Choiceone Financial Services Inc: Form 10-Q for the period ended Jun 30, 2026

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. 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) involve judgments that are inherently 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, 2025. 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 financial measures are used as comparative tools, together with GAAP financial 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 financial measures may differ from methods used by other companies. These non-GAAP financial measures should not be considered in isolation or as a substitute for those financial measures prepared in accordance with GAAP or applicable 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 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.

RESULTS OF OPERATIONS

ChoiceOne reported net income of $12,463,000 and $26,167,000 for the three and six months ended June 30, 2026, respectively, compared to net income of $13,534,000 and a net loss of $372,000 for the three and six months ended June 30, 2025, respectively. Diluted earnings per share were $0.83 and $1.74 for the three and six months ended June 30, 2026, compared to diluted earnings per share of $0.90 and diluted loss per share of $0.03 for the three and six months ended June 30, 2025, respectively. Second quarter results for 2026 included a pre-tax securities loss of approximately $1.9 million, which reduced diluted earnings per share by approximately $0.10, as ChoiceOne repositioned lower-yielding municipal securities to fund loan growth and improve its interest rate profile.

As of June 30, 2026, total assets were $4.5 billion, an increase of $146.6 million compared to June 30, 2025. The growth in total assets is primarily attributed to growth in core loans, securities and warehouse mortgage advances. This growth was partially offset by a reduction in the cash balance of $67.6 million as of June 30, 2026, during the twelve months ended June 30, 2026.

Core loans, which exclude held for sale loans and mortgage warehouse advances, increased by $87.1 million or an annualized 11.9% during the second quarter of 2026 and grew by $101.5 million or 3.5% during the twelve months ended June 30, 2026. Of this growth approximately $40.0 million was due to a purchase of seasoned, high quality adjustable rate mortgages from another community bank made during the second quarter 2026. Loan interest income increased $703,000 in the second quarter of 2026 compared to the first quarter of 2026 and decreased $187,000 compared to the second quarter of 2025. The decrease from the second quarter of 2025 is partially due to a decline in interest income due to accretion from purchased loans during the second quarter of 2026 compared to the second quarter of 2025. Interest income due to accretion from purchased loans was approximately $2.4 million during the second quarter of 2026 compared to $3.5 million for the three months ended June 30, 2025. Interest income due to accretion from purchased loans increased net interest margin by 24 and 36 basis points in the second quarter of 2026 and the second quarter of 2025, respectively. Of the amount recognized in the second quarter of 2026, $2.0 million was calculated using the effective interest rate method of amortization, while the remaining $433,000 resulted from unexpected payoffs and paydowns of loans with an associated fair value mark. Estimated interest income due to accretion from purchased loans for the remainder of 2026 using the effective interest method of amortization is $3.8 million; however, actual results will be dependent on prepayment speeds and other factors. It is estimated that a total of $48.0 million remains to be recognized as interest income due to accretion from purchased loans over the life of the purchased loans portfolio.

Deposits, excluding brokered deposits, decreased by $55.4 million as of June 30, 2026, compared to March 31, 2026. This decline is largely due to seasonality in municipal deposits as municipal operational balances fluctuate with the timing of tax receipts. Municipal deposits decreased by approximately $95.0 million during the second quarter of 2026, which is consistent with historical fluctuations. Deposits, excluding brokered deposits, increased by $22.2 million as of June 30, 2026, compared to June 30, 2025. This increase is primarily organic growth in interest bearing and savings accounts offset by a decline in higher interest certificate of deposit accounts. ChoiceOne continues to be proactive in managing its liquidity position by using brokered deposits and short-term FHLB advances to ensure ample liquidity. As of June 30, 2026, the total balance of borrowed funds from the FHLB was $295.0 million at a weighted average rate of 3.80%, with $275.0 million due within 12 months. At June 30, 2026, total available borrowing capacity secured by pledged assets was $1.1 billion. ChoiceOne can increase its borrowing capacity by utilizing unsecured federal fund lines and pledging additional assets. Uninsured deposits totaled $1.2 billion or 33.1% of deposits at June 30, 2026.

In the three months ended June 30, 2026, ChoiceOne's annualized cost of deposits to average total deposits increased four basis points to 1.58% from 1.54% for the three months ended March 31, 2026. The annualized cost of funds increased four basis points to 1.77% for the three months ended June 30, 2026, from 1.73% in the prior quarter, primarily driven by higher rates on interest-bearing demand deposits and savings deposits offset by lower rates on certificates of deposit, borrowings, subordinated debentures, and brokered deposits. The average balance of certificates of deposit declined $14.2 million during the second quarter of 2026. Interest expense on borrowings increased $58,000 compared to the first quarter of 2026 as average borrowings increased $5.1 million. ChoiceOne’s deposit costs may have slight upward pressure as new and repriced deposits carry rates above the existing portfolio average.

ChoiceOne incurred a $550,000 provision for credit losses on loans during the second quarter of 2026, due to the increase in loan balances and $309,000 in net charge offs. The ratio of the allowance for credit losses to total loans (excluding loans held for sale) was 1.16% on June 30, 2026 compared to 1.19% and 1.18% on March 31, 2026 and December 31, 2025, respectively. Asset quality continues to remain strong, with annualized net loan charge-offs to average loans of 0.04% for the second quarter of 2026. Nonperforming loans to total loans (excluding loans held for sale) increased to 1.07% as of June 30, 2026 compared to 1.01% as of March 31, 2026. Notably, 0.49% of the nonperforming loans to total loans (excluding loans held for sale) is attributed to certain purchased loans which were identified prior to acquisition as having credit deterioration. In addition, 30.6% of the nonperforming loans carry partial government guarantees from the SBA or USDA.

The annualized return on average assets and annualized return on average shareholders’ equity were 1.13% and 10.46%, respectively, for the second quarter of 2026, compared to 1.26% and 12.66%, respectively, for the same period in 2025. The annualized return on average assets and annualized return on average shareholders’ equity were 1.19% and 11.04%, respectively, for the six months ended June 30 2026, compared to annualized loss on average assets and annualized loss on average shareholders’ equity of (0.02)% and (0.21)%, respectively, for the same period in 2025.

Dividends

Cash dividends of $4.3 million or $0.29 per share were declared in the second quarter of 2026, compared to $4.2 million or $0.28 per share in the second quarter of 2025. The cash dividend payout percentage was 34.8% for the second quarter of 2026, compared to 31.1% in the same period in the prior year. Cash dividends declared in the first six months of 2026 were $8.7 million or $0.58 per share, compared to $8.4 million or $0.56 per share in the same period during the prior year. The cash dividend payout percentage was 33.1% for the six months ended June 30, 2026. The Board of Directors’ determination of appropriate cash dividends will be based on, among other things, market conditions and ChoiceOne’s requirements for cash and capital.

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, 2026 and 2025. 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 mortgage warehouse advances and loans held for sale.

(4) Non-accruing loan balances are included in the balances of average loans. Non-accruing loan average balances were $29.4 million, $27.5 million, and $16.8 million in the second quarter of 2026, the first quarter of 2026 and the second quarter of 2025, respectively.

(5) Interest on loans included net origination fees and interest income due to accretion from purchased loans. Interest income due to accretion from purchased loans was $2.4 million, $2.7 million and $3.5 million in the second quarter of 2026, the first quarter of 2026 and the second quarter of 2025, 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 $28.6 million and $12.4 million in the six months ended June 30, 2026 and 2025, respectively.

(5) Interest on loans included net origination fees and accretion income. Accretion income was $5.1 million and $6.4 million in the six months ended June 30, 2026 and 2025, 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

Net interest income increased $375,000 to $36.7 million for the three months ended June 30, 2026, compared to $36.3 million for the same period in 2025. For the six months ended June 30, 2026, net interest income increased $10.7 million to $73.3 million compared to $62.6 million for the same period in 2025. The increase during both periods was driven primarily by growth in average earning assets, including loans and securities, and a lower cost funding base. These benefits were partially offset by lower yields on earning assets, principally due to the continuing decline in interest income due to accretion from purchased loans and the repricing of variable-rate loans in a lower interest rate environment.

Net interest margin was 3.59% for the second quarter of 2026, compared to 3.66% for the second quarter of 2025, while tax-equivalent net interest margin was 3.63% compared to 3.70% in the prior-year quarter. The seven-basis-point decline in both measures was largely attributable to interest income due to accretion from purchased loans, which contributed approximately 24 basis points to the second quarter of 2026 net interest margin, compared to 36 basis points in the second quarter of 2025. Excluding the impact of interest income due to accretion from purchased loans, underlying margin performance remained relatively stable as lower earning asset yields were substantially offset by continued improvement in funding costs.

For the first six months of 2026, net interest margin increased to 3.61% from 3.56% for the same period in 2025, while tax-equivalent net interest margin increased to 3.65% from 3.60% in the same period in 2025. The improvement was primarily driven by a reduction in funding costs and favorable changes in funding mix, including growth in interest-bearing demand deposits and savings deposits and a reduction in higher-cost certificates of deposit. Average earning assets increased $546.4 million, or 15.4% for the first six months of 2026, compared to the prior-year period, while the annualized cost of deposits declined six basis points to 1.55% and the annualized cost of funds declined ten basis points to 1.73%.

The following table presents the annualized cost of deposits and the annualized cost of funds for the three months ended June 30, 2026, March 31, 2026 and June 30, 2025 for the six months ended June 30, 2026 and 2025.

Average loans increased $62.0 million during the second quarter of 2026 and $508.5 million, during the first six months of 2026 compared to the corresponding periods in 2025. The average yield on loans declined 16 basis points during the second quarter of 2026 and 21 basis points during the first six months of 2026 compared to the corresponding periods in 2025, primarily due to lower interest income due to accretion from purchased loans and the repricing of variable-rate loans in a lower interest rate environment. Interest income due to accretion from purchased loans totaled $2.4 million during the second quarter of 2026, compared to $3.5 million in the prior-year quarter, reducing the benefit to net interest margin to 24 basis points from 36 basis points in the prior-year quarter. As of June 30, 2026, approximately $48.0 million of interest income due to accretion from purchased loans remained to be recognized over the life of the purchased loan portfolio.

Interest income on securities increased $415,000 and $1.2 million for the three and six months ended June 30, 2026, respectively, compared to the same periods in 2025. The increase was primarily attributable to higher average securities balances, which increased $64.9 million and $61.4 million for the three and six months ended June 30, 2026, respectively. Average securities balances increased as the Company redeployed excess liquidity into agency mortgage-backed securities and other investment securities. The average yield earned on securities decreased approximately 2 basis points to 2.84% for the three months ended June 30, 2026 compared to 2.86% for the same period in 2025. For the six months ended June 30, 2026, the average yield earned on securities increased approximately 7 basis points to 2.83% compared to 2.76% for the same period in 2025. Securities income and yields continued to be impacted by lower cash settlements from interest rate swaps that matured or were terminated during late 2025 and early 2026 and had previously provided additional income on portions of the securities portfolio.

Deposits and borrowings continued to provide stable funding for balance sheet growth while benefiting from the repricing of liabilities in a lower interest rate environment. Average interest-bearing deposits increased during both the three- and six-month periods ended June 30, 2026, led by growth in interest-bearing demand and savings deposits, while higher-cost certificates of deposit declined as a percentage of total funding. As a result, the annualized cost of deposits decreased to 1.58% for the second quarter of 2026 from 1.65% in the second quarter of 2025 and to 1.55% for the first six months of 2026 from 1.61% in the comparable prior-year period.

Interest expense on borrowings and subordinated debentures increased $270,000 for the three months ended June 30, 2026 compared to the same period in 2025. Average balance of borrowings and subordinated debentures increased $61.6 million, which was offset by a 72 point basis point decrease in rate for borrowings and an 18 basis point decrease in rate for subordinated debentures. Interest expense on borrowings and subordinated debentures increased $403,000 for the six months ended June 30, 2026 compared to the same period in 2025. Average balance of borrowings and subordinated debentures increased $51.3 million, which was offset by a 70 point basis point decrease in rate for borrowings and an 6 basis point increase in rate for subordinated debentures.

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. Our lookback period for benchmark peer net charge-off history excludes the years 2020 and 2021 due to the COVID-19 pandemic and spans from January 1, 2004, to December 31, 2019, and January 1, 2022, to December 31, 2025.

The provision for credit losses on loans was $550,000 for the first six months of 2026 compared to $13.8 million in the same period in 2025. 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 loans purchased without credit deterioration 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 loans purchased with credit deterioration (“PCD loans”) migrated into the reserve.

Nonperforming assets, which includes Other Real Estate Owned ("OREO") but excludes performing troubled loan modifications ("TLM"), increased by $3.2 million during the first six months of 2026 to $32.8 million at June 30, 2026, compared to the balance on December 31, 2025. The ACL was 1.16% of total loans, excluding loans held for sale, at June 30, 2026, compared to 1.18% as of December 31, 2025. The liability for expected credit losses on unfunded loans and other commitments was $1.3 million for both June 30, 2026 and December 31, 2025.

Charge-offs and recoveries for respective loan categories for the six months ended June 30, 2026 and 2025 were as follows:

(Dollars in thousands)

Net charge-offs were $362,000 during the first six months of 2026, compared to net charge-offs of $491,000 during the same period in 2025. Net charge-offs for checking accounts during the first six months of 2026 were $161,000 compared to $132,000 for the same period in the prior year. Annualized net loan charge-offs as a percentage of average loans were 0.04% for the second quarter of 2026 compared to 0.06% for the same period in the prior year. Nonperforming loans to total loans (excluding loans held for sale) were 1.07% as of June 30, 2026 compared to 0.66% for the same period last year. Notably, 0.49% 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. In addition, 30.6% of the nonperforming loans at June 30, 2026 carry partial government guarantees from the SBA or USDA.

Noninterest Income

Noninterest income for the three months ended June 30, 2026 decreased $1.6 million to $4.9 million compared to $6.5 million for the same period in 2025. The decline was primarily driven by a $1.9 million loss on the sale of securities during the second quarter of 2026, compared to no gains or losses on the sale of securities in the prior-year period. In late June 2026, ChoiceOne sold approximately $25 million of municipal securities with a tax-equivalent yield of 2.28% for a pre-tax loss of $1.9 million. The sale of securities was undertaken to provide funding for the purchase of adjustable-rate residential mortgages and improve ChoiceOne’s overall interest rate profile. Partially offsetting this decline were increases in customer service charges and interchange income and insurance and investment commissions. Compared to the first quarter of 2026, noninterest income declined $876,000, primarily due to the increase in net losses on sales of securities. Noninterest income for the six months ended June 30, 2026 decreased $671,000, to $10.8 million compared to $11.4 million for the same period in 2025.

Noninterest Expense

Noninterest expense for the three months ended June 30, 2026 increased $545,000, or 2.1%, to $26.1 million compared to $25.5 million for the same period in 2025. The increase was primarily attributable to higher salaries and benefits expense, partially offset by lower intangible amortization expense. Compared to the first quarter of 2026, noninterest expense increased $275,000, reflecting higher salaries and benefits expenses and data processing costs, partially offset by lower occupancy and equipment and intangible amortization expenses. Noninterest expense for the six months ended June 30, 2026 decreased $9.3 million, to $51.8 million compared to $61.2 million for the same period in 2025. The decrease was primarily attributable to the absence of $17.4 million of merger-related expenses incurred during the prior-year period. Excluding merger-related expenses, noninterest expense increased due to higher salaries and benefits, occupancy and equipment, data processing, professional fees, and other operating expenses associated with the Company's growth and integration activities. ChoiceOne expects to open a full service branch and lending office in Troy, Michigan later in 2026. ChoiceOne currently serves customers throughout Southeast Michigan and expects the Troy office to further support commercial lending and treasury management growth initiatives.

