CHOICEONE FINANCIAL SERVICES INC (Form: 10-K, Received: 03/31/2014 13:14:08)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

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, 2013

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

	For the transition period from__________________ to __________________

Commission File Number: 000-19202

ChoiceOne Financial Services, Inc.

(Exact Name of Registrant as Specified in its Charter)

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

109 East Division 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(g) of the Securities Exchange Act of 1934:

Common Stock
(Title of Class)

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ☒ No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained in this form, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer ☐

Non-accelerated filer ☐	Smaller reporting company ☒

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

As of June 30, 2013, the aggregate market value of common stock held by non-affiliates of the Registrant was $50.9 million. This amount is based on an average bid price of $15.44 per share for the Registrant’s stock as of such date.

As of February 28, 2014, the Registrant had 3,296,537 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Part I, Item 1, and Part II, Items 5 through 9A incorporate by reference portions of the Registrant’s Annual Report to Shareholders for the year ended December 31, 2013.

Part III, Items 10 through 14 incorporate by reference portions of the Registrant’s Definitive Proxy Statement for the Registrant’s Annual Meeting of Shareholders to be held April 30, 2014.

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 the Registrant itself. Words such as “anticipates,” “believes,” “expects,” “forecasts,” “intends,” “is likely,” “plans,” “predicts,” “projects,” “may,” “could,” “estimates,” 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 and loan servicing rights, and the fair value of investment securities (including whether any impairment on any investment security is temporary or other than temporary) and management’s assumptions concerning pension and other postretirement benefit plans involve judgments that are inherently forward-looking. All of the information concerning interest rate sensitivity is 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, the Registrant 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, changes in interest rates and interest rate relationships; demand for products and services; the degree of competition by traditional and non-traditional competitors; changes in banking laws and regulations; changes in tax laws; changes in prices, levies, and assessments; the impact of technological advances; governmental and regulatory policy changes; the outcomes of pending and future litigation and contingencies; trends in customer behavior as well as their abilities to repay loans; changes in the local and national economies; changes in market conditions; the level and timing of asset growth; local and global uncertainties such as acts of terrorism and military actions; and current uncertainties and fluctuations in the financial markets and stocks of financial services providers due to concerns about credit availability and concerns about the Michigan economy in particular. 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

Item 1.

Business

General

ChoiceOne Financial Services, Inc. (the “Registrant”) is a one-bank holding company registered under the Bank Holding Company Act of 1956, as amended. The Registrant was incorporated on February 24, 1986, as a Michigan corporation. The Registrant was formed to create a bank holding company for the purpose of acquiring all of the capital stock of ChoiceOne Bank (formerly Sparta State Bank), which became a wholly owned subsidiary of the Registrant on April 6, 1987. The Registrant’s only subsidiary and significant asset as of December 31, 2013, was ChoiceOne Bank (the “Bank”). Effective January 1, 1996, the Bank acquired all of the outstanding common stock of ChoiceOne Insurance Agencies, Inc. (formerly Bradford Insurance Centre, Ltd.), an independent insurance agency headquartered in Sparta, Michigan (the “Insurance Agency”). Effective January 1, 2002, the Bank formed ChoiceOne Mortgage Company of Michigan (the “Mortgage Company”). In December 2008, the operations of the Mortgage Company were consolidated into the Bank and the Mortgage Company subsidiary was eliminated. The Bank also owns a 25% interest in a non-banking corporation, West Shore Computer Services, Inc., a data processing firm located in Scottville, Michigan. Effective November 1, 2006, the Registrant merged with Valley Ridge Financial Corp. (“VRFC”), a single-bank holding company for Valley Ridge Bank (“VRB”). In the merger, the Registrant issued shares of its common stock in exchange for all outstanding shares of VRFC. In December 2006, VRB was consolidated into the Bank.

The Registrant’s business is primarily concentrated in a single industry segment - banking. 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 department makes direct and indirect loans to consumers and purchasers of residential and real property. The Mortgage Company originated and sold a full line of conventional type mortgage loans for 1-4 family and multi-family residential real estate properties. No material part of the business of the Registrant 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 Registrant.

The Bank’s primary market area lies within portions of Kent, Muskegon, Newaygo, and Ottawa counties in Michigan in the communities where the Bank’s offices are located. Currently the Bank serves these markets through thirteen full-service offices. The Registrant and the Bank have no foreign assets or income.

The principal source of revenue for the Registrant and the Bank is interest and fees on loans. On a consolidated basis, interest and fees on loans accounted for 62%, 62%, and 67% of total revenues in 2013, 2012, and 2011, respectively. Interest on securities accounted for 13%, 12%, and 11% of total revenues in 2013, 2012, and 2011, respectively.

The Consolidated Financial Statements incorporated by reference in Part II, Item 8 contain information concerning the financial position and results of operations of the Registrant.

Competition

The Bank’s competition primarily comes from other financial institutions located within Kent, Muskegon, Newaygo, and Ottawa counties in western Michigan. There are a number of larger commercial banks within the Bank’s primary market area. 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 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.

Supervision and Regulation

Banks and bank holding companies are extensively regulated. The Registrant is subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). The Registrant’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 Registrant to acquire control of any additional bank holding companies, banks or other operating subsidiaries.

The Bank is chartered under state law and is subject to regulation by the Michigan Office of Financial and Insurance Regulation. 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 extent provided by law. The Bank became a member of the Federal Home Loan Bank system in March 1993. This provides certain advantages to the Bank, including favorable borrowing rates for certain funds.

The Registrant is a legal entity separate and distinct from the Bank. There are legal limitations on the extent to which the Bank can lend or otherwise supply funds to the Registrant. In addition, payment of dividends to the Registrant by the Bank is subject to various state and federal regulatory limitations.

Under Federal Reserve Board policy, the Registrant is expected to act as a source of financial strength to the Bank and to commit resources to support it. The FDIC formed the Deposit Insurance Fund (“DIF”) in accordance with the Federal Deposit Insurance Reform Act of 2005 (“Reform Act”). The FDIC will maintain the insurance reserves of the DIF by assessing depository institutions an insurance premium.

The FDIC adopted final regulations that implemented the Reform Act to create a stronger and more stable insurance system. The final regulations enable the FDIC to tie each depository institution’s DIF insurance premiums both to the balance of insured deposits, as well as to the degree of risk the institution poses to the DIF. In addition, the FDIC has new flexibility to manage the DIF’s reserve ratio within a range, which in turn may help prevent sharp swings in assessment rates that were possible under the design of the former system. Under the new risk-based assessment system, the FDIC will evaluate each depository institution’s risk based on three primary sources of information: supervisory ratings for all insured institutions, financial ratios for most institutions, and long-term debt issuer ratings for large institutions that have them. Neither the Registrant nor the Bank has a long-term debt issuer rating. The ability to differentiate on the basis of risk will improve incentives for effective risk management and will reduce the extent to which safer banks subsidize riskier ones.

The 2008 DIF rates for nearly all depository institutions varied between five and seven cents for every $100 of deposits. The 2009 rates were approximately double those of the prior year as depository institutions classified in the FDIC’s Risk Category I were assessed between 12 and 14 cents for every $100 of deposits. The rates could increase up to 50 cents for every $100 of deposits for riskier institutions. In addition, the FDIC imposed a special assessment of 5 basis points on each insured institution’s assets minus its Tier 1 capital on September 30, 2009. The FDIC passed a regulation in November 2010 that changed the deposit insurance assessment base from total domestic deposits to average total assets less average tangible equity.

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. Until the change in the law, only SAIF member institutions bore the cost of funding these interest payments.

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 Credit Reporting Act, the Expedited Funds Availability Act, the Community Reinvestment Act, the Real Estate Settlement Procedures Act, the USA PATRIOT Act, the Bank Secrecy Act, 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 instruments of monetary policy of authorities, such as 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.

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.

Michigan banking laws do not significantly restrict interstate banking. The Michigan Banking Code permits, in appropriate circumstances and with the approval of the Office of Financial and Insurance Regulation, (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.

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 clean up 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 Registrant 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, 2014, the Registrant, the Bank and the Insurance Agency employed 153 employees, of which 122 were full-time employees. The Registrant, Bank, and Insurance Agency believe their relations with their employees are good.

Statistical Information

Additional statistical information describing the business of the Registrant appears on the following pages and in Management’s Discussion and Analysis of Financial Condition and Results of Operations incorporated by reference in Item 7 of this report and in the Consolidated Financial Statements and the notes thereto incorporated by reference 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 thereto incorporated by reference in this report.

Securities Portfolio

The carrying value of securities categorized by type at December 31 was as follows:

(Dollars in thousands)

	2013		2012		2011

U.S. Government and federal agency	$	43,722	$	40,268	$	40,413
U.S. Treasury notes and bonds		7,224		7,398		—
State and municipal		64,775		64,678		54,499
Mortgage-backed		8,470		12,526		9,780
Corporate		8,815		6,712		6,011
Foreign debt securities		990		1,001		—
Equity securities		1,603		1,909		1,535
Asset-backed securities		483		—		—
FDIC-guaranteed financial institution debt		—		—		2,038
Total	$	136,082	$	134,492	$	114,276

The Registrant did not hold investment securities from any one issuer at December 31, 2013, that were greater than 10% of the Registrant’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, 2013 and 2012, a schedule of maturities of securities as of December 31, 2013, and the weighted average yields of securities as of December 31, 2013.

(Dollars in thousands)

	Securities maturing within:
									Fair Value		Fair Value
	Less than		1 Year -		5 Years -		More than		at Dec. 31		at Dec. 31
	1 Year		5 Years		10 Years		10 Years		2013		2012

U.S. Government and federal agency	$	13,010	$	27,803	$	2,909	$	—	$	43,722	$	40,268
U.S. Treasury notes and bonds		—		7,224		—		—		7,224		7,398
State and municipal		8,956		24,786		28,331		2,702		64,775		64,678
Mortgage-backed securities		153		5,623		2,625		69		8,470		12,526
Corporate		2,231		6,584		—		—		8,815		6,712
Foreign debt securities		—		990		—		—		990		1,001
Asset-backed securities		483		—		—		—		483		—
Total debt securities	$	24,833	$	73,010	$	33,865	$	2,771	$	134,479	$	132,583

Equity securities (1)		—		—		—		1,603		1,603		1,909
	$	24,833	$	73,010	$	33,865	$	4,374	$	136,082	$	134,492

	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		1.62	%		1.18	%		1.58	%		—	%		1.34	%
State and municipal (2)		4.35			4.43			4.00			4.81			4.25
Foreign debt securities		—			1.10			—			—			1.10
Asset-backed securities		0.50			—			—			—			0.50
U.S. Treasury		—			0.78			—			—			0.78
Mortgage-backed securities		4.50			2.46			1.94			2.33			2.34
Corporate		1.96			1.56			—			—			1.66
Equity securities (1)		—			—			—			4.23			4.33

( 1) Equity securities are preferred and common stock that may or may not have a stated maturity.

(2) The yield is computed for tax-exempt securities on a fully tax-equivalent basis at an incremental tax rate of 34%.

Loan Portfolio

The Bank’s loan portfolio categorized by loan type (excluding loans held for sale) as of December 31 is presented below.

(Dollars in thousands)

	2013		2012		2011		2010		2009
Agricultural	$	37,048	$	31,790	$	38,929	$	29,681	$	31,322
Commercial and industrial		68,530		67,365		58,685		55,947		53,964
Consumer		19,931		19,367		18,657		16,709		16,285
Real estate - commercial		96,987		93,312		106,250		116,351		121,100
Real estate - construction		890		1,056		1,169		853		1,158
Real estate - residential		92,580		98,578		96,437		97,399		98,887
Total loans, gross	$	315,966	$	311,468	$	320,127		316,940	$	322,716

Maturities and Sensitivities of Loans to Changes in Interest Rates

The following schedule presents the maturities of loans (excluding residential real estate and consumer loans) as of December 31, 2013. All loans over one year in maturity (excluding residential real estate and consumer loans) are also presented classified according to the sensitivity to changes in interest rates as of December 31, 2013.

(Dollars in thousands)

	Less than		1 Year -		More than
	1 Year		5 Years		5 Years		Total
Loan Type
Agricultural	$	9,720	$	17,193	$	10,135	$	37,048
Commercial and industrial		14,843		41,853		11,834		68,530
Real estate - commercial		20,716		60,790		15,481		96,987
Real estate - construction		—		656		234		890
Totals	$	45,279	$	120,492	$	37,684	$	203,455

	Less than		1 Year -		More than
	1 Year		5 Years		5 Years		Total
Loan Sensitivity to Changes in Interest Rates
Loans with fixed interest rates	$	16,593	$	118,015	$	37,684	$	172,292
Loans with floating or adjustable interest rates		28,686		2,477		—		31,163
Totals	$	45,279	$	120,492	$	37,684	$	203,455

(1) 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.

Risk Elements

The following loans were classified as nonperforming as of December 31:

(Dollars in thousands)

	2013		2012		2011		2010		2009
Loans accounted for on a non-accrual basis	$	3,123	$	2,331	$	4,155	$	6,273	$	11,881
Accruing loans which are contractually past due
90 days or more as to principal or interest payments		11		30		70		23		202
Loans defined as “troubled debt restructurings”		4,523		4,405		2,448		2,141		1,919
Totals	$	7,657	$	6,766	$	6,673	$	8,437	$	14,002

A loan is placed on nonaccrual status at the point in time at which the collectability of principal or interest is considered doubtful.

The table below illustrates interest forgone and interest recorded on nonperforming loans for the years presented.

(Dollars in thousands)

	2013		2012		2011		2010		2009
Interest on non-performing loans which would have
been earned had the loans been in an accrual or
performing status	$	251	$	183	$	373	$	492	$	567
Interest on non-performing loans that was actually
recorded when received	$	—	$	—	$	—	$	2	$	—

Potential Problem Loans

At December 31, 2013, there were $14 million of loans not disclosed above where some concern existed as to the borrowers’ abilities to comply with original loan terms. Specific loss allocations totaling $1.1 million from the allowance for loan losses had been allocated for all nonperforming and potential problem loans as of December 31, 2013. However, the entire allowance for loan losses is also available for these potential problem loans.

Loan Concentrations

As of December 31, 2013, there was no concentration of loans exceeding 10% of total loans that is not otherwise disclosed as a category of loans in the loan portfolio listing in Note 3 to the Consolidated Financial Statements incorporated by reference in Item 8 of this report.

Other Interest-Bearing Assets

As of December 31, 2013, there were no other interest-bearing assets requiring disclosure.

Summary of Loan Loss Experience

The following schedule presents a summary of activity in the allowance for loan losses for the periods shown and the percentage of net charge-offs during each period to average gross loans outstanding during the period.

(Dollars in thousands)
	2013			2012			2011			2010			2009

Balance at January 1	$	5,852		$	5,213		$	4,729		$	4,322		$	3,600

Charge-offs:
Agricultural		88			—			45			—			—
Commercial and industrial		122			405			228			765			1,558
Consumer		351			338			361			444			535
Real estate - commercial		858			869			1,357			1,523			1,217
Real estate - construction		—			—			—			—			15
Real estate - residential		732			887			1,677			1,152			1,369
Total charge-offs		2,151			2,499			3,668			3,884			4,694

Recoveries:
Agricultural		6			5			10			—			—
Commercial and industrial		337			61			32			68			102
Consumer		175			214			217			230			246
Real estate - commercial		84			224			89			16			58
Real estate - construction		—			—			—			—			29
Real estate - residential		132			119			104			27			106
Total recoveries		734			623			452			341			541

Net charge-offs		1,417			1,876			3,216			3,543			4,153

Additions charged to operations (1)		300			2,515			3,700			3,950			4,875

Balance at December 31	$	4,735		$	5,852		$	5,213		$	4,729		$	4,322

Ratio of net charge-offs during the period to average loans outstanding during the period		0.45	%		0.61	%		1.01	%		1.12	%		1.30	%

(1)

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.

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)
	2013		2012		2011		2010		2009
Agricultural	$	178	$	140	$	55	$	181	$	124
Commercial and industrial		562		381		609		641		735
Consumer		192		250		197		243		306
Real estate - commercial		1,842		2,596		2,299		1,729		1,546
Real estate - construction		12		15		34		2		3
Real estate - residential		1,626		1,923		1,847		1,554		1,590
Unallocated		323		547		172		379		18
Total allowance	$	4,735	$	5,852	$	5,213	$	4,729	$	4,322

The increase in the allowance allocation to commercial and industrial loans was caused by an increase in loans rated 5, 6, or 7 from $1,359,000 as of December 31, 2012 to $1,697,000 as of December 31, 2013. The decrease in the allowance allocation to commercial real estate loans was due to a decrease in loans rated 5, 6, or 7 from $15,083,000 as of December 31, 2012 to $12,696,000 as of December 31, 2013. The decline in the allowance allocation to residential real estate loans occurred as a result of a reduction in historical charge-off levels in this loan category.

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 is sufficient at December 31, 2013.

The following schedule presents the stratification of the loan portfolio by category, based on the amount of loans outstanding as a percentage of total loans for the respective years ended December 31.

	2013			2012			2011			2010			2009
Agricultural		12	%		10	%		12	%		9	%		10	%
Commercial and industrial		22			22			18			18			17
Consumer		6			6			6			5			5
Real estate - commercial		31			30			33			37			37
Real estate - construction		—			—			1			—			—
Real estate - residential		29			32			30			31			31
Total allowance		100	%		100	%		100	%		100	%		100	%

Deposits

The following schedule presents the average deposit balances by category and the average rates paid thereon for the respective years.

(Dollars in thousands)

	2013				2012				2011
Noninterest-bearing demand	$	93,853	—		$	83,810	—		$	72,707	—
Interest-bearing demand and money market deposits		132,053	0.20	%		136,118	0.27	%		124,575	0.43	%
Savings		65,484	0.06	%		50,252	0.12	%		45,698	0.11	%
Certificates of deposit		119,072	0.86	%		138,805	1.20	%		153,494	1.54	%
Total	$	410,462	0.32	%	$	408,985	0.51	%	$	396,474	0.74	%

The following table illustrates the maturities of certificates of deposits issued in denominations of $100,000 or more as of December 31, 2013.

(Dollars in thousands)
Maturing in less than 3 months	$	12,432
Maturing in 3 to 6 months		13,078
Maturing in 6 to 12 months		11,970
Maturing in more than 12 months		19,873
Total	$	57,353

Short-Term Borrowings

Federal funds purchased by the Registrant are unsecured overnight borrowings from correspondent banks. Federal funds purchased are due the next business day. The table below provides additional information regarding these short-term borrowings:

(Dollars in thousands)
	2013			2012			2011
Outstanding balance at December 31	$	—		$	—		$	—
Average interest rate at December 31		—	%		—	%		—	%
Average balance during the year	$	578		$	97		$	3
Average interest rate during the year		0.36	%		0.14	%		0.72	%
Maximum month end balance during the year	$	5,597		$	—		$	6,120

Repurchase agreements include advances by Bank customers that are not covered by federal deposit insurance. These agreements are direct obligations of the Registrant and are secured by securities held in safekeeping at a correspondent bank. The table below provides additional information regarding these short-term borrowings:

(Dollars in thousands)
	2013			2012			2011
Outstanding balance at December 31	$	26,033		$	19,572		$	16,869
Average interest rate at December 31		0.22	%		0.25	%		0.30	%
Average balance during the year	$	19,456		$	19,289		$	15,815
Average interest rate during the year		0.23	%		0.27	%		0.36	%
Maximum month end balance during the year	$	26,995		$	22,984		$	17,249

Advances from the Federal Home Loan Bank (“FHLB”) with original repayment terms less than one year are considered short-term borrowings for the Registrant. These advances are secured by residential real estate mortgage loans and U.S. government agency securities. The advances have maturities ranging from 6 months to 9 months from the date of issue.

The table below provides additional information regarding these short-term borrowings:

(Dollars in thousands)
	2013			2012			2011
Outstanding balance at December 31	$	6,000		$	—		$	—
Average interest rate at December 31		0.40	%		—	%		—	%
Average balance during the year	$	7,415		$	—		$	1
Average interest rate during the year		0.60	%		—	%		0.49	%
Maximum month end balance during the year	$	12,409		$	—		$	—

There were no other categories of short-term borrowings whose average balance outstanding exceeded 30% of shareholders’ equity in 2013, 2012, or 2011.

Return on Equity and Assets

The following schedule presents the Registrant’s ratios for the years ended December 31:

	2013			2012			2011
Return on assets(net income divided by average total assets)		1.01	%		0.85	%		0.72	%

Return on equity(net income dividend by average equity)		8.31	%		7.17	%		6.26	%

Dividend payout ratio(dividends declared per share divided		34.93	%		38.67	%		44.92	%
by net income per share)

Equity to assets ratio(average equity divided by average total assets)		12.21	%		11.87	%		11.53	%

Item 1A. Risk Factors

The Registrant is subject to many risks and uncertainties. Although the Registrant seeks ways to manage these risks and develop programs to control risks to the extent that management can control them, the Registrant 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 Registrant faces. Additional risks and uncertainties of which the Registrant is unaware, or that it currently does not consider to be material, also may become important factors that affect the Registrant and its business. If any of these risks were to occur, the Registrant’s business, financial condition or results of operations could be materially and adversely affected.

Investments in the Registrant’s common stock involve risk.

The market price of the Registrant’s common stock may fluctuate significantly in response to a number of factors, including:

·	Variations in quarterly or annual operating results
·	Changes in interest rates
·	New developments in the banking industry
·	Regulatory actions
·	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

Asset quality could be less favorable than expected.

A significant source of risk for the Registrant 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 Registrant 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. In addition, collateral appraisals that are out of date or that do not meet industry recognized standards may create the impression that a loan is adequately collateralized when in fact it is not.

General economic conditions in the state of Michigan could be less favorable than expected.

The Registrant is affected by general economic conditions in the United States, although most directly within Michigan. A further 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.

Volatility and disruptions in the functioning of the financial markets and related liquidity issues could continue or worsen and, therefore, may adversely impact the Registrant’s business, financial condition and results of operations.

The financial markets have been experiencing volatility and disruption in recent periods. The impact of this situation, together with concerns regarding the financial strength of financial institutions, has led to distress in financial markets and issues relating to liquidity among financial institutions. As a result of concern about the stability of the financial markets generally, the resulting credit availability issues, lack of confidence in the financial sector, increased volatility in the financial markets and reduced business activity could have a material adverse effect on the Registrant’s ability to access capital and manage liquidity. There can be no assurance that the Registrant’s business, financial condition and results of operations will not be materially and adversely impacted by financial market volatility and disruptions. There can be no assurances that legislation or actions taken by government agencies for the purpose of stabilizing the financial markets will achieve their intended effects.

If the Registrant does not adjust to changes in the financial services industry, its financial performance may suffer.

The Registrant’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 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 the accelerating pace of consolidation among financial service providers. New competitors may emerge to increase the degree of competition for the Registrant’s customers and services. Financial services and products are also constantly changing. The Registrant’s financial performance will also depend in part upon customer demand for the Registrant’s products and services and the Registrant’s ability to develop and offer competitive financial products and services.

Changes in interest rates could reduce the Registrant’s income and cash flow.

The Registrant’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 Registrant’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.

The Dodd-Frank Act may have a significant impact on the Registrant and results of its operations.

The Dodd-Frank Act was signed into law by President Obama on July 21, 2010. The Dodd-Frank Act represents a comprehensive overhaul of the financial services industry within the United States, established the new federal Consumer Financial Protection Bureau (CFPB), and requires the CFPB and other federal agencies to implement many new and significant rules and regulations. The CFPB has issued significant new regulations that impact consumer mortgage lending and servicing. Those regulations became effective in January 2014. In addition, the CFPB is drafting regulations that will change the disclosure requirements and forms used under the Truth in Lending Act and Real Estate Settlement and Procedures Act. Compliance with these new laws and regulations and other regulations under consideration by the CFPB will likely result in additional costs and changes in the products and/or services that are currently being offered, which could be significant and could adversely impact the Registrant’s results of operations, financial condition or liquidity.

Unauthorized disclosure of sensitive or confidential client or customer information, whether through a breach of computer systems or otherwise, could severely harm the Registrant’s business.

As part of its business, the Registrant collects, processes and retains sensitive and confidential client and customer information on behalf of itself and other third parties. Despite the security measures the Registrant has in place for its facilities and systems, and the security measures of its third party service providers, the Registrant 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 Registrant or by its vendors, could severely damage the Registrant’s reputation, expose it to the risks of litigation and liability, disrupt the Registrant’s operations and have a material adverse effect on the Registrant’s business.

The Registrant’s information systems may experience an interruption or breach in security.

The Registrant 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 Registrant’s customer relationship management, general ledger, deposit, loan and other systems. While the Registrant 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 Registrant’s information systems or its customers’ information or computer systems would not damage the Registrant’s reputation, result in a loss of customer business, subject the Registrant to additional regulatory scrutiny, or expose the Registrant to civil litigation and financial liability, any of which could have a material adverse effect on the Registrant’s financial condition and results of operations.

Severe weather, natural disasters, acts of war or terrorism and other external events could significantly impact the Registrant’s business.

Severe weather, natural disasters, acts of war or terrorism and other adverse external events could have a significant impact on the Registrant’s ability to conduct business. Such events could affect the stability of the Registrant’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 Registrant to incur additional expenses.

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 Registrant and the Registrant’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.

Item 1B.

Unresolved Staff Comments

None.

Item 2.

Properties

The offices of the Bank and Insurance Agency as of February 28, 2014, were as follows:

Registrant’s, Bank’s and Insurance Agency’s main office:
109 East Division, Sparta, Michigan
Office is owned by the Bank and comprises 24,000 square feet.

Bank’s branch office:
416 West Division, Sparta, Michigan
Office is leased by the Bank and comprises 3,000 square feet.

Bank’s branch office:
4170 - 17 Mile Road, Cedar Springs, Michigan
Office is owned by the Bank and comprises 3,000 square feet.

Bank’s branch office:
6795 Courtland Drive, Rockford, Michigan
Office is owned by the Bank and comprises 2,400 square feet.

Bank’s branch office:
5050 Alpine Avenue NW, Comstock Park, Michigan
Office is owned by the Bank and comprises 2,400 square feet.

Bank’s branch office:
450 West Muskegon, Kent City, Michigan
Office is owned by the Bank and comprises 27,300 square feet.

Bank’s branch office:
3069 Slocum Road, Ravenna, Michigan
Office is owned by the Bank and comprises 4,800 square feet.

Bank’s branch office:
5475 East Apple Avenue, Muskegon, Michigan
Office is owned by the Bank and comprises 4,800 square feet.

Bank’s branch office:
661 West Randall, Coopersville, Michigan
Office is owned by the Bank and comprises 2,700 square feet.

Bank’s branch office:
10 West Main Street, Grant, Michigan
Office is owned by the Bank and comprises 4,800 square feet.

Bank’s branch office:
246 West River Valley Drive, Newaygo, Michigan
Office is owned by the Bank and comprises 2,600 square feet.

Bank’s branch office:
1423 West Main Street, Fremont, Michigan
Office is owned by the Bank and comprises 1,600 square feet.

The Registrant operates its business at the main office of the Bank. The Registrant did not own any properties as of February 28, 2014. The Registrant, Bank and Insurance Agency believe that their offices are suitable and adequate for their future needs and are in good condition. The Registrant’s management believes all offices are adequately covered by property insurance.

Item 3.

Legal Proceedings

As of December 31, 2013, there are no significant pending legal proceedings to which the Registrant or the Bank is a party or to which any of their properties are 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 effect on the consolidated financial condition of the Registrant.

Item 4.

Mine Safety Disclosures

Not applicable.

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The information under the caption “Stock Information” on pages 3 and 4 of the Registrant’s Annual Report to Shareholders for the year ended December 31, 2013, is incorporated herein by reference.

On October 23, 2013, the Registrant issued 660 shares of common stock to its directors pursuant to the Directors’ Stock Purchase Plan for an aggregate cash price of $11,000. The Registrant relied on the exemption contained in Section 4(6) of the Securities Act of 1933 in connection with this sale.

ISSUER PURCHASES OF EQUITY SECURITIES

The Board of Directors authorized a repurchase plan on July 26, 2007 to buy back 100,000 shares. The Registrant did not purchase any of its own common stock during the quarter ended December 31, 2013. There were 96,388 shares that may yet be purchased under the plan as of December 31, 2013. There is no stated expiration date.

Item 6.

Selected Financial Data

The information under the caption “Selected Financial Data” on page 5 of the Registrant’s Annual Report to Shareholders for the year ended December 31, 2013, is incorporated herein by reference.

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The information under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” including all subheadings, on pages 6 through 19, inclusive, of the Registrant’s Annual Report to Shareholders for the year ended December 31, 2013, is incorporated herein by reference.

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

The information under the subheading “Liquidity and Interest Rate Risk” under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on pages 16 through 19, inclusive, of the Registrant’s Annual Report to Shareholders for the year ended December 31, 2013, is incorporated herein by reference.

Item 8.

Financial Statements and Supplementary Data

The Report of Independent Registered Public Accounting Firm, Consolidated Financial Statements, and Notes to Consolidated Financial Statements on pages 21 through 54, inclusive, of the Registrant’s Annual Report to Shareholders for the year ended December 31, 2013, are incorporated herein by reference.

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A.

Controls and Procedures

An evaluation was performed under the supervision and with the participation of the Registrant’s management, including the Chief Executive Officer and principal financial officer, of the effectiveness of the design and operation of the Registrant’s disclosure controls and procedures. Based on and as of the time of that evaluation, the Registrant’s management, including the Chief Executive Officer and principal financial officer, concluded that the Registrant’s disclosure controls and procedures were effective as of the end of the period covered by this report. There was no change in the Registrant’s internal control over financial reporting that occurred during the three months ended December 31, 2013 that has materially affected, or that is reasonably likely to materially affect, the Registrant’s internal control over financial reporting.

Management’s Report on Internal Control over Financial Reporting on page 20 of the Registrant’s Annual Report to Shareholders for the year ended December 31, 2013 is here incorporated by reference.

Item 9B.

Other Information

None.

PART III

Item 10.

Directors, Executive Officers and Corporate Governance

The information under the captions “ChoiceOne’s Board of Directors and Executive Officers,” “Related Matters - Section 16(a) Beneficial Ownership Reporting Compliance” and “Corporate Governance” in the Registrant’s Definitive Proxy Statement for the Annual Meeting of Shareholders to be held April 30, 2014, is incorporated herein by reference.

The Registrant has adopted a Code of Ethics for Executive Officers and Senior Financial Officers, which applies to the Chief Executive Officer and the Chief Financial Officer, as well as all other senior financial and accounting officers. The Code of Ethics is posted on the Registrant’s website at “ www.choiceone.com .” The Registrant intends to satisfy the disclosure requirements under Item 5.05 of Form 8-K regarding an amendment to, or a waiver from, a provision of the Code of Ethics by posting such information on its website at “ www.choiceone.com .”

Item 11.

Executive Compensation

The information under the captions “Executive Compensation” in the Registrant’s Definitive Proxy Statement for the Annual Meeting of Shareholders to be held April 30, 2014, is incorporated herein by reference.

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information under the caption “Ownership of ChoiceOne Common Stock” in the Registrant’s Definitive Proxy Statement for the Annual Meeting of Shareholders to be held April 30, 2014, is incorporated herein by reference.

The following table presents information regarding the equity compensation plans both approved and not approved by shareholders at December 31, 2013:

	Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
	(a)		(b)		(c)
Equity compensation plans approved by
security holders		38,625	$	17.29	140,805
Equity compensation plans not approved
by security holders		—		—	26,800
Total		38,625	$	17.29	167,605

Equity compensation plans approved by security holders include the Amended and Restated Executive Stock Incentive Plan and the Employee Stock Purchase Plan.

Shareholders at the Registrant’s 2012 Annual Meeting approved the Stock Incentive Plan of 2012. Officers and key employees of the Registrant and its subsidiaries are eligible to receive awards under this Plan. Incentive awards may be given in the form of stock options, stock appreciation rights, restricted stock units, restricted stock, stock awards and other equity-based awards. The Plan provides for a maximum of 100,000 shares of the Registrant’s common stock, subject to adjustments in the capital structure of the Registrant. New awards for up to 100,000 shares may be made under this Plan.

The number of shares available for issuance under the Plan is equal to the number determined by the following formula: (a) for the initial plan year, 5% of the total number of shares of common stock outstanding at the time the Plan became effective; plus (b) in each subsequent plan year, an additional number of shares of common stock not to exceed 2% of the number of shares of common stock outstanding as reported in the Registrant’s Annual Report on Form 10-K for the fiscal year ending immediately before such plan year such that at the beginning of each plan year after the initial plan year there shall be available, in addition to any amount of shares remaining from the 5% authorization for the initial plan year, a minimum number of shares equal to 2% of the number of shares of common stock outstanding; plus (c) there shall be carried forward and available for additional awards certain shares that are either unused, canceled or surrendered in connection with incentive awards.

Shareholders at the 2002 Annual Meeting approved the Employee Stock Purchase Plan. This Plan allows employees to purchase the Registrant’s common stock at up to a 15% discount from the average bid price for the Registrant’s common stock. Employees who elect to participate in the plan can purchase shares of the Registrant’s common stock on a quarterly basis. The Plan provides for a maximum of 55,126 shares of the Registrant’s common stock, subject to adjustments for certain changes in the capital structure of the Registrant. Shareholders at the 2011 Annual Meeting approved an Amended and Restated Employee Stock Purchase Plan. The new plan made an additional 50,000 available for purchase providing a total of 105,126 shares under the plan. As of December 31, 2013, new issuances for up to 40,805 shares may be made under the plan.

Equity compensation plans not approved by security holders consist of the Directors’ Stock Purchase Plan. The Plan is designed to provide directors of the Registrant the option of receiving their fees in the Registrant’s stock. Directors who elect to participate in the Plan may elect to contribute to the Plan twenty-five, fifty, seventy-five or one hundred percent of their board of director fees and one hundred percent of their director committee fees earned as directors of the Registrant. Contributions to the Plan are made by the Registrant on behalf of each electing participant. Plan participants may terminate their participation in the Plan at any time by written notice of withdrawal to the Registrant. Participants will cease to be eligible to participate in the Plan when they cease to serve as directors of the Registrant. Shares are distributed to participants on a quarterly basis. The Plan provides for a maximum of 100,000 shares of the Registrant’s common stock, subject to adjustments for certain changes in the capital structure of the Registrant. New issuances for up to 26,800 shares may be made under this Plan.

Item 13.

Certain Relationships and Related Transactions, and Director Independence

The information under the captions “Related Matters - Transactions with Related Persons” and “Corporate Governance” in the Registrant’s Definitive Proxy Statement for the Annual Meeting of Shareholders to be held April 30, 2014, is incorporated herein by reference.

Item 14.

Principal Accountant Fees and Services

The information under the caption “Related Matters - Independent Certified Public Accountants” in the Registrant’s Definitive Proxy Statement for the Annual Meeting of Shareholders to be held April 30, 2014, is incorporated herein by reference.

PART IV

Item 15.

Exhibits and Financial Statement Schedules

(a)	(1)	Financial Statements . The following financial statements and independent auditors’ reports are filed as part of this report:

			Consolidated Balance Sheets at December 31, 2013 and 2012.

			Consolidated Statements of Income for the years ended December 31, 2013, 2012, and 2011.

			Consolidated Statement of Comprehensive Income for the years ended December 31, 2013, 2012, and 2011.

		Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2013, 2012, and 2011.

		Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012, and 2011.

		Notes to Consolidated Financial Statements.

		Report of Independent Registered Public Accounting Firm dated March 27, 2014.

	The consolidated financial statements, notes to consolidated financial statements and independent auditors’ report dated March 27, 2014 listed above are incorporated by reference in Item 8 of this report from the Registrant’s Annual Report to Shareholders for the year ended December 31, 2013.

(2)	Financial Statement Schedules . None.

(b)

Exhibits . The following exhibits are filed as part of this report:

Exhibit	Document

3.1	Amended and Restated Articles of Incorporation of the Registrant.

3.2	Bylaws of the Registrant as currently in effect and any amendments thereto.

4	Advances, Pledge and Security Agreement between ChoiceOne Bank and the Federal Home Loan Bank of Indianapolis.

10.1	Employment Agreement with James A. Bosserd. (1) Previously filed as an exhibit to the Registrant’s Form 10-K Annual Report for the year ended December 31, 2012. Here incorporated by reference.

10.2	Stock Incentive Plan of 2012. (1) Previously filed as an appendix to the Registrant’s definitive proxy statement filed with the commission on March 30, 2012. Here incorporated by reference.

10.3	Amended and Restated Executive Stock Incentive Plan. (1) Previously filed as an exhibit to the Registrant’s Form 10-K Annual Report for the year ended December 31, 2011. Here incorporated by reference.

10.4	Directors’ Stock Purchase Plan. (1). Previously filed as an exhibit to the Registrant’s Form 10-K Annual Report for the year ended December 31, 2011. Here incorporated by reference.

10.5	Former Valley Ridge Executive Employee Salary Continuation Agreements, as amended. (1)

10.6	Former Valley Ridge Directors’ Deferred Compensation Plan and Agreement. (1)

13	Annual Report to Shareholders for the year ended December 31, 2013 .

21	Subsidiaries of the Registrant.

23	Consent of Independent Registered Public Accounting Firm for fiscal years ended December 31, 2013, 2012, and 2011.

24	Powers of Attorney.

31.1	Certification of Chief Executive Officer.

31.2	Certification of Treasurer.

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

101.1	Interactive Data File.

(1)	This agreement is a management contract or compensation plan or arrangement to be filed as an exhibit to this Form 10-K.

Copies of any exhibits will be furnished to shareholders upon written request. Requests should be directed to: Thomas L. Lampen, Treasurer, ChoiceOne Financial Services, Inc., 109 East Division, Sparta, Michigan 49345.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	ChoiceOne Financial Services, Inc.

By:	/s/ James A. Bosserd	March 27, 2014
	James A. Bosserd President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

/s/ James A. Bosserd	President and Chief Executive Officer and Director (Principal Executive Officer)	March 27, 2014
James A. Bosserd

/s/ Thomas L. Lampen	Treasurer (Principal Financial and Accounting Officer)	March 27, 2014
Thomas L. Lampen	Treasurer (Principal Financial and Accounting Officer)

*/s/ Paul L. Johnson	Chairman of the Board and Director	March 27, 2014
Paul L. Johnson	Chairman of the Board and Director

*/s/ Jerome Arends	Director	March 27, 2014
Jerome Arends

*/s/ Frank G. Berris	Director	March 27, 2014
Frank G. Berris

*/s/ K. Timothy Bull	Director	March 27, 2014
K. Timothy Bull

*/s/ William F. Cutler, Jr.	Director	March 27, 2014
William F. Cutler, Jr.

*/s/ Lewis G. Emmons	Director	March 27, 2014
Lewis G. Emmons

*/s/ Gary Gust	Director	March 27, 2014
Gary Gust

*/s/ Dennis C. Nelson	Director	March 27, 2014
Dennis C. Nelson

*/s/ Nels W. Nyblad	Director	March 27, 2014
Nels W. Nyblad

*/s/ Roxanne M. Page	Director	March 27, 2014
Roxanne M. Page

*/s/ Jack Hendon	Director	March 27, 2014
Jack Hendon

*By /s/ Thomas L. Lampen
Attorney-in-Fact

Choiceone Financial Services 10-K

EXHIBIT 3.1

RESTATED ARTICLES OF INCORPORATION,

AS AMENDED TO DATE

OF

CHOICEONE FINANCIAL SERVICES, INC.

ARTICLE I

NAME

The name of the corporation is:

CHOICEONE FINANCIAL SERVICES, INC.

ARTICLE II

PURPOSES

The purposes of the corporation are to engage in any activity within the purposes for which corporations may be organized under the Michigan Business Corporation Act.

ARTICLE III

AUTHORIZED CAPITAL

The total authorized capital stock of the corporation is Seven Million One Hundred Thousand (7,100,000) shares of stock divided into two classes, as follows:

A. Seven Million (7,000,000) shares of common stock, which shall be called "Common Stock."

B. One Hundred Thousand (100,000) shares of preferred stock, which shall be called "Preferred Stock."

The following provisions shall apply to the authorized stock of the corporation:

1. Provisions Applicable to Common Stock

a. No Preference . None of the shares of Common Stock shall be entitled to any preferences, and each share of Common Stock shall be equal to every other share of said Common Stock in every respect.

b. Dividends . After payment or declaration of full dividends on all shares having a priority over the Common Stock as to dividends, and after making all required sinking or retirement fund payments, if any, on all classes of Preferred Stock and on any other stock of the corporation ranking as to dividends or assets prior to the Common Stock, dividends on the shares of Common Stock may be declared and paid, but only when and as determined by the Board of Directors.

c. Rights on Liquidation . On any liquidation, dissolution or winding up of the affairs of the corporation, after there shall have been paid to or set aside for the holders of all shares having priority over the Common Stock the full preferential amounts to which they are respectively entitled, the holders of the Common Stock shall be entitled to receive pro rata all the remaining assets of the corporation available for distribution to shareholders. The Board of Directors may distribute in kind to the holders of Common Stock such remaining assets of the corporation or may sell, transfer or otherwise dispose of all or any part of such remaining assets to any person and may sell all or any part of the consideration so received and distribute any balance thereof in kind to holders of Common Stock. The merger or consolidation of the corporation into or with any other corporation, or the merger or consolidation of any other corporation into it, or any purchase or redemption of shares of stock of the corporation of any class, shall not be deemed to be a dissolution, liquidation or winding up of the corporation for the purposes of this paragraph.

d. Voting . At all meetings of shareholders of the corporation, the holders of the Common Stock shall be entitled to one (1) vote for each share of Common Stock held by them respectively.

2. Provisions Applicable To Preferred Stock.

a. Provisions to be Fixed by the Board of Directors . The Board of Directors is expressly authorized at any time, and from time to time, to provide for the issuance of shares of Preferred Stock in one or more series, each with such voting powers, full or limited, or without voting powers, and with such

designations, preferences and relative, participating, conversion, optional or other rights, and such qualifications, limitations or restrictions thereof, as shall be stated in the resolution or resolutions providing for the issue thereof adopted by the Board of Directors, and as are not stated in these Restated Articles of Incorporation, or any amendments thereto, including (without limiting the generality of the foregoing) the following:

(1) The distinctive designation and number of shares comprising such series, which number may (except where otherwise provided by the Board of Directors in creating such series) be increased or decreased (but not below the number of shares then outstanding) from time to time by action of the Board of Directors.

(2) The stated value of the shares of such series.

(3) The dividend rate or rates on the shares of such series and the relation which such dividends shall bear to the dividends payable on any other class of capital stock or on any other series of Preferred Stock, the terms and conditions upon which and the periods in respect of which dividends shall be payable, whether and upon what conditions such dividends shall be cumulative and, if cumulative, the date or dates from which dividends shall accumulate.

(4) Whether the shares of such series shall be redeemable and, if redeemable, whether redeemable for cash, property or rights, including securities of any other corporation, and whether redeemable at the option of the holder or the corporation or upon the happening of a specified event, the limitations and restrictions with respect to such redemption, the time or times when, the price or prices or rate or rates at which, the adjustments with which and the manner in which such shares shall be redeemable, including the manner of selecting shares of such series for redemption if less than all shares are to be redeemed.

(5) The rights to which the holders of shares of such series shall be entitled, and the preferences, if any, over any other series (or of any other series over such series), upon the voluntary or involuntary liquidation, dissolution, distribution or winding up of the corporation, which rights may vary depending on whether such liquidation, dissolution, distribution or winding up is voluntary or involuntary, and, if voluntary, may vary at different dates.

(6) Whether the shares of such series shall be subject to the operation of a purchase, retirement or sinking fund and, if so, whether and upon what conditions such fund shall be cumulative or noncumulative, the extent to which and the manner in which such fund

shall be applied to the purchase or redemption of the shares of such series for retirement or to other corporation purposes and the terms and provisions relative to the operation thereof.

(7) Whether the shares of such series shall be convertible into or exchangeable for shares of any other class or of any other series of any class of capital stock of the corporation or any other corporation, and, if so convertible or exchangeable, the price or prices or the rate or rates of conversion or exchange and the method, if any, of adjusting the same, and any other terms and conditions of such conversion or exchange.

(8) The voting powers, if any, of the shares of such series, and whether and under what conditions the shares of such series (alone or together with the shares of one or more of other series having similar provisions) shall be entitled to vote separately as a single class, for the election of one or more additional directors of the corporation in case of dividend arrearages or other specified events, or upon other matters.

(9) Whether the issuance of any additional shares of such series, or of any shares of any other series, shall be subject to restrictions as to issuance, or as to the powers, preferences or rights of any such other series.

(10) Any other preferences, privileges and powers and relative participating, optional or other special rights, and qualifications, limitations or restrictions of such series, as the Board of Directors may deem advisable and as shall not be inconsistent with the provisions of these Restated Articles of Incorporation.

b. Provisions Applicable to All Preferred Stock .

(1) All Preferred Stock shall rank equally and be identical in all respects except as to the matters permitted to be fixed by the Board of Directors, and all shares of any one series thereof shall be identical in every particular except as to the date, if any, from which dividends on such shares shall accumulate.

(2) Shares of Preferred Stock redeemed, converted, exchanged, purchased, retired or surrendered to the corporation, or which have been issued and reacquired in any manner, may, upon compliance with any applicable provisions of the Michigan Business Corporation Act, be given the status of authorized and unissued shares of Preferred Stock and may be reissued by the Board of Directors as part of the series of which they were originally a part or may be reclassified into

and reissued as part of a new series or as a part of any other series, all subject to the protective conditions or restrictions of any outstanding series of Preferred Stock.

ARTICLE IV

REGISTERED OFFICE AND RESIDENT AGENT

The street address (which is the mailing address) of the current registered office is 109 East Division, Sparta, Michigan 49345.

The name of the current resident agent is Jae M. Maxfield.

ARTICLE V

POWERS OF BOARD OF DIRECTORS

In furtherance and not in limitation of the powers conferred by the Michigan Business Corporation Act, the Board of Directors is expressly authorized:

A. To make, alter or repeal the Bylaws of the corporation.

B. To authorize and cause to be executed mortgages and liens upon the real and personal property of the corporation.

C. To set apart out of any of the funds of the corporation available for dividends a reserve or reserves for any proper purpose and to abolish any such reserve in the manner in which it was created.

D. By a majority of the whole Board, to designate one or more committees, each committee to consist of one or more of the directors of the corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. The Bylaws may provide that

in the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors, or in the Bylaws of the corporation, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power to authorize amending these Restated Articles of Incorporation, adopting an agreement of merger or consolidation, recommending to the shareholders the sale, lease, exchange or other disposition of all or substantially all of the corporation's property and assets other than in the usual and regular course of its business, recommending to the shareholders a dissolution of the corporation or a revocation of a dissolution or amending the Bylaws of the corporation; and, unless the resolution or Bylaws expressly so provide, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock.

E. When and as authorized by the shareholders in accordance with the Michigan Business Corporation Act, to sell, lease or exchange all or substantially all of the property and assets of the corporation, including its goodwill and its corporate franchises, upon such terms and conditions and for such consideration, which may consist in whole or in part of money or property including shares of stock in, and/or other securities of, any other corporation or corporations, as the Board of Directors shall deem expedient and in the best interests of the corporation.

F. To elect and determine the duties of the officers of the corporation and to establish the rights, powers, duties, rules and procedures that (1) govern the Board of Directors, including without limitation the vote required for any action by the Board of Directors; and (2) affect the directors' power to manage the affairs of the corporation.

G. To create and issue, by way of distributions to shareholders, as dividends or otherwise, rights or options entitling the holders thereof to purchase from the corporation shares of any class or series of the corporation's capital stock. Such rights or options shall be evidenced in such manner as the Board shall approve and shall set forth the terms upon which, the time within which and the price at which such shares may be purchased from the corporation upon the exercise of any such right or option. The terms and conditions of such rights or options may include, without limitation, provisions which adjust the option price or number of shares issuable under such rights or options in the event of an acquisition of shares or a reorganization, merger, consolidation, sale of assets or other occurrence involving the corporation, and restrictions or conditions that preclude or limit the entitlement, exercise or transfer of such rights or options by any person or persons who, after the date of creation or issuance of such rights or options, acquires, obtains the right to acquire or offers to acquire directly or indirectly, beneficial ownership of a specified number or percentage of the

corporation's outstanding voting shares or other shares of the corporation, or that invalidate or void such rights or options held by any such person or persons.

H. No Bylaw shall be adopted by shareholders which shall impair or impede the implementation of the foregoing.

ARTICLE VI

INDEMNIFICATION

The corporation shall indemnify directors and executive officers of the corporation as of right to the fullest extent now or hereafter permitted by law in connection with any actual or threatened civil, criminal, administrative or investigative action, suit or proceeding (whether brought by or in the name of the corporation, a subsidiary or otherwise) arising out of their service to the corporation, a subsidiary or to another organization at the request of the corporation or a subsidiary. The corporation may indemnify persons who are not directors or executive officers of the corporation to the extent authorized by Bylaw, resolution of the Board of Directors or contractual agreement authorized by the Board of Directors. The corporation may purchase and maintain insurance to protect itself and any such director, officer or other person against any liability asserted against the person and incurred by him or her in respect of such service whether or not the corporation would have the power to indemnify him or her against such liability by law or under the provisions of this paragraph. The provisions of this paragraph shall apply to actions, suits or proceedings, whether arising from acts or omissions occurring before or after the adoption of this Article VI, and to directors, officers and other persons who have ceased to render such service, and shall inure to the benefit of the heirs, executors and administrators of the directors, officers and other persons referred to in this Article VI.

ARTICLE VII

DIRECTORS

A. Number and Term of Directors . The corporation shall be managed by a Board of Directors who will initially be elected in accordance with this Section. The number of directors shall not be less than nine (9) nor more than fifteen (15). Initially there shall be eleven (11) directors. The exact number of directors may be increased or decreased from time

to time by the Board of Directors, pursuant to a resolution adopted by a majority of the entire Board of Directors. Effective on January 1, 1987, the members of the Board must be shareholders of the corporation. The Board of Directors shall be divided into three (3) classes, with the term of office of one class expiring each year. At the annual meeting of shareholders in 1986, four (4) directors of Class I shall be elected to hold office for a term expiring at the 1987 annual meeting, four (4) directors of Class II shall be elected to hold office for a term expiring at the 1988 annual meeting and three (3) directors of Class III shall be elected to hold office for a term expiring at the 1989 annual meeting. Beginning with the annual meeting of shareholders in 1987, each class of directors whose term shall then expire shall be elected to hold office for a three (3) year term and until the election and qualification of their respective successors.

B. Nominations of Director Candidates .

1. Nominations of candidates for election as directors of the corporation at any meeting of shareholders called for election of directors (an "Election Meeting") may be made by the Board of Directors or by any shareholder entitled to vote at such Election Meeting.

2. Nominations made by the Board of Directors shall be made at a meeting of the Board of Directors, or by written consent of directors in lieu of a meeting, not less than thirty (30) days prior to the date of the Election Meeting, and such nominations shall be reflected in the minute books of the corporation as of the date made. At the request of the Secretary of the corporation, each proposed nominee shall provide the corporation with such information concerning himself as is required under the rules of the Securities and Exchange Commission to be included in the corporation's proxy statement soliciting proxies for such person's election as a director.

3. Any shareholder who intends to make a nomination at an Election Meeting shall deliver, not less than one hundred twenty (120) days prior to the date of notice of the Election Meeting in the case of an annual meeting, and not more than seven (7) days following the date of notice of the meeting in the case of a special meeting, a notice to the Secretary of the corporation setting forth: (a) the name, age, business address and residence address of each nominee proposed in such notice; (b) the principal occupation or employment of each such nominee; (c) the number of shares of capital stock of the corporation which are beneficially owned by each such nominee; (d) a statement that each such nominee is willing to be nominated and serve; and (e) such other information concerning each such nominee as would be required under the rules of the Securities and Exchange Commission in a proxy statement soliciting proxies for the election of such nominees.

4. If the chairman of the Election Meeting determines that a nomination was not made in accordance with the foregoing procedures, such nomination shall be void.

C. Vacancies . All vacancies in the membership of the Board shall be filled by appointment made by a majority vote of the remaining directors. Any vacancy resulting from the removal of a director for cause shall be filled solely by appointment made by a majority of the Continuing Directors as defined in Article IX. Each person so appointed to fill a vacancy shall remain a director until the next election of the class for which that director shall have been chosen and until that director's successor shall be elected by the shareholders.

D. Removal of Directors . A director may be removed before the end of a term only for cause, except that the Bylaws may provide for mandatory retirement from the Board of Directors at seventy (70) years of age or older. At any annual meeting of the shareholders, or at a meeting of shareholders called expressly for the purpose, the notice of which shall state that the removal of a director or directors is among the purposes of the meeting, the holders of a majority of the shares then entitled to vote at an election of directors, present in person or by proxy, may remove such director or directors for cause. If the holders of the shares of any class are entitled to elect one (1) or more directors by the provisions of these Restated Articles of Incorporation the provisions of this Section shall apply only to the vote of the holders of that class of outstanding shares.

Except as may be provided otherwise by law, cause for removal shall be construed to exist only if: (1) the director whose removal is proposed has been convicted of a felony by a court of competent jurisdiction and such conviction is no longer subject to direct appeal; (2) such director has been adjudicated by a court of competent jurisdiction to be liable for negligence or misconduct in the performance of such person's duty to the corporation in a matter of substantial importance to the corporation and such adjudication is no longer subject to a direct appeal; (3) such director has become mentally incompetent, whether or not so adjudicated, which mental incompetency directly affects such person's ability as a director of the corporation; or (4) the director's actions or failure to act have been in derogation of the director's duties, as provided in the Bylaws of the corporation or otherwise provided by law. Any proposal for removal pursuant to (3) or (4) of this paragraph which is initiated by the Board of Directors for submission to the shareholders shall require the affirmative vote of at least sixty-six and 2/3 percent (66-2/3%) of the total number of directors then in office, exclusive of the director who is the subject of the removal action and who shall not be entitled to vote thereon.

ARTICLE VIII

OPT-OUT PROVISION

Pursuant to Section 784(l)(b) of the Michigan Business Corporation Act, the corporation elects not to be governed by Chapter 7A of the Michigan Business Corporation Act, or any amended versions of that Chapter.

ARTICLE IX

CERTAIN BUSINESS COMBINATIONS

A. Higher Vote Requirements For Certain Business Combinations . In addition to any vote otherwise required by law or by these Restated Articles of Incorporation, a Business Combination shall require approval by an affirmative vote of not less than sixty-six and 2/3 percent (66-2/3%) of the Voting Stock, other than Voting Stock held by either (1) an Interested Shareholder who is, or whose Affiliate or Associate is, a party to a Business Combination, or (2) an Affiliate or Associate of the Interested Shareholder.

B. Conditions Exempting Higher Vote Requirements . The vote requirements of Section A of this Article IX shall not be applicable to a particular Business Combination if the conditions specified in either one of the following paragraphs are met:

1. Approval By Continuing Directors . The Business Combination has been approved by a vote of a majority of the Continuing Directors; or

2. Fair Price Provision . Payment to shareholders in the Business Combination is exclusively in the form of cash, or cash and notes at the individual shareholder's option, provided that the option is available to all shareholders, and all of the following conditions are met:

a. Common Stock . The amount of cash to be paid per share to holders of Common Stock of the corporation must be at least equal to the highest of the following amounts:

(1) The highest per share price, including any brokerage commissions, transfer taxes and soliciting dealers' fees, paid by the

Interested Shareholder for any shares of Common Stock of the same class or series acquired by the Interested Shareholder at any time prior to the Announcement Date of the proposal of the Business Combination, or in the transaction in which it became an Interested Shareholder, whichever is higher.

(2) The fair market value per share of Common Stock of the same class or series as determined in good faith by the Continuing Directors, which determination may be based upon an appraisal by any investment banking or similar firm, on the Announcement Date or on the Determination Date, whichever is higher.

b. Non-Common Stock . The amount of the cash to be paid per share in the Business Combination to holders of shares of any class or series of outstanding stock other than Common Stock shall be at least equal to the highest of the following amounts, whether or not the Interested Shareholder has previously acquired any shares of the particular class or series of stock:

(1) The highest per share price, including any brokerage commissions, transfer taxes and soliciting dealers' fees, paid by the Interested Shareholder for any shares of the class of stock acquired at any time prior to the Announcement Date of the proposal of the Business Combination, or in the transaction in which it became an Interested Shareholder, whichever is higher.

(2) The highest preferential amount per share to which the holders of shares of the class of stock are entitled in the event of any voluntary or involuntary liquidation, dissolution or winding up of the corporation.

(3) The fair market value per share of the class of stock as determined in good faith by the Continuing Directors, which determination may be based upon an appraisal by any investment banking or similar firm, on the Announcement Date or on the Determination Date, whichever is higher.

c. Other Conditions . Prior to the consummation of a Business Combination by an Interested Shareholder, all of the following conditions shall be met:

(1) Any full periodic dividends, whether or not cumulative, on any outstanding Preferred Stock of the corporation shall have been declared and paid at the regular date therefor.

(2) The annual rate of dividends paid on any class or series of stock of the corporation that is not Preferred Stock, except as necessary to reflect any subdivision of the stock, shall not have been reduced, and the annual rate of dividends shall have increased as necessary to reflect any reclassification, including any reverse stock split, recapitalization, reorganization or any similar transaction that has the effect of reducing the number of outstanding shares of the stock.

(3) The Interested Shareholder may not have received the benefit, directly or indirectly, except proportionately as a shareholder, of any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided by the corporation or any of its subsidiaries, whether in anticipation of or in connection with the Business Combination or otherwise.

(4) The Interested Shareholder did not become the Beneficial Owner of any additional shares of the corporation except as part of the transaction that created the Interested Shareholder status or as a result of proportionate stock splits or stock dividends.

d. Proxy Statement . A proxy statement describing the proposed Business Combination that complies with the disclosure requirements of the Securities Exchange Act of 1934, as amended, and which complies with the disclosure requirements of the Michigan Blue Sky Laws, as amended, and the rules and regulations promulgated thereunder (collectively the "Acts"), must be sent by first class mail to all shareholders of the corporation at least thirty (30) days prior to the consummation of the Business Combination. The proxy statement must be sent regardless of whether it is required by the Acts. The proxy statement shall prominently display a recommendation of the Continuing Directors on the advisability or inadvisability of the Business Combination and a recommendation of any investment banking or similar firm selected by a majority of the Continuing Directors, as to the fairness of the Business Combination to the shareholders of the corporation.

C. Definitions .

1. "Affiliate" or "Affiliated Person" means a Person who directly, or indirectly through one or more intermediaries, controls, is controlled by or is under common control with a specified Person.

2. "Announcement Date" means the first general public announcement or the first communication generally to shareholders of the corporation, whichever is

earlier, of the proposal or intention to make a proposal concerning a Business Combination.

3. "Associate," when used to indicate a relationship with any person, means any one of the following:

a. Any corporation, partnership or other organization, (except for the corporation or a subsidiary of the corporation), in which the Person is (1) an officer, director or partner, or (2) directly or indirectly, the Beneficial Owner of ten percent (10%) or more of any class of Equity Securities.

b. Any trust or other estate (1) in which the Person has a beneficial interest of ten percent (10%) or more, or (2) as to which the Person serves as trustee or in a similar fiduciary capacity.

c. Any relative of the Person or the Person's spouse who has the same residence as the Person or who is a director or officer of the corporation or any of its Affiliates.

4. "Beneficial Owner," when used with respect to any Voting Stock, means a Person who:

a. Individually or with any of its Affiliates or Associates, beneficially owns Voting Stock, directly or indirectly.

b. Individually or with any of its Affiliates or Associates has:

(1) The right to acquire Voting Stock whether the right is exercisable immediately or only after the passage of time, pursuant to any agreement, or upon the exercise of conversion rights, exchange rights, warrants, options or otherwise.

(2) The right to vote Voting Stock pursuant to any agreement.

(3) Any agreement for the purpose of acquiring, holding, voting or disposing of Voting Stock with any other person who beneficially owns, or whose Affiliates or Associates beneficially own, directly or indirectly, the Voting Stock.

5. "Book Value" means the net amount of an asset or group of assets shown in the accounting records which record the cost of the asset less reductions from the cost of the asset, such as depreciation and amortization, determined in accordance with generally accepted accounting principles.

6. "Business Combination" means any one of the following:

a. Any merger or consolidation of the corporation, or any subsidiary of the corporation, that alters the contract rights of the Voting Stock as expressly set forth in these Restated Articles of Incorporation or changes or converts, in whole or in part, the outstanding shares of the corporation with either:

(1) Any Interested Shareholder.

(2) Any other corporation, whether or not itself an Interested Shareholder, which is, or after the merger or consolidation would be, an Affiliate of an Interested Shareholder that was an Interested Shareholder prior to the transaction.

b. Any sale, lease, transfer or other disposition, except in the ordinary course of business, in one transaction or a series of transactions in any twelve (12) month period, to any Interested Shareholder or any Affiliate of any Interested Shareholder (other than the corporation or any of its subsidiaries) of any assets of the corporation or any of its subsidiaries having an aggregate Book Value as of the end of the corporation's most recently ended fiscal quarter of ten percent (10%) or more of its Consolidated Net Worth measured at the time the transaction or transactions are approved by the Board of Directors of the corporation.

c. The issuance or transfer by the corporation, or any of its subsidiaries in one transaction or a series of transactions, of any Equity Securities of the corporation or any of its subsidiaries that have an aggregate market value of ten percent (10%) or more of the total fair market value of the outstanding shares of the corporation to any Interested Shareholder or any Affiliate of any Interested Shareholder (other than the corporation or any of its subsidiaries) except pursuant to the exercise of warrants or rights to purchase Equity Securities offered pro rata to all holders of the corporation's Voting Stock or any other method affording substantially proportionate treatment to the holders of Voting Stock.

d. The adoption of any plan or proposal for the liquidation or dissolution of the corporation in which anything other than cash will be received by an Interested Shareholder or any Affiliate of any Interested Shareholder.

e. Any reclassification of securities, including any reverse stock split, or recapitalization of the corporation, or any merger or consolidation of the corporation with any of its subsidiaries that has the effect, directly or indirectly, in one transaction or a series of transactions, of increasing by ten percent (10%) or more of the total number of outstanding shares, the proportionate amount of the outstanding shares of any class of Equity Securities of the corporation or any of its subsidiaries which is directly or indirectly owned by any Interested Shareholder or any Affiliate of any Interested Shareholder.

7. "Common Stock" means any stock other than preferred or preference stock.

8. "Consolidated Net Worth" means the total assets of the corporation less its total liabilities determined in accordance with generally accepted accounting principles.

9. "Continuing Director" means any member of the Board of Directors of the corporation who is not an Affiliate or an Associate of an Interested Shareholder and either (a) was a member of the Board of Directors prior to the time that the Interested Shareholder became an Interested Shareholder, or (b) is a successor to a Continuing Director who is not an Affiliate or Associate of an Interested Shareholder and is recommended to succeed a Continuing Director by a majority of the Continuing Directors who are then members of the Board of Directors.

10. "Control," "controlling," "controlled by," or "under common control with" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting shares, by contract, or otherwise. The Beneficial Ownership of 10% or more of the voting shares of a corporation shall create a presumption of control.

11. "Determination Date" means the date on which an Interested Shareholder first became an Interested Shareholder.

12. "Equity Security" or "Equity Securities" mean any one of the following:

a. Any stock or similar security, certificate of interest or participation in any profit sharing agreement, voting trust certificate or voting share.

b. Any security convertible, with or without consideration, into an equity security, or any warrant or other security carrying any right to subscribe to or purchase an equity security.

c. Any put, call, straddle or other option or privilege of buying an equity security from, or selling an equity security to, another without being bound to do so.

13. "Interested Shareholder" means any Person (other than the corporation or any of its subsidiaries) who is either:

a. The Beneficial Owner, directly or indirectly, of ten percent (10%) or more of the outstanding Voting Stock of the corporation.

b. An Affiliate of the corporation and at any time within the two (2) year period immediately prior to the date in question was the Beneficial Owner, directly or indirectly, of ten percent (10%) or more of the then outstanding Voting Stock of the corporation.

c. For the purpose of determining whether a Person is an Interested Shareholder pursuant to subdivision (a) or (b), the number of shares of Voting Stock considered to be outstanding shall include all Voting Stock owned by the Person.

14. "Person" means any entity including, without limitation, an individual, a corporation, a partnership, a trust, a bank, a joint stock company, an unincorporated association or similar organization.

15. "Valuation Date" means:

a. In a Business Combination voted upon by shareholders, the day prior to the date of the shareholders vote or the day which is twenty (20) calendar days prior to the consummation of the Business Combination, whichever is later.

b. In a Business Combination not voted upon by shareholders, the date of the consummation of the Business Combination.

16. "Voting Stock" means all outstanding shares of Common Stock and Preferred Stock of the corporation entitled to vote in an election of directors.

ARTICLE X

EVALUATION OF OFFERS

The Board of Directors shall not initiate, approve, adopt or recommend any offer of any party other than the corporation to make a tender or exchange offer for any equity security of the corporation, or to engage in any Business Combination as defined in Article IX, unless and until it shall have first evaluated the proposed offer and determined in its judgment that the proposed offer would be in compliance with all applicable laws. In evaluating a proposed offer to determine whether it would be in compliance with law, the Board of Directors shall consider all aspects of the proposed offer, including the manner in which the offer is proposed to be made, the documents proposed for the communication of the offer and the effects and consequences of the offer if consummated, in the light of the laws of the United States of America and affected states and foreign countries. In connection with this evaluation, the Board may seek and rely upon the opinion of independent legal counsel and it may test the legality of the proposed offer in any state, federal or foreign court or before any state, federal or foreign administrative agency which may have jurisdiction. If the Board of Directors determines in its judgment that a proposed offer would be in compliance with all applicable laws, the Board of Directors shall then evaluate the proposed offer and determine whether the proposed offer is in the best interests of the corporation and its shareholders. The Board of Directors shall not initiate, approve, adopt or recommend any such offer which in its judgment would not be in the best interests of the corporation and its shareholders. In evaluating a proposed offer to determine whether it would be in the best interests of the corporation and its shareholders, the Board of Directors shall consider all factors which it deems relevant including, without limitation:

A. The fairness of the consideration to be received by the corporation and its shareholders under the proposed offer, taking into account the trading price of the corporation's stock immediately prior to the announcement of the proposed offer, the historical trading prices of the corporation's stock, the price that might be achieved in a negotiated sale of the corporation as a whole, premiums over the trading price of their securities which have been proposed or offered to other companies in the past in connection with similar offers and the future prospects of the corporation;

B. The possible social and economic impact of the proposed offer and its consummation on the corporation and its employees, customers and suppliers;

C. The possible social and economic impact of the proposed offer and its consummation on the communities in which the corporation and its subsidiaries operate or are located;

D. The business and financial conditions and earnings prospects of the offering party, including, without limitation, debt service and other existing or likely financial obligations of the offering party;

E. The competence, experience and integrity of the offering party and its management; and

F. The intentions of the offering party regarding the use of the assets of the corporation to finance the transaction.

ARTICLE XI

LIABILITY OF DIRECTORS

A director of the corporation shall not be personally liable to the corporation or its shareholders for monetary damages for a breach of the director's fiduciary duty, except for liability:

A. For any breach of the director's duty of loyalty to the corporation or its shareholders;

B. For any acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law;

C. For any violation of Section 551(1) of the Michigan Business Corporation Act;

D. For any transaction from which the director derived an improper personal benefit; or

E. For any acts or omissions occurring before March 1, 1987.

If the Michigan Business Corporation Act is amended after this Article has been adopted by the shareholders to authorize corporate action to further eliminate or limit the

personal liability of directors, then the liability of a director of the corporation shall be eliminated or limited to the fullest extent permitted by the Michigan Business Corporation Act as amended.

Any repeal, modification or adoption of any provision in these Restated Articles of Incorporation inconsistent with this Article XI shall not adversely affect any right or protection of a director of the corporation existing at the time of such repeal, modification or adoption.

ARTICLE XII

DURATION

The term of this corporation is perpetual.

ARTICLE XIII

AMENDMENTS

These Restated Articles of Incorporation may be amended by the affirmative vote of a majority of the shares entitled to vote at any regular or special meeting of shareholders of the corporation if notice of the proposed amendment is contained in the notice of the meeting, except that the affirmative vote of not less than sixty-six and 2/3 percent (66-2/3%) of the shares entitled to vote at any regular or special meeting of shareholders of the corporation shall be necessary for any amendment to Articles VII, VIII, IX, X and this Article XIII.

Choiceone Financial Services 10-K

Exhibit 3.2

BYLAWS

CHOICEONE FINANCIAL SERVICES, INC.
(As amended through August 12, 1998)

ARTICLE I

SHAREHOLDERS

Section 1. Time and Place of Meetings. Shareholder meetings shall be held at the Corporation's principal executive office during regular business hours or at such other time and place as the Board of Directors determines.

Section 2. Annual Meetings of Shareholders. An annual meeting of shareholders shall, unless action to be taken at the meeting is instead taken by written consent as permitted by law, be held on the fourth Tuesday of April (or the next business day if that Tuesday is a holiday) after the end of the Corporation's fiscal year at the time designated in the notice of the meeting or at such other date and time as the Board of Directors determines.

Section 3. Special Meetings. A special meeting of shareholders may be called by the Board of Directors, the Chairperson of the Board, the President or by shareholders holding, in the aggregate, not less than 10% of all shares entitled to vote at a meeting. Upon delivery to the President or the Secretary of a written instrument setting forth the date and purposes of the meeting, signed by an officer or director on behalf of the Board of Directors, the Chairperson, or the President, or by holders of a sufficient number of shares, notice of the meeting shall be given to each shareholder entitled to vote at the meeting.

Section 4. Notice of Meetings. Written notice of the date, time, place, and purposes of a shareholder meeting shall be given not less than 10 nor more than 60 days before the date of the meeting, either personally or by mail, to each shareholder of record entitled to vote at the meeting. Notice of the purposes of the meeting shall include notice of any shareholder proposals that are proper subjects for shareholder action and are intended to be presented by shareholders who have notified the Corporation in writing of their intention to present the proposals at the meeting in accordance with these Bylaws.

Section 5. Shareholder Proposals. Except as otherwise provided by statute, the Articles of Incorporation, or these Bylaws:

(a) No matter may be presented for shareholder action at an annual or special meeting of shareholders unless such matter is: (i) specified in the notice of the meeting (or any supplement to the notice) given by or at the direction of the Board of Directors; (ii) otherwise presented at the meeting by or at the direction of the Board of Directors; (iii) properly presented for action at the meeting by a shareholder in accordance with the notice provisions set forth in this Section and any other applicable requirements; or (iv) a procedural matter presented, or accepted for presentation, by the chairperson of the meeting in his or her sole discretion.

(b) For a matter to be properly presented by a shareholder, the shareholder must have given timely notice of the matter in writing to the Secretary of the Corporation. To be timely, the notice must be delivered to or mailed to and received at the principal executive offices of the Corporation not less than 120 calendar days prior to the date corresponding to the date of the Corporation's proxy statement or notice of meeting released to shareholders in connection with the last preceding annual meeting of shareholders in the case of an annual meeting (unless the Corporation did not hold an annual meeting within the last year, or if the date of the upcoming annual meeting changed by more than 30 days from the date of the last preceding meeting, then the notice must be delivered or mailed and received not more than seven days after the earlier of the date of the notice of the meeting or public disclosure of the date of the meeting), and not more than seven days after the earlier of the date of the notice of the meeting or public disclosure of the date of the meeting in the case of a special meeting. The notice by the shareholder must set forth: (i) a brief description of the matter the shareholder desires to present for shareholder action; (ii) the name and record address of the shareholder proposing the matter for shareholder action; (iii) the class and number of shares of capital stock of the Corporation that are beneficially owned by the shareholder; and (iv) any material interest of the shareholder in the matter proposed for shareholder action.

(c) The shareholder proposal, together with any accompanying supporting statement, shall not in the aggregate exceed 500 words. Except to the extent that a shareholder proposal submitted pursuant to this Section is not made available at the time of mailing, the notice of the purposes of the meeting shall include the name and address of and the number of shares of the voting security held by the proponent of each shareholder proposal.

(d) A shareholder may submit matters and proposals for shareholder action at any annual or special shareholder meeting if the matters and proposals are of general concern to, and are proper subjects for action by, the shareholders. A submitted proposal or matter may not be presented for shareholder action if it: (i) relates to the enforcement of a personal claim or the redress of a personal grievance against the Corporation, its management or any other person; (ii) consists of a recommendation, request or mandate that action be taken with respect to a matter, including a general economic, political, racial, religious, social or similar cause, that is not significantly related to the Corporation's business or is not within the Corporation's power to effectuate; (iii) has, at the shareholder's request, previously been submitted in either of the last two annual share-

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holder meetings and the shareholder has failed to present the proposal, in person or by proxy, for action at the meeting; (iv) is substantially similar to a matter or proposal presented within the preceding five calendar years: (x) if it was submitted once during the past five annual meetings and it received less than 3% of the total votes cast, or (y) if it was submitted twice during the past five annual meetings and it received less than 6% of the total votes cast at the time of its second submission, or (z) if it was submitted three times during such period and it received less than 10% of the votes cast at the time of its third submission (if any of (x), (y) or (z) apply, the proposal may not be submitted for three years after the latest previous submission); or (v) consists of a recommendation or request that the management take action with respect to a matter relating to the conduct of the Corporation's ordinary business operations.

(e) Notwithstanding the above, if the Corporation is subject to the solicitation rules and regulations of the Securities Exchange Act of 1934, as amended, and the shareholder desires to require the Corporation to include the shareholder's proposal in the Corporation's proxy materials, matters and proposals submitted for inclusion in the Corporation's proxy materials shall be governed by those rules and regulations.

Section 6. Adjournments. If a meeting is adjourned, it is not necessary to give notice of the adjourned meeting if (i) the date, time, and place to which the meeting is adjourned are announced at the meeting at which the adjournment is taken, and (ii) at the adjourned meeting only such business is transacted as might have been transacted at the original meeting. If after the adjournment the Board of Directors fixes a new record date for the adjourned meeting, a notice of the adjourned meeting shall be given in accordance with Section 4 above.

Section 7. Waiver of Notice. A shareholder or a shareholder's attorney-in-fact may waive the shareholder's right to notice before or after a meeting by a signed waiver of notice. A shareholder's attendance at a meeting will result in a waiver of objection to:

(a) lack of notice or defective notice of the meeting, unless the shareholder at the beginning of the meeting objects to holding the meeting or transacting business at the meeting; and

(b) consideration of a particular matter at the meeting that is not within the purposes described in the meeting notice, unless the shareholder objects to considering the matter when it is presented.

Section 8. List of Shareholders Entitled to Vote. The officer or agent having charge of the stock transfer books for shares of the Corporation shall make and certify a complete list of the shareholders entitled to vote at a shareholder meeting or any adjournment thereof. The list shall be:

(a) arranged alphabetically within each class and series, with the address of, and the number of shares held by, each shareholder;

(b) produced at the time and place of the meeting;

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(d) prima facie evidence as to who are the shareholders entitled to examine the list or to vote at the meeting.

Failure to comply with the requirements of this Section shall not affect the validity of an action taken at the meeting before a shareholder makes a demand to comply with the requirements.

Section 9. Quorum. Unless a greater quorum is required by the Articles of Incorporation, these Bylaws or statute, shares entitled to cast a majority of the votes at a shareholder meeting constitute a quorum at the meeting. The shareholders present in person or by proxy at the meeting are counted for the purpose of determining a quorum. Once a quorum is present, business may be conducted until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum. Whether or not a quorum is present, the meeting may be adjourned by a vote of the shares present. When the holders of a class or series of shares are entitled to vote separately on an item of business, each class or series must have a quorum, as determined by this Section, for the purpose of transacting the item of business.

Section 10. Voting Rights. Except as otherwise provided by statute or the Articles of Incorporation, each share is entitled to one vote on each matter submitted to a vote.

Section 11. Vote Required. An action, other than the election of directors, to be taken by shareholder vote shall be authorized by a majority of the votes cast by shareholders entitled to vote on the action, unless a greater vote is required by statute, the Articles of Incorporation, or these Bylaws. Unless the Articles of Incorporation provide otherwise, directors shall be elected by a plurality of votes cast. Shareholders may not cumulate their votes.

Section 12. Class Voting. If the Articles of Incorporation provide that a class of shares or a series of a class shall vote as a class, either generally or to authorize one or more specified actions, such voting as a class or series shall be in addition to any other required vote. Where voting as a class or series is required on an action other than the election of directors, the action shall be authorized by a majority of the votes cast by the holders of the class or series entitled to vote on the action, unless a greater vote is required by statute or the Articles of Incorporation.

Section 13. Electronic Participation in Meeting. A shareholder may participate in a shareholder meeting by a conference telephone or by other similar communications equipment through which all persons participating in the meeting may communicate with the other participants, if all participants are advised of the communications equipment and the names of the participants in the meeting are disclosed to all participants. Such participation in a meeting constitutes presence in person at the meeting.

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Section 14. Conduct of Meetings. Shareholder meetings shall be conducted as follows:

(a) The chairperson of the meeting shall determine the order of business and shall have the authority to establish rules for the conduct of the meeting. Any rules adopted for, and the conduct of, the meeting shall be fair to shareholders.

(b) The chairperson of the meeting shall announce at the meeting when the polls close for each matter voted upon. If no announcement is made, the polls shall close upon the final adjournment of the meeting. After the polls close, no ballots, proxies, or votes nor any revocations or changes to ballots, proxies, or votes may be accepted.

(c) If disorder arises that prevents the continuation of the business of the meeting, the chairperson may adjourn the meeting.

(d) The chairperson may require any person who is not a shareholder of record or holding a proxy to leave the meeting.

Section 15. Business Transacted. The business effectively transacted at a shareholder meeting shall be confined to the following:

(a) any matter specified in the notice or reasonably related to a matter specified in the notice; and

(b) any matter (i) the consideration of which is not objected to by any shareholder attending the meeting, and (ii) notice of which is waived by all shareholders not attending the meeting.

Section 16. Action Without a Meeting. Any action required or permitted to be taken at a shareholder meeting may be taken without a meeting, without prior notice, and without a vote if, before or after the action, all the shareholders entitled to vote at the meeting consent in writing.

Section 17. Record Date.

(a) For the purpose of determining shareholders entitled to notice of and to vote at a shareholder meeting or an adjournment of a meeting, the Board of Directors may fix a record date, which may not precede the date on which the Board adopts the resolution fixing the record date. The date may not be more than 60 nor less than 10 days before the date of the meeting. If a record date is not fixed, the record date for determination of shareholders entitled to notice of or to vote at a shareholder meeting shall be the close of business on the day next preceding the day on which notice is given or, if no notice is given, the day next preceding the day on which the meeting is held. When a determination of shareholders of record entitled to notice of or to vote at a shareholder meeting is made as

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provided in this Section, the determination applies to any adjournment of the meeting, unless the Board of Directors fixes a new record date under this Section for the adjourned meeting.

(b) For the purpose of determining shareholders entitled to express consent to or to dissent from a proposal without a meeting, the Board of Directors may fix a record date, which may not be more than 60 days before effectuation of the action proposed to be taken. If a record date is not fixed and prior action by the Board of Directors is required with respect to the corporate action to be taken without a meeting, the record date is the close of business on the day on which the Board resolution is adopted. If a record date is not fixed and prior Board action is not required, the record date is the first date on which a signed written consent is delivered to the Corporation as provided in these Bylaws.

(c) For the purpose of determining shareholders entitled to receive payment of a share dividend or distribution, or allotment of a right, or for the purpose of any other action, the Board of Directors may fix a record date, which may not precede the date on which the Board adopts the resolution fixing the record date. The date may not be more than 60 days before the payment of the share dividend or distribution, allotment of a right, or other action. If a record date is not fixed, the record date is the close of business on the day on which the Board resolution relating to the corporate action is adopted.

Section 18. Proxies. A shareholder entitled to vote at a shareholder meeting or to express consent or dissent without a meeting may authorize one or more other persons to act for the shareholder by proxy only by the following methods:

(a) The execution of a writing authorizing another person or persons to act for the shareholder as proxy. Execution may be accomplished by the shareholder or by an authorized officer, director, employee, or agent of the shareholder by either signing the writing or causing his or her signature to be affixed to the writing by any reasonable means including, without limitation, facsimile signature;

(b) Transmitting or authorizing the transmission of a telegram, cablegram, or other means of electronic transmission to the person who will hold the proxy or to a proxy solicitation firm, proxy support service organization, or similar agent fully authorized by the person who will hold the proxy to receive that transmission. Any telegram, cablegram, or other means of electronic transmission must either set forth or be submitted with information from which it can be determined that the telegram, cablegram, or other electronic transmission was authorized by the shareholder. If a telegram, cablegram, or other electronic transmission is determined to be valid, the inspectors, or, if there are no inspectors, the persons making the determination shall specify the information upon which they relied.

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A copy, facsimile telecommunication, or other reliable reproduction of the writing or transmission created pursuant to subsections (a) or (b) may be substituted or used in lieu of the original writing or transmission for any purpose for which the original writing or transmission could be used, if the copy, facsimile telecommunication, or other reproduction is a complete reproduction of the entire original writing or transmission.

A proxy is not valid after the expiration of three years from its date unless otherwise provided in the proxy. A proxy must be filed with the Corporation at or before the meeting.

ARTICLE II

DIRECTORS

Section 1. Number and Term of Directors. Except as otherwise provided in the Articles of Incorporation, the Board of Directors shall consist of one or more directors as determined initially by the incorporator(s) and, thereafter, from time to time by the Board of Directors. Except as otherwise provided in the Articles of Incorporation, a number of directors equal to the number whose term expires at the time of the meeting shall be elected at each annual shareholder meeting and each director shall hold office until the third succeeding annual shareholder meeting and until a successor is elected and qualified. If shareholders of any class or series of shares have the exclusive right to elect one or more directors, those directors may be elected only by the vote of those shareholders.

Section 2. Mandatory Retirement. No director may continue to serve on the Board of Directors after reaching 70 years of age.

Section 3. Resignation. A director may resign by written notice to the Corporation. A resignation is effective upon its receipt by the Corporation or at a later time specified in the notice.

Section 4. Powers. The Corporation's business and affairs shall be managed by or under the direction of the Board of Directors, except as otherwise provided by statute or the Articles of Incorporation.

Section 5. Directors' Compensation. The Board of Directors, by affirmative vote of a majority of directors in office and irrespective of any personal interest of any of them, may establish reasonable compensation for a director's services to the Corporation as a director or officer. Directors may also be reimbursed for their expenses, if any, of attendance at each meeting of the Board or a committee.

Section 6. Regular Meetings. Regular meetings of the Board of Directors shall be held at the date, time, and place that the Board determines. A notice to directors is not required for a regular meeting, except that, when the Board establishes or thereafter changes the schedule of regular meetings, or changes the date, time, or place of a previously scheduled regular meeting,

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notice of the action shall be given to each director who was absent from the meeting at which the action was taken.

Section 7. Special Meetings. The Chairperson, the President, or directors constituting at least one-third of the directors then in office may call a special meeting of the Board of Directors by giving notice to each director.

Section 8. Notice of Meetings. Except as otherwise provided by these Bylaws, notice of the date, time, and place of each meeting of the Board of Directors shall be given to each director by either of the following methods:

(a) by mailing a written notice of the meeting to the address that the director designates or, in the absence of designation, to the last known address of the director, at least five days before the date of the meeting; or

(b) by delivering a written notice of the meeting to the director at least one full business day before the meeting, personally or by telecopier or telex, to the director's last known office or home.

Section 9. Waiver of Notice. A director's attendance at or participation in a meeting waives any required notice to the director of the meeting, unless, at the beginning of the meeting or promptly upon the director's arrival, the director objects to holding the meeting or transacting business at the meeting and does not thereafter vote for or assent to any action taken at the meeting. A director may waive notice in writing before or after a meeting.

Section 10. Purpose of Meetings. Neither the business to be transacted nor the purpose of a regular or special meeting need be specified in the notice or waiver of notice of the meeting. If the purpose is stated in the notice, the business transacted at the meeting is not limited to the purpose stated.

Section 11. Quorum and Required Vote. A majority of the directors then in office, or of the members of a committee of the Board of Directors, constitutes a quorum for the transaction of business, unless the Articles of Incorporation, these Bylaws or, in the case of a committee, the Board resolution establishing the committee, provide for a larger or smaller number. The vote of the majority of members present at a meeting at which a quorum is present constitutes the action of the Board or of the committee, unless the vote of a larger number is required by statute, the Articles of Incorporation, these Bylaws, or, in the case of a committee, the Board resolution establishing the committee.

Section 12. Action by Written Consent. Action required or permitted to be taken under authorization voted at a meeting of the Board of Directors or a committee of the Board may be taken without a meeting if, before or after the action, all members of the Board then in office or of the committee consent to the action in writing. The written consents shall be filed with the minutes of the Board or committee. The consent has the same effect as a vote of the Board or committee for all purposes.

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Section 13. Electronic Participation in Meeting. A member of the Board of Directors or of a committee of the Board may participate in a meeting by means of conference telephone or similar communications equipment through which all persons participating in the meeting can communicate with each other. Such participation in a meeting constitutes presence in person at the meeting. A director must be permitted to participate in a meeting by such means if the director so requests.

Section 14. Committees of Directors. The Board of Directors may designate one or more committees consisting of one or more directors. The Board may designate one or more directors as alternate members of a committee, who may replace an absent or disqualified member at a meeting of the committee. Unless prohibited by the Board resolution creating the committee, in the absence or disqualification of a committee member, the committee members present at a meeting and not disqualified from voting, whether or not they constitute a quorum, may unanimously appoint another director to act at the meeting in the place of the absent or disqualified member. A committee, to the extent provided in the Board resolution creating the committee, may exercise all of the Board's power and authority in the management of the business and affairs of the Corporation, except that a committee may not: (i) amend the Articles of Incorporation, except that a committee may prescribe the relative rights and preferences of a series of a class of shares for which the Board of Directors has such authority under the Articles of Incorporation; (ii) adopt an agreement of merger or consolidation; (iii) recommend to shareholders the sale, lease, or exchange of all or substantially all of the Corporation's property and assets; (iv) recommend to the shareholders a dissolution of the Corporation or a revocation of a dissolution; (v) amend the Bylaws of the Corporation; or (vi) fill vacancies in the Board of Directors. Unless a resolution of the Board of Directors expressly so provides, a committee may not declare a distribution or dividend or authorize the issuance of stock. A committee exists, and each member serves, at the pleasure of the Board. A committee may establish a time and place for regular meetings, for which no notice is required, except that, if the committee changes the date, time, or place of a regular meeting, notice of the change shall be given to each member who was absent from the meeting at which the change was made. Otherwise, a notice of a committee meeting shall be given in the same manner as a notice of a Board meeting.

Section 16. Miscellaneous Powers of the Directors. Unless the Articles of Incorporation provide otherwise, the Board of Directors may adopt one or more of the following amendments to the Corporation's Articles of Incorporation without shareholder action:

(a) Extend the duration of the Corporation if it was incorporated at a time when limited duration was required by law;

(b) Delete the names and addresses of the initial directors;

(c) Delete the name and address of the initial resident agent or registered office, if a statement of change is on file with the administrator;

(d) Change each issued and unissued authorized share of an outstanding class into a greater number of whole shares if the Corporation has only shares of that class outstanding;

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(e) Adopt and file an amendment of the Articles of Incorporation eliminating a series of shares if there are no outstanding shares of the series, no outstanding shares or bonds convertible into shares of the series, or other rights, options, or warrants issued by the Corporation that could require issuing shares of the series;

(f) Change the Corporation name by substituting the word "corporation," "incorporation," "company," "limited," or the abbreviation "corp.," "inc.," "co.," or "ltd.," for a similar word or abbreviation in the corporate name, or by adding, deleting, or changing a geographical attribution for the Corporation name.

(g) Any other change that the Michigan Business Corporation Act expressly permits the Board of Directors to make without shareholder action.

ARTICLE III

OFFICERS

Section 1. Appointment. The Board of Directors, at its first meeting following the annual shareholder meeting, shall appoint a Chairperson, President, Secretary, and Treasurer and may elect from their number one or more Vice Chairpersons. The Chairperson and the President shall be members of the Board. The Board may also appoint one or more Vice Presidents, Assistant Secretaries, Assistant Treasurers and other officers and agents that it deems necessary. The Board of Directors need not appoint or elect an officer to an office that is already filled and whose specified term has not expired. The same person may hold two or more offices, but an officer may not execute, acknowledge or verify an instrument in more than one capacity if the instrument is required by law, the Articles of Incorporation, or these Bylaws to be executed, acknowledged, or verified by two or more officers.

Section 2. Term, Removal, and Vacancies. An officer shall hold office for the term the Board specifies upon election or appointment and until a successor is elected or appointed and qualified, or until the officer's death, resignation, or removal. The Board may remove an officer with or without cause. An officer may resign by written notice to the Corporation. The resignation is effective upon its receipt by the Corporation or at a later date specified in the notice.

Section 3. Chairperson of the Board. The Chairperson of the Board shall preside when present at all meetings of the shareholders and the Board of Directors. The Chairperson shall perform any other duties and exercise any other authority that the Board prescribes and, unless otherwise provided by Board resolution, is an ex officio member of all committees. Except where by law the signature of the President is required, the Chairperson possesses the same power and authority as the President to make and execute contracts, instruments, papers, and documents of every kind in the name of and on behalf of the Corporation.

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Section 4. Vice Chairperson of the Board. During the unavailability or disability of the Chairperson, or while that office is vacant, the Vice Chairpersons, in the order the Board designates, may exercise all of the powers and discharge all of the duties of the Chairperson. A Vice Chairperson shall perform any other duties that the Board prescribes.

Section 5. President. The President shall be the Corporation's chief executive officer and have the general control and management of its business, under the direction of the Board. The President shall ensure that all orders and resolutions of the Board are carried into effect. Unless the Board specifically provides otherwise, the President shall be an ex officio member of all committees. The President shall perform all duties incident to the office of President and other duties that the Board prescribes. The President may make and execute contracts, instruments, papers, and documents of every kind in the name and on behalf of the Corporation, except when the Board specifies the same to be done by another officer or agent. During the absence or disability of the Chairperson and the Vice Chairpersons, or while those offices are vacant, the President shall preside over all meetings of the Board of Directors and the shareholders and perform all of the duties and have all of the power and authority of the Chairperson.

Section 6. Vice Presidents. The Board may designate one or more Vice Presidents to perform the duties and exercise the authority of the President during the President's absence or disability. Each Vice President shall perform other duties that the President assigns or the Board prescribes.

Section 7. Secretary. The Secretary shall cause to be recorded and maintained minutes of all meetings of the Board, Board committees, and shareholders. The Secretary shall cause to be given all notices required by law, these Bylaws, or resolution of the Board and shall perform other duties that the President assigns or the Board prescribes.

Section 8. Treasurer. The Treasurer shall cause to be kept in books belonging to the Corporation a full and accurate account of all receipts, disbursements, and other financial transactions of the Corporation. The Treasurer shall perform other duties that the President assigns or the Board prescribes.

Section 9. Assistant Secretaries and Assistant Treasurers. An Assistant Secretary or an Assistant Treasurer may perform any duty or exercise any authority of the Secretary or Treasurer, respectively. An Assistant Secretary or Assistant Treasurer also shall perform duties that the Secretary or the Treasurer, respectively, or the President assigns or that the Board prescribes.

Section 10. Other Officers. The Board of Directors may appoint other officers to perform duties and exercise authority that the President assigns or the Board prescribes.

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ARTICLE IV

SUBSIDIARIES AND DIVISIONS

Section 1. Divisional Officers. The Board of Directors or the President may appoint divisional officers. The Board of Directors or the President may withdraw a divisional officer's title at any time and without cause. A divisional officer may, but need not, be a director or an executive officer of the Corporation. A divisional officer shall perform duties and exercise authority that the President assigns or the Board prescribes.

Section 2. Subsidiary Directors. The Corporation may cause to be elected to the board of directors of a subsidiary corporation such persons as it determines, any of whom may, but need not, be directors, executive officers, or other employees or agents of the Corporation. The Board of Directors or the President may instruct the directors of a subsidiary corporation as to the manner in which they are to vote upon any issue properly coming before them as the directors of the subsidiary corporation, and such directors shall have no liability to the Corporation as the result of any action taken in accordance with those instructions.

Section 3. Divisional and Subsidiary Officers Not Executive Officers. A divisional officer or officer of a subsidiary corporation shall not, by virtue of holding office, be deemed to be an executive officer of the Corporation, nor shall a divisional officer or officer of a subsidiary corporation (unless also a director or executive officer of the Corporation) be entitled to have access to any files, records, or other information relating to the Corporation or its business and finances or to attend or receive the minutes of meetings of the Board of Directors or a committee of the Corporation, except as and to the extent that the Board of Directors or the President expressly authorize.

ARTICLE V

INDEMNIFICATION

Section 1. Indemnification in Action by Third Party. The Corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action, suit, or proceeding (other than an action by or in the right of the Corporation), whether civil, criminal, administrative, or investigative and whether formal or informal, by reason of the fact that the person is or was a director, officer, employee, or agent of the Corporation or is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, or other enterprise, whether for profit or not for profit, against expenses (including attorney fees), judgments, penalties, fines, and amounts paid in settlement actually and reasonably incurred by the person in connection with such action, suit, or proceeding if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the Corporation or its shareholders and, with respect to a criminal action or proceeding, the person had no reasonable cause to believe his or her conduct was unlawful. The termination of an action, suit, or proceeding by judgment, order, settlement,

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conviction, or upon a plea of nolo contendere or its equivalent, does not, of itself, create a presumption that the person did not act in good faith and in a manner that the person reasonably believed to be in or not opposed to the best interests of the Corporation or its shareholders and, with respect to a criminal action or proceeding, had reasonable cause to believe that his or her conduct was unlawful.

Section 2. Indemnification in Action by or in Right of the Corporation. The Corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that the person is or was a director, officer, employee, or agent of the Corporation or is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, or other enterprise, whether for profit or not for profit, against expenses, including attorney fees and amounts paid in settlement actually and reasonably incurred by the person in connection with the action or suit, if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the Corporation or its shareholders. Indemnification shall not be made for a claim, issue, or matter in which the person shall have been found liable to the Corporation except to the extent authorized by statute.

Section 3. Expenses. To the extent that a director, officer, employee, or agent of the Corporation has been successful on the merits or otherwise in defense of an action, suit, or proceeding referred to in Section 1 or 2 of this Article, or in defense of a claim, issue, or matter in the action, suit, or proceeding, the Corporation shall indemnify that person against actual and reasonable expenses, including attorney fees that person incurred in connection with the action, suit, or proceeding and an action, suit, or proceeding brought to enforce the mandatory indemnification provided in this Section.

Section 4. Determination, Evaluation, and Authorization of Indemnification.

(a) Except as otherwise provided in Subsection (e) or unless ordered by a court, the Corporation shall make an indemnification under Section 1 or 2 of this Article only upon a determination that indemnification of the director, officer, employee, or agent is proper in the circumstances because he or she has met the applicable standard of conduct set forth in Section 1 or 2 of this Article and upon an evaluation of the reasonableness of expenses and amounts paid in settlement. This determination and evaluation may be made in any of the following ways:

(1) By a majority vote of a quorum of the Board of Directors consisting of directors who are not parties or threatened to be made parties to the action, suit, or proceeding.

(2) If a quorum cannot be obtained under Subsection (1) above, by majority vote of a committee duly designated by the Board and consisting solely of two or more directors not at the time parties or threatened to be made parties to the action, suit, or proceeding.

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(3) By independent legal counsel in a written opinion, which counsel shall be selected in one of the following ways:

(A) By the Board or its committee in the manner prescribed in Subsections (1) or (2) above.

(B) If a quorum of the Board cannot be obtained under Subsection (1) above and a committee cannot be designated under Subsection (2) above, by the Board.

(4) By all independent directors (as that term is defined in the Michigan Business Corporation Act) who are not parties or threatened to be made parties to the action, suit, or proceeding.

(5) By the shareholders, but shares held by directors, officers, employees, or agents who are parties or threatened to be made parties to the action, suit, or proceeding may not be voted.

(b) In the designation of a committee under Subsection (a)(2) or in the selection of independent legal counsel under Subsection (a)(3)(B), all directors may participate.

(c) If a person is entitled to indemnification under Section 1 or 2 for a portion of expenses, including reasonable attorney fees, judgments, penalties, fines, and amounts paid in settlement, but not for the total amount, the Corporation may indemnify the person for the portion of the expenses, judgments, penalties, fines, or amounts paid in settlement for which the person is entitled to be indemnified.

(d) The Corporation shall authorize payment of indemnification under this Section in one of the following ways:

(1) By the Board in one of the following ways:

(A) If there are two or more directors who are not parties or threatened to be made parties to the action, suit, or proceeding, by a majority vote of all directors who are not parties or threatened to be made parties, a majority of whom shall constitute a quorum for this purpose.

(B) By a majority of the members of a committee of two or more directors who are not parties or threatened to be made parties to the action, suit, or proceeding.

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(C) If the Corporation has one or more independent directors who are not parties or threatened to be made parties to the action, suit, or proceeding, by a majority vote of all independent directors who are not parties or are threatened to be made parties, a majority of whom shall constitute a quorum for this purpose.

(D) If there are no independent directors and less than two directors who are not parties or threatened to be made parties to the action, suit, or proceedings, by the vote necessary for action by the Board in accordance with Section 523 of the Michigan Business Corporation Act, in which authorization all directors may participate.

(2) By the shareholders, but shares held by directors, officers, employees, or agents who are parties or threatened to be made parties to the action, suit, or proceeding may not be voted on the authorization.

(e) To the extent that the Articles of Incorporation include a provision eliminating or limiting the liability of a director pursuant to Section 209(1)(c) of the Michigan Business Corporation Act, the Corporation may indemnify a director for the expenses and liabilities described in this Subsection without a determination that the director has met the standard of conduct set forth in Sections 1 or 2 of this Article, but no indemnification shall be made except to the extent authorized in Section 564c of the Michigan Business Corporation Act if the director received a financial benefit to which he or she was not entitled, intentionally inflicted harm on the Corporation or its shareholders, violated Section 551 of the Michigan Business Corporation Act, or intentionally committed a criminal act. In connection with an action or suit by or in the right of the Corporation as described in Section 2 of this Article, indemnification under this Subsection shall be for expenses, including attorneys' fees, actually and reasonably incurred. In connection with an action, suit, or proceeding other than an action, suit, or proceeding by or in the right of the Corporation, as described in Section 1 of this Article, indemnification under this Subsection shall be for expenses, including attorneys' fees, actually and reasonably incurred, and for judgments, penalties, fines, and amounts paid in settlement actually and reasonably incurred.

Section 5. Advances.

(a) The Corporation may pay or reimburse the reasonable expenses incurred by a director, officer, employee, or agent who is a party or threatened to be made a party to an action, suit, or proceeding before final disposition of the proceeding if both of the following apply:

(1) The person furnishes the Corporation a written affirmation of the person's good faith belief that he or she has met

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the applicable standard of conduct set forth in Section 1 or 2 of this Article.

(2) The person furnishes the Corporation a written undertaking, executed personally or on the person's behalf, to repay the advance if it is ultimately determined that the person did not meet the standard of conduct set forth in Section 1 or 2 of this Article.

(b) The undertaking required by Subsection (a)(2) above must be an unlimited general obligation of the person, but need not be secured and may be accepted without reference to the financial ability of the person to make repayment.

(c) Determinations and evaluations under this Section shall be made in the manner specified in Section 4(a) above, and authorizations shall be made in the manner specified in Section 4(d) above.

(d) A provision in the Articles of Incorporation or Bylaws, a resolution of the Board or shareholders, or an agreement making indemnification mandatory shall also make the advancement of expenses mandatory unless the provision, resolution, or agreement specifically provides otherwise.

Section 6. Other Indemnification Agreements. The indemnification or advancement of expenses provided by this Article is not exclusive of any other rights to which a person seeking indemnification or advancement of expenses may be entitled under the Articles of Incorporation, these Bylaws, or a contractual agreement. The total amount of expenses advanced or indemnified from all sources combined may not exceed the amount of actual expenses incurred by the person seeking indemnification or advancement of expenses. The indemnification provided in Sections 1 to 6 of this Article continues as to a person who ceases to be a director, officer, employee, or agent and shall inure to the benefit of the person's heirs, executors, and administrators.

Section 7. Insurance. The Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee, or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise against any liability asserted against the person and incurred by the person in any such capacity or arising out of the person's status as such, whether or not the Corporation would have power to indemnify the person against the liability under Sections 1 to 6 of this Article. To the extent that the Articles of Incorporation include a provision eliminating or limiting the liability of a director pursuant to Section 209(1)(c) of the Michigan Business Corporation Act, the Corporation may purchase insurance on behalf of a director from an insurer owned by the Corporation, but insurance purchased from that insurer may insure a director against monetary liability to the Corporation or its shareholders only to the extent that the Corporation could indemnify the director under Section 4(e).

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Section 8. Constituent Corporation. For the purposes of this Article, "Corporation" includes all constituent corporations absorbed in a consolidation or merger and the resulting or surviving corporation, so that a person who is or was a director, officer, employee, or agent of the constituent corporation or is or was serving at the request of the constituent corporation as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, or other enterprise whether for profit or not shall stand in the same position under the provisions of this Article with respect to the resulting or surviving corporation as the person would if the person had served the resulting or surviving corporation in the same capacity.

ARTICLE VI

SHARE CERTIFICATES AND TRANSFERS

Section 1. Share Certificates: Required Signatures. Except as otherwise required by the Articles of Incorporation or these Bylaws and permitted by statute, shares of the Corporation's stock shall be represented by certificates. Each certificate must be signed by one of the following: the Chairperson, a Vice Chairperson, the President, or a Vice President. Share certificates may be sealed with the seal of the Corporation or a facsimile of the seal. The signatures of the officers may be facsimiles if the certificate is countersigned by a transfer agent or registered by a registrar other than the Corporation itself or its employee. The Corporation may issue a certificate even though the officer who has signed or whose facsimile signature has been placed upon the certificate ceases to be an officer before the certificate is issued.

Section 2. Replacement of Certificates. The Corporation shall issue a new certificate for shares in place of a certificate alleged to have been lost or destroyed. The Board of Directors may require the owner of the lost or destroyed certificate, or his legal representative, to give the Corporation a bond or other security and/or execute an indemnity agreement sufficient to indemnify the Corporation against any claim that may be made against it on account of the lost or destroyed certificate or the issuance of a replacement certificate.

Section 3. Registered Shareholders. The Corporation may treat the registered holder of a share as the absolute owner of the share and shall not be bound to recognize any equitable interest in or other claim to the share by any other person, whether or not the Corporation has actual notice of the interest or claim, except as otherwise provided by law.

Section 4. Transfer Agent and Registrar. The Board of Directors may appoint a transfer agent and a registrar for the transfer and registration of its securities.

Section 5. Transfer of Shares. A sale, assignment, exchange, conveyance, gift, pledge, hypothecation, or other transfer of shares of the Corporation's stock, whether by operation of law or otherwise, shall not be effective as to the Corporation until recorded on the Corporation's stock transfer books.

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ARTICLE VII

GENERAL PROVISIONS

Section 1. Dividends or Other Distributions. By action of the Board of Directors, the Corporation may declare and pay dividends or make other distributions as permitted by law.

Section 2. Voting of Securities. Unless the Board directs otherwise, the Chairperson or the President, or, during their absence or disability, the Vice Presidents in the order that the Board designates, may on behalf of the Corporation attend and vote (or execute in the name or on behalf of the Corporation a consent in writing in lieu of a meeting of shareholders or a proxy authorizing an agent or attorney-in-fact for the Corporation to attend and vote) at any meeting of security holders of any corporation in which the Corporation holds securities. At such meetings such person may exercise all rights incident to the ownership of such securities which the Corporation might exercise if present. The Board may confer this voting power upon any other person.

Section 3. Checks. The Corporation's checks, drafts, and orders for the payment of money shall be signed in the name of the Corporation in the manner and by the persons that the Board of Directors designates.

Section 4. Signing of Instruments. When the Board or these Bylaws authorize the signing of a contract, conveyance, or other instrument without specification of the signing officer, the Chairperson, the President, any Vice President, the Secretary, or the Treasurer may sign in the name and on behalf of the Corporation and may affix the corporate seal to the instrument. The Board may authorize other officers and agents to sign instruments in the name and on behalf of the Corporation.

Section 5. Corporate Books and Records. The Corporation shall keep books and records of account and minutes of the proceedings of its shareholders, Board of Directors, and executive committee, if any. The books, records, and minutes may be kept outside the State of Michigan. The Corporation shall keep at its registered office, or at the office of its transfer agent within or without the State of Michigan, records containing the names and addresses of all shareholders, the number, class and series of shares held by each, and the dates when they respectively became holders of record. Any of the books, records, or minutes may be in written form or in any other form capable of being converted into written form within a reasonable time. The Corporation shall convert into written form without charge any record not in written form, unless otherwise requested by a person entitled to inspect the record.

Section 6. Seal. The Corporation may have a seal in the form that the Board of Directors determines. The seal may be used by causing it or a facsimile to be affixed, impressed, or reproduced.

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ARTICLE VIII

AMENDMENTS

The shareholders or the Board of Directors may amend or repeal these Bylaws or adopt new bylaws, unless the Articles of Incorporation or these Bylaws provide that the power to adopt new bylaws is reserved exclusively to the shareholders or that the Board may not alter or repeal these Bylaws or any particular bylaw. Amendment of these Bylaws by the Board requires the vote of a majority of the directors then in office.

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Choiceone Financial Services 10-K

EXHIBIT 4

ADVANCES, PLEDGE, AND SECURITY AGREEMENT

This Advances, Pledge, and Security Agreement (the "Advances Agreement"), dated as of this 21 ^st day of December 21 , 20 01 , is between ChoiceOne Bank with its principal place of business at Sparta Michigan (the "Member") and the Federal Home Loan Bank of Indianapolis, with its principal place of business at 8250 Woodfield Crossing Boulevard, Indianapolis, Indiana 46240, and mailing address at P. O. Box 60, Indianapolis, Indiana 46206 (the "Bank").

WHEREAS , the Bank, subject to the provisions of the Federal Home Loan Bank Act ("Bank Act"), the Rules and Regulations of the Federal Housing Finance Board or its legal successor ("FHFB Regulations"), the policies of the FHFB and the Bank's Credit Policies (as hereinafter defined) is authorized to make available Advances and Other Credit Products to its members; and

WHEREAS , Member desires from time to time to apply for such Advances and Other Credit Products that may be available to it; and

WHEREAS , the Bank requires that such Advances and Other Credit Products provided by the Bank be secured pursuant to this Advances Agreement, and Member agrees to provide such security as requested by the Bank by the means set forth in this Advances Agreement.

NOW THEREFORE , intending to be legally bound, the Member and the Bank agree as follows:

1. General.

Section 1.01. Definitions.

As used herein, the following terms shall have the following meanings:

"Advances" means any and all loans or other extensions of credit now or hereafter granted by the Bank to the Member, including all loans or extensions of credit by the Bank to the Member prior to the date hereof.

"Advice of Credit" means one or more written confirmations to be executed by the Member and the Bank specifying the type or category of advance made, the terms of repayment, the interest rate (which may be fixed or variable), and any other pertinent terms and conditions, which shall evidence an advance.

"Application for Advance" means one or more written

or telephonic requests for an advance, in such form or forms as shall be specified by the Bank from time to time, and which if executed by the Bank shall evidence an Advance.

"Bank Deposits" shall mean all deposit accounts maintained by the Member with the Bank (excluding safekeeping accounts expressly held for the benefit of a third-party), all money, cash and checks, drafts, notices, bills, bills of exchange and bonds deposited therein or credited thereto, including any increases, renewals, extensions, substitutions and replacements, whether or not such instruments have been posted to any such deposit account, and all statements, certificates, passbooks and instruments representing any such deposit account.

"Capital Stock" means all of the capital stock of the Bank owned by the Member, and all payments which have been or hereafter are made on account of subscriptions to, and all unpaid dividends on, such Capital Stock.

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"Collateral" means all assets of the Member of any kind or nature whatsoever, whether tangible or intangible, including without limitation, all Capital Stock, Bank Deposits, Mortgage Collateral, Securities Collateral, and Other Collateral, all cash and cash equivalents, all insurance proceeds, all tax refunds, all proceeds of any of the foregoing, and all collections on any and all of the foregoing, which are now or hereafter pledged to the Bank pursuant to Section 3.01 hereof. It also means, including without limitation, any of the foregoing which have previously been assigned, transferred or pledged to the Bank by the Member as collateral for loans or other extensions of credit prior to the date hereof, all of such assets in which a security interest is granted pursuant to the terms hereof or in which a security interest is hereafter assigned, transferred, granted, or pledged pursuant to the terms hereof.

"Collateral Policy" shall mean the Bank's Collateral Policy as stated in the Credit Policy Manual, policy statement or operating circulars of the Bank, as in effect from time to time.

"Collateral Requirement" means such aggregate Market Value (or unpaid principal balance) of Eligible Collateral as is specified in the Bank's Collateral Policy or as may be otherwise specified in writing by the Bank from time to time as being the collateral maintenance level the Member must maintain hereunder. The Bank may increase or decrease the Collateral Requirement at any time for, including without limitation, specific collateral listings, physical possession requirements, and where applicable, blanket collateral requirements.

"Credit Policies" shall mean the Bank's Credit Policy Manual, policy statements, or operating circulars relating to Advances and Other Credit Products offered by the Bank, all as in effect from time to time.

"Eligible Collateral" means Collateral other than Capital Stock which: (I) meets the definition of Eligible Collateral under the Bank's Collateral Policy, including without limitation one-to-four family whole mortgage loans, government and agency securities, private mortgage-backed securities, arid Bank Deposits; (II) is owned by the Member free and clear of any liens, encumbrances or other interests other than the assignment to the Bank hereunder; (III) has not been in default within the most recent 12-month period provided that in the case of Mortgage Collateral, mortgage payments that are overdue by more than sixty (60) days shall not be included within Eligible Collateral; (IV) in the case of Mortgage Collateral, relates to residential real property which is

covered by fire, hazard, and where applicable, flood insurance in an amount at least sufficient to discharge the mortgage loan in full in case of loss and as to which all real estate taxes are current; and (V) in the case of Mortgage Collateral, does not secure an indebtedness on which any director, officer, employee, attorney or agent of the Member or of any Federal Home Loan Bank is personally liable. The Bank may change the definition of Eligible Collateral from time to time, and the Bank's determination of Eligible Collateral shall be conclusive.

"Indebtedness" means all obligations, liabilities or indebtedness of the Member to the Bank, due or to become due, direct or indirect, absolute or contingent, joint or several, now existing or hereafter at any time created, arising or incurred under this Advances Agreement, or any Advice of Credit, Application for Advance, Other, Credit Product Agreements, Advances, Other Credit Products, Bank Deposits, including any overdrafts or other charges in connection therewith. Indebtedness also means any obligations for any other services (including without limitation, safekeeping, operating and other correspondence services) provided by the Bank, including any applications, commitments, other agreements or documents relating to the foregoing, any amendments to any of the foregoing agreements or documents and any obligations under indemnification provisions in any such agreements or documents, and any renewal, extension or substitution of any such obligations, liabilities and indebtedness, including attorneys' fees of the Bank in that collection thereof and the enforcement of any remedies with respect to any Collateral.

"Market Value" means the market value of Collateral determined in a manner as specified by the Bank from time to time. The Bank may change the method of determining Market Value at any time which shall be consistently applied to substantially all borrowers. The Bank's determination of Market Value shall be conclusive.

"Mortgage Collateral" means whole mortgage loans, Mortgage Documents and all security agreements, guaranties, insurance policies, certificates, binders, commitments or reports relating thereto, including title insurance, private mortgage insurance and hazard and liability insurance, surveys, bonds, participations, purchase commitments, hedge contracts or other agreements to purchase, guaranty or insure any mortgage loans or securities to be issued by the Member. Mortgage Collateral also means any other agreement, instrument or document pertaining to, affecting or obtained by the Member in connection with the loans covered by the Mortgage

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Documents, financing statements perfecting the Member's security interest in any of the foregoing, certificates, evidences of recordation, applications, underwriting materials, appraisals, notices, opinions of counsel, loan servicing data, files, correspondence, computer programs, tapes, discs, cards, account records and all other electronically stored or written records or materials relating to the loans covered by the Mortgage Documents, including any and all rights, claims, and choses in action against or with respect to any person or entity which has provided services to the Member in connection with any other Mortgage Collateral, including without limitation, surveyors, appraisers, environmental engineers, environmental assessment firms, contractors, and architects. Unless otherwise authorized by the Bank, Mortgage Collateral shall not include mortgage securities or loan participations.

"Mortgage Documents" means mortgages, deeds of trust or other security deeds in land and interests in real property and the improvements and fixtures located thereon (herein "mortgages") and all notes, bonds or other instruments evidencing loans secured thereby (herein "mortgage notes") and any endorsement and assignments thereof to the Member.

"Other Collateral" means such items of tangible and intangible property, other than Capital Stock, Bank Deposits, Mortgage Collateral, and Securities Collateral, which are offered as collateral by the Member to the Bank and which the Bank in its discretion expressly accepts by written notice delivered to the Member as collateral for Advances and Other Credit Products.

"Other Credit Product Agreement" means a writing or electronic transmission in such form as shall be specified by the Bank, executed by the Bank and the Member and setting forth the obligations of the Bank and Member, including without limitation, any Affordable Housing Program transaction, any service confirmation, service contract, reimbursement agreement, interest rate swap agreement, transaction, confirmation, applications, notices, advice or other instruments between the Bank and the Member.

"Other Credit Products" means any and all commitments or obligations under which the Bank agrees to make Advances to the Member or payments on behalf of or for the account of the Member, including without limitation, letters of credit, guarantees, demand or CMS account transactions, NOW account processing, deposit overdrafts, item processing services, coin and currency services, safekeeping services (including security lend-

ing programs), Affordable Housing Program transactions, correspondent banking service debits or services charges, or other arrangements intended to facilitate transactions between or among the Bank, the Member and third parties, or under which the Bank enters into a credit or financial accommodation agreement or other arrangement with the Member, including without limitation, repurchase agreements and interest rate exchange transactions (such as interest rate swap agreements, cap, collar and floor agreements) and such other products or services as may be offered by the Bank from time to time pursuant to its Credit Policies and irrespective of whether the Bank's obligation is contingent or conditional.

"Outstanding Commitments" means, at any point in time, the maximum aggregate principal amount of Advances or payments which the Bank may be obligated to make to the Member (or other parties) under Advance Applications or Other Credit Product Agreements then in effect.

"Securities Collateral" means all securities or certificates evidencing a direct or indirect interest in a loan or a group of loans secured by mortgages, including without limitation, mortgage-backed securities, collateralized mortgage obligations and real estate mortgage investment conduits, including Federal Home Loan Mortgage Corporation mortgage participation certificates, Federal National Mortgage Association mortgage pass- through mortgage-backed certificates and Government National Mortgage Association modified pass-through mortgage-backed certificates, and all Mortgage Documents and items of Mortgage Collateral owned or otherwise acquired by the Member relating to the loans underlying such securities or certificates; consolidated obligations of the Federal Home Loan Bank System; obligations of or guaranteed by the United States; and obligations of or guaranteed by agencies or instrumentalities of the United States.

2. Advances Documentation.

Section 2.01. Application for Advances.

The Member may apply for Advances or commitments by completing and submitting an Application for Advance or requesting Other Credit Product services. The preceding sentence notwithstanding, the Bank may in its discretion make an Advance, make a commitment, or deliver Other Credit Products to the Member pursuant to the Bank Act, FHFB Regulations, Credit Policies, and other Bank procedures in effect from time to time, and by either (1) the receipt of an oral or written application which is executed

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by the Bank without change, or (II) in the case of an application received, completed or modified by the Bank pursuant to a telephonic or other unsigned communication by the Member, by an Advice of Credit writing generated by the Bank. The Member shall be estopped from asserting any claim or defense with respect to the terms applicable to an Advance, commitment, or Other Credit Product entered into pursuant to a telephone application or other unsigned communication unless, within two (2) business days of receipt of the Bank's advice, the Member delivers to the Bank a written notice specifying the disputed term(s) or conditions. The Bank shall have the absolute right to rely upon the procedures established hereby or pursuant to the terms hereof and shall have no liability to the Member for any actions taken or omitted to be taken in connection with such procedures. The Member agrees that it will hold the Bank and each of its employees, officers, directors, agents, and representatives harmless from any loss, liability or damage which the Member may suffer, including without limitation, lost profits and attorneys' fees and disbursements, arising out of or in connection with such procedures, absent fraud, willful misconduct, or recklessness on the part of the Bank.

Section 2.02. Bank's Receipt of Written Confirmations and Findings.

Within five (5) business days of receipt, Member agrees to execute and return any Advice of Credit, confirmation, or Other Credit Product Agreement to the Bank. Upon request of the Bank, the Member shall sign and deliver to the Bank a promissory note or notes in such form as the Bank may reasonably require evidencing any Advance. Unless otherwise requested by the Member and approved by the Bank, each Advance shall be funded by crediting the Member's CMS account(s) with the Bank.

Section 2.03. Interest Computations and Repayment of Advances and Other Credit Products.

The Member agrees to repay each Advance or Other Credit Product in accordance with this Advances Agreement and the terms and conditions of the Advice of Credit or Other Credit Product Agreement. Each Advance, Advice of Credit, Application for Advance, Other Credit Product and Other Credit Product Agreement shall be subject to the terms of the Credit Policies and applicable laws, regulations, and limitations, all as in effect from time to time, including the Bank Act, the FHFB Regulations and the statements of policy and guidelines of the FHFB, which shall be deemed to be incorporated by reference into this Advances Agreement. Unless otherwise speci-

fied in the Bank's Credit Policies or as may be otherwise specified in writing by the Bank from time to time, interest shall be paid at the time of each payment of all of the principal of each Advance on the amount of principal so repaid, and shall be paid on the fifteenth (15th) day of each month (or the Bank's next business day if the Bank is not open for business on the fifteenth (15th)) on the daily outstanding principal amount of each Advance since the previous interest payment date (other than principal amounts which have been repaid in full since such interest payment date), in each case at the rate applicable to such Advance as stated in the related Advice of Credit. The Member shall pay to the Bank, immediately and without demand, interest on any past due amount owing on any Advance or Other Credit Product at the rate in effect and being charged by the Bank from time to time on defaults. The default rate on past due payments of principal and interest may, at the option of the Bank, be at a rate of five percent (5%) per annum in addition to the then highest current rate being charged by the Bank for advances, not to exceed the highest legal interest rate allowed under Indiana law. The Member shall maintain in the Member's CMS account with the Bank an amount at least equal to the amounts then currently due and payable to the Bank on outstanding Advances and Other Credit Products. The Member hereby authorizes the Bank to debit the Member's CMS account with the Bank for all amounts due and payable on any Advance or Other Credit Product and for all other amounts due and payable hereunder. In the event that the amount in the Member's CMS account is, at any time, insufficient to pay such due and payable amounts, the Bank may without notice to the Member apply any Bank Deposits then in the possession of the Bank to the payment of such due and payable amounts.

Section 2.04. Payment of Prepayment Charges.

Any prepayment fees or charges for which provision is made, whether under the Advice of Credit, Other Credit Product Agreement, or otherwise, shall be payable at the time of any voluntary or involuntary payment of the principal of such Advance or Other Credit Product prior to the originally scheduled maturity thereof, including without limitation, payments that are made as a part of a liquidation of the Member or that become due as a result of an acceleration pursuant to Section 4.01 hereof, and whether such payment is made by the Member, by a conservator, receiver, liquidator or trustee of or for the Member, or by any successor to or any assignee of the Member. The method of computation for the prepayment fee, unless expressly provided for in the applicable credit documentation, is set forth in the Credit Policies of the

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Bank and may be subject to change from time to time with advance notice to the Member.

Section 2.05. Right of Bank to Make Payments with Respect to Outstanding Commitments.

In the event that there are one or more Outstanding Commitments at the time of an Event of Default under Section 4.01 hereof, the Bank may, at its option, make any payments due thereunder from time to time by crediting a special account with the Bank over which the Bank has sole dominion and control. Amounts credited to such special accounts shall be deemed to have satisfied the Bank's obligations under the Outstanding Commitments. When all such obligations have been satisfied, the Bank shall disburse the balance, if any, in such account first to the satisfaction of any amounts then due and owing by the Member to the Bank and then to the Member or its successors in interest. Payments made pursuant to this section shall be payable on demand and shall bear interest at the rate specified for each applicable Advance (or if such rate is not specified, at the rate in effect and being charged by the Bank from time to time on variable rate advances), and shall include applicable prepayment fees.

The Bank shall not fund outstanding commitments previously made to the Member whose access to advances is restricted by its primary federal regulator. In addition, the Bank shall not fund outstanding commitments previously made to the Member whose access to advances is subsequently restricted because it does not have positive tangible capital or if the Bank deems itself insecure for any reason as determined by the Bank in its sole discretion. The Bank shall not honor any outstanding commitments to the Member if the Member is a savings association that fails to maintain its status as a Qualified Thrift Lender as such rule is defined under the applicable federal law and federal regulations as may be in effect from time to time.

3. Security Agreement.

Section 3.01. Creation of Security Interest.

As security for all Indebtedness, including without limitation, all Advances and Other Credit Products, the Member hereby assigns, transfers, and pledges to the Bank and grants to the Bank a security interest in all Collateral, now or hereafter owned by the Member, and all proceeds thereof, provided, however, that Collateral that is encumbered or disposed of by the Member in conformity with the requirements of Section 3.03(a) hereof shall not be subject to the security interest created hereunder. Without !imitation of the foregoing, all tangible and intangible

property heretofore assigned, transferred or pledged by the Member to the Bank as Collateral for Advances and Other Credit Products prior to the date hereof is hereby assigned, transferred and pledged to Bank as Collateral hereunder.

Section 3.02. Member's Representations and Warranties Concerning Collateral.

The Member represents and warrants to the Bank, as of the date hereof and as of the date of all future Advances or Other Credit Products secured hereunder, the following:

(a) The Member owns and has marketable title to the Collateral and has the right and authority to grant a security interest in the Collateral and to subject all of the Collateral to this Advances Agreement;

(b) The information contained in any certification, status report, schedule, or other information given from time to time by the Member as to each item of Collateral is true, accurate and complete in all material respects;

(c) The Member maintains Eligible Collateral which has a Market Value (or unpaid principal balance) that is at least equal to the then current Collateral Requirement and which meets the standards and requirements from time to time established by the Bank's Collateral Policy, the Bank Act and the FHFB Regulations, and all other applicable laws and regulations;

(d) The Member has not conveyed or otherwise created, and there does not otherwise exist, any participation interest or other direct, indirect, legal, or beneficial interest in any Collateral pledged under Sections 3.01, 3.03(a), and 3.04 on the part of any person or entity other than the Bank and the Member;

(e) Except as may be approved in writing by the Bank, no account debtor or other obligor owing any obligation to the Member with respect to any item of Mortgage Collateral or Other Collateral has or will have any defenses, offsetting claims, or other rights affecting the right of the Member or the Bank to enforce such mortgage, mortgage note or promissory obligation, and no defaults (or conditions that, with the passage of time or the giving of notice or both, would constitute a default) exist under any such writings; and

(f) No part of any real property or interest in real property that is the subject of Collateral contains or is subject to the effects of toxins or hazardous materials or

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other hazardous substances (including those defined in any applicable state or local law; or applicable federal law, including the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 USC 9601 et seq.; the Hazardous Materials Transportation Act, 49 USC 1801 et seq.; the Resource Conservation and Recovery Act, 42 USC 6901 et seq.; and in the regulations adopted and publications promulgated pursuant to said laws), the presence of which could subject the Bank to any liability under applicable state or Federal law or local ordinance either at any time that such property is pledged to the Bank or upon the enforcement by the Bank of its security interest therein.

Section 3.03. Collateral Maintenance Requirement For Blanket Liens and Specific Listings.

(a) The Member shall at all times maintain an amount of Eligible Collateral which has a Market Value (or unpaid principal balance, if so required by the Bank) that is at least equal to the then current Collateral Requirement. The Member shall not assign, pledge, transfer, create any security interest in, sell, or otherwise dispose of any Collateral if (I) such Collateral is held by or on behalf of the Bank pursuant to Section 3.04 hereof, (II) such Collateral has been provided in a specific listing of Eligible Collateral pursuant to Section 3.03(e), (III) the Bank has otherwise perfected its security interest in such Collateral, or (IV) at the time of or immediately after such action, Member is not or would not be in compliance with the collateral maintenance requirements of the first sentence of this Section 3.03(a) or is or would be otherwise in default under this Advances Agreement. So long as Member is not in default under this Agreement, Member shall be at liberty to sell, use, commingle, and dispose of the Collateral or the proceeds of such Collateral without being required to account for the proceeds or replace the Collateral, subject only to its obligation to maintain the Collateral as herein provided.

(b) Collateral shall be held by the Member in trust for the benefit of the Bank and subject to the Bank's direction and control, will not be commingled with assets of the Member which are not Collateral, and will be physically safeguarded by the Member in accordance with usual, customary and prudent commercial practices but in any event with not less than the same degree of care which the Member uses in physically safeguarding its other property and assets of like kind and nature. Without limitation of the foregoing, Member shall take all action necessary or desirable to protect and preserve the Collateral and the Bank's interest therein, including without limitization, 'he maintaining of insurance on property secur-

ing mortgages constituting Collateral (such policies and certificates of insurance or guaranty relating to such mortgages are herein called "insurance"), the collection of payments under all mortgages and under all insurance, and otherwise assuring that the loans comprising the Mortgage Collateral are serviced in accordance with the standards of a reasonable and prudent mortgagee. The Member (or its agent), acting on behalf of the Bank, shall collect all payments when due on all Collateral. If the Bank requires under Section 3.12, the Member shall hold such collections separate from its other monies and apply them to the reduction of Indebtedness as it becomes due; otherwise, the Member shall be entitled to use and dispose of all such collections in the ordinary course of its business and in compliance with all laws, rules, and regulations.

(c) If any Collateral that was Eligible Collateral ceases to be Eligible Collateral the Member shall promptly notify the Bank in writing of that fact and, if so requested by the Bank, of the reason that the Collateral has ceased to be Eligible Collateral. The Member shall promptly specify, or deliver, as the case may be, other Eligible Collateral having at least the same Market Value as the Collateral so requested to be withdrawn.

(d) The Bank may review the form and sufficiency of all documents pertaining to the Collateral. Such documents must be satisfactory to the Bank and, if not, such Collateral may not be acceptable as Eligible Collateral or may have a Market Value applied thereto that is less than the Market Value otherwise applicable under the Bank's Collateral Policy, or as the Bank may specify. The Bank may require that the Member make any or all documents pertaining to the Collateral

available to the Bank for its inspection and approval.

(e) If so requested by the Bank, Member agrees to (I) provide a specific listing of the Eligible Collateral to Bank, (II) physically segregate Mortgage Documents and Other Collateral which are a part of such specified Collateral from all other property of the Member in a manner satisfactory to the Bank, and/or (III) hold each Mortgage Document which is a part of Mortgage Collateral in a separate file folder with each file folder clearly labeled with the loan identification number and the name of the borrowers). Immediately upon the written request of the Bank, the Member further agrees to clearly and legibly mark or stamp each Mortgage Document and each file folder containing Mortgage Documents with the following statement (or a substantially similar statement which has been approved in writing by the Bank): "The Mortgage/ Deed Of Trust And Note Relating To This Loan Have

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Been Assigned To And Represent Collateral Of The Federal Home Loan Bank Of Indianapolis And Its Successors And Assigns" and such other statement as may be required by the Bank from time to time.

Section 3.04. Delivery of Collateral; Physical Possession Requirements.

(a) At anytime upon the Bank's oral or written request, or at any time that the Member becomes subject to any mandatory collateral delivery requirements pursuant to the Collateral Policy or that may be otherwise established in writing by the Bank, the Member shall promptly on a schedule acceptable to the Bank deliver to the Bank, or to a custodian designated by the Bank, all Collateral including such Eligible Collateral as may be necessary so that the Market Value of Eligible Collateral held by the Bank, or such custodian, meets or exceeds the Collateral Requirement at all times, and take any and all other action as may be specified by the Bank to further evidence the perfection of the Bank's security interest in the Collateral and to otherwise effectuate the transactions contemplated hereby, including the signature and filing of financing statements. Collateral delivered to the Bank shall be endorsed or assigned in recordable form by the Member to the Bank as directed by the Bank. With respect to Mortgage Collateral that is to be delivered hereunder, the Member shall deliver the Mortgage Documents with necessary endorsements and assignments relating thereto unless otherwise directed by the Bank. Concurrently with the initial delivery of Collateral and at such other times as provided in the Collateral Policy or as the Bank may otherwise request, the Member will deliver to the Bank a status report and accompanying schedules, all in form and substance satisfactory to the Bank and dated as of the then most recent valuation date, describing the Collateral held by the Bank or its custodian.

(b) The Member authorizes the Bank to execute and file one or more financing statements, this Agreement, and any other documents, instruments, or statements of any kind on its behalf and without the signature of the Member in those public offices deemed necessary by the Bank in its sole discretion to perfect and continue the perfection of its security interest in the Collateral and to protect, defend and further assure the grant, validity and perfection thereof. In addition, the Member will, at its expense, deliver or cause to be delivered such other documents as the Bank may request to secure the indebtedness referred to herein or to further perfect, protect, and defend the security interest granted herein.

the Bank as Securities Collateral or Other Collateral hereunder, the delivery requirements contained in this Advances Agreement shall be satisfied by the transfer of such securities to the Bank, such transfer to be effected in such manner and to be evidenced by such documents as shall be specified by the Bank.

(d) The Member agrees to pay to the Bank such reasonable fees and charges as may be assessed by the Bank to cover the Bank's overhead and other costs relating to the receipt, holding, redelivery and reassignment of Collateral and to reimburse the Bank. upon request for all recording fees and advances incurred or made by the Bank in connection therewith (including the reasonable compensation and the expenses and disbursements of any custodian that may be appointed by the Bank hereunder, and the agents and legal counsel of the Bank and of such custodian).

(e) The Member shall, upon request of the Bank, immediately take such other actions as the Bank shall deem necessary or appropriate to perfect the Bank's security interest in the Collateral or otherwise to obtain, preserve, protect, enforce or collect the Collateral.

Section 3.05. Withdrawal or Reassignment of Collateral.

Upon receipt by the Bank of writings in form and substance satisfactory to the Bank constituting (I) a request from the Member for the withdrawal or reassignment of Collateral which has been delivered pursuant to Section 3.04 hereof, or as to which the Bank has otherwise perfected its security interest, and (II) a detailed listing of the Collateral to be withdrawn or reassigned, provided that the Bank's valuation of such delivered Collateral confirms that the Member's Collateral Requirement will be satisfied other such withdrawal or reassignment, then the Bank shall redeliver or reassign to the Member the Collateral specified in Member's request. Notwithstanding anything to the contrary herein contained, while an Event of Default hereunder shall have occurred and be continuing, or at any time that the Bank in good faith deems itself insecure, the Member may not obtain any such withdrawal or reassignment. Further, Member agrees for specific listings provided under section 3.03(e) to follow the withdrawal procedures provided for under this Section 3.05 or as otherwise specified by the Bank.

Section 3.06. Additional Collateral.

The Bank may at any time require the Member to maintain and deliver to the Bank additional Collateral over that

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amount of Eligible Collateral required to meet the Member's Collateral Requirement or substitutions of Collateral. The Member expressly agrees to maintain and deliver such additional Collateral or substitutions of Collateral as the Bank shall require.

