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 June 30, 2024
☐	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: 001-39209

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 July 31, 2024, the Registrant had 8,957,495 shares of common stock outstanding.

Table of Contents

		Page
PART I.	FINANCIAL INFORMATION	3
Item 1.	Financial Statements	3
	Consolidated Balance Sheets	3
	Consolidated Statements Of Income	4
	Consolidated Statements Of Comprehensive Income (Loss)	5
	Consolidated Statements Of Changes In Shareholders’ Equity	6
	Consolidated Statements Of Cash Flows	8
	Notes To Interim Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
Item 4.	Controls and Procedures	46
PART II.	OTHER INFORMATION	47
Item 1.	Legal Proceedings	47
Item 1A.	Risk Factors	47
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49
Item 5.	Other Information	49
Item 6.	Exhibits	50
Signatures		51

PART I.  FINANCIAL INFORMATION

 Item 1.  Financial Statements.

ChoiceOne Financial Services, Inc.
CONSOLIDATED BALANCE SHEETS (Unaudited)

(Dollars in thousands, except share data)	June 30, 2024			December 31, 2023
Assets
Cash and due from banks	$	100,652		$	55,083
Time deposits in other financial institutions		350			350
Cash and cash equivalents		101,002			55,433
Equity securities, at fair value (Note 2)		7,502			7,505
Securities available for sale, at fair value (Note 2)		491,670			514,598
Securities held to maturity, at amortized cost net of credit losses (Note 2)		392,699			407,959
Federal Home Loan Bank stock		4,449			4,449
Federal Reserve Bank stock		5,066			5,065
Loans held for sale		5,946			4,710
Loans to other financial institutions (Note 3)		36,569			19,400
Core loans (Note 3)		1,400,958			1,391,253
Total loans held for investment (Note 3)		1,437,527			1,410,653
Allowance for credit losses (Note 3)		(16,152	)		(15,685	)
Loans, net		1,421,375			1,394,968
Premises and equipment, net		27,370			29,750
Other real estate owned, net		272			122
Cash value of life insurance policies		45,384			45,074
Goodwill		59,946			59,946
Core deposit intangible		1,448			1,854
Other assets		58,938			45,273
Total assets	$	2,623,067		$	2,576,706
Liabilities
Deposits – noninterest-bearing	$	517,137		$	547,625
Deposits – interest-bearing		1,582,365			1,550,985
Brokered deposits		27,177			23,445
Total deposits		2,126,679			2,122,055
Borrowings		210,000			200,000
Subordinated debentures		35,630			35,507
Other liabilities		36,239			23,510
Total liabilities		2,408,548			2,381,072
Shareholders’ Equity
Preferred stock; shares authorized: 100,000; shares outstanding: none		-			-
Common stock and paid-in capital, no par value; shares authorized: 15,000,000; shares outstanding: 7,573,618 at June 30, 2024 and 7,548,217 at December 31, 2023		173,984			173,513
Retained earnings		81,836			73,699
Accumulated other comprehensive loss, net		(41,301	)		(51,578	)
Total shareholders’ equity		214,519			195,634
Total liabilities and shareholders’ equity	$	2,623,067		$	2,576,706

See accompanying notes to interim consolidated financial statements.

3

 ChoiceOne Financial Services, Inc.

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(Dollars in thousands, except share data)	Three Months Ended June 30,						Six Months Ended June 30,
	2024			2023			2024			2023
Interest income
Loans, including fees	$	21,971		$	15,978		$	42,757		$	30,851
Securities:
Taxable		5,471			5,378			10,819			10,291
Tax exempt		1,410			1,389			2,822			2,824
Other		1,092			571			1,978			748
Total interest income		29,944			23,316			58,376			44,714
Interest expense
Deposits		8,325			5,056			17,102			8,332
Advances from Federal Home Loan Bank		463			621			904			1,226
Other		2,785			1,548			5,525			2,053
Total interest expense		11,573			7,225			23,531			11,611
Net interest income		18,371			16,091			34,845			33,103
Provision for (reversal of) credit losses on loans		272			(415	)		675			(106	)
Provision for (reversal of) credit losses on unfunded commitments		(272	)		165			(675	)		(119	)
Net Provision for (reversal of) credit losses expense		-			(250	)		-			(225	)
Net interest income after provision		18,371			16,341			34,845			33,328
Noninterest income
Customer service charges		2,662			2,271			5,067			4,538
Insurance and investment commissions		190			172			388			368
Gains on sales of loans		525			540			979			943
Net gains (losses) on sales of securities		-			-			-			-
Net gains on sales and write downs of other assets		11			133			12			136
Earnings on life insurance policies		305			269			800			532
Trust income		220			196			433			380
Change in market value of equity securities		(71	)		(385	)		(36	)		(322	)
Other		241			289			491			581
Total noninterest income		4,083			3,485			8,134			7,156
Noninterest expense
Salaries and benefits		8,264			7,837			16,095			15,920
Occupancy and equipment		1,477			1,507			2,939			3,150
Data processing		1,780			1,681			3,450			3,363
Professional fees		593			619			1,208			1,240
Supplies and postage		168			197			346			388
Advertising and promotional		199			155			349			304
Intangible amortization		203			253			406			505
FDIC insurance		390			220			765			520
Other		1,204			1,104			2,404			2,178
Total noninterest expense		14,278			13,573			27,962			27,568
Income before income tax		8,176			6,253			15,017			12,916
Income tax expense		1,590			1,040			2,797			2,070
Net income	$	6,586		$	5,213		$	12,220		$	10,846
Basic earnings per share (Note 4)	$	0.87		$	0.69		$	1.62		$	1.44
Diluted earnings per share (Note 4)	$	0.87		$	0.69		$	1.61		$	1.44
Dividends declared per share	$	0.27		$	0.26		$	0.54		$	0.52

See accompanying notes to interim consolidated financial statements.

4

ChoiceOne Financial Services, Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)

(Dollars in thousands)	Three Months Ended June 30,						Six Months Ended June 30,
	2024			2023			2024			2023
Net income	$	6,586		$	5,213		$	12,220		$	10,846
Other comprehensive income:
Change in net unrealized gain (loss) on available-for-sale securities		184			(5,018	)		(2,986	)		8,676
Income tax benefit (expense)		(39	)		1,054			627			(1,822	)
Less: reclassification adjustment for net (gain) loss included in net income		-			-			-			-
Income tax benefit (expense)		-			-			-			-
Less: reclassification adjustment for net (gain) loss for fair value hedge		1,663			6,752			6,986			731
Income tax benefit (expense)		(349	)		(1,417	)		(1,467	)		(153	)
Less: net unrealized (gains) losses on securities transferred from available-for-sale to held-to-maturity		-			-			-			-
Income tax benefit (expense)		-			-			-			-
Unrealized gain (loss) on available-for-sale securities, net of tax		1,459			1,371			3,160			7,432
Reclassification of unrealized gain (loss) upon transfer of securities from available-for-sale to held-to-maturity		-			-			-			-
Income tax benefit (expense)		-			-			-			-
Amortization of net unrealized (gains) losses on securities transferred from available-for-sale to held-to-maturity		56			165			112			194
Income tax benefit (expense)		(12	)		(35	)		(24	)		(41	)
Unrealized loss on held to maturity securities, net of tax		44			130			88			153
Change in net unrealized gain (loss) on cash flow hedge		1,719			6,019			7,805			3,123
Income tax benefit (expense)		(361	)		(1,264	)		(1,639	)		(656	)
Less: reclassification adjustment for net (gain) loss on cash flow hedge		-			-			-			-
Income tax benefit (expense)		-			-			-			-
Less: amortization of net unrealized (gains) losses included in net income		205			887			1,092			1,043
Income tax benefit (expense)		(43	)		(186	)		(229	)		(219	)
Unrealized gain (loss) on cash flow hedge instruments, net of tax		1,520			5,456			7,029			3,291
Other comprehensive income (loss), net of tax		3,023			6,957			10,277			10,876
Comprehensive income (loss)	$	9,609		$	12,170		$	22,497		$	21,722

 See accompanying notes to interim consolidated financial statements.

5

ChoiceOne Financial Services, Inc.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

For the six months ended June 30,

(Dollars in thousands, except per share data)	Number of Shares		Common Stock and Paid in Capital		Retained Earnings			Accumulated Other Comprehensive Income/(Loss), Net			Total
Balance, January 1, 2023		7,516,098	$	172,277	$	60,348		$	(71,797	)	$	160,828
Net income						10,846						10,846
Other comprehensive income (loss)									10,876			10,876
Shares issued		18,560		297								297
Effect of employee stock purchases				14								14
Stock-based compensation expense				292								292
Cash dividends declared ($0.52 per share)						(3,913	)					(3,913	)
Balance, June 30, 2023		7,534,658	$	172,880	$	67,281		$	(60,921	)	$	179,240
Balance, January 1, 2024		7,548,217	$	173,513	$	73,699		$	(51,578	)	$	195,634
Net income						12,220						12,220
Other comprehensive income (loss)									10,277			10,277
Shares issued		24,521		115								115
Effect of employee stock purchases				22								22
Stock options exercised and issued (1)		880										-
Stock-based compensation expense				334								334
Cash dividends declared ($0.54 per share)						(4,083	)					(4,083	)
Balance, June 30, 2024		7,573,618	$	173,984	$	81,836		$	(41,301	)	$	214,519

(1) The amount shown represents the number of shares issued in net exercise transactions where shares were surrendered in payment of taxes and/or payment of all or part of the exercise price.

6

ChoiceOne Financial Services, Inc.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

For the three months ended June 30,

(Dollars in thousands, except per share data)	Number of Shares		Common Stock and Paid in Capital		Retained Earnings			Accumulated Other Comprehensive Income/(Loss), Net			Total
Balance, April 1, 2023		7,521,749	$	172,564	$	64,026		$	(67,878	)	$	168,712
Net income						5,213						5,213
Other comprehensive income (loss)									6,957			6,957
Shares issued		12,909		150								150
Effect of employee stock purchases				7								7
Stock-based compensation expense				159								159
Cash dividends declared ($0.26 per share)						(1,958	)					(1,958	)
Balance, June 30, 2023		7,534,658	$	172,880	$	67,281		$	(60,921	)	$	179,240
Balance, April 1, 2024		7,556,137	$	173,786	$	77,294		$	(44,324	)	$	206,756
Net income						6,586						6,586
Other comprehensive income (loss)									3,023			3,023
Shares issued		17,481		25								25
Effect of employee stock purchases				11								11
Stock-based compensation expense				162								162
Cash dividends declared ($0.27 per share)						(2,044	)					(2,044	)
Balance, June 30, 2024		7,573,618	$	173,984	$	81,836		$	(41,301	)	$	214,519

(1) The amount shown represents the number of shares issued in net exercise transactions where shares were surrendered in payment of taxes and/or payment of all or part of the exercise price.

7

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

	Six Months Ended June 30,
(Dollars in thousands)	2024			2023
Cash flows from operating activities:
Net income	$	12,220		$	10,846
Adjustments to reconcile net income to net cash from operating activities:
(Reversal of) provision for credit losses		-			(225	)
Depreciation		1,272			1,230
Amortization		4,810			4,970
Compensation expense on employee and director stock purchases, stock options, and restricted stock units		576			487
Net change in market value of equity securities		36			322
Gains on sales of loans		(979	)		(943	)
Loans originated for sale		(29,067	)		(29,192	)
Proceeds from loan sales		28,400			25,684
Earnings on bank-owned life insurance		(604	)		(532	)
Earnings on death benefit from bank-owned life insurance		(196	)		-
Deferred federal income tax (benefit)/expense		231			59
Net change in:
Other assets		794			6,601
Other liabilities		13,557			5,856
Net cash provided by operating activities		31,050			25,163
Cash flows from investing activities:
Sales of equity securities		-			42
Maturities, prepayments and calls of securities available for sale		17,962			15,159
Maturities, prepayments and calls of securities held to maturity		15,086			5,091
Purchases of securities available for sale		(768	)		(676	)
Purchases of equity securities		(33	)		(98	)
Purchases of securities held to maturity		(700	)		(597	)
Purchase of Federal Home Loan Bank stock		(1	)		(4,849	)
Loan originations and payments, net		(27,232	)		(74,553	)
Proceeds from bank owned life insurance death benefits claim		490			-
Additions to premises and equipment		(794	)		(2,212	)
Payments for derivative contracts settlements		-			(4,191	)
Net cash provided by (used in) investing activities		4,010			(66,884	)
Cash flows from financing activities:
Net change in deposits		4,624			(31,615	)
Net change in short term borrowings		10,073			110,000
Issuance of common stock		115			116
Share based compensation withholding obligation		(220	)		-
Cash dividends		(4,083	)		(3,913	)
Net cash provided by financing activities		10,509			74,588
Net change in cash and cash equivalents		45,569			32,867
Beginning cash and cash equivalents		55,433			43,943
Ending cash and cash equivalents	$	101,002		$	76,810
Supplemental disclosures of cash flow information:
Cash paid for interest	$	24,686		$	10,269
Cash paid for income taxes		2,750			2,900
Loans transferred to other real estate owned		150			266

See accompanying notes to interim consolidated financial statements.

8

ChoiceOne Financial Services, Inc.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include ChoiceOne Financial Services, Inc. (“ChoiceOne”), its wholly-owned subsidiaries, ChoiceOne Bank (the “Bank”) and 109 Technologies, LLC, and ChoiceOne Bank’s wholly-owned subsidiary, ChoiceOne Insurance Agencies, Inc. (the “Insurance Agency”). 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 such financial statements.  Operating results for the six months ended June 30, 2024, are not necessarily indicative of the results that may be expected for the year ending December 31, 2024.

The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in ChoiceOne’s Annual Report on Form 10-K for the year ended December 31, 2023.

Use of Estimates

To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, ChoiceOne’s management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided. These estimates and assumptions are subject to many risks and uncertainties, and actual results may differ from these estimates. Estimates associated with the allowance for credit losses and the unrealized gains and losses on securities available for sale and held to maturity are particularly susceptible to change.

