    $ 3.0 million related to the adoption of CECL.  These unfunded loans and other commitments are open credit lines with current customers and loans approved by ChoiceOne but not yet funded.  The increase in the reserve and the cost of the liability will result in a decrease in 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. 46 Table of Contents ChoiceOne has elected the discounted cash flow methodology for all loan types, and will be utilizing third party software to store and measure historical loss experience.  ChoiceOne has worked with a third party advisory group to develop loss drivers which we believe have a strong correlation to our historical loss trends.  The loss drivers ChoiceOne has elected are unemployment and GDP growth which have readily available 12 month forecast data from the FOMC. Reclassifications Certain amounts presented in prior year consolidated financial statements have been reclassified to conform to the 2022 presentation. Note 2 – Securities On January 1, 2022, ChoiceOne reassessed and transferred, at fair value, $ 428.4 million of securities classified as available for sale to the held to maturity classification.  The net unrealized after-tax loss of $ 2.7 million as of the transfer date remained in accumulated other comprehensive income to be amortized over the remaining life of the securities, offsetting the related amortization of discount or premium on the transferred securities. No gains or losses were recognized at the time of the transfer.  The remaining net unamortized unrealized loss on transferred securities included in accumulated other comprehensive income was $ 2.4 million after tax as of December 31, 2022. The fair value of equity securities and the related gross unrealized gains and losses recognized in noninterest income at December 31 were as follows: December 31, 2022 Gross Gross (Dollars in thousands) Amortized Unrealized Unrealized Fair Cost Gains Losses Value Equity securities $ 8,982 $ 305 $ ( 721 ) $ 8,566 December 31, 2021 Gross Gross (Dollars in thousands) Amortized Unrealized Unrealized Fair Cost Gains Losses Value Equity securities $ 7,953 $ 665 $ ( 126 ) $ 8,492 The fair value of securities available for sale and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows: December 31, 2022 Gross Gross (Dollars in thousands) Amortized Unrealized Unrealized Fair Available for S Cost Gains Losses Value U.S. Government and federal agency $ - $ - $ - $ - U.S. Treasury notes and bonds 90,810 - ( 12,606 ) 78,204 State and municipal 277,489 - ( 47,551 ) 229,938 Mortgage-backed 236,703 - ( 28,140 ) 208,563 Corporate 757 - ( 46 ) 711 Asset-backed securities 13,031 - ( 698 ) 12,333 Total $ 618,790 $ - $ ( 89,041 ) $ 529,749 December 31, 2021 Gross Gross (Dollars in thousands) Amortized Unrealized Unrealized Fair Available for S Cost Gains Losses Value U.S. Government and federal agency $ 2,001 $ 7 $ - $ 2,008 U.S. Treasury notes and bonds 93,267 23 ( 1,311 ) 91,979 State and municipal 528,252 10,704 ( 4,109 ) 534,847 Mortgage-backed 441,383 781 ( 9,049 ) 433,115 Corporate 20,856 19 ( 233 ) 20,642 Asset-backed securities 16,387 - ( 93 ) 16,294 Total $ 1,102,146 $ 11,534 $ ( 14,795 ) $ 1,098,885 The fair value of securities held to maturity and the related gross unrealized gains and losses were as follows: December 31, 2022 Gross Gross (Dollars in thousands) Amortized Unrealized Unrealized Fair Held to Maturity: Cost Gains Losses Value U.S. Government and federal agency $ 2,966 $ - $ ( 421 ) $ 2,545 State and municipal 201,890 1 ( 39,355 ) 162,536 Mortgage-backed 200,473 - ( 29,868 ) 170,605 Corporate 19,603 - ( 2,285 ) 17,318 Asset-backed securities 974 - ( 77 ) 897 Total $ 425,906 $ 1 $ ( 72,006 ) $ 353,901 There were no securities held to maturity at December 31, 2021. 47 Table of Contents Information regarding sales of securities available for sale for the year ended December 31 follows: (Dollars in thousands) 2022 2021 2020 Proceeds from sales of securities $ 47,167 $ 29,742 $ 121,942 Gross realized gains - - 1,308 Gross realized losses ( 809 ) ( 40 ) - Contractual maturities of securities available for sale at December 31, 2022 were as follows: (Dollars in thousands) Amortized Fair Cost Value Due within one year $ 6,035 $ 5,972 Due after one year through five years 17,069 16,176 Due after five years through ten years 149,578 130,215 Due after ten years 209,405 168,823 Total debt securities 382,087 321,186 Mortgage-backed securities 236,703 208,563 Total $ 618,790 $ 529,749 Contractual maturities of securities held to maturity at December 31, 2022 were as follows: (Dollars in thousands) Amortized Fair Cost Value Due within one year $ 2,417 $ 2,389 Due after one year through five years 6,262 5,834 Due after five years through ten years 109,263 92,553 Due after ten years 107,491 82,520 Total debt securities 225,433 183,296 Mortgage-backed securities 200,473 170,605 Total $ 425,906 $ 353,901 Certain securities were pledged as collateral for participation in a program that provided Community Reinvestment Act credits. The carrying amount of the securities pledged as collateral at December 31 was as follows: (Dollars in thousands) 2022 2021 Securities pledged for Community Reinvestment Act credits $ 250 $ 273 Securities with unrealized losses at year-end 2022 and 2021 , aggregated by investment category and length of time the individual securities have been in an unrealized loss position, were as follows: 2022 Less than 12 months More than 12 months Total (Dollars in thousands) Fair Unrealized Fair Unrealized Fair Unrealized Available for S Value Losses Value Losses Value Losses U.S. Government and federal agency $ - $ - $ - $ - $ - $ - U.S. Treasury notes and bonds - - 78,204 12,606 78,204 12,606 State and municipal 89,158 12,612 140,390 34,939 229,548 47,551 Mortgage-backed 63,249 3,093 144,318 25,047 207,567 28,140 Corporate 711 46 - - 711 46 Asset-backed securities - - 12,333 698 12,333 698 Total temporarily impaired $ 153,118 $ 15,751 $ 375,245 $ 73,290 $ 528,363 $ 89,041 2021 Less than 12 months More than 12 months Total (Dollars in thousands) Fair Unrealized Fair Unrealized Fair Unrealized Available for S Value Losses Value Losses Value Losses U.S. Government and federal agency $ - $ - $ - $ - $ - $ - U.S. Treasury notes and bonds 89,958 1,311 - - 89,958 1,311 State and municipal 130,001 3,253 15,237 856 145,238 4,109 Mortgage-backed 261,560 5,709 86,974 3,340 348,534 9,049 Corporate 17,369 233 - - 17,369 233 Asset-backed securities 16,294 93 - - 16,294 93 Total temporarily impaired $ 515,182 $ 10,599 $ 102,211 $ 4,196 $ 617,393 $ 14,795 48 Table of Contents 2022 Less than 12 months More than 12 months Total (Dollars in thousands) Fair Unrealized Fair Unrealized Fair Unrealized Held to Maturity: Value Losses Value Losses Value Losses U.S. Government and federal agency $ - $ - $ 2,545 $ 421 $ 2,545 $ 421 State and municipal 13,457 1,899 149,016 37,456 162,473 39,355 Mortgage-backed 25,582 822 145,024 29,046 170,606 29,868 Corporate 5,296 603 10,771 1,682 16,067 2,285 Asset-backed securities - - 897 77 897 77 Total temporarily impaired $ 44,335 $ 3,324 $ 308,253 $ 68,682 $ 352,588 $ 72,006 There were no securities classified as held to maturity as of December 31, 2021. ChoiceOne evaluates all securities on a quarterly basis to determine whether unrealized losses are temporary or other than temporary. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of ChoiceOne to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value of amortized cost basis. Management believed that unrealized losses as of December 31, 2022 were temporary in nature and were caused primarily by changes in interest rates, increased credit spreads, and reduced market liquidity and were not caused by the credit status of the issuer. No other than temporary impairments were recorded in 2022 or 2021. Following is information regarding unrealized gains and losses on equity securities for the years ending December 31: 2022 2021 2020 Net gains and losses recognized during the period $ ( 955 ) $ 479 $ ( 155 ) L 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 $ ( 955 ) $ 479 $ ( 155 ) At December 31, 2022 , there were 611 securities with an unrealized loss, compared to 247 securities with an unrealized loss as of December 31, 2021 . Unrealized losses on corporate and municipal bonds 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 December 31, 2022, are related to U.S. Treasury notes and bonds, State and municipal bonds and mortgage backed.  U.S. Treasury notes are guaranteed by the U.S. government and of which 100 % 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 December 31, 2022, 86 % of state and municipal bonds held are rated AA or better.  Agency issued securities are generally guaranteed by a U.S. government agency, such as the government national mortgage association which give 100 % of these AA ratings or better. Of the mortgage-backed securities held on December 31, 2022, 38 % were issued by US government sponsored entities and agencies, and rated AA, 31 % are AAA rated private issue, and 13 % are unrated privately issued mortgage-backed securities with structured credit enhancement. Note 3 – Loans and Allowance for Loan Losses The Bank’s loan portfolio as of December 31 was as follows: (Dollars in thousands) 2022 2021 Agricultural $ 64,159 $ 64,819 Commercial and industrial 210,210 203,024 Consumer 39,808 35,174 Real estate - commercial 630,953 525,884 Real estate - construction 14,736 19,066 Real estate - residential 229,916 168,881 Loans, gross $ 1,189,782 $ 1,016,848 Allowance for Loan Losses ( 7,619 ) ( 7,688 ) Loans, net $ 1,182,163 $ 1,009,160 ChoiceOne manages its credit risk through the use of its loan policy and its loan approval process and by monitoring of loan credit performance. The loan approval process for commercial loans involves individual and group approval authorities. Individual authority levels are based on the experience of the lender. Group authority approval levels can consist of an internal loan committee that includes the Bank’s President or Senior Lender and other loan officers for loans that exceed individual approval levels, or a loan committee of the Board of Directors for larger commercial loans. Most consumer loans are approved by individual loan officers based on standardized underwriting criteria, with larger consumer loans subject to approval by the internal loan committee. Ongoing credit review of commercial loans is the responsibility of the loan officers. ChoiceOne’s internal credit committee meets at least monthly and reviews loans with payment issues and loans with a risk rating of 6, 7, or 8. Risk ratings of commercial loans are reviewed periodically and adjusted if needed. ChoiceOne’s consumer loan portfolio is primarily monitored on an exception basis. Loans where payments are past due are turned over to the applicable Bank’s collection department, which works with the borrower to bring payments current or take other actions when necessary. In addition to internal reviews of credit performance, ChoiceOne contracts with a third party for independent loan review that monitors the loan approval process and the credit quality of the loan portfolio. 