Quarterly Report (10-q)

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

FORM 10-Q

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

	For the quarterly period ended March 31, 2021

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

	For the transition period from to

Commission File Number: 000-19202

ChoiceOne Financial Services, Inc.

(Exact Name of Registrant as Specified in its Charter)

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

109 East Division Sparta, Michigan (Address of Principal Executive Offices)	49345 (Zip Code)

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

Indicate by 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer ☐

Non-accelerated filer ☒	Smaller reporting company ☒

Emerging growth company ☐

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

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common stock	COFS	NASDAQ Capital Market

As of April 30, 2021, the Registrant had outstanding 7,806,482 shares of common stock.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

ChoiceOne Financial Services, Inc.
CONSOLIDATED BALANCE SHEETS

	March 31,			December 31,
(Dollars in thousands)	2021			2020
	(Unaudited)			(Audited)
Assets
Cash and due from banks	$	134,978		$	79,169
Time deposits in other financial institutions		350			350
Cash and cash equivalents		135,328			79,519

Equity securities at fair value (Note 2)		3,804			2,896
Securities available for sale (Note 2)		722,627			574,787
Federal Home Loan Bank stock		3,824			3,824
Federal Reserve Bank stock		4,180			4,180
Loans held for sale		18,736			12,921
Loans to other financial institutions		7,312			35,209
Loans (Note 3)		1,035,083			1,069,668
Allowance for loan losses (Note 3)		(7,740	)		(7,593	)
Loans, net		1,027,343			1,062,075

Premises and equipment, net		29,870			29,489
Other real estate owned, net		123			266
Cash value of life insurance policies		32,938			32,751
Goodwill		59,946			60,506
Core deposit intangible		4,961			5,269
Other assets		19,111			15,650
Total assets	$	2,070,103		$	1,919,342

Liabilities
Deposits – noninterest-bearing	$	515,552		$	477,654
Deposits – interest-bearing		1,324,412			1,196,924
Total deposits		1,839,964			1,674,578
Borrowings		3,484			9,327
Subordinated debentures		3,115			3,089
Other liabilities		4,901			5,080
Total liabilities		1,851,464			1,692,074

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: 7,802,285 at March 31, 2021 and 7,796,352 at December 31, 2020		178,993			178,750
Retained earnings		42,012			37,490
Accumulated other comprehensive income, net		(2,366	)		11,028
Total shareholders’ equity		218,639			227,268
Total liabilities and shareholders’ equity	$	2,070,103		$	1,919,342

See accompanying notes to interim consolidated financial statements.

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

	Three Months Ended
(Dollars in thousands, except per share data)	March 31,
	2021		2020
Interest income
Loans, including fees	$	12,682	$	10,075
Securities:
Taxable		1,856		1,857
Tax exempt		1,097		368
Other		20		194
Total interest income		15,655		12,494

Interest expense
Deposits		880		1,385
Advances from Federal Home Loan Bank		1		136
Other		86		2
Total interest expense		967		1,523

Net interest income		14,688		10,971
Provision for loan losses		250		775
Net interest income after provision for loan losses		14,438		10,196

Noninterest income
Customer service charges		1,920		1,845
Insurance and investment commissions		273		126
Gains on sales of loans		2,146		1,743
Net gains (losses) on sales of securities		1		2
Net gains on sales and write-downs of other assets		5		2
Earnings on life insurance policies		186		192
Trust income		172		170
Change in market value of equity securities		608		(389	)
Other		289		408
Total noninterest income		5,600		4,099

Noninterest expense
Salaries and benefits		7,168		5,128
Occupancy and equipment		1,555		1,270
Data processing		1,429		1,484
Professional fees		729		762
Supplies and postage		100		225
Advertising and promotional		145		148
Intangible amortization		307		353
FDIC insurance		152		68
Other		943		978
Total noninterest expense		12,528		10,416

Income before income tax		7,510		3,879
Income tax expense		1,272		625

Net income	$	6,238	$	3,254

Basic earnings per share (Note 4)	$	0.80	$	0.45
Diluted earnings per share (Note 4)	$	0.80	$	0.45
Dividends declared per share	$	0.22	$	0.20

See accompanying notes to interim consolidated financial statements.

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

	Three Months Ended
(Dollars in thousands)	March 31,
	2021			2020
Net income	$	6,238		$	3,254

Other comprehensive income:
Changes in net unrealized gains(losses) on investment securities available for sale, net of tax benefit of $3,560 and expense of $458 for the three months ended March 31, 2021 and March 31, 2020, respectively.		(13,393	)		1,725

Reclassification adjustment for realized (gain) loss on sale of investment securities available for sale included in net income, net of tax expense of $0 and $0 for the three months ended March 31, 2021 and March 31, 2020, respectively.		(1	)		(2	)

Other comprehensive income (loss), net of tax		(13,394	)		1,723

Comprehensive income	$	(7,156	)	$	4,977

See accompanying notes to interim consolidated financial statements.

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

For the three months ended March 31

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

Net income						3,254						3,254
Other comprehensive income									1,723			1,723
Shares issued		3,656		106								106
Effect of employee stock purchases				4								4
Stock options exercised and issued (1)		789		-								-
Stock-based compensation expense				25								25
Cash dividends declared ($0.20 per share)						(1,449	)					(1,449	)

Balance, March 31, 2020		7,249,533	$	162,745	$	29,856		$	3,201		$	195,802


Balance, January 1, 2021		7,796,352	$	178,750	$	37,490		$	11,028		$	227,268

Net income						6,238						6,238
Other comprehensive income									(13,394	)		(13,394	)
Shares issued		4,732		175								175
Effect of employee stock purchases		1,201		4								4
Stock-based compensation expense				64								64
Cash dividends declared ($0.22 per share)						(1,716	)					(1,716	)

Balance, March 31, 2021		7,802,285	$	178,993	$	42,012		$	(2,366	)	$	218,639

(1) The amount shown represents the number of shares issued upon exercise of options, net of shares withheld for payment of certain taxes.

See accompanying notes to interim consolidated financial statements.

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

	Three Months Ended
(Dollars in thousands)	March 31,
	2021			2020
Cash flows from operating activities:
Net income	$	6,238		$	3,254
Adjustments to reconcile net income to net cash from operating activities:
Provision for loan losses		250			775
Depreciation		646			563
Amortization		1,949			718
Compensation expense on employee and director stock purchases, stock options, and restricted stock units		214			112
Net gains on sales of securities		(1	)		(2	)
Net change in market value of equity securities		(608	)		389
Gains on sales of loans		(2,146	)		(1,743	)
Loans originated for sale		(72,727	)		(32,372	)
Proceeds from loan sales		68,637			29,614
Earnings on bank-owned life insurance		(186	)		(192	)
(Gains)/losses on sales of other real estate owned		(4	)		-
Proceeds from sales of other real estate owned		270			64
Costs capitalized to other real estate		-			(19	)
Deferred federal income tax (benefit)/expense		506			(281	)
Net change in:
Other assets		(3,952	)		(3,354	)
Other liabilities		3,124			(17	)
Net cash (used in)/provided by operating activities		2,210			(2,491	)

Cash flows from investing activities:
Maturities, prepayments and calls of securities available for sale		12,918			9,633
Purchases of securities available for sale		(179,221	)		(29,954	)
Loan originations and payments, net		63,084			1,776
Additions to premises and equipment		(1,038	)		(412	)
Net cash (used in)/provided by investing activities		(104,257	)		(18,957	)

Cash flows from financing activities:
Net change in deposits		165,386			18,797
Payments on borrowings		(5,843	)		(10,010	)
Issuance of common stock		29			23
Cash dividends		(1,716	)		(1,449	)
Net cash provided by/(used in) financing activities		157,856			7,361

Net change in cash and cash equivalents		55,809			(14,087	)
Beginning cash and cash equivalents		79,519			59,558

Ending cash and cash equivalents	$	135,328		$	45,471

Supplemental disclosures of cash flow information:
Cash paid for interest	$	1,021		$	1,508
Cash paid for income taxes		-			42
Loans transferred to other real estate owned		123			-

See accompanying notes to interim consolidated financial statements.

