This 2010 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. 2010 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 2010 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, 2010, 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 69%, 70%, and 74% of total revenues in 2010, 2009, and 2008, respectively. Interest from securities accounted for 10%, 11%, and 12% of total revenues in 2010, 2009, and 2008, 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 28, 2011, there were 3,281,944 shares of ChoiceOne Financial Services, Inc. common stock issued and outstanding. As of February 28, 2011, there were 824 shareholders of record of ChoiceOne Financial Services, Inc. common stock.

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The following table summarizes cash dividends declared per share of common stock during 2010 and 2009:

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 2011, 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 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.

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 2010. 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.

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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. Generally accepted 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, 2010. ChoiceOne engaged an outside consulting firm to perform a 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. 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 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 4.6%. 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

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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 2010 was $2,711,000, which represented a $1,233,000 or 84% increase from 2009. The growth in net income resulted from increases in net interest income and noninterest income while decreases occurred in the provision for loan losses and noninterest expense in 2010 compared to 2009. The increase in net interest income was due to growth in average earning assets and an increase in ChoiceOne's net interest spread in 2010 compared to the prior year. The expansion in noninterest income was due to higher levels of gains on sales of loans and gains on sales of securities in 2010 than in 2009. The decrease in the provision for loan losses resulted from lower net charge-offs in 2010 than in 2009 and a $5.6 million reduction in nonperforming loans from December 31, 2009 to December 31, 2010. The small decline in noninterest expense was due to lower occupancy and equipment expense, loan and collection expense, and FDIC insurance expense, offset by increases in salaries and benefits and various other expenses in 2010 compared to the prior year.

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.

Dividends
Cash dividends of $1,572,000 or $0.48 per common share were declared in 2010, compared to $1,563,000 or $0.48 per common share in 2009 and $2,202,000 or $0.68 per common share in 2008. Dividends declared were $0.12 per share in each quarter in 2010 and 2009, compared to $0.17 per share in each quarter in 2008. The dividend reduction in 2009 was believed prudent based on the Board of Directors' desire to retain more capital due to the uncertainty of Michigan's economy. The dividend yield on ChoiceOne's common stock was 4.79% in 2010, compared to 6.66% in 2009 and 6.50% in 2008. The cash dividend payout as a percentage of net income was 58% in 2010, compared to 106% in 2009 and 153% in 2008.

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 2011 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.

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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 $809,000 in 2010 compared to 2009. The growth was due to growth of $8.0 million in average interest-earning assets in 2010 compared to 2009 and a 22 basis point increase in ChoiceOne's net interest income spread compared to 2009. The higher level of average interest-earning assets contributed an additional $406,000 in net interest income in 2010 compared to 2009, while the growth in the net interest income spread caused an increase of $403,000 in net interest income in 2010 compared to the prior year.

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The average balance of loans declined $5.3 million in 2010 compared to 2009. This decline, combined with a 17 basis point decrease in the average rate earned on loans, caused interest income on loans to fall $841,000 in 2010 compared to the prior year. The average balance of total securities increased by $9.5 million in 2010 compared to 2009. This growth in the average balance was offset by a lower average rate earned on securities, causing interest income from securities to decrease $489,000 in 2010 compared to the prior year. An increase in both the average balance and average rate earned on other interest-earning assets resulted in an increase in interest income of $15,000 in 2010 compared to 2009. The reduction in loans resulted from sluggish loan demand, which was caused by continued concerns about the Michigan economy. Growth in securities was due to ChoiceOne's desire to maintain earning assets.

The average balance of interest-bearing demand deposits increased $23.4 million in 2010 compared to 2009. The effect of this increase, partially offset by a 10 basis point decline in the average rate paid, caused interest expense to be $33,000 higher in 2010 than in the prior year. The effect of an 11 basis point decrease in the average rate paid on savings deposits in 2010 compared to 2009 was partially offset by the effect of growth of $4.2 million in the average balance as interest expense dropped $33,000. The average balance of certificates of deposit was $6.7 million lower in 2010 than in the prior year. Approximately $4.9 million of the certificates of deposit decline was related to certificates from ChoiceOne's local markets, while the remaining $1.8 million was a lower level of brokered certificates. The average balance decrease plus the effect of an 89 basis point decline in the average rate paid caused interest expense on certificates of deposit to fall $1.6 million in 2010 compared to 2009. A $12.4 million decrease in the average balance of Federal Home Loan Bank advances offset by a 43 basis point increase in the average rate paid caused interest expense to decline $438,000 in 2010 compared to the prior year. Interest expense on other interest-bearing liabilities fell $47,000 in 2010 compared to 2009 due to a small decline in the average balance and a 23 basis point decrease in the average rate paid. 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 4.12% (shown in Table 1) for 2010, compared to 3.90% in 2009. The average yield received on interest-earning assets in 2010 decreased 44 basis points to 5.56% while the average rate paid on interest-bearing liabilities in 2010 fell 66 basis points to 1.44%. The decline in general market interest rates in both 2009 and 2010 caused the reduction in rates for both assets and liabilities in the two time periods.

Table 2 - Changes in Tax-Equivalent Net Interest Income

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Tax-equivalent net interest income increased $666,000 in 2009 compared to 2008. The increase was caused by a 45 basis point increase in the net interest spread, offset by a decline in average interest-earning assets. The growth in ChoiceOne's net interest spread was caused by a 108 basis point decrease in the average rate paid on interest-bearing liabilities compared to a 63 basis point decline in the average rate earned on interest-earning assets. The decline in general market interest rates in 2009 caused almost all of the rates earned on assets and paid on liabilities to be lower than in the prior year. Average interest-earning assets decreased $14.1 million while average interest-bearing liabilities fell $15.4 million in 2009 compared to 2008.

Management anticipates that the level of net interest income in 2011 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 will continue to be dependent on the Michigan economy. If growth in loans is difficult to obtain, the Bank can opt to invest in securities as it did in 2010. The Bank's ability to maintain or grow its net interest spread will be contingent on movement in general market interest rates and their effect on new and maturing assets and 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

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As shown in Table 3, the provision for loan losses was $925,000 lower in 2010 than in 2009. The reduction in the provision level resulted in part from a decrease of $610,000 in net charge-offs experienced in 2010 compared to 2009. Net charge-offs of commercial and industrial loans declined $759,000 in 2010 from the level experienced in 2009. 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. Commercial real estate loan net charge-offs increased $347,000 in 2010 compared to the prior year. Residential real estate loan net charge-offs declined $138,000 in 2010 compared to 2009. Consumer loan net charge-offs were down slightly in 2010 compared to the prior year. The allowance for loan losses as a percentage of total loans increased from 1.34% as of the end of 2009 to 1.49% as of the end of 2010. The coverage ratio of the allowance for loan losses to nonperforming loans increased from 31% as of December 31, 2009 to 56% as of December 31, 2010. This was primarily due to a reduction of nonperforming loans from $14.0 million as of the end of 2009 to $8.4 million as of the end of 2010. ChoiceOne had $582,000 of specific allowance allocations for problem loans as of the end of 2010, compared to $1,112,000 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 2010 and 2009 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 increase in the allowance allocation to agricultural loans from 2009 to 2010 was based on the slightly higher perceived level of risk in this portfolio. The increase in the allocation to commercial real estate loans in 2010 was due to the higher level of charge-offs experienced in 2010 than in the prior year. The small decline in the allowance allocated to the other loan categories was due to lower charge-off levels in 2010 than the prior year. The growth in the unallocated allowance from 2009 to 2010 was believed prudent based on management's continued concerns regarding the economy and its impact on the ability of borrowers to make loan payments.

Management maintains the allowance at a level 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. 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, 2010 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 $148,000 in 2010 compared to 2009. Customer service charges were virtually unchanged as decreases in overdraft charges were offset by increases in fees from debit card usage. Gains on sales of loans grew $81,000 in 2010 compared to the prior year as mortgage refinancing activity continued to be stimulated by low interest rates for long-term fixed rate mortgages. ChoiceOne sold $28.1 million and $28.0 million of mortgage loans in 2010 and 2009, respectively. If rates for long-term fixed rate mortgage loans rise in 2011, management believes that mortgage refinancing activity may slow and resulting gains on sales of loans may be lower than in 2010. ChoiceOne's net gains on sales of securities grew $135,000 in 2010 compared to 2009. Gains on sales of preferred stock were $386,000 in 2010 compared to $245,000 in the prior year. These gains represented a recovery of losses recognized on money market preferred securities in 2008. The loss on other than temporary impairment of securities in 2010 and 2009 was related to a municipal security that defaulted upon its maturity in September 2009.

