WASHINGTON, DC 20549 FORM 10-K ☒ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2021 ☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from__________________ to __________________ Commission File Numbe 000-19202 ChoiceOne Financial Services, Inc. (Exact Name of Registrant as Specified in its Charter) Michigan (State or Other Jurisdiction of Incorporation or Organization) 38-2659066 (I.R.S. Employer Identification No.) 109 East Division Street , Sparta , Michigan (Address of Principal Executive Offices) 49345 (Zip Code) ( 616 ) 887-7366 (Registrant's Telephone Number, Including Area Code) Securities registered pursuant to Section 12(b) of the Ac Title of each class Trading symbol(s) Name of each exchange on which registered Common stock COFS NASDAQ Capital Market Securities registered pursuant to Section 12(g) of the Ac None. Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒   No ☐ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒ Emerging growth company ☐ Smaller reporting company ☒ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public acco unting firm that prepared or issued its audit report. ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒ As of June 30, 2021, the aggregate market value of common stock held by non-affiliates of the Registrant was $ 166.6 million. This amount is based on an average bid price of $24.22 per share for the Registrant's stock as of such date. As of February 28, 2022, the Registrant had 7,516,017 shares of common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive Proxy Statement of ChoiceOne Financial Services, Inc. for the Annual Meeting of Shareholders to be held on May 25, 2022 are inc orporated by reference into Part III of this Form 10-K. 1 ChoiceOne Financial Services, Inc. Form 10-K ANNUAL REPORT Contents Page PART 1 Item 1: Business 4 Item 1A: Risk Factors 12 Item 1B: Unresolved Staff Comments 17 Item 2: Properties 17 Item 3: Legal Proceedings 17 Item 4: Mine Safety Disclosures 17 PART II Item 5: Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 18 Item 6: Reserved 18 Item 7: Management’s Discussion and Analysis of Results of Operations and Financial Condition 19 Item 7A: Quantitative and Qualitative Disclosures About Market Risk 32 Item 8: Financial Statements and Supplementary Data 34 Item 9: Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 71 Item 9A: Controls and Procedures 71 Item 9B: Other Information 71 Item 9C: Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 71 PART III Item 10: Directors, Executive Officers and Corporate Governance 72 Item 11: Executive Compensation 72 Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 72 Item 13: Certain Relationships and Related Transactions, and Director Independence 73 Item 14: Principal Accountant Fees and Services 73 PART IV Item 15: Exhibits and Financial Statement Schedules 73 SIGNATURES 75 2 FORWARD-LOOKING STATEMENTS This report and the documents incorporated into this report contain forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and ChoiceOne Financial Services, Inc. Words such as “anticipates,” “believes,” “expects,” “forecasts,” “intends,” “is likely,” “plans,” “predicts,” “projects,” “may,” “could,” “estimates,” “look forward,” “continue,” “future,” and variations of such words and similar expressions are intended to identify such forward-looking statements. Management’s determination of the provision and allowance for loan losses, the carrying value of goodwill, loan servicing rights, other real estate owned, and the fair value of investment securities (including whether any impairment on any investment security is temporary or other-than-temporary and the amount of any impairment) and management’s assumptions concerning pension and other postretirement benefit plans involve judgments that are inherently forward-looking. Examples of forward-looking statements also include, but are not limited to, statements related to the impact of the global coronavirus (COVID-19) pandemic on the businesses, financial condition and results of operations of ChoiceOne and its customers and statements regarding the outlook and expectations of ChoiceOne and its customers.   All of the information concerning interest rate sensitivity is forward-looking. All statements with references to future time periods are forward-looking. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions (“risk factors”) that are difficult to predict with regard to timing, extent, likelihood, and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed, implied or forecasted in such forward-looking statements. Furthermore, ChoiceOne Financial Services, Inc. undertakes no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events, or otherwise. Risk factors include, but are not limited to, the risk factors disclosed in Item 1A of this report. These are representative of the risk factors that could cause a difference between an ultimate actual outcome and a preceding forward-looking statement. PART I Explanatory Note On July 1, 2020, ChoiceOne Financial Services, Inc. (“ChoiceOne” or the “Company”) completed the merger of Community Shores Bank Corporation ("Community Shores") with and into ChoiceOne with ChoiceOne surviving the merger. Accordingly, the reported consolidated financial condition and operating results as of and for the years ended December 31, 2020 and December 31, 2021 include the impact of the merger, which was effective as of July 1, 2020. On October 1, 2019, ChoiceOne completed the merger of County Bank Corp. ("County") with and into ChoiceOne with ChoiceOne surviving the merger. Accordingly, the reported consolidated financial condition and operating results as of and for the years ended December 31, 2019, December 31, 2020, and December 31, 2021 include the impact of the merger, which was effective as of October 1, 2019. For additional details regarding the mergers with Community Shores and County, see Note 21 (Business Combinations) of the Notes to the Consolidated Financial Statements included in Item 8 of this report. 3 Item 1. Business General ChoiceOne is a financial holding company registered under the Bank Holding Company Act of 1956, as amended (“BHC Act”). The Company was incorporated on February 24, 1986, as a Michigan corporation. The Company was formed to create a bank holding company for the purpose of acquiring all of the capital stock of ChoiceOne Bank, which became a wholly owned subsidiary of the Company on April 6, 1987. Effective November 1, 2006, the Company merged with Valley Ridge Financial Corp., a one-bank holding company for Valley Ridge Bank (“VRB”). In December 2006, VRB was consolidated into ChoiceOne Bank. Effective October 1, 2019, County, a one-bank holding company for Lakestone Bank & Trust (“Lakestone”), merged with and into the Company.  Lakestone was consolidated into ChoiceOne Bank in May 2020.  On July 1, 2020, Community Shores Bank Corporation ("Community Shores"), a one bank holding company for Community Shores Bank, merged with and into the Company.   Community Shores Bank was consolidated into ChoiceOne Bank in October 2020. ChoiceOne Bank owns all of the outstanding common stock of ChoiceOne Insurance Agencies, Inc., an independent insurance agency headquartered in Sparta, Michigan (the "Insurance Agency"). The Company's business is primarily concentrated in a single industry segment, banking. ChoiceOne Bank (referred to as the “Bank”) is a full-service banking institution that offers a variety of deposit, payment, credit and other financial services to all types of customers. These services include time, savings, and demand deposits, safe deposit services, and automated transaction machine services. Loans, both commercial and consumer, are extended primarily on a secured basis to corporations, partnerships and individuals. Commercial lending covers such categories as business, industry, agricultural, construction, inventory and real estate. The Bank’s consumer loan departments make direct and indirect loans to consumers and purchasers of residential and real property. In addition, the Bank offers trust and wealth management services. No material part of the business of the Company or the Bank is dependent upon a single customer or very few customers, the loss of which would have a materially adverse effect on the Company. The Bank’s primary market areas lie within Kent, Muskegon, Newaygo, and Ottawa counties in western Michigan, and Lapeer, Macomb, and St. Clair counties in southeastern Michigan in the communities where the Bank's respective offices are located. The Bank serves these markets through 32 full-service offices and three loan production offices. The Company and the Bank have no foreign assets or income. At December 31, 2021 , the Company had consolidated total assets of $2.4 billion, net loans of $1.0 billion, total deposits of $2.1 billion and total shareholders' equity of $221.7 million. For the year ended December 31, 2021 , the Company recognized consolidated net income of $22.0 million. The principal source of revenue for the Company and the Bank is interest and fees on loans. On a consolidated basis, interest and fees on loans accounted for 58%, 60%, and 64% of total revenues in 2021, 2020, and 2019 , respectively. Interest on securities accounted for 19%, 11%, and 13% of total revenues in 2021, 2020, and 2019 , respectively. For more information about the Company's financial condition and results of operations, see the consolidated financial statements and related notes included in Item 8 of this report. The information under the heading “The Coronavirus (COVID-19) Outbreak” in Item 7 below is incorporated herein by reference. Competition The Bank’s competition primarily comes from other financial institutions located within Kent, Muskegon, Newaygo, and Ottawa counties in western Michigan and Lapeer, Macomb, and St. Clair counties in southeastern Michigan. There are a number of larger commercial banks within the Bank’s primary market areas. The Bank also competes with a large number of other financial institutions, such as savings and loan associations, insurance companies, consumer finance companies, credit unions, internet banks and other financial technology companies, and commercial finance and leasing companies for deposits, loans and service business. Money market mutual funds, brokerage houses and nonfinancial institutions provide many of the financial services offered by the Bank. Many of these competitors have substantially greater resources than the Bank. The principal methods of competition for financial services are price (the rates of interest charged for loans, the rates of interest paid for deposits and the fees charged for services) and the convenience and quality of services rendered to customers. 4 Supervision and Regulation Banks and bank holding companies are extensively regulated. The Company is subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). The Company's activities are generally limited to owning or controlling banks and engaging in such other activities as the Federal Reserve Board may determine to be closely related to banking. Prior approval of the Federal Reserve Board, and in some cases various other government agencies, is required for the Company to acquire control of any additional bank holding companies, banks or other operating subsidiaries. Under Federal Reserve Board policy, the Company is expected to act as a source of financial strength to the Bank and to commit resources to support it. The Bank is chartered under state law and is subject to regulation by the Michigan Department of Insurance and Financial Services (“DIFS”). State banking laws place restrictions on various aspects of banking, including permitted activities, loan interest rates, branching, payment of dividends and capital and surplus requirements. The Bank is a member of the Federal Reserve System and is also subject to regulation by the Federal Reserve Board. The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (the “FDIC”) to the maximum extent provided by law. The Bank is a member of the Federal Home Loan Bank system, which provides certain advantages to the Bank, including favorable borrowing rates for certain funds. The Company is a legal entity separate and distinct from the Bank. The Company's primary source of funds available to pay dividends to shareholders is dividends paid to it by the Bank. There are legal limitations on the extent to which the Bank can lend or otherwise supply funds to the Company. In addition, payment of dividends to the Company by the Bank is subject to various state and federal regulatory limitations. The Deposit Insurance Funds Act of 1996 authorized the Financing Corporation (“FICO”) to impose periodic assessments on all depository institutions. The purpose of these periodic assessments is to spread the cost of the interest payments on the outstanding FICO bonds issued to recapitalize the Savings Association Insurance Fund (“SAIF”) over a larger number of institutions. The federal banking agencies have adopted guidelines to promote the safety and soundness of federally-insured depository institutions. These guidelines establish standards for, among other things, internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings. The Company and the Bank are subject to regulatory “risk-based” capital guidelines. Failure to meet these capital guidelines could subject the Company or the Bank to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on accepting brokered deposits, and other restrictions on its business. In addition, the Bank would generally not receive regulatory approval of any application that requires the consideration of capital adequacy, such as a branch or merger application, unless it could demonstrate a reasonable plan to meet the capital requirement within a reasonable period of time. Under Federal Reserve Board policy, the Company is expected to act as a source of financial strength to the Bank and to commit resources to support the Bank. In addition, if DIFS deems the Bank's capital to be impaired, DIFS may require the Bank to restore its capital by a special assessment on the Company as the Bank's sole shareholder. If the Company fails to pay any assessment, the Company’s directors will be required, under Michigan law, to sell the shares of the Bank's stock owned by the Company to the highest bidder at either a public or private auction and use the proceeds of the sale to restore the Bank's capital. 5 The Federal Deposit Insurance Corporation Improvement Act (“FDICIA”) requires, among other things, federal banking agencies to take “prompt corrective action” in respect of depository institutions that do not meet minimum capital requirements. FDICIA sets forth the following five capital categori “well-capitalized,” “adequately-capitalized,” “undercapitalized,” “significantly-undercapitalized” and “critically-undercapitalized.” A depository institution's capital category will depend upon how its capital levels compare with various relevant capital measures as established by regulation, which include Tier 1 and total risk-based capital ratio measures and a leverage capital ratio measure. Under certain circumstances, the appropriate banking agency may treat a well-capitalized, adequately-capitalized, or undercapitalized institution as if the institution were in the next lower capital category. Federal banking regulators are required to take specified mandatory supervisory actions and are authorized to take other discretionary actions with respect to institutions in the three undercapitalized categories. The severity of the action depends upon the capital category in which the institution is placed. Subject to a narrow exception, the banking regulator must generally appoint a receiver or conservator for an institution that is critically undercapitalized. An institution in any of the undercapitalized categories is required to submit an acceptable capital restoration plan to its appropriate federal banking agency. An undercapitalized institution is also generally prohibited from paying any dividends, increasing its average total assets, making acquisitions, establishing any branches, accepting or renewing any brokered deposits or engaging in any new line of business, except under an accepted capital restoration plan or with FDIC approval. On July 3, 2013, the FDIC Board of Directors approved the Regulatory Capital Interim Final Rule, implementing Basel III. This rule redefines Tier 1 capital as two components (Common Equity Tier 1 and Additional Tier 1), creates a new capital ratio (Common Equity Tier 1 Risk-based Capital Ratio) and implements a capital conservation buffer. It also revises the prompt corrective action thresholds and makes changes to risk weights for certain assets and off-balance-sheet exposures. The Bank was required to transition into the new rule beginning on January 1, 2015. Banks are subject to a number of federal and state laws and regulations, which have a material impact on their business. These include, among others, minimum capital requirements, state usury laws, state laws relating to fiduciaries, the Truth in Lending Act, the Truth in Savings Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Fair Credit Reporting Act, the Expedited Funds Availability Act, the Community Reinvestment Act, the Real Estate Settlement Procedures Act, the Service Members Civil Relief Act, the USA PATRIOT Act, the Bank Secrecy Act, regulations of the Office of Foreign Assets Controls, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, electronic funds transfer laws, redlining laws, predatory lending laws, antitrust laws, environmental laws, money laundering laws and privacy laws. The monetary policy of the Federal Reserve Board may influence the growth and distribution of bank loans, investments and deposits, and may also affect interest rates on loans and deposits. These policies may have a significant effect on the operating results of banks. In general, the BHC Act limits the business of bank holding companies to banking, managing or controlling banks and other activities that the Federal Reserve Board has determined to be closely related to the business of banking. In addition, bank holding companies that qualify and elect to be financial holding companies may engage in any activities that are financial in nature or complementary to a financial activity and do not pose a substantial risk to the safety and soundness of depository institutions or the financial system without prior approval of the Federal Reserve Board. Activities that are financial in nature include securities underwriting and dealing, insurance underwriting and making merchant banking investments.  