CHOICEONE FINANCIAL SERVICES, INC.

2009

ANNUAL REPORT TO SHAREHOLDERS

This 2009 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. 2009 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 2009 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, 2009, 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.

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 the Bank's offices are located and the areas immediately surrounding those communities. Currently the Bank serves those markets through thirteen full-service offices. ChoiceOne Insurance Agencies, Inc. is a wholly-owned subsidiary of ChoiceOne Bank and sells insurance and investment products. ChoiceOne Mortgage Company of Michigan, formerly a wholly-owned subsidiary of ChoiceOne Bank, was formed on January 1, 2002 and was engaged in mortgage lending. As of December 31, 2008, ChoiceOne consolidated the operations of ChoiceOne Mortgage Company of Michigan into ChoiceOne Bank and eliminated the separate mortgage company subsidiary.

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 (and ChoiceOne Mortgage Company of Michigan through December 31, 2008) 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 70%, 74%, and 70% of total revenues in 2009, 2008, and 2007, respectively. Interest from securities accounted for 11%, 12%, and 11% of total revenues in 2009, 2008, and 2007, respectively.

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:

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 26, 2010, there were 3,266,948 shares of ChoiceOne Financial Services, Inc. common stock issued and outstanding. As of February 26, 2010, there were 840 shareholders of record of ChoiceOne Financial Services, Inc. common stock.

The following table summarizes cash dividends declared per share of common stock during 2009 and 2008:

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 22 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 2010, although the amount of the quarterly dividends will be dependent on market conditions and ChoiceOne's requirements for cash and capital, among other things.

*  Per share amounts are retroactively adjusted for the effect of stock dividends and stock splits.

In November 2006, ChoiceOne merged with Valley Ridge Financial Corp. Accordingly, two months of combined operations are included in the 2006 results of operations and all assets acquired and liabilities assumed from Valley Ridge Financial Corp. are included in the 2006 year-end balance sheet.

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"), ChoiceOne Insurance Agencies, Inc. (the "Insurance Agency"), and ChoiceOne Mortgage Company of Michigan (the "Mortgage Company"). As of December 31, 2008, ChoiceOne consolidated the operations of the Mortgage Company into the Bank and eliminated the mortgage company subsidiary. This discussion should be read in conjunction with the consolidated financial statements and related footnotes.

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 possibility that anticipated cost savings and revenue enhancements from the merger with Valley Ridge Financial Corp. may not be realized in full or at all or within the expected time frames; 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 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.

The purpose of this section of the annual report is to provide a narrative discussion about the Company's financial condition and results of operations during 2009. Management's discussion and analysis of financial condition and results of operations as well as disclosures found elsewhere in the annual report are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses and loan servicing rights. Actual results could differ from those estimates.

Securities
Securities available for sale may be sold prior to maturity due to changes in interest rate, 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 value 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.

Management performed its annual review of goodwill as of June 30, 2009. Due to the impact of economic conditions on the market value of bank stocks, ChoiceOne engaged an outside consulting firm to perform a goodwill impairment analysis as of October 31, 2009. 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 accepting 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:

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 standards 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 3.5%. Based on this assessment, management believed that there was no indication of goodwill impairment.

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, 2009, management determined that no valuation allowance was necessary.

On November 1, 2006, ChoiceOne merged with Valley Ridge Financial Corp. ("VRFC"). At the time of the merger, VRFC was roughly equal in size in terms of assets with ChoiceOne. The 2006 results of operations include two months of combined financial results after the close of the merger and the 2006 year-end balance sheet includes all of the assets acquired and all of the liabilities assumed from VRFC in the merger. Therefore, a comparison of 2006 financial condition and results of operations to the financial condition and results of operations for any subsequent year is materially affected as a result of the merger. The increase in the total allowance for loan losses in 2006 was related to the allowance of $1,751,000 acquired from the merger with VRFC in November 2006.

Summary

Net income for 2009 was $1,478,000, which represented a $43,000 or 3% increase from 2008. The increase in net income resulted from increased net interest income and noninterest income in 2009, which was offset by a higher provision for loan losses and higher noninterest expense in 2009 than in 2008. The growth in net interest income was due to an increase in ChoiceOne's net interest spread, which was partially offset by lower average earning assets in 2009 than in 2008. The expansion in noninterest income was due to an increase in gains on sales of loans and gains on sales of securities in 2009 compared to the prior year. Noninterest income was affected in 2008 by $867,000 of securities losses related to money market preferred securities. The increase in the provision for loan losses was caused by a higher level of charge-offs in 2009 than in 2008. The growth in noninterest expense was due to increased FDIC insurance expense and costs related to carrying other real estate properties and loan collection expenses.

Net income for 2008 was $1,435,000, which represented a $2.1 million or 60% decrease from 2007. The decrease in net income was due to an elevated provision for loan losses in 2008 as well as a lower level of noninterest income compared to the prior year. The increased provision for loan losses was primarily due to a higher level of charge-offs in 2008 than in 2007. The reduction in noninterest income in 2008 compared to 2007 was principally due to nonrecurring events in both years. Noninterest income in 2007 included a gain of $875,000 from the sale of ChoiceOne's property and casualty lines of business in October 2007. As a result of the sale, insurance commission income was $522,000 lower in 2008 than in 2007. Noninterest income was affected in 2008 by a $435,000 loss recognized upon the conversion of a money market preferred security to preferred stock. Noninterest income was also affected by a $432,000 loss on a money market preferred security when its decline in market value was considered to be an other than temporary impairment. The effect of the increase in the provision for loan losses and the decrease in noninterest income was partially offset by a reduction in noninterest expense in 2008 compared to 2007. The noninterest expense change was caused by reduced expenses from the sale of the property and casualty lines of business in late 2007.

Dividends
Cash dividends of $1,563,000 or $0.48 per common share were declared in 2009, compared to $2,202,000 or $0.68 per common share in 2008 and $2,200,000 or $0.68 per common share in 2007. Dividends declared were $0.12 per share in each quarter in 2009, compared to $0.17 per share in each quarter in 2008. The dividend reduction in 2009 was believed prudent based on ChoiceOne's earnings forecast for 2009 and the Board of Directors' desire to retain more capital due to the continued uncertainty of Michigan's economy. The dividend yield on ChoiceOne's common stock was 6.66% in 2009, compared to 6.50% in 2008 and 4.38% in 2007. The cash dividend payout as a percentage of net income was 106% in 2009, compared to 153% in 2008 and 61% in 2007.

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 2010 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

Net Interest Income
As shown in Tables 1 and 2, tax-equivalent net interest income increased $666,000 in 2009 compared to 2008. The growth was due to a 45 basis point increase in ChoiceOne's net interest income spread in 2009 compared to 2008, partially offset by the effect of a decline of $14.1 million in average earning assets in the same time period. The growth in net interest income spread contributed an additional $765,000 in net interest income in 2009, while the effect of the decrease in average earning assets offset by a slightly larger decrease in average interest-bearing liabilities caused a reduction in net interest income of $99,000 in 2009 compared to the prior year.

The average balance of loans declined $6.1 million in 2009 compared to 2008. This decline, combined with a 72 basis point decrease in the average rate earned on loans, caused interest income on loans to fall $2.7 million in 2009 compared to 2008. Part of the decrease in interest income from loans resulted from a reduction in accretion income from purchase accounting adjustments on loans acquired from the merger with VRFC in November 2006 from $659,000 in 2008 to $229,000 in 2009. The average balance of total securities fell by $8.2 million in 2009 compared to the prior year. The average balance decline, coupled with a lower average rate earned on taxable securities, caused interest income from securities to decrease $655,000 in 2009 compared to 2008. A reduction in the average rate earned on other interest-earning assets resulted in a decline in interest income of $59,000 in 2009 compared to the prior year.

The average balance of interest-bearing demand deposits decreased $3.9 million in 2009 compared to 2008. The effect of this decrease along with an 84 basis point decline in the average rate paid caused interest expense to be $775,000 lower in 2009 than in the prior year. The effect of a 15 basis point decrease in the average rate paid on savings deposits in 2009 compared to 2008 was almost offset by the effect of growth of $5.8 million in the average balance as interest expense dropped $27,000. The average balance of certificates of deposit was $6.9 million lower in 2009 than in 2008. Approximately $3.8 million of the certificates of deposit decline was related to certificates from ChoiceOne's local markets, while the remaining $3.1 million was a lower level of brokered certificates. The average balance decrease plus the effect of a 137 basis point decline in the average rate paid caused interest expense on certificates of deposit to fall $2.6 million in 2009 compared to 2008. A $10.0 million decrease in the average balance of Federal Home Loan Bank advances combined with a 28 basis point reduction in the average rate paid caused interest expense to decline $518,000 in 2009 compared to 2008. Interest expense on other interest-bearing liabilities fell $216,000 in 2009 compared to 2008 due to a 104 basis point decrease in the average rate paid.