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

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Management anticipates that regulatory changes in 2010 and proposed changes for 2011 will continue to have a negative impact on deposit-related fees in 2011. A change that became effective July 1, 2010 restricted 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 opted in for overdraft coverage for these types of transactions. This caused some decrease in overdraft fees in the second half of 2010 and will affect the full year of 2011. In addition, the Dodd-Frank Act passed in 2010 gave the Federal Reserve the authority to establish rules regarding interchange fees that are charged for electronic debit transactions. In December 2010, the Federal Reserve proposed a new regulation that would establish standards for determining whether an interchange fee related to an electronic debit transaction is reasonable. The new standards, which are scheduled to become effective on July 21, 2011, propose to set limits at one-third to one-half of the fees currently charged by banks. Although the standards are restricted to banks with assets of $10 billion or more, ChoiceOne believes that the potential restrictions for big banks may also affect community banks like ChoiceOne.

Noninterest Expense
Total noninterest expense decreased $10,000 in 2010 compared to 2009. Salaries and benefits increased $138,000 in 2010 compared to the prior year, partly due to an increase of $113,000 in 401(k) plan expense as ChoiceOne reinstated its company contribution in 2010. Occupancy and equipment expense was $70,000 lower in 2010 than in 2009 as depreciation expense and various other expenses declined from the prior year. The $52,000 increase in data processing expense in 2010 compared to the prior year resulted from higher costs related to electronic banking usage. Professional fees were $46,000 higher in 2010 than in 2009 due to increases in legal, accounting, and consulting costs. Advertising and promotional expense grew $44,000 in 2010 compared to the prior year as a result of more promotion of ChoiceOne's new and existing products. Loan and collection expense declined $99,000 in 2010 compared to 2009 due to lower collection costs for problem loans. FDIC insurance expense was $144,000 lower in 2010 than in the prior year due to a special assessment of $204,000 that was levied in the second quarter of 2009, the effect of which was partially offset by higher deposit balances in 2010 than in 2009. Other noninterest expense grew by $51,000 in 2010 compared to 2009 as a result of changes in a number of expense accounts.

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. Loan and collection expense increased $355,000 in 2009 compared to 2008 as a result of more costs related to other real estate owned and problem loans. 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. A decrease of $262,000 in other noninterest expense in 2009 compared to 2008 was caused by reductions in training and seminars, Michigan business tax, directors' fees, and various other expenses.

Management believes that loan and collection expense will continue to be affected by Michigan's economy in 2011. 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 change is effective with the quarter beginning April 1, 2011. Management anticipates that ChoiceOne's insurance expense may be lower under the adjusted total assets assessment base than it would have been under the total domestic deposits assessment base.

Income Taxes
Income taxes were $654,000 in 2010, compared to benefits of $195,000 in 2009 and $207,000 in 2008. The change in the income tax effect from 2009 to 2010 was caused by a $2.1 million increase in income before income tax in 2010 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 $480.5 million as of December 31, 2010, which represented an increase of $14.6 million or 3% from the end of 2009. Cash and cash equivalents grew $4.3 million in 2010 as excess funds from deposit growth were held at correspondent banks or sold as overnight federal funds. Securities available for sale increased $16.4 million during 2010 as management purchased securities to use funds that were provided by deposit growth. Loans declined $5.8 million in 2010 due to sluggish loan demand. Total deposits grew $24.9 million in 2010 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 $13.5 million in 2010 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 increased $16.4 million from December 31, 2009 to December 31, 2010. ChoiceOne purchased a mix of government agency, municipal, mortgage-backed, corporate securities, and FDIC-guaranteed financial institution debt totaling $44.1 million during 2010 to replace securities that matured or were called and to provide growth in earning assets. Approximately $19.6 million in various securities were called or matured in 2010. Principal payments for municipal and mortgage-backed securities totaling $2.7 million were received during 2010. Various securities totaling approximately $6.1 million were sold during 2010 for net gains totaling $537,000. Approximately $3.7 million of the sales that occurred in 2010 were sales of municipal securities as ChoiceOne lessened its exposure to certain issuers. 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 2010 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 as to when and how much value will be received for the remaining principal balance of the bond, other than temporary impairments were recorded in 2009 and 2010 to reduce the carrying value to 70% of the remaining par value as of December 31, 2010.

