SPARTA — ChoiceOne Financial Services Inc. wasn’t actively looking to do another deal, but the parent company of ChoiceOne Bank saw an opportunity with Community Shores Bank Corp. that was too good to pass up.
Rather than developing new branch offices and growing organically, Sparta-based ChoiceOne Bank will gain an immediate market presence and book of business in western Muskegon County and northwestern Ottawa County through the proposed $21.9 million acquisition of Muskegon-based Community Shores Bank (Nasdaq: CSHB).
The lakeshore market is one where ChoiceOne had wanted to expand its footprint for a couple of years.
“It just makes a lot of sense on a lot of levels for us,” ChoiceOne CEO Kelly Potes said of the deal, which comes five months after the corporation closed on an $89 million merger with Lapeer-based County Bank Corp., the parent company of Lakestone Bank & Trust.
“(The market) is one that has made sense for our bank for a long time and now just happened to be the right time for Community Shores. The fact that we just had a merger of equals (with County Bank), it wasn’t something that we were pressing for, but the timing was right both for us and for them, so we went ahead and started talking,” Potes said. “Muskegon is doing well and we want to be part of that.”
The two banks are targeting to close the deal in the second quarter, pending approval from regulators and Community Shores shareholders. The acquisition would elevate ChoiceOne (OTC: COFS) to become a top 10 bank based in Michigan with nearly $1.6 billion in assets, deposits of $1.33 billion and 33 offices in Western and Southeastern Michigan.
In Muskegon County, where ChoiceOne has two offices on the east side, the bank would rank third in deposit market share behind market leader Fifth Third Bank and PNC Bank, based on the 2019 FDIC Summary of Deposits.
After doubling in size with the County Bank merger, ChoiceOne also would gain a little more scale with the Community Shores acquisition, Potes said.
“Primarily what it does is allow for future growth. We can impact the lakeshore more as a $1.6 billion bank than the $200 million bank that Community Shores was,” he said. “From a level of products and services and technology, we really feel that we can grow that marketplace, along with our current marketplace in the West Michigan area, and do the same thing on the east side of the state.”
ChoiceOne has no plans for in-fill development between the west and east sides of the state, seeing “a lot of growth opportunity on both sides of the state” within its existing markets. However, “as things come available, maybe there could be an opportunity in the middle of the state, but that’s not something that we see as critical,” Potes said.
Merger talks with Community Shores (OTC: CSHB) began last summer as ChoiceOne worked to close on the County Bank deal on Oct. 1. The two banks signed a definitive agreement Jan. 3 as ChoiceOne now works to complete the integration of Lakestone Bank & Trust by the middle of the second quarter.
The County Bank deal grew ChoiceOne to 29 offices in Western and Southeastern Michigan with assets of about $1.3 billion. The latest deal would add three Community Shores offices in Muskegon County and one in Grand Haven in neighboring Ottawa County.
Best for shareholders
ChoiceOne’s opportunity to pursue another acquisition came after directors at Community Shores decided to seek a suitor amid high regulatory compliance costs, a need for capital to grow and uncertainty about the future economy, said President and CEO Heather Brolick.
“Our board of directors looked around at the world and said, ‘We think we should be evaluating whether this would be in the best interests of our shareholders,’ and after a lot of thoughtful consideration and research, they decided now was the time to investigate whether a move was appropriate. As it turned out, we found that it was,” said Brolick, who was among a group of executives who founded Community Shores in 1999.
“Overall, the greater thought was are we going to be able to — in the near term and on our time horizon — generate sufficient return for our shareholders relative to what we might be able to do for them if we were to find a buyer that could offer all of what we believe are the important things from a service and a product point of view and a cultural point of view, and yet leverage that size and scale,” she said.
That “mutual conclusion arrived at around the table” in the boardroom led to a formal process that included working with Louisville, Ky.-based investment bank ProBank Austin to “investigate potential buyers for the organization,” Brolick said.
The process settled on ChoiceOne, a community bank that makes “an absolutely perfect fit for Community Shores,” she said.
“Culturally, service-wise, value-wise, and in market and future plans, they are all very much in sync with what our mission, vision and values for the future are,” Brolick said. “We believe very strongly that the Muskegon and north Ottawa market has huge potential and there is opportunity for significant growth. That’s why a partnership with ChoiceOne is so attractive.”
Under the terms of the new deal, 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. The deal could close in the second half of 2020 with integration of the two banks occurring in the third quarter, when Community Shores branches would take on the ChoiceOne name.
The acquisition would generate $2.75 million in annual cost savings when fully realized in 2021, and add 7 percent to 10 percent in earnings per share, according to an analysis. It would carry a one-time pre-tax cost of $4 million.
Brolick will join ChoiceOne Bank as senior vice president of human resources, while Chief Lending Officer Brent McCarthy would become vice president and Muskegon market executive.
Becoming part of ChoiceOne would bring a significantly higher in-house and legal lending limit for Community Shores’ commercial lending clients, Brolick said.
“That provides a lot of flexibility for clients of different sizes,” she said. “It’s going to allow us to go to middle-market lending for sure. There’s going to be a much greater opportunity for us to retain and manage the clients’ full book of business.”
ChoiceOne also brings more treasury management services for the bank’s commercial clients, Potes said.
ProBank Austin serves as financial adviser and Dickinson Wright PLLC is legal counsel for Community Shores Bank in the deal. Grosse Pointe-based Donnelly Penman & Partners Inc. is serving as financial adviser and Grand Rapids-based Warner Norcross + Judd LLP is serving as legal counsel to ChoiceOne Financial Services.
Just as he stated following the County Bank deal, Potes said ChoiceOne remains open to further M&A, if the right opportunity arises.
“It’s the same as what it was before: We’ll strategically look at opportunities and where they make sense, we’ll pursue those,” he said