UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

Commission File Number: 000-19202

ChoiceOne Financial Services, Inc.
(Exact Name of Registrant as Specified in its Charter)

Indicate by checkmark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes    X             No        

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

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

As of July 31, 2008, the Registrant had outstanding 3,239,349 shares of common stock.

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements.

ChoiceOne Financial Services, Inc.
CONSOLIDATED BALANCE SHEETS

See accompanying notes to consolidated financial statements.

ChoiceOne Financial Services, Inc.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited)

See accompanying notes to consolidated financial statements.

ChoiceOne Financial Services, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)

See accompanying notes to consolidated financial statements.

ChoiceOne Financial Services, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

See accompanying notes to consolidated financial statements.

ChoiceOne Financial Services, Inc.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation
The consolidated financial statements include ChoiceOne Financial Services, Inc. (the "Registrant") and its wholly-owned subsidiary, ChoiceOne Bank (the "Bank"), and the Bank's wholly-owned subsidiaries ChoiceOne Insurance Agencies, Inc. (the "Insurance Agency"), and ChoiceOne Mortgage Company of Michigan (the "Mortgage Company"). Intercompany transactions and balances have been eliminated in consolidation.

The consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information, prevailing practices within the banking industry and the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

The accompanying consolidated financial statements reflect all adjustments ordinary in nature which are, in the opinion of management, necessary for a fair presentation of the Consolidated Balance Sheets as of June 30, 2008 and December 31, 2007, the Consolidated Statements of Income for the three- and six-month periods ended June 30, 2008 and June 30, 2007, the Consolidated Statements of Changes in Shareholders' Equity for the six-month periods ended June 30, 2008 and June 30, 2007, and the Consolidated Statements of Cash Flows for the six-month periods ended June 30, 2008 and June 30, 2007. Operating results for the six months ended June 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008.

The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Registrant's Annual Report on Form 10-K for the year ended December 31, 2007.

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. See Note 2 to the interim consolidated financial statements for additional information.

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 economic conditions and (2) the impact of recognizing an impairment or loan loss could have a material effect on ChoiceOne's assets reported on the balance sheet as well as its net income.

Stock Transactions
A total of 3,916 shares of common stock were issued to the Registrant's Board of Directors for a cash price of $49,000 under the terms of the Directors' Stock Purchase Plan in the first half of 2008. A total of 4,582 shares were issued to employees for a cash price of $35,000 under the Employee Stock Purchase Plan in the first two quarters of 2008.

Reclassifications
Certain amounts presented in prior periods have been reclassified to conform to the current presentation.

ChoiceOne Financial Services, Inc.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 2 - ALLOWANCE FOR LOAN LOSSES

An analysis of changes in the allowance for loan losses follows:

Information regarding impaired loans follows:

NOTE 3 - EARNINGS PER SHARE

Earnings per share are based on the weighted average number of shares outstanding during the period. A computation of basic earnings per share and diluted earnings per share follows:

As of June 30, 2008, there were 48,732 stock options that are considered to be anti-dilutive to earnings per share for both the three-month and six-month periods ended June 30, 2008. As of June 30, 2007, there were 30,585 stock options considered to be anti-dilutive to earnings per share for the three-month period ended June 2007 and 23,865 stock options for the six months ended June 30, 2007. These stock options have been excluded from the calculation above.

NOTE 4 - FAIR VALUE MEASUREMENTS

The following tables present information about the Bank's assets and liabilities measured at fair value on a recurring basis at June 30, 2008, and the valuation techniques used by the Bank to determine those fair values.

In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities that the Bank has the ability to access.

Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset or liability.

In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Bank's assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability.

There were no liabilities measured at fair value as of June 30, 2008. Disclosures concerning assets measured at fair value are as follows:

Assets Measured at Fair Value on a Recurring Basis at June 30, 2008
(Dollars in Thousands)

Changes in Level 3 Assets Measured at Fair Value on a Recurring Basis
(Dollars in Thousands)

Of the Level 3 assets that were still held by the Bank at June 30, 2008, the net unrealized loss for the six months ended June 30, 2008 was $141,000, which is recognized in other comprehensive income in the consolidated balance sheet. There were sales of $200,000 of Level 3 securities in the first half of 2008. There were no purchases of Level 3 securities during the six months ended June 30, 2008.

Both observable and unobservable inputs may be used to determine the fair value of positions classified as Level 3 assets and liabilities. As a result, the unrealized gains and losses for these assets and liabilities presented in the tables above may include changes in fair value that were attributable to both observable and unobservable inputs.

Available-for-sale investment securities categorized as Level 3 assets consist of bonds issued by local municipalities and money market preferred securities. The Bank estimates the fair value of these bonds based on the present value of expected future cash flows using management's best estimate of key assumptions, including forecasted interest yield and payment rates, credit quality and a discount rate commensurate with the current market and other risks involved.

The Bank also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis. These assets include loans which have been classified as impaired under the provisions of Statement of Financial Accounting Standards 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS 114"). The Bank has estimated the fair values of these assets using Level 3 inputs, specifically discounted cash flow projections.

Assets Measured at Fair Value on a Nonrecurring Basis
(Dollars in Thousands)

Impaired loans accounted for under SFAS 114 categorized as Level 3 assets consist of non-homogeneous loans that are considered impaired. The Bank estimates the fair value of the loans based on the present value of expected future cash flows using management's best estimate of key assumptions. These assumptions include future payment ability, timing of payment streams, and estimated realizable values of available collateral (typically based on outside appraisals). The losses indicated for the period ended June 30, 2008 consisted of charge-downs that were posted to the allowance for loan losses.

Other assets, including bank-owned life insurance, goodwill, intangible assets and other assets acquired in business combinations, are also subject to periodic impairment assessments under other accounting principles generally accepted in the United States of America. These assets are not considered financial instruments. Effective February 12, 2008, the Financial Accounting Standards Board issued a staff position that delayed the applicability of Statement of Financial Accounting Standards 157, "Fair Value Measurements" to non-financial instruments. Accordingly, these assets have been omitted from the above disclosures.

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion is designed to provide a review of the consolidated financial condition and results of operations of ChoiceOne Financial Services, Inc. ("ChoiceOne" or the "Registrant") and its wholly-owned subsidiary, ChoiceOne Bank (the "Bank"), and the Bank's wholly-owned subsidiaries, ChoiceOne Insurance Agencies, Inc. (the "Insurance Agency"), and ChoiceOne Mortgage Company of Michigan (the "Mortgage Company"). This discussion should be read in conjunction with the consolidated financial statements and related notes.

FORWARD-LOOKING STATEMENTS

This discussion and other sections of this report contain forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates, and projections about the financial services industry, the economy, and the Registrant itself. Words such as "anticipates," "believes," "estimates," "expects," "forecasts," "intends," "is likely," "plans," "predicts," "projects," variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions ("risk factors") that are difficult to predict with regard to timing, extent, likelihood, and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed, implied or forecasted in such forward-looking statements. Furthermore, the Registrant undertakes no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events, or otherwise.

Risk factors include, but are not limited to, the risk factors disclosed in Item 1A of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2007; 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 ability 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 fully realized at all or within the expected time frames; the level and timing of asset growth; local and global uncertainties such as acts of terrorism and military actions; and current uncertainties and fluctuations in the financial markets and stocks of financial services providers due to concerns about credit availability and concerns about the Michigan economy in particular. These are representative of the risk factors that could cause a difference between an ultimate actual outcome and a preceding forward-looking statement.

RESULTS OF OPERATIONS

Summary
Net income was $723,000 in the second quarter of 2008 compared to $901,000 in the second quarter of 2007. For the six months ended June 30, 2008, net income was $1,482,000, compared to $1,902,000 in the same period in 2007. The change in both cases resulted primarily from a higher provision for loan losses in 2008 than in 2007.

Lower noninterest expense in the first quarter and first six months of 2008 compared to the same periods in 2007 was offset by lower net interest income and noninterest income in the same periods. The return on average assets and return on average shareholders' equity was 0.63% and 5.52%, respectively, for the first half of 2008, compared to .82% and 7.32%, respectively, for the same period in 2007.

Dividends
Cash dividends of $550,000 or $0.17 per share were declared in the second quarter of 2008, compared to $552,000 or $0.17 per share in the second quarter of 2007. The cash dividends declared in the first six months of 2008 were $1,100,000 or $.34 per share, compared to $1,103,000 or $.34 per share declared in 2007. The cash dividend payout percentage was 74% for the first six months of 2008, compared to 58% in the same period a year ago.

Interest Income and Expense
Tables 1 and 2 on the following pages provide information regarding interest income and expense for the six-month periods ended June 30, 2008 and 2007, respectively. Table 1 documents ChoiceOne's average balances and interest income and expense, as well as the average rates earned or paid on assets and liabilities. Table 2 documents the effect on interest income and expense of changes in volume (average balance) and interest rates. These tables are referred to in the discussion of interest income, interest expense and net interest income.