ChoiceOne's net interest income spread was 3.90% (shown in Table 1) for 2009, compared to 3.45% in 2008. The average yield received on interest-earning assets in 2009 decreased 63 basis points to 6.00% while the average rate paid on interest-bearing liabilities in 2009 fell 108 basis points to 2.10%. The decline in general market interest rates in both 2008 and 2009 caused the reduction in rates between the two time periods.

Table 2 - Changes in Tax-Equivalent Net Interest Income

Tax-equivalent net interest income increased $214,000 in 2008 compared to 2007. The reasons for the increase were evenly split between small amounts due to the relationship between average interest-earning assets and interest-bearing liabilities and a slightly larger net interest spread. Average interest-earning assets grew $167,000 in 2008 compared to 2007, while average interest-bearing liabilities declined $1,396,000 when comparing the two years. The growth in assets and reduction of liabilities caused an increase of $108,000 in net interest income in 2008 compared to 2007. ChoiceOne's net interest spread increased by 13 basis points in 2008 compared to 2007, which contributed $106,000 toward the increase in net interest income in 2008. The decline in general market interest rates in 2008 caused almost all of the rates earned on assets and paid on liabilities to be lower than in the prior year.

Management anticipates that the level of net interest income in 2010 will depend upon the Bank's ability to grow or maintain interest-earning assets in the form of loans and securities as well as its ability to do the same with its base of core deposits. Growth in earning assets may prove to be difficult in 2010 given the continued weakness in the Michigan economy. Additionally, if general market interest rates continue to remain at relatively low levels, they may have an impact on ChoiceOne's net interest spread as new activity, maturities, and payments may have differing impacts on interest-earning assets and interest-bearing liabilities.

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

As shown in Table 3, the provision for loan losses was $1,400,000 higher in 2009 than in 2008. The higher provision level resulted in part from an increase of $678,000 in net charge-offs experienced in 2009 compared to 2008. The elevated level of net charge-offs in 2009 was believed to be caused by the continued economic challenges affecting borrowers in ChoiceOne's market areas. Net charge-offs of commercial and industrial loans were $1,456,000 in 2009, which represented an increase of $323,000 from 2008. Approximately $737,000 of the commercial and industrial charge-offs in 2009 was related to an unsecured relationship with one borrower that was charged off in December 2009 due to the borrower's bankruptcy. Management reviewed the remaining unsecured commercial and industrial loans as of December 31, 2009 and did not find the same level of risk as the charged-off loan. Commercial real estate loan net charge-offs were $1,159,000 in 2009, an increase of $378,000 from 2008. Residential real estate loan net charge-offs were $1,263,000 in 2009, which was virtually equal to $1,246,000 of net charge-offs experienced in 2008. Consumer loan net charge-offs were $289,000 in 2009, which represented a small decline from $315,000 in 2008. The allowance for loan losses as a percentage of total loans increased from 1.10% as of the end of 2008 to 1.34% as of the end of 2009. The coverage ratio of the allowance for loan losses to nonperforming loans declined slightly from 39% as of December 31, 2008 to 31% as of December 31, 2009. ChoiceOne had $1,112,000 of specific allowance allocations for problem loans as of the end of 2009, compared to $545,000 as of the prior year end. Special allowance amounts have been allocated where the fair value of loans was considered to be less than their carrying value. 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 2009 and 2008 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:

The decrease in the allowance allocation to agricultural loans from 2008 to 2009 was based on the limited charge-off activity experienced by this loan category. The increase in the allocation to commercial and industrial loans in 2009 was due to the higher level of charge-off activity experienced in 2009 compared to 2008. The increase in the allocation to commercial real estate loans in 2009 was caused by an increase in specific allowance allocations from $420,000 at the end of 2008 to $1,031,000 at the end of 2009. The growth in the allowance allocation to residential real estate mortgage loans resulted from the continued high level of charge-offs in this loan category during 2009, along with an increase in nonaccrual loans in this loan category from $2.5 million as of the end of 2008 to $4.1 million as of the end of 2009. The increase in the total allowance in 2006 was related to the allowance of $1,751,000 acquired from the merger with VRFC in November 2006.