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

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Explanatory Note

On July 1, 2020, ChoiceOne Financial Services, Inc. (“ChoiceOne” or the “Company”) 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 periods ending after July 1, 2020 include the impact of the merger.

For additional details regarding the merger with Community Shores and the merger of County Bank Corp. ("County") with and into ChoiceOne, see Note 8 (Business Combination) of the Notes to the Consolidated Financial Statements included in this report.

Principles of Consolidation

The consolidated financial statements include ChoiceOne Financial Services, Inc. ("ChoiceOne"), its wholly-owned subsidiary, 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.

ChoiceOne owns all of the common securities of Community Shores Capital Trust I (the “Capital 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.

The accompanying unaudited consolidated financial statements and notes thereto reflect all adjustments ordinary in nature which are, in the opinion of management, necessary for a fair presentation of the Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020, the Consolidated Statements of Income for the three-month periods ended March 31, 2021 and March 31, 2020, the Consolidated Statements of Comprehensive Income for the three-month periods ended March 31, 2021 and March 31, 2020, the Consolidated Statements of Changes in Shareholders’ Equity for the three-month periods ended March 31, 2021 and March 31, 2020, and the Consolidated Statements of Cash Flows for the three-month periods ended March 31, 2021 and March 31, 2020. Operating results for the three months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.

The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in ChoiceOne’s Annual Report on Form 10-K for the year ended December 31, 2020.

Use of Estimates

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

Loans to Other Financial Institutions

ChoiceOne Bank entered into an agreement with another financial institution to fund mortgage loans. Loans to other financial institutions are purchased participating interests in individual advances made to mortgage bankers nation-wide from an unaffiliated originating bank. The originating bank services these loans and cash flows on the individual advances (principal, interest, and fees) which are allocated pro-rata based on ownership in the participating interest, less fees paid for the servicing activity. The underlying collateral is generally made up of 1-4 family first residential mortgages owned by the mortgage banker and held for sale in the secondary market and have been underwritten using secondary market underwriting standards prior to purchasing the participating interest. Once the mortgage banker delivers the loan to the secondary market, the advance is required to be paid off, including ChoiceOne Bank’s participating interest. If the advance (in which ChoiceOne Bank has a participating interest) is outstanding over 90 days, the originating bank has the right to request the participating interest be paid off by the mortgage banker. The participating interests are subject to concentration risk to 14 different mortgage banks, with the largest creditor outstanding representing 22% of the total at March 31, 2021.

Credit risk associated with the participating interest is measured as an allowance for loan losses when necessary. Losses are charged off against the allowance when incurred and recoveries of loan charge-offs are recorded when received. At least quarterly, ChoiceOne Bank reviews the portfolios of participating interests for potential losses including any participating interest that is outstanding over 90 days (even if the advance and participating interest is current). At March 31, 2021, 12 of the 114 participating interests with principal balances totaling $2.1 million had balances outstanding over 30 days. At December 31, 2020, 26 of the 222 participating interests with principal balances totaling $6.4 million had balances outstanding over 30 days. During the first quarter of 2021, there were no losses or charge-offs of participating interests. Loans to other financial institutions are excluded from note 3. As of March 31, 2021 and 2020 none of the loans to other financial institutions were classified as impaired or nonaccrual.

Allowance for Loan Losses

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

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

Stock Transactions

A total of 4,732 shares of common stock were issued to ChoiceOne’s Board of Directors for a cash price of $ 146,000 under the terms of the Directors’ Stock Purchase Plan in the first quarter of 2021. A total of 1,201 shares for a cash price of $ 29,000 were issued under the Employee Stock Purchase Plan in the first quarter of 2021.

Stock-Based Compensation

ChoiceOne grants restricted stock units to a select group of employees under the Stock Incentive Plan of 2012. All of the restricted stock units are initially unvested and vest three years after the grant date. Certain additional vesting provisions apply. Each unit, once vested, is settled by delivery of one share of ChoiceOne common stock.

Reclassifications

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

Recent Accounting Pronouncements

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

Goodwill

Goodwill is not amortized but is evaluated annually for impairment and on an interim basis if events or changes in circumstances indicate that goodwill might be impaired. 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 $7.3 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 (ChoiceOne), 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.

Despite ChoiceOne's market capitalization declining slightly from December 2020 to March 2021, 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, first quarter 2021 revenue reflected significant and continuing growth driven by ChoiceOne' mortgage banking business, as well as net SBA fees related to Payroll Protection Program ("PPP") loans.

Management concurred with the conclusion derived from the quantitative goodwill analysis performed 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 March 31, 2021, and as a result that it is more likely than not that there was no goodwill impairment as of March 31, 2021.

During the first three months of 2021, management recorded two adjustment period entries to goodwill related to the merger with Community Shores. The net effect of the adjustments decreased goodwill by $560,000.

NOTE 2 – SECURITIES

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

	March 31, 2021
			Gross		Gross
(Dollars in thousands)	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Equity securities	$	3,136	$	708	$	(40	)	$	3,804

December 31, 2020

Gross

(Dollars in thousands)

Amortized

Unrealized

Fair

Cost

Gains

Losses

Value

Equity securities

2,836

2,896

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

	March 31, 2021
			Gross		Gross
(Dollars in thousands)	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
U.S. Government and federal agency	$	2,005	$	36	$	-		$	2,041
U.S. Treasury notes and bonds		11,954		51		(141	)		11,864
State and municipal		429,772		7,209		(5,506	)		431,475
Mortgage-backed		276,592		1,495		(6,164	)		271,923
Corporate		1,956		34		-			1,990
Trust preferred securities		1,000		-		-			1,000
Asset-backed securities		2,343		-		(9	)		2,334
Total	$	725,622	$	8,825	$	(11,820	)	$	722,627

	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

ChoiceOne reviews its securities portfolio on a quarterly basis to determine whether unrealized losses are considered to be temporary or other-than-temporary. No other-than-temporary impairment charges were recorded in the three months ended March 31, 2021 or in the same period in 2020. ChoiceOne believes that unrealized losses on securities were temporary in nature and were due to changes in interest rates and reduced market liquidity and not as a result of credit quality issues.

Presented below is a schedule of maturities of securities as of March 31, 2021, the fair value of securities as of March 31, 2021 and December 31, 2020, and the weighted average yields of securities as of March 31, 2021:

	Securities maturing within:
										Fair Value		Fair Value
	Less than		1 Year -		5 Years -		More than		at March 31,		at Dec. 31,
(Dollars in thousands)	1 Year		5 Years		10 Years		10 Years		2021		2020

U.S. Government and federal agency	$	2,041	$	-	$	-	$	-	$	2,041	$	2,051
U.S. Treasury notes and bonds		-		2,048		9,816		-		11,864		2,056
State and municipal		13,224		56,492		245,466		116,293		431,475		320,368
Corporate		958		1,032		-		-		1,990		2,589
Trust preferred securities		-		-		-		1,000		1,000		1,000
Asset-backed securities		-		2,334						2,334		-
Total debt securities		16,223		61,906		255,282		117,293		450,704		328,064

Mortgage-backed securities		2,762		75,355		186,889		6,917		271,923		246,723
Equity securities		-		1,000		-		2,804		3,804		2,896
Total	$	18,985	$	138,261	$	442,171	$	127,014	$	726,431	$	577,683

	Weighted average yields:
	Less than			1 Year -			5 Years -			More than
	1 Year			5 Years			10 Years			10 Years			Total
U.S. Government and federal agency		1.98	%		-	%		-	%		-	%		1.98	%
U.S. Treasury notes and bonds		-			1.85			-			-			1.30
State and municipal		3.02			2.88			2.57			2.34			2.56
Corporate		2.63			2.86			-			-			2.75
Trust preferred securities		-			-			-			-			3.75
Asset-backed securities		-			0.94			-			-			0.94
Mortgage-backed securities		4.94			1.81			1.09			1.73			1.35
Equity securities		-			4.61			-			-			1.21

Following is information regarding unrealized gains and losses on equity securities for the three-month periods ended March 31, 2021 and 2020:

	Three Months Ended
	March 31,
	2021		2020

Net gains and losses recognized during the period	$	608	$	(389	)
Less: Net gains and losses recognized during the period on securities sold		—		—