Table 1 - Average Balances and Tax-Equivalent Interest Rates

______________

Table 2 - Changes in Tax-Equivalent Net Interest Income

_______________

Net Interest Income
The presentation of net interest income on a tax-equivalent basis is not in accordance with generally accepted accounting principles ("GAAP"), but is customary in the banking industry. This non-GAAP measure ensures comparability of net interest income arising from both taxable and tax-exempt loans and investment securities. The adjustments to determine net interest income on a tax-equivalent basis were $494,000 and $406,000 for the six months ended June 30, 2008 and 2007, respectively. These adjustments were computed using a 34% federal income tax rate.

As shown in Tables 1 and 2, tax-equivalent net interest income decreased $90,000 in the first six months of 2008 compared to the same period in 2007. Although average interest-earning assets were $3.2 million higher in the first half of 2008 than in the same period in the prior year, a decrease of 6 basis points in the net interest spread from 2007 to 2008 caused the small decline in net interest income as the average rate earned on interest-earning assets fell more than the rate paid on interest-bearing liabilities.

The average balance of loans decreased $3.9 million in the first six months of 2008 compared to the same period in 2007. Average residential mortgage loans were $7.2 million lower in 2008 than in 2007 as borrowers refinanced from adjustable rate loans that the Bank held in its portfolio to fixed rate loans that were sold in the secondary market. The decrease in the average loans balance combined with a 46 basis point decrease in the average rate earned caused tax-equivalent interest income from loans to decrease $905,000 in the first six months of 2008 compared to the same period in the prior year. The decrease in the average rate earned on loans was due to a 250 basis point decrease in the Bank's prime lending rate that occurred from December 2007 through April 2008. The average balance of total securities increased $4.4 million in the first half of 2008 compared to the same period in

2007. Securities were purchased in the second half of 2007 and early 2008 to provide growth in interest-earnings assets. As a result of the balance growth and a relatively small increase in yields earned, tax-equivalent interest income rose $203,000 in the first six months of 2008 compared to the same period in the prior year. The increase in other interest-earning assets in the first two quarters of 2008 compared to the first quarter of 2007 was caused by a higher level of federal funds sold in 2008 than in the prior year.

The average balance of interest-bearing demand deposits increased $830,000 in the first six months of 2008 compared to the same period in 2007. The higher average balance was offset by a 60 basis point decline in the average rate paid, which caused interest expense to fall $263,000 in the first half of 2008 compared to the same quarter in 2007. The average balance of certificates of deposit was down $16.6 million in the first six months of 2008 compared to the same period in 2007. The decrease was caused by maturing brokered certificates of deposit that were not replaced, which caused the average brokered balance to be $21.7 million less in the first half of 2008 than in the same period in 2007. The decline in certificates of deposit, combined with an 11 basis point decrease in the average rate paid, caused interest expense to fall $479,000 in 2008 compared to 2007. The average balance of advances from the Federal Home Loan Bank of Indianapolis ("FHLBI") was $12.9 million higher in the first six months of 2008 than the prior year. FHLB advances were used in the last half of 2007 and the first half of 2008 to replace maturing brokered certificates of deposit since the rate on new advances was lower than that of new certificates of deposit. The growth in FHLB advances, although partially offset by a 62 basis point decrease in the average rate paid, caused interest expense to increase $214,000 in the first half of 2008 compared to the same period in 2007. Growth in other interest-bearing liabilities in the first quarter of 2008 compared to the first quarter of 2007 was due to a higher average balance in repurchase agreements.

ChoiceOne's net interest income spread was 3.31% in the first six months of 2008, compared to 3.37% for the first six months of 2007. The lower average rate earned on loans caused the average rate earned on interest-earning assets to decline 38 basis points in the first half of 2008 compared to the same period in 2007. The impact of loans was partially offset by higher rates earned on securities. The total funding cost dropped 32 basis points in the first six months of 2008 compared to the same period in 2007. This was due to lower interest rates paid on all interest-bearing liability categories. Management plans to continue its emphasis on local deposit growth in 2008.

Management estimates growth in earning assets may be a challenge for the remainder of 2008 given the lackluster economy in Michigan and depressed real estate values affecting commercial and residential borrowers.