Goodwill

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

Core Deposit Intangible

Core deposit intangible represents the value of the acquired customer core deposit bases and is included as an asset on the consolidated balance sheets. The core deposit intangible has an estimated finite life, is amortized on an accelerated basis over a 120 month period and is subject to periodic impairment evaluation.

Stock Transactions

A total of 3,883 and 7,705 shares of common stock were issued to ChoiceOne’s Board of Directors for a cash price of $106,000 and $219,000 under the terms of the Directors’ Stock Purchase Plan in the second quarter and first half of 2024, respectively. A total of 2,506 and 4,906 shares for a cash price of $61,000 and $117,000 were issued under the Employee Stock Purchase Plan in the second quarter and first half of 2024, respectively.  ChoiceOne’s common stock repurchase program announced in April 2021 and amended in 2022, authorizes repurchases of up to 375,388 shares, representing 5% of the total outstanding shares of common stock as of the date the program was adopted.  No shares were repurchased under this program in the second quarter of 2024.

Reclassifications

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

9

Allowance for Credit Losses (“ACL”)

The ACL is a valuation allowance for expected credit losses. The ACL is increased by the provision for credit losses and decreased by loans charged off less any recoveries of charged off loans. As ChoiceOne has had very limited loss experience since 2011, management elected to utilize benchmark peer loss history data to estimate historical loss rates.  ChoiceOne identified an appropriate peer group for each loan cohort which shared similar characteristics. Management estimates the ACL required based on the selected peer group loan loss experience, the nature and volume of the loan portfolio, information about specific borrower situations and estimated collateral values, a reasonable and supportable economic forecast, and other factors. Allocations of the ACL may be made for specific loans, but the entire ACL is available for any loan that, in management’s judgment, should be charged off. Loan losses are charged against the ACL when management believes that collection of a loan balance is not possible.

The ACL consists of general and specific components. The general component covers loans collectively evaluated for credit losses and is based on peer historical loss experience adjusted for current and forecasted factors. Management’s adjustment for current and forecasted factors is based on trends in delinquencies, trends in charge-offs and recoveries, trends in the volume of loans, changes in underwriting standards, trends in loan review findings, the experience and ability of lending staff, and a reasonable and supportable economic forecast described further below.

The discounted cash flow methodology is utilized for all loan pools.  This methodology is supported by our CECL software provider and allows management to calculate contractual life by factoring in all cash flows and adjusting them for behavioral and credit-related aspects.

Reasonable and supportable economic forecasts have to be incorporated in determining expected credit losses. The forecast period represents the time frame from the current period end through the point in time that we can reasonably forecast and support entity and environmental factors that are expected to impact the performance of our loan portfolio. Ideally, the economic forecast period would encompass the contractual terms of all loans; however, the ability to produce a forecast that is considered reasonable and supportable becomes more difficult or may not be possible in later periods. Subsequent to the end of the forecast period, we revert to historical loan data based on an ongoing evaluation of each economic forecast in relation to then current economic conditions as well as any developing loan loss activity and resulting historical data. As of June 30, 2024, we used a one-year reasonable and supportable economic forecast period, with a two year straight-line reversion period.

We are not required to develop and use our own economic forecast model, and we elected to utilize economic forecasts from third-party providers that analyze and develop forecasts of the economy for the entire United States at least quarterly.

Other inputs to the calculation are also updated or reviewed quarterly.  Prepayment speeds are updated on a one quarter lag based on the asset liability model from the previous quarter.  This model is performed at the loan level.  Curtailment is updated quarterly within the ACL model based on our peer group average.  The reversion period is reviewed by management quarterly with consideration of the current economic climate.

We are also required to consider expected credit losses associated with loan commitments over the contractual period in which we are exposed to credit risk on the underlying commitments unless the obligation is unconditionally cancellable by us. Any allowance for off-balance sheet credit exposures is reported as an other liability on our Consolidated Balance Sheet and is increased or decreased via the provision for credit losses account on our Consolidated Statement of Income. The calculation includes consideration of the likelihood that funding will occur and forecasted credit losses on commitments expected to be funded over their estimated lives. The allowance is calculated using the same aggregate reserve rates calculated for the funded portion of loans at the portfolio level applied to the amount of commitments expected to be funded.

Loans that do not share risk characteristics are evaluated on an individual basis and are excluded from the collective evaluation. ChoiceOne has determined that any loans which have been placed on non-performing status, loans with a risk rating of 6 or higher, and loans past due more than 60 days will be assessed individually for evaluation.  Management’s judgment will be used to determine if the loan should be migrated back to pool on an individual basis.  Individual analysis will establish a specific reserve for loans in scope. Specific reserves on non-performing loans are typically based on management’s best estimate of the fair value of collateral securing these loans, adjusted for selling costs as appropriate or based on the present value of the expected cash flows from that loan.

10

Securities

Debt securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Debt securities are classified as available for sale because they might be sold before maturity. Debt securities classified as available for sale are carried at fair value, with unrealized holding gains and losses reported separately in the accumulated other comprehensive income or loss section of shareholders’ equity, net of tax effect. Restricted investments in Federal Reserve Bank stock and Federal Home Loan Bank stock are carried at cost. Equity securities consist of investments in preferred stock and investments in common stock of other financial institutions. Equity securities are reported at their fair value with changes in market value reported through current earnings.

Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized using the level-yield method without anticipating prepayments. Gains or losses on sales are recorded on the trade date based on the amortized cost of the security sold.

Securities Available for Sale (“AFS”) – For securities AFS in an unrealized loss position, management determines whether they intend to sell or if it is more likely than not that ChoiceOne will be required to sell the security before recovery of the amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income with an allowance being established under CECL.  For securities AFS with unrealized losses not meeting these criteria, management evaluates whether any decline in fair value is due to credit loss factors.  In making this assessment, management considers any changes to the rating of the security by rating agencies and adverse conditions specifically related to the issuer of the security, among other factors.  If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security.  If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses (“ACL”) is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Changes in the ACL under ASC 326-30 are recorded as provisions for (or reversal of) credit loss expense.  Losses are charged against the allowance when the collectability of a security AFS is confirmed or when either of the criteria regarding intent or requirement to sell is met.  Any impairment that has not been recorded through an ACL is recognized in other comprehensive income, net of income taxes.  At June 30, 2024, there was no ACL related to securities AFS.  Accrued interest receivable on securities AFS was excluded from the estimate of credit losses.

Securities Held to Maturity (“HTM”) – Since the adoption of CECL, ChoiceOne measures credit losses on securities HTM on a collective basis by major security type with each type sharing similar risk characteristics, and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. The ACL on HTM securities is a contra asset valuation account that is deducted from the carrying amount of securities HTM to present the net amount expected to be collected.  HTM securities are charged off against the ACL when deemed uncollectible. Adjustments to the ACL are reported in ChoiceOne’s Consolidated Statements of Income in the provision for credit losses.  Accrued interest receivable on securities HTM is excluded from the estimate of credit losses. With regard to US Treasury securities, these have an explicit government guarantee; therefore, no ACL is recorded for these securities.  With regard to obligations of states and political subdivisions and other HTM securities, management considers (1) issuer bond ratings, (2) historical loss rates for given bond ratings, (3) the financial condition of the issuer, and (4) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities.  A discounted cash flow method will be used to determine the reserve required for any credit losses on HTM securities.  At June 30, 2024, the ACL related to securities HTM is insignificant.

Recent Accounting Pronouncements

Improvements to Income Tax Disclosure

ASU 2023-09 enhances transparency by requiring consistent categorization, greater disaggregation, and detailed disclosure related to income taxes paid. These changes aim to help users of financial statements understand factors contributing to differences between effective and statutory tax rates. The disclosure is effective for annual reporting periods beginning after December 15, 2024.

11

NOTE 2 – SECURITIES

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

	June 30, 2024
(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Equity securities	$	7,993	$	266	$	(757	)	$	7,502

	December 31, 2023
(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Equity securities	$	7,960	$	212	$	(667	)	$	7,505

The following tables present the amortized cost and fair value of securities available for sale and the gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) and the amortized cost and fair value of securities held to maturity and the related gross unrealized gains and losses:

	June 30, 2024
(Dollars in thousands) Available for Sale:	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Treasury notes and bonds	$	90,112	$	-	$	(10,801	)	$	79,311
State and municipal		260,866		-		(31,611	)		229,255
Mortgage-backed		196,032		26		(23,000	)		173,058
Corporate		250		-		(45	)		205
Asset-backed securities		10,050		-		(209	)		9,841
Total	$	557,310	$	26	$	(65,666	)	$	491,670
(Dollars in thousands)
Held to Maturity:
U.S. Government and federal agency	$	2,975	$	-	$	(340	)	$	2,635
State and municipal		195,460		6		(32,418	)		163,048
Mortgage-backed		173,860		-		(24,715	)		149,145
Corporate		20,028		19		(2,652	)		17,395
Asset-backed securities		376		-		(16	)		360
Total	$	392,699	$	25	$	(60,141	)	$	332,583

12

	December 31, 2023
(Dollars in thousands) Available for Sale:	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Treasury notes and bonds	$	90,345	$	-	$	(10,151	)	$	80,194
State and municipal		269,918		-		(35,236	)		234,682
Mortgage-backed		212,392		14		(23,905	)		188,501
Corporate		250		-		(46	)		204
Asset-backed securities		11,334		-		(317	)		11,017
Total	$	584,239	$	14	$	(69,655	)	$	514,598
(Dollars in thousands)
Held to Maturity:
U.S. Government and federal agency	$	2,972	$	-	$	(293	)	$	2,679
State and municipal		196,098		14		(30,220	)		165,892
Mortgage-backed		188,329		-		(25,796	)		162,533
Corporate		20,013		21		(2,864	)		17,170
Asset-backed securities		547		-		(30	)		517
Total	$	407,959	$	35	$	(59,203	)	$	348,791

Available for sale securities with unrealized losses as of June 30, 2024 and December 31, 2023, aggregated by investment category and length of time the individual securities have been in an unrealized loss position, were as follows:

	June 30, 2024
	Less than 12 months				More than 12 months				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
(Dollars in thousands) Available for Sale:
U.S. Treasury notes and bonds	$	-	$	-	$	79,311	$	10,801	$	79,311	$	10,801
State and municipal		-		-		229,255		31,611		229,255		31,611
Mortgage-backed		2,503		14		159,321		22,986		161,824		23,000
Corporate		-		-		205		45		205		45
Asset-backed securities		-		-		9,841		209		9,841		209
Total temporarily impaired	$	2,503	$	14	$	477,933	$	65,652	$	480,436	$	65,666

	December 31, 2023
	Less than 12 months				More than 12 months				Total
(Dollars in thousands) Available for Sale:	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. Treasury notes and bonds	$	-	$	-	$	80,194	$	10,151	$	80,194	$	10,151
State and municipal		557		6		234,125		35,230		234,682		35,236
Mortgage-backed		1,255		23		176,400		23,882		177,655		23,905
Corporate		-		-		204		46		204		46
Asset-backed securities		-		-		11,017		317		11,017		317
Total temporarily impaired	$	1,812	$	29	$	501,940	$	69,626	$	503,752	$	69,655

13

Held to maturity securities with unrealized losses as of June 30, 2024 and December 31, 2023, aggregated by investment category and length of time the individual securities have been in an unrealized loss position, were as follows:

	June 30, 2024
	Less than 12 months				More than 12 months				Total
(Dollars in thousands) Held to Maturity:	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. Government and federal agency	$	-	$	-	$	2,635	$	340	$	2,635	$	340
State and municipal		7,256		1,350		155,628		31,068		162,884		32,418
Mortgage-backed		-		-		149,145		24,715		149,145		24,715
Corporate		-		-		15,731		2,652		15,731		2,652
Asset-backed securities		-		-		360		16		360		16
Total temporarily impaired	$	7,256	$	1,350	$	323,499	$	58,791	$	330,755	$	60,141

	December 31, 2023
	Less than 12 months				More than 12 months				Total
(Dollars in thousands) Held to Maturity:	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. Government and federal agency	$	-	$	-	$	2,679	$	293	$	2,679	$	293
State and municipal		23		-		165,526		30,220		165,549		30,220
Mortgage-backed		-		-		162,533		25,796		162,533		25,796
Corporate		-		-		15,509		2,864		15,509		2,864
Asset-backed securities		-		-		517		30		517		30
Total temporarily impaired	$	23	$	-	$	346,764	$	59,203	$	346,787	$	59,203

ChoiceOne evaluates all securities on a quarterly basis to determine if an ACL and corresponding impairment charge should be recorded. Consideration is given to the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of ChoiceOne to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value of amortized cost basis. ChoiceOne believes that unrealized losses on securities were temporary in nature and were caused primarily by changes in interest rates, increased credit spreads, and reduced market liquidity and were not caused by the credit status of the issuer.  No ACL was recorded in the three and six months ended June 30, 2024 and 2023.

At June 30, 2024 and December 31, 2023, there were 553 and 569 securities with an unrealized loss, respectively.  Unrealized losses have not been recognized into income because the issuers’ bonds are of high credit quality, and management does not intend to sell prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions. The issuers continue to make timely principal and interest payments on the bonds. The fair value is expected to recover as the bonds approach maturity.

The majority of unrealized losses at June 30, 2024, are related to U.S. Treasury notes and bonds, state and municipal bonds and mortgage backed securities.  The U.S. Treasury notes are guaranteed by the U.S. government and 100% of the notes are rated AA or better. State and municipal bonds are backed by the taxing authority of the bond issuer or the revenues from the bond. On June 30, 2024, 85% of state and municipal bonds held are rated AA or better, 11% are A rated and 4% are not rated.  Of the mortgage-backed securities held on June 30, 2024, 42% were issued by US government sponsored entities and agencies, and rated AA, 43% are AAA rated private issue and collateralized mortgage obligation, and 15% are unrated privately issued mortgage-backed securities with structured credit enhancement and collateralized mortgage obligation.

14

Presented below is a schedule of maturities of securities as of June 30, 2024.  Available for sale securities are reported at fair value and held to maturity securities are reported at amortized cost.  Callable securities in the money are presumed called and matured at the callable date.

	Available for Sale Securities maturing within:
(Dollars in thousands)	Less than 1 Year		1 Year - 5 Years		5 Years - 10 Years		More than 10 Years		Fair Value at June 30, 2024
U.S. Treasury notes and bonds	$	-	$	73,173	$	6,138	$	-	$	79,311
State and municipal		1,006		15,130		77,614		135,505		229,255
Corporate		-		-		205		-		205
Asset-backed securities		-		7,192		2,649		-		9,841
Total debt securities		1,006		95,495		86,606		135,505		318,612
Mortgage-backed securities		12,846		79,329		56,372		24,511		173,058
Total Available for Sale	$	13,852	$	174,824	$	142,978	$	160,016	$	491,670

	Held to Maturity Securities maturing within:
(Dollars in thousands)	Less than 1 Year		1 Year - 5 Years		5 Years - 10 Years		More than 10 Years		Amortized Cost at June 30, 2024
U.S. Government and federal agency	$	-	$	2,975	$	-	$	-	$	2,975
State and municipal		1,690		17,189		98,079		78,502		195,460
Corporate		-		-		20,028		-		20,028
Asset-backed securities		376		-		-		-		376
Total debt securities		2,066		20,164		118,107		78,502		218,839
Mortgage-backed securities		16,659		29,543		127,658		-		173,860
Total Held to Maturity	$	18,725	$	49,707	$	245,765	$	78,502	$	392,699

Following is information regarding unrealized gains and losses on equity securities for the three and six months ended June 30, 2024 and 2023:

	Three Months Ended June 30,						Six Months Ended June 30,
	2024			2023			2024			2023
(Dollars in thousands)
Net gains and (losses) recognized during the period	$	(71	)	$	(385	)	$	(36	)	$	(322	)
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	$	(71	)	$	(385	)	$	(36	)	$	(322	)

15

NOTE 3 – LOANS AND ALLOWANCE FOR CREDIT LOSSES

Loans by type as a percentage of the portfolio were as follows:

	June 30, 2024					December 31, 2023
(Dollars in thousands)	Balance		%			Balance		%			Percent Increase (Decrease)
Agricultural	$	45,274		3.2	%	$	49,210		3.5	%		(8.0	)%
Commercial and Industrial		224,031		15.6	%		229,915		16.3	%		(2.6	)%
Commercial Real Estate		804,213		55.9	%		786,921		55.8	%		2.2	%
Consumer		32,811		2.3	%		36,541		2.6	%		(10.2	)%
Construction Real Estate		18,751		1.3	%		20,936		1.5	%		(10.4	)%
Residential Real Estate		275,878		19.2	%		267,730		19.0	%		3.0	%
Loans to Other Financial Institutions		36,569		2.5	%		19,400		1.4	%		88.5	%
Gross Loans	$	1,437,527				$	1,410,653
Allowance for credit losses		16,152		1.12	%		15,685		1.11	%
Net loans	$	1,421,375				$	1,394,968

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

(Dollars in thousands)	Agricultural		Commercial And Industrial			Consumer			Commercial Real Estate		Construction Real Estate			Residential Real Estate			Loans to Other Financial Institutions		Total
Allowance for Credit Losses Three Months Ended June 30, 2024
Beginning balance	$	97	$	2,243		$	918		$	9,167	$	49		$	3,513		$	50	$	16,037
Charge-offs		-		-			(328	)		-		-			-			-		(328	)
Recoveries		-		2			166			-		-			3			-		171
Provision		15		(84	)		39			194		-			108			-		272
Ending balance	$	112	$	2,161		$	795		$	9,361	$	49		$	3,624		$	50	$	16,152
Allowance for Credit Losses Six Months Ended June 30, 2024
Beginning balance	$	94	$	2,216		$	823		$	8,820	$	58		$	3,644		$	30	$	15,685
Charge-offs		-		(1	)		(451	)		-		-			-			-		(452	)
Recoveries		-		11			226			-		-			7			-		244
Provision		18		(65	)		197			541		(9	)		(27	)		20		675
Ending balance	$	112	$	2,161		$	795		$	9,361	$	49		$	3,624		$	50	$	16,152
Individually evaluated for credit loss	$	1	$	7		$	-		$	1	$	-		$	78		$	-	$	87
Collectively evaluated for credit loss	$	111	$	2,154		$	795		$	9,360	$	49		$	3,546		$	50	$	16,065
Loans
June 30, 2024
Individually evaluated for credit loss	$	27	$	151		$	4		$	383	$	-		$	1,927		$	-	$	2,492
Collectively evaluated for credit loss		45,247		223,880			32,807			803,830		18,751			273,951			36,569		1,435,035
Ending balance	$	45,274	$	224,031		$	32,811		$	804,213	$	18,751		$	275,878		$	36,569	$	1,437,527

16

(Dollars in thousands)	Agricultural		Commercial and Industrial		Consumer		Commercial Real Estate		Construction Real Estate		Residential Real Estate		Loans to Other Financial Institutions		Total
Allowance for Credit Losses December 31, 2023
Individually evaluated for impairment	$	2	$	6	$	-	$	1	$	-	$	51	$	-	$	60
Collectively evaluated for impairment	$	92	$	2,210	$	823	$	8,819	$	58	$	3,593	$	30	$	15,625
Loans
December 31, 2023
Individually evaluated for impairment	$	54	$	136	$	2	$	29	$	-	$	1,858	$	-	$	2,079
Collectively evaluated for impairment	$	49,156	$	229,779	$	36,539	$	786,892	$	20,936	$	265,872	$	19,400		1,408,574
Acquired with deteriorated credit quality		-		-		-		-		-		-		-		-
Ending balance	$	49,210	$	229,915	$	36,541	$	786,921	$	20,936	$	267,730	$	19,400	$	1,410,653

(Dollars in thousands)	Agricultural			Commercial and Industrial			Consumer			Commercial Real Estate			Construction Real Estate			Residential Real Estate		Loans to Other Financial Institution		Unallocated			Total
Allowance for Credit Losses Three Months Ended June 30, 2023
Beginning balance	$	136		$	3,020		$	913		$	7,837		$	72		$	3,087	$	-	$	-		$	15,065
Charge-offs		-			-			(131	)		-			-			-		-		-			(131	)
Recoveries		-			2			59			-			-			2		-		-			63
Provision		(58	)		(126	)		44			(600	)		(2	)		287		40		-			(415	)
Ending balance	$	78		$	2,896		$	885		$	7,237		$	70		$	3,376	$	40	$	-		$	14,582
Allowance for Credit Losses Six Months Ended June 30, 2023
Beginning balance	$	144		$	1,361		$	310		$	4,822		$	63		$	906	$	-	$	13		$	7,619
Cumulative effect of change in accounting principle	$	14		$	1,587		$	541		$	3,006		$	20		$	2,010		-	$	(13	)		7,165
Charge-offs		-			-			(271	)		-			-			-		-		-			(271	)
Recoveries		-			29			129			13			-			5		-		-			176
Provision		(80	)		(81	)		176			(604	)		(13	)		455		40		-			(106	)
Ending balance	$	78		$	2,896		$	885		$	7,237		$	70		$	3,376	$	-	$	-		$	14,582
Individually evaluated for impairment	$	1		$	34		$	-		$	1		$	-		$	36	$	-	$	-		$	72
Collectively evaluated for impairment	$	77		$	2,862		$	885		$	7,236		$	70		$	3,340	$	40	$	-		$	14,510

17

The provision for credit losses on loans was an expense of $272,000 in the second quarter of 2024, compared to a reversal of expense of $415,000 in the same period in the prior year.  The provision expense was deemed necessary due to the increase in reserve for collateral dependent loans and an increase in qualitative factors related to the value of underlying collateral for collateral dependent non owner occupied loans and consumer loans.

The process to monitor the credit quality of ChoiceOne’s loan portfolio includes tracking (1) the risk ratings of business loans and (2) 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.

18

The following table reflects the amortized cost basis of loans as of June 30, 2024 based on year of origination (dollars in thousands):

Commercial:	2024		2023		2022		2021		2020		Prior		Term Loans Total		Revolving Loans		Grand Total
Agricultural
Pass	$	4,093	$	2,064	$	3,391	$	2,998	$	1,588	$	20,055	$	34,189	$	10,887	$	45,076
Special mention		-		-		-		-		-		198		198		-		198
Substandard		-		-		-		-		-		-		-		-		-
Doubtful		-		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-		-
Total	$	4,093	$	2,064	$	3,391	$	2,998	$	1,588	$	20,253	$	34,387	$	10,887	$	45,274
Current year-to-date gross write-offs (1)	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Commercial and Industrial
Pass	$	12,034	$	22,713	$	35,475	$	18,536	$	8,736	$	15,342	$	112,836	$	110,682	$	223,518
Special mention		-		-		102		21		31		245		399		112		511
Substandard		-		-		-		-		-		-		-		2		2
Doubtful		-		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-		-
Total	$	12,034	$	22,713	$	35,577	$	18,557	$	8,767	$	15,587	$	113,235	$	110,796	$	224,031
Current year-to-date gross write-offs (1)	$	-	$	-	$	-	$	-	$	-	$	1	$	1	$	-	$	1
Commercial Real Estate
Pass	$	28,961	$	152,813	$	121,262	$	102,700	$	69,234	$	168,671	$	643,641	$	159,854	$	803,495
Special mention		-		-		-		-		-		362		362		-		362
Substandard		-		-		356		-		-		-		356		-		356
Doubtful		-		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-		-
Total	$	28,961	$	152,813	$	121,618	$	102,700	$	69,234	$	169,033	$	644,359	$	159,854	$	804,213
Current year-to-date gross write-offs (1)	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Total Commercial Loans	$	45,088	$	177,590	$	160,586	$	124,255	$	79,589	$	204,873	$	791,981	$	281,537	$	1,073,518

19

Retail:	2024		2023		2022		2021		2020		Prior		Term Loans Total		Revolving Loans		Grand Total
Consumer
Performing	$	4,325	$	7,989	$	10,010	$	5,586	$	2,136	$	1,710	$	31,756	$	1,051	$	32,807
Nonperforming		-		-		-		-		-		-		-		-		-
Nonaccrual		-		-		3		1		-		-		4		-		4
Total	$	4,325	$	7,989	$	10,013	$	5,587	$	2,136	$	1,710	$	31,760	$	1,051	$	32,811
Current year-to-date gross write-offs (1)	$	-	$	34	$	103	$	1	$	-	$	2	$	140	$	-	$	140
Construction real estate
Performing	$	1,105	$	2,209	$	-	$	538	$	-	$	-	$	3,852	$	14,899	$	18,751
Nonperforming		-		-		-		-		-		-		-		-		-
Nonaccrual		-		-		-		-		-		-		-		-		-
Total	$	1,105	$	2,209	$	-	$	538	$	-	$	-	$	3,852	$	14,899	$	18,751
Current year-to-date gross write-offs (1)	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Residential real estate
Performing	$	19,368	$	48,776	$	59,768	$	26,752	$	15,053	$	48,874	$	218,591	$	55,561	$	274,152
Nonperforming		-		-		-		-		-		-		-		-		-
Nonaccrual		-		259		490		833		-		108		1,690		36		1,726
Total	$	19,368	$	49,035	$	60,258	$	27,585	$	15,053	$	48,982	$	220,281	$	55,597	$	275,878
Current year-to-date gross write-offs (1)	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Loans to Other Financial Institutions
Performing	$	36,569	$	-	$	-	$	-	$	-	$	-	$	36,569	$	-	$	36,569
Nonperforming		-		-		-		-		-		-		-		-		-
Nonaccrual		-		-		-		-		-		-		-		-		-
Total	$	36,569	$	-	$	-	$	-	$	-	$	-	$	36,569	$	-	$	36,569
Current year-to-date gross write-offs (1)	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Total Retail Loans	$	61,367	$	59,233	$	70,271	$	33,710	$	17,189	$	50,692	$	292,462	$	71,547	$	364,009

20

The following table reflects the amortized cost basis of loans as of December 31, 2023 based on year of origination (dollars in thousands):

Commercial:	2023		2022		2021		2020		2019		Prior		Term Loans Total		Revolving Loans		Grand Total
Agricultural
Pass	$	5,015	$	4,088	$	3,078	$	1,788	$	7,028	$	18,476	$	39,473	$	9,507	$	48,980
Special mention		-		-		-		-		176		54		230		-		230
Substandard		-		-		-		-		-		-		-		-		-
Doubtful		-		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-		-
Total	$	5,015	$	4,088	$	3,078	$	1,788	$	7,204	$	18,530	$	39,703	$	9,507	$	49,210
Current year-to-date gross write-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Commercial and Industrial
Pass	$	23,600	$	45,489	$	23,462	$	10,502	$	9,214	$	11,882	$	124,149	$	105,559	$	229,708
Special mention		-		-		28		35		73		64		200		3		203
Substandard		-		-		-		-		-		4		4		-		4
Doubtful		-		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-		-
Total	$	23,600	$	45,489	$	23,490	$	10,537	$	9,287	$	11,950	$	124,353	$	105,562	$	229,915
Current year-to-date gross write-offs	$	-	$	55	$	30	$	71	$	-	$	2	$	158	$	-	$	158
Commercial Real Estate
Pass	$	149,181	$	134,289	$	107,033	$	71,754	$	43,846	$	136,361	$	642,464	$	143,120	$	785,584
Special mention		-		-		-		-		-		1,337		1,337		-		1,337
Substandard		-		-		-		-		-		-		-		-		-
Doubtful		-		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-		-
Total	$	149,181	$	134,289	$	107,033	$	71,754	$	43,846	$	137,698	$	643,801	$	143,120	$	786,921
Current year-to-date gross write-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Total Commercial Loans	$	177,796	$	183,866	$	133,601	$	84,079	$	60,337	$	168,178	$	807,857	$	258,189	$	1,066,046