49 Table of Contents The table below details the outstanding balances of the County Bank Corp. acquired portfolio and the acquisition fair value adjustments at acquisition date: (Dollars in thousands) Acquired Acquired Acquired Impaired Non-impaired Total Loans acquired - contractual payments $ 7,729 $ 387,394 $ 395,123 Nonaccretable difference ( 2,928 ) - ( 2,928 ) Expected cash flows 4,801 387,394 392,195 Accretable yield ( 185 ) ( 1,894 ) ( 2,079 ) Carrying balance at acquisition date $ 4,616 $ 385,500 $ 390,116 The table below presents a roll-forward of the accretable yield on County Bank Corp. acquired loans for the year ended December 31, 2022: (Dollars in thousands) Acquired Acquired Acquired Impaired Non-impaired Total Balance, January 1, 2019 $ - $ - $ - Merger with County Bank Corp. on October 1, 2019 185 1,894 2,079 Accretion October 1, 2019 through December 31, 2019 - ( 75 ) -75 Balance January 1, 2020 185 1,819 2,004 Accretion January 1, 2020 through December 31, 2020 ( 50 ) ( 295 ) ( 345 ) Balance January 1, 2021 135 1,524 1,659 Accretion January 1, 2021 through December 31, 2021 ( 247 ) ( 348 ) ( 595 ) Transfer from non-accretable to accretable yield 400 - 400 Balance January 1, 2022 288 1,176 1,464 Transfer from non-accretable to accretable yield 2,192 - 2,192 Accretion January 1, 2022 through December 31, 2022 ( 553 ) ( 98 ) ( 651 ) Balance, December 31, 2022 $ 1,927 $ 1,078 $ 3,005 The table below details the outstanding balances of the Community Shores Bank Corporation acquired loan portfolio and the acquisition fair value adjustments at acquisition date: (Dollars in thousands) Acquired Acquired Acquired Impaired Non-impaired Total Loans acquired - contractual payments $ 20,491 $ 158,495 $ 178,986 Nonaccretable difference ( 2,719 ) - ( 2,719 ) Expected cash flows 17,772 158,495 176,267 Accretable yield ( 869 ) ( 596 ) ( 1,465 ) Carrying balance at acquisition date $ 16,903 $ 157,899 $ 174,802 The table below presents a roll-forward of the accretable yield on Community Shores Bank Corporation acquired loans for the year ended December 31, 2022: (Dollars in thousands) Acquired Acquired Acquired Impaired Non-impaired Total Balance January 1, 2020 $ - $ - $ - Merger with Community Shores Bank Corporation on July 1, 2020 869 596 1,465 Accretion July 1, 2020 through December 31, 2020 ( 26 ) ( 141 ) ( 167 ) Balance, January 1, 2021 843 455 1,298 Accretion January 1, 2021 through December 31, 2021 ( 321 ) ( 258 ) ( 579 ) Balance January 1, 2022 522 197 719 Transfer from non-accretable to accretable yield 1,086 - 1,086 Accretion January 1, 2022 through December 31, 2022 ( 993 ) ( 197 ) ( 1,190 ) Balance, December 31, 2022 $ 615 $ - $ 615 50 Table of Contents Activity in the allowance for loan losses and balances in the loan portfolio was as follows: Commercial (Dollars in thousands) and Commercial Construction Residential Agricultural Industrial Consumer Real Estate Real Estate Real Estate Unallocated Total Allowance for Loan Losses Year Ended December 31, 2022 Beginning balance $ 448 $ 1,454 $ 290 $ 3,705 $ 110 $ 671 $ 1,010 $ 7,688 Charge-offs — ( 177 ) ( 496 ) — — — — ( 673 ) Recoveries — 143 206 3 — 2 — 354 Provision ( 304 ) ( 59 ) 310 1,114 ( 47 ) 233 ( 997 ) 250 Ending balance $ 144 $ 1,361 $ 310 $ 4,822 $ 63 $ 906 $ 13 $ 7,619 Individually evaluated for impairment $ 2 $ 14 $ 1 $ 5 $ — $ 131 $ — $ 153 Collectively evaluated for impairment $ 142 $ 1,347 $ 309 $ 4,817 $ 63 $ 775 $ 13 $ 7,466 Loans December 31, 2022 Individually evaluated for impairment $ 23 $ 177 $ 7 $ 165 $ — $ 2,474 $ 2,846 Collectively evaluated for impairment 64,136 206,074 39,793 622,131 14,736 225,792 1,172,662 Acquired with deteriorated credit quality — 3,959 8 8,657 — 1,650 14,274 Ending balance $ 64,159 $ 210,210 $ 39,808 $ 630,953 $ 14,736 $ 229,916 $ 1,189,782 Commercial (Dollars in thousands) and Commercial Construction Residential Agricultural Industrial Consumer Real Estate Real Estate Real Estate Unallocated Total Allowance for Loan Losses Year Ended December 31, 2021 Beginning balance $ 257 $ 1,327 $ 317 $ 4,178 $ 97 $ 1,300 $ 117 $ 7,593 Charge-offs — ( 195 ) ( 370 ) ( 111 ) — — — ( 676 ) Recoveries — 86 214 48 — 7 — 355 Provision 191 236 129 ( 410 ) 13 ( 636 ) 893 416 Ending balance $ 448 $ 1,454 $ 290 $ 3,705 $ 110 $ 671 $ 1,010 $ 7,688 Individually evaluated for impairment $ 251 $ 95 $ 2 $ 9 $ — $ 146 $ — $ 503 Collectively evaluated for impairment $ 197 $ 1,359 $ 288 $ 3,696 $ 110 $ 525 $ 1,010 $ 7,185 Loans December 31, 2021 Individually evaluated for impairment $ 2,616 $ 339 $ 14 $ 273 $ — $ 2,191 $ 5,433 Collectively evaluated for impairment 62,203 197,656 35,148 515,528 19,066 164,647 994,248 Acquired with deteriorated credit quality — 5,029 12 10,083 — 2,043 17,167 Ending balance $ 64,819 $ 203,024 $ 35,174 $ 525,884 $ 19,066 $ 168,881 $ 1,016,848 Commercial (Dollars in thousands) and Commercial Construction Residential Agricultural Industrial Consumer Real Estate Real Estate Real Estate Unallocated Total Allowance for Loan Losses Year Ended December 31, 2020 Beginning balance $ 471 $ 655 $ 270 $ 1,663 $ 76 $ 640 $ 282 $ 4,057 Charge-offs ( 15 ) ( 148 ) ( 329 ) ( 254 ) - ( 8 ) - ( 754 ) Recoveries - 57 204 10 - 19 - 290 Provision ( 199 ) 763 172 2,759 21 649 ( 165 ) 4,000 Ending balance $ 257 $ 1,327 $ 317 $ 4,178 $ 97 $ 1,300 $ 117 $ 7,593 Individually evaluated for impairment $ - $ 19 $ 1 $ 157 $ - $ 254 $ - $ 431 Collectively evaluated for impairment $ 257 $ 1,308 $ 316 $ 4,021 $ 97 $ 1,046 $ 117 $ 7,162 Loans December 31, 2020 Individually evaluated for impairment $ 348 $ 1,663 $ 8 $ 3,032 $ 80 $ 2,720 $ 7,851 Collectively evaluated for impairment 53,387 295,154 33,982 453,681 16,559 186,982 1,039,745 Acquired with deteriorated credit quality - 6,710 24 12,534 - 2,804 22,072 Ending balance $ 53,735 $ 303,527 $ 34,014 $ 469,247 $ 16,639 $ 192,506 $ 1,069,668 51 Table of Contents The process to monitor the credit quality of ChoiceOne’s loan portfolio includes tracking ( 1 ) the risk ratings of business loans, ( 2 ) the level of classified business loans, and ( 3 ) delinquent and nonperforming consumer loans. Business loans are risk rated on a scale of 1 to 9. A description of the characteristics of the ratings follows: Risk Rating 1 through 5 or pass: These loans are considered pass credits. They exhibit acceptable credit risk and demonstrate the ability to repay the loan from normal business operations. Risk rating 6 or special menti 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 substandar 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 doubtfu 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 l Loans in this classification are considered uncollectible and cannot be justified as a viable asset of ChoiceOne Bank. This classification does not mean the loan has absolutely no recovery value, but that it is neither practical nor desirable to defer writing off this loan even though partial recovery may be obtained in the future. Information regarding the Bank’s credit exposure as of December 31 was as follows: Corporate Credit Exposure - Credit Risk Profile By Creditworthiness Category (Dollars in thousands) Agricultural Commercial and Industrial Commercial Real Estate December 31, December 31, December 31, December 31, December 31, December 31, 2022 2021 2022 2021 2022 2021 Pass $ 63,867 $ 61,864 $ 209,700 $ 201,202 $ 624,555 $ 519,537 Special Mention 289 339 400 300 2,048 778 Substandard 3 2,616 110 1,266 4,350 5,569 Doubtful - - - 256 - - Loss - - - - - - $ 64,159 $ 64,819 $ 210,210 $ 203,024 $ 630,953 $ 525,884 Consumer Credit Exposure - Credit Risk Profile Based On Payment Activity (Dollars in thousands) Consumer Construction Real Estate Residential Real Estate December 31, December 31, December 31, December 31, December 31, December 31, 2022 2021 2022 2021 2022 2021 Performing $ 39,808 $ 35,174 $ 14,736 $ 19,066 $ 228,653 $ 168,031 Nonperforming - - - - - - Nonaccrual - - - - 1,263 850 $ 39,808 $ 35,174 $ 14,736 $ 19,066 $ 229,916 $ 168,881 Included within the loan categories above were loans in the process of foreclosure. As of December 31, 2022 and 2021 , loans in the process of foreclosure totaled $ 1.1 million an d $ 813,000 , respectively. Loans are classified as performing when they are current as to principal and interest payments or are past due on payments less than 90 days. Loans are classified as nonperforming when they are past due 90 days or more as to principal and interest payments or are considered a troubled debt restructuring. The following schedule provides information on loans that were considered troubled debt restructurings ("TDRs") that were modified during the years ended December 31, 2022 and 2021: Year Ended December 31, 2022 Year Ended December 31, 2021 Year Ended December 31, 2020 Pre- Post- Pre- Post- Pre- Post- Modification Modification Modification Modification Modification Modification Outstanding Outstanding Outstanding Outstanding Outstanding Outstanding (Dollars in thousands) Number of Recorded Recorded Number of Recorded Recorded Number of Recorded Recorded Loans Investment Investment Loans Investment Investment Loans Investment Investment Agricultural - $ - $ - 5 $ 1,803 $ 1,803 5 $ 1,803 $ 1,803 Commercial and Industrial 1 15 15 4 270 270 4 270 270 Commercial Real Estate - - - 2 619 619 2 619 619 Total 1 $ 15 $ 15 11 $ 2,692 $ 2,692 11 $ 2,692 $ 2,692 52 Table of Contents There were no TDRs as of December 31, 2022 where the borrower was past due with respect to principal and interest for 30 days or more during the year ended December 31, 2022. The following schedule provides information on TDRs as of December 31, 2021 where the borrower was past due with respect to principal and/or interest for 30 days or more during the year ended December 31, 2021 that had been modified during the year prior to the defaul Year Ended Year Ended Year