Quarterly Report for Quarter Ending September 30, 2026 (Form 10-Q)

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

The following discussion is designed to provide a review of the consolidated financial condition and results of operations of ChoiceOne Financial Services, Inc. ("ChoiceOne" or the "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 $14.5 million, or $0.97 per diluted share, for the third quarter of 2026, and net income of $40.7 million, or $2.71 per diluted share, for the first nine months of 2026, compared with net income of $14.7 million, or $0.97 per diluted share, for the third quarter of 2025, and net income of $14.3 million, or $1.05 per diluted share, for the first nine months of 2025. For the nine months ended September 30, 2025, results were impacted by the Merger, which was completed during the first quarter of 2025. As of September 30, 2026, total assets were $4.5 billion, an increase of $162.2 million compared to September 30, 2025. The growth in total assets is primarily attributed to growth in core loans and warehouse mortgage advances.

Core loans, which exclude held for sale loans and mortgage warehouse advances, increased by $33.6 million or an annualized 4.4% during the third quarter of 2026 and grew by $145.4 million or 5.0% during the twelve months ended September 30, 2026. Loan interest income increased $1.7 million in the third quarter of 2026 compared to the second quarter of 2026 and $894,000 compared to the third quarter of 2025. Interest income due to accretion from purchased loans was approximately $2.7 million during the third quarter of 2026 compared to $3.6 million for the three months ended September 30, 2025. Interest income due to accretion from purchased loans increased GAAP net interest margin by 25 and 36 basis points in the third quarter of 2026 and the third quarter of 2025, respectively. Of the amount recognized in the third quarter of 2026, $1.9 million was calculated using the effective interest rate method of amortization, while the remaining $806,000 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 and 2027 using the effective interest method of amortization is $1.8 million and $6.0 million, respectively; however, actual results will be dependent on prepayment speeds and other factors. It is estimated that a total of $45.3 million remains to be recognized as interest income due to accretion from purchased loans over the life of the purchased loans portfolio, with $22.0 million expected to be recognized using the effective interest method over the next five years.

Deposits, excluding brokered deposits, totaled $3.6 billion at September 30, 2026, an increase of $95.7 million from June 30, 2026, and an increase of $109.9 million from September 30, 2025. The growth during the quarter is primarily due to seasonal fluctuations related to municipal deposits and the timing of tax receipts, while growth year over year reflects steady growth in sustainable deposits. The increase from June 30, 2026 was primarily attributable to growth of $100.3 million in interest-bearing demand deposits and $8.6 million in savings deposits, partially offset by a $7.0 million decrease in noninterest-bearing deposits and a $6.2 million decrease in certificates of deposit. Growth in relationship-based deposits strengthened the balance sheet, improved liquidity, and reduced the Company's reliance on brokered deposits and other borrowed funds. Brokered deposits decreased $25.8 million during the third quarter of 2026 to $67.5 million, while borrowed funds decreased $60.0 million to $234.9 million. At September 30, 2026, 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 $1.3 billion or 35.0% of deposits at September 30, 2026.

For the three months ended September 30, 2026, the annualized cost of deposits decreased four basis points to 1.54% from 1.58% for the second quarter of 2026, while the annualized cost of funds decreased four basis points to 1.73% from 1.77%. The cost of interest-bearing liabilities also decreased four basis points to 2.28% for the three months ended September 30, 2026 compared to June 30, 2026. These improvements were primarily due to deposit mix, as the average balance of lower cost liquid deposit balances were higher in the third quarter 2026 due to seasonality. Average brokered deposits decreased $68.1 million and average borrowings decreased $11.5 million in the third quarter of 2026 compared to the second quarter of 2026.

ChoiceOne has improved its funding profile through growth in relationship-based deposits and reduced reliance on wholesale funding sources in the third quarter of 2026 compared to the third quarter of 2025. During the nine months ended September 30, 2026, ChoiceOne's annualized cost of deposits declined to 1.54% from 1.57%, while annualized cost of funds decreased to 1.73% from 1.77%. Average brokered deposits declined $24.1 million and average certificates of deposit declined $32.8 million in the three months ended September 30, 2026 compared to the three months ended September 30, 2025, while average interest-bearing demand and savings deposits increased $113.2 million. This favorable deposit mix contributed to lower funding costs and enhanced ChoiceOne's net interest income performance.

ChoiceOne incurred a $900,000 provision for credit losses on loans during the third quarter of 2026, due to the increase in loan balances and $648,000 in net charge offs. The ratio of the allowance for credit losses to total loans (excluding loans held for sale) was 1.16% on September 30, 2026 compared to 1.16% and 1.18% on June 30, 2026 and December 31, 2025, respectively. Asset quality continues to remain strong, with annualized net loan charge-offs to average loans of 0.08% for the third quarter of 2026. Nonperforming loans to total loans (excluding loans held for sale) increased to 1.25% as of September 30, 2026 compared to 1.07% as of June 30, 2026. Notably, 0.40% 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. Although nonperforming assets increased to $38.6 million at quarter end, the portfolio continues to benefit from meaningful credit protection. Approximately 35.5% of the loans are supported by SBA or USDA guarantees, and approximately 34.3% of nonperforming assets consist of residential real estate loans, where strong collateral values and ChoiceOne's historical loss experience have limited realized losses.

The annualized return on average assets and annualized return on average shareholders' equity were 1.30% and 12.14%, respectively, for the third quarter of 2026, compared to 1.36% and 13.39%, respectively, for the same period in 2025. The annualized return on average assets and annualized return on average shareholders' equity were 1.23% and 11.42%, respectively, for the nine months ended September 30 2026, compared to 0.48% and 5.00%, respectively, for the same period in 2025.

Dividends

Cash dividends of $4.3 million or $0.29 per share were declared in the third quarter of 2026, compared to $4.2 million or $0.28 per share in the third quarter of 2025. The cash dividend payout percentage was 29.7% for the third quarter of 2026, compared to 28.6% in the same period in the prior year. Cash dividends declared in the first nine months of 2026 were $13.0 million or $0.87 per share, compared to $12.6 million or $0.84 per share in the same period during the prior year. The cash dividend payout percentage was 31.9% for the nine months ended September 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 nine months ended September 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

Table 2 - Changes in Tax-Equivalent Net Interest Income

Net Interest Income

Tax equivalent net interest income increased $806,000 to $38.8 million for the three months ended September 30, 2026, compared to $38.0 million for the same period in 2025. For the nine months ended September 30, 2026, net interest income increased $11.5 million to $112.9 million compared to $101.4 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.

GAAP net interest margin was 3.67% for the third quarter of 2026, compared to 3.73% for the third quarter of 2025. The six-basis-point decline was largely attributable to interest income due to accretion from purchased loans, which contributed approximately 25 basis points to the third quarter of 2026 net interest margin, compared to 36 basis points in the third quarter of 2025. Excluding the impact of interest income due to accretion from purchased loans, underlying margin performance improved by five basis points, as improvement in funding costs were offset by lower earning asset yields.

For the first nine months of 2026, GAAP net interest margin increased one basis point to 3.63% compared to 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. Average earning assets increased $412.8 million, or 11.1% for the first nine months of 2026, compared to the prior-year period, while the annualized cost of deposits declined five basis points to 1.55% and the annualized cost of funds declined seven basis points to 1.74%.

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

Average loans increased $56.3 million during the third quarter of 2026 compared to the three months ended June 30, 2026 and $126.6 million during the three months ended September 30, 2026 compared to the three months ended September 30, 2025. The average yield on loans increased 4 basis points during the third quarter of 2026 compared to the three months ended June 30, 2026, and decreased 15 basis points during the three months ended September 30, 2026 compared to the three months ended September 30, 2025. The decline in yield for the three months ended September 30, 2026 compared to the same period in 2025 was 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 $2.7 million during the third quarter of 2026, compared to $3.6 million in the three months ended September 30, 2025, reducing the benefit to net interest margin to 25 basis points from 36 basis points in the three months ended September 30, 2026 and 2025, respectively. As of September 30, 2026, approximately $45.3 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 $243,000 and $1.5 million for the three and nine months ended September 30, 2026, respectively, compared to the same periods in 2025. The increase was primarily attributable to higher average securities balances, which increased $30.4 million and $50.1 million for the three and nine months ended September 30, 2026, compared to the three and nine months ended September 30, 2025. 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 increased approximately 1 basis point to 2.86% for the three months ended September 30, 2026 compared to 2.85% for the same period in 2025. For the nine months ended September 30, 2026, the average yield earned on securities increased approximately 6 basis points to 2.84% compared to 2.78% 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 nine month periods ended September 30, 2026, compared to the three and nine months ended September 30, 2025, led by growth in interest-bearing demand and savings deposits. As a result, the annualized cost of deposits decreased to 1.54% for the third quarter of 2026 from 1.57% in the third quarter of 2025 and to 1.55% for the first nine months of 2026 from 1.60% in the comparable prior-year period.

Interest expense on borrowings and subordinated debentures increased $204,000 and $607,000 for the three and nine months ended September 30, 2026 compared to the same period in 2025, respectively. Average balance of borrowings and subordinated debentures increased $40.7 million for the three months ended September 30, 2026, compared to the same period in the prior year, which was offset by a 52 basis point decrease in rate for borrowings and a 29 basis point increase in rate for subordinated debentures during that same time period. Average balance of borrowings and subordinated debentures increased $47.7 million for the nine months ended September 30, 2026, compared to the same period in the prior year, which was offset by a 65 basis point decrease in rate for borrowings and a 13 basis point increase in rate for subordinated debentures during that same time period.

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.

ChoiceOne incurred a $900,000 provision for credit losses on loans during the third quarter of 2026, due to the increase in loan balances and $648,000 in net charge offs. The provision for credit losses on loans was $1.5 million for the first nine months of 2026 compared to $14.0 million in the same period in 2025. The provision for credit losses in the first nine 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.

The ratio of the allowance for credit losses to total loans (excluding loans held for sale) was 1.16% on September 30, 2026 compared to 1.16% and 1.18% on June 30, 2026 and December 31, 2025, respectively. Asset quality continues to remain strong, with annualized net loan charge-offs to average loans of 0.08% for the third quarter of 2026. Nonperforming loans to total loans (excluding loans held for sale) increased to 1.25% as of September 30, 2026 compared to 1.07% as of June 30, 2026. Notably, 0.40% 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. Although nonperforming loans increased to $38.6 million at September 30, 2026, the portfolio continues to benefit from meaningful credit protection. Approximately 35.5% of the loans are supported by SBA or USDA guarantees, and approximately 34.3% of nonperforming assets consist of residential real estate loans, where strong collateral values and the Bank's historical loss experience have limited realized losses. The liability for expected credit losses on unfunded loans and other commitments was $1.3 million for both September 30, 2026 and December 31, 2025.

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

Net charge-offs were $1.0 million during the first nine months of 2026, compared to net charge-offs of $734,000 during the same period in 2025. Net charge-offs for checking accounts during the first nine months of 2026 were $295,000 compared to $206,000 for the same period in the prior year. Annualized net loan charge-offs as a percentage of average loans were 0.08% for the third quarter of 2026 compared to 0.03% for the same period in the prior year.

Noninterest Income

Noninterest income for the three months ended September 30, 2026 was $6.8 million, a decrease of $389,000, from $7.1 million for the third quarter of 2025. The year-over-year decrease was primarily attributable to a $309,000 loss on other assets during the third quarter of 2026 compared to a $39,000 loss in the third quarter of 2025, and an unrealized loss on the market value of equity securities of $156,000 during the third quarter of 2026 compared to a gain of $458,000 in the third quarter of 2025, due to a CRA bond mutual fund whose fair value is impacted by higher long term interest rates. These two items decreased 2026 third quarter earnings by approximately $0.03 per fully diluted share. Compared with the second quarter of 2026, noninterest income increased $1.8 million, primarily due to the absence of the $1.9 million loss on the sale of securities recognized in the second quarter of 2026. For the nine months ended September 30, 2026, noninterest income decreased $1.1 million to $17.5 million compared to the same period in 2025, primarily due to

losses on sales of securities and unfavorable changes in the market value of equity securities, partially offset by growth in customer service charges, interchange income, and insurance and investment commissions.

Noninterest Expense

Noninterest expense for the three months ended September 30, 2026 increased $330,000 to $26.5 million, compared to the third quarter of 2025. The increase primarily reflected higher salaries and benefits and data processing expenses, partially offset by lower intangible amortization, occupancy and equipment expense, and lower other operating expenses. Compared with the second quarter of 2026, noninterest expense increased $494,000. For the nine months ended September 30, 2026, noninterest expense decreased $9.0 million compared to the same period in 2025, primarily due to the absence of $17.4 million of merger-related expenses. Excluding those merger-related expenses, the year-over-year increase primarily reflected higher salaries and benefits and other operating costs associated with the Company's expanded operations.

Income Tax Expense

Income tax expense was $3.2 million in the three months ended September 30, 2026 and $8.7 million in the nine months ended September 30, 2026, compared to income tax expense of $3.6 million and $3.1 million for the same periods in 2025. The tax expense for the nine months ended September 30, 2025 was reduced by the loss in the first quarter of 2025 due to expenses related to the Merger. The effective tax rate was 18.0% and 17.7% for the three and nine months ended September 30, 2026, respectively, compared to 19.9% and 17.8% for the same periods in 2025. ChoiceOne's tax expense for the first nine months of 2026 was reduced by $600,000 as a result of purchasing a transferable tax credit that will be applied to 2026 income taxes. Depending on market conditions, management intends to purchase additional transferable tax credits in the remainder of 2026 to reduce tax expense.

FINANCIAL CONDITION

At September 30, 2026, ChoiceOne had consolidated total assets of $4.5 billion, net loans of $3.1 billion, total deposits (excluding brokered deposits) of $3.6 billion and total shareholders' equity of $469.8 million. Asset growth during the first nine months of 2026 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. The Company's balance sheet is well-positioned to support continued lending activity, customer deposit relationships, and overall liquidity needs.

Securities

On September 30, 2026, total available-for-sale securities ("AFS securities") were $527.3 million, compared to $554.4 million at December 31, 2025. The decrease was primarily driven by the decline in the fair value of securities due to the increase in long term rates during the first nine months of 2026. During the nine months ended September 30, 2026, ChoiceOne purchased $55.3 million of AFS securities, partially offset by sales of $29.5 million, and maturities, paydowns and calls of $23.9 million.

Total held to maturity securities on September 30, 2026 were $376.6 million compared to $385.2 million on December 31, 2025. ChoiceOne's held to maturity securities declined during the first nine months of 2026 due to principal repayments, calls and maturities, which was offset by the purchase of $2.6 million of securities during the first nine months of 2026.

At September 30, 2026, ChoiceOne had $129.4 million in gross unrealized losses on its investment securities, including $76.4 million in unrealized losses on available for sale securities, $52.3 million in unrealized losses on held to maturity securities, and $730,000 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 September 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:

Core loans, which exclude held for sale loans and mortgage warehouse advances, increased by $89.8 million or an annualized 4.0% during the nine months ended September 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. ChoiceOne also generated growth in key commercial loan categories during the nine months ended September 30, 2026, with commercial and industrial loans

increasing $50.1 million and owner-occupied commercial real estate loans increasing $43.3 million. These increases were partially offset by declines of $46.2 million in multifamily loans and $18.6 million in non-owner-occupied commercial real estate loans.

Mortgage warehouse advances decreased by $16.8 million as of September 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, increased by $109.2 million as of September 30, 2026, compared to December 31, 2025. The growth during the nine months ended September 30, 2026 is a mix of seasonal fluctuations related to municipal deposits and the timing of tax receipts and growth in sustainable deposits. Deposits, excluding brokered deposits, grew $95.7 million during the third quarter of 2026 compared to June 30, 2026, which was primarily attributable to growth of $100.3 million in interest-bearing demand deposits and $8.6 million in savings deposits, partially offset by a $7.0 million decrease in noninterest-bearing deposits and a $6.2 million decrease in certificates of deposit. ChoiceOne continues to be proactive in managing its liquidity position by using brokered deposits and short-term FHLB advances to ensure ample liquidity. Brokered deposits declined $37.4 million during the nine months ended September 30, 2026 and the total balance of borrowed funds declined $29.9 million during that same time period.

Total funds borrowed from the FHLB were $235.0 million at a weighted average rate of 4.01%, with $215.0 million due within 12 months at September 30, 2026. At September 30, 2026, 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 $1.3 billion or 35.0% of deposits at September 30, 2026.

For the three months ended September 30, 2026, the annualized cost of deposits decreased four basis points to 1.54% from 1.58% for the second quarter of 2026, while the annualized cost of funds decreased four basis points to 1.73% from 1.77%. The cost of interest-bearing liabilities also decreased four basis points to 2.28% for the three months ended September 30, 2026 compared to June 30, 2026. These improvements were primarily due to deposit mix, as the average balance of lower cost liquid deposit balances were higher in the third quarter due to seasonality. Average brokered deposits decreased $68.1 million and average borrowings decreased $11.5 million in the third quarter of 2026 compared to the second quarter of 2026.

ChoiceOne has improved its funding profile through growth in relationship-based deposits in the third quarter of 2026 compared to the third quarter of 2025. During the three months ended September 30, 2026, ChoiceOne's annualized cost of deposits declined to 1.54% from 1.57%, while annualized cost of funds decreased to 1.73% from 1.77%. Average brokered deposits declined $24.1 million and average certificates of deposit declined $32.8 million in the three months ended September 30, 2026 compared to the three months ended September 30, 2025, while average interest-bearing demand and savings deposits increased $113.2 million. This favorable deposit mix contributed to lower funding costs and enhanced ChoiceOne's net interest income performance.

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 $1.6 million for the three months ended September 30, 2026 and $4.8 million for the nine months ended September 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, offset by the merger mark-to-market adjustment.

Shareholders' Equity

At September 30, 2026, shareholders' equity totaled $469.8 million, compared with $482.7 million at June 30, 2026 and $449.6 million at September 30, 2025. The decline in the third quarter of 2026 compared to the second quarter of 2026 was primarily attributable to a $22.3 million decline in accumulated other comprehensive income resulting from the effect of higher long-term interest rates on the fair value of the Company's available-for-sale securities portfolio, partially offset by third-quarter earnings. ChoiceOne repurchased 40,000 and 125,000 shares of stock for a net cost of $1.3 million and $3.9 million for the three and nine months ended September 30, 2026, respectively, under its existing share repurchase plan. The repurchase reflects management's continued confidence in the Company's capital position and its commitment to enhancing long-term shareholder value. ChoiceOne Bank continues to be "well-capitalized," with a total risk-based capital ratio of 12.9% as of September 30, 2026, compared to 12.8% on September 30, 2025.

Regulatory Capital Requirements

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

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 September 30, 2026 are adequate for the foreseeable future.

Liquidity

Net cash provided by operating activities was $45.5 million for the nine months ended September 30, 2026, compared to $17.8 million for the same period in 2025. The increase was primarily attributable to higher net income and the absence of merger-related costs incurred during same period in the prior year and an increase in other liabilities for the nine months ended September 30, 2026 compared to the same periods in the prior year.

Net cash used in investing activities was $63.9 million for the nine months ended September 30, 2026, compared to net cash provided by investing activities of $224.9 million for the same period in 2025. Investing cash flows in the nine months ended September 30, 2025 were significantly impacted by the Merger, including $173.1 million of cash acquired from The State Bank and the increase in cash from the sale of securities available for sale acquired in the Merger. In addition, net loan originations and payments, including purchases of loan pools, used $63.4 million of cash during the first nine months of 2026, compared to providing $25.5 million of cash during the same period in 2025.

Net cash provided by financing activities was $25.4 million for the nine months ended September 30, 2026, compared to net cash used in financing activities of $240.5 million for the same period in 2025. Deposits increased $71.7 million during the first nine months of 2026, compared to a decrease of $79.0 million during the same period in 2025. The increase in deposits during 2026 reflected organic deposit growth and seasonal fluctuations in municipal deposits. Borrowings decreased $30.0 million during the first nine months of 2026, compared to a decrease of $147.2 million during the same period in 2025.

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 $235.0 million in outstanding borrowings from the FHLB at a weighted average fixed rate of 4.01% with $215.0 million due within 12 months as of September 30, 2026. ChoiceOne had $67.5 million in brokered deposits on September 30, 2026. The acceptance of brokered deposits is not limited as long as the Bank is categorized as "well capitalized" under regulatory guidelines. At September 30, 2026, total available borrowing capacity from the FHLB and the Federal Reserve Bank was $1.2 billion.