21

Retail:	2023		2022		2021		2020		2019		Prior		Term Loans Total		Revolving Loans		Grand Total
Consumer
Performing	$	9,775	$	13,876	$	6,771	$	2,849	$	1,260	$	1,202	$	35,733	$	808	$	36,541
Nonperforming		-		-		-		-		-		-		-		-		-
Nonaccrual		-		-		-		-		-		-		-		-		-
Total	$	9,775	$	13,876	$	6,771	$	2,849	$	1,260	$	1,202	$	35,733	$	808	$	36,541
Current year-to-date gross write-offs	$	8	$	24	$	11	$	28	$	-	$	1	$	72	$	-	$	72
Construction real estate
Performing	$	2,507	$	2,719	$	552	$	-	$	-	$	-	$	5,778	$	15,158	$	20,936
Nonperforming		-		-		-		-		-		-		-		-		-
Nonaccrual		-		-		-		-		-		-		-		-		-
Total	$	2,507	$	2,719	$	552	$	-	$	-	$	-	$	5,778	$	15,158	$	20,936
Current year-to-date gross write-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Residential real estate
Performing	$	54,231	$	64,768	$	28,301	$	16,391	$	12,556	$	40,270	$	216,517	$	49,491	$	266,008
Nonperforming		-		-		-		-		-		-		-		-		-
Nonaccrual		-		380		826		-		-		486		1,692		30		1,722
Total	$	54,231	$	65,148	$	29,127	$	16,391	$	12,556	$	40,756	$	218,209	$	49,521	$	267,730
Current year-to-date gross write-offs	$	-	$	26	$	-	$	-	$	-	$	1	$	27	$	-	$	27
Loans to Other Financial Institutions
Performing	$	19,400	$	-	$	-	$	-	$	-	$	-	$	19,400	$	-	$	19,400
Nonperforming		-		-		-		-		-		-		-		-		-
Nonaccrual		-		-		-		-		-		-		-		-		-
Total	$	19,400	$	-	$	-	$	-	$	-	$	-	$	19,400	$	-	$	19,400
Current year-to-date gross write-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Total Retail Loans	$	85,913	$	81,743	$	36,450	$	19,240	$	13,816	$	41,958	$	279,120	$	65,487	$	344,607

(1) It is noted that write-offs in the tables above do not include checking account write offs.  Checking account write-offs during the first six months of 2024 were $311,000 or an annualized $628,000 compared to $480,000 during the full year 2023 and $221,000 or an annualized $442,000 during the first six months of 2023.

22

The following tables present the amortized cost basis of the loans modified to borrowers experiencing financial difficulty disaggregated by class of financing receivable and type of concession granted during the first six months of 2024 and the full year 2023.

For the period ended:	June 30, 2024
	Term Extension
(Dollars in thousands)	Amortized Cost Basis		% of Total Class of Financing Receivable
Residential real estate		123		0	%
Total	$	123

For the period ended:	December 31, 2023
	Term Extension
(Dollars in thousands)	Amortized Cost Basis		% of Total Class of Financing Receivable
Commercial and industrial	$	60		0	%
Residential real estate		129		0	%
Total	$	189

The following table presents the financial effect by type of modification made to borrowers experiencing financial difficulty and class of financing receivable during the first six months of 2024 and the full year 2023.

For the period ended:	June 30, 2024
	Term Extension
Residential real estate	Provided with new five year payment plan based on bankruptcy

For the period ended:	December 31, 2023
	Term Extension
Commercial and industrial	Termed out line of credit & termed out draw note
Residential real estate	Provided with new twelve month payment plan to catch up on past due balance.

The following table presents the period-end amortized cost basis of financing receivables that had a payment default during the period and were modified in the 12 months before default to borrowers experiencing financial difficulty.

For the period ended:	June 30, 2024
(Dollars in thousands)	Term extension
Commercial and industrial		-
Residential real estate		123
Total	$	123

23

For the period ended:	December 31, 2023
(Dollars in thousands)	Term extension
Commercial and industrial		60
Residential real estate		129
Total	$	189

The following table presents the period-end amortized cost basis of loans that have been modified in the past 12 months to borrowers experiencing financial difficulty by payment status and class of financing receivable.

For the period ended:	June 30, 2024
(Dollars in thousands)	Current		30-89 days		Greater than 90 days		Total
Commercial and industrial	$	46		-		-	$	46
Residential real estate		-		-		123		123
Total	$	46	$	-	$	123	$	169

For the period ended:	December 31, 2023
(Dollars in thousands)	Current		30-89 days		Greater than 90 days		Total
Commercial and industrial	$	60	$	-	$	-	$	60
Residential real estate		-		-		129		129
Total	$	60	$	-	$	129	$	189

Nonaccrual loans by loan category were as follows:

As of June 30, 2024
(Dollars in thousands)	Nonaccrual loans with no ACL		Total nonaccrual loans		Interest income recognized year to date on nonaccrual loans
Consumer	$	-	$	4	$	-
Commercial real estate		356		356		9
Residential real estate		262		1,726		2
Total nonaccrual loans	$	618	$	2,086	$	11

As of June 30, 2023
(Dollars in thousands)	Nonaccrual loans with no ACL		Total nonaccrual loans		Interest income recognized year to date on nonaccrual loans
Residential real estate	$	676	$	1,581	$	-
Total nonaccrual loans	$	676	$	1,581	$	-

As of December 31, 2023
(Dollars in thousands)	Nonaccrual loans with no ACL		Total nonaccrual loans		Interest income recognized year to date on nonaccrual loans
Commercial and industrial	$	-	$	1	$	-
Residential real estate		707		1,722		16
Total nonaccrual loans	$	707	$	1,723	$	16

24

An aging analysis of loans by loan category follows:

(Dollars in thousands)	Loans Past Due 30 to 59 Days (1)		Loans Past Due 60 to 89 Days (1)		Loans Past Due Greater Than 90 Days (1)		Total (1)		Loans Not Past Due		Total Loans		Loans 90 Days Past Due and Accruing
June 30, 2024
Agricultural	$	-	$	-	$	-	$	-	$	45,274	$	45,274	$	-
Commercial and industrial		61		-		-		61		223,970		224,031		-
Consumer		46		-		3		49		32,762		32,811		-
Commercial real estate		148		-		356		504		803,709		804,213		-
Construction real estate		-		-		-		-		18,751		18,751		-
Residential real estate		1,507		361		499		2,367		273,511		275,878
Loans to Other Financial Institutions		-		-		-		-		36,569		36,569
	$	1,762	$	361	$	858	$	2,981	$	1,434,546	$	1,437,527	$	-

December 31, 2023
Agricultural	$	-	$	-	$	-	$	-	$	49,210	$	49,210	$	-
Commercial and industrial		-		-		1		1		229,914		229,915		-
Consumer		31		2		-		33		36,508		36,541		-
Commercial real estate		173		-		-		173		786,748		786,921		-
Construction real estate		-		-		-		-		20,936		20,936		-
Residential real estate		755		549		870		2,174		265,556		267,730		-
Loans to Other Financial Institutions		-		-		-		-		19,400		19,400
	$	959	$	551	$	871	$	2,381	$	1,408,272	$	1,410,653	$	-

(1) Includes nonaccrual loans.

25

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:

(Dollars in thousands, except share data)	Three Months Ended June 30,				Six Months Ended June 30,
	2024		2023		2024		2023
Basic
Net income	$	6,586	$	5,213	$	12,220	$	10,846
Weighted average common shares outstanding
Basic earnings per common shares	$	0.87	$	0.69	$	1.62	$	1.44
Diluted
Net income	$	6,586	$	5,213	$	12,220	$	10,846
Weighted average common shares outstanding		7,569,241		7,529,177		7,560,960		7,524,257
Plus dilutive stock options and restricted stock units		35,722		22,720		37,255		28,335
Weighted average common shares outstanding and potentially dilutive shares		7,604,963		7,551,897		7,598,215		7,552,592
Diluted earnings per common share	$	0.87	$	0.69	$	1.61	$	1.44

There were 6,000 stock options that were considered anti-dilutive to earnings per share for the three months ended June 30, 2024 and 4,500 stock option that were considered anti-dilutive to earnings per share for the six months ended June 30, 2024.  There were 15,000 stock options and 5,125 performance awards that were considered anti-dilutive to earnings per share for the three months ended June 30, 2023.  There were 15,000 stock option that were considered anti-dilutive to earnings per share for the six months ended June 30, 2023.

26

 NOTE 5 – FINANCIAL INSTRUMENTS

 Financial instruments as of the dates indicated were as follows:

(Dollars in thousands)	Carrying Amount		Estimated Fair Value		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
June 30, 2024
Assets
Cash and cash equivalents	$	101,002	$	101,002	$	101,002	$	-	$	-
Equity securities at fair value		7,502		7,502		4,661		-		2,841
Securities available for sale		491,670		491,670		79,311		412,359		-
Securities held to maturity		392,699		332,583		-		319,702		12,881
Federal Home Loan Bank and Federal
Reserve Bank stock		9,515		9,515		-		9,515		-
Loans held for sale		5,946		6,124		-		6,124		-
Loans, net		1,421,375		1,379,874		-		-		1,379,874
Accrued interest receivable		10,441		10,441		-		10,441		-
Interest rate lock commitments		23		23		-		23		-
Interest rate derivative contracts		23,629		23,629		-		23,629		-
Liabilities
Noninterest-bearing deposits		517,137		517,137		517,137		-		-
Interest-bearing deposits		1,582,365		1,580,436		-		1,580,436		-
Brokered deposits		27,177		27,126		-		27,126		-
Borrowings		210,000		209,286		-		209,286		-
Subordinated debentures		35,630		31,942		-		31,942		-
Accrued interest payable		5,120		5,120		-		5,120		-
Interest rate derivative contracts		-		-		-		-		-
December 31, 2023
Assets
Cash and cash equivalents	$	55,433	$	55,433	$	55,433	$	-	$	-
Equity securities at fair value		7,505		7,505		4,749		-		2,756
Securities available for sale		514,598		514,598		80,194		434,404		-
Securities held to maturity		407,959		348,791		-		335,493		13,298
Federal Home Loan Bank and Federal
Reserve Bank stock		9,514		9,514		-		9,514		-
Loans held for sale		4,710		4,851		-		4,851		-
Loans, net		1,394,968		1,362,920		-		-		1,362,920
Accrued interest receivable		10,066		10,066		-		10,066		-
Interest rate lock commitments		64		64		-		64		-
Interest rate derivative contracts		8,880		8,880		-		8,880		-
Liabilities
Noninterest-bearing deposits		547,625		547,625		547,625		-		-
Interest-bearing deposits		1,550,985		1,549,386		-		1,549,386		-
Brokered deposits		23,445		23,435		-		23,435		-
Borrowings		200,000		199,743		-		199,743		-
Subordinated debentures		35,507		31,748		-		31,748		-
Accrued interest payable		6,223		6,223		-		6,223		-
Interest rate derivative contracts		-		-		-		-		-

27

NOTE 6 – FAIR VALUE MEASUREMENTS

The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis at June 30, 2024 and December 31, 2023, and the valuation techniques used by the Company to determine those fair values.

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

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

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

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

28

Disclosures concerning assets and liabilities measured at fair value are as follows:

Assets and Liabilities Measured at Fair Value on a Recurring Basis

(Dollars in thousands)	Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at Date Indicated
Equity Securities Held at Fair Value - June 30, 2024
Equity securities	$	4,661	$	-	$	2,841	$	7,502
Investment Securities, Available for Sale - June 30, 2024
U.S. Treasury notes and bonds	$	79,311	$	-	$	-	$	79,311
State and municipal		-		229,255		-		229,255
Mortgage-backed		-		173,058		-		173,058
Corporate		-		205		-		205
Asset-backed securities		-		9,841		-		9,841
Total	$	79,311	$	412,359	$	-	$	491,670
Derivative Instruments - June 30, 2024
Interest rate derivative contracts - assets	$	-	$	23,629	$	-	$	23,629
Interest rate derivative contracts - liabilities	$	-	$	-	$	-	$	-
Equity Securities Held at Fair Value - December 31, 2023
Equity securities	$	4,749	$	-	$	2,756	$	7,505
Investment Securities, Available for Sale - December 31, 2023
U. S. Treasury notes and bonds	$	80,194	$	-	$	-	$	80,194
State and municipal		-		234,682		-		234,682
Mortgage-backed		-		188,501		-		188,501
Corporate		-		204		-		204
Asset-backed securities		-		11,017		-		11,017
Total	$	80,194	$	434,404	$	-	$	514,598
Derivative Instruments - December 31, 2023
Interest rate derivative contracts - assets	$	-	$	8,880	$	-	$	8,880
Interest rate derivative contracts - liabilities	$	-	$	-	$	-	$	-

Securities classified as available for sale are generally reported at fair value utilizing Level 2 inputs. ChoiceOne’s external investment advisor obtained fair value measurements from an independent pricing service that uses matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). The fair value measurements considered observable data that may include dealer quotes, market spreads, cash flows and the bonds’ terms and conditions, among other things. Securities classified in Level 2 included U.S. Government and federal agency securities, state and municipal securities, mortgage-backed securities, corporate bonds, and asset backed securities. The Company classified certain state and municipal securities and corporate bonds, and equity securities as Level 3. Based on the lack of observable market data, estimated fair values were based on the observable data available and reasonable unobservable market data.

29

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

	Six Months Ended June 30,
(Dollars in thousands)	2024		2023
Equity Securities Held at Fair Value
Balance, January 1	$	2,756	$	2,542
Total realized and unrealized gains included in noninterest income		52		60
Net purchases, sales, calls, and maturities		33		98
Net transfers into Level 3		-		-
Balance, June 30,	$	2,841	$	2,700
Amount of total losses for the period included in earning attributable to the change in unrealized gains (losses) relating to assets and liabilities still held at June 30,	$	12	$	-

Of the Level 3 assets that were held by the Company at June 30, 2024, the net unrealized gain as of June 30, 2024 was $265,000, compared to $202,000 as of June 30, 2023.  The change in the net unrealized gain or loss is recognized in noninterest income or other comprehensive income in the consolidated balance sheets and income statements. Amounts recognized in noninterest income relate to changes in equity securities. A total of $33,000 and $98,000 of Level 3 securities were purchased during the six months ended 2024 and 2023, respectively.

