Amended Annual Report (10-k/a)

0000803164 ChoiceOne Financial Services, Inc. true --12-31 FY 2020 1 244,000 0 10 8 20.86 27.25 6.4 3 0 0 1,456 1,375 162,558 98,835 159,684 98,683 123,353 98,683 135,836 76,288 69,412 42,039 52,549 42,039 63,885 34,056 42,570 63,885 63,885 34,056 63,885 The amount shown represents the number of shares issued in cashless transactions where some taxes are netted on a portion of the exercises. Includes nonaccrual loans. Adjusted for 5% stock dividend issued on May 31, 2018. 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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-K/A

(Amendment No. 1)

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

	For the fiscal year ended December 31, 2020

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

	For the transition period from__________________ to __________________

Commission File Number: 000-19202

ChoiceOne Financial Services, Inc.
(Exact Name of Registrant as Specified in its Charter)

Michigan (State or Other Jurisdiction of Incorporation or Organization)	38-2659066 (I.R.S. Employer Identification No.)

109 East Division Street, Sparta, Michigan (Address of Principal Executive Offices)	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	Trading symbol(s)	Name of each exchange on which registered
Common stock	COFS	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 ☐ No ☒

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 ☐ No ☒

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

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.

Large accelerated filer ☐

Accelerated filer ☐

Non-accelerated filer ☒

Emerging growth company ☐

Smaller reporting company ☒

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

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

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

As of June 30, 2020, the aggregate market value of common stock held by non-affiliates of the Registrant was $198.2 million. This amount is based on an average bid price of $29.56 per share for the Registrant's stock as of such date.

As of February 28, 2021, the Registrant had 7,801,084 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, 2021 are incorporated by reference into Part III of this Form 10-K.

EXPLANATORY NOTE

ChoiceOne Financial Services, Inc. (the "Company") is filing this Amendment No. 1 on Form 10-K/A (this "Amendment") to amend its Annual Report on Form 10-K for the fiscal year ended December 31, 2020, as previously filed with the Securities and Exchange Commission (the "Original 10-K"), solely to make certain technical corrections to the Report of Independent Registered Public Accounting Firm included in Item 8 of the Original 10-K and to correct certain omitted dates in Item 13 and Item 14 of Part III of the Original 10-K.

The Company is filing an updated Consent of Independent Registered Public Accounting Firm as Exhibit 23 to this Form 10-K/A. In addition, pursuant to Rule 12b-15 under the Securities Exchange Act of 1934, as amended, the Company is refiling the certifications required pursuant to Section 302 and Section 906 of the Sarbanes-Oxley Act of 2002, as Exhibits 31.1, 31.2, and 32 to this Form 10-K/A.

Except as described above, no changes have been made to the Original Form 10-K and this Amendment does not otherwise update or modify any disclosures made in the Original Form 10-K, change any previously-reported financial results, or reflect any events occurring after the date of the Original Form 10-K.

PART II

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 Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of ChoiceOne Financial Services, Inc. (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020, and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

The Company's management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“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 consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated 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 consolidated 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 consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.

Allowance for Loan Losses – Current Factor Adjustments – Refer to Notes 1 and 3 to the Consolidated Financial Statements

Critical Audit Matter Description

The general component of management’s estimate of the allowance for loan losses covers non-classified loans and is based on historical loss experience adjusted for current factors. Management’s adjustment for current factors is based on trends in delinquencies, trends in charge-offs and recoveries, trends in the volume of loans, changes in underwriting standards, trends in loan review findings, experience and ability of lending staff, national and economic trends and conditions, industry conditions, trends in real estate values, and other conditions. Identification of factors to consider and adjustments to those factors involve management’s judgement.

Given the significant estimates and assumptions management makes to estimate the current factor adjustments of the allowance for loan losses, performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions required a high degree of auditor judgment and an increased extent of effort.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the current factor adjustments used in the estimate of the allowance for loan losses included the following, among others:

●

We obtained an understanding of management’s process for determining the current factor adjustments, which included identification of internal and external data used in the analysis and understanding how management selects inputs from a range of potential assumptions.

●

We evaluated the design of controls over management’s allowance for loan losses estimate, including those over current factor adjustments.

●

We evaluated management’s selection of factors to consider when making current factor adjustments.

●

We evaluated management's determination of adjustments for each factor, including evaluation of each adjustment for consistency with the direction and magnitude of changes in internal and external data.

Acquisition of Community Shores Bank Corporation – Valuation of Loans – Refer to Notes 1 and 21 to the Consolidated Financial Statements

Critical Audit Matter Description

The Company completed the acquisition of Community Shores Bank Corporation (“Community Shores”) on July 1, 2020. The assets acquired and liabilities assumed were recorded at their acquisition date fair values. Management utilized a third-party specialist to assist in the estimation of the fair value of loans at the acquisition date based on a discounted cash flow approach. The fair value adjustments required management to make significant estimates and assumptions, including the probability of default, loss given default, and realizable collateral values of the acquired loans.

Given the significant estimates and assumptions management made to estimate the fair value of acquired loans, performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the evaluation of significant estimates and assumptions used in the valuation of acquired loans included the following, among others:

●

We obtained an understanding of management’s process for determining the fair value of acquired loans, which included identification of internal and external data used in selecting inputs to the model and understanding how management selected inputs from a range of potential assumptions.

●

We evaluated the design of controls over management’s loan fair value estimate.

●

With the assistance of our fair value specialists, we evaluated the reasonableness of the discounted cash flow valuation methodology and significant assumptions based on unobservable data.

●

We tested the completeness and accuracy of data used by management in the fair value calculation.

●

We evaluated the significant inputs selected by management and tested the mathematical accuracy of the calculation.

/s/Plante & Moran, PLLC

We have served as the Company’s auditor since 2006.

Auburn Hills, Michigan

March 30, 2021

ChoiceOne Financial Services, Inc.
Consolidated Balance Sheets

	December 31,
(Dollars in thousands)	2020			2019
Assets
Cash and due from banks	$	79,169		$	59,308
Time deposits in other financial institutions		350			250
Cash and cash equivalents		79,519			59,558

Equity securities at fair value (Note 2)		2,896			2,851
Securities available for sale (Note 2)		574,787			339,579
Federal Home Loan Bank stock		3,824			3,524
Federal Reserve Bank stock		4,180			2,934
Loans held for sale		12,921			3,095
Loans to other financial institutions		35,209			51,048
Loans (Note 3)		1,069,668			802,048
Allowance for loan losses (Note 3)		(7,593	)		(4,057	)
Loans, net		1,062,075			797,991

Premises and equipment, net (Note 5)		29,489			24,265
Other real estate owned, net (Note 7)		266			929
Cash value of life insurance policies		32,751			31,979
Goodwill (Note 6)		60,506			52,870
Core deposit intangible (Note 6)		5,269			6,006
Other assets		15,650			9,499
Total assets	$	1,919,342		$	1,386,128

Liabilities
Deposits – noninterest-bearing (Note 8)	$	477,654		$	287,460
Deposits – interest-bearing (Note 8)		1,196,924			867,142
Total deposits		1,674,578			1,154,602

Borrowings (Note 9)		9,327			33,198
Subordinated debentures (Note 10)		3,089			-
Other liabilities (Notes 11 and 13)		5,080			6,189
Total liabilities		1,692,074			1,193,989

Shareholders' Equity
Preferred stock; shares authorized: 100,000; shares outstanding: none		-			-
Common stock and paid-in capital, no par value; shares authorized: 12,000,000; shares outstanding: 7,796,352 at December 31, 2020 and 7,245,088 at December 31, 2019 (Note 14)		178,750			162,610
Retained earnings		37,490			28,051
Accumulated other comprehensive income, net		11,028			1,478
Total shareholders’ equity		227,268			192,139
Total liabilities and shareholders’ equity	$	1,919,342		$	1,386,128

See accompanying notes to consolidated financial statements.

ChoiceOne Financial Services, Inc.
Consolidated Statements of Income

	Years Ended
(Dollars in thousands, except per share data)	December 31,
	2020			2019		2018
Interest income
Loans, including fees	$	46,874		$	26,777	$	20,033
Securities:
Taxable		5,891			3,956		2,896
Tax exempt		2,684			1,472		1,465
Other		266			268		131
Total interest income		55,715			32,473		24,525

Interest expense
Deposits		4,178			4,188		2,175
Advances from Federal Home Loan Bank		220			455		235
Other		246			57		51
Total interest expense		4,644			4,700		2,461

Net interest income		51,071			27,773		22,064
Provision for loan losses		4,000			-		35
Net interest income after provision for loan losses		47,071			27,773		22,029

Noninterest income
Customer service charges		7,252			5,277		4,525
Insurance and investment commissions		541			310		335
Mortgage servicing rights (Note 4)		3,180			822		441
Gains on sales of loans (Note 4)		8,133			1,129		562
Net gains on sales of securities (Note 2)		1,308			22		34
Net (losses) gains on sales and write-downs of other assets (Note 7)		(13	)		55		83
Earnings on life insurance policies		772			773		385
Trust income		739			162		-
Change in market value of equity securities		(155	)		-		71
Other		941			618		484
Total noninterest income		22,698			9,168		6,920

Noninterest expense
Salaries and benefits (Note 13 and 14)		26,539			14,401		10,997
Occupancy and equipment (Note 5)		5,783			3,557		2,722
Data processing		6,765			3,210		2,205
Professional fees		3,716			3,112		1,349
Supplies and postage		844			407		408
Advertising and promotional		588			528		308
Intangible amortization (Note 6)		1,498			353		-
FDIC insurance		450			45		185
Other		4,701			2,863		2,287
Total noninterest expense		50,884			28,476		20,461

Income before income tax		18,885			8,465		8,488
Income tax expense		3,272			1,294		1,155

Net income	$	15,613		$	7,171	$	7,333

Basic earnings per share (Note 15)	$	2.08		$	1.58	$	2.03
Diluted earnings per share (Note 15)	$	2.07		$	1.58	$	2.02
Dividends declared per share	$	0.82		$	1.40	$	0.71

See accompanying notes to consolidated financial statements.

ChoiceOne Financial Services, Inc.

Consolidated Statements of Comprehensive Income

	Years Ended
(Dollars in thousands)	December 31,
	2020			2019			2018
Net income	$	15,613		$	7,171		$	7,333

Other comprehensive income:
Changes in net unrealized gains (losses) on investment securities available for sale, net of tax expense (benefit) of $2,846, $583, and $(196) for the years ended December 31, 2020, 2019, and 2018, respectively.		10,708			2,246			(737	)

Reclassification adjustment for realized gain on sale of investment securities available for sale included in net income, net of tax expense of $275, $5, and $7 for the years ended December 31, 2020, 2019, and 2018, respectively.		(1,033	)		(18	)		(27	)

Change in adjustment for postretirement benefits, net of tax expense (benefit) of $(33), $(5), and $10 for the years ended December 31, 2020, 2019, and 2018, respectively.		(125	)		(18	)		39

Other comprehensive income, net of tax		9,550			2,210			(725	)

Comprehensive income	$	25,163		$	9,381		$	6,608

See accompanying notes to consolidated financial statements.

ChoiceOne Financial Services, Inc.
Consolidated Statements of Changes in Shareholders’ Equity

										Accumulated
				Common						Other
				Stock and						Comprehensive
	Number of			Paid in			Retained			Income/(Loss),
(Dollars in thousands, except per share data)	Shares			Capital			Earnings			Net			Total
Balance, January 1, 2018		3,448,569		$	50,290		$	26,023		$	237		$	76,550

Net income								7,333						7,333
Other comprehensive loss											(725	)		(725	)
Shares issued		7,904			126									126
Shares repurchased		(20,628	)		(523	)								(523	)
Effect of employee stock purchases					13									13
Stock options exercised and issued (1)		1,241												-
Stock-based compensation expense					282									282
Restricted stock units issued		7,303												-
Adoption effect of ASU 2016-01 (3)								244			(244	)		-
Stock dividend declared (5%)		172,094			4,335			(4,342	)					(7	)
Cash dividends declared ($0.71 per share) (2)								(2,572	)					(2,572	)

Balance, December 31, 2018		3,616,483		$	54,523		$	26,686		$	(732	)	$	80,477

Net income								7,171						7,171
Other comprehensive income											2,210			2,210
Shares issued		8,118			25									25
Shares repurchased		(2,228	)		(67	)								(67	)
Effect of employee stock purchases					14									14
Stock options exercised and issued (1)		3,913			78									78
Stock-based compensation expense					398									398
Restricted stock units issued		14,930												-
Merger with County Bank Corp, net of issuance costs		3,603,872			107,639									107,639
Cash dividends declared ($1.40 per share)								(5,806	)					(5,806	)

Balance, December 31, 2019		7,245,088		$	162,610		$	28,051		$	1,478		$	192,139

Net income								15,613						15,613
Other comprehensive income											9,550			9,550
Shares issued		19,583			451									451
Effect of employee stock purchases					24									24
Stock options exercised and issued (1)		7,261												-
Stock-based compensation expense					171									171
Restricted stock units issued		365												-
Merger with Community Shores Bank Corporation		524,055			15,494									15,494
Cash dividends declared ($0.82 per share)								(6,174	)					(6,174	)

Balance, December 31, 2020		7,796,352		$	178,750		$	37,490		$	11,028		$	227,268

(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, 2018.

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

See accompanying notes to consolidated financial statements.

ChoiceOne Financial Services, Inc.
Consolidated Statements of Cash Flows

	Years Ended
(Dollars in thousands)	December 31,
	2020			2019			2018
Cash flows from operating activities:
Net income	$	15,613		$	7,171		$	7,333
Adjustments to reconcile net income to net cash from operating activities:
Provision for loan losses		4,000			-			35
Depreciation		2,721			1,610			1,183
Amortization		4,985			1,517			893
Compensation expense on employee and director stock purchases, stock options, and restricted stock units		512			373			344
Net gains on sales of securities		(1,308	)		(22	)		(34	)
Net change in market value of equity securities		155			-			(71	)
Gains on sales of loans		(11,313	)		(1,951	)		(1,003	)
Loans originated for sale		(326,286	)		(63,920	)		(33,555	)
Proceeds from loan sales		325,306			62,763			34,872
Earnings on bank-owned life insurance		(772	)		(485	)		(385	)
Proceeds from BOLI policy		-			605			-
Earnings on death benefit from bank-owned life insurance		-			(288	)		-
(Gains) on sales of other real estate owned		(64	)		(54	)		(79	)
Write downs of ORE		80			-			-
Proceeds from sales of other real estate owned		1,384			938			515
Costs capitalized to other real estate		(19	)		-			-
Deferred federal income tax expense		202			310			209
Net change in:
Other assets		(3,186	)		2,128			(875	)
Other liabilities		(3,532	)		(1,493	)		573
Net cash provided by operating activities		8,478			9,202			9,955

Cash flows from investing activities:
Sales of securities available for sale		121,942			178,450			2,634
Sales of equity securities		-			463			91
Maturities, prepayments and calls of securities available for sale		48,787			47,816			13,443
Purchases of securities available for sale		(375,670	)		(209,763	)		(31,450	)
Purchase of Federal Reserve Bank stock		-			(1	)		-
Loan originations and payments, net		(79,594	)		(485	)		(24,366	)
Additions to premises and equipment		(1,852	)		(766	)		(4,207	)
Cash received from merger with Community Shores Bank Corporation		35,636			-			-
Cash received from merger with County Bank Corp		-			20,638			-
Net cash (used in)/provided by investing activities		(250,751	)		36,352			(43,855	)

Cash flows from financing activities:
Net change in deposits		292,145			3,986			37,162
Net change in repurchase agreements		-			-			(7,148	)
Net change in fed funds purchased		-			(8,600	)		4,800
Proceeds from borrowings		10,050			115,000			128,500
Payments on borrowings		(33,921	)		(110,035	)		(143,535	)
Repurchase of common stock		-			(67	)		(523	)
Issuance of common stock		134			142			77
Cash dividends and fractional shares from merger		(6,174	)		(5,815	)		(2,580	)
Cash related to equity issuance for merger		-			(297	)		-
Net cash provided by/(used in) financing activities		262,234			(5,686	)		16,753

Net change in cash and cash equivalents		19,961			39,868			(17,147	)
Beginning cash and cash equivalents		59,558			19,690			36,837

Ending cash and cash equivalents	$	79,519		$	59,558		$	19,690

Supplemental disclosures of cash flow information:
Cash paid for interest	$	4,872		$	4,500		$	2,300
Cash paid for income taxes		5,001			1,035			850
Loans transferred to other real estate owned		372			347			432

See accompanying notes to consolidated financial statements.

Note 1 – Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include ChoiceOne Financial Services, Inc. ("ChoiceOne"), its wholly-owned subsidiaries, ChoiceOne Bank (the "Bank"), and ChoiceOne Bank’s wholly-owned subsidiaries: ChoiceOne Insurance Agencies, Inc. (the "Insurance Agency"), Lakestone Financial Services, Inc. ("Lakestone Financial"), and Community Shores Financial Services, Inc. (“Community Shores Financial”). Intercompany transactions and balances have been eliminated in consolidation.

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

Recent Mergers

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.

On July 1, 2020, ChoiceOne completed the merger of Community Shores Bank Corporation ("Community Shores") 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, 2020 include the impact of the merger, which was effective as of July 1, 2020. For additional details regarding the merger with Community Shores, see Note 21 (Business Combination) below.

The Coronavirus (COVID-19) Outbreak

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

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

COVID-19 has also affected ChoiceOne's customers. Although there were no material increases in delinquencies or net charge-offs during 2020, ChoiceOne increased its provision for loan losses by $4.0 million in 2020 as compared to 2019 in anticipation of an expected increase in levels of delinquencies and loan losses related to the impact of COVID-19. Consistent with federal banking agencies' revised “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus,” ChoiceOne is working with its borrowers affected by COVID-19 and has granted approximately 750 payment deferrals on numerous loans to borrowers affected by the pandemic. Following the initial 90 day deferment period, ChoiceOne offered a second round of deferment in accordance with the Coronavirus Aid, Relief, and Economic Security ("CARES") Act; however, significantly fewer customers requested further deferment. Less than 40 deferments remained active with loan balances totaling just $3.2 million at December 31, 2020 with all other previous deferments resuming their payments in accordance with loan terms. ChoiceOne will continue to attempt to assist borrowers using various means in appropriate circumstances, as needed.

