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Merger and the Cost of Compliance

Following the 2007 mortgage crash, cost of new compliance technology helped drive the first bank merger in Alabama in almost a decade.

Ray Smith (left), formerly of Keystone, and Jimmy Stubbs of River Bank chose merger as the best way to address new regulations and higher costs.

Ray Smith (left), formerly of Keystone, and Jimmy Stubbs of River Bank chose merger as the best way to address new regulations and higher costs.

It may not be a marriage made in heaven, but the merger between River Bank and Trust and Keystone Bank — announced last May — has received the blessing of just about everybody in Alabama community banking circles and may be a sign of things to come.

“The River Bank-Keystone merger is significant because it was the first significant combination of Alabama banks in almost a decade,” says Alan Deer, a partner in the financial institutions practice group of Balch and Bingham, a law firm with offices across the South.

“This was not a distress transaction like those we saw during the financial crisis. Instead, it was two good banks who decided to join together to create synergy and more opportunities for themselves,” Deer says.

River Bank and Trust had two offices in Montgomery, two offices in Prattville, one office in Wetumpka and a loan production office in Alexander City. Keystone Bank had offices in Auburn, Opelika and Gadsden.

Jimmy Stubbs, chief executive officer of the new River Bank and Trust, says maximizing shareholder equity and continuing a community bank culture were key factors in the decision to join forces.

Ray Smith, former CEO of Keystone and now president of River Bank and Trust, says the merger will allow both parties to accomplish some of the goals of the board of directors.

“There are some economies of scale as they relate to compliance costs that we could certainly benefit from, some things that we had to do to comply with the new regulations,” Smith says.

“It always goes back to business school and why you are in business and that’s to maximize shareholder equity,” Stubbs says. “And what we quickly discovered is that there is some value growth opportunity by taking our bank and Keystone Bank and putting them together.”

The combined bank has about $700 million in total assets, $450 million in total loans and $600 million in total deposits, with nine office locations. Before the merger, Keystone had $250 million in assets and River Bank had $450 million.

While shareholder equity was priority No. 1, Stubbs says just as important to both organizations was to make sure that they were combining a community culture that was “living and breathing very well in two separate institutions.

“That community bank culture is a culture that our employees like and is a culture that our customers like, and when we began to sit down and talk about a merged bank, we saw that our culture for our employees and our customers was very similar, so not only can we get some additional shareholder value, but we are not going to give up cultures that have made us successful, not only in attracting good bankers but attracting and retaining good customers.”

Increasing government regulations and laws also played a large part in the decision to merge.

“For example,” Smith says, “real estate lending has changed so much that some of our community banker friends have exited the owner-occupied residential loans because of all the new disclosures and laws that are now in place. They simply could not provide the technology and all the expertise required so they exited. Well, that happens to be one of the most significant lines of business that we as community banks have, helping our customers with their home needs for them and their families.

“There are more regulations coming down the pike that we are going to have to deal with that at the end of the day, if we are going to be a strong community bank and take care of our customers in the manner that we have in the past, and that we are committed to do in the future, and our customers are accustomed to, we need to be larger and to have those resources.”

Smith says Keystone was approached by several banks over the past two or three years “but we were committed to finding a quality organization. We had built a quality organization, and if we were going to merge, we had to have a merger partner that had the same basic philosophy on community banking that we have and they were going to have to be very solid financially. Otherwise, we were not going to jeopardize any of our shareholder equity and the future of our company.

“We believe we found that with River Bank and Trust, and after 90 days of life together, we and our customers have really grown to appreciate what River Bank is all about.” 

Stubbs says while new and emerging — and expensive — banking technology has taken on a larger role in business transactions over the years, he sees an upside to the issue.

“Even though we have to pay for that technology, it allows us to have the same culture, to provide the same personalized service, the same day, one-on-one banker relationship that people chose us for, so not only can we provide that same culture at $700 million but even at $1 billion and even $2 billion.” 

“We have a very strong technology team,” Smith says, “people who understand banking technology and how that impacts customers and what is important to the customer.”

So far, customer feedback on the merger has been positive, Smith says.

“We hear firsthand how they are amazed how transparent the merger has been. They expected a lot of change and there really has been none. One of the things we committed to early on was to continue to provide high quality banking with local bankers and that’s what really sets us apart. We have outstanding bankers that are entrenched in the community where they work and they are there to take care of their customers.”

So what is next for River Bank and Trust?

“We will certainly continue to look for banks who have similar cultures and who are interested in maximizing shareholder value, simply because you can maintain a little bit larger size because the market rewards that. So if we can continue the same culture at a larger size, then why not go out and try to find another bank that has similar values,” Stubbs says. 

“We know that in Alabama there are some good markets, we know that the metropolitan areas of this state are good economic areas and something that we would be interested if we could find the right partner to merge with.”

Bill Gerdes and Robert Fouts are freelance contributors to Business Alabama. Gerdes is based in McCalla and Fouts in Prattville.

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