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

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

Assets Measured at Fair Value on a Non-recurring Basis

(Dollars in thousands)	Balances at Dates Indicated		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Collateral Dependent Loans
June 30, 2024	$	923	$	-	$	-	$	923
December 31, 2023	$	387	$	-	$	-	$	387
Other Real Estate
June 30, 2024	$	272	$	-	$	-	$	272
December 31, 2023	$	122	$	-	$	-	$	122

Collateral dependent loans classified as Level 3 are loans for which the repayment is expected to be provided substantially through the sale or operation of the collateral when the borrower is experiencing financial difficulty.  The fair value of the collateral should be adjusted for estimated costs to sell if the repayment depends on the sale of the collateral. The net carrying amount of the loan should not exceed the fair value of the collateral (less costs to sell, if applicable).

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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 June 30,				Six Months Ended June 30,
(Dollars in thousands)	2024		2023		2024		2023
Service charges and fees on deposit accounts	$	1,134	$	1,105	$	2,252	$	2,132
Interchange income		1,528		1,166		2,815		2,406
Investment commission income		190		172		388		368
Trust fee income		220		196		433		380
Other charges and fees for customer services		99		155		247		292
Noninterest income from contracts with customers within the scope of ASC 606		3,171		2,794		6,135		5,578
Noninterest income within the scope of other GAAP topics		912		691		1,999		1,578
Total noninterest income	$	4,083	$	3,485	$	8,134	$	7,156

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 NOTE 8 – DERIVATIVE AND HEDGING ACTIVITIES

ChoiceOne is exposed to certain risks relating to its ongoing business operations. ChoiceOne utilizes interest rate derivatives as part of its asset liability management strategy to help manage its interest rate risk position. Derivative instruments represent contracts between parties that result in one party delivering cash to the other party based on a notional amount and an underlying term (such as a rate, security price or price index) as specified in the contract. The amount of cash delivered from one party to the other is determined based on the interaction of the notional amount of the contract with the underlying term. Derivatives are also implicit in certain contracts and commitments.

ChoiceOne recognizes derivative financial instruments in the consolidated financial statements at fair value regardless of the purpose or intent for holding the instrument. ChoiceOne records derivative assets and derivative liabilities on the balance sheet within other assets and other liabilities, respectively. Changes in the fair value of derivative financial instruments are either recognized in income or in shareholders’ equity as a component of accumulated other comprehensive income or loss depending on whether the derivative financial instrument qualifies for hedge accounting and, if so, whether it qualifies as a fair value hedge or cash flow hedge.

Interest rate swaps

ChoiceOne uses interest rate swaps as part of its interest rate risk management strategy to add stability to net interest income and to manage its exposure to interest rate movements. Interest rate swaps designated as hedges involve the receipt of variable-rate amounts from a counterparty in exchange for ChoiceOne making fixed-rate payments or the receipt of fixed-rate amounts from a counterparty in exchange for ChoiceOne making variable rate payments, over the life of the agreements without the exchange of the underlying notional amount.

In the second quarter of 2022, ChoiceOne entered into two pay-floating/receive-fixed interest rate swaps (the “Pay Floating Swap Agreements”) for a total notional amount of $200.0 million that were designated as cash flow hedges. These derivatives hedge the variable cash flows of specifically identified available-for-sale securities, cash and loans. The Pay Floating Swap Agreements were determined to be highly effective during the periods presented and therefore no amount of ineffectiveness has been included in net income. The Pay Floating Swap Agreements pay a coupon rate equal to SOFR while receiving a fixed coupon rate of 2.41%.  In March 2023, ChoiceOne terminated all Pay Floating Swap Agreements for a cash payment of $4.2 million.  The loss was amortized into interest income over 13 months, which was the remaining period of the swap agreements.  As of April 2024, the loss was fully amortized.

In the second quarter of 2022, ChoiceOne entered into one forward starting pay-fixed/receive-floating interest rate swap (the “Pay Fixed Swap Agreement”) for a notional amount of $200.0 million that was designated as a cash flow hedge. This derivative hedges the risk of variability in cash flows attributable to forecasted payments on future deposits or floating rate borrowings indexed to the SOFR Rate. The Pay Fixed Swap Agreement is two years forward starting with an eight-year term set to expire in 2032. The Pay Fixed Swap Agreements will pay a fixed coupon rate of 2.75% while receiving the SOFR Rate, which began in April 2024. Net settlements on the Pay Fixed Swap Agreement were $974,000 for the three and six months ended June 30, 2024, which were included in interest expense.

In the fourth quarter of 2022, ChoiceOne entered into four pay-fixed/receive-floating interest rate swaps for a total notional amount of $201.0 million that were designated as fair value hedges. These derivatives hedge the risk of changes in fair value of certain available for sale securities for changes in the SOFR benchmark interest rate component of the fixed rate bonds. All four of these hedges were effective immediately on December 22, 2022. Of the total notional value, $101.9 million has a ten-year term set to expire in 2032, with the benchmark SOFR interest rate risk component of the fixed rate bonds equal to 3.390%. Of the total notional value, $50.0 million has a nine-year term set to expire in 2031, with the benchmark SOFR interest rate risk component of the fixed rate bonds equal to 3.4015%. The remaining notional value of $49.1 million has a nine-year term set to expire in 2031, with the benchmark SOFR interest rate risk component of the fixed rate bond equal to 3.4030%. ChoiceOne adopted ASC2022-01, as of December 20, 2022, to use the portfolio layer method. The fair value basis adjustment associated with available-for-sale fixed rate bonds initially results in an adjustment to AOCI.  For available-for-sale securities subject to fair value hedge accounting, the changes in the fair value of the fixed rate bonds related to the hedged risk (the benchmark interest rate component and the partial term) are then reclassed from AOCI to current earnings offsetting the fair value measurement change of the interest rate swap, which is also recorded in current earnings. Net cash settlements are received/paid semi-annually, with the first starting in March 2023, and are included in interest income.

Net settlements on these four pay-fixed/receive-floating swaps were $989,000 and $798,000 for the three months ended June 30, 2024 and 2023, respectively, and $2.0 million and $1.4 million for the six months ended June 30, 2024 and 2023, respectively, which were included in interest income.

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The table below presents the fair value of derivative financial instruments as well as the classification within the consolidated statements of financial condition:

	June 30, 2024			December 31, 2023
(Dollars in thousands)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments
Interest rate contracts	Other Assets	$	23,629	Other Assets	$	8,880
Interest rate contracts	Other Liabilities	$	-	Other Liabilities	$	-

The table below presents the effect of fair value and cash flow hedge accounting on the consolidated statements of operations for the periods presented:

	Location and Amount of Gain or (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships										Location and Amount of Gain or (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships
	Three months ended June 30, 2024					Three months ended June 30, 2023					Six months ended June 30, 2024					Six months ended June 30, 2023
(Dollars in thousands)	Interest Income			Interest Expense		Interest Income			Interest Expense		Interest Income			Interest Expense		Interest Income			Interest Expense
Total amounts of income and expense line items presented in the consolidated statements of income in which the effects of fair value or cash flow hedges are recorded	$	800		$	974	$	(137	)	$	-	$	858		$	974	$	(504	)	$	-
Gain or (loss) on fair value hedging relationships:
Interest rate contracts:
Hedged items	$	(1,664	)	$	-	$	(6,753	)	$	-	$	(6,986	)	$	-	$	(731	)	$	-
Derivatives designated as hedging instruments	$	1,680		$	-	$	6,705		$	-	$	6,945		$	-	$	745		$	-
Amount excluded from effectiveness testing recognized in earnings based on amortization approach	$	-		$	-	$	-		$	-	$	-		$	-	$	-		$	-
Gain or (loss) on cash flow hedging relationships:
Interest rate contracts:
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income	$	(205	)	$	-	$	(887	)	$	-	$	(1,092	)	$	-	$	(1,043	)	$	-
Amount excluded from effectiveness testing recognized in earnings based on amortization approach	$	-		$	-	$	-		$	-	$	-		$	-	$	-		$	-

The table below presents the cumulative basis adjustments on hedged items designated as fair value hedges and the related amortized cost of those items as of the periods presented:

(Dollars in thousands) Line Item in the Statement of Financial Position in which the Hedged Item is included	Amortized cost of the Hedged Assets/(Liabilities)		June 30, 2024 Cumulative amount of Fair Value Hedging Adjustment included in the carrying amount of the Hedged Assets/(Liabilities)
Securities available for sale	$	221,452	$	(7,383	)

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 NOTE 9 – Borrowings

Federal Home Loan Bank Advances

(Dollars in thousands)	June 30, 2024		December 31, 2023
Maturity of July 2025 with fixed interest rate of 4.88%	$	20,000	$	20,000
Maturity of January 2026 with fixed interest rate of 4.35%		10,000		-
Maturity of December 2026 with fixed interest rate of 4.20%		10,000		10,000
Total advances outstanding at period end	$	40,000	$	30,000

Bank Term Funding Program (“BTFP”)

(Dollars in thousands)	June 30, 2024		December 31, 2023
Maturity of May 2024 with fixed interest rate of 4.71%	$	-	$	160,000
Maturity of December 2024 with fixed interest rate of 4.83%		-		10,000
Maturity of January 2025 with fixed interest rate of 4.76%		170,000		-
Total BTFP outstanding at period end	$	170,000	$	170,000

Advances from the FHLB were secured by residential real estate loans with a carrying value of approximately $196.0 million at June 30, 2024 and residential real estate loans with a carrying value of approximately $191.1 million and securities with a carrying value of approximately $278.5 million at December 31, 2023. Based on this collateral, the Bank was eligible to borrow an additional $90.5 million at June 30, 2024.

Advances from the Federal Reserve Bank were secured by securities with a carrying value of approximately $510.0 million and loans with a carrying value of approximately $460.3 million at June 30, 2024 and securities with a carrying value of approximately $526.4 million and loans with a carrying value of approximately $433.2 million at December 31, 2023. Based on this collateral, the Bank was eligible to borrow an additional $669.0 million at June 30, 2024.

In June 2021, ChoiceOne obtained a $20 million line of credit with an annual renewal.  The line carries a floating rate of prime rate with a floor of 3.25% and current rate of 8.5% at June 30, 2024.  The credit agreement includes certain financial covenants, including minimum capital ratios, asset quality ratios, and the requirements of achieving certain profitability thresholds.

ChoiceOne was in compliance with all covenants as of June 30, 2024. The line of credit balance was $0 at June 30, 2024.

NOTE 10 – Subsequent Events

On July 26, 2024, ChoiceOne completed an underwritten public offering of 1,380,000 shares of its common stock at a price to the public of $25.00 per share, including 180,000 shares of common stock sold pursuant to the underwriter’s option to purchase additional shares to cover over-allotments, which was exercised in full. The aggregate gross proceeds of the offering were approximately $34.5 million before deducting underwriting discounts and estimated offering expenses. The proceeds from the offering will qualify as tangible common equity and Tier 1 common equity. The Company intends to use the net proceeds of this offering for general corporate purposes including supplementing regulatory capital ratios and in conjunction with its announced merger with Fentura Financial, Inc.

On July 25, 2024, ChoiceOne and Fentura Financial, Inc. (“Fentura”), the parent company of The State Bank, announced the signing of a definitive merger agreement pursuant to which ChoiceOne and Fentura will merge in an all-stock transaction.  The agreement was unanimously approved by the boards of directors of both companies. Under the terms of the merger agreement, each share of Fentura common stock outstanding immediately prior to completion of the merger will be converted into the right to receive 1.35 shares of ChoiceOne common stock. Once completed, the combination will create the third largest publicly traded bank in Michigan with approximately $4.3 billion in consolidated total assets and 56 offices in Western, Central and Southeastern Michigan. The proposed transaction is expected to close in the first quarter of 2025, subject to the satisfaction of customary closing conditions, including receipt of approval from Fentura and ChoiceOne shareholders and receipt of all necessary regulatory approvals.

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

The following discussion is designed to provide a review of the consolidated financial condition and results of operations of ChoiceOne Financial Services, Inc. (“ChoiceOne”) and its wholly-owned subsidiaries.  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,” “will” 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 credit 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 post-retirement benefit plans involve judgments that are inherently forward-looking.  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, 2023 and in Part II, Item 1A of this Quarterly Report on Form 10-Q.  These are representative of the risk factors that could cause a difference between an ultimate actual outcome and a preceding forward-looking statement.

RECENT EVENTS

On July 26, 2024, ChoiceOne completed an underwritten public offering of 1,380,000 shares of its common stock at a price to the public of $25.00 per share, including 180,000 shares of common stock sold pursuant to the underwriter’s option to purchase additional shares to cover over-allotments, which was exercised in full. The aggregate gross proceeds of the offering were approximately $34.5 million before deducting underwriting discounts and estimated offering expenses. The proceeds from the offering will qualify as tangible common equity and Tier 1 common equity. The Company intends to use the net proceeds of this offering for general corporate purposes including supplementing regulatory capital ratios and in conjunction with its announced merger with Fentura Financial, Inc.

On July 25, 2024, ChoiceOne and Fentura Financial, Inc. (“Fentura”), the parent company of The State Bank, announced the signing of a definitive merger agreement (the “Merger Agreement”) pursuant to which ChoiceOne and Fentura will merge in an all-stock transaction.  The agreement was unanimously approved by the boards of directors of both companies. Under the terms of the merger agreement, each share of Fentura common stock outstanding immediately prior to completion of the merger will be converted into the right to receive 1.35 shares of ChoiceOne common stock. Once completed, the combination will create the third largest publicly traded bank in Michigan with approximately $4.3 billion in consolidated total assets and 56 offices in Western, Central and Southeastern Michigan. The proposed transaction is expected to close in the first quarter of 2025, subject to the satisfaction of customary closing conditions, including receipt of approval from Fentura and ChoiceOne shareholders and receipt of all necessary regulatory approvals.