Unrealized gains and losses recognized during the reporting period on securities still held at the reporting date	$	608	$	(389	)

NOTE 3 – LOANS AND ALLOWANCE FOR LOAN LOSSES

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

			Commercial
(Dollars in thousands)			and						Commercial			Construction			Residential
	Agricultural		Industrial			Consumer			Real Estate			Real Estate			Real Estate			Unallocated			Total
Allowance for Loan Losses Three Months Ended March 31, 2021
Beginning balance	$	257	$	1,327		$	317		$	4,178		$	97		$	1,300		$	117		$	7,593
Charge-offs		—		(74	)		(71	)		(48	)		—			-			—			(193	)
Recoveries		—		9			79			-			—			2			—			90
Provision		85		337			(78	)		215			(23	)		(278	)		(8	)		250
Ending balance	$	342	$	1,599		$	247		$	4,345		$	74		$	1,024		$	109		$	7,740

Individually evaluated for impairment	$	114	$	2		$	—		$	10		$	—		$	213		$	—		$	339

Collectively evaluated for impairment	$	227	$	1,596		$	246		$	4,337		$	75		$	811		$	109		$	7,401

Loans
March 31, 2021
Individually evaluated for impairment	$	3,173	$	1,626		$	—		$	3,001		$	—		$	2,589					$	10,389
Collectively evaluated for impairment		43,513		290,140			32,311			448,261			15,670			174,562						1,004,457
Acquired with deteriorated credit quality		—		6,284			19			11,159			—			2,775						20,237
Ending balance	$	46,686	$	298,050		$	32,330		$	462,421		$	15,670		$	179,926					$	1,035,083

				Commercial
(Dollars in thousands)				and					Commercial		Construction		Residential
	Agricultural			Industrial		Consumer			Real Estate		Real Estate		Real Estate		Unallocated			Total
Allowance for Loan Losses Three Months Ended March 31, 2020
Beginning balance	$	471		$	655	$	270		$	1,663	$	76	$	640	$	282		$	4,057
Charge-offs		-			-		(89	)		-		-		-		-			(89	)
Recoveries		-			1		44			-		-		2		-			47
Provision		(124	)		197		(5	)		297		48		419		(57	)		775
Ending balance	$	347		$	853	$	220		$	1,960	$	124	$	1,061	$	225		$	4,790

Individually evaluated for impairment	$	98		$	-	$	1		$	13	$	-	$	266	$	-		$	378

Collectively evaluated for impairment	$	249		$	853	$	219		$	1,947	$	124	$	795	$	225		$	4,412


Loans
March 31, 2020
Individually evaluated for impairment	$	379		$	259	$	16		$	2,272	$	-	$	2,449				$	5,375
Collectively evaluated for impairment		50,104			136,989		34,236			348,365		17,525		213,706					800,925
Acquired with deteriorated credit quality		-			3,953		-			1,116		-		208					5,277
Ending balance	$	50,483		$	141,201	$	34,252		$	351,753	$	17,525	$	216,363				$	811,577

			Commercial
(Dollars in thousands)			and				Commercial		Construction		Residential
	Agricultural		Industrial		Consumer		Real Estate		Real Estate		Real Estate		Unallocated		Total
Allowance for Loan Losses
December 31, 2020
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

The provision for loan losses was $250,000 in the first quarter of 2021, compared to $775,000 in the same period in the prior year. The first quarter of 2021 provision was deemed prudent due to changes in the risk profile of ChoiceOne’s loan portfolio and the economic impact on ChoiceOne's local market areas and the national economy resulting from the COVID-19 pandemic upon ChoiceOne’s borrowers and their ability to repay loans. While it is difficult to predict the impact that COVID-19 will have in future quarters, ChoiceOne estimates these losses have been incurred as of March 31, 2021, and expects increased levels of past due loans, nonperforming loans and loan losses.

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

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

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

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

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

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

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

Corporate Credit Exposure - Credit Risk Profile By Creditworthiness Category

(Dollars in thousands)	Agricultural				Commercial and Industrial				Commercial Real Estate
	March 31,		December 31,		March 31,		December 31,		March 31,		December 31,
	2021		2020		2021		2020		2021		2020
Pass	$	43,145	$	50,185	$	289,781	$	294,614	$	449,666	$	453,080
Special Mention		368		3,202		2,109		4,101		3,674		6,006
Substandard		3,173		348		6,160		4,812		9,081		8,925
Doubtful		-		-		-		-		-		1,236
	$	46,686	$	53,735	$	298,050	$	303,527	$	462,421	$	469,247

Consumer Credit Exposure - Credit Risk Profile Based On Payment Activity

(Dollars in thousands)	Consumer				Construction Real Estate				Residential Real Estate
	March 31,		December 31,		March 31,		December 31,		March 31,		December 31,
	2021		2020		2021		2020		2021		2020
Performing	$	32,330	$	34,006	$	15,670	$	16,559	$	178,650	$	191,125
Nonperforming		-		-		-		-		-		-
Nonaccrual		-		8		-		80		1,276		1,381
	$	32,330	$	34,014	$	15,670	$	16,639	$	179,926	$	192,506

The following table provides information on loans that were considered troubled debt restructurings ("TDRs") that were modified during the three months ended March 31, 2021. There were no new TDRs in the three months ended March 31, 2020.

	Three Months Ended March 31, 2021
			Pre-		Post-
			Modification		Modification
			Outstanding		Outstanding
(Dollars in thousands)	Number of		Recorded		Recorded
	Loans		Investment		Investment
Agricultural		6	$	2,326	$	2,326
Commercial Real Estate		1		958		958
Total		7	$	3,284	$	3,284

The following schedule provides information on TDRs as of March 31, 2021 where the borrower was past due with respect to principal and/or interest for 30 days or more during the three months ended March 31, 2021, which loans had been modified and classified as TDRs during the year prior to the default. There were no TDRs as of March 31, 2020 where the borrower was past due with respect to principal and/or interest for 30 days or more during the three months ended March 31, 2020, which loans had been modified and classified as TDRs during the year prior to the default.

	Three Months Ended
	March 31, 2021
(Dollars in thousands)	Number		Recorded
	of Loans		Investment
Commercial and industrial		1	$	52
Commercial Real Estate		3		1,850
Total		4	$	1,902

In March of 2020, the Coronavirus Aid, Relief and Economic Security (“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. Further, 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, followed by a revised statement on April 7, 2020, providing in part 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. As a result of the pandemic, the Company provided a modification program to borrowers that included certain concessions such as interest only payments or payment deferrals. As of March 31, 2021, the Company had granted pandemic-related modifications on approximately 17 loans totaling $1.2 million which, in reliance on the statements of federal banking agencies and the CARES Act, are not reflected as TDRs in this report. A total of 17 deferments with loan balances totaling approximately $1.2 million remained active at March 31, 2021, with all other previous deferments resuming their payments in accordance with loan terms.