Ended December 31, 2022 December 31, 2021 December 31, 2020 (Dollars in thousands) Number Recorded Number Recorded Number Recorded of Loans Investment of Loans Investment of Loans Investment Commercial Real Estate - - 1 185 - - Total - $ - 1 $ 185 - $ - Impaired loans by loan category as of December 31 were as follows: Unpaid Average Interest (Dollars in thousands) Recorded Principal Related Recorded Income Investment Balance Allowance Investment Recognized December 31, 2022 With no related allowance recorded Agricultural $ - $ - $ - $ 250 $ - Commercial and industrial - - - 18 - Consumer - - - - - Construction real estate - - - - - Commercial real estate - - - 19 - Residential real estate 550 595 - 231 1 Subtotal 550 595 - 518 1 With an allowance recorded Agricultural 23 27 2 913 2 Commercial and industrial 177 177 14 209 13 Consumer 7 7 1 14 1 Construction real estate - - - - - Commercial real estate 165 165 5 158 13 Residential real estate 1,924 1,954 131 1,897 93 Subtotal 2,296 2,330 153 3,191 122 Total Agricultural 23 27 2 1,163 2 Commercial and industrial 177 177 14 227 13 Consumer 7 7 1 14 1 Construction real estate - - - - - Commercial real estate 165 165 5 177 13 Residential real estate 2,474 2,549 131 2,128 94 Total $ 2,846 $ 2,925 $ 153 $ 3,709 $ 123 Unpaid Average Interest (Dollars in thousands) Recorded Principal Related Recorded Income Investment Balance Allowance Investment Recognized December 31, 2021 With no related allowance recorded Agricultural $ 314 $ 428 $ - $ 598 $ - Commercial and industrial - - - 596 - Consumer - - - - - Construction real estate - - - 16 - Commercial real estate 94 94 - 1,117 5 Residential real estate 164 172 - 228 - Subtotal 572 694 - 2,555 5 With an allowance recorded Agricultural 2,302 2,302 251 1,873 139 Commercial and industrial 339 363 95 226 5 Consumer 14 15 2 4 - Construction real estate - - - - - Commercial real estate 179 179 9 456 10 Residential real estate 2,027 2,084 146 2,177 64 Subtotal 4,861 4,943 503 4,736 218 Total Agricultural 2,616 2,730 251 2,471 139 Commercial and industrial 339 363 95 822 5 Consumer 14 15 2 4 - Construction real estate - - - 16 - Commercial real estate 273 273 9 1,573 15 Residential real estate 2,191 2,256 146 2,405 64 Total $ 5,433 $ 5,637 $ 503 $ 7,291 $ 223 53 Table of Contents Unpaid Average Interest (Dollars in thousands) Recorded Principal Related Recorded Income Investment Balance Allowance Investment Recognized December 31, 2020 With no related allowance recorded Agricultural $ 348 $ 434 $ - $ 329 $ - Commercial and industrial 1,516 1,629 - 464 2 Consumer - - - 1 - Construction real estate 80 80 - 16 - Commercial real estate 1,852 2,664 - 1,495 14 Residential real estate 162 162 - 99 3 Subtotal 3,958 4,969 - 2,404 19 With an allowance recorded Agricultural - - - 152 - Commercial and industrial 147 147 19 111 12 Consumer 8 8 1 16 - Construction real estate - - - - - Commercial real estate 1,180 1,180 157 897 35 Residential real estate 2,558 2,651 254 2,330 87 Subtotal 3,893 3,986 431 3,506 134 Total Agricultural 348 434 - 481 - Commercial and industrial 1,663 1,776 19 575 14 Consumer 8 8 1 17 - Construction real estate 80 80 - 16 - Commercial real estate 3,032 3,844 157 2,392 49 Residential real estate 2,720 2,813 254 2,429 90 Total $ 7,851 $ 8,955 $ 431 $ 5,910 $ 153 An aging analysis of loans by loan category as of December 31 follows: Loans Loans Loans Past Due Loans Past Due Past Due Greater 90 Days Past (Dollars in thousands) 30 to 59 60 to 89 Than 90 Loans Not Total Due and Days (1) Days (1) Days (1) Total (1) Past Due Loans Accruing December 31, 2022 Agricultural $ - $ - $ - $ - $ 64,159 $ 64,159 $ - Commercial and industrial - 171 - 171 210,039 210,210 - Consumer 39 7 - 46 39,762 39,808 - Commercial real estate - - - - 630,953 630,953 - Construction real estate - - - - 14,736 14,736 - Residential real estate 682 - 842 1,524 228,392 229,916 - $ 721 $ 178 $ 842 $ 1,741 $ 1,188,041 $ 1,189,782 $ - December 31, 2021 Agricultural $ - $ - $ - $ - $ 64,819 $ 64,819 $ - Commercial and industrial 21 - 88 109 202,915 203,024 - Consumer 70 15 - 85 35,089 35,174 - Commercial real estate 422 13 279 714 525,170 525,884 - Construction real estate 1,149 1,235 - 2,384 16,682 19,066 - Residential real estate 1,489 306 454 2,249 166,632 168,881 - $ 3,151 $ 1,569 $ 821 $ 5,541 $ 1,011,307 $ 1,016,848 $ - ( 1 ) Includes nonaccrual loans Nonaccrual loans by loan category as of December 31 as follows: (Dollars in thousands) 2022 2021 Agricultural $ - $ 313 Commercial and industrial - 285 Consumer - - Commercial real estate - 279 Construction real estate - - Residential real estate 1,263 850 $ 1,263 $ 1,727 54 Table of Contents Note 4 – Mortgage Banking Activity in secondary market loans during the year was as follows: (Dollars in thousands) 2022 2021 2020 Loans originated for resale, net of principal payments $ 71,829 $ 197,387 $ 326,286 Proceeds from loan sales 77,681 205,398 325,306 Net gains on sales of loans held for sale 2,343 6,776 11,313 Loan servicing fees, net of amortization 175 ( 163 ) ( 129 ) Net gains on sales of loans held for sale include capitalization of loan servicing rights. Loans serviced for others are not reported as assets in the accompanying consolidated balance sheets. The unpaid principal balances of these loans were $ 488.6 million and $ 481.9 million at December 31, 2022 and 2021 , respectively. The Bank maintains custodial escrow balances in connection with these serviced loans; however, such escrows were immaterial at December 31, 2022 and 2021 . Activity for loan servicing rights (included in other assets) was as follows: (Dollars in thousands) 2022 2021 2020 Balance, beginning of year $ 4,667 $ 3,967 $ 2,131 Capitalized 1,007 1,961 3,554 Amortization ( 1,352 ) ( 1,635 ) ( 1,344 ) Market valuation allowance change - 374 ( 374 ) Balance, end of year $ 4,322 $ 4,667 $ 3,967 The fair value of loan servicing rights was $ 5,855,000 and $ 5,521,000 as of December 31, 2022 and 2021, respectively. Valuation allowances of $ 0 were recorded at December 31, 2022 and December 31, 2021, respectively. The fair value of the Bank’s servicing rights at December 31, 2022 was determined using a discount rate of 8.00 % and prepayment speeds ranging from 5.2 % to 6.7 %.  The fair value of the Bank’s servicing rights at December 31, 2021 was determined using a discount rate of 8.00 % and prepayment speeds ranging from 5 % to 27 %. Note 5 – Premises and Equipment As of December 31, premises and equipment consisted of the followin (Dollars in thousands) 2022 2021 Land and land improvements $ 8,327 $ 8,888 Leasehold improvements 81 69 Buildings 26,823 26,091 Furniture and equipment 11,208 11,145 Total cost 46,439 46,193 Accumulated depreciation ( 18,207 ) ( 16,313 ) Premises and equipment, net $ 28,232 $ 29,880 Depreciation expense was $ 2.7 million, and $ 2.6 million in 2022 and 2021 , respectively. The Bank leases certain branch properties and automated-teller machine locations in its normal course of business. Rent expense totaled $ 211,000 , and $ 153,000 for 2022 and 2021 , respectively. The associated right of use assets are included in the applicable categories of fixed assets in the above table and the net book value of such assets approximates the operating lease liability. Rent commitments under non-cancelable operating leases were as follows, before considering renewal options that generally are present (dollars in thousands): 2023 $ 322 2024 232 2025 227 2026 166 2027 65 Total undiscounted cash flows 1,012 Less discount 119 Total operating lease liabilities $ 893 55 Table of Contents Note 6 - Goodwill and Acquired Intangible Assets Goodwill The change in the balance for goodwill was as follows: (Dollars in thousands) 2022 2021 Balance, beginning of year $ 59,946 $ 60,506 Goodwill adjustment from merger with Community Shores Bank Corporation - ( 560 ) Balance, end of year $ 59,946 $ 59,946 Goodwill is not amortized but is evaluated annually for impairment and on an interim basis if events or changes in circumstances indicate that goodwill might be impaired. The goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount, and an impairment charge would be recognized for any amount by which the carrying amount exceeds the reporting unit's fair value.  Accounting pronouncements allow a company to first perform a qualitative assessment for goodwill prior to a quantitative assessment (Step 1 assessment). If the results of the qualitative assessment indicate that it is more likely than not that goodwill is impaired, then a quantitative assessment must be performed. If not, there is no further assessment required. The Company acquired Valley Ridge Financial Corp. in 2006, County in 2019, and Community Shores in 2020, which resulted in the recognition of goodwill of $ 13.7 million, $ 38.9 million and $ 7.3 million, respectively. We conducted an annual assessment of goodwill as of June 30, 2022 and no impairment was identified. The Company used a qualitative assessment to determine goodwill was not impaired as of June 30, 2022. Additionally, the Company 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 concurred with the conclusion derived from the quantitative goodwill analysis as of the valuation date and determined that there were no material changes and that no triggering events had occurred that indicated impairment from the valuation date through December 31, 2022, and as a result that it is more likely than not that there was no goodwill impairment as of December 31, 2022. Acquired Intangible Assets Information for acquired intangible assets at December 31 is as follows: 2022 2021 Gross Gross Carrying Accumulated Carrying Accumulated (Dollars in thousands) Amount Amortization Amount Amortization Core deposit intangible $ 7,120 $ 4,311 $ 7,120 $ 3,158 The core deposit intangible from the County and Community Shores mergers is being amortized on a sum-of-the-years digits basis over ten years and eight years, respectively.  Amortization expense was $ 1,153,000 in 2022 and $ 1,307,000 in 2021. The estimated amortization expense for the next five years ending December 31 is as follows (dollars in thousands): 2023 $ 955 2024 757 2025 560 2026 362 2027 164 Thereafter 11 Total $ 2,809 56 Table of Contents Note 7 – Other Real Estate Owned Other real estate owned represents residential and commercial properties primarily owned as a result of loan collection activities and is reported net of a valuation allowance. Activity within other real estate owned was as follows: (Dollars in thousands) 2022 2021 2020 Balance, beginning of year $ 194 $ 266 $ 929 Transfers from loans - 520 391 Additions from merger - - 346 Proceeds from sales ( 235 ) ( 611 ) ( 1,384 ) Write-downs - - ( 80 ) Gains on sales 41 19 64 Balance, end of year $ - $ 194 $ 266 Included in the balances above were residential real estate mortgage loans of $ 0 , $ 80,000 , and $ 61,000 as of December 31, 2022, 2021, and 2020, respectively, and $ 0 , $ 114,000 , and $ 205,000 of commercial real estate loans as of December 31, 2022, 2021, and 2020 respectively. Note 8 – Derivatives 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. ChoiceOne currently uses interest rate swaps and interest rate caps to manage its exposure to certain fixed and variable rate assets and variable rate liabilities. 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 will pay a coupon rate equal to SOFR while receiving a fixed coupon rate of 2.41 %. Net cash settlements received for the twelve months ended December 31, 2022, on pay-floating/ received-fixed swaps were $ 161,000 as of December 31, 2022, which were included in interest income. 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. 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 bonds 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 an 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 will be included in interest income. Subsequent to December 31, 2022, ChoiceOne terminated all pay-floating/receive-fixed (“pay floating swap agreements”) interest rate swaps with a notational amount of $ 200.0 million which resulted in a loss of $ 4.2 million.  The pay floating swap agreements were designated as cash flow hedges against specifically identified available-for-sale securities, cash and loans.  The loss was capitalized to available for sale securities and loans on the statement of financial condition and will be amortized into interest income over 13 months, or the remaining period of the agreements.  Refer to footnote 23 for further discussion. 57 Table of Contents Interest rate caps ChoiceOne also uses interest rate caps to provide stability to net interest income and to manage its exposure to interest rate movements. Interest rate caps designated as hedges involve the payment of a fixed premium by ChoiceOne who will then receive payments equivalent to the spread between the current rate and the strike rate until the conclusion of the term from the counterparty. In the second quarter of 2022, ChoiceOne entered into four forward starting interest rate cap agreements with a total notional amount of $ 200.0 million (“SOFR Cap Agreements”). Three of the SOFR Cap Agreements with a total notional amount of $ 100.0 million are designated as fair value hedges and hedge against changes in the fair value of certain fixed rate tax-exempt municipal bonds. ChoiceOne utilizes the interest rate caps as hedges against adverse changes in interest rates on the designated securities attributable to fluctuations in the SOFR rate above 2.68 %, as applicable. An increase in the benchmark interest rate hedged reduces the fair value of these assets. The remaining SOFR Cap Agreement with a notional amount of $ 100.0 million is designated as a cash flow hedge and hedges against the risk of variability in cash flows attributable to fluctuations in the SOFR rate above 2.68 % for forecasted payments on future deposits or borrowings indexed to the SOFR Rate. All of the SOFR Cap Agreements are two -year forward starting with an eight -year term set to expire in 2032. The initial amount excluded from hedge effectiveness testing and amortized into earnings over the life of the interest rate cap derivatives is $ 16.5 million. In the fourth quarter of 2022, ChoiceOne sold all four of the SOFR Cap Agreements for a total of $ 15,550,000 , which resulted in a loss of $ 770,803 . Of the total loss, $ 321,903 was related to the SOFR Cap Agreements designated as a cash flow hedge and recognized immediately in interest expense. The remaining loss of $ 448,900 was related to the SOFR Cap Agreements designated as fair value hedges and was capitalized to available for sale securities on the statement of financial condition and will be amortized into interest income over the weighted average life of the available for sale securities hedged. The table below presents the fair value of derivative financial instruments as well as the classification within the consolidated statements of financial condition. December 31, 2022 December 31, 2021 (Dollars in thousands) Balance Sheet Location Fair Value Balance Sheet Location Fair Value Derivatives designated as hedging instruments Interest rate contracts Other Assets $ 9,204 Other Assets $ - Interest rate contracts Other Liabilities $ 5,823 Other Liabilities $ - 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. Location and Amount of Gain or (Loss) Location and Amount of Gain or (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships Recognized in Income on Fair Value and Cash Flow Hedging Relationships Year Ended December 31, 2022 Year Ended December 31, 2021 (Dollars in thousands) 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 $ ( 55 ) $ ( 825 ) $ - $ - Gain or (loss) on fair value hedging relationships: Hedged items $ ( 1,930 ) $ - $ - $ - Derivatives designated as hedging instruments $ 2,171 $ - $ - $ - Amount excluded from effectiveness testing recognized in earnings based on amortization approach $ ( 496 ) $ - $ - $ - Gain or (loss) on cash flow hedging relationships: Interest rate contra Amount of gain or (loss) reclassified from accumulated other comprehensive income into income $ - $ - $ - $ - Amount excluded from effectiveness testing recognized in earnings based on amortization approach $ - $ ( 503 ) $ - $ - The table below presents the effect of fair value and cash flow hedge accounting on the consolidated statements of operations for the periods presented. 12/31/2022 Cumulative amount of Fair (Dollars in thousands) Value Hedging Adjustment Line Item in the Statement of included in the carrying Financial Position in which the Amortized cost of the amount of the Hedged Hedged Item is included Hedged Assets/(Liabilities) Assets/(Liabilities) Securities available for sale $ 225,851 $ 1,930 58 Table of Contents Note 9 – Deposits Deposit balances as of December 31 consisted of the followin (Dollars in thousands) 2022 2021 Noninterest-bearing demand deposits $ 599,579 $ 560,931 Interest-bearing demand deposits 638,641 665,482 Money market deposits 214,026 218,211 Savings deposits 427,583 425,626 Local certificates of deposit 236,431 182,044 Brokered certificates of deposit 1,743 - Total deposits $ 2,118,003 $ 2,052,294 Scheduled maturities of certificates of deposit as of December 31, 2022 were as follows: (Dollars in thousands) 2023 $ 210,989 2024 16,334 2025 5,778 2026 2,619 2027 2,452 Total $ 238,174 The Bank had certificates of deposit issued in denominations of $250,000 or greater totaling $ 148.9 million and $ 87.3 million at December 31, 2022 and 2021, respectively. The Bank held $ 1.7 million and $ 0 in brokered certificates of deposit at December 31, 2022 and 2021, respectively. In addition, the Bank had $ 17.3 million and $ 13.7 million of certificates of deposit as of December 31, 2022, and December 31, 2021, respectively, that had been issued through the Certificate of Deposit Account Registry Service ("CDARS"). 59 Table of Contents Note 10 – Borrowings Federal Home Loan Bank Advances At December 31, advances from the FHLB were as follows: (Dollars in thousands) 2022 2021 Maturity of January 2023 with fixed interest rate of 4.16 % $ 50,000 $ - Maturity of January 2022 with fixed interest rate of .21 % - 50,000 Total advances outstanding at year-end $ 50,000 $ 50,000 Fees are charged on fixed rate advances that are paid prior to maturity. Fees of $ 0 and $ 16,000 were charged in 2022 and 2021, respectively.  Advances were secured by residential real estate loans with a carrying value of approximately $ 169.7 million and $ 127.5 million at December 31, 2022 and December 31, 2021, respectively. Based on this collateral, the Bank was eligible to borrow an additional $ 39.6 million at year-end 2022. FHLB Advances matured in January 2023. In June 2021, ChoiceOne obtained a $ 20,000,000 line of credit with an annual renewal.  The line carries a floating rate of prime rate with a floor of 3.25 %.  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 December 31, 2022. The line of credit balance was $ 0 at December 31, 2022. Note 11 – Subo rdinated Debentures The Capital Trust sold 4,500 Cumulative Preferred Securities (“trust preferred securities”) at $ 1,000 per security in a December 2004 offering. The proceeds from the sale of the trust preferred securities were used by the Capital Trust to purchase an equivalent amount of subordinated debentures from Community Shores. The trust preferred securities and subordinated debentures carry a floating rate of 2.05 % over the 3 -month LIBOR and the rate was 5.72 % at December 31, 2022 and 2.27 % at December 31, 2021. The stated maturity is December 30, 2034. The trust preferred securities are redeemable at par value on any interest payment date and are, in effect, guaranteed by ChoiceOne. Interest on the subordinated debentures is payable quarterly on March 30, June 30, September 30 and December 30. ChoiceOne is not considered the primary beneficiary of the Capital Trust (under the variable interest entity rules), therefore the Capital Trust is not consolidated in the consolidated financial statements, rather the subordinated debentures are shown as a liability, and the interest expense is recorded in the consolidated statement of income. The terms of the subordinated debentures, the trust preferred securities and the agreements under which they were issued give ChoiceOne the right, from time to time, to defer payment of interest for up to 20 consecutive quarters, unless certain specified events of default have occurred and are continuing. The deferral of interest payments on the subordinated debentures results in the deferral of distributions on the trust preferred securities. 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. The notes will initially bear interest at a fixed interest rate of 3.25% per annum until September 3, 2026, after which time the interest rate will reset quarterly to a floating rate equal to a benchmark rate, which is expected to be the then current three -month term Secured Overnight Financing Rate ("SOFR") plus 255 basis points until the notes’ maturity on September 3, 2031. The notes are redeemable by ChoiceOne, in whole or in part, on or after September 3, 2026, and at any time upon the occurrence of certain events. The notes have been structured to qualify as Tier 2 capital for ChoiceOne for regulatory capital purposes.  ChoiceOne used a portion of net proceeds from the private placement to redeem senior debt, fund common stock repurchases, and support bank-level capital ratios. 60 Table of Contents Note 12 – Income Taxes Information as of December 31 and for the year follows: (Dollars in thousands) 2022 2021 2020 Provision for Income Taxes Current federal income tax expense $ 4,033 $ 3,532 $ 3,070 Deferred federal income tax expense/(benefit) ( 15 ) 924 202 Income tax expense $ 4,018 $ 4,456 $ 3,272 Reconciliation of Income Tax Provision to Statutory Rate Income tax computed at statutory federal rate of 21 % $ 5,808 $ 5,565 $ 3,966 Tax exempt interest income ( 1,323 ) ( 1,190 ) ( 574 ) Tax exempt earnings on bank-owned life insurance ( 276 ) ( 170 ) ( 162 ) Tax credits ( 289 ) ( 284 ) ( 240 ) Nondeductible merger expenses - - 182 Disallowed interest expense 179 74 64 Other items ( 81 ) 461 36 Income tax expense $ 4,018 $ 4,456 $ 3,272 Effective income tax rate 15 % 17 % 17 % (Dollars in thousands) Components of Deferred Tax Assets and Liabilities 2022 2021 Deferred tax assets: Purchase accounting adjustments from mergers with County and Community Shores $ 945 $ 1,374 Allowance for loan losses 1,600 1,614 Unrealized losses on securities available for sale 19,745 685 Net operating loss carryforward 505 544 Deferred loan fees and costs, net - 319 Compensation 299 286 Other 716 68 Total deferred tax assets 23,810 4,890 Deferred tax liabiliti Purchase accounting adjustments from mergers with County and Community Shores 844 1,107 Loan servicing rights 908 980 Depreciation 605 540 Interest rate derivative contracts 660 - Deferred loan fees and costs, net 15 - Other 404 323 Total deferred tax liabilities 3,436 2,950 Net deferred tax asset (liability) $ 20,374 $ 1,940 As of December 31, 2022, deferred tax assets included federal net operating loss carryforwards of approximately $ 2.4 million which was acquired through the merger with Community Shores.  The loss carryforwards expire at various dates from 2031 to 2035. Deferred tax assets are recognized for net operating losses because the benefit is more likely than not to be realized.  Under Code Section 382, ChoiceOne is limited to applying approximately $ 185,000 of net operating losses per year. 61 Table of Contents Note 13 – Related Party Transactions Loans to executive officers, directors and their affiliates were as follows at December 31: (Dollars in thousands) 2022 2021 Balance, beginning of year $ 24,000 $ 20,724 New loans 9,684 13,188 Repayments ( 9,259 ) ( 9,912 ) Effect of changes in related parties ( 389 ) - Balance, end of year $ 24,036 $ 24,000 Deposits from executive officers, directors and their affiliates were $ 30.0 million and $ 16.8 million at December 31, 2022 and 2021 , respectively. Note 14 – Employee Benefit Plans 401 (k) Plan : The 401 (k) plan allows employees to contribute to their individual accounts under the plan amounts up to the IRS maximum. Matching company contributions to the plan are discretionary. Expense for matching company contributions under the plan was $ 650,000 and $ 627,000 in 2022 and 2021, respectively. Note 15 - Stock Based Compensation Options to buy stock have been granted to key employees to provide them with additional equity interests in ChoiceOne. Compensation expense in connection with stock options granted was $ 4,000 in 2022 and $ 15,000 in 2021. The Stock Incentive Plan of 2022 was approved by the Company’s shareholders at the Annual Meeting held on May 25, 2022. The Stock Incentive Plan of 2022 provides for the issuance of up to 200,000 shares of common stock. At December 31, 2022, there were 200,000 shares available for future grants. A summary of stock options activity during the year ended December 31, 2022 was as follows: Weighted Weighted average average exercise Grant Date Shares price Fair Value Options outstanding at January 1, 2022 20,631 $ 25.30 $ 3.46 Options granted - - - Options exercised - - - Options forfeited or expired - - - Options outstanding, end of year 20,631 $ 25.30 $ 3.46 Options exercisable at December 31, 2022 20,631 $ 25.30 $ 3.46 The exercise prices for options outstanding and exercisable at the end of 2022 ranged from $ 20.86 to $ 27.25 per share. The weighted average remaining contractual life of options outstanding and exercisable at the end of 2022 was approximately 5.57 years. The intrinsic value of all outstanding stock options and exercisable stock options was $ 76,000 and $ 34,000 respectively, at December 31, 2022 and December 31, 2021. The aggregate intrinsic values of outstanding and exercisable options at December 31, 2022 were calculated based on the closing market price of the Company’s common stock on December 31, 2022 of $ 29.00 per share less the exercise price. Information pertaining to options outstanding at December 31, 2022 was as follows: Exercise price of stock optio Number of options outstanding at year-end Number of options exercisable at year-end Average remaining contractual life (in years) $ 27.25 12,000 12,000 6.42 $ 25.65 3,000 3,000 5.50 $ 20.86 3,306 3,306 4.35 $ 21.13 2,325 2,325 3.00 The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model. ChoiceOne uses historical data to estimate the volatility of the market price of ChoiceOne stock and employee terminations within the valuation model. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. As of December 31, 2022, there was no unrecognized compensation expense related to stock options. 62 Table of Contents ChoiceOne has granted restricted stock units to a select group of employees under the Stock Incentive Plan of 2012. Restricted stock units outstanding as of December 31, 2022 vest on the three year anniversary of the grant date. Certain additional vesting provisions apply. Each restricted stock unit, once vested, is settled by delivery of one share of ChoiceOne common stock. ChoiceOne recognized compensation expense of $ 503,000 and $ 320,000 , in 2022 and 2021, respectively, in connection with restricted stock units for current participants during these years. A summary of the activity for restricted stock units outstanding during the year ended December 31, 2022 is presented be Outstanding Stock Awards Shares Weighted Average Grant Date Fair Value Per Share Outstanding at January 1, 2022 35,684 $ 28.36 Granted 28,660 26.34 Vested ( 10,442 ) 27.34 Forfeited ( 35 ) 26.34 Outstanding at December 31, 2022 53,867 $ 27.48 At December 31, 2022, there were 53,867 restricted stock units outstanding with an approximate stock value of $ 1.6 million based on ChoiceOne’s December 31, 2022 stock price.  At December 31, 2021, there were 35,684 restricted stock units outstanding with an approximate stock value of $ 945,000 based on ChoiceOne’s December 31, 2021 stock price.  The grant date fair value of restricted stock units granted was $ 755,000 and $ 558,000 in 2022 and 2021, respectively.  The cost is expected to be recognized over a weighted average period of 1.68 years.  As of December 31, 2022, there was $ 753,000 of unrecognized compensation cost related to unvested shares granted. ChoiceOne has granted performance stock units to a select group of employees under the Stock Incentive Plan of 2012. Restricted stock units outstanding as of December 31, 2022 vest on the three year anniversary of the grant date based on earnings per share growth rate from the date of the grant. Shares can vest at a rate of 125 %, 100 %, 75 %, or 0 % based on the growth rate achieved over the three year time frame.  Certain additional vesting provisions apply. Each restricted stock unit, once vested, is settled by delivery of one share of ChoiceOne common stock. ChoiceOne recognized compensation expense of $ 47,000 in 2022 in connection with performance stock units for current participants during the year. A summary of the activity for performance stock units outstanding during the year ended December 31, 2022 is presented be Weighted Average Grant Date Fair Value Outstanding Stock Awards Shares Per Share Outstanding at January 1, 2022 - $ - Granted 6,396 26.34 Vested - - Forfeited - - Outstanding at December 31, 2022 6,396 $ 26.34 At December 31, 2022, there were 6,396 performance stock units outstanding assuming 100% vesting with an approximate stock value of $ 185,000 based on ChoiceOne’s December 31, 2022 stock price.  The grant date fair value of restricted stock units granted was $ 168,000 in 2022. The cost is expected to be recognized over a weighted average period of 2.36 years.  As of December 31, 2022, there was $ 122,000 of unrecognized compensation cost related to unvested shares granted. Note 16 - Earnings Per Share (Dollars in thousands, except share data) 2022 2021 2020 Basic Net income $ 23,640 $ 22,042 $ 15,613 Weighted average common shares outstanding 7,504,173 7,685,459 7,521,771 Basic earnings per common shares $ 3.15 $ 2.87 $ 2.08 Diluted Net income $ 23,640 $ 22,042 $ 15,613 Weighted average common shares outstanding 7,504,173 7,685,459 7,521,771 Plus dilutive stock options and restricted stock units 23,198 17,255 9,846 Weighted average common shares outstanding and potentially dilutive shares 7,527,371 7,702,714 7,531,617 Diluted earnings per common share $ 3.15 $ 2.86 $ 2.07 Stock options considered anti-dilutive to earnings per share were 15,000 , 15,000 , and 0 as of December 31, 2022 , December 31, 2021 , and December 31, 2020 , respectively. This calculation is based on the average stock price during the year. 63 Table of Contents Note 17 – Condensed Financial Statements of Parent Company Condensed Balance Sheets (Dollars in thousands) December 31, 2022 2021 Assets Cash $ 8,310 $ 17,622 Equity securities at fair value 3,199 2,555 Other assets 586 553 Investment in subsidiaries 192,540 236,462 Total assets $ 204,635 $ 257,192 Liabilities Subordinated debentures $ 31,971 $ 31,827 Trust preferred securities 3,291 3,190 Other liabilities 499 506 Total liabilities 35,761 35,523 Shareholders' equity 168,874 221,669 Total liabilities and shareholders’ equity $ 204,635 $ 257,192 Condensed Statements of Income (Dollars in thousands) Years Ended December 31, 2022 2021 2020 Interest income Interest and dividends from ChoiceOne Bank $ - $ 6,125 $ 12,942 Interest and dividends from other