Section 3.07. Reports; Collateral Audit; Access.

(a) In accordance with the Collateral Policy and at such other times as the Bank may request, the Member shall furnish to the Bank, in a format satisfactory to the Bank, a report so that the Bank may verify that the Member maintains Eligible Collateral with a Market Value (or unpaid principal balance, if so required by the Bank) sufficient to meet the Collateral Requirement. If the Market Value or unpaid principal balance of Eligible Collateral owned by the Member, free and clear of any liens or encumbrances, shall at any time fall below the Collateral Requirement, the Member shall immediately notify the Bank.

(b) The Member shall provide annually an audit report prepared by the Member's external independent auditor in accordance with generally accepted auditing standards (and in a format acceptable to the Bank) certifying that the Member owns, free and clear of any lien or encumbrances (except for Bank's), Eligible Collateral with a Market Value (or unpaid principal balance, if so required by the Bank) at least equal to the Collateral Requirement, and deliver such report to the Bank within ninety (90) days of each fiscal year-end of the Member, including an explanation for any exceptions or qualifications in the report or any failure to obtain such report. The Bank reserves the right to waive the audit report requirement if Member's Collateral is in the physical possession of the Bank or in the Bank's sole discretion based on particular circumstances.

(c) The Member agrees that the Bank shall have access at all reasonable times to the Collateral in the Member's possession or control and to the Member's books and records of account relating to such Collateral. The Member shall permit the Bank to examine, inspect, audit and take copies or make extracts from its books and records and to discuss its affairs with its independent auditor (or other representative) as often as the Bank may reasonably request.

(d) The Member agrees that examination reports prepared by local, state or federal authorities may be furnished by such authorities to the Bank upon its request, and by this Agreement, the Member authorizes and directs such authorities to deliver such reports to the Bank

and waives any objections or restrictions thereto which it may lawfully waive. Member agrees that upon request of the Bank, it will take any and all steps necessary to assist the Bank in obtaining such reports from such authorities. The Bank agrees that to the extent such reports or the information contained therein are confidential, the Bank will use the same degree of care in keeping such reports confidential as it applies to the Bank's own confidential information and will not knowingly disclose any confidential information contained therein unless required to do so by law, rules, regulations, or judicial or regulatory process applicable to the Bank.

(e) If requested by the Bank, the Member shall furnish to the Bank a written report covering such matters regarding the Collateral as the Bank may require, including listing of mortgages, securities, and unpaid principal balances thereof, and certifications concerning the status of payments on mortgages and of taxes and insurance on property securing mortgages.

(f) The Member agrees to promptly report to the Bank any event which reduces the principal balance of any mortgage or security by ten percent (10%) or more, whether by prepayment, foreclosure sale, property- casualty insurance or guaranty payment or otherwise.

(g) All Collateral and the satisfaction by the Member of the Collateral Requirement shall be subject to audit and verification by or on behalf of the Bank. Such audits and verifications may occur without notice during the Member's normal business hours or upon reasonable notice at such other times as the Bank may reasonably request. The Member shall provide to the representatives or agents of the Bank for purposes of such audits and verifications, access to all books and records related to transactions whether made or contemplated under this Agreement. Further, Member shall provide adequate working facilities, at Member's expense for the Bank to conduct such audits or verifications. The Member agrees to pay to the Bank such reasonable fees and charges as may be assessed by the Bank to cover overhead and other costs relating to such audit and verification. The Member further agrees that it will prepare and deliver promptly upon request of the Bank inquiries to Member's outside auditors, outside counsel, customers (including depositors or borrowers), and any other person that the Bank may reasonably request, to provide such information to the Bank as it may reasonably request in connection with such audit and verification.

Section 3.08. Additional Documentation and Status Reports.

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The Member shall at its expense make, execute, record and deliver to the Bank such financing statements, assignments, listings, powers, notices and other documents with respect to the Collateral and the Bank's security interest therein as directed by the Bank and in form and substance satisfactory to the Bank. Upon request, Member agrees to give Bank verbal or written reports concerning the financial condition or status of any regulatory action maintained against the Member, its holding company, or any affiliated entity or affiliated person.

Section 3.09. Bank's Responsibilities as to Collateral.

The Bank's duty as to the Collateral shall be solely to use reasonable care in the custody and preservation of the Collateral in its possession, which shall not include any steps necessary to preserve rights against prior parties nor the duty to send notices, perform services, or take any action in connection with the management of the Collateral. The Bank shall not have any responsibility or liability for the form, sufficiency, correctness, genuineness or legal effect of any instrument or document constituting a part of the Collateral, or any signature thereon or the description or misdescription, or value of property represented, or purported to be represented, by any such document or instrument. The Member agrees that any and all Collateral may be removed by the Bank from the state or location where situated, and may there be dealt with by the Bank as provided in this Advances Agreement.

Section 3.10. Bank's Rights as to Collateral; Power of Attorney.

At any time or times, at the expense of the Member, the Bank may, at its discretion, before or after the occurrence of an Event of Default as defined in Section 4.01 hereof, in its own name or in the name of its nominee or of the Member, do any or all things and take any and all actions that are pertinent to the protection of the Bank's interests hereunder and which are lawful under the laws of the State of Indiana, or the laws of any jurisdiction under which the Bank may be exercising its rights hereunder, including the following:

(a) Terminate any consent given hereunder;

(b) With advance notice to Member (or its legal successor), notify obligors on any Collateral to make payments thereon directly to the Bank;

(d) Enter into any extension, compromise, settlement, or other agreement relating to or affecting any Collateral;

(e) Take any action the Member is required to take or which is otherwise necessary to: (i) sign and record a financing statement or otherwise perfect a security interest in any or all of the Collateral; or (ii) obtain, preserve, protect, enforce or collect the Collateral;

(f) Take control of any funds or other proceeds generated by the Collateral and use the same to reduce Indebtedness as it becomes due; and

(g) Cause the Collateral to be transferred to its name or the name of its nominee.

The Member hereby appoints the Bank as its true and lawful attorney, with full power of substitution, for and on behalf of the Member and in its name, place and stead, to prepare, execute and record endorsements and assignments to the Bank of all or any item of Collateral, giving or granting to the Bank, as such attorney, full power and authority to do or perform every lawful act necessary or proper in connection therewith as fully as the Member might or could do. The Member hereby ratifies and confirms all that the Bank shall lawfully do or cause to be done by virtue of this special power of attorney. This special power of attorney is granted for a period commencing on the date hereof and continuing until the discharge of all Indebtedness and all obligations of the Member hereunder regardless of any default by the Member, is coupled with an interest and is irrevocable for the period granted.

Section 3.11. Subordination of Other Loans to Mortgage Collateral.

The Member hereby agrees that all mortgage notes which are part of the Mortgage Collateral and any notes secured by personal property ("personalty notes") which may become part of the Other Collateral shall have priority in right and remedy over any claims, however evidenced, for other loans, whether made before or after the date of such mortgage or personalty notes which are secured by the mortgages or security agreements securing such mortgage or personalty notes but are not part of the Collateral, and shall be satisfied out of the property covered by such mortgages or security agreements before recourse to such property may be obtained for the repayment of such other loans. To this end, the Member hereby subordinates the lien of such mortgages and

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security agreements with respect to such other loans to the lien of such mortgages and security agreements with respect to such mortgage and personalty notes. The Member further agrees to retain possession of any promissory notes evidencing such other loans and not to pledge, assign or transfer the same, except that the same may be pledged to the Bank as part of the Collateral. The Member, for itself and for any other person or entity claiming by or through the Member, waives any and all rights which it or such other person or entity may have to require the Bank to marshal the assets of the Member or to otherwise prioritize or sequence any class or category of Collateral with respect to which the Bank may pursue its rights and remedies.

Section 3.12. Proceeds of Collateral.

The Member shall collect all payments when due on ail Collateral. If the Bank so requires, the Member, as the Bank's agent, shall hold such collections separate from its other monies in one or more designated cash collateral accounts maintained at the Bank and apply them to the reduction of Indebtedness as it becomes due; otherwise, the Member shall be entitled to use and dispose of all such collections in the ordinary course of its business and in compliance with all laws, rules, and regulations.

4. Default; Remedies.

Section 4.01. Events of Default; Acceleration.

In the event of the occurrence of any of the following events or conditions of default ("Event of Default"), the Bank may at its option, by a notice to the Member, declare all Indebtedness and accrued interest thereon, including any prepayment fees (including without limitation, those fees charged pursuant to Section 2.03 and 2.04), or charges which are payable in connection with the payment prior to the originally scheduled maturity of any Indebtedness, to be immediately due and payable without presentment, demand, protest or any further notice:

(a) Failure of the Member to pay when due any interest on, or principal of, any Advance or any amount payable in connection with any Other Credit Product; or

(b) Failure of the Member to timely perform any promise or obligation or to satisfy any condition or liability contained herein, in an Application for advance, Advice of Credit, or in any Other Credit Product Agreement to which the Member and the Bank are parties; or

or furnished in any manner to the Bank by or on behalf of the Member in connection with any Advance or Other Credit Product or any certification of the Market Value (or unpaid principal balance, if so required by the Bank) of Eligible Collateral shall have been false or misleading in any material respect when made or furnished; or

(d) Failure of the Member to maintain Eligible

Collateral which has a Market Value (or unpaid principal balance, if so required by the Bank) that is at least equal to the then current Collateral Requirement under the applicable blanket lien/specific listing requirements of Section 3.03 or physical possession requirements of Section 3.04, free of any encumbrances or claims as required herein; or

(e) The issuance of any tax levy, seizure, attachment, garnishment, levy of execution, or other process with respect to the Collateral; or

(f) Any failure to pay or suspension of payment by the Member to any creditor of sums due or the occurrence of any event which results in another creditor having the right to accelerate the maturity of any indebtedness of the Member under any security agreement, indenture, loan agreement, or comparable undertaking; or

(g) Application for or appointment of a conservator, receiver, or trustee for the Member or of any affiliate or subsidiary of the Member or the Member's properly, entry of a judgment or decree adjudicating the Member or any affiliate or subsidiary of Member insolvent or bankrupt. or an assignment by the Member or any affiliate or subsidiary of the Member for the benefit of creditors; or

(h) Sale by the Member of all or a material part of the Member's assets or the taking of any other action by the Member to liquidate or dissolve; or

(i) Termination of the Member's membership in the Bank. or the Member ceasing to be a type of financial institution that is eligible under the Bank Act to borrow or apply for membership in the Bank; or

(j) Merger, consolidation or other combination of the Member with an entity which is not a member of the Bank if the nonmember entity is the surviving entity; or

(k) With respect to Advances made pursuant to Section 11(g)(4) of the Bank Act (12 USC 1431(g)), if the creditor liabilities of the Member, excepting liabilities to the Bank, are increased in any manner to an amount exceeding five percent (5%) of the Member's net assets; or

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(l) Member threatens or initiates legal action to challenge an otherwise legally enforceable provision under this Advances Agreement in an attempt to make the Bank insecure under this Advances Agreement; or

(m) The Bank in good faith determines that a material adverse change has occurred in the financial condition of the Member (including its holding company or other affiliates), or the Member fails to comply with the Bank's Credit Policies or other applicable policies including the requirement of creditworthiness as determined by the Bank at its sole discretion.

Section 4.02. Remedies; Set Off; Specific Performance.

(a) Upon the occurrence of any Event of Default, the Bank shall have all of the rights and remedies provided by applicable law, which shall include, but not be limited to, all of the remedies of a secured party under the Uniform Commercial Code as in effect in the State of Indiana, Section 10 of the Bank Act (12 USC 1430), and other applicable federal law. In addition, the Bank may take immediate possession of any of the Collateral or any part thereof wherever the same may be found without judicial process. The Bank may require the Member to assemble the Collateral and make it available to the Bank at a place designated by the Bank which is reasonably convenient to both parties. The Bank may sell, assign and deliver the Collateral or any part thereof at public or private sale for such price as the Bank deems appropriate without any liability for any loss due to decrease in the market value of the Collateral during the period held. The Bank shall have the right to purchase all or part of the Collateral at such sale. If the Collateral includes insurance or securities which will be redeemed by the issuer upon surrender, or any accounts or deposits in the possession of the Bank, the Bank may realize upon such Collateral without notice to the Member. If any notification of intended disposition of any of the Collateral is required by applicable law, such notification shall be deemed reasonable and properly given if mailed, postage prepaid, at least five (5) days before any such disposition to the address of the Member appearing on the records of the Bank. The proceeds of any sale shall be applied in the order that the Bank, in its sole discretion, may choose. The Member agrees to pay all the costs and expenses of the Bank in the collection of the Indebtedness and enforcement of the Bank's rights and remedies in case of default, including, without limitation, reasonable attorneys' fees. The Bank shall, to the extent required by law, apply any surplus after (I) payment of the Indebtedness, (II) provision for repayment to the Bank of any amounts to be paid or advanced under

Outstanding Commitments, and (III) all costs of collection and enforcement, to third parties claiming a secondary or other security interest in the Collateral, with any remaining surplus paid to the Member. The Member shall be liable to the Bank for any deficiency remaining.

(b) If the Indebtedness, accrued interest thereon and other amounts or charges owing by the Member shall have become due and payable (by acceleration or otherwise), the Bank shall have the right, at any time or from time to time to the fullest extent permitted by law, in addition to all other rights and remedies available to it, without prior notice to the Member, to set off against and to appropriate and apply to such due and payable amounts any debt owing to, and any other funds held in any manner for the account of, the Member by the Bank, including without limitation, all Bank Deposits now or hereafter maintained by the Member with the Bank. Such right shall exist whether or not such debt owing to, or funds held for the account of, the Member is matured by its terms or is accelerated by the Bank, and regardless of the existence or adequacy of any collateral, guaranty or any other security, right or remedy available to the Bank. The Member hereby consents to and confirms the foregoing arrangements and confirms the Bank's rights of banker's lien and set off. Nothing in this Advances Agreement shall be deemed a waiver or prohibition of or restriction on the Bank's rights of banker's lien or set off.

(c) The Member acknowledges that the breach by the Member of the provisions of this Agreement and in particular Section 3.04 hereof would cause irreparable injury to the Bank and that remedies at law for any such breach will be inadequate, and consents and agrees that the Bank shall be entitled, without the necessity of proof of actual damage, to specific performance of the terms of this Agreement and to injunctive relief in any proceedings which may be brought to enforce the provisions of this Agreement. The Member waives the right to assert the defense that such breach or violation can be compensated adequately in damages in an action of law.

5. Miscellaneous.

Section 5.01. General Representations, QTL Reporting, Warranties and Indemnifications by the Member.

The Member hereby represents and warrants that, as of the date hereof and the date of each Advance or Other Credit Product hereunder:

(a) The Member, if a savings association, will truly and accurately represent and warrant its status as a Qualified

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Thrift Lender ("QTL") as defined by applicable federal law on any Application for Advance or Other Credit Product Agreement between Member and the Bank. If the Member is a savings association and it fails the QTL test as set forth by the Office of Thrift Supervision Regulations now in effect or as amended, and becomes ineligible under applicable federal law for Bank advances, the savings association Member shall immediately provide the Bank with written notification of its ineligibility for bank advances. If a non-QTL member, the Member warrants that Advances made under Section 1 0(a) of the Bank Act (12 USC 1430(a)), shall be for the purposes of housing finance.

(b) The Member will truly and accurately represent and warrant the purpose of any Advance or Other Credit Product on any Application for Advance or Other Credit Product Agreement between Member and the Bank.

(c) The Member will promptly furnish any financial, collateral or other information requested by the Bank in connection with any Advance or Other Credit Product.

(d) The Member is not, and neither the execution of nor the performance of any transactions or obligations of the Member under any Advice of Credit, Application for Advance, Other Credit Product Agreement or this Advances Agreement shall, with the passage of time, the giving of notice or otherwise, cause the Member to be: (I) in violation of its charter or articles of incorporation, bylaws, the Bank Act, the FHFB Regulations, any other law or administrative regulation, agreement, or any court decree; or (II) in default or in breach of any indenture, contract, or other instrument or agreement to which the Member is a party or by which it or any of its property is bound or any default under, breach of, or failure to comply with any judgment, order, decree, regulatory directive, or other process of any court or agency having jurisdiction of or which is binding upon the Member.

(e) The Member is not in default under any Advice of Credit or Other Credit Product Agreement with the Bank.

(f) The Member has full power and authority and has received all corporate and governmental authorizations and approvals (including without limitation, those required under the Bank Act and the FHFB Regulations) as may be required to enter into and perform its obligations under any Advice of Credit, Application for Advance, Other Credit Product Agreement or this Advances Agreement, and to obtain Advances and Other Credit Products.

(g) The information given by the Member in any writing

provided, electronic transmission or in any oral statement made, in connection with any Application for Advance or Other Credit Product Agreement, is at all relevant times true, accurate and complete in all material respects.

(h) The Member will at all times maintain and accurately reflect the terms of this Advances Agreement (including the Bank's security interest in the Collateral) and all Advances and Other Credit Products hereunder on its books and records. including evidence of necessary authorizations to effectuate transactions under this Agreement.

(i) The Member and its successors and assigns (collectively referred to in this Section 5.01(i) as "Member") shall indemnify and hold the Bank harmless from and against any and all costs, claims, expenses, damages, and liabilities with respect to any action which may be instituted by any person or entity against the Bank as a result of any transaction, including without limitation, Bank credit extensions, services, and Other Credit Products contemplated by this Advances Agreement or action or nonaction arising from this Advances Agreement, except where the same results solely from the recklessness or willful misconduct of the Bank. In addition, the Member shall indemnify and hold the Bank harmless from and against any and all costs, claims, expenses, damages, and liabilities resulting in any way from the presence or effects of any toxic or hazardous substances or materials in, on, or under any real property or interest in real property that is subject to or included in the Collateral. The Member also agrees to reimburse the Bank for such reasonable fees and charges as may be assessed by the Bank to cover overhead and other cost, including reasonable attorneys' fees, incurred either under this indemnification provision or in the administration of this Advances Agreement, any Advice of Credit or Other Credit Product Agreement.

Section 5.02. Assignment.

The Bank may assign or negotiate to any other Federal Home Loan Bank or to any other person or entity, with or without recourse, any Indebtedness of the Member or participations therein, and the Bank may assign or transfer all or any part of the Bank's right, title, and interest in and to this Advances Agreement and may assign and deliver the whole or any part of the Collateral to the transferee, which shall succeed to all the powers and rights and duties of the Bank in respect thereof, and the Bank shall thereafter be forever relieved and fully discharged from any liability or responsibility with respect to the transferred Collateral. The Member may not assign

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or transfer any of its rights or obligations hereunder (by operation of law, the appointment of a receivership, or otherwise) without the express prior written consent of the Bank.

Section 5.03. Discretion of Bank to Grant or Deny Advances and Other Credit Products.

Nothing contained herein or in any documents or oral representations describing or setting forth the Bank's credit programs or Credit Policies shall be construed as an agreement or commitment on the part of the Bank to grant Advances or extend Other Credit Products hereunder, the right and power of the Bank in its discretion to either grant or deny any Advance or Other Credit Product requested hereunder being expressly reserved.

Section 5.04. Amendment; Waivers.

No modification, amendment or waiver of any provision of this Advances Agreement or consent to any departure therefrom shall be effective unless executed by the party against whom such change is asserted and shall be effective only in the specific instance and for the purpose for which given. No notice to or demand on the Member in any case shall entitle the Member to any other or further notice or demand in the same, or similar or other circumstances. Any forbearance, failure or delay by the Bank in exercising any right, power or remedy hereunder shall not be deemed to be a waiver thereof, and any single or partial exercise by the Bank of any right, power or remedy hereunder shall not preclude the further exercise thereof. Every right, power and remedy of the Bank shall continue in full force and effect until specifically waived by the Bank in writing.

Section 5.05. Jurisdiction; Legal Fees.

In any action or proceeding brought by the Bank or the Member in order to enforce any right or remedy under this Advances Agreement, the parties hereby consent to, and agree that they will submit to, the jurisdiction of the United States District Court for the Southern District of Indiana or, if such action or proceeding may not be brought in federal court, the jurisdiction of the courts of the State of Indiana located in Marion County. The Member agrees that, if any action or proceeding is brought by the Member seeking to obtain any legal or equitable relief against the Bank tinder or arising out of this Advances Agreement or any transaction contemplated hereby, and such relief is not granted by the final decision, after any and all appeals, of a court of competent jurisdiction, the Member shall promptly pay upon demand all attorneys' fees and other

costs incurred by the Bank in connection therewith. Further, the Member agrees that if any action or proceeding is brought by the Bank in connection with the successful enforcement of any of the Bank's rights or remedies hereunder or otherwise or if the services of legal counsel are required in connection with the administration of the credit facilities contemplated hereby, the Member shall pay promptly upon demand all attorneys' fees and other costs incurred by the Bank in connection therewith.

Section 5.06. Waiver of Jury Trial.

To the extent allowed by law, the Member hereby waives the right to a jury trial in any action or proceeding brought by or against the Member regarding this Agreement, the Collateral, Other Credit Products, or the credit facilities contemplated hereby.

Section 5.07. Notices.

Except as provided in the last sentence of this Section 5.07, any written notice, advice, request, consent or direction given, made or withdrawn pursuant to this Agreement shall be either in writing or transmitted electronically and reproduced mechanically by the addressee and shall be given by first class mail, postage prepaid, or by telecopy or other facsimile transmission, or by private courier or delivery service. Except for notices made under Section 4.02, all non-oral notices shall be deemed given when actually received at the principal office of the Bank or the Member, as appropriate. All notices shall be designated to the attention of an office or section of the Bank or of the Member if the Bank or the Member has made a request for the notice to be so addressed. Any notice by the Bank to the Member pursuant to Sections 2.01, 3.03, 3.04 or 3.05 hereof may be oral and shall be deemed to have been duly given to and received by the Member at the time of the oral communication.

Section 5.08. Signatures of Member; Acceptance by Bank.

(a) For purposes of this Advances Agreement, documents shall be deemed signed by the Member when a signature of an authorized signatory or an authorized facsimile thereof appears on the document. The Bank may rely on any signature or facsimile thereof which reasonably appears to the Bank to be the signature of an authorized person, including signatures appearing on documents transmitted electronically to and reproduced mechanically at the Bank. The Secretary, the Cashier, the Assistant Secretaries, or the Assistant Cashiers of the Member shall from time to time certify to the Bank on

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forms provided by the Bank the names and titles of the persons authorized to apply on behalf of the Member to the Bank for Advances and Other Credit Products. Such certifications are incorporated herein and made a part of this Advances Agreement and shall continue in effect until expressly revoked by the Member notwithstanding that subsequent certifications may authorize additional persons to act for and on behalf of Member.

(b) This Agreement shall only be binding upon the Bank when accepted and executed by the Bank by two duly authorized officers and shall be deemed accepted by and delivered to the Bank at its home office in Indianapolis, Indiana.

Section 5.09. Applicable Law; Severability.

In addition to the terms and conditions specifically set forth herein and in any Advice of Credit or Other Credit Product Agreement between the Bank and the Member, this Advances Agreement and all Advances and Other Credit Products extended hereunder shall be governed by the statutory and common law of the United States and, to the extent federal law incorporates or defers to state law, the laws (exclusive of the choice of law provisions) of the State of Indiana, including the Uniform Commercial Code as in effect in the State of Indiana. In the event that any portion of this Advances Agreement conflicts with applicable law or the Credit Policies, such conflict shall not affect other provisions of this Advances Agreement which can be given effect without the conflicting provisions, and to this end the provisions of this Advances Agreement are declared to be severable.

Section 5.10. Interest Rate Limitations.

Notwithstanding anything contained herein to the contrary, the obligation of the Member to make payments of interest shall be subject to the limitation that payments of interest shall not be required to be made to the Bank to the extent that its receipt thereof would not be permissible under the law or laws applicable to the Bank limiting rates of interest which may be charged or collected by the Bank. Any such payments of interest which are not made as a result of the limitation referred to in the preceding sentence shall be made by the Member to the Bank on the earliest interest payment date or dates on which the receipt thereof would be permissible under the laws applicable to the Bank limiting rates of interest which may be charged or collected by the Bank.

Section 5.11. Successors and Assigns.

This Advances Agreement shall be binding upon and inure to the benefit of the successors and assigns of the Member and the Bank, provided that the Member may not assign any of its rights or obligations hereunder (by operation of law, the appointment of a receivership, or other) without the prior written consent of the Bank. The Bank may sell, transfer or assign or grant participations in Advances or Other Credit Products.

Section 5.12. Remedies Cumulative.

All rights and remedies provided herein or otherwise at law or in equity shall be cumulative, and are in addition to, and not exclusive of, any rights or remedies provided by law, including without limitation, the rights and remedies of a secured party under federal law and the Uniform Commercial Code as it is in effect from time to time in Indiana, including the right of the Bank to retain the Collateral in satisfaction of the Indebtedness. The exercise of one or more thereof shall not preclude, or be deemed an election of remedies against, any other remedy, right or privilege contained herein or provided to the Bank by law, rule, or regulation or at equity.

Section 5.13. Records of Bank Presumed Accurate.

The books and records of the Bank with respect 'to the Indebtedness, the Member's accounts or any other obligations of the Member hereunder or otherwise owing to the Bank shall be presumed to be accurate, complete. and binding upon the Member, absent fraud or willful misconduct on the part of the Bank with respect to such account or obligation.

Section 5.14. Entire Agreement.

This Advances Agreement and the other documents referenced herein relating to Advances and Other Credit Products embody the entire Agreement and understanding between the parties hereto relating to the subject matter hereof. This Advances Agreement amends, restates and supersedes all prior agreements between such parties which relate to such subject matter, and all Advances and Other Credit Products made by the Bank to the Member prior to the execution of this Advances Agreement shall be governed by the terms of this Advances Agreement and not by the terms of the prior agreement. The Agreement and the other documents contemplated hereby or delivered in connection herewith shall be construed consistently with each other in order to best effectuate the intent of the Member and the Bank in entering into the relationships contemplated by all these agreements. The agreements referenced herein consti-

Form APSP-A-Standard

Page 14 of 16

April 1994

tute the sole and entire agreement of the parties and no statement or promise has been made with respect to the subject matter of these agreements other than as expressed herein. In the event of a conflict between the

terms of this Agreement and any of the other such documents, the provisions of this Agreement shall control, except with respect to any note, whose respective terms shall control.

IN WITNESS WHEREOF , the Member and the Bank have caused this Advances Agreement to be signed in their names by their duly authorized officers as of the date first above mentioned.

ChoiceOne Bank		FEDERAL HOME LOAN BANK OF INDIANAPOLIS
(Full Name of Member)


By:	/s/ Linda Pitsch	By:	/s/ Cindy Konich

Its:	Sr Vice President & Cashier	Its:	Cindy Konich, Vice President


By:	/s/ Thomas Lampen	By:	/s/ Tim Zapf

Its:	VP & CFO	Its:	Tim Zapf, Vice President

Form APSP-A-Standard

Page 15 of 16

April 1994

FEDERAL HOME LOAN BANK OF INDIANAPOLIS

MEMBER ACKNOWLEDGEMENT
AND NOTARIZATION

State of Michigan )
SS:
County of Kent )

On this 21 ^st day of December , 20 01 , before me personally came Linda Pitsch and Thomas Lampen , to me known, who, being by me duly sworn, did depose and state that they are the Sr. Vice President & Cashier and Vice President CFO of said Member; and that they signed their names thereto by order of the Board of Directors or other governing body of said Member and that said Linda Pitsch and Thomas Lampen are duly authorized and acknowledge the execution of said instrument to be the voluntary act and deed of said Member.

/s/ Linda S. Peck	(SEAL)	LINDA S. PECK, NOTARY PUBLIC KENT COUNTY, STATE OF MICHIGAN MY COMMISSION EXPIRES ON 3/27/02
Notary Public Signature

Linda S. Peck
Printed Name

My Commission Expires:	3-27-02

My County of Residence:	Kent

Form APSP-A-Standard

Page 16 of 16

April 1994

Choiceone Financial Services 10-K

EXHIBIT 10.5

The following person has an Executive Employee Salary Continuation Agreement with the Corporation in the form filed herewith with the name or amounts set forth below inserted in the blanks identified by the following column headings.

(i)		(ii)		(iii)
Michael McHugh		9,100		758.33

EXECUTIVE EMPLOYEE SALARY
CONTINUATION AGREEMENT

for

(i)

TABLE OF CONTENTS

					PAGE
SECTION 1					1
	DEFINITIONS				1
		1.1	Administrative Committee		1
		1.2	Age		1
		1.3	Change in Control		1
		1.4	Crediting Rate		2
		1.5	Disability		3
		1.6	Discharge for Cause		3
		1.7	Early Retirement Date		3
		1.8	Mortality Assumptions		4
		1.9	Normal Retirement Date		4
		1.9a	Specified Employee		4
		1.10	Termination of Employment		4
		1.11	Vesting		5
SECTION 2					5
	ELIGIBILITY				5
SECTION 3					5
	PAYMENT OF BENEFITS				5
		3.1	Benefits Upon Normal Retirement		5
		3.2	Benefits Upon Early Retirement		6
		3.3	Benefits Upon Late Retirement .		6
		3.4	Benefits Upon Disability .		6
		3.5	Other Terminations of Employment		7
			(a)	Voluntary Termination of Employment Prior to the Early
				Retirement Date or Discharge for Cause at any Time	7
			(b)	Involuntary Termination of Employment Prior to the Early
				Retirement Date Other Than Because of Death, Disability
				or Discharge for Cause	7
			(c)	Termination of Employment At or After A Change in
				Ownership of Control	7
		3.6	Survivorship Benefits		8
			(a)	Prior to Commencement of Normal or Early Retirement
				Benefits	8
			(b)	After Commencement of Benefits	8
		3.7	Recipients of Payments: Designation of Beneficiary		8
		3.8	Restriction on Timing of Distributions		9
		3.9	Distributions Upon Income Inclusion Under Section 409A of the Code		9
		3.10	Change in Form or Timing of Distributions		9

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SECTION 4				10
	ADDITIONAL CHANGE IN CONTROL PROVISIONS			10
		4.1	Application of Section	10
		4.2	Limit on Payments	10
		4.3	Determination by Experts	10
SECTION 5				11
	ADMINISTRATION AND INTERPRETATION OF THIS AGREEMENT			11
SECTION 6				11
	CLAIMS PROCEDURE			11
SECTION 7				12
	REVIEW PROCEDURE			12
		7.1		12
		7.2		12
SECTION 8				12
	LIFE INSURANCE AND FUNDING			12
SECTION 9				13
	ASSIGNMENT OF BENEFITS			13
SECTION 10				13
	EMPLOYMENT NOT GUARANTEED BY AGREEMENT			13
SECTION 11				13
	TAXES			13
SECTION 12				14
	AMENDMENT AND TERMINATION			14
		12.1	Amendments	14
		12.2	Plan Termination Generally	14
		12.3	Plan Terminations Under Section 409A	14
SECTION 13				15
	CONSTRUCTION			15
SECTION 14				15
	FORM OF COMMUNICATION			15
SECTION 15				15
	CAPTIONS			15
SECTION 16				16
	SEVERABILITY			16
SECTION 17				16
	BINDING EFFECT			16
SECTION 18				16
	COMPLIANCE WITH SECTION 409A			16

BENEFICIARY DESIGNATION				17

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EXECUTIVE EMPLOYEE SALARY CONTINUATION AGREEMENT
FOR

THIS AGREEMENT is made this ______ day of _____________, 1998, effective January 1, 1997, between Valley Ridge Bank, a Michigan corporation (the "Company") and (i) (the "Participant").

WHEREAS, the Participant is an executive employee of the Company and as such has materially contributed to the Company's position, and

WHEREAS the Company wishes to establish this Agreement for purposes of promoting in the Participant the strongest interest in the successful operation of the Company and increased efficiency in his work and to provide the Participant benefits upon retirement, death, disability or other termination of employment, in consideration of services to be performed after the date of this agreement but prior to his retirement; and

WHEREAS, the Company also wishes to establish this Agreement to enhance its abilities to attract and retain highly qualified executives and to enable those executives to perform their duties in the best interests of the Company and its shareholders in the event of possible or threatened Change in Control of the Company without undue concern regarding the personal, financial interests of such executives.

NOW THEREFORE, in consideration of the premises, the parties hereto agree as follows:

SECTION 1

DEFINITIONS

1.1 Administrative Committee - "Administrative Committee" shall consist of all outside directors of the Bank's Personnel Committee.

1.2 Age - "Age" shall mean the age of the person as of the date of his last birthday.

1.3 Change in Control - For purposes of this Agreement, a Change in Control of the Company shall have occurred (i) on the fifth day preceding the scheduled expiration date of a tender offer by, or exchange offer by any corporation, person, other entity or group (other than the Company

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or any of its wholly owned subsidiaries), to acquire Voting Stock of the Company if (a) after giving effect to such offer such corporation, person other entity or group would own twenty-five percent (25%) or more of the Voting Stock of the Company, (b) there shall have been filed documents with the Securities and Exchange Commission ("SEC") in connection therewith (or, if no such filling is required, public evidence that the offer has already commenced), and (c) such corporation, person, other entity or group has secured all required regulatory approvals to own or control twenty-five percent (25%) or more of the Voting Stock of the Company, (ii) if the shareholders of the Company approve a definitive agreement to merge or consolidate the Company with or into another corporation in a transaction in which neither the Company nor any of its wholly owned subsidiaries will be the surviving corporation, or to sell or otherwise dispose of all or substantially all of the Company's assets to any corporation, person, other entity or group (other than the Company or any of its wholly owned subsidiaries), and such definitive agreement is consummated; (iii) if any corporation, person, other entity or group (other than the Company of any of its wholly owned subsidiaries) becomes the Beneficial Owner of stock representing twenty-five percent (25%) or more of the Voting Stock of the Company, or (iv) if during any period of two (2) consecutive years Continuing Directors cease to comprise a majority of the Company's Board of Directors. The term "Continuing Director" means (i) any member of the Board of Directors of the Company who was a member of the Board of Directors of the Company at the beginning of any period of two (2) consecutive years, and (ii) any person who subsequently becomes a member of the Board of Directors of the Company, if (a) such person's nomination for election or election to the Board of Directors of the Company is recommended or approved by resolution of a majority of the Continuing Directors, or (b) such person is included as a nominee in a proxy statement of the Company distributed when a majority of the Board of Directors of the Company consists of Continuing Directors. For purposes of this Agreement, "Voting Stock" shall mean those shares of the Company entitled to vote generally in the election of directors.

1.4 Crediting Rate - "Crediting Rate" shall mean an annual rate of interest equal to 7.5%.

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1.5 Disability - "Disability" shall mean, if the Participant is insured under the company long term disability policy, the definition of total disability contained in the long term disability insurance policy. If the Participant is not insured under such a policy, the board shall, in its complete and sole discretion, determine whether the Participant is disabled for the purposes of this Agreement.

1.6 Discharge for Cause - The Company may terminate the Participant's employment under this Agreement for "Cause." A termination for Cause is a termination by reason of the Board's good faith determination that the Participant (i) is incompetent or acted dishonestly or engaged in willful misconduct in the performance of his duties, (ii) breached a fiduciary duty to the Company for personal profit to himself, (iii) intentionally failed to perform reasonably assigned duties, (iv) willfully violated any law, rule or regulation (other than traffic violations or similar offenses) or any final cease and desist order, or (v) materially breached this Agreement. No act, or failure to act, on the Participant's part shall be considered "willful" unless he has acted, or failed to act, with an absence of good faith and without a reasonable belief that his action or failure to act was in the best interest of the Company. Notwithstanding the foregoing, (i) the Participant shall not be deemed to have been terminated for Cause unless there shall have been delivered to the Participant a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the entire membership of the Board at a meeting of the Board called and held for the purpose (after reasonable notice to the Participant and an opportunity for the Participant, together with is counsel, to be heard before the Board), finding that in the good faith opinion of the Board the Participant was guilty of conduct set forth above in the second sentence of this Section and specifying the particulars thereof in detail, and (ii) in no event will the Participant be subject to termination for Cause pursuant to clause (v) above unless the Participant shall have failed to cure, correct or prevent the alleged breach within thirty days after such resolution has been delivered to the Participant.

1.7 Early Retirement Date - "Early Retirement Date" shall mean the first day of the month following the month in which a Participant reaches age 60.

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1.8 Mortality Assumptions - "Mortality Assumptions" shall mean the life expectancy of a Participant, determined by applying Commissioners Standard Ordinary Mortality Table 1980CSO.

1.9 Normal Retirement Date - "Normal Retirement Date" shall mean the first day of the month following the month in which a Participant reaches age 65.

1.9a Specified Employee - "Specified Employee" means a key employee (as defined in Section 416(i) of the Code without regard to paragraph 5 thereof) of the Company if any stock of the Company is publicly traded on an established securities market or otherwise, as determined by the plan administrator based on the twelve (12) month period ending each December 31 (the "identification period"). If the Participant is determined to be a Specified Employee for an identification period, the Participant shall be treated as a Specified Employee for purposes of this Agreement during the twelve (12) month period that begins on the first day of the fourth month following the close of the identification period.

1.10. Termination of Employment - "Termination of Employment" means the termination of the Participant's employment with the Company for reasons other than death. Whether a Termination of Employment takes place is determined in accordance with the requirements of Code Section 409A and related Treasury guidance or Regulations based on the facts and circumstances surrounding the termination of the Participant's employment and whether the Company and the Participant intended for the Participant to provide significant services for the Company following such termination. A Termination of Employment will not have occurred if

(a) the Participant continues to provide services as an employee of the Company at an annual rate that is twenty percent (20%) or more of the services rendered, on average, during the immediately preceding three (3) full calendar years of employment (or, if employed less than three (3) years, such lesser period) and the annual remuneration for such services is twenty percent (20%) or more of the average annual remuneration earned during the final three (3) full calendar years of employment (or, if less, such lesser period), or

(b) the Participant continues to provide services to the Company in a capacity other than as an employee of the Company at an annual rate that is fifty percent (50%) or more of the services rendered, on average, during the immediately preceding three (3) full calendar years of employment (or if employed less than three (3) years, such lesser period)

-4-

and the annual remuneration for such services is fifty percent (50%) or more of the average annual remuneration earned during the final three (3) full calendar years of employment (or if less, such lesser period).

The Participant's employment relationship will be treated as continuing intact while the Participant is on military leave, sick leave, or other bona fide leave of absence if the period of such leave of absence does not exceed six (6) months, or if longer, so long as the Participant's right to reemployment with the Company is provided either by statute or by contract. If the period of leave exceeds six (6) months and there is no right to reemployment, a Termination of Employment will be deemed to have occurred as of the first date immediately following such six (6) month period.

1.11 Vesting - For the purpose of this Agreement, vesting shall accrue to the Participant on a pro rata annual basis commencing January 1, 1997. The Participant shall earn 20 percent vesting for each complete year under the Agreement. Regardless of the number of years completed by the Participant, upon a Change in Control, the Participant shall become 100% vested in all benefits under this Agreement.

SECTION 2

ELIGIBILITY

The Participant is eligible for the benefits provided herein in accordance with the terms of this Agreement upon the execution hereof.

A Participant shall cease to be a Participant at Termination of Employment. However, the employment of a Participant shall not be deemed to be terminated by reason of an approved leave of absence granted in accordance with uniform rules applied in a non-discriminatory manner.

SECTION 3

PAYMENT OF BENEFITS

3.1 Benefits Upon Normal Retirement .

Upon a Participant's Termination of Employment on or after the Normal Retirement Date, the Company shall pay to the Participant the sum of $ (ii) per year, payable in monthly installments of $ (iii) each, commencing on the first day of the month coincident with or next

-5-

following the date of Termination of Employment and continuing on the first day of each month thereafter for a period of 15 years, but in any event until a minimum of 180 total monthly payments are made to the Participant or the Participant's beneficiary per Section 3.6(b). At the sole discretion of the board of directors, the initial benefit may be increased in

subsequent years to offset the effect of inflation.

3.2 Benefits Upon Early Retirement .

Upon a Participant's Termination of Employment on or after reaching the Early Retirement Date but prior to the Normal Retirement Date, the Participant will become 100% vested in the benefit described in Section 3.1. The Company shall pay the Participant the sum of (ii) per year, payable in monthly installments of (iii) each, commencing on the Normal Retirement Date and continuing on the first day of each month thereafter for a period of 15 years, but in any event until a minimum of 180 total monthly payments are made to the Participant or the Participant's beneficiary per Section 3.6(b).

3.3 Benefits Upon Late Retirement .

Upon a Participant's Termination of Employment after the Normal Retirement Date, the Company shall pay to the Participant the normal retirement benefit described in Section 3.1 above, increased by .05 per year or .00416 for each month that the Participant's Termination of Employment is deferred beyond the Normal Retirement Date, in equal monthly installments commencing on the first day of the month coincident with or next following the date of Termination of Employment and continuing on the first day of each month thereafter for the periods specified in Section 3.1.

3.4 Benefits Upon Disability .

Upon a Participant's Termination of Employment prior to the Normal Retirement Date due to Disability, no separate provision is made for a disability benefit under this Agreement. However, any such Participant shall be considered, notwithstanding such Termination of Employment, to continue to be a Participant while disabled and for so long as the disability continues prior to reaching the Early Retirement Date, such Participant's beneficiary shall receive the survivor's benefits described in Section 3.6(a). In the event the Participant lives to the Early Retirement Date, the Participant shall be entitled to receive the early retirement benefit described in Section 3.2.

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3.5 Other Terminations of Employment .

(a) Voluntary Termination of Employment Prior to the Early Retirement Date or Discharge for Cause at any Time . Upon a Participant's voluntary Termination of Employment prior to reaching the Early Retirement Date, for reasons other than death or Disability, or upon the Participant's Discharge for Cause at any time, the Company shall pay the vested benefit to the Participant pursuant to Schedule A attached to this Agreement in the form of an "Immediate Lump Sum Benefit", and the Participant shall have no further right to receive any additional benefit hereunder.

(b) Involuntary Termination of Employment Prior to the Early Retirement Date Other Than Because of Death, Disability or Discharge for Cause . Upon a Participant's involuntary Termination of Employment prior to reaching the Early Retirement Date, for reasons other than death, disability or discharge for cause, the Participant shall become 100% vested and the Company shall pay to the Participant as compensation for services rendered prior to such Termination of Employment the "Immediate Lump Sum Benefit" as defined in Schedule A. For purposes of this subsection 3.5(b), the Participant shall be deemed to have incurred an Involuntary Termination of Employment covered by this subsection if he quits employment as a result of the Company's significantly lessening either his title, duties, responsibilities, compensation or altering his situs of employment, without his consent. His compensation shall be deemed to be significantly lessened if any cutback is imposed except as a part of an overall cutback applied proportionately to all of the Company's management employees or if the Participant fails to receive periodic increases substantially proportionate to and coincident with the increase granted to management employees.

(c) Termination of Employment At or After A Change in Ownership of Control . If a Participant incurs an involuntary Termination of Employment prior to reaching the Early Retirement Date, for reasons other than death, disability, or discharge for cause, but on or after the occurrence of a Change in Control, or if in connection with such change in control, the Participant's title, duties, responsibilities, or compensation is significantly lessened or his situs of employment is changed, without his consent, the Company shall immediately pay to the Participant an amount equal to the sum of a) 100% of the Participant's gross annual salary for the twelve-month period prior to Termination, and b) the "Immediate Lump Sum Benefit"

-7-

on Schedule A. For purposes hereof, the standards set forth in subparagraph (b) above with respect to what constitutes a significant lessening of compensation shall apply.

3.6 Survivorship Benefits .

(a) Prior to Commencement of Normal or Early Retirement Benefits . If a Participant dies while in the service of the Company or after a Termination of Employment due to Disability and while Disabled or after a Termination of Employment on or after the Early Retirement Date, but prior to commencement of any benefit payments under this Agreement, the Company shall pay to the Participant's beneficiary a survivor's benefit of 180 equal monthly installments of $______ commencing on the first day of the month after the Participant's death and continuing on the first day of each month thereafter until all such payments are completed. In the event a beneficiary dies before receiving all the survivor's benefit payments, the remaining payments shall be paid to the legal representatives of the beneficiary's estate. Payment of the survivor's benefit shall relieve the Company of the obligation to pay any other benefit which the Participant would have otherwise received, under the terms of this Agreement.