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RESULTS OF OPERATIONS

ChoiceOne reported net income of $6,586,000 and $12,220,000 for the three and six months ended June 30, 2024, compared to $5,213,000 and $10,846,000 for the same periods in 2023, representing annualized growth of 26.3% and 12.7%, respectively.  Diluted earnings per share were $0.87 and $1.61 in the three and six months ended June 30, 2024, compared to $0.69 and $1.44 per share in the same periods in the prior year.

As of June 30, 2024, total assets were $2.6 billion, an increase of $46.4 million compared to December 31, 2023.  The growth was due to an increase in cash of $45.6 million, modest growth in core loans (total loans held for investment less loans to other financial institutions) of $9.7 million and an increase in loans to other financial institutions of $17.2 million over the six month period ending June 30, 2024. However, this growth was partialy offset by a $38.2 million reduction in securities during the same time period. ChoiceOne has actively managed its liquidity to support organic loan growth, strategically shifting from lower-yielding assets to higher-yielding loans.

Deposits, excluding brokered deposits, decreased $44.4 million or an annualized 8.3% in the second quarter of 2024 and remained flat during the first half of 2024.  The decrease in deposits in the second quarter was largely public funds including schools and townships which historically fluctuate with summer tax bill collection in July.  ChoiceOne continues to be proactive in managing its liquidity position by using brokered deposits, the Bank Term Funding Program (“BTFP”), and FHLB advances to ensure ample liquidity.  At June 30, 2024, total available borrowing capacity from all sources was $759.5 million.   Uninsured deposits totaled $754.4 million or 35.5% of deposits at June 30, 2024.

Increases to short term interest rates have led to higher deposit costs, which rose to an annualized 1.56% in the second quarter of 2024, compared to an annualized 0.98% in the second quarter of 2023.  As deposits reprice and customers shift to certificates of deposits and other interest bearing products, this trend is likely to persist.  Deposit costs have declined since the first quarter of 2024 due to positive cash flow from pay-fixed interest rate swaps, hedged against deposits, decreasing deposit expenses. ChoiceOne is taking active measures to control these costs and expects to pay lower rates on deposits than the federal funds rate.  Interest expense on borrowings for the three and six months ended June 30, 2024 increased $1.1 million and $3.2 million compared to the same periods in the prior year, due to increases in borrowing amounts and interest rates.  Borrowings include $170 million from the BTFP and $40 million of FHLB borrowings at a weighted average fixed rate of 4.7%, with the earliest maturity in January 2025.  Total cost of funds decreased to an annualized 1.92% in the second quarter of 2024 compared to an annualized 2.0% in the first quarter of 2024, due to the aforementioned swap settlements, and increased compared to an annualized 1.29% in the second quarter of 2023.

The annualized return on average assets and annualized return on average shareholders’ equity were 0.99% and 12.50%, respectively, for the second quarter of 2024, compared to an annualized 0.86% and an annualized 12.13%, respectively, for the same period in 2023.  The annualized return on average assets and annualized return on average shareholders’ equity were 0.93% and 11.91%, respectively, for the first six months of 2024, compared to 0.90% and 12.75%, respectively, for the same period in 2023.

Dividends

Cash dividends of $2.0 million or $0.27 per share were declared in the second quarter of 2024, compared to $2.0 million or $0.26 per share in the second quarter of 2023.  Cash dividends declared in the first six months of 2024 were $4.1 million or $0.54 per share, compared to $3.9 million or $0.52 per share in the same period during the prior year.  The cash dividend payout percentage was 33.4% for the first half of 2024, compared to 36.1% 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 and six months ended June 30, 2024 and 2023.  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.

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Table 1 – Average Balances and Tax-Equivalent Interest Rates

	Three Months Ended June 30,
	2024								2023
(Dollars in thousands)	Average								Average
	Balance		Interest			Rate			Balance		Interest			Rate
Assets:
Loans (1)(3)(4)(5)	$	1,435,966	$	21,981			6.16	%	$	1,218,860	$	15,986			5.26	%
Taxable securities (2)		696,023		5,471			3.16			756,239		5,378			2.85
Nontaxable securities (1)		290,258		1,785			2.47			296,952		1,758			2.38
Other		80,280		1,092			5.47			41,075		571			5.57
Interest-earning assets		2,502,527		30,329			4.87			2,313,126		23,693			4.11
Noninterest-earning assets		145,189								109,441
Total assets	$	2,647,716							$	2,422,567
Liabilities and Shareholders’ Equity:
Interest-bearing demand deposits	$	876,344	$	2,921			1.34	%	$	815,179	$	1,905			0.94	%
Savings deposits		333,056		649			0.78			372,651		345			0.37
Certificates of deposit		391,620		4,331			4.45			285,160		2,225			3.13
Brokered deposit		34,218		424			4.98			49,679		581			4.69
Borrowings		210,000		2,480			4.75			144,231		1,717			4.78
Subordinated debentures		35,596		412			4.65			35,352		407			4.62
Other		26,426		356			5.41			3,763		45			4.81
Interest-bearing liabilities		1,907,260		11,573			2.44			1,706,015		7,225			1.70
Demand deposits		516,308								534,106
Other noninterest-bearing liabilities		13,406								10,534
Total liabilities		2,436,974								2,250,655
Shareholders’ equity		210,742								171,912
Total liabilities and shareholders’ equity	$	2,647,716							$	2,422,567
Net interest income (tax-equivalent basis) (Non-GAAP) (1)			$	18,756							$	16,468
Net interest margin (tax-equivalent basis) (Non-GAAP) (1)							3.01	%							2.86	%
Reconciliation to Reported Net Interest Income
Net interest income (tax-equivalent basis) (Non-GAAP) (1)			$	18,756							$	16,468
Adjustment for taxable equivalent interest				(385	)							(377	)
Net interest income  (GAAP)			$	18,371							$	16,091
Net interest margin (GAAP)							2.95	%							2.79	%

(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.

(3) Loans include both loans to other financial institutions and loans held for sale.

(4) Non-accruing loan balances are included in the balances of average loans.  Non-accruing loan average balances were $1.9 million and $1.6 million in the second quarter of 2024 and 2023, respectively.

(5) Interest on loans included net origination fees and accretion income related to acquired loans.  Accretion income related to acquired loans was $279,000 and $444,000 in the second quarter of 2024 and 2023, respectively

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	Six Months Ended June 30,
	2024								2023
(Dollars in thousands)	Average								Average
	Balance		Interest			Rate			Balance		Interest			Rate
Assets:
Loans (1)(3)(4)(5)	$	1,424,266	$	42,788			6.04	%	$	1,210,611	$	30,876			5.10	%
Taxable securities (2)		703,266		10,819			3.09			756,967		10,291			2.72
Nontaxable securities (1)		290,944		3,573			2.47			296,969		3,575			2.41
Other		72,172		1,978			5.51			30,325		748			4.93
Interest-earning assets		2,490,648		59,158			4.78			2,294,872		45,490			3.96
Noninterest-earning assets		143,734								112,160
Total assets	$	2,634,382							$	2,407,032
Liabilities and Shareholders’ Equity:
Interest-bearing demand deposits	$	879,858	$	6,498			1.49	%	$	845,140	$	3,477			0.82	%
Savings deposits		335,776		1,290			0.77			389,742		618			0.32
Certificates of deposit		384,630		8,446			4.42			266,611		3,504			2.63
Brokered deposit		34,463		868			5.06			31,322		733			4.68
Borrowings		212,418		5,004			4.74			103,900		2,425			4.67
Subordinated debentures		35,566		824			4.66			35,321		809			4.58
Other		22,413		601			5.40			1,888		45			4.78
Interest-bearing liabilities		1,905,124		23,531			2.48			1,673,924		11,611			1.39
Demand deposits		511,241								550,281
Other noninterest-bearing liabilities		12,743								12,721
Total liabilities		2,429,108								2,236,926
Shareholders’ equity		205,274								170,106
Total liabilities and shareholders’ equity	$	2,634,382							$	2,407,032
Net interest income (tax-equivalent basis) (Non-GAAP) (1)			$	35,627							$	33,879
Net interest margin (tax-equivalent basis) (Non-GAAP) (1)							2.88	%							2.95	%
Reconciliation to Reported Net Interest Income
Net interest income (tax-equivalent basis) (Non-GAAP) (1)			$	35,627							$	33,879
Adjustment for taxable equivalent interest				(782	)							(776	)
Net interest income  (GAAP)			$	34,845							$	33,103
Net interest margin (GAAP)							2.81	%							2.88	%

(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.

(3) Loans include both loans to other financial institutions and loans held for sale.

(4) Non-accruing loan balances are included in the balances of average loans.  Non-accruing loan average balances were $1.8 million and $1.5 million in the first six months of 2024 and 2023, respectively.

(5) Interest on loans included net origination fees and accretion income related to acquired loans.  Accretion income related to acquired loans was $669,000 and $916,000 in the first six months of 2024 and 2023, respectively

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Table 2 – Changes in Tax-Equivalent Net Interest Income

	Three Months Ended June 30,
(Dollars in thousands)	2024 Over 2023
	Total			Volume			Rate
Increase (decrease) in interest income (1)
Loans (2)	$	5,995		$	3,063		$	2,932
Taxable securities		93			(1,947	)		2,040
Nontaxable securities (2)		27			(192	)		219
Other		521			592			(71	)
Net change in interest income		6,636			1,516			5,120
Increase (decrease) in interest expense (1)
Interest-bearing demand deposits		1,016			152			864
Savings deposits		304			(241	)		545
Certificates of deposit		2,106			990			1,116
Brokered deposit		(157	)		(374	)		217
Borrowings		763			837			(74	)
Subordinated debentures		5			2			3
Other		311			304			7
Net change in interest expense		4,348			1,670			2,678
Net change in tax-equivalent net interest income	$	2,288		$	(154	)	$	2,442

	Six Months Ended June 30,
(Dollars in thousands)	2024 Over 2023
	Total			Volume			Rate
Increase (decrease) in interest income (1)
Loans (2)	$	11,912		$	6,679		$	5,233
Taxable securities		528			(1,517	)		2,045
Nontaxable securities (2)		(2	)		(143	)		141
Other		1,230			1,156			74
Net change in interest income		13,668			6,175			7,493
Increase (decrease) in interest expense (1)
Interest-bearing demand deposits		3,021			192			2,829
Savings deposits		672			(227	)		899
Certificates of deposit		4,942			2,297			2,645
Brokered deposit		135			84			51
Borrowings		2,579			2,552			27
Subordinated debentures		15			5			10
Other		556			551			4
Net change in interest expense		11,920			5,454			6,465
Net change in tax-equivalent net interest income	$	1,748		$	721		$	1,028

(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%.

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Net Interest Income

Tax-equivalent net interest income increased $2.3 million and $1.7 million in the three and six months ended June 30, 2024, compared to the same periods in 2023.  The primary factor contributing to the increase in interest income is the higher interest rates on new loans and the impact of fixed rate swaps (see note 8).  Tax equivalent net interest margin increased 15 basis points in the three months ended June 30, 2024 to 3.01%, compared to the same period in 2023.  GAAP based net interest margin increased 16 basis points in the three months ended June 30, 2024 to 2.95%, compared to the same period in 2023.  Tax equivalent net interest margin decreased 7 basis points in the first six months of 2024 to 2.88%, compared to the same period in 2023. GAAP based net interest margin decreased 7 basis points in the first six months of 2024 to 2.81%, compared to the same period in 2023.

The following table presents the annualized cost of deposits and the annualized cost of funds for the three and six months ended June 30, 2024 and 2023.

	Three Months Ended June 30,						Six Months Ended June 30,
	2024			2023			2024			2023
Cost of deposits		1.56	%		0.98	%		1.59	%		0.80	%
Cost of funds		1.92	%		1.29	%		1.95	%		1.04	%

ChoiceOne has experienced loan growth, leading to an increase in interest income from loans of $6.0 million and $11.9 million in the three and six months ended June 30, 2024, respectively, compared to the same periods in the prior year.  Average loans grew $217.1 million and $213.7 million in the three and six months ended June 30, 2024, respectively, compared to the same periods in the prior year.  In addition, the average rate earned on loans increased 90 basis points and 94 basis points in the three and six months ended June 30, 2024, respectively, compared to the same period in the prior year. Interest income on loans for the three and six months of 2024 was increased by $512,000 and $591,000, respectively, compared to the same periods in 2023 due to amortization expense related to the March 2023 sale of the pay floating swap derivative and a decline in accretion income related to acquired loans of $165,000 and $246,000, respectively, compared to the same periods in 2023.

The average balance of total securities decreased $66.9 million and $59.7 million for the three and six months ended June 30, 2024, respectively, compared to the same periods in the prior year.  The decrease is due to paydowns and a decline in the fair value of available for sale securities.  The average rate earned on securities increased 23 basis points and 26 basis points for the three and six months ended June 30, 2024, respectively, compared to the same periods in the prior year.   Interest income on securities increased by $171,000 for the three months ended June 30, 2024 compared to three months ended June 30, 2023 due to amortization expense related to the March 2023 sale of the pay floating swap derivative ending in April 2024.

Interest expense increased $4.3 million and $11.9 million in the three and six months ended June 30, 2024, respectively, compared to the same periods in the prior year.  The average rate paid on interest bearing-demand deposits and savings deposits increased 42 basis points and 62 basis points in the three and six months ended June 30, 2024, respectively, compared to the same periods in the prior year.  This was aided by the increase in the average balance of interest bearing-demand deposits and savings deposits, of $21.6 million for the three months ended June 30, 2024 and offset by the decline in the average balance of interest bearing-demand deposits and savings deposits, of $19.2 million for the six months ended June 30, 2024, compared to the same time periods in the prior year.  The increase in the average balance of certificates of deposit of $106.5 million and $118.0 million in the three and six months ended June 30, 2024, respectively, combined with a 132 basis point and 179 basis point increase in the rate paid on certificates of deposits in the three and six months ended June 30, 2024, respectively, compared to the same periods in the prior year, led to an increase in interest expense of $2.1 million and $4.9 million during the respective time periods.

In order to bolster liquidity, ChoiceOne borrowed a total of $170.0 million from the Bank Term Funding Program (“BTFP”) during the second and fourth quarters of 2023 and held $27.2 million in brokered deposits and $40.0 million in FHLB advances on June 30, 2024.  The net effect of these additional borrowed funds and brokered deposits was an increase in interest expense of $606,000 and $2.7 million, respectively, for the three and six months ended June 30, 2024, compared to the same periods in 2023.

In September 2021, ChoiceOne completed a private placement of $32.5 million in aggregate principal amount of 3.25% fixed-to-floating rate subordinated notes due 2031.  In addition, ChoiceOne holds certain subordinated debentures issued in connection with a trust preferred securities offering that were obtained as part of the merger with Community Shores.  The average balance of subordinated debentures was relatively flat in the first quarter of 2024 compared to the same period in the prior year.

Provision and Allowance for Credit Losses

The allowance for credit losses (“ACL”) consists of general and specific components. The general component covers loans collectively evaluated for credit loss and is based on peer historical loss experience adjusted for current and forecasted factors. Management’s adjustment for current and forecasted factors is based on trends in delinquencies, trends in charge-offs and recoveries, trends in the volume of loans, changes in underwriting standards, trends in loan review findings, the experience and ability of lending staff, and a reasonable and supportable economic forecast described further below.

The determination of our loss factors is based, in part, upon benchmark peer loss history adjusted for qualitative factors that, in management’s judgment, affect the collectability of the portfolio as of the analysis date.  ChoiceOne’s lookback period of benchmark peer net charge-off history was from January 1, 2004 through December 31, 2019 for this analysis.

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Loans individually evaluated for credit losses increased by $413,000 to $2.5 million during the first half of 2024, and the ACL related to these individually evaluated loans increased by $27,000 during the same period.

Nonperforming loans, which includes Other Real Estate Owned (“OREO”) but excludes performing troubled loan modifications (“TLM”), remained low at $2.4 million on June 30, 2024, compared to $1.8 million as of December 31, 2023, and $1.8 million as of June 30, 2023.  The ACL was 1.12% of total loans, excluding loans held for sale, at June 30, 2024, compared to 1.11% on December 31, 2023, and 1.15% on June 30, 2023.  The liability for expected credit losses on unfunded loans and other commitments was $1.5 million on June 30, 2024, compared to $2.2 million on December 31, 2023, and $3.2 million on June 30, 2023.

Charge-offs and recoveries for respective loan categories for the six months ended June 30, 2024 and 2023 were as follows:

(Dollars in thousands)	2024				2023
	Charge-offs		Recoveries		Charge-offs		Recoveries
Agricultural	$	-	$	-	$	-	$	-
Commercial and industrial		1		11		-		29
Consumer		451		226		271		129
Commercial real estate		-		-		-		13
Construction real estate		-		-		-		-
Residential real estate		-		7		-		5
	$	452	$	244	$	271	$	176

Net charge-offs were $208,000 during the first six months of 2024, compared to net charge-offs of $95,000 during the same period in 2023. Net charge-offs for checking accounts during the first six months of 2024 were $91,000 or an annualized $182,000 compared to $100,000 or an annualized $200,000 for the same period in the prior year.  Annualized net loan charge-offs as a percentage of average loans were 0.04% for the second quarter of 2024 compared to 0.02% for the same period in the prior year.

The provision for credit losses on loans was $675,000 during the first six months of 2024, compared to release of provision of $106,000 in the same period in the prior year.  The provision expense was deemed necessary due to loan growth.

The loan provision expense was offset by the decrease in unfunded commitments provision expense of $675,000 in the first six months of 2024, due to changes in mix, historical average funding rate declines, and a decline in balance.  Total unfunded commitments decreased $15.9 million in the first six months of 2024 compared to December 31, 2023.

Net provision for credit losses was $0 for the second quarter and first six months of 2024.

Noninterest Income

Noninterest income increased $598,000 and $978,000 in the three and six months ended June 30, 2024, compared to the same periods in the prior year.  The increase was largely due to an increase in customer service charges of $391,000 and $529,000 in the three and six months ended June 30, 2024, respectively, compared to the same periods in 2023, and a decline in the change in market value of equity securities in the three and six months ended June 30, 2024, compared to the same periods in the prior year.  In addition, ChoiceOne recognized earnings on a bank owned life insurance death benefit claim in the amount of $196,000 during the first quarter of 2024.

Noninterest Expense

Noninterest expense increased by $705,000 or 5.2% and $394,000 or 1.4% in the three and six months ended June 30, 2024, respectively, compared to the same periods in 2023. The increase in total noninterest expense was due to an increase in employee health insurance benefits, an increase to FDIC insurance, and other costs related to inflationary pressures.  This was partially offset by a decline in occupancy and equipment expense related to two branch closures which occurred during the first quarter of 2024.  Management continues to seek out ways to manage costs, but also recognizes the value of investing in innovation and attracting the best talent in our industry to compete effectively in our markets.

Income Tax Expense

Income tax expense was $1.6 million and $2.8 million in the three and six months ended June 30, 2024, respectively, compared to $1.0 million and $2.1 million for the same periods in 2023.  The effective tax rate was 19.4% and 18.6% for the three and six months ended June 30, 2024, respectively, compared to 16.6% and 16.0% for the same periods in 2023.  During the first six months of 2024, disallowed interest expense increased compared to the same period in 2023.

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FINANCIAL CONDITION

Securities

Total available for sale securities on June 30, 2024 were $491.7 million compared to $514.6 million on December 31, 2023, with the  decrease caused by $18.0 million of principal repayments, calls and maturities. The unrealized loss on securities available for sale declined by $4.0 million in the first six months of 2024.  Total held to maturity securities on June 30, 2024 were $392.7 million compared to $408.0 million on December 31, 2023.  ChoiceOne’s held to maturity securities declined during the first six months of 2024 due to $15.1 million of principal repayments, calls and maturities.

At June 30, 2024, ChoiceOne had $126.6 million in unrealized losses on its investment securities, including $65.7 million in unrealized losses on available for sale securities, $60.1 million in unrealized losses on held to maturity securities, and $757,000 in unrealized losses on equity securities.  Unrealized losses on corporate and municipal bonds have not been recognized into income because management believes the issuers are of high credit quality, and management does not intend to sell prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions. The issuers continue to make timely principal and interest payments on the bonds. The fair value is expected to recover as the bonds approach maturity.

 ChoiceOne utilizes interest rate derivatives as part of its asset liability management strategy to help manage its interest rate risk position. In order to hedge the risk of rising rates and unrealized losses on securities resulting from the rising rates, ChoiceOne currently holds pay fixed, receive variable interest rate swaps with a total notional value of $401.0 million. These derivative instruments increase in value as long-term interest rates rise, which partially offsets the reduction in shareholders’ equity due to unrealized losses on securities available for sale.  Refer to Note 8 - Derivatives and Hedging Activities of the consolidated financial statements for more discussion on ChoiceOne’s derivative position.

Equity securities included a money market preferred security (“MMP”) of $1.0 million and common stock of $6.5 million as of June 30, 2024. As of December 31, 2023, equity securities included a MMP of $1.0 million and common stock of $6.5 million.

Per U.S. generally accepted accounting principles, unrealized gains or losses on securities available for sale are reflected on the balance sheet in accumulated other comprehensive income (loss), while unrealized gains or losses on securities held to maturity are not reflected on the balance sheet.

Loans

The company’s loan portfolio by call report code was as follows:

		June 30, 2024					December 31, 2023
(Dollars in thousands)	Call Report Codes	Balance		%			Balance		%
Construction & Development Loans	1A2	$	93,678		6.5	%	$	112,877		8.0	%
1-4 Family Loans	1A1, 1C1, 1C2A, 1C2B		370,542		25.8	%		347,036		24.6	%
Multifamily Loans	1D		57,893		4.0	%		56,563		4.0	%
Owner Occupied CRE Loans	1E1		296,818		20.6	%		281,515		20.0	%
Non-Owner Occupied CRE Loans	1E2		318,655		22.2	%		298,265		21.1	%
Commercial & Industrial Loans	2A2, 4A		216,899		15.1	%		219,849		15.6	%
Farm & Agriculture Loans	1B, 3		42,579		3.0	%		46,515		3.3	%
Consumer & Other Loans	6B, 6C, 6D, 8, 9b2,10B		40,463		2.8	%		48,033		3.4	%
Total Loans		$	1,437,527				$	1,410,653

Average loan balances increased to $1.44 billion in the second quarter of 2024 compared to $1.36 billion in the fourth quarter of 2023 and $1.22 billion in the second quarter of 2023. Core loans grew organically by $12.4 million or 3.6% on an annualized basis during the second quarter of 2024 and $9.7 million or 1.4% on an annualized basis since December 31, 2023.  Loan growth during the first six months of 2024 was concentrated in 1-4 Family loans which grew $23.5 million and Non-Owner Occupied CRE loans, which grew by $20.4 million.  The growth in 1-4 Family loans was largely related to growth in loans to other financial institutions which were $36.6 million as of June 30, 2024, compared to $19.4 million as of December 31, 2023.  Loans to other financial institutions is comprised of a warehouse line of credit to facilitate mortgage loan originations and the interest rate fluctuates with the national mortgage market. This balance is short term in nature with an average life of under 30 days.  Management believes the short-term structure and low credit risk of this asset is advantageous in the current rate environment.  Loan interest including fee income increased $2.2 million and $6.0 million in the three months ended June 30, 2024 compared to the three months ended December 31, 2023 and the three months ended June 30, 2023, respectively.

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During the first six months of 2024 and 2023, ChoiceOne recorded accretion income related to acquired loans in the amount of $669,000 and $916,000, respectively.  Remaining credit and yield mark on acquired loans from the mergers with County Bank Corp. and Community Shores will accrete into income as the acquired loans mature. The remaining yield mark on acquired loans from the mergers with County Bank Corp. and Community Shores totaled $1.8 million as of June 30, 2024.

Asset Quality

As part of its review of the loan portfolio, management also monitors the various nonperforming loans. Nonperforming loans are comprised of loans accounted for on a nonaccrual basis, loans not included in nonaccrual loans, which are contractually past due 90 days or more as to interest or principal payments, and troubled loan modifications which are accruing and initiated in the past year.

The balances of these nonperforming loans were as follows:

(Dollars in thousands)	June 30,		December 31,
	2024		2023
Loans accounted for on a nonaccrual basis	$	2,086	$	1,723
Accruing loans which are contractually past due 90 days or more as to principal or interest payments		-		-
Loans defined as “troubled loan modifications” which are not included above		46		189
Total	$	2,132	$	1,912

The balance of nonaccrual loans in the first six months of 2024 is primarily made up of residential mortgage loans.  Management believes the ACL allocated to its nonperforming loans was sufficient at June 30, 2024.

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 Bank Corp 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.

ChoiceOne engaged a third party valuation firm to assist in performing a quantitative analysis of goodwill as of November 30, 2022 (“the valuation date”). In deriving 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 2027 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.

Management performed the last annual assessment in November 2023 based on a qualitative assessment and determined that no further quantitative assessment was necessary.  No material changes and no triggering events have occurred that indicated impairment from the valuation date through June 30, 2024.

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Deposits and Borrowings

Deposits, excluding brokered deposits, were flat as of June 30, 2024 compared to December 31, 2023 and increased $64.5 million or 3.2% compared to June 30, 2023.  Increases to short term interest rates have led to higher annualized deposit costs of 1.56% in the second quarter of 2024.  The second quarter of 2024 deposit costs were flat compared to an annualized 1.57% in the fourth quarter of 2023, but rose compared to an annualized 0.98% in the second quarter of 2023.  As deposits reprice and customers shift to certificates of deposits and other interest bearing products, this trend is likely to persist.  The apparent leveling off of deposit costs since the end of the fourth quarter of 2023 is due to positive cash flow from pay-fixed interest rate swaps, hedged against deposits, decreasing deposit expenses. ChoiceOne had an annualized cost of funds of 1.92% in the second quarter of 2024 compared to an annualized 1.91% in the fourth quarter of 2023 and an annualized 1.29% in the second quarter of 2023. ChoiceOne is taking active measures to control these costs and expects to pay lower rates on deposits than the federal funds rate.

Uninsured deposits totaled $754.4 million or 35.5% of deposits on June 30, 2024 compared to $769.7 million, or 36.3% of total deposits at December 31, 2023.  At June 30, 2024, total available borrowing capacity from all sources was $759.5 million, which exceeds uninsured deposits.

In September 2021, ChoiceOne completed a private placement of $32.5 million in aggregate principal amount of 3.25% fixed-to-floating rate subordinated notes due 2031.  ChoiceOne also holds $3.4 million in subordinated debentures issued in connection with a $4.5 million trust preferred securities offering, which were obtained in the merger with Community Shores, offset by the merger mark-to-market adjustment.

At June 30, 2024, ChoiceOne has borrowed $170 million from the Federal Reserve’s Bank Term Funding Program (BTFP).  This program provides a 1-year term at a fixed rate with the ability to prepay at any time without penalty.  The interest rate on the BTFP borrowings as of  June 30, 2024 was 4.76% and fixed through January of 2025.  Collateral pledged is U.S. Treasuries, agency debt and mortgage-backed securities valued at par.  At June 30, 2024 ChoiceOne had $40 million of borrowings from the FHLB with a weighted average rate of 4.58% with maturities through 2026. Total cost of funds decreased to an annualized 1.92% in the second quarter of 2024 compared to an annualized 2.0% in the first quarter of 2024 and increased compared to an annualized 1.29% in the second quarter of 2023.

Shareholders’ Equity

Shareholders’ equity totaled $214.5 million as of June 30, 2024, up from $195.6 million and $179.2 million as of December 31, 2023 and June 30, 2023, respectively.  This increase is due to increased retained earnings and an improvement in accumulated other compressive loss (AOCI) of $10.3 million and $19.6 million compared to December 31, 2023 and June 30, 2023, respectively.  The improvement in AOCI, despite the rise in interest rates, is due to both the shortening duration and maturing (paydowns) of the securities portfolio, as well as an increase in unrealized gain of the pay-fixed swap derivatives.  ChoiceOne Bank remains “well-capitalized” with a total risk-based capital ratio of 13.2% as of June 30, 2024, compared to 12.4% and 12.7% on December 31, 2023 and June 30, 2023, respectively.

ChoiceOne uses interest rate swaps to manage interest rate exposure to certain fixed assets and variable rate liabilities.  On June 30, 2024, ChoiceOne had pay-fixed interest rate swaps with a total notional value of $401.0 million, a weighted average coupon of 3.07%, a fair value of $23.6 million and an average remaining contract length of 7 to 8 years.  These derivative instruments increase in value as long-term interest rates rise, which offsets the reduction in equity due to unrealized losses on securities available for sale.  Fair value was $18.4 million shown net of tax in AOCI at June 30, 2024.  Included in the total is $200.0 million of pay-fixed, receive floating interest rate swaps used to hedge interest bearing liabilities.  These swaps pay a fixed coupon of 2.75% while receiving SOFR.  Settlements from these swaps amounted to $974,000 for the three and six months ended June 30, 2024, and were a contributing factor to the increase in net interest margin during the second quarter of 2024.

On January 1, 2023, ChoiceOne adopted ASU 2016-13 CECL which caused an increase in the ACL of $7.2 million and booked a liability for expected credit losses on unfunded loans and other commitments of $3.3 million.  The increase in the ACL and the cost of the liability resulted in a decrease in the retained earnings account on our Consolidated Balance Sheet equal to the after-tax impact, with the tax impact portion being recorded in deferred taxes in our Consolidated balance Sheet in accordance with FASB guidance.  This reduction in retained earnings was offset by first quarter 2023 earnings and recovery of accumulated other comprehensive loss.

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Regulatory Capital Requirements

Following is information regarding compliance of ChoiceOne and ChoiceOne 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
June 30, 2024
ChoiceOne Financial Services Inc.
Total capital (to risk weighted assets)	$	244,728		13.5	%	$	145,342		8.0	%		N/A		N/A
Common equity Tier 1 capital (to risk weighted assets)		194,426		10.7			81,755		4.5			N/A		N/A
Tier 1 capital (to risk weighted assets)		198,926		10.9			109,007		6.0			N/A		N/A
Tier 1 capital (to average assets)		198,926		7.7			103,594		4.0			N/A		N/A
ChoiceOne Bank
Total capital (to risk weighted assets)	$	240,366		13.2	%	$	145,175		8.0	%	$	181,469		10.0	%
Common equity Tier 1 capital (to risk weighted assets)		226,752		12.5			81,661		4.5			117,955		6.5
Tier 1 capital (to risk weighted assets)		226,752		12.5			108,881		6.0			145,175		8.0
Tier 1 capital (to average assets)		226,752		8.8			103,507		4.0			129,384		5.0
December 31, 2023
ChoiceOne Financial Services Inc.
Total capital (to risk weighted assets)	$	233,840		13.0	%	$	144,441		8.0	%		N/A		N/A
Common equity Tier 1 capital (to risk weighted assets)		185,412		10.3			81,248		4.5			N/A		N/A
Tier 1 capital (to risk weighted assets)		189,912		10.5			108,331		6.0			N/A		N/A
Tier 1 capital (to average assets)		189,912		7.5			101,337		4.0			N/A		N/A
ChoiceOne Bank
Total capital (to risk weighted assets)	$	224,095		12.4	%	$	144,274		8.0	%	$	180,342		10.0	%
Common equity Tier 1 capital (to risk weighted assets)		212,283		11.8			81,154		4.5			117,223		6.5
Tier 1 capital (to risk weighted assets)		212,283		11.8			108,205		6.0			144,274		8.0
Tier 1 capital (to average assets)		212,283		8.4			101,244		4.0			126,555		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 June 30, 2024 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.

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Liquidity

Net cash provided by operating activities was $31.1 million for the six months ended June 30, 2024 compared to $25.2 million in the same period in 2023.  The change was due to the change in net income, proceeds from loan sales and other liabilities, partially offset by other assets in 2024 compared to 2023. Net cash provided by investing activities was $4.0 million for the six months ended June 30, 2024 compared to $66.9 million used in the same period in 2023. The change was due to a decrease in net loan originations that led to cash used of $27.2 million in the first six months of 2024 compared to $74.6 million used in the same period during the prior year.  Net maturities, payments and calls of available for sale and held to maturity securities was $33.0 million for the six months ended June 30, 2024 compared to $20.3 million in the same period in 2023.  Net cash provided by financing activities was $10.5 million for the six months ended June 30, 2024, compared to $74.6 million in the same period in the prior year. ChoiceOne had $4.6 million in deposit growth in the first six months of 2024 compared to a decrease of $31.6 million in the same period in 2023.  ChoiceOne also increased borrowing by $10.0 million in the first six months of 2024 compared to an increase of $110.0 million in the same period during the prior year.

ChoiceOne’s market risk exposure occurs in the form of interest rate risk and liquidity risk.  ChoiceOne’s business is transacted in U.S. dollars with no foreign exchange risk exposure. Agricultural loans comprise a relatively small portion of ChoiceOne’s total assets. Management believes that ChoiceOne’s exposure to changes in commodity prices is insignificant.

Liquidity risk deals with ChoiceOne’s ability to meet its cash flow requirements. These requirements include depositors desiring to withdraw funds and borrowers seeking credit.  Longer-term liquidity needs may be met through core deposit growth, maturities of and cash flows from investment securities, normal loan repayments, advances from the FHLB and the Federal Reserve Bank, brokered certificates of deposit, and income retention. ChoiceOne had $170.0 million in outstanding borrowings from the BTFP as of June 30, 2024.  ChoiceOne had $40.0 million in outstanding borrowings at the FHLB as of June 30, 2024. The acceptance of brokered certificates of deposit is not limited as long as the Bank is categorized as “well capitalized” under regulatory guidelines.  At June 30, 2024, total available borrowing capacity from the FHLB and the Federal Reserve Bank was $759.5 million.

ChoiceOne continues to review its liquidity management and has taken steps in an effort to ensure adequacy.  These steps include limiting bond purchases in the first six months of 2024, pledging securities to FHLB and the Federal Reserve Bank in order to increase borrowing capacity and using alternative funding sources such as brokered deposits.

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 Chief Financial Officer, of the effectiveness of the design and operation of ChoiceOne’s disclosure controls and procedures as of June 30, 2024. Based on and as of the time of that evaluation, ChoiceOne’s management, including the Chief Executive Officer and Chief 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 six months ended June 30, 2024 that has materially affected, or that is reasonably likely to materially affect, ChoiceOne’s internal control over financial reporting.

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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.

Item 1A. Risk Factors.

The Fentura acquisition may not be consummated, which could have an adverse impact on our business and on the value of our common stock.

We expect the Fentura acquisition to close during the first quarter of 2025, but the acquisition is subject to a number of closing conditions. Satisfaction of many of these conditions is beyond our control. If these conditions are not satisfied or waived, the Fentura acquisition will not be completed. Certain of the conditions that remain to be satisfied include, but are not limited to:

• the continued accuracy of the representations and warranties made by the parties in the Merger Agreement;

• the approval by Fentura shareholders of the Merger Agreement and the merger;

• the approval by ChoiceOne shareholders of the amendment to our articles of incorporation to increase the number of authorized shares of ChoiceOne common stock from 15,000,000 shares to 30,000,000 shares and the issuance of ChoiceOne common stock as merger consideration;

• the performance by each party of its respective obligations under the Merger Agreement;

• the receipt of required regulatory approvals, including the approval of the Federal Reserve and the Michigan Department of Insurance and Financial Services;

• the absence of any injunction, order, or decree restraining, enjoining or otherwise prohibiting the Fentura acquisition; and

• the absence of any material adverse change in the financial condition, business or results of operations of Fentura and The State Bank.

As a result, the Fentura acquisition may not close as scheduled, or at all. In addition, either ChoiceOne or Fentura may terminate the Merger Agreement under certain circumstances. Failure to complete the Fentura acquisition or any delays in completing the Fentura acquisition on the terms and timing we expect could have an adverse impact on our future business, operations and results of operations and could negatively impact the price of our common stock.

Regulatory approvals may not be received, may take longer than expected or may impose conditions that we do not anticipate or cannot be met.

Before the Fentura acquisition may be completed, various approvals or waivers must be obtained from bank regulatory authorities, including the Federal Reserve and the Michigan Department of Insurance and Financial Services. These regulators may impose conditions on the completion of, or require changes to the terms of, the Fentura acquisition. Such conditions or changes and the process of obtaining regulatory approvals or waivers could have the effect of delaying completion of the Fentura acquisition or of imposing additional costs or limitations on us following the completion of the Fentura acquisition. The regulatory approvals or waivers may not be received at all, may not be received in a timely fashion or may contain conditions on the completion of the Fentura acquisition that are burdensome, not anticipated, or cannot be met. If the completion of the Fentura acquisition is delayed, including by a delay in receipt of necessary governmental approvals or waivers, the business, financial condition, and results of operations of ChoiceOne and Fentura may also be materially adversely affected.

We may be unsuccessful in integrating the operations of the businesses we have acquired or expect to acquire in the future, including Fentura.

From time to time, we evaluate and acquire businesses that we believe complement our existing business. The acquisition component of our growth strategy depends on the successful integration of these acquisitions. We face numerous risks and challenges to the successful integration of acquired businesses, including the following:

• the potential for unexpected costs, delays and challenges that may arise in integrating acquisitions into our existing business;

• limitations on our ability to realize the expected cost savings and synergies from an acquisition;

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• challenges related to integrating acquired operations, including our ability to retain key employees and maintain relationships with significant customers and depositors;

• challenges related to the integration of businesses that operate in new geographic areas, including difficulties in identifying and gaining access to customers in new markets; and

• the discovery of previously unknown liabilities following an acquisition associated with the acquired business.

If we are unable to successfully integrate the businesses we acquire, including Fentura, our business, financial condition and results of operations may be materially adversely affected.

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The Fentura acquisition could result in unexpected disruptions on the combined business.

In response to the announcement of the Fentura acquisition, Fentura’s customers may cease or reduce their business with Fentura, which could negatively affect our combined business operations. Similarly, current or prospective employees of ChoiceOne or of Fentura may experience uncertainty about their future roles with the combined entity. This may adversely affect our ability to attract and retain key management, banking and other personnel. In addition, the diversion of the attention of our respective management teams away from day-to-day operations during the negotiation and pendency of the Fentura acquisition could have an adverse effect on the financial condition and operating results of either us or Fentura.

We or Fentura or both may be subject to claims and litigation pertaining to the merger that could prevent or delay the completion of the merger.

Any lawsuits filed in connection with the proposed merger could prevent or delay completion of the merger and result in substantial costs to ChoiceOne and Fentura, including any costs associated with indemnification. The defense or settlement of any lawsuit or claim that may be filed seeking remedies against ChoiceOne, its board of directors or Fentura or its board of directors in connection with the merger that remains unresolved at the effective time of the merger may adversely affect ChoiceOne’s business, financial condition, results of operations and cash flows.

We may fail to realize some or all of the anticipated benefits of the Fentura acquisition.

The success of the Fentura acquisition will depend, in part, on our ability to realize the anticipated benefits and cost savings from combining our business with Fentura’s business. However, to realize these anticipated benefits and cost savings, we must successfully combine both businesses. If we are not able to achieve these objectives, the anticipated benefits and cost savings of the Fentura acquisition may not be realized fully, or at all, or may take longer to realize than we expect.

We will incur significant transaction and merger-related integration costs in connection with the Fentura acquisition.

We expect to incur significant costs associated with completing the Fentura acquisition and integrating Fentura’s operations into our operations and are continuing to assess the impact of these costs. Although we believe that the elimination of duplicate costs, as well as the realization of other efficiencies related to the integration of Fentura’s business with ChoiceOne’s business, will offset incremental transaction and merger-related costs over time, this net benefit may not be achieved in the near term, or at all.

The Fentura acquisition may be completed on different terms from those contained in the merger agreement.

Prior to the completion of the Fentura acquisition, ChoiceOne and Fentura may, by mutual agreement, amend or alter the terms of the Merger Agreement, including with respect to, among other things, the merger consideration payable by us to Fentura’s shareholders or any covenants or agreements with respect to the parties’ respective operations during the pendency thereof. Any such amendments or alterations may have negative consequences to ChoiceOne.

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

There were no unregistered sales of equity securities in the second quarter of 2024.

There were no issuer purchases of equity securities during the second quarter of 2024.

Item 5. Other Information

None.

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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 by and between ChoiceOne Financial Services, Inc. and Fentura Financial, Inc. dated July 25, 2024. Previously filed with the Commission on July 25, 2024 in ChoiceOne Financial Services, Inc.’s Current Report on Form 8-K, Exhibit 2.1. Here incorporated by reference.
3.1	Restated Articles of Incorporation of ChoiceOne Financial Services, Inc. Previously filed as an exhibit to ChoiceOne’s Form 10-K Annual Report for the year ended December 31, 2022.  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.
4.2	Form of 3.25% Fixed-to-Floating Rate Subordinated Note due September 3, 2031. Previously filed as an exhibit to ChoiceOne Financial Services, Inc.’s Form 8-K filed September 7, 2021. Here incorporated by reference.
4.3	Form of 3.25% Fixed-to-Floating Rate Global Subordinated Note due September 3, 2031. Previously filed as an exhibit to ChoiceOne Financial Services, Inc.’s Form 8-K filed September 7, 2021. Here incorporated by reference.
31.1	Certification of Chief Executive Officer
31.2	Certification of Chief Financial Officer
32.1	Certification pursuant to 18 U.S.C. § 1350.
101.INS	Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)
101.SCH	Inline XBRL Taxonomy Extension Schema Document
101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document
104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

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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:   August 14, 2024	/s/ Kelly J. Potes
	Kelly J. Potes Chief Executive Officer (Principal Executive Officer)
Date:   August 14, 2024	/s/ Adom J. Greenland
	Adom J. Greenland Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)

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