Income Tax Expense

Income tax expense was $2.6 million in the three months ended June 30, 2026 and $5.5 million in the six months ended June 30, 2026, compared to income tax expense of $3.1 million and $554,000 tax benefit for the same periods in 2025. The tax benefit for 2025 was generated by the loss in the first quarter of 2025 due to expenses related to the Merger. The effective tax rate was 17.1% and 17.5% for the three and six months ended June 30, 2026, respectively, compared to 18.8% and 59.8% for the same periods in 2025. ChoiceOne’s second quarter 2026 tax expense was reduced by a $1.9 million loss on sale of securities.

FINANCIAL CONDITION

At June 30, 2026, ChoiceOne had consolidated total assets of $4.5 billion, net loans of $3.0 billion, total deposits (excluding brokered deposits) of $3.5 billion and total shareholders' equity of $482.7 million. Asset growth was primarily due to growth in the loan portfolio and increases in the cash surrender value of bank-owned life insurance, partially offset by decreases in investment securities and other assets. The Company’s balance sheet is well-positioned to support continued lending activity, customer deposit relationships, and overall liquidity needs.

Securities

On June 30, 2026, total available‑for‑sale securities were $555.5 million, compared to $554.4 million at December 31, 2025. The modest increase was primarily driven by the purchase of $45.5 million of securities, $34.2 million of which were agency mortgage-backed securities, partially offset by the sale of $29.5 million of securities and normal portfolio runoff from principal repayments, calls, and maturities.

Total held to maturity securities on June 30, 2026 were $383.3 million compared to $385.2 million on December 31, 2025. ChoiceOne's held to maturity securities declined during the first six months of 2026 due to principal repayments, calls and maturities, which was offset by the purchase of $1.9 million of securities during the first six months of 2026.

At June 30, 2026, ChoiceOne had $87.7 million in gross unrealized losses on its investment securities, including $48.6 million in unrealized losses on available for sale securities, $39.0 million in unrealized losses on held to maturity securities, and $528,000 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 the bonds 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.

Equity securities included a money market preferred security of $1.0 million and common stock of $8.4 million as of June 30, 2026 and December 31, 2025.

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)

Core loans, which exclude held for sale loans and mortgage warehouse advances, increased by $87.1 million or an annualized 11.9% during the second quarter of 2026 and grew by $101.5 million or 3.5% during the twelve months ended June 30, 2026. Of this growth, approximately $40.0 million was due to a purchase of seasoned, high quality adjustable rate mortgages from another community bank made during the second quarter of 2026.

Mortgage warehouse advances decreased by $5.5 million as of June 30, 2026 compared to December 31, 2025. Mortgage warehouse advances consist of a warehouse line of credit used to facilitate mortgage loan originations, with interest rates and balances that fluctuate in line with the national mortgage market.

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 Bank Corporation in 2020, and Fentura in 2025, which resulted in the recognition of goodwill of $13.7 million, $38.9 million, $7.3 million and $69.9 million, respectively.

ChoiceOne conducted an annual assessment of goodwill as of June 30, 2026 and no impairment was identified.

Deposits and Borrowings

Deposits, excluding brokered deposits, decreased by $55.4 million as of June 30, 2026, compared to March 31, 2026. This decline is largely due to seasonality in municipal deposits as municipal operational balances fluctuate with the timing of tax receipts. Municipal deposits decreased by approximately $95.0 million during the second quarter, which is consistent with historical fluctuations. Deposits, excluding brokered deposits, increased by $13.5 million as of June 30, 2026, compared to December 31, 2025. This increase is primarily organic growth in interest bearing and savings accounts offset by a decline in higher interest certificate of deposit accounts. ChoiceOne continues to be proactive in managing its liquidity position by using brokered deposits and short-term FHLB advances to ensure ample liquidity. As of June 30, 2026, the total balance of borrowed funds from the FHLB was $295.0 million at a weighted average rate of 3.80%, with $275.0 million due within 12 months. At June 30, 2026, total available borrowing capacity secured by pledged assets was $1.1 billion. ChoiceOne can increase its borrowing capacity by utilizing unsecured federal fund lines and pledging additional assets.

In the three months ended June 30, 2026, ChoiceOne's annualized cost of deposits to average total deposits increased four basis points to 1.58% from 1.54% for the three months ended March 31, 2026. The annualized cost of funds increased four basis points to 1.77% for the three months ended June 30, 2026, from 1.73% in the prior quarter, primarily driven by higher rates on interest-bearing demand deposits and savings deposits offset by lower rates on certificates of deposit, borrowings, subordinated debentures, and brokered deposits.

ChoiceOne recognized a core deposit intangible of $31.0 million related to the Merger in the first quarter of 2025. 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 $1.2 million for the three months ended June 30, 2026 and $2.9 million for the six months ended June 30, 2026.

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 $16.2 million in subordinated debentures that were obtained in the acquisition of Community Shores Bank Corporation and the Merger with Fentura, offset by the merger mark-to-market adjustment.

Shareholders' Equity

At June 30, 2026, shareholders’ equity was $482.7 million, an increase from $431.8 million on June 30, 2025. ChoiceOne repurchased 35,000 shares of stock for a net cost of $1.1 million in the second quarter of 2026 and 75,116 shares collectively, during the first quarter of 2026 and the fourth quarter of 2025 for a net cost of $2.2 million under our existing share repurchase plan. The repurchase plan has 265,272 shares remaining to purchase as of June 30, 2026. The repurchase of shares reflects our view that our capital position is healthy and the repurchase of shares is in the best interest of our shareholders. ChoiceOne Bank continues to be “well-capitalized,” with a total risk-based capital ratio of 12.9% as of June 30, 2026, compared to 12.4% on June 30, 2025.

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, 2026 are adequate for the foreseeable future.

Liquidity

Net cash provided by operating activities was $29.8 million for the six months ended June 30, 2026 compared to $2.5 million in the same period in 2025. The year-over-year change was primarily due to increased earnings and the lack of merger-related costs. Net cash used in investing activities was $50.0 million for the six months ended June 30, 2026 compared to net cash provided by investing activities of $267.0 million in the same period in 2025. The decrease is due to the cash acquired in the Merger, loan growth and the sale of $49.3 million of securities acquired in the Merger with Fentura in the first six months of 2025. ChoiceOne also received $173.1 million of cash from The State Bank as part of the Merger. During the first six months of 2026, net loan originations and payments used $46.0 million of cash, compared to providing $11.6 million of cash during the same period in 2025. Net cash provided by financing activities was $20.9 million for the six months ended June 30, 2026, compared to $210.0 million used in the same period in the prior year. ChoiceOne increased borrowing by $30.0 million in the first six months of 2026 compared to a decrease of $146.5 million in the same period during the prior year. ChoiceOne had a $1.8 million increase in deposits in the first six months of 2026 compared to a decrease of $53.4 million in the same period in 2025. The deposit increase is a combination of organic deposit growth offset by seasonality in municipal 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 $295.0 million in outstanding borrowings from the FHLB at a weighted average fixed rate of 3.80% with $275.0 million due within 12 months as of June 30, 2026. ChoiceOne had $93.2 million in brokered deposits on June 30, 2026. The acceptance of brokered deposits is not limited as long as the Bank is categorized as “well capitalized” under regulatory guidelines. At June 30, 2026, total available borrowing capacity from the FHLB and the Federal Reserve Bank was $1.1 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, 2026. 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, 2026 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, 2025.