Choiceone Financial Services Inc: Form 10-Q for the period ended Jun 30, 2025

The following discussion is designed to provide a review of the consolidated financial condition and results of operations of ChoiceOne Financial Services, Inc. (“ChoiceOne”) and its wholly-owned subsidiaries. This discussion should be read in conjunction with the interim consolidated financial statements and related notes.

FORWARD-LOOKING STATEMENTS

This discussion and other sections of this quarterly 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. Words such as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “intends,” “is likely,” “plans,” “predicts,” “projects,” “may,” “could,” “look forward,” “continue,” “future,” “will” and variations of such words and similar expressions are intended to identify such forward-looking statements. Management’s determination of the provision and allowance for credit losses, the carrying value of goodwill, loan servicing rights, other real estate owned, and the fair value of investment securities (including whether any impairment on any investment security is temporary or other-than-temporary and the amount of any impairment) and management’s assumptions concerning pension and other post-retirement benefit plans involve judgments that are inherently forward-looking. All of the information concerning interest rate sensitivity is forward-looking. All statements with references to future time periods are 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 ChoiceOne’s Annual Report on Form 10-K for the year ended December 31, 2024. These are representative of the risk factors that could cause a difference between an ultimate actual outcome and a preceding forward-looking statement.

NON-GAAP FINANCIAL MEASURES

In addition to results presented in accordance with GAAP, this report includes certain non-GAAP financial measures. ChoiceOne

believes these non-GAAP financial measures provide additional information that is useful to investors in helping to understand

underlying financial performance and condition and trends of ChoiceOne.

Non-GAAP financial measures have inherent limitations. Readers should be aware of these limitations and should be cautious with

respect to the use of such measures. To compensate for these limitations, non-GAAP measures are used as comparative tools, together

with GAAP measures, to assist in the evaluation of operating performance or financial condition. These measures are also calculated

using the appropriate GAAP or regulatory components in their entirety and are computed in a manner intended to facilitate consistent

period-to-period comparisons. ChoiceOne’s method of calculating these non-GAAP measures may differ from methods used by other

companies. These non-GAAP measures should not be considered in isolation or as a substitute for those financial measures prepared in accordance with GAAP or in-effect regulatory requirements.

Where non-GAAP financial measures are used, the most directly comparable GAAP or regulatory financial measure, as well as the

reconciliation to the most directly comparable GAAP or regulatory financial measure, can be found in the tables to this Form 10-Q

under the heading non-GAAP reconciliation.

RECENT EVENTS

On July 26, 2024, ChoiceOne completed an underwritten public offering of 1,380,000 shares of its common stock at a price to the public of $25.00 per share (the “Common Stock Offering”). The aggregate gross proceeds of the Common Stock Offering were approximately $34.5 million before deducting underwriting discounts and estimated offering expenses. The proceeds from the Common Stock Offering will qualify as tangible common equity and Tier 1 common equity.

On March 1, 2025, ChoiceOne completed the merger (the “Merger”) of Fentura Financial, Inc. (“Fentura”), the former parent company of The State Bank, with and into ChoiceOne with ChoiceOne surviving the Merger. On March 14, 2025, ChoiceOne Bank completed the consolidation of The State Bank with and into ChoiceOne Bank with ChoiceOne Bank surviving the consolidation. Following the Merger, ChoiceOne has approximately $4.3 billion in consolidated total assets and 56 offices in Western, Central and Southeastern Michigan.

RESULTS OF OPERATIONS

ChoiceOne reported net income of $13,534,000 and a net loss of $372,000 for the three and six months ended June 30, 2025, compared to net income of $6,586,000 and $12,220,000 for the same periods in the prior year, respectively. Net income excluding merger expenses, net of taxes, and merger related provision for credit losses, net of taxes was $13,666,000 and $22,976,000 for the three and six months ended June 30, 2025, respectively. Diluted earnings per share was $0.90 for the three months ended June 30, 2025 and diluted loss per share was $0.03 per share for the six months ended June 30, 2025, compared to diluted earnings per share of $0.87 and $1.61 in the same periods in the prior year. Diluted earnings per share excluding merger expenses, net of taxes, and merger related provision for credit losses, net of taxes, were $0.91 and $1.78 for the three and six months ended June 30, 2025, respectively.

A reconciliation for non-GAAP adjusted net income and adjusted earnings per share to GAAP net income and earnings (loss) per share follows:

(In Thousands, Except Per Share Data)

(1) Merger related provision for credit losses represents the calculated credit loss on Non-PCD loans acquired during the Merger on March 1, 2025.

As of June 30, 2025, total assets were $4.3 billion, an increase of $1.7 billion compared to June 30, 2024. The growth is primarily attributed to the Merger. This growth was offset by a $33.5 million reduction in loans to other financial institutions and a $14.5 million reduction in securities on June 30, 2025 compared to June 30, 2024. Loans to other financial institutions consist of a warehouse line of credit used to facilitate mortgage loan originations, with interest rates that fluctuate in line with the national mortgage market. This decline is attributed to ChoiceOne's strategic shift towards a higher percentage of internally driven originations. The reduction in securities occurred as ChoiceOne chose to restructure much of the acquired securities portfolio purchased in the Merger in order to reduce high cost wholesale funding. ChoiceOne has actively managed its balance sheet to support organic loan growth with a loan to deposit ratio of 81.5% at June 30, 2025.

Core loans, which exclude held for sale loans and loans to other financial institutions, declined by $4.8 million or less than 1% on an annualized basis during the second quarter of 2025 and grew organically by $140.1 million or 10.0% during the twelve months ended June 30, 2025. Core loans grew by $1.4 billion due to the Merger on March 1, 2025. Loan interest income increased $24.6 million in the second quarter of 2025 compared to the same period in 2024. Interest income for the three months ended June 30, 2025 includes $3.5 million of interest income accretion due to loans purchased. Of this amount, $2.4 million was calculated using the effective interest rate method of amortization, while the remaining $1.1 million resulted from accretion through unexpected payoffs and paydowns of loans with an associated fair value mark. Estimated accretion income from purchased loans for the remainder of 2025 using the effective interest method of amortization is $4.1 million; however, actual results will be dependent on prepayment speeds and other factors.

ChoiceOne uses interest rate swaps to manage interest rate exposure to certain fixed rate assets and variable rate liabilities. On February 6, 2025, ChoiceOne sold $50.0 million notional value of pay fixed receive floating interest rate swaps. The sold swaps had a fixed rate of 2.75% and a floating rate that will be determined periodically over the life of the swaps. This transaction resulted in a gain of approximately $3.6 million, which will be recognized through interest expense over the 7 years remaining on the life of the swap. On June 30, 2025, ChoiceOne held pay-fixed interest rate swaps with a total notional value of $351.0 million, a weighted average coupon of 3.12%, a fair value of $7.9 million and an average remaining contract length of 6.9 years. These derivative instruments change in value as rates rise or fall inverse to the change in unrealized losses of the available for sale portfolio due to rates. Income from the effect of swaps amounted to $1.3 million and $2.6 million, respectively, for the three and six months ended June 30, 2025 compared to $1.8 million for both the three and six months ended June 30, 2024, which were included in interest income and interest expense. In addition to the pay-fixed interest rate swaps, ChoiceOne also employs back-to-back swaps on select commercial loans, with the impact reflected in interest income.

ChoiceOne's annualized cost of deposits to average total deposits has increased by 9 basis points from June 30, 2024 to June 30, 2025, as higher cost deposits were acquired in the Merger. The increase was slightly offset by the decline in the cost of CD's during the same time period. ChoiceOne has been able to mitigate the increase in the annualized cost of deposits to average total deposits by paying down borrowings in order to decrease the cost of funds to average total deposits to an annualized 1.84% in the second quarter of 2025, down from 1.92% in the second quarter of 2024. If rates continue to decline, we anticipate further reductions in deposit costs, although these will be tempered by decreased cash flows from pay-fixed interest rate swaps. Interest expense on borrowings for the three months ended June 30, 2025, declined by $536,000 compared to the same period in the prior year. As of June 30, 2025, the total borrowed balance at the FHLB was $195.0 million at a weighted average fixed rate of 4.36%, with $155.0 million due within 12 months.

The ratio of the allowance for credit losses to total loans (excluding loans held for sale) was 1.19% on June 30, 2025 compared to 1.07% on December 31, 2024. Asset quality continues to remain strong, with annualized net loan charge-offs to average loans of 0.06% and nonperforming loans to total loans (excluding loans held for sale) of 0.66% as of June 30, 2025. Notably, 0.41% of the nonperforming loans to total loans (excluding loans held for sale) is attributed to loans purchased with credit deterioration acquired through the Merger.

The annualized return on average assets and annualized return on average shareholders’ equity was 1.26% and 12.66%, respectively, for the second quarter of 2025, compared to an annualized 0.99% and an annualized 12.50%, respectively, for the same period in 2024. The annualized loss on average assets and annualized loss on average shareholders’ equity was (0.02)% and (0.21)%, respectively, for the first six months of 2025, compared to a return of 0.93% and 11.91%, respectively, for the same period in 2024.

Dividends

Cash dividends of $4.2 million or $0.28 per share were declared in the second quarter of 2025, compared to $2.0 million or $0.27 per share in the second quarter of 2024. Cash dividends declared in the first six months of 2025 were $8.4 million or $0.56 per share, compared to $4.1 million or $0.54 per share in the same period during the prior year. The cash dividend payout percentage was 31.1% for the second quarter of 2025, compared to 31.0% in the same period in the prior year.

Interest Income and Expense

Tables 1 and 2 on the following pages provide information regarding interest income and expense for the three and six months ended June 30, 2025 and 2024. 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

(Dollars in thousands)

(1) Adjusted to a fully tax-equivalent basis to facilitate comparison to the taxable interest-earning assets. The adjustment uses an incremental tax rate of 21%. The presentation of these measures on a tax-equivalent basis is not in accordance with GAAP, but is customary in the banking industry. These non-GAAP measures ensure comparability with respect to both taxable and tax-exempt loans and securities.

(2) Taxable securities include dividend income from Federal Home Loan Bank and Federal Reserve Bank stock.

(3) Loans include both loans to other financial institutions and loans held for sale.

(4) Non-accruing loan balances are included in the balances of average loans. Non-accruing loan average balances were $16.8 million and $1.9 million in the second quarter of 2025 and 2024, respectively.

(5) Interest on loans included net origination fees and accretion income. Accretion income was $3.5 million and $279,000 in the second quarter of 2025 and 2024, respectively.

(Dollars in thousands)

(1) Adjusted to a fully tax-equivalent basis to facilitate comparison to the taxable interest-earning assets. The adjustment uses an incremental tax rate of 21%. The presentation of these measures on a tax-equivalent basis is not in accordance with GAAP, but is customary in the banking industry. These non-GAAP measures ensure comparability with respect to both taxable and tax-exempt loans and securities.

(2) Taxable securities include dividend income from Federal Home Loan Bank and Federal Reserve Bank stock.

(3) Loans include both loans to other financial institutions and loans held for sale.

(4) Non-accruing loan balances are included in the balances of average loans. Non-accruing loan average balances were $12.4 million and $1.8 million in the six months ended June 30, 2025 and 2024, respectively.

(5) Interest on loans included net origination fees and accretion income. Accretion income was $6.4 million and $669,000 in the six months ended June 30, 2025 and 2024, respectively.

Table 2 – Changes in Tax-Equivalent Net Interest Income

(Dollars in thousands)

(1) The volume variance is computed as the change in volume (average balance) multiplied by the previous year’s interest rate. The rate variance is computed as the change in interest rate multiplied by the previous year’s volume (average balance). The change in interest due to both volume and rate has been allocated to the volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.

(2) Interest on nontaxable investment securities and loans has been adjusted to a fully tax-equivalent basis using an incremental tax rate of 21%.

(Dollars in thousands)

(1) The volume variance is computed as the change in volume (average balance) multiplied by the previous year’s interest rate. The rate variance is computed as the change in interest rate multiplied by the previous year’s volume (average balance).

The change in interest due to both volume and rate has been allocated to the volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.

(2) Interest on nontaxable investment securities and loans has been adjusted to a fully tax-equivalent basis using an incremental tax rate of 21%.

Net Interest Income

Tax-equivalent net interest income increased $18.0 and $27.8 million in the three and six months ended June 30, 2025, respectively compared to the same periods in 2024. The primary factor contributing to the increase in interest income was loan growth, both organically and due to the Merger, the impact of interest income accretion due to purchased loans, and the impact of fixed rate swaps (see note 8). Tax equivalent net interest margin increased 69 and 72 basis points in the three and six months ended June 30, 2025, respectively, compared to the same periods in 2024. GAAP based net interest margin increased 71 and 75 basis points in the three and six months ended June 30, 2025, respectively, compared to the same periods in 2024.

The following table presents the annualized cost of deposits and the annualized cost of funds for the three and six months ended June 30, 2025 and 2024.

ChoiceOne has experienced loan growth, leading to an increase in interest income from loans of $24.6 million and $36.4 million in the three and six months ended June 30, 2025, respectively, compared to the same periods in 2024. In the three and six months ended June 30, 2025, average loans increased by $1.5 billion and $1.1 billion, respectively, driven by both organic growth and the impact of the Merger, compared to the same periods in 2024. In addition, the average rate earned on loans increased 20 and 40 basis points in the three and six months ended June 30, 2025, respectively, compared to the same periods in 2024. Interest income for the three and six months ended June 30, 2025 includes $3.5 million and $6.4 million, respectively, of interest income accretion due to purchased loans.

The average balance of total securities decreased $1.7 million and $12.5 million for the three and six months ended June 30, 2025, respectively, compared to the same periods in the prior year. The decrease is due to paydowns and a decline in the fair value of available for sale securities. The average rate earned on securities decreased 9 basis points and 14 basis points for the three and six months ended June 30, 2025, respectively, compared to the same periods in the prior year. Interest income and rate on securities were impacted by a decline in cash settlements from fixed rate interest rate swaps which are hedged against securities.

Total interest expense increased $6.0 million and $7.7 million in the three and six months ended June 30, 2025, respectively, compared to the same periods in the prior year. This increase was driven by a $1.2 billion increase in interest bearing liabilities from the Merger. Interest expense on interest bearing-demand deposits and savings deposits increased $3.6 million and $4.7 million in the three and six months ended June 30, 2025, respectively. The average rate paid on interest bearing-demand deposits and savings deposits increased by 31 basis points and 15 basis points in the three and six months ended June 30, 2025, respectively, compared to the same periods in the prior year as higher cost deposits were acquired in the Merger.

ChoiceOne's annualized cost of deposits to average total deposits has increased by 9 basis points from June 30, 2024 to June 30, 2025, as higher cost deposits were acquired in the Merger. The increase was slightly offset by the decline in the cost of CD's during the same time period. ChoiceOne has been able to mitigate the increase in the annualized cost of deposits to average total deposits by paying down borrowings in order to decrease the cost of funds to average total deposits to an annualized 1.84% in the second quarter of 2025, down from 1.92% in the second quarter of 2024. If rates continue to decline, we anticipate further reductions in deposit costs, although these will be tempered by decreased cash flows from pay-fixed interest rate swaps.

The average balance of borrowings declined by $40.7 million and $30.9 million in the three and six months ended June 30, 2025, respectively, compared to the same periods in 2024. In addition, the rate paid on borrowings declined by 14 basis points in both the three and six months ended June 30, 2025, compared to the same periods in 2024. The decline in balance and rate led to a decline in interest expense of $535,000 and $860,000 in the three and six months ended June 30, 2025, respectively, compared to the same periods in 2024.

In September 2021, ChoiceOne completed a private placement of $32.5 million in aggregate principal amount of 3.25% fixed-to-floating rate subordinated notes due 2031. In addition, ChoiceOne holds certain subordinated debentures issued in connection with trust preferred securities that were obtained as part of the merger with Community Shores and the Merger with Fentura. The average balance of subordinated debentures increased $8.9 million and the average rate on subordinated debentures increased 78 basis points in the first six months of 2025, compared to the same period in the prior year due to the additional subordinated debentures obtained in the Merger. The increase led to additional expense of $376,000 for the first six months of 2025 compared to the same period in prior year.

Provision and Allowance for Credit Losses

The ACL consists of general and specific components. The general component covers loans collectively evaluated for credit loss and is based on peer historical loss experience adjusted for current and forecasted factors. Management's adjustment for current and forecasted factors is based on trends in delinquencies, trends in charge-offs and recoveries, trends in the volume of loans, changes in underwriting standards, trends in loan review findings, the experience and ability of lending staff, and a reasonable and supportable economic forecast described further below.

The determination of our loss factors is based, in part, upon benchmark peer loss history adjusted for qualitative factors that, in management's judgment, affect the collectability of the portfolio as of the analysis date. We have updated our lookback period for benchmark peer net charge-off history to exclude the years 2020 and 2021 due to the COVID-19 pandemic. Our revised lookback period now spans from January 1, 2004, to December 31, 2019, and January 1, 2022, to December 31, 2024.

The provision for credit losses on loans was $650,000 and $13.8 million for the three and six months ended June 30, 2025, respectively. The provision for credit losses in the first six months of 2025 was due primarily to $12.0 million of expense in the first quarter for the acquisition of $1.3 billion of non-PCD loans in the Merger. Additional expense was recorded to account for organic growth, changes in qualitative factors, and forecast data used in the allowance for credit losses calculation. The allowance for credit losses also increased by $4.9 million in the first quarter of 2025 as the credit mark on PCD loans migrated into the reserve in accordance with CECL guidelines.

Nonperforming assets, which includes Other Real Estate Owned ("OREO") but excludes performing troubled loan modifications ("TLM"), increased by $15.1 million to $19.3 million at June 30, 2025, compared to the balance on December 31, 2024, largely due to $12.9 million in non-accrual loans and $1.7 million of OREO acquired in the Merger. All non-accrual loans from the Merger are classified as PCD loans. The ACL was 1.19% of total loans, excluding loans held for sale, at June 30, 2025, compared to 1.07% as of December 31, 2024. The liability for expected credit losses on unfunded loans and other commitments was $1.6 million as of June 30, 2025, compared to $1.5 million as of December 31, 2024.

Charge-offs and recoveries for respective loan categories for the six months ended June 30, 2025 and 2024 were as follows:

(Dollars in thousands)

Net charge-offs were $491,000 during the first six months of 2025, compared to net charge-offs of $208,000 during the same period in 2024. Net charge-offs for checking accounts during the first six months of 2025 were $132,000 compared to $91,000 for the same period in the prior year. Annualized net loan charge-offs as a percentage of average loans were 0.06% for the second quarter of 2025 compared to 0.04% for the same period in the prior year. Nonperforming loans to total loans (excluding loans held for sale) was 0.66% as of June 30, 2025. Notably, 0.41% of the nonperforming loans to total loans (excluding loans held for sale) is attributed to PCD loans acquired through the Merger which have a corresponding PCD credit reserve.

Noninterest Income

Noninterest income increased by $2.4 million and $3.3 million for the three and six months ended June 30, 2025, respectively, compared to the same periods in the prior year. This increase was partly driven by higher credit and debit card fees, which rose due to increased volume from the Merger. Additionally, ChoiceOne recognized income from two death benefit claims during the second quarter for an additional $299,000 of noninterest income. Trust income also increased as a result of higher estate settlement fees and customers obtained from the Merger.

Noninterest Expense

Noninterest expense increased by $11.2 million and $33.2 million for the three and six months ended June 30, 2025, respectively, compared to the same periods in 2024. This increase was largely due to merger-related expenses of $166,000 and $17.4 million during the three and six months ended June 30, 2025, respectively, compared to $0 in the same periods in the prior year. The remainder of the increase was primarily due to the additional operating expenses as a result of the Merger. Management is committed to managing costs strategically while making prudent investments to sustain our competitive edge and provide exceptional value to our customers, shareholders, and communities.

Income Tax Expense

Income tax expense was $3.1 million in the three months ended June 30, 2025 and income tax benefit was $554,000 in the six months ended June 30, 2025, compared to income tax expense of $1.6 million and $2.8 million for the same periods in 2024. The effective tax rate was 18.8% and 59.8% for the three and six months ended June 30, 2025, respectively, compared to 19.4% and 18.6% for the same periods in 2024. The effective tax rate in 2025 is higher than compared to 2024 due to reduced pre-tax net income in 2025 as well as increased non-deductible expenses in 2025.

FINANCIAL CONDITION

At June 30, 2025, ChoiceOne had consolidated total assets of $4.3 billion, net loans of $2.9 billion, total deposits (excluding brokered deposits) of $3.5 billion and total shareholders' equity of $431.8 million.

Securities

In the first quarter of 2025, ChoiceOne acquired $90.7 million in securities as part of the Merger. However, to reduce higher-cost wholesale funding, management opted to sell $78.9 million of those securities. As a result, the net increase in securities from the Merger totaled $11.8 million.

On June 30, 2025, total available-for-sale securities amounted to $479.4 million, up from $479.1 million on December 31, 2024. This small increase was driven by securities acquired through the Merger and purchases, offset by principal repayments, calls, and maturities. The unrealized loss on securities available for sale increased by $8.7 million to $69.8 million in the first six months of 2025 primarily due to an increase in spreads on tax exempt municipal bonds.

Total held to maturity securities on June 30, 2025 were $390.5 million compared to $394.5 million on December 31, 2024. ChoiceOne's held to maturity securities declined during the first six months of 2025 due to $9.3 million of principal repayments, calls and maturities, which was offset by $3.5 million in securities acquired through the Merger and purchases during the first six months of 2025.

At June 30, 2025, ChoiceOne had $116.9 million in gross unrealized losses on its investment securities, including $69.9 million in unrealized losses on available for sale securities, $46.4 million in unrealized losses on held to maturity securities, and $555,000 in unrealized losses on equity securities. Unrealized losses on corporate and municipal bonds have not been recognized into income because management believes the issuers are of high credit quality, and management does not intend to sell prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions. The issuers continue to make timely principal and interest payments on the bonds. The fair value is expected to recover as the bonds approach maturity.

ChoiceOne utilizes interest rate derivatives as part of its asset liability management strategy to help manage its interest rate risk position. In order to hedge the risk of rising rates and unrealized losses on securities resulting from the rising rates, ChoiceOne currently holds pay fixed, receive variable interest rate swaps with a total notional value of $351.0 million. These derivative instruments change in value as rates rise or fall inverse to the change in unrealized losses of the available for sale portfolio. Refer to Note 8 - Derivatives and Hedging Activities of the consolidated financial statements for more discussion on ChoiceOne’s derivative position.

Equity securities included a money market preferred security ("MMP") of $1.0 million and common stock of $8.6 million as of June 30, 2025. As of December 31, 2024, equity securities included a MMP of $1.0 million and common stock of $6.8 million.

Per U.S. generally accepted accounting principles, unrealized gains or losses on securities available for sale are reflected on the balance sheet in accumulated other comprehensive income (loss), while unrealized gains or losses on securities held to maturity are not reflected on the balance sheet.

Loans

The company's loan portfolio by call report code was as follows:

(Dollars in thousands)

58

Average loan balances increased to $2.9 billion in the second quarter of 2025 compared to $1.4 billion in the second quarter of 2024. Core loans, which exclude held for sale loans and loans to other financial institutions, declined by $4.8 million or less than 1% on an annualized basis during the second quarter of 2025 and grew organically by $140.1 million or 10.0% during the twelve months ended June 30, 2025. Core loans grew by $1.4 billion due to the Merger on March 1, 2025. Loan interest income increased $24.6 million in the second quarter of 2025 compared to the same period in 2024.

Interest income for the three months ended June 30, 2025 includes $3.5 million of interest income accretion due to loans purchased. Of this amount, $2.4 million was calculated using the effective interest rate method of amortization, while the remaining $1.1 million resulted from accretion through unexpected payoffs and paydowns of loans with an associated fair value mark. Estimated accretion income from purchased loans for the remainder of 2025 using the effective interest method of amortization is $4.1 million; however, actual results will be dependent on prepayment speeds and other factors. The remaining yield mark on acquired loans totaled $54.7 million as of June 30, 2025.

Loans to other financial institutions decreased by $36.8 million from June 30, 2024 to June 30, 2025. These loans consist of a

warehouse line of credit used to facilitate mortgage loan originations, with interest rates that fluctuate in line with the national mortgage market. This decline is attributed to ChoiceOne's strategic shift towards a higher percentage of internally driven originations.

Goodwill

Goodwill is not amortized but is evaluated annually for impairment and on an interim basis if events or changes in circumstances indicate that goodwill might be impaired. The goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount, and an impairment charge would be recognized for any amount by which the carrying amount exceeds the reporting unit’s fair value. Accounting pronouncements allow a company to first perform a qualitative assessment for goodwill prior to a quantitative assessment (Step 1 assessment). If the results of the qualitative assessment indicate that it is more likely than not that goodwill is impaired, then a quantitative assessment must be performed. If not, there is no further assessment required. The Company acquired Valley Ridge Financial Corp. in 2006, County Bank Corp in 2019, Community Shores in 2020, and Fentura in 2025, which resulted in the recognition of goodwill of $13.7 million, $38.9 million, $7.3 million and $66.6 million, respectively.

ChoiceOne conducted an annual assessment of goodwill as of June 30, 2025 and no impairment was identified. No material changes and no triggering events have occurred that indicated impairment.

Deposits and Borrowings

Deposits, excluding brokered deposits, declined by $98.0 million as of June 30, 2025, compared to March 31, 2025, primarily due to seasonal municipal fluctuations and some reduction of higher cost deposits acquired from the Merger. Deposits, excluding brokered deposits, increased by $1.4 billion as of June 30, 2025, compared to June 30, 2024 as a result of the Merger. ChoiceOne continues to be proactive in managing its liquidity position by using brokered deposits and FHLB advances to ensure ample liquidity. At June 30, 2025, total available borrowing capacity secured by pledged assets was $1.2 billion. ChoiceOne can increase its borrowing capacity by utilizing unsecured federal fund lines and pledging additional assets. Uninsured deposits totaled $1.1 billion or 29.6% of deposits on June 30, 2025 compared to $833.2 million, or 37.6% of total deposits at December 31, 2024.

ChoiceOne recognized a core deposit intangible of $31.0 million related to the Merger. This intangible asset, valued at 2.78% of Fentura's core deposits, is being amortized over a period of 10 years using the sum-of-years-digits method. This approach reflects the anticipated pattern of economic benefits derived from the core deposits. ChoiceOne recognized core deposit intangible expense of $2.4 million for the six months ended June 30, 2025.

ChoiceOne's annualized cost of deposits to average total deposits has increased by 9 basis points from June 30, 2024 to June 30, 2025, as higher cost deposits were acquired in the Merger. The increase was slightly offset by the decline in the cost of CD's during the same time period. ChoiceOne has been able to mitigate the increase in the annualized cost of deposits to average total deposits by paying down borrowings in order to decrease the cost of funds to average total deposits to an annualized 1.84% in the second quarter of 2025, down from 1.92% in the second quarter of 2024. If rates continue to decline, we anticipate further reductions in deposit costs, although these will be tempered by decreased cash flows from pay-fixed interest rate swaps.

As of June 30, 2025, the total borrowed balance at the FHLB was $195.0 million at a weighted average fixed rate of 4.36%, with the earliest maturity in July 2025. ChoiceOne also has a $3.7 million line of credit at the holding company with a rate of 7.50%.

In September 2021, ChoiceOne completed a private placement of $32.5 million in aggregate principal amount of 3.25% fixed-to-floating rate subordinated notes due 2031. ChoiceOne also holds $15.9 million in subordinated debentures that were obtained in the merger with Community Shores and the Merger with Fentura, offset by the merger mark-to-market adjustment.

Shareholders' Equity

As of June 30, 2025, shareholders’ equity was $431.8 million, a significant increase from $214.5 million on June 30, 2024. This growth was primarily driven by the Merger, in which ChoiceOne issued 6,070,836 shares of common stock on March 1, 2025, valued at $193.0 million. Additionally, the sale of 1,380,000 shares of common stock at $25.00 per share on July 26, 2024, generated $34.5 million in aggregate gross proceeds (before deducting discounts and estimated offering expenses). However, this was slightly offset by a minor decline in retained earnings. ChoiceOne Bank continues to be “well-capitalized,” with a total risk-based capital ratio of 12.4% as of June 30, 2025, compared to 13.2% on June 30, 2024, primarily due to the impact of the Merger.

Regulatory Capital Requirements

Following is information regarding compliance of ChoiceOne and ChoiceOne Bank with regulatory capital requirements:

(Dollars in thousands)

Management reviews the capital levels of ChoiceOne and ChoiceOne Bank on a regular basis. The Board of Directors and management believe that the capital levels as of June 30, 2025 are adequate for the foreseeable future. The Board of Directors’ determination of appropriate cash dividends for future periods will be based on, among other things, market conditions and ChoiceOne’s requirements for cash and capital.

Liquidity

Net cash provided by operating activities was $2.5 million for the six months ended June 30, 2025 compared to $31.1 million net cash provided in the same period in 2024. The change was due to the net loss of $372,000 in the first six months of 2025 compared to net income of $12.2 million in the same period in 2024 and a decline in other liabilities of $24.3 million in the six months ended June 30, 2025. The change was partially offset by a provision for credit losses of $13.8 million in the six months ended June 30, 2025 compared to $0 in the same period in 2024. Net cash provided by investing activities was $267.0 million for the six months ended June 30, 2025 compared to $4.0 million in the same period in 2024. The increase is due to the sale of $78.9 million of securities acquired in the Merger with Fentura. ChoiceOne also received $173.1 million of cash from The State Bank as part of the Merger. Net cash used in financing activities was $210.0 million for the six months ended June 30, 2025, compared to $10.5 million provided in the same period in the prior year. ChoiceOne decreased borrowing by $146.5 million in the first six months of 2025 compared to an increase of $10.0 million in the same period during the prior year. ChoiceOne had $53.4 million in deposit decline in the first six months of 2025 compared to an increase of $4.6 million in the same period in 2024. The deposit decline was primarily due to seasonal municipal fluctuations and some reduction of higher cost deposits acquired from the Merger, offset by an increase in brokered deposits.

ChoiceOne's market risk exposure occurs in the form of interest rate risk and liquidity risk. ChoiceOne's business is transacted in U.S. dollars with no foreign exchange risk exposure. Agricultural loans comprise a relatively small portion of ChoiceOne's total assets. Management believes that ChoiceOne's exposure to changes in commodity prices is insignificant.

Liquidity risk deals with ChoiceOne's ability to meet its cash flow requirements. These requirements include depositors desiring to withdraw funds and borrowers seeking credit. Longer-term liquidity needs may be met through core deposit growth, maturities of and cash flows from investment securities, normal loan repayments, advances from the FHLB and the Federal Reserve Bank, brokered certificates of deposit, and income retention. ChoiceOne had $195.0 million in outstanding borrowings from the FHLB at a weighted average fixed rate of 4.36%, with the earliest maturity in July 2025 as of June 30, 2025. ChoiceOne had $3.7 million in outstanding borrowings at the holding company from a line of credit at June 30, 2025. The acceptance of brokered certificates of deposit is not limited as long as the Bank is categorized as “well capitalized” under regulatory guidelines. At June 30, 2025, total available borrowing capacity from the FHLB and the Federal Reserve Bank was $1.2 billion.

An evaluation was performed under the supervision and with the participation of ChoiceOne’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of ChoiceOne’s disclosure controls and procedures as of June 30, 2025. Based on and as of the time of that evaluation, ChoiceOne’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that ChoiceOne’s disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that material information required to be disclosed in the reports that ChoiceOne files or submits under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that ChoiceOne files or submits under the Exchange Act is accumulated and communicated to management, including ChoiceOne’s principal executive and principal financial officers, as appropriate to allow for timely decisions regarding required disclosure.

There was no change in ChoiceOne’s internal control over financial reporting that occurred during the six months ended June 30, 2025 that has materially affected, or that is reasonably likely to materially affect, ChoiceOne’s internal control over financial reporting.

Information concerning risk factors is contained in the discussion in Item 1A, “Risk Factors,” in ChoiceOne’s Annual Report on Form 10-K for the year ended December 31, 2024.