In addition, ChoiceOne processed over $126 million in PPP loans through December 31, 2020 and acquired an additional $37 million in PPP loans in the merger with Community Shores. PPP loans are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP. PPP loans carry a fixed rate of 1.00% and a term of two years (loans made before June 5, 2020) or five years (loans made on or after June 5, 2020), if not forgiven in whole or in part. Payments are deferred until either the date on which the Small Business Administration ("SBA") remits the amount of forgiveness proceeds to the lender or the date that is ten months after the last day of the covered period if the borrower does not apply for forgiveness within that ten-month period. The loans are 100% guaranteed by the SBA. The SBA pays the originating bank a processing fee based on the size of the loan. The initial PPP expired on August 8, 2020. On December 27, 2020, the Consolidated Appropriations Act, 2021, was signed into law, providing additional funding for the PPP. This round of the PPP opened on February 24, 2021 and, absent extension, will expire on March 31, 2021 (or such earlier date as funds are exhausted). Gross fees associated with PPP loans originated through December 31, 2020 totaled $5.0 million. Costs associated with these loans were approximately $199,000 and the net of $4.8 million is being recognized over the term of the loans. Upon the SBA forgiveness, unrecognized fees are then recognized into interest income. Fee income, which was included in interest income, recognized in the year ended December 31, 2020 was $3.0 million. $23.4 million in PPP loans were forgiven during the year ended December 31, 2020.

Nature of Operations

The Bank is a full-service community bank that offers commercial, consumer, and real estate loans as well as traditional demand, savings and time deposits to both commercial and consumer clients within the Bank’s primary market areas in Kent, Muskegon, Newaygo, and Ottawa counties in western Michigan and 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.

Community Shores Financial is a wholly-owned subsidiary of the Bank. The primary source of revenue for Community Shores Financial is referral fee income from a local insurance agency, Lakeshore Employee Benefits. Lakeshore Employee Benefits offers, among other things, employer-sponsored benefit plans.

The Insurance Agency is a wholly-owned subsidiary of the 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 the Bank, which earns revenues through the sale of annuities and other third party investment products.

Together, the Bank and the other subsidiaries 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. These estimates and assumptions are subject to many risks and uncertainties, including changes in interest rates and other general economic, business and political conditions, including the effects of the COVID-19 pandemic, and its potential effects on the economic environment, our customers and our operations, as well as any changes to federal, state and local government laws, regulations and orders in connection with the pandemic. Actual results may differ from these estimates. Estimates associated with 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.

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.

During 2020, the Company funded loans under the Small Business Administration's ("SBA") Paycheck Protection Program ("PPP") to provide liquidity to small businesses during the COVID-19 pandemic. The loans are guaranteed by the SBA and are forgivable by the SBA if certain criteria are met. The Company originated PPP loans totaling $126.4 million during 2020. PPP processing fees received from the SBA totaling $5.0 million were deferred along with loan origination costs and recognized as interest income using the effective yield method. Upon forgiveness of a loan and resulting repayment by the SBA, any unrecognized net fee for a given loan is recognized as interest income. $3.0 million of fees from the SBA were recognized in 2020.

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. Loans to other financial institutions are excluded from Note 3. As of December 31, 2020 and 2019 none of the loans to other financial institutions were classified as impaired or nonaccrual.

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 possibl

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

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 the Bank, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower by modifying a loan. To make this determination, the Bank 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.

In March of 2020, the CARES Act was passed into law. Among other things, the CARES Act provides that certain loans subject to modifications related to the COVID-19 pandemic need not be classified as TDRs. As a result of the pandemic, the Company provided a modification program to borrowers that included certain concessions such as interest only or payment deferrals. The Company granted pandemic-related modifications of loans totaling $148 million. As of December 31, 2020, there were $3.2 of loans that remained under a modification agreement but are not disclosed as TDRs pursuant to the CARES Act. Regardless of whether a modified loan is classified as a TDR, the Company continues to apply policies for risk rating, accruing interest, and classifying loans as impaired.

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 Bank’s 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.

Goodwill

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

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.

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)	As of December 31,
	2020			2019
Unrealized gain (loss) on available for sale securities	$	13,959		$	1,713
Unrecognized gains on post-retirement benefits		—			158
Tax effect		(2,931	)		(393	)
Accumulated other comprehensive income (loss)	$	11,028		$	1,478

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, 2020.

Cash Restrictions

Cash on hand or on deposit with the Federal Reserve Bank of $0 and $13,231,000 was required to meet regulatory reserve and clearing requirements for the Bank at December 31, 2020 and 2019, respectively. The balance in excess of the amount required was interest-bearing as of December 31, 2020 and December 31, 2019.

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 Bank 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 Bank, Insurance Agency, Lakestone Financial, and Community Shores 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 No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU provides financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date by replacing the incurred loss impairment methodology in current generally accepted accounting principles (GAAP) with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The new guidance attempts to reflect an entity’s current estimate of all expected credit losses and broadens the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually to include forecasted information, as well as past events and current conditions. There is no specified method for measuring expected credit losses, and an entity may apply methods that reasonably reflect its expectations of the credit loss estimate. Although an entity may still use its current systems and methods for recording the allowance for credit losses, under the new rules, the inputs used to record the allowance for credit losses generally will need to change to appropriately reflect an estimate of all expected credit losses and the use of reasonable and supportable forecasts. Additionally, credit losses on available-for-sale debt securities will have to be presented as an allowance rather than as a write-down. This ASU is effective for fiscal years beginning after December 15, 2022, and for interim periods within those years for companies considered smaller reporting filers with the Securities and Exchange Commission. ChoiceOne was classified as a smaller reporting filer as of December 31, 2020. Management is currently evaluating the impact of this new ASU on its consolidated financial statements which may be significant.

Reclassifications
Certain amounts presented in prior year consolidated financial statements have been reclassified to conform to the 2020 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:

December 31, 2020

Gross

(Dollars in thousands)

Amortized

Unrealized

Fair

Cost

Gains

Losses

Value

Equity securities

2,836

2,896

December 31, 2019

Gross

(Dollars in thousands)

Amortized

Unrealized

Fair

Cost

Gains

Losses

Value

Equity securities

2,426

425

2,851

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

	December 31, 2020
			Gross		Gross
(Dollars in thousands)	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
U.S. Government and federal agency	$	2,007	$	44	$	-		$	2,051
U.S. Treasury notes and bonds		1,996		60		-			2,056
State and municipal		307,201		13,191		(24	)		320,368
Mortgage-backed		246,085		1,510		(872	)		246,723
Corporate		2,539		51		(1	)		2,589
Trust preferred securities		1,000		-		-			1,000
Total	$	560,828	$	14,856	$	(897	)	$	574,787

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

Information regarding sales of equity securities and securities available for sale for the year ended December 31 follows:

(Dollars in thousands)
	2020		2019		2018
Proceeds from sales of securities	$	121,942	$	178,913	$	2,634
Gross realized gains		1,308		22		42
Gross realized losses		-		-		8

Contractual maturities of equity securities and securities available for sale at December 31, 2020 were as follows:

(Dollars in thousands)	Amortized		Fair
	Cost		Value
Due within one year	$	17,050	$	17,184
Due after one year through five years		59,120		60,900
Due after five years through ten years		221,304		231,775
Due after ten years		17,269		18,205
Total debt securities		314,743		328,064
Mortgage-backed securities		246,085		246,723
Equity securities		2,836		2,896
Total	$	563,664	$	577,683

Certain securities were pledged as collateral for participation in a program that provided Community Reinvestment Act credits. The carrying amount of the securities pledged as collateral at December 31 was as follows:

(Dollars in thousands)		2020				2019
Securities pledged for Community Reinvestment Act credits		$	278			$	252

Securities with unrealized losses at year-end 2020 and 2019, aggregated by investment category and length of time the individual securities have been in an unrealized loss position, were as follows:

	2020
	Less than 12 months					More than 12 months					Total
(Dollars in thousands)	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
U.S. Government and federal agency	$	-	$	-		$	-	$	-		$	-	$	-
U.S. Treasury notes and bonds		-		-			-		-			-		-
State and municipal		8,950		24			-		-			8,950		24
Mortgage-backed		75,126		866			9,994		6			85,120		872
Corporate		453		1			-		-			453		1
Total temporarily impaired	$	84,529	$	891		$	9,994	$	6		$	94,523	$	897

	2019
	Less than 12 months					More than 12 months					Total
(Dollars in thousands)	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
U.S. Government and federal agency	$	7,175	$	(39	)	$	-	$	-		$	7,175	$	(39	)
U.S. Treasury notes and bonds		-		-			-		-			-		-
State and municipal		75,099		(1,256	)		252		(1	)		75,351		(1,257	)
Mortgage-backed		109,652		(327	)		373		(2	)		110,025		(329	)
Corporate		-		-			300		(1	)		300		(1	)
Total temporarily impaired	$	191,926	$	(1,622	)	$	925	$	(4	)	$	192,851	$	(1,626	)

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 issuer 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, 2020 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 2020 or 2019.

Following is information regarding unrealized gains and losses on equity securities for the years ending December 31:

	2020			2019			2018

Net gains and losses recognized during the period	$	(155	)	$	—		$	71
Less: Net gains and losses recognized during the period on securities sold		—			(5	)		9

Unrealized gains and losses recognized during the reporting period on securities still held at the reporting date	$	(155	)	$	5		$	62

At December 31, 2020, there were 22 securities with an unrealized loss, compared to 63 securities with an unrealized loss as of December 31, 2019.

Note 3 – Loans and Allowance for Loan Losses

The Bank’s loan portfolio as of December 31 was as follows:

(Dollars in thousands)
	2020			2019
Agricultural	$	53,735		$	57,339
Commercial and industrial		303,527			148,083
Consumer		34,014			38,854
Real estate - commercial		469,247			326,379
Real estate - construction		16,639			13,411
Real estate - residential		192,506			217,982
Loans, gross	$	1,069,668		$	802,048
Allowance for Loan Losses		(7,593	)		(4,057	)
Loans, net	$	1,062,075		$	797,991

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 6, 7, or 8. 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 outstanding balances of the County Bank Corp. acquired portfolio and the acquisition fair value adjustments at acquisition date:

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

The table below presents a roll-forward of the accretable yield on County Bank Corp. acquired loans for the year ended December 31, 2020:

(Dollars in thousands)	*Acquired*			*Acquired*
	*Impaired*			*Non-impaired*			*Total*
Balance, January 1, 2019	$	-		$	-		$	-
Merger with County Bank Corp on October 1, 2019		185			1,894			2,079
Accretion October 1, 2019 through December 31, 2019		-			(75	)		(75	)
Balance, January 1, 2020		185			1,819			2,004
Accretion January 1, 2020 through December 31, 2020		(50	)		(295	)		(345	)
Balance, December 31, 2020	$	135		$	1,524		$	1,659

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

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

The table below presents a roll-forward of the accretable yield on Community Shores Bank Corporation acquired loans for the year ended December 31, 2020:

(Dollars in thousands)	*Acquired*			*Acquired*
	*Impaired*			*Non-impaired*			*Total*
Balance, January 1, 2020	$	-		$	-		$	-
Merger with Community Shores Bank Corporation on July 1, 2020		869			596			1,465
Accretion July 1, 2020 through December 31, 2020		(26	)		(141	)		(167	)
Balance, December 31, 2020	$	843		$	455		$	1,298

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

				Commercial
(Dollars in thousands)				and						Commercial			Construction		Residential
	Agricultural			Industrial			Consumer			Real Estate			Real Estate		Real Estate			Unallocated			Total
Allowance for Loan Losses Year Ended December 31, 2020
Beginning balance	$	471		$	655		$	270		$	1,663		$	76	$	640		$	282		$	4,057
Charge-offs		(15	)		(148	)		(329	)		(254	)		—		(8	)		—			(754	)
Recoveries		—			57			204			10			—		19			—			290
Provision		(199	)		763			172			2,759			21		649			(165	)		4,000
Ending balance	$	257		$	1,327		$	317		$	4,178		$	97	$	1,300		$	117		$	7,593

Individually evaluated for impairment	$	—		$	19		$	1		$	157		$	—	$	254		$	—		$	431

Collectively evaluated for impairment	$	257		$	1,308		$	316		$	4,021		$	97	$	1,046		$	117		$	7,162

Loans
December 31, 2020
Individually evaluated for impairment	$	348		$	1,663		$	8		$	3,032		$	80	$	2,720					$	7,851
Collectively evaluated for impairment		53,387			295,154			33,982			453,681			16,559		186,982						1,039,745
Acquired with deteriorated credit quality		—			6,710			24			12,534			—		2,804						22,072
Ending balance	$	53,735		$	303,527		$	34,014		$	469,247		$	16,639	$	192,506					$	1,069,668

				Commercial
(Dollars in thousands)				and						Commercial			Construction		Residential
	Agricultural			Industrial			Consumer			Real Estate			Real Estate		Real Estate			Unallocated			Total
Allowance for Loan Losses Year Ended December 31, 2019
Beginning balance	$	481		$	892		$	254		$	1,926		$	38	$	537		$	545		$	4,673
Charge-offs		-			(83	)		(292	)		(589	)		-		(25	)		-			(989	)
Recoveries		65			22			136			26			-		124			-			373
Provision		(75	)		(176	)		172			300			38		4			(263	)		-
Ending balance	$	471		$	655		$	270		$	1,663		$	76	$	640		$	282		$	4,057

Individually evaluated for impairment	$	103		$	-		$	4		$	13		$	-	$	235		$	-		$	355

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


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

				Commercial
(Dollars in thousands)				and						Commercial		Construction		Residential
	Agricultural			Industrial			Consumer			Real Estate		Real Estate		Real Estate			Unallocated		Total
Allowance for Loan Losses Year Ended December 31, 2018
Beginning balance	$	506		$	1,001		$	262		$	1,761	$	35	$	726		$	286	$	4,577
Charge-offs		-			(58	)		(282	)		-		-		(25	)		-		(365	)
Recoveries		33			107			112			61		-		113			-		426
Provision		(58	)		(158	)		162			104		3		(277	)		259		35
Ending balance	$	481		$	892		$	254		$	1,926	$	38	$	537		$	545	$	4,673

Individually evaluated for impairment	$	94		$	3		$	13		$	20	$	-	$	167		$	-	$	297

Collectively evaluated for impairment	$	387		$	889		$	241		$	1,906	$	38	$	370		$	545	$	4,376


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

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

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

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

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

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

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

Information regarding the Bank’s credit exposure as of December 31 was as follows:

Corporate Credit Exposure - Credit Risk Profile By Creditworthiness Category

(Dollars in thousands)	Agricultural				Commercial and Industrial				Commercial Real Estate
	December 31,		December 31,		December 31,		December 31,		December 31,		December 31,
	2020		2019		2020		2019		2020		2019
Pass	$	50,185	$	55,866	$	294,614	$	146,728	$	453,080	$	322,105
Special Mention		3,202		1,094		4,101		1,081		6,006		1,332
Substandard		348		379		4,812		274		8,925		2,942
Doubtful		-		-		-		-		1,236		-
	$	53,735	$	57,339	$	303,527	$	148,083	$	469,247	$	326,379

Consumer Credit Exposure - Credit Risk Profile Based On Payment Activity

(Dollars in thousands)	Consumer				Construction Real Estate				Residential Real Estate
	December 31,		December 31,		December 31,		December 31,		December 31,		December 31,
	2020		2019		2020		2019		2020		2019
Performing	$	34,006	$	38,838	$	16,559	$	13,411	$	191,125	$	216,651
Nonperforming		-		-		-		-		-		-
Nonaccrual		8		16		80		-		1,381		1,331
	$	34,014	$	38,854	$	16,639	$	13,411	$	192,506	$	217,982

Included within the loan categories above were loans in the process of foreclosure. As of December 31, 2020 and 2019, loans in the process of foreclosure totaled $337,000 and $173,000, 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.

The following table provides information on loans that were considered troubled debt restructurings ("TDRs") that were modified during the year ended December 31, 2020. There were no new TDRs in 2019.

	Year Ended December 31, 2020
			Pre-		Post-
			Modification		Modification
			Outstanding		Outstanding
(Dollars in thousands)	Number of		Recorded		Recorded
	Loans		Investment		Investment
Agricultural		1	$	62	$	62
Commercial and Industrial		1		53		53
Commercial Real Estate		3		1,852		1,852
Total		5	$	1,967	$	1,967

The following schedule provides information on TDRs as of December 31, 2020 where the borrower was past due with respect to principal and/or interest for 30 days during the year ended December 31, 2020, which loans had been modified and classified as TDRs during the year prior to the default. There were no TDRs as of December 31, 2019 where the borrower was past due with respect to principal and/or interest for 30 days or more during year ended December 31, 2019, which loans had been modified and classified as TDRs during the year prior to the default.

	Year Ended
	December 31, 2020
(Dollars in thousands)	Number		Recorded
	of Loans		Investment
Commercial Real Estate		2	$	1,666
Total		2	$	1,666

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

Impaired loans by loan category as of December 31 were as follows:

			Unpaid				Average		Interest
(Dollars in thousands)	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
December 31, 2020
With no related allowance recorded
Agricultural	$	348	$	434	$	-	$	329	$	-
Commercial and industrial		1,516		1,629		-		464		2
Consumer		-		-		-		1		-
Construction real estate		80		80		-		16		-
Commercial real estate		1,852		2,664		-		1,495		14
Residential real estate		162		162		-		99		3
Subtotal		3,958		4,969		-		2,404		19
With an allowance recorded
Agricultural		-		-		-		152		-
Commercial and industrial		147		147		19		111		12
Consumer		8		8		1		16		-
Construction real estate		-		-		-		-		-
Commercial real estate		1,180		1,180		157		897		35
Residential real estate		2,558		2,651		254		2,330		87
Subtotal		3,893		3,986		431		3,506		134
Total
Agricultural		348		434		-		481		-
Commercial and industrial		1,663		1,776		19		575		14
Consumer		8		8		1		17		-
Construction real estate		80		80		-		16		-
Commercial real estate		3,032		3,844		157		2,392		49
Residential real estate		2,720		2,813		254		2,429		90
Total	$	7,851	$	8,955	$	431	$	5,910	$	153

			Unpaid				Average		Interest
(Dollars in thousands)	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
December 31, 2019
With no related allowance recorded
Agricultural	$	545	$	545	$	-	$	146	$	10
Commercial and industrial		259		340		-		104		9
Consumer		-		-		-		-		-
Construction real estate		-		-		-		-		-
Commercial real estate		1,882		2,471		-		782		30
Residential real estate		42		42		-		133		4
Subtotal		2,728		3,398		-		1,165		53
With an allowance recorded
Agricultural		379		439		103		388		-
Commercial and industrial		-		-		-		86		1
Consumer		17		18		4		48		-
Construction real estate		-		-		-		-		-
Commercial real estate		406		406		13		975		32
Residential real estate		2,392		2,460		235		2,486		83
Subtotal		3,194		3,323		355		3,983		116
Total
Agricultural		924		984		103		534		10
Commercial and industrial		259		340		-		190		10
Consumer		17		18		4		48		-
Construction real estate		-		-		-		-		-
Commercial real estate		2,288		2,877		13		1,757		62
Residential real estate		2,434		2,502		235		2,619		87
Total	$	5,922	$	6,721	$	355	$	5,148	$	169

			Unpaid				Average		Interest
(Dollars in thousands)	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
December 31, 2018
With no related allowance recorded
Agricultural	$	185	$	185	$	-	$	291	$	-
Commercial and industrial		-		-		-		29		2
Consumer		1		1		-		2		8
Construction real estate		-		-		-		54		-
Commercial real estate		74		109		-		78		30
Residential real estate		250		261		-		177		114
Subtotal		510		556		-		631		154
With an allowance recorded
Agricultural		393		440		94		161		13
Commercial and industrial		21		21		3		296		-
Consumer		88		88		13		59		-
Construction real estate		-		-		-		-		-
Commercial real estate		550		609		20		692		-
Residential real estate		2,462		2,494		167		2,523		6
Subtotal		3,514		3,652		297		3,731		19
Total
Agricultural		578		625		94		452		13
Commercial and industrial		21		21		3		325		2
Consumer		90		90		13		61		8
Construction real estate		-		-		-		54		-
Commercial real estate		623		718		20		770		30
Residential real estate		2,712		2,755		167		2,700		120
Total	$	4,024	$	4,209	$	297	$	4,362	$	173

An aging analysis of loans by loan category as of December 31 follows:

					Loans
	Loans		Loans		Past Due								Loans
	Past Due		Past Due		Greater								90 Days Past
(Dollars in thousands)	30 to 59		60 to 89		Than 90				Loans Not		Total		Due and
	Days (1)		Days (1)		Days (1)		Total (1)		Past Due		Loans		Accruing
December 31, 2020
Agricultural	$	-	$	-	$	-	$	-	$	53,735	$	53,735	$	-
Commercial and industrial		-		109		515		624		302,903		303,527		-
Consumer		39		-		-		39		33,975		34,014		-
Commercial real estate		532		44		1,744		2,320		466,927		469,247		-
Construction real estate		1,076		180		80		1,336		15,303		16,639		-
Residential real estate		1,563		256		352		2,171		190,335		192,506		-
	$	3,210	$	589	$	2,691	$	6,490	$	1,063,178	$	1,069,668	$	-

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

(1) Includes nonaccrual loans

Nonaccrual loans by loan category as of December 31 as follows:

(Dollars in thousands)
	2020		2019
Agricultural	$	348	$	379
Commercial and industrial		1,802		776
Consumer		8		16
Commercial real estate		3,088		2,185
Construction real estate		80		-
Residential real estate		1,381		1,331
	$	6,707	$	4,687

Note 4 – Mortgage Banking

Activity in secondary market loans during the year was as follows:

(Dollars in thousands)
	2020			2019		2018
Loans originated for resale, net of principal payments	$	326,286		$	63,920	$	33,555
Proceeds from loan sales		325,306			62,763		34,872
Net gains on sales of loans held for sale		11,313			1,951		1,003
Loan servicing fees, net of amortization		(129	)		82		91

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 $404.2 million and $242.0 million at December 31, 2020 and 2019, respectively. The Bank maintain custodial escrow balances in connection with these serviced loans; however, such escrows were immaterial at December 31, 2020 and 2019.

Activity for loan servicing rights (included in other assets) was as follows:

(Dollars in thousands)
	2020			2019			2018
Balance, beginning of year	$	2,131		$	1,049		$	908
Capitalized		3,554			822			441
Amortization		(1,344	)		(453	)		(300	)
Market valuation allowance change		(374	)		-			-
Acquired from merger with County Bank Corp.		-			713			-
Balance, end of year	$	3,967		$	2,131		$	1,049

The fair value of loan servicing rights was $3,967,000 and $2,304,000 as of December 31, 2020 and 2019, respectively. Valuation allowances of $373,000 and $0 were recorded at December 31, 2020 and December 31, 2019, respectively. The fair value of the Bank’s servicing rights at December 31, 2020 was determined using a discount rate of 7.75% and prepayment speeds ranging from 7% to 26%. The fair value of the 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’s servicing rights at December 31, 2019 was determined using a discount rate of 8.65% and prepayment speeds ranging from 11% to 13%.

Note 5 – Premises and Equipment

As of December 31, premises and equipment consisted of the following:

(Dollars in thousands)
	2020			2019
Land and land improvements	$	8,753		$	7,576
Leasehold improvements		69			38
Buildings		25,985			20,251
Furniture and equipment		10,687			11,078
Total cost		45,494			38,943
Accumulated depreciation		(16,005	)		(14,678	)
Premises and equipment, net	$	29,489		$	24,265

Depreciation expense was $2,721,000, $1,610,000, and $1,183,000 for 2020, 2019 and 2018, respectively.

The Bank leases certain branch properties and automated-teller machine locations in its normal course of business. Rent expense totaled $83,000, $72,000, and $108,000 for 2020, 2019 and 2018, 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):

2021	$	138
2022		120
2023		75
2024		28
2025		14
Total undiscounted cash flows		375
Less discount		15
Total operating lease liabilities	$	360

Note 6 - Goodwill and Acquired Intangible Assets

Goodwill

The change in the balance for goodwill was as follows:

(Dollars in thousands)	2020			2019
Balance, beginning of year	$	52,870		$	13,728
Acquired goodwill from merger with County Bank Corp.		-			39,142
Goodwill adjustment from merger with County Bank Corp.		(277	)		-
Acquired goodwill from merger with Community Shores Bank Corporation		7,913			-
Balance, end of year	$	60,506		$	52,870

Goodwill is not amortized but is evaluated annually for impairment and on an interim basis if events or changes in circumstances indicate that goodwill might be impaired. The goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount, and an impairment charge would be recognized for any amount by which the carrying amount exceeds the reporting unit's fair value. Accounting pronouncements allow a company to first perform a qualitative assessment for goodwill prior to a quantitative assessment (Step 1 assessment). If the results of the qualitative assessment indicate that it is more likely than not that goodwill is impaired, then a quantitative assessment must be performed. If not, there is no further assessment required. The Company acquired Valley Ridge Financial Corp. in 2006, County in 2019, and Community Shores in 2020, which resulted in the recognition of goodwill of $13.7 million, $38.9 million and $7.9 million, respectively.

As a result of the decline in economic conditions triggered by the COVID-19 pandemic, the market valuations, including ChoiceOne’s stock price, saw a significant decline in March 2020. These events indicated that goodwill may be impaired and resulted in management performing a qualitative goodwill impairment assessment as of the end of the first quarter of 2020. As a result of the analysis, management concluded that it was more-likely-than-not that the fair value of the reporting unit could be greater than its carrying amount. Based on the results of its qualitative analysis, management believed that a quantitative analysis was not necessary as of March 31, 2020.

Management performed its annual qualitative assessment of goodwill as of June 30, 2020. In evaluating whether it is more likely than not that the fair value of ChoiceOne's operations was less than the carrying amount, management assessed the relevant events and circumstances such as the ones noted in ASC 350-20-35-3c. The analysis consisted of a review of ChoiceOne’s current and expected future financial performance, the potential impact of COVID-19 on the ability of ChoiceOne’s borrowers to comply with loan terms, and the impact that reductions in both short-term and long-term interest rates have had and may continue to have on net interest margin and mortgage sales activity. The share price and book value of ChoiceOne’s stock were also compared to the prior year. Management also compared average deal values for recent closed bank transactions to ChoiceOne transactions. Despite ChoiceOne's market capitalization declining slightly from December 2019 to June 2020, ChoiceOne's financial performance remained positive. This was evidenced by the strong financial indicators, solid credit quality ratios, as well as the strong capital position of ChoiceOne. In addition, second quarter 2020 revenue reflected significant and continuing growth in ChoiceOne's residential mortgage banking business, as well as net SBA fees related to Payroll Protection Program ("PPP") loans funded during the second quarter of 2020. In assessing the totality of the events and circumstances, management determined that it was more likely than not that the fair value of the Bank’s operations, from a qualitative perspective, exceeded the carrying value as of June 30, 2020.

Due to the potential impact of COVID-19 and any long term economic fallout that might occur, ChoiceOne engaged a third-party valuation firm to perform a quantitative analysis of goodwill as of November 30, 2020 ("the valuation date"). In deriving at the fair value of the reporting unit (the Bank), the third-party firm assessed general economic conditions and outlook; industry and market considerations and outlook; the impact of recent events to financial performance; the market price of ChoiceOne’s common stock and other relevant events. In addition, the valuation relied on financial projections through 2025 and growth rates prepared by management. Based on the valuation prepared, it was determined that the ChoiceOne's estimated fair value of the reporting unit at the valuation date was greater than its book value and impairment of goodwill was not required.

Management concurred with the conclusion derived from the quantitative goodwill analysis as of the valuation date and determined that there were no material changes and that no triggering events have occurred that indicated impairment from the valuation date through December 31, 2020, and as a result that it is more likely than not that there was no goodwill impairment as of December 31, 2020.

Acquired Intangible Assets

Information for acquired intangible assets at December 31, 2020 follows:

	2020				2019
	Gross				Gross
	Carrying		Accumulated		Carrying		Accumulated
(Dollars in thousands)	Amount		Amortization		Amount		Amortization
Core deposit intangible	$	7,120	$	1,851	$	6,359	$	353

The core deposit intangible from the County and Community Shores mergers is being amortized on a sum-of-the-years digits basis over ten years and eight years, respectively. Amortization expense was $1,498,000 in 2020 and $353,000 in 2019. The estimated amortization expense for the next five years ending December 31 is as follows (dollars in thousands):

2021	$	1,307
2022		1,153
2023		955
2024		757
2025		560
Thereafter		537
Total	$	5,269

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)	2020			2019			2018

Balance, beginning of year	$	929		$	102		$	106
Transfers from loans		391			347			432
Additions from merger		346			1,364			-
Proceeds from sales		(1,384	)		(938	)		(515	)
Write-downs		(80	)		-			-
Gains on sales		64			54			79
Balance, end of year	$	266		$	929		$	102

Included in the balances above were residential real estate mortgage loans of $61,000, $175,000, and $102,000 as of December 31, 2020, 2019, and 2018, respectively, and $205,000 and $754,000 of commercial real estate loans as of December 31, 2020 and December 31, 2019, respectively.

Note 8 – Deposits

Deposit balances as of December 31 consisted of the following:

(Dollars in thousands)	2020		2019

Noninterest-bearing demand deposits	$	477,654	$	287,460
Interest-bearing demand deposits		471,346		236,154
Money market deposits		191,681		263,666
Savings deposits		337,332		206,050
Local certificates of deposit		196,565		158,985
Brokered certificates of deposit		-		2,287
Total deposits	$	1,674,578	$	1,154,602

Scheduled maturities of certificates of deposit at December 31, 2020 were as follows:

(Dollars in thousands)

2021	$	156,612
2022		22,001
2023		9,790
2024		4,181
2025		3,656
Thereafter		325
Total	$	196,565

The Bank had certificates of deposit issued in denominations of $250,000 or greater totaling $88.2 million and $68.3 million at December 31, 2020 and 2019, respectively. The Bank held $0 in brokered certificates of deposit at December 31, 2020, compared to $2.3 million at December 31, 2019. In addition, the Bank had $12.7 million and $7.1 million of certificates of deposit as of December 31, 2020, and December 31, 2019, respectively, that had been issued through the Certificate of Deposit Account Registry Service (CDARS).

Note 9 – Borrowings

Federal Home Loan Bank Advances

At December 31, advances from the FHLB were as follows:

(Dollars in thousands)	2020		2019

Maturity of November 2024 with fixed interest rate of 3.98%	$	161	$	198
Maturity of April 2020 with floating interest rate of 1.99%		-		10,000
Maturity of May 2020 with fixed interest rate of 2.16%		-		23,000
Total advances outstanding at year-end	$	161	$	33,198

Fees are charged on fixed rate advances that are paid prior to maturity. No fixed rate advances were paid prior to maturity in 2020 or 2019. Advances were secured by agricultural loans and residential real estate loans with a carrying value of approximately $158.2 million and $200.1 million at December 31, 2020 and December 31, 2019, respectively. Based on this collateral, the Bank was eligible to borrow an additional $85.6 million at year-end 2020.

The scheduled maturities of advances from the FHLB at December 31, 2020 were as follows:

(Dollars in thousands)

2021	$	39
2022		40
2023		42
2024		40
Total	$	161

Holding Company Term Loan

ChoiceOne obtained a $10,000,000 term note in June 2020. Part of the proceeds from the note were used to fund the cash portion of the consideration paid in the Community Shores merger. The note matures June 2023 with quarterly principal and interest payments. The note carries a floating rate of 2.50% over the 1-month LIBOR with a floor of 3.00%. At December 31, 2020 the effective rate was 3.00%. All or part of the note can be prepaid at any time. The agreement includes certain financial covenants, including minimum capital ratios, asset quality ratios, and achieving certain profitability thresholds. ChoiceOne was in compliance with all covenants as of December 31, 2020.

At December 31, information regarding the holding company term loan was as follows:

(Dollars in thousands)	2020		2019

Maturity of June 2023 with floating interest rate of 3.00%	$	9,167	$	-

The scheduled maturities of the holding company term note at December 31, 2020 were as follows:

(Dollars in thousands)

2021	$	3,333
2022		3,334
2023		2,500
Total	$	9,167

Note 10 – Subordinated Debentures

The Capital Trust, as discussed in Note 1, sold 4,500 Cumulative Preferred Securities (“trust preferred securities”) at $1,000 per security in a December 2004 offering. The proceeds from the sale of the trust preferred securities were used by the Capital Trust to purchase an equivalent amount of subordinated debentures from Community Shores. The trust preferred securities and subordinated debentures carry a floating rate of 2.05% over the 3-month LIBOR and the rate was 2.29% at December 31, 2020 and 4.01% at December 31, 2019. The stated maturity is December 30, 2034. The trust preferred securities are redeemable at par value on any interest payment date and are, in effect, guaranteed by ChoiceOne. Interest on the subordinated debentures is payable quarterly on March 30, June 30, September 30 and December 30. ChoiceOne is not considered the primary beneficiary of the Capital Trust (under the variable interest entity rules), therefore the Capital Trust is not consolidated in the consolidated financial statements, rather the subordinated debentures are shown as a liability, and the interest expense is recorded in the consolidated statement of income.

The terms of the subordinated debentures, the trust preferred securities and the agreements under which they were issued give ChoiceOne the right, from time to time, to defer payment of interest for up to 20 consecutive quarters, unless certain specified events of default have occurred and are continuing. The deferral of interest payments on the subordinated debentures results in the deferral of distributions on the trust preferred securities.

On April 27, 2016, Community Shores’ Board of Directors voted to defer regularly scheduled interest payments beginning with the payment scheduled to be made on June 30, 2016 in order to preserve its cash for general operations and potential capital support for Community Shores Bank as it grew. The deferral of interest did not constitute an event of default. ChoiceOne paid all deferred interest due as of December 30, 2020. As a result, the accrued and unpaid interest owed on the subordinated debentures was $0 as of December 31, 2020, compared to $708,034 as of December 31, 2019.

Note 11 – Income Taxes

Information as of December 31 and for the year follows:

(Dollars in thousands)
	2020			2019			2018
Provision for Income Taxes
Current federal income tax expense	$	3,070		$	984		$	946
Deferred federal income tax expense/(benefit)		202			310			209
Income tax expense	$	3,272		$	1,294		$	1,155

Reconciliation of Income Tax Provision to Statutory Rate
Income tax computed at statutory federal rate of 21%	$	3,966		$	1,778		$	1,783
Tax exempt interest income		(574	)		(320	)		(309	)
Tax exempt earnings on bank-owned life insurance		(162	)		(162	)		(81	)
Tax credits		(240	)		(218	)		(154	)
Nondeductible merger expenses		182			164			-
Other items		100			52			(84	)
Income tax expense	$	3,272		$	1,294		$	1,155

Effective income tax rate		17	%		15	%		14	%

(Dollars in thousands)

Components of Deferred Tax Assets and Liabilities	2020			2019
Deferred tax assets:
Purchase accounting adjustments from mergers with County
and Community Shores	$	1,953		$	1,129
Allowance for loan losses		1,595			585
Net operating loss carryforward		851			-
Deferred loan fees		466			301
Write-downs of other real estate owned		326			169
Other		380			198
Total deferred tax assets		5,571			2,382

Deferred tax liabilities:
Unrealized gains on securities available for sale		2,931			360
Purchase accounting adjustments from mergers with County
and Community Shores		1,403			1,285
Loan servicing rights		833			447
Depreciation		653			778
Interest rate lock commitments		177			14
Other		230			221
Total deferred tax liabilities		6,227			3,105
Net deferred tax liability	$	(656	)	$	(723	)

As of December 31, 2020, deferred tax assets included federal net operating loss carryforwards of approximately $4.1 million which was acquired through the merger with Community Shores. The loss carryforwards expire at various dates from 2032 to 2036. Deferred tax assets are recognized for net operating losses because the benefit is more likely than not to be realized. Under Internal Revenue Service limitations, ChoiceOne is limited to applying approximately $185,000 of net operating losses per year.

Note 12 – Related Party Transactions

Loans to executive officers, directors and their affiliates were as follows at December 31:

(Dollars in thousands)	2020			2019

Balance, beginning of year	$	10,563		$	5,343
New loans		12,211			2,988
Repayments		(5,125	)		(3,372	)
Effect of changes in related parties		-			(4,664	)
Loans acquired from merger		3,075			10,268
Balance, end of year	$	20,724		$	10,563

Deposits from executive officers, directors and their affiliates were $14.7 million and $9.0 million at December 31, 2020 and 2019, 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 $465,000, $233,000, and $207,000 in 2020, 2019, and 2018, respectively.

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. Effective in December 2020, ChoiceOne curtailed the plan to the extent that it would be no longer offered to future retirees. Current retirees receiving the benefit were not affected. As a result of the curtailment, ChoiceOne realized a recovery of post-retirement benefit expense of $222,000 in 2020, compared to recoveries of $14,000 and $12,000 in 2019 and 2018, respectively. The post-retirement obligation liability was $10,000 as of December 31, 2020 and $107,000 as of December 31, 2019.

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 $1,000, $3,000, and $5,000 in 2020, 2019, and 2018, respectively. The deferred compensation liability was $8,000 as of December 31, 2020 and $33,000 as of December 31, 2019.

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 $17,000, $26,000, and $6,000 in 2020, 2019, and 2018, respectively. Liabilities related to the supplemental executive retirement plan of $306,000 and $368,000 were outstanding as of December 31, 2020 and December 31, 2019, respectively.