Impaired loans by loan category follow:

			Unpaid
(Dollars in thousands)	Recorded		Principal		Related
	Investment		Balance		Allowance
March 31, 2021
With no related allowance recorded
Agricultural	$	348	$	434	$	-
Commercial and industrial		1,463		1,574		-
Consumer		-		-		-
Construction real estate		-		-		-
Commercial real estate		2,624		3,429		-
Residential real estate		172		176		-
Subtotal		4,607		5,613		-
With an allowance recorded
Agricultural		2,825		2,825		114
Commercial and industrial		163		165		2
Consumer		-		-		-
Construction real estate		-		-		-
Commercial real estate		377		384		10
Residential real estate		2,417		2,495		212
Subtotal		5,782		5,869		338
Total
Agricultural		3,173		3,259		114
Commercial and industrial		1,626		1,739		2
Consumer		-		-		-
Construction real estate		-		-		-
Commercial real estate		3,001		3,813		10
Residential real estate		2,589		2,671		212
Total	$	10,389	$	11,482	$	338

			Unpaid
(Dollars in thousands)	Recorded		Principal		Related
	Investment		Balance		Allowance
December 31, 2020
With no related allowance recorded
Agricultural	$	348	$	434	$	-
Commercial and industrial		1,516		1,629		-
Consumer		-		-		-
Construction real estate		80		80		-
Commercial real estate		1,852		2,664		-
Residential real estate		162		162		-
Subtotal		3,958		4,969		-
With an allowance recorded
Agricultural		-		-		-
Commercial and industrial		147		147		19
Consumer		8		8		1
Construction real estate		-		-		-
Commercial real estate		1,180		1,180		157
Residential real estate		2,558		2,651		254
Subtotal		3,893		3,986		431
Total
Agricultural		348		434		-
Commercial and industrial		1,663		1,776		19
Consumer		9		8		1
Construction real estate		80		80		-
Commercial real estate		3,031		3,844		157
Residential real estate		2,720		2,813		254
Total	$	7,851	$	8,955	$	431

The following schedule provides information regarding average balances of impaired loans and interest recognized on impaired loans for the three-month periods ended March 31, 2021 and 2020:

	Average		Interest
(Dollars in thousands)	Recorded		Income
	Investment		Recognized
Three Months Ended March 31, 2021
With no related allowance recorded
Agricultural	$	348	$	-
Commercial and industrial		1,490		-
Consumer		-		-
Construction real estate		40		-
Commercial real estate		2,238		3
Residential real estate		166		1
Subtotal		4,282		4
With an allowance recorded
Agricultural		1,413		-
Commercial and industrial		155		-
Consumer		4		-
Construction real estate		-		-
Commercial real estate		778		4
Residential real estate		2,488		17
Subtotal		4,838		21
Total
Agricultural		1,761		-
Commercial and industrial		1,645		-
Consumer		4		-
Construction real estate		40		-
Commercial real estate		3,016		7
Residential real estate		2,654		18
Total	$	9,120	$	25

	Average		Interest
(Dollars in thousands)	Recorded		Income
	Investment		Recognized
Three Months Ended March 31, 2020
With no related allowance recorded
Agricultural	$	272	$	-
Commercial and industrial		259		-
Consumer		-		-
Construction real estate		-		-
Commercial real estate		1,882		-
Residential real estate		59		-
Subtotal		2,472		-
With an allowance recorded
Agricultural		379		-
Commercial and industrial		7		-
Consumer		16		-
Construction real estate		-		-
Commercial real estate		391		7
Residential real estate		2,383		30
Subtotal		3,176		37
Total
Agricultural		651		-
Commercial and industrial		266		-
Consumer		17		-
Construction real estate		-		-
Commercial real estate		2,272		7
Residential real estate		2,442		30
Total	$	5,648	$	37

An aging analysis of loans by loan category follows:

					Loans
	Loans		Loans		Past Due								Loans
	Past Due		Past Due		Greater								90 Days Past
(Dollars in thousands)	30 to 59		60 to 89		Than 90				Loans Not		Total		Due and
	Days (1)		Days (1)		Days (1)		Total (1)		Past Due		Loans		Accruing
March 31, 2021
Agricultural	$	-	$	-	$	-	$	-	$	46,686	$	46,686	$	-
Commercial and industrial		182		-		413		595		297,455		298,050		-
Consumer		11		-		-		11		32,319		32,330		-
Commercial real estate		184		-		1,666		1,850		460,571		462,421		-
Construction real estate		492		-		-		492		15,178		15,670		-
Residential real estate		1,742		-		79		1,821		178,105		179,926		-
	$	2,611	$	-	$	2,158	$	4,769	$	1,030,314	$	1,035,083	$	-

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	$	-

(1) Includes nonaccrual loans.

Nonaccrual loans by loan category follow:

(Dollars in thousands)	March 31,		December 31,
	2021		2020
Agricultural	$	348	$	348
Commercial and industrial		1,699		1,802
Consumer		-		8
Commercial real estate		1,850		3,088
Construction real estate		-		80
Residential real estate		1,276		1,381
	$	5,173	$	6,707

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

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

The table below presents a roll forward of the accretable yield on County Bank Corp. acquired loan portfolio for the three months ended March 31, 2021 (dollars in thousands):

(Dollars in thousands)	*Acquired*			*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
Accretion January 1, 2021 through March 31, 2021		(5	)		(76	)		(81	)
Balance, March 31, 2021	$	130		$	1,448		$	1,578

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

	*Acquired*			*Acquired*			*Acquired*
	*Impaired*			*Non-impaired*			*Total*
Loans acquired - contractual payments	$	20,491		$	158,495		$	178,986
Nonaccretable difference		(2,719	)		-			(2,719	)
Expected cash flows		17,772			158,495			176,267
Accretable yield		(869	)		(596	)		(1,465	)
Carrying balance at acquisition date	$	16,903		$	157,899		$	174,802

The table below presents a roll forward of the accretable yield on Community Shores Bank Corporation acquired loan portfolio for the three months ended March 31, 2021 (dollars in thousands):

	*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
Accretion January 1, 2021 through March 31, 2021		(328	)		(198	)		(526	)
Balance, March 31, 2021	$	515		$	257		$	772

NOTE 4 – EARNINGS PER SHARE

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

	Three Months Ended
(Dollars in thousands, except share data)	March 31,
	2021		2020
Basic
Net income	$	6,238	$	3,254

Weighted average common shares outstanding		7,801,058		7,247,772

Basic earnings per common shares	$	0.80	$	0.45

Diluted
Net income	$	6,238	$	3,254

Weighted average common shares outstanding		7,801,058		7,247,772
Plus dilutive stock options and restricted stock units		9,732		14,633

Weighted average common shares outstanding and potentially dilutive shares		7,810,790		7,262,405

Diluted earnings per common share	$	0.80	$	0.45

There were no stock options that were considered to be anti-dilutive to earnings per share for the three months ended March 31, 2021 or March 31, 2020.

Note 5 – Financial Instruments

Financial instruments as of the dates indicated were as follows:

					Quoted Prices
					In Active		Significant
					Markets for		Other		Significant
					Identical		Observable		Unobservable
(Dollars in thousands)	Carrying		Estimated		Assets		Inputs		Inputs
	Amount		Fair Value		(Level 1)		(Level 2)		(Level 3)
March 31, 2021
Assets
Cash and cash equivalents	$	135,328	$	135,328	$	135,328	$	-	$	-
Equity securities at fair value		3,804		3,804		1,859		-		1,945
Securities available for sale		722,627		722,627		-		709,021		13,606
Federal Home Loan Bank and Federal
Reserve Bank stock		8,004		8,004		-		8,004		-
Loans held for sale		18,736		19,298		-		19,298		-
Loans to other financial institutions		7,312		7,312		-		7,312		-
Loans, net		1,027,343		1,024,203		-		-		1,024,203
Accrued interest receivable		7,751		7,751		-		7,751		-
Interest rate lock commitments		1,756		1,756		-		1,756		-

Liabilities
Noninterest-bearing deposits		515,552		515,552		-		515,552		-
Interest-bearing deposits		1,324,412		1,324,629		-		1,324,629		-
Borrowings		3,484		3,265		-		3,265		-
Subordinated debentures		3,115		2,918		-		2,918		-
Accrued interest payable		129		129		-		129		-

December 31, 2020
Assets
Cash and due from banks	$	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		-

NOTE 6 – FAIR VALUE MEASUREMENTS

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

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

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

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

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

There were no liabilities measured at fair value as of March 31, 2021 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		Balance
(Dollars in thousands)	Assets		Inputs		Inputs		at Date
	(Level 1)		(Level 2)		(Level 3)		Indicated
Equity Securities Held at Fair Value - March 31, 2021
Equity securities	$	1,859	$	-	$	1,945	$	3,804

Investment Securities, Available for Sale - March 31, 2021
U. S. Government and federal agency	$	-	$	2,041	$	-	$	2,041
U. S. Treasury notes and bonds		-		11,864		-		11,864
State and municipal		-		418,869		12,606		431,475
Mortgage-backed		-		271,923		-		271,923
Corporate		-		1,990		-		1,990
Trust preferred securities		-		-		1,000		1,000
Asset-backed securities		-		2,334		-		2,334
Total	$	-	$	709,021	$	13,606	$	722,627

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

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

	Three Months Ended
(Dollars in thousands)	March 31,
	2021			2020
Equity Securities Held at Fair Value
Balance, January 1	$	1,485		$	1,472
Total realized and unrealized gains included in noninterest income		(40	)		(65	)
Net purchases, sales, calls, and maturities		500			-
Net transfers into Level 3		-			-
Balance, March 31	$	1,945		$	1,407

Investment Securities, Available for Sale
Balance, January 1	$	11,423		$	12,367
Total unrealized gains included in other comprehensive income		(270	)		185
Net purchases, sales, calls, and maturities		2,453			-
Net transfers into Level 3		-			-
Balance, March 31	$	13,606		$	12,552

Of the available for sale Level 3 assets that were held by ChoiceOne at March 31, 2021, the net unrealized gain as of March 31, 2021 was $826,000, which was recognized in accumulated other comprehensive income in the consolidated balance sheet.

