1st Choice banks on merger

Local charter chooses Wells Fargo over uncertain future

In early February, as television-watchers across the country began wondering, “Who wants to marry a multi-millionaire?” 1st Choice Bank of Greeley answered, “I do,” to Wells Fargo & Company.

On Feb. 4, with limited fanfare and little surprise, 1st Choice Financial Corp. announced its sale to Wells Fargo (NYSE: WFC), which, in Colorado, will keep the Norwest name until May. With a formal application to state and federal regulators yet to be filed, the 1st Choice-Wells Fargo union has not yet been consummated, but unlike the marriage of FOX’s ill-fated ratings buster, the banks’ partnership, from the very start, was founded on mutual benefit.

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1st Choice Bank and Wells Fargo found one another just as the era of pooling-of-interests — a popular and often lucrative accounting technique for mergers — reached its twilight hour.

With more than $420 million in total assets, 1st Choice is among the region’s preeminent community-owned banks and at one time advertised a “$100,000 No Name Change Guarantee” that it would stay that way. But like all independent banks, 1st Choice’s first responsibility had to be to its shareholders, who in the end wanted to take advantage of the pooling-of-interest market before it disappeared.

As guaranteed, a $100,000 check to United Way will soon be in the mail, said Darrell McAllister, 1st Choice founder and chief executive officer.

“Every business should have an exit strategy,” he said. “Eventually you have to give your shareholders back their money: a return of and a return on their investment.”

The stage is set

The possibility of a 1st Choice merger was never a new concept, McAllister said. The bank was courted during its first year of business in 1991, and in the last seven years has received about six different offers from various other institutions.

With each offer, the bank stopped to weigh its options, he said. But the timing was never right.

When Norwest came knocking on the door in the late summer of 1999, the timing was perfect.

Industry uncertainties were swarming in the shadow of a Financial Accounting Standards Board decision to eliminate pooling-of-interests — a bank-merger accounting method that allows a high purchase price without a penalty to the acquirer’s net income.

1st Choice commissioned a consulting firm, Alex Sheshunoff & Co., to pull together a forecast for the industry’s mergers and acquisitions market, and Sheshunoff’s findings were cause for concern.

“Our shