COFS — Q2 2026 Financial Report Analysis

Q2 2026: a deliberate one-off loss hides a slightly better underlying quarter

ChoiceOne Financial Services, the Sparta, Michigan parent of ChoiceOne Bank (54 offices across West, Central and Southeast Michigan, about $4.5 billion in assets), earned $12.5 million, or $0.83 per diluted share, in the second quarter of 2026, down from $13.5 million and $0.90 a year earlier. Most of that drop is self-inflicted and planned: in late June the bank sold about $25 million of low-yielding municipal bonds (2.28% tax-equivalent yield) at a $1.9 million pre-tax loss, which the company says cut EPS by about $0.10, and used the money to buy roughly $40 million of adjustable-rate home loans from another community bank. Without that sale, EPS would have been about $0.93, a little above last year.

This is ChoiceOne's sixth quarter since it absorbed Fentura Financial (parent of The State Bank) on March 1, 2025, a deal that added about $1.7 billion of assets, $1.4 billion of loans and 20 branches. Both the current and year-ago quarters include Fentura in full, so the comparison with a year ago below is like for like. The six-month comparison is not (see below).

At a glance

• $0.83 EPS vs $0.90 a year ago, but about $0.93 excluding the $1.9 million bond-sale loss the company took on purpose to fund higher-yielding loans.
• Core loans up $87.1 million in the quarter (11.9% annualized), about $40 million of it a purchased mortgage pool; the rest was the bank's own lending, led by commercial and industrial loans (+$41.8 million).
• Nonperforming loans rose to 1.07% of loans from 0.66% a year ago while net charge-offs stayed tiny (0.04% annualized), so problem loans are piling up on the books faster than they are turning into actual losses.

Key figures

Source: ChoiceOne Form 10-Q for the quarter ended June 30, 2026, and the Q2 2026 earnings release (Exhibit 99.1 to the July 24, 2026 Form 8-K). Revenue is our sum of net interest income and noninterest income; all ratios are the company's own.

How the bank makes money, and what moved

A bank like ChoiceOne earns most of its income from the gap between the interest it collects on loans and bonds and the interest it pays depositors and lenders. That gap in dollars is net interest income ($36.7 million, 88% of revenue this quarter). Expressed as a percentage of the bank's interest-earning assets, it is the net interest margin (NIM): how many cents a year the bank keeps per dollar it has lent or invested.

The headline margin slipped, but the underlying margin improved. GAAP NIM fell to 3.59% from 3.66% a year ago and 3.63% in Q1. The reason is an accounting tail from the Fentura deal: when a bank buys loans below face value, it books the discount as extra interest income over the loans' remaining life ("accretion"). That accretion was $2.4 million this quarter versus $3.5 million a year ago, adding 24 basis points to NIM now versus 36 then (a basis point is one-hundredth of a percentage point). Strip it out and the margin from ordinary banking was roughly 3.35%, up from about 3.30% a year ago. That improvement came from the funding side: the average rate paid on certificates of deposit fell to 3.38% from 3.94%, and on borrowings to 3.89% from 4.61%, while the yield on loans eased to 6.20% from 6.36%.

Funding costs ticked up again in the quarter itself. Cost of deposits rose to 1.58% from 1.54% in Q1, as rates paid on interest-bearing checking (1.93% vs 1.81%) and savings accounts (0.98% vs 0.91%) climbed. Management warns deposit costs "may have slight upward pressure as new and repriced deposits carry rates above the existing portfolio average."

Loan growth had a commercial tilt. Commercial and industrial loans rose to $411.2 million from $369.4 million in Q1 and $351.4 million a year ago (+17% YoY). Residential mortgages rose to $776.8 million from $725.4 million, mostly the purchased pool. Commercial real estate loans actually shrank to $1,730.2 million from $1,745.4 million. The bank also carries $53.5 million of mortgage warehouse advances (short-term loans to mortgage lenders), a line that was just $3.0 million a year ago.

Fee income, excluding the bond loss, grew. Noninterest income of $4.9 million includes the $1.9 million loss; without it, fees were about $6.9 million, up from $6.5 million, helped by customer service charges ($1.7 million vs $1.4 million), insurance and investment commissions ($0.7 million vs $0.5 million) and trust income.

Costs grew modestly. Noninterest expense rose 2.1% to $26.1 million, driven by salaries and benefits (+5.3% to $14.5 million), partly offset by lower amortization of acquired intangibles ($1.6 million vs $1.7 million). Full-time-equivalent staff rose to 577 from 571.

What the headline numbers hide

• The six-month figures flatter 2026. First-half net income was $26.2 million versus a $0.4 million loss in the first half of 2025, and net interest income was up 17%. That is almost entirely the merger: Fentura was only included from March 1, 2025, and the first half of 2025 carried $17.4 million of merger expenses plus a $12.0 million credit-loss provision booked on the acquired loans at closing. The quarterly comparison is the honest one.
• The bond loss is a trade, not a mistake. Selling bonds yielding 2.28% to fund loans yielding several points more costs $1.9 million now and should earn it back over time. It also shows the bank still holds underwater bonds: unrealized losses in shareholders' equity (accumulated other comprehensive loss) were $34.1 million at June 30, smaller than $49.1 million a year ago.
• Accretion is a fading prop. Purchased-loan accretion made up about 4.5% of this quarter's interest income. The company expects only $3.8 million more in the second half of 2026 under its standard method (versus $5.1 million in the first half), with about $48.0 million left over the life of the acquired loans. Unexpected payoffs make the timing lumpy: $433,000 of this quarter's $2.4 million came from early loan payoffs.
• Problem loans are rising, but losses are not. Nonaccrual loans (borrowers far enough behind that the bank stopped counting their interest as income) rose to $30.9 million from $16.9 million a year ago. Of the 1.07% nonperforming ratio, 0.49 points is loans already flagged as troubled when ChoiceOne bought them (and marked down at the time), and 30.6% of nonperforming loans carry partial SBA or USDA guarantees. Even so, the allowance for credit losses fell to 1.16% of loans from 1.19%, and covers nonperforming loans about 1.1 times. Management also changed the peer group it uses to estimate expected losses during 2026. A thinner reserve against a rising nonperformer count is worth watching.
• The efficiency ratio is a cleaned-up number. The efficiency ratio measures how many cents of operating cost the bank spends to earn each dollar of revenue (lower is better). ChoiceOne's stated 55.9% excludes intangible amortization and the securities loss and uses tax-equivalent income; dividing total GAAP noninterest expense by total revenue gives about 62.6%, up from about 59.6%. The company-stated trend (55.3% to 55.9%) is the fairer like-for-like read, but readers comparing banks should know what's taken out.
• ROTCE is calculated unusually. In its reconciliation, ChoiceOne subtracts after-tax intangible amortization from net income to get the earnings figure behind its 14.1% return on tangible common equity; most banks add it back. On the more common convention, the quarter's ROTCE would be roughly 17%. Either way the trend is down from a year ago, because tangible equity has grown faster than profit.
• Lower tax helped. The effective tax rate was about 17.1% versus 18.8% a year ago; year-to-date tax was cut by $400,000 through a purchased transferable tax credit, and management plans to buy more in 2026. Buybacks barely mattered: shares outstanding fell only 0.4% to 14.95 million.
• Cash conversion is fine. Operating cash flow for the first half was $29.8 million against $26.2 million of net income.
• Funding leans more on short-term borrowing. Deposits excluding brokered fell $55.4 million in the quarter, which the company attributes to a seasonal $95 million drop in municipal balances. Federal Home Loan Bank borrowings rose to $295.0 million (from $184.8 million at March 31), $275.0 million of it due within 12 months at a 3.80% average rate. The loan-to-deposit ratio rose to 85.4% from 81.5%. Uninsured deposits were 33.1% of the total, against $1.1 billion of available borrowing capacity.
• Capital is clearly stronger. The holding company's common equity Tier 1 ratio (core capital as a share of risk-weighted assets) rose to 10.7% from 9.8%, tangible book value per share to $21.73 from $18.10, and non-owner-occupied commercial real estate loans fell to 249.9% of total capital from 288.2%, well under the 300% level regulators use as a concentration flag.

Takeaway: Read past the $0.83: the margin from ordinary lending improved by about 5 basis points once merger accretion is removed, loans grew at a double-digit annualized pace, and capital built steadily. The open question is credit, where nonperforming loans have climbed from 0.66% to 1.07% of loans in a year while the reserve ratio drifted down.

What to watch next

Management gave no numeric earnings guidance. It points to "disciplined growth, operational efficiency, and prudent capital management," a new full-service branch and lending office in Troy, Michigan later in 2026 aimed at commercial lending and treasury management, and further tax-credit purchases to lower the tax bill.

Our read on the trajectory:

• Margin: modest tailwind from the mix shift, headwind from accretion. Replacing 2.28% bonds with adjustable-rate mortgages and adding commercial loans should lift asset yields, but accretion is guided lower ($3.8 million for the second half) and deposit costs are drifting up. A GAAP NIM held near 3.6% while accretion falls would confirm the core margin is still improving.
• Credit is the swing factor. If nonaccrual loans keep rising and the bank has to rebuild its reserve toward the 1.19% level of a year ago, provisions would rise from this quarter's $550,000.
• Funding. The $275 million of FHLB borrowings due within a year will reprice; whether municipal deposits flow back in the second half (the usual seasonal pattern the company describes) determines how much of that borrowing it needs to keep.

ChoiceOne released Q3 2025 results on October 24, 2025, so Q3 2026 results are likely in late October 2026 (our estimate from last year's timing, not a company-announced date).