ChoiceOne Financial Services (COFS) Q3 2026 earnings review
ChoiceOne lending margins widen, but problem loans climb
ChoiceOne Financial Services, a Michigan community bank, widened its lending spreads even as an accounting boost from last year's merger faded. Net interest income rose 2% from a year ago, and excluding purchased loan accretion it grew 5% by our math, while earnings per share stayed at $0.97. Chief executive Kelly Potes credited loan growth and relationship deposits, which let the bank pay down $86 million in wholesale funding.
| Net interest income, excluding loan accretion | $35.7M +5.1% from a year ago (by our math) |
|---|---|
| GAAP net interest margin | 3.67% +0.08 percentage points from last quarter |
| Nonperforming loans to total loans | 1.25% 1.07% last quarter |
| 2027 scheduled loan accretion outlook | $6.0M new; down 25% from initial 2026 plan |
⚖️ Verdict: ⚪ Neutral
The story is unchanged because wider lending margins and lower funding costs were offset by a rise in problem loans. Nonperforming loans outside the pre-identified merger portfolio climbed from 0.58% of loans in June to 0.85% by our math, while higher long-term interest rates cut tangible book value per share by 3%.
The question now is whether core loan growth can keep lifting net interest income as merger accretion steps down to $6 million next year and credit costs rise. If recent defaults are isolated and government guarantees prevent actual losses, wider spreads will carry earnings; if defaults keep climbing, bigger loss provisions will eat up the gain. Fourth-quarter nonperforming loan balances and reserve levels will show which way credit is heading.
🐂 Bull Case
Lending Spreads Widened Beyond the Merger Boost
When ChoiceOne bought Fentura Financial in March 2025, it marked the acquired loans down to fair value. As borrowers pay those loans back, the bank records the discount as extra interest income, which it calls accretion. That accounting boost is fading over time, so core lending must grow fast enough to replace it.
Chief executive Kelly Potes said the bank achieved "expansion in our net interest margin and growth in net interest income". Net interest margin — the spread between what the bank earns on loans and pays on deposits — rose 0.08 percentage points from last quarter to 3.67%. Even with lower accretion from a year ago, net interest income rose 2.2% to $38.4 million.
- Net interest income excluding purchased loan accretion: $35.7 million, up 5.1% from a year ago by our math
- Margin boost from purchased loans: 0.25 percentage points, down from 0.36 points a year ago
- Extra accretion from early loan payoffs: $806,000, on top of $1.9 million in scheduled amortization
This matters because the underlying loan book is doing the work. Stripping out the merger accounting boost, ChoiceOne's lending margin rose 0.05 percentage points from a year ago to 3.42% by our math, as loan yields rose 0.04 points from last quarter to 6.24%.
What to watch: net interest income excluding accretion in the fourth quarter, when scheduled merger accretion drops to $1.8 million. Further growth would show that new loan yields can offset the scheduled 2027 step-down in merger income.
Tax Receipts Allowed a Paydown of Wholesale Debt
Community banks pay much less for local checking and savings accounts than for brokered deposits or Federal Home Loan Bank borrowings. In the second quarter, seasonal outflows forced ChoiceOne to lean on those pricier wholesale funds.
That reversed in the third quarter. Deposits excluding brokered accounts rose by $95.7 million, or 3.1% from a year ago, to $3.60 billion. The bank credited "seasonal fluctuations related to municipal deposits and the timing of tax receipts" for the quarterly inflow. Management used that cash to cut brokered deposits by $25.8 million and debt borrowings by $60.0 million, lowering its annualized cost of funds by 0.04 percentage points to 1.73%.
What to watch: fourth-quarter average brokered deposits and borrowings. Holding those balances near $302 million after towns spend their tax receipts would show that underlying customer deposit growth of 3.1% from a year ago can fund the loan book.
🐻 Bear Case
Nonperforming Loans Outside the Acquired Book Climbed
"The combination of strong loan production, growth in relationship-based deposits, and continued credit discipline drove improved net interest margin and profitability," Potes said. Management has long noted that many of its problem loans were troubled loans acquired in the Fentura merger that it knew about before closing.
Yet problem loans outside that pre-identified group are rising. Total nonperforming loans — loans that are in default or close to it — climbed from 1.07% of loans in June to 1.25%, or $38.6 million. The pre-identified merger loans accounted for 0.40 percentage points of that total, down from 0.49 points in June and 0.61 points in March. By our math, all other nonperforming loans rose from 0.40% of the book in March to 0.85% in September.
That pushed the quarterly provision for credit losses up to $900,000, compared with $200,000 a year ago, which cut pre-tax margin by 1.5 percentage points of revenue by our math. ChoiceOne said the troubled book has "meaningful credit protection" because federal SBA or USDA guarantees cover 35.5% of nonperforming loans and residential mortgages make up 34.3%.
What to watch: nonperforming loans outside the pre-identified merger book in the fourth quarter. Another rise above 0.85% of total loans would force the bank to add to its loss reserves, which stood flat at 1.16% of loans.
Higher Long-Term Rates Cut Tangible Book Value
ChoiceOne holds $903.9 million in bond securities, and accounting rules require it to mark the available-for-sale portion to market prices inside shareholders' equity. During the third quarter, paper losses on those bonds grew by $22.3 million to $56.4 million because of "the effect of higher long-term interest rates on the fair value of the Company’s available-for-sale securities portfolio".
Those bond marks more than wiped out the quarter's retained profit. Shareholders' equity fell by $12.9 million to $469.8 million, and tangible book value per share — the bank's net asset value excluding goodwill and intangibles — dropped 3.3% from June to $21.02. Higher rates also caused a $156,000 unrealized loss on a bond mutual fund on the income statement.
What to watch: accumulated other comprehensive loss in the fourth quarter. A wider paper loss would keep tangible book value per share below its second-quarter peak of $21.73 even as the bank retains earnings.
👓 Other Themes
Tax Credits and Buybacks Trimmed Taxes and Shares
ChoiceOne bought another $200,000 in transferable tax credits by our math, bringing its nine-month tax savings from the credits to $600,000 and keeping its third-quarter tax rate at 18.0%. The Michigan lender also repurchased 40,000 common shares for $1.3 million, which leaves 225,272 shares under its current authorization by our math and reduced diluted shares by 0.4% from a year ago.
💲 Other KPIs
Core loans — total loans excluding loans held for sale and short-term advances to mortgage lenders — rose by $33.6 million in the quarter, or 5.0% from a year ago. After dipping in the first quarter, loan balances have grown for two straight quarters and helped lift loan interest income by $1.7 million from the second quarter.
Fee and other noninterest income fell 5.4% from a year ago, but rebounded 36.8% from the second quarter, when the bank took a $1.9 million loss on bond sales. Asset write-downs of $309,000 and a $156,000 mutual fund loss cut third-quarter earnings by $0.03 per share, while core customer service, card, trust and insurance fees rose 7.5% from a year ago by our math.
Operating expenses rose 1.3% from a year ago and 1.9% from the second quarter. Employee salaries and benefits caused the increase, rising 0.8 percentage points of total revenue from a year ago by our math to $14.6 million, while lower intangible amortization and branch occupancy costs offset part of the rise.
🔮 Guidance
Unchanged. ChoiceOne expects $1.8 million in scheduled interest income from purchased loan discounts in the fourth quarter, almost matching the $1.9 million recorded in the third quarter. Total accretion will be higher if borrowers pay off acquired loans early, which added $806,000 this quarter.
New. Management issued its first estimate for 2027 scheduled loan accretion at $6.0 million, or about $1.5 million per quarter. By our math, that is 25% below the $8.0 million scheduled estimate the bank started 2026 with, as the $45.3 million remaining discount pool winds down over the life of the loans.
Unchanged. The company plans to "purchase similar sized transferable tax credits in the remainder of 2026 to reduce tax expense", matching the $200,000 quarterly pace it has kept all year.
❓ Key Questions
What drove the rise in non-merger problem loans?
Nonperforming loans outside the pre-identified Fentura portfolio climbed from 0.40% of total loans in March to 0.85% in September by our math. Management did not say whether the new defaults came from a single commercial borrower or several smaller accounts.
Is the Troy branch still opening in 2026?
In both the first and second quarters, ChoiceOne said it planned to open a full-service branch and lending office in Troy, Michigan later in 2026. The third-quarter release dropped any mention of the project.
How much municipal cash will leave in Q4?
Tax receipts lifted deposits excluding brokered accounts by $95.7 million this quarter and allowed an $85.8 million paydown of wholesale funding. Investors need to know how much of that seasonal cash will flow back out before year-end.