A supplemental executive retirement plan covered one former executive officer and one current executive officer of Lakestone. 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 was accrued for the obligation under this plan. The liability was paid in the first quarter of 2020. The liability related to this plan was $0 and $337,000 as of December 31, 2020 and December 31, 2019, respectively.

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 $15,000 in 2020, $53,000 in 2019, and $38,000 in 2018. 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, 2020, there were 92,482 shares available for future grants.

A summary of stock options activity during the year ended December 31, 2020 was as follows:

				Weighted		Weighted
				average		average
				exercise		Grant Date
	Shares			price		Fair Value

Options outstanding at January 1, 2020		57,748		$	23.39	$	3.36
Options granted		-			-
Options exercised		(35,617	)		22.33		3.31
Options forfeited or expired		(1,500	)		27.25		3.64
Options outstanding, end of year		20,631		$	25.30	$	3.46


Options exercisable at December 31, 2020		8,631		$	22.60	$	3.22

The exercise prices for options outstanding and exercisable at the end of 2020 ranged from $20.86 to $27.25 per share. The weighted average remaining contractual life of options outstanding and exercisable at the end of 2020 was approximately 6.4 years.

The intrinsic value of all outstanding stock options and exercisable stock options was $82,000 and $71,000 respectively, at December 31, 2020 and December 31, 2019. The aggregate intrinsic values of outstanding and exercisable options at December 31, 2020 were calculated based on the closing market price of the Company’s common stock on December 31, 2020 of $30.81 per share less the exercise price. The grant date fair value of stock options granted in 2019 was $49,000.

Information pertaining to options outstanding at December 31, 2020 was as follows:

Exercise price of stock options:		Number of options outstanding at year-end		Number of options exercisable at year-end		Average remaining contractual life (in years)
$	27.25		12,000		-		8.45
$	25.65		3,000		3,000		7.53
$	20.86		3,306		3,306		6.38
$	21.13		2,325		2,325		5.03

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, 2020, there was $19,000 in unrecognized compensation expense related to stock options.

There were no stock options granted in 2020.

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 $157,000, $349,000, and $244,000 in 2020, 2019, and 2018, respectively, in connection with restricted stock units for current participants during these years.

A summary of the activity for restricted stock units outstanding during the year ended December 31, 2020 is presented below:

Outstanding Stock Awards	Shares			Per Share
Outstanding at January 1, 2020		9,000		$	27.25
Granted		10,539			29.00
Vested		(550	)		28.05
Forfeited		-			-
Outstanding at December 31, 2020		18,989		$	28.20

At December 31, 2020, there were 18,989 restricted stock units outstanding with an approximate stock value of $585,000 based on ChoiceOne’s December 31, 2020 stock price. 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. As a result of the merger with County, all unvested stock awards granted prior to October 1, 2019 vested upon completion of the merger. The grant date fair value of stock issued was $306,000 and $270,000 in 2020 and 2019, respectively. The cost is expected to be recognized over a weighted average period of 1.84 years. As of December 31, 2020, there was $337,000 of unrecognized compensation cost related to unvested shares granted.

Note 15 - Earnings Per Share

(Dollars in thousands, except share data)
	2020		2019		2018
Basic
Net income	$	15,613	$	7,171	$	7,333

Weighted average common shares outstanding		7,521,771		4,528,786		3,614,302

Basic earnings per common shares	$	2.08	$	1.58	$	2.03

Diluted
Net income	$	15,613	$	7,171	$	7,333

Weighted average common shares outstanding		7,521,771		4,528,786		3,614,302
Plus dilutive stock options and restricted stock units		9,846		10,489		13,825

Weighted average common shares outstanding and potentially dilutive shares		7,531,617		4,539,275		3,628,127

Diluted earnings per common share	$	2.07	$	1.58	$	2.02

Per share amounts have been adjusted for the 5% stock dividends paid on May 31, 2018.

Stock options considered anti-dilutive to earnings per share were 0, 0, and 15,000 as of December 31, 2020, December 31, 2019, and December 31, 2018, respectively. This calculation is based on the average stock price during the year.

Note 16 – Condensed Financial Statements of Parent Company

Condensed Balance Sheets

(Dollars in thousands)	December 31,
	2020		2019
Assets
Cash	$	11,939	$	991
Equity securities at fair value		1,884		1,840
Securities available for sale		-		959
Other assets		292		468
Investment in subsidiaries		228,895		189,578
Total assets	$	243,010	$	193,836

Liabilities
Term loan	$	9,167	$	-
Trust preferred securities		3,089		-
Other liabilities		3,486		1,697
Total liabilities		15,742		1,697

Shareholders' equity		227,268		192,139
Total liabilities and shareholders’ equity	$	243,010	$	193,836

Condensed Statements of Income

(Dollars in thousands)	Years Ended December 31,
	2020			2019			2018
Interest income
Interest and dividends from ChoiceOne Bank	$	12,942		$	4,011		$	2,800
Interest and dividends from other securities		13			50			47
Total interest income		12,955			4,061			2,847

Interest expense
Borrowings		239			-			-

Net interest income		12,716			4,061			2,847

Noninterest income
Gains on sales of securities		26			8			9
Change in market value of equity securities		(155	)		(114	)		184
Total noninterest income		(129	)		(106	)		193

Noninterest expense
Salaries and benefits		1,201			339			-
Professional fees		1,093			1,517			-
Other		217			492			144
Total noninterest expense		2,511			2,348			144

Income before income tax and equity in undistributed net income of subsidiary		10,076			1,607			2,896
Income tax (expense)/benefit		431			261			(14	)
Income before equity in undistributed net income of subsidiary		10,507			1,868			2,882
Equity in undistributed net income of subsidiary		5,106			5,303			4,451
Net income	$	15,613		$	7,171		$	7,333

Condensed Statements of Cash Flows

(Dollars in thousands)	Years Ended December 31,
	2020			2019			2018
Cash flows from operating activities:
Net income	$	15,613		$	7,171		$	7,333
Adjustments to reconcile net income to net cash from operating activities:
Equity in undistributed net income of subsidiary		(5,106	)		(5,303	)		(4,451	)
Amortization		51			14			18
Compensation expense on employee and director stock purchases, stock options, and restricted stock units		488			359			331
Net gain on sale of securities		(26	)		(8	)		(9	)
Change in market value of equity securities		155			114			(184	)
Changes in other assets		582			(344	)		66
Changes in other liabilities		551			1,485			(19	)
Net cash from operating activities		12,308			3,488			3,085

Cash flows from investing activities:
Sales of securities		958			1,102			91
Purchases of securities		(200	)		-			-
Cash acquired from mergers with Community Shores Bank Corporation and County Bank Corp.		142			1,038			-
Net cash from investing activities		900			2,140			91

Cash flows from financing activities:
Issuance of common stock		134			142			77
Repurchase of common stock		-			(67	)		(523	)
Proceeds from borrowings		10,000			-			-
Payments on borrowings		(833	)		-			-
Cash used as part of equity issuance for merger		(5,387	)		(297	)		-
Cash dividends paid		(6,174	)		(5,815	)		(2,579	)
Net cash from financing activities		(2,260	)		(6,037	)		(3,025	)

Net change in cash		10,948			(409	)		151
Beginning cash		991			1,400			1,249
Ending cash	$	11,939		$	991		$	1,400

Note 17 – Financial Instruments

Financial instruments as of the dates indicated were as follows:

					Quoted Prices
					In Active		Significant
					Markets for		Other		Significant
					Identical		Observable		Unobservable
(Dollars in thousands)	Carrying		Estimated		Assets		Inputs		Inputs
	Amount		Fair Value		(Level 1)		(Level 2)		(Level 3)
December 31, 2020
Assets
Cash and cash equivalents	$	79,519	$	79,519	$	79,519	$	-	$	-
Equity securities at fair value		2,896		2,896		1,411		-		1,485
Securities available for sale		574,787		574,787		-		563,364		11,423
Federal Home Loan Bank and Federal Reserve Bank stock		8,004		8,004		-		8,004		-
Loans held for sale		12,921		13,350		-		13,350		-
Loans to other financial institutions		35,209		35,209		-		35,209		-
Loans, net		1,062,075		1,057,786		-		-		1,057,786
Accrued interest receivable		6,521		6,521		-		6,521		-
Interest rate lock commitments		842		842		-		842		-

Liabilities
Noninterest-bearing deposits		477,654		477,654		-		477,654		-
Interest-bearing deposits		1,196,924		1,197,964		-		1,197,964		-
Borrowings		9,327		9,143		-		9,143		-
Subordinated debentures		3,089		3,089		-		3,089		-
Accrued interest payable		183		183		-		183		-

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

Liabilities
Noninterest-bearing deposits		287,460		287,460		-		287,460		-
Interest-bearing deposits		867,142		867,154		-		867,154		-
Borrowings		33,198		33,243		-		33,243		-
Accrued interest payable		411		411		-		411		-

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.