Management maintains the allowance at a level at which 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. In order to better identify the risk in total commercial loans, management created separate loan categories for agricultural loans, commercial leases, and unsecured commercial loans in the December 2009 allowance computation from the commercial real estate loan and commercial and industrial loan categories that existed previously. 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, 2009 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 increased $1,338,000 in 2009 compared to 2008. Customer service charges were $103,000 less in 2009 compared to 2008 due to a $99,000 decrease in overdraft charges. Lower levels of life insurance commission income and mutual fund commission income in 2009 caused the decline in insurance and investment commission income from 2008. Gains on sales of loans increased $386,000 in 2009 compared to 2008 due to a higher level of mortgage refinancing activity stimulated by low interest rates for long-term fixed rate mortgage loans. ChoiceOne sold $28.0 million of mortgage loans in 2009 compared to $12.2 million in 2008.

If rates for long-term fixed rate mortgage loans rise in 2010, management believes that mortgage refinancing activity may slow and resulting gains on sales of loans may be lower than the prior year. ChoiceOne had $355,000 of net gains on sales of securities in 2009, compared to $833,000 of net losses in 2008. The net gains in 2009 included $245,000 of gains on sales of preferred stock that represented a recovery of losses recognized on money market preferred securities in 2008. Net losses from sales of securities in 2008 included a $435,000 loss recognized when a money market preferred security was converted to preferred stock. A $432,000 loss on other than temporary impairment of securities in 2008 resulted when a decline in the market value of another money market preferred security was considered to be other than temporary. The net loss on sales of other assets was $230,000 larger in 2009 than in 2008 due to the sale of more real estate properties. An increase of $184,000 in other noninterest income in 2009 compared to 2008 was caused in part by higher levels of check printing fees, rental income from foreclosed properties, and income from an investment in Michigan Bankers Title Company.

Total noninterest income decreased $2,398,000 or 37% in 2008 compared to 2007. Insurance and investment commission income declined $368,000 in 2008 compared to 2007. The decrease in commission income was due to the sale of ChoiceOne's property and casualty insurance lines of business in October 2007, which caused insurance commission income to be $522,000 lower in 2008 than in the prior year. The sale of the insurance lines of business caused an $875,000 gain to be recorded in the fourth quarter of 2007. Gains on sales of loans decreased $72,000 in 2008 compared to 2007 due to a lower volume of residential mortgage loans sold into the secondary market. The $401,000 loss on sales of securities in 2008 was due to a $435,000 loss recognized when a money market preferred security was converted to preferred stock. The $432,000 loss on other than temporary impairment of securities resulted when a decline in the market value of another money market preferred security was considered to be other than temporary. A decrease of $150,000 in other noninterest income in 2008 compared to 2007 was caused by a number of small items.

Management anticipates that noninterest income will be affected in 2010 by recent regulatory changes regarding overdraft fee income. The changes, which become effective July 1, 2010, will serve to restrict ChoiceOne's ability to charge overdraft fees for certain types of transactions, which include automatic teller machine or one-time debit card usage, unless the depositors opt in for overdraft coverage for these types of transactions. As a result, ChoiceOne believes that this may cause overdraft fee income to decrease in the second half of 2010. Management plans to continue its emphasis of growth of checking and savings deposit accounts in 2010, which may generate additional fee income from debit card usage and other deposit related fees.

Noninterest Expense
Total noninterest expense increased $548,000 in 2009 compared to 2008. The $238,000 decrease in salaries and benefits expense in 2009 compared to the prior year was partly due to a $141,000 reduction in 401(k) plan expense as no company contribution was made in 2009. Data processing expense grew $213,000 in 2009 compared to 2008 as a result of increased numbers of accounts and increased volumes, especially in the form of electronic banking. FDIC insurance expense was $518,000 higher in 2009 as a result of a special assessment of $204,000 levied in the second quarter of 2009 and a doubling of assessment rates in 2009 compared to 2008. An increase of $93,000 in other noninterest expense in 2009 included an increase of $355,000 in costs of carrying other real estate properties and loan collection expenses in 2009 compared to 2008.

