Note 21 – Business Combination

ChoiceOne completed the merger of County Bank Corp (“County”) with and into ChoiceOne on October 1, 2019. County had 14 branch offices and one loan production office as of the date of the merger. Total assets of County as of October 1, 2019 were $673 million, including total loans of $424 million. Deposits garnered in the merger, the majority of which are core deposits, totaled $574 million. The results of operations as a result of the merger have been included in ChoiceOne’s results since the effective date of the merger. As consideration in the merger, ChoiceOne issued 3,603,872 shares of ChoiceOne common stock, which was net of 299 fractional shares not issued, with an approximate value of $108 million. ChoiceOne recorded a preliminary deposit based intangible of $6.4 million and goodwill of $39.1 million. While ChoiceOne believes the majority of the business combination and purchase accounting activity is complete, it is expected there will be minor adjustments in the normal course within the allotted GAAP adjustment period. Purchase accounting activity still being analyzed primarily includes certain tax implications.

Acquisition costs related to the merger amounted to $2.1 million, of which $1.8 million was expensed and $297,000 was netted with stock issuance costs. The transaction created $39.1 million of goodwill, none of which is deductible for tax purposes. As the transaction happened on October 1, 2019, only earnings related to the period from October 1, 2019 through December 31, 2019 were included in ChoiceOne Financial Services income for the year ended December 31, 2019. These County earnings amounted to $2.3 million for the year ended December 31, 2019.

The table below highlights the allocation of purchase price for the merger with County (dollars in thousands):


*Purchase Price:*

Consideration	$	107,945

*Net assets acquired:*
Cash and cash equivalents		20,638
Equity securities at fair value		474
Securities available for sale		187,230
Federal Home Loan Bank and Federal Reserve Bank stock		2,903
Loans to other financial institutions		33,481
Originated loans		390,354
Premises and equipment		9,271
Other real estate owned		1,364
Deposit based intangible		6,359
Bank owned life insurance		16,912
Other assets		4,002
Total assets		672,988

Non-interest bearing deposits		124,113
Interest bearing deposits		449,488
Total deposits		573,601
Federal funds purchased		3,800
Advances from Federal Home Loan Bank		23,000
Other liabilities		3,784
Total liabilities		604,185

Net assets acquired		68,803

Goodwill	$	39,142

The following table provides the unaudited pro forma information for the results of operations for the twelve months ended December 31, 2019, 2018 and 2017, as if the merger with County had occurred on January 1. Dollars are shown in thousands, except for per share data. These adjustments reflect the impact of certain purchase accounting fair value measurements, primarily on the loan and deposit portfolios of County. In addition, merger-related costs are excluded from the amounts below, for comparative purposes. Further operating cost savings are expected along with additional business synergies as a result of the merger which are not presented in the pro forma amounts. These unaudited pro forma results are presented for illustrative purposes only and are not intended to represent or be indicative of the actual results of operations of the combined banking organization that would have been achieved had the merger occurred at the beginning of the period, nor are they intended to represent or be indicative of the future results of the Company.

(Dollars in thousands, except per share data)
	2019		2018		2017
Net interest income	$	44,440	$	42,974	$	40,178
Noninterest income		13,289		12,151		13,364
Noninterest expense		42,611		38,501		37,361
Net income		13,487		14,251		11,513
Net income per diluted share		1.86		1.97		1.63

In most instances, determining the fair value of the acquired assets and assumed liabilities required ChoiceOne to estimate the cash flows expected to result from those assets and liabilities and to discount those cash flows at appropriate rates of interest. The most significant of those determinations is related to the valuation of acquired loans. For such loans, the excess cash flows expected at the effective time of the merger over the estimated fair value is recognized as interest income over the remaining lives of the loans. The difference between contractually required payments at the effective time of the merger and the cash flows expected to be collected at the effective time of the merger reflects the impact of estimated credit losses, interest rate changes, and other factors, such as prepayments. In accordance with the applicable accounting guidance for business combinations, there was no carry-over of the County’s previously established allowance for loan losses.

The Merger with County was effective on October 1, 2019. The combined company will have the opportunity to deploy existing low-cost funding into strategic markets across Michigan. County appears to be a cultural fit with very similar values regarding community involvement and development that ChoiceOne has fostered over its history. County also has an attractive core deposit base expected to provide support for future expansion.

On January 6, 2020, ChoiceOne entered into an Agreement and Plan of Merger with Community Shores Bank Corp (“Community Shores”), the holding company for Community Shores Bank. Completion of the acquisition is subject to receipt of shareholder approval from Community Shores shareholders, receipt of regulatory approval, and the satisfaction of other customary closing conditions. Management expects the merger to become effective in the second half of 2020. As of December 31, 2019, Community Shores had total assets of approximately $204 million, total loans of approximately $156 million, and total deposits of approximately $184 million.