Market conditions for community banks are so tough that even a spirited cowboy is seeking the cover of a larger organization.
Mountain Valley Bank in Walden, Colo., agreed last week to merge with Platte Valley Financial Services in Scottsbluff, Neb. The merger is more of a reunion than an acquisition; Platte Valley was the $157 million-asset Mountain Valley's biggest shareholder when it was started in 2004.
Platte Valley's stake fell below 5% in 2007, as Mountain Valley sought a higher concentration of local ownership. Seven years later, the mounting costs of running a bank outweighed the frontiersman mentality of Terry Jost, Mountain Valley's chief executive.
"Out here, we have an independent Western mentality. There wasn't a feeling that Platte Valley had done anything wrong, my directors just felt they would prefer to call the shots," Jost says of the initial separation.
"The world has changed so much since 2007," he adds. "My concern is not for right now, but three to five years down the road. We decided to reach out and ask [Platte Valley] if it made sense to reunite."
It did make sense to Platte Valley. In fact, the $741 million-asset multi-bank holding company's executives had been thinking the same thing, says Chief Executive Hod Kosman. The company had bid on a few failed banks in Colorado and has been hunting for ways to deploy capital. Platte Valley is still looking for deals. Kosman says he is working on another potential deal.
"We are in an acquisition mode," Kosman says. Mountain Valley "gives our organization another market in another state, so it brings some nice diversity. We're happy to be back in Colorado."
Kosman and Jost began discussing a reunion at the same place where they first decided to pair up, meeting at nearby summer homes in Clark, Colo.
Few mergers reunite companies, but this deal speaks to a move toward friendlier transactions. In the last year, several deals have involved companies with some history. In some cases, the executives are old friends or colleagues. Other times, the buyer had been courting the seller for years.
"Most of the transactions we've been working have a buyer-seller relationship that predates the marketing process," says Wesley A. Brown, managing director at St. Charles Capital, which represented Mountain Valley. "We are often asked to go shop the deal, but the winner often ends up being the one with the pre-existing relationship."
That wasn't always the case, Brown says. In the past, if sellers didn't go to the highest bidder, they went to the one who was nicest to them in the process.
Dealmaking has changed. More deals are being negotiated because there are fewer and pickier buyers and more deals involve stock. Jost, who is also a rancher, says he prefers it this way. He gets the benefit of a larger organization, but gets to stick around and still run his bank.
"Otherwise, a buyer can take your bank and send you down the road," Jost says. "This way, my shareholders have an interest in a profitable and growing bank with plenty of opportunity to make money."
The idea of building scale is a key objective for Jost and Kosman. As they see it, the combination lets Mountain Valley spread its operating cost over a larger set of earning assets. Added compliance costs are just part of the math. Jost says he was also feeling pressure from higher health care costs tied to the Affordable Care Act and the expense of information technology tied to cyber security and core processors. Increasing the bank's asset base independently to offset those costs has been challenging.
"This part of the world has not really recovered in terms of growth. I delivered a presentation to our investors in July 2010 when our loan-to-deposit ratio was 109%," Jost says. "We are loaned up to 59% now. I don't care what the interest rate is, you can see what happens to the top line growth when your loans shrink by $55 million."
Platte Valley had a 95% loan-to-deposit ratio at the end of 2013. "I can take my cheaper liquidity to work over there," Jost says.
Platte Valley also has some products and services that can be layered into Mountain Valley's operations, including secondary mortgages, trust, insurance and equipment finance.
"Remote deposit capture could work really well there, too," Kosman says. "It can get pretty remote out there in the mountains."