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

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

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

Assets Measured at Fair Value on a Non-recurring Basis

			Quoted Prices
			In Active		Significant
			Markets for		Other		Significant
	Balances at		Identical		Observable		Unobservable
(Dollars in thousands)	Dates		Assets		Inputs		Inputs
	Indicated		(Level 1)		(Level 2)		(Level 3)
Impaired Loans
March 31, 2021	$	10,389	$	-	$	-	$	10,389
December 31, 2020	$	7,851	$	-	$	-	$	7,851

Other Real Estate
March 31, 2021	$	123	$	-	$	-	$	123
December 31, 2020	$	266	$	-	$	-	$	266

Mortgage Loan Servicing Rights
March 31, 2021	$	4,336	$	-	$	-	$	4,336
December 31, 2020	$	3,967	$	-	$	-	$	3,967

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

NOTE 7 – REVENUE FROM CONTRACTS WITH CUSTOMERS

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

Service Charges and Fees on Deposit Accounts

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

Interchange Income

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

Investment Commission Income

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

Trust Fee Income

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

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

	Three Months Ended
	March 31,
(Dollars in thousands)	2021		2020

Service charges and fees on deposit accounts	$	785	$	1,009
Interchange income		1,135		836
Investment commission income		236		119
Trust fee income		173		170
Other charges and fees for customer services		166		147
Noninterest income from contracts with customers within the scope of ASC 606		2,495		2,281
Noninterest income within the scope of other GAAP topics		3,105		1,818
Total noninterest income	$	5,600	$	4,099

NOTE 8 – BUSINESS COMBINATION

Community Shores Bank Corporation

ChoiceOne completed the acquisition of Community Shores Bank Corporation (“Community Shores”) with and into ChoiceOne, with ChoiceOne as the surviving entity, effective on July 1, 2020. Community Shores had 4 branch offices as of the date of the merger. Total assets of Community Shores as of July 1, 2020 were $244.5 million, including total loans of $174.8 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 524,139 shares of ChoiceOne common stock, which was net of 84 fractional shares not issued, and cash in the amount of $5,390,000 with an approximate total value of $20.9 million. The initial accounting for the business combination has been determined provisionally for the fair value of certain assets and liabilities, including loans, core deposit intangible, and deferred taxes. During the quarter ended March 31, 2021 management finalized accounting for certain loans and deferred tax accounts, resulting in measurement period adjustments increasing the acquisition date fair value of loans by $828,000 and decreasing the acquisition date fair value of other assets by $268,000. As a result, goodwill recognized as a result of the acquisition was reduced by $560,000. Management expects to finalize calculations supporting the fair value of these assets and liabilities during the measurement period.

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

*Purchase Price*

Consideration	$	20,881

*Net assets acquired:*
Cash and cash equivalents		41,023
Securities available for sale		20,023
Federal Home Loan Bank and Federal Reserve Bank stock		300
Originated loans		174,802
Premises and equipment		6,204
Other real estate owned		346
Deposit based intangible		760
Other assets		1,077
Total assets		244,535

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		13,528

Goodwill	$	7,353

County Bank Corp

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

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

Purchase Price

Consideration	$	107,945

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

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

Net assets acquired		69,079

Goodwill	$	38,866

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

The following discussion is designed to provide a review of the consolidated financial condition and results of operations of ChoiceOne Financial Services, Inc. (“ChoiceOne”), its wholly-owned subsidiary ChoiceOne Bank, and ChoiceOne Bank’s wholly-owned subsidiaries, ChoiceOne Insurance Agencies, Inc., Lakestone Financial Services, Inc., and Community Shores’ Financial Services, Inc. This discussion should be read in conjunction with the interim consolidated financial statements and related notes.

FORWARD-LOOKING STATEMENTS

This discussion and other sections of this quarterly report contain forward-looking statements that are based on management’s beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and ChoiceOne. Words such as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “intends,” “is likely,” “plans,” “predicts,” “projects,” “may,” “could,” “look forward,” “continue”, “future”, and variations of such words and similar expressions are intended to identify such forward-looking statements. Management’s determination of the provision and allowance for loan losses, the carrying value of goodwill, loan servicing rights, other real estate owned, and the fair value of investment securities (including whether any impairment on any investment security is temporary or other-than-temporary and the amount of any impairment) and management’s assumptions concerning pension and other postretirement benefit plans involve judgments that are inherently forward-looking. Examples of forward-looking statements also include, but are not limited to, statements related to risks and uncertainties related to, and the impact of, the global coronavirus (COVID-19) pandemic on the businesses, financial condition and results of operations of ChoiceOne and its customers and statements regarding the outlook and expectations of ChoiceOne and its customers. The COVID-19 pandemic is adversely affecting ChoiceOne and its customers, counterparties, employees, and third-party service providers. The ultimate extent of the impacts on ChoiceOne's business, financial position, results of operations, liquidity, and prospects is uncertain. All of the information concerning interest rate sensitivity is forward-looking. All statements with references to future time periods are forward-looking. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions (“risk factors”) that are difficult to predict with regard to timing, extent, likelihood, and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed, implied or forecasted in such forward-looking statements. Furthermore, ChoiceOne undertakes no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events, or otherwise.

Additional risk factors include, but are not limited to, the risk factors discussed in Item 1A of ChoiceOne’s Annual Report on Form 10-K for the year ended December 31, 2020. These are representative of the risk factors that could cause a difference between an ultimate actual outcome and a preceding forward-looking statement.

RESULTS OF OPERATIONS

Net income for the first quarter of 2021 was $6,238,000, which represented an increase of $2,984,000 or 92% compared to the first quarter period in 2020. Growth in net income in the first quarter of 2021 compared to the same period in the prior year resulted in part from the effects of the Coronavirus Aid, Relief, and Economic Security ("CARES") Act and Paycheck Protection Program ("PPP") fees and deposit dollars resulting from the Act. The merger with Community Shores Bank Corporation ("Community Shores") that was effective on July 1, 2020 also had an impact on ChoiceOne's financial results. There were no merger expenses in the first quarter of 2021; however, net income was impacted by $282,000 of costs related to the merger with Community Shores in the first quarter of 2020. Net income, adjusted to exclude tax-effected merger-related expenses, would have been $3,536,000 in the first quarter of 2020.

Basic and diluted earnings per common share were $0.80 for the first quarter of 2021 compared to $0.45 or $0.49 adjusted to exclude the tax-effected merger-related expenses for the first quarter of the prior year. The return on average assets and return on average shareholders’ equity percentages were 1.25% and 11.13%, respectively, for the first quarter of 2021, compared to 0.93% and 6.60%, respectively, for the same period in 2020.

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

Acquisition of Community Shores Bank Corporation

ChoiceOne completed the acquisition of Community Shores Bank Corporation (“Community Shores”) with and into ChoiceOne effective on July 1, 2020. Community Shores had 4 branch offices as of the date of the acquisition. Total assets of Community Shores as of July 1, 2020 were $244.5 million, including total loans of $174.8 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 524,139 shares of ChoiceOne common stock and cash in the amount of $5,390,000 with an approximate total value of $20.9 million. The consolidation of Community Shores Bank with and into ChoiceOne Bank was completed on October 16, 2020.

