     2021.  For further details, refer to Note 12 (Income Taxes) of the Notes to the Consolidated Financial Statements included in Item 8 of this report. 22 Table of Contents Table 1 – Average Balances and Tax-Equivalent Interest Rates Tables 1 and 2 on the following pages provide information regarding interest income and expense for the years ended December 31, 2022, 2021, and 2020. Table 1 documents ChoiceOne’s average balances and interest income and expense, as well as the average rates earned or paid on assets and liabilities.  Table 2 documents the effect on interest income and expense of changes in volume (average balance) and interest rates. Year Ended December 31, 2022 2021 2020 (Dollars in thousands) Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate Assets: Loans (1) (3)(4)(5) $ 1,104,030 $ 52,861 4.79 % $ 1,040,430 $ 48,672 4.68 % $ 1,014,959 $ 46,893 4.62 % Taxable securities (2) 779,915 15,583 2.00 599,902 10,260 1.71 276,085 5,891 2.13 Nontaxable securities (1) 314,644 7,790 2.48 269,886 7,098 2.63 112,712 3,402 3.02 Other 34,255 491 1.43 68,879 84 0.12 71,417 266 0.37 Interest-earning assets 2,232,844 76,725 3.44 1,979,097 66,114 3.34 1,475,173 56,452 3.83 Noninterest-earning assets 140,530 177,677 179,699 Total assets $ 2,373,374 $ 2,156,774 $ 1,654,872 Liabilities and Shareholders' Equity: Interest-bearing demand deposits $ 902,090 $ 3,514 0.39 % $ 791,886 $ 1,797 0.23 % $ 571,693 $ 1,832 0.32 % Savings deposits 452,542 711 0.16 398,969 551 0.14 267,217 300 0.11 Certificates of deposit 196,166 1,620 0.83 186,898 957 0.51 183,836 2,046 1.11 Borrowings 13,537 410 3.02 5,465 101 1.86 16,712 327 1.96 Subordinated debentures 35,211 1,491 4.23 12,841 571 4.45 1,532 139 9.07 Interest-bearing liabilities 1,599,546 7,746 0.48 1,396,059 3,977 0.28 1,040,990 4,644 0.45 Demand deposits 582,992 527,876 398,422 Other noninterest-bearing liabilities 12,421 7,719 870 Total liabilities 2,194,959 1,931,654 1,440,282 Shareholders' equity 178,415 225,120 214,591 Total liabilities and shareholders' equity $ 2,373,374 $ 2,156,774 $ 1,654,873 Net interest income (tax-equivalent basis) (Non-GAAP) (1) $ 68,979 $ 62,137 $ 51,808 Net interest margin (tax-equivalent basis) (Non-GAAP) (1) 3.09 % 3.14 % 3.51 % Reconciliation to Reported Net Interest Income Net interest income (tax-equivalent basis) (Non-GAAP) (1) $ 68,979 $ 62,137 $ 51,808 Adjustment for taxable equivalent interest (1,665 ) (1,513 ) (737 ) Net interest income (GAAP) $ 67,314 $ 60,624 $ 51,071 Net interest margin (GAAP) 3.01 % 3.08 % 3.38 % (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 and PPP loan balances are included in the balances of average loans. Non-accruing loan average balances were $1.3 million, $3.3 million, and $5.0 million for the year ended 2022, 2021, and 2020, respectively. PPP loan average balances were $8.7 million, $95.9 million, and $84.2 million for the year ended 2022, 2021, and 2020, respectively. At December 31, 2022 no PPP loans remain in ChoiceOne’s loan portfolio. (5) Interest on loans included net origination fees, accretion income, and PPP fees. Accretion income was $2.0 million, $1.1 million, and $420,000 for the full year 2022, 2021 and 2020, respectively. PPP fees were approximately $1.2 million, $5.2 million, and $3.0 million for the full year 2022, 2021, and 2020, respectively. 23 Table of Contents Table 2 – Changes in Tax-Equivalent Net Interest Income Year Ended December 31, (Dollars in thousands) 2022 Over 2021 2021 Over 2020 Total Volume Rate Total Volume Rate Increase (decrease) in interest income (1) Loans (2) $ 4,189 $ 3,026 $ 1,163 $ 1,779 $ 1,187 $ 592 Taxable securities 5,323 3,410 1,913 4,369 5,737 (1,368 ) Nontaxable securities (2) 692 1,126 (434 ) 3,696 4,185 (489 ) Other 407 (62 ) 469 (182 ) (9 ) (173 ) Net change in interest income $ 10,611 $ 7,500 $ 3,111 $ 9,662 $ 11,099 $ (1,437 ) Increase (decrease) in interest expense (1) Interest-bearing demand deposits $ 1,717 $ 279 $ 1,438 $ (35 ) $ 588 $ (623 ) Savings deposits 159 79 80 251 171 80 Certificates of deposit 664 50 614 (1,089 ) 34 (1,123 ) Borrowings 309 217 92 (226 ) (210 ) (16 ) Subordinated debentures 920 948 (28 ) 432 1,516 (37 ) Net change in interest expense $ 3,769 $ 1,573 $ 2,196 $ (667 ) $ 2,099 $ (1,719 ) Net change in tax-equivalent net interest income $ 6,841 $ 5,927 $ 915 $ 10,329 $ 9,001 $ 282 (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 2022, 2021, and 2020. Net I nterest Income Tax-equivalent net interest income increased $6.8 million for the full year 2022, compared to the same period in 2021.  The Federal Reserve increased the federal funds rate by 4.0% during 2022 in response to published inflation rates.  This both increased rates on newly originated loans and increased the rates paid on deposits and led to a net decline in tax equivalent net interest margin of 5 basis points in 2022 compared to 2021.  GAAP based net interest margin declined 7 basis points in 2022 compared to 2021. The following table presents the cost of deposits and the cost of funds for the years ended December 31, 2022, December 31, 2021, and December 31, 2020. Year Ended December 31, 2022 2021 2020 Cost of deposits 0.27 % 0.17 % 0.29 % Cost of funds 0.35 % 0.21 % 0.32 % Net interest income increased $6.7 million in 2022 compared to 2021 due to the $224.8 million increase in the average balance of securities and a 14 basis point increase in the average rate earned on securities during the full year 2022 as ChoiceOne deployed excess deposit dollars into securities with the intent to transition to loans as good credits become available.  ChoiceOne has also experienced core loan growth during 2022 leading to an increase in interest income from loans of $4.2 million in the full year 2022, compared to the same period in the prior year.  Average core loans, which exclude PPP loans, loans held for sale, and loans to other financial institutions, grew $153.9 million during the full year 2022.  In addition, the average rate earned on loans increased 11 basis points in 2022 compared to 2021.  The increase in interest income from loans and the average rate increase on loans is muted by a $3.9 million decline in PPP fee income in the full year 2022 compared to 2021.  This decline was somewhat offset by a $919,000 increase in accretion income from acquired loans in 2022 compared to 2021. Interest expense increased $3.8 million for the full year 2022, compared to the same period in 2021.  Growth of $163.8 million in the average balance of interest-bearing demand deposits and savings deposits and a combined 11 basis point increase in the average rate paid, caused interest expense to increase $1.9 million in 2022 compared to the prior year.  The increase in the average balance of certificates of deposit of $9.3 million, combined with a 31 basis point increase in the rate paid on certificates of deposits in 2022 compared to 2021, led to an increase in interest expense of $664,000. In September 2021, ChoiceOne completed a private placement of $32.5 million in aggregate principal amount of 3.25% fixed-to-floating rate subordinated notes due 2031.  In addition, ChoiceOne holds certain subordinated debentures issued in connection with a trust preferred securities offering that were obtained as part of the merger with Community Shores.  These increased the average balance of subordinated debentures by $22.4 million in 2022 compared to the same period in the prior year and caused interest expense to increase by $920,000 over the same period. The rise in interest rates has led to ChoiceOne's cost of funds increasing 15 basis points from 0.21% in 2021 to 0.35% in 2022.  10 basis points of this increase is due to the rising cost of deposits, while the remainder is due to the increased cost of borrowing and a full year's expense of the subordinated notes completed in September of 2021. 24 Table of Contents Provision and Allowance For Loan Losses Table 3 – Provision and Allowance For Loan Losses (Dollars in thousands) 2022 2021 2020 Allowance for loan losses at beginning of year $ 7,688 $ 7,593 $ 4,057 Charge-offs: Agricultural - - 15 Commercial and industrial 177 195 148 Consumer 496 370 329 Real estate - commercial - 111 254 Real estate - construction - - - Real estate - residential - - 8 Total 673 676 754 Recoveri Agricultural - - - Commercial and industrial 143 86 57 Consumer 206 214 204 Real estate - commercial 3 48 10 Real estate - construction - - - Real estate - residential 2 7 19 Total 354 355 290 Net charge-offs (recoveries) 319 321 464 Provision for loan losses 250 416 4,000 Allowance for loan losses at end of year $ 7,619 $ 7,688 $ 7,593 Allowance for loan losses as a percentage o Total loans as of year end 0.64 % 0.76 % 0.71 % Nonaccrual loans, accrual loans past due 90 days or more and troubled debt restructurings 286 % 139 % 92 % Ratio of net charge-offs during the period to average loans outstanding during the period 0.03 % 0.03 % 0.05 % Loan recoveries as a percentage of prior year's charge-offs 52 % 47 % 29 % 25 Table of Contents The provision for loan losses was $250,000 in 2022, compared to $416,000 in the prior year.  The provision for loan losses expense was deemed necessary to reserve for core loan growth of $206.1 million in 2022.  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 $2.6 million during 2022 which led to a decline in the specific allowance for loan losses for impaired loans of $350,000 in 2022 compared to 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 basis for the computation. Nonperforming loans were $2.7 million as of December 31, 2022 compared to $5.5 million as of December 31, 2021. The allowance for loan losses was 0.64% of total loans at December 31, 2022, compared to 0.76% at December 31, 2021. 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. Net charge-offs were $319,000 in 2022 compared to net charge-offs of $321,000 during the same period in 2021.  Net charge-offs on an annualized basis as a percentage of average loans were 0.03% in 2022 compared to 0.03% in 2021. Management is aware that the economic climate in Michigan will continue to affect business and individual borrowers. ChoiceOne adopted ASU 2016-13 current expected credit loss ("CECL") on January 1, 2023.  Due to the current economic environment, the nature of the new calculation, and purchase accounting with our recent mergers, we anticipate an increase in our current allowance for loan losses of between $6.5 million and $7.0 million, which will result in an expected allowance for loan losses to total loan coverage ratio between 1.15% and 1.25% on January 1, 2023.  Approximately 20% to 25% of this increase is related to the migration of purchased loans into the portfolio assessed by the CECL calculation.  ChoiceOne will also record a liability for expected credit losses on unfunded loans and other commitments of between $2.5 million to $3.0 million related to the adoption of CECL.  These unfunded loans and other commitments are open credit lines with current customers and loans approved by ChoiceOne but not yet funded.  The increase in the reserve and the cost of the liability will result in a decrease in retained earnings account on our Consolidated Balance Sheet equal to the after-tax impact, with the tax impact portion being recorded in deferred taxes in our Consolidated balance Sheet in accordance with FASB guidance.  Further discussion of the change in accounting policy can be found in Item 8 Note 1. 26 Table of Contents Financial Condition Summary Total assets grew $19.2 million in the twelve months ended December 31, 2022.  Core loans grew $206.1 million or 21.0% and were offset by a decline in securities of $143.2 million, and a decline in loans to other financial institutions of $42.6 million.  ChoiceOne also grew deposits by $65.7 million during 2022.  Deposit costs rose steadily during the year with larger increases coming in the fourth quarter as competition and rate awareness has amplified. Securities The Company’s securities balances as of December 31 were as follows: (Dollars in thousands) 2022 2021 Equity securities $ 8,566 $ 8,492 Available for Sale Securities at fair value U.S. Government and federal agency $ - $ 2,008 U.S. Treasury notes and bonds 78,204 91,979 State and municipal 229,938 534,847 Mortgage-backed 208,563 433,115 Corporate 711 20,642 Asset-backed securities 12,333 16,294 Total $ 529,749 $ 1,098,885 Held to Maturity Securities at amortized cost U.S. Government and federal agency $ 2,966 $ - U.S. Treasury notes and bonds - - State and municipal 201,890 - Mortgage-backed 200,473 - Corporate 19,603 - Asset-backed securities 974 - Total $ 425,906 $ - In the last two years ChoiceOne has grown its securities portfolio substantially. Total available for sale securities on December 31, 2020, amounted to $577.7 million and grew steadily to an available for sale balance on December 31, 2021, of $1.1 billion.  Many of the securities making up this balance include local municipals and other securities ChoiceOne has no intent to sell prior to maturity.  During the first quarter of 2022, ChoiceOne elected to move $428.4 million of the portfolio into a held to maturity status. Total investment securities declined $143.2 million from December 31, 2021 to December 31, 2022 .  ChoiceOne purchased $63.6 million of securities in 2022.  This was offset by the liquidation of $47.2 million in securities during 2022, resulting in an $809,000 realized loss and reduced the risk of extension on certain fixed income securities which included a call option. Securities totaling $19.6 million were called or matured in 2022 . ChoiceOne received principal payments for municipal and mortgage-backed securities totaling $40.1 million during 2022 . At December 31, 2022, the Company had $161.0 million in unrealized losses on its investment securities, including $89.0 million in unrealized losses on available for sale securities and $72.0 in unrealized losses on held to maturity securities.  Unrealized losses on corporate and municipal bonds have not been recognized into income because the issuers’ bonds are of high credit quality, and management does not intend to sell prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions. The issuers continue to make timely principal and interest payments on the bonds. The fair value is expected to recover as the bonds approach maturity. ChoiceOne utilizes interest rate derivatives as part of its asset liability management strategy to help manage its interest rate risk position.  In order to hedge the risk of rising rates and unrealized losses on securities resulting from the rising rates, ChoiceOne currently holds four interest rate swaps with a total notional value of $400.1 million. These derivative instruments increase in value as long-term interest rates rise, which offsets the reduction in equity due to unrealized losses on securities available for sale.  Refer to footnote 8 and 23 for more discussion on ChoiceOne’s derivative position. 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 $7.6 million as of December 31, 2022 . As of December 31, 2021 , equity securities included an MMP of $1.0 million and common stock of $7.5 million. 27 Table of Contents Loans The Company’s loan portfolio as of December 31 was as follows: (Dollars in thousands) 2022 2021 Agricultural $ 64,159 $ 64,819 Commercial and industrial 210,210 203,024 Consumer 39,808 35,174 Real estate - commercial 630,953 525,884 Real estate - construction 14,736 19,066 Real estate - residential 229,916 168,881 Loans, gross $ 1,189,782 $ 1,016,848 Core loans, which exclude PPP loans, held for sale loans, and loans to other financial institutions, grew organically by $206.1 million in 2022.  Excluding PPP loans, ChoiceOne saw growth of $144.7 million in commercial loans and $56.7 million in retail loans in 2022.  Additions to our commercial lending staff in 2021 and 2022 as well as investments in the automation of our commercial loan process have helped drive our pipeline of commercial loans and corresponding growth. Loans to other financial institutions declined $42.6 million from December 31, 2021 to December 31, 2022, as management chose to suspend the program at the end of the third quarter 2022.  Additionally, the remaining $33.1 million of PPP loans were forgiven resulting in $1.2 million of fee income.  At December 31, 2022, all PPP loans have been fully forgiven, and the associated fee income has been recognized. ChoiceOne recorded accretion income related to acquired loans in the amount of $2.0 million during 2022.  Remaining credit and yield mark on acquired loans from the recent mergers with County Bank Corp. and Community Shores will accrete into income as the acquired loans mature.  ChoiceOne estimates that roughly $4.0 million will accrete into income over the next two to four years. 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) 2022 2021 Loans accounted for on a nonaccrual basis $ 1,263 $ 1,727 Loans contractually past due 90 days or more as to principal or interest payments - - Loans considered troubled debt restructurings which are not included above 1,404 3,816 Total $ 2,667 $ 5,543 Nonaccrual loans included $1.3 million in residential real estate loans as of December 31, 2022, compared to $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.  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 $3,000 in agricultural loans, $58,000 in commercial and industrial loans, $131,000 in commercial real estate loans and $1.2 million in residential real estate loans at December 31, 2022, compared to $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. 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 10 loans totaling $180,000 fitting this description as of December 31, 2022 , and no loans fitting that description on December 31, 2021 . 28 Table of Contents Deposits and Other Funding Sources The Company’s deposit balances as of December 31 were as follows: (Dollars in thousands) 2022 2021 Noninterest-bearing demand deposits $ 599,579 $ 560,931 Interest-bearing demand deposits 638,641 665,482 Money market deposits 214,026 218,211 Savings deposits 427,583 425,626 Local certificates of deposit 236,431 182,044 Brokered certificates of deposit 1,743 - Total deposits $ 2,118,003 $ 2,052,294 Total deposits increased $65.7 million from December 31, 2021 to December 31, 2022 ; however, most of this was in the first half of 2022. ChoiceOne saw deposits decline $38.7 million in the fourth quarter of 2022 due to some seasonality in municipal deposits and increased competition. The Federal Reserve increased the federal funds rate by 4.0% during 2022 in response to published inflation rates. In response, the cost of interest-bearing deposits increased to 0.66% in the fourth quarter of 2022 primarily due to the increases in rates offered to retain clients and an increased interest in certificates of deposit. ChoiceOne is actively managing these costs while still retaining funds, and anticipates that deposit expense will continue to lag the cumulative increases in the federal funds rate. The actual cost of deposits increased by $940,000 in the fourth quarter of 2022 compared to the third quarter of 2022 and $1.9 million compared to the fourth quarter of 2021. 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 $3.2 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 mark-to-market adjustment. At December 31, 2022, the aggregate balance of all deposits exceeding the FDIC insured limit of $250,000 totaled $823.2 million, or 39% of total deposits, compared to $889.2 million, or 43% of total deposits and $583.7 million, or 35% of total deposits at December 31, 2021 and 2020, respectively. Core deposits, which we define as insured branch deposits less certificates of deposit, totaled $1.2 billion or 55.0% of total deposits at December 31, 2022. Shareholders’ Equity Total shareholders' equity declined $52.8 million in 2022. Accumulated other comprehensive income declined $69.2 million in 2022 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 2022.  ChoiceOne's derivative strategy implemented during the second quarter of 2022 and repositioned during the fourth quarter of 2022, is expected to better position the Bank should rates continue to rise.  The net impact on equity of the derivative strategy as of December 31, 2022, was $957,000 net of tax. For further details refer to Footnote 8 "Derivatives and Hedging Activities".  As permitted by U.S. generally accepted accounting principles, unrecognized losses on securities held to maturity do not reduce other comprehensive income and, as a result, are not reflected as a reduction to shareholders’ equity on our balance sheet. ChoiceOne Bank remains “well-capitalized” with a total risk-based capital ratio of 13.0% as of December 31, 2022, compared to 12.9% on December 31, 2021. ChoiceOne repurchased 25,899 shares for $683,000, or a weighted average all-in cost per share of $26.35, during the first quarter of 2022. 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 program was adopted.  No shares of common stock were repurchased for the remainder of 2022; however, ChoiceOne may strategically repurchase shares of common stock in the future depending on market and other conditions. Note 21 to the consolidated financial statements presents regulatory capital information for ChoiceOne and the Bank at the end of 2022 and 2021. Management will monitor these capital ratios during 2023 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, 2022, the Bank was categorized as "well-capitalized" under regulatory guidelines. 29 Table of Contents Table 4 – Contractual Obligations The following table discloses information regarding the maturity of ChoiceOne’s contractual obligations at