The Company has elected to be a financial holding company. In order for the Company to maintain financial holding company status, both the Company and the Bank must be categorized as "well-capitalized" and "well-managed" under applicable regulatory guidelines. If the Company or the Bank ceases to meet these requirements, the Federal Reserve Board may impose corrective capital and/or managerial requirements and place limitations on the Company’s ability to conduct the broader financial activities permissible for financial holding companies. In addition, if the deficiencies persist, the Federal Reserve Board may require the Company to divest of the Bank. The Company and the Bank were each categorized as "well-capitalized" and "well-managed" as of December 31, 2021. Bank holding companies may acquire banks and other bank holding companies located in any state in the United States without regard to geographic restrictions or reciprocity requirements imposed by state banking law. Banks may also establish interstate branch networks through acquisitions of and mergers with other banks. The establishment of de novo interstate branches or the acquisition of individual branches of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) is allowed only if specifically authorized by state law. 6 Michigan banking laws do not significantly restrict interstate banking. The Michigan Banking Code permits, in appropriate circumstances and with the approval of DIFS, (1) acquisition of Michigan banks by FDIC-insured banks, savings banks or savings and loan associations located in other states, (2) sale by a Michigan bank of branches to an FDIC-insured bank, savings bank or savings and loan association located in a state in which a Michigan bank could purchase branches of the purchasing entity, (3) consolidation of Michigan banks and FDIC-insured banks, savings banks or savings and loan associations located in other states having laws permitting such consolidation, (4) establishment of branches in Michigan by FDIC-insured banks located in other states, the District of Columbia or U.S. territories or protectorates having laws permitting a Michigan bank to establish a branch in such jurisdiction, and (5) establishment by foreign banks of branches located in Michigan. Banks are subject to the provisions of the Community Reinvestment Act ("CRA"). Under the terms of the CRA, the appropriate federal bank regulatory agency is required, in connection with its examination of a bank, to assess the bank's record in meeting the credit needs of the community served by that bank, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of the institution. Under the CRA, institutions are assigned a rating of "outstanding," "satisfactory," "needs to improve," or "substantial non-compliance." The regulatory agency's assessment of the bank's record is made available to the public. Further, a bank's federal regulatory agency is required to assess the CRA compliance record of any bank that has applied to establish a new branch office that will accept deposits, relocate an office, or merge or consolidate with, or acquire the assets or assume the liabilities of, a federally regulated financial institution. In the case of a bank holding company applying for approval to acquire a bank or another bank holding company, the Federal Reserve Board will assess the CRA compliance record of each subsidiary bank of the applicant bank holding company, and such compliance records may be the basis for denying the application. Upon receiving notice that a subsidiary bank is rated less than "satisfactory," a financial holding company will be prohibited from additional activities that are permitted to be conducted by a financial holding company and from acquiring any company engaged in such activities. The CRA rating of the Bank was "Satisfactory" as of its most recent examination. Effects of Compliance With Environmental Regulations The nature of the business of the Bank is such that it holds title, on a temporary or permanent basis, to a number of parcels of real property. These include properties owned for branch offices and other business purposes as well as properties taken in or in lieu of foreclosure to satisfy loans in default. Under current state and federal laws, present and past owners of real property may be exposed to liability for the cost of cleanup of environmental contamination on or originating from those properties, even if they are wholly innocent of the actions that caused the contamination. These liabilities can be material and can exceed the value of the contaminated property. Management is not presently aware of any instances where compliance with these provisions will have a material effect on the capital expenditures, earnings or competitive position of the Company or the Bank, or where compliance with these provisions will adversely affect a borrower's ability to comply with the terms of loan contracts. Employees As of February 28, 2022, the Company, on a consolidated basis, e mployed 386 employees, of which 320 were full -time employees.  Our employees are not represented by any collective bargaining group. Management considers its employee relations to be good. Statistical Information Additional statistical information describing the business of the Company appears on the following pages and in Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this report and in the Consolidated Financial Statements and the notes thereto in Item 8 of this report. The following statistical information should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and notes in this report.  Average balances used in statistical information are calculated using daily averages, unless otherwise specified. 7 The Company did not hold investment securities from any one issuer at December 31, 2021 , that were greater than 10% of the Company's shareholders' equity, exclusive of U.S. Government and U.S. Government agency securities. Presented below is the fair value of securities as of December 31, 2021 and 2020 , a schedule of maturities of securities as of December 31, 2021 , and the weighted average yields of securities as of December 31, 2021 .  Callable securities in the money are presumed called and matured at the callable date. Securities maturing within: Fair Value Fair Value Less than 1 Year - 5 Years - More than at Dec. 31, at Dec. 31, (Dollars in thousands) 1 Year 5 Years 10 Years 10 Years 2021 2020 U.S. Government and federal agency $ 2,008 $ - $ - $ - $ 2,008 $ 2,051 U.S. Treasury notes and bonds 2,021 - 89,958 - 91,979 2,056 State and municipal (1) 20,776 42,569 366,634 104,868 534,847 320,368 Corporate 505 1,769 14,369 3,999 20,642 3,589 Asset-backed securities - 6,641 9,653 - 16,294 - Total debt securities 25,310 50,979 480,614 108,867 665,770 328,064 Mortgage-backed securities 18,315 113,991 291,088 9,721 433,115 246,723 Equity securities (2) - 1,000 - 7,492 8,492 2,896 Total $ 43,625 $ 165,970 $ 771,702 $ 126,080 $ 1,107,377 $ 577,683 Weighted average yields: Less than 1 Year - 5 Years - More than 1 Year 5 Years 10 Years 10 Years Total U.S. Government and federal agency 1.98 % - % - % - % 1.98 % U.S. Treasury notes and bonds 1.85 - 1.16 - 1.18 State and municipal (1) 2.71 2.95 2.50 2.31 2.51 Corporate 2.50 3.70 2.93 3.25 3.04 Asset-backed securities - 0.60 0.84 - 0.74 Mortgage-backed securities 1.56 1.88 1.44 1.79 1.57 Equity securities (2) - 4.61 - - 0.54 (1) The yield is computed for tax-exempt securities on a fully tax-equivalent basis at an incremental tax rate of 21% for 2021. (2) Equity securities are preferred and common stock that may or may not have a stated maturity. Weighted average yields are based on the fair value of securities which are denoted in the table above.  Callable securities in the money are presumed called and matured at the callable date. 8 Maturities and Sensitivities of Loans to Changes in Interest Rates The following schedule presents the maturities of loans as of December 31, 2021. Loans are also classified according to the sensitivity to changes in interest rates as of December 31, 2021. (Dollars in thousands) In one year After one year After five years After fifteen or less through five years through fifteen years years Total Agricultural $ 12,350 $ 29,426 $ 18,493 $ 4,550 $ 64,819 Commercial and industrial 47,704 98,651 56,183 486 203,024 Commercial real estate 39,844 256,366 220,123 9,551 525,884 Construction real estate 18,245 212 - 609 19,066 Consumer 1,244 18,099 15,542 289 35,174 Residential real estate 2,535 10,138 82,552 73,656 168,881 Totals $ 121,922 $ 412,892 $ 392,893 $ 89,141 $ 1,016,848 (Dollars in thousands) Fixed or Floating or predetermined rates variable rates Total Loans maturing after one y Agricultural $ 35,713 $ 16,756 $ 52,469 Commercial and industrial 133,803 21,516 155,319 Commercial real estate 396,942 89,098 486,040 Construction real estate 821 - 821 Consumer 33,511 420 33,931 Residential real estate 91,501 74,845 166,346 Totals $ 692,291 $ 202,635 $ 894,926 Loan maturities are classified according to the contractual maturity date or the anticipated amortization period, whichever is appropriate. The anticipated amortization period is used in the case of loans where a balloon payment is due before the end of the loan’s normal amortization period. At the time the balloon payment is due, the loan can either be rewritten or payment in full can be requested. The decision regarding whether the loan will be rewritten or a payment in full will be requested will be based upon the loan’s payment history, the borrower’s current financial condition, and other relevant factors. 9 The following table reflects the composition of our allowance for loan loss, non-accrual loans, and nonperforming loans as a percentage of total loans represented by each class of loans as of the dates indicat (Dollars in thousands) Agricultural Commercial and industrial Consumer Commercial real estate Construction real estate Residential real estate Loans December 31, 2021 $ 64,819 $ 203,024 $ 35,174 $ 525,884 $ 19,066 $ 168,881 Allowance for loan losses year ended December 31, 2021 $ 448 $ 1,454 $ 290 $ 3,705 $ 110 $ 671 Allowance as a percentage of loan category 0.69 % 0.72 % 0.82 % 0.70 % 0.58 % 0.40 % Nonaccrual loans year ended December 31, 2021 $ 313 $ 285 $ - $ 279 $ - $ 850 Nonaccrual as a percentage of loan category 0.48 % 0.14 % 0.00 % 0.05 % 0.00 % 0.50 % Nonperforming loans year ended December 31, 2021 $ 2,117 $ 358 $ - $ 880 $ - $ 2,189 Nonperforming loans as a percentage of loan category 3.27 % 0.18 % 0.00 % 0.17 % 0.00 % 1.30 % (Dollars in thousands) Agricultural Commercial and industrial Consumer Commercial real estate Construction real estate Residential real estate Loans December 31, 2020 $ 53,735 $ 303,527 $ 34,014 $ 469,247 $ 16,639 $ 192,506 Allowance for loan losses year ended December 31, 2020 $ 257 $ 1,327 $ 317 $ 4,178 $ 97 $ 1,300 Allowance as a percentage of loan category 0.48 % 0.44 % 0.93 % 0.89 % 0.58 % 0.68 % Nonaccrual loans year ended December 31, 2020 $ 348 $ 1,802 $ 8 $ 3,088 $ 80 $ 1,381 Nonaccrual as a percentage of loan category 0.65 % 0.59 % 0.02 % 0.66 % 0.48 % 0.72 % Nonperforming loans year ended December 31, 2020 $ 348 $ 1,802 $ 8 $ 3,284 $ 80 $ 2,722 Nonperforming loans as a percentage of loan category 0.65 % 0.59 % 0.02 % 0.70 % 0.48 % 1.41 % Additions to the allowance for loan losses charged to operations during the periods shown were based on management’s judgment after considering factors such as loan loss experience, evaluation of the loan portfolio, and prevailing and anticipated economic conditions. The evaluation of the loan portfolio is based upon various risk factors such as the financial condition of the borrower, the value of collateral and other considerations, which, in the opinion of management, deserve current recognition in estimating loan losses. 10 The following schedule presents an allocation of the allowance for loan losses to the various loan categories as of the years ended December 31: (Dollars in thousands) 2021 2020 2019 Agricultural $ 448 $ 257 $ 471 Commercial and industrial 1,454 1,327 655 Consumer 290 317 270 Real estate - commercial 3,705 4,178 1,663 Real estate - construction 110 97 76 Real estate - residential 671 1,300 640 Unallocated 1,010 117 282 Total Allowance $ 7,688 $ 7,593 $ 4,057 Management periodically reviews the assumptions, loss ratios and delinquency trends in estimating the appropriate level of its allowance for loan losses and believes the unallocated portion of the total allowance was sufficient at December 31, 2021. Deposits The following schedule presents the average deposit balances by category and the average rates paid thereon for the respective yea (Dollars in thousands) 2021 2020 2019 Average Balance Average Rate Average Balance Average Rate Average Balance Average Rate Noninterest-bearing demand $ 527,876 - % $ 398,422 - % $ 186,411 - % Interest-bearing demand and money market deposits 791,886 0.23 571,693 0.32 278,444 0.56 Savings 398,969 0.14 267,217 0.11 109,028 0.07 Certificates of deposit 186,898 0.51 183,836 1.11 136,537 1.87 Total $ 1,905,629 0.17 % $ 1,421,168 0.29 % $ 710,420 0.63 % At December 31, 2021, the aggregate balance of time deposits exceeding the FDIC insured limit of $250,000 totaled $87.3 million.  At December 31, 2021, 93% of uninsured time deposit accounts were scheduled to mature within one year.  The maturity profile of uninsured time deposits at December 31, 2021 is as follows: Amount of time deposits in uninsured accounts (Dollars in thousands) Maturing in less than 3 months $ 29,498 Maturing in 3 to 6 months 34,891 Maturing in 6 to 12 months 13,607 Maturing in more than 12 months 9,347 Total uninsured time deposits $ 87,343 At December 31, 2021, the aggregate balance of all deposits exceeding the FDIC insured limit of $250,000 totaled $889.2 million, compared to $583.7 million and $323.8 million in 2020 and 2019, respectively. At December 31, 2021, the Bank had no material foreign deposits. 11 Return on Equity and Assets The following schedule presents certain financial ratios of the Company for the years ended December 31: 2021 2020 2019 Return on assets (net income divided by average total assets) 1.02 % 0.94 % 0.85 % Return on equity (net income divided by average equity) 9.79 % 7.28 % 6.48 % Dividend payout ratio (dividends declared per share divided by net income per share) 32.67 % 39.54 % 80.97 % Equity to assets ratio (average equity divided by average total assets) 10.44 % 12.97 % 13.08 % Item 1A. Risk Factors The Company is subject to many risks and uncertainties. Although the Company seeks ways to manage these risks and develop programs to control risks to the extent that management can control them, the Company cannot predict the future. Actual results may differ materially from management’s expectations. Some of these significant risks and uncertainties are discussed below. The risks and uncertainties described below are not the only ones that the Company faces. Additional risks and uncertainties of which the Company is unaware, or that it currently does not consider to be material, also may become important factors that affect the Company and its business. If any of these risks were to occur, the Company’s business, financial condition or results of operations could be materially and adversely affected. Risks Related to the Company ’ s Business The continuing COVID-19 pandemic could adversely impact the Company ’ s and its customers ’ business, financial condition, and results of operations. The continuing COVID-19 pandemic is significantly disrupting the economy, financial markets, and societal norms in Michigan, the United States and across the world.  Due to the nature of the pandemic, uncertainty and fluidity of the spread of the virus and its multiple variants, volatility of financial markets, and varied responses and actions from local, state and federal governments, including mandated shutdowns and other restrictive orders, it is impossible to predict the ultimate adverse impact COVID-19 could have on the Company and its customers.  The effects of COVID-19 could, among other risks, result in a material increase in requests from the Company’s customers for loan deferrals, modifications to the terms of loans, or other borrower accommodations; have a material adverse impact on the financial condition of the Company’s customers, potentially impacting their ability to make payments to the Company as scheduled and driving an increase in delinquencies and loan losses; result in additional material provision for loan losses; result in a decreased demand for the Company’s loans; or negatively impact the Company’s ability to access capital on attractive terms or at all.  Those effects could have a material adverse impact on the Company’s and its customers’ business, financial condition, and results of operations. Asset quality could be less favorable than expected. A significant source of risk for the Company arises from the possibility that losses will be sustained because borrowers, guarantors and related parties may fail to perform in accordance with the terms of their loan agreements. Most loans originated by the Company are secured, but some loans are unsecured depending on the nature of the loan. With respect to secured loans, the collateral securing the repayment of these loans includes a wide variety of real and personal property that may be insufficient to cover the obligations owed under such loans. Collateral values may be adversely affected by changes in prevailing economic, environmental and other conditions, including declines in the value of real estate, changes in interest rates, changes in monetary and fiscal policies of the federal government, terrorist activity, environmental contamination and other external events. The Company’s allowance for loan losses may not be adequate to cover actual loan losses. The risk of nonpayment of loans is inherent in all lending activities and nonpayment of loans may have a material adverse effect on the Company’s earnings and overall financial condition, and the value of its common stock. The Company makes various assumptions and judgments about the collectability of its loan portfolio and provides an allowance for potential losses based on a number of factors. If its assumptions are wrong, the allowance for loan losses may not be sufficient to cover losses, which could have an adverse effect on the Company’s operating results and may cause it to increase the allowance in the future. The actual amount of future provisions for loan losses cannot now be determined and may exceed the amounts of past provisions for loan losses. Federal and state banking regulators, as an integral part of their supervisory function, periodically review the allowance for loan losses. These regulatory agencies may require the Company to increase its provision for loan losses or to recognize further loan charge-offs based upon their judgments, which may be different from the Company’s judgments. Any increase in the allowance for loan losses could have a negative effect on the Company’s regulatory capital ratios, net income, financial condition and results of operations. In addition, a large portion of the loan portfolio was marked to fair value as part of the mergers with County and Community Shores and does not carry an allowance as management determined no credit deterioration had occurred since the effective date of the merger. 12 General economic conditions in the state of Michigan could be less favorable than expected. The Company is affected by general economic conditions in the United States, although most directly within Michigan. An economic downturn within Michigan could negatively impact household and corporate incomes. This impact may lead to decreased demand for both loan and deposit products and increase the number of customers who fail to pay interest or principal on their loans. The Company could be adversely affected by the soundness of other financial institutions, including defaults by larger financial institutions. The Company's ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of credit, trading, clearing, counterparty or other relationships between financial institutions. The Company has exposure to multiple counterparties, and it routinely executes transactions with counterparties in the financial industry. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, could lead to market-wide liquidity problems and losses or defaults by the Company or by other institutions. This is sometimes referred to as "systemic risk" and may adversely affect financial intermediaries, such as clearing agencies, clearing houses, banks, securities firms and exchanges, with which the Company interacts on a daily basis, and therefore could adversely affect the Company. If the Company does not adjust to changes in the financial services industry, its financial performance may suffer. The Company’s ability to maintain its financial performance and return on investment to shareholders will depend in part on its ability to maintain and grow its core deposit customer base and expand its financial services to its existing customers. In addition to other banks, competitors include credit unions, securities dealers, brokers, mortgage bankers, investment advisors, internet banks and other financial technology companies, and finance and insurance companies. The increasingly competitive environment is, in part, a result of changes in the economic environment within the state of Michigan, regulation, changes in technology and product delivery systems and consolidation among financial service providers. New competitors may emerge to increase the degree of competition for the Company’s customers and services. Financial services and products are also constantly changing. The Company’s financial performance will also depend in part upon customer demand for the Company’s products and services and the Company’s ability to develop and offer competitive financial products and services. Changes in interest rates could reduce the Company's income and cash flow. The Company’s income and cash flow depends, to a great extent, on the difference between the interest earned on loans and securities, and the interest paid on deposits and other borrowings. Market interest rates are beyond the Company’s control, and they fluctuate in response to general economic conditions and the policies of various governmental and regulatory agencies including, in particular, the Federal Reserve Board. Changes in monetary policy, including changes in interest rates and interest rate relationships, will influence the origination of loans, the purchase of investments, the generation of deposits and the rate received on loans and securities and paid on deposits and other borrowings. Interest rates on our outstanding financial instruments might be subject to change based on regulatory developments, which could adversely affect our revenue, expenses, and the value of those financial instruments . LIBOR and certain other “benchmarks” are the subject of recent national, international, and other regulatory guidance and proposals for reform. These reforms may cause such benchmarks to perform differently than in the past or have other consequences which cannot be predicted. On July 27, 2017, the United Kingdom’s Financial Conduct Authority (“FCA”), which regulates LIBOR, publicly announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. In November 2020, the FCA announced that it would continue to publish LIBOR rates through June 30, 2023. It is unclear whether, or in what form, LIBOR will continue to exist after that date. Any uncertainty regarding the continued use and reliability of LIBOR as a benchmark interest rate could adversely affect the value of our floating rate obligations, loans, deposits, and other financial instruments tied to LIBOR rates, as well as the revenue and expenses associated with those financial instruments. While, at this time, it appears that consensus is growing around using the Secured Overnight Financing Rate (“SOFR”) as an alternative to LIBOR, it remains to be determined whether this will ultimately be the case and what the impact of a possible transition to SOFR or other alternative reference rates may have on our business, financial results and results of operations.  We could become subject to litigation and other types of disputes as a consequence of the transition from LIBOR to SOFR or another alternative reference rate, which could subject us to increased legal expenses, monetary damages and reputational harm. The Company is subject to liquidity risk in its operations, which could adversely affect its ability to fund various obligations. Liquidity risk is the possibility of being unable to meet obligations as they come due or capitalize on growth opportunities as they arise because of an inability to liquidate assets or obtain adequate funding on a timely basis, at a reasonable cost and within acceptable risk tolerances. Liquidity is required to fund various obligations, including credit obligations to borrowers, loan originations, withdrawals by depositors, repayment of debt, dividends to shareholders, operating expenses and capital expenditures. Liquidity is derived primarily from retail deposit growth and earnings retention, principal and interest payments on loans and investment securities, net cash provided from operations and access to other funding. If the Company is unable to maintain adequate liquidity, then its business, financial condition and results of operations would be negatively affected. 13 The Company has significant exposure to risks associated with commercial and residential real estate. A substantial portion of the Company’s loan portfolio consists of commercial and residential real estate-related loans, including real estate development, construction and residential and commercial mortgage loans.  As of December 31, 2021, the Company had approximately $545.0 million of commercial and construction real estate loans outstanding, which represented approximately 54% of its loan portfolio.  As of that same date, the Company had approximately $168.9 million in residential real estate loans outstanding, or approximately 17% of its loan portfolio. Consequently, real estate-related credit risks are a significant concern for the Company. The adverse consequences from real estate-related credit risks tend to be cyclical and are often driven by national economic developments that are not controllable or entirely foreseeable by the Company or its borrowers. Commercial loans may expose the Company to greater financial and credit risk than other loans. The Company’s commercial and industrial loan portfolio, including commercial mortgages, was approximately $203.0 million at December 31, 2021, comprising approximately 20% of its total loan portfolio. Commercial loans generally carry larger loan balances and can involve a greater degree of financial and credit risk than other loans. Any significant failure to pay on time by the Company’s customers would hurt the Company’s earnings. The increased financial and credit risk associated with these types of loans are a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the size of loan balances, the effects of general economic conditions on income-producing properties and the increased difficulty of evaluating and monitoring these types of loans. Legislative or regulatory changes or actions could adversely impact the Company or the businesses in which it is engaged. The Company and the Bank are subject to extensive state and federal regulation, supervision and legislation that govern almost all aspects of their operations. Laws and regulations may change from time to time and are primarily intended for the protection of consumers, depositors and the deposit insurance fund, and not to benefit the Company's shareholders. The impact of any changes to laws and regulations or other actions by regulatory agencies may negatively impact the Company or its ability to increase the value of its business. Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of an institution, the classification of assets by the institution and the adequacy of an institution's allowance for loan losses. Future regulatory changes or accounting pronouncements may increase the Company's regulatory capital requirements or adversely affect its regulatory capital levels. Additionally, actions by regulatory agencies against the Company or the Bank could require the Company to devote significant time and resources to defending its business and may lead to penalties that materially affect the Company. The Company relies heavily on its management and other key personnel, and the loss of any of them may adversely affect its operations. The Company is and will continue to be dependent upon the services of its management team and other key personnel. Losing the services of one or more key members of the Company’s management team could adversely affect its operations. The Company ’ s controls and procedures may fail or be circumvented. Management regularly reviews and updates the Company’s internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met.  If the Company fails to identify and remediate control deficiencies, it is possible that a material misstatement of interim or annual financial statements will not be prevented or detected on a timely basis.  In addition, any failure or circumvention of the Company’s other controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on the Company’s business, results of operations and financial condition. The Company may be a defendant in a variety of litigation and other actions, which may have a material adverse effect on the Company's financial condition and results of operations. The Company and the Bank are regularly involved in a variety of litigation arising out of the normal course of business. The Company's insurance may not cover all claims that may be asserted against it, and any claims asserted against it, regardless of merit or eventual outcome, may harm its reputation or cause the Company to incur unexpected expenses, which could be material in amount. Should the ultimate expenses, judgments or settlements in any litigation exceed the Company's insurance coverage, they could have a material adverse effect on the Company's financial condition and results of operations. In addition, the Company may not be able to obtain appropriate types or levels of insurance in the future, nor may it be able to obtain adequate replacement policies with acceptable terms, if at all. If the Company cannot raise additional capital when needed, its ability to further expand its operations through organic growth or acquisitions could be materially impaired. The Company is required by federal and state regulatory authorities to maintain specified levels of capital to support its operations. The Company may need to raise additional capital to support its current level of assets or its growth. The Company’s ability to raise additional capital will depend on conditions in the capital markets at that time, which are outside its control, and on its financial performance. The Company cannot assure that it will be able to raise additional capital in the future on terms acceptable to it or at all. If the Company cannot raise additional capital when needed, its ability to maintain its current level of assets or to expand its operations through organic growth or acquisitions could be materially limited. 14 Unauthorized disclosure of sensitive or confidential client or customer information, whether through a breach of computer systems or otherwise, could severely harm the Company's business. As part of its business, the Company collects, processes and retains sensitive and confidential client and customer information on behalf of itself and other third parties. Despite the security measures the Company has in place for its facilities and systems, and the security measures of its third party service providers, the Company may be vulnerable to security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming and/or human errors or other similar events. Any security breach involving the misappropriation, loss or other unauthorized disclosure of confidential customer information, whether by the Company or by its vendors, could severely damage the Company's reputation, expose it to the risks of litigation and liability, disrupt the Company's operations and have a material adverse effect on the Company's business. The Company's information systems may experience an interruption or breach in security. The Company relies heavily on communications and information systems to conduct its business and deliver its products. Any failure, interruption or breach in security of these systems could result in failures or disruptions in the Company's customer relationship management, general ledger, deposit, loan and other systems. While the Company has policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of its information systems, there can be no assurance that any such failures, interruptions or security breaches of the Company's information systems or its customers' information or computer systems would not damage the Company's reputation, result in a loss of customer business, subject the Company to additional regulatory scrutiny, or expose the Company to civil litigation and financial liability, any of which could have a material adverse effect on the Company's financial condition and results of operations. Cybersecurity incidents could disrupt business operations, result in the loss of critical and confidential information, and adversely impact our reputation and results of operations. Global cybersecurity threats and incidents can range from uncoordinated individual attempts to gain unauthorized access to information technology (IT) systems to sophisticated and targeted measures known as advanced persistent threats, directed at the Company and/or its third party service providers. Although we employ comprehensive measures to prevent, detect, address and mitigate these threats (including access controls, employee training, data encryption, vulnerability assessments, continuous monitoring of our IT networks and systems and maintenance of backup and protective systems), cybersecurity incidents, depending on their nature and scope, could potentially result in the misappropriation, destruction, corruption or unavailability of critical data and confidential or proprietary information (our own or that of third parties) and the disruption of business operations. The potential consequences of a material cybersecurity incident include reputational damage, litigation with third parties and increased cybersecurity protection and remediation costs, which in turn could materially adversely affect our results of operations. Environmental liability associated with commercial lending could result in losses. In the course of its business, the Company may acquire, through foreclosure, properties securing loans it has originated or purchased that are in default. Particularly in commercial real estate lending, there is a risk that hazardous substances could be discovered on these properties. In this event, the Company might be required to remove these substances from the affected properties at the Company's sole cost and expense. The cost of this removal could substantially exceed the value of affected properties. The Company may not have adequate remedies against the prior owner or other responsible parties and could find it difficult or impossible to sell the affected properties. These events could have an adverse effect on the Company's business, results of operations and financial condition. The Company depends upon the accuracy and completeness of information about customers. In deciding whether to extend credit to customers, the Company relies on information provided to it by its customers, including financial statements and other financial information. The Company may also rely on representations of customers as to the accuracy and completeness of that information and on reports of independent auditors on financial statements. The Company's financial condition and results of operations could be negatively impacted to the extent that the Company extends credit in reliance on financial statements that do not comply with generally accepted accounting principles or that are misleading or other information provided by customers that is false or misleading. The Company operates in a highly competitive industry and market area. The Company faces substantial competition in all areas of its operations from a variety of different competitors, many of which are larger and may have more financial resources. Such competitors primarily include national and regional banks within the various markets where the Company operates, as well as internet banks and other financial technology companies. The Company also faces competition from many other types of financial institutions, including savings and loan associations, credit unions, finance companies, brokerage firms, insurance companies and other financial intermediaries. The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. The Company competes with these institutions both in attracting deposits and in making new loans. Technology has lowered barriers to entry into the market and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Many of the Company's competitors have fewer regulatory constraints and may have lower cost structures, such as credit unions that are not subject to federal income tax. Due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services than the Company can. Severe weather, natural disasters, acts of war or terrorism and other external events could significantly impact the Company's business. Severe weather, natural disasters, acts of war or terrorism, risks posed by an outbreak of a widespread epidemic or pandemic of disease (or widespread fear thereof), including the impact of the COVID-19 pandemic, and other adverse external events could have a significant impact on the Company's ability to conduct business. Such events could affect the stability of the Company's deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause the Company to incur additional expenses. 15 The Company relies on dividends from the Bank for most of its revenue. The Company is a separate and distinct legal entity from the Bank. It receives substantially all of its revenue from dividends from the Bank. These dividends are the principal source of funds to pay cash dividends on the Company's common stock. Various federal and/or state laws and regulations limit the amount of dividends that the Bank may pay to the Company. If the Bank is unable to pay dividends to the Company, the Company may not be able to pay cash dividends on its common stock. The earnings of the Bank have been the principal source of funds to pay cash dividends to shareholders. Over the long-term, cash dividends to shareholders are dependent upon earnings, as well as capital requirements, regulatory restraints and other factors affecting the Company and the Bank. Additional risks and uncertainties could have a negative effect on financial performance. Additional factors could have a negative effect on the financial performance of the Company and the Company’s common stock. Some of these factors are financial market conditions, changes in financial accounting and reporting standards, new litigation or changes in existing litigation, regulatory actions and losses. Risks Related to the Company ’ s Common Stock Investments in the Company ’ s common stock involve risk. The market price of the Company’s common stock may fluctuate significantly in response to a number of factors, includin ● The impact associated with the COVID-19 pandemic ● Variations in quarterly or annual operating results ● Changes in dividends per share ● Changes in interest rates ● New developments, laws or regulations in the banking industry ● Acquisitions or business combinations involving the Company or its competition ● Regulatory actions, including changes to regulatory capital levels, the components of regulatory capital and how regulatory capital is calculated ● Volatility of stock market prices and volumes ● Changes in market valuations of similar companies ● New litigation or contingencies or changes in existing litigation or contingencies ● Changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or other regulatory agencies ● Rumors or erroneous information ● Credit and capital availability ● Issuance of additional shares of common stock or other debt or equity securities of the Company The Company's common stock, while publicly traded, has less liquidity than the average liquidity of stocks listed on the Nasdaq Stock Market. The Company's common stock is listed for trading on the Nasdaq Capital Market.  However, the Company's common stock has less liquidity than the average liquidity for companies listed in the Nasdaq Stock Market.  The public trading market for the Company's common stock depends on a marketplace of willing buyers and sellers at any given time, which in turn depends on factors outside of the Company's control, including general economic and market conditions and the decisions of individual investors.  The limited market for the Company's common stock may affect a shareholder's ability to sell their shares at any given time, and the sale of a large number of shares at one time could temporarily adversely affect the market price of our common stock. The Company's common stock is not insured by any government entity. The Company's common stock is not insured by the FDIC or any other government entity.  Investment in the Company's common stock is subject to risk and potential loss. A shareholder's ownership of common stock may be diluted if the Company issues additional shares of common stock in the future. The Company's articles of incorporation authorize the Company's Board of Directors to issue additional shares of common stock or preferred stock without shareholder approval.  To the extent the Company issues additional shares of common stock or preferred stock, or issues options or warrants permitting the holder to purchase or acquire common stock in the future and such warrants or options are exercised, the Company's shareholders may experience dilution in their ownership of the Company's common stock.  Holders of the Company's common stock do not have any preemptive or similar rights to purchase a pro rata share of any additional shares offered or issued by the Company. 16 The value of the Company's common stock may be adversely affected if the Company issues debt and equity securities that are senior to the Company's common stock in liquidation or as to distributions. The Company may increase its capital by issuing debt or equity securities or by entering into debt or debt-like financing.  This may include the issuance of common stock, preferred stock, senior notes, or subordinated notes.  Upon any liquidation of the Company, the Company's lenders and holders of its debt securities would be entitled to distribution of the Company's available assets before distributions to the holders of the Company's common stock, and holders of preferred stock may be granted rights to similarly receive a distribution upon liquidation prior to distribution to holders of the Company's common stock.  The Company cannot predict the amount, timing or nature of any future debt financings or stock offerings, and the decision of whether to incur debt or issue securities will depend on market conditions and other factors beyond the Company's control.  Future offerings could dilute a shareholder's interests in the Company or reduce the per-share value of the Company's common stock. The Company's articles of incorporation and bylaws, and certain provisions of Michigan law, contain provisions that could make a takeover effort more difficult. The Michigan Business Corporation Act, and the Company's articles of incorporation and bylaws, include provisions intended to protect shareholders and prohibit, discourage, or delay certain types of hostile takeover activities.  In addition, federal law requires the Federal Reserve Board's prior approval for acquisition of "control" of a bank holding company such as the Company, including acquisition of 10% or more of the Company's outstanding securities by any person not defined as a company under the Bank Holding Company Act of 1956, as amended (the "BHC Act").  These provisions and requirements could discourage potential acquisition proposals, delay or prevent a change in control, diminish the opportunities for a shareholder to participate in tender offers, prevent transactions in which our shareholders might otherwise receive a premium for their shares, or limit the ability for our shareholders to approve transactions that they may believe to be in their best interests. An entity or group holding a certain percentage of the Company's outstanding securities could become subject to regulation as a "bank holding company" or may be required to obtain prior approval of the Federal Reserve Board. Any bank holding company or foreign bank with a presence in the United States may be required to obtain approval of the Federal Reserve Board under the BHC Act to acquire or retain 5% or more of the Company's outstanding securities.  Further, if any entity (including a "group" comprised of individual persons) owns or controls the power to vote 25% or more of the Company's outstanding securities, or 5% or more of the outstanding securities if the entity otherwise exercises a "controlling influence" over the Company, the entity may become subject to regulation as a "bank holding company" under the BHC Act.  An entity that is subject to regulation as a bank holding company would be subject to regulatory and statutory obligations and restrictions, and could be required to divest all or a portion of the entity's investment in the Company's securities or in other investments that are not permitted for a bank holding company. Item 1B. Unresolved Staff Comments None. Item 2. Properties The Company’s headquarters are located at 109 East Division, Sparta, Michigan 49345. The headquarters location is owned by the Company and is not subject to any mortgage. 32 of the Company’s 36 locations are designed for use and operation as a bank, are well maintained, and are suitable for current operations. The remaining Four locations are comprised of three loan offices and a wealth management center. Banking offices generally range in size from 1,200 to 3,200 square feet, based on the location and number of employees located at the facility. All of our banking offices are owned by the Bank except for 4 that are leased under various operating lease agreements.  The Company’s management believes all offices are adequately covered by property insurance. Item 3. Legal Proceedings As of December 31, 2021, there were no significant pending legal proceedings to which the Company or the Bank is a party or to which any of their properties were subject, except for legal proceedings arising in the ordinary course of business. In the opinion of management, pending legal proceedings will not have a material adverse effect on the consolidated financial condition of the Company. Item 4. Mine Safety Disclosures Not applicable. 17 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Stock Information The Company’s common stock is traded on the NASDAQ Capital Market under the symbol COFS. As of February 28, 2022, there were approximately 1,167 owners of record and approximately 1,050 beneficial owners of our common stock. The following table summarizes the quarterly cash dividends declared per share of common stock during 2021 and 2020: 2021 2020 First Quarter $ 0.22 $ 0.20 Second Quarter 0.22 0.20 Third Quarter 0.25 0.20 Fourth Quarter 0.25 0.22 Total $ 0.94 $ 0.82 ChoiceOne’s principal source of funds to pay cash dividends is the earnings and dividends paid by the Bank. The Bank is restricted in its ability to pay cash dividends under current banking regulations. See Note 20 to the consolidated financial statements for a description of these restrictions. Based on information presently available, management expects ChoiceOne to declare and pay regular quarterly cash dividends in 2021, although the amount of the quarterly dividends will be dependent on market conditions and ChoiceOne’s requirements for cash and capital, among other things. Information regarding the Company’s equity compensation plans may be found in Item 12 of this report and is here incorporated by reference. ISSUER PURCHASES OF EQUITY SECURITIES ChoiceOne repurchased approximately 85,000 shares for $2.2 million, or a weighted average cost per share of $25.78, during the fourth quarter of 2021. ChoiceOne repurchased approximately 309,000 shares for $7.8 million, or a weighted average cost per share of $25.17 during the year ended December 31, 2021. Total Number Maximum of Shares Number of Total Purchased as Shares that Number Average Part of a May Yet be of Shares Price Paid Publicly Purchased Period Purchased per Share Announced Plan Under the Plan October 1 - October 31, 2021 Employee Transactions - $ - - Repurchase Plan 20,840 $ 24.94 20,840 146,333 November 1 - November 30, 2021 Employee Transactions - $ - - Repurchase Plan 37,715 $ 26.22 37,715 108,618 December 1 - December 31, 2021 Employee Transactions - $ - - Repurchase Plan 27,778 $ 25.79 27,778 80,840 As of December 31, 2021, there are approximately 81,000 shares remaining that may yet be purchased under approved plans. The repurchase plan was adopted and announced in April 2021. There was no stated expiration date. The plan authorized the repurchase of up to 390,114 shares, representing 5% of the total outstanding shares of common stock as of the date the plan was adopted. Item 6. Reserved 18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion is designed to provide a review of the consolidated financial condition and results of operations of ChoiceOne Financial Services, Inc. (“ChoiceOne” or the “Company”), and its wholly-owned subsidiaries. This discussion should be read in conjunction with the consolidated financial statements and related footnotes. We have omitted discussion of 2020 results where it would be redundant to the discussion previously included in Part II, Item 7 of our 2020 Annual Report on Form 10-K. Selected Financial Data (Dollars in thousands, except per share data) 2021 2020 2019 For the year Net interest income $ 60,641 $ 51,071 $ 27,773 Provision for loan losses 416 4,000 - Noninterest income 19,194 22,698 9,168 Noninterest expense 52,921 50,884 28,476 Income before income taxes 26,498 18,885 8,465 Income tax expense 4,456 3,272 1,294 Net income 22,042 15,613 7,171 Cash dividends declared 7,200 6,174 5,806 Per share * Basic earnings $ 2.87 $ 2.08 $ 1.58 Diluted earnings 2.86 2.07 1.58 Cash dividends declared 0.94 0.82 1.40 Shareholders' equity (at year end) 29.52 29.15 26.52 Average for the year Securities $ 869,788 $ 388,797 $ 210,492 Gross loans 1,040,430 1,014,959 534,646 Deposits 1,905,629 1,421,168 710,419 Borrowings 5,465 16,712 21,270 Subordinated debt 12,841 1,532 - Shareholders' equity 225,120 214,591 110,610 Assets 2,156,774 1,654,873 845,851 At year end Securities $ 1,116,265 $ 585,687 $ 348,888 Gross loans 1,068,831 1,117,798 856,191 Deposits 2,052,294 1,674,578 1,154,602 Borrowings 50,000 9,327 33,198 Subordinated debt 35,017 3,089 - Shareholders' equity 221,669 227,268 192,139 Assets 2,366,682 1,919,342 1,386,128 Selected financial ratios Return on average assets 1.02 % 0.94 % 0.85 % Return on average shareholders' equity 9.79 7.28 6.48 Cash dividend payout as a percentage of net income 32.67 39.54 80.97 Shareholders' equity to assets (at year end) 9.37 11.84 13.86 Note - 2019 financial data includes the impact of the merger with County, which was effective as of October 1, 2019, and 2020 financial data includes the impact of the merger with Community Shores, which was effective July 1, 2020. 19 Explanatory Note On July 1, 2020, ChoiceOne completed the merger of Community Shores Bank Corporation ("Community Shores") with and into ChoiceOne with ChoiceOne surviving the merger. Accordingly, the reported consolidated financial condition and operating results as of and for the years ended December 31, 2020 and December 31, 2021 include the impact of the merger, which was effective as of July 1, 2020. On October 1, 2019, ChoiceOne completed the merger of County Bank Corp. ("County") with and into ChoiceOne with ChoiceOne surviving the merger. Accordingly, the reported consolidated financial condition and operating results as of and for the years ended December 31, 2019, December 31, 2020, and December 31, 2021 include the impact of the merger, which was effective as of October 1, 2019. For additional details regarding the mergers with Community Shores and County, see Note 21 (Business Combinations) of the Notes to the Consolidated Financial Statements included in Item 8 of this report. RESULTS OF OPERATIONS Summary ChoiceOne's net income for 2021 was $22.0 million, compared to $15.6 million in 2020 .  Diluted earnings per share was $2.86 during in the twelve months ended December 31, 2021, compared to $2.07 per share in the twelve months ended December 31, 2020.  Net income for the year ended December 31, 2020, excluding $2.7 million of tax-effected merger expenses, was $18.3 million or $2.43 per diluted share. Total assets grew to $2.4 billion as of December 31, 2021 compared to $1.9 billion as of December 31, 2020 .  The increase was related to organic deposit growth of $ 377.7 million in the twelve months ended December 31, 2021.  This growth was partly due to how individuals and businesses have managed funds received under the Coronavirus Aid, Relief and Economic Security ("CARES") Act.  In an effort to deploy deposit growth, ChoiceOne grew its securities portfolio $530.6 million in the year ended December 31, 2021.  During the twelve months ended December 31, 2021, $192.5 million of loans under the Paycheck Protection Program ("PPP") were forgiven resulting in $5.2 million of fee income.  This growth in the securities portfolio coupled with PPP fees helped total interest income for 2021 to grow $8.9 million compared to 2020. 2021 interest income on loans included accretion income related to loans acquired from the mergers with County Bank Corp. and Community Shores Bank Corporation in the amount of $1.1 million.  The remaining credit mark on these acquired loans totaled $6.8 million as of December 31, 2021.  Despite the large increase in deposit balances, interest cost of deposits decreased by $873,000 in 2021 compared to 2020. In September 2021, ChoiceOne completed a private placement of $32.5 million in aggregate principal amount of 3.25% fixed-to-floating rate subordinated notes due 2031.  ChoiceOne used a portion of net proceeds from the private placement to redeem senior debt, fund common stock repurchases, and support bank-level capital ratios. Total noninterest income declined $3.5 million in the twelve months ended December 31, 2021, compared to the twelve months ended December 31, 2020.  Total noninterest income in 2020 was bolstered by heightened levels of refinancing activity within ChoiceOne's mortgage portfolio, with gains on sales of loans $3.7 million higher than in 2021.  Customer service charges increased $1.4 million in the twelve months ended December 31, 2021, compared to the twelve months ended December 31, 2020.  2020 service charges were depressed by stay-at-home orders during the COVID 19 pandemic.  2021 service charges also included the effect from the merger with Community Shores, which closed on July 1, 2020. Total noninterest expense increased $2.0 million in the year ended December 31, 2021, compared to the year ended December 31, 2020.  Much of the increase in 2021 was caused by the increase in scale related to the merger with Community Shores. 20 The Coronavirus (COVID-19) Outbreak Consistent with federal banking agencies' “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus,” ChoiceOne is working with its borrowers affected by the COVID-19 pandemic. ChoiceOne granted deferrals on numerous loans to borrowers affected by the pandemic; however, as of June 30, 2021, all deferments had resumed payments in accordance with loan terms. In addition, ChoiceOne processed over $126 million in PPP loans in 2020 and acquired an additional $37 million in PPP loans in the merger with Community Shores. ChoiceOne originated an additional $89.1 million in PPP loans in 2021. PPP loans are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP. PPP loans carry a fixed rate of 1.00% and a term of two years (loans made before June 5, 2020) or five years (loans made on or after June 5, 2020), if not forgiven in whole or in part. Payments are deferred until either the date on which the Small Business Administration ("SBA") remits the amount of forgiveness proceeds to the lender or the date that is ten months after the last day of the covered period if the borrower does not apply for forgiveness within that ten-month period. The loans are 100% guaranteed by the SBA. The SBA pays the originating bank a processing fee ranging from 1% to 5%, based on the size of the loan. Upon SBA forgiveness, unrecognized fees are recognized into interest income.  During the year ended December 31, 2021, $192.5 million of PPP loans were forgiven resulting in $5.2 million of fee income compared to $23.4 million of PPP loans forgiven resulting in $3.0 million of fee income in 2020. $33.1 million in PPP loans and $1.2 million in deferred PPP fee income remains outstanding as of December 31, 2021.  Management expects the remaining PPP loans to be forgiven in the first half of 2022. Dividends Cash dividends of $7.2 million or $0.94 per common share were declared in 2021 compared to $6.2 million or $0.82 per common share were declared in 2020.  The dividend yield for ChoiceOne’s common stock was 3.55% as of the end of 2021, compared to 2.66% as of the end of 2020. The cash dividend payout as a percentage of net income was 33% as of December 31, 2021, compared to 40% as of December 31, 2020. 21 Table 1 – Average Balances and Tax-Equivalent Interest Rates Year Ended December 31, 2021 2020 2019 (Dollars in thousands) Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate Assets: Loans (1) (3)(4)(5) $ 1,040,430 $ 48,672 4.68 % $ 1,014,959 $ 46,893 4.62 % $ 534,646 $ 26,791 5.01 % Taxable securities (2) 599,902 10,260 1.71 276,085 5,891 2.13 152,094 3,955 2.60 Nontaxable securities (1) 269,886 7,098 2.63 112,712 3,402 3.02 58,398 1,867 3.20 Other 68,879 84 0.12 71,417 266 0.37 14,992 268 1.79 Interest-earning assets 1,979,097 66,114 3.34 1,475,173 56,452 3.83 760,130 32,881 4.33 Noninterest-earning assets 177,677 179,699 85,721 Total assets $ 2,156,774 $ 1,654,873 $ 845,851 Liabilities and Shareholders' Equity: Interest-bearing demand deposits $ 791,886 $ 1,797 0.23 % $ 571,693 $ 1,832 0.32 % $ 278,444 $ 1,559 0.56 % Savings deposits 398,969 551 0.14 267,217 300 0.11 109,028 79 0.07 Certificates of deposit 186,898 957 0.51 183,836 2,046 1.11 136,537 2,550 1.87 Borrowings 5,465 101 1.86 16,712 327 1.96 21,269 512 2.41 Subordinated debentures 12,841 571 4.45 1,532 139 9.07 - - 0.00 Interest-bearing liabilities 1,396,059 3,977 0.28 1,040,990 4,644 0.45 545,278 4,700 0.86 Demand deposits 527,876 398,422 186,411 Other noninterest-bearing liabilities 7,719 870 3,552 Total liabilities 1,931,654 1,440,282 735,241 Shareholders' equity 225,120 214,591 110,610 Total liabilities and shareholders' equity $ 2,156,774 $ 1,654,873 $ 845,851 Net interest income (tax-equivalent basis) (Non-GAAP) (1) $ 62,137 $ 51,808 $ 28,181 Net interest margin (tax-equivalent basis) (Non-GAAP) (1) 3.14 % 3.51 % 3.71 % Reconciliation to Reported Net Interest Income Net interest income (tax-equivalent basis) (Non-GAAP) (1) $ 62,137 $ 51,808 $ 28,181 Adjustment for taxable equivalent interest (1,513 ) (737 ) (408 ) Net interest income (GAAP) $ 60,624 $ 51,071 $ 27,773 Net interest margin (GAAP) 3.08 % 3.38 % 3.47 % (1) Adjusted to a fully tax-equivalent basis to facilitate comparison to the taxable interest-earning assets. The adjustment uses an incremental tax rate of 21%.  The presentation of these measures on a tax-equivalent basis is not in accordance with GAAP, but is customary in the banking industry. These non-GAAP measures ensure comparability with respect to both taxable and tax-exempt loans and securities. (2) Interest on taxable securities includes dividends on Federal Home Loan Bank and Federal Reserve Bank stock. (3) Loans include both loans to other financial institutions and loans held for sale. (4) Non-accruing loan balances are included in the balance of average loans. (5) Interest on loans included net origination fees and PPP fees of approximately $7,232,000, $5,236,000, and $866,000 in 2021, 2020, and 2019, respectively. 22 Table 2 – Changes in Tax-Equivalent Net Interest Income Year Ended December 31, (Dollars in thousands) 2021 Over 2020 2020 Over 2019 Total Volume Rate Total Volume Rate Increase (decrease) in interest income (1) Loans (2) $ 1,779 $ 1,187 $ 592 $ 20,102 $ 22,336 $ (2,234 ) Taxable securities 4,369 5,737 (1,368 ) 1,936 2,749 (813 ) Nontaxable securities (2) 3,696 4,185 (489 ) 1,535 1,647 (112 ) Other (182 ) (9 ) (173 ) (2 ) 349 (351 ) Net change in interest income 9,662 11,099 (1,437 ) 23,571 27,081 (3,510 ) Increase (decrease) in interest expense (1) Interest-bearing demand deposits (35 ) 588 (623 ) 273 1,143 (870 ) Savings deposits 251 171 80 221 156 65 Certificates of deposit (1,089 ) 34 (1,123 ) (504 ) 721 (1,225 ) Borrowings (226 ) (210 ) (16 ) (235 ) (230 ) (5 ) Subordinated debentures 432 1,516 (37 ) 189 183 6 Net change in interest expense (667 ) 2,099 (1,719 ) (56 ) 1,973 (2,029 ) Net change in tax-equivalent net interest income $ 10,329 $ 9,001 $ 282 $ 23,627 $ 25,108 $ (1,481 ) (1) The volume variance is computed as the change in volume (average balance) multiplied by the previous year’s interest rate. The rate variance is computed as the change in interest rate multiplied by the previous year’s volume (average balance). The change in interest due to both volume and rate has been allocated to the volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. (2) Interest on tax-exempt securities and loans has been adjusted to a fully tax-equivalent basis using an incremental tax rate of 21% for 2021, 2020, and 2019. Net I nterest Income The presentation of net interest income on a tax-equivalent basis is not in accordance with generally accepted accounting principles (“GAAP”), but is customary in the banking industry. This non-GAAP measure ensures comparability of net interest income arising from both taxable and tax-exempt loans and investment securities. The adjustments to determine net interest income on a tax-equivalent basis were $1.5 million and $737,000 for the years ended 2021 and 2020, respectively. These adjustments were computed using a 21% federal income tax rate. On March 3, 2020 the Federal Reserve Open Market Committee lowered the federal funds rate by 50 basis points which was followed by a reduction of 100 basis points on March 15, 2020. Operating in an environment with lower interest rates has had a negative effect on both ChoiceOne’s interest income and interest spread. ChoiceOne management continues to monitor rates and their effect on income as part of the Asset/Liability Risk Committee to determine what strategic decisions will need to be made in both higher and lower rate environments.  No changes were made to the federal funds rate during 2021. Tax-equivalent net interest income increased $10.3 million in 2021 compared to 2020 . The increase was attributed to an increase of $503.9 million in average interest-earning assets.  The average balance of loans increased $25.5 million in 2021 compared to 2020 .  This is due to loan growth excluding loans held for sale, loans to other financial institutions, and PPP loans during that period of $52.1 million offset by a decline in the average balance of PPP loans held during 2021 compared to 2020.  The average rate earned on loans also increased by 6 basis points in 2021 compared to 2020 as a result of the recognition of $5.2 million in PPP fees earned. Tax-equivalent interest income on loans increased $1.8 million in 2021 compared to the prior year. The average balance of total securities grew $481.0 million in 2021 compared to the prior year as ChoiceOne made efforts to deploy deposit growth into earning assets.  The average balance growth offset by a 39 basis point decline in the average rate earned on securities caused interest income from securities to grow $8.1 million in 2021 compared to the prior year. A decline of $2.5 million in average balance in other interest-earning assets in 2021 compared to 2020, coupled with a 25 basis point decline in the rate earned, caused interest income to decline by $182,000. Despite large increases in deposit balances, a significant decline in overall market interest rates in 2021 compared to 2020 caused the interest paid on interest-bearing liabilities to decline by $667,000. The average balance of interest-bearing demand deposits and savings deposits increased $351.9 million in 2021 compared to 2020 . The effect of this increase, offset by a 6 basis point decline in the average rate paid, caused interest expense to be $216,000 higher in 2021 than in the prior year. The average balance of certificates of deposit was $3.1 million higher in 2021 than in 2020 . Growth in the average balance was more than offset by a decline in average rate paid of 60 basis points which caused interest expense to decline by $1.1 million. ChoiceOne’s tax-equivalent net interest income margin was 3.14% in 2021 and 3.51% in 2020 . The decrease in the net interest income margin resulted from a lower rate environment and an asset mix with a higher percentage of securities to total assets. 23 Provision and Allowance For Loan Losses Table 3 – Provision and Allowance For Loan Losses (Dollars in thousands) 2021 2020 2019 Allowance for loan losses at beginning of year $ 7,593 $ 4,057 $ 4,673 Charge-offs: Agricultural - 15 - Commercial and industrial 195 148 83 Real estate - commercial 111 254 - Real estate - construction - - 25 Real estate - residential - 8 292 Consumer 370 329 589 Total 676 754 989 Recoveri Agricultural - - 65 Commercial and industrial 86 57 22 Real estate - commercial 48 10 - Real estate - construction - - 124 Real estate - residential 7 19 136 Consumer 214 204 26 Total 355 290 373 Net charge-offs (recoveries) 321 464 616 Provision for loan losses 416 4,000 - Allowance for loan losses at end of year $ 7,688 $ 7,593 $ 4,057 Allowance for loan losses as a percentage o Total loans as of year end 0.76 % 0.71 % 0.51 % Nonaccrual loans, accrual loans past due 90 days or more and troubled debt restructurings 139 % 92 % 63 % Ratio of net charge-offs during the period to average loans outstanding during the period 0.03 % 0.05 % 0.12 % Loan recoveries as a percentage of prior year's charge-offs 47 % 29 % 102 % 24 The provision for loan losses was $416,000 in 2021, compared to $4.0 million in the prior year. The provision in 2020 was impacted by the economic impact of the COVID-19 pandemic on ChoiceOne's local market areas and the national economy.  The provision in 2021 was deemed prudent based on our assessment of the probable estimated losses inherent in the loan portfolio. Our methodology for measuring the appropriate level of allowance for loan losses and related provision for loan losses involves specific allocations for loans considered impaired, and general allocations for homogeneous loans based on historical loss experience. Loans classified as impaired loans declined by $2.4 million during 2021. The specific allowance for loan losses for impaired loans increased $72,000 during 2021 as the loans being evaluated had a higher risk of loss based on management's judgement than impaired loans at December 31, 2020. Loans that were collectively analyzed for impairment decreased by $45.5 million in 2021 as a result of forgiveness of PPP loans of $192.5 million offset by loans excluding PPP, loans to other financial institutions, and loans held for sale, increasing by $52.1 million and PPP originations of $89.1 million.  As PPP loans are 100% government guaranteed and carry no allowance,  the net decrease in PPP loans had no impact on the allowance for loan losses.  The general allocation for loan losses not considered impaired increased by $23,000 during 2021. The determination of our loss factors is based, in part, upon our actual loss history adjusted for significant qualitative factors that, in management's judgment, affect the collectability of the portfolio as of the analysis date. ChoiceOne uses a rolling 20 quarter actual net charge-off history as the base for the computation. Nonperforming loans were $5.5 million as of December 31, 2021 compared to $8.2 million as of December 31, 2020. The allowance for loan losses was 0.76% of total loans at December 31, 2021, compared to 0.71% at December 31, 2020. Loans acquired in the mergers with County and Community Shores were recorded at fair value and as a result do not have an allowance for loan losses allocated to them unless credit deteriorates subsequent to acquisition. ChoiceOne has $6.8 million in credit mark remaining on loans acquired in the mergers. If the credit mark associated with the loans acquired in the mergers were added to the allowance for loan losses, the total allowance for loan losses would have represented 1.37% of total loans excluding loans held for sale at December 31, 2021 and 1.55% at December 31, 2020. Net charge-offs were $321,000 in 2021 compared to net charge-offs of $464,000 during the same period in 2020.  Net charge-offs on an annualized basis as a percentage of average loans were 0.03% in 2021 compared to 0.05% and 0.12% in 2020. Management is aware that the economic climate in Michigan will continue to affect business and individual borrowers.  Management believes that the COVID-19 pandemic continue to have an impact in 2022 and, accordingly, has maintained a qualitative allocation related to the COVID-19 pandemic in evaluating its allowance for loan losses.  Management has worked and intends to continue to work with delinquent borrowers in an attempt to lessen the impact of the COVID-19 pandemic on ChoiceOne. ChoiceOne has allocated approximately $1.1 million of its allowance for loan losses at December 31, 2021 compared to $2.2 million at December 31, 2020, to borrowers falling into industry classification codes that management believes to be highly or moderately affected by the pandemic, as follows: Highly Affected Moderately Affected Accommodation Ambulatory Health Care Services Amusement, Gambling, and Recreation Industries Educational Services Food Services and Drinking Places Merchant Wholesalers, Durable Goods Performing Arts, Spectator Sports, and Related Industries Merchant Wholesalers, Nondurable Goods Rental and Leasing Services Miscellaneous Store Retailers Scenic and Sightseeing Transportation Motion Picture and Sound Recording Industries Transit and Ground Passenger Transportation Real Estate Loans highly affected and moderately affected based on their commercial industry category have been allocated an additional 20 basis points and 10 basis points, respectively. ChoiceOne has also allocated 10 basis points to all retail loan categories. It is noted that this allowance amount is in addition to the regularly calculated allowance based on risk rating and qualitative factors. These allocations have declined from their highest levels at December 31, 2020, as ChoiceOne has seen improvements in customer, industry, and economic conditions related to the effects of the pandemic. ChoiceOne will continue to monitor concentrations as part of its analysis on an ongoing basis. Management will continue to monitor charge-offs, changes in the level of nonperforming loans, changes within the composition of the loan portfolio and the impact of the COVID-19 pandemic, and it will adjust the provision and allowance for loan losses as determined to be necessary. 25 Noninterest Income Total noninterest income declined $3.5 million in 2021 compared to 2020.  Total noninterest income in 2020 was bolstered by heightened levels of refinancing activity within ChoiceOne's mortgage portfolio, with gains on sales of loans $3.7 million higher than in 2021.  Customer service charges increased $1.4 million in 2021 compared to the prior year.  Prior year service charges were depressed by stay-at-home orders during the COVID-19 pandemic.  Current year service charges also included the effect from the merger with Community Shores, which closed on July 1, 2020.  The stock market dipped sharply in March 2020 related to the COVID-19 pandemic, which affected securities held by ChoiceOne. Since that time ChoiceOne has seen the value of equity investments held climb to pre-pandemic levels. The change in the market value of equity securities was $634,000 higher in 2021, when compared to the prior year. It is also noted that ChoiceOne performed a restructuring of its security portfolio in the second quarter of 2020, which provided $1.3 million of additional noninterest income in 2020 compared to 2021. Noninterest Expense Total noninterest expense increased $2.0 million in the year ended December 31, 2021, compared to the year ended December 31, 2020.  Much of the increase in 2021 was caused by the increase in scale related to the merger with Community Shores.  During 2021, ChoiceOne hired six experienced commercial lenders, opened a loan production office in Wyoming, Michigan, and added four experienced members to the wealth management team.  These increases were offset by declines in professional fees of $707,000, data processing of $576,000, and supplies and postage of $230,000.  These reductions in expenses in 2021 are related to synergies from the merger with Community Shores and fees incurred in 2020 related to the merger with Community Shores. Inco me Taxes Income tax expense was $1.2 million higher in 2021 than in 2020 . The increase is related to additional pre-tax income offset by the effect of merger-related expenses in 2020.  The effective tax rate was 17% in 2021 and 2020 . Financial Condition Summary Total assets grew $447.3 million in the twelve months ended December 31, 2021, while deposit growth during the twelve months ended December 31, 2021 was $377.7 million.  Despite the large increase in deposits, ChoiceOne has been able to maintain low deposit costs; interest expense from deposits decreased $873,000 during the year ended December 31, 2021 compared to the year ended December 31, 2020.  Excluding PPP loans, loans held for sale, and loans held at other financial institutions, ChoiceOne grew loans by $52.1 million during 2021.  Management expects the remaining PPP loans to be forgiven in the first half of 2022. Securities The Company’s securities balances as of December 31 were as follows: (Dollars in thousands) 2021 2020 Equity securities $ 8,492 $ 2,896 Available for Sale Securities U.S. Government and federal agency $ 2,008 $ 2,051 U.S. Treasury notes and bonds 91,979 2,056 State and municipal 534,847 320,368 Mortgage-backed 433,115 246,723 Corporate 20,642 3,589 Asset-backed securities 16,294 - Total $ 1,098,885 $ 574,787 Total investment securities increased $530.6 million from December 31, 2020 to December 31, 2021 .  Approximately $637.9 million of securities were purchased in 2021 . Securities totaling $14.6 million were called or matured in 2021 . Principal payments for municipal and mortgage-backed securities totaling $39.6 million were received during 2021 . Approximately $29.7 million of securities were sold during 2021 for a net loss of $40,000.  The Bank’s Investment Committee continues to monitor the portfolio and purchases securities as it considers prudent. Equity securities included a money market preferred security ("MMP") of $1.0 million and common stock of $7.5 million as of December 31, 2021 . As of December 31, 2020 , equity securities included an MMP of $1.0 million and common stock of $1.9 million. 26 Loans The Company’s loan portfolio as of December 31 was as follows: (Dollars in thousands) 2021 2020 Agricultural $ 64,819 $ 53,735 Commercial and industrial 203,024 303,527 Consumer 35,174 34,014 Real estate - commercial 525,884 469,247 Real estate - construction 19,066 16,639 Real estate - residential 168,881 192,506 Loans, gross $ 1,016,848 $ 1,069,668 The loan portfolio (excluding loans held for sale and loans to other financial institutions) decreased $52.8 million from December 31, 2020 to December 31, 2021.  If PPP loans are also excluded the portfolio grew by $52.1 million during the same time period. The Bank entered into an agreement during 2018 to provide a line of credit to facilitate funding of residential mortgage loan originations at other financial institutions. The loans are short-term in nature and are designed to provide funding for the time period between the loan origination and its subsequent sale in the secondary market. The balance of the lines of credit held by the Bank was $42.6 million as of December 31, 2021 compared to $35.2 million as of December 31, 2020. Information regarding impaired loans can be found in Note 3 to the consolidated financial statements included in this report. In addition to its review of the loan portfolio for impaired loans, management also monitors various nonperforming loans. Nonperforming loans are comprised of (1) loans accounted for on a nonaccrual basis; (2) loans, not included in nonaccrual loans, which are contractually past due 90 days or more as to interest or principal payments; and (3) loans, not included in nonaccrual or past due 90 days or more, which are considered troubled debt restructurings. Troubled debt restructurings consist of loans where the terms have been modified to assist the borrowers in making their payments. The modifications can include capitalization of interest onto the principal balance, reduction in interest rate, and extension of the loan term. The balances of these nonperforming loans as of December 31 were as follows: (Dollars in thousands) 2021 2020 Loans accounted for on a nonaccrual basis $ 1,727 $ 6,707 Loans contractually past due 90 days or more as to principal or interest payments - - Loans considered troubled debt restructurings which are not included above 3,816 1,537 Total $ 5,543 $ 8,244 Nonaccrual loans included $313,000 in agricultural loans, $285,000 in commercial and industrial loans, $279,000 in commercial real estate loans, and $850,000 in residential real estate loans as of December 31, 2021.  Nonaccrual loans included $348,000 in agricultural loans, $1.8 million in commercial and industrial loans, $8,000 in consumer loans, $3.1 million in commercial real estate loans, $80,000 in construction real estate loans, and $1.4 million in residential real estate loans as of December 31, 2020.  Loans considered troubled debt restructurings which were not on a nonaccrual basis and were not 90 days or more past due as to principal or interest payments consisted of $1.8 million in agricultural loans, $73,000 in commercial and industrial loans, 601,000 in commercial real estate loans and $1.3 million in residential real estate loans at December 31, 2021, compared to $196,000 in commercial real estate loans and $1.3 million in residential real estate loans at December 31, 2020. The federal banking agencies issued an “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” on March 22, 2020 and subsequently issued a revised statement on April 7, 2020. These statements encourage financial institutions to work constructively with borrowers affected by COVID-19, and provide that short-term modifications to loans made on a good faith basis to borrowers who were current as of the implementation date of the statements are not considered TDRs. Further, Section 4013 of the CARES Act states that COVID-19 related modifications on loans that were current as of December 31, 2019 are not TDRs.  As of December 31, 2020, ChoiceOne had granted deferments on approximately 750 loans with loan balances totaling $148 million which, in reliance on the statements of federal banking agencies and the CARES Act, are not reflected as TDRs in this report.  All deferments had resumed payments in accordance with loan terms as of June 30, 2021. Management also maintains a list of loans that are not classified as nonperforming loans but where some concern exists as to the borrowers’ abilities to comply with the original loan terms. There were no loans fitting this description as of December 31, 2021 , compared to $26.1 million as of December 31, 2020 . 27 Deposits and Other Funding Sources The Company’s deposit balances as of December 31 were as follows: (Dollars in thousands) 2021 2020 Noninterest-bearing demand deposits $ 560,931 $ 477,654 Interest-bearing demand deposits 665,482 471,346 Money market deposits 218,211 191,681 Savings deposits 425,626 337,332 Local certificates of deposit 182,044 196,565 Brokered certificates of deposit - - Total deposits $ 2,052,294 $ 1,674,578 Total deposits increased $377.7 million from December 31, 2020 to December 31, 2021 .  Much of the growth was due to the various stimulus programs offered as a result of the COVID-19 pandemic. As of December 31, 2021, borrowings consisted of Federal Home Loan Bank ("FHLB") advances of $50.0 million.  Total borrowings increased in 2021 as management invested in earning assets.  FHLB advances were secured by agricultural loans and residential real estate loans with a carrying value of approximately $127.5 million at December 31, 2021. Approximately $69.3 million of additional FHLB advances were available as of December 31, 2021 based on the collateral pledged by the Bank. In 2022, management will continue to focus its marketing efforts toward growth in local deposits. If local deposit growth is insufficient to support asset growth, management believes that advances from the FHLB and brokered certificates of deposit can address corresponding funding needs. In September 2021, ChoiceOne completed a private placement of $32.5 million in aggregate principal amount of 3.25% fixed-to-floating rate subordinated notes due 2031. ChoiceOne used a portion of net proceeds from the private placement to redeem senior debt, fund common stock repurchases, and support bank-level capital ratios. ChoiceOne also holds $3.1 million in subordinated debentures issued in connection with a $4.5 million trust preferred securities offering, which were obtained in the merger with Community Shores, offset by the merger mark-to-market adjustment. Shareholders’ Equity Total shareholders' equity declined $5.6 million in 2021. Accumulated other comprehensive income declined $13.6 million in 2021 as a result of market value declines in ChoiceOne’s available for sale securities. The change was caused by increases in certain general market interest rates since the beginning of 2021. The reduction in common stock and paid in capital resulted from ChoiceOne's repurchase of approximately 309,000 shares for $7.8 million, or a weighted average all-in cost per share of $25.17, during 2021. This was part of the common stock repurchase program announced in April 2021 which authorized repurchases of up to 390,114 shares, representing 5% of the total outstanding shares of common stock as of the date the plan was adopted. This program replaced and superseded all prior repurchase programs for ChoiceOne. Note 20 to the consolidated financial statements presents regulatory cap ital information for ChoiceOne and the Bank at the end of 2021 and 2020. Management will monitor these capital ratios during 2022 as they relate to asset growth and earnings retention. ChoiceOne’s Board of Directors and management do not plan to allow capital to decrease below those levels necessary to be considered "well capitalized" by regulatory guidelines. At December 31, 2021, the Bank was categorized as "well-capitalized" under the Basel III framework. 28 Table 4 – Contractual Obligations The following table discloses information regarding the maturity of ChoiceOne’s contractual obligations at December 31, 2021: Payment Due by Period Less More than 1 - 3 3 - 5 than (Dollars in thousands) Total 1 year Years Years 5 Years Time deposits $ 182,044 $ 149,991 $ 25,170 $ 6,491 $ 392 Borrowings 50,000 50,000 - - - Cumulative Preferred Securities 3,190 (101 ) (202 ) (202 ) 3,695 ChoiceOne Subordinated Debenture 31,827 (144 ) (288 ) (241 ) 32,500 Operating leases 657 221 284 152 - Other obligations 227 68 118 19 22 Total $ 267,945 $ 200,035 $ 25,082 $ 6,219 $ 36,609 Liquidity and Interest Rate Risk Net cash from operating activities was $37.7 million in 2021 compared to $8.5 million in 2020 . Net cash used in investing activities was $521.4 million in 2021 compared to cash used of $250.8 million in 2020 . The change was caused by higher net purchases of securities in 2021 compared to 2020 offset by higher loan payments due to PPP loan forgiveness than loan originations in 2021 .  Net cash flows from financing activities were a positive $436.0 million in 2021 compared to a positive $262.2 million in 2020 . The change was caused by more growth in deposits in 2021 and higher proceeds from borrowings and subordinated debt in 2021 compared to 2020 . ChoiceOne's primary market risk exposure occurs in the form of interest rate risk. Liquidity risk also can have an impact but to a lesser extent. ChoiceOne's business is transacted in U.S. dollars with no foreign exchange risk exposure. Agricultural loans comprise a relatively small portion of ChoiceOne's total assets. Management believes that ChoiceOne's exposure to changes in commodity prices is insignificant. Management believes that the current level of liquidity is sufficient to meet the Bank's normal operating needs. This belief is based upon the availability of deposits from both the local and national markets, maturities of securities, normal loan repayments, income retention, federal funds purchased, lines of credit from correspondent banks, and advances available from the FHLB. Liquidity risk deals with ChoiceOne's ability to meet its cash flow requirements. These requirements include depositors desiring to withdraw funds and borrowers seeking credit. Relatively short-term liquid funds exist in the form of lines of credit to purchase federal funds at correspondent banks. As of December 31, 2021 , the amount of federal funds available for purchase from the Bank's correspondent banks totaled approximately $134.5 million. ChoiceOne’s federal funds purchased balance was $0 as of December 31, 2021 and December 31, 2020 . The Bank also has a line of credit secured by ChoiceOne’s commercial loans with the Federal Reserve Bank of Chicago for $196.5 million, which is designated for nonrecurring short-term liquidity needs. Longer-term liquidity needs may be met through local deposit growth, maturities of securities, normal loan repayments, advances from the FHLB, brokered certificates of deposit, and income retention. Approximately $69.4 million of additional borrowing capacity was available from the FHLB based on agricultural real estate loans and residential real estate loans pledged as collateral at the end of 2021 . The acceptance of brokered certificates of deposit is not limited as long as the Bank is categorized as “well capitalized” under regulatory guidelines. 29 NON-GAAP FINANCIAL MEASURES This report contains references to net income excluding tax-effected merger-related expenses, which is a financial measure that is not defined in U.S. generally accepted accounting principles ("GAAP"). Management believes this non-GAAP financial measure provides additional information that is useful to investors in helping to understand the underlying financial performance of ChoiceOne. Non-GAAP financial measures have inherent limitations. Readers should be aware of these limitations and should be cautious with respect to the use of such measures. To compensate for these limitations, we use non-GAAP measures as comparative tools, together with GAAP measures, to assist in the evaluation of our operating performance or financial condition. Also, we ensure that these measures are calculated using the appropriate GAAP or regulatory components in their entirety and that they are computed in a manner intended to facilitate consistent period-to-period comparisons. ChoiceOne’s method of calculating these non-GAAP financial measures may differ from methods used by other companies. These non-GAAP financial measures should not be considered in isolation or as a substitute for those financial measures prepared in accordance with GAAP or in-effect regulatory requirements. NON-GAAP Reconciliation (Unaudited) The non-GAAP measures presented in the table below reflect the adjustments of the reported U.S. GAAP results for significant items that management does not believe are reflective of the Company's current and ongoing operations. Year Ended December 31, (In Thousands, Except Per Share Data) 2021 2020 Income before income tax $ 26,498 $ 18,885 Adjustment for pre-tax merger expenses - 3,219 Adjusted income before income tax 26,498 22,104 Income tax expense 4,456 3,272 Tax impact of adjustment for pre-tax merger expenses - 505 Adjusted income tax expense 4,456 3,777 Net income 22,042 15,613 Adjustment for pre-tax merger expenses, net of tax impact - 2,714 Adjusted net income $ 22,042 $ 18,327 Basic earnings per share $ 2.87 $ 2.08 Effect of merger expenses, net of tax impact - 0.36 Adjusted basic earnings per share $ 2.87 $ 2.44 Diluted earnings per share $ 2.86 $ 2.07 Effect of merger expenses, net of tax impact - 0.36 Adjusted diluted earnings per share $ 2.86 $ 2.43 30 Critical Accounting Policies And Estimates Management’s discussion and analysis of financial condition and results of operations as well as disclosures found elsewhere in this report are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the market value of securities, the amount of the allowance for loan losses, loan servicing rights, carrying value of goodwill, and income taxes. Actual results could differ from those estimates. Securities Debt securities available for sale may be sold prior to maturity due to changes in interest rates, prepayment risks, yield, availability of alternative investments, liquidity needs, credit rating changes, or other factors. Debt securities classified as available for sale are reported at their fair value with changes flowing through other comprehensive income. Declines in the fair value of securities below their cost that are considered to be “other than temporary” are recorded as losses in the income statement. In estimating whether a fair value decline is considered to be “other than temporary,” management considers the length of time and extent that the security’s fair value has been less than its carrying value, the financial condition and near-term prospects of the issuer, and the Bank’s ability and intent to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value. Market values for securities available for sale are obtained from outside sources and applied to individual securities within the portfolio. The difference between the amortized cost and the fair value of securities is recorded as a valuation adjustment and reported net of tax effect in other comprehensive income. Equity securities are reported at their fair value with changes in market value flowing through net income. Prior to 2018, equity securities were accounted for in a manner similar to available for sale debt securities. Allowance for Loan Losses The allowance for loan losses is maintained at a level believed adequate by management to absorb probable incurred losses inherent in the consolidated loan portfolio. Management’s evaluation of the adequacy of the allowance for loan losses is an estimate based on reviews of individual loans, assessments of the impact of current economic conditions on the portfolio and historical loss experience of seasoned loan portfolios. Management believes the accounting estimate related to the allowance for loan losses is a “critical accounting estimate” because (1) the estimate is highly susceptible to change from period to period because of assumptions concerning the changes in the types and volumes of the portfolios and current economic conditions and (2) the impact of recognizing an impairment or loan loss could have a material effect on the Company’s assets reported on the balance sheet as well as its net income. Loan Servicing Rights Loan servicing rights represent the estimated value of servicing loans that are sold with servicing retained by ChoiceOne and are initially recorded at estimated fair value. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues. Management’s accounting treatment of loan servicing rights is estimated based on current prepayment speeds that are typically market driven. Management believes the accounting estimate related to loan servicing rights is a “critical accounting estimate” because (1) the estimate is highly susceptible to change from period to period because of significant changes within long-term interest rates affecting the prepayment speeds for current loans being serviced and (2) the impact of recognizing an impairment loss could have a material effect on ChoiceOne’s net income. Management has obtained a third-party valuation of its loan servicing rights to corroborate its current carrying value at the end of each reporting period. Goodwill Generally accepted accounting principles require that the fair values of the assets and liabilities of an acquired entity be recorded at their fair value on the date of acquisition. The fair values are determined using both internal computations and information obtained from outside parties when deemed necessary. The net difference between the price paid for the acquired company and the net value of its balance sheet is recorded as goodwill. Accounting principles also require that goodwill be evaluated for impairment on an annual basis or more frequently whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Under recently issued accounting pronouncements, ChoiceOne is permitted to first perform a qualitative assessment to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of equity is less than its carrying value. If the conclusion is that it is more likely than not that the fair value of equity is more than its carrying value, no further testing in the form of a quantitative assessment is necessary. If the conclusion is that it is more likely than not that the fair value of equity is less than its carrying value, then a two-step quantitative assessment test is performed to identify any potential goodwill impairment. Management hired a third party to perform a quantitative assessment of goodwill as of November 30, 2020.  The third party used an income approach to calculate cash flow based on excess capital above a required tangible equity to tangible assets ratio selected with consideration given to regulatory guidelines and the risk profile of ChoiceOne.  As a result of the income approach, no indication of goodwill impairment was noted.  The third party analysis also assessed the share price, book value, and financial results of ChoiceOne as compared to the previous year. Additionally, industry and market conditions were evaluated and compared, including the potential impact of COVID-19 on the ability of ChoiceOne’s borrowers to comply with loan terms. The third party also compared average values for recently closed bank merger and acquisition transactions to ChoiceOne's recently completed merger and acquisition transactions. In assessing the totality of the events and circumstances, management determined that it is more likely than not that the fair value of the Bank’s operations, from a qualitative perspective, exceeded the carrying value as of November 30, 2020 and there was no further quantitative assessment necessary. Management performed its annual qualitative assessment of goodwill as of June 30, 2021. In evaluating whether it is more likely than not that the fair value of ChoiceOne's operations was less than the carrying amount, management assessed the relevant events and circumstances such as the ones noted in ASC 350-20-35-3c. The analysis consisted of a review of ChoiceOne’s current and expected future financial performance, the potential impact of the COVID-19 pandemic on the ability of ChoiceOne’s borrowers to comply with loan terms, and the impact that reductions in both short-term and long-term interest rates have had and may continue to have on net interest margin and mortgage sales activity.  ChoiceOne’s stock price per share was less than its book value as of December 31, 2021. This indicated that goodwill may be impaired and resulted in management performing another qualitative goodwill impairment assessment as of the year ended December 31, 2021.  As a result of the analysis, management concluded that it was more-likely-than-not that the fair value of the reporting unit was greater than the carrying value.  This was evidenced by the strong financial indicators, solid credit quality ratios, as well as the strong capital position of ChoiceOne. In addition, revenue for the year ended December 31, 2021 reflected significant and continuing growth in ChoiceOne's interest income, as well as net Small Business Administration fees related to Paycheck Protection Program loans.  Based on the results of the qualitative analysis, management believed that a quantitative analysis was not necessary as of December 31, 2021. 31 Taxes Income taxes include both a current and deferred portion. Deferred tax assets and liabilities are recorded to account for differences in the timing of the recognition of revenues and expenses for financial reporting and tax purposes. Generally accepted accounting principles require that deferred tax assets be reviewed to determine whether a valuation allowance should be established using a “more likely than not” standard. Based on its review of ChoiceOne’s deferred tax assets as of December 31, 2021, management determined that no valuation allowance was necessary. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Interest rate risk is related to liquidity because each is affected by maturing assets and sources of funds. ChoiceOne’s Asset/Liability Management Committee (the "ALCO") attempts to stabilize the interest rate spread and avoid possible adverse effects when unusual or rapid changes in interest rates occur. The ALCO uses a simulation model to measure the Bank's interest rate risk. The model incorporates changes in interest rates on rate-sensitive assets and liabilities. The degree of rate sensitivity is affected by prepayment assumptions that exist in the assets and liabilities. One method the ALCO uses of measuring interest rate sensitivity is the ratio of rate-sensitive assets to rate-sensitive liabilities. An asset or liability is considered to be rate-sensitive if it matures or otherwise reprices within a given time frame. Table 5 documents the maturity or repricing schedule for ChoiceOne’s rate-sensitive assets and liabilities for selected time periods: Table 5 – Maturities and Repricing Schedule As of December 31, 2021 (Dollars in thousands) 0 - 3 3 - 12 1 - 5 Over Months Months Years 5 Years Total Assets Equity securities at fair value $ 8,492 $ - $ - $ - $ 8,492 Securities available for sale 88,300 53,738 218,381 738,466 1,098,885 Federal Home Loan Bank stock 3,824 - - - 3,824 Federal Reserve Bank stock - - - 5,064 5,064 Loans held for sale 9,351 - - - 9,351 Loans to other financial institutions 42,632 - - - 42,632 Loans 247,874 196,556 497,906 74,512 1,016,848 Cash surrender value of life insurance policies - - - 43,356 43,356 Rate-sensitive assets $ 400,473 $ 250,294 $ 716,287 $ 861,398 $ 2,228,452 Liabilities Interest-bearing demand deposits $ 665,482 $ - $ - $ - $ 665,482 Money market deposits 218,211 - - - 218,211 Savings deposits 425,626 - - - 425,626 Certificates of deposit 51,577 98,414 31,661 392 182,044 Borrowings 50,000 - - - 50,000 Subordinated debentures (61 ) (184 ) 31,568 3,694 35,017 Rate-sensitive liabilities $ 1,410,835 $ 98,230 $ 63,229 $ 4,086 $ 1,576,380 Rate-sensitive assets less rate-sensitive liabiliti Asset (liability) gap for the period $ (1,010,362 ) $ 152,064 $ 653,058 $ 857,312 $ 652,072 Cumulative asset (liability) gap $ (1,010,362 ) $ (858,298 ) $ (205,240 ) $ 652,072 Under this method, the ALCO measures interest rate sensitivity by focusing on the one-year repricing gap. ChoiceOne’s ratio of rate-sensitive assets to rate-sensitive liabilities that matured or repriced within a one-year time frame was 43% at December 31, 2021 , compared to 63% at December 31, 2020 . Table 5 above shows the entire balance of interest-bearing demand deposits, savings deposits, and money market deposits in the shortest repricing term. Although these categories have the ability to reprice immediately, management has some control over the actual timing or extent of the changes in interest rates on these liabilities. The ALCO plans to continue to monitor the ratio of rate-sensitive assets to rate-sensitive liabilities on a quarterly basis in 2022. As interest rates change, the ALCO will attempt to match its maturing assets with corresponding liabilities to maximize ChoiceOne’s net interest income. Another method the ALCO uses to monitor its interest rate sensitivity is to subject rate-sensitive assets and liabilities to interest rate shocks. At December 31, 2021 , management used a simulation model to subject its assets and liabilities up to an immediate 400 basis point increase. The maturities of loans and mortgage-backed securities were affected by certain prepayment assumptions. Maturities for interest-bearing core deposits were based on an estimate of the period over which they would be outstanding. The maturities of advances from the FHLB were based on their contractual maturity dates. In the case of variable rate assets and liabilities, repricing dates were used to determine their values. The simulation model measures the effect of immediate interest rate changes on both net interest income and shareholders' equity. 32 Table 6 provides an illustration of hypothetical interest rate changes as of December 31, 2021 and 2020: Table 6 – Sensitivity to Changes in Interest Rates 2021 Net Market (Dollars in thousands) Interest Percent Value of Percent Income Change Equity Change Change in Interest Rate 400 basis point rise $ 60,978 - % $ 345,361 -21 % 300 basis point rise 60,627 -1 % 383,202 -13 % 200 basis point rise 60,058 -1 % 416,435 -5 % 100 basis point rise 60,482 -1 % 437,975 - % Base rate scenario 60,970 - % 439,144 - % 100 basis point decline 59,132 -3 % 390,180 -11 % 200 basis point decline 57,503 -6 % 326,201 -26 % 300 basis point decline 56,502 -7 % 325,906 -26 % 400 basis point decline 56,264 -8 % 325,839 -26 % 2020 Net Market (Dollars in thousands) Interest Percent Value of Percent Income Change Equity Change Change in Interest Rate 400 basis point rise $ 57,184 8 % $ 394,977 5 % 300 basis point rise 55,380 5 % 404,998 8 % 200 basis point rise 54,106 3 % 405,238 8 % 100 basis point rise 43,420 1 % 398,862 6 % Base rate scenario 52,722 - % 376,571 - % 100 basis point decline 51,341 -3 % 304,778 -19 % 200 basis point decline 50,125 -5 % 277,058 -26 % 300 basis point decline 49,177 -7 % 276,744 -27 % 400 basis point decline 48,968 -7 % 276,317 -27 % As of December 31, 2021, the Bank was within its guidelines for immediate rate shocks up and down for all net interest income scenarios and for the up rate scenarios and the down 300 and 400 basis points scenarios for the market value of shareholders’ equity. The Bank’s percent change in the 100 and 200 basis points down scenarios for the market value of shareholders’ equity was slightly higher than the policy guidelines. As of December 31, 2020, the Bank was within its guidelines for immediate rate shocks up and down for all net interest income scenarios and for the up rate scenarios and the down 100 and down 200 basis points scenarios for the market value of shareholders’ equity. The Bank’s percent change in the 300 and 400 basis points down scenarios for the market value of shareholders’ equity was slightly higher than the policy guidelines. The ALCO plans to continue to monitor the effect of changes in interest rates on both net interest income and shareholders’ equity and will make changes in the duration of its rate-sensitive assets and rate-sensitive liabilities where necessary. 33 Item 8. Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors of ChoiceOne Financial Services, Inc. Opinion on the Financial Statements We have audited the accompanying balance sheets of ChoiceOne Financial Services, Inc. (the “Company”) as of December 31, 2021 and 2020, the related statements of income, comprehensive income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion The Company's management is responsible for these financial statements. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. 34 Allowance for Loan Losses – Current Factor Adjustments – Refer to Notes 1 and 3 to the consolidated financial statements Critical Audit Matter Description The general component of management’s estimate of the allowance for loan losses covers non-impaired loans and is based on historical loss experience adjusted for current factors.  Management’s adjustment for current factors is based on trends in delinquencies, trends in charge-offs and recoveries, trends in the volume of loans, changes in underwriting standards, trends in loan review findings, experience and ability of lending staff, national and economic trends and conditions, industry conditions, trends in real estate values, and other conditions.  Identification of factors to consider and adjustments to those factors involve management’s judgement. Given the significant estimates and assumptions management makes to estimate the current factor adjustments of the allowance for loan losses, performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions required a high degree of auditor judgment and an increased extent of effort. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the current factor adjustments used in the estimate of the allowance for loan losses included the following, among othe ● We obtained an understanding of management’s process for determining the current factor adjustments, which included identification of internal and external data used in the analysis and understanding how management selects inputs from a range of potential assumptions. ● We evaluated the design of controls over management’s allowance for loan losses estimate, including those over current factor adjustments. ● We evaluated management’s selection of factors to consider when making current factor adjustments. ● We evaluated management's determination of adjustments for each factor, including evaluation of each adjustment for consistency with the direction and magnitude of changes in internal and external data. /s/ Plante & Moran, PLLC We have served as the Company’s auditor since 2006. Auburn Hills, Michigan March 17, 2022 35 ChoiceOne Financial Services, Inc. Consolidated Balance Sheets December 31, (Dollars in thousands) 2021 2020 Assets Cash and due from banks $ 31,537 $ 79,169 Time deposits in other financial institutions 350 350 Cash and cash equivalents 31,887 79,519 Equity securities at fair value (Note 2) 8,492 2,896 Securities available for sale (Note 2) 1,098,885 574,787 Federal Home Loan Bank stock 3,824 3,824 Federal Reserve Bank stock 5,064 4,180 Loans held for sale 9,351 12,921 Loans to other financial institutions 42,632 35,209 Loans (Note 3) 1,016,848 1,069,668 Allowance for loan losses (Note 3) ( 7,688 ) ( 7,593 ) Loans, net 1,009,160 1,062,075 Premises and equipment, net (Note 5) 29,880 29,489 Other real estate owned, net (Note 7) 194 266 Cash value of life insurance policies 43,356 32,751 Goodwill (Note 6) 59,946 60,506 Core deposit intangible (Note 6) 3,962 5,269 Other assets 20,049 15,650 Total assets $ 2,366,682 $ 1,919,342 Liabilities Deposits – noninterest-bearing (Note 8) $ 560,931 $ 477,654 Deposits – interest-bearing (Note 8) 1,491,363 1,196,924 Total deposits 2,052,294 1,674,578 Borrowings (Note 9) 50,000 9,327 Subordinated debentures (Note 10) 35,017 3,089 Other liabilities (Notes 11) 7,702 5,080 Total liabilities 2,145,013 1,692,074 Shareholders' Equity Preferred stock; shares authoriz 100,000 ; shares outstandin none - - Common stock and paid-in capital, no par value; shares authoriz 12,000,000 ; shares outstandin 7,510,379 at December 31, 2021 and 7,796,352 at December 31, 2020 (Note 14) 171,913 178,750 Retained earnings 52,332 37,490 Accumulated other comprehensive income, net ( 2,576 ) 11,028 Total shareholders’ equity 221,669 227,268 Total liabilities and shareholders’ equity $ 2,366,682 $ 1,919,342 See accompanying notes to consolidated financial statements. 36 ChoiceOne Financial Services, Inc. Consolidated Statements of Income Years Ended (Dollars in thousands, except per share data) December 31, 2021 2020 2019 Interest income Loans, including fees $ 48,657 $ 46,874 $ 26,777 Securiti Taxable 10,260 5,891 3,956 Tax exempt 5,617 2,684 1,472 Other 84 266 268 Total interest income 64,618 55,715 32,473 Interest expense Deposits 3,305 4,178 4,188 Advances from Federal Home Loan Bank 22 220 455 Other 650 246 57 Total interest expense 3,977 4,644 4,700 Net interest income 60,641 51,071 27,773 Provision for loan losses 416 4,000 - Net interest income after provision for loan losses 60,225 47,071 27,773 Noninterest income Customer service charges 8,628 7,252 5,277 Insurance and investment commissions 765 541 310 Mortgage servicing rights (Note 4) 2,335 3,180 822 Gains on sales of loans (Note 4) 4,441 8,133 1,129 Net (losses) gains on sales of securities (Note 2) ( 40 ) 1,308 22 Net (losses) gains on sales and write-downs of other assets (Note 7) 6 ( 13 ) 55 Earnings on life insurance policies 809 772 773 Trust income 790 739 162 Change in market value of equity securities 479 ( 155 ) - Other 981 941 618 Total noninterest income 19,194 22,698 9,168 Noninterest expense Salaries and benefits (Note 13 and 14) 29,300 26,539 14,401 Occupancy and equipment (Note 5) 6,168 5,783 3,557 Data processing 6,189 6,765 3,210 Professional fees 3,009 3,716 3,112 Supplies and postage 614 844 407 Advertising and promotional 848 588 528 Intangible amortization (Note 6) 1,307 1,498 353 FDIC insurance 804 450 45 Other 4,682 4,701 2,863 Total noninterest expense 52,921 50,884 28,476 Income before income tax 26,498 18,885 8,465 Income tax expense 4,456 3,272 1,294 Net income $ 22,042 $ 15,613 $ 7,171 Basic earnings per share (Note 15) $ 2.87 $ 2.08 $ 1.58 Diluted earnings per share (Note 15) $ 2.86 $ 2.07 $ 1.58 Dividends declared per share $ 0.94 $ 0.82 $ 1.40 See accompanying notes to consolidated financial statements. 37 ChoiceOne Financial Services, Inc. Consolidated Statements of Comprehensive Income Years Ended (Dollars in thousands) December 31, 2021 2020 2019 Net income $ 22,042 $ 15,613 $ 7,171 Other comprehensive income: Changes in net unrealized gains (losses) on investment securities available for sale, net of tax expense (benefit) of $( 3,625 ), $ 2,846 , and $ 583 for the years ended December 31, 2021, 2020, and 2019, respectively. ( 13,636 ) 10,708 2,246 Reclassification adjustment for realized (loss) gain on sale of investment securities available for sale included in net income, net of tax (benefit) expense of $ 7 , $ 275 , and $ 5 for the years ended December 31, 2021, 2020, and 2019, respectively. 32 ( 1,033 ) ( 18 ) Change in adjustment for postretirement benefits, net of tax expense (benefit) of $ 0 , $( 33 ), and $( 5 ) for the years ended December 31, 2021, 2020, and 2019, respectively. - ( 125 ) ( 18 ) Other comprehensive income (loss), net of tax ( 13,604 ) 9,550 2,210 Comprehensive income $ 8,437 $ 25,163 $ 9,381 See accompanying notes to consolidated financial statements. 38 ChoiceOne Financial Services, Inc. Consolidated Statements of Changes in Shareholders’ Equity Accumulated Common Other Stock and Comprehensive Number of Paid in Retained Income/(Loss), (Dollars in thousands, except per share data) Shares Capital Earnings Net Total Balance, January 1, 2019 3,616,483 $ 54,523 $ 26,686 $ ( 732 ) $ 80,477 Net income 7,171 7,171 Other comprehensive income 2,210 2,210 Shares issued 8,118 25 25 Shares repurchased ( 2,228 ) ( 67 ) ( 67 ) Effect of employee stock purchases 14 14 Stock options exercised and issued (1) 3,913 78 78 Stock-based compensation expense 398 398 Restricted stock units issued 14,930 - Merger with County Bank Corp, net of issuance costs 3,603,872 107,639 107,639 Cash dividends declared ($ 1.40 per share) ( 5,806 ) ( 5,806 ) Balance, December 31, 2019 7,245,088 $ 162,610 $ 28,051 $ 1,478 $ 192,139 Net income 15,613 15,613 Other comprehensive income 9,550 9,550 Shares issued 19,583 451 451 Effect of employee stock purchases 24 24 Stock options exercised and issued (1) 7,261 - Stock-based compensation expense 171 171 Restricted stock units issued 365 - Merger with Community Shores Bank Corporation 524,055 15,494 15,494 Cash dividends declared ($ 0.82 per share) ( 6,174 ) ( 6,174 ) Balance, December 31, 2020 7,796,352 $ 178,750 $ 37,490 $ 11,028 $ 227,268 Net income 22,042 22,042 Other comprehensive income (loss) ( 13,604 ) ( 13,604 ) Shares issued 23,301 509 509 Effect of employee stock purchases 25 25 Stock-based compensation expense 415 415 Shares repurchased ( 309,274 ) ( 7,786 ) ( 7,786 ) Cash dividends declared ($ 0.94 per share) ( 7,200 ) ( 7,200 ) Balance, December 31, 2021 7,510,379 $ 171,913 $ 52,332 $ ( 2,576 ) $ 221,669 (1) The amount shown represents the number of shares issued in cashless transactions where some taxes are netted on a portion of the exercises. See accompanying notes to consolidated financial statements. 39 ChoiceOne Financial Services, Inc. Consolidated Statements of Cash Flows Years Ended (Dollars in thousands) December 31, 2021 2020 2019 Cash flows from operating activiti Net income $ 22,042 $ 15,613 $ 7,171 Adjustments to reconcile net income to net cash from operating activiti Provision for loan losses 416 4,000 - Depreciation 2,624 2,721 1,610 Amortization 9,801 4,985 1,517 Compensation expense on employee and director stock purchases, stock options, and restricted stock units 812 512 373 Net (gains) losses on sales of securities 40 ( 1,308 ) ( 22 ) Net change in market value of equity securities ( 479 ) 155 - Gains on sales of loans ( 6,776 ) ( 11,313 ) ( 1,951 ) Loans originated for sale ( 197,387 ) ( 326,286 ) ( 63,920 ) Proceeds from loan sales 205,398 325,306 62,763 Earnings on bank-owned life insurance ( 778 ) ( 772 ) ( 485 ) Proceeds from BOLI policy 204 - 605 Earnings on death benefit from bank-owned life insurance ( 31 ) - ( 288 ) (Gains) on sales of other real estate owned ( 19 ) ( 64 ) ( 54 ) Write downs of ORE - 80 - Proceeds from sales of other real estate owned 611 1,384 938 Costs capitalized to other real estate - ( 19 ) - Deferred federal income tax expense 924 202 310 Net change in: Other assets ( 5,418 ) ( 3,186 ) 2,128 Other liabilities 5,715 ( 3,532 ) ( 1,493 ) Net cash provided by operating activities 37,699 8,478 9,202 Cash flows from investing activiti Sales of securities available for sale 29,742 121,942 178,450 Sales of equity securities - - 463 Maturities, prepayments and calls of securities available for sale 54,202 48,787 47,816 Purchases of securities available for sale ( 637,943 ) ( 375,670 ) ( 209,763 ) Purchase of bank-owned life insurance policies ( 10,000 ) - - Purchase of Federal Reserve Bank stock - - ( 1 ) Loan originations and payments, net 45,384 ( 79,594 ) ( 485 ) Additions to premises and equipment ( 2,759 ) ( 1,852 ) ( 766 ) Cash received from merger with Community Shores Bank Corporation - 35,636 - Cash received from merger with County Bank Corp - - 20,638 Net cash (used in)/provided by investing activities ( 521,374 ) ( 250,751 ) 36,352 Cash flows from financing activiti Net change in deposits 377,716 292,145 3,986 Net change in fed funds purchased - - ( 8,600 ) Proceeds from borrowings 87,500 10,050 115,000 Payments on borrowings ( 14,326 ) ( 33,921 ) ( 110,035 ) Issuance of common stock 139 134 142 Repurchase of common stock ( 7,786 ) - ( 67 ) Cash dividends and fractional shares from merger ( 7,200 ) ( 6,174 ) ( 5,815 ) Cash related to equity issuance for merger - - ( 297 ) Net cash provided by/(used in) financing activities 436,043 262,234 ( 5,686 ) Net change in cash and cash equivalents ( 47,632 ) 19,961 39,868 Beginning cash and cash equivalents 79,519 59,558 19,690 Ending cash and cash equivalents $ 31,887 $ 79,519 $ 59,558 Supplemental disclosures of cash flow informati Cash paid for interest $ 3,718 $ 4,872 $ 4,500 Cash paid for income taxes 3,251 5,001 1,035 Loans transferred to other real estate owned 520 372 347 See accompanying notes to consolidated financial statements. 40 Note 1 – Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include ChoiceOne Financial Services, Inc. ("ChoiceOne"), its wholly-owned subsidiary, ChoiceOne Bank (the "Bank"), and ChoiceOne Bank’s wholly-owned subsidiary. ChoiceOne Insurance Agencies, Inc. (the "Insurance Agency"). Intercompany transactions and balances have been eliminated in consolidation. ChoiceOne owns all of the common securities of Community Shores Capital Trust I (the “Capital Trust”).  Under U.S. generally accepted accounting principles ("GAAP"), the Capital Trust is not consolidated because it is a variable interest entity and ChoiceOne is not the primary beneficiary. Recent Mergers On July 1, 2020, ChoiceOne completed the merger of Community Shores Bank Corporation ("Community Shores") with and into ChoiceOne with ChoiceOne surviving the merger. Accordingly, the reported consolidated financial condition and operating results as of and for the years ended December 31, 2020 and December 31, 2021 include the impact of the merger. On October 1, 2019, ChoiceOne completed the merger of County Bank Corp. ("County") with and into ChoiceOne with ChoiceOne surviving the merger. Accordingly, the reported consolidated financial condition and operating results as of and for the years ended December 31, 2019, December 31, 2020, and December 31, 2021 include the impact of the merger. The Coronavirus (COVID- 19 ) Outbreak Consistent with federal banking agencies' “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus,” ChoiceOne is working with its borrowers affected by the COVID- 19 pandemic. ChoiceOne granted deferrals on numerous loans to borrowers affected by the pandemic; however, as of June 30, 2021, all deferments had resumed payments in accordance with loan terms. In addition, ChoiceOne processed over $ 126 million in Paycheck Protection Program ("PPP") loans in 2020 and acquired an additional $ 37 million in PPP loans in the merger with Community Shores. ChoiceOne originated an additional $ 89.1 million in PPP loans in 2021. PPP loans are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP. PPP loans carry a fixed rate of 1.00% and a term of two years (loans made before June 5, 2020) or five years (loans made on or after June 5, 2020), if not forgiven in whole or in part. Payments are deferred until either the date on which the Small Business Administration ("SBA") remits the amount of forgiveness proceeds to the lender or the date that is ten months after the last day of the covered period if the borrower does not apply for forgiveness within that ten -month period. The loans are 100% guaranteed by the SBA. The SBA pays the originating bank a processing fee ranging from 1% to 5%, based on the size of the loan. Upon SBA forgiveness, unrecognized fees are recognized into interest income. During the year ended December 31, 2021, $ 192.5 million of PPP loans were forgiven resulting in $ 5.2 million of fee income compared to $ 23.4 million of PPP loans forgiven resulting in $ 3.0 million of fee income in 2020. $ 33.1 million in PPP loans and $ 1.2 million in deferred PPP fee income remains outstanding as of December 31, 2021. Management expects the remaining PPP loans to be forgiven in the first half of 2022. Nature of Operations The Bank is a full-service community bank that offers commercial, consumer, and real estate loans as well as traditional demand, savings and time deposits to both commercial and consumer clients within the Bank’s primary market areas in Kent, Muskegon, Newaygo, and Ottawa counties in western Michigan and Lapeer, Macomb, and St. Clair counties in southeastern Michigan. Substantially all loans are secured by specific items of collateral including business assets, consumer assets, and real estate. Commercial loans are expected to be repaid from the cash flows from operations of businesses. Real estate loans are collateralized by either residential or commercial real estate. The Insurance Agency is a wholly-owned subsidiary of the Bank. The Insurance Agency sells insurance policies such as life and health for both commercial and consumer clients. The Insurance Agency also offers alternative investment products such as annuities and mutual funds through a registered broker. Together, the Bank and ChoiceOne's other direct and indirect subsidiaries account for substantially all of ChoiceOne’s assets, revenues and operating income. 41 Use of Estimates To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, ChoiceOne’s management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided. These estimates and assumptions are subject to many risks and uncertainties, including changes in interest rates and other general economic, business and political conditions, including the effects of the COVID- 19 pandemic, and its potential effects on the economic environment, our customers and our operations, as well as any changes to federal, state and local government laws, regulations and orders in connection with the pandemic. Actual results may differ from these estimates. Estimates associated with the allowance for loan losses are particularly susceptible to change. Cash and Cash Equivalents Cash and cash equivalents are defined to include cash on hand, demand deposits with other banks, and federal funds sold. Cash flows are reported on a net basis for customer loan and deposit transactions, deposits with other financial institutions, and short-term borrowings with original terms of 90 days or less. Securities Debt securities are classified as available for sale because they might be sold before maturity. Debt securities classified as available for sale are carried at fair value, with unrealized holding gains and losses reported separately in the accumulated other comprehensive income or loss section of shareholders’ equity, net of tax effect. Restricted investments in Federal Reserve Bank stock and Federal Home Loan Bank stock are carried at cost. Equity securities consist of investments in preferred stock and investments in common stock of other financial institutions. Equity securities are reported at their fair value with changes in market value reported through current earnings. Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized using the level-yield method without anticipating prepayments. Gains or losses on sales are recorded on the trade date based on the amortized cost of the security sold. Management evaluates debt securities for other-than-temporary impairment ("OTTI") on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The evaluation of securities includes consideration given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, whether the market decline was affected by macroeconomic conditions and whether ChoiceOne has the intent to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis. In analyzing an issuer's financial condition, management may consider whether the securities are issued by the federal government or its agencies, or U.S. Government sponsored enterprises, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer's financial condition. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time. When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether ChoiceOne intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis. If ChoiceOne intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, the OTTI shall be recognized in earnings equal to the entire difference between the investment's amortized cost basis and its fair value at the balance sheet date. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment. If a security is determined to be other-than-temporarily impaired, but ChoiceOne does not intend to sell the security, only the credit portion of the estimated loss is recognized in earnings, with the other portion of the loss recognized in other comprehensive income. Loans Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of unearned interest, deferred loan fees and costs, remaining purchase accounting adjustments, and an allowance for loan losses. Loans held for sale are reported at the lower of cost or market, on an aggregate basis. Interest income on loans is reported on the interest method and includes amortization of net deferred loan fees and costs over the estimated loan term. Interest on loans is accrued based upon the principal balance outstanding. The accrual of interest is discontinued at the time at which loans are 90 days past due unless the loan is secured by sufficient collateral and is in the process of collection. Past due status is based on the contractual terms of the loan. Loans are placed into nonaccrual status or charged off at an earlier date if collection of principal or interest is considered doubtful. Interest accrued but not received is reversed against interest income when the loans are placed into nonaccrual status. Interest received on such loans is applied to principal until qualifying for return to accrual. Loans are returned to accrual basis when all the principal and interest amounts contractually due are brought current and future payment is reasonably assured. No allowance for loan loss is recorded for loans acquired in a business combination unless losses are incurred subsequent to the acquisition date. Acquired loans are considered purchased credit impaired (“PCI”) if as of the acquisition date, management determines the loan has evidence of deterioration in credit quality since origination and it is probable at acquisition the Company will be unable to collect all contractually required payments. The discount related to credit quality for PCI loans is recorded as an adjustment to the loan balance as of the acquisition date and is not accreted into income. Management subsequently estimates expected cash flows on an individual loan basis. If the present value of expected cash flows is less than a loan's carrying amount, an allowance for loan loss is recorded through the provision for loan losses. If the present value of expected cash flows is greater than the carrying amount, the excess may be reclassified to an accretable difference and recognized into income over the loan's remaining life. For non-PCI loans, the difference between acquisition date fair value and expected cash flows is accreted into income over a pool's expected life using the level yield method. 42 Loans to Other Financial Institutions Loans to other financial institutions are made for the purpose of providing a warehouse line of credit to facilitate funding of residential mortgage loan originations at other financial institutions. The loans are short-term in nature and are designed to provide funding for the time period between the loan origination and its subsequent sale in the secondary market. Loans to other financial institutions earn a share of interest income, determined by the contract, from when the loan is funded to when the loan is sold on the secondary market.  Loans to other financial institutions are excluded from Note 3. As of December 31, 2021 and 2020 none of the loans to other financial institutions were classified as impaired or nonaccrual. No loans to other financial institutions were impaired, nonaccrual, or past due greater than 30 days as of December 31, 2021 or December 31, 2020. Allowance for Loan Losses The allowance for loan losses is a valuation allowance for probable incurred credit losses. The allowance for loan losses is increased by the provision for loan losses and decreased by loans charged off less any recoveries of charged off loans. Management estimates the allowance for loan losses balance required based on past loan loss experience, the nature and volume of the loan portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance for loan losses may be made for specific loans, but the entire allowance for loan losses is available for any loan that, in management’s judgment, should be charged off. Loan losses are charged against the allowance for loan losses when management believes that collection of a loan balance is not possible. The allowance for loan losses consists of general and specific components. The general component covers non-classified loans and is based on historical loss experience adjusted for current factors. The specific component relates to loans that are individually classified as impaired or loans otherwise classified as substandard or doubtful.  The general component of management's estimate of the allowance for loan losses covers non-impaired loans and is based on historical loss experience adjusted for current factors. Management's adjustment for current factors is based on trends in delinquencies, trends in charge-offs and recoveries, trends in the volume of loans, changes in underwriting standards, trends in loan review findings, experience and ability of lending staff, national and economic trends and conditions, industry conditions, trends in real estate values, and other conditions. A loan is impaired when full payment under the loan terms is not expected. Troubled debt restructuring of loans is undertaken to improve the likelihood that the loan will be repaid in full under the modified terms in accordance with a reasonable repayment schedule. All modified loans are evaluated to determine whether the loans should be reported as Troubled Debt Restructurings ("TDR"). A loan is a TDR when the Bank, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower by modifying a loan. To make this determination, the Bank must determine whether (a) the borrower is experiencing financial difficulties and (b) the Bank granted the borrower a concession. This determination requires consideration of all facts and circumstances surrounding the modification. An overall general decline in the economy or some deterioration in a borrower’s financial condition does not automatically mean the borrower is experiencing financial difficulties. Commercial loans are evaluated for impairment on an individual loan basis. If a loan is considered impaired or if a loan has been classified as a TDR, a portion of the allowance for loan losses is allocated to the loan so that it is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of smaller-balance homogeneous loans such as consumer and residential real estate mortgage loans are collectively evaluated for impairment and, accordingly, they are not separately identified for impairment disclosures. Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation. Land is carried at cost. Land improvements are depreciated using the straight-line method with useful lives ranging from 7 to 15 years. Building and related components are depreciated using the straight-line method with useful lives ranging from 5 to 39 years. Leasehold improvements are depreciated over the shorter of the estimated life or the lease term. Furniture and equipment are depreciated using the straight-line method with useful lives ranging from 3 to 7 years. Fixed assets are periodically reviewed for impairment. If impaired, the assets are recorded at fair value. Other Real Estate Owned Real estate properties acquired in the collection of a loan are initially recorded at the lower of the Bank’s basis in the loans or fair value at acquisition establishing a new cost basis. Any reduction to fair value from the carrying value of the related loan is accounted for as a loan loss. After acquisition, a valuation allowance reduces the reported amount to the lower of the initial amount or fair value less costs to sell. Expenses to repair or maintain properties are included within other noninterest expenses. Gains and losses upon disposition and changes in the valuation allowance are reported net within noninterest income. Bank Owned Life Insurance Bank owned life insurance policies are stated at the current cash surrender value of the policy, or the policy death proceeds less any obligation to provide a death benefit to an insured’s beneficiaries if that value is less than the cash surrender value. Increases in the asset value are recorded as earnings in other income. Loan Servicing Rights Loan servicing rights represent the allocated value of servicing rights on loans sold with servicing retained. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the rights, using groupings of the underlying loans as to interest rates and then, secondarily, as to geographic and prepayment characteristics. Servicing rights are initially recorded at estimated fair value and fair value is determined using prices for similar assets with similar characteristics when available or based upon discounted cash flows using market-based assumptions. Any impairment of a grouping is reported as a valuation allowance. Goodwill and Intangible Assets Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of the acquired tangible assets and liabilities and identifiable intangible assets. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually or more frequently if events and circumstances exist that indicate that a goodwill impairment test should be performed. 43 Core Deposit Intangible Core deposit intangible represents the value of the acquired customer core deposit bases and is included as an asset on the consolidated balance sheets. The core deposit intangible has an estimated finite life, is amortized on an accelerated basis over a 120 month period and is subject to periodic impairment evaluation. Loan Commitments and Related Financial Instruments Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit issued to meet financing needs of customers. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded. Employee Benefit Plans ChoiceOne’s 401 (k) plan allows participants to make contributions to their individual accounts under the plan in amounts up to the IRS maximum. Employer matching contributions from ChoiceOne to its 401 (k) plan are discretionary. Income Taxes Income tax expense is the sum of the current year income tax due and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Company recognizes interest and/or penalties related to income tax matters in income tax expense. Earnings Per Share Basic earnings per common share ("EPS") is based on weighted-average common shares outstanding. Diluted EPS assumes issuance of any dilutive potential common shares issuable under stock options or restricted stock units granted. Comprehensive Income Comprehensive income consists of net income and other comprehensive income or loss. Other comprehensive income or loss includes unrealized gains and losses on securities available for sale and changes in the funded status of post-retirement plans, net of tax, which are also recognized as a separate component of shareholders’ equity. Accumulated other comprehensive income was as follows: (Dollars in thousands) As of December 31, 2021 2020 Unrealized gain (loss) on available for sale securities $ ( 3,261 ) $ 13,959 Unrecognized gains on post-retirement benefits — — Tax effect 685 ( 2,931 ) Accumulated other comprehensive income (loss) $ ( 2,576 ) $ 11,028 L oss Contingencies Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe that there are any such matters that may have a material effect on the financial statements as of December 31, 2021 . Cash Restrictions Cash on hand or on deposit with the Federal Reserve Bank was 