Provision and Allowance for Loan Losses
The allowance for loan losses was $3,710,000 as of June 30, 2008, compared to $3,843,000 as of March 31, 2008 and $3,600,000 as of December 31, 2007. The decrease in the allowance in the second quarter of 2008 was due to a lower level of specific allowance allocations to certain commercial and industrial and commercial real estate loans. This was in contrast to the first quarter of 2008 when specific allowance allocations increased. The balance of general allowance dollars was higher as of June 30, 2008 than it was as of the end of 2007. The provision for loan losses was $450,000 and $1,000,000 for the second quarter and first half of 2008, respectively, compared to $270,000 and $370,000 for the same period in 2007. The allowance increase and higher provision were believed necessary due to higher net charge-offs in the first six months of 2008 than in the same period in 2007, deterioration in certain commercial real estate and residential real estate loan credits, and continued concerns over the Michigan economy. The allowance for loan losses was 1.13% of total loans as of June 30, 2008, compared to 1.19% at March 31, 2008 and 1.10% at December 31, 2007.

Charge-offs and recoveries for respective loan categories for the six months ended June 30 were as follows:

Net charge-offs in the first six months of 2008 were $890,000, compared to $390,000 in the first half of 2007. Net charge-offs as a percentage of average loans were .55% in the first half of 2008 and .24% for the same period in the prior year. As shown in the table above, the increase was due to higher charge-off levels for commercial real estate loans and residential real estate loans. Management believes that the primary reason for the higher charge-off level is the economic climate in Michigan which has affected both business and personal borrowers. This climate has had a negative impact on real estate collateral values for ChoiceOne's loans. Management has and intends to continue working with delinquent borrowers in an attempt to lessen the negative impact to ChoiceOne. As charge-offs, changes in the level of nonperforming loans, and changes within the composition of the loan portfolio occur throughout 2008, the provision and allowance for loan losses will be reviewed by the Bank's management and adjusted as necessary.

Noninterest Income
Total noninterest income was $1,249,000 in the second quarter of 2008 compared to $1,453,000 in the same period in 2007. For the six months ended June 30, 2008, total noninterest income was $2,582,000, compared to $2,881,000 in the same period in 2007. The change in noninterest income in the first two quarters of 2008 compared to 2007 was due to the sale of ChoiceOne's property and casualty insurance lines of business in October 2007. These lines of business produced $404,000 in revenues in the first six months of 2007 that were included in insurance commissions and other noninterest income. Offsetting part of the effect of the insurance sale was an increase of $128,000 in investment commission revenue and an improvement of $33,000 in gains on sales of securities in the first six months of 2008 compared to the same period in 2007. The growth in investment commissions was caused by increased mutual fund and annuity sales and higher investment advisory fees in the first half of 2008 compared to the same period in 2007.

Management anticipates that noninterest income may be lower in the third quarter of 2008 compared to the same period in 2007 as a result of the gain on the sale of the insurance lines of business in October 2007 and the revenues generated by these lines of business. Management plans to continue its emphasis of growth in deposit accounts and investment sales to offset the lower revenue from insurance.

Noninterest Expense
Total noninterest expense was $3,673,000 in the second quarter of 2008 compared to $3,862,000 in the same period in 2007. For the six months ended June 30, 2008, total noninterest expense was $7,245,000 compared to $7,657,000 in the first half of 2007. Compensation and benefits were $187,000 lower in the second quarter and $307,000 lower in the first six months of 2008 than in the same periods in 2007. This decrease was due to the sale of the property and casualty lines of business in October 2007, which eliminated the compensation and other costs related to this activity. Data processing expense was $31,000 lower in the second quarter and $97,000 lower in the first half of 2008 than in the same periods in the prior year. This resulted primarily from cost reductions for ATM processing due to a new contract signed by ChoiceOne in early 2008. Professional fees were up $54,000 in the second quarter and $40,000 in the first half of 2008 than the same periods in 2007. The reason for the increase was higher accounting fees and costs related to ChoiceOne's overdraft protection program. FDIC insurance cost was $57,000 higher in the second quarter and $107,000 higher in the first six months of 2008 compared to similar periods in 2007. ChoiceOne had assessment credits from the FDIC that were used to reduce the insurance cost in 2007. These credits were fully utilized in January 2008. Advertising and promotional expense was down in both the second quarter and first half of 2008 compared to the same periods in 2007 as fewer costs had been incurred in the first two quarters of 2008. The increase in other noninterest expense in the first half of 2008 compared to the same period in 2007 was caused by higher training expenses, higher loan-related costs, and increases in various other expenses.