Total noninterest expense decreased $359,000 or 2% in 2008 compared to 2007. Salaries and benefits expense was $569,000 lower in 2008 than in 2007. Much of the reduction was due to the sale of ChoiceOne's property and casualty lines of business in October 2007, which eliminated the ongoing compensation costs related to this activity. Salaries and benefits expense was also impacted by a $175,000 decrease in bonus expense from 2007 to 2008. Data processing expense declined $84,000 in 2008 compared to 2007, which was primarily due to new contracts in 2008 for processing of automatic teller machine transactions. The increase in professional fees of $56,000 in 2008 compared to the prior year was due to higher levels of legal fees related to loan matters and higher audit and tax fees. Advertising and promotional expense was $154,000 lower in 2008 than in 2007 as ChoiceOne cut expenses in all advertising categories. An increase of $204,000 in FDIC insurance expense was caused by assessment credits from the FDIC that the Bank used in 2007 being fully utilized in January 2008. Other noninterest expense grew $187,000 in 2008 compared to the prior year. Foreclosed asset and loan collection expenses were up $209,000 in 2008 due to problem loans. Training expense was $109,000 higher in 2008 than in the prior year as an outside consultant was used for management, customer service, and sales training.

Management believes that noninterest expense in 2010 will continue to be affected by higher than normal levels of FDIC insurance expense and expenses related to nonperforming loans and foreclosed properties.

Income Taxes
Income taxes produced a benefit of $195,000 in 2009, compared to a benefit of $207,000 in 2008 and expense of $939,000 in 2007. The significant decrease in tax expense in 2008 was caused by a $3,291,000 decline in income before income tax in 2008 compared to the prior year. The tax benefit realized in both 2009 and 2008 was due to the level of ChoiceOne's tax exempt interest income, which was larger than income before income tax in both years.

Summary
Total assets were $465.9 million as of December 31, 2009, which represented an increase of $2.4 million or 1% during 2009. Securities available for sale declined $3.0 million or 4% in 2009 as purchases of new securities did not fully offset the effect of sales, maturities, payments, and calls. Loans decreased $3.3 million or 1% in 2009 as a result of reductions in the balances of commercial and residential real estate loans. Total deposits grew $18.0 million in 2009 due to increases in checking and savings deposits, which were partially offset by a decrease in certificates of deposit. Advances from the Federal Home Loan Bank of Indianapolis were reduced $18.0 million in 2009 as the deposit growth was used to pay off maturing advances.

Securities
The Bank's securities available for sale balances as of December 31 were as follows:

The securities available for sale portfolio decreased $3.0 million from December 31, 2008 to December 31, 2009. ChoiceOne purchased a mix of government agency, municipal, and mortgage-backed securities totaling $31.3 million during 2009 to replace securities that matured or were called. Approximately $24.3 million in various securities were called or matured in 2009. Principal payments for municipal and mortgage-backed securities totaling $2.9 million were received during 2009. Various securities totaling approximately $8.2 million were sold during 2009 for net gains totaling $402,000. Approximately $3.3 million of the sales that occurred in 2009 were sales of municipal securities in the fourth quarter as ChoiceOne moved to lessen the exposure to this category. The proceeds from the sales were reinvested into government agency securities. The Bank's Investment Committee continues to monitor the portfolio and purchases securities when deemed 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 2009 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. No further payments have been received. Legal counsel was engaged in September 2009 by the bondholders to work with the issuer on their behalf. ChoiceOne's third party investment advisor is a member of the bondholder executive committee and is working closely with the legal counsel. Due to the uncertainty of the timing as to when ChoiceOne will receive value for the remaining principal balance of the bond, an other than temporary impairment of $47,000 or 10% of the remaining par value was recognized as of December 31, 2009.

Equity securities included preferred stock of $954,000, a money market preferred security (MMP) of $860,000, and a trust preferred security of $500,000 as of December 31, 2009. Equity securities included MMPs of $1,050,000, trust preferred securities of $500,000, and preferred stock of $431,000 as of December 31, 2008. A loss of $435,000 was recognized upon a conversion from an MMP to preferred stock in November 2008 due to a market value that was less than its carrying value at time of conversion. An other than temporary impairment of $432,000 was recorded in December 2008 for an MMP that converted to preferred stock in January 2009. Part of the losses that were recorded in 2008 were recovered in 2009 as approximately 40% of the par value of the two preferred stock issues were sold for a gain of $245,000. The remaining MMP as of December 31, 2009 had a $140,000 unrealized loss that was recorded to other comprehensive income. Auctions remain active for this security and interest continues to be received. Its decline in market value is not considered to be other than temporary as of the end of 2009.

Management will continue to monitor its equity securities closely in 2010. ChoiceOne plans to continue selling its preferred stock if certain pricing levels can be achieved.

