CHOICEONE FINANCIAL SERVICES INC (COFS) stock intrinsic value fair value estimate & owner earnings analysis

ChoiceOne Financial is the holding company for ChoiceOne Bank, a Michigan community bank with $4.46 billion of assets at June 30, 2026, after its March 1, 2025 merger with Fentura Financial roughly doubled its size. It makes commercial real estate, business, residential and consumer loans across West, central and Southeast Michigan, funded overwhelmingly by local deposits, and earns fees from interchange, trust, insurance and investment services. Growth over the past decade has come almost entirely from three stock-financed mergers (County Bank Corp. in 2019, Community Shores in 2020 and Fentura in 2025), which took the diluted share count from about 3.6 million to 15.0 million. Earnings level. For a bank we treat net income to common shareholders as the owners' cash, since interest on deposits and borrowings is the cost of the raw material; stock pay is already expensed and is not deducted twice. Per-share earnings were $1.68 (2016), $1.70, $2.02, $1.58 (County merger costs), $2.07 (pandemic provision and Community Shores costs), $2.86 (2021), $3.14, $2.81, $3.25 (2024) and $2.01 in 2025. The 2025 figure is not representative: it carries $17.4 million of merger costs and a $12.0 million day-one loan-loss provision that accounting rules require on acquired performing loans; neither recurs, and management states no further material merger costs are expected. First-half 2026 diluted earnings were $1.74, about $3.48 annualised. But part of today's earnings is purchase-accounting accretion - interest income booked as the discount on acquired Fentura loans unwinds: $13.1 million in 2025, an estimated $8.0 million in 2026, $53.1 million in total over the life of those loans, then gone. Stripping it out, the current run rate is about $3.06 a share and the 2025 adjusted figure about $2.74. Taking the median of the post-2021 years on that basis (2.81, 2.86, 3.14, 3.25, 2.74, 3.06) gives an earning power of about $2.95 a share, about a 1.0% return on assets and roughly 13.6% on tangible equity of $325 million ($21.66 a share). We use the 2021 onward window because the earlier years describe a bank one-sixth the size. The accretion is treated as a wasting asset: it is excluded from the level so it is never capitalised as if permanent. Growth path. Reported per-share earnings fell 38% in 2025, entirely from the one-off merger charges above; first-half 2026 earnings have already reversed that, so year one is set at no growth from the $2.95 base. After that the base case credits 2.5% a year of balance-sheet growth for ten years and 1.5% for ten more, in line with the organic core-loan growth the bank actually achieved in 2025 (5.7%) tempered by a slow-growing Michigan market. Each dollar of new assets must be backed by about 8 cents of retained capital, so only the earnings left after that are counted; after year twenty earnings are held flat and fully paid out. No further acquisitions are credited in any case: deals have been lumpy, paid in stock and each a separate bet, so they do not qualify as a steady repeatable process. The base case is worth about $57 a share. Bear case ($35). Earning power of $2.50 a share, reflecting a narrower deposit margin as purchase accretion runs off and competition for deposits continues (uninsured deposits are 33% of the total; $245 million of the $265 million of Federal Home Loan Bank borrowings matures within a year), with near-zero growth. It then runs one full credit cycle of the kind Michigan banks went through in 2008-2010: about $142 million of pre-tax loan losses and reserve builds over three years, roughly 4.7% of the $3.0 billion loan book, falling heaviest on the commercial real estate portfolio. That wipes out three years of earnings and shaves retained capital by about $33 million, leaving tangible equity near 6.8% of assets - thin but still above regulatory minimums, so no dilutive capital raise is assumed. Today's credit record is clean (net charge-offs 0.04% in 2025) but non-performing loans rose to 0.98% of loans from 0.24%, with 73% of the problem loans inherited from Fentura; the bear case takes that as the first sign of the cycle rather than a one-off. The bear value is above tangible book because the bank's pre-provision earnings, roughly $50-55 million a year, and its low-cost core deposit base (about a quarter of deposits pay no interest) absorb a 2008-style loss without exhausting capital; the franchise keeps earning after the cycle passes. Bull case ($73). Earning power of $3.35, close to the 2024 pre-merger level of $3.25 plus full realisation of the Fentura cost savings the combined first-half 2026 results already show, with 4.5% growth for ten years and 2.5% for ten more, matching the bank's best stretches of organic loan growth. No new acquisitions are credited. There is no debt to subtract: borrowings and deposits are the bank's operating raw material and their cost is already inside earnings. What could be wrong. The three things most likely to be wrong are the margin once accretion is gone (every 10 basis points of margin is about $0.20 a share of annual earnings), the commercial real estate book in a Michigan downturn, and deposit costs if rates stay high. If all three go badly together - earnings of $2.40 and a cycle as above - the shares would still be worth around $30. The worst plausible outcome no case models is a severe local recession concentrated in office and retail property combined with a run on uninsured deposits; with tangible equity of about 7.6% of assets the bank would likely survive it but might need to raise capital at a low price. The business pays a dividend of about $1.16 a year during the holding period. Prior estimates were built on a different basis and are not comparable. Since the last review the bank has reported a second clean post-merger quarter (second-quarter 2026 diluted earnings of $0.83), which supports the earnings level; the accretion runoff now estimated for 2026 is the main reason we set earning power below the current run rate. Margin-of-safety price. The margin-of-safety price is about $19.50, a little below tangible book value of $21.66. At that price the dividend is roughly 6% of the price, and the bank earns about 15% on that price at our earning-power estimate. If the base case plays out and is recognised within three to five years, the base case implies well above 20% a year; if instead the bear credit cycle arrives and recovery takes five years, the dividends plus a recovered business imply a mid-teens annual return, and the price allows for having overestimated earnings after the accretion runs off. Above about $22 the bear path no longer comes close to the target, and below tangible book the downside in a downturn is largely confined to retained earnings rather than capital.