance attempts to reflect an entity’s current estimate of all expected credit losses and broadens the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually to include forecasted information, as well as past events and current conditions. There is no specified method for measuring expected credit losses, and an entity may apply methods that reasonably reflect its expectations of the credit loss estimate. Although an entity may still use its current systems and methods for recording the allowance for credit losses, under the new rules, the inputs used to record the allowance for credit losses generally will need to change to appropriately reflect an estimate of all expected credit losses and the use of reasonable and supportable forecasts. Additionally, credit losses on available-for-sale debt securities will have to be presented as an allowance rather than as a write-down. This ASU is effective for fiscal years beginning after December 15, 2022, and for interim periods within those years for companies considered a smaller reporting company with the Securities and Exchange Commission. ChoiceOne was classified as a smaller reporting company as of December 31, 2019. Management is currently evaluating the impact of this new ASU on its consolidated financial statements which may be significant.

Goodwill

Goodwill is not amortized, but is evaluated annually for impairment and on an interim basis if events or changes in circumstances indicate that goodwill might be impaired. 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 results of the qualitative assessment indicate that it is more likely than not that goodwill is impaired, then a quantitative assessment must be performed. If not, there is no further assessment required.

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.

NOTE 2 – SECURITIES

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

September 30, 2020

Gross

(Dollars in thousands)

Amortized

Unrealized

Fair

Cost

Gains

Losses

Value

Equity securities

2,636

2,667

December 31, 2019

Gross

(Dollars in thousands)

Amortized

Unrealized

Fair

Cost

Gains

Losses

Value

Equity securities

2,636

215

2,851

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

	September 30, 2020
			Gross		Gross
(Dollars in thousands)	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
U.S. Government and federal agency	$	2,008	$	53	$	-		$	2,061
U.S. Treasury notes and bonds		1,996		69		-			2,065
State and municipal		258,226		10,324		-			268,550
Mortgage-backed		115,695		1,565		(487	)		116,773
Corporate		2,838		51		-			2,889
Trust preferred securities		1,000		-		-			1,000
Total	$	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		-			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		-		-			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. No other-than-temporary impairment charges were recorded in the three and nine months ended September 30, 2020 or in the same periods in 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, 2020, the fair value of securities as of September 30, 2020 and December 31, 2019, and the weighted average yields of securities as of September 30, 2020:

	Securities maturing within:
									Fair Value		Fair Value
	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		2020		2019

U.S. Government and federal agency	$	-	$	2,061	$	-	$	-	$	2,061	$	17,215
U.S. Treasury notes and bonds		-		2,065		-		-		2,065		2,008
State and municipal		14,534		53,241		187,171		13,604		268,550		173,924
Corporate		1,856		1,033		-		-		2,889		2,672
Trust preferred securities		-		-		1,000		-		1,000		1,000
Total debt securities		16,390		58,400		188,171		13,604		276,565		196,819

Mortgage-backed securities		4,305		30,667		79,727		2,074		116,773		142,760
Equity securities		-		-		1,000		1,667		2,667		2,851
Total	$	20,695	$	89,067	$	268,898	$	17,345	$	396,005	$	342,430

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

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

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

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

Unrealized gains and losses recognized during the reporting period on securities still held at the reporting date	$	(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		$	-	$	5,750
Charge-offs		—			(29	)		(58	)		(255	)		—		(1	)		—		(343	)
Recoveries		—			1			46			4			—		2			—		53
Provision		17			(285	)		48			961			31		122			331		1,225
Ending balance	$	269		$	1,085		$	279		$	3,543		$	110	$	1,068		$	331	$	6,685


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

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

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

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

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

Allowance for Loan Losses 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


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
Acquired with deteriorated credit quality		-			-			-			-			-		-					-
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	$	-	$	4	$	13	$	-	$	235	$	-	$	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	$	-	$	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		-		6,241		313		733		-		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) the risk ratings of business loans, (2) the level of classified business loans, and (3) delinquent and nonperforming consumer loans. Business loans are risk rated on a scale of 1 to 9. A description of the characteristics of the ratings follows:

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

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

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

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

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

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

Corporate Credit Exposure - Credit Risk Profile By Creditworthiness Category

(Dollars in thousands)	Agricultural				Commercial and Industrial				Commercial Real Estate
	September 30,		December 31,		September 30,		December 31,		September 30,		December 31,
	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		-		-		-		-		1,473		-
	$	53,503	$	57,339	$	306,120	$	148,083	$	463,306	$	326,379

Consumer Credit Exposure - Credit Risk Profile Based On Payment Activity

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

The following table provides information on loans that were considered troubled debt restructurings ("TDRs") that were modified during the three and nine months ended September 30, 2020. There were no new TDRs in 2019.

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

The following schedule provides information on TDRs as of September 30, 2020 where the borrower was past due with respect to principal and/or interest for 30 days or more during the three and nine months ended September 30, 2020, which loans had been modified and classified as TDRs during the year prior to the default. 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
	September 30, 2020				September 30, 2020
(Dollars in thousands)	Number		Recorded		Number		Recorded
	of Loans		Investment		of Loans		Investment
Agricultural		1	$	67		1	$	67
Commercial Real Estate		2		1,666		2		1,666
Total		3	$	1,733		3	$	1,733

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
(Dollars in thousands)	Recorded		Principal		Related
	Investment		Balance		Allowance
September 30, 2020
With no related allowance recorded
Agricultural	$	373	$	440	$	-
Commercial and industrial		284		395		-
Consumer		4		5		-
Construction real estate		-		-		-
Commercial real estate		1,859		2,664		-
Residential real estate		196		200		-
Subtotal		2,716		3,704		-
With an allowance recorded
Agricultural		-		-		-
Commercial and industrial		61		64		1
Consumer		15		16		1
Construction real estate		-		-		-
Commercial real estate		290		290		13
Residential real estate		2,007		2,068		218
Subtotal		2,373		2,438		233
Total
Agricultural		373		440		-
Commercial and industrial		345		459		1
Consumer		19		21		1
Construction real estate		-		-		-
Commercial real estate		2,149		2,954		13
Residential real estate		2,203		2,268		218
Total	$	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		-		-		-
Construction real estate		-		-		-
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		-		-		-
Consumer		17		18		4
Construction real estate		-		-		-
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		-
Consumer		18		18		4
Construction real estate		-		-		-
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 the three- and nine-month periods ended September 30, 2020 and 2019:

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

	Average		Interest
(Dollars in thousands)	Recorded		Income
	Investment		Recognized
Three Months Ended September 30, 2019
With no related allowance recorded
Agricultural	$	-	$	-
Commercial and industrial		129		-
Consumer		-		-
Construction real estate		-		-
Commercial real estate		941		-
Residential real estate		109		1
Subtotal		1,179		1
With an allowance recorded
Agricultural		389		-
Commercial and industrial		191		-
Consumer		37		1
Construction real estate		-		-
Commercial real estate		1,693		13
Residential real estate		2,521		48
Subtotal		4,831		62
Total
Agricultural		389		-
Commercial and industrial		320		-
Consumer		37		1
Construction real estate		-		-
Commercial real estate		2,634		13
Residential real estate		2,630		49
Total	$	6,010	$	63

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

	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		-		-
Construction real estate		-		-
Commercial real estate		507		61
Residential real estate		156		4
Subtotal		774		74
With an allowance recorded
Agricultural		390		-
Commercial and industrial		107		2
Consumer		56		1
Construction real estate		-		-
Commercial real estate		1,117		27
Residential real estate		2,510		112
Subtotal		4,180		142
Total
Agricultural		436		-
Commercial and industrial		172		11
Consumer		56		1
Construction real estate		-		-
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:

					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	$	-	$	-	$	373	$	373	$	53,130	$	53,503	$	-
Commercial and industrial		369		-		666		1,035		305,085		306,120		-
Consumer		75		-		-		75		34,078		34,153		-
Commercial real estate		1,164		16		1,884		3,064		460,242		463,306		-
Construction real estate		-		663		-		663		15,826		16,489		-
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	$	-	$	68	$	-	$	68	$	57,271	$	57,339	$	-
Commercial and industrial		542		15		259		816		147,267		148,083		-
Consumer		121		19		11		151		38,703		38,854		-
Commercial real estate		-		-		1,882		1,882		324,497		326,379		-
Construction real estate		-		-		-		-		13,411		13,411		-
Residential real estate		2,466		582		393		3,441		214,541		217,982		-
	$	3,129	$	684	$	2,545	$	6,358	$	795,690	$	802,048	$	-

(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		-		-
Residential real estate		775		1,331
	$	5,081	$	4,687

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	)		-			(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	)		-			(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 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 per share for the three and nine months ended September 30, 2020. 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.

Note 5 – Financial Instruments

Financial instruments as of the dates indicated were as follows:

					Quoted Prices
					In Active		Significant
					Markets for		Other		Significant
					Identical		Observable		Unobservable
(Dollars in thousands)	Carrying		Estimated		Assets		Inputs		Inputs
	Amount		Fair Value		(Level 1)		(Level 2)		(Level 3)
September 30, 2020
Assets
Cash and cash equivalents	$	117,883	$	117,883	$	117,883	$	-	$	-
Equity securities at fair value		2,667		2,667		1,187		-		1,480
Securities available for sale		393,338		393,338		-		382,025		11,313
Federal Home Loan Bank and Federal
Reserve Bank stock		6,771		6,771		-		6,771		-
Loans held for sale		35,826		36,901		-		36,901		-
Loans to other financial institutions		55,064		55,064		-		55,064		-
Loans, net		1,072,111		1,069,641		-		-		1,069,641
Accrued interest receivable		6,610		6,610		-		6,610		-
Interest rate lock commitments		1,756		1,756		-		1,756		-

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

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

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

NOTE 6 – FAIR VALUE MEASUREMENTS

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

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

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

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

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

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

Assets Measured at Fair Value on a Recurring Basis

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

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

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

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

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

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

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

	Nine Months Ended
(Dollars in thousands)	September 30,
	2020			2019
Equity Securities Held at Fair Value
Balance, January 1	$	1,472		$	886
Total realized and unrealized gains included in noninterest income		8			114
Net purchases, sales, calls, and maturities		-			-
Net transfers into Level 3		-			-
Balance, September 30	$	1,480		$	1,000

Investment Securities, Available for Sale
Balance, January 1	$	12,367		$	8,498
Total unrealized gains included in other comprehensive income		452			350
Net purchases, sales, calls, and maturities		(1,506	)		1,429
Net transfers into Level 3		-			-
Balance, September 30	$	11,313		$	10,277

Of the available for sale Level 3 assets that were held by ChoiceOne at September 30, 2020, the net unrealized gain as of September 30, 2020 was $826,000, which was recognized in accumulated other comprehensive income in the consolidated balance sheet.

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

Securities categorized as Level 3 assets primarily consist of bonds issued by local municipalities and common and preferred equity securities of community banks. ChoiceOne estimates the fair value of these bonds and equity securities based on the present value of expected future cash flows using management’s best estimate of key assumptions, including forecasted interest yield and payment rates, credit quality and a discount rate commensurate with the current market and other risks involved.

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

Assets Measured at Fair Value on a Non-recurring Basis

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

Other Real Estate
September 30, 2020	$	676	$	-	$	-	$	676
December 31, 2019	$	929	$	-	$	-	$	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 ASC Topic 606 include service charges and fees on deposit accounts, interchange income, investment asset management income and transaction-based revenue, and other charges and fees for customer services.

Service Charges and Fees on Deposit Accounts

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

Interchange Income

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

Investment Commission Income

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

Trust Fee Income

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

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(Dollars in thousands)	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		-		569		-
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

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.

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

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

Purchase Price

Consideration	$	107,945

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

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

Net assets acquired		69,079

Goodwill	$	38,866

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

The following discussion is designed to provide a review of the consolidated financial condition and results of operations of ChoiceOne Financial Services, Inc. (“ChoiceOne”), its wholly-owned subsidiaries ChoiceOne Bank and Community Shores Bank, and ChoiceOne Bank’s wholly-owned 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. 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.

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, 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

Net income for the third quarter of 2020 was $3,829,000, which represented an increase of $2,808,000 or 275% compared to the third quarter period in 2019. Net income for the first nine months of 2020 was $11,513,000, which represented an increase of $7,369,000 or 178% compared to the first nine months of the prior year. Growth in the first nine months of 2020 compared to the same period in the prior 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 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, respectively. Net income, adjusted to exclude tax-effected merger-related expenses, would have been $13,680,000 in the first nine months of 2020 compared to $5,338,000 in the first nine months of 2019.

Basic and diluted earnings per common share were $0.49 for the third quarter and $1.55 for the first nine months of 2020 compared to $0.28 and $1.14, respectively, for the same periods in 2019. Basic and diluted earnings per common share, adjusted to exclude the tax-effected merger-related expenses, would have been $1.84 in the first nine months of 2020 compared to adjusted basic and diluted earnings per common share of $1.47 and $1.46 respectively, in the first nine months of the prior year. The return on average assets and return on average shareholders’ equity percentages were 0.87% and 7.50%, respectively, for the first nine months of 2020, compared to 0.83% and 6.62%, respectively, for the same period in 2019.

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

Acquisition of Community Shores Bank Corporation

ChoiceOne completed the acquisition of Community Shores Bank Corporation (“Community Shores”) with and into ChoiceOne effective on July 1, 2020. Community Shores had 4 branch offices as of the date of the acquisition. Total assets of Community Shores as of July 1, 2020 were $244 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 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, 2020 was $1.0 million and $1.8 million, respectively.

Dividends

Cash dividends of $1,558,000 or $0.20 per share were declared in the third quarter of 2020, compared to $2,906,000 or $0.80 per share declared in the third quarter of 2019. Cash dividends declared in the first nine months of 2020 were $4,459,000 or $0.60 per share, compared to $4,356,000 or $1.20 per share in the prior year. The amount of the cash dividends declared in the third quarter and first nine months of 2019 included the 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 39% for the first nine months of 2020.

Interest Income and Expense

Tables 1 and 2 on the following pages provide information regarding interest income and expense for the three- and nine-month periods ended September 30, 2020 and 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,
	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)	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)	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	)

	(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 $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 to 3.42% in the same period in 2020. Interest income was aided in the nine months ended September 30, 2020 by $1.8 million of loan fees recognized from loans originated under the Paycheck Protection Program.

The average balance of loans increased $546.9 million in the first nine months of 2020 compared to the same period in 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, were higher in 2020 than in 2019 as a result of the mergers. The increase in the average loans balance was partially offset by a 36 basis points decline in the average rate earned. 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 $18.1 million in the first nine months of 2020 compared to the same period in the prior year. The average balance of total securities increased $196.3 million in the first nine months of 2020 compared to the same period in 2019. The increase in the securities portfolio resulted primarily from the mergers with County and Community Shores. The effect of the average balance growth, partially offset by a combined 38 basis point reduction in the average rate earned on securities, caused tax-equivalent securities income to increase $3.2 million in the first nine months of 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 the prior year.

The average balance in all interest-bearing liabilities categories were higher in the third quarter and first nine months of 2020 compared to the same periods in 2019 as a result of the 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 point decrease in the average rate paid, caused interest expense to be $600,000 higher in the first nine months of 2020 compared to the first nine months of the prior year. The average balance of certificates of deposit was up $52.7 million in the first nine months of 2020 compared to the same period in 2019. The growth was overshadowed by a reduction of 78 basis points in the average rate paid on certificates which caused interest expense to decrease $269,000 in the first nine months of 2020 compared to the same period in 2019.

Provision and Allowance for Loan Losses

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 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 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, 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. The allowance for loan losses was 0.62% of total loans at September 30, 2020, compared to 0.51% at December 31, 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)	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 during the same time periods in 2019. Net charge-offs on an annualized basis as a percentage of average loans were 0.05% in the first nine months of 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 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 in the future and the impact of COVID-19 becomes more apparent, the provision and allowance for loan losses will be reviewed by ChoiceOne's management and adjusted as determined to be necessary.

Noninterest Income

Total noninterest income increased $4.4 million in the third quarter and $11.3 million in the first nine months of 2020 compared to the same periods in 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 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 securities in 2020 compared to 2019 was caused by a restructuring of ChoiceOne's securities portfolio in the second quarter of 2020 to take advantage of the low market interest rates. Trust income was a result of activity from trust services added from the merger with County. The negative change in the market value of equity securities in the first three quarters of 2020 compared to the positive change in the same period in the prior year was due primarily to the effect of the COVID-19 pandemic on equity market values in 2020.

Noninterest Expense

Total noninterest expense increased $8.2 million in the third quarter and $19.6 million in the first nine months of 2020 compared to the same periods in 2019. All expense categories grew as a result of the merger with County that was effective on October 1, 2019 and 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 2020 compared to the 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 and Community Shores, which contributed to the increase in expense in the first nine months of 2020 compared to 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 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. The higher effective tax rate in the first nine months of 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

Securities

The securities available for sale portfolio increased $53.8 million from December 31, 2019 to September 30, 2020. The increase in the securities portfolio primarily resulted from purchases in 2020 in excess of sales and maturities. Various securities totaling $183.1 million were purchased in the first nine months of 2020. Purchases were offset by approximately $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 $12.3 million in the first nine months of 2020.

Loans

Loans held for sale were $32.7 million higher at September 30, 2020 than at December 31, 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 the majority of 2020. Loans excluding loans held for sale and loans to other financial institutions grew $276.7 million from December 31, 2019 to September 30, 2020. A total of $174.0 million 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, $45.7 million in commercial 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, 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 $5.1 million at September 30, 2020, compared to $5.3 million as of June 30, 2020 and $5.9 million as of December 31, 2019. The change in the first nine months of 2020 was primarily comprised of a decrease of $545,000 in impaired agricultural loans in the first quarter of 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 ("TDRs").

The balances of these nonperforming loans were as follows:

(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

The increase in the nonaccrual loans balance in the first nine months of 2020 was primarily due to a $1,001,000 increase in nonaccrual commercial real estate loans, which was partially offset by a $556,000 reduction in nonaccrual residential real estate loans. Approximately 51% of the balance of loans considered TDRs were performing according to their restructured terms as of September 30, 2020. Management believes the allowance for loan losses allocated to its nonperforming loans was sufficient at September 30, 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 $262.1 million in the third quarter and $431.8 million in the first nine months of 2020. $227.8 million of deposits 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, while certificates of deposit declined $19.6 million in the first nine months of 2020. The change in checking and savings accounts was due in part to funds related to the stimulus package included in the CARES Act as well as funds on deposit from the PPP loans that were not fully utilized as of September 30, 2020. Seasonal fluctuations for ChoiceOne’s depositors also contributed to the growth in 2020.

Total borrowings declined $3.1 million in the third quarter and $20.0 million in the first nine months of 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 2020.

Shareholders' Equity

Total shareholders' equity increased $20.3 million in the third quarter of 2020 and $30.8 million from December 31, 2019 to September 30, 2020. $15.5 million of common stock was issued as consideration in connection with the merger with Community Shores. Other comprehensive income of $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 2020. Net income for the first nine months of 2020, net of cash dividends declared, also contributed $7.1 million to the equity balance growth.

Regulatory Capital Requirements

Following is information regarding compliance of ChoiceOne and the 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, 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 ChoiceOne Bank on a regular basis. The Board of Directors and management believe that the capital levels as of September 30, 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 used in operating activities was $20.3 million for the nine months ended September 30, 2020 compared to net cash provided of $5.4 million in the same period a year ago. The change was primarily due to a $26.0 million net negative change in the difference between loans originated for sale and proceeds from loan sales in the first nine months of 2020 as compared to the same period in the prior year. Net cash used in investing activities was $98.0 million for the first nine months of 2020 compared to $8.5 million provided in the same period in 2019. Cash used for net loan originations and net purchases of securities was $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 ended September 30, 2020, compared to $17.0 million used in the same period in the prior year. Higher growth of $206.9 million in deposits in the first nine months of 2020 was partially offset by an $18.0 million larger decline in wholesale funding compared to the same period in 2019.

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

NON-GAAP FINANCIAL MEASURES

This report contains references to 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 these non-GAAP financial measures provide additional information that is useful to investors in helping to understand the underlying financial performance of ChoiceOne.

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

A reconciliation of these non-GAAP financial measures follows:

Non-GAAP Reconciliation

(Unaudited)

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

	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands, Except Per Share Data)	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, 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 three months ended September 30, 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 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, 2019. As of the date of this report, ChoiceOne believes that 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.

In response to the 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 Michigan, placing restrictions on 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 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.

There were no unregistered sales of equity securities in the third quarter of 2020.

ISSUER PURCHASES OF EQUITY SECURITIES

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

2.1		Agreement and Plan of Merger between ChoiceOne Financial Services, Inc. and County Bank Corp dated March 22, 2019. Previously filed as an exhibit to ChoiceOne’s Form 8-K filed March 25, 2019. Here incorporated by reference.

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

31.1		Certification of Chief Executive Officer

31.2		Certification of Treasurer

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

101.INS		Inline XBRL Instance Document

101.SCH		Inline XBRL Taxonomy Extension Schema Document

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document

104		Cover Page Interactive Data File

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 9, 2020	/s/ Kelly J. Potes
	Kelly J. Potes Chief Executive Officer (Principal Executive Officer)

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