Published in Finance
ChoiceOne Bank opened a new branch office in Rockford in the fourth quarter of 2018. ChoiceOne Bank opened a new branch office in Rockford in the fourth quarter of 2018. COURTESY PHOTO

ChoiceOne seizes growth opportunity in deal for SE Michigan community bank

BY Sunday, March 31, 2019 10:12pm

SPARTA — ChoiceOne Financial Services Inc.’s proposed $89 million merger with a similarly sized community bank in Lapeer began last summer when Kelly Potes struck up a conversation with his counterparts.

Potes, the president and CEO of Sparta-based ChoiceOne, knew County Bank Corp. Chairman and CEO Bruce Cady and President Michael Burke from their service together on the board at the trade association Community Bankers of Michigan and other organizations. They began talking late last August about the business and how it may make sense for their two banks to come together.

Directors at each of their banks agreed and “we thought, ‘Well, let’s do some more talking and see what happens,’” Potes said.

“It just got more serious as time went on,” he said. “The more we looked at it, and how the two banks seemed to really mesh together well, we thought this is an opportunity we really won’t see for either one of us in the state.”

That conversation culminated with last week’s announcement that ChoiceOne Financial Services (OTC: COFS) planned a “merger of equals” with County Bank (OTC: CNBC), the parent company of Lakestone Bank & Trust. Headquartered in Sparta, the merged bank would have 28 offices in western and southeastern Michigan with a combined $1.28 billion in assets.

Pending shareholder and regulatory approvals, the County Bank merger “with and into” ChoiceOne could close in the second half of 2019. Full integration of the two banks would come in the second quarter of 2020, with a decision still to come on the brand name the merged bank would take.

“We are two strong, growing institutions with a powerful commitment to serve our customers and give back to our communities. Leveraging these strengths in this merger, as well as our complementary products and leading market positions, will clearly position us as one of the finest community banks in Michigan,” Cady said.

The deal is the latest in the Michigan banking market where a number of mergers and acquisitions have occurred over the last several years.

Many of the deals have been driven by the need for smaller community banks to bulk up with a partner to drive growth and to better handle the high cost of regulatory compliance.

“We certainly like the two banks and think this is a responsible action on both parties’ part in light of industry trends of consolidation,” said John Donnelly, managing partner at Grosse Pointe-based investment bank Donnelly Penman & Partners Inc. “That said, I know there will be some banks who will be disappointed they did not get a chance at Lakestone.”

The deal between ChoiceOne and County Bank was opportunistic, Potes said. ChoiceOne was not actively seeking a merger when the potential arose to do a deal with County Bank.

ChoiceOne was open to a deal “just because we were looking at continuing to grow and expand in Michigan, and they were looking at the same thing,” he said.

“This was an opportunity that presented itself,” Potes said. “It’s probably something we knew we both were going to do sometime in the future, as far as getting bigger. This really just seemed like a good time for us now to do it. It wasn’t anything either of us felt we had to do.”

The two banks are not only similar in size but also share similar strategies, balance sheets and culture. Both banks also serve largely rural markets. ChoiceOne has been moving more into the Grand Rapids area the last two years. Likewise, County Bank has been venturing into parts of Macomb County northeast of metro Detroit, Potes said.

“We complement each other in so many ways,” he said. “We really started looking at each other and saying, ‘We’re really the same bank. We’re just located on two different sides of the state.’”

Under the terms of the stock transaction, each share of County Bank common stock would convert into the right to receive 2.0632 shares of ChoiceOne common stock. ChoiceOne would declare and pay a special dividend of 60 cents per share to its shareholders.

ChoiceOne shareholders will own approximately 50.1 percent of the merged bank and County shareholders will own 49.9 percent. A 14-member board of directors will consist of seven representatives from each bank. After the merger closes, the bank plans to apply to list its shares on the Nasdaq exchange.

ChoiceOne Bank has 14 offices in Kent, Newaygo, Muskegon and Ottawa counties with $670.1 million in total assets as of Dec. 31. During the fourth quarter of 2018, the bank opened new offices in downtown Grand Rapids and Rockford.

The bank in January reported $7.3 million in net income for 2018, or $2.02 per diluted share. ChoiceOne recorded net income of $6.1 million, or $1.70 per diluted share, in 2017.

County Bank has 14 Lakestone Bank & Trust offices in Lapeer, Macomb and St. Clair counties with $616.1 million in assets and $6.9 million in net income for 2018, according to a quarterly financial report filed the FDIC. In the FDIC’s 2018 Summary of Deposits, the bank held a leading 36.54 percent of the deposit market share in its home Lapeer County market.

Executives project that the merged bank will generate about 14 percent per-share earnings accretion in the first full year based on cost savings of about 10 percent at full implementation.

The merged bank will also have more heft to pursue business with larger commercial clients.

ChoiceOne’s in-house lending limit will increase from $10 million to a range of $15 million to $20 million after the deal closes, enabling the bank to grow along with commercial clients, Potes said.

“It does open up more availability of the clients that we could bank,” he said. “It really allows us to grow as our clients grow.”

An investor presentation on the merger noted the merged bank will have the opportunity to expand into adjacent growth markets, and that the deal “opens the door” for future mergers or acquisitions in lower Michigan.

Future expansion or deals would occur “selectively,” with any M&A occurring opportunistically, Potes said.

ChoiceOne Chairman Paul Johnson will become chairman of the merged bank and Potes will serve as the CEO. County Bank’s Cady will serve as vice chairman and Burke will become president.

ChoiceOne is being advised on the deal by financial adviser ProBank Austin of Louisville, Ky. and the Grand Rapids-based law firm Warner Norcross + Judd LLP.

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