Loans
The Bank's loan portfolio as of December 31 was as follows:

The loan portfolio (excluding loans held for sale) decreased $3.3 million from December 31, 2008 to December 31, 2009. Growth in the agricultural loans portfolio in 2009 was caused by new borrower relationships and increased borrowings by existing clients. The decline in commercial and industrial loans and commercial real estate loans was primarily due to sluggish loan demand in 2009 as the uncertain economy in Michigan affected the willingness of borrowers to assume debt. The reduction in residential real estate loans in 2009 was caused by adjustable rate mortgages held in the portfolio that were refinanced into fixed rate loans and sold in the secondary market.

Management anticipates loan demand in 2010 will depend upon the stability of the local and state economies and the confidence level of business and personal borrowers. The Bank intends to continue its calling program with commercial customers in its market areas.

Information regarding impaired loans can be found in Note 5 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:

At December 31, 2009, nonaccrual loans included $7,804,000 in commercial and industrial and commercial real estate loans, $4,060,000 in residential real estate loans, and $17,000 in consumer loans. At the end of the prior year, nonaccrual loans were comprised of $5,836,000 in commercial and industrial and commercial real estate loans, $2,450,000 in residential real estate loans, and $19,000 in consumer loans. Approximately $2.6 million of the increase in nonaccrual commercial loans was comprised of one borrower, of which the balance is 75% government guaranteed. The increase in nonaccrual residential real estate loans was comprised of a number of loans where the payment ability of the borrowers has been negatively affected by the current economic climate. Loans considered troubled debt restructurings which were not on a nonaccrual basis and were not 90 days or more past due on principal or interest payments consisted of $134,000 in commercial and industrial loans and $1,785,000 in residential real estate loans as of December 31, 2009, compared to $605,000 in commercial real estate loans as of December 31, 2008. The increase in residential real estate loans considered troubled debt restructurings was caused by loans where the terms had been modified to assist the borrowers in making their payments. The modifications included capitalization of interest onto the principal balance, reduction in interest rate, and extension of loan term. ChoiceOne began making the modifications for residential real estate loans in September 2009 and plans to continue this process in 2010.

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 $17.1 million as of December 31, 2009, compared to $17.9 million as of December 31, 2008.

Deposits and Other Funding Sources
The Bank's deposit balances as of December 31 were as follows:

Total deposits increased $18.0 million from December 31, 2008 to December 31, 2009. The balance of local deposits grew $31.4 million during 2009, while the balance of brokered certificates of deposit declined $13.4 million. The balance in all local deposit categories grew in 2009 with money market deposits and interest-bearing demand deposits contributing more than 60% of the total increase. Management believes that the deposit growth was due in part to the attractiveness of FDIC-guaranteed deposits in contrast to the uncertainty of investments in the stock market. Deposit growth also resulted from new product offerings and calling efforts on business and municipal clients.

Securities sold under agreements to repurchase increased $1.9 million during 2009. The change was due to a higher balance in sweep repurchase accounts used by the Bank's local customers. Advances from the Federal Home Loan Bank of Indianapolis ("FHLB") decreased $18.0 million in 2009 as growth in deposits was used to replace maturing advances. A blanket collateral agreement covering residential real estate loans was pledged against all outstanding advances at the end of 2009. Approximately $26.1 million of additional advances were available as of December 31, 2009 based on the collateral pledged.

In 2010, management will continue to focus its marketing efforts towards growing local deposits. If local deposit growth is insufficient to support asset growth during 2009, management believes that FHLB advances, repurchase agreements and brokered certificates of deposit can address corresponding funding needs.

Shareholders' Equity
Total shareholders' equity increased $741,000 from December 31, 2008 to December 31, 2009. The growth in equity resulted primarily from an increase in accumulated other comprehensive income and proceeds from the issuance of ChoiceOne's stock. Dividends paid in 2009 exceeded net income by $85,000. ChoiceOne did not repurchase any of its common stock in 2008 or 2009, in contrast to 2007, when 32,700 shares were repurchased. Shares of common stock may be repurchased in the future if management deems it to be a prudent use of capital.

ChoiceOne applied for $9.6 million in a capital investment as part of the U.S. Treasury's Capital Purchase Program in November 2008. Approval of the investment was received from the U.S. Treasury in March 2009. After considering the cost of the investment, the restrictions connected with receipt of the funds, and the potential dilution of existing shareholders, management decided not to accept the capital investment.

Note 22 to the consolidated financial statements presents regulatory capital information for the Bank at the end of 2009 and 2008. The Bank's capital ratios increased slightly from December 31, 2008 to December 31, 2009 due to growth in the shareholders' equity balance during 2009. Management will monitor these capital ratios closely during 2010 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, 2009 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, 2009: