ChoiceOne Financial posts $12.5 million Q2 profit as Michigan community bank pivots toward floating-rate assets

Community banks across the Midwest are reshuffling their balance sheets as deposit costs edge higher and the income from fixed-rate securities acquired during lower-yield years fades. ChoiceOne Financial Services (NASDAQ: COFS), the Sparta, Michigan parent of ChoiceOne Bank, reported second-quarter 2026 net income of $12.5 million, or $0.83 per diluted share, taking a $1.9 million pre-tax securities loss to shed lower-yielding municipal paper and redirect the proceeds toward loan growth.

Loan growth and the pivot to adjustable-rate assets

Core loans, which exclude held-for-sale loans and mortgage warehouse advances, rose $87.1 million in the quarter, an annualized rate of 11.9%. Roughly $40 million of that gain came from purchasing seasoned adjustable-rate residential mortgages from another community bank. The tilt toward floating-rate paper is consistent with a sector-wide effort to compress duration risk as funding costs remain elevated.

Total assets reached $4.5 billion at June 30, 2026, up $146.6 million from a year earlier. Growth was spread across core loans, securities, and warehouse mortgage advances, partially offset by a $67.6 million reduction in cash over the twelve-month period.

Margin narrows as the cost-of-funds squeeze bites

GAAP net interest margin was 3.59% for the second quarter, down from 3.63% in the first quarter and 3.66% in the same quarter of 2025. The sequential compression reflects a recognizable pattern in the community banking sector: stronger asset yields, but higher funding costs eroding the spread. The annualized cost of funds rose four basis points to 1.77%, and the cost of deposits reached 1.58%.

Accretion income from purchased loans contributed to the NIM picture in ways worth separating out. That income totaled $2.4 million in the second quarter, against $3.5 million in the comparable quarter of 2025, and added 24 basis points to GAAP net interest margin versus 36 basis points a year ago. About $48 million in accretion income remains to be recognized over the life of the purchased-loan portfolio, with timing dependent on prepayment speeds.

Deposits, excluding brokered deposits, fell $55.4 million for the quarter, with municipal operating balances accounting for roughly $95 million of the decline on seasonal timing. The bank described the movement as consistent with historical fluctuations. On a year-over-year basis the same deposit base was up $22.2 million.

Credit quality and capital position

Asset quality stayed largely contained. Annualized net charge-offs were 0.04% of average loans. The nonperforming loans ratio edged to 1.07% of total loans (excluding loans held for sale) at June 30, up from 1.01% at the end of March. The allowance for credit losses stood at 1.16% of total loans, against 1.19% in the prior quarter.

For the first half of 2026, ChoiceOne earned $26.2 million, or $1.74 per diluted share. That compares to a net loss of $372,000, or $0.03 per diluted share, in the same period of 2025. Chief Executive Officer Kelly Potes credited loan growth, stable credit quality, and capital accretion, and said the bank's balance-sheet approach is reshaping the earning-asset mix as it moves into the second half.

Federal Home Loan Bank borrowings stood at $295 million at a weighted average rate of 3.80%, with $275 million of that balance due within 12 months.