ChoiceOne Financial Services, Inc.
Annual Report 2019

Plain-text annual report

FINANCIAL SERVICES, INC. 2019 ANNUAL REPORT 1898 Sparta State Bank formed 1902 - Lapeer Savings Bank formed 1964 – Lapeer Savings Bank changed to Lapeer County Bank & Trust Co. 1925 – Lapeer Savings Bank establishes a Trust Department 1990 Sparta State Bank renames to ChoiceOne Bank and Kent City renames to Valley Ridge after merging with Grant State Bank. Both banks continue to grow and add branches to serve local communities. 2016 In December, Lapeer County Bank & Trust Co. and CSB Bank combine to form Lakestone Bank & Trust. 2020 the end of a DECADE Dear Shareholders and Friends, In 2019, our vision to be the best bank in Michigan became clearer. We closed the decade with a significant milestone – our merger with County Bank Corp. In March 2019, ChoiceOne Financial Services, Inc., parent company of ChoiceOne Bank announced our merger agreement with County Bank Corp., parent company of Lakestone Bank & Trust. On October 1, 2019, County Bank Corp., was merged into ChoiceOne after receiving regulatory and shareholder approvals. ChoiceOne is now looking forward to merging Lakestone Bank & Trust into ChoiceOne Bank in the second quarter of 2020. Doubling in size, ChoiceOne is now an approximately $1.4 billion asset bank holding company with 29 offices in West and Southeastern Michigan. LEVERAGING THE BEST The value of the merger of ChoiceOne and County Bank Corp., is how similar our two banks are and how we complement each other. Naturally as community banks, our teams excel at customer relations and community service. Together with our excellent management teams and similar cultures, we have leveraged the best technology, most innovative services and lucrative products, and the most efficient operations from each bank to secure our infrastructure and enhance our growth going forward. Now spanning Michigan, ChoiceOne will offer our customers and our communities the best of the best. 2006 – ChoiceOne Financial Services and Valley Ridge Financial Corp merge along with their subsidiaries, retaining the ChoiceOne Bank name. Because of our separate, but similar markets, this merger presents efficiencies and growth opportunities in our expanded network across Michigan. Our achievements over the last decade have allowed us to make these progressive moves, creating the 12th largest bank domiciled in Michigan based on assets. A NEW DECADE We began the new decade with another strategic milestone – our pending acquisition of Community Shores Bank Corporation. On January 6, 2020, ChoiceOne and Community Shores announced the signing of a definitive merger agreement pursuant to which ChoiceOne will acquire Community Shores. The combination will create an approximate $1.6 billion asset bank holding company with 33 offices in West and Southeastern Michigan. The transaction is expected to close in the second half of 2020, subject to the satisfaction of customary closing conditions, including receipt of Community Shores shareholder and regulatory approvals. Also in 2020, ChoiceOne began trading on the Nasdaq Stock Exchange as COFS. The company was previously traded on the OTC Pink Open Market under the same symbol. With the growth of our community bank franchise, the size of our organization now dictates a more recognized platform for our stock, making it easier to buy and sell for our shareholders. Our priorities for the future will build on the momentum we have set in place over the last decade. Given the recent pandemic we have experienced, our new size and scale have proven to be great assets. We will maintain the strength and resilience we have built over the last 120 years. And we will look forward to growth in our new markets as we bridge the East and West sides of Michigan. We are fortunate and grateful for our expert board of directors, committed employees and loyal shareholders. It’s community banking that has us all dedicated to serving…with a mission to provide superior service, quality advice and show our utmost respect to everyone we meet. Thank you, Paul Johnson Chairman of the Board Kelly Potes Chief Executive Officer corporate board of DIRECTORS FRONT ROW, FROM LEFT Bruce J. Cady VICE CHAIRMAN OF THE BOARD FORMER CHIEF EXECUTIVE OFFICER COUNTY BANK CORP. Roxanne M. Page CERTIFIED PUBLIC ACCOUNTANT, PARTNER BEENE GARTER LLP Paul L. Johnson CHAIRMAN OF THE BOARD FORMER PRESIDENT FALCON RESOURCES, INC Nels W. Nyblad PRESIDENT NYBLAD ORCHARDS MIDDLE ROW, FROM LEFT David H.Bush, O.D. RETIRED OPTOMETRIST Harold J. Burns CPA & PARTNER, UHY ADVISORS MI, INC. Jack G. Hendon CO-FOUNDER AND PARTNER H&S COMPANIES Keith D. Brophy DIRECTOR EMERGENT HOLDINGS BUSINESS LAB James A. Bosserd FORMER CHIEF EXECUTIVE OFFICER CHOICEONE FINANCIAL SERVICES, INC. AND CHOICEONE BANK BACK ROW, FROM LEFT Gregory A. McConnell RETIRED INSURANCE AGENT Patrick A. Cronin INSURANCE AGENT - STATE FARM INSURANCE COMPANIES Eric E. Burrough OWNER - MICHIGAN WEB PRESS/VIEW NEWSPAPER GROUP Kelly J. Potes CHIEF EXECUTIVE OFFICER, CHOICEONE FINANCIAL SERVICES, INC. AND CEO & PRESIDENT OF CHOICEONE BANK Michael J. Burke, Jr. PRESIDENT, CHOICEONE FINANCIAL SERVICES, INC. AND CEO & PRESIDENT OF LAKESTONE BANK & TRUST board of directors CHOICEONE BANK Greg L. Armock, President, Armock Mechanical Contractors Inc. | Keith D. Brophy, Director Emergent Holdings Business Lab | James A. Bosserd, Former Chief Executive Officer, ChoiceOne Financial Services, Inc., and ChoiceOne Bank | Michael J. Burke, Jr., President, ChoiceOne Financial Services, Inc. and CEO & President, Lakestone Bank & Trust | Jack G. Hendon, Co-Founder and Partner, H&S Companies | Paul L. Johnson, Chairman of the Board, Former President Falcon Resources, Inc. | Bradley F. McGinnis, President, Mega Wall Corporation | Nels W. Nyblad, President, Nyblad Orchards | Roxanne M. Page, Certified Public Accountant, Partner Beene Garter LLP | Kelly J. Potes, Chief Executive Officer, ChoiceOne Financial Services, Inc., and CEO & President of ChoiceOne Bank board of directors LAKESTONE BANK & TRUST Michael J. Burke, Jr., President, ChoiceOne Financial Services, Inc. and CEO & President, Lakestone Bank & Trust | Harold J. Burns, CPA & Partner, UHY Advisors MI, Inc. | Eric E. Burrough, Owner, Michigan Web Press/View Newspaper Group | David H. Bush, Retired Optometrist | Bruce J. Cady, Vice Chairman of the Board, Former CEO County Bank Corp. | David J. Churchill, Attorney, Taylor, Butterfield, Howell, Churchill & Garner, PC | Curt E. Coulter, Physician, Lapeer Medical Associates | Patrick A. Cronin, Insurance Agent - State Farm Insurance Companies | Gregory A. McConnell, Retired Insurance Agent | Kelly J. Potes, Chief Executive Officer, ChoiceOne Financial Services, Inc., and CEO & President of ChoiceOne Bank | Michelle M. Wendling, Senior Director, Frito Lay consolidated FINANCIALS FOR THE YEAR (DOLLARS IN THOUSANDS) Net Income Cash Dividends Declared PER SHARE 3 Net Income Cash Dividends Declared 4 AT YEAR-END (DOLLARS IN THOUSANDS) Gross Loans Deposits RATIOS Return on Average Assets Return on Average Shareholders’ Equity $ $ $ $ $ $ 1 actual 2019 7,171 5,806 1.58 1.40 802,048 1,154,602 0.85% 6.48% 2 adjusted 2019 8,940 1.97 $ $ 2018 2017 $ $ $ $ $ $ 7,333 2,572 2.03 0.71 409,073 577,015 1.15% 9.55% $ $ $ $ $ $ 6,168 2,317 1.70 0.64 398,785 539,853 0.98% 8.22% 2 ($000) ($000) ($000) 2 3 4 4 ($000) 1 All 2019 financial data includes the impact of the merger with County Bank Corp., which was effective as of October 1, 2019. 2 Adjusted net income and adjusted net income per share are not GAAP. A GAAP reconciliation is included in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of ChoiceOne’s Annual Report on form 10-K for the fiscal year ended December 31, 2019. Adjusted numbers are net of merger expenses. 3 Per share amounts have been adjusted for the 5% stock dividends paid in May 2017 and May 2018. 4 For 2019, includes a special dividend of $0.60 per share paid in connection with the merger with County Bank Corp. senior management Kelly J. Potes CEO & PRESIDENT CHOICEONE BANK Michael J. Burke, Jr. CEO & PRESIDENT LAKESTONE BANK & TRUST Adom J. Greenland SVP, CHIEF OPERATING OFFICER CHOICEONE BANK bank leadership CHOICEONE BANK Peter Batistoni SVP, CHIEF LENDING OFFICER LAKESTONE BANK & TRUST Lee A. Braford SVP, CHIEF CREDIT OFFICER CHOICEONE BANK Steven M. DeVolder SVP, CHIEF TRUST OFFICER LAKESTONE BANK & TRUST Bradley A. Henion SVP, CHIEF LENDING OFFICER CHOICEONE BANK Shelly M. Childers SVP, CHIEF INFORMATION OFFICER LAKESTONE BANK & TRUST Thomas L. Lampen SVP, CHIEF FINANCIAL OFFICER CHOICEONE BANK Brian Bacon VP, COMMERCIAL LOAN OFFICER Trent Hancock VP, REGIONAL MANAGER Bob Michel VP, OPERATIONS Amber Behrendt VP, BUSINESS DEVELOPMENT John Harpst VP, LOAN OPERATIONS MANAGER John Mousel, CFP ® VP, FINANCIAL ADVISOR Jennifer Bellamy VP, COMMERCIAL LOAN OFFICER Josh Hucul VP, CREDIT MANAGER Carrie Olson VP, CLIENT DEVELOPMENT Patricia Brown VP, COMMERCIAL LOAN OFFICER Scott Jennings VP, SPECIAL ASSETS MANAGER Jason Parker VP, COMMERCIAL LOAN OFFICER Kent Gagnon VP, BUSINESS DEVELOPMENT Bart Jonker VP, RISK MANAGEMENT Robert Robbins VP, COMMERCIAL LOAN OFFICER Denise Gates VP, REGIONAL BANKING, CONSUMER LOANS Gary Hall VP, MORTGAGE SALES MANAGER bank leadership LAKESTONE BANK & TRUST Bonnie Koehn VP, CLIENT DEVELOPMENT Maria Roossinck VP, DEPOSIT OPERATIONS Todd LaVictoire VP, CONTROLLER Paul Tucker VP, IT MANAGER Matt Ankley VP, COMMERCIAL LOAN OFFICER Eric Dyson VP, RETAIL LENDING DIRECTOR Tamra Kleynenberg VP, BRANCH ADMINISTRATOR Joseph H. Black CFO, CHIEF RISK OFFICER Danielle Chateauvert VP, MARKETING Robert J. Funk PORT HURON MARKET MANAGER Alexander Shoemaker VP, ASSISTANT TRUST OFFICER Beth Henderson VP, RETAIL UNDERWRITING Sharon Skirke VP, COMPLIANCE & ADMINISTRATION OFFICER Ashley Winter VP, COMMERCIAL LOAN OFFICER Rick Chown VP, COMMERCIAL & MEDICAL LOANS David Hendry VP, CREDIT MANAGER Debra M. Coe VP, BRANCH OPERATIONS Travis Jackson VP, COMMERCIAL LOAN OFFICER our bank MISSION Our mission is to provide superior service, quality advice, and show utmost respect to everyone we meet. our bank VISION Our vision is to become the Best Bank in Michigan. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K (cid:54) (cid:133) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2019 Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from__________________ to __________________ Commission File Number: 000-19202 ChoiceOne Financial Services, Inc. (Exact Name of Registrant as Specified in its Charter) Michigan (State or Other Jurisdiction of Incorporation or Organization) 109 East Division Street, Sparta, Michigan (Address of Principal Executive Offices) 38-2659066 (I.R.S. Employer Identification No.) 49345 (Zip Code) (616) 887-7366 (Registrant’s Telephone Number, Including Area Code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Common stock Trading symbol(s) COFS Name of each exchange on which registered NASDAQ Capital Market Securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934: None. Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:133) No (cid:54) Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:133) No (cid:54) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (cid:54) No (cid:133) 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 (cid:54) No (cid:133) Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (cid:133) Large accelerated filer Accelerated filer (cid:54) Non-accelerated filer (cid:133) Smaller reporting company (cid:54) Emerging growth company (cid:133) 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. (cid:133) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes (cid:133) No (cid:54) As of June 30, 2019, the aggregate market value of common stock held by non-affiliates of the Registrant was $99.7 million. This amount is based on an average bid price of $26.25 per share for the Registrant’s stock as of such date. As of February 28, 2020, the Registrant had 7,248,492 shares of common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive Proxy Statement of ChoiceOne Financial Services, Inc. for the Annual Meeting of Shareholders to be held on May 27, 2020 are incorporated by reference into Part III of this Form 10-K. CHOICEONE FINANCIAL SERVICES, INC. Form 10-K ANNUAL REPORT Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . . . . Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . . . . . . . . . . . . Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Contents PART 1 Item 1: Item 1A: Item 1B: Item 2: Item 3: Item 4: PART II Item 5: Item 6: Item 7: Item 7A: Item 8: Item 9: Item 9A: Item 9B: PART III Item 10: Item 11: Item 12: Item 13: Item 14: PART IV Item 15: SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 4 13 17 18 18 18 19 21 22 33 36 74 74 76 77 77 77 78 78 78 80 Page | 2 FORWARD-LOOKING STATEMENTS This report and the documents incorporated into this 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 Financial Services, Inc. Words such as “anticipates,” “believes,” “expects,” “forecasts,” “intends,” “is likely,” “plans,” “predicts,” “projects,” “may,” “could,” “estimates,” “look forward,” “continue,” “future,” and variations of such words and similar expressions are intended to identify such forward-looking statements. Management’s determination of the provision and allowance for loan losses, the carrying value of goodwill, loan servicing rights, other real estate owned, and the fair value of investment securities (including whether any impairment on any investment security is temporary or other-than-temporary and the amount of any impairment) and management’s assumptions concerning pension and other postretirement benefit plans involve judgments that are inherently forward-looking. Examples of forward- looking statements also include, but are not limited to, statements regarding the outlook and expectations of ChoiceOne and Community Shores Bank Corporation (“Community Shores”) with respect to their planned merger, the strategic benefits and financial benefits of the merger, including the expected impact of the transaction on the combined company’s future financial performance (including anticipated accretion to earnings per share, cost savings, the tangible book value earn-back period and other operating and return metrics), and the timing of the closing of the transaction. All of the information concerning interest rate sensitivity is forward-looking. All statements with references to future time periods are forward-looking. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions (“risk factors”) that are difficult to predict with regard to timing, extent, likelihood, and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed, implied or forecasted in such forward-looking statements. Furthermore, ChoiceOne Financial Services, Inc. undertakes no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events, or otherwise. Such risks, uncertainties, and assumptions with respect to the pending acquisition of Community Shores include, among others, the following: • • • • • • • the failure to obtain necessary regulatory approvals when expected or at all (and the risk that such approvals may result in the imposition of conditions that could adversely affect the combined company or the expected benefits of the transaction); the failure of Community Shores to obtain shareholder approval, or to satisfy any of the other closing conditions to the transaction, on a timely basis or at all; the occurrence of any event, change or other circumstances that could give rise to the right of one or both of the parties to terminate the merger agreement; the possibility that the anticipated benefits of the transaction, including anticipated cost savings and strategic gains, are not realized when expected or at all, including as a result of the impact of, or problems arising from, the integration of the two companies or as a result of the strength of the economy, competitive factors in the areas where ChoiceOne and Community Shores do business, or as a result of other unexpected factors or events; the impact of purchase accounting with respect to the transaction, or any change in the assumptions used regarding the assets purchased and liabilities assumed to determine their fair value; diversion of management’s attention from ongoing business operations and opportunities; potential adverse reactions or changes to business or employee relationships, including those resulting from the announcement or completion of the transaction; and • the outcome of any legal proceedings that may be instituted against ChoiceOne or Community Shores. Risk factors include, but are not limited to, the risk factors disclosed in Item 1A of this report. These are representative of the risk factors that could cause a difference between an ultimate actual outcome and a preceding forward-looking statement. PART I Explanatory Note On October 1, 2019, ChoiceOne Financial Services, Inc. (“ChoiceOne” or the “Company”) completed the merger of County Bank Corp. (“County”) with and into ChoiceOne with ChoiceOne surviving the merger. Accordingly, the reported consolidated financial condition and operating results as of and for the year ended December 31, 2019 include the impact of the merger, which was effective as of October 1, 2019. For additional details regarding the merger with County, see Note 21 (Business Combination) of the Notes to the Consolidated Financial Statements included in Item 8 of this report. Page | 3 Item 1. Business General ChoiceOne is a financial holding company registered under the Bank Holding Company Act of 1956, as amended (“BHC Act”). The Company was incorporated on February 24, 1986, as a Michigan corporation. The Company was formed to create a bank holding company for the purpose of acquiring all of the capital stock of ChoiceOne Bank, which became a wholly owned subsidiary of the Company on April 6, 1987. Effective November 1, 2006, the Company merged with Valley Ridge Financial Corp. (“VRFC”), a one-bank holding company for Valley Ridge Bank (“VRB”). In December 2006, VRB was consolidated into ChoiceOne Bank. Effective October 1, 2019, County, a one-bank holding company for Lakestone Bank & Trust (“Lakestone”), merged with and into the Company. It is expected that Lakestone will be consolidated into ChoiceOne Bank in May 2020. ChoiceOne Bank owns all of the outstanding common stock of ChoiceOne Insurance Agencies, Inc., an independent insurance agency headquartered in Sparta, Michigan (the “Insurance Agency”), and Lakestone owns all of the outstanding capital stock of Lakestone Financial Services, Inc. (“Lakestone Financial”). The Company’s business is primarily concentrated in a single industry segment banking. ChoiceOne Bank and Lakestone (together referred to as the “Banks”) are full-service banking institutions that offer a variety of deposit, payment, credit and other financial services to all types of customers. These services include time, savings, and demand deposits, safe deposit services, and automated transaction machine services. Loans, both commercial and consumer, are extended primarily on a secured basis to corporations, partnerships and individuals. Commercial lending covers such categories as business, industry, agricultural, construction, inventory and real estate. The Banks’ consumer loan departments make direct and indirect loans to consumers and purchasers of residential and real property. In addition, Lakestone provides trust and wealth management services. No material part of the business of the Company or the Banks is dependent upon a single customer or very few customers, the loss of which would have a materially adverse effect on the Company. ChoiceOne Bank’s primary market areas lie within Kent, Muskegon, Newaygo, and Ottawa counties in western Michigan, and Lakestone Bank’s in Lapeer, Macomb, and St. Clair counties in southeastern Michigan in the communities where the Banks’ respective offices are located. The Banks serve these markets through 27 full-service offices. The Company and the Banks have no foreign assets or income. At December 31, 2019, the Company had consolidated total assets of $1.4 billion, net loans of $798.0 million, total deposits of $1.2 billion and total shareholders’ equity of $192.1 million. For the year ended December 31, 2019, the Company recognized consolidated net income of $7.2 million. The principal source of revenue for the Company and the Banks is interest and fees on loans. On a consolidated basis, interest and fees on loans accounted for 64%, 64%, and 60% of total revenues in 2019, 2018, and 2017, respectively. Interest on securities accounted for 13%, 14%, and 13% of total revenues in 2019, 2018, and 2017, respectively. For more information about the Company’s financial condition and results of operations, see the consolidated financial statements and related notes included in Part II, Item 8 of this report. Pending Acquisition On January 3, 2020, ChoiceOne and Community Shores Bank Corporation (“Community Shores”) entered into an Agreement and Plan of Merger providing for the merger of Community Shores with and into ChoiceOne, with ChoiceOne as the surviving corporation. Subject to the terms and conditions of the merger agreement, upon completion of the merger, each share of Community Shores common stock outstanding immediately prior to the merger will be converted into the right to receive, at the election of each Community Shores shareholder, an amount of cash equal to $5.00 or 0.17162 shares of ChoiceOne common stock, in each case subject to the limitation that the total number of shares of Community Shores common stock to be converted into shares of ChoiceOne common stock will equal not less than 50% and not more than 75% of the total outstanding shares of Community Shores common stock as of the effective time of the merger. Completion of the merger with Community Shores is subject to certain customary closing conditions, including, among others, receipt of the requisite approval by the Community Shores shareholders, receipt of required regulatory approvals, the absence of any law or order prohibiting completion of the merger, the effectiveness of the registration statement to be filed by ChoiceOne with respect to the shares of ChoiceOne common stock to be issued in the merger and the absence of a material adverse effect (as defined in the merger agreement). The foregoing description of the merger and merger agreement with Community Shores is qualified in its entirety by reference to the merger agreement, which was filed as Exhibit 2.1 to ChoiceOne’s Form 8-K filed January 6, 2020. Competition The Banks’ competition primarily comes from other financial institutions located within Kent, Muskegon, Newaygo, and Ottawa counties in western Michigan and Lapeer, Macomb, and St. Clair counties in southeastern Michigan. There are a number of larger commercial banks within the Banks’ primary market areas. The Banks also compete with a large number of other financial institutions, Page | 4 such as savings and loan associations, insurance companies, consumer finance companies, credit unions, internet banks and other financial technology companies, and commercial finance and leasing companies for deposits, loans and service business. Money market mutual funds, brokerage houses and nonfinancial institutions provide many of the financial services offered by the Banks. Many of these competitors have substantially greater resources than the Banks. The principal methods of competition for financial services are price (the rates of interest charged for loans, the rates of interest paid for deposits and the fees charged for services) and the convenience and quality of services rendered to customers. Supervision and Regulation Banks and bank holding companies are extensively regulated. The Company is subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). The Company’s activities are generally limited to owning or controlling banks and engaging in such other activities as the Federal Reserve Board may determine to be closely related to banking. Prior approval of the Federal Reserve Board, and in some cases various other government agencies, is required for the Company to acquire control of any additional bank holding companies, banks or other operating subsidiaries. Under Federal Reserve Board policy, the Company is expected to act as a source of financial strength to the Banks and to commit resources to support them. The Banks are chartered under state law and are subject to regulation by the Michigan Department of Insurance and Financial Services (“DIFS”). State banking laws place restrictions on various aspects of banking, including permitted activities, loan interest rates, branching, payment of dividends and capital and surplus requirements. The Banks are members of the Federal Reserve System and are also subject to regulation by the Federal Reserve Board. The Banks’ deposits are insured by the Federal Deposit Insurance Corporation (the “FDIC”) to the maximum extent provided by law. The Banks are members of the Federal Home Loan Bank system, which provides certain advantages to the Banks, including favorable borrowing rates for certain funds. The Company is a legal entity separate and distinct from the Banks. The Company’s primary source of funds available to pay dividends to shareholders is dividends paid to it by the Banks. There are legal limitations on the extent to which the Banks can lend or otherwise supply funds to the Company. In addition, payment of dividends to the Company by the Banks is subject to various state and federal regulatory limitations. The FDIC formed the Deposit Insurance Fund (“DIF”) in accordance with the Federal Deposit Insurance Reform Act of 2005 (“Reform Act”) to create a stronger and more stable insurance system. The FDIC maintains the insurance reserves of the DIF by assessing depository institutions an insurance premium. The DIF insures deposit accounts of the Banks up to a maximum amount of $250,000 per separately insured depositor. FDIC insured depository institutions are required to pay deposit insurance premiums based on the risk an institution poses to the DIF. In February 2011, the FDIC finalized rules, effective for assessments occurring after April 1, 2011, which redefined an institution’s assessment base as average consolidated total assets minus average Tier 1 capital. The new rules also established the initial base assessment rate for Risk Category 1 institutions, such as the Banks, at 5 to 9 basis points (annualized). Effective July 1, 2016, the FDIC amended its rules to eliminate Risk Categories for small banks, replacing them with a method based on a bank’s CAMELS composite rating and several financial ratios. On that date, the Banks’ initial base assessment rate was reduced to 3 basis points, since the Federal Deposit Insurance Reserve Ratio reached 1.15% as of June 30, 2016. The Deposit Insurance Funds Act of 1996 authorized the Financing Corporation (“FICO”) to impose periodic assessments on all depository institutions. The purpose of these periodic assessments is to spread the cost of the interest payments on the outstanding FICO bonds issued to recapitalize the Savings Association Insurance Fund (“SAIF”) over a larger number of institutions. The federal banking agencies have adopted guidelines to promote the safety and soundness of federally-insured depository institutions. These guidelines establish standards for, among other things, internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings. The Company and the Banks are subject to regulatory “risk-based” capital guidelines. Failure to meet these capital guidelines could subject the Company or the Banks to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on accepting brokered deposits, and other restrictions on its business. In addition, the Banks would generally not receive regulatory approval of any application that requires the consideration of capital adequacy, such as a branch or merger application, unless it could demonstrate a reasonable plan to meet the capital requirement within a reasonable period of time. Under Federal Reserve Board policy, the Company is expected to act as a source of financial strength to the Banks and to commit resources to support the Banks. In addition, if DIFS deems the Banks’ capital to be impaired, DIFS may require the Banks to restore their capital by a special assessment on the Company as the Banks’ sole shareholder. If the Company fails to pay any assessment, the Company’s directors will be required, under Michigan law, to sell the shares of the Banks’ stock owned by the Company to the highest bidder at either a public or private auction and use the proceeds of the sale to restore the Banks’ capital. Page | 5 The Federal Deposit Insurance Corporation Improvement Act (“FDICIA”) requires, among other things, federal banking agencies to take “prompt corrective action” in respect of depository institutions that do not meet minimum capital requirements. FDICIA sets forth the following five capital categories: “well-capitalized,” “adequately-capitalized,” “undercapitalized,” “significantly-undercapitalized” and “critically-undercapitalized.” A depository institution’s capital category will depend upon how its capital levels compare with various relevant capital measures as established by regulation, which include Tier 1 and total risk-based capital ratio measures and a leverage capital ratio measure. Under certain circumstances, the appropriate banking agency may treat a well-capitalized, adequately- capitalized, or undercapitalized institution as if the institution were in the next lower capital category. Federal banking regulators are required to take specified mandatory supervisory actions and are authorized to take other discretionary actions with respect to institutions in the three undercapitalized categories. The severity of the action depends upon the capital category in which the institution is placed. Subject to a narrow exception, the banking regulator must generally appoint a receiver or conservator for an institution that is critically undercapitalized. An institution in any of the undercapitalized categories is required to submit an acceptable capital restoration plan to its appropriate federal banking agency. An undercapitalized institution is also generally prohibited from paying any dividends, increasing its average total assets, making acquisitions, establishing any branches, accepting or renewing any brokered deposits or engaging in any new line of business, except under an accepted capital restoration plan or with FDIC approval. On July 3, 2013, the FDIC Board of Directors approved the Regulatory Capital Interim Final Rule, implementing Basel III. This rule redefines Tier 1 capital as two components (Common Equity Tier 1 and Additional Tier 1), creates a new capital ratio (Common Equity Tier 1 Risk-based Capital Ratio) and implements a capital conservation buffer. It also revises the prompt corrective action thresholds and makes changes to risk weights for certain assets and off-balance-sheet exposures. The Banks were required to transition into the new rule beginning on January 1, 2015. Banks are subject to a number of federal and state laws and regulations, which have a material impact on their business. These include, among others, minimum capital requirements, state usury laws, state laws relating to fiduciaries, the Truth in Lending Act, the Truth in Savings Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Fair Credit Reporting Act, the Expedited Funds Availability Act, the Community Reinvestment Act, the Real Estate Settlement Procedures Act, the Service Members Civil Relief Act, the USA PATRIOT Act, the Bank Secrecy Act, regulations of the Office of Foreign Assets Controls, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, electronic funds transfer laws, redlining laws, predatory lending laws, antitrust laws, environmental laws, money laundering laws and privacy laws. The monetary policy of the Federal Reserve Board may influence the growth and distribution of bank loans, investments and deposits, and may also affect interest rates on loans and deposits. These policies may have a significant effect on the operating results of banks. In general, the BHC Act limits the business of bank holding companies to banking, managing or controlling banks and other activities that the Federal Reserve Board has determined to be closely related to the business of banking. In addition, bank holding companies that qualify and elect to be financial holding companies may engage in any activities that are financial in nature or complementary to a financial activity and do not pose a substantial risk to the safety and soundness of depository institutions or the financial system without prior approval of the Federal Reserve Board. Activities that are financial in nature include securities underwriting and dealing, insurance underwriting and making merchant banking investments. In order for the Company to maintain financial holding company status, both the Company and the Banks must be categorized as “well- capitalized” and “well-managed” under applicable regulatory guidelines. If the Company or either of the Banks ceases to meet these requirements, the Federal Reserve Board may impose corrective capital and/or managerial requirements and place limitations on the Company’s ability to conduct the broader financial activities permissible for financial holding companies. In addition, if the deficiencies persist, the Federal Reserve Board may require the Company to divest of the Banks. The Company and the Banks were each categorized as “well-capitalized” and “well-managed” as of December 31, 2019. Bank holding companies may acquire banks and other bank holding companies located in any state in the United States without regard to geographic restrictions or reciprocity requirements imposed by state banking law. Banks may also establish interstate branch networks through acquisitions of and mergers with other banks. The establishment of de novo interstate branches or the acquisition of individual branches of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) is allowed only if specifically authorized by state law. Michigan banking laws do not significantly restrict interstate banking. The Michigan Banking Code permits, in appropriate circumstances and with the approval of the Department of Insurance and Financial Services, (1) acquisition of Michigan banks by FDIC-insured banks, savings banks or savings and loan associations located in other states, (2) sale by a Michigan bank of branches to an FDIC-insured bank, savings bank or savings and loan association located in a state in which a Michigan bank could purchase branches of the purchasing entity, (3) consolidation of Michigan banks and FDIC-insured banks, savings banks or savings and loan associations located in other states having laws permitting such consolidation, (4) establishment of branches in Michigan by FDIC-insured banks located in other states, the District of Columbia or U.S. territories or protectorates having laws permitting a Michigan bank to establish a branch in such jurisdiction, and (5) establishment by foreign banks of branches located in Michigan. Page | 6 Banks are subject to the provisions of the Community Reinvestment Act (“CRA”). Under the terms of the CRA, the appropriate federal bank regulatory agency is required, in connection with its examination of a bank, to assess the bank’s record in meeting the credit needs of the community served by that bank, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of the institution. Under the CRA, institutions are assigned a rating of “outstanding,” “satisfactory,” “needs to improve,” or “substantial non-compliance.” The regulatory agency’s assessment of the bank’s record is made available to the public. Further, a bank’s federal regulatory agency is required to assess the CRA compliance record of any bank that has applied to establish a new branch office that will accept deposits, relocate an office, or merge or consolidate with, or acquire the assets or assume the liabilities of, a federally regulated financial institution. In the case of a bank holding company applying for approval to acquire a bank or another bank holding company, the Federal Reserve Board will assess the CRA compliance record of each subsidiary bank of the applicant bank holding company, and such compliance records may be the basis for denying the application. Upon receiving notice that a subsidiary bank is rated less than “satisfactory,” a financial holding company will be prohibited from additional activities that are permitted to be conducted by a financial holding company and from acquiring any company engaged in such activities. The CRA rating of each of the Banks was “Satisfactory” as of its most recent examination. Effects of Compliance With Environmental Regulations The nature of the business of the Banks is such that they hold title, on a temporary or permanent basis, to a number of parcels of real property. These include properties owned for branch offices and other business purposes as well as properties taken in or in lieu of foreclosure to satisfy loans in default. Under current state and federal laws, present and past owners of real property may be exposed to liability for the cost of cleanup of environmental contamination on or originating from those properties, even if they are wholly innocent of the actions that caused the contamination. These liabilities can be material and can exceed the value of the contaminated property. Management is not presently aware of any instances where compliance with these provisions will have a material effect on the capital expenditures, earnings or competitive position of the Company or the Banks, or where compliance with these provisions will adversely affect a borrower’s ability to comply with the terms of loan contracts. Employees As of February 28, 2020, the Company, the Banks and the Insurance Agency employed 339 employees, of which 270 were full-time employees. The Company, the Banks, and the Insurance Agency believe their overall relations with their employees are good. Statistical Information Additional statistical information describing the business of the Company appears on the following pages and in Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Item 7 of this report and in the Consolidated Financial Statements and the notes thereto in Item 8 of this report. The following statistical information should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and notes in this report. Securities Portfolio The carrying value of securities categorized by type as of December 31 was as follows: (Dollars in thousands) Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,851 $ 2,847 $ 2019 2018 2017 — U.S. Government and federal agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S. Treasury notes and bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State and municipal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trust preferred securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,008 1,947 $ 17,215 $ 33,529 $ 35,126 1,960 173,924 103,928 100,048 9,820 142,760 5,151 2,672 2,892 — 500 1,000 94 — $ 339,579 $ 166,602 $ 155,591 21,575 5,102 — 500 21 The Company did not hold investment securities from any one issuer at December 31, 2019, that were greater than 10% of the Company’s shareholders’ equity, exclusive of U.S. Government and U.S. Government agency securities. Page | 7 Presented below is the fair value of securities as of December 31, 2019 and 2018, a schedule of maturities of securities as of December 31, 2019, and the weighted average yields of securities as of December 31, 2019: (Dollars in thousands) U.S. Government and federal agency . . . . . . . . . U.S. Treasury notes and bonds . . . . . . . . . . . . . . State and municipal(1) . . . . . . . . . . . . . . . . . . . . . Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trust preferred securities . . . . . . . . . . . . . . . . . . Asset-backed securities . . . . . . . . . . . . . . . . . . . . Total debt securities . . . . . . . . . . . . . . . . . . . Mortgage-backed securities . . . . . . . . . . . . . . . . Equity securities(2) . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities maturing within: Less than 1 Year 1 Year - 5 Years 5 Years - 10 Years $ 9,099 $ 2,026 $ 6,090 $ — 64,436 — — — 70,526 — 16,450 300 1,000 — 26,849 2,008 50,121 2,372 — — 56,527 More than 10 Years — $ — Fair Value at Dec. 31, 2019 17,215 $ 2,008 Fair Value at Dec. 31, 2018 33,529 1,947 42,917 173,924 103,928 5,102 500 21 42,917 196,819 145,027 2,672 1,000 — — — — 8 — 60,607 1,000 $ 26,857 $ 133,778 $ 132,133 $ 77,251 — 4,894 142,760 2,851 1,851 21,575 2,847 49,662 $ 342,430 $ 169,449 Weighted average yields: Less than 1 Year 1 Year - 5 Years 5 Years - 10 Years More than 10 Years Total U.S. Government and federal agency . . . . . . . . . . . . . . . . U.S. Treasury notes and bonds . . . . . . . . . . . . . . . . . . . . . State and municipal(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trust preferred securities . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . Equity securities(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.88 % — 2.89 2.03 5.25 3.67 — 1.98 % 1.85 2.88 2.74 — 2.51 — 2.43 % — 2.94 — — 2.26 4.56 —% — 1.23 — — 3.03 — 2.09 % 1.85 2.50 2.66 5.25 2.42 0.92 (1) The yield is computed for tax-exempt securities on a fully tax-equivalent basis at an incremental tax rate of 21% for 2019. (2) Equity securities are preferred and common stock that may or may not have a stated maturity. Loan Portfolio The Company’s loan portfolio categorized by loan type (excluding loans held for sale and loans to other financial institutions) is presented below for the respective years ended December 31: 2017 2019 2018 2016 2015 $ 57,339 $ 49,109 $ 48,464 $ 44,614 $ 40,232 94,347 20,090 97,736 5,390 91,509 $ 802,048 $ 409,073 $ 398,785 $ 369,000 $ 349,304 104,386 24,513 123,487 6,613 91,322 91,406 24,382 139,453 8,843 95,880 148,083 38,854 326,379 13,411 217,982 96,088 21,596 110,762 6,153 89,787 (Dollars in thousands) Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate - commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate - construction . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate - residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total loans, gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page | 8 Maturities and Sensitivities of Loans to Changes in Interest Rates The following schedule presents the maturities of loans (excluding residential real estate and consumer loans) as of December 31, 2019. All loans over one year in maturity (excluding residential real estate and consumer loans) are also presented classified according to the sensitivity to changes in interest rates as of December 31, 2019. (Dollars in thousands) Less than 1 Year 1 Year - 5 Years More than 5 Years Total Loan Type Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate - commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate - construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,336 $ 15,610 $ 17,779 $ 23,950 $ 57,339 47,846 47,901 148,083 24,727 130,333 171,319 326,379 13,411 12,126 $ 100,309 $ 201,733 $ 243,170 $ 545,212 1,285 — (Dollars in thousands) Less than 1 Year 1 Year - 5 Years More than 5 Years Total Loan Sensitivity to Changes in Interest Rates Loans with fixed interest rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans with floating or adjustable interest rates . . . . . . . . . . . . . . . . . . . . . . . . . . Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 39,463 $ 174,100 $ 132,544 $ 346,107 27,633 110,626 199,105 $ 100,309 $ 201,733 $ 243,170 $ 545,212 60,846 Loan maturities are classified according to the contractual maturity date or the anticipated amortization period, whichever is appropriate. The anticipated amortization period is used in the case of loans where a balloon payment is due before the end of the loan’s normal amortization period. At the time the balloon payment is due, the loan can either be rewritten or payment in full can be requested. The decision regarding whether the loan will be rewritten or a payment in full will be requested will be based upon the loan’s payment history, the borrower’s current financial condition, and other relevant factors. Risk Elements The following loans were classified as nonperforming as of December 31: (Dollars in thousands) Loans accounted for on a nonaccrual basis . . . . . . . . . . . . . . . . . . . . Accruing loans which are contractually past due 90 days $ 2019 4,687 $ 2018 1,532 $ 2017 1,096 $ 2016 1,983 $ 2015 2,198 or more as to principal or interest payments . . . . . . . . . . . . . . . Loans defined as “troubled debt restructurings” . . . . . . . . . . . . . . . . Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — 1,726 6,413 $ — 2,254 3,786 $ 258 2,896 4,250 $ 229 2,853 5,065 $ 29 3,271 5,498 A loan is placed on nonaccrual status at the point in time at which the collectability of principal or interest is considered doubtful. The table below illustrates interest forgone and interest recorded on nonperforming loans for the years presented: (Dollars in thousands) Interest on non-performing loans that would have been earned had the loans been in an accrual or performing status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest on non-performing loans that was actually recorded when received . . . . . . . . . . . . . . . $ $ 474 $ 104 $ 224 $ 122 $ 218 145 2019 2018 2017 Potential Problem Loans At December 31, 2019, there were no loans not disclosed above where known information about possible credit problems of borrowers caused management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms. Specific loss allocations totaling $355,000 from the allowance for loan losses had been allocated for all nonperforming and potential problem loans as of December 31, 2019. However, the entire allowance for loan losses is also available for any potential problem loans. Page | 9 Loan Concentrations As of December 31, 2019, there was no concentration of loans exceeding 10% of total loans that is not otherwise disclosed as a category of loans pursuant to Item III.A. of Industry Guide 3. Other Interest-Bearing Assets As of December 31, 2019, there were no other interest-bearing assets requiring disclosure under Item III.C.1. or 2. of Industry Guide 3 if such assets were loans. Summary of Loan Loss Experience The following schedule presents a summary of activity in the allowance for loan losses for the periods shown and the percentage of net charge-offs during each period to average gross loans outstanding during the period: (Dollars in thousands) Allowance for loan losses at beginning of year . . . . . . . . . . . . . . $ 2019 4,673 2018 $ 4,577 $ 2017 4,277 $ 2016 4,194 $ 2015 4,173 Charge-offs: Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate - commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate - construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate - residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Recoveries: Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate - commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate - construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate - residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net charge-offs (recoveries) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 83 292 589 — 25 989 65 22 136 26 — 124 373 616 — — 58 282 — — 25 365 33 107 112 61 — 113 426 (61) 35 — 439 253 — — 43 735 — 21 169 258 40 62 550 185 485 — 37 218 — — 102 357 — 31 149 89 — 171 440 (83) — — 30 291 — — 140 461 1 64 121 47 — 149 382 79 100 Allowance for loan losses at end of year . . . . . . . . . . . . . . . . . . . $ 4,057 $ 4,673 $ 4,577 $ 4,277 $ 4,194 Allowance for loan losses as a percentage of: Total loans as of year end . . . . . . . . . . . . . . . . . . . . . . . . . . . Nonaccrual loans, accrual loans past due 90 days or more 0.51% 1.14% 1.15% 1.16% 1.21% and troubled debt restructurings . . . . . . . . . . . . . . . . . . . 63% 123% 108% 84% 76% Ratio of net charge-offs during the period to average loans outstanding during the period . . . . . . . . . . . . . . . . . . . . . . . . Loan recoveries as a percentage of prior year’s charge-offs . . . . . 0.12% 102% (0.02)% 58% 0.05% 154% (0.02)% 95% 0.02% 36% (1) Additions to the allowance for loan losses charged to operations during the periods shown were based on management’s judgment after considering factors such as loan loss experience, evaluation of the loan portfolio, and prevailing and anticipated economic conditions. The evaluation of the loan portfolio is based upon various (cid:85)(cid:76)(cid:86)(cid:78)(cid:3)(cid:73)(cid:68)(cid:70)(cid:87)(cid:82)(cid:85)(cid:86)(cid:3)(cid:86)(cid:88)(cid:70)(cid:75)(cid:3)(cid:68)(cid:86)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:191)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:70)(cid:82)(cid:81)(cid:71)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:69)(cid:82)(cid:85)(cid:85)(cid:82)(cid:90)(cid:72)(cid:85)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:70)(cid:82)(cid:79)(cid:79)(cid:68)(cid:87)(cid:72)(cid:85)(cid:68)(cid:79)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:82)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:70)(cid:82)(cid:81)(cid:86)(cid:76)(cid:71)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:15)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:15)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:82)(cid:83)(cid:76)(cid:81)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:80)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:15)(cid:3)(cid:71)(cid:72)(cid:86)(cid:72)(cid:85)(cid:89)(cid:72)(cid:3)(cid:70)(cid:88)(cid:85)(cid:85)(cid:72)(cid:81)(cid:87)(cid:3) recognition in estimating loan losses. Page | 10 The following schedule presents an allocation of the allowance for loan losses to the various loan categories as of the years ended December 31: (Dollars in thousands) Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate - commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate - construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate - residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unallocated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 2018 2019 471 $ 481 $ 892 254 1,926 38 537 545 4,057 $ 4,673 $ 655 270 1,663 76 640 282 2017 506 $ 1,001 262 1,761 35 726 286 4,577 $ 2016 433 $ 688 305 1,438 62 1,013 338 4,277 $ 2015 420 586 297 1,030 46 1,388 427 4,194 The lower level in the allowance allocation to commercial and industrial loans was due to lower historical charge-off levels. The decline in the allocation to commercial real estate loans was caused by net charge-offs in 2019 which were not completely replaced by a provision allocation. The reduction in both the unallocated and total allowance for loan losses balances in 2019 resulted from net charge- offs during the year with a provision of $0. Management periodically reviews the assumptions, loss ratios and delinquency trends in estimating the appropriate level of its allowance for loan losses and believes the unallocated portion of the total allowance was sufficient at December 31, 2019. The following schedule presents the stratification of the loan portfolio by category, based on the amount of loans outstanding as a percentage of total loans for the respective years ended December 31. Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate - commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate - construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate - residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2019 2018 2017 2016 7% 18 5 40 2 28 100% 12% 22 6 34 2 24 100% 12% 26 6 31 2 23 100% 12% 26 6 30 2 24 100% 2015 12% 26 6 28 2 26 100% Deposits The following schedule presents the average deposit balances by category and the average rates paid thereon for the respective years: (Dollars in thousands) Noninterest-bearing demand . . . . . . . . . . . . . . . . . . . . . . . . . Interest-bearing demand and money market deposits . . . . . . Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2019 2018 $ 186,411 —% $ 148,495 —% $ 136,353 —% 209,542 0.33 278,444 0.56 76,102 0.02 109,028 0.07 136,537 1.87 109,834 1.34 $ 710,420 0.63% $ 543,973 0.40% $ 525,445 0.22% 208,049 0.18 76,107 0.02 104,936 0.75 2017 The following table illustrates the maturities of certificates of deposits issued in denominations of $100,000 or more as of December 31, 2019: (Dollars in thousands) Maturing in less than 3 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Maturing in 3 to 6 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Maturing in 6 to 12 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Maturing in more than 12 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25,279 27,958 21,400 10,771 $ 85,408 At December 31, 2019, the Banks had no material foreign deposits. Page | 11 Short-Term Borrowings Federal funds purchased by the Company are unsecured overnight borrowings from correspondent banks. Federal funds purchased are due the next business day. The table below provides additional information regarding these short-term borrowings: (Dollars in thousands) Outstanding balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average interest rate at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average balance during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average interest rate during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Maximum month end balance during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 2019 — —% 2,289 2.48% 2018 $ 4,800 $ 2.80% 2017 — —% $ 2,174 $ 703 2.31% 1.47% $ 15,000 $ 13,000 $ 5,470 Repurchase agreements include advances by the Banks’ customers that are not covered by federal deposit insurance. These agreements are direct obligations of the Company and are secured by securities held in safekeeping at a correspondent bank. The table below provides additional information regarding these short-term borrowings: (Dollars in thousands) Outstanding balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average interest rate at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average balance during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average interest rate during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Maximum month end balance during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ $ 2019 — $ —% — —% — 2017 $ 7,148 2018 — —% 0.05% $ 1,412 $ 4,958 0.05% 0.05% $ 7,148 $ 8,440 Advances from the Federal Home Loan Bank (“FHLB”) with original repayment terms less than one year are considered short-term borrowings for the Company. These advances are secured by residential real estate mortgage loans and U.S. government agency securities. The advances have maturities ranging from 1 month to 12 months from the date of issue. The table below provides additional information regarding these short-term borrowings: (Dollars in thousands) Outstanding balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average interest rate at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average balance during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average interest rate during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Maximum month end balance during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2019 $ 33,000 $ 2.12% 2018 5,000 2017 $ 20,268 2.57% 1.36% $ 18,765 $ 11,752 $ 22,830 2.38% 1.92% 1.21% $ 53,000 $ 25,000 $ 40,273 There were no other categories of short-term borrowings whose average balance outstanding exceeded 30% of shareholders’ equity in 2019, 2018 or 2017. Return on Equity and Assets The following schedule presents certain financial ratios of the Company for the years ended December 31: Return on assets (net income divided by average total assets) . . . . . . . . . . . . . . . . . . . . . . . . 2019 0.85% 2018 1.15% 2017 0.98% Return on equity (net income dividend by average equity) . . . . . . . . . . . . . . . . . . . . . . . . . . 6.48% 9.55% 8.22% Dividend payout ratio (dividends declared per share divided by net income per share) . . . . 80.97% 35.08% 37.57% Equity to assets ratio (average equity divided by average total assets) . . . . . . . . . . . . . . . . . 13.08% 12.04% 11.91% Page | 12 Item 1A. Risk Factors The Company is subject to many risks and uncertainties. Although the Company seeks ways to manage these risks and develop programs to control risks to the extent that management can control them, the Company cannot predict the future. Actual results may differ materially from management’s expectations. Some of these significant risks and uncertainties are discussed below. The risks and uncertainties described below are not the only ones that the Company faces. Additional risks and uncertainties of which the Company is unaware, or that it currently does not consider to be material, also may become important factors that affect the Company and its business. If any of these risks were to occur, the Company’s business, financial condition or results of operations could be materially and adversely affected. Investments in the Company’s common stock involve risk. The market price of the Company’s common stock may fluctuate significantly in response to a number of factors, including: • The impact associated with the novel coronavirus outbreak, COVID-19 • Variations in quarterly or annual operating results • Changes in dividends per share • Changes in interest rates • New developments, laws or regulations in the banking industry • Acquisitions or business combinations involving the Company or its competition • Regulatory actions, including changes to regulatory capital levels, the components of regulatory capital and how regulatory capital is calculated • Volatility of stock market prices and volumes • Changes in market valuations of similar companies • New litigation or contingencies or changes in existing litigation or contingencies • Changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or other regulatory agencies • Rumors or erroneous information • Credit and capital availability • Issuance of additional shares of common stock or other debt or equity securities of the Company Asset quality could be less favorable than expected. A significant source of risk for the Company arises from the possibility that losses will be sustained because borrowers, guarantors and related parties may fail to perform in accordance with the terms of their loan agreements. Most loans originated by the Company are secured, but some loans are unsecured depending on the nature of the loan. With respect to secured loans, the collateral securing the repayment of these loans includes a wide variety of real and personal property that may be insufficient to cover the obligations owed under such loans. Collateral values may be adversely affected by changes in prevailing economic, environmental and other conditions, including declines in the value of real estate, changes in interest rates, changes in monetary and fiscal policies of the federal government, terrorist activity, environmental contamination and other external events. The Company’s allowance for loan losses may not be adequate to cover actual loan losses. The risk of nonpayment of loans is inherent in all lending activities and nonpayment of loans may have a material adverse effect on the Company’s earnings and overall financial condition, and the value of its common stock. The Company makes various assumptions and judgments about the collectability of its loan portfolio and provides an allowance for potential losses based on a number of factors. If its assumptions are wrong, the allowance for loan losses may not be sufficient to cover losses, which could have an adverse effect on the Company’s operating results, and may cause it to increase the allowance in the future. The actual amount of future provisions for loan losses cannot now be determined and may exceed the amounts of past provisions for loan losses. Federal and state banking regulators, as an integral part of their supervisory function, periodically review the allowance for loan losses. These regulatory agencies may require the Company to increase its provision for loan losses or to recognize further loan charge-offs based upon their judgments, which may be Page | 13 different from the Company’s judgments. Any increase in the allowance for loan losses could have a negative effect on the Company’s regulatory capital ratios, net income, financial condition and results of operations. In addition, a large portion of the loan portfolio was marked to fair value as part of the merger with County and does not carry an allowance as management determined no credit deterioration had occurred since the effective date of the merger. General economic conditions in the state of Michigan could be less favorable than expected. The Company is affected by general economic conditions in the United States, although most directly within Michigan. An economic downturn within Michigan could negatively impact household and corporate incomes. This impact may lead to decreased demand for both loan and deposit products and increase the number of customers who fail to pay interest or principal on their loans. The Company could be adversely affected by the soundness of other financial institutions, including defaults by larger financial institutions. The Company’s ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of credit, trading, clearing, counterparty or other relationships between financial institutions. The Company has exposure to multiple counterparties, and it routinely executes transactions with counterparties in the financial industry. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, could lead to market-wide liquidity problems and losses or defaults by the Company or by other institutions. This is sometimes referred to as “systemic risk” and may adversely affect financial intermediaries, such as clearing agencies, clearing houses, banks, securities firms and exchanges, with which the Company interacts on a daily basis, and therefore could adversely affect the Company. If the Company does not adjust to changes in the financial services industry, its financial performance may suffer. The Company’s ability to maintain its financial performance and return on investment to shareholders will depend in part on its ability to maintain and grow its core deposit customer base and expand its financial services to its existing customers. In addition to other banks, competitors include credit unions, securities dealers, brokers, mortgage bankers, investment advisors, internet banks and other financial technology companies, and finance and insurance companies. The increasingly competitive environment is, in part, a result of changes in the economic environment within the state of Michigan, regulation, changes in technology and product delivery systems and consolidation among financial service providers. New competitors may emerge to increase the degree of competition for the Company’s customers and services. Financial services and products are also constantly changing. The Company’s financial performance will also depend in part upon customer demand for the Company’s products and services and the Company’s ability to develop and offer competitive financial products and services. Changes in interest rates could reduce the Company‘s income and cash flow. The Company’s income and cash flow depends, to a great extent, on the difference between the interest earned on loans and securities, and the interest paid on deposits and other borrowings. Market interest rates are beyond the Company’s control, and they fluctuate in response to general economic conditions and the policies of various governmental and regulatory agencies including, in particular, the Federal Reserve Board. Changes in monetary policy, including changes in interest rates and interest rate relationships, will influence the origination of loans, the purchase of investments, the generation of deposits and the rate received on loans and securities and paid on deposits and other borrowings. Interest rates on our outstanding financial instruments might be subject to change based on regulatory developments, which could adversely affect our revenue, expenses, and the value of those financial instruments. LIBOR and certain other “benchmarks” are the subject of recent national, international, and other regulatory guidance and proposals for reform. These reforms may cause such benchmarks to perform differently than in the past or have other consequences which cannot be predicted. On July 27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, publicly announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. It is unclear whether, at that time, LIBOR will cease to exist or if new methods of calculating LIBOR will be established. If LIBOR ceases to exist or if the methods of calculating LIBOR change from current methods for any reason, interest rates on our floating rate obligations, loans, deposits, and other financial instruments tied to LIBOR rates, as well as the revenue and expenses associated with those financial instruments, may be adversely affected. Further, any uncertainty regarding the continued use and reliability of LIBOR as a benchmark interest rate could adversely affect the value of our floating rate obligations, loans, deposits, and other financial instruments tied to LIBOR rates. Page | 14 The Company is subject to liquidity risk in its operations, which could adversely affect its ability to fund various obligations. Liquidity risk is the possibility of being unable to meet obligations as they come due or capitalize on growth opportunities as they arise because of an inability to liquidate assets or obtain adequate funding on a timely basis, at a reasonable cost and within acceptable risk tolerances. Liquidity is required to fund various obligations, including credit obligations to borrowers, loan originations, withdrawals by depositors, repayment of debt, dividends to shareholders, operating expenses and capital expenditures. Liquidity is derived primarily from retail deposit growth and earnings retention, principal and interest payments on loans and investment securities, net cash provided from operations and access to other funding. If the Company is unable to maintain adequate liquidity, then its business, financial condition and results of operations would be negatively affected. Legislative or regulatory changes or actions could adversely impact the Company or the businesses in which it is engaged. The Company and the Banks are subject to extensive state and federal regulation, supervision and legislation that govern almost all aspects of their operations. Laws and regulations may change from time to time and are primarily intended for the protection of consumers, depositors and the deposit insurance fund, and not to benefit the Company’s shareholders. The impact of any changes to laws and regulations or other actions by regulatory agencies may negatively impact the Company or its ability to increase the value of its business. Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of an institution, the classification of assets by the institution and the adequacy of an institution’s allowance for loan losses. Future regulatory changes or accounting pronouncements may increase the Company’s regulatory capital requirements or adversely affect its regulatory capital levels. Additionally, actions by regulatory agencies against the Company or the Banks could require the Company to devote significant time and resources to defending its business and may lead to penalties that materially affect the Company. The Company relies heavily on its management and other key personnel, and the loss of any of them may adversely affect its operations. The Company is and will continue to be dependent upon the services of its management team and other key personnel. Losing the services of one or more key members of the Company’s management team could adversely affect its operations. The Company may be a defendant in a variety of litigation and other actions, which may have a material adverse effect on the Company’s financial condition and results of operations. The Company and the Banks are regularly involved in a variety of litigation arising out of the normal course of business. The Company’s insurance may not cover all claims that may be asserted against it, and any claims asserted against it, regardless of merit or eventual outcome, may harm its reputation or cause the Company to incur unexpected expenses, which could be material in amount. Should the ultimate expenses, judgments or settlements in any litigation exceed the Company’s insurance coverage, they could have a material adverse effect on the Company’s financial condition and results of operations. In addition, the Company may not be able to obtain appropriate types or levels of insurance in the future, nor may it be able to obtain adequate replacement policies with acceptable terms, if at all. If the Company cannot raise additional capital when needed, its ability to further expand its operations through organic growth or acquisitions could be materially impaired. The Company is required by federal and state regulatory authorities to maintain specified levels of capital to support its operations. The Company may need to raise additional capital to support its current level of assets or its growth. The Company’s ability to raise additional capital will depend on conditions in the capital markets at that time, which are outside its control, and on its financial performance. The Company cannot assure that it will be able to raise additional capital in the future on terms acceptable to it or at all. If the Company cannot raise additional capital when needed, its ability to maintain its current level of assets or to expand its operations through organic growth or acquisitions could be materially limited. Unauthorized disclosure of sensitive or confidential client or customer information, whether through a breach of computer systems or otherwise, could severely harm the Company’s business. As part of its business, the Company collects, processes and retains sensitive and confidential client and customer information on behalf of itself and other third parties. Despite the security measures the Company has in place for its facilities and systems, and the security measures of its third party service providers, the Company may be vulnerable to security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming and/or human errors or other similar events. Any security breach involving the misappropriation, loss or other unauthorized disclosure of confidential customer information, whether by the Company or by its vendors, could severely damage the Company’s reputation, expose it to the risks of litigation and liability, disrupt the Company’s operations and have a material adverse effect on the Company’s business. Page | 15 The Company’s information systems may experience an interruption or breach in security. The Company relies heavily on communications and information systems to conduct its business and deliver its products. Any failure, interruption or breach in security of these systems could result in failures or disruptions in the Company’s customer relationship management, general ledger, deposit, loan and other systems. While the Company has policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of its information systems, there can be no assurance that any such failures, interruptions or security breaches of the Company’s information systems or its customers’ information or computer systems would not damage the Company’s reputation, result in a loss of customer business, subject the Company to additional regulatory scrutiny, or expose the Company to civil litigation and financial liability, any of which could have a material adverse effect on the Company’s financial condition and results of operations. Cybersecurity incidents could disrupt business operations, result in the loss of critical and confidential information, and adversely impact our reputation and results of operations. Global cybersecurity threats and incidents can range from uncoordinated individual attempts to gain unauthorized access to information technology (IT) systems to sophisticated and targeted measures known as advanced persistent threats, directed at the Company and/or its third party service providers. Although we employ comprehensive measures to prevent, detect, address and mitigate these threats (including access controls, employee training, data encryption, vulnerability assessments, continuous monitoring of our IT networks and systems and maintenance of backup and protective systems), cybersecurity incidents, depending on their nature and scope, could potentially result in the misappropriation, destruction, corruption or unavailability of critical data and confidential or proprietary information (our own or that of third parties) and the disruption of business operations. The potential consequences of a material cybersecurity incident include reputational damage, litigation with third parties and increased cybersecurity protection and remediation costs, which in turn could materially adversely affect our results of operations. Environmental liability associated with commercial lending could result in losses. In the course of its business, the Company may acquire, through foreclosure, properties securing loans it has originated or purchased that are in default. Particularly in commercial real estate lending, there is a risk that hazardous substances could be discovered on these properties. In this event, the Company might be required to remove these substances from the affected properties at the Company’s sole cost and expense. The cost of this removal could substantially exceed the value of affected properties. The Company may not have adequate remedies against the prior owner or other responsible parties and could find it difficult or impossible to sell the affected properties. These events could have an adverse effect on the Company’s business, results of operations and financial condition. The Company depends upon the accuracy and completeness of information about customers. In deciding whether to extend credit to customers, the Company relies on information provided to it by its customers, including financial statements and other financial information. The Company may also rely on representations of customers as to the accuracy and completeness of that information and on reports of independent auditors on financial statements. The Company’s financial condition and results of operations could be negatively impacted to the extent that the Company extends credit in reliance on financial statements that do not comply with generally accepted accounting principles or that are misleading or other information provided by customers that is false or misleading. The Company operates in a highly competitive industry and market area. The Company faces substantial competition in all areas of its operations from a variety of different competitors, many of which are larger and may have more financial resources. Such competitors primarily include national and regional banks within the various markets where the Company operates, as well as internet banks and other financial technology companies. The Company also faces competition from many other types of financial institutions, including savings and loan associations, credit unions, finance companies, brokerage firms, insurance companies and other financial intermediaries. The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. The Company competes with these institutions both in attracting deposits and in making new loans. Technology has lowered barriers to entry into the market and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Many of the Company’s competitors have fewer regulatory constraints and may have lower cost structures, such as credit unions that are not subject to federal income tax. Due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services than the Company can. Page | 16 Severe weather, natural disasters, acts of war or terrorism and other external events could significantly impact the Company’s business. Severe weather, natural disasters, acts of war or terrorism, risks posed by an outbreak of a widespread epidemic or pandemic of disease (or widespread fear thereof), including the impact of the novel coronavirus outbreak, COVID-19, and other adverse external events could have a significant impact on the Company’s ability to conduct business. Such events could affect the stability of the Company’s deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause the Company to incur additional expenses. The effects of the novel coronavirus outbreak, COVID-19, on the financial condition of the Banks’ borrowers are currently not completely known. As a result of the outbreak, it is possible that certain of the Banks’ borrowers may be negatively impacted. The Banks may begin to experience requests for payment extensions and, ultimately, some borrowers may be unable to make payments in accordance with the terms of their loan agreements, which in turn may have a negative effect on the Company’s financial condition and results of operations. The Company relies on dividends from the Banks for most of its revenue. The Company is a separate and distinct legal entity from the Banks. It receives substantially all of its revenue from dividends from the Banks. These dividends are the principal source of funds to pay cash dividends on the Company’s common stock. Various federal and/or state laws and regulations limit the amount of dividends that the Banks may pay to the Company. If the Banks are unable to pay dividends to the Company, the Company may not be able to pay cash dividends on its common stock. The earnings of the Banks have been the principal source of funds to pay cash dividends to shareholders. Over the long-term, cash dividends to shareholders are dependent upon earnings, as well as capital requirements, regulatory restraints and other factors affecting the Company and the Banks. Additional risks and uncertainties could have a negative effect on financial performance. Additional factors could have a negative effect on the financial performance of the Company and the Company’s common stock. Some of these factors are financial market conditions, changes in financial accounting and reporting standards, new litigation or changes in existing litigation, regulatory actions and losses. Item 1B. Unresolved Staff Comments None. Page | 17 Item 2. Properties The Company’s headquarters are located at 109 East Division, Sparta, Michigan 49345. The headquarters location is owned by the Company and is not subject to any mortgage. 28 of the Company’s 29 branch locations are designed for use and operation as a bank, are well maintained, and are suitable for current operations. One location is a leased loan production office. The Company’s management believes all offices are adequately covered by property insurance. Of the 29 branch locations, 27 are owned and 2 are leased. Below is a comprehensive listing of the Company’s branch locations: Almont . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Armada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Attica . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capac . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cedar Springs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Comstock Park . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Coopersville . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deerfield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Elba . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Emmett . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fremont . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Grand Rapids . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Grant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Imlay City . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kent City . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lapeer – Main . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lapeer – South . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loan Production Office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Memphis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Metamora . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Muskegon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Newaygo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ravenna . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rockford – Downtown . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rockford – Belding Road . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sparta – Appletree . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sparta – Main . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Wealth Management Center . . . . . . . . . . . . . . . . . . . . . . . . . . . Yale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 3. Legal Proceedings Owned Almont, Michigan 5515 Van Dyke Road Owned Armada, Michigan 72890 North Avenue Owned Attica, Michigan 4515 Imlay City Road Owned Capac, Michigan 206 North Main Street Cedar Springs, Michigan Owned 4170 17 Mile Road Comstock Park, Michigan Owned 5050 Alpine Avenue NW Owned Coopersville, Michigan 661 West Randall Owned Fostoria, Michigan 30 West Burnside Road Owned Lapeer, Michigan 5508 Davison Road Owned Emmett, Michigan 3177 Main Street Owned Fremont, Michigan 1423 West Main Street Owned Grand Rapids, Michigan 330 Market Avenue SW Owned Grant, Michigan 10 West Main Street Owned Imlay City, Michigan 1875 South Cedar Street Owned Kent City, Michigan 450 West Muskegon Owned Lapeer, Michigan 83 West Nepessing Street Owned Lapeer, Michigan 637 South Main Street Leased Port Huron, Michigan 609 A, Huron Avenue Owned Memphis, Michigan 81111 Main Street Owned Metamora, Michigan 3414 South Lapeer Street Owned 5475 East Apple Avenue Muskegon, Michigan Owned 246 West River Valley Drive Newaygo, Michigan Owned Ravenna, Michigan 3069 Slocum Road Owned Rockford, Michigan 890 East Division Street NE Owned Rockford, Michigan 6795 Courtland Drive Leased Sparta, Michigan 440 West Division Owned Sparta, Michigan 109 East Division Owned Lapeer, Michigan 1175 South Lapeer Road Owned Yale, Michigan 3 North Main Street As of December 31, 2019, there were no significant pending legal proceedings to which the Company or the Banks is a party or to which any of their properties were subject, except for legal proceedings arising in the ordinary course of business. In the opinion of management, pending legal proceedings will not have a material adverse effect on the consolidated financial condition of the Company. Item 4. Mine Safety Disclosures Not applicable. Page | 18 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities STOCK INFORMATION The Company’s common stock is traded on the NASDAQ Capital Market under the symbol COFS. The range of high and low bid prices for shares of common stock for each quarterly period during the past two years is as follows: 2019 2018 Low High Low High First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 24.50 $ 24.85 28.65 28.55 26.05 $ 30.00 31.75 32.99 20.41 $ 22.81 26.15 24.75 23.14 26.50 29.99 27.95 The prices listed above are over-the-counter market quotations reported to ChoiceOne by its market makers. The over-the-counter market quotations reflect inter-dealer prices without retail markup, markdown or commission and may not necessarily represent actual transactions. As of February 28, 2020, the closing price for shares of ChoiceOne common stock was $33.00. As of February 28, 2020, there were 1,119 shareholders of record of ChoiceOne common stock. The following table summarizes the quarterly cash dividends declared per share of common stock during 2019 and 2018: First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 2019 0.20 $ 0.20 0.80 0.20 1.40 $ 2018 0.17 0.18 0.18 0.18 0.71 ChoiceOne’s principal source of funds to pay cash dividends is the earnings and dividends paid by the Banks. The Banks are restricted in their ability to pay cash dividends under current banking regulations. See Note 20 to the consolidated financial statements for a description of these restrictions. Based on information presently available, management expects ChoiceOne to declare and pay regular quarterly cash dividends in 2020, although the amount of the quarterly dividends will be dependent on market conditions and ChoiceOne’s requirements for cash and capital, among other things. On October 23, 2019, the Company issued 665 shares of common stock to its directors pursuant to the Directors’ Stock Purchase Plan for an aggregate cash price of $19,000. The Company relied on the exemption contained in Section 4(6) of the Securities Act of 1933 in connection with these sales. Information regarding the Company’s equity compensation plans may be found in Item 12 of this report and is here incorporated by reference. Page | 19 The following table provides information regarding ChoiceOne’s purchases of its common stock during the quarter ended December 31, 2019. ISSUER PURCHASES OF EQUITY SECURITIES Period October 1 - October 31, 2019 Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of a Publicly Announced Plan Maximum Number of Shares that May Yet be Purchased Under the Plan Employee Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . Repurchase Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — $ — $ — — November 1 - November 30, 2019 Employee Transactions(1) . . . . . . . . . . . . . . . . . . . . . . . . . . Repurchase Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,432 $ — $ 30.00 — December 1 - December 31, 2019 Employee Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . Repurchase Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — $ — $ — — — — 2,432 — — — 68,650 66,218 66,218 (1) Shares submitted for the purchase of stock options. Page | 20 Item 6. Selected Financial Data (Dollars in thousands, except per share data) For the year ChoiceOne Financial Services, Inc. SELECTED FINANCIAL DATA 2019 2018 2017 2016 2015 $ Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . Noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash dividends declared . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,773 — 9,168 28,476 8,465 1,295 7,171 5,806 $ 22,064 35 6,920 20,461 8,488 1,155 7,333 2,572 $ 20,563 485 7,811 19,334 8,555 2,387 6,168 2,317 $ 19,343 — 7,881 18,972 8,252 2,162 6,090 2,231 $ 18,362 100 7,702 18,276 7,688 1,945 5,743 2,170 Per share * Basic earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash dividends declared . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shareholders’ equity (at year end) . . . . . . . . . . . . . . . . . . . . . $ $ 1.58 1.58 1.40 26.52 $ $ 2.03 2.02 0.71 22.25 1.70 1.70 0.64 21.14 $ 1.68 1.68 0.62 19.73 1.59 1.58 0.60 19.22 Average for the year Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Federal Home Loan Bank advances . . . . . . . . . . . . . . . . . . . Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 210,492 534,646 710,419 18,980 110,610 845,851 $ 170,461 404,494 543,973 12,002 76,801 637,790 $ 177,125 388,609 525,445 22,830 75,026 629,748 $ 173,119 357,880 479,670 26,049 72,134 586,299 $ 152,361 342,382 443,972 19,989 68,439 551,762 At year end Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Federal Home Loan Bank advances . . . . . . . . . . . . . . . . . . . Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 348,888 802,048 1,154,602 33,198 192,139 1,386,128 $ 173,016 409,073 577,015 5,233 80,477 670,544 $ 159,158 398,785 539,853 20,268 76,550 646,544 $ 177,955 369,000 512,386 12,301 71,698 607,371 $ 163,323 349,304 474,696 11,332 69,842 567,746 Selected financial ratios Return on average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on average shareholders’ equity . . . . . . . . . . . . . . . . . Cash dividend payout as a percentage of net income . . . . . . Shareholders’ equity to assets (at year end) . . . . . . . . . . . . . . 0.85% 6.48 80.97 13.86 1.15% 9.55 35.08 12.00 0.98% 8.22 37.57 11.84 1.04% 8.44 36.63 11.80 1.04% 8.39 37.79 12.30 * Per share amounts have been adjusted for the 5% stock dividends paid in 2017 and 2018. Note - All 2019 financial data includes the impact of the merger with County, which was effective as of October 1, 2019. Page | 21 Item 7. 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, and its wholly-owned subsidiaries. This discussion should be read in conjunction with the consolidated financial statements and related footnotes. EXPLANATORY NOTE On October 1, 2019, ChoiceOne completed the merger of County Bank Corp (“County”) with and into ChoiceOne with ChoiceOne surviving the merger. Accordingly, the reported consolidated financial condition and operating results as of and for the year ended December 31, 2019 include the impact of the merger, which was effective as of October 1, 2019. For additional details regarding the merger with County, see Note 21 (Business Combination) of the Notes to the Consolidated Financial Statements included in Item 8 of this report. RESULTS OF OPERATIONS Summary ChoiceOne’s net income for 2019 was $7,171,000, compared to $7,333,000 in 2018. Excluding $1,769,000 in merger-related expenses, after tax, net income for 2019 amounted to $8,940,000. In this report, the term merger-related expenses includes expenses related to the merger with County and the pending merger with Community Shores Bank Corporation. Total assets have grown to $1.4 billion as of December 31, 2019 compared to $671 million as of December 31, 2018; the increase was primarily related to the merger with County. Net loans grew $394 million from December 31, 2018 to December 31, 2019. This loan growth coupled with a larger securities portfolio helped total interest income for 2019 to grow $7,948,000 compared to the prior year. All loan growth was attributed to the merger with County. Full year and fourth quarter 2019 interest income on loans included $75,000 of accretion of the discount recorded on the Lakestone loans acquired in the merger with County. ChoiceOne also saw deposit growth during 2019 of $578 million. ChoiceOne Bank experienced $33 million of growth in local deposits which was offset by a reduction of $32 million of brokered deposits, while the remainder was attributed to the merger with County. The interest cost of deposits and other funding increased by $2,239,000 in 2019 compared to 2018; $1,119,000 of the increase was related to ChoiceOne Bank funds while the remainder was attributed to Lakestone. Total noninterest income increased $2,248,000 in 2019 compared to the prior year. Gains on sales of loans increased due to lower interest rates encouraging refinance activity and a favorable housing market in ChoiceOne’s market areas. Customer service charges increased largely due to the impact of the merger with County in the fourth quarter of 2019. Total noninterest expense increased $8,015,000 in 2019 compared to 2018. Much of the increase was caused by merger related expenses and Lakestone Bank’s expenses included in the fourth quarter of 2019. The increase in salaries and benefits expense was related to annual wage increases and the addition of Lakestone in the fourth quarter of 2019. Other noninterest expenses were also higher in the fourth quarter and twelve months ended December 31, 2019 compared to the same periods in the prior year due to growth in the related costs and the addition of Lakestone in the fourth quarter of 2019. Net income for 2018 was $7,333,000, which represented an increase of $1,165,000 or 19% from 2017. Growth in net income resulted primarily from an increase in net interest income in 2018 compared to 2017, a reduction of tax expense related to the Tax Cut and Jobs Act and a decline in the provision for loan losses. This impact was partially offset by a reduction in noninterest income and growth in noninterest expense in 2018 compared to the prior year. The benefit of $7.3 million of growth in average earning assets in 2018 compared to 2017 was aided by an 11 basis point increase in ChoiceOne’s net interest spread. Net loan recoveries of $61,000 in 2018 allowed ChoiceOne to take a minimal provision for loan losses, compared to net charge-offs of $185,000 in 2017 which necessitated a provision expense of $485,000. A decline in noninterest income of $891,000 in 2018 compared to 2017 was primarily due to a nonrecurring gain of $908,000 on the sale of a portion of ChoiceOne’s investment book of business that occurred in the fourth quarter of 2017. The increase of $1,127,000 in noninterest expense in 2018 compared to the prior year was primarily caused by higher salaries and benefits expense and other noninterest expense. Dividends Cash dividends of $5,806,000 or $1.40 per common share were declared in 2019, compared to $2,572,000 or $0.71 per common share in 2018 and $2,317,000 or $0.64 per common share in 2017. Dividends in 2019 included a special dividend of $0.60 per share paid on September 30, 2019 in connection with the merger with County. The dividend yield on ChoiceOne’s common stock was 4.38% as of the end of 2019, compared to 2.84% in 2018, and 2.86% in 2017. The cash dividend payout as a percentage of net income was 81% in 2019, compared to 35% in 2018 and 38% in 2017. In addition, a 5% stock dividend was paid on May 31, 2018, which caused $4,335,000 to be transferred from retained earnings to paid-in capital. A 5% stock dividend was also paid on May 31, 2017 and produced a transfer of $3,779,000 from retained earnings to paid-in capital. Page | 22 Table 1 – Average Balances and Tax-Equivalent Interest Rates (Dollars in thousands) Assets: 2019 Year ended December 31, 2018 2017 Average Balance Interest Rate Average Balance Interest Rate Average Balance Interest Rate Loans(1)(2) . . . . . . . . . . . . . . . . . . . $534,646 $ 26,791 5.01% $404,494 $ 20,038 4.95% $388,609 $ 17,974 4.63% Taxable securities(3) . . . . . . . . . . . 152,094 Nontaxable securities(1) . . . . . . . . 58,398 14,992 Other . . . . . . . . . . . . . . . . . . . . . . 3,955 2.60 1,867 3.20 268 1.79 Interest-earning assets . . . . . 760,130 32,881 4.33 114,570 2,896 2.53 1,858 3.32 55,891 131 1.74 7,504 582,459 24,923 4.28 55,331 $637,790 122,150 54,975 9,465 2,371 1.94 2,142 3.90 102 1.08 575,199 22,589 3.93 54,549 $629,748 Noninterest-earning assets(4) . . . . 85,721 Total assets . . . . . . . . . . . . . . $845,851 Liabilities and Shareholders’ Equity: Interest-bearing demand deposits $278,444 $ 1,559 0.56% $209,542 $ 76,102 Savings deposits . . . . . . . . . . . . . . 109,028 109,834 136,537 Certificates of deposit . . . . . . . . . Advances from Federal Home 79 0.07 2,550 1.87 688 0.33% $208,049 $ 76,107 17 0.02 104,936 1,470 1.34 385 0.18% 14 0.02 790 0.75 Other . . . . . . . . . . . . . . . . . . . . . . Loan Bank . . . . . . . . . . . . . . 18,980 2,289 Interest-bearing liabilities . . . 545,278 Demand deposits . . . . . . . . . . . . . 186,411 Other noninterest-bearing liabilities . . . . . . . . . . . . . . . . 3,552 Total liabilities . . . . . . . . . . . 735,241 Shareholders’ equity . . . . . . . . . . 110,610 Total liabilities and shareholders’ equity . . . . $845,851 455 2.40 57 2.48 4,700 0.86 12,002 3,586 235 1.96 51 1.42 411,066 2,461 0.60 148,495 22,830 5,661 276 1.21 13 0.23 417,583 1,478 0.36 136,353 1,428 560,989 76,801 $637,790 786 554,722 75,026 $629,748 Net interest income (tax-equivalent basis)- interest spread . . . . . . . . . Tax-equivalent adjustment(1) . . . . . . . . Net interest income . . . . . . . . . . . . . . . Net interest income as a percentage of interest-earning assets (tax-equivalent basis) . . . . . . . . . . 28,181 3.47% 22,462 3.68% (408) $ 27,773 (398) $ 22,064 21,111 3.57% (548) $ 20,563 3.71% 3.86% 3.67% (1) Interest on nontaxable securities and loans has been 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% for 2019 and 2018 and 34% for 2017. (2) Interest on loans included net origination fees charged on loans of approximately $866,000, $1,087,000, and $1,003,000 in 2019, 2018, and 2017, respectively. (3) Interest on taxable securities includes dividends on Federal Home Loan Bank and Federal Reserve Bank stock. (4) Noninterest-earning assets include loans in nonaccrual status, which averaged approximately $2,965,000, $1,266,000, and $1,486,000 in 2019, 2018, and 2017, respectively. Page | 23 Table 2 – Changes in Tax-Equivalent Net Interest Income (Dollars in thousands) Increase (decrease) in interest income(1) Loans(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxable securities . . . . . . . . . . . . . . . . . . . . . . . . Nontaxable securities(2) . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net change in interest income . . . . . . . . . . $ Increase (decrease) in interest expense(1) Interest-bearing demand deposits . . . . . . . . . . . Savings deposits . . . . . . . . . . . . . . . . . . . . . . . . . Certificates of deposit . . . . . . . . . . . . . . . . . . . . Advances from Federal Home Loan Bank . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net change in interest expense . . . . . . . . . . Net change in tax-equivalent net Year ended December 31, 2019 Over 2018 Volume Total Rate Total 2018 Over 2017 Volume Rate 6,753 1,059 9 137 7,958 871 62 1,080 220 6 2,239 $ $ 6,519 973 82 133 7,707 $ 234 86 (73) 4 251 $ 2,064 525 (284) 29 2,334 277 10 411 159 (22) 835 594 52 669 61 28 1,404 303 3 680 (41) 38 983 $ 754 (155) 35 (24) 610 3 — 39 (165) (7) (130) 1,310 680 (319) 53 1,724 300 3 641 124 45 1,113 interest income . . . . . . . . . . . . . . . . . . $ 5,719 $ 6,872 $ (1,153) $ 1,351 $ 740 $ 611 (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 tax-exempt securities and loans has been adjusted to a fully tax-equivalent basis using an incremental tax rate of 21% for 2019 and 2018, and 34% for 2017. Net Interest Income The presentation of net interest income on a tax-equivalent basis is not in accordance with generally accepted accounting principles (“GAAP”), but is customary in the banking industry. This non-GAAP measure ensures comparability of net interest income arising from both taxable and tax-exempt loans and investment securities. The adjustments to determine net interest income on a tax-equivalent basis were $408,000, $398,000 and $548,000 for the years ended 2019, 2018 and 2017, respectively. These adjustments were computed using a 21% federal income tax rate in 2019 and 2018, and 34% federal income tax rate in 2017. Tax-equivalent net interest income increased $5,719,000 in 2019 compared to 2018. The increase was attributed to an increase of $177.7 million in average interest-earning assets, partially offset by the impact of a decline of 21 basis points in ChoiceOne’s net interest spread. The reduction in the net interest spread resulted from an increase of 26 basis points in the average rate paid on interest-bearing liabilities, while the average rate earned on interest-earning assets increased 5 basis points. The average balance of loans increased $130.2 million in 2019 compared to 2018, $105.8 million of which was due to Lakestone loans which were included in the fourth quarter of 2019. The remaining growth was primarily from residential real estate loans, whose average balance increased $22.6 million in 2019 compared to 2018. In addition to the average balance growth, the average rate earned on loans increased 6 basis points in 2019 compared to 2018 as a result of higher general market interest rates and higher rates charged on new loan originations. Tax-equivalent interest income on loans increased $6.8 million in 2019 compared to the prior year. The average balance of total securities grew $40.0 million in 2019 compared to the prior year. The inclusion of Lakestone securities in the fourth quarter of 2019 caused an average balance increase of $45.0 million, while the average balance of ChoiceOne Bank securities was $5.0 million lower in 2019 than in 2018. The average balance growth and a minimal change in the average rate earned on securities caused interest income from securities to grow $1.1 million in 2019 compared to the prior year. An average balance in other interest-earning assets of $15.0 million in 2019, as compared to the balance of $7.5 million in 2018, caused interest income to increase $137,000. Page | 24 Overall higher general market interest rates in 2019 compared to 2018 caused the average rate paid to be higher for all interest-bearing liability categories. The average balance of interest-bearing demand deposits increased $68.9 million in 2019 compared to 2018. The effect of this increase and a 23 basis point increase in the average rate paid caused interest expense to be $871,000 higher in 2019 than in the prior year. The average balance of certificates of deposit was $26.7 million higher in 2019 than in 2018. Growth in the average balance plus the impact of a 53 basis point increase in the average rate paid caused interest expense to grow $1,080,000. A $7.0 million increase in the average balance of Federal Home Loan Bank advances coupled with a 44 basis point increase in the average rate paid caused interest expense to grow $220,000 in 2019 compared to the prior year. ChoiceOne’s tax-equivalent net interest income spread was 3.47% in 2019 and 3.68% in 2018. The decrease in the net interest income spread resulted from a lower level of growth in the average rate earned on interest-earning assets than the rate paid on interest-bearing liabilities. Tax-equivalent net interest income increased $1,351,000 in 2018 compared to 2017. The increase was attributed to an increase of $6.7 million in interest-earning assets and 11 basis points of growth in ChoiceOne’s net interest spread. The increase in the net interest spread resulted from growth of 35 basis points in the average rate on interest-earning assets, while the average rate on interest-bearing liabilities increased 24 basis points. The average balance of loans increased $15.9 million in 2018 compared to 2017. Most of the increase resulted from growth of $14.0 million in commercial real estate loans. Growth in the average balance of consumer loans and residential real estate loans was largely offset by declines in the average balance of agricultural and commercial and industrial loans in 2018 compared to the prior year. In addition to the average balance growth, the average rate earned on loans increased 32 basis points in 2018 compared to 2017 as a result of higher general market interest rates and higher rates charged on new loan originations. Tax-equivalent interest income on loans increased $2.1 million in 2018 compared to the prior year. A decrease in the average balance of total securities of $6.7 million in 2018 compared to 2017 was primarily due to the sale of $35 million of securities in the fourth quarter of 2017. The lower average balance of securities was more than offset by higher average interest rates earned, which caused interest income from securities to grow $242,000 in 2018 compared to the prior year. Increases in general market interest rates in 2018 compared to 2017 caused the average rate paid to be higher for all interest-bearing liability categories, except for savings deposits. The average balance of interest-bearing demand deposits increased $1.5 million in 2018 compared to 2017. The effect of this increase and a 15 basis point increase in the average rate paid caused interest expense to be $303,000 higher in 2018 than in the prior year. The average balance of certificates of deposit was $4.9 million higher in 2018 than in 2017. Growth in the average balance plus the impact of a 59 basis point increase in the average rate paid caused interest expense to grow $680,000. A $10.8 million decline in the average balance of Federal Home Loan Bank advances, partially offset by a 75 basis point increase in the average rate paid, caused interest expense to decrease $41,000 in 2018 compared to the prior year. Although the average balance of other interest-bearing liabilities was $2.1 million lower in 2018 than in 2017, an increase of 119 basis points caused interest expense to grow by $38,000. ChoiceOne’s tax-equivalent net interest income spread was 3.68% for 2018 and 3.57% for 2017. The increase in the net interest income spread resulted from the average rate earned on interest-earning assets increasing more than the average rate paid on interest-bearing liabilities. On March 3, 2020 the Federal Reserve Open Market Committee lowered the federal funds rate by 50 basis points which was followed by a reduction of 100 basis points on March 15, 2020. Operating in an environment with lower interest rates is expected to have a negative effect on both ChoiceOne’s interest income and interest spread. ChoiceOne management continues to monitor rates and their effect on income as part of the Asset/Liability Risk Committee to determine what strategic decisions will need to be made in both rate up and rate down environments. Page | 25 Provision and Allowance For Loan Losses Table 3 – Provision and Allowance For Loan Losses (Dollars in thousands) Allowance for loan losses at beginning of year Charge-offs: Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate - commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate - construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate - residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Recoveries: Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate - commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate - construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate - residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net charge-offs (recoveries) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2019 4,673 $ 2018 4,577 $ 2017 4,277 $ 2016 4,194 $ 2015 4,173 $ — 83 589 — 25 292 989 65 22 26 — 124 136 373 616 — — 58 — — 25 282 365 33 107 61 — 113 112 426 (61) 35 — 439 — — 43 253 735 — 21 258 40 62 169 550 185 485 — 37 — — 102 218 357 — 31 89 — 171 149 440 (83) — — 30 — — 140 291 461 1 64 47 — 149 121 382 79 100 Allowance for loan losses at end of year . . . . . . . . . . . . . . . . . . . $ 4,057 $ 4,673 $ 4,577 $ 4,277 $ 4,194 Allowance for loan losses as a percentage of: Total loans as of year end . . . . . . . . . . . . . . . . . . . . . . . . . . . Nonaccrual loans, accrual loans past due 90 days or more 0.51% 1.14% 1.15% 1.16% 1.20% and troubled debt restructurings . . . . . . . . . . . . . . . . . . . 63% 123% 108% 84% 76% Ratio of net charge-offs (recoveries) to average total loans outstanding during the year . . . . . . . . . . . . . . . . . . . . . . . . . . Loan recoveries as a percentage of prior year’s charge-offs . . . . . 0.12% 102% (0.02)% 58% 0.05% 154% (0.02)% 95% 0.02% 36% The provision for loan losses was $0 in 2019 compared to $35,000 in 2018. No provision was deemed necessary in 2019 based on ChoiceOne’s review of the losses inherent in the loan portfolio and the related allowance for loan losses. The allowance for loan losses as a percentage of total loans decreased to 0.51% of loans as of December 31, 2019, compared to 1.14% as of the end of 2018 and 1.15% as of the end of 2017. The decline was due to the acquisition of $424 million of loans from the merger with County. A fair value market adjustment of $4.7 million related to these loans existed as of the end of 2019. This fair value adjustment is not considered an allowance for loan losses but was recorded upon the acquisition of the loans from County. The coverage ratio of the allowance for loan losses to nonperforming loans was 63% as December 31, 2019, compared to 123% and 108% as of the ends of 2018 and 2017, respectively. The decline in the coverage ratio resulted primarily from an increase of $2.6 million in nonperforming loans during 2019. ChoiceOne had $355,000 of specific allowance allocations for problem loans as of the end of 2019, compared to $297,000 as of the prior year end. Special allowance amounts have been allocated where the fair values of loans were considered to be less than their carrying values. ChoiceOne obtains valuations on collateral dependent loans when the loan is considered by management to be impaired and uses the valuation amounts in the determination of fair value. Management believes the specific reserves allocated to certain problem loans at the end of 2019 and 2018 were reasonable based on the circumstances surrounding each particular borrower. Page | 26 The following schedule presents an allocation of the allowance for loan losses to the various loan categories as of the years ended December 31: (Dollars in thousands) Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate - commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate - construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate - residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unallocated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2017 2016 2019 2018 2015 $ 471 $ 481 $ 506 $ 433 $ 420 586 1,030 46 1,388 297 427 $ 4,057 $ 4,673 $ 4,577 $ 4,277 $ 4,194 688 1,438 62 1,013 305 338 1,001 1,761 35 726 262 286 892 1,926 38 537 254 545 655 1,663 76 640 270 282 Loans acquired from the merger with County were considered for the allowance for loan losses, but no allowance allocation was deemed necessary as management concluded there was no deterioration in credit subsequent to the effective date of the merger, and the recorded fair value adjustments were adequate based on management’s assessment of losses incurred. The decrease in the allowance allocation to commercial and industrial loans was due to a 9.4% decline in the balance in thwis loan category in 2019. The decrease in the allocation to commercial real estate loans resulted from lower historical charge-off levels in 2019 than in 2018. The increase in the allocation to residential real estate loans resulted from an 8.9% increase in the balance in this loan category in 2019. Changes in historical charge-off levels and environmental factors affected all loan categories. Management maintains the allowance at a level that it believes adequately provides for losses inherent in the loan portfolio. Such losses are estimated by a variety of factors, including specific examination of certain borrowing relationships and consideration of historical losses incurred on certain types of credits. Current economic conditions and collateral values affect loss estimates. Management focuses on early identification of problem credits through ongoing reviews by management and the independent loan review function. Based on the current state of the economy and a recent review of the loan portfolio, management believes that the allowance for loan losses as of December 31, 2019 was adequate. As charge-offs, changes in the level of nonperforming loans, and changes within the composition of the loan portfolio occur, the provision and allowance for loan losses will be reviewed by the Banks’ management and adjusted as necessary. Noninterest Income Total noninterest income increased $2,248,000 in 2019 compared to 2018, a large portion of which was due to Lakestone’s noninterest income included in the fourth quarter of 2019. Customer service charges increased $752,000 in 2019 compared to the prior year due to higher overdraft fees, checking account service charges, and net debit card fees. Gains on sales of loans grew $948,000 in 2019 compared to the prior year as relatively low interest rates for residential real estate loans has increased the level of residential mortgage originations. Earnings on life insurance policies included $288,000 from a death claim recorded in the fourth quarter of 2019. The growth in other noninterest income was primarily due to trust income and other income from Lakestone in the fourth quarter of 2019. Total noninterest income decreased $891,000 in 2018 compared to 2017. Customer service charges increased $391,000 in 2018 compared to the prior year due to higher overdraft fees, checking account service charges, and net debit card fees. Insurance and investment commissions were $491,000 lower and the gain on sale of investment book of business was $908,000 lower in 2018 than in 2017 as a result of the sale of a majority of ChoiceOne’s investment book of business in the fourth quarter of 2017. Gains on sales of loans declined $262,000 in 2018 compared to the prior year as higher interest rates for residential real estate loans and a low inventory of homes for sale in ChoiceOne’s market areas has reduced the level of residential mortgage originations. The $314,000 improvement in net gains on sales of securities in 2018 compared to 2017 was caused by ChoiceOne’s sale of securities for a loss in the fourth quarter of 2017. Noninterest Expense Total noninterest expense increased $8,015,000 in 2019 compared to 2018, a large portion of which was due to Lakestone’s noninterest expense included in the fourth quarter of 2019. Salaries and benefits expense grew $3,404,000 in 2019 compared to the prior year. The majority of the increase was due to Lakestone’s expenses in the fourth quarter of 2019 and a portion was also due to merger-related costs. Commission and bonus expenses were higher in the current year than the prior year while health insurance costs were lower. Occupancy and equipment expense grew $835,000 in 2019 compared to 2018, with the increase caused by Lakestone’s expenses and costs related to the two offices opened by ChoiceOne in 2018. An increase of $1,005,000 in data processing expenses resulted from Lakestone’s expenses and higher debit card processing costs. The growth of $1,763,000 in professional fees in 2019 compared to the prior year was principally due to costs related to the merger with County. Advertising and promotional expense was $220,000 higher in 2019 than 2018 due to Lakestone expenses and costs related to a checking account promotion campaign in 2019. FDIC insurance expense declined in 2019 compared to the prior year as an insurance credit was created when the FDIC insurance fund reached 1.35% of total deposits. Growth of $576,000 in other noninterest expense in the current year compared to the prior year was caused by Lakestone expenses and various changes in general expense accounts. Page | 27 Total noninterest expense increased $1,127,000 in 2018 compared to 2017. Salaries and benefits expense grew $748,000 due to higher costs related to salaries and health insurance, the impact of which was partially offset by lower commission expense as a result of the sale of the majority of the investment book of business in 2017. Part of the salaries increase was caused by staffing for ChoiceOne’s two new offices that opened in 2018. A decline of $174,000 in occupancy and equipment expense resulted from lower equipment depreciation in 2018 than in 2017. Professional fees increased $183,000 in 2018 compared to the prior year as a result of higher external and internal audit costs connected with new audit requirements for ChoiceOne’s internal controls over financial reporting in 2018 and higher consulting costs. Other noninterest expense was $440,000 higher in 2018 than in the prior year. Higher loan related costs, expenses connected to low income housing tax credits, and general growth in operating expenses contributed to the growth. Income Taxes Income tax expense was $139,000 higher in 2019 than in 2018. The increase was due to certain merger-related expenses incurred in 2019 which were nondeductible. Income tax expense was $1,233,000 less in 2018 than in 2017. The reduction was principally caused by the effect of the Tax Cut and Jobs Act passed in December 2017, which reduced ChoiceOne’s federal tax rate from 34% to 21%. The effective tax rate was 15% in 2019, compared to 14% in 2018 and 28% in 2017. Financial Condition Summary Total assets were $1.4 billion as of December 31, 2019, which represented an increase of $715.6 million from the end of 2018. $711.9 million of the increase resulted from the merger with County noted above. Cash and due from banks increased $39.6 million of which $20.6 million came from Lakestone. The investment securities portfolio grew $173.0 million in 2019 due to the addition of $187.7 million from Lakestone and offset by a decline in the ChoiceOne Bank portfolio due to maturities and calls which were not redeployed to securities. Loans to other financial institutions grew $30.4 million with $27.7 million of this increase coming from Lakestone. Both Lakestone and ChoiceOne obtain loans from other financial institutions. As of December 31, 2019, loans from other financial institutions were $23.4 million for ChoiceOne and $28.4 million for Lakestone. Net loans grew $393 million from December 31, 2018 to December 31, 2019. All loan growth was attributed to the merger with County. The largest increases were in the commercial real estate and residential real estate categories which grew by $186.9 million and $122.1 million respectively. Total deposits increased $577.6 million, of which $573.6 million was obtained from the merger with County. Local deposits with ChoiceOne Bank grew $32.9 million while brokered certificates of deposit were reduced $32.1 million in 2019. Securities The Company’s securities balances as of December 31 were as follows: (Dollars in thousands) Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2019 2,851 $ 2018 2,847 Available for Sale Securities U.S. Government and federal agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S. Treasury notes and bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State and municipal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage-backed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trust preferred securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,008 $ 17,215 $ 33,529 1,947 173,924 103,928 21,575 142,760 5,102 2,672 500 1,000 — 21 $ 339,579 $ 166,602 As noted above total investment securities increased $173.0 million from December 31, 2018 to December 31, 2019. A total of $187.7 million was obtained from the merger with County. Approximately $209.8 million of securities were purchased in 2019, $178.9 million of which were part of a restructuring of Lakestone’s portfolio that occurred early in the fourth quarter of 2019. Securities totaling $40.8 million were called or matured in 2019. Principal payments for municipal and mortgage-backed securities totaling $7.0 million were received during 2019. Approximately $178.9 million of securities were sold during the year for net gains of $22,000. Securities totaling $177.7 million were sold as part of the restructuring of Lakestone’s portfolio in 2019. Each Bank’s Investment Committee continues to monitor the portfolio and purchases securities as it considers prudent. Page | 28 Equity securities included a money market preferred security (MMP) of $1.0 million and common stock of $1.9 million as of December 31, 2019. As of December 31, 2018, equity securities included an MMP of $0.9 million and common stock of $1.9 million. Loans The Company’s loan portfolio as of December 31 was as follows: (Dollars in thousands) Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate - commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate - construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate - residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2019 2018 $ 57,339 $ 49,109 91,406 148,083 24,382 38,854 326,379 139,453 8,843 13,411 217,982 95,880 $ 802,048 $ 409,073 As noted above the loan portfolio (excluding loans held for sale and loans to other financial institutions) increased $393.0 million from December 31, 2018 to December 31, 2019. Economic factors in ChoiceOne’s market areas are continuing to improve in most industry sectors. Growth in all categories is due to the merger with County with minimal organic growth due to a large number of paydowns occurring during the year. Both ChoiceOne Bank and Lakestone entered into an agreement during 2017 to provide a line of credit to facilitate funding of residential mortgage loan originations at other financial institutions. The loans are short-term in nature and are designed to provide funding for the time period between the loan origination and its subsequent sale in the secondary market. The balance of the lines of credit held by the Banks was $51.0 million as of December 31, 2019 and ChoiceOne Bank held $20.6 million as of December 31, 2018. Information regarding impaired loans can be found in Note 3 to the consolidated financial statements included in this report. In addition to its review of the loan portfolio for impaired loans, management also monitors 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 past due 90 days or more, which are considered troubled debt restructurings. Troubled debt restructurings consist of loans where the terms have been modified to assist the borrowers in making their payments. The modifications can include capitalization of interest onto the principal balance, reduction in interest rate, and extension of the loan term. The balances of these nonperforming loans as of December 31 were as follows: (Dollars in thousands) Loans accounted for on a nonaccrual basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans contractually past due 90 days or more as to principal or interest payments . . . . . . . . . . . . . . . . . . . . . Loans considered troubled debt restructurings which are not included above . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 2019 4,687 $ — 1,726 6,413 $ 2018 1,532 — 2,254 3,786 Nonaccrual loans included $379,000 in agricultural loans, $776,000 in commercial and industrial loans, $16,000 in consumer loans, $2,185,000 in commercial real estate loans, and $1,331,000 in residential real estate loans as of December 31, 2019. Nonaccrual loans included $393,000 in agricultural loans, $62,000 in consumer loans, $123,000 in commercial real estate loans, and $954,000 in residential real estate loans as of December 31, 2018. The primary reason for the increase in nonaccrual loans in 2019 was the movement of one large commercial relationship into nonaccrual status during the year. Loans considered troubled debt restructurings which were not on a nonaccrual basis and were not 90 days or more past due as to principal or interest payments consisted of $391,000 in commercial real estate loans and $1,335,000 in residential real estate loans at December 31, 2019, compared to $19,000 in commercial and industrial loans, $14,000 in consumer loans, $500,000 in commercial real estate loans, and $1,721,000 in residential real estate loans at December 31, 2018. Page | 29 Management also maintains a list of loans that are not classified as nonperforming loans but where some concern exists as to the borrowers’ abilities to comply with the original loan terms. These loans totaled $14.0 million as of December 31, 2019, compared to $1.8 million as of December 31, 2018. Deposits and Other Funding Sources The Company’s deposit balances as of December 31 were as follows: (Dollars in thousands) Noninterest-bearing demand deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest-bearing demand deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Money market deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Savings deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Local certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Brokered certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2019 2018 $ 287,460 $ 153,542 236,154 135,425 86,720 263,666 75,615 206,050 91,343 158,985 34,370 2,287 $1,154,602 $ 577,015 Total deposits increased $577.6 million from December 31, 2018 to December 31, 2019, of which $573.6 million was obtained from the merger with County. Excluding deposits related to Lakestone, noninterest-bearing and interest-bearing demand deposits grew a total of $11.2 million as the Banks’ depositors valued the liquidity available in this deposit category. Higher rates paid on local certificates of deposit in 2019 compared to 2018 as a result of rising general market interest rates helped to generate depositor interest in this category and contributed to the $18.3 million of growth during 2019 excluding Lakestone deposits. Brokered certificates of deposit decreased $32.1 million in 2019 as organic loan growth was minimal. Federal funds purchased declined $4.8 million from December 31, 2018 to December 31, 2019 as overnight funding was replaced by local deposits growth. Federal Home Loan Bank advances increased $28.0 million in 2019 as advances were used to meet short term funding needs. ChoiceOne Bank’s blanket collateral agreement covering agricultural real estate loans and residential real estate loans and Lakestone’s blanket collateral agreement covering commercial real estate loans and residential real estate loans were pledged against each bank’s outstanding advances at the end of 2019. Approximately $78.6 million of additional advances were available as of December 31, 2019 based on the collateral pledged by the Banks. In 2020, management will continue to focus its marketing efforts toward growth in local deposits. If local deposit growth is insufficient to support asset growth, management believes that advances from the FHLB and brokered certificates of deposit can address corresponding funding needs. Shareholders’ Equity Total shareholders’ equity increased $111.7 million from December 31, 2018 to December 31, 2019. The merger with County caused $107.9 million of equity to be issued in consideration for County’s stock. The remaining growth in equity resulted from the retention of earnings in 2019 as net income exceeded dividends paid by $1.4 million. Accumulated other comprehensive income increased by $2.2 million in 2019 principally as a result of available for sale securities moving from a net unrealized loss at the end of 2018 to a net unrealized gain as of the end of 2019. Equity issuances net of shares repurchased also contributed $448,000 to equity during 2019. Note 20 to the consolidated financial statements presents regulatory capital information for ChoiceOne and the Banks at the end of 2019 and ChoiceOne and ChoiceOne Bank at the end of 2018. Management will monitor these capital ratios during 2020 as they relate to asset growth and earnings retention. ChoiceOne’s Board of Directors and management do not plan to allow capital to decrease below those levels necessary to be considered “well capitalized” by regulatory guidelines. At December 31, 2019, the Banks were categorized as “well-capitalized.” Page | 30 Table 4 – Contractual Obligations The following table discloses information regarding the maturity of ChoiceOne’s contractual obligations at December 31, 2019: (Dollars in thousands) Total Payment Due by Period 1 - 3 Years Less than 1 year 3 - 5 Years More than 5 Years Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Advances from Federal Home Loan Bank . . . . . . . . . . . . . . . . . . . . Operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liquidity and Interest Rate Risk $ 161,272 $ 121,653 $ 29,039 $ 10,523 $ 82 103 117 $ 195,875 $ 155,415 $ 29,523 $ 10,825 $ 33,037 138 587 33,198 514 891 79 259 146 57 — 14 41 112 Net cash from operating activities was $9.2 million in 2019 compared to $10.0 million in 2018. Net cash from investing activities was $36.4 million in 2019 compared to $43.9 million used in 2018. The increase was caused by higher net proceeds from sales of securities in 2019 compared to 2018, limited net growth in loans in 2019 outside of Lakestone loans added compared to more significant growth in 2018, and cash received as a result of the merger with County. Net cash flows from financing activities were a negative $5.7 million in 2019 compared to a positive $16.8 million in 2018. The change was caused by less growth in deposits in 2019 outside of Lakestone deposits than the prior year and a decline in the balance of federal funds purchased in 2019 in contrast with an increase in 2018. This was partially offset by net proceeds from Federal Home Loan Bank advances in 2019 compared to net paydowns in 2018. ChoiceOne’s primary market risk exposure occurs in the form of interest rate risk. Liquidity risk also can have an impact but to a lesser extent. ChoiceOne’s business is transacted in U.S. dollars with no foreign exchange risk exposure. Agricultural loans comprise a relatively small portion of ChoiceOne’s total assets. Management believes that ChoiceOne’s exposure to changes in commodity prices is insignificant. Management believes that the current level of liquidity is sufficient to meet the Banks’ 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 lines of credit from correspondent banks, and advances available from the FHLB. Liquidity risk deals with ChoiceOne’s ability to meet its cash flow requirements. These requirements include depositors desiring to withdraw funds and borrowers seeking credit. Relatively short-term liquid funds exist in the form of lines of credit to purchase federal funds at correspondent banks. As of December 31, 2019, the amount of federal funds available for purchase from the Banks’ correspondent banks totaled approximately $95.5 million. ChoiceOne’s federal funds purchased balance was $0 as of December 31, 2019 and $4.8 million as of December 31, 2018. ChoiceOne Bank also has a line of credit secured by ChoiceOne’s commercial loans with the Federal Reserve Bank of Chicago for $66.6 million, which is designated for nonrecurring short-term liquidity needs. Longer-term liquidity needs may be met through local deposit growth, maturities of securities, normal loan repayments, advances from the FHLB, brokered certificates of deposit, and income retention. Approximately $78.6 million of borrowing capacity was available from the FHLB based on agricultural real estate loans, commercial real estate loans, and residential real estate loans pledged as collateral at the end of 2019. The acceptance of brokered certificates of deposit is not limited as long as the Banks are categorized as “well capitalized” under regulatory guidelines. Non-GAAP Financial Measures This report contains references to net income excluding tax-effected merger-related expenses, which is a financial measure that is not defined in U.S. generally accepted accounting principles (“GAAP”). Management believes this non-GAAP financial measure provides additional information that is useful to investors in helping to understand the underlying financial performance of ChoiceOne. Non-GAAP financial measures have inherent limitations. Readers should be aware of these limitations and should be cautious with respect to the use of such measures. To compensate for these limitations, we use non-GAAP measures as comparative tools, together with GAAP measures, to assist in the evaluation of our operating performance or financial condition. Also, we ensure that these measures are calculated using the appropriate GAAP or regulatory components in their entirety and that they are computed in a manner intended to facilitate consistent period-to-period comparisons. ChoiceOne’s method of calculating these non-GAAP financial measures may differ from methods used by other companies. These non-GAAP financial measures should not be considered in isolation or as a substitute for those financial measures prepared in accordance with GAAP or in-effect regulatory requirements. Page | 31 The non-GAAP measures presented in the table below reflect the adjustments of the reported U.S. GAAP results for significant items that management does not believe are reflective of the Company’s current and ongoing operations. Non-GAAP Reconciliation (Unaudited) (In Thousands, Except Per Share Data) Income before income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustment for pre-tax merger expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjusted income before income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax impact of adjustment for pre-tax merger expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjusted income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustment for pre-tax merger expenses, net of tax impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjusted net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effect of merger expenses, net of tax impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjusted basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effect of merger expenses, net of tax impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjusted diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ $ $ $ Year Ended December 31, 2019 8,465 $ 2,001 10,466 1,294 232 1,526 7,171 1,769 8,940 $ 1.58 $ 0.39 1.97 $ 1.58 $ 0.39 1.97 $ 2018 8,488 — 8,488 1,155 — 1,155 7,333 7,333 2.03 — 2.03 2.02 — 2.02 CRITICAL ACCOUNTING POLICIES AND ESTIMATES Management’s discussion and analysis of financial condition and results of operations as well as disclosures found elsewhere in this report are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the market value of securities, the amount of the allowance for loan losses, loan servicing rights, carrying value of goodwill, and income taxes. Actual results could differ from those estimates. Securities Debt securities available for sale may be sold prior to maturity due to changes in interest rates, prepayment risks, yield, availability of alternative investments, liquidity needs, credit rating changes, or other factors. Debt securities classified as available for sale are reported at their fair value with changes flowing through other comprehensive income. Declines in the fair value of securities below their cost that are considered to be “other than temporary” are recorded as losses in the income statement. In estimating whether a fair value decline is considered to be “other than temporary,” management considers the length of time and extent that the security’s fair value has been less than its carrying value, the financial condition and near-term prospects of the issuer, and the Banks’ ability and intent to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value. Market values for securities available for sale are obtained from outside sources and applied to individual securities within the portfolio. The difference between the amortized cost and the fair value of securities is recorded as a valuation adjustment and reported net of tax effect in other comprehensive income. Effective January 1, 2018, equity securities are reported at their fair value with changes in market value flowing through net income. Prior to 2018, equity securities were accounting for in a manner similar to available for sale debt securities. Page | 32 Allowance for Loan Losses The allowance for loan losses is maintained at a level believed adequate by management to absorb probable incurred losses inherent in the consolidated loan portfolio. Management’s evaluation of the adequacy of the allowance for loan losses is an estimate based on reviews of individual loans, assessments of the impact of current economic conditions on the portfolio and historical loss experience of seasoned loan portfolios. 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 current economic conditions and (2) the impact of recognizing an impairment or loan loss could have a material effect on the Company’s assets reported on the balance sheet as well as its net income. Loan Servicing Rights Loan servicing rights represent the estimated value of servicing loans that are sold with servicing retained by ChoiceOne and are initially recorded at estimated fair value. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues. Management’s accounting treatment of loan servicing rights is estimated based on current prepayment speeds that are typically market driven. Management believes the accounting estimate related to loan servicing rights is a “critical accounting estimate” because (1) the estimate is highly susceptible to change from period to period because of significant changes within long-term interest rates affecting the prepayment speeds for current loans being serviced and (2) the impact of recognizing an impairment loss could have a material effect on ChoiceOne’s net income. Management has obtained a third-party valuation of its loan servicing rights to corroborate its current carrying value at the end of each reporting period. Goodwill Generally accepted accounting principles require that the fair values of the assets and liabilities of an acquired entity be recorded at their fair value on the date of acquisition. The fair values are determined using both internal computations and information obtained from outside parties when deemed necessary. The net difference between the price paid for the acquired company and the net value of its balance sheet is recorded as goodwill. Accounting principles also require that goodwill be evaluated for impairment on an annual basis or more frequently whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Under recently issued accounting pronouncements, ChoiceOne is permitted to first perform a qualitative assessment to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of equity is less than its carrying value. If the conclusion is that it is more likely than not that the fair value of equity is more than its carrying value, no further testing in the form of a quantitative assessment is necessary. If the conclusion is that it is more likely than not that the fair value of equity is less than its carrying value, then a two-step quantitative assessment test is performed to identify any potential goodwill impairment. Management performed a qualitative assessment of goodwill as of June 30, 2019. The analysis was performed including evaluation of the share price, book value, and financial results of ChoiceOne as compared to the previous year. Additionally, industry and market conditions were evaluated and compared. Average deal prices in the Midwest of closed transactions have indicated increases in deal values to tangible common equity, deal values to earnings, and core deposit premiums when compared to the observed prices used in the last quantitative assessment of goodwill in 2016. Further, macro-economic trends have been on a positive trajectory recently and there have been no adverse legal, regulatory, contractual, political or other factors that have materially impacted ChoiceOne. Upon completion of the qualitative assessment, ChoiceOne believes that it was more likely than not that the fair value of ChoiceOne’s equity exceeded the carrying value at the assessment date and there was no further quantitative assessment necessary. Taxes Income taxes include both a current and deferred portion. Deferred tax assets and liabilities are recorded to account for differences in the timing of the recognition of revenues and expenses for financial reporting and tax purposes. Generally accepted accounting principles require that deferred tax assets be reviewed to determine whether a valuation allowance should be established using a “more likely than not” standard. Based on its review of ChoiceOne’s deferred tax assets as of December 31, 2019, management determined that no valuation allowance was necessary. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Interest rate risk is related to liquidity because each is affected by maturing assets and sources of funds. ChoiceOne’s Asset/Liability Management Committee (the “ALCO”) attempts to stabilize the interest rate spread and avoid possible adverse effects when unusual or rapid changes in interest rates occur. The ALCO uses a simulation model to measure the Banks’ interest rate risk. The model incorporates changes in interest rates on rate-sensitive assets and liabilities. The degree of rate sensitivity is affected by prepayment assumptions that exist in the assets and liabilities. One method the ALCO uses of measuring interest rate sensitivity is the ratio of rate-sensitive assets to rate-sensitive liabilities. An asset or liability is considered to be rate-sensitive if it matures or otherwise reprices within a given time frame. Page | 33 Table 5 documents the maturity or repricing schedule for ChoiceOne’s rate-sensitive assets and liabilities for selected time periods: Table 5 – Maturities and Repricing Schedule (Dollars in thousands) Assets 0 - 3 Months As of December 31, 2019 1 - 5 Years 3 - 12 Months Over 5 Years Equity securities at fair value . . . . . . . . . . . . . . . . . . . . . . . . . Securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . Federal Home Loan Bank stock . . . . . . . . . . . . . . . . . . . . . . . Federal Reserve Bank stock . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans to other financial institutions . . . . . . . . . . . . . . . . . . . . Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash surrender value of life insurance policies . . . . . . . . . . . . Rate-sensitive assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,851 118,677 3,524 — 3,095 51,048 215,190 — $ 394,385 $ — 28,907 — — — — 132,230 — $ 161,137 $ — 71,355 — — — — 364,124 — $ 435,479 $ — 120,640 — 2,934 — — 90,504 31,979 $ 246,057 Liabilities Interest-bearing demand deposits . . . . . . . . . . . . . . . . . . . . . . Money market deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Savings deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Advances from FHLB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rate-sensitive liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . $ 236,154 263,666 206,050 38,932 10,009 $ 754,811 $ — — — 82,721 23,028 $ 105,749 $ — — — 39,562 161 $ 39,723 $ $ — — — 57 — 57 Rate-sensitive assets less rate-sensitive liabilities: Asset (liability) gap for the period . . . . . . . . . . . . . . . . . . Cumulative asset (liability) gap . . . . . . . . . . . . . . . . . . . . $(360,426) $ 55,388 $ 395,756 $(360,426) $(305,038) $ 90,718 $ 246,000 $ 336,718 Total $ 2,851 339,579 3,524 2,934 3,095 51,048 802,048 31,979 $1,237,058 $ 236,154 263,666 206,050 161,272 33,198 $ 900,340 $ 336,718 Under this method, the ALCO measures interest rate sensitivity by focusing on the one-year repricing gap. ChoiceOne’s ratio of rate- sensitive assets to rate-sensitive liabilities that matured or repriced within a one-year time frame was 65% at December 31, 2019, compared to 63% at December 31, 2018. Table 5 above shows the entire balance of interest-bearing demand deposits, savings deposits, money market deposits, and overnight repurchase agreements in the shortest repricing term. Although these categories have the ability to reprice immediately, management has some control over the actual timing or extent of the changes in interest rates on these liabilities. The ALCO plans to continue to monitor the ratio of rate-sensitive assets to rate-sensitive liabilities on a quarterly basis in 2020. As interest rates change during 2020, the ALCO will attempt to match its maturing assets with corresponding liabilities to maximize ChoiceOne’s net interest income. Another method the ALCO uses to monitor its interest rate sensitivity is to subject rate-sensitive assets and liabilities to interest rate shocks. At December 31, 2019, management used a simulation model to subject its assets and liabilities up to an immediate 400 basis point increase. The maturities of loans and mortgage-backed securities were affected by certain prepayment assumptions. Maturities for interest-bearing core deposits were based on an estimate of the period over which they would be outstanding. The maturities of advances from the FHLB were based on their contractual maturity dates. In the case of variable rate assets and liabilities, repricing dates were used to determine their values. The simulation model measures the effect of immediate interest rate changes on both net interest income and shareholders’ equity. Page | 34 Table 6 provides an illustration of hypothetical interest rate changes as of December 31, 2019 and 2018: Table 6 – Sensitivity to Changes in Interest Rates (Dollars in thousands) Change in Interest Rate 2019 Net Interest Income Percent Change Market Value of Equity Percent Change 400 basis point rise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300 basis point rise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200 basis point rise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 basis point rise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Base rate scenario . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 basis point decline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200 basis point decline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300 basis point decline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400 basis point decline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 46,575 46,184 45,754 45,243 44,654 43,573 41,407 40,453 39,996 4% $ 258,936 3% 261,284 2% 260,998 1% 261,204 —% 256,047 -2% 236,307 -7% 202,759 -9% 204,270 -10% 209,687 2018 1% 2% 2% 2% —% -8% -21% -20% -18% (Dollars in thousands) Change in Interest Rate Net Interest Income Percent Change Market Value of Equity Percent Change 400 basis point rise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300 basis point rise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200 basis point rise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 basis point rise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Base rate scenario . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 basis point decline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200 basis point decline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300 basis point decline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400 basis point decline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 23,929 23,884 23,794 23,669 23,534 22,769 21,316 20,392 19,959 2% $ 162,529 1% 165,869 1% 167,245 1% 169,173 —% 168,501 -3% 156,542 -9% 135,114 -13% 113,880 -15% 114,152 -4% -2% -1% —% —% -7% -20% -32% -32% As of December 31, 2019, the Banks were within their guidelines for immediate rate shocks up and down for all net interest income scenarios and for the up rate scenarios and the down 100 and 200 basis points scenarios for the market value of shareholders’ equity. The Banks’ percent change in the 300 and 400 basis points down scenarios for the market value of shareholders’ equity was slightly higher than the policy guidelines. As of December 31, 2018, ChoiceOne Bank was within its guidelines for immediate rate shocks up and down for all net interest income scenarios and for the up rate scenarios and the down 100 and down 200 basis points scenarios for the market value of shareholders’ equity. ChoiceOne Banks’ percent change in the 300 and 400 basis points down scenarios for the market value of shareholders’ equity was slightly higher than the policy guidelines. The ALCO plans to continue to monitor the effect of changes in interest rates on both net interest income and shareholders’ equity and will make changes in the duration of its rate-sensitive assets and rate-sensitive liabilities where necessary. Page | 35 Item 8. Financial Statements and Supplementary Data REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and Board of Directors of ChoiceOne Financial Services, Inc. Opinion on the Financial Statements We have audited the accompanying balance sheets of ChoiceOne Financial Services, Inc. (the “Company”) as of December 31, 2019 and 2018, the related statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three- year period ended December 31, 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018 and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019 in conformity with accounting principles generally accepted in the United States of America. We also have audited the Company’s internal control over financial reporting as of December 31, 2019 in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), based on criteria established in Internal Control- Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Our report dated March 16, 2020 expresses an unqualified opinion. Basis for Opinion The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/Plante & Moran, PLLC We have served as the Company’s auditor since 2006. Auburn Hills, Michigan March 16, 2020 Page | 36 (Dollars in thousands) Assets ChoiceOne Financial Services, Inc. CONSOLIDATED BALANCE SHEETS December 31, 2019 2018 Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Time deposits in other financial institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 59,308 250 59,558 $ 19,690 — 19,690 Equity securities at fair value (Note 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities available for sale (Note 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Federal Home Loan Bank stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Federal Reserve Bank stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans to other financial institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans (Note 3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for loan losses (Note 3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Premises and equipment, net (Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other real estate owned, net (Note 7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash value of life insurance policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill (Note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Core deposit intangible (Note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,851 339,579 3,524 2,934 3,095 51,048 802,048 (4,057) 797,991 24,265 929 31,979 52,870 6,006 9,499 $1,386,128 2,847 166,602 1,994 1,573 831 20,644 409,073 (4,673) 404,400 15,879 102 14,899 13,728 — 7,355 $ 670,544 Liabilities Deposits – noninterest-bearing (Note 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deposits – interest-bearing (Note 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 287,460 867,142 1,154,602 $ 153,542 423,473 577,015 Federal funds purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Advances from Federal Home Loan Bank (Note 10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities (Notes 11 and 13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 33,198 6,189 1,193,989 4,800 5,233 3,019 590,067 Shareholders’ Equity (Note 20) 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: 7,245,088 in 2019 and 3,616,483 in 2018 (Note 14) . . . . . . . . . . . . . . . . . . . . . . . Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive income (loss), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 162,610 28,051 1,478 192,139 $1,386,128 54,523 26,686 (732) 80,477 $ 670,544 See accompanying notes to consolidated financial statements. Page | 37 ChoiceOne Financial Services, Inc. CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except per share data) Interest income Loans, including fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax exempt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Advances from Federal Home Loan Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for loan losses (Note 3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net interest income after provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Noninterest income Customer service charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Insurance and investment commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gains on sales of loans (Note 4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net gains/(losses) on sales of securities (Note 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net gains on sales and write-downs of other assets (Note 7) . . . . . . . . . . . . . . . . . . . . . . Earnings on life insurance policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in market value of equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gain on sale of investment book of business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Noninterest expense Salaries and benefits (Notes 13 and 14) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Occupancy and equipment (Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Data processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Supplies and postage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Advertising and promotional . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intangible amortization (Note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . FDIC insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax expense (Note 11) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Years ended December 31, 2019 2018 2017 $ 26,777 $ 20,033 $ 17,964 3,956 1,472 268 32,473 4,188 455 57 4,700 27,773 — 27,773 5,277 310 1,951 22 55 773 — — 780 9,168 14,401 3,557 3,210 3,112 407 528 353 45 2,863 28,476 8,465 1,294 2,896 1,465 131 24,525 2,175 235 51 2,461 22,064 35 22,029 4,525 335 1,003 34 83 385 71 — 484 6,920 10,997 2,722 2,205 1,349 408 308 — 185 2,287 20,461 8,488 1,155 2,556 1,419 102 22,041 1,189 276 13 1,478 20,563 485 20,078 4,135 826 1,265 (280) 26 398 — 908 533 7,811 10,249 2,896 2,279 1,166 399 298 — 200 1,847 19,334 8,555 2,387 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,171 $ 7,333 $ 6,168 Basic earnings per share (Note 15) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted earnings per share (Note 15) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends declared per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.58 $ 1.58 $ 1.40 $ 2.03 $ 2.02 $ 0.71 $ 1.70 $ 1.70 $ 0.64 See accompanying notes to consolidated financial statements. Page | 38 (Dollars in thousands) ChoiceOne Financial Services, Inc. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Years ended December 31, 2019 2018 2017 $ 6,168 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,171 $ 7,333 Other comprehensive income (loss): Changes in net unrealized gains (losses) on investment securities available for sale, (cid:81)(cid:72)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:68)(cid:91)(cid:3)(cid:72)(cid:91)(cid:83)(cid:72)(cid:81)(cid:86)(cid:72)(cid:3)(cid:11)(cid:69)(cid:72)(cid:81)(cid:72)(cid:191)(cid:87)(cid:12)(cid:3)(cid:82)(cid:73)(cid:3)(cid:7)(cid:24)(cid:27)(cid:22)(cid:15)(cid:3)(cid:7)(cid:11)(cid:20)(cid:28)(cid:25)(cid:12)(cid:15)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:7)(cid:22)(cid:21)(cid:23)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:86)(cid:3)(cid:72)(cid:81)(cid:71)(cid:72)(cid:71)(cid:3) December 31, 2019, 2018, and 2017, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,246 (737) 628 (cid:53)(cid:72)(cid:70)(cid:79)(cid:68)(cid:86)(cid:86)(cid:76)(cid:191)(cid:70)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:71)(cid:77)(cid:88)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:85)(cid:72)(cid:68)(cid:79)(cid:76)(cid:93)(cid:72)(cid:71)(cid:3)(cid:74)(cid:68)(cid:76)(cid:81)(cid:3)(cid:82)(cid:81)(cid:3)(cid:86)(cid:68)(cid:79)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:86)(cid:72)(cid:70)(cid:88)(cid:85)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:68)(cid:89)(cid:68)(cid:76)(cid:79)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3) (cid:73)(cid:82)(cid:85)(cid:3)(cid:86)(cid:68)(cid:79)(cid:72)(cid:3)(cid:76)(cid:81)(cid:70)(cid:79)(cid:88)(cid:71)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:81)(cid:72)(cid:87)(cid:3)(cid:76)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)(cid:15)(cid:3)(cid:81)(cid:72)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:68)(cid:91)(cid:3)(cid:72)(cid:91)(cid:83)(cid:72)(cid:81)(cid:86)(cid:72)(cid:3)(cid:11)(cid:69)(cid:72)(cid:81)(cid:72)(cid:191)(cid:87)(cid:12)(cid:3)(cid:82)(cid:73)(cid:3)(cid:7)(cid:24)(cid:15)(cid:3)(cid:7)(cid:26)(cid:15)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:7)(cid:11)(cid:28)(cid:24)(cid:12)(cid:3) for the years ended December 31, 2019, 2018, and 2017, respectively . . . . . . . . . . . (18) (27) 185 (cid:38)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:3)(cid:76)(cid:81)(cid:3)(cid:68)(cid:71)(cid:77)(cid:88)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:83)(cid:82)(cid:86)(cid:87)(cid:85)(cid:72)(cid:87)(cid:76)(cid:85)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:69)(cid:72)(cid:81)(cid:72)(cid:191)(cid:87)(cid:86)(cid:15)(cid:3)(cid:81)(cid:72)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:68)(cid:91)(cid:3)(cid:72)(cid:91)(cid:83)(cid:72)(cid:81)(cid:86)(cid:72)(cid:3)(cid:11)(cid:69)(cid:72)(cid:81)(cid:72)(cid:191)(cid:87)(cid:12)(cid:3) of $(5), $10, and $(9) for the years ended December 31, 2019, 2018, and 2017, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (18) 39 Other comprehensive income (loss), net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,210 (725) (17) 796 Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,381 $ 6,608 $ 6,964 See accompanying notes to consolidated financial statements. Page | 39 ChoiceOne Financial Services, Inc. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ E QUITY (Dollars in thousands, except per share data) Balance, January 1, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares repurchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effect of employee stock purchases . . . . . . . . . . . . . . . . . . . Stock options exercised and issued(1) . . . . . . . . . . . . . . . . . . Stock-based compensation expense . . . . . . . . . . . . . . . . . . . Restricted stock units issued . . . . . . . . . . . . . . . . . . . . . . . . . Stock dividend declared (5%) . . . . . . . . . . . . . . . . . . . . . . . . Effect of tax law change on other comprehensive income . . Cash dividends declared ($0.64 per share)(2)(3) . . . . . . . . . . . Common Stock and Paid in Capital $ 46,299 Number of Shares 3,277,944 Retained Earnings $ 25,997 6,168 8,776 (8,800) 1,463 5,197 163,989 149 (203) 13 13 240 3,779 (3,786) (39) (2,317) Accumulated Other Comprehensive Income/(Loss), Net Total $ (598) $ 71,698 796 39 6,168 796 149 (203) 13 13 240 — (7) — (2,317) Balance, December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . 3,448,569 $ 50,290 $ 26,023 $ 237 $ 76,550 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares repurchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effect of employee stock purchases . . . . . . . . . . . . . . . . . . . Stock options exercised and issued(1) . . . . . . . . . . . . . . . . . . Stock-based compensation expense . . . . . . . . . . . . . . . . . . . Restricted stock units issued . . . . . . . . . . . . . . . . . . . . . . . . . Adoption effect of ASU 2016-01(4) . . . . . . . . . . . . . . . . . . . . Stock dividend declared (5%) . . . . . . . . . . . . . . . . . . . . . . . . Cash dividends declared ($0.71 per share)(2)(3) . . . . . . . . . . . 7,904 (20,628) 1,241 7,303 126 (523) 13 282 172,094 4,335 7,333 244 (4,342) (2,572) (725) (244) 7,333 (725) 126 (523) 13 — 282 — (7) (2,572) Balance, December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . 3,616,483 $ 54,523 $ 26,686 $ (732) $ 80,477 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . Shares issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares repurchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effect of employee stock purchases . . . . . . . . . . . . . . . . . . . Stock options exercised and issued(1) . . . . . . . . . . . . . . . . . . Stock-based compensation expense . . . . . . . . . . . . . . . . . . . Restricted stock units issued . . . . . . . . . . . . . . . . . . . . . . . . . Merger with County Bank Corp, net of issuance costs . . . . . Cash dividends declared ($1.40 per share) . . . . . . . . . . . . . . 8,118 (2,228) 3,913 25 (67) 14 78 398 14,930 3,603,872 107,639 7,171 2,210 (5,806) 7,171 2,210 25 (67) 14 78 398 — 107,639 (5,806) Balance, December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . 7,245,088 $ 162,610 $ 28,051 $ 1,478 $ 192,139 (1) The amount shown represents the number of shares issued in cashless transactions where some taxes are netted on a portion of the exercises. (2) Adjusted for 5% stock dividend issued on May 31, 2017. (3) Adjusted for 5% stock dividend issued on May 31, 2018. (cid:11)(cid:23)(cid:12)(cid:3)(cid:3) (cid:36)(cid:54)(cid:56)(cid:3)(cid:21)(cid:19)(cid:20)(cid:25)(cid:16)(cid:19)(cid:20)(cid:3)(cid:76)(cid:86)(cid:3)(cid:73)(cid:88)(cid:85)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:68)(cid:71)(cid:71)(cid:85)(cid:72)(cid:86)(cid:86)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:49)(cid:82)(cid:87)(cid:72)(cid:3)(cid:20)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:191)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:86)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:17) See accompanying notes to consolidated financial statements. Page | 40 ChoiceOne Financial Services, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) Cash flows from operating activities: Years ended December 31, 2019 2018 2017 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustments to reconcile net income to net cash from operating activities: $ 7,171 $ 7,333 $ 6,168 Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Compensation expense on employee and director stock purchases, stock options, and restricted stock units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net (gains)/losses on sales of securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net change in market value of equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gains on sales of loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans originated for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from loan sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Earnings on bank-owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from BOLI policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Earnings on death benefit from bank-owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (Gains)/losses on sales of other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from sales of other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred federal income tax (benefit)/expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net change in: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash from operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash flows from investing activities: Sales of securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales of equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Maturities, prepayments and calls of securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchases of securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchases or calls of FHLB stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loan originations and payments, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions to premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash received from merger with County Bank Corp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash from investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash flows from financing activities: Net change in deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net change in repurchase agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net change in fed funds purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from Federal Home Loan Bank advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payments on Federal Home Loan Bank advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash dividends and fractional shares from stock dividend and merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash related to equity issuance for merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash from financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net change in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Beginning cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 1,610 1,517 373 (22) — (1,951) (63,920) 62,763 (485) 605 (288) (54) 938 310 2,128 (1,493) 9,202 178,450 463 47,816 (209,763) (1) (485) (766) 20,638 36,352 3,986 — (8,600) 115,000 (110,035) 142 (67) (5,815) (297) (5,686) 39,868 19,690 35 1,183 893 344 (34) (71) (1,003) (33,555) 34,872 (385) — — (79) 515 209 (875) 573 9,955 2,634 91 13,443 (31,450) — (24,366) (4,207) — (43,855) 37,162 (7,148) 4,800 128,500 (143,535) 77 (523) (2,580) — 16,753 (17,147) 36,837 485 1,389 1,061 317 280 — (1,265) (43,171) 42,883 (398) — — (18) 663 62 417 (783) 8,090 57,595 33 17,572 (56,123) — (35,723) (1,656) — (18,302) 27,467 (765) — 212,500 (204,533) 98 (203) (2,324) — 32,240 22,028 14,809 Ending cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 59,558 $ 19,690 $ 36,837 Supplemental disclosures of cash flow information: Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash paid for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans transferred to other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,500 1,035 347 $ 2,300 850 432 $ 1,465 2,120 314 See accompanying notes to consolidated financial statements. Page | 41 Note 1 – Summary of Significant Accounting Policies ChoiceOne Financial Services, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Principles of Consolidation The consolidated financial statements include ChoiceOne Financial Services, Inc. (“ChoiceOne”), its wholly-owned subsidiaries, ChoiceOne Bank and Lakestone Bank & Trust (together referred to as the “Banks”), ChoiceOne Bank’s wholly-owned subsidiary, ChoiceOne Insurance Agencies, Inc. (the “Insurance Agency”) and Lakestone’s wholly-owned subsidiary, Lakestone Financial Services, Inc. (“Lakestone Financial”). Intercompany transactions and balances have been eliminated in consolidation. Merger with County On October 1, 2019, ChoiceOne completed the merger of County Bank Corp (“County”) with and into ChoiceOne with ChoiceOne surviving the merger. Accordingly, the reported consolidated financial condition and operating results as of and for the year ended December 31, 2019 include the impact of the merger, which was effective as of October 1, 2019. For additional details regarding the merger with County, see Note 21 (Business Combination) below. Nature of Operations The Banks are full-service community banks that offer commercial, consumer, and real estate loans as well as traditional demand, savings and time deposits to both commercial and consumer clients within ChoiceOne Bank’s primary market areas in Kent, Muskegon, Newaygo, and Ottawa counties in western Michigan and Lakestone Bank’s primary market areas in Lapeer, Macomb, and St. Clair counties in southeastern Michigan. Substantially all loans are secured by specific items of collateral including business assets, consumer assets, and real estate. Commercial loans are expected to be repaid from the cash flows from operations of businesses. Real estate loans are collateralized by either residential or commercial real estate. The Insurance Agency is a wholly-owned subsidiary of the ChoiceOne Bank. The Insurance Agency sells insurance policies such as life and health for both commercial and consumer clients. The Insurance Agency also offers alternative investment products such as annuities and mutual funds through a registered broker. Lakestone Financial is a wholly-owned subsidiary of Lakestone, which earns revenues through the sale of annuities and other third party investment products. Together, the Banks and the Insurance Agency and Lakestone Financial account for substantially all of ChoiceOne’s assets, revenues and operating income. Use of Estimates To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, ChoiceOne’s management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided. Actual results may differ from these estimates. Estimates associated with securities available for sale, the allowance for loan losses, other real estate owned, loan servicing rights, goodwill, and fair values of certain financial instruments are particularly susceptible to change. Cash and Cash Equivalents Cash and cash equivalents are defined to include cash on hand, demand deposits with other banks, and federal funds sold. Cash flows are reported on a net basis for customer loan and deposit transactions, deposits with other financial institutions, and short-term borrowings with original terms of 90 days or less. Securities Debt securities are classified as available for sale because they might be sold before maturity. Debt securities classified as available for sale are carried at fair value, with unrealized holding gains and losses reported separately in the accumulated other comprehensive income or loss section of shareholders’ equity, net of tax effect. Restricted investments in Federal Reserve Bank stock and Federal Home Loan Bank stock are carried at cost. Equity securities consist of investments in preferred stock and investments in common stock of other financial institutions. Effective January 1, 2018, equity securities are reported at their fair value with changes in market value flowing through net income. Prior to 2018, equity securities were accounted for in a manner similar to available for sale debt securities. Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized using the level-yield method without anticipating prepayments. Gains or losses on sales are recorded on the trade date based on the amortized cost of the security sold. Page | 42 ChoiceOne Financial Services, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Management evaluates securities for other-than-temporary impairment (“OTTI”) on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The evaluation of securities includes consideration given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, whether the market decline was affected by macroeconomic conditions and whether ChoiceOne has the intent to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis. In analyzing an issuer’s financial condition, management may consider whether the securities are issued by the federal government or its agencies, or U.S. Government sponsored enterprises, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time. When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether ChoiceOne intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis. If ChoiceOne intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment. If a security is determined to be other-than-temporarily impaired, but ChoiceOne does not intend to sell the security, only the credit portion of the estimated loss is recognized in earnings, with the other portion of the loss recognized in other comprehensive income. Loans Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of unearned interest, deferred loan fees and costs, remaining purchase accounting adjustments, and an allowance for loan losses. Loans held for sale are reported at the lower of cost or market, on an aggregate basis. Interest income on loans is reported on the interest method and includes amortization of net deferred loan fees and costs over the estimated loan term. Interest on loans is accrued based upon the principal balance outstanding. The accrual of interest is discontinued at the time at which loans are 90 days past due unless the loan is secured by sufficient collateral and is in the process of collection. Past due status is based on the contractual terms of the loan. Loans are placed into nonaccrual status or charged off at an earlier date if collection of principal or interest is considered doubtful. Interest accrued but not received is reversed against interest income when the loans are placed into nonaccrual status. Interest received on such loans is applied to principal until qualifying for return to accrual. Loans are returned to accrual basis when all the principal and interest amounts contractually due are brought current and future payment is reasonably assured. No allowance for loan loss is recorded for loans acquired in a business combination unless losses are incurred subsequent to the acquisition date. Acquired loans are considered purchased credit impaired (“PCI”) if as of the acquisition date, management determines the loan has evidence of deterioration in credit quality since origination and it is probable at acquisition the Company will be unable to collect all contractually required payments. The discount related to credit quality for PCI loans is recorded as an adjustment to the loan balance as of the acquisition date and is not accreted into income. Management subsequently estimates expected cash flows on an individual loan basis. If the present value of expected cash flows is less than a loan’s carrying amount, an allowance for loan loss is recorded through the provision for loan losses. If the present value of expected cash flows is greater than the carrying amount, the excess may be reclassified to an accretable difference and recognized into income over the loan’s remaining life. For non-PCI loans, the difference between acquisition date fair value and expected cash flows is accreted into income over a pool’s expected life using the level yield method. Loans to Other Financial Institutions Loans to other financial institutions are made for the purpose of providing a warehouse line of credit to facilitate funding of residential mortgage loan originations at other financial institutions. The loans are short-term in nature and are designed to provide funding for the time period between the loan origination and its subsequent sale in the secondary market. Loans to other financial institutions earn a share of interest income, determined by the contract, from when the loan is funded to when the loan is sold on the secondary market. Similar to loans held for sale, these loans are excluded from the allowance for loan losses as the risk of default is minimal during the short time period held. Page | 43 ChoiceOne Financial Services, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Allowance for Loan Losses The allowance for loan losses is a valuation allowance for probable incurred credit losses. The allowance for loan losses is increased by the provision for loan losses and decreased by loans charged off less any recoveries of charged off loans. Management estimates the allowance for loan losses balance required based on past loan loss experience, the nature and volume of the loan portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance for loan losses may be made for specific loans, but the entire allowance for loan losses is available for any loan that, in management’s judgment, should be charged off. Loan losses are charged against the allowance for loan losses when management believes that collection of a loan balance is not possible. The allowance for loan losses consists of general and specific components. The general component covers non-classified loans and is based on historical loss experience adjusted for current factors. The specific component relates to loans that are individually classified as impaired or loans otherwise classified as substandard or doubtful. A loan is impaired when full payment under the loan terms is not expected. Troubled debt restructuring of loans is undertaken to improve the likelihood that the loan will be repaid in full under the modified terms in accordance with a reasonable repayment schedule. All modified loans are evaluated to determine whether the loans should be reported as Troubled Debt Restructurings (TDR). A loan is a TDR when one of the Banks, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower by modifying a loan. To make this determination, the Banks must determine whether (a) the borrower is experiencing financial difficulties and (b) the Bank granted the borrower a concession. This determination requires consideration of all facts and circumstances surrounding the modification. An overall general decline in the economy or some deterioration in a borrower’s financial condition does not automatically mean the borrower is experiencing financial difficulties. Commercial loans are evaluated for impairment on an individual loan basis. If a loan is considered impaired or if a loan has been classified as a TDR, a portion of the allowance for loan losses is allocated to the loan so that it is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of smaller-balance homogeneous loans such as consumer and residential real estate mortgage loans are collectively evaluated for impairment and, accordingly, they are not separately identified for impairment disclosures. Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation. Land is carried at cost. Land improvements are depreciated using the straight-line method with useful lives ranging from 7 to 15 years. Building and related components are depreciated using the straight-line method with useful lives ranging from 5 to 39 years. Leasehold improvements are depreciated over the shorter of the estimated life or the lease term. Furniture and equipment are depreciated using the straight-line method with useful lives ranging from 3 to 7 years. Fixed assets are periodically reviewed for impairment. If impaired, the assets are recorded at fair value. Other Real Estate Owned Real estate properties acquired in the collection of a loan are initially recorded at the lower of the Banks’ basis in the loans or fair value at acquisition establishing a new cost basis. Any reduction to fair value from the carrying value of the related loan is accounted for as a loan loss. After acquisition, a valuation allowance reduces the reported amount to the lower of the initial amount or fair value less costs to sell. Expenses to repair or maintain properties are included within other noninterest expenses. Gains and losses upon disposition and changes in the valuation allowance are reported net within noninterest income. Bank Owned Life Insurance Bank owned life insurance policies are stated at the current cash surrender value of the policy, or the policy death proceeds less any obligation to provide a death benefit to an insured’s beneficiaries if that value is less than the cash surrender value. Increases in the asset value are recorded as earnings in other income. Loan Servicing Rights Loan servicing rights represent the allocated value of servicing rights on loans sold with servicing retained. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the rights, using groupings of the underlying loans as to interest rates and then, secondarily, as to geographic and prepayment characteristics. Servicing rights are initially recorded at estimated fair value and fair value is determined using prices for similar assets with similar characteristics when available or based upon discounted cash flows using market-based assumptions. Any impairment of a grouping is reported as a valuation allowance. Page | 44 ChoiceOne Financial Services, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Goodwill Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of the acquired tangible assets and liabilities and identifiable intangible assets. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized but tested for impairment at least annually or more frequently if events and circumstances exists that indicate that a goodwill impairment test should be performed. Loan Commitments and Related Financial Instruments Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit issued to meet financing needs of customers. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded. Employee Benefit Plans ChoiceOne’s 401(k) plan allows participants to make contributions to their individual accounts under the plan in amounts up to the IRS maximum. Employer matching contributions from ChoiceOne to its 401(k) plan are discretionary. ChoiceOne also allows retired employees to participate in its health insurance plan. Employees who have attained age 55 and completed at least ten years of service to ChoiceOne are eligible to participate as a retiree until they are eligible for Medicare. These post-retirement benefits are accrued during the years in which the employee provides service. Income Taxes Income tax expense is the sum of the current year income tax due and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Company recognizes interest and/or penalties related to income tax matters in income tax expense. Earnings Per Share Basic earnings per common share (“EPS”) is based on weighted-average common shares outstanding. Diluted EPS assumes issuance of any dilutive potential common shares issuable under stock options or restricted stock units granted. Comprehensive Income Comprehensive income consists of net income and other comprehensive income or loss. Other comprehensive income or loss includes unrealized gains and losses on securities available for sale and changes in the funded status of post-retirement plans, net of tax, which are also recognized as a separate component of shareholders’ equity. Accumulated other comprehensive income was as follows: (Dollars in thousands) Unrealized gain (loss) on available for sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrecognized gains on post-retirement benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . As of December 31, 2019 $ 1,713 158 (393) $ 1,478 2018 $ (1,108) 181 195 $ (732) Loss Contingencies Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe that there are any such matters that may have a material effect on the financial statements as of December 31, 2019. Cash Restrictions Cash on hand or on deposit with the Federal Reserve Bank of $13,231,000 and $781,000 was required to meet regulatory reserve and clearing requirements for the Banks at December 31, 2019 and 2018, respectively. The balance in excess of the amount required was interest-bearing as of December 31, 2019 and December 31, 2018. Page | 45 ChoiceOne Financial Services, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Stock-Based Compensation The Company values share-based stock option awards granted using the Black-Scholes option-pricing model. The Company recognizes compensation expense for its awards on a straight-line basis over the requisite service period for the entire award (straight-line attribution method), ensuring that the amount of compensation cost recognized at any date at least equals the portion of the grant-date fair value of the award that is vested at that time. Compensation costs related to stock options granted are disclosed in Note 14. ChoiceOne has granted restricted stock units to a select group of employees under the Stock Incentive Plan of 2012. Each unit, once vested, is settled by delivery of one share of ChoiceOne common stock. Dividend Restrictions Banking regulations require the maintenance of certain capital levels and may limit the amount of dividends that may be paid by the Banks to ChoiceOne (see Note 20). Fair Value of Financial Instruments Fair values of financial instruments are estimated using relevant market information and other assumptions, which are more fully documented in Note 18 to the consolidated financial statements. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. Operating Segments While ChoiceOne’s management monitors the revenue streams of various products and services for the Banks, Insurance Agency, and Lakestone Financial, operations and financial performance are evaluated on a company-wide basis. Accordingly, all of the financial service operations are considered by management to be aggregated into one reportable operating segment. Recent Accounting Pronouncements The Financial Accounting Standards Board (“FASB”) issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. The ASU covers various changes to the accounting, measurement, and disclosure related to certain financial instruments. The most significant change included in the update is the requirement for certain equity investments (excluding investments that are consolidated or accounted for under the equity method of accounting) to be measured at fair value with changes in fair value recognized in net income. An entity may choose to measure equity investments that do not have readily determinable fair values at cost, minus impairment. When a qualitative assessment of equity investments without readily determinable fair values indicates that impairment exists, an entity is required to measure the investment at fair value. The update also eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The new standard is effective for ChoiceOne for the fiscal year beginning after December 15, 2017, including interim periods within this fiscal year. Management implemented ASU 2016-01 effective January 1, 2018. A cumulative effect adjustment was recorded as of January 1, 2018 to reclassify $244,000 of unrealized gains on equity securities from accumulated other comprehensive income to retained earnings. Equity securities have been presented separately from available for sale securities on the Consolidated Balance Sheet and changes in the market value of securities is presented on the Consolidated Statement of Income. In addition, the fair value of loans has been estimated using an exit price notion. The FASB issued ASU 2016-02, Leases. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. ChoiceOne adopted ASU 2016-02 using the modified retrospective approach to capitalize all leases existing at or entered into after January 1, 2019. The FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU provides financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date by replacing the incurred loss impairment methodology in current generally accepted accounting principles (GAAP) with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The new guidance attempts to reflect an entity’s current estimate of all expected credit losses and broadens the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually to include forecasted Page | 46 ChoiceOne Financial Services, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS information, as well as past events and current conditions. There is no specified method for measuring expected credit losses, and an entity may apply methods that reasonably reflect its expectations of the credit loss estimate. Although an entity may still use its current systems and methods for recording the allowance for credit losses, under the new rules, the inputs used to record the allowance for credit losses generally will need to change to appropriately reflect an estimate of all expected credit losses and the use of reasonable and supportable forecasts. Additionally, credit losses on available-for-sale debt securities will have to be presented as an allowance rather than as a write-down. This ASU is effective for fiscal years beginning after December 15, 2022, and for interim periods within those years for companies considered smaller reporting filers with the Securities and Exchange Commission. ChoiceOne was classified as a smaller reporting filer as of December 31, 2019. Management is currently evaluating the impact of this new ASU on its consolidated financial statements which may be significant. The FASB issued ASU No. 2018-13. Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. This ASU improves the effectiveness of disclosures in the notes to financial statements by facilitating clear communication of the information required by generally accepted accounting principles that is most important to users of each entity’s financial statements. The objective of improving the effectiveness will include the development of a framework that promotes consistent decisions by FASB about disclosure requirements and the appropriate exercise of discretion by reporting entities. This ASU is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2019. Management is currently evaluating the impact of this new ASU on its consolidated financial statements. Reclassifications Certain amounts presented in prior year consolidated financial statements have been reclassified to conform to the 2019 presentation. Note 2 – Securities The fair value of equity securities and the related gross unrealized gains recognized in noninterest income at December 31 were as follows: (Dollars in thousands) 2019 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,426 $ 425 $ — $ 2,851 (Dollars in thousands) 2018 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,502 $ 459 $ (114) $ 2,847 The fair value of securities available for sale and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) at December 31 were as follows: (Dollars in thousands) U.S. Government and federal agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S. Treasury notes and bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State and municipal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage-backed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trust preferred securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2019 Gross Unrealized Gains Gross Unrealized Losses Fair Value $ $ 23 14 2,694 585 24 — 3,340 $ $ (39) $ 17,215 2,008 — 173,924 (1,257) 142,760 (329) 2,672 (1) 1,000 — (1,626) $ 339,579 Amortized Cost $ 17,231 1,994 172,487 142,504 2,649 1,000 $ 337,865 Page | 47 ChoiceOne Financial Services, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) U.S. Government and federal agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S. Treasury notes and bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State and municipal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage-backed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trust preferred securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2018 Gross Unrealized Gains Gross Unrealized Losses Fair Value $ $ 1 — 544 126 1 — — 672 $ $ (551) $ 33,529 1,947 (45) 103,928 (933) 21,575 (205) 5,102 (46) 500 — 21 — (1,780) $ 166,602 Amortized Cost $ 34,079 1,992 104,317 21,654 5,147 500 21 $ 167,710 Information regarding sales of equity securities and securities available for sale for the year ended December 31 follows: (Dollars in thousands) Proceeds from sales of securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross realized losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 178,913 $ 22 — 2019 2017 2018 2,634 $ 57,595 184 464 42 8 Contractual maturities of equity securities and securities available for sale at December 31, 2019 were as follows: (Dollars in thousands) Due within one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due after one year through five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due after five years through ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortized Cost $ 26,742 55,484 69,356 43,779 195,361 142,504 2,426 $ 340,291 Fair Value $ 26,849 56,527 70,526 42,917 196,819 142,760 2,851 $ 342,430 Various securities were pledged as collateral for securities sold under agreements to repurchase and participation in a program that provided Community Reinvestment Act credits. The carrying amount of securities pledged as collateral at December 31 was as follows: (Dollars in thousands) Securities pledged for securities sold under agreements to repurchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2019 $ 252 $ 2018 257 The fair value of securities pledged to secure repurchase agreements may decline, and the Company may be required to provide additional collateral. The Company manages this risk by pledging securities with fair values in excess of the repurchase liability. Page | 48 ChoiceOne Financial Services, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Securities with unrealized losses at year-end 2019 and 2018, aggregated by investment category and length of time the individual securities have been in an unrealized loss position, were as follows: 2019 (Dollars in thousands) Less than 12 months More than 12 months Unrealized Losses Unrealized Losses Fair Value Fair Value Fair Value Total U.S. Government and federal agency . . . . . . . . . . . . U.S. Treasury notes and bonds . . . . . . . . . . . . . . . . . State and municipal . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage-backed . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total temporarily impaired . . . . . . . . . . . . . . . . $ 7,175 — 75,099 109,652 — $ 191,926 $ $ (39) $ — (1,256) (327) — (1,622) $ — — 252 373 300 925 $ $ 2018 $ — — (1) (2) (1) 7,175 — 75,351 110,025 300 (4) $ 192,851 (Dollars in thousands) Less than 12 months More than 12 months Unrealized Losses Unrealized Losses Fair Value Fair Value Fair Value Total U.S. Government and federal agency . . . . . . . . . . . U.S. Treasury notes and bonds . . . . . . . . . . . . . . . . State and municipal . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage-backed . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total temporarily impaired . . . . . . . . . . . . . . . $ Value — — 9,726 5,384 — $ 15,110 $ $ Value Losses $ 31,499 — 1,947 — 56,763 (36) 7,443 (28) — 4,604 (64) $ 102,256 $ $ Losses Value (551) $ 31,499 1,947 66,489 12,827 4,604 (1,716) $ 117,366 (45) (897) (177) (46) Unrealized Losses $ (39) — (1,257) (329) (1) $ (1,626) Unrealized Losses $ Losses (551) (45) (933) (205) (46) $ (1,780) ChoiceOne evaluates all securities on a quarterly basis to determine whether unrealized losses are temporary or other than temporary. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near- term prospects of the issuer, and the intent and ability of ChoiceOne to retain its investment in the issue for a period of time sufficient to allow for any anticipated recovery in fair value of amortized cost basis. Management believed that unrealized losses as of December 31, 2019 were temporary in nature and were caused primarily by changes in interest rates, increased credit spreads, and reduced market liquidity and were not caused by the credit status of the issuer. No other than temporary impairments were recorded in 2019 or 2018. Following is information regarding unrealized gains and losses on equity securities for the years ending December 31: New gains and losses recognized during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Net gains and losses recognized during the period on securities sold . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized gains and losses recognized during the reporting period on securities $ 2019 — $ (5) 2018 71 9 still held at the reporting date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5 $ 62 At December 31, 2019, there were 63 securities with an unrealized loss, compared to 210 securities with an unrealized loss as of December 31, 2018. Page | 49 ChoiceOne Financial Services, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 3 – Loans and Allowance for Loan Losses The Banks’ loan portfolio as of December 31 was as follows: (Dollars in thousands) Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate - commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate - construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate - residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans, gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 57,339 148,083 38,854 326,379 13,411 217,982 802,048 (4,057) $ 797,991 2019 2018 $ 49,109 91,406 24,382 139,453 8,843 95,880 409,073 (4,673) $ 404,400 ChoiceOne manages its credit risk through the use of its loan policy and its loan approval process and by monitoring of loan credit performance. The loan approval process for commercial loans involves individual and group approval authorities. Individual authority levels are based on the experience of the lender. Group authority approval levels can consist of an internal loan committee that includes the applicable Bank’s President or Senior Lender and other loan officers for loans that exceed individual approval levels, or a loan committee of the Board of Directors for larger commercial loans. Most consumer loans are approved by individual loan officers based on standardized underwriting criteria, with larger consumer loans subject to approval by the internal loan committee. Ongoing credit review of commercial loans is the responsibility of the loan officers. ChoiceOne’s internal credit committee meets at least monthly and reviews loans with payment issues and loans with a risk rating of 5, 6, or 7. Risk ratings of commercial loans are reviewed periodically and adjusted if needed. ChoiceOne’s consumer loan portfolio is primarily monitored on an exception basis. Loans where payments are past due are turned over to the applicable Bank’s collection department, which works with the borrower to bring payments current or take other actions when necessary. In addition to internal reviews of credit performance, ChoiceOne contracts with a third party for independent loan review that monitors the loan approval process and the credit quality of the loan portfolio. The table below details the acquisition balances of the County Bank Corp acquired portfolio and the acquisition fair value adjustments at acquisition date: (Dollars in thousands) Loans acquired - contractual payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nonaccretable difference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected cash flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accretable yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Carrying balance at acquisition date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquired Impaired 7,729 (2,928) 4,801 (185) 4,616 $ $ Acquired Non- impaired $ 387,394 — 387,394 (1,656) $ 385,738 Acquired Total $ 395,123 (2,928) 392,195 (1,841) $ 390,354 The table below presents a roll-forward of the accretable yield on acquired loans for the year end December 31, 2019: (Dollars in thousands) Balance, January 1, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Merger with County Bank Corp on October 1, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accretion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reclassification from nonaccretable difference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance, December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page | 50 Acquired Impaired — 185 — — 185 $ $ Acquired Non- impaired — $ 1,656 (75) — 1,581 $ Acquired Total $ $ — 1,841 (75) — 1,766 ChoiceOne Financial Services, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Activity in the allowance for loan losses and balances in the loan portfolio was as follows: (Dollars in thousands) Commercial and Industrial Consumer Agricultural Commercial Real Estate Construction Real Estate Residential Real Estate Unallocated Total 2019 Allowance for Loan Losses Beginning balance . . . . . . . $ Charge-offs . . . . . . . . . . . . Recoveries . . . . . . . . . . . . . Provision . . . . . . . . . . . . . . Ending balance . . . . . . . . . $ Individually evaluated 481 $ — 65 (75) 471 $ 892 $ (83) 22 (176) 655 $ 254 $ (292) 136 172 270 $ 1,926 $ (589) 26 300 1,663 $ 38 $ — — 38 76 $ 537 $ (25) 124 4 640 $ 545 $ 4,673 (989) — 373 — (263) — 282 $ 4,057 for impairment . . . . . . $ 103 $ — $ 4 $ 13 $ — $ 235 $ — $ 355 Collectively evaluated for impairment . . . . . . $ 368 $ 655 $ 266 $ 1,650 $ 76 $ 405 $ 282 $ 3,702 Loans 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 . . . . . . . Ending balance . . . . . . . . . $ — 313 57,339 $ 148,083 $ 38,854 $ 6,241 733 326,379 $ — 442 13,411 $ 217,982 7,729 $ 802,048 (Dollars in thousands) Commercial and Industrial Consumer Agricultural Commercial Real Estate Construction Real Estate Residential Real Estate Unallocated Total 2018 Allowance for Loan Losses Beginning balance . . . . . . . $ Charge-offs . . . . . . . . . . . . Recoveries . . . . . . . . . . . . . Provision . . . . . . . . . . . . . . Ending balance . . . . . . . . . $ Individually evaluated 506 $ — 33 (58) 481 $ 1,001 $ (58) 107 (158) 892 $ 262 $ (282) 112 162 254 $ 1,761 $ — 61 104 1,926 $ 35 $ — — 3 38 $ 726 $ (25) 113 (277) 537 $ 286 $ 4,577 (365) 426 35 545 $ 4,673 — — 259 for impairment . . . . . . $ 94 $ 3 $ 13 $ 20 $ — $ 167 $ — $ 297 Collectively evaluated for impairment . . . . . . $ 387 $ 889 $ 241 $ 1,906 $ 38 $ 370 $ 545 $ 4,376 Loans Individually evaluated for impairment . . . . . . $ 578 $ 21 $ 90 $ 623 $ — $ 2,712 $ 4,024 Collectively evaluated for impairment . . . . . . Ending balance . . . . . . . . . $ 48,531 49,109 $ 24,292 91,385 91,406 $ 24,382 $ 138,830 139,453 $ 93,168 8,843 8,843 $ 95,880 405,049 $ 409,073 Page | 51 ChoiceOne Financial Services, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) Commercial and Industrial Consumer Agricultural Commercial Real Estate Construction Real Estate Residential Real Estate Unallocated Total 2017 Allowance for Loan Losses Beginning balance . . . . . . Charge-offs . . . . . . . . . . . Recoveries . . . . . . . . . . . . Provision . . . . . . . . . . . . . Ending balance . . . . . . . . $ $ 433 $ — — 73 506 $ 688 $ (439) 21 731 1,001 $ 305 $ (253) 169 41 262 $ 1,438 $ — 258 65 1,761 $ 62 $ — 40 (67) 35 $ 1,013 $ (43) 62 (306) 726 $ 338 $ 4,277 (735) 550 485 4,577 — — (52) 286 Individually evaluated for impairment . . . . . $ — $ 26 $ 3 $ 49 $ — $ 224 $ — $ 302 Collectively evaluated for impairment . . . . . $ 506 $ 975 $ 259 $ 1,712 $ 35 $ 502 $ 286 $ 4,275 Loans Individually evaluated for impairment . . . . . $ 423 $ 124 $ 36 $ 778 $ — $ 2,779 $ $ 4,140 Collectively evaluated for impairment . . . . . Ending balance . . . . . . . . 48,041 24,477 104,262 48,464 $ 104,386 $ 24,513 $ 122,709 123,487 $ 6,613 88,543 6,613 $ 91,322 $ $ 394,645 $ 398,785 The process to monitor the credit quality of ChoiceOne’s loan portfolio includes tracking (1) the risk ratings of business loans, (2) the level of classified business loans, and (3) delinquent and nonperforming consumer loans. Business loans are risk rated on a scale of 1 to 8. A description of the characteristics of the ratings follows: Risk ratings 1 and 2: These loans are considered pass credits. They exhibit good to exceptional credit risk and demonstrate the ability to repay the loan from normal business operations. Risk rating 3: These loans are considered pass credits. They exhibit acceptable credit risk and demonstrate the ability to repay the loan from normal business operations. Risk rating 4: These loans are considered watch credits. They have potential developing weaknesses that, if not corrected, may cause deterioration in the ability of the borrower to repay the loan. While a loss is possible for a loan with this rating, it is not anticipated. Risk rating 5: These loans are considered special mention credits. Loans in this risk rating are considered to be inadequately protected by the net worth and debt service coverage of the borrower or of any pledged collateral. These loans have well defined weaknesses that may jeopardize the borrower’s ability to repay the loan. If the weaknesses are not corrected, loss of principal and interest could be probable. Risk rating 6: These loans are considered substandard credits. These loans have well defined weaknesses, the severity of which makes collection of principal and interest in full questionable. Loans in this category may be placed on nonaccrual status. Risk rating 7: These loans are considered doubtful credits. Some loss of principal and interest has been determined to be probable. The estimate of the amount of loss could be affected by factors such as the borrower’s ability to provide additional capital or collateral. Loans in this category are on nonaccrual status. No loans are classified as risk rating 7 and the category has been omitted from the table below. Page | 52 ChoiceOne Financial Services, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Risk rating 8: These loans are considered loss credits. They are considered uncollectible and will be charged off against the allowance for loan losses. No loans are classified as risk rating 8 and the category has been omitted from the table below. Information regarding the Banks’ credit exposure as of December 31 was as follows: Corporate Credit Exposure - Credit Risk Profile By Creditworthiness Category (Dollars in thousands) Risk ratings 1 and 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . Risk rating 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Risk rating 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Risk rating 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Risk rating 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Agricultural 2019 Commercial and Industrial 2019 Commercial Real Estate 2019 2018 2018 2018 $ 14,173 $ 15,300 $ 14,920 $ 11,972 $ 11,051 $ 7,962 89,173 23,938 105,656 36,193 26,152 4,850 1,081 1,275 274 $ 57,339 $ 49,109 $ 148,083 $ 91,406 $ 326,379 $ 139,453 50,266 271,120 39,934 23,961 1,332 5,204 2,942 3 27,163 14,530 1,094 379 9,082 211 578 Consumer Credit Exposure - Credit Risk Profile Based On Payment Activity (Dollars in thousands) Consumer Performing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nonperforming . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nonaccrual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Construction Real Estate 2019 Residential Real Estate 2019 2018 2019 2018 $ 38,838 $ 24,320 $ 13,411 $ 8,843 $ 216,651 $ 94,925 — — 955 — $ 38,854 $ 24,382 $ 13,411 $ 8,843 $ 217,982 $ 95,880 — 1,331 — — — 16 — 62 2018 Included within the loan categories above were loans in the process of foreclosure. As of December 31, 2019 and 2018, loans in the process of foreclosure totaled $173,000 and $156,000, respectively. Loans are classified as performing when they are current as to principal and interest payments or are past due on payments less than 90 days. Loans are classified as nonperforming when they are past due 90 days or more as to principal and interest payments or are considered a troubled debt restructuring. There were no loans that were considered troubled debt restructurings (“TDRs”) that were modified during the twelve months ended December 31, 2019 and December 31, 2018. The Banks may agree to modify the terms of a loan in order to improve the Banks’ ability to collect amounts due. These modifications may include reduction of the interest rate, extension of the loan term, or in some cases, reduction of the principal balance. As of December 31, 2019 and December 31, 2018 there were no instances of a borrower who was past due with respect to principal and/or interest for 30 days or more during the twelve months ended December 31, 2019 and December 31, 2018 that had been modified during the 12-month period prior to the default. Loans modified in a TDR may already be on nonaccrual status and partial charge-offs have in some cases already been taken against the outstanding loan balance. As a result, loans modified in a TDR for the Banks may have the financial effect of increasing the specific allowance associated with the loan. The allowance for impaired loans that have been modified in a TDR is measured based on the estimated fair value of the collateral, less any selling costs, if the loan is collateral dependent or on the present value of expected future cash flows discounted at the loan’s effective interest rate. Management exercises significant judgment in developing these estimates. At December 31, 2019 the Banks had no commitments to lend additional funds to the related debtors whose terms have been modified in a TDR. Page | 53 Impaired loans by loan category as of December 31 were as follows: ChoiceOne Financial Services, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) 2019 With no related allowance recorded Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Construction real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ With an allowance recorded Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Construction real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total 545 $ 259 — — 1,882 42 2,728 379 — 17 — 406 2,392 3,194 Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Construction real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 924 259 17 — 2,288 2,434 5,922 $ 545 $ 340 — — 2,471 42 3,398 439 — 18 — 406 2,460 3,323 984 340 18 — 2,877 2,502 6,721 $ — $ — — — — — — 103 — 4 — 13 235 355 146 $ 104 — — 782 133 1,165 388 86 48 — 975 2,486 3,983 103 — 4 — 13 235 355 $ 534 190 48 — 1,757 2,619 5,148 $ 10 9 — — 30 4 53 — 1 — — 32 83 116 10 10 — — 62 87 169 Page | 54 ChoiceOne Financial Services, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized (Dollars in thousands) 2018 With no related allowance recorded Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Construction real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ With an allowance recorded Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Construction real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Construction real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 185 $ — 1 — 74 250 510 393 21 88 — 550 2,462 3,514 578 21 90 — 623 2,712 4,024 $ 185 $ — 1 — 109 261 556 440 21 88 — 609 2,494 3,652 625 21 90 — 718 2,755 4,209 $ — $ — — — — — — 94 3 13 — 20 167 297 291 $ 29 2 54 78 177 631 161 296 59 — 692 2,523 3,731 — 2 8 — 30 114 154 13 — — — — 6 19 94 3 13 — 20 167 297 $ 452 325 61 54 770 2,700 4,362 $ 13 2 8 — 30 120 173 (Dollars in thousands) 2017 With no related allowance recorded Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ With an allowance recorded Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total 423 $ — — 127 115 665 — 124 36 651 2,664 3,475 Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 423 124 36 778 2,779 4,140 $ 455 $ — — 258 126 839 — 124 36 734 2,690 3,584 455 124 36 992 2,816 4,423 $ — $ — — — — — — 26 3 49 224 302 322 $ 103 — 110 106 641 121 177 33 826 2,522 3,679 — — — — 4 4 — 1 1 34 110 146 — 26 3 49 224 302 $ 443 280 33 936 2,628 4,320 $ — 1 1 34 114 150 Page | 55 An aging analysis of loans by loan category as of December 31 follows: ChoiceOne Financial Services, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) 2019 Agricultural . . . . . . . . . . . . . . . . . . . . . . Commercial and industrial . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . . Construction real estate . . . . . . . . . . . . . Residential real estate . . . . . . . . . . . . . . 2018 Agricultural . . . . . . . . . . . . . . . . . . . . . . Commercial and industrial . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . . Construction real estate . . . . . . . . . . . . . Residential real estate . . . . . . . . . . . . . . Loans Past Due 30 to 59 Days(1) Loans Past Due 60 to 89 Days(1) Loans Past Due Greater Than 90 Days(1) Total(1) Loans Not Past Due Total Loans Loans 90 Days Past Due and Accruing $ $ $ $ — $ 542 121 — — 2,466 3,129 $ — $ 5 149 — — 1,493 1,647 $ 68 $ 15 19 — — 582 684 $ — $ — 40 — — 486 526 $ — $ 259 11 1,882 — 393 2,545 $ 68 $ 57,271 $ 57,339 $ 816 147,267 148,083 38,854 151 38,703 1,882 324,497 326,379 13,411 13,411 3,441 214,541 217,982 6,358 $ 795,690 $ 802,048 $ — — $ — 11 73 — 648 732 $ 91,401 24,182 — $ 49,109 $ 49,109 $ 91,406 5 24,382 200 73 139,380 139,453 8,843 8,843 — 2,627 95,880 93,253 2,905 $ 406,168 $ 409,073 $ — — — — — — — — — — — — — — (1) Includes nonaccrual loans Nonaccrual loans by loan category as of December 31 as follows: (Dollars in thousands) Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Construction real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2019 379 $ 776 16 2,185 — 1,331 4,687 $ 2018 393 — 62 123 — 954 1,532 $ $ Note 4 – Mortgage Banking Activity in secondary market loans during the year was as follows: (Dollars in thousands) Loans originated for resale, net of principal payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from loan sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net gains on sales of loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loan servicing fees, net of amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page | 56 2019 2018 2017 $ 63,920 $ 33,555 $ 43,171 42,883 1,265 155 34,872 1,003 91 62,763 1,951 82 ChoiceOne Financial Services, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Net gains on sales of loans held for sale include capitalization of loan servicing rights. Loans serviced for others are not reported as assets in the accompanying consolidated balance sheets. The unpaid principal balances of these loans were $242.0 million and $134.6 million at December 31, 2019 and 2018, respectively. The Banks maintain custodial escrow balances in connection with these serviced loans; however, such escrows were immaterial at December 31, 2019 and 2018. Activity for loan servicing rights (included in other assets) was as follows: (Dollars in thousands) Balance, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capitalized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquired from merger with County Bank Corp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2019 $ 1,049 822 (453) 713 $ 2,131 2018 $ 908 441 (300) — $ 1,049 2017 $ 697 443 (232) — $ 908 The fair value of loan servicing rights was $2,304,000 and $1,700,000 as of December 31, 2019 and 2018, respectively. Consequently, a valuation allowance was not necessary at year-end 2019 or 2018. The fair value of ChoiceOne Bank’s servicing rights at December 31, 2019 was determined using a discount rate of 5.51% and prepayment speeds ranging from 11% to 18%. The fair value of Lakestone Bank & Trust’s servicing rights at December 31, 2019 was determined using a discount rate of 8.65% and prepayment speeds ranging from 11% to 13%. The fair value of servicing rights at December 31, 2018 was determined using a discount rate of 6.92% and prepayment speeds ranging from 7% to 13%. Note 5 – Premises and Equipment As of December 31, premises and equipment consisted of the following: (Dollars in thousands) Land and land improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation expense was $1,610,000, $1,183,000, and $1,389,000 for 2019, 2018 and 2017, respectively. $ 2019 7,576 38 20,251 11,078 38,943 (14,678) $ 24,265 $ 2018 5,318 38 16,251 7,357 28,964 (13,085) $ 15,879 The Banks lease certain branch properties and automated-teller machine locations in their normal course of business. Rent expense totaled $72,000, $108,000, and $99,000 for 2019, 2018 and 2017, respectively. The associated right of use assets are included in the applicable categories of fixed assets in the above table and the net book value of such assets approximates the operating lease liability. Rent commitments under non-cancelable operating leases were as follows, before considering renewal options that generally are present (dollars in thousands): 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total undiscounted cash flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total operating lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 138 139 120 75 28 14 514 27 $ 487 Page | 57 ChoiceOne Financial Services, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 6 - Goodwill and Intangible Assets Goodwill The change in the balance for goodwill was as follows: (Dollars in thousands) January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquired goodwill from merger with County . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2019 2018 $ 13,728 $ 13,728 — $ 52,870 $ 13,728 39,142 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. The Company previously acquired Valley Ridge Financial Corp. in 2006 and County in 2019, which resulted in the recognition of goodwill of $13.7 million and $39.1 million, respectively. Management concluded no impairment of goodwill existed as of the reporting date. Acquired Intangible Assets Information for acquired intangible assets at December 31, 2019 follows: (Dollars in thousands) Gross Carrying Amount Core deposit intangible . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,359 $ Accumulated Amortization 353 The core deposit intangible is being amortized on a sum-of-the-years digits basis over ten years. Amortization expense was $353,000 in 2019. The estimated amortization expense for the next five years ending December 31 is as follows: 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 1,369 1,192 1,016 839 662 928 6,006 Note 7 – Other Real Estate Owned Other real estate owned represents residential and commercial properties primarily owned as a result of loan collection activities and is reported net of a valuation allowance. Activity within other real estate owned was as follows: (Dollars in thousands) Balance, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transfers from loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisition from County Bank Corp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gains/(losses) on sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 102 347 1,364 (938) 54 $ 929 $ 106 432 — (515) 79 $ 102 2019 2018 2017 $ 437 314 — (663) 18 $ 106 Page | 58 ChoiceOne Financial Services, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Included in the balances above were residential real estate mortgage loans of $175,000, $102,000, and $106,000 as of December 31, 2019, 2018, and 2017, respectively, and $754,000 of commercial real estate loans as of December 31, 2019. Note 8 – Deposits Deposit balances as of December 31 consisted of the following: (Dollars in thousands) Noninterest-bearing demand deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest-bearing demand deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Money market deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Savings deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Local certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Brokered certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2019 2018 $ 287,460 $ 153,542 236,154 135,425 86,720 263,666 75,615 206,050 91,343 158,985 2,287 34,370 $1,154,602 $ 577,015 Scheduled maturities of certificates of deposit at December 31, 2019 were as follows: (Dollars in thousands) 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 121,653 19,378 9,661 6,984 3,539 57 $ 161,272 The Banks had certificates of deposit issued in denominations of $250,000 or greater totaling $68.3 million and $39.3 million at December 31, 2019 and 2018, respectively. The Banks held $2.3 million in brokered certificates of deposit at December 31, 2019, compared to $34.4 million at December 31, 2018. In addition, the Banks had $7.1 million and $2.1 million of certificates of deposit as of December 31, 2019, and December 31, 2018, respectively, that had been issued through the Certificate of Deposit Account Registry Service (CDARS). As a result of the Economic Growth, Regulatory Relief, and Consumer Protection Act which became law in May 2018, reciprocal brokered deposits are no longer considered brokered deposits as of December 31, 2018 and December 31, 2019. Note 9 – Repurchase Agreements Securities sold under agreements to repurchase are advances to the Banks by customers or another bank. These agreements are direct obligations of the Banks and are secured by securities held in safekeeping at a correspondent bank. Repurchase agreements with the Banks’ customers mature daily. Information regarding repurchase agreements follows: (Dollars in thousands) Outstanding balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average interest rate at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average balance during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average interest rate during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Maximum month end balance during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ $ Page | 59 2019 — $ —% — —% — 2018 — —% $ 1,412 0.05% $ 7,148 ChoiceOne Financial Services, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 10 – Federal Home Loan Bank Advances At December 31, advances from the FHLB were as follows: (Dollars in thousands) Maturity of November 2024 with fixed interest rate of 3.98% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Maturity of April 2020 with floating interest rate of 1.99% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Maturity of May 2020 with fixed interest rate of 2.16% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Maturity of March 2019 with fixed interest rate of 2.57% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total advances outstanding at year-end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2019 $ 198 $ 10,000 23,000 — $ 33,198 $ 2018 233 — — 5,000 5,233 Fees are charged on fixed rate advances that are paid prior to maturity. No fixed rate advances were paid prior to maturity in 2019 or 2018. Advances were secured by agricultural loans, commercial real estate loans, and residential real estate loans with a carrying value of approximately $200.1 million and $96.8 million at December 31, 2019 and December 31, 2018, respectively. Based on this collateral, the Banks were eligible to borrow an additional $78.6 million at year-end 2019. The scheduled maturities of advances from the FHLB at December 31, 2019 were as follows: (Dollars in thousands) 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 33,037 39 40 42 40 $ 33,198 Note 11 – Income Taxes Information as of December 31 and for the year follows: (Dollars in thousands) Provision for Income Taxes Current federal income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred federal income tax expense/(benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reconciliation of Income Tax Provision to Statutory Rate Income tax computed at statutory federal rate of 21% in 2019 and 2018 and 34% in 2017 . . . Tax exempt interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax exempt earnings on bank-owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax adjustment related to reduction in U.S. federal statutory income income tax rate . . Nondeductible merger expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2019 2018 2017 $ $ $ $ 984 310 1,294 1,778 (320) (162) (218) — 164 52 1,294 $ $ $ $ 946 209 1,155 1,783 (309) (81) (154) — — (84) 1,155 $ $ $ $ 2,325 62 2,387 2,909 (486) (135) (85) 206 — (22) 2,387 Effective income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15% 14% 28% Page | 60 (Dollars in thousands) ChoiceOne Financial Services, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Components of Deferred Tax Assets and Liabilities 2019 2018 Deferred tax assets: Purchase accounting adjustments from merger with County . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Alternative minimum tax credit carryforward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized losses on securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Deferred tax liabilities: Purchase accounting adjustments from merger with County . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loan servicing rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized gains on securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net deferred tax (liability) asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 1,129 585 301 — 169 198 2,382 1,285 778 447 360 235 3,105 (723) $ — 981 — 233 102 160 1,476 — 797 220 — 88 1,105 371 On December 22, 2017, H.R. 1, commonly known as the Tax Cuts and Jobs Act (the “Tax Act”), was signed into law. The Tax Act reduced the corporate income tax rate to 21% effective January 1, 2018 and changed certain other provisions. Accounting guidance required the Company to remeasure its deferred tax assets and liabilities as of the date of the Tax Act’s enactment using the new effective tax rate. The effect of the remeasurement is recognized in income tax expense in the year of enactment. The Company recorded $206,000 in additional income tax expense in 2017 as a result of the remeasurement of its net deferred tax asset. Note 12 – Related Party Transactions Loans to executive officers, directors and their affiliates were as follows at December 31: (Dollars in thousands) Balance, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . New loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effect of changes in related parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans acquired from merger with County Bank Corp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2019 $ 5,343 2,988 (3,372) (4,664) 10,268 $ 10,563 2018 $ 6,477 3,029 (3,835) (328) — $ 5,343 Deposits from executive officers, directors and their affiliates were $9.0 million and $6.3 million at December 31, 2019 and 2018, respectively. Note 13 – Employee Benefit Plans 401(k) Plan: The 401(k) plan allows employees to contribute to their individual accounts under the plan amounts up to the IRS maximum. Matching company contributions to the plan are discretionary. Expense for matching company contributions under the plan was $233,000, $207,000, and $189,000 in 2019, 2018, and 2017, respectively. Page | 61 ChoiceOne Financial Services, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Post-retirement Benefits Plan: ChoiceOne maintains an unfunded post-retirement health care plan, which permits employees (and their dependents) the ability to participate upon retirement from ChoiceOne. ChoiceOne does not pay any portion of the health care premiums charged to its retired participants. A liability has been accrued for the obligation under this plan. ChoiceOne realized a recovery of post-retirement benefit expense of $14,000, $12,000, and $14,000 in 2019, 2018, and 2017, respectively. The post-retirement obligation liability was $107,000 as of December 31, 2019 and $98,000 as of December 31, 2018. Deferred Compensation Plans: A deferred director compensation plan covers former directors of Valley Ridge Financial Corp., which was acquired by ChoiceOne in 2006. Under the plan, ChoiceOne pays each former director the amount of director fees deferred plus interest at rates ranging from 5.50% to 5.84% over various periods as elected by each director. A liability has been accrued for the obligation under this plan. ChoiceOne incurred deferred compensation plan expense of $3,000, $5,000, and $7,000 in 2019, 2018, and 2017, respectively. The deferred compensation liability was $33,000 as of December 31, 2019 and $65,000 as of December 31, 2018. A supplemental executive retirement plan covers four former executive officers of Valley Ridge Financial Corp. Under the plan, ChoiceOne pays these individuals a specific amount of compensation over a 15-year period commencing upon early retirement age (as defined in the plan) or normal retirement age (as defined in the plan). A liability has been accrued for the obligation under this plan. The effective interest rate used for the accrual for the retirement liability is based on long-term interest rates. ChoiceOne incurred deferred compensation plan expense of $26,000, $6,000, and $12,000 in 2019, 2018, and 2017, respectively. Liabilities related to the supplemental executive retirement plan of $368,000 and $420,000 were outstanding as of December 31, 2019 and December 31, 2018, respectively. A supplemental executive retirement plan covers one former executive officer and one current executive officer of Lakestone Bank & Trust. Under the plan, the individuals would be paid a specific amount of compensation over a 15-year period commencing upon early or normal retirement age (as defined in the plan). A liability has been accrued for the obligation under this plan. The liability related to this plan was $337,000 as of December 31, 2019. Note 14 – Stock Based Compensation Options to buy stock have been granted to key employees to provide them with additional equity interests in ChoiceOne. Compensation expense in connection with stock options granted was $53,000 in 2019, $38,000 in 2018, and $49,000 in 2017. The Stock Incentive Plan of 2012 was approved by the Company’s shareholders at the Annual Meeting held on April 25, 2012. The Stock Incentive Plan of 2012, as amended effective May 23, 2018, provides for the issuance of up to 200,000 shares of common stock. At December 31, 2019, there were 100,971 shares available for future grants. A summary of stock options activity during the year ended December 31, 2019 was as follows: Options outstanding at January 1, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Options granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Options forfeited or expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Options outstanding, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,129 $ 13,500 (12,381) (1,500) 57,748 $ 22.41 27.25 21.64 27.25 23.39 Options exercisable at December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,748 $ 22.38 Weighted average exercise price Shares Page | 62 ChoiceOne Financial Services, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The exercise prices for options outstanding and exercisable at the end of 2019 ranged from $20.86 to $27.25 per share. The weighted average remaining contractual life of options outstanding and exercisable at the end of 2019 was approximately 6.6 years. The intrinsic value of all outstanding in-the-money stock options and exercisable in-the-money stock options was $495,000 and $438,000 respectively, at December 31, 2019. The aggregate intrinsic values of outstanding and exercisable options at December 31, 2019 were calculated based on the closing market price of the Company’s common stock on December 31, 2019 of $31.96 per share less the exercise price. Information pertaining to options outstanding at December 31, 2019 was as follows: Exercise price of stock options: $27.25 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $25.65 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $20.86 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $21.13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $22.31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Number of options outstanding at year-end Number of options exercisable at year-end 12,000 12,000 12,404 15,986 5,358 — 12,000 12,404 15,986 5,358 Average remaining contractual life (in years) 9.47 8.54 7.39 6.05 2.04 The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model. ChoiceOne uses historical data to estimate the volatility of the market price of ChoiceOne stock and employee terminations within the valuation model. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. As of December 31, 2019, there was $34,000 in unrecognized compensation expense related to stock options issued in 2019. The fair value of stock options granted during 2019 was $49,000, which was determined using the following weighted-average assumptions as of the grant date. Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected option life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected stock price volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fair value of options granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.48% 6.50 years 21.00% 2.65% 3.64 $ ChoiceOne has granted restricted stock units to a select group of employees under the Stock Incentive Plan of 2012. Beginning with the awards granted in April 2019, restricted stock units vest on the three year anniversary of the grant date. Certain additional vesting provisions apply. Each restricted stock unit, once vested, is settled by delivery of one share of ChoiceOne common stock. ChoiceOne recognized compensation expense of $349,000, $244,000, and $191,000 in 2019, 2018, and 2017, respectively, in connection with restricted stock units for current participants during these years. A summary of the activity for RSU’s during the year ended December 31, 2019 is presented below: Outstanding Stock Awards Outstanding at January 1, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Outstanding at December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares 20,440 9,900 (20,440) (900) 9,000 Weighted Average Grant Date Fair Value Per Share $ $ 24.74 27.25 24.74 27.25 27.25 Page | 63 ChoiceOne Financial Services, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS At December 31, 2019, there were 9,000 restricted stock units outstanding with an approximate stock value of $288,000 based on ChoiceOne’s December 31, 2019 stock price. At December 31, 2018, there were 20,440 restricted stock units outstanding with an approximate stock value of $511,000 based on ChoiceOne’s December 31, 2018 stock price. As a result of the merger with County, all unvested stock awards granted prior to December 31, 2018 vested upon completion of the merger. Note 15 – Earnings Per Share (Dollars in thousands, except share data) Basic Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,171 $ 7,333 $ 6,168 2019 2018 2017 Weighted average common shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,528,786 3,614,302 3,621,216 Basic earnings per common shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.58 $ 2.03 $ 1.70 Diluted Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,171 $ 7,333 $ 6,168 Weighted average common shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Plus dilutive stock options and restricted stock units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,528,786 3,614,302 3,621,216 8,465 13,825 10,489 Weighted average common shares outstanding and potentially dilutive shares . . . . . . . . . . 4,539,275 3,628,127 3,629,682 Diluted earnings per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.58 $ 2.02 $ 1.70 Per share amounts have been adjusted for the 5% stock dividends paid on May 31, 2017 and May 31, 2018. Stock options considered anti-dilutive to earnings per share were 0, 15,000, and 0 as of December 31, 2019, December 31, 2018, and December 31, 2017, respectively. This calculation is based on the average stock price during the year. Page | 64 ChoiceOne Financial Services, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 16 – Condensed Financial Statements of Parent Company Condensed Balance Sheets (Dollars in thousands) Assets December 31, 2019 2018 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity securities at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment in Bank subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 991 1,840 959 468 189,578 $ 193,836 $ 1,400 1,960 1,692 122 75,313 $ 80,487 Liabilities Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,697 1,697 $ 10 10 Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192,139 $ 193,836 80,477 $ 80,487 Years Ended December 31, 2019 $ 4,011 50 8 (114) 3,955 2,348 1,607 261 1,868 5,303 $ 7,171 2018 $ 2,800 47 9 184 3,040 144 2,896 (14) 2,882 4,451 $ 7,333 2017 $ 3,042 55 1 — 3,098 123 2,975 73 3,048 3,120 $ 6,168 (Dollars in thousands) Condensed Statements of Income Interest and dividends from ChoiceOne Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest and dividends from other securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gains on sales of securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in market value of equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before income tax and equity in undistributed net income of subsidiaries . . . . . . . . . . Income tax (expense)/benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before equity in undistributed net income of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . Equity in undistributed net income of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page | 65 ChoiceOne Financial Services, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Condensed Statements of Cash Flows (Dollars in thousands) Cash flows from operating activities: Years Ended December 31, 2019 2018 2017 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustments to reconcile net income to net cash from operating activities: $ 7,171 $ 7,333 $ 6,168 Equity in undistributed net income of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Compensation expense on employee and director stock purchases, stock options, and restricted stock units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net gain on sale of securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in market value of equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes in other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes in other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash from operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash flows from investing activities: Sales of securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchases of securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash acquired from merger with County Bank Corp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash from investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash flows from financing activities: Issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash used as part of equity issuance for merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash dividends and fractional shares from stock dividend and merger . . . . . . . . . . . . . . . Net cash from financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,303) 14 (4,451) 18 (3,120) 19 359 (8) 114 (344) 1,485 3,488 1,102 — 1,038 2,140 142 (67) (297) (5,815) (6,037) 331 (9) (184) 66 (19) 3,085 91 — — 91 77 (523) — (2,579) (3,025) 304 (1) — (37) (39) 3,294 334 (466) — (132) 98 (203) — (2,324) (2,429) Net change in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Beginning cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ending cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (409) 1,400 991 151 1,249 $ 1,400 733 516 $ 1,249 Page | 66 Quoted Prices In Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Carrying Amount Estimated Fair Value $ 59,558 2,851 339,579 $ 59,558 2,851 339,579 $ 59,558 1,379 — $ — — 327,212 $ ChoiceOne Financial Services, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 17 – Financial Instruments Financial instruments as of the dates indicated were as follows: (Dollars in thousands) December 31, 2019 Assets Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . Equity securities at fair value . . . . . . . . . . . . . . . . . . . Securities available for sale . . . . . . . . . . . . . . . . . . . . . Federal Home Loan Bank and Federal Reserve Bank stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans to other financial institutions . . . . . . . . . . . . . . Loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . 6,458 3,095 51,048 797,991 3,965 6,458 3,134 51,048 793,270 3,965 Liabilities Noninterest-bearing deposits . . . . . . . . . . . . . . . . . . . . Interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . Federal Home Loan Bank advances . . . . . . . . . . . . . . Accrued interest payable . . . . . . . . . . . . . . . . . . . . . . . 287,460 867,142 33,198 411 287,460 867,154 33,243 411 December 31, 2018 Assets Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . Equity securities at fair value . . . . . . . . . . . . . . . . . . . Securities available for sale . . . . . . . . . . . . . . . . . . . . . Federal Home Loan Bank and Federal Reserve Bank stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans to other financial institutions . . . . . . . . . . . . . . Loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . 3,567 831 20,644 404,400 2,267 3,567 856 20,644 399,091 2,267 Liabilities Noninterest-bearing deposits . . . . . . . . . . . . . . . . . . . . Interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . Federal funds purchased . . . . . . . . . . . . . . . . . . . . . . . Federal Home Loan Bank advances . . . . . . . . . . . . . . Accrued interest payable . . . . . . . . . . . . . . . . . . . . . . . 153,542 423,473 4,800 5,233 210 153,542 422,381 4,800 5,241 210 — 1,472 12,367 — — — 793,270 — — — — — — 886 8,498 — — — 399,091 — — — — — — — — — — — — — — — 6,458 3,134 51,048 — 3,965 287,460 867,154 33,243 411 — — — — — — — — — — 3,567 856 20,644 — 2,267 153,542 422,381 4,800 5,241 210 $ 19,690 2,847 166,602 $ 19,690 2,847 166,602 $ 19,690 1,961 — $ — — 158,104 $ The estimated fair values approximate the carrying amounts for all financial instruments except those described later in this paragraph. The methodology for determining the estimated fair value for securities available for sale is described in Note 18. The estimated fair value for loans follows the guidance in ASU 2016-01 which prescribes an “exit price” approach, which incorporates discounts for credit, liquidity, and marketability. The allowance for loan losses is considered to be a reasonable estimate of discount for credit quality concerns. The estimated fair value of loans also included the mark to market adjustments related to the Company’s merger with County. Page | 67 The estimated fair value of deposits is based on comparing the average rate paid on deposits compared to the three month LIBOR rate which is assumed to be the replacement value of these deposits. The estimated fair values for time deposits and FHLB advances are based on the rates paid at December 31 for new deposits or FHLB advances, applied until maturity. The estimated fair values for other financial instruments and off-balance sheet loan commitments are considered nominal. Note 18 – Fair Value Measurements The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis at December 31, 2019 and December 31, 2018, and the valuation techniques used by the Company to determine those fair values. In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset or liability. In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Company’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 December 31, 2018 or December 31, 2019. Disclosures concerning assets measured at fair value are as follows: Assets Measured at Fair Value on a Recurring Basis (Dollars in thousands) Quoted Prices In Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Balance at Date Indicated 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . U. S. Treasury notes and bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State and municipal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage-backed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trust preferred securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity Securities Held at Fair Value - December 31, 2018 Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment Securities, Available for Sale - December 31, 2018 U. S. Government and federal agency . . . . . . . . . . . . . . . . . . . . . . . . . . . U. S. Treasury notes and bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State and municipal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage-backed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trust preferred securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asset backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ $ $ $ Page | 68 — $ 17,215 $ 2,008 — — 162,557 — 142,760 2,672 — — — — $ 327,212 $ — $ 17,215 2,008 — 11,367 173,924 — 142,760 2,672 — 1,000 1,000 12,367 $ 339,579 1,961 $ — $ 886 $ 2,847 — $ 33,529 $ 1,947 — 95,930 — 21,575 — 5,102 — — — — 21 — $ 158,104 $ — $ 33,529 1,947 — 7,998 103,928 21,575 5,102 500 21 8,498 $ 166,602 — — 500 — Securities classified as available for sale are generally reported at fair value utilizing Level 2 inputs. ChoiceOne’s external investment advisor obtained fair value measurements from an independent pricing service that uses matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). The fair value measurements considered observable data that may include dealer quotes, market spreads, cash flows and the bonds’ terms and conditions, among other things. Securities classified in Level 2 included U.S. Government and federal agency securities, U.S. Treasury notes and bonds, state and municipal securities, mortgage-backed securities, corporate bonds, and asset backed securities. The Company classified certain state and municipal securities and corporate bonds, and equity securities as Level 3. Based on the lack of observable market data, estimated fair values were based on the observable data available and reasonable unobservable market data. Changes in Level 3 Assets Measured at Fair Value on a Recurring Basis (Dollars in thousands) Equity Securities Held at Fair Value Balance, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reclassification due to implementation of ASU 2016-01 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total realized and unrealized gains included in noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net purchases, sales, calls, and maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net transfers into Level 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquired from merger with County Bank Corp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2019 2018 $ 886 $ — 114 — — 472 $ 1,472 $ — 1,000 (114) — — — 886 Investment Securities, Available for Sale Balance, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reclassification due to implementation of ASU 2016-01 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total realized and unrealized gains included in income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total unrealized gains/(losses) included in other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net purchases, sales, calls, and maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net transfers into Level 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquired from merger with County Bank Corp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,498 $ 13,398 (1,000) — — — (186) 210 (3,714) 1,375 — — — 2,284 $ 12,367 $ 8,498 Of the Level 3 assets that were still held by the Company at December 31, 2019, the net unrealized gain for the twelve months ended December 31, 2019 was $324,000, compared to a $300,000 unrealized loss for the twelve months ended December 31, 2018, which is recognized in noninterest income or other comprehensive income in the consolidated balance sheets and income statements. Amounts recognized in noninterest income relate to changes in equity securities based on ASU 2016-01, which was implemented by ChoiceOne effective January 1, 2018. A total of $2,091,000 and $224,000 of Level 3 securities were purchased in 2019 and 2018, respectively. In addition, Level 3 securities totaling $2,756,000 were obtained from the merger with County. Both observable and unobservable inputs may be used to determine the fair value of positions classified as Level 3 assets 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. Available for sale investment securities categorized as Level 3 assets consist of bonds issued by local municipalities and a trust- preferred security. The Company estimates the fair value of these assets based on the present value of expected future cash flows using management’s best estimate of key assumptions, including forecasted interest yield and payment rates, credit quality and a discount rate commensurate with the current market and other risks involved. The Company 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: Page | 69 ChoiceOne Financial Services, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Assets Measured at Fair Value on a Non-recurring Basis Quoted Prices In Active Markets for Identical Assets (Level 1) Balances at Dates Indicated Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) (Dollars in thousands) Impaired Loans December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,922 $ $ 4,024 $ — $ — $ — $ — $ 5,922 4,024 Other Real Estate December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 929 $ 102 $ — $ — $ — $ — $ 929 102 Impaired loans categorized as Level 3 assets consist of non-homogeneous loans that are considered impaired. The Company estimates the fair value of the loans based on the present value of expected future cash flows using management’s best 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 owned that were posted to a valuation account. The fair value of other real estate owned was based on appraisals or other reviews of property values, adjusted for estimated costs to sell. Note 19 – Off-Balance Sheet Activities Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customers’ financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment. The contractual amount of financial instruments with off-balance sheet risk was as follows at December 31: (Dollars in thousands) Unused lines of credit and letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commitments to fund loans (at market rates) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2019 2018 Fixed Rate Variable Rate Fixed Rate Variable Rate $ 38,064 $ 177,447 $ 20,036 $ 103,978 1,421 $ 18,216 $ 4,580 $ 20,997 $ Commitments to fund loans are generally made for periods of 180 days or less. The fixed rate loan commitments have interest rates ranging from 3.25% to 7.50% and maturities ranging from 1 year to 30 years. Note 20 – Regulatory Capital ChoiceOne and the Banks are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. Depending upon the capital category to which an institution is assigned, the regulators’ corrective powers include: prohibiting the acceptance of brokered deposits; requiring the submission of a capital restoration plan; placing limits on asset growth and restrictions on activities; requiring the institution to issue additional capital stock (including additional voting stock) or to be acquired; restricting transactions with affiliates; restricting the interest rate the institution may pay on deposits; ordering a new election of directors of the institution; requiring that senior executive officers or directors be dismissed; prohibiting the institution from accepting deposits from correspondent banks; requiring the institution to divest certain subsidiaries; prohibiting the payment of principal or interest on subordinated debt; and ultimately, appointing a receiver for the institution. At year- end 2019 and 2018, the Banks were categorized as well capitalized under the regulatory framework for prompt corrective action. Page | 70 Actual capital levels and minimum required levels for ChoiceOne and the Banks were as follows: ChoiceOne Financial Services, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) Actual Minimum Required for Capital Adequacy Purposes Minimum Required to be Well Capitalized Under Prompt Corrective Action Regulations Ratio Amount Ratio Amount Ratio Amount December 31, 2019 ChoiceOne Financial Services Inc. Total capital (to risk weighted assets) . . . . . . . . . . . . . . . . . Common equity Tier 1 capital (to risk weighted assets) . . . Tier 1 capital (to risk weighted assets) . . . . . . . . . . . . . . . . Tier 1 capital (to average assets) . . . . . . . . . . . . . . . . . . . . . $135,836 131,785 131,785 131,785 14.2% $ 76,288 42,912 13.8 57,216 13.8 54,646 9.6 8.0% 4.5 6.0 4.0 N/A N/A N/A N/A ChoiceOne Bank Total capital (to risk weighted assets) . . . . . . . . . . . . . . . . . Common equity Tier 1 capital (to risk weighted assets) . . . Tier 1 capital (to risk weighted assets) . . . . . . . . . . . . . . . . Tier 1 capital (to average assets) . . . . . . . . . . . . . . . . . . . . . $ 69,412 65,362 65,362 65,362 13.2% $ 42,039 23,647 12.4 31,530 12.4 26,179 10.0 8.0% $ 52,549 34,157 4.5 42,039 6.0 32,724 4.0 Lakestone Bank & Trust Total capital (to risk weighted assets) . . . . . . . . . . . . . . . . . Common equity Tier 1 capital (to risk weighted assets) . . . Tier 1 capital (to risk weighted assets) . . . . . . . . . . . . . . . . Tier 1 capital (to average assets) . . . . . . . . . . . . . . . . . . . . . $ 63,885 63,885 63,885 63,885 15.0% $ 34,056 19,156 15.0 25,542 15.0 28,338 9.0 8.0% $ 42,570 27,670 4.5 34,056 6.0 35,423 4.0 December 31, 2018 ChoiceOne Financial Services Inc. Total capital (to risk weighted assets) . . . . . . . . . . . . . . . . . Common equity Tier 1 capital (to risk weighted assets) . . . Tier 1 capital (to risk weighted assets) . . . . . . . . . . . . . . . . Tier 1 capital (to average assets) . . . . . . . . . . . . . . . . . . . . . $ 72,148 67,481 67,481 67,481 13.8% $ 41,811 23,519 12.9 31,359 12.9 25,658 10.5 8.0% 4.5 6.0 4.0 N/A N/A N/A N/A ChoiceOne Bank Total capital (to risk weighted assets) . . . . . . . . . . . . . . . . . Common equity Tier 1 capital (to risk weighted assets) . . . Tier 1 capital (to risk weighted assets) . . . . . . . . . . . . . . . . Tier 1 capital (to average assets) . . . . . . . . . . . . . . . . . . . . . $ 66,976 62,309 62,309 62,309 12.9% $ 41,599 23,399 12.0 31,199 12.0 25,512 9.8 8.0% $ 51,999 33,799 4.5 41,599 6.0 31,890 4.0 N/A N/A N/A N/A 10.0% 6.5 8.0 5.0 10.0% 6.5 8.0 5.0 N/A N/A N/A N/A 10.0% 6.5 8.0 5.0 Banking regulations limit capital distributions by state-chartered banks. Generally, capital distributions are limited to undistributed net income for the current and prior two years. At December 31, 2019, approximately $12.9 million was available for the Banks to pay dividends to ChoiceOne. ChoiceOne’s ability to pay dividends to shareholders is dependent on the payment of dividends from the Banks, which is restricted by state law and regulations. Page | 71 ChoiceOne Financial Services, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 21 – Business Combination ChoiceOne completed the merger of County Bank Corp (“County”) with and into ChoiceOne 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 garnered in the merger, the majority of which are core deposits, totaled $574 million. The results of operations as a result of the merger have been included in ChoiceOne’s results 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. ChoiceOne recorded a preliminary deposit based intangible of $6.4 million and goodwill of $39.1 million. While ChoiceOne believes the majority of the business combination and purchase accounting activity is complete, it is expected there will be minor adjustments in the normal course within the allotted GAAP adjustment period. Purchase accounting activity still being analyzed primarily includes certain tax implications. Acquisition costs related to the merger amounted to $2.1 million, of which $1.8 million was expensed and $297,000 was netted with stock issuance costs. The transaction created $39.1 million of goodwill, none of which is deductible for tax purposes. As the transaction happened on October 1, 2019, only earnings related to the period from October 1, 2019 through December 31, 2019 were included in ChoiceOne Financial Services income for the year ended December 31, 2019. These County earnings amounted to $2.3 million for the year ended December 31, 2019. The table below highlights 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity securities at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Federal Home Loan Bank and Federal Reserve Bank stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans to other financial institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Originated loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deposit based intangible . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bank owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-interest bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Federal funds purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Advances from Federal Home Loan Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,638 474 187,230 2,903 33,481 390,354 9,271 1,364 6,359 16,912 4,002 672,988 124,113 449,488 573,601 3,800 23,000 3,784 604,185 Net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68,803 Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 39,142 The following table provides the unaudited pro forma information for the results of operations for the twelve months ended December 31, 2019, 2018 and 2017, as if the merger with County had occurred on January 1. Dollars are shown in thousands, except for per share data. These adjustments reflect the impact of certain purchase accounting fair value measurements, primarily on the loan and deposit portfolios of County. In addition, merger-related costs are excluded from the amounts below, for comparative purposes. Further operating cost savings are expected along with additional business synergies as a result of the merger which are not presented in the pro forma amounts. These unaudited pro forma results are presented for illustrative purposes only and are not intended to represent or be indicative Page | 72 ChoiceOne Financial Services, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS of the actual results of operations of the combined banking organization that would have been achieved had the merger occurred at the beginning of the period, nor are they intended to represent or be indicative of the future results of the Company. (Dollars in thousands, except per share data) Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income per diluted share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2019 2018 2017 $ 44,440 $ 42,974 $ 40,178 13,364 37,361 11,513 1.63 12,151 38,501 14,251 1.97 13,289 42,611 13,487 1.86 In most instances, determining the fair value of the acquired assets and assumed liabilities required ChoiceOne to estimate the cash flows expected to result from those assets and liabilities and to discount those cash flows at appropriate rates of interest. The most significant of those determinations is related to the valuation of acquired loans. For such loans, the excess cash flows expected at the effective time of the merger over the estimated fair value is recognized as interest income over the remaining lives of the loans. The difference between contractually required payments at the effective time of the merger and the cash flows expected to be collected at the effective time of the merger reflects the impact of estimated credit losses, interest rate changes, and other factors, such as prepayments. In accordance with the applicable accounting guidance for business combinations, there was no carry-over of the County’s previously established allowance for loan losses. The Merger with County was effective on October 1, 2019. The combined company will have the opportunity to deploy existing low- cost funding into strategic markets across Michigan. County appears to be a cultural fit with very similar values regarding community involvement and development that ChoiceOne has fostered over its history. County also has an attractive core deposit base expected to provide support for future expansion. On January 6, 2020, ChoiceOne entered into an Agreement and Plan of Merger with Community Shores Bank Corp (“Community Shores”), the holding company for Community Shores Bank. Completion of the acquisition is subject to receipt of shareholder approval from Community Shores shareholders, receipt of regulatory approval, and the satisfaction of other customary closing conditions. Management expects the merger to become effective in the second half of 2020. As of December 31, 2019, Community Shores had total assets of approximately $204 million, total loans of approximately $156 million, and total deposits of approximately $184 million. Note 22 – Quarterly Financial Data (Unaudited) (Dollars in thousands, except per share data) Interest Income Net Interest Income Net Income Earnings Per Share Fully Diluted Basic 2019 First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2018 First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 6,477 $ 6,554 6,561 12,881 5,496 $ 5,501 5,570 11,206 1,637 $ 1,486 1,021 3,027 0.45 $ 0.41 0.28 0.44 5,722 $ 6,141 6,212 6,450 5,330 $ 5,595 5,522 5,617 1,658 $ 1,833 2,014 1,828 0.46 $ 0.51 0.55 0.51 0.45 0.41 0.28 0.44 0.46 0.51 0.55 0.50 Per share amounts have been adjusted for the 5% stock dividend paid on May 31, 2018. The growth in interest income and net interest income in the first three quarters of 2019 was primarily due to growth in earning assets, which was partially offset by a tightening of ChoiceOne’s net interest spread. The increase in the fourth quarter of 2019 resulted primarily from the merger with County. The increase that occurred during 2018 in interest income and net interest income was due to growth in earning assets and a widening of ChoiceOne’s net interest spread resulting from rising general market interest rates. Net income in 2019 was lower than the prior year primarily as a result of merger-related expenses incurred in 2019. Page | 73 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on and as of the time of that evaluation, the Company’s management, including the Chief Executive Officer and principal financial officer, concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the required time periods. Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting that is designed to produce reliable financial statements in conformity with United States generally accepted accounting principles. The system of internal control over financial reporting as it relates to the financial statements is evaluated for effectiveness by management and tested for reliability through a program of internal audits. Actions are taken to correct potential deficiencies as they are identified. Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected. Also, because of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial statement preparation. Management assessed the effectiveness of the Company’s system of internal control over financial reporting as of December 31, 2019, as required by Section 404 of the Sarbanes-Oxley Act of 2002. Management’s assessment is based on the criteria for effective internal control over financial reporting as described in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, management has concluded that, as of December 31, 2019, its system of internal control over financial reporting was effective and meets the criteria of the “Internal Control – Integrated Framework.” Plante & Moran PLLC, the independent registered public accounting firm that audited the consolidated financial statements of the Company incorporated by reference to this Annual Report on Form 10-K, has issued an attestation report, included herein, on the Company’s internal control over financial reporting as of December 31, 2019. As permitted by SEC guidance, the Company has excluded the operations of County Bank Corp, which was merged with and into Company, the merger of which is described in Note 21 (Business Combination) of the Notes to the Consolidated Financial Statements included in Item 8 of this report, from the scope of management’s report on internal control over financial reporting. There was no change in the Company’s internal control over financial reporting that occurred during the three months ended December 31, 2019 that has materially affected, or that is reasonably likely to materially affect, the Company’s internal control over financial reporting. Page | 74 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and Board of Directors of ChoiceOne Financial Services, Inc. Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting as of December 31, 2019 of ChoiceOne Financial Services, Inc. (the “Company”), based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO framework”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019 based on criteria established in the COSO framework. We also have audited the accompanying balance sheets of the Company as of December 31, 2019 and 2018, the related statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2019, 2018, and the related notes (collectively referred to as the “financial statements”), in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our report dated March 16, 2020, expresses an unqualified opinion. The Company acquired County Bank Corp and its wholly-owned subsidiary Lakestone Bank & Trust on October 1, 2019. County Bank Corp was merged into ChoiceOne Financial Services, Inc. as of October 1, 2019, and Lakestone Bank & Trust remained a wholly- owned subsidiary of ChoiceOne Financial Services, Inc. as of December 31, 2019. Management has excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019, internal control over financial reporting associated with total assets of $711 million and total revenues of $8 million included in the consolidated financial statements of the Company as of and for the year ended December 31, 2019. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of Lakestone Bank & Trust. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/Plante & Moran, PLLC We have served as the Company’s auditor since 2006. Auburn Hills, Michigan March 16, 2020 Page | 75 Item 9B. Other Information None. Page | 76 Item 10. Directors, Executive Officers and Corporate Governance PART III The information under the captions “ChoiceOne’s Board of Directors and Executive Officers,” “Related Matters – Delinquent Section 16(a) Reports” and “Corporate Governance” in the Company’s Definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 27, 2020, is incorporated herein by reference. The Company has adopted a Code of Ethics for Executive Officers and Senior Financial Officers, which applies to the Chief Executive Officer and the Chief Financial Officer, as well as all other senior financial and accounting officers. The Code of Ethics is posted on the Company’s website at “www.choiceone.com.” The Company intends to satisfy the disclosure requirements under Item 5.05 of Form 8-K regarding an amendment to, or a waiver from, a provision of the Code of Ethics by posting such information on its website at “www.choiceone.com.” Item 11. Executive Compensation The information under the captions “Executive Compensation” in the Company’s Definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 27, 2020, is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information under the caption “Ownership of ChoiceOne Common Stock” in the Company’s Definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 27, 2020, is incorporated herein by reference. The following table presents information regarding the equity compensation plans both approved and not approved by shareholders at December 31, 2019: Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) Weighted-average exercise price of outstanding options, warrants and rights (b) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) Equity compensation plans approved by security holders . . . . . . . . . . . . . . . . . . . . . . . . . . 66,748 $ 20.24 Equity compensation plans not approved by security holders . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 66,748 $ — 20.24 121,103 200,000 321,103 Equity compensation plans approved by security holders include the Stock Incentive Plan of 2012, the Amended and Restated Executive Stock Incentive Plan and the Employee Stock Purchase Plan. 100,971 shares remain available for future issuance under the Stock Incentive Plan of 2012 and 20,132 shares remain available for future issuance under the Employee Stock Purchase Plan, in each case other than upon the exercise of outstanding stock options. No further future issuances of shares are permitted under the Amended and Restated Executive Stock Incentive Plan other than upon the exercise of outstanding stock options. The Directors’ Stock Purchase Plan and the Directors’ Equity Compensation Plan are the only equity compensation plans not approved by security holders. The Directors’ Stock Purchase Plan is designed to provide directors of the Company the option of receiving their fees in the Company’s common stock. Directors who elect to participate in the plan may elect to contribute to the plan twenty-five, fifty, seventy-five or one hundred percent of their board of director fees and one hundred percent of their director committee fees earned as directors of the Company. Contributions to the plan are made by the Company on behalf of each electing participant. Plan participants may terminate their participation in the plan at any time by written notice of withdrawal to the Company. The Directors’ Equity Compensation Plan provides for the grant and award of stock options, restricted stock, restricted stock units, stock awards, and other stock-based and stock-related awards as part of director compensation. Participants will cease to be eligible to participate in both plans when they cease to serve as directors of the Company. Shares are distributed to participants on a quarterly basis. The Directors’ Equity Compensation Plan provides for the issuance of a maximum of 100,000 shares of the Company’s common stock thereunder and the Directors’ Stock Purchase Plan provides for issuance of a maximum of 100,000 shares thereunder, in each case subject to adjustments for certain changes in the capital structure of the Company. As of December 31, 2019, 100,000 shares remained available for issuance under each plan. Page | 77 Item 13. Certain Relationships and Related Transactions, and Director Independence The information under the captions “Related Matters - Transactions with Related Persons” and “Corporate Governance” in the Company’s Definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 27, 2020, is incorporated herein by reference. Item 14. Principal Accountant Fees and Services The information under the caption “Related Matters - Independent Certified Public Accountants” in the Company’s Definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 27, 2020, is incorporated herein by reference. Item 15. Exhibits and Financial Statement Schedules PART IV (a) (1) Financial Statements. The following financial statements and independent auditors’ reports are filed as part of this report: Consolidated Balance Sheets at December 31, 2019 and 2018. Consolidated Statements of Income for the years ended December 31, 2019, 2018, and 2017. Consolidated Statement of Comprehensive Income for the years ended December 31, 2019, 2018, and 2017. Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2019, 2018, and 2017. Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018, and 2017. Notes to Consolidated Financial Statements. Report of Independent Registered Public Accounting Firm dated March 16, 2020. (2) Financial Statement Schedules. None. Page | 78 Exhibit Document 2.1 2.2 3.1 3.2 4.1 4.2 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 21 23 24 31.1 31.2 32 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. Agreement and Plan of Merger between ChoiceOne Financial Services, Inc. and Community Shores Bank Corporation dated January 3, 2020. Previously filed as an exhibit to ChoiceOne Financial Services, Inc.’s Form 8-K filed January 6, 2020. Here incorporated by reference. Restated Articles of Incorporation of ChoiceOne Financial Services, Inc. Previously filed as an exhibit to ChoiceOne Financial Services, Inc.’s Form 8-A filed February 4, 2020. Here incorporated by reference. Bylaws of ChoiceOne Financial Services, Inc., as currently in effect and any amendments thereto. Previously filed as an exhibit to ChoiceOne Financial Services, Inc.’s Form 8-K filed October 1, 2019. Here incorporated by reference. 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. Description of Rights of Shareholders. Employment Agreement between ChoiceOne Financial Services, Inc. and Kelly J. Potes, dated as of September 30, 2019. (1) Previously filed as an exhibit to ChoiceOne’s Form 8-K filed October 1, 2019. Here incorporated by reference. Employment Agreement between ChoiceOne Financial Services, Inc. and Michael J. Burke, Jr., dated as of March 22, 2019. (1) Previously filed as Exhibit 10.7 to ChoiceOne’s Pre-Effective Amendment No. 2 to Form S-4 filed August 5, 2019. Here incorporated by reference. Stock Incentive Plan of 2012. (1) Previously filed as Appendix A to ChoiceOne’s definitive proxy statement for ChoiceOne’s 2018 Annual Meeting of Shareholders, filed on April 19, 2018. Here incorporated by reference. Directors’ Stock Purchase Plan, as amended. (1) Director Equity Compensation Plan of 2019. (2) Former Valley Ridge Executive Employee Salary Continuation Agreements, as amended. (1) 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. Former Valley Ridge Directors’ Deferred Compensation Plan and Agreement. (1) Previously filed as an exhibit to the ChoiceOne Financial Services, Inc.’s Form 10-K Annual Report for the year ended December 31, 2013. Here incorporated by reference. Amended and Restated Employee Stock Purchase Plan. (1) Previously filed as an exhibit to ChoiceOne Financial Services, Inc.’s Form 10-K Annual Report for the year ended December 31, 2016. Here incorporated by reference. Subsidiaries of ChoiceOne Financial Services, Inc. Consent of Independent Registered Public Accounting Firm. Powers of Attorney. Certification of Chief Executive Officer. Certification of Treasurer. Certification pursuant to 18 U.S.C. § 1350. 101.1 Interactive Data File. (cid:11)(cid:20)(cid:12)(cid:3)(cid:3) (cid:55)(cid:75)(cid:76)(cid:86)(cid:3)(cid:68)(cid:74)(cid:85)(cid:72)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:76)(cid:86)(cid:3)(cid:68)(cid:3)(cid:80)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:68)(cid:70)(cid:87)(cid:3)(cid:82)(cid:85)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:72)(cid:81)(cid:86)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:83)(cid:79)(cid:68)(cid:81)(cid:3)(cid:82)(cid:85)(cid:3)(cid:68)(cid:85)(cid:85)(cid:68)(cid:81)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:87)(cid:82)(cid:3)(cid:69)(cid:72)(cid:3)(cid:191)(cid:79)(cid:72)(cid:71)(cid:3)(cid:68)(cid:86)(cid:3)(cid:68)(cid:81)(cid:3)(cid:72)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:76)(cid:86)(cid:3)(cid:41)(cid:82)(cid:85)(cid:80)(cid:3)(cid:20)(cid:19)(cid:16)(cid:46)(cid:17) Copies of any exhibits will be furnished to shareholders upon written request. Requests should be directed to: Thomas L. Lampen, Treasurer, ChoiceOne Financial Services, Inc., 109 East Division, Sparta, Michigan, 49345. Page | 79 Pursuant to the requirements of Section 13 or 15(d) 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. SIGNATURES ChoiceOne Financial Services, Inc. By: /s/ Kelly J. Potes Kelly J. Potes Chief Executive Officer March 16, 2020 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Chief Executive Officer and Director (Principal Executive Officer) Treasurer (Principal Financial and Accounting Officer) March 16, 2020 March 16, 2020 Chairman of the Board and Director March 16, 2020 Director Director March 16, 2020 March 16, 2020 President and Director March 16, 2020 Director Director Director Director Director Director Director Director Director March 16, 2020 March 16, 2020 March 16, 2020 March 16, 2020 March 16, 2020 March 16, 2020 March 16, 2020 March 16, 2020 March 16, 2020 /s/ Kelly J. Potes Kelly J. Potes /s/ Thomas L. Lampen Thomas L. Lampen */s/ Paul L. Johnson Paul L. Johnson */s/ James A. Bosserd James A. Bosserd */s/ Keith Brophy Keith Brophy */s/ Michael J. Burke, Jr. Michael J. Burke, Jr. */s/ Harold J. Burns Harold J. Burns */s/ Eric E. Burrough Eric E. Burrough */s/ David H. Bush David H. Bush */s/ Bruce J. Cady Bruce J. Cady */s/ Patrick A. Cronin Patrick A. Cronin */s/ Jack G. Hendon Jack G. Hendon */s/ Gregory A. McConnell Gregory A. McConnell */s/ Nels W. Nyblad Nels W. Nyblad */s/ Roxanne M. Page Roxanne M. Page *By /s/ Thomas L. Lampen Attorney-in-Fact Page | 80 [This page intentionally left blank] [This page intentionally left blank] [This page intentionally left blank] 122 Y E A R S I N T H E C O M M U N I T Y 5,600+ V O L U N T E E R H O U R S I N 2 0 1 9 $352,000+ I N C O M M U N I T Y D O N AT I O N S & S P O N S O R S H I P S a year of ACCOMPLISHMENT AMERICAN ADVERTISING AWARDS 2019 Silver Addy TRUENORTH COMMUNITY SERVICES 2019 TrueNorth Community Partner Award FINOVATE AWARDS 2019 Best Small Business Solutions Nomination BAUER FINANCIAL 2019 Five Star Bank GRAND RAPIDS BUSINESS JOURNAL 2019 Newsmaker Finalist of the Year MICHIGAN BANKERS ASSOCIATION 2019 Financial Literacy Award BANK DIRECTOR 2019 Best of FinXTech Startup Innovation Finalist with Plinqit CARDRATES.COM 2019 Editor’s Choice Award for Community Commitment grand rapids lapeer corporate & shareholder INFORMATION Market Makers in ChoiceOne Financial Services, Inc. Stock D.A. Davidson & Co. 3773 Attucks Drive Powell, Ohio 43065 800.394.9230 Boenning & Scattergood, Inc. 200 Barr Harbor Drive, Suite 300 West Conshohocken, PA 19428-2979 800.883.1212 Stock Registrar & Transfer Agent Continental Stock Transfer & Trust Company 1 State Street Plaza; 30th Floor New York, NY 10004-1561 212.509.4000 Raymond James & Associates 2060 East Paris Avenue SE Suite 250 Grand Rapids, MI 49546 616.974.3380 Stifel, Nicolaus & Company, Inc. 5181 Cascade Road SE Grand Rapids, MI 49546 616.224.1553 ChoiceOne Financial Services, Inc. common stock is quoted on the NASDAQ Capital Markets as COFS. our community is growing! please visit choiceone.com for a complete list of our locations and hours as we continue to expand. FINANCIAL SERVICES, INC. Member FDIC • Equal Housing Lender 

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