Management anticipates that the sale of ChoiceOne's property and casualty insurance lines of business that occurred in October 2007 will cause expense related to these activities to be less in the third quarter of 2008 than in the corresponding quarter in 2007.

Income Tax Expense
Income tax expense decreased $120,000 and $275,000, respectively, in the second quarter and first six months of 2008 compared to the same periods in 2007. Taxable income was significantly less in 2008 due to the lower level of income before income tax. Nontaxable income from municipal securities and bank-owned life insurance also

affected taxable income as they comprised a larger percentage of income before income tax in 2008 than in the prior year. As a result, ChoiceOne's effective tax rate was 15.9% for the first six months of 2008 versus 22.6% for the first six months of 2007.

FINANCIAL CONDITION

Securities
The securities available for sale declined $3.8 million from December 31, 2007 to June 30, 2008. ChoiceOne has purchased a mix of government agency, mortgage-backed, municipal, and equity securities totaling $13.3 million in the first six months of 2008 to replace maturities, principal repayments, and calls within the securities portfolio. Approximately $11.4 million in various securities were called or matured since the end of 2007. Principal repayments on securities totaled $3.2 million in the first half of 2008. Approximately $1.7 million of securities were sold in the first two quarters of 2008 for a net gain of $33,000. ChoiceOne's balance in Money Market Preferred Securities declined from $4.5 million as of December 31, 2007 to $2.8 million as of June 30, 2008. Management has reviewed the quality of its securities in the first six months of 2008 with particular attention paid to the ratings of insurance companies that insure municipal bonds. Management anticipates that purchases of securities in the remainder of 2008 will depend on reinvestment rates and the level of growth in ChoiceOne's local deposits.

Loans
The loan portfolio (excluding loans held for sale) declined $822,000 from December 31, 2007 to June 30, 2008. Commercial and industrial, commercial real estate and agricultural loans increased $4.2 million due to calling efforts on borrowers. Consumer loans were virtually unchanged in the first half of 2008. Residential real estate loans declined $4.9 million in the first six months of 2008. The residential loans decrease was primarily due to mortgage borrowers refinancing from adjustable rate loans into fixed rate loans. ChoiceOne holds adjustable rate mortgage loans in its loan portfolio while most fixed rate loans are sold into the secondary market.

Information regarding impaired loans can be found in Note 2 to the consolidated financial statements included in this report. The total balance of loans classified as impaired was $5.0 million as of June 30, 2008, compared to $4.1 million as of March 31, 2008 and $4.8 million as of December 31, 2007. The balance of loans with no allowance allocated decreased $189,000 in the first six months of 2008 while the balance of loans with an allowance allocated increased $350,000. The balance of loans shown in Note 2 with no allowance allocated was $2,677,000 as of December 31, 2007.

As part of its review of the loan portfolio, management also monitors the 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 loans past due 90 days or more, which are considered troubled debt restructurings.

The balances of these nonperforming loans were as follows:

At June 30, 2008, nonaccrual loans included $4.1 million in commercial industrial and commercial real estate loans, $2.7 million in residential real estate loans, and $0.1 million in consumer loans. At December 31, 2007, nonaccrual loans included $3.0 million in commercial industrial and commercial real estate loans, $2.4 million in residential real estate loans, and $0.2 million in consumer loans. The increase in nonperforming loans since the end of 2007 was caused by a restaurant property loan for $1.5 million that was reclassified to a nonaccrual basis in the second quarter of 2008. The loan is in the process of foreclosure and management believes that the loan is well secured. Management believes the specific reserves allocated to its nonperforming loans are sufficient at June 30, 2008.

Other Real Estate Owned
The balance of other real estate owned ("OREO") increased $1.1 million from December 31, 2007 to June 30, 2008. Commercial and residential real estate loans totaling $1,929,000 were transferred into OREO during the first six months of 2008 while sales of properties or payments upon them were $839,000 for the same time period. Due to the current state of the Michigan economy, there may be continuing transfers from loans into OREO during the remainder of 2008.

Deposits and Borrowings
Total deposits were $344 million as of June 30, 2008, compared to $352 million as of December 31, 2007. Local deposits have grown $3.1 million in the first six months of 2008 while brokered certificates of deposit were reduced $10.8 million. Since the end of 2007, checking account balances have declined $4.3 million; however, money market account balances have risen $5.8 million. Savings account balances increased by $3.5 million in the first half of 2008 while local certificates of deposit declined $1.9 million. The decrease in brokered deposits resulted from management's decision to replace them with local cost funding in the way of local deposits and Federal Home Loan Bank advances.