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Sparta-based ChoiceOne Financial Services planned for the acquisition of Community Shores Bank Corp. to close in the second quarter, but the deal may now extend into the third quarter.  Sparta-based ChoiceOne Financial Services planned for the acquisition of Community Shores Bank Corp. to close in the second quarter, but the deal may now extend into the third quarter. MIBIZ FILE PHOTO: JOE BOOMGAARD

ChoiceOne-Community Shores deal progresses toward ‘likely’ third quarter close

BY Sunday, May 10, 2020 06:54pm

In mid-2018, executives and directors at Community Shores Bank Corp. began to study “strategic alternatives” to grow the bank.

They met several times between July and December and “evaluated the considerable progress that Community Shores Bank had made over the past years,” according to a recent federal regulatory filing.

In the months that followed, Community Shores directors decided to sell the bank. They ultimately chose Sparta-based ChoiceOne Financial Services Inc. (Nasdaq: COFS), citing among their rationale a good cultural fit between their two organizations.

“Ultimately, in the judgment of the board, ChoiceOne’s proposal surpassed the others in terms of economic return to its shareholders and the continued commitment to excellence in community banking for the benefit of its customers and employees,” according to a prospectus filed April 29 with the U.S. Securities and Exchange Commission.

Nearly six months after the $21.9 million deal was signed and publicly announced, Community Shores shareholders are scheduled to vote on the acquisition on June 17 in a virtual meeting. 

Approval is almost a formality, since directors and executives at Community Shores who hold about 40 percent of common shares have agreed to cast them in favor of the transaction. Another 24.2 percent of the bank’s common shares are held by Bruce Essex Jr., the son of Bruce Essex Sr. The elder Essex is a longtime director at Community Shores.

The deal has been progressing smoothly toward the shareholder vote, even as executives at both banks managed through the COVID-19 pandemic, Community Shores President and CEO Heather Brolick told MiBiz. Shareholders should soon receive materials for the virtual meeting, she said.

“I have been encouraged by how smoothly this is actually working,” Brolick said. “We think alike and we probably have been running our businesses alike, both boards and management. It’s been very simple for us to communicate and work together as we put this into place formally.”

Brolick was among a group of banking executives who formed Community Shores in 1998. She will become senior vice president of human resources at ChoiceOne when the deal closes.

When the two banks announced the deal in early January, they had hoped to close it by the end of the second quarter. The closing, presuming shareholder and regulatory approvals, now may occur a little later.

“Initially we thought the acquisition at the holding company level could be completed in the second quarter of 2020. As time went on, we found the timing to be too aggressive,” ChoiceOne CEO Kelly Potes wrote in an email to MiBiz. “We are working hard toward still closing in the second quarter, but our closing will likely fall into the third quarter.”

ChoiceOne Financial Services, the parent company of Sparta-based ChoiceOne Bank, was already looking to expand into the lakeshore market when the opportunity arose to acquire Community Shores. Under the deal, ChoiceOne would add three offices in Muskegon County and one in Grand Haven in neighboring Ottawa County.

ChoiceOne last year doubled in size to 29 offices in Western and Southeastern Michigan with an $89 million merger with Lapeer-based County Bank Corp., the parent company of Lakestone Bank & Trust. The final integration of the two banks, including Lakestone offices assuming the ChoiceOne name, is set to occur this summer.

Best interests

The opportunity to pursue another acquisition came about as Community Shores executives and directors examined their options. By May 2019, they had determined to pursue a sale.

“After assessing the information presented by investment bankers concerning market trends in the banking sector, size, historical growth, and financial progress of the bank, the board found it in the best interest of Community Shores’ shareholders to proceed toward a sale of the company from among the strategic options available,” according to the prospectus.

Community Shores directors hired investment bank ProBank Austin, which by July 2019 had “identified potential transaction partners that could fit within the parameters outlined by the board.” ProBank then sent information to 12 potential suitors.

In August, Community Shores received seven “indications of interest from prospective acquirers,” one of which was ChoiceOne, according to the prospectus that details how the deal came together. After “further discussions” with the seven, ProBank subsequently received five “revised indications of interest.”

After “conducting a comparative analysis between the five indications of interest, accounting for factors like merger consideration, employment matters, geographical advantages, and future avenues for a combined growth,” Community Shores directors whittled their choice to two: ChoiceOne and another unidentified bank.

On Oct. 2, 2019, a meeting between Community Shores’ board, ProBank and ChoiceOne executives “shed light on ChoiceOne’s strengths, its products and services, loan portfolio and deposit growth, strategic focus, mission and vision, merger and acquisition history, particularly the recent merger of equals with County Bank Corp., market capitalization, and shareholder return,” according to the prospectus.

Finding growth

ChoiceOne submitted another revised bid to Community Shores on Oct. 18. Five days later, the two decided to move toward a deal. They negotiated and conducted due diligence through the rest of 2019 on a final agreement, which was executed on Friday, Jan. 3, 2020, and publicly announced the following Monday morning.

Under the terms of the agreement, Community Shores shareholders have the right to receive an amount equal to $5 in cash or 0.12161 shares of ChoiceOne stock for each of their shares.

Directors at both banks approved the agreement. Among the reasons Community Shores directors cite in the prospectus in urging shareholders to support the deal is the 7 percent to 10 percent earnings accretion once the sale to ChoiceOne is fully implemented, and “the expectation that the merger will result in a larger and more diversified financial organization with a larger and more diversified asset base.”

If approved by Community Shores shareholders, the acquisition would elevate ChoiceOne to about $1.6 billion in assets and $1.4 billion in deposits.

Community Shores for 2019 had net income of $763,000, or 19 cents per diluted share, down from $905,000, or 22 cents per diluted share, in 2018. The corporation ended 2019 with $202.1 million in total assets and $178 million in deposits.

In addition to ProBank Austin serving as financial adviser, Dickinson Wright PLLC is legal counsel for Community Shores Bank in the deal. Grosse Pointe-based Donnelly Penman & Partners Inc. is financial adviser and Grand Rapids-based Warner Norcross + Judd LLP is the legal counsel to ChoiceOne Financial Services.

Earnings performance

The 2019 merger with County Bank doubled ChoiceOne’s earnings for the first quarter.

The corporation in April reported $3.2 million in quarterly net income, or 45 cents per diluted share. That compares with net income of $1.6 million, or also 45 cents per diluted share, for the first quarter of 2019.

This year’s first quarter included $282,000 in merger-related expenses. Minus that cost, ChoiceOne’s quarterly net income was $3.5 million, or 49 cents per share.

ChoiceOne ended the quarter with $1.39 billion in total assets.

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