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, 2020 and December 31, 2019, 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, 2019 or December 31, 2020. Disclosures concerning assets measured at fair value are as follows:

Assets Measured at Fair Value on a Recurring Basis

	Quoted Prices
	In Active		Significant
	Markets for		Other		Significant
	Identical		Observable		Unobservable
(Dollars in thousands)	Assets		Inputs		Inputs		Balance at
	(Level 1)		(Level 2)		(Level 3)		Date Indicated
Equity Securities Held at Fair Value - December 31, 2020
Equity securities	$	1,411	$	-	$	1,485	$	2,896

Investment Securities, Available for Sale - December 31, 2020
U. S. Government and federal agency	$	-	$	2,051	$	-	$	2,051
U. S. Treasury notes and bonds		-		2,056		-		2,056
State and municipal		-		309,945		10,423		320,368
Mortgage-backed		-		246,723		-		246,723
Corporate		-		2,589		-		2,589
Trust preferred securities		-		-		1,000		1,000
Total	$	-	$	563,364	$	11,423	$	574,787

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

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

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)
	2020		2019
Equity Securities Held at Fair Value
Balance, January 1	$	1,472	$	886
Total realized and unrealized gains included in noninterest income		13		114
Net purchases, sales, calls, and maturities		-		-
Net transfers into Level 3		-		-
Acquired from merger with County Bank Corp.		-		472
Balance, December 31	$	1,485	$	1,472

Investment Securities, Available for Sale
Balance, January 1	$	12,367	$	8,498
Total realized and unrealized gains included in income		-		-
Total unrealized gains/(losses) included in other comprehensive income		512		210
Net purchases, sales, calls, and maturities		(1,456)		1,375
Net transfers into Level 3		-		-
Acquired from merger with County Bank Corp.		-		2,284
Balance, December 31	$	11,423	$	12,367

Of the Level 3 assets that were still held by the Company at December 31, 2020, the net unrealized gain as of December 31, 2020 was $889,000, compared to $324,000 as of December 31, 2019. The change in the net unrealized gain or loss 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 $1,642,000 and $2,091,000 of Level 3 securities were purchased in 2020 and 2019, respectively. In addition, Level 3 securities totaling $2,756,000 were obtained in 2019 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:

Assets Measured at Fair Value on a Non-recurring Basis

			Quoted Prices
			In Active		Significant
			Markets for		Other		Significant
	Balances at		Identical		Observable		Unobservable
(Dollars in thousands)	Dates		Assets		Inputs		Inputs
	Indicated		(Level 1)		(Level 2)		(Level 3)
Impaired Loans
December 31, 2020	$	7,851	$	-	$	-	$	7,851
December 31, 2019	$	5,922	$	-	$	-	$	5,922

Other Real Estate
December 31, 2020	$	266	$	-	$	-	$	266
December 31, 2019	$	929	$	-	$	-	$	929

Mortgage Loan Servicing Rights
December 31, 2020	$	3,967	$	-	$	3,967	$	-
December 31, 2019	$	2,131	$	-	$	2,131	$	-

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:

	2020				2019
	Fixed		Variable		Fixed		Variable
(Dollars in thousands)	Rate		Rate		Rate		Rate

Unused lines of credit and letters of credit	$	48,622	$	231,667	$	38,064	$	177,447
Commitments to fund loans (at market rates)		10,691		3,954		18,216		4,580

Commitments to fund loans are generally made for periods of 180 days or less. The fixed rate loan commitments have interest rates ranging from 2.25% to 6.50% and maturities ranging from 1 year to 30 years.

Note 20 – Regulatory Capital

ChoiceOne and the Bank 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 2020 and 2019, the Bank was categorized as well capitalized under the regulatory framework for prompt corrective action.

Actual capital levels and minimum required levels for ChoiceOne and the Bank were as follows:

							Minimum Required
							to be Well
				Minimum Required			Capitalized Under
				for Capital			Prompt Corrective
(Dollars in thousands)	Actual			Adequacy Purposes			Action Regulations
	Amount	Ratio		Amount	Ratio		Amount	Ratio
December 31, 2020
ChoiceOne Financial Services Inc.
Total capital (to risk weighted assets)	$ 162,558	13.2	%	$ 98,835	8.0	%	N/A	N/A
Common equity Tier 1 capital (to risk weighted assets)	150,465	12.2		55,595	4.5		N/A	N/A
Tier 1 capital (to risk weighted assets)	150,465	12.2		74,126	6.0		N/A	N/A
Tier 1 capital (to average assets)	150,465	8.3		72,281	4.0		N/A	N/A

ChoiceOne Bank
Total capital (to risk weighted assets)	$ 159,684	12.9	%	$ 98,683	8.0	%	$ 123,353	10.0	%
Common equity Tier 1 capital (to risk weighted assets)	152,091	12.3		55,509	4.5		80,180	6.5
Tier 1 capital (to risk weighted assets)	152,091	12.3		74,012	6.0		98,683	8.0
Tier 1 capital (to average assets)	152,091	8.4		72,208	4.0		90,259	5.0

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

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

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

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, 2020, approximately $14.9 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 Bank, which is restricted by state law and regulations.

Note 21 – Business Combination

Community Shores Bank Corporation

ChoiceOne completed the acquisition of Community Shores Bank Corporation (“Community Shores”) effective on July 1, 2020. Community Shores had 4 branch offices as of the date of the merger. Total assets of Community Shores as of July 1, 2020 were $244.0 million, including total loans of $174.0 million. Deposits acquired in the merger, the majority of which were core deposits, totaled $227.8 million. The impact of the merger has been included in ChoiceOne’s results of operations since the effective date of the merger. As consideration in the merger, ChoiceOne issued 524,055 shares of ChoiceOne common stock and paid cash in the amount of $5,390,000, with an approximate aggregate value of $20.9 million. The initial accounting for the business combination has been determined provisionally for the fair value of certain assets and liabilities, including loans, core deposit intangible, and deferred taxes. Management expects to finalize calculations supporting the fair value of these assets and liabilities during the measurement period. Subsequent to the effective date of the merger, Community Shores Bank was consolidated into ChoiceOne Bank in October 2020.

Acquisition costs related to the merger amounted to $3.2 million, all of which was expensed. The transaction created $7.9 million of goodwill, none of which is deductible for tax purposes.

As the transaction became effective on July 1, 2020, only earnings related to the period from July 1, 2020 through December 31, 2020 were included in ChoiceOne’s income for the year ended December 31, 2020. These earnings amounted to $1,041,000 for the year ended December 31, 2020.

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

*Purchase Price*

Consideration	$	20,881

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

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

Net assets acquired		12,968

Goodwill	$	7,913

The following table provides the unaudited pro forma information for the results of operations for the twelve months ended December 31, 2020 and 2019, as if the merger with Community Shores had occurred on January 1, 2019. These adjustments reflect the impact of certain purchase accounting fair value measurements, primarily on the loan and deposit portfolios of Community. 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 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)
	2020		2019
Net interest income	$	54,357	$	51,266
Noninterest income		23,462		14,722
Noninterest expense		55,182		49,865
Net income		15,257		14,250
Net income per diluted share		1.96		1.83

County Bank Corp.

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 were 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 with an approximate value of $108 million. ChoiceOne recorded a preliminary deposit based intangible of $6.4 million and goodwill of $39.1 million. Subsequent to the preliminary fair value accounting, management finalized accounting for acquired loans and deferred taxes. As a result, the acquisition date fair value of loans was decreased by approximately $200,000, other liabilities were decreased by approximately $500,000, and goodwill was decreased by approximately $300,000. Adjusted goodwill related to the merger with County was $38.9 million. Subsequent to the effective date of the merger, Lakestone Bank & Trust was consolidated into ChoiceOne Bank in May 2020.

Acquisition costs related to the merger amounted to $2.4 million, of which $2.1 million was expensed and $297,000 was netted against stock issuance costs. The transaction created $38.9 million of goodwill, none of which is deductible for tax purposes.

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

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

Net assets acquired		69,079

Goodwill	$	38,866

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 County’s or Community Shores' previously established allowance for loan losses.

Note 22 – Quarterly Financial Data (Unaudited)

			Net				Earnings Per Share
(Dollars in thousands, except per share data)	Interest		Interest		Net				Fully
	Income		Income		Income		Basic		Diluted
2020
First Quarter	$	12,662	$	11,138	$	3,254	$	0.45	$	0.45
Second Quarter		12,863		11,879		4,430		0.61		0.61
Third Quarter		15,150		14,062		3,829		0.49		0.49
Fourth Quarter		15,040		13,992		4,100		0.53		0.52

2019
First Quarter	$	6,477	$	5,496	$	1,637	$	0.45	$	0.45
Second Quarter		6,554		5,501		1,486		0.41		0.41
Third Quarter		6,561		5,570		1,021		0.28		0.28
Fourth Quarter		12,881		11,206		3,027		0.44		0.44

The growth in interest income and net interest income in the first two quarters of 2020 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 third and fourth quarters of 2020 resulted primarily from the merger with County. The increase that occurred during 2019 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.

PART III

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, 2021, 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, 2021, is incorporated herein by reference.

PART IV

Item 15.

Exhibits and Financial Statement Schedules

(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, 2020 and 2019.

			Consolidated Statements of Income for the years ended December 31, 2020, 2019, and 2018.

			Consolidated Statement of Comprehensive Income for the years ended December 31, 2020, 2019, and 2018.

			Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2020, 2019, and 2018.

			Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019, and 2018.

			Notes to Consolidated Financial Statements.

			Report of Independent Registered Public Accounting Firm dated March 30, 2021.

	(2)	Financial Statement Schedules. None.

Exhibit		Document

23		Consent of Independent Registered Public Accounting Firm.

31.1		Certification of Chief Executive Officer.

31.2		Certification of Treasurer.

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

101.INS	Inline XBRL Instance Document (the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)

101.SCH	Inline XBRL Taxonomy Extension Schema Document

101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document

104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

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.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this amendment to be signed on its behalf by the undersigned, thereunto duly authorized.

	ChoiceOne Financial Services, Inc.

By:	/s/ Kelly J. Potes	April 21, 2021
	Kelly J. Potes Chief Executive Officer

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