(b) After Commencement of Benefits . If a Participant dies after any benefit payments have commenced, but prior to receiving all of the scheduled minimum number of monthly payments, the company shall pay the remaining monthly payment to the Participant's beneficiary. In the event a beneficiary dies before receiving all of the remaining payments, the remaining payments shall be paid to the legal representatives of the beneficiary's estate.

3.7 Recipients of Payments: Designation of Beneficiary .

All payments to be made by the Company shall be made to the Participant, if living. In the event of a Participant's death prior to the receipt of all benefit payments, all subsequent payments to be made under this Agreement shall be to the beneficiary or beneficiaries of the Participant. The Participant shall designate a beneficiary by filing a written notice of such designation with the Company in such form as the Company may prescribe. The Participant may revoke or modify said designation at any time by a further written designation. The Participant's beneficiary designation shall be deemed automatically revoked in the event of the death of the beneficiary, or if the beneficiary is the Participant's spouse, in the event of dissolution of marriage. If no designation shall be in effect at the time of any benefits payable under this Agreement shall

-8-

become due, the beneficiary shall be the spouse of the Participant, or if no spouse is then living, the legal representatives of the Participant's estate.

3.8 Restriction on Timing of Distributions .

Notwithstanding any provision of this Agreement to the contrary, if the Participant is considered a Specified Employee at Termination of Employment, the provisions of this Section 3.8 shall govern all distributions hereunder. Benefit distributions that are made due to a Termination of Employment occurring while the Participant is a Specified Employee shall not be made during the first six (6) months following Termination of Employment. Rather, any distribution which would otherwise be paid to the Participant during such period shall be accumulated and paid to the Participant in a lump sum on the first day of the seventh month following the Termination of Employment. All subsequent distributions shall be paid in the manner specified.

3.9 Distributions Upon Income Inclusion Under Section 409A of the Code .

If any amount is required to be included in income by the Participant prior to receipt due to a failure of this Agreement to meet the requirements of Code Section 409A, the Participant may petition the plan administrator for a distribution of that portion of the amount the Company has accrued with respect to the Company's obligations hereunder that is required to be included in the Participant's income. Upon the grant of such a petition, which grant shall not be unreasonably withheld, the Company shall distribute to the Participant immediately available funds in an amount equal to the portion of the amount the Company has accrued with respect to the Company's obligations hereunder required to be included in income as a result of the failure of this Agreement to meet the requirements of Code Section 409A, within ninety (90) days of the date when the Participant's petition is granted. Such a distribution shall affect and reduce the Participant's benefits to be paid under this Agreement.

3.10 Change in Form or Timing of Distributions .

All changes in the form or timing of distributions hereunder must comply with the following requirements. The changes:

(a) may not accelerate the time or schedule of any distribution, except as provided in Code Section 409A and the regulations thereunder;

-9-

(b) must, for benefits distributable under Sections 3.1, 3.2, 3.3, 3.5(a) and 3.5(b), delay the commencement

of distributions for a minimum of five (5) years from the date the first distribution was originally scheduled to be made; and

SECTION 4

ADDITIONAL CHANGE IN CONTROL PROVISIONS

4.1 Application of Section .

If the Participant receives payments under this Agreement that are contingent upon a Change in Control, as determined under Section 280G of the Internal Revenue Code of 1986 (the "Code") and the regulations thereunder, then the provisions of this Section 4 shall apply.

4.2 Limit on Payments .

If payments or benefits under this Agreement, after taking into account all other payments or benefits to which the Participant is entitled from the Company, are expected to result in an excise tax on the Participant or the loss of certain tax deductions by the Company by reason of Code Section 280G and 4999, then payments under this Agreement shall be reduced to an amount such that all payments to the Participant from the Company, which are considered contingent upon the Change in Control, shall not exceed 2.99 times the Participant's Base Amount as defined in Code Section 280G.

4.3 Determination by Experts .

If the Participant and the Company shall disagree as to whether a payment under this Agreement could result in the loss of a deduction, the matter shall be resolved by an opinion of [the Company's law firm], or if [Company's law firm] is unable to provide such an opinion, counsel selected by the Company, and agreed to by the Officer. Counsel's opinion need not be unqualified. Counsel's opinion shall be based on determinations of the Base Amount and Excess Parachute Payments, as such terms are defined by Section 280G of the Code or its successor, by [Consulting Firm], or if [Consulting Firm] is unable to make such determinations, a consulting firm chosen by the Company and agreed to by the Officer. The Company shall pay the fees and expenses of such counsel and consulting firm, and shall make available such information as may be reasonably requested by such counsel and consulting firm to prepare the opinion. If the maximum amount

-10-

payable to the Officer pursuant to this Section cannot be determined prior to the due date for such payment, the Company shall pay on the due date the minimum amount which it in good faith determines to be payable, and shall pay the remaining amount as soon as practicable after such remaining amount is determined.

SECTION 5

ADMINISTRATION AND INTERPRETATION OF THIS AGREEMENT

The Board of Directors shall appoint an Administrative Committee consisting of three (3) or more persons to administer and interpret this Agreement. Interpretation by the Administrative Committee shall be final and binding upon a Participant. The Administrative Committee may adopt rules and regulations relating to this Agreement as it may deem necessary or advisable for the administration thereof.

SECTION 6

CLAIMS PROCEDURE

If the Participant or the Participant's beneficiary (hereinafter referred to as a "Claimant") is denied all or a portion of an expected benefit under this Plan for any reason, he or she may file a claim with the Administrative Committee. The Administrative Committee shall notify the Claimant within sixty (60) days of allowance or denial of the claim, unless the Claimant receives written notice from the Administrative Committee prior to the end of the sixty (60) day period stating that special circumstances requires an extension of the time for decision. The notice of the Administrative Committee's decision shall be in writing, sent by mail to Claimant's last known address, and, if a denial of the claim, must contain the following information:

	(a)	the specific reasons for the denial;
	(b)	specific reference to pertinent provisions of the Plan on which the denial is based; and
	(c)	if applicable, a description of any additional information or material necessary to perfect the claim, an explanation of why such information or material is necessary, and an explanation of the claims review procedure.

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SECTION 7

REVIEW PROCEDURE

7.1 A Claimant is entitled to request a review of any denial of his claim by the Administrative Committee. The request for review must be submitted in writing within a sixty (60) day period, the claim will be deemed to be conclusively denied. The Claimant or his representative shall be entitled to review all pertinent documents, and to submit issues and comments orally and in writing.

7.2 If the request for review by a Claimant concerns the interpretation and application of the provisions of the Agreement and the Company's obligations, then the review shall be conducted by a separate committee consisting of three persons designated or appointed by the Administrative Committee. The separate committee shall afford the Claimant a hearing and the opportunity to review all pertinent documents and submit issues and comments orally and in writing and shall render a review decision in writing, all within sixty (60) days after receipt of a request for a review, provided that, in special circumstances (such as the necessity of holding a hearing) the committee may extend the time for decision by not more than sixty (60) days upon written notice to the Claimant. The Claimant shall receive written notice of the separate committee's review decision, together with specific reasons for the decision and reference to the pertinent provisions of this Agreement.

SECTION 8

LIFE INSURANCE AND FUNDING

The Company in its discretion may apply for and procure as owner and for its own benefit, insurance on the life of the Participant, in such amounts and in such forms as the Company may choose. The Participant shall have no interest whatsoever in any such policy or policies, but at the request of the Company he shall submit to medical examinations and supply such information and execute such documents as may be required by the insurance company or companies to whom the Company has applied for insurance.

The rights of the Participant, or his beneficiary, or estate, to benefits under the Plan shall be solely those of an unsecured creditor of the Company. Any insurance policy or other assets acquired by or held by the Company in connection with the liabilities assumed by it pursuant to the

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Plan shall not be deemed to be held under any trust for the benefit of the Participant, his beneficiary, or his estate, or to be security for the performance of the obligations of the Company but shall be, in remain, a general, unpledged, and unrestricted asset of the Company.

If this Agreement is funded through insurance on the life of the Participant, then in the event of such Participant's death during the first two (2) years after the effective date of this Agreement, and if such Participant's death was a result of suicide or if such Participant made any material misstatement or failed to make a material disclosure of information in any documentation which the Participant is requested to complete in connection with this Agreement, then no death benefits under the terms of this Agreement will be payable, unless and to the extent that the Board of Directors of Company, in their absolute discretion, may otherwise determine.

SECTION 9

ASSIGNMENT OF BENEFITS

Neither the Participant nor any other beneficiary under the Plan shall have any right to assign the right to receive any benefits hereunder, and in the event of any attempted assignment or transfer, the Company shall have no further liability hereunder.

SECTION 10

EMPLOYMENT NOT GUARANTEED BY AGREEMENT

Neither this Agreement nor any action taken hereunder shall be construed as giving the Participant the right to be retained as an Executive Employee or as an employee of the Company for any period.

SECTION 11

TAXES

The Company shall deduct from all payments made hereunder all applicable federal or state taxes required by law to be withheld from such payments. In the event that the Company determines that benefits under the Plan are subject to FICA currently, the Company shall withhold the Participant's portion of FICA from such other amounts payable to the Participant as the Company deems appropriate.

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SECTION 12

AMENDMENT AND TERMINATION

12.1 Amendments .

The company may amend this Agreement unilaterally by written action; provided, however, that the Company may not reduce or modify any benefit that is in pay status or any benefit that would become payable hereunder if the Participant was involuntarily terminated under Section 3.5(b) hereof on the day prior to such action by the Board, without the prior written consent of the Participant.

12.2 Plan Termination Generally .

The Company may terminate this Agreement unilaterally by written action. In the event that the Company terminates this Agreement, the Participant will become 100% vested in the benefit described in Section 3.1 as of the date that the Company terminates this Agreement. Except as provided in Section 12.3, the termination of this Agreement shall not cause a distribution of benefits under this Agreement. Rather, after such termination, benefit distributions will be made at the earliest distribution event permitted under Article 3.

12.3 Plan Terminations Under Section 409A .

Notwithstanding anything to the contrary in Section 12.2, if this Agreement terminates in the following circumstances:

(a) Within thirty (30) days before or twelve (12) months after a change in the ownership or effective control of the Company, or in the ownership of a substantial portion of the assets of the Company as described in Section 409A(2)(A)(v) of the Code, provided that all distributions are made no later than twelve (12) months following such termination of the Agreement and further provided that all the Company's arrangements which are substantially similar to the Agreement are terminated so the Participant and all participants in the similar arrangements are required to receive all amounts of compensation deferred under the terminated arrangements within twelve (12) months of the such terminations;

(b) Upon the Company's dissolution or with the approval of a bankruptcy court provided that the amounts deferred under the Agreement are included in the Participant's gross income in the latest of (i) the calendar year in which the Agreement terminates; (ii) the

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calendar year in which the amount is no longer subject to a substantial risk of forfeiture; or (iii) the first calendar year in which the distribution is administratively practical; or

(c) Upon the Company's termination of this and all other non-account balance plans (as referenced in Section 409A of the Code or the regulations thereunder), provided that all distributions are made no earlier than twelve (12) months and no later than twenty-four (24) months following such termination, and the Company does not adopt any new non-account balance plans for a minimum of five (5) years following the date of such termination;

The Company may distribute the amount of the Participant's vested benefit to the Participant in a lump sum subject to the above terms.

SECTION 13

CONSTRUCTION

This Agreement shall be construed according to the laws of the State of Michigan.

SECTION 14

FORM OF COMMUNICATION

Any election, application, claim, notice or other communication required or permitted to be made by the Participant to the Company shall be made in writing and in such form as the Company shall prescribe. Such communication shall be effective upon mailing, if sent by first-class mail, postage prepaid, and addressed to the Company's office at 6 Main Street, Kent City, Michigan 49330.

SECTION 15

CAPTIONS

The captions at the head of a section or a paragraph of this Agreement are designed for convenience of reference only and are not to be resorted to for the purpose of interpreting any provision of this Agreement.

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SECTION 16

SEVERABILITY

The invalidity of any portion of this Agreement shall not invalidate the remainder thereof, and said remainder shall continue in full force and effect.

SECTION 17

BINDING EFFECT

This Agreement shall be binding upon and shall inure to the benefit of the Company and the Participant, and each of their successors, heirs, personal representatives and permitted assigns. No sale of substantially all of the Company's assets shall be made without the buyer expressly assuming the obligation of this Agreement. The Company further agrees that it will not be a party to any merger, consolidation or reorganization unless and until its obligations hereunder are expressly assumed by the successor or successors.

SECTION 18

COMPLIANCE WITH SECTION 409A

This Agreement shall be interpreted and administered consistent with Code Section 409A.

IN WITNESS WHEREOF, this Agreement has been executed by the parties as of the date first set forth above.

	By:

	Its:

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BENEFICIARY DESIGNATION NOTICE

VALLEY RIDGE BANK

To the Plan Administrator of ______________________ Executive Salary Continuation Agreement:

Pursuant to the Provisions of my Executive Salary Continuation Agreement with __________________________ permitting the designation of a beneficiary or beneficiaries by the participant, I hereby designate the following persons and entities as primary and secondary beneficiaries of any benefit under said Agreement payable by reason of my death.

Primary Beneficiary:
Name	Address	Relationship

Secondary (Contingent) Beneficiary:
Name	Address	Relationship

THE RIGHT TO REVOKE OR CHANGE ANY BENEFICIARY DESIGNATION IS HEREBY RESERVED. ALL PRIOR DESIGNATIONS, IF ANY, OF BENEFICIARIES AND SECONDARY BENEFICIARIES ARE HEREBY REVOKED.

The Plan Administrator shall pay all sums payable under this Agreement by reason of my death to the Primary Beneficiary, if he or she survives me, and if no Primary Beneficiary shall survive me, then to the Secondary Beneficiary, and if no named beneficiary survives me, then the Plan Administrator shall pay all amounts in accordance with the terms of the Executive Salary Continuation Agreement. In the event that a named beneficiary survives me and dies prior to receiving the entire benefit payable under said Agreement, then and in that event, the remaining unpaid benefit, payable according to the terms of the Agreement, shall be payable to the personal representatives of the estate of said deceased beneficiary, who survives me, but die prior to receiving the total benefit.


Date of Designation		Signature of Executive

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Choiceone Financials Services 10-K

EXHIBIT 10.6

VALLEY RIDGE BANK
AMENDED & RESTATED DIRECTOR DEFERRED COMPENSATION PLAN

VALLEY RIDGE BANK
AMENDED & RESTATED
DIRECTOR DEFERRED COMPENSATION PLAN

THIS AMENDED & RESTATED DIRECTOR DEFERRED COMPENSATION PLAN (the "Plan") is adopted this 28th day of December, 2006, by Valley Ridge Bank, a state-chartered commercial bank located in Kent City, Michigan (the "Corporation") amending and restating the following agreements:

Deferred Compensation Agreement dated September 1, 1994 between the Corporation and Jerry Arends;

Deferred Compensation Agreement dated September 1, 1994 between the Corporation and K. Timothy Bull;

Deferred Compensation Agreement dated September 1, 1994 between the Corporation and Richard Edgar;

Deferred Compensation Agreement dated September 23, 1996 between the Corporation and Fred Finkbeiner;

Deferred Compensation Agreement dated September 1, 1994 between the Corporation and Gary Gust;

Deferred Compensation Agreement dated December 18, 1996 between the Corporation and Ronald Hansen;

Deferred Compensation Agreement dated September 1, 1994 between the Corporation and Robert Humphreys;

Deferred Compensation Agreement dated September 23, 1996 between the Corporation and Ben Landheer;

Deferred Compensation Agreement dated September 1, 1994 between the Corporation and Michael McHugh;

Deferred Compensation Agreement dated September 23, 1996 between the Corporation and Dennis Nelson;

Deferred Compensation Agreement dated September 1, 1994 between the Corporation and John Niederer;

VALLEY RIDGE BANK
AMENDED & RESTATED DIRECTOR DEFERRED COMPENSATION PLAN

Deferred Compensation Agreement dated September 1, 1994 between the Corporation and Paul Spoelman;

Deferred Compensation Agreement dated September 1, 1994 between the Corporation and Donald Swanson; and

Deferred Compensation Agreement dated September 23, 1996 between the Corporation and Donald Vansingel (collectively, the "Prior Plan").

The parties intend this Amended and Restated Plan to be a material modification of the Prior Plan such that all amounts earned and vested prior to December 31, 2004 shall be subject to the provisions of Section 409A of the Code and the regulations promulgated thereunder.

The purpose of this Plan is to provide specified benefits to the Participant who contributes to the continued growth, development and future business success of the Corporation.

Article 1
Definitions

Whenever used in this Plan, the following words and phrases shall have the meanings specified:

1.1	" Beneficiary " means each designated person, or the estate of a deceased Participant, entitled to benefits, if any, upon the death of the Participant determined pursuant to Article 6.

1.2	" Beneficiary Designation Form " means the form established from time to time by the Plan Administrator that the Participant completes, signs and returns to the Plan Administrator to designate one or more beneficiaries.

1.3	" Board " means the Board of Directors of the Corporation as from time to time constituted.

1.4	" Code " means the Internal Revenue Code of 1986, as amended.

1.5	" Compensation " means the total gross Fees paid by the Corporation to a Participant and shall not include: salary or other forms of employment compensation, compensation payable in forms other than director fees, salary, retainers, expense allowances, contributions by the Corporation to any plan qualified under Section 401 of the Code, and amounts, if any, expended by the Corporation for health, medical, life or other insurance on behalf of the Participant.

1.6	" Crediting Rate " means the ChoiceOne Bank one-year Certificate of Deposit rate as in effect on January 1 of the Plan Year.

VALLEY RIDGE BANK
AMENDED & RESTATED DIRECTOR DEFERRED COMPENSATION PLAN

1.7	" Deferral Account " means the Corporation's accounting of the Participant's accumulated Deferrals plus accrued interest.

1.8	" Deferral Election Form " means the form established from time to time by the Plan Administrator that the Participant completes, signs and returns to the Plan Administrator to designate the amount of the Deferrals.

1.9	" Deferrals " means the amount of the Participant's Compensation which the Participant elects to defer according to this Plan.

1.10	" Distribution Election Form " means the form established from time to time by the Plan Administrator that the Participant completes, signs and returns to the Plan Administrator to designate the time and form of distribution.

1.11	" Effective Date " means January 1, 2005.

1.12	" Fees " means the total fees payable to the Participant during a Plan Year.

1.13	" Participation Agreement " means the written agreement signed by the Participant and Corporation once a Participant is selected for participation in the Plan.

1.14	" Plan Administrator " means the plan administrator described in Article 8.

1.15	" Plan Year " means each twelve (12) month period commencing on January 1 and ending on December 31 of each year.

1.16	" Projected Benefit " means the amount that would have accumulated in the Participant's Deferral Account as of February 1, 2007 if it is assumed that the Participant: (1) Continued to defer Fees at the same rate that the Participant had been deferring Fees on the date of the Participant's death until December 31, 2006; and (2) the Deferral Account continued to earn interest at the same rate on the date of the Participant's death.

1.17	" Separation from Service " means the termination of the Participant's service with the Corporation for reasons other than death. Whether a Separation from Service takes place is determined based on the facts and circumstances surrounding the termination of the Participant's service and whether the Corporation and the Participant intended for the Participant to provide significant services for the Corporation following such termination.

1.18	" Specified Employee " means a key employee (as defined in Section 416(i) of the Code without regard to paragraph 5 thereof) of the Corporation if any stock of the Corporation is publicly traded on an established securities market or otherwise.

1.19	" Termination for Cause " means a Separation from Service for:
	(a)	Gross negligence or gross neglect of duties to the Corporation; or

VALLEY RIDGE BANK
AMENDED & RESTATED DIRECTOR DEFERRED COMPENSATION PLAN

	(b)	Conviction of a felony or of a gross misdemeanor involving moral turpitude in connection with the Participant's service with the Corporation; or

	(c)	Fraud, disloyalty, dishonesty or willful violation of any law or significant Corporation policy committed in connection with the Participant's service and resulting in a material adverse effect on the Corporation.

1.20	" Unforeseeable Emergency " means a severe financial hardship to the Participant resulting from an illness or accident of the Participant, the Participant's spouse, or the Participant's dependent (as defined in Section 152(a) of the Code), loss of the Participant's property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant.

1.21	" Vesting " the Participant shall be one-hundred percent (100%) vested unless otherwise stated in the Participation Agreement.

Article 2
Deferral Election

2.1	Elections Generally . The Participant may annually file a Deferral Election Form with the Plan Administrator no later than the end of the Plan Year preceding the Plan Year in which services leading to such Fees will be performed.

2.2	Initial Election . After being notified by the Plan Administrator of becoming eligible for participation in the Plan, the Participant may make an initial deferral election under this Plan by delivering to the Plan Administrator a signed Deferral Election Form and Beneficiary Designation Form within thirty (30) days of becoming eligible. The Deferral Election Forms shall set forth the amount of Fees to be deferred. However, if the Participant was eligible to participate in any other account balance plans sponsored by the Corporation (as referenced in Section 409A of the Code or the regulations thereunder) prior to becoming eligible to participate in this Plan, the initial election to defer Fees under this Plan shall not be effective until the Plan Year following the Plan Year in which the Participant became eligible to participate in this Plan.

2.3	Eligibility . A director shall be eligible for the Plan at the beginning of the Plan Year after completing one (1) year of service on the Board. One year of service shall be the one (1) year anniversary after being elected to the Board.

Article 3
Deferral Account

3.1	Establishing and Crediting . The Corporation shall establish a Deferral Account on its books for the Participant and shall credit to the Deferral Account the following amounts:

VALLEY RIDGE BANK
AMENDED & RESTATED DIRECTOR DEFERRED COMPENSATION PLAN

(a)	Any vested amount deemed credited to the Participant's account under the Prior Plan;
(b)	Any Deferrals hereunder;
(c)	Interest as follows:
	(i)	On the last day of each month and immediately prior to the distribution of any benefits, but only until commencement of benefit distributions under this Agreement, interest shall be credited on the Deferral Account at an annual rate equal to the Crediting Rate, compounded monthly; and
	(ii)	On the last day of each month during any applicable installment period, interest shall be credited on the unpaid Deferral Account balance at an annual rate equal to the Crediting Rate, compounded monthly. Prior to the commencement of any distributions hereunder, the Board, in its sole discretion, may change the rate used to calculate interest in this Section 3.1(b)(ii).

3.2

Accounting Device Only . The Deferral Account is solely a device for measuring amounts to be paid under this Plan. The Deferral Account is not a trust fund of any kind. The Participant is a general unsecured creditor of the Corporation for the distribution of benefits. The benefits represent the mere Corporation promise to distribute such benefits. The Participant's rights are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by the Participant's creditors.

Article 4
Distributions During Lifetime

4.1	Normal Benefit . Within thirty (30) days following February 1, 2007, the Corporation shall distribute to the Participant the benefit described in this Section 4.1 in lieu of any other benefit under this Article.

	4.1.1	Amount of Benefit . The benefit under this Section 4.1 is the Deferral Account balance on February 1, 2007.

	4.1.2	Distribution of Benefit . The Corporation shall distribute the benefit to the Participant as elected by the Participant on the Distribution Election Form, commencing within thirty (30) days following February 1, 2007. Interest shall be credited in accordance with Section 3.1.

4.2		This section has been deleted

4.3		Hardship Distribution. If an Unforeseeable Emergency occurs, the Participant may petition the Board to receive a distribution from the Agreement. The Board in its sole discretion may grant such petition. If granted, the Participant shall receive, within sixty (60) days, a distribution from the Agreement (i) only to the extent deemed necessary by the Board to remedy the Unforeseeable Emergency, plus an amount necessary to pay

VALLEY RIDGE BANK
AMENDED & RESTATED DIRECTOR DEFERRED COMPENSATION PLAN

	taxes reasonably anticipated as a result of the distribution; and (ii) after taking into account the extent to which such hardship is or may be relieved through reimbursement or compensation by insurance or otherwise or by liquidation of the Participant's assets (to the extent the liquidation would not itself cause severe financial hardship). In any event, the maximum amount which may be paid out pursuant to this Section 4.3 is the Deferral Account balance as of the day that the Participant petitioned the Board to receive a Hardship Distribution under this Section.

4.4	Restriction on Timing of Distribution . Notwithstanding any provision of this Plan to the contrary, if the Participant is considered a Specified Employee at Separation from Service under such procedures as established by the Corporation in accordance with Section 409A of the Code, benefit distributions that are made upon Separation from Service may not commence earlier than six (6) months after the date of such Separation from Service. Therefore, in the event this Section 4.4 is applicable to the Participant, any distribution which would otherwise be paid to the Participant within the first six months following the Separation from Service shall be accumulated and paid to the Participant in a lump sum on the first day of the seventh month following the Separation from Service. All subsequent distributions shall be paid in the manner specified.

4.5	Distributions Upon Income Inclusion Under Section 409A of the Code . Upon the inclusion of any portion of the Deferral Account balance into the Participant's income as a result of the failure of this non-qualified deferred compensation plan to comply with the requirements of Section 409A of the Code, to the extent such tax liability can be covered by the Deferral Account balance, a distribution shall be made as soon as is administratively practicable following the discovery of the plan failure.

4.6	Change in Form or Timing of Distributions . For distribution of benefits under this Article 4, the Participant may elect to delay the timing or change the form of distributions by submitting the appropriate Distribution Election Form(s) to the Plan Administrator, provided however that no such election shall be permitted once distributions have commenced pursuant to this Article 4. Any such elections:

		(a)	may not accelerate the time or schedule of any distribution, except as provided in Section 409A of the Code and the regulations thereunder;
		(b)	must, for benefits distributable under Section 4.1, delay the commencement of distributions for a minimum of five (5) years from the date the first distribution was originally scheduled to be made; and
		(c)	must take effect not less than twelve (12) months after the election is made.

Article 5
Distributions at Death

5.1	Death During Active Service . If the Participant dies while in active service to the Corporation, the Corporation shall distribute to the Beneficiary the benefit described in this Section 5.1. This benefit shall be distributed in lieu of the benefits under Article 4.

VALLEY RIDGE BANK
AMENDED & RESTATED DIRECTOR DEFERRED COMPENSATION PLAN

	5.1.1	Amount of Benefit . The benefit under this Section 5.1 shall be the Participant's Projected Benefit.

	5.1.2	Distribution of Benefit . The Corporation shall distribute the benefit to the Beneficiary, as elected by the Participant on the Distribution Election Form commencing within thirty (30) days following receipt by the Corporation of the Participant's death certificate, but not earlier than January 1, 2007. Interest shall be credited in accordance with Section 3.1.

5.2	Death During Distribution of a Benefit . If the Participant dies after any benefit distributions have commenced under this Plan but before receiving all such distributions, the Corporation shall distribute to the Beneficiary the remaining benefits at the same time and in the same amounts that would have been distributed to the Participant had the Participant survived.

5.3	Death After Entitlement to Benefit But Before Benefit Distributions Commence . If the Participant is entitled to benefit distributions under this Plan, but dies prior to the commencement of said benefit distributions, the Corporation shall distribute to the Beneficiary the same benefits that the Participant was entitled to prior to death except that the benefit distributions shall commence within thirty (30) days following receipt by the Corporation of the Participant's death certificate.

Article 6
Beneficiaries

6.1	Beneficiary . The Participant shall have the right, at any time, to designate a Beneficiary to receive any benefits distributable under the Plan to a Beneficiary upon the death of the Participant. The Beneficiary designated under this Plan may be the same as or different from the beneficiary designated under any other plan of the Corporation in which the Participant participates.

6.2	Beneficiary Designation: Change . The Participant shall designate a Beneficiary by completing and signing the Beneficiary Designation Form, and delivering it to the Plan Administrator or its designated agent. The Participant's beneficiary designation shall be deemed automatically revoked if the Beneficiary predeceases the Participant or if the Participant names a spouse as Beneficiary and the marriage is subsequently dissolved. The Participant shall have the right to change a Beneficiary by completing, signing and otherwise complying with the terms of the Beneficiary Designation Form and the Plan Administrator's rules and procedures, as in effect from time to time. Upon the acceptance by the Plan Administrator of a new Beneficiary Designation Form, all Beneficiary designations previously filed shall be cancelled. The Plan Administrator shall be entitled to rely on the last Beneficiary Designation Form filed by the Participant and accepted by the Plan Administrator prior to the Participant's death.

VALLEY RIDGE BANK
AMENDED & RESTATED DIRECTOR DEFERRED COMPENSATION PLAN

6.3	Acknowledgment . No designation or change in designation of a Beneficiary shall be effective until received, accepted and acknowledged in writing by the Plan Administrator or its designated agent.

6.4	No Beneficiary Designation . If the Participant dies without a valid Beneficiary designation, or if all designated Beneficiaries predecease the Participant, then the Participant's spouse shall be the designated Beneficiary. If the Participant has no surviving spouse, the benefits shall be paid to the personal representative of the Participant's estate.

6.5	Facility of Distribution . If the Plan Administrator determines in its discretion that a benefit is to be paid to a minor, to a person declared incompetent, or to a person incapable of handling the disposition of that person's property, the Plan Administrator may direct distribution of such benefit to the guardian, legal representative or person having the care or custody of such minor, incompetent person or incapable person. The Plan Administrator may require proof of incompetence, minority or guardianship as it may deem appropriate prior to distribution of the benefit. Any distribution of a benefit shall be a distribution for the account of the Participant and the Beneficiary, as the case may be, and shall be a complete discharge of any liability under the Plan for such distribution amount.

Article 7
General Limitations

7.1	Termination for Cause . Notwithstanding any provision of this Plan to the contrary, the Corporation shall not distribute any benefit under this Plan in excess of the Deferrals (i.e., Deferral Account minus interest credited thereon) if the Participant's service with the Corporation is terminated due to a Termination for Cause.

7.2	Suicide or Misstatement . Notwithstanding any provision of this Plan to the contrary, the Corporation shall not distribute any benefit under this Plan in excess of the Deferrals if the Participant commits suicide within two (2) years after the Effective Date of this Plan, or if an insurance company which issued a life insurance policy covering the Participant and owned by the Corporation denies coverage (i) for material misstatements of fact made by the Participant on an application for such life insurance, or (ii) for any other reason.

7.3	Removal . Notwithstanding any provision of this Plan to the contrary, the Corporation shall not distribute any benefit under this Plan in excess of the Deferrals (i.e., Deferral Account minus interest credited on both) if the Participant is subject to a final removal or prohibition order issued by an appropriate federal banking agency pursuant to Section 8(e) of the Federal Deposit Insurance Act.

VALLEY RIDGE BANK
AMENDED & RESTATED DIRECTOR DEFERRED COMPENSATION PLAN

Article 8
Administration of Agreement

8.1	Plan Administrator Duties . This Plan shall be administered by a Plan Administrator which shall consist of the Board, or such committee or person(s) as the Board shall appoint. The Plan Administrator shall administer this Plan according to its express terms and shall also have the discretion and authority to (i) make, amend, interpret and enforce all appropriate rules and regulations for the administration of this Plan and (ii) decide or resolve any and all questions including interpretations of this Plan, as may arise in connection with the Plan to the extent the exercise of such discretion and authority does not conflict with Section 409A of the Code and regulations thereunder.

8.2	Agents . In the administration of this Plan, the Plan Administrator may employ agents and delegate to them such administrative duties as it sees fit, (including acting through a duly appointed representative), and may from time to time consult with counsel who may be counsel to the Corporation.

8.3	Binding Effect of Decisions . The decision or action of the Plan Administrator with respect to any question arising out of or in connection with the administration, interpretation and application of the Plan and the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all persons having any interest in the Plan.

8.4	Indemnity of Plan Administrator . The Corporation shall indemnify and hold harmless the members of the Plan Administrator against any and all claims, losses, damages, expenses or liabilities arising from any action or failure to act with respect to this Plan, except in the case of willful misconduct by the Plan Administrator or any of its members.

8.5	Corporation Information . To enable the Plan Administrator to perform its functions, the Corporation shall supply full and timely information to the Plan Administrator on all matters relating to the Compensation of its Participants, the date and circumstances of the death or Separation from Service of its Participants, and such other pertinent information as the Plan Administrator may reasonably require.

8.6	Statement of Accounts . The Plan Administrator shall provide to the Participant, within one hundred twenty (120) days after the end of each Plan Year, a statement setting forth the Deferral Account balance.

Article 9
Claims and Review Procedures

9.1	Claims Procedure . The Participant or Beneficiary ("Claimant") who has not received benefits under the Plan that he or she believes should be paid shall make a claim for such benefits as follows:

VALLEY RIDGE BANK
AMENDED & RESTATED DIRECTOR DEFERRED COMPENSATION PLAN

9.1.1	Initiation - Written Claim . The Claimant initiates a claim by submitting to the Corporation a written claim for the benefits. If such a claim relates to the contents of a notice received by the Claimant, the claim must be made within sixty (60) days after such notice was received by the Claimant. All other claims must be made within one hundred eighty (180) days of the date on which the event that caused the claim to arise occurred. The claim must state with particularity the determination desired by the Claimant.

9.1.2	Timing of Corporation Response . The Corporation shall respond to such Claimant within ninety (90) days after receiving the claim. If the Corporation determines that special circumstances require additional time for processing the claim, the Corporation can extend the response period by an additional ninety (90) days by notifying the Claimant in writing, prior to the end of the initial ninety (90) day period, that an additional period is required. The notice of extension must set forth the special circumstances and the date by which the Corporation expects to render its decision.

9.1.3	Notice of Decision . If the Corporation denies part or all of the claim, the Corporation shall notify the Claimant in writing of such denial. The Corporation shall write the notification in a manner calculated to be understood by the Claimant. The notification shall set forth:
	(a)	The specific reasons for the denial,
	(b)	A reference to the specific provisions of the Plan on which the denial is based,
	(c)	A description of any additional information or material necessary for the Claimant to perfect the claim and an explanation of why it is needed, and
	(d)	An explanation of the Plan's review procedures and the time limits applicable to such procedures.

9.2	Review Procedure . If the Corporation denies part or all of the claim, the Claimant shall have the opportunity for a full and fair review by the Corporation of the denial, as follows:

	9.2.1	Initiation - Written Request . To initiate the review, the Claimant, within sixty (60) days after receiving the Corporation's notice of denial, must file with the Corporation a written request for review.

	9.2.2	Additional Submissions - Information Access . The Claimant shall then have the opportunity to submit written comments, documents, records and other information relating to the claim. The Corporation shall also provide the Claimant, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant to the Claimant's claim for benefits.

VALLEY RIDGE BANK
AMENDED & RESTATED DIRECTOR DEFERRED COMPENSATION PLAN

9.2.3	Considerations on Review . In considering the review, the Corporation shall take into account all materials and information the Claimant submits relating to the claim, without regard to whether such information was submitted or considered in the initial benefit determination.

9.2.4	Timing of Corporation Response . The Corporation shall respond in writing to such Claimant within sixty (60) days after receiving the request for review. If the Corporation determines that special circumstances require additional time for processing the claim, the Corporation can extend the response period by an additional sixty (60) days by notifying the Claimant in writing, prior to the end of the initial sixty (60) day period, that an additional period is required. The notice of extension must set forth the special circumstances and the date by which the Corporation expects to render its decision.

9.2.5	Notice of Decision . The Corporation shall notify the Claimant in writing of its decision on review. The Corporation shall write the notification in a manner calculated to be understood by the Claimant. The notification shall set forth:
	(a)	The specific reasons for the denial,
	(b)	A reference to the specific provisions of the Plan on which the denial is based, and
	(c)	A statement that the Claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant to the Claimant's claim for benefits.

Article 10
Amendments and Termination

10.1	Amendments . The Corporation may amend this Agreement unilaterally by written action.

10.2	Plan Termination Generally . The Corporation may unilaterally terminate this Plan at any time. Except as provided in Section 10.3, the termination of this Plan shall not cause a distribution of benefits under this Plan. Rather, upon such termination benefit distributions will be made at the earliest distribution event permitted under Article 4 or Article 5.

10.3	Plan Terminations Under Section 409A . Notwithstanding anything to the contrary in Section 10.2, if the Corporation terminates this Plan in the following circumstances:

	(a)	Within thirty (30) days before, or twelve (12) months after a change in the ownership or effective control of the Corporation, or in the ownership of a substantial portion of the assets of the Corporation as described in Section 409A(2)(A)(v) of the Code, provided that all distributions are made no later than twelve (12) months following such termination of the Plan and further provided that all the Corporation's arrangements which are substantially similar to the Plan are terminated so the Participant and all participants in the similar arrangements

VALLEY RIDGE BANK
AMENDED & RESTATED DIRECTOR DEFERRED COMPENSATION PLAN

		are required to receive all amounts of compensation deferred under the terminated arrangements within twelve (12) months of the termination of the arrangements;
	(b)	Upon the Corporation's dissolution or with the approval of a Bankruptcy court provided that the amounts deferred under the Plan are included in the Participant's gross income in the latest of (i) the calendar year in which the Plan terminates; (ii) the calendar year in which the amount is no longer subject to a substantial risk of forfeiture; or (iii) the first calendar year in which the distribution is administratively practical; or
	(c)	Upon the Corporation's termination of this and all other account balance plans (as referenced in Section 409A of the Code or the regulations thereunder), provided that all distributions are made no earlier than twelve (12) months and no later than twenty-four (24) months following such termination, and the Corporation does not adopt any new account balance plans for a minimum of five (5) years following the date of such termination;

	the Corporation may distribute the Deferral Account balance, determined as of the date of the termination of the Plan, to the Participant in a lump sum subject to the above terms.

Article 11
Miscellaneous

11.1	Binding Effect . This Plan shall bind the Participant and the Corporation and their beneficiaries, survivors, executors, administrators and transferees.

11.2	No Guarantee of Service . This Plan is not a contract for service. It does not give the Participant the right to remain as a director of the Corporation, nor does it interfere with the Corporation's right to discharge the Participant. It also does not require the Participant to remain a director nor interfere with the Participant's right to terminate service at any time.

11.3	Non-Transferability . Benefits under this Plan cannot be sold, transferred, assigned, pledged, attached or encumbered in any manner.

11.4	Tax Withholding and Reporting . The Corporation shall withhold any taxes that are required to be withheld, including but not limited to taxes owed under Section 409A of the Code and regulations thereunder, from the benefits provided under this Plan. Participant acknowledges that the Corporation's sole liability regarding taxes is to forward any amounts withheld to the appropriate taxing authority(ies). Further, the Corporation shall satisfy all applicable reporting requirements, including those under Section 409A of the Code and regulations thereunder.

11.5	Applicable Law . The Plan and all rights hereunder shall be governed by the laws of the State of Michigan, except to the extent preempted by the laws of the United States of America.

VALLEY RIDGE BANK
AMENDED & RESTATED DIRECTOR DEFERRED COMPENSATION PLAN

11.6	Unfunded Arrangement . The Participant and the Beneficiary are general unsecured creditors of the Corporation for the distribution of benefits under this Plan. The benefits represent the mere promise by the Corporation to distribute such benefits. The rights to benefits are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors. Any insurance on the Participant's life or other informal funding asset is a general asset of the Corporation to which the Participant and the Beneficiary have no preferred or secured claim.

11.7	Reorganization . The Corporation shall not merge or consolidate into or with another Corporation, or reorganize, or sell substantially all of its assets to another Corporation, firm, or person unless such succeeding or continuing Corporation, firm, or person agrees to assume and discharge the obligations of the Corporation under this Plan. Upon the occurrence of such event, the term "Corporation" as used in this Plan shall be deemed to refer to the successor or survivor Corporation.

11.8	Entire Agreement . This Plan constitutes the entire agreement between the Corporation and the Participant as to the subject matter hereof. No rights are granted to the Participant by virtue of this Plan other than those specifically set forth herein.

11.9	Interpretation . Wherever the fulfillment of the intent and purpose of this Plan requires, and the context will permit, the use of the masculine gender includes the feminine and use of the singular includes the plural.

11.10	Alternative Action . In the event it shall become impossible for the Corporation or the Plan Administrator to perform any act required by this Plan, the Corporation or Plan Administrator may in its discretion perform such alternative act as most nearly carries out the intent and purpose of this Plan and is in the best interests of the Corporation, provided that such alternative acts do not violate Section 409A of the Code.

11.11	Headings . Article and section headings are for convenient reference only and shall not control or affect the meaning or construction of any of its provisions.

11.12	Validity . In case any provision of this Plan shall be illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but this Plan shall be construed and enforced as if such illegal and invalid provision has never been inserted herein.

11.13	Notice . Any notice or filing required or permitted to be given to the Plan Administrator under this Plan shall be sufficient if in writing and hand-delivered, or sent by registered or certified mail, to the address below:

	Valley Ridge Bank
	PO Box 248
	Kent City, MI 49330-0248

VALLEY RIDGE BANK
AMENDED & RESTATED DIRECTOR DEFERRED COMPENSATION PLAN

Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark or the receipt for registration or certification.

Any notice or filing required or permitted to be given to the Participant under this Plan shall be sufficient if in writing and hand-delivered, or sent by mail, to the last known address of the Participant.

11.14

Compliance with Section 409A . This Plan shall at all times be administered and the provisions of this Plan shall be interpreted consistent with the requirements of Section 409A of the Code and any and all regulations thereunder, including such regulations as may be promulgated after the Effective Date of this Plan.

VALLEY RIDGE BANK
AMENDED & RESTATED DIRECTOR DEFERRED COMPENSATION PLAN

IN WITNESS WHEREOF, the Corporation has signed this Plan as of the 28th day of December , 2006.

Corporation:
VALLEY RIDGE BANK

By:	/s/ Mike McHugh

Title:	Senior VP/EVP

VALLEY RIDGE BANK
Director Deferred Compensation Plan
ELECTION FORM - Form and Timing of Distributions

ELECTION FORM

Form and Timing of Distributions

Benefit	Distribution of Benefit
	Lump Sum (Initial below)	Equal Monthly Installments for 36 months. (Initial below)	Equal Monthly Installments for 60 months. (Initial below)
§ 4.1 - Normal Benefit
Article 5 - Death Benefit

The Participant understands and agrees that:

1.	No Deferrals may be made after the 2006 Plan Year.

2.	Prior to distribution and during any applicable installment period, interest on the Participant's Deferral Account will be credited for a Plan Year at an annual rate equal to the ChoiceOne Bank 1 year Certificate of Deposit rate as in effect on January 1 of the Plan Year.

3.	This election is made pursuant to the transition rules under Section 409A of the Code that permit a new payment election to be made with respect to both the time and form of payment under the Plan, and that under the transition rules this election:

	•	applies only to amounts that would not be payable in 2006; and
	•	may not cause an amount to be paid in 2006 that would not otherwise be payable in 2006.

4.	Although some or all of the amounts payable under this Plan may have been grandfathered under Section 409A of the Internal Revenue Code and therefore may not have been subject to Section 409A, the Plan and all amounts payable under the Plan are being treated as not grandfathered. As a result, the Plan and all amounts payable under the Plan are subject to and must comply with Section 409A and its regulations to avoid possible adverse tax consequences to the Participant.

Printed Name:

Signature:

Date:	December ___, 2006

Received by the Plan Administrator this _____ day of December, 2006


By:

Title:

VALLEY RIDGE BANK
AMENDED & RESTATED DIRECTOR DEFERRED COMPENSATION PLAN
BENEFICIARY DESIGNATION FORM

{ }	New Designation
{ }	Change in Designation

I, _________________________, designate the following as Beneficiary under the Agreement:


Primary:

			%

			%

			%

Contingent:
			%

			%

			%

Notes:
	•	Please PRINT CLEARLY or TYPE the names of the beneficiaries.
	•	To name a trust as beneficiary, please provide the name of the trustee(s) and the exact name and date of the trust agreement.
	•	To name your estate as beneficiary, please write "Estate of [your name] ".
	•	Be aware that none of the contingent beneficiaries will receive anything unless ALL of the primary beneficiaries predecease you.

I understand that I may change these beneficiary designations by delivering a new written designation to the Plan Administrator, which shall be effective only upon receipt and acknowledgment by the Plan Administrator prior to my death. I further understand that the designations will be automatically revoked if the beneficiary predeceases me, or, if I have named my spouse as beneficiary and our marriage is subsequently dissolved.

Name:

Signature:			Date:

Received by the Plan Administrator this _____ day of ________________, 2____


By:

Title:

Exhibit 10.6

The following persons have Deferred Compensation Agreements with ChoiceOne Bank in the form filed herewith with the information set forth below inserted in the blanks identified.

Dennis Nelson	(i)	September 23, 1996
	(ii)	The Grant State Bank
	(iii)	7/22/48
	(iv)	April 1985
	(v)	$31,952.00
	(vi)	7.5%

Jerome B. Arends	(i)	September 1, 1994
	(ii)	Kent City State Bank
	(iii)	12/16/44
	(iv)	February 18, 1987
	(v)	$31,083.00
	(vi)	8.0%

Kenneth T. Bull	(i)	September 1, 1994
	(ii)	Kent City State Bank
	(iii)	1/28/48
	(iv)	1st - February 18, 1987; 2nd - April 23, 1993
	(v)	$44,145.00
	(vi)	8.0%

Richard L. Edgar	(i)	September 1, 1994
	(ii)	Kent City State Bank
	(iii)	5/19/44
	(iv)	January 15, 1974
	(v)	$31,083.00
	(vi)	8.0%

Gary D. Gust	(i)	September 1, 1994
	(ii)	Kent City State Bank
	(iii)	11/11/44
	(iv)	April 16, 1991
	(v)	$31,083.00
	(vi)	8.0%

Robert C. Humphreys	(i)	September 1, 1994
	(ii)	Kent City State Bank
	(iii)	6/20/38
	(iv)	February 17, 1988
	(v)	$23,038.00
	(vi)	8.0%

Michael E. McHugh	(i)	September 1, 1994
	(ii)	Kent City State Bank
	(iii)	6/13/49
	(iv)	March 1989
	(v)	$52,207.00
	(vi)	8.0%

Ronald Hansen	(i)	December 18, 1996
	(ii)	The Grant State Bank
	(iii)	1/12/45
	(iv)	June 1982
	(v)	$16,449
	(vi)	7.5%

Donald Vansingel	(i)	September 23, 1996
	(ii)	The Grant State Bank
	(iii)	8/24/43
	(iv)	December 1973
	(v)	$18,100.00
	(vi)	7.5%

EXHIBIT A

DEFERRED COMPENSATION AGREEMENT

THIS AGREEMENT, made and entered into on this (i) day of (i) , by and between (ii) (the "Corporation") and (the "Participant").

WITNESSETH;

WHEREAS, the Corporation has adopted the Deferred Compensation Plan for The Grant State Bank (the "Plan"); and

WHEREAS, the Participant has been determined to be eligible to participate in the Plan; and

WHEREAS, the Plan requires that an agreement be entered into between the Corporation and the

Participant setting forth certain terms of the Plan as they apply to the Participant;

NOW, THEREFORE, the Corporation and the Participant agree as follows:

1. Participant . The Participant is hereby designated as a participant in the Plan.

2. Incorporation of Plan . The Plan, a copy of which is attached, is hereby incorporated into and made a part of this Agreement as though set forth in full herein. The parties shall be bound by, and have the benefit of, each and every provision of the Plan including but not limited to the non-transferability provisions of paragraph 15 of the Plan. The Participant hereby acknowledges receipt of a copy of the Plan, and that he/she has read the same.

3. Information Regarding the Participant . The Participant was born on (iii) , and his/her present status as a director of the Corporation began in (iv) .

4. Election to Defer . The Participant will irrevocably elect to defer, by the filing of a Deferral Election Form with the Administrative Committee of the Corporation.

5. Projected Benefit . For purposes of paragraph 9 of the Plan, the amount of the Projected Benefit at the commencement of the Plan with respect to the Participant is (v) annually. The Projected Benefit may change based on changes in the interest crediting rate for the Plan pursuant to paragraph 6 and on amounts deferred by the Participant.

6. Deferral Crediting Rate . The initial interest credited on all balances in the participant's deferral account for the first Plan year shall be the rate of (vi) %, subject to and in accordance with the terms of the Plan.

7. Certification by Participant . The Participant certifies that his/her decision to defer Compensation is not due to any reliance upon financial or tax advice given by the Corporation, and that the Corporation has not represented or warranted the tax effect of any Compensation deferred pursuant to the Plan. The Participant further certifies that he/she is aware that no ruling or determination has been obtained from the Internal Revenue Service that the Plan will effect the deferral of income for income tax purposes. The Participant further certifies that he/she understands that all Compensation deferred by the undersigned pursuant to the Plan will remain the property of the Corporation until paid out in accordance with the terms of the Plan, and that all such amounts are subject to the claims of the Corporation's creditors.

8. Definitions . All capitalized terms utilized but not defined herein shall be defined as set forth in the Plan.

9. Entire Agreement . This Agreement, together with the Plan, constitutes the entire Agreement between the parties as to the subject matter hereof. No rights are granted to the Participant by virtue of this Agreement other than those specifically set forth herein or in the Plan.

10. Binding Effect . This Agreement shall be binding upon the parties, the successors and assigns of the Corporation, and subject to the limitations of the Plan, the heirs and beneficiaries of the Participant.

11. Governing Law . This Agreement shall be construed and interpreted in accordance with the laws of the State of Michigan and its enforcement is subject to federal laws and regulations applicable to the Corporation or its successors.

IN WITNESS WHEREOF, the parties hereto have entered into the Agreement as of the date first above written.

	By

	Its


	Participant

ChoiceOne Financial Services, Inc. 10-K

Exhibit 13

ChoiceOne Financial Services, Inc.

2013

Annual Report to Shareholders

ChoiceOne Financial Services, Inc.

2013 Annual Report to Shareholders

Contents

To Our Shareholders	3

About ChoiceOne Financial Services, Inc	3

Stock Information	3

Selected Financial Data	5

Management’s Discussion and Analysis of Financial Condition and Results of Operations	6

Management’s Report on Internal Control Over Financial Reporting	20

Report of Independent Registered Public Accounting Firm	21

Consolidated Financial Statements	22

Notes to Consolidated Financial Statements	27

Corporate and Shareholder Information	55

Directors and Officers	56

ChoiceOne Financial Services, Inc.

To Our Shareholders

This 2013 Annual Report to Shareholders contains our audited financial statements, detailed financial review and all of the information that regulations of the Securities and Exchange Commission (the “SEC”) require to be presented in annual reports to shareholders. For legal purposes, this is the ChoiceOne Financial Services, Inc. 2013 Annual Report to Shareholders. Although attached to our proxy statement, this report is not part of our proxy statement, is not considered to be soliciting material and is not considered to be filed with the SEC except to the extent that it is expressly incorporated by reference in a document filed with the SEC. Shareholders who would like to receive even more detailed information than that contained in this 2013 Annual Report to Shareholders are invited to request our Annual Report on Form 10-K.

Our Annual Report on Form 10-K for the year ended December 31, 2013, including the financial statements and financial statement schedules, will be provided to any shareholder, without charge, upon written request to Mr. Thomas Lampen, Treasurer, ChoiceOne Financial Services, Inc., 109 East Division Street, Sparta, Michigan 49345.

About ChoiceOne Financial Services, Inc.

ChoiceOne Financial Services, Inc. is a single-bank holding company. Its principal banking subsidiary, ChoiceOne Bank (Sparta, Michigan), primarily serves communities in portions of Kent, Muskegon, Newaygo, and Ottawa counties in Michigan where ChoiceOne’s offices are located and the areas immediately surrounding those communities. Currently ChoiceOne serves those markets through twelve full-service offices. ChoiceOne Insurance Agencies, Inc. is a wholly-owned subsidiary of ChoiceOne Bank and sells insurance and investment products.

ChoiceOne’s business is primarily concentrated in a single industry segment – banking. ChoiceOne 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. ChoiceOne Bank’s consumer loan department makes direct loans to consumers and purchasers of residential property.

The principal source of revenue for ChoiceOne is interest and fees on loans. On a consolidated basis, interest and fees on loans accounted for 62%, 62%, and 67% of total revenues in 2013, 2012, and 2011, respectively. Interest from securities accounted for 13%, 12%, and 11% of total revenues in 2013, 2012, and 2011, respectively.

Stock Information

Several brokers trade ChoiceOne’s common shares in the over-the-counter bulletin board market. There is no well-established public trading market for the shares and trading activity is infrequent. ChoiceOne’s trading volume and recent share price information can be viewed under the symbol ’ COFS.OB ’ on certain financial websites.

The range of high and low bid prices for shares of common stock for each quarterly period during the past two years is as follows:

	2013				2012
	Low		High		Low		High
First Quarter	$	14.21	$	16.47	$	11.25	$	14.14
Second Quarter		15.00		17.00		13.01		15.38
Third Quarter		16.40		17.09		13.50		16.50
Fourth Quarter		16.25		17.10		14.30		15.50

The prices listed above are over-the-counter market quotations reported to ChoiceOne by its market makers listed in this annual report. The over-the-counter market quotations reflect inter-dealer prices without retail markup, markdown or commission and may not necessarily represent actual transactions. As of February 28, 2014, the average bid price for shares of ChoiceOne common stock was $17.50.

As of February 28, 2014, there were 3,296,537 shares of ChoiceOne Financial Services, Inc. common stock issued and outstanding. As of February 28, 2014, there were 761 shareholders of record of ChoiceOne Financial Services, Inc. common stock.

The following table summarizes cash dividends declared per share of common stock during 2013 and 2012:

	2013		2012
First Quarter	$	0.13	$	0.12
Second Quarter		0.13		0.12
Third Quarter		0.14		0.13
Fourth Quarter		0.14		0.13
Total	$	0.54	$	0.50

ChoiceOne’s principal source of funds to pay cash dividends is the earnings and dividends paid by ChoiceOne Bank. ChoiceOne Bank is restricted in its ability to pay cash dividends under current banking regulations. See Note 21 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 2014, although the amount of the quarterly dividends will be dependent on market conditions and ChoiceOne’s requirements for cash and capital, among other factors.

ChoiceOne Financial Services, Inc.

Selected Financial Data

(Dollars in thousands, except per share data)

	2013			2012			2011			2010			2009
For the year
Net interest income	$	17,596		$	17,675		$	17,922		$	16,995		$	15,996
Provision for loan losses		300			2,515			3,700			3,950			4,875
Noninterest income		6,402			6,889			6,139			5,569			5,421
Noninterest expense		16,821			16,444			15,788			15,249			15,259
Income before income taxes		6,877			5,605			4,573			3,365			1,283
Income tax expense/(benefit)		1,783			1,343			1,060			654			(195	)
Net income		5,094			4,262			3,513			2,711			1,478
Cash dividends declared		1,780			1,648			1,578			1,572			1,563

Per share
Basic earnings	$	1.55		$	1.29		$	1.07		$	0.83		$	0.45
Diluted earnings		1.54			1.29			1.07			0.83			0.45
Cash dividends declared		0.54			0.50			0.48			0.48			0.48
Shareholders’ equity (at year end)		18.68			18.35			17.58			16.56			16.21

Average for the year
Securities	$	133,704		$	129,337		$	104,986		$	86,437		$	76,934
Gross loans		312,798			307,639			317,271			315,031			320,328
Deposits		410,462			408,785			396,474			374,274			347,007
Federal Home Loan Bank advances		7,415			6,130			8,461			16,477			28,857
Shareholders’ equity		61,317			59,431			56,098			54,012			53,115
Assets		502,333			500,636			486,478			469,484			453,876

At year end
Securities	$	139,832		$	138,242		$	118,025		$	94,979		$	78,987
Gross loans		315,966			311,468			320,127			316,940			322,716
Deposits		418,127			424,199			403,365			389,884			365,010
Federal Home Loan Bank advances		6,392			420			8,447			8,473			21,980
Shareholders’ equity		61,558			60,506			57,904			54,313			52,926
Assets		514,575			508,913			495,914			480,524			465,915

Selected financial ratios
Return on average assets		1.01	%		0.85	%		0.72	%		0.58	%		0.33	%
Return on average shareholders’ equity		8.31			7.17			6.26			5.02			2.78
Cash dividend payout as a percentage of net income		34.93			38.67			44.92			57.99			105.75
Shareholders’ equity to assets (at year end)		11.96			11.89			11.68			11.30			11.36

ChoiceOne Financial Services, Inc.

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, ChoiceOne Bank (the “Bank”) and ChoiceOne Insurance Agencies, Inc. (the “Insurance Agency”). This discussion should be read in conjunction with the consolidated financial statements and related footnotes.

Forward-Looking Statements

This discussion and other sections of this annual 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 itself. Words such as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “intends,” “is likely,” “plans,” “predicts,” “projects,” “may,” “could,” 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 and loan servicing rights, and the fair value of investment securities (including whether any impairment on any investment security is temporary or other than temporary) and management’s assumptions concerning pension and other postretirement benefit plans involve judgments that are inherently forward-looking. All of the information concerning interest rate sensitivity is forward-looking. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions (“risk factors”) that are difficult to predict with regard to timing, extent, likelihood, and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed, implied or forecasted in such forward-looking statements. Furthermore, ChoiceOne undertakes no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events, or otherwise.

Risk factors include, but are not limited to, the risk factors discussed in Item 1A of the Company’s Annual Report on Form 10-K; changes in interest rates and interest rate relationships; demand for products and services; the degree of competition by traditional and non-traditional competitors; changes in banking laws and regulations; changes in tax laws; changes in prices, levies, and assessments; the impact of technological advances; governmental and regulatory policy changes; the outcomes of pending and future litigation and contingencies; trends in customer behavior as well as their abilities to repay loans; changes in the local and national economies; changes in market conditions; the level and timing of asset growth; various other local and global uncertainties such as acts of terrorism and military actions; and current uncertainties and fluctuations in the financial markets and stocks of financial services providers due to concerns about capital and credit availability and concerns about the Michigan economy in particular. These are representative of the risk factors that could cause a difference between an ultimate actual outcome and a preceding forward-looking statement.

Critical Accounting Policies And Estimates

The purpose of this section of the 2013 Annual Report to Shareholders is to provide a narrative discussion about the Company’s financial condition and results of operations during 2013. Management’s discussion and analysis of financial condition and results of operations as well as disclosures found elsewhere in the 2013 Annual Report to Shareholders 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, and goodwill valuation. Actual results could differ from those estimates.

Securities

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. Securities classified as available for sale are reported at their fair value. 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.

Allowance for Loan Losses

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

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. 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.

Prior to 2013, ChoiceOne was required to perform a quantitative assessment and engaged an outside consulting firm to assist in the goodwill impairment analysis. The following steps were used in the valuation: determination of the reporting unit, determination of the appropriate standard of value, determination of the appropriate level of value, calculation of fair value, and comparison of the fair value computed to the equity carrying value. It was determined that the relevant reporting unit to be valued was ChoiceOne Bank. The standard of value used in the valuation was fair value as determined by generally accepted accounting principles. The appropriate level of value was determined to be the controlling interest level. The appraisal methodology used to calculate the fair value included the following valuation approaches:

Income Approach: A discounted cash flow value was calculated based on earnings capacity. The discount rate used for the calculation was 12.50%. The growth assumption for assets was 1.8% for the first year and 2.0% in subsequent years. In addition, it was assumed that cost savings of 20% of noninterest expense would occur as a result of synergies and cost reductions from a change in control.

Market Approach: The analysis was based on price-to-earnings multiples, price-to-tangible book value ratios, and core deposit premiums for selected bank sale transactions.

The Asset Approach was also an approach reviewed, but it was not used in determining the fair value since it did not render a control level indication of value. The results from the valuation approaches were used to calculate an estimate of the fair value of ChoiceOne’s equity. The fair value was compared to the carrying value of equity to determine whether the Step 1 test under generally accepted accounting principles that govern the valuation of goodwill was passed. The goodwill analysis determined that the fair value of ChoiceOne’s equity exceeded the carrying value by 10.8% in 2012. Based on this assessment, management believed that there was no indication of goodwill impairment.

Management performed a qualitative assessment of goodwill as of June 30, 2013 and December 31, 2013. The analysis was performed including evaluation of 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 to 2011 and 2012. Average deal prices in the Midwest of closed transactions have indicated increases in deal values to tangible common equity, deal values to earnings, and core deposit premiums when compared to the observed prices used in the 2012 quantitative assessment. Further, macro-economic trends have been on a positive trajectory recently and there have been no adverse legal, regulatory, contractual, political or other factors that have materially impacted ChoiceOne. Upon completion of the qualitative assessment, ChoiceOne believed that it was more likely than not that the fair value of equity exceeded the carrying value at the assessment dates and there was no further quantitative assessment necessary.

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, 2013, management determined that a valuation allowance of $85,000 was necessary.

RESULTS OF OPERATIONS

Summary

(Dollars in thousands)	Year ended December 31,
	2013			2012			2011
Net interest income	$	17,596		$	17,675		$	17,922
Provision for loan losses		(300	)		(2,515	)		(3,700	)
Noninterest income		6,402			6,889			6,139
Noninterest expense		(16,821	)		(16,444	)		(15,788	)
Income tax expense		(1,783	)		(1,343	)		(1,060	)
Net income	$	5,094		$	4,262		$	3,513


	2013		2012		2011
Return on average assets	1.01	%	0.85	%	0.72	%
Return on average shareholders’ equity	8.31		7.17		6.26

Net income for 2013 was $5,094,000, which represented an $832,000 or 20% increase from 2012. The growth in net income resulted primarily from a lower provision for loan losses, which was partially offset by a decrease in net interest income and an increase in noninterest expense in 2013 compared to 2012. Net charge-offs were lower in 2013 than 2012, which caused the need for less provision expense. Although average earning assets grew $4.3 million in 2013, net interest income decreased $79,000 in 2013 compared to the prior year as a 31 basis point decrease in the rate earned on earning assets was applied to a larger dollar volume than the 31 basis point reduction in the rate paid on interest-bearing liabilities. The increase in noninterest expense was due to higher salaries and benefits and other noninterest expense in 2013 compared to the prior year.

Net income for 2012 was $4,262,000, which represented a $749,000 or 21% increase from 2011. The growth in net income resulted from an increase in noninterest income and a decrease in the provision for loan losses, which was partially offset by a decrease in net interest income and an increase in noninterest expense in 2012 compared to 2011. The increase in noninterest income was due primarily to increases in gains on sales of loans and gains on sales of securities. The decrease in the provision for loan losses resulted from lower net charge-offs in 2012 than in 2011. The decrease in net interest income was primarily due to a lower average rate on average earning assets resulting in a decrease in ChoiceOne’s net interest spread in 2012 compared to the prior year. The increase in noninterest expense was due to higher salaries and benefits, data processing, professional fees, and other noninterest expense as well as smaller increases in other expense categories in 2012 compared to the prior year offset by decreases in supplies and postage and FDIC insurance expenses.

Dividends

Cash dividends of $1,780,000 or $0.54 per common share were declared in 2013, compared to $1,648,000 or $0.50 per common share in 2012 and $1,578,000 or $0.48 per common share in 2011. Dividends declared were $0.14 per share for the last two quarters and $0.13 per share for the first two quarters in 2013. Dividends declared were $0.13 per share for the last two quarters and $0.12 per share for the first two quarters in 2012. Dividends declared were $0.12 for each quarter in 2011. The dividend yield on ChoiceOne’s common stock was 3.16% in 2013, compared to 3.42% in 2012 and 3.84% in 2011. The cash dividend payout as a percentage of net income was 35% in 2013, compared to 39% in 2012 and 45% in 2011.

ChoiceOne’s principal source of funds to pay cash dividends is the earnings of the Bank. The availability of these earnings is dependent upon the capital needs, regulatory constraints and other factors involving the Bank. Regulatory constraints include the maintenance of minimum capital ratios and limits based on net income and retained earnings of the Bank for the past three years. ChoiceOne expects to pay quarterly cash dividends in 2014 to shareholders based on the actual earnings of the Bank, although the amount of the quarterly dividends will be dependent on market conditions and ChoiceOne’s requirements for cash and capital, among other things.

Table 1 – Average Balances and Tax-Equivalent Interest Rates

(Dollars in thousands)	Year ended December 31,
	2013								2012								2011
	Average					Average			Average					Average			Average					Average
		Balance		Interest			Rate			Balance		Interest			Rate			Balance		Interest			Rate
Assets:
Loans (1) (2)	$	312,798	$	15,814			5.06	%	$	307,639	$	16,891			5.49	%	$	317,271	$	18,417			5.80	%
Taxable securities (3)		91,083		1,812			1.99			90,783		1,958			2.16			71,871		1,789			2.49
Nontaxable securities (1)		42,621		2,099			4.92			38,554		2,053			5.32			33,115		1,913			5.78
Other		4,817		12			0.25			10,021		25			0.25			8,426		20			0.25
Interest-earning assets		451,319		19,737			4.37			446,997		20,927			4.68			430,683		22,139			5.14
Noninterest-earning assets (4)		51,014								53,639								55,795
Total assets	$	502,333							$	500,636							$	486,478

Liabilities and Shareholders’ Equity:
Interest-bearing demand deposits	$	132,053	$	261			0.20	%	$	136,118	$	364			0.27	%	$	124,575	$	541			0.43	%
Savings deposits		65,484		40			0.06			50,252		59			0.12			45,698		51			0.11
Certificates of deposit		119,072		1,027			0.86			138,805		1,664			1.20			153,494		2,364			1.54
Advances from Federal Home Loan Bank		7,415		45			0.61			6,130		271			4.42			8,461		307			3.63
Other		20,034		46			0.23			22,282		186			0.83			21,179		290			1.37
Interest-bearing liabilities		344,058		1,419			0.41			353,587		2,544			0.72			353,407		3,553			1.01
Demand deposits		93,853								83,810								72,707
Other noninterest-bearing liabilities		3,105								3,808								4,266
Total liabilities		441,016								441,205								430,380
Shareholders’ equity		61,317								59,431								56,098
Total liabilities and shareholders’ equity	$	502,333							$	500,636							$	486,478

Net interest income (tax-equivalent basis) - interest spread				18,318			3.96	%				18,383			3.96	%				18,586			4.13	%
Tax-equivalent adjustment (1)				(722	)							(708	)							(664	)
Net interest income			$	17,596							$	17,675							$	17,922
Net interest income as a percentage of earning assets (tax-equivalent basis)							4.06	%							4.11	%							4.32	%


	(1)	Interest on nontaxable securities and loans has been adjusted to a fully tax-equivalent basis to facilitate comparison to the taxable interest-earning assets. The adjustment uses an incremental tax rate of 34% for the years presented.

(2)

Interest on loans included net origination fees charged on loans of approximately $909,000, $885,000, and $831,000 in 2013, 2012, and 2011, respectively.

(3)

Interest on taxable securities includes dividends on Federal Home Loan Bank and Federal Reserve Bank stock.

(4)

Noninterest-earning assets include loans on a nonaccrual status, which averaged approximately $2,132,000, $4,364,000, and $6,256,000 in 2013, 2012, and 2011, respectively.

Net Interest Income

As shown in Tables 1 and 2, tax-equivalent net interest income decreased $65,000 in 2013 compared to 2012. The decrease was attributed to a 31 basis point decline in the average rate on interest-earning assets offset by a 31 basis point decline in the average rate on interest-bearing liabilities. ChoiceOne’s net interest spread remained constant in 2013 compared to 2012 as growth of $4.3 million in average interest-earning assets was offset by a decline of $9.5 million in average interest-bearing liabilities.

The average balance of loans increased $5.2 million in 2013 compared to 2012. $4.0 million of the growth came from loans to businesses in ChoiceOne’s markets as calling efforts were emphasized in 2013. The remaining $1.2 million resulted from retail lending, which was bolstered by marketing and ChoiceOne’s referral program. Combined with a 43 basis point decrease in the average rate earned on loans, interest income on loans declined $1,077,000 in 2013 compared to the prior year. The average balance of total securities increased by $4.4 million in 2013 compared to 2012 as securities were purchased to provide earning assets growth. This growth in the average balance was offset by a lower average rate earned on securities, which caused interest income from securities to decrease $100,000 in 2013 compared to the prior year. The average balance of other interest-earning assets decreased $5.2 million as excess funds were deployed toward loan and securities growth, resulting in a decrease of $13,000 in interest income for 2013 compared to 2012.

The average balance of interest-bearing demand deposits decreased $4.1 million in 2013 compared to 2012. The effect of this decrease, combined with a 7 basis point decline in the average rate paid, caused interest expense to be $103,000 lower in 2013 than in the prior year. The effect of $15.2 million of growth in average savings deposits offset by a decrease in average rate paid of 6 basis points caused a $19,000 decrease in interest expense in 2013 compared to the prior year. The average balance of certificates of deposit was $19.7 million lower in 2013 than in the prior year. Approximately $16 million of the certificates of deposit decline was related to certificates from ChoiceOne’s local markets, while the remaining $3.7 million resulted from a lower level of brokered certificates. The average balance decrease plus the effect of a 34 basis point decline in the average rate paid caused interest expense on certificates of deposit to fall $637,000 in 2013 compared to 2012. A $1.3 million increase in the average balance of Federal Home Loan Bank advances, offset by a 381 basis point decrease in the average rate paid, caused interest expense to decline $226,000 in 2013 compared to the prior year. Interest expense on other interest-bearing liabilities fell $140,000 in 2013 compared to 2012 due to a reduction of 60 basis points in the average interest rate paid, plus the effect of a $2.2 million decrease in the average balance. The growth experienced in savings deposits was primarily due to depositors choosing the liquidity and safety afforded by this type of deposit as compared to certificates of deposit or nonbank investments.

ChoiceOne’s net interest income spread was 3.96% (shown in Table 1) for both 2013 and 2012. The average yield received on interest-earning assets in 2013 decreased 31 basis points to 4.37% while the average rate paid on interest-bearing liabilities in 2013 fell 31 basis points to 0.41%. The decline in general market interest rates in both 2012 and 2013 caused the reduction in rates for both assets and liabilities in the two time periods.

Table 2 – Changes in Tax-Equivalent Net Interest Income

(Dollars in thousands)	Year ended December 31,
	2013 Over 2012									2012 Over 2011
		Total			Volume			Rate			Total			Volume			Rate
Increase (decrease) in interest income (1)
Loans (2)	$	(1,077	)	$	279		$	(1,356	)	$	(1,526	)	$	(548	)	$	(978	)
Taxable securities		(146	)		7			(153	)		169			429			(260	)
Nontaxable securities (2)		46			207			(161	)		140			297			(157	)
Other		(13	)		(13	)		—			5			4			1
Net change in tax-equivalent income		(1,190	)		480			(1,670	)		(1,212	)		182			(1,394	)

Increase (decrease) in interest expense (1)
Interest-bearing demand deposits		(103	)		(11	)		(92	)		(177	)		46			(223	)
Savings deposits		(19	)		15			(34	)		8			5			3
Certificates of deposit		(637	)		(214	)		(423	)		(700	)		(211	)		(489	)
Advances from Federal Home Loan Bank		(226	)		47			(273	)		(36	)		(95	)		59
Other		(140	)		(17	)		(123	)		(104	)		15			(119	)
Net change in interest expense		(1,125	)		(180	)		(945	)		(1,009	)		(240	)		(769	)
Net change in tax-equivalent net interest income	$	(65	)	$	660		$	(725	)	$	(203	)	$	422		$	(625	)


	(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 34% for the years presented.

As shown in Tables 1 and 2, tax-equivalent net interest income decreased $203,000 in 2012 compared to 2011. The decrease was attributed to a 46 basis point decline in the average rate on interest bearing assets offset by a 29 basis point decline in average interest bearing liabilities. The effect of the reduction in ChoiceOne’s net interest spread was partially offset by growth of $16.3 million in average interest-earning assets in 2012 compared to 2011.

The average balance of loans decreased $9.6 million in 2012 compared to 2011. Combined with a 31 basis point decrease in the average rate earned on loans, interest income on loans declined $1,526,000 in 2012 compared to the prior year. The average balance of total securities increased by $24.4 million in 2012 compared to 2011. This growth in the average balance, partially offset by a lower average rate earned on securities, caused interest income from securities to increase $309,000 in 2012 compared to the prior year. A small increase in the average balance of other interest-earning assets resulted in an increase of $5,000 in 2012 compared to 2011. As average loans experienced a decline in 2012 compared to 2011, growth in securities was ChoiceOne’s method to achieve growth in earning assets in 2012.

The average balance of interest-bearing demand deposits increased $11.5 million in 2012 compared to 2011. The effect of this increase, offset by a 16 basis point decline in the average rate paid, caused interest expense to be $177,000 lower in 2012 than in the prior year. The effect of $4.6 million of growth in average savings deposits caused an $8,000 increase in interest expense in 2012 compared to the prior year. The average balance of certificates of deposit was $14.7 million lower in 2012 than in the prior year. Approximately $12.1 million of the certificates of deposit decline was related to certificates from ChoiceOne’s local markets, while the remaining $2.6 million resulted from a lower level of brokered certificates. The average balance decrease plus the effect of a 34 basis point decline in the average rate paid caused interest expense on certificates of deposit to fall $700,000 in 2012 compared to 2011. A $2.3 million decrease in the average balance of Federal Home Loan Bank advances, partially offset by a 79 basis point increase in the average rate paid, caused interest expense to decline $36,000 in 2012 compared to the prior year. The increase in the rate paid on FHLB advances in 2012 compared to 2011 was caused by the payoff of a $3 million advance with an interest rate of 2.54% in June 2012. Interest expense on other interest-bearing liabilities fell $104,000 in 2012 compared to 2011 due to a reduction of 54 basis points in the average interest rate paid, which was partially offset by a $1.1 million increase in the average balance. The growth experienced in interest-bearing demand deposits and savings deposits was primarily due to depositors choosing the liquidity and safety afforded by this type of deposit as compared to certificates of deposit or nonbank investments.

ChoiceOne’s net interest income spread was 3.96% (shown in Table 1) for 2012, compared to 4.13% in 2011. The average yield received on interest-earning assets in 2012 decreased 46 basis points to 4.68% while the average rate paid on interest-bearing liabilities in 2012 fell 29 basis points to 0.72%. The decline in general market interest rates in both 2011 and 2012 caused the reduction in rates for both assets and liabilities in the two time periods.

Allowance and Provision For Loan Losses

Information regarding the allowance and provision for loan losses can be found in Table 3 below:

Table 3 – Provision and Allowance For Loan Losses

(Dollars in thousands)
	2013			2012			2011			2010			2009
Allowance for loan losses at beginning of year	$	5,852		$	5,213		$	4,729		$	4,322		$	3,600
Charge-offs:
Agricultural		88			—			45			—			—
Commercial and industrial		122			405			228			765			1,558
Real estate - commercial		858			869			1,357			1,523			1,218
Real estate - construction		—			—			—			—			14
Real estate - residential		732			887			1,677			1,152			1,369
Consumer		351			338			361			444			535
Total		2,151			2,499			3,668			3,884			4,694

Recoveries:
Agricultural		6			5			10			—			—
Commercial and industrial		337			61			32			68			102
Real estate - commercial		84			224			89			16			58
Real estate - construction		—			—			—			—			29
Real estate - residential		132			119			104			27			106
Consumer		175			214			217			230			246
Total		734			623			452			341			541

Net charge-offs		1,417			1,876			3,216			3,543			4,153

Provision for loan losses		300			2,515			3,700			3,950			4,875

Allowance for loan losses at end of year	$	4,735		$	5,852		$	5,213		$	4,729		$	4,322

Allowance for loan losses as a percentage of:
Total loans as of year end		1.52	%		1.88	%		1.63	%		1.49	%		1.34	%
Nonaccrual loans, accrual loans past due 90 days or more and troubled debt restructurings		62	%		86	%		78	%		56	%		31	%
Ratio of net charge-offs to average total loans outstanding during the year		0.45	%		0.61	%		1.01	%		1.12	%		1.30	%
Loan recoveries as a percentage of prior year’s charge-offs		29	%		17	%		12	%		7	%		14	%

As shown in Table 3, the provision for loan losses was $2,215,000 lower in 2013 than in 2012. The reduction in the provision level resulted from a decrease of $459,000 in net charge-offs experienced in 2013 compared to 2012. Net charge-offs of residential real estate loans declined $168,000 and net charge-offs of commercial real estate loans increased $129,000 in 2013 compared to 2012, while net charge-offs of commercial and industrial loans decreased $559,000. Agricultural loan and consumer loan net charge-offs both increased slightly in 2013 compared to 2012. Management believes that the lower net charge-off levels are due in part to the improving economy in the Bank’s market areas. The allowance for loan losses as a percentage of total loans decreased from 1.88% as of the end of 2012 to 1.52% as of the end of 2013. The coverage ratio of the allowance for loan losses to nonperforming loans decreased from 86% as of December 31, 2012 to 62% as of December 31, 2013. This was due to a decline of $1,117,000 in the allowance balance during 2013. ChoiceOne had $1,063,000 of specific allowance allocations for problem loans as of the end of 2013, compared to $700,000 as of the prior year end. Special allowance amounts have been allocated where the fair values of loans were considered to be less than their carrying values. ChoiceOne obtains valuations on collateral dependent loans when the loan is considered by management to be impaired and uses the valuation amounts in the determination of fair value. Management believes the specific reserves allocated to certain problem loans at the end of 2013 and 2012 were reasonable based on the circumstances surrounding each particular borrower.

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)

	2013		2012		2011		2010		2009
Agricultural	$	178	$	140	$	55	$	181	$	124
Commercial and industrial		562		381		609		641		735
Real estate - commercial		1,842		2,596		2,299		1,729		1,546
Real estate - construction		12		15		34		2		3
Real estate - residential		1,626		1,923		1,847		1,554		1,590
Consumer		192		250		197		243		306
Unallocated		323		547		172		379		18

Total allowance for loan losses	$	4,735	$	5,852	$	5,213	$	4,729	$	4,322

Management maintains the allowance at a level that it believes adequately provides for losses inherent in the loan portfolio. Such losses are estimated by a variety of factors, including specific examination of certain borrowing relationships and consideration of historical losses incurred on certain types of credits. Current economic conditions and declining collateral values affect loss estimates. Management focuses on early identification of problem credits through ongoing reviews by management and the independent loan review function. Based on the current state of the economy and a recent review of the loan portfolio, management believes that the allowance for loan losses as of December 31, 2013 is adequate. As charge-offs, changes in the level of nonperforming loans, and changes within the composition of the loan portfolio occur, the provision and allowance for loan losses will be reviewed by the Bank’s management and adjusted as necessary.

Noninterest Income

Total noninterest income decreased $487,000 in 2013 compared to 2012. Customer service charges increased $312,000 in 2013 compared to the prior year due to growth in overdraft fees and debit card volume. An increase in insurance and investment commissions of $115,000 in 2013 compared to 2012 was due to overall higher volumes including brokerage fees for investment transactions for customers, including REIT sales. Gains on sales of securities decreased $282,000 primarily due to the rise in interest rates during 2013, which negated any gains securities had built up. Losses on sales of other assets were $464,000 higher in 2013 than in the prior year as write-downs of values of other real estate properties and losses on sales of properties were significantly higher in 2013 than in 2012. Earnings on life insurance policies decreased $148,000 in 2013 compared to 2012 as the prior year included a death benefit received.

Total noninterest income increased $750,000 in 2012 compared to 2011. Customer service charges decreased $89,000 in 2012 compared to the prior year as lower income from overdraft fees was partially offset by growth in debit card interchange fees. Gains on sales of loans grew $962,000 in 2012 compared to 2011 as proceeds from loan sales totaled $46 million in 2012 compared to $27 million in 2011. An increase of $290,000 in gains on sales of securities was caused by sales of $9.4 million of securities in 2012 compared to $3.3 million in the prior year. Losses on sales of other assets were $387,000 higher in 2012 than in the prior year as write-downs of values of other real estate properties and losses on sales of properties were higher in 2012 than in 2011. Earnings on life insurance policies were $93,000 higher in 2012 than the prior year as a result of a death benefit received. The $158,000 decrease in other noninterest income in 2012 compared to 2011 was primarily due to lower ATM surcharge fees.

Noninterest Expense

Total noninterest expense increased $377,000 in 2013 compared to 2012. Salaries and benefits increased $367,000 in 2013 compared to the prior year as a result of higher commission expense related to investment sales, performance bonuses, and the hiring of several new employees. Occupancy and equipment expense increased $85,000 from 2012 to 2013 primarily due to several small remodeling projects and information technology related equipment purchases. Supplies and postage expense was $63,000 higher in 2013 than in 2012 as a result of a postage increase and additional supplies purchased to build stock. The $212,000 decrease in collection expense in 2013 compared to the prior year was caused by a lower level of other real estate properties. FDIC insurance expense declined $47,000 in 2013 compared to 2012 due to 2013 benefiting from a full year under a lower insurance assessment base changed during 2012.

Total noninterest expense increased $656,000 in 2012 compared to 2011. Salaries and benefits increased $525,000 in 2012 compared to the prior year as a result of higher commission expense related to mortgage originations, performance bonuses, and supplemental retirement expense. Data processing expense was $112,000 higher in 2012 than in 2011 due to higher software maintenance costs. Professional fees grew $94,000 higher in 2012 than in 2011 due to increased use of outside consultants. Supplies and postage expense was $87,000 lower in 2012 than in 2011 as a result of postage savings from increased electronic statement usage. The $52,000 increase in advertising and promotional expense in 2012 compared to the prior year was caused by higher radio and television advertising and website development expenses. FDIC insurance expense declined $111,000 in 2012 compared to 2011 due to a change in the insurance assessment base beginning in the second quarter of 2011.

Income Taxes

Income taxes were $1,783,000 in 2013, compared to tax expense of $1,343,000 in 2012 and a tax expense of $1,060,000 in 2011. The increase in income tax expense from 2011 to 2012 and from 2012 to 2013 was caused by higher income before income tax compared to the prior year in 2012 and 2013. The effective tax rate was 26% in 2013, compared to 24% in 2012 and 23% in 2011. The increase in the effective tax rate was caused by the portion of income before income tax comprised of nontaxable income declining in both 2012 and 2013.

Financial Condition

Summary

Total assets were $514.6 million as of December 31, 2013, which represented an increase of $5.7 million or 1.1% from the end of 2012. Securities available for sale increased $1.6 million during 2013 as management purchased securities to support asset growth. Loans increased $4.5 million in 2013, with most of the increase occurring in commercial non-real estate and agricultural loans. The allowance for loan losses decreased $1.1 million as the quality of loans continued to improve allowing for lower net charge-offs and minimal provision expense. Net other real estate owned decreased $1.5 million in 2013 with increased effort of the bank to reduce this balance and therefore collection expenses. Total deposits fell $6.1 million in 2013 due to decreases in checking deposits and local certificates of deposit, which were partially offset by an increase in savings deposits.

Securities

The Bank’s securities available for sale balances as of December 31 were as follows:

(Dollars in thousands)

	2013		2012
U.S. Government and federal agency	$	43,722	$	40,268
U.S. Treasury notes and bonds		7,224		7,398
State and municipal		64,775		64,678
Mortgage-backed		8,470		12,526
Corporate		8,815		6,712
Foreign debt		990		1,001
Equity securities		1,603		1,909
Asset-backed securities		483		—
Total	$	136,082	$	134,492

The securities available for sale portfolio increased $1.6 million from December 31, 2012 to December 31, 2013. ChoiceOne purchased $40.7 million of securities during 2013 to replace securities that matured or were called and to provide growth in earning assets. Approximately $22 million in various securities were called or matured in 2013. Principal payments for municipal and mortgage-backed securities totaling $4 million were received during 2013. Various securities totaling approximately $8.8 million were sold during 2013 for net gains totaling $136,000. The Bank’s Investment Committee continues to monitor the portfolio and purchases securities as it considers prudent. Also, certain securities are sold under agreements to repurchase and management plans to continue this practice as a low-cost source of funding.

State and municipal securities as of the end of 2011 included a security that matured on September 1, 2009 and was not redeemed by the issuer. A principal payment of $29,000 was received in October 2009 on the par value of $500,000. Impairment losses totaling $141,000 had been recorded in 2009 and 2010 due to uncertainty as to when or how much principal repayment would be received. Settlement was reached with the security’s issuer in December 2011 and ChoiceOne received the remaining carrying value of the security in the first quarter of 2012.

Equity securities included a money market preferred security (MMP) and a trust preferred security totaling $1,389,000, and common stock of $214,000 as of December 31, 2013. As of December 31, 2012, equity securities included an MMP of $1,000,000, a trust preferred security of $500,000, preferred stock of $263,000, and common stock of $146,000.

Management will continue to monitor its securities in 2013. Securities may be sold if believed prudent from a risk standpoint.

Loans

The Bank’s loan portfolio as of December 31 was as follows:

(Dollars in thousands)

	2013		2012
Agricultural	$	37,048	$	31,790
Commercial and industrial		68,530		67,365
Consumer		19,931		19,367
Real estate - commercial		96,987		93,312
Real estate - construction		890		1,056
Real estate - residential		92,580		98,578
Total loans	$	315,966	$	311,468

The loan portfolio (excluding loans held for sale) increased $4.5 million from December 31, 2012 to December 31, 2013. Economic factors in ChoiceOne’s market areas show signs of improvement, which affected loan demand in 2013. The significant increase in agricultural loans was caused by ideal weather conditions and record crops in 2013. The growth in commercial and industrial loans as well as commercial real estate loans resulted from calling efforts by ChoiceOne’s loan officers. The decrease in residential real estate loans resulted from a continued low interest rate environment for most of 2013 with high competition in the market to refinance higher interest rate loans.

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.

The balances of these nonperforming loans as of December 31 were as follows:

(Dollars in thousands)

	2013		2012
Loans accounted for on a nonaccrual basis	$	3,123	$	2,331
Loans contractually past due 90 days or more as to principal or interest payments		11		30
Loans considered troubled debt restructurings which are not included above		4,523		4,405
Total	$	7,657	$	6,766

Nonaccrual loans included $452,000 in agricultural loans, $372,000 in commercial and industrial loans, $2,000 in consumer loans, $1,606,000 in commercial real estate loans, and $691,000 in residential real estate loans as of December 31, 2013. Nonaccrual loans included $94,000 in agricultural loans, $220,000 in commercial and industrial loans, $33,000 in consumer loans, $1,230,000 in commercial real estate loans, and $754,000 in residential real estate loans as of December 31, 2012. The increase in nonaccrual loans in 2013 was caused by loans experiencing payment difficulties where management believed it was prudent to cease the accrual of interest. 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 $29,000 in consumer loans, $2,576,000 in commercial real estate loans, and $1,918,000 in residential real estate loans at December 31, 2013, compared to $72,000 in agricultural loans, $32,000 in consumer loans, $2,581,000 in commercial real estate loans and $1,720,000 of residential real estate loans at December 31, 2012. 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.

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. These loans totaled $14.0 million as of December 31, 2013, compared to $14.2 million as of December 31, 2012.

Deposits and Other Funding Sources

The Bank’s deposit balances as of December 31 were as follows:

(Dollars in thousands)

	2013		2012
Noninterest-bearing demand deposits	$	102,243	$	101,861
Interest-bearing demand deposits		64,560		66,569
Money market deposits		75,110		60,806
Savings deposits		63,681		63,406
Local certificates of deposit		112,533		130,057
Brokered certificates of deposit		—		1,500
Total deposits	$	418,127	$	424,199

Total deposits decreased $6.1 million from December 31, 2012 to December 31, 2013. Local deposits fell $17.5 million and brokered certificates of deposit declined $1.5 million during 2013. Management believes that the decline in both local deposits and brokered deposits is in part due to the customer base both reentering the stock market and wanting more liquid funds available as seen in the increase in money market deposits of $14.3 million.

Securities sold under agreements to repurchase increased $6.5 million during 2013. The increase was due to growth in sweep repurchase accounts used by the Bank’s local customers. Advances from the Federal Home Loan Bank of Indianapolis increased $6 million in 2013 due to additional advances taken to offset the deposit decline. A blanket collateral agreement covering residential real estate loans was pledged against all outstanding advances at the end of 2013. Approximately $40.2 million of additional advances were available as of December 31, 2013 based on the collateral pledged.

In 2014, 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, repurchase agreements and brokered certificates of deposit can address corresponding funding needs.

Shareholders’ Equity

Total shareholders’ equity increased $1.1 million from December 31, 2012 to December 31, 2013. The growth in equity resulted from the retention of earnings in 2013 as net income exceeded dividends paid by $3.3 million. Other comprehensive income declined $2.2 million in 2013 primarily due to rising interest rates affecting the gains held on the portfolio of securities.

Note 21 to the consolidated financial statements presents regulatory capital information for the Bank at the end of 2013 and 2012. All three capital ratios presented increased in 2013 as a result of more growth in capital than assets during the year. Management will monitor these capital ratios closely during 2014 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. The Board of Directors and management believe that ChoiceOne’s capital level as of December 31, 2013 is adequate for the foreseeable future.

Table 4 – Contractual Obligations

The following table discloses information regarding the maturity of ChoiceOne’s contractual obligations at December 31, 2013:

(Dollars in thousands)	Payment Due by Period
				Less						More
				than		1 - 3		3 - 5		than
		Total		1 year		Years		Years		5 Years

Time deposits	$	112,533	$	66,783	$	33,717	$	11,461	$	572
Repurchase agreements		26,033		26,033		—		—		—
Advances from Federal Home Loan Bank		6,392		6,029		62		67		234
Operating leases		137		49		88		—		—
Other obligations		936		82		177		181		496
Total	$	146,031	$	98,976	$	34,044	$	11,709	$	1,302

Liquidity and Interest Rate Risk

Net cash from operating activities was $10.4 million for 2013 compared to $9.6 million for 2012. Lower loan originations for sale, lower provision for loan losses and net changes in other assets and liabilities contributed to the change in 2013. Cash used in investing activities was $13.4 million in 2013 compared to $16.6 million in 2012. The decrease was caused by a reduction in the purchases of securities offset by loan origination and payment activity in 2013 in contrast to 2012. Cash flows from financing activities were $4.5 million in 2013 compared to $8.9 million in the prior year. Proceeds from the Federal Home Loan Bank and the change in repurchase agreements was offset by less deposits in 2013 than in 2012.

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 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 four of the Bank’s correspondent banks. As of December 31, 2013, the amount of federal funds available for purchase from the Bank’s correspondent banks totaled approximately $34 million. ChoiceOne had no federal funds purchased at the end of 2013 or 2012. The Bank also has a line of credit secured by ChoiceOne’s commercial loans with the Federal Reserve Bank of Chicago for $67 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 $40.2 million of borrowing capacity was available from the FHLB based on residential real estate loans pledged as collateral at year-end 2013. The acceptance of brokered certificates of deposit is not limited as long as the Bank’s capital to assets ratio is considered to be “well capitalized” under regulatory guidelines.

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

(Dollars in thousands)	As of December 31, 2013
		0 - 3			3 - 12			1 - 5		Over
		Months			Months			Years		5 Years		Total
Assets
Securities available for sale	$	2,694		$	16,426		$	84,517	$	32,445	$	136,082
Federal Home Loan Bank stock		2,478			—			—		—		2,478
Federal Reserve Bank stock		—			—			—		1,272		1,272
Loans held for sale		931			—			—		—		931
Loans		101,579			79,064			126,644		8,679		315,966
Cash surrender value of life insurance policies		—			—			—		10,269		10,269
Rate-sensitive assets	$	107,682		$	95,490		$	211,161	$	52,665	$	466,998

Liabilities
Interest-bearing demand deposits	$	64,560		$	—		$	—	$	—	$	64,560
Money market deposits		75,110			—			—		—		75,110
Savings deposits		63,681			—			—		—		63,681
Certificates of deposits		21,892			44,666			45,403		572		112,533
Repurchase agreements		26,033			—			—		—		26,033
Advances from FHLB		3,007			3,022			129		234		6,392
Rate-sensitive liabilities	$	254,283		$	47,688		$	45,532	$	806	$	348,309
Rate-sensitive assets less rate-sensitve liabilities:
Asset (liability) gap for the period	$	(146,601	)	$	47,802		$	165,629	$	51,859	$	118,689
Cumulative asset (liability) gap	$	(146,601	)	$	(98,799	)	$	66,830	$	118,689

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 67% at December 31, 2013, compared to 81% at December 31, 2012. Table 5 above shows the entire balance of interest-bearing demand deposits, savings deposits, money market deposits, and overnight repurchase agreements 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 2014. As interest rates change during 2014, 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, 2013, 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.

Table 6 provides an illustration of hypothetical interest rate changes as of December 31, 2013 and 2012:

Table 6 – Sensitivity to Changes in Interest Rates

	2013
		Net				Market
		Interest	Percent			Value of	Percent
		Income	Change			Equity	Change
Change in Interest Rate
400 basis point rise	$	17,910	-5	%	$	85,498	-15	%
300 basis point rise		18,108	-4	%		90,365	-10	%
200 basis point rise		18,277	-3	%		95,034	-6	%
100 basis point rise		18,458	-2	%		98,997	-2	%
Base rate scenario		18,830	-	%		100,573	-	%
100 basis point decline		18,214	-3	%		94,075	-6	%
200 basis point decline		17,748	-6	%		82,563	-18	%
300 basis point decline		17,376	-8	%		73,398	-27	%
400 basis point decline		17,279	-8	%		72,943	-27	%

		2012
		Net				Market
		Interest	Percent			Value of	Percent
		Income	Change			Equity	Change
Change in Interest Rate
400 basis point rise	$	17,057	-3	%	$	71,148	-15	%
300 basis point rise		17,262	-2	%		76,058	-9	%
200 basis point rise		17,391	-2	%		79,555	-5	%
100 basis point rise		17,488	-1	%		82,396	-2	%
Base rate scenario		17,657	-	%		83,731	-	%
100 basis point decline		17,226	-2	%		77,256	-8	%
200 basis point decline		16,851	-5	%		71,641	-14	%
300 basis point decline		16,550	-6	%		72,430	-13	%
400 basis point decline		16,489	-7	%		72,335	-14	%

As of both December 31, 2013 and December 31, 2012, the Bank was within its guidelines for immediate rate shocks up and down for both net interest income and the market value of shareholders’ equity. 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.

ChoiceOne Financial Services, Inc.

Management’s Report on Internal Control Over Financial Reporting

Management of ChoiceOne Financial Services, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting that is designed to produce reliable financial statements in conformity with United States generally accepted accounting principles. The system of internal control over financial reporting as it relates to the financial statements is evaluated for effectiveness by management and tested for reliability through a program of internal audits. Actions are taken to correct potential deficiencies as they are identified. Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected. Also, because of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial statement preparation.

Management assessed the effectiveness of the Company’s system of internal control over financial reporting as of December 31, 2013, as required by Section 404 of the Sarbanes-Oxley Act of 2002. Management’s assessment is based on the criteria for effective internal control over financial reporting as described in “Internal Control – Integrated Framework,” issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in 1992. Based on this assessment, management has concluded that, as of December 31, 2013, its system of internal control over financial reporting was effective and meets the criteria of the “Internal Control – Integrated Framework.” This annual report is not required to include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting.


James A. Bosserd President and Chief Executive Officer	Thomas L. Lampen Treasurer

March 27 , 2014	March 27, 2014

Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors

of ChoiceOne Financial Services, Inc.

We have audited the accompanying consolidated balance sheet of ChoiceOne Financial Services, Inc. as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each year in the three-year period ended December 31, 2013. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of ChoiceOne Financial Services, Inc. as of December 31, 2013 and 2012, and the consolidated results of its operations and its cash flows for each year in the three-year period ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.

	Plante & Moran, PLLC

Grand Rapids, Michigan

March 31, 2014

ChoiceOne Financial Services, Inc.
Consolidated Balance Sheets

(Dollars in thousands)	December 31,
	2013			2012
Assets
Cash and due from banks	$	20,479		$	19,034

Securities available for sale (Note 2)		136,082			134,492
Federal Home Loan Bank stock		2,478			2,478
Federal Reserve Bank stock		1,272			1,272
Loans held for sale		931			1,874
Loans (Note 3)		315,966			311,468
Allowance for loan losses (Note 3)		(4,735	)		(5,852	)
Loans, net		311,231			305,616

Premises and equipment, net (Note 5)		11,995			12,121
Other real estate owned, net (Note 7)		508			2,019
Cash value of life insurance policies		10,269			9,970
Intangible assets, net (Note 6)		1,275			1,724
Goodwill (Note 6)		13,728			13,728
Other assets		4,327			4,585
Total assets	$	514,575		$	508,913

Liabilities
Deposits – noninterest-bearing (Note 8)	$	102,243		$	101,861
Deposits – interest-bearing (Note 8)		315,884			322,338
Total deposits		418,127			424,199

Repurchase agreements (Note 9)		26,033			19,572
Advances from Federal Home Loan Bank (Note 10)		6,392			420
Other liabilities (Notes 11 and 13)		2,465			4,216
Total liabilities		453,017			448,407

Shareholders’ Equity (Note 21)
Preferred stock; shares authorized: 100,000; shares outstanding: none		—			—
Common stock and paid-in capital, no par value; shares authorized: 7,000,000; shares outstanding: 3,295,463 in 2013 and 3,298,081 in 2012 (Note 14)		46,595			46,649
Retained earnings		14,815			11,501
Accumulated other comprehensive income, net (Note 16)		148			2,356
Total shareholders’ equity		61,558			60,506
Total liabilities and shareholders’ equity	$	514,575		$	508,913

See accompanying notes to consolidated financial statements.

ChoiceOne Financial Services, Inc.
Consolidated Statements of Income

(Dollars in thousands, except per share data)
	Years ended December 31,
	2013			2012			2011
Interest income
Loans, including fees	$	15,801		$	16,875		$	18,398
Securities:
Taxable		1,812			1,958			1,789
Tax exempt		1,390			1,361			1,268
Other		12			25			20
Total interest income		19,015			20,219			21,475

Interest expense
Deposits		1,328			2,087			2,956
Advances from Federal Home Loan Bank		45			271			307
Other		46			186			290
Total interest expense		1,419			2,544			3,553

Net interest income		17,596			17,675			17,922
Provision for loan losses (Note 3)		300			2,515			3,700
Net interest income after provision for loan losses		17,296			15,160			14,222

Noninterest income
Customer service charges		3,677			3,365			3,454
Insurance and investment commissions		826			711			672
Gains on sales of loans (Note 4)		1,566			1,634			672
Gains on sales of securities (Note 2)		137			419			129
Gains (losses) on sales and write-downs of other assets (Note 7)		(822	)		(358	)		29
Earnings on life insurance policies		299			447			354
Other		719			671			829
Total noninterest income		6,402			6,889			6,139

Noninterest expense
Salaries and benefits (Notes 13 and 14)		8,240			7,873			7,348
Occupancy and equipment (Note 5)		2,341			2,256			2,247
Data processing		1,832			1,852			1,740
Professional fees		887			887			793
Supplies and postage		493			430			517
Advertising and promotional		239			212			160
Intangible assets amortization (Note 6)		449			448			448
Loan and collection expense		377			589			575
FDIC insurance		330			377			488
Other		1,633			1,520			1,472
Total noninterest expense		16,821			16,444			15,788

Income before income tax		6,877			5,605			4,573
Income tax expense (Note 11)		1,783			1,343			1,060

Net income	$	5,094		$	4,262		$	3,513

Basic earnings per common share (Note 15)	$	1.55		$	1.29		$	1.07
Diluted earnings per common share (Note 15)	$	1.54		$	1.29		$	1.07
Dividends declared per common share	$	0.54		$	0.50		$	0.48

See accompanying notes to consolidated financial statements.

ChoiceOne Financial Services, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands)

	Years ended December 31,
	2013			2012			2011
Net income	$	5,094		$	4,262		$	3,513

Other comprehensive income:
Unrealized holding gains/(losses) on available for sale securities		(3,226	)		363			2,448
Less reclassification adjustments for gains included in net income		137			419			129
Net unrealized gains/(losses)		(3,363	)		(56	)		2,319
Less tax effect		(1,143	)		(19	)		789
Net-of-tax amount		(2,220	)		(37	)		1,530

Change in funded status of post-retirement benefit plan		19			(34	)		(23	)
Less tax effect		7			(12	)		(8	)
Net-of-tax amount		12			(22	)		(15	)
Other comprehensive income/(loss), net of tax		(2,208	)		(59	)		1,515

Comprehensive income	$	2,886		$	4,203		$	5,028

See accompanying notes to consolidated financial statements.

ChoiceOne Financial Services, Inc.
Consolidated Statements of Changes in Shareholders’ Equity

(Dollars in thousands, except per share data)
	Number of Shares			Common Stock and Paid in Capital			Retained Earnings			Accumulated Other Comprehensive Income/(Loss), Net			Total

Balance, January 1, 2011		3,280,515		$	46,461		$	6,952		$	900		$	54,313

Net income								3,513						3,513
Other comprehensive income											1,515			1,515
Shares issued		12,754			127									127
Change in ESOP repurchase obligation					(1	)								(1	)
Stock-based compensation					5									5
Effect of employee stock purchases					10									10
Cash dividends declared ($0.48 per share)								(1,578	)					(1,578	)

Balance, December 31, 2011		3,293,269		$	46,602		$	8,887		$	2,415		$	57,904

Net income								4,262						4,262
Other comprehensive loss											(59	)		(59	)
Shares issued		9,812			123									123
Shares repurchased		(5,000	)		(75	)								(75	)
Change in ESOP repurchase obligation					(12	)								(12	)
Effect of employee stock purchases					11									11
Cash dividends declared ($0.50 per share)								(1,648	)					(1,648	)

Balance, December 31, 2012		3,298,081		$	46,649		$	11,501		$	2,356		$	60,506

Net income								5,094						5,094
Other comprehensive loss											(2,208	)		(2,208	)
Shares issued		8,850			130									130
Shared repurchased		(11,468	)		(192	)								(192	)
Change in ESOP repurchase obligation					(14	)								(14	)
Effect of employee stock purchases					11									11
Restricted stock units issued					11									11
Cash dividends declared ($0.54 per share)								(1,780	)					(1,780	)

Balance, December 31, 2013		3,295,463		$	46,595		$	14,815		$	148		$	61,558

See accompanying notes to consolidated financial statements.

ChoiceOne Financial Services, Inc.
Consolidated Statements of Cash Flows

(Dollars in thousands)

	Years ended December 31,
	2013			2012			2011
Cash flows from operating activities:
Net income	$	5,094		$	4,262		$	3,513
Adjustments to reconcile net income to net cash from operating activities
Provision for loan losses		300			2,515			3,700
Depreciation		927			900			944
Amortization		1,636			1,569			1,300
Compensation expense on employee stock purchases and restricted stock units		22			11			15
Gains on sales of securities		(137	)		(419	)		(129	)
Gains on sales of loans		(1,566	)		(1,634	)		(672	)
Loans originated for sale		(42,906	)		(44,889	)		(25,685	)
Proceeds from loan sales		45,204			45,622			26,611
Earnings on bank-owned life insurance		(299	)		(447	)		(354	)
Gains on sales of other real estate owned		(122	)		(51	)		(279	)
Write-downs of other real estate owned		926			405			255
Proceeds from sales of other real estate owned		1,604			1,259			3,015
Deferred federal income tax (benefit)/expense		59			(132	)		378
Net change in:
Other assets		289			667			2,391
Other liabilities		(667	)		4			(2,458	)
Net cash from operating activities		10,364			9,642			12,545

Cash flows from investing activities:
Sales of securities available for sale		8,790			9,369			3,310
Maturities, prepayments and calls of securities available for sale		26,072			39,098			18,687
Purchases of securities available for sale		(40,687	)		(69,564	)		(43,651	)
Purchase of Federal Reserve Bank stock		—			(1	)		(1	)
Sale of Federal Reserve Bank stock		—			—			411
Loan originations and payments, net		(6,812	)		5,065			(9,375	)
Proceeds from life insurance		—			311			—
Additions to premises and equipment		(801	)		(921	)		(499	)
Net cash from investing activities		(13,438	)		(16,643	)		(31,118	)

Cash flows from financing activities:
Net change in deposits		(6,072	)		20,834			13,481
Net change in repurchase agreements		6,461			(2,297	)		(380	)
Proceeds from Federal Home Loan Bank advances		7,000			—			250
Payments on Federal Home Loan Bank advances		(1,028	)		(8,027	)		(276	)
Issuance of common stock		130			123			127
Repurchase of common stock		(192	)		(75	)		—
Cash dividends		(1,780	)		(1,648	)		(1,578	)
Net cash from financing activities		4,519			8,910			11,624

Net change in cash and cash equivalents		1,445			1,909			(6,949	)
Beginning cash and cash equivalents		19,034			17,125			24,074

Ending cash and cash equivalents	$	20,479		$	19,034		$	17,125

Supplemental disclosures of cash flow information:
Cash paid for interest	$	1,456		$	2,625		$	3,608
Cash paid for income taxes		2,000			1,425			765
Loans transferred to other real estate owned		897			1,718			2,972
Other real estate owned transferred to premises and equipment		—			20			—

See accompanying notes to consolidated financial statements.

ChoiceOne Financial Services, Inc.

Notes to Consolidated Financial Statements

Note 1 – Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include ChoiceOne Financial Services, Inc., its wholly-owned subsidiary, ChoiceOne Bank, and ChoiceOne Bank’s wholly-owned subsidiary, ChoiceOne Insurance Agencies, Inc. (together referred to as “ChoiceOne”). Intercompany transactions and balances have been eliminated in consolidation.

Nature of Operations

ChoiceOne Bank (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 in portions of Kent, Muskegon, Newaygo, and Ottawa counties in 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.

ChoiceOne Insurance Agencies, Inc. (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 the Insurance Agency account for substantially all of ChoiceOne’s assets, revenues and operating income.

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. Actual results may differ from these estimates. Estimates associated with securities available for sale, the allowance for loan losses, other real estate owned, core deposit intangible assets, loan servicing rights, goodwill, and fair values of certain financial instruments 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

Securities are classified as available for sale because they might be sold before maturity. 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, trust-preferred securities, and investments in common stock of other financial institutions.

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 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 more likely than not will be required to sell the security before its anticipated recovery. 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.

ChoiceOne Financial Services, Inc.

Notes to Consolidated Financial Statements

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, 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 commercial loans are 90 days past due unless the loan is secured by sufficient collateral and is in the process of collection. Interest on consumer or real estate secured loans is discontinued at the time at which the loan is 120 days past due unless the credit is secured by sufficient collateral and is in the process of collection. Past due status is based on the contractual terms of the loan. In all cases, 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.

Allowance for Loan Losses

The allowance for loan losses is a valuation allowance for probable incurred credit losses. The allowance 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 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 may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off. Loan losses are charged against the allowance when management believes that collection of a loan balance is not possible.

The allowance 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.

A loan is impaired when full payment under the loan terms is not expected. Commercial loans are evaluated for impairment on an individual loan basis. If a loan is considered impaired, 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.

ChoiceOne Financial Services, Inc.

Notes to Consolidated Financial Statements

Loan Servicing Rights

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. Fair value is determined using prices for similar assets with similar characteristics when available or based upon discounted cashflows using market-based assumptions. Any impairment of a grouping is reported as a valuation allowance.

Goodwill

Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of the acquired tangible assets and liabilities and identifiable intangible assets. Goodwill is assessed at least annually for impairment and any such impairment will be recognized in the period identified.

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. Contributions from ChoiceOne to its 401(k) plan are discretionary. ChoiceOne also allows retired employees to participate in its health insurance plan. Employees who have attained age 55 and completed at least ten years of service to ChoiceOne are eligible to participate as a retiree until they are eligible for Medicare. These post-retirement benefits are accrued during the years in which the employee provides service.

Employee Stock Ownership Plan

Dividends on Employee Stock Ownership Plan (the “ESOP”) shares are recorded as a reduction of retained earnings. Upon distribution of shares to a participant, the participant has the right to require the Company to purchase his or her shares at fair value in accordance with the terms and conditions of the ESOP. As such, these shares are not classified in shareholders' equity as permanent equity.

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.

Earnings Per Share

Basic earnings per common share (“EPS”) is based on weighted-average common shares outstanding. The weighted-average number of shares used in the computation of basic and diluted EPS includes shares allocated to the ESOP. Diluted EPS further assumes issue 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, net of tax, and changes in the funded status of post-retirement plans, which are also recognized as a separate component of shareholders’ equity.

Loss 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.

ChoiceOne Financial Services, Inc.

Notes to Consolidated Financial Statements

Cash Restrictions

Cash on hand or on deposit with the Federal Reserve Bank of $352,000 and $318,000 was required to meet regulatory reserve and clearing requirements at December 31, 2013 and 2012, respectively. The balance in excess of the amount required was interest-bearing as of December 31, 2013 and December 31, 2012.

Stock-Based Compensation

The Company values share-based stock option awards granted using the Black-Scholes option-pricing model. The Company recognizes compensation expense for its awards on a straight-line basis over the requisite service period for the entire award (straight-line attribution method), ensuring that the amount of compensation cost recognized at any date at least equals the portion of the grant-date fair value of the award that is vested at that time. Compensation costs related to stock options granted is disclosed in Note 14.

Effective July 1, 2013, ChoiceOne granted Restricted Stock Units to a select group of employees under the Stock Incentive Plan of 2012. All of the Restricted Stock Units are initially unvested and vest in three annual installments on each of the next three anniversaries of the grant date. Certain additional vesting provisions apply. Each unit, once vested, is settled by delivery of one share of ChoiceOne common stock.

Dividend Restrictions

Banking regulations require the maintenance of certain capital levels and may limit the amount of dividends that may be paid by the Bank to ChoiceOne (see Note 21).

Fair Value of Financial Instruments

Fair values of financial instruments are estimated using relevant market information and other assumptions, which are more fully documented in Note 19 to the consolidated financial statements. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.

Operating Segments

While ChoiceOne’s management monitors the revenue streams of various products and services for the Bank and Insurance Agency, operations and financial performance are evaluated on a company-wide basis. Accordingly, all of the financial service operations are considered by management to be aggregated into one reportable operating segment.

Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013-02”), to improve the reporting of reclassifications out of accumulated other comprehensive income. ASU 2013-02 requires that an entity report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. generally accepted accounting principles (“GAAP”) to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about these amounts. ASU 2013-02 is effective prospectively for reporting periods beginning after December 15, 2012. ChoiceOne adopted ASU 2013-02 as of January 1, 2013. The adoption of ASU 2013-02 did not have a material impact on ChoiceOne's consolidated financial condition or results of operations.

In July 2012, the FASB issued ASU No. 2012-02, Intangibles – Goodwill and Other: Testing Indefinite-Lived Intangible Assets for Impairment (“ASU 2012-02”) to reduce the cost and complexity of testing indefinite-lived intangible assets for impairment. ASU 2012-02 gives an entity the option of first assessing qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that an indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that an indefinite-lived asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of an indefinite-lived asset and perform the quantitative impairment test by comparing the fair value with the carrying amount in accordance with Subtopic 350-30. An entity also has the option to bypass the qualitative assessment for any indefinite-lived asset in any period and proceed directly to performing the quantitative impairment test. An entity will be able to resume performing the qualitative assessment in any subsequent period. ASU 2012-02 is effective for fiscal years beginning after September 15, 2012 and early adoption is permitted. ChoiceOne adopted ASU 2012-02 as of January 1, 2013. The adoption of ASU 2012-02 did not have a material impact on ChoiceOne’s consolidated financial condition or results of operations.

ChoiceOne Financial Services, Inc.

Notes to Consolidated Financial Statements

Reclassifications

Certain amounts presented in prior year consolidated financial statements have been reclassified to conform to the current year’s presentation.

Note 2 – Securities

The fair value of securities available for sale and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) at December 31 were as follows:

	2013
(Dollars in thousands)			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
U.S. Government and federal agency	$	44,059	$	166	$	(503	)	$	43,722
U.S. Treasury notes and bonds		7,285		17		(78	)		7,224
State and municipal		64,215		1,622		(1,062	)		64,775
Mortgage-backed		8,541		95		(166	)		8,470
Corporate		8,805		61		(51	)		8,815
Foreign debt		1,000		—		(10	)		990
Equity securities		1,707		7		(111	)		1,603
Asset-backed securities		486		—		(3	)		483
Total	$	136,098	$	1,968	$	(1,984	)	$	136,082


	2012
(Dollars in thousands)			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
U.S. Government and federal agency	$	39,815	$	455	$	(2	)	$	40,268
U.S. Treasury notes and bonds		7,362		45		(9	)		7,398
State and municipal		62,248		2,668		(238	)		64,678
Mortgage-backed		12,218		308		—			12,526
Corporate		6,600		113		(1	)		6,712
Foreign debt		1,000		1		—			1,001
Equity securities		1,902		12		(5	)		1,909
Total	$	131,145	$	3,602	$	(255	)	$	134,492

Information regarding sales of securities available for sale follows:

(Dollars in thousands)
	2013		2012		2011
Proceeds from sales of securities	$	8,790	$	9,369	$	3,310
Gross realized gains		197		421		133
Gross realized losses		60		2		4

ChoiceOne Financial Services, Inc.

Notes to Consolidated Financial Statements

Contractual maturities of securities available for sale at December 31, 2013 were as follows:

(Dollars in thousands)	Fair
	Value
Due within one year	$	24,680
Due after one year through five years		67,387
Due after five years through ten years		31,240
Due after ten years		2,702
Total debt securities		126,009
Mortgage-backed securities, not due at a specific date		8,470
Equity securities		1,603
Total	$	136,082

Various securities were pledged as collateral for securities sold under agreements to repurchase. The carrying amount of securities pledged as collateral at December 31 was as follows:

(Dollars in thousands)

		2013		2012
Securities pledged for securities sold under agreements to repurchase	$	31,919	$	27,085

Securities with unrealized losses at year-end 2013 and 2012, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position, were as follows:

(Dollars in thousands)	2013
	Less than 12 months					More than 12 months					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
U.S. Government agencies	$	25,104	$	(503	)	$	—	$	—		$	25,104	$	(503	)
U.S. Treasury notes and bonds		5,190		(78	)		—		—			5,190		(78	)
State and municipal		19,532		(740	)		5,030		(322	)		24,562		(1,062	)
Mortgage-backed		6,380		(166	)		—		—			6,380		(166	)
Corporate		2,823		(51	)		398		—			3,221		(51	)
Foreign debt		990		(10	)		—		—			990		(10	)
Equity securities		1,096		(111	)		—		—			1,096		(111	)
Asset-backed securities		—		—			483		(3	)		483		(3	)
Total temporarily impaired	$	61,115	$	(1,659	)	$	5,911	$	(325	)	$	67,026	$	(1,984	)

(Dollars in thousands)	2012
	Less than 12 months					More than 12 months					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
U.S. Government agencies	$	1,997	$	(2	)	$	—	$	—		$	1,997	$	(2	)
U.S. Treasury notes and bonds		2,187		(9	)		—		—			2,187		(9	)
State and municipal		7,623		(203	)		811		(35	)		8,434		(238	)
Corporate		768		(1	)		—		—			768		(1	)
Equity securities		146		(5	)		—		—			146		(5	)
Total temporarily impaired	$	12,721	$	(220	)	$	811	$	(35	)	$	13,532	$	(255	)

ChoiceOne evaluates all securities on a quarterly basis to determine whether unrealized losses are temporary or other than temporary. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of ChoiceOne to retain its investment in the issue for a period of time sufficient to allow for any anticipated recovery in fair value. Management believed that unrealized losses as of December 31, 2013 were temporary in nature and were caused primarily by changes in interest rates, increased credit spreads, and reduced market liquidity and were not caused by the credit status of the issuer. No other than temporary impairments were recorded in 2013 or 2012.

During 2013, a security formerly classified as a state and municipal security was reclassified as an asset-backed security. There were no other reclassifications during 2013 or 2012.

At December 31, 2013, there were 113 securities with an unrealized loss, compared to 28 securities with an unrealized loss as of December 31, 2012. The increase in the number of securities in an unrealized loss position was caused by a rise in longer-term market interest rates that began in the second quarter of 2013.

ChoiceOne Financial Services, Inc.

Notes to Consolidated Financial Statements

Note 3 – Loans and Allowance for Loan Losses

The Bank’s loan portfolio as of December 31 was as follows:

(Dollars in thousands)
	2013			2012
Agricultural	$	37,048		$	31,790
Commercial and industrial		68,530			67,365
Consumer		19,931			19,367
Real estate - commercial		96,987			93,312
Real estate - construction		890			1,056
Real estate - residential		92,580			98,578
Loans, gross		315,966			311,468
Allowance for loan losses		(4,735	)		(5,852	)
Loans, net	$	311,231		$	305,616

ChoiceOne manages its credit risk through the use of its loan policy and its loan approval process and by monitoring of loan credit performance. The loan approval process for commercial loans involves individual and group approval authorities. Individual authority levels are based on the experience of the lender. Group authority approval levels can consist of an internal loan committee that includes the Bank’s President or Senior Lender and other loan officers for loans that exceed individual approval levels, or a loan committee of the Board of Directors for larger commercial loans. Most consumer loans are approved by individual loan officers based on standardized underwriting criteria, with larger consumer loans subject to approval by the internal loan committee.

Ongoing credit review of commercial loans is the responsibility of the loan officers. ChoiceOne’s internal credit committee meets at least monthly and reviews loans with payment issues and loans with a risk rating of 5, 6, or 7. Risk ratings of commercial loans are reviewed periodically and adjusted if needed. ChoiceOne’s consumer loan portfolio is primarily monitored on an exception basis. Loans where payments are past due are turned over to the Bank’s collection department, which works with the borrower to bring payments current or takes other actions when necessary. In addition to internal reviews of credit performance, ChoiceOne contracts with a third party for independent loan review that monitors the loan approval process and the credit quality of the loan portfolio.

ChoiceOne Financial Services, Inc.

Notes to Consolidated Financial Statements

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

(Dollars in thousands)

	Agricultural			Commercial and Industrial			Consumer			Commercial Real Estate			Construction Real Estate			Residential Real Estate			Unallocated			Total
2013
Allowance for Loan Losses
Beginning balance	$	140		$	381		$	250		$	2,596		$	15		$	1,923		$	547		$	5,852
Charge-offs		(88	)		(122	)		(351	)		(858	)		—			(732	)		—			(2,151	)
Recoveries		6			337			175			84			—			132			—			734
Provision		120			(34	)		118			20			(3	)		303			(224	)		300
Ending balance	$	178		$	562		$	192		$	1,842		$	12		$	1,626		$	323		$	4,735

Individually evaluated for impairment	$	—		$	53		$	3		$	699		$	—		$	308		$	—		$	1,063

Collectively evaluated for impairment	$	178		$	509		$	189		$	1,143		$	12		$	1,318		$	323		$	3,672

Loans
Individually evaluated for impairment	$	452		$	776		$	37		$	4,195		$	—		$	2,827					$	8,287
Collectively evaluated for impairment		36,596			67,754			19,894			92,792			890			89,753						307,679
Ending balance	$	37,048		$	68,530		$	19,931		$	96,987		$	890		$	92,580					$	315,966

	Agricultural		Commercial and Industrial			Consumer			Commercial Real Estate			Construction Real Estate			Residential Real Estate			Unallocated		Total
2012
Allowance for Loan Losses
Beginning balance	$	55	$	609		$	197		$	2,299		$	34		$	1,847		$	172	$	5,213
Charge-offs		—		(405	)		(338	)		(869	)		—			(887	)		—		(2,499	)
Recoveries		5		61			214			224			—			119			—		623
Provision		80		116			177			942			(19	)		844			375		2,515
Ending balance	$	140	$	381		$	250		$	2,596		$	15		$	1,923		$	547	$	5,852

Individually evaluated for impairment	$	1	$	112		$	—		$	449		$	—		$	138		$	—	$	700

Collectively evaluated for impairment	$	139	$	269		$	250		$	2,147		$	15		$	1,785		$	547	$	5,152

Loans
Individually evaluated for impairment	$	166	$	198		$	32		$	3,723		$	—		$	1,820				$	5,939
Collectively evaluated for impairment		31,624		67,167			19,335			89,589			1,056			96,758					305,529
Ending balance	$	31,790	$	67,365		$	19,367		$	93,312		$	1,056		$	98,578				$	311,468

ChoiceOne Financial Services, Inc.

Notes to Consolidated Financial Statements

	Agricultural			Commercial and Industrial			Consumer			Commercial Real Estate			Construction Real Estate		Residential Real Estate			Unallocated			Total
2011
Allowance for Loan Losses
Beginning balance	$	181		$	641		$	243		$	1,729		$	2	$	1,554		$	379		$	4,729
Charge-offs		(45	)		(228	)		(361	)		(1,357	)		—		(1,677	)		—			(3,668	)
Recoveries		10			32			217			89			—		104			—			452
Provision		(91	)		164			98			1,838			32		1,866			(207	)		3,700
Ending balance	$	55		$	609		$	197		$	2,299		$	34	$	1,847		$	172		$	5,213

Individually evaluated for impairment	$	—		$	7		$	—		$	424		$	—	$	—		$	—		$	431

Collectively evaluated for impairment	$	55		$	602		$	197		$	1,875		$	34	$	1,847		$	172		$	4,782

Loans
Individually evaluated for impairment	$	—		$	163		$	—		$	2,758		$	—	$	1,580					$	4,501
Collectively evaluated for impairment		38,929			58,522			18,657			103,492			1,169		94,857						315,626
Ending balance	$	38,929		$	58,685		$	18,657		$	106,250		$	1,169	$	96,437					$	320,127

The process to monitor the credit quality of ChoiceOne’s loan portfolio includes tracking (1) the risk ratings of business loans, (2) the level of classified business loans, and (3) delinquent and nonperforming consumer loans. Business loans are risk rated on a scale of 1 to 8. A description of the characteristics of the ratings follows:

Risk ratings 1 and 2: These loans are considered pass credits. They exhibit good to exceptional credit risk and demonstrate the ability to repay the loan from normal business operations.

Risk rating 3: These loans are considered pass credits. They exhibit acceptable credit risk and demonstrate the ability to repay the loan from normal business operations.

Risk rating 4: These loans are considered watch credits. They have potential developing weaknesses that, if not corrected, may cause deterioration in the ability of the borrower to repay the loan. While a loss is possible for a loan with this rating, it is not anticipated.

Risk rating 5: These loans are considered special mention credits. Loans in this risk rating are considered to be inadequately protected by the net worth and debt service coverage of the borrower or of any pledged collateral. These loans have well defined weaknesses that may jeopardize the borrower’s ability to repay the loan. If the weaknesses are not corrected, loss of principal and interest could be probable.

Risk rating 6: These loans are considered substandard credits. These loans have well defined weaknesses, the severity of which makes collection of principal and interest in full questionable. Loans in this category may be placed on nonaccrual status.

Risk rating 7: These loans are considered doubtful credits. Some loss of principal and interest has been determined to be probable. The estimate of the amount of loss could be affected by factors such as the borrower’s ability to provide additional capital or collateral. Loans in this category are on nonaccrual status.

Risk rating 8: These loans are considered loss credits. They are considered uncollectible and will be charged off against the allowance for loan losses.

ChoiceOne Financial Services, Inc.

Notes to Consolidated Financial Statements

Information regarding the Bank’s credit exposure as of December 31 was as follows:


Corporate Credit Exposure - Credit Risk Profile By Creditworthiness Category

(Dollars in thousands)	Agricultural				Commercial and Industrial				Commercial Real Estate
	2013		2012		2013		2012		2013		2012
Risk ratings 1 and 2	$	8,339	$	8,615	$	7,333	$	9,040	$	3,000	$	2,711
Risk rating 3		23,036		16,173		46,943		43,549		53,681		45,295
Risk rating 4		4,330		5,040		12,557		13,417		27,610		30,223
Risk rating 5		1,193		1,939		1,025		855		6,813		7,847
Risk rating 6		150		19		608		361		5,818		6,960
Risk rating 7		—		4		64		143		65		276
	$	37,048	$	31,790	$	68,530	$	67,365	$	96,987	$	93,312

Consumer Credit Exposure - Credit Risk Profile Based On Payment Activity

	Consumer					Construction Real Estate			Residential Real Estate
		2013		2012		2013		2012		2013		2012
Performing	$	19,931	$	19,334	$	890	$	1,056	$	92,568	$	98,018
Nonperforming		—		33		—		—		12		560
	$	19,931	$	19,367	$	890	$	1,056	$	92,580	$	98,578

The following schedule provides information on loans that were considered troubled debt restructurings (“TDRs”) that were modified during the twelve months ended December 31, 2013 and December 31, 2012:

	December 31, 2013						December 31, 2012
			Pre-		Post-				Pre-		Post-
			Modification		Modification				Modification		Modification
	Number		Outstanding		Outstanding		Number		Outstanding		Outstanding
(Dollars in thousands)	of		Recorded		Recorded		of		Recorded		Recorded
	Loans		Investment		Investment		Loans		Investment		Investment
Agricultural		—	$	—	$	—		1	$	72	$	72
Commercial and industrial		1		216		216		2		159		149
Consumer		—		—		—		1		32		32
Commercial real estate		4		948		948		5		1,990		1,990
Residential real estate		2		112		112		3		353		353
		7	$	1,276	$	1,276		12	$	2,606	$	2,596

The pre-modification and post-modification outstanding recorded investment represents amounts as of the date of loan modification. If a difference exists between the pre-modification and post-modification outstanding recorded investment, it represents impairment recognized through the provision for loan losses computed based on a loan’s post-modification present value of expected future cash flows discounted at the loan’s original effective interest rate. If no difference exists, a loss is not expected to be incurred based on an assessment of the borrower’s expected cash flows.

ChoiceOne Financial Services, Inc.

Notes to Consolidated Financial Statements

The following schedule provides information on TDRs as of December 31, 2013 and December 31, 2012 where the borrower was past due with respect to principal and/or interest for 30 days or more during the twelve months ended December 31, 2013 and December 31, 2012 that had been modified during the 12-month period prior to the default:

	With Payment Defaults During the Following Periods
	December 31, 2013				December 31, 2012
(Dollars in thousands)	Number		Recorded		Number		Recorded
	of Loans		Investment		of Loans		Investment
Agricultural		—	$	—		1	$	72
Commercial and industrial		—		—		2		149
Consumer		1		29		1		32
Commercial real estate		3		573		1		68
Residential real estate		1		71		—		—
		5	$	673		5	$	321

Loans are classified as performing when they are current as to principal and interest payments or are past due on payments less than 90 days. Loans are classified as nonperforming when they are past due 90 days or more as to principal and interest payments or are considered a troubled debt restructuring.

ChoiceOne Financial Services, Inc.

Notes to Consolidated Financial Statements

Impaired loans by loan category as of December 31 follow:

(Dollars in thousands)

			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
2013
With no related allowance recorded
Agricultural	$	452	$	455	$	—	$	204	$	7
Commercial and industrial		229		300		—		85		—
Consumer		2		3		—		3		—
Commercial real estate		782		843		—		693		25
Residential real estate		891		1,128		—		456		7
Subtotal		2,356		2,729		—		1,441		39
With an allowance recorded
Agricultural		—		—		—		112		1
Commercial and industrial		547		554		53		377		11
Consumer		35		35		3		43		3
Commercial real estate		3,413		3,997		699		4,126		217
Residential real estate		1,936		1,936		308		2,207		81
Subtotal		5,931		6,522		1,063		6,865		313
Total
Agricultural		452		455		—		316		8
Commercial and industrial		776		854		53		462		11
Consumer		37		38		3		46		3
Commercial real estate		4,195		4,840		699		4,819		242
Residential real estate		2,827		3,064		308		2,663		88
Total	$	8,287	$	9,251	$	1,063	$	8,306	$	352


			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
2012
With no related allowance recorded
Agricultural	$	94	$	441	$	—	$	19	$	—
Commercial and industrial		49		49		—		223		6
Consumer		—		—		—		—		—
Commercial real estate		577		848		—		1,586		—
Residential real estate		—		—		—		1,366		48
Subtotal		720		1,338		—		3,194		54
With an allowance recorded
Agricultural		72		72		1		14		1
Commercial and industrial		149		169		112		112		—
Consumer		32		32		—		6		—
Commercial real estate		3,146		3,193		449		1,576		24
Residential real estate		1,820		1,820		138		364		20
Subtotal		5,219		5,286		700		2,072		45
Total
Agricultural		166		513		1		33		1
Commercial and industrial		198		218		112		335		6
Consumer		32		32		—		6		—
Commercial real estate		3,723		4,041		449		3,162		24
Residential real estate		1,820		1,820		138		1,730		68
Total	$	5,939	$	6,624	$	700	$	5,266	$	99

ChoiceOne Financial Services, Inc.

Notes to Consolidated Financial Statements

An aging analysis of loans by loan category as of December 31 follows:

(Dollars in thousands)

					Greater								90 Days Past
	30 to 59		60 to 89		Than 90				Loans Not		Total		Due and
	Days (1)		Days (1)		Days (1)		Total (1)		Past Due		Loans		Accruing
2013
Agricultural	$	9	$	1	$	428	$	438	$	36,610	$	37,048	$	—
Commercial and industrial		93		352		73		518		68,012		68,530		—
Consumer		60		7		—		67		19,864		19,931		—
Commercial real estate		901		884		242		2,027		94,960		96,987		—
Construction real estate		—		—		—		—		890		890		—
Residential real estate		673		186		167		1,026		91,554		92,580		11
	$	1,736	$	1,430	$	910	$	4,076	$	311,890	$	315,966	$	11
2012
Agricultural	$	261	$	—	$	—	$	261	$	31,529	$	31,790	$	—
Commercial and industrial		102		4		198		304		67,061		67,365		—
Consumer		173		28		33		234		19,133		19,367		1
Commercial real estate		64		68		339		471		92,841		93,312		—
Construction real estate		—		—		—		—		1,056		1,056		—
Residential real estate		1,439		691		559		2,689		95,889		98,578		29
	$	2,039	$	791	$	1,129	$	3,959	$	307,509	$	311,468	$	30


(1)	Includes nonaccrual loans

Nonaccrual loans by loan category as of December 31 follow:

(Dollars in thousands)

	2013		2012
Agricultural	$	452	$	94
Commercial and industrial		372		220
Consumer		2		33
Commercial real estate		1,606		1,230
Construction real estate		—		—
Residential real estate		691		754
	$	3,123	$	2,331

Note 4 – Mortgage Banking

Activity in secondary market loans during the year was as follows:

(Dollars in thousands)
	2013		2012		2011
Loans originated for resale, net of principal payments	$	42,906	$	44,889	$	25,685
Proceeds from loan sales		45,204		45,622		26,611
Net gains on sales of loans held for sale		1,566		1,634		672
Loan servicing fees, net of amortization		167		131		161

Loans serviced for others are not reported as assets in the accompanying consolidated balance sheets. The unpaid principal balances of these loans were $98 million and $97 million at December 31, 2013 and 2012, respectively. The Bank maintains custodial escrow balances in connection with these serviced loans; however, such escrows were immaterial at December 31, 2013 and 2012.

ChoiceOne Financial Services, Inc.

Notes to Consolidated Financial Statements

Activity for loan servicing rights (included in other assets) was as follows:

(Dollars in thousands)
	2013			2012			2011
Balance, beginning of year	$	473		$	318		$	347
Capitalized		211			289			94
Amortization		(140	)		(134	)		(123	)
Balance, end of year	$	544		$	473		$	318

The fair value of loan servicing rights was $958,000 and $807,000 as of December 31, 2013 and 2012, respectively. Consequently, a valuation allowance was not necessary at year-end 2013 or 2012. The fair value of servicing rights at December 31, 2013 was determined using a discount rate of 8.25% and prepayment speeds ranging from 7% to 23%. The fair value of servicing rights at December 31, 2012 was determined using a discount rate of 7.7% and prepayment speeds ranging from 14% to 34%.

Note 5 – Premises and Equipment

As of December 31, premises and equipment consisted of the following:

(Dollars in thousands)
	2013			2012
Land and land improvements	$	4,221		$	4,108
Leasehold improvements		38			38
Buildings		11,838			11,190
Furniture and equipment		4,517			4,556
Total cost		20,614			19,892
Accumulated depreciation		(8,619	)		(7,771	)
Premises and equipment, net	$	11,995		$	12,121

Depreciation expense was $927,000, $900,000, and $944,000 for 2013, 2012 and 2011, respectively.

The Bank leases certain branch properties and automated-teller machine locations in its normal course of business. Rent expense totaled $56,000, $98,000, and $75,000 for 2013, 2012 and 2011, respectively. Rent commitments under non-cancelable operating leases were as follows, before considering renewal options that generally are present (dollars in thousands):

2014	$	49
2015		50
2016		38
	$	137

Note 6 – Goodwill and Intangible Assets

Goodwill

There were no changes in the goodwill balance in 2013 or 2012. ChoiceOne evaluates goodwill annually for impairment. Recently issued accounting pronouncements allow a company to first perform a qualitative assessment for goodwill prior to a quantitative assessment (Step 1 assessment). If the results of the qualitative assessment indicate that it is more likely than not that goodwill is impaired, then a quantitative assessment must be performed. If not, there is no further assessment required.

Prior to 2013, ChoiceOne was required to perform a quantitative assessment and engaged an outside consulting firm to assist management in performing its annual evaluation of goodwill for impairment as of June 30, 2012. The following steps were used in the valuation: determination of the reporting unit, determination of the appropriate standard of value, determination of the appropriate level of value, calculation of fair value, and comparison of the fair value computed to the equity carrying value. It was determined that the relevant reporting unit to be valued was ChoiceOne Bank. The standard of value used in the valuation was fair value as determined by generally accepted accounting principles. The appropriate level of value was determined to be the controlling interest level. The appraisal methodology used to calculate the fair value included the income approach, which was a discounted cash flow value based on projected earnings capacity. The income approach used a discount rate of 12.50%, a growth assumption of 1.8% for assets for the first year and 2.0% in subsequent years, and an assumption of cost savings of 20% of noninterest expense as a result of synergies and cost reductions from a change in control. The appraisal methodology also included the market approach, which was based on price-to-earnings multiples, price-to-tangible book value ratios, and core deposit premiums for selected bank sale transactions. The asset approach was also an approach that was reviewed, but it was not used in determining the fair value since it did not render a control level indication of value. The results from the valuation approaches were used to calculate an estimate of the fair value of ChoiceOne’s equity, which was compared to the carrying value of equity to determine whether the Step 1 test under generally accepted accounting principles that govern the valuation of goodwill was passed. The goodwill analysis determined that the fair value of ChoiceOne’s equity exceeded the carrying value by 10.8%. Based on this assessment, management believed that there was no indication of goodwill impairment at June 30, 2012.

Management performed a qualitative assessment of goodwill as of June 30, 2013 and December 31, 2013. The analysis was performed including evaluation of 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 to 2011 and 2012. Average deal prices in the Midwest of closed transactions have indicated increases in deal values to tangible common equity, deal values to earnings, and core deposit premiums when compared to the observed prices used in the 2012 quantitative assessment. Further, macro-economic trends have been on a positive trajectory recently and there have been no adverse legal, regulatory, contractual, political or other factors that have materially impacted ChoiceOne. Upon completion of the qualitative assessment, ChoiceOne believed that was more likely than not that the fair value of ChoiceOne’s equity exceeded the carrying value at the assessment dates and there was not further quantitative assessment necessary for 2013.

ChoiceOne Financial Services, Inc.

Notes to Consolidated Financial Statements

Acquired Intangible Assets

Information for acquired intangible assets at December 31 follows:

(Dollars in thousands)

	2013				2012
	Gross				Gross
	Carrying		Accumulated		Carrying		Accumulated
	Amount		Amortization		Amount		Amortization

Core deposit intangible	$	4,134	$	2,963	$	4,134	$	2,549
Other intangible assets		347		243		347		208
Totals	$	4,481	$	3,206	$	4,481	$	2,757

The core deposit intangible and other intangible assets are being amortized on a straight-line basis over ten years. Intangible assets are reviewed for impairment on a quarterly basis. No impairment was indicated as of December 31, 2013 or December 31, 2012. Aggregate amortization expense was $449,000 for 2013 and $448,000 for both 2012 and 2011. The estimated amortization expense for the next three years ending December 31 is as follows:

(Dollars in thousands)	Core		Other
	Deposit		Intangible
	Intangible		Assets		Total

2014	$	413	$	35	$	448
2015		413		35		448
2016		345		34		379
Totals	$	1,171	$	104	$	1,275

Note 7 – Other Real Estate Owned

Other real estate owned represents residential and commercial properties primarily owned as a result of loan collection activities and is reported net of a valuation allowance. Activity within other real estate owned was as follows:

(Dollars in thousands)

	2013			2012			2011

Balance, beginning of year	$	2,019		$	1,934		$	1,953
Transfers from loans		897			1,718			2,972
Reclassification to buildings		—			(20	)		—
Proceeds from sales		(1,604	)		(1,259	)		(3,015	)
Gains on sales		122			51			279
Write-downs		(926	)		(405	)		(255	)
Balance, end of year	$	508		$	2,019		$	1,934

ChoiceOne Financial Services, Inc.

Notes to Consolidated Financial Statements

Note 8 – Deposits

Deposit balances as of December 31 consisted of the following:

(Dollars in thousands)

	2013		2012

Noninterest-bearing demand deposits	$	102,243	$	101,861
Interest-bearing demand deposits		64,560		66,569
Money market deposits		75,110		60,806
Savings deposits		63,681		63,406
Local certificates of deposit		112,533		130,057
Brokered certificates of deposit		—		1,500
Total deposits	$	418,127	$	424,199

Scheduled maturities of certificates of deposit at December 31 were as follows:

(Dollars in thousands)	2013

2014	$	66,783
2015		23,663
2016		10,054
2017		5,037
2018		6,424
2019		572
Total	$	112,533

The Bank had certificates of deposit issued in denominations of $100,000 or greater totaling $45.8 million and $66.9 million at December 31, 2013 and 2012, respectively. The Bank had no brokered certificates of deposit at December 31, 2013 compared to $1.5 million at December 31, 2012. In addition, the Bank had $4.1 million of certificates of deposit as of December 31, 2013 and $14.2 million as of December 31, 2012 that had been issued through the Certificate of Deposit Account Registry Service (CDARS). Although certificates of deposit issued through CDARS are issued to local customers, this type of deposit is classified as brokered deposits for regulatory purposes.

ChoiceOne Financial Services, Inc.

Notes to Consolidated Financial Statements

Note 9 – Repurchase Agreements

Securities sold under agreements to repurchase are advances to the Bank by customers or another bank. These agreements are direct obligations of the Bank and are secured by securities held in safekeeping at a correspondent bank. Repurchase agreements with Bank customers mature daily. Information regarding repurchase agreements follows:

(Dollars in thousands)

	2013			2012
Outstanding balance at December 31	$	26,033		$	19,572
Average interest rate at December 31		0.22	%		0.25	%
Average balance during the year	$	19,456		$	22,185
Average interest rate during the year		0.23	%		0.84	%
Maximum month end balance during the year	$	26,995		$	24,662

Note 10 – Federal Home Loan Bank Advances

At December 31, advances from the Federal Home Loan Bank (the “FHLB”) were as follows:

(Dollars in thousands)

	2013		2012

Maturity of November 2024 with fixed interest rate of 3.98%	$	392	$	420
Maturities ranging from February 2014 to May 2014, fixed interest rates ranging from 0.39% to 0.41%, with an average rate of 0.40%		6,000		—
Total advances outstanding at year-end	$	6,392	$	420

Penalties are charged on fixed rate advances that are paid prior to maturity. A $3,000,000 advance was paid prior to its maturity in June 2012 and a $37,000 prepayment penalty was charged. No fixed rate advances were paid prior to maturity in 2013 or 2011. Advances were secured by residential real estate loans with a carrying value of approximately $71 million at December 31, 2013 and $74 million at December 31, 2012. Based on this collateral, the Bank was eligible to borrow an additional $40.2 million at year-end 2013. The scheduled maturities of advances from the FHLB at December 31, 2013 were as follows:

(Dollars in thousands)

2014	$	6,029
2015		30
2016		32
2017		33
2018		34
Thereafter		234
Total	$	6,392

Note 11 – Income Taxes

Information as of December 31 and for the year follows:

(Dollars in thousands)

	2013		2012			2011
Provision for Income Taxes
Current federal income tax expense	$	1,724	$	1,475		$	682
Deferred federal income tax expense/(benefit)		59		(132	)		378
Income tax expense	$	1,783	$	1,343		$	1,060

ChoiceOne Financial Services, Inc.

Notes to Consolidated Financial Statements

	2013			2012			2011
Reconciliation of Income Tax Provision to Statutory Rate
Income tax computed at statutory federal rate of 34%	$	2,338		$	1,906		$	1,555
Tax exempt interest income		(476	)		(466	)		(437	)
Tax exempt earnings on bank-owned life insurance		(101	)		(152	)		(121	)
Nondeductible interest expense		8			13			16
Other items		14			42			47
Income tax expense	$	1,783		$	1,343		$	1,060

Effective income tax rate		26	%		24	%		23	%


Components of Deferred Tax Assets and Liabilities	2013		2012
Deferred tax assets:
Allowance for loan losses	$	1,075	$	920
Deferred compensation		316		349
Write-downs on other real estate owned		119		255
Other		214		294
Total deferred tax assets		1,724		1,818

Deferred tax liabilities:
Depreciation		1,279		1,396
Unrealized gains on securities available for sale		—		1,138
Purchase accounting adjustments from merger		462		602
Loan servicing rights		185		161
Stock dividends received from Federal Home Loan Bank		83		83
Post-retirement benefits obligation		82		75
Other		132		112
Total deferred tax liabilities		2,223		3,567
Net deferred tax liabilities	$	499	$	1,749

ChoiceOne had a deferred tax asset of $42,000 as of December 31, 2013 and December 31, 2012 that resulted from capital losses incurred on the sales of equity securities in 2009 and 2010. A valuation allowance of $42,000 had been recorded as of December 31, 2013 and December 31, 2012 due to the uncertainty as to ChoiceOne’s ability to generate capital gains in the future that can offset the capital loss carryforward. ChoiceOne also had a deferred tax asset of $44,000 as of December 31, 2013 and December 31, 2012 that was related to unexercised stock options. A valuation allowance for the entire balance had been recorded due to the fact that the exercise price of most of the options was higher than the market price of ChoiceOne’s stock as of the end of 2013 and 2012. The valuation allowances totaling $86,000 as of December 31, 2013 and December 31, 2012 have been netted against the total deferred tax assets listed above.

Note 12 – Related Party Transactions

Loans to executive officers, directors and their affiliates were as follows at December 31:

(Dollars in thousands)	2013			2012

Balance, beginning of year	$	5,836		$	6,254
New loans		612			669
Repayments		(1,286	)		(1,087	)
Balance, end of year	$	5,162		$	5,836

Deposits from executive officers, directors and their affiliates were $11.4 million and $12.5 million at December 31, 2013 and 2012, respectively.

ChoiceOne Financial Services, Inc.

Notes to Consolidated Financial Statements

Note 13 – Employee Benefit Plans

401(k) Plan:

The 401(k) plan allows employees to contribute to their individual accounts under the plan amounts up to the IRS maximum. Matching company contributions to the plan are discretionary. Expense of this plan was $91,000, $178,000, and $115,000 in 2013, 2012, and 2011, respectively.

Employee Stock Ownership Plan :

Employees participate in an Employee Stock Ownership Plan (the “ESOP”). ChoiceOne may make discretionary contributions to the ESOP. Shares of ChoiceOne common stock are allocated to participants based on relative compensation earned and compensation expense is recorded when allocated. Dividends on allocated shares increase the participant accounts. Participants become fully vested upon completing six years of qualifying service. Participants receive the shares at the end of employment. A participant may require stock received to be repurchased by ChoiceOne at any time. ChoiceOne did not contribute to the ESOP nor was any expense recorded in 2013, 2012, or 2011.

Shares held by the ESOP as of December 31 were as follows:

(Dollars in thousands)	2013		2012		2011

Shares allocated to participants		5,355		5,355		5,355
Shares unallocated		—		—		—
Total shares of ChoiceOne stock held by ESOP		5,355		5,355		5,355

Fair value of allocated shares, subject to repurchase obligation, recorded in other liabilities	$	91	$	77	$	65

Post-retirement Benefits Plan:

ChoiceOne maintains an unfunded post-retirement health care plan, which permits employees (and their dependents) the ability to participate upon retirement from ChoiceOne. ChoiceOne does not pay any portion of the health care premiums charged to its retired participants. A liability has been accrued for the obligation under this plan. ChoiceOne incurred negative post-retirement benefit expense of $11,000 in 2013, $10,000 in 2012, and $11,000 in 2011. The post-retirement obligation liability was $125,000 as of December 31, 2013 and $158,000 as of December 31, 2012.

Deferred Compensation Plans :

A deferred director compensation plan covers former directors of Valley Ridge Bank, which was acquired by ChoiceOne in 2006. Under the plan, ChoiceOne pays each former director the amount of director fees deferred plus interest at rates ranging from 5.50% to 5.84% over various periods as elected by each director. The payout periods range from one month to ten years beginning with the individual’s termination of service. A liability has been accrued for the obligation under this plan. ChoiceOne incurred deferred compensation plan expense of $14,000, $15,000, and $17,000 in 2013, 2012, and 2011, respectively. The deferred compensation liability was $233,000 as of December 31, 2013 and $261,000 as of December 31, 2012.

A supplemental retirement plan covers four former executive officers of Valley Ridge Bank. Under the plan, ChoiceOne pays these individuals a specific amount of compensation plus interest at 7.50% over a 15-year period commencing upon early retirement age (as defined in the plan) or normal retirement age (as defined in the plan). A liability has been accrued for the obligation under this plan. The effective interest rate used for the accrual for the retirement liability is based on long-term interest rates. As a result, an increase in long-term interest rates during 2013 caused a decrease in plan expense in 2013 while a decline in long-term interest rates during 2012 caused an increase in plan expense. ChoiceOne incurred negative deferred compensation plan expense of $1,000 in 2013 and positive deferred compensation plan expense of $120,000 and $32,000 in 2012 and 2011, respectively. Deferred compensation liabilities of $696,000 and $766,000 were outstanding as of December 31, 2013 and December 31, 2012, respectively.

Note 14 - Stock Based Compensation

Options to buy stock have been granted to key employees under an incentive stock option plan to provide them with additional equity interests in ChoiceOne. ChoiceOne recognized compensation expense of $0 in 2013, $0 in 2012, and $5,000 in 2011 in connection with stock options during these years. The Amended and Restated Executive Stock Incentive Plan under which the stock options were granted expired in 2012. A new Stock Incentive Plan was approved by the Registrant’s shareholders at the Annual Meeting held on April 25, 2012. The new plan provides for the issuance of up to 100,000 shares of common stock. At December 31, 2013, there were 100,000 shares available for future grants.

ChoiceOne Financial Services, Inc.

Notes to Consolidated Financial Statements

A summary of the activity in the plan follows:

	2013				2012				2011
			Weighted				Weighted				Weighted
			average				average				average
			exercise				exercise				exercise
	Shares		price		Shares		price		Shares		price

Options outstanding, beginning of year		40,725	$	16.99		46,656	$	16.62		49,232	$	16.46
Options granted		—		—		—		—		—		—
Options exercised		2,100	$	13.70		2,625	$	13.70		2,576	$	13.44
Options forfeited or expired		—		—		3,306	$	13.04		—		—
Options outstanding, end of year		38,625	$	17.29		40,725	$	16.99		46,656	$	16.62

Options exercisable at December 31		38,625	$	17.29		40,725	$	16.99		46,656	$	16.62

The range of prices for options outstanding and exercisable at the end of 2013 ranged from $13.50 to $21.43 per share. The weighted average remaining contractual life of options outstanding and exercisable at the end of 2013 was approximately 2.32 years. A total of 10,000 options had an exercise price lower than ChoiceOne’s closing stock price as of the end of 2013, while 28,625 options had an exercise price higher than the closing stock price. Information pertaining to options outstanding at December 31, 2013 is as follows:

Exercise price of stock options:	Number of options outstanding at year-end	Number of options exercisable at year-end	Average remaining contractual life (in years)
$13.50	10,000	10,000	4.07
$16.31	6,299	6,299	0.06
$17.95	9,500	9,500	3.05
$18.85	6,000	6,000	2.05
$21.43	6,826	6,826	1.05

The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model. ChoiceOne uses historical data to estimate the volatility of the market price of ChoiceOne stock and employee terminations within the valuation model. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. No options were granted in 2013, 2012, or 2011.

There were no shares that were vested during 2013. As of December 31, 2013, there was no unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the plan.

ChoiceOne granted Restricted Stock Units effective July 1, 2013 to a select group of employees under the Stock Incentive Plan of 2012. All of the Restricted Stock Units are initially unvested and vest in three annual installments on each of the next three anniversaries of the grant date. Certain additional vesting provisions apply. Each unit, once vested, is settled by delivery of one share of ChoiceOne common stock. ChoiceOne recognized compensation expense of $11,000 in 2013 in connection with restricted stock units for current participants during these years. At December 31, 2013 there were 3,300 units issued with an approximate stock value of $62,000.

ChoiceOne Financial Services, Inc.

Notes to Consolidated Financial Statements

Note 15 - Earnings Per Share

(Dollars in thousands, except per share data)

	2013		2012		2011
Basic
Net income	$	5,094	$	4,262	$	3,513

Weighted average common shares outstanding		3,296,408		3,296,462		3,286,969

Basic earnings per common share	$	1.55	$	1.29	$	1.07

Diluted
Net income	$	5,094	$	4,262	$	3,513

Weighted average common shares outstanding		3,296,408		3,296,462		3,286,969
Plus dilutive stock options and restricted stock units		5,653		436		—

Weighted average common shares outstanding and potentially dilutive shares		3,302,061		3,296,898		3,286,969

Diluted earnings per common share	$	1.54	$	1.29	$	1.07

There were 28,625 stock options as of both December 31, 2013 and December 31, 2012, and 46,656 as of December 31, 2011 considered to be anti-dilutive to earnings per share and thus have been excluded from the calculations above.

ChoiceOne Financial Services, Inc.

Notes to Consolidated Financial Statements

Note 16 - Accumulated Other Comprehensive Income

Accumulated other comprehensive income, a component of equity, was comprised of the following at December 31:

(Dollars in thousands)

	2013			2012
Unrealized holding gains/(losses) on available for sale securities	$	(16	)	$	3,347
Unrecognized actuarial gains on post-retirement benefit plan		242			223
Tax effect		(78	)		(1,214	)
Net accumulated other comprehensive income	$	148		$	2,356

Note 17 – Condensed Financial Statements of Parent Company

Condensed Balance Sheets
(Dollars in thousands)	December 31,
	2013		2012
Assets
Cash	$	637	$	135
Securities available for sale		684		628
Other assets		29		27
Investment in ChoiceOne Bank		60,354		59,810
Total assets	$	61,704	$	60,600

Liabilities
Mandatory redeemable shares under ESOP, at fair value	$	91	$	77
Other liabilities		55		17
Total liabilities		146		94

Shareholders’ equity		61,558		60,506
Total liabilities and shareholders’ equity	$	61,704	$	60,600

ChoiceOne Financial Services, Inc.

Notes to Consolidated Financial Statements

Condensed Statements of Income
(Dollars in thousands)	Years Ended December 31,
	2013		2012		2011
Interest and dividends from ChoiceOne Bank	$	2,399	$	1,710	$	1,695
Interest and dividends from other securities		19		16		7
Other income		1		—		33
Total income		2,419		1,726		1,735
Other expenses		98		89		81

Income before income tax and equity in undistributed net income of subsidiary		2,321		1,637		1,654
Income tax benefit		31		29		16
Income before equity in undistributed net income of subsidiary		2,352		1,666		1,670
Equity in undistributed net income of subsidiary		2,742		2,596		1,843
Net income	$	5,094	$	4,262	$	3,513

Condensed Statements of Cash Flows
(Dollars in thousands)	Years Ended December 31,
	2013			2012			2011
Cash flows from operating activities:
Net income	$	5,094		$	4,262		$	3,513
Adjustments to reconcile net income to net cash from operating activities:
Equity in undistributed net income of subsidiary		(2,742	)		(2,596	)		(1,843	)
Amortization		2			2			—
Expense of restricted stock units		10			—			—
Changes in other assets		(2	)		(1	)		50
Changes in other liabilities		37			(10	)		17
Net cash from operating activities		2,399			1,657			1,737

Cash flows from investing activities:
Sale of securities		70			—			—
Purchases of securities		(125	)		(409	)		—
Net cash from investing activities		(55	)		(409	)		—

Cash flows from financing activities:
Issuance of common stock		130			123			127
Repurchase of common stock		(192	)		(75	)		—
Cash dividends paid		(1,780	)		(1,648	)		(1,578	)
Net cash from financing activities		(1,842	)		(1,600	)		(1,451	)

Net change in cash		502			(352	)		286
Beginning cash		135			487			201
Ending cash	$	637		$	135		$	487

ChoiceOne Financial Services, Inc.

Notes to Consolidated Financial Statements

Note 18 – Financial Instruments

Financial instruments as of the dates indicated were as follows :

(Dollars in thousands)

					Quoted Prices
					In Active		Significant
					Markets for		Other		Significant
					Identical		Observable		Unobservable
	Carrying		Estimated		Assets		Inputs		Inputs
	Amount		Fair Value		(Level 1)		(Level 2)		(Level 3)
December 31, 2013
Assets
Cash and due from banks	$	20,479	$	20,479	$	20,479	$	—	$	—
Securities available for sale		136,082		136,082		214		124,540		11,328
Federal Home Loan Bank and Federal
Reserve Bank stock		3,750		3,750		—		3,750		—
Loans held for sale		931		957		—		957		—
Loans, net		311,231		313,659		—		—		313,659

Liabilities
Noninterest-bearing deposits		102,243		102,243		—		102,243		—
Interest-bearing deposits		315,884		316,222		—		316,222		—
Repurchase agreements		26,033		26,034		—		26,034		—
Federal Home Loan Bank advances		6,392		6,428		—		6,428		—

December 31, 2012
Assets
Cash and due from banks	$	19,034	$	19,034	$	19,034	$	—	$	—
Securities available for sale		134,492		134,492		—		131,893		2,599
Federal Home Loan Bank and Federal
Reserve Bank stock		3,750		3,750		—		3,750		—
Loans held for sale		1,874		1,933		—		1,933		—
Loans, net		305,616		310,175		—		—		310,175

Liabilities
Noninterest-bearing deposits		101,861		101,861		—		101,861		—
Interest-bearing deposits		322,338		323,457		—		323,457		—
Repurchase agreements		19,572		19,573		—		19,573		—
Federal Home Loan Bank advances		420		485		—		485		—

The estimated fair values approximate the carrying amounts for all assets and liabilities except those described later in this paragraph. The methodology for determining the estimated fair value for securities available for sale is described in Note 19. The estimated fair value for loans is based on the rates charged at December 31 for new loans with similar maturities, applied until the loan is assumed to reprice or be paid. The allowance for loan losses is considered to be a reasonable estimate of discount for credit quality concerns. The estimated fair value of deposits is based on comparing the average rate paid on deposits compared to the three month Libor rate which is assumed to be the replacement value of these deposits. At December 31, 2013, all average rates were lower than the three month Libor rate causing fair values to be significantly less than carrying amounts. The estimated fair values for time deposits and FHLB advances are based on the rates paid at December 31 for new deposits or FHLB advances, applied until maturity. The estimated fair values for other financial instruments and off-balance sheet loan commitments are considered nominal.

Note 19 – Fair Value Measurements

The following tables present information about the Bank’s assets and liabilities measured at fair value on a recurring basis at December 31, 2013 and December 31, 2012, and the valuation techniques used by the Bank to determine those fair values.

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

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

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

ChoiceOne Financial Services, Inc.

Notes to Consolidated Financial Statements

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

There were no liabilities measured at fair value as of December 31, 2013 or December 31, 2012. Disclosures concerning assets measured at fair value are as follows:

Assets Measured at Fair Value on a Recurring Basis

(Dollars in Thousands)

	Quoted Prices
	In Active		Significant
	Markets for		Other		Significant
	Identical		Observable		Unobservable		Balance at
	Assets		Inputs		Inputs		Date
	(Level 1)		(Level 2)		(Level 3)		Indicated
Investment Securities, Available for Sale - December 31, 2013
U. S. Government and federal agency	$	—	$	43,722	$	—	$	43,722
U. S. Treasury notes and bonds		—		7,224		—		7,224
State and municipal		—		55,234		9,541		64,775
Mortgage-backed		—		8,470		—		8,470
Corporate		—		8,417		398		8,815
Foreign debt		—		990		—		990
Equity securities		214		—		1,389		1,603
Asset backed securities		—		483		—		483
Total	$	214	$	124,540	$	11,328	$	136,082

Investment Securities, Available for Sale - December 31, 2012
U. S. Government and federal agency	$	—	$	40,268	$	—	$	40,268
U. S. Treasury notes and bonds		—		7,398		—		7,398
State and municipal		—		62,579		2,099		64,678
Mortgage-backed		—		12,526		—		12,526
Corporate		—		6,712		—		6,712
Foreign debt		—		1,001		—		1,001
Equity securities		—		1,409		500		1,909
Total	$	—	$	131,893	$	2,599	$	134,492

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

ChoiceOne reviewed the methodologies used to estimate the fair values of all securities in 2013 and 2012. Based on further analysis, it was determined that the fair values of several local municipal securities were based upon Level 3 inputs. These securities classes, which were previously disclosed as based on Level 2 inputs, have been adjusted accordingly.

ChoiceOne Financial Services, Inc.

Notes to Consolidated Financial Statements

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

(Dollars in Thousands)

	2013		2012
Investment Securities, Available for Sale
Balance, January 1	$	2,599	$	2,771
Total realized and unrealized gains included in income		—		—
Total unrealized gains (losses) included in other comprehensive income		125		(9	)
Net purchases, sales, calls, and maturities		3,890		(163	)
Net transfers into Level 3		4,714		—
Balance, December 31	$	11,328	$	2,599

Of the Level 3 assets that were still held by the Bank at December 31, 2013, the net unrealized gain (loss) for the twelve months ended December 31, 2013 and 2012 was $4,000 and ($9,000), respectfully, which is recognized in other comprehensive income in the consolidated balance sheets. A total of $2,540,000 and $564,000 of Level 3 securities were purchased in 2013 and 2012, respectively.

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

Available for sale investment securities categorized as Level 3 assets consist of bonds issued by local municipalities and a trust-preferred security. The Bank estimates the fair value of these assets based on the present value of expected future cash flows using management’s best estimate of key assumptions, including forecasted interest yield and payment rates, credit quality and a discount rate commensurate with the current market and other risks involved.

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

Assets Measured at Fair Value on a Non-recurring Basis

(Dollars in Thousands)

			Quoted Prices
			In Active		Significant
			Markets for		Other		Significant
	Balances at		Identical		Observable		Unobservable
	Dates		Assets		Inputs		Inputs
	Indicated		(Level 1)		(Level 2)		(Level 3)
Impaired Loans
December 31, 2013	$	8,288	$	—	$	—	$	8,288
December 31, 2012	$	5,939	$	—	$	—	$	5,939

Other Real Estate
December 31, 2013	$	508	$	—	$	—	$	508
December 31, 2012	$	2,019	$	—	$	—	$	2,019

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

Note 20 – Off-Balance Sheet Activities

Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customers’ financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.

ChoiceOne Financial Services, Inc.

Notes to Consolidated Financial Statements

The contractual amount of financial instruments with off-balance sheet risk was as follows at December 31:

(Dollars in thousands)	2013				2012
	Fixed		Variable		Fixed		Variable
	Rate		Rate		Rate		Rate

Unused lines of credit and letters of credit	$	3,495	$	66,421	$	2,474	$	49,196
Commitments to fund loans (at market rates)		7,464		1,899		5,145		5,798

Commitments to fund loans are generally made for periods of 180 days or less. The fixed rate loan commitments have interest rates ranging from 3.75% to 7.25% and maturities ranging from 1 year to 30 years.

Note 21 – Regulatory Capital

ChoiceOne and the Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If only adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as are asset growth and expansion, and plans for capital restoration are required. At year-end 2013 and 2012, the most recent regulatory notifications categorized ChoiceOne and the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed ChoiceOne or the Bank’s categories.

ChoiceOne Financial Services, Inc.

Notes to Consolidated Financial Statements

Actual capital levels and minimum required levels for ChoiceOne and the Bank were as follows:

											Minimum Required
											to be Well
(Dollars in thousands)						Minimum Required					Capitalized Under
						for Capital					Prompt Corrective
	Actual					Adequacy Purposes					Action Regulations
	Amount		Ratio			Amount		Ratio			Amount		Ratio
December 31, 2013
ChoiceOne Financial Services Inc.
Total capital (to risk weighted assets)	$	50,530		14.4	%	$	28,077		8.0	%	$	35,097		10.0	%
Tier 1 capital (to risk weighted assets)		46,406		13.2			14,039		4.0			21,058		6.0
Tier 1 capital (to average assets)		46,406		9.5			19,517		4.0			24,396		5.0

ChoiceOne Bank
Total capital (to risk weighted assets)	$	49,340		14.1	%	$	28,048		8.0	%	$	35,060		10.0	%
Tier 1 capital (to risk weighted assets)		45,216		12.9			14,024		4.0			21,036		6.0
Tier 1 capital (to average assets)		45,216		9.3			19,489		4.0			24,361		5.0

December 31, 2012
ChoiceOne Financial Services Inc.
Total capital (to risk weighted assets)	$	46,670		13.9	%	$	26,880		8.0	%	$	33,600		10.0	%
Tier 1 capital (to risk weighted assets)		42,698		12.7			13,440		4.0			20,160		6.0
Tier 1 capital (to average assets)		42,698		8.9			19,216		4.0			24,021		5.0

ChoiceOne Bank
Total capital (to risk weighted assets)	$	46,004		13.7	%	$	26,856		8.0	%	$	33,570		10.0	%
Tier 1 capital (to risk weighted assets)		42,015		12.5			13,428		4.0			20,142		6.0
Tier 1 capital (to average assets)		42,015		8.8			19,191		4.0			23,988		5.0

Banking regulations limit capital distributions by state-chartered banks. Generally, capital distributions are limited to undistributed net income for the current and prior two years. At December 31, 2013, approximately $7,180,000 was available for ChoiceOne Bank to pay dividends to ChoiceOne Financial Services, Inc. ChoiceOne’s ability to pay dividends to shareholders is dependent on the Bank, which is restricted by state law and regulations.

Note 22 – Quarterly Financial Data (Unaudited)

(Dollars in thousands, except per share)

							Earnings Per Share
	Interest		Net Interest		Net				Fully
	Income		Income		Income		Basic		Diluted
2013
First Quarter	$	4,816	$	4,427	$	1,235	$	0.37	$	0.37
Second Quarter		4,807		4,448		1,312		0.40		0.40
Third Quarter		4,735		4,391		1,201		0.37		0.36
Fourth Quarter		4,657		4,330		1,346		0.41		0.41

2012
First Quarter	$	5,175	$	4,419	$	1,015	$	0.31	$	0.31
Second Quarter		5,004		4,290		1,021		0.31		0.31
Third Quarter		5,103		4,512		1,122		0.34		0.34
Fourth Quarter		4,937		4,454		1,104		0.33		0.33

There were no significant fluctuations in the quarterly financial data in 2012 or 2013. The growth in net income that occurred in 2013 was due to a reduced provision for loan losses, which was partially offset by a decline in noninterest income and increase in noninterest expenses.

ChoiceOne Financial Services, Inc.

Corporate and Shareholder information

Corporate Headquarters
ChoiceOne Financial Services, Inc.
  109 East Division Street
  Sparta, Michigan 49345
  Phone: (616) 887-7366
  Fax: (616) 887-7990
  Website: www.choiceone.com

Market Makers in ChoiceOne Financial
Services, Inc. Stock
Boenning & Scattergood

9916 Brewster Lane

Powell, Ohio
(866) 326-8113

Stock Registrar and Transfer Agent
Registrar and Transfer Company
  10 Commerce Drive
  Cranford, New Jersey 07016
  (800) 368-5948

Annual Shareholder Meeting

The 2014 Annual Shareholder Meeting of
ChoiceOne Financial Services, Inc., will
be held at 11:00 a.m. local time on Wednesday,
April 30, 2014, at
Moss Ridge Golf Club in
Ravenna, Michigan.

ChoiceOne Bank
Alpine Office
   5050 Alpine Avenue NW
   Comstock Park, Michigan 49321

Cedar Springs Office
   4170 – 17 Mile Road
   Cedar Springs, Michigan 49319

Coopersville Office
   661 West Randall Street
   Coopersville, Michigan 49404

Egelston Office
   5475 East Apple Avenue
   Muskegon, Michigan 49442

Fremont Office
   1423 West Main Street
   Fremont, Michigan 49412

Grant Office
   10 West Main Street
   Grant, Michigan 49327

Kent City Office
   450 West Muskegon Street
   Kent City, Michigan 49330

Newaygo Office
   246 West River Valley
   Newaygo, Michigan 49337

Ravenna Office
   3069 Slocum Road
   Ravenna, Michigan 49451

Rockford Office
   6795 Courtland Drive
   Rockford, Michigan 49341

Sparta - Main Office
   109 East Division Street
   Sparta, Michigan 49345

Sparta - Appletree Office
   416 West Division Street
   Sparta, Michigan 49345

ChoiceOne Insurance Agencies, Inc.
Sparta Office
109 East Division Street
Sparta, Michigan 49345

ChoiceOne Financial Services, Inc.

Directors and Officers

Directors
ChoiceOne Financial Services, Inc.

Jerome B. Arends

Former President and Chief Executive

Officer of Ravenna Farm Equipment
(Agricultural Equipment Supplier)

Frank G. Berris

Chief Executive Officer,

American Gas & Oil Co., Inc.
(Distributor of Petroleum Products)

James A. Bosserd

President and Chief Executive

Officer ChoiceOne Financial Services, Inc.
and ChoiceOne Bank

K. Timothy Bull

President, Moon Lake Orchards, Inc.
(Fruit Producer)

William F. Cutler, Jr.

Former Vice President, H. H. Cutler Co. .
(Apparel Manufacturer)

Lewis G. Emmons

President, Emmons Development
(Real Estate Development)

Gary D. Gust

Former President, Gust Construction Company
(General Contractor)

Jack G. Hendon

Cofounder and Partner, H&S Companies

(CPAs and Business Consultants)

Paul L. Johnson

Chairman of The Board, ChoiceOne Financial Services, Inc. and

ChoiceOne Bank

Former President, Falcon Resources, Inc.
(Automotive and Furniture Design)

Dennis C. Nelson, DDS

President, Nelson Family Dentistry

(General Dentistry)

Directors
ChoiceOne Financial Services, Inc.
(continued)

Nels W. Nyblad
President, Nyblad Orchards
(Fruit Producer)

Roxanne M. Page

Vice Chairman of The Board,
ChoiceOne Financial Services, Inc. and
ChoiceOne Bank

Certified Public Accountant and Partner,
Beene Garter LLP

(Certified Public Accountants)

Officers
ChoiceOne Financial Services, Inc.

James A. Bosserd
President and Chief Executive Officer

Mary J. Johnson
Secretary

Louis D. Knooihuizen
Senior Vice President

Thomas L. Lampen
Treasurer

ChoiceOne Financial Services, Inc.

Directors and Officers (continued)

Officers

ChoiceOne Bank

James A. Bosserd

President

Chief Executive Officer

Lee A. Braford

Senior Vice President

Chief Credit Officer

Sheila R. Clark

Senior Vice President

Human Resources Director

Mary J. Johnson

Senior Vice President

Operations/Cashier

Louis D. Knooihuizen

Senior Vice President

Chief Lending Officer

Thomas L. Lampen

Senior Vice President

Chief Financial Officer

Kelly J. Potes

Senior Vice President

Retail Banking & GM Investments/Ins.

Linda K. Anderson

Vice President

Retail Banking &

Consumer Loans

Brian R. Bacon

Vice President

Commercial Loan Office

Kent G. Gagnon

Vice President

Business Development

Denise L. Gates

Vice President

Regional/Branch Sales Manager,

Cedar Springs

Gregory M. Goss

Vice President

Security/BSA Officer

Adom Greeland

Vice President

Operations/IT

Amy S. Homich

Vice President

Marketing & Business Development

Officers

ChoiceOne Bank (continued)

Bonnie K. Koehn

Vice President

Regional Branch Sales Manager

Peggy A. O’Dea

Vice President

Business Development/Branch Sales Manager

Coopersville

Nicole N. Sakowski

Vice President

Collections Manager

Daniel C. Wheat

Vice President

Commercial Loan Officer/Branch

Sales Manager-Grant

Lisa R. Beard

Assistant Vice President

Branch Sales Manager – Fremont

Jennifer M. Bellamy

Assistant Vice President

Commercial Loan Officer

Veronica M. Bishop

Assistant Vice President

Call Center Manager

Patricia J. Brown

Assistant Vice President

Branch Sales Manager, Egelston

Lee J. Decker

Assistant Vice President

Consumer Loan Manager

Rita A. Flintoff

Assistant Vice President

Branch Sales Manager – Newaygo

Gary B. Hall

Assistant Vice President

Mortgage Sales Manager

John K. Harpst

Assistant Vice President

Mortgage Operations Manager

Jason J. Herbig

Assistant Vice President

Network Administrator

Rebecca J. Johnson

Assistant Vice President

Retail Operations

Officers

ChoiceOne Bank (continued)

Linda S. Nichols

Assistant Vice President

Branch Sales Manager, Ravenna

Lori J. O’Brien

Assistant Vice President

Loan Operations

Jason A. Parker

Assistant Vice President

Commercial Loan Officer

Kyle R. Purdy, CPA

Assistant Vice President

Controller

Maria J. Roossinck

Assistant Vice President

Risk Management

Paul E. Tucker

Assistant Vice President

Network Administrator

Cynthia J. Watson

Assistant Vice President

Operations

Candace J. Bouwkamp

Assistant Controller

Susan Compton

Branch Sales Manager, Kent City

Josh Hucul

Credit Manager

Carrie J. Olson

Branch Sales Manager, Alpine

Officers

ChoiceOne Insurance Agencies, Inc.

James A. Bosserd

President

Mary J. Johnson

Secretary

Thomas L. Lampen

Treasurer

Kelly J. Potes, CFP

Senior Vice President

Randy A. Schmidt, CFP

Vice President

Investment Advisor/Agent

ChoiceOne Financial Services 10-K

EXHIBIT 21

SUBSIDIARIES OF THE REGISTRANT

The following lists the subsidiaries of the Registrant and the state or jurisdiction of incorporation.

	Name and Address of Subsidiary	Incorporated

1.	ChoiceOne Bank 109 East Division Sparta, Michigan 49345	Michigan

2.	ChoiceOne Insurance Agencies, Inc. (1) 109 East Division Sparta, Michigan 49345	Michigan

3.	West Shore Computer Services, Inc. (2) 111 North Main Street Scottville, Michigan 49454	Michigan

4.	Valley Ridge Financial Services, Inc. (1) 450 West Muskegon Kent City, Michigan 49330	Michigan

5.	Valley Ridge Realty, Inc. (1) 450 West Muskegon Kent City, Michigan 49330	Michigan

6.	1423 West Main LLC (1) 450 West Muskegon Kent City, Michigan 49330	Michigan

(1)	These are wholly-owned subsidiaries of ChoiceOne Bank.
(2)	ChoiceOne Bank owns a 25% interest in West Shore Computer Services, Inc.

ChoiceOne Financial Services 10-K

Exhibit 23

CONSENT OF REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the following Registration Statements of ChoiceOne Financial Services, Inc. on Form S-4 (333-136523); and S-3 (333-44336); and S-8 (Registration No. 333-91364); and Form S-8 (Registration No. 333- 91366) of our report dated March 27, 2014 on the consolidated financial statements of ChoiceOne Financial Services, Inc. for the years ended December 31, 2013, 2012 and 2011, which report is included in Item 8 of the Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

Plante & Moran, PLLC

Grand Rapids, Michigan

March 31, 2014

ChoiceOne Financial Services, Inc. 10-K

Exhibit 24

LIMITED POWER OF ATTORNEY

The undersigned, in his or her capacity as a director or officer, or both, of ChoiceOne Financial Services, Inc., does hereby appoint James A. Bosserd, Mary J. Johnson and Thomas Lampen, or any of them, his or her attorneys or attorney, with full power of substitution, to execute in his or her name an Annual Report of ChoiceOne Financial Services, Inc. on Form 10-K for its fiscal year ended December 31, 2013, and any amendments to that report, and to file it with the Securities and Exchange Commission. Each attorney shall have power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act to be done in the premises as fully and to all intents and purposes as the undersigned could do in person, and the undersigned hereby ratifies and approves the acts of such attorneys.

Dated: January 20, 2014	/s/ Jerome B. Arends
	(signature)

	Jerome B. Arends
	(type or print name)

LIMITED POWER OF ATTORNEY

Dated: January 18, 2014	/s/ Frank G. Berris
	(signature)

	Frank G. Berris
	(type or print name)

LIMITED POWER OF ATTORNEY

Dated: January 21, 2014	/s/ K. Timothy Bull
	(signature)

	K. Timothy Bull
	(type or print name)

LIMITED POWER OF ATTORNEY

Dated: January 22, 2014	/s/ William F. Cutler, Jr.
	(signature)

	William F. Cutler, Jr.
	(type or print name)

LIMITED POWER OF ATTORNEY

Dated: January 22, 2014	/s/ Lewis G. Emmons
	(signature)

	Lewis G. Emmons
	(type or print name)

LIMITED POWER OF ATTORNEY

Dated: January 22, 2014	/s/ Gary D. Gust
	(signature)

	Gary D. Gust
	(type or print name)

LIMITED POWER OF ATTORNEY

Dated: January 22, 2014	/s/ Jack G. Hendon
	(signature)

	Jack G. Hendon
	(type or print name)

LIMITED POWER OF ATTORNEY

Dated: January 21, 2014	/s/ Paul L. Johnson
	(signature)

	Paul L. Johnson
	(type or print name)

LIMITED POWER OF ATTORNEY

Dated: January 22, 2014	/s/ Dennis C. Nelson
	(signature)

	Dennis C. Nelson
	(type or print name)

LIMITED POWER OF ATTORNEY

Dated: January 20, 2014	/s/ Nels W. Nyblad
	(signature)

	Nels W. Nyblad
	(type or print name)

LIMITED POWER OF ATTORNEY

Dated: January 20, 2014	/s/ Roxanne M. Page
	(signature)

	Roxanne M. Page
	(type or print name)

ChoiceOne Financial Services 10-K

EXHIBIT 31.1

CERTIFICATION

I, James A. Bosserd, certify that:

1.	I have reviewed this annual report on Form 10-K for the year ended December 31, 2013 of ChoiceOne Financial Services, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

	a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

	a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 31, 2014	/s/ James A. Bosserd
	James A. Bosserd President and Chief Executive Officer ChoiceOne Financial Services, Inc.

ChoiceOne Financial Services 10-K

EXHIBIT 31.2

CERTIFICATION

I, Thomas L. Lampen, certify that:

1.	I have reviewed this annual report on Form 10-K for the year ended December 31, 2013 of ChoiceOne Financial Services, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

	a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

	a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 31, 2014	/s/ Thomas L. Lampen
	Thomas L. Lampen Treasurer ChoiceOne Financial Services, Inc.

ChoiceOne Financial Services 10-K

EXHIBIT 32

CERTIFICATION

Pursuant to 18 U.S.C. § 1350, each of the undersigned hereby certifies in his capacity as an officer of ChoiceOne Financial Services, Inc. (the “Company”) that the Annual Report of the Company on Form 10-K for the accounting period ended December 31, 2013 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the financial condition of the Company at the end of such period and the results of operations of the Company for such period.

Dated: March 31, 2014	/s/ James A. Bosserd
	James A. Bosserd President and Chief Executive Officer

Dated: March 31, 2014	/s/ Thomas L. Lampen
	Thomas L. Lampen Treasurer

A signed original of this written statement required by Section 906 has been provided to ChoiceOne Financial Services, Inc. and will be retained by ChoiceOne Financial Services, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.