securities 27 10 13 Total interest income 27 6,135 12,955 Interest expense Borrowings 1,491 645 239 Net interest income ( 1,464 ) 5,490 12,716 Noninterest income Gains on sales of securities - - 26 Change in market value of equity securities ( 385 ) 554 ( 155 ) Other 2 4 - Total noninterest income ( 383 ) 558 ( 129 ) Noninterest expense Salaries and benefits - - 1,201 Professional fees 40 15 1,093 Other 174 203 217 Total noninterest expense 214 218 2,511 Income before income tax and equity in undistributed net income of subsidiary ( 2,061 ) 5,830 10,076 Income tax (expense)/benefit 433 64 431 Income before equity in undistributed net income of subsidiary ( 1,628 ) 5,894 10,507 Equity in undistributed net income of subsidiary 25,268 16,148 5,106 Net income $ 23,640 $ 22,042 $ 15,613 64 Table of Contents Condensed Statements of Cash Flows (Dollars in thousands) Years Ended December 31, 2022 2021 2020 Cash flows from operating activiti Net income $ 23,640 $ 22,042 $ 15,613 Adjustments to reconcile net income to net cash from operating activiti Equity in undistributed net income of subsidiary ( 25,268 ) ( 16,148 ) ( 5,106 ) Amortization 245 101 51 Compensation expense on employee and director stock purchases, stock options, and restricted stock units 928 787 488 Net gain on sale of securities - - ( 26 ) Change in market value of equity securities 385 ( 554 ) 155 Changes in other assets ( 33 ) ( 260 ) 582 Changes in other liabilities ( 7 ) ( 2,982 ) 551 Net cash from operating activities ( 110 ) 2,986 12,308 Cash flows from investing activiti Sales of securities - - 958 Purchases of securities ( 1,029 ) ( 117 ) ( 200 ) Investment in Subsidiary - ( 5,000 ) - Cash acquired from mergers with Community Shores Bank Corporation - - 142 Net cash from investing activities ( 1,029 ) ( 5,117 ) 900 Cash flows from financing activiti Issuance of common stock 172 139 134 Repurchase of common stock ( 767 ) ( 7,786 ) - Proceeds from borrowings - 36,827 10,000 Payments on borrowings - ( 14,166 ) ( 833 ) Cash used as part of equity issuance for merger - - ( 5,387 ) Cash dividends paid ( 7,578 ) ( 7,200 ) ( 6,174 ) Net cash from financing activities ( 8,173 ) 7,814 ( 2,260 ) Net change in cash ( 9,312 ) 5,683 10,948 Beginning cash 17,622 11,939 991 Ending cash $ 8,310 $ 17,622 $ 11,939 65 Table of Contents Note 18 – Financial Instruments Financial instruments as of the dates indicated were as follows: Quoted Prices In Active Significant Markets for Other Significant Identical Observable Unobservable (Dollars in thousands) Carrying Estimated Assets Inputs Inputs Amount Fair Value (Level 1) (Level 2) (Level 3) December 31, 2022 Assets Cash and cash equivalents $ 43,943 $ 43,943 $ 43,943 $ - $ - Equity securities at fair value 8,566 8,566 6,024 - 2,542 Securities available for sale 529,749 529,749 78,204 451,545 - Securities held to maturity 425,906 353,901 - 338,583 15,318 Federal Home Loan Bank and Federal Reserve Bank stock 8,581 8,581 - 8,581 - Loans held for sale 4,834 4,979 - 4,979 - Loans, net 1,182,163 1,123,198 - - 1,123,198 Accrued interest receivable 8,949 8,949 - 8,949 - Interest rate lock commitments 28 28 - 28 - Mortgage loan servicing rights 4,322 5,855 - 5,855 - Interest rate derivative contracts 9,204 9,204 - 9,204 - Liabilities Noninterest-bearing deposits 599,579 599,579 - 599,579 - Interest-bearing deposits 1,518,424 1,514,294 - 1,514,294 - Borrowings 50,000 50,000 - 50,000 - Subordinated debentures 35,262 30,304 - 30,304 - Accrued interest payable 610 610 - 610 - Interest rate derivative contracts 5,823 5,823 - 5,823 - December 31, 2021 Assets Cash and cash equivalents $ 31,887 $ 31,887 $ 31,887 $ - $ - Equity securities at fair value 8,492 8,492 6,724 - 1,768 Securities available for sale 1,098,885 1,098,885 91,979 985,856 21,050 Federal Home Loan Bank and Federal Reserve Bank stock 8,888 8,888 - 8,888 - Loans held for sale 9,351 9,632 - 9,632 - Loans to other financial institutions 42,632 42,632 - 42,632 - Loans, net 1,009,160 999,393 - - 999,393 Accrued interest receivable 8,211 8,211 - 8,211 - Interest rate lock commitments 172 172 - 172 - Liabilities Noninterest-bearing deposits 560,931 560,931 - 560,931 - Interest-bearing deposits 1,491,363 1,491,135 - 1,491,135 - Borrowings 50,000 50,000 - 50,000 - Subordinated debentures 35,017 33,414 - 33,414 - Accrued interest payable 441 441 - 441 - The estimated fair values approximate the carrying amounts for all financial instruments except those described later in this paragraph. The methodology for determining the estimated fair value for securities available for sale is described in Note 18. The estimated fair value for loans follows an “exit price” approach, which incorporates discounts for credit, liquidity, and marketability. The allowance for loan losses is considered to be a reasonable estimate of discount for credit quality concerns. The estimated fair value of loans also included the mark to market adjustments related to the Company’s mergers. The estimated fair value of deposits is based on comparing the average rate paid on deposits compared to the three month LIBOR rate which is assumed to be the replacement value of these deposits. The estimated fair values for time deposits and FHLB advances are based on the rates paid at December 31 for new deposits or FHLB advances, applied until maturity. The estimated fair values for other financial instruments and off-balance sheet loan commitments are considered nominal. 66 Table of Contents Note 19 – Fair Value Measurements The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis at December 31, 2022 and December 31, 2021 , 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. Disclosures concerning assets and liabilities measured at fair value as of December 31, 2021 or December 31, 2022 are as follows: Assets and Liabilities Measured at Fair Value on a Recurring Basis Quoted Prices In Active Significant Markets for Other Significant Identical Observable Unobservable (Dollars in thousands) Assets Inputs Inputs Balance at (Level 1) (Level 2) (Level 3) Date Indicated Equity Securities Held at Fair Value - December 31, 2022 Equity securities $ 6,024 $ - $ 2,542 $ 8,566 Investment Securities, Available for Sale - December 31, 2022 U. S. Government and federal agency $ - $ - $ - $ - U. S. Treasury notes and bonds 78,204 - - 78,204 State and municipal - 229,938 - 229,938 Mortgage-backed - 208,563 - 208,563 Corporate - 711 - 711 Asset-backed Securities - 12,333 - 12,333 Total $ 78,204 $ 451,545 $ - $ 529,749 Derivative Instruments - December 31, 2022 Interest rate derivative contracts - assets $ - $ 9,204 $ - $ 9,204 Interest rate derivative contracts - liabilities $ - $ 5,823 $ - $ 5,823 Equity Securities Held at Fair Value - December 31, 2021 Equity securities $ 6,724 $ - $ 1,768 $ 8,492 Investment Securities, Available for Sale - December 31, 2021 U. S. Government and federal agency $ - $ 2,008 $ - $ 2,008 U. S. Treasury notes and bonds 91,979 - - 91,979 State and municipal - 514,797 20,050 534,847 Mortgage-backed - 433,115 - 433,115 Corporate - 19,642 1,000 20,642 Asset-backed Securities - 16,294 - 16,294 Total $ 91,979 $ 985,856 $ 21,050 $ 1,098,885 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. 67 Table of Contents Changes in Level 3 Assets Measured at Fair Value on a Recurring Basis (Dollars in thousands) 2022 2021 Equity Securities Held at Fair Value Balance, January 1 $ 1,768 $ 1,485 Total realized and unrealized gains included in noninterest income 161 166 Net purchases, sales, calls, and maturities 613 117 Balance, December 31 $ 2,542 $ 1,768 Investment Securities, Available for Sale Balance, January 1 $ 21,050 $ 11,423 Total unrealized gains/(losses) included in other comprehensive income - 1,720 Net purchases, sales, calls, and maturities - 7,907 Transfer to held to maturity ( 21,050 ) - Balance, December 31 $ - $ 21,050 Of the Level 3 assets that were held by the Company at December 31, 2022, the net unrealized gain as of December 31, 2022 was $ 161,000 , compared to $ 591,000 as of December 31, 2021. 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 $ 613,000 and $ 8,839,000 of Level 3 securities were purchased in 2022 and 2021, 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. Available for sale investment securities categorized as Level 3 assets consist of bonds issued by local municipalities and a trust-preferred security. The Company estimates the fair value of these assets based on the present value of expected future cash flows using management’s best estimate of key assumptions, including forecasted interest yield and payment rates, credit quality and a discount rate commensurate with the current market and other risks involved. The Company also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis. These assets are not normally measured at fair value, but can be subject to fair value adjustments in certain circumstances, such as impairment. Disclosures concerning assets measured at fair value on a non-recurring basis are as follows: Assets Measured at Fair Value on a Non-recurring Basis Quoted Prices In Active Significant Markets for Other Significant Balances at Identical Observable Unobservable (Dollars in thousands) Dates Assets Inputs Inputs Indicated (Level 1) (Level 2) (Level 3) Impaired Loans December 31, 2022 $ 2,846 $ - $ - $ 2,846 December 31, 2021 $ 5,433 $ - $ - $ 5,433 Other Real Estate December 31, 2022 $ - $ - $ - $ - December 31, 2021 $ 194 $ - $ - $ 194 Impaired loans categorized as Level 3 assets consist of non-homogeneous loans that are considered impaired. The Company estimates the fair value of the loans based on the present value of expected future cash flows using management’s best estimate of key assumptions. These assumptions include future payment ability, timing of payment streams, and estimated realizable values of available collateral (typically based on outside appraisals). The changes in fair value consisted of charge-downs of impaired loans that were posted to the allowance for loan losses and write-downs of other real estate owned that were posted to a valuation account. The fair value of other real estate owned was based on appraisals or other reviews of property values, adjusted for estimated costs to sell. 68 Table of Contents Note 20 – Off-Balance Sheet Activities Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customers’ financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment. The contractual amount of financial instruments with off-balance sheet risk was as follows at December 31: 2022 2021 Fixed Variable Fixed Variable (Dollars in thousands) Rate Rate Rate Rate Unused lines of credit and letters of credit $ 54,523 $ 148,497 $ 63,001 $ 275,170 Commitments to fund loans (at market rates) 35,789 12,565 72,257 25,545 Commitments to fund loans are generally made for periods of 180 days or less. The fixed rate loan commitments have interest rates ranging from 2.375 % to 6.00 % and maturities ranging from 1 year to 30 years. 69 Table of Contents Note 21 – Regulatory Capital ChoiceOne and the Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. Depending upon the capital category to which an institution is assigned, the regulators' corrective powers inclu prohibiting the acceptance of brokered deposits; requiring the submission of a capital restoration plan; placing limits on asset growth and restrictions on activities; requiring the institution to issue additional capital stock (including additional voting stock) or be acquired; restricting transactions with affiliates; restricting the interest rate the institution may pay on deposits; ordering a new election of directors of the institution; requiring that senior executive officers or directors be dismissed; prohibiting the institution from accepting deposits from correspondent banks; requiring the institution to divest certain subsidiaries; prohibiting the payment of principal or interest on subordinated debt; and ultimately, appointing a receiver for the institution. At year-end 2022 and 2021 , the Bank was categorized as well capitalized under the regulatory framework for prompt corrective action. Actual capital levels and minimum required levels for ChoiceOne and the Bank were as follows: Minimum Required to be Well Minimum Required Capitalized Under for Capital Prompt Corrective (Dollars in thousands) Actual Adequacy Purposes Action Regulations Amount Ratio Amount Ratio Amount Ratio December 31, 2022 ChoiceOne Financial Services Inc. Total capital (to risk weighted assets) $ 222,006 13.8 % $ 128,545 8.0 % N/A N/A Common equity Tier 1 capital (to risk weighted assets) 177,916 11.1 72,307 4.5 N/A N/A Tier 1 capital (to risk weighted assets) 182,416 11.4 96,409 6.0 N/A N/A Tier 1 capital (to average assets) 182,416 7.9 92,558 4.0 N/A N/A ChoiceOne Bank Total capital (to risk weighted assets) $ 208,696 13.0 % $ 128,294 8.0 % $ 160,367 10.0 % Common equity Tier 1 capital (to risk weighted assets) 201,077 12.5 72,165 4.5 104,239 6.5 Tier 1 capital (to risk weighted assets) 201,077 12.5 96,220 6.0 128,294 8.0 Tier 1 capital (to average assets) 201,077 8.7 92,449 4.0 115,562 5.0 December 31, 2021 ChoiceOne Financial Services Inc. Total capital (to risk weighted assets) $ 204,353 14.4 % $ 113,604 8.0 % N/A N/A Common equity Tier 1 capital (to risk weighted assets) 160,338 11.3 63,902 4.5 N/A N/A Tier 1 capital (to risk weighted assets) 164,838 11.6 85,203 6.0 N/A N/A Tier 1 capital (to average assets) 164,838 7.4 89,415 4.0 N/A N/A ChoiceOne Bank Total capital (to risk weighted assets) $ 182,275 12.9 % $ 113,444 8.0 % $ 141,806 10.0 % Common equity Tier 1 capital (to risk weighted assets) 174,587 12.3 63,813 4.5 92,174 6.5 Tier 1 capital (to risk weighted assets) 174,587 12.3 85,083 6.0 113,444 8.0 Tier 1 capital (to average assets) 174,587 7.8 89,289 4.0 111,611 5.0 Banking laws and regulations limit capital distributions by state-chartered banks. Generally, capital distributions are limited to undistributed net income for the current and prior two years. At December 31, 2022, approximately $ 53.3 million was available for the Bank to pay dividends to ChoiceOne assuming regulatory approval of any amount in excess of the applicable capital conservation buffer.  ChoiceOne’s ability to pay dividends to shareholders is dependent on the payment of dividends from the Bank, which is restricted by state law and regulations. 70 Table of Contents Note 22 – Business Combinations Community Shores Bank Corporation ChoiceOne completed the acquisition of Community Shores Bank Corporation (“Community Shores”) with and into ChoiceOne, with ChoiceOne as the surviving entity, effective on July 1, 2020. Community Shores had 4 branch offices as of the date of the merger. Total assets of Community Shores as of July 1, 2020 were $ 244.5 million, including total loans of $ 174.8 million. Deposits acquired in the merger, the majority of which were core deposits, totaled $ 227.8 million. The impact of the merger has been included in ChoiceOne’s results of operations since the effective date of the merger. As con sideration in the merger, ChoiceOne issued 524,139 shares of ChoiceOne common stock and cash in the amount of $ 5,390,000 with an approximate total value of $ 20.9 million. During 2021 management finalized accounting for certain loans and deferred tax accounts, resulting in measurement period adjustments increasing the acquisition date fair value of loans by $ 828,000 and decreasing the acquisition date fair value of other assets by $ 268,000 . As a result, goodwill recognized as a result of the acquisition was reduced by $ 560,000 . The table below presents the allocation of purchase price for the merger with Community Shores (dollars in thousands): Purchase Price Consideration $ 20,881 Net assets acquir Cash and cash equivalents 41,023 Securities available for sale 20,023 Federal Home Loan Bank and Federal Reserve Bank stock 300 Originated loans 174,802 Premises and equipment 6,204 Other real estate owned 346 Deposit based intangible 760 Other assets 1,077 Total assets 244,535 Non-interest bearing deposits 65,499 Interest bearing deposits 162,333 Total deposits 227,832 Trust preferred securities 3,039 Other liabilities 136 Total liabilities 231,007 Net assets acquired 13,528 Goodwill $ 7,353 71 Table of Contents County Bank Corp. ChoiceOne completed the merger of County Bank Corp. (“County”) with and into ChoiceOne effective on October 1, 2019. County had 14 branch offices and one loan production office as of the date of the merger. Total assets of County as of October 1, 2019 were $ 673 million, including total loans of $ 424 million. Deposits acquired in the merger, the majority of which were core deposits, totaled $ 574 million. The impact of the merger has been included in ChoiceOne’s results of operations since the effective date of the merger. As consideration in the merger, ChoiceOne issued 3,603,872 shares of ChoiceOne common stock with an approximate value of $ 108 million. During 2020, management finalized accounting for acquired loans and deferred taxes. As a result, the acquisition date fair value of loans was decreased by $ 238,000 , other liabilities were decreased by $ 502,000 , and goo dwill recognized as a result of the acquisition was reduced by $ 276,000 . The table below highlights the allocation of purchase price for the merger with County (dollars in thousands): Purchase Price Consideration $ 107,945 Net assets acquir Cash and cash equivalents 20,638 Equity securities at fair value 474 Securities available for sale 187,230 Federal Home Loan Bank and Federal Reserve Bank stock 2,915 Loans to other financial institutions 33,481 Originated loans 390,116 Premises and equipment 9,271 Other real estate owned 1,364 Deposit based intangible 6,359 Bank owned life insurance 16,912 Other assets 4,002 Total assets 672,762 Non-interest bearing deposits 124,113 Interest bearing deposits 449,488 Total deposits 573,601 Federal funds purchased 3,800 Advances from Federal Home Loan Bank 23,000 Other liabilities 3,282 Total liabilities 603,683 Net assets acquired 69,079 Goodwill $ 38,866 72 Table of Contents Note 23 – Subsequent Event Sale of Derivatives On March 15, 2023, ChoiceOne terminated all pay-floating/receive-fixed (“pay floating swap agreements”) interest rate swaps with a notational amount of $ 200.0 million which resulted in a loss of $ 4.2 million.  The pay floating swap agreements were designated as cash flow hedges against specifically identified available-for-sale securities, cash and loans.  The loss was capitalized to available for sale securities and loans on the statement of financial condition and will be amortized into interest income over 13 months, or the remaining period of the agreements. With the rapid increase in interest rates during 2022 and 2023 the pay floating swap agreements were in a loss position.  At termination, the expected negative carry for the remainder of the term was greater than the exit price of the agreements. ChoiceOne has four remaining interest rate swaps with a total notional value of $ 400.1 million. 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. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and principal financial officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on and as of the time of that evaluation, the Company’s management, including the Chief Executive Officer and principal financial officer, concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the required time periods. Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting that is designed to produce reliable financial statements in conformity with United States generally accepted accounting principles. The system of internal control over financial reporting as it relates to the financial statements is evaluated for effectiveness by management and tested for reliability through a program of internal audits. Actions are taken to correct potential deficiencies as they are identified. Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected. Also, because of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial statement preparation. Management assessed the effectiveness of the Company’s system of internal control over financial reporting as of December 31, 2022, as required by Section 404 of the Sarbanes-Oxley Act of 2002. Management’s assessment is based on the criteria for effective internal control over financial reporting as described in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, management has concluded that, as of December 31, 2022, its system of internal control over financial reporting was effective and meets the criteria of the “Internal Control – Integrated Framework." There was no change in the Company’s internal control over financial reporting that occurred during the three months ended December 31, 2022 that has materially affected, or that is reasonably likely to materially affect, the Company’s internal control over financial reporting. Item 9B. Other Information None. Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections None. 73 Table of Contents PART III Item 10. Directors, Executive Officers and Corporate Governance The information under the captions “ChoiceOne's Board of Directors and Executive Officers and “Corporate Governance” in the Company's Definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 24, 2023, is incorporated herein by reference. The Company has adopted a Code of Ethics for Executive Officers and Senior Financial Officers, which applies to the Chief Executive Officer and the Chief Financial Officer, as well as all other senior financial and accounting officers. The Code of Ethics is posted on the Company’s website at “ www.choiceone.com. ” The Company intends to satisfy the disclosure requirements under Item 5.05 of Form 8-K regarding an amendment to, or a waiver from, a provision of the Code of Ethics by posting such information on its website at “ www.choiceone.com. ” Item 11. Executive Compensation The information under the captions “Executive Compensation” in the Company's Definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 24, 2023, is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information under the caption "Ownership of ChoiceOne Common Stock" in the Company's Definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 24, 2023, is incorporated herein by reference. The following table presents information regarding the equity compensation plans both approved and not approved by shareholders at December 31, 2022: Number of securities remaining available for Number of securities to Weighted-average future issuance under be issued upon exercise exercise price of equity compensation plans of outstanding options, outstanding options, (excluding securities warrants and rights warrants and rights reflected in column (a)) (a) (b) (c) Equity compensation plans approved by security holders 74,498 $ 7.01 393,088 Equity compensation plans not approved by security holders - - 166,910 Total 74,498 $ 7.01 559,998 Equity compensation plans approved by security holders include the Stock Incentive Plan of 2012, the Equity Incentive Plan of 2022, and the 2022 Employee Stock Purchase Plan.  As of December 31, 2022, no shares remained available for future issuance under the Stock Incentive Plan of 2012, 200,000 shares remained available for future issuance under the Equity Incentive Plan of 2022, and 193,088 shares remained available for future issuance under the 2022 Employee Stock Purchase Plan, in each case other than upon the exercise of outstanding stock options. The Stock Incentive Plan of 2012 has expired and no further issuance of shares are permitted under the plan other than upon the exercise or vesting of outstanding awards. The Directors’ Stock Purchase Plan and the Directors’ Equity Compensation Plan are the only equity compensation plans not approved by security holders. The Directors’ Stock Purchase Plan is designed to provide directors of the Company the option of receiving their fees in the Company’s common stock. Directors who elect to participate in the plan may elect to contribute to the plan twenty-five, fifty, seventy-five or one hundred percent of their board of director fees and one hundred percent of their director committee fees earned as directors of the Company. Contributions to the plan are made by the Company on behalf of each electing participant. Plan participants may terminate their participation in the plan at any time by written notice of withdrawal to the Company. The Directors’ Equity Compensation Plan provides for the grant and award of stock options, restricted stock, restricted stock units, stock awards, and other stock-based and stock-related awards as part of director compensation. Participants will cease to be eligible to participate in both plans when they cease to serve as directors of the Company. Shares are distributed to participants on a quarterly basis. The Directors' Equity Compensation Plan provides for the issuance of a maximum of 100,000 shares of the Company's common stock thereunder and the Directors' Stock Purchase Plan provides for issuance of a maximum of 100,000 shares thereunder, in each case subject to adjustments for certain changes in the capital structure of the Company. As of December 31, 2022, 85,166 shares remained available for issuance under the Directors' Equity Compensation Plan and 81,744 shares remained available for issuance under the Directors' Stock Purchase Plan. 74 Table of Contents Item 13. Certain Relationships and Related Transactions, and Director Independence The information under the captions “Related Matters - Transactions with Related Persons” and “Corporate Governance” in the Company's Definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 24, 2023, is incorporated herein by reference. Item 14. Principal Accountant Fees and Services The information under the caption "Related Matters - Independent Certified Public Accountants" in the Company's Definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 24, 2023, is incorporated herein by reference. Independent Registered Public Accounting F N Plante & Moran, PLLC Locati Grand Rapids, Michigan PCAOB ID: 166 PART IV Item 15. Exhibits and Financial Statement Schedules (a) (1) Financial Statements . The following financial statements and independent auditors' reports are filed as part of this repor Consolidated Balance Sheets at December 31, 2022 and 2021. Consolidated Statements of Income for the years ended December 31, 2022, 2021, and 2020. Consolidated Statement of Comprehensive Income for the years ended December 31, 2022, 2021, and 2020. Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2022, 2021, and 2020. Consolidated Statements of Cash Flows for the years ended December 31, 2022, 2021, and 2020. Notes to Consolidated Financial Statements. Report of Independent Registered Public Accounting Firm dated March 17, 2021. (2) Financial Statement Schedules . None. Exhibit Document 3.1 Restated Articles of Incorporation of ChoiceOne Financial Services, Inc. 3.2 Bylaws of ChoiceOne Financial Services, Inc., as currently in effect and any amendments thereto. Previously filed as an exhibit to ChoiceOne Financial Services, Inc.'s Form 8-K filed 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. 4.4 Description of Rights of Shareholders. 75 Table of Contents 10.1 Employment Agreement between ChoiceOne Financial Services, Inc. and Kelly J. Potes, dated as of September 30, 2019. (1) Previously filed as an exhibit to ChoiceOne’s Form 8-K filed October 1, 2019. Here incorporated by reference. 10.2 Employment Agreement between ChoiceOne Financial Services, Inc. and Michael J. Burke, Jr., dated as of March 22, 2019. (1) Previously filed as exhibit to ChoiceOne’s Pre-Effective Amendment No. 2 to Form S-4 filed August 5, 2019. Here incorporated by reference. 10.3 Stock Incentive Plan of 2012. (1) Previously filed as Appendix A to ChoiceOne’s definitive proxy statement for ChoiceOne’s 2018 Annual Meeting of Shareholders, filed on April 19, 2018. Here incorporated by reference. 10.4 2022 Employee Stock Purchase Plan. (1) Previously filed as an exhibit to ChoiceOne’s Form S-8 filed May 27, 2022. Here incorporated by reference. 10.5 Equity Incentive Plan of 2022. (1) Previously filed as an exhibit to ChoiceOne’s Form S-8 filed May 27, 2022. Here incorporated by reference. 10.6 Directors' Stock Purchase Plan, as amended. (1) Previously filed as an exhibit to ChoiceOne Financial Services, Inc.'s Form 10-K Annual Report for the year ended December 31, 2019. Here incorporated by reference. 10.7 Director Equity Compensation Plan of 2019. (1) Previously filed as an exhibit to ChoiceOne Financial Services, Inc.'s Form 10-K Annual Report for the year ended December 31, 2019. Here incorporated by reference. 10.8 Former Valley Ridge Executive Employee Salary Continuation Agreements, as amended. (1) Previously filed as an exhibit to ChoiceOne Financial Services, Inc.’s Form 10-K Annual Report for the year ended December 31, 2013. Here incorporated by reference. 10.9 Former Valley Ridge Directors’ Deferred Compensation Plan and Agreement. (1) Previously filed as an exhibit to the ChoiceOne Financial Services, Inc.’s Form 10-K Annual Report for the year ended December 31, 2013. Here incorporated by reference. 21 Subsidiaries of ChoiceOne Financial Services, Inc. 23 Consent of Independent Registered Public Accounting Firm. 24 Powers of Attorney. 31.1 Certification of Chief Executive Officer. 31.2 Certification of Chief Financial Officer 32 Certification pursuant to 18 U.S.C. § 1350. 101.INS Inline XBRL Instance Document (the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) 101.SCH Inline XBRL Taxonomy Extension Schema Document 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) (1) This agreement is a management contract or compensation plan or arrangement to be filed as an exhibit to this Form 10-K. Copies of any exhibits will be furnished to shareholders upon written request. Requests should be directed t Adom J. Greenland, Secretary, Chief Financial Officer and Treasurer, ChoiceOne Financial Services, Inc., 109 East Division, Sparta, Michigan, 49345. 76 Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ChoiceOne Financial Services, Inc. By: /s/ Kelly J. Potes March 23, 2023 Kelly J. Potes Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ Kelly J. Potes Chief Executive Officer and March 23, 2023 Kelly J. Potes Director (Principal Executive Officer) /s/ Adom J. Greenland Chief Financial Officer and Treasurer (Principal Financial and March 23, 2023 Adom J. Greenland Accounting Officer) */s/ Jack G. Hendon Chairman of the Board and Director March 23, 2023 Jack G. Hendon */s/ Greg L. Armock Director March 23, 2023 Greg L. Armock */s/ Keith Brophy Director March 23, 2023 Keith Brophy */s/ Michael J. Burke, Jr. President and Director March 23, 2023 Michael J. Burke, Jr. */s/ Harold J. Burns Director March 23, 2023 Harold J. Burns */s/ Eric E. Burrough Director March 23, 2023 Eric E. Burrough */s/ David Churchill Director March 23, 2023 David Churchill */s/ Curt E. Coulter Director March 23, 2023 Curt E. Coulter */s/ Bruce John Essex, Jr. Director March 23, 2023 Bruce John Essex, Jr. */s/ Gregory A. McConnell Director March 23, 2023 Gregory A. McConnell */s/ Bradley F. McGinnis Director March 23, 2023 Bradley F. McGinnis */s/ Nels W. Nyblad Director March 23, 2023 Nels W. Nyblad */s/ Roxanne M. Page Director March 23, 2023 Roxanne M. Page */s/ Michelle M. Wendling Director March 23, 2023 Michelle M. Wendling *By /s/ Adom J. Greenland Attorney-in-Fact 77