CHOICEONE FINANCIAL SERVICES INC (COFS)

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

The following discussion is designed to provide a review of the consolidated financial condition and results of operations of ChoiceOne Financial Services, Inc. (“ChoiceOne” or the "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

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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

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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.

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Interest Income and Expense

Tables 1 and 2 on the following pages provide information regarding interest income and expense for the three

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Item 7. 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 consolidated financial statements and related footnotes.

We have omitted discussion of 2024 results where it would be redundant to the discussion previously included in Part II, Item 7 of our 2024 Annual Report on Form 10-K.

Selected Financial Data

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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

Summary

ChoiceOne reported net income of $28,176,000 for the year ended December 31, 2025, compared to net income of $26,727,000 for the same period in the prior year . Net income excluding merger expenses, net of taxes, and merger related provision for credit losses, net of taxes, was $51,524,000 for the year ended December 31, 2025. Diluted earnings per share were $2.01 for the year ended December 31, 2025, compared to diluted earnings per share of $3.25 for the same period 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 $3.68 for the year ended December 31, 2025.

ChoiceOne's asset mix has shifted from loans held for investment of 69.8% of deposits at December 31, 2024 to 83.9% of deposits at December 31, 2025. As of December 31, 2025, total assets were $4.4 billion, an increase of $1.7 billion compared to December 31, 2024. The growth in total assets is primarily attributed to the Merger. In addition to growth related to the Merger, ChoiceOne also grew in core loans, securities and mortgage warehouse advances, which consist of a line of credit to fund participated mortgage loans. Interest rates and balances from this warehouse line of credit fluctuate with the national mortgage market and are short term in nature.

Core loans, which exclude held for sale loans and mortgage warehouse advances, grew organically by $86.1 million or 5.7% during the twelve months ended December 31, 2025. Core loans also grew by $1.4 billion due to the Merger on March 1, 2025. As a result of loan growth and interest income due to accretion from purchased loans, loan interest income increased $83.3 million in the full year 2025 compared to the same period in 2024. Interest income for the year ended December 31, 2025, includes $13.1 million of interest income due to accretion from purchased loans compared to $1.2 million for the same period in 2024. Interest income due to accretion from purchased loans increased GAAP net interest margin by 34 basis points in the full year 2025. Estimated interest income due to accretion from purchased loans for 2026 using the effective interest method of amortization is $8.0 million; however, actual results will be dependent on prepayment speeds and other factors. It is estimated that a total of $53.1 million remains to be recognized as interest income due to accretion from purchased loans over the life of the loan portfolio.

Deposits, excluding brokered deposits, increased by $1.3 billion as of December 31, 2025, compared to December 31, 2024 largely as a result of the Merger. 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 December 31, 2025, the total balance of borrowed funds from the FHLB was $265.0 million at a weighted average rate of 3.83%, with $245.0 million due within 12 months. At December 31, 2025, 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 33.2% of deposits at December 31, 2025.

The provision for credit losses on loans was $15.1 million during 2025, due primarily to $12.0 million of expense for the acquisition of $1.3 billion of purchased loans without credit deterioration (“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 ratio of the allowance for credit losses to total loans (excluding loans held for sale) was 1.18% on December 31, 2025 compared 1.07% on December 31, 2024. Asset quality continues to remain strong, with annualized net loan charge-offs to average loans of 0.04%. Nonperforming loans to total loans (excluding loans held for sale) increased to 0.98% as of December 31, 2025 compared to 0.24% as of December 31, 2024. Notably, 0.63% of the nonperforming loans to total loans (excluding loans held for sale) is attributed to certain purchased loans which were identified prior to the Merger as having credit deterioration. Importantly, we believe this uptick is not indicative of a broader trend, and current portfolio performance does not suggest emerging weakness in underlying credit quality.

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Noninterest Income

Noninterest income increased by $6.7 million for the year ended December 31, 2025, compared to the same period in the prior year. This increase was partly driven by higher interchange income, which rose due to increased volume from the Merger. Trust income as well as insurance and investment commissions income also increased as a result of higher estate settlement fees and customers obtained from the Merger. These increases were offset by a decline in gains on sales of loans and losses on sales and write downs of other assets. Gains on sales of loans declined due to a higher mix of loans held on the balance sheet and market conditions.

Noninterest Expense

Noninterest expense increased by $54.0 million for the year ended December 31, 2025, compared to the same period in 2024. The increase in 2025 was largely due to merger-related expenses of $17.4 million during 2025, compared to $1.0 million in the year ended December 31, 2024. Management does not anticipate additional material merger-related expenses. The remainder of the increase was primarily due to the addition of Fentura on March 1, 2025. ChoiceOne will continue to invest in its talented staff, technology and footprint while prioritizing operational efficiency and disciplined investment. ChoiceOne has secured a location in Troy, Michigan and expects to open a full service branch and lending office later in 2026. We believe this new office will help us continue our strong growth in an attractive market. In addition, we are experimenting with automation and AI‑driven solutions designed to modernize processes to augment the ability for our existing staff to manage our growth.

Dividends

Cash dividends of $16.9 million or $1.13 per common share were declared in 2025 compared to $9.0 million or $1.09 per common share in 2024. The dividend yield for ChoiceOne’s common stock was 3.83% as of the end of 2025, compared to 3.06% as of the end of 2024. The cash dividend payout as a percentage of net income was 60.2% as of December 31, 2025, compared to 33.7% as of December 31, 2024. The large increase was due to merger-related expenses leading to a net income loss during the first quarter of 2025.

Income Taxes

Income tax expense was $350,000 lower in 2025 than in 2024. The effective tax rate was 17.6% for the year ended December 31, 2025 compared to 19.2% for the same period in 2024. ChoiceOne’s fourth‑quarter 2025 tax expense was reduced by a net of $340,000 as a result of purchasing a transferable tax credit that will be applied to 2025 income taxes, with allowable carrybacks to prior years. Management is continuing to evaluate additional transferable tax credit opportunities and may pursue further purchases to help offset tax expense in 2026. For further details, refer to Note 12 - Income Taxes of the Notes to the Consolidated Financial Statements included in Item 8 of this report.

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Table 1 – Average Balances and Tax-Equivalent Interest Rates

Tables 1 and 2 on the following pages provide information regarding interest income and expense for the years ended December 31, 2025, 2024, and 2023. 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.

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