The Coronavirus (COVID-19) Outbreak

The coronavirus outbreak (COVID-19) has had a substantial impact on numerous aspects of life in the United States, including threats to public health, government imposed restrictions on business and gatherings, increased volatility in markets, and severe effects on national and local economies.

COVID-19 has affected ChoiceOne's customers. Although there were no material increases in delinquencies or net charge-offs in the first quarter of 2021, ChoiceOne recorded a provision for loan losses of $250,000 related to the impact of COVID-19. Consistent with federal banking agencies' “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus,” ChoiceOne is working with its borrowers affected by COVID-19 and has granted approximately 750 payment deferrals on numerous loans to borrowers affected by the pandemic from March of 2020 through June of 2020. Following the initial 90 day deferment period, ChoiceOne offered a second round of deferment in accordance with the CARES act; however, significantly fewer customers requested further deferment. As of March 31, 2021, approximately 17 deferments remained active with loan balances totaling $1.2 million with all other previous deferments resuming their payments in accordance with loan terms.

In addition, ChoiceOne processed over $126 million in Paycheck Protection Program ("PPP") loans in 2020 and acquired an additional $37 million in PPP loans in the merger with Community Shores. PPP loans are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP. PPP loans carry a fixed rate of 1.00% and a term of two years (loans made before June 5, 2020) or five years (loans made on or after June 5, 2020), if not forgiven in whole or in part. Payments are deferred until either the date on which the Small Business Administration ("SBA") remits the amount of forgiveness proceeds to the lender or the date that is ten months after the last day of the covered period if the borrower does not apply for forgiveness within that ten-month period. The loans are 100% guaranteed by the SBA. The SBA pays the originating bank a processing fee ranging from 1% to 5%, based on the size of the loan. Upon SBA forgiveness, unrecognized fees are then recognized into interest income. In the first quarter of 2021, $56.4 million of Paycheck Protection Program (PPP) loans were forgiven resulting in $1.4 million of fee income. Another round of PPP loans was offered in the first quarter of 2021. ChoiceOne added 718 PPP loans to its portfolio in the first quarter of 2021 with a balance of $76.7 million. Fee income related to new PPP loans amounted to $3.7 million, of which $208,000 was recognized in the first quarter of 2021.

Dividends

Cash dividends of $1,716,000 or $0.22 per share were declared in the first quarter of 2021, compared to $1,449,000 or $0.20 per share declared in the first quarter of 2020. The cash dividend payout percentage was 28% for the first quarter of 2021, compared to 45% in the same period in the prior year.

Interest Income and Expense

Tables 1 and 2 on the following pages provide information regarding interest income and expense for the three-month periods ended March 31, 2021 and 2020. Table 1 documents ChoiceOne’s average balances and interest income and expense, as well as the average rates earned or paid on assets and liabilities. Table 2 documents the effect on interest income and expense of changes in volume (average balance) and interest rates. These tables are referred to in the discussion of interest income, interest expense and net interest income.

Table 1 – Average Balances and Tax-Equivalent Interest Rates

	Three Months Ended March 31,
	2021				2020
(Dollars in thousands)	Average				Average
	Balance	Interest	Rate		Balance	Interest	Rate
Assets:
Loans (1)	$ 1,080,181	$ 12,687	4.70	%	$ 830,107	$ 10,081	4.86	%
Taxable securities (2)	438,575	1,856	1.69		239,104	1,857	3.11
Nontaxable securities (1)	201,228	1,390	2.76		113,130	467	1.65
Other	84,822	20	0.09		54,451	194	1.43
Interest-earning assets	1,804,806	15,953	3.54		1,236,792	12,599	4.07
Noninterest-earning assets	184,954				170,324
Total assets	$ 1,989,760				$ 1,407,116

Liabilities and Shareholders' Equity:
Interest-bearing demand deposits	$ 715,868	$ 429	0.24	%	$ 502,240	$ 656	0.52	%
Savings deposits	355,395	114	0.13		213,108	40	0.08
Certificates of deposit	195,093	337	0.69		179,076	689	1.54
Borrowings	8,462	36	1.70		26,956	138	2.05
Subordinated debentures	3,099	52	6.65		-	-	0.00
Interest-bearing liabilities	1,277,917	968	0.30		921,380	1,523	0.66
Demand deposits	479,649				279,905
Other noninterest-bearing liabilities	7,937				8,719
Total liabilities	1,765,503				1,210,004
Shareholders' equity	224,257				197,112
Total liabilities and shareholders' equity	$ 1,989,760				$ 1,407,116

Net interest income (tax-equivalent basis) (Non-GAAP) (1)		$ 14,985				$ 11,076

Net interest margin (tax-equivalent basis) (Non-GAAP) (1)			3.23	%			3.42	%

Reconciliation to Reported Net Interest Income
Net interest income (tax-equivalent basis) (Non-GAAP) (1)		$ 14,985				$ 11,076
Adjustment for taxable equivalent interest		(297)				(105)
Net interest income (GAAP)		$ 14,688				$ 10,971
Net interest margin (GAAP)			3.32	%			3.58	%

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

Table 2 – Changes in Tax-Equivalent Net Interest Income

	Three Months Ended March 31,
(Dollars in thousands)	2021 Over 2020
	Total	Volume	Rate
Increase (decrease) in interest income (1)
Loans (2)	$ 2,606	$ 4,769	$ (2,163)
Taxable securities	(1)	4,383	(4,384)
Nontaxable securities (2)	923	495	428
Other	(174)	479	(653)
Net change in interest income	3,354	10,126	(6,772)

Increase (decrease) in interest expense (1)
Interest-bearing demand deposits	(227)	1,142	(1,369)
Savings deposits	74	39	35
Certificates of deposit	(352)	376	(728)
Borrowings	(102)	(82)	(20)
Subordinated debentures	52	52	-
Net change in interest expense	(555)	1,527	(2,082)
Net change in tax-equivalent net interest income	$ 3,909	$ 8,599	$ (4,690)

	(1)	The volume variance is computed as the change in volume (average balance) multiplied by the previous year’s interest rate. The rate variance is computed as the change in interest rate multiplied by the previous year’s volume (average balance). The change in interest due to both volume and rate has been allocated to the volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.
	(2)	Interest on nontaxable investment securities and loans has been adjusted to a fully tax-equivalent basis using an incremental tax rate of 21%.

Net Interest Income

Tax-equivalent net interest income increased $3.9 million in the first three months of 2021 compared to the same period in 2020 partially due to $1.6 million in PPP loan fees recognized during the first quarter of 2021, partially offset by a reduction in ChoiceOne’s net interest margin. Net interest margin on a tax-equivalent basis declined by 19 basis points from 3.42% in the first quarter of 2020 to 3.23% in the same period in 2021.

The average balance of loans increased $250.1 million in the first quarter of 2021 compared to the same period in 2020. $174.8 million of the increase was due to the impact of the merger with Community Shores which closed on July 1, 2020 with the remaining increase due to PPP loans which were originated after the first quarter of 2020. The increase in the average loans balance was partially offset by a 16 basis points decline in the average rate earned. Part of the decrease was caused by short-term market interest rates which were reduced 150 basis points by the Federal Open Market Committee in March 2020. PPP loans with an interest rate of 1.00% also reduced the overall rate earned on loans during the first quarter of 2021. The combination of these factors caused tax-equivalent interest income from loans to increase $2.6 million in the first quarter of 2021 compared to the same period in the prior year. The average balance of total securities increased $287.6 million in the first quarter of 2021 compared to the same period in 2020. The securities portfolio has grown as ChoiceOne has deployed excess deposit dollars into sufficiently short-term securities to allow loans to grow organically as good credits become available. The effect of the average balance growth, partially offset by a combined 61 basis point reduction in the average rate earned on securities, caused tax-equivalent securities income to increase $922,000 in the first quarter of 2021 compared to the same quarter in 2020.

Growth of $355.9 million in the average balance of interest-bearing demand deposits and savings deposits, partially offset by a 19 basis point decrease in the average rate paid, caused interest expense to be $153,000 lower in the first three months of 2021 compared to the first three months of the prior year. The average balance of certificates of deposit increased $16.0 million in the first three months of 2021 compared to the same period in 2020. The growth was overshadowed by a reduction of 85 basis points in the average rate paid on certificates which caused interest expense to decrease $352,000 in the first three months of 2021 compared to the same period in 2020.

Provision and Allowance for Loan Losses

The provision for loan losses was $250,000 in the first quarter 2021, compared to $775,000 in the same period in the prior year. The provision in the first quarter of 2021 was deemed prudent due to changes in the risk profile of ChoiceOne’s loan portfolio and the economic impact on ChoiceOne's local market areas and the national economy resulting from the COVID-19 pandemic. Nonperforming loans were $10.0 million as of March 31, 2021, compared to $8.2 million as of December 31, 2020. The allowance for loan losses was 0.75% of total loans at March 31, 2021, compared to 0.71% at December 31, 2020. Loans acquired in the mergers with County and Community Shores were recorded at fair value and as a result do not have an allowance for loan losses allocated to them unless credit deteriorates subsequent to acquisition. If the credit mark associated with the loans acquired in the mergers were added to the allowance for loan losses, the total would have represented 1.52% of total loans at March 31, 2021.

Charge-offs and recoveries for respective loan categories for the three months ended March 31, 2021 and 2020 were as follows:

(Dollars in thousands)	2021				2020
	Charge-offs		Recoveries		Charge-offs		Recoveries
Agricultural	$	-	$	-	$	-	$	-
Commercial and industrial		74		9		-		1
Consumer		71		79		89		44
Commercial real estate		48		-		-		-
Construction real estate		-		-		-		-
Residential real estate		-		2		-		2
	$	193	$	90	$	89	$	47

Net charge-offs were $102,000 in the first quarter of 2021, compared to net charge-offs of $42,000 during the same period in 2020. Net charge-offs on an annualized basis as a percentage of average loans were 0.04% in the first three months of 2021 compared to annualized net charge-offs of 0.02% of average loans in the same period in the prior year. Management is aware that the economic climate in Michigan will continue to affect business and individual borrowers. Management believes that COVID-19 will also have an impact in the remainder of 2021 and beyond. Management has worked and intends to continue to work with delinquent borrowers in an attempt to lessen the impact of COVID-19 on ChoiceOne.

ChoiceOne has allocated approximately $2.1 million in the allowance for loan losses to borrowers falling into industry classification codes that management believes to be highly or moderately affected by the pandemic. The following chart indicates industries management believes to be moderately or highly effected by the pandemic:

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

Loans highly affected and moderately affected based on their commercial industry category have been allocated an additional 35 basis points and 25 basis points, respectively. ChoiceOne has also allocated 25 basis points to all retail loan categories. It is noted that this allowance amount is in addition to the regularly calculated allowance based on risk rating and qualitative factors. ChoiceOne will continue to monitor concentrations as part of its analysis on an ongoing basis. Management will continue to monitor charge-offs, changes in the level of nonperforming loans, changes within the composition of the loan portfolio and the impact of COVID-19, and it will adjust the provision and allowance for loan losses as determined to be necessary.

Noninterest Income

Total noninterest income increased $1.5 million in the first quarter of 2021 compared to the same period in 2020. While increased scale was a factor, most of the increase was related to a difference in the change in the market value of equity securities from a negative $389,000 in the first quarter of 2020 to a positive $608,000 in the first quarter of 2021. The stock market dipped sharply in March 2020 related to the COVID-19 pandemic which affected securities held by ChoiceOne. Since that time ChoiceOne has seen the value of equity investments held climb to pre-pandemic levels. Mortgage activity continued to remain strong with an increase of $403,000 in gains on sales of loans in the first quarter of 2021 compared to the same period in 2020, as lower interest rates continued to encourage refinancing activity. Insurance and investment commissions increased $147,000 in the first quarter of 2021 compared to the same period in 2020, due in part to the addition of Community Shores Financial Services Inc., a wholly owned subsidiary acquired during the merger with Community Shores.

Noninterest Expense

Total noninterest expense increased $2.1 million in the first quarter of 2021 compared to the same period in 2020. All categories included expenses as a result of the merger with Community Shores that was effective on July 1, 2020. Salaries and benefits included a higher level of commission expense in the first quarter of 2021 compared to the same period in the prior year as a result of the significant increase in residential mortgage loan originations. Data processing expense declined in the first quarter of 2021 as compared to the same period in 2020, as the prior year included some conversion expenses from ChoiceOne's merger with County, which closed on October 1, 2019. Supplies and postage also declined in the first quarter of 2021 compared the same period in the prior year as ChoiceOne continues to move mailings digital when applicable. The intangible amortization expense in 2021 represented the amortization of the core deposit intangible that resulted from the mergers with County and Community Shores.

Income Tax Expense

Income tax expense was $1,272,000 in the first quarter of 2021 compared to $625,000 for the same period in 2020. The increase was due to a higher level of income before income tax. The effective tax rate was 16.9% for the first quarter of 2021 and 16.1% for the first quarter of 2020.

FINANCIAL CONDITION

Securities

Total securities increased $148.7 million from December 31, 2020 to March 31, 2021. Various securities totaling $179.2 million were purchased in the first three months of 2021. There were no sales in the first three months of 2021; however, $2.6 million of securities called or matured during that same time period. Principal repayments on securities totaled $10.3 million in the first three months of 2021. ChoiceOne believes the portfolio will provide a natural hedge for floating rate loans and investments are sufficiently short-term to allow organic growth in loans as good credits become available.

Loans

Loans held for sale were $5.8 million higher at March 31, 2021 than at December 31, 2020. This was caused by a heightened level of refinancing activity of residential mortgage loans due to the low market interest rates that persisted through the first quarter in 2021. Loans excluding loans held for sale and loans to other financial institutions declined by $34.6 million from December 31, 2020 to March 31, 2021. This decline was due to $56.4 million of PPP loans forgiven as well as other paydowns partially offset by the addition of $76.7 million of new PPP loan production. ChoiceOne saw declines of $12.6 million in residential real estate loans, $7.0 million in agricultural loans, $6.8 million in commercial real estate loans, $5.3 million in commercial and industrial loans, and $1.7 million of consumer loans. The other changes resulted from normal fluctuations in borrower activity.

Asset Quality

Information regarding impaired loans can be found in Note 3 to the consolidated financial statements included in this report. The total balance of loans classified as impaired was $10.4 million at March 31, 2021, compared to $7.9 million as of December 31, 2020. The change in the first three months of 2021 was primarily comprised of an increase of $2.8 million in impaired agricultural loans in the first quarter of 2021.

As part of its review of the loan portfolio, management also monitors the various nonperforming loans. Nonperforming loans are comprised of: (1) loans accounted for on a nonaccrual basis; (2) loans, not included in nonaccrual loans, which are contractually past due 90 days or more as to interest or principal payments; and (3) loans, not included in nonaccrual or loans past due 90 days or more, which are considered troubled debt restructurings ("TDRs").

The balances of these nonperforming loans were as follows:

(Dollars in thousands)	March 31,		December 31,
	2021		2020
Loans accounted for on a nonaccrual basis	$	5,173	$	6,707
Accruing loans which are contractually past due 90 days or more as to principal or interest payments		-		-
Loans defined as "troubled debt restructurings " which are not included above		4,807		1,537
Total	$	9,980	$	8,244

The increase in the TDR loans balance in the first three months of 2021 was primarily due to a $2.3 million increase in TDR agricultural loans. Approximately 70% of the balance of loans considered TDRs were performing according to their restructured terms as of March 31, 2021. Management believes the allowance for loan losses allocated to its nonperforming loans was sufficient at March 31, 2021.

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. Further, 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, followed by a revised statement on April 7, 2020, providing in part 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. As a result of the pandemic, the Company provided a modification program to borrowers that included certain concessions such as interest only payments or payment deferrals. As of March 31, 2021, the Company had granted pandemic-related modifications on approximately 17 loans totaling $1.2 million which, in reliance on the statements of federal banking agencies and the CARES Act, are not reflected as TDRs in this report.

Goodwill

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 arriving 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 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.

Despite ChoiceOne's market capitalization declining slightly from December 2020 to March 2021, 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, first quarter 2021 revenue reflected significant and continuing growth driven by ChoiceOne' mortgage banking business, as well as net SBA fees related to Payroll Protection Program ("PPP") loans.

Management concurred with the conclusion derived from the quantitative goodwill analysis performed as of the valuation date of November 30, 2020 and determined that there were no material changes and that no triggering events have occurred that indicated impairment from the valuation date through March 31, 2021, and as a result that it is more likely than not that there was no goodwill impairment as of March 31, 2021. During the first three months of 2021, management recorded two adjustment period entries to goodwill related to the merger with Community Shores. The net effect of the adjustments decreased goodwill by $560,000.

Deposits and Borrowings

Total deposits increased $165.4 million in the first quarter of 2021. The change in checking and savings accounts was due in part to funds related to the stimulus package included in the CARES Act as well as funds on deposit from the PPP loans that were not fully utilized as of March 31, 2021. Seasonal fluctuations for ChoiceOne’s depositors also contributed to the growth in 2021 as tax refunds typically come in during the first quarter of the year.

Total borrowings declined $5.8 million in the first quarter 2021 as ChoiceOne made payments on its holding company term loan. ChoiceOne also holds $3.1 million in subordinated debentures obtained in the merger with Community Shores that represented a $4.5 million subordinated debt offering, offset by the merger mark-to-market adjustment. ChoiceOne may use Federal Home Loan Bank advances and advances from the Federal Reserve Bank Discount Window to meet short-term funding needs if needed in the remainder of 2021.

Shareholders' Equity

Total shareholders' equity decreased $8.6 million in the first quarter of 2021. Accumulated other comprehensive income declined $13.4 million in the first quarter of 2021 as a result of market value declines in ChoiceOne’s available for sale securities. The change was caused by increases in certain general market interest rates in the first three months of 2021. The decline in accumulated other comprehensive income was partially offset by net income, net of dividends paid.

Regulatory Capital Requirements

Following is information regarding compliance of ChoiceOne and the Bank with regulatory capital requirements:

											Minimum Required
											to be Well
						Minimum Required					Capitalized Under
						for Capital					Prompt Corrective
(Dollars in thousands)	Actual					Adequacy Purposes					Action Regulations
	Amount		Ratio			Amount		Ratio			Amount		Ratio
March 31, 2021
ChoiceOne Financial Services Inc.
Total capital (to risk weighted assets)		168,338		13.5	%		99,581		8.0	%		N/A		N/A
Common equity Tier 1 capital (to risk weighted assets) weighted assets)		156,098		12.5			56,014		4.5			N/A		N/A
Tier 1 capital (to risk weighted assets)		156,098		12.5			74,686		6.0			N/A		N/A
Tier 1 capital (to average assets)		156,098		8.1			77,229		4.0			N/A		N/A

ChoiceOne Bank
Total capital (to risk weighted assets)		163,242		13.1	%		99,430		8.0	%		124,288		10.0	%
Common equity Tier 1 capital (to risk weighted assets) weighted assets)		155,502		12.5			55,930		4.5			80,787		6.5
Tier 1 capital (to risk weighted assets)		155,502		12.5			74,573		6.0			99,430		8.0
Tier 1 capital (to average assets)		155,502		8.1			77,144		4.0			96,430		5.0


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) 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) weighted assets)		152,091		12.3			55,409		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

Management reviews the capital levels of ChoiceOne and ChoiceOne Bank on a regular basis. The Board of Directors and management believe that the capital levels as of March 31, 2021 are adequate for the foreseeable future. The Board of Directors’ determination of appropriate cash dividends for future periods will be based on, among other things, market conditions and ChoiceOne’s requirements for cash and capital.

Liquidity

Net cash provided by operating activities was $2.2 million for the three months ended March 31, 2021 compared to net cash used of $2.5 million in the same period a year ago. The change was primarily due to $3.0 million more in net income in the current year than the prior year and a $2.9 million net positive change in other liabilities. Net cash used in investing activities was $104.3 million for the first three months of 2021 compared to $19.0 million used in the same period in 2020. $179.2 million of cash used to purchase securities was offset by cash provided of $63.1 million in net loan originations. Net cash provided by financing activities was $157.9 million in the three months ended March 31, 2021, compared to $7.4 million provided in the same period in the prior year. Higher growth of $165.4 million in deposits in the first quarter of 2021 compared to $18.8 million in the same quarter in the prior year was the main driver of the year over year change.

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

NON-GAAP FINANCIAL MEASURES

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

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

A reconciliation of these non-GAAP financial measures follows:

Non-GAAP Reconciliation

(Unaudited)

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

	Three Months Ended March 31,
(In Thousands, Except Per Share Data)	2021		2020

Income before income tax	$	7,510	$	3,879
Adjustment for pre-tax merger expenses		-		302
Adjusted income before income tax	$	7,510	$	4,181

Income tax expense	$	1,272	$	625
Tax impact of adjustment for pre-tax merger expenses		-		20
Adjusted income tax expense	$	1,272	$	645

Net income	$	6,238	$	3,254
Adjustment for pre-tax merger expenses, net of tax impact		-		282
Adjusted net income	$	6,238	$	3,536

Basic earnings per share	$	0.80	$	0.45
Effect of merger expenses, net of tax impact		0.00		0.04
Adjusted basic earnings per share	$	0.80	$	0.49

Diluted earnings per share	$	0.80	$	0.45
Effect of merger expenses, net of tax impact		0.00		0.04
Adjusted diluted earnings per share	$	0.80	$	0.49

Item 4. Controls and Procedures.

An evaluation was performed under the supervision and with the participation of ChoiceOne’s management, including the Chief Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of ChoiceOne’s disclosure controls and procedures as of March 31, 2021. Based on and as of the time of that evaluation, ChoiceOne’s management, including the Chief Executive Officer and Principal Financial Officer, concluded that ChoiceOne’s disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that material information required to be disclosed in the reports that ChoiceOne files or submits under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that ChoiceOne files or submits under the Exchange Act is accumulated and communicated to management, including ChoiceOne’s principal executive and principal financial officers, as appropriate to allow for timely decisions regarding required disclosure. There was no change in ChoiceOne’s internal control over financial reporting that occurred during the three months ended March 31, 2021 that has materially affected, or that is reasonably likely to materially affect, ChoiceOne’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

There are no material pending legal proceedings to which ChoiceOne or ChoiceOne Bank is a party or to which any of their properties are subject, except for proceedings that arose in the ordinary course of business. In the belief of management, pending or current legal proceedings should not have a material effect on the consolidated financial condition of ChoiceOne.

Item 1A. Risk Factors.

Information concerning risk factors is contained in the discussion in Item 1A, “Risk Factors,” in ChoiceOne’s Annual Report on Form 10-K for the year ended December 31, 2020.

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

There were no unregistered sales of equity securities in the first quarter of 2021.

ISSUER PURCHASES OF EQUITY SECURITIES

There were no issuer purchases of equity securities during the first quarter of 2021.

Item 5. Other Information

None.

Item 6. Exhibits

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

Exhibit Number		Document

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

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

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

3.2		Bylaws of ChoiceOne as currently in effect and any amendments thereto. Previously filed as an exhibit to ChoiceOne’s Form 8-K filed April 21, 2021. Here incorporated by reference.
4.1		Advances, Pledge and Security Agreement between ChoiceOne Bank and the Federal Home Loan Bank of Indianapolis. Previously filed as an exhibit to ChoiceOne Financial Services, Inc.’s Form 10-K Annual Report for the year ended December 31, 2013. Here incorporated by reference.

31.1		Certification of Chief Executive Officer

31.2		Certification of Treasurer

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

101.INS		Inline XBRL Instance Document

101.SCH		Inline XBRL Taxonomy Extension Schema Document

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document

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

SIGNATURES

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

	CHOICEONE FINANCIAL SERVICES, INC.

Date: May 13, 2021	/s/ Kelly J. Potes
	Kelly J. Potes Chief Executive Officer (Principal Executive Officer)

Date: May 13, 2021	/s/ Thomas L. Lampen
	Thomas L. Lampen Treasurer (Principal Financial and Accounting Officer)

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