Equity securities included a money market preferred security (MMP) of $838,000 and a trust preferred security of $500,000 as of December 31, 2010 and preferred stock of $954,000, an MMP of $860,000, and a trust preferred security of $500,000 as of December 31, 2009. The preferred stock held as of the end of 2009 was sold in the first quarter of 2010 and a gain of $386,000 was recognized. The MMP had a $162,000 unrealized loss as of December 31, 2010 that was recorded to other comprehensive income. Auctions remain active for this security and interest continues to be received.

Management will continue to monitor its municipal and equity securities closely in 2011. Securities may be sold if believed prudent from a risk standpoint.

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

The loan portfolio (excluding loans held for sale) decreased $5.8 million from December 31, 2009 to December 31, 2010. Loan demand continued to be sluggish in 2010 as the uncertain economy in Michigan affected the willingness of borrowers to assume debt. Growth was achieved in commercial and industrial loans and consumer loans in 2010 through officer calling activities and marketing of consumer loan products. Loans secured by real estate continued to be affected by reduced collateral values, which impacted the ability to originate these loans. Residential real estate loans were also affected by portfolio loans that were refinanced into long-term fixed rate loans and sold in the secondary market.

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:

Nonaccrual loans included $3,621,000 in commercial and industrial and commercial real estate loans, $2,646,000 in residential real estate loans, and $6,000 in consumer loans as of December 31, 2010, compared to $7,805,000, $4,060,000, and $17,000, respectively, as of December 31, 2009. The decreases in nonaccrual loans in 2010 were caused by charge-offs, transfers to other real estate owned, and payments received on loans. 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 $2,141,000 in residential real estate loans as of December 31, 2010, compared to $134,000 in commercial and industrial loans and $1,785,000 in residential real estate loans as of December 31, 2009. 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. ChoiceOne began making the modifications for residential real estate loans in September 2009 and plans to continue this process in 2011.

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 $21.2 million as of December 31, 2010, compared to $17.1 million as of December 31, 2009.

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

Total deposits increased $24.9 million from December 31, 2009 to December 31, 2010. Local deposits grew $23.4 million while brokered certificates of deposit grew $1.5 million since the end of 2009. Management believes that the local 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. The balance in all checking and savings account categories increased during the year while the balance of local certificates of deposit declined. Management believes that some of the local certificate of deposit decrease consisted of transfers into the other interest-bearing deposit accounts since the liquidity obtained offset the relatively small difference in the interest rate paid.

Securities sold under agreements to repurchase increased $1.6 million during 2010. 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 $13.5 million in 2010 as growth in deposits caused it to be unnecessary to replace maturing advances. A blanket collateral agreement covering residential real estate loans was pledged against all outstanding advances at the end of 2010. Approximately $35 million of additional advances were available as of December 31, 2010 based on the collateral pledged.

In 2011, 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 $1.4 million from December 31, 2009 to December 31, 2010. The growth in equity resulted primarily from the retention of earnings in 2010 as net income exceeded dividends paid by $1.1 million. Issuances of common stock and an increase in accumulated other comprehensive income also contributed to the growth in 2010.

Note 21 to the consolidated financial statements presents regulatory capital information for the Bank at the end of 2010 and 2009. The Bank's capital ratios for total risk-based capital and Tier 1 capital increased slightly in 2010 while the Tier 1 leverage capital ratio declined slightly. Management will monitor these capital ratios closely during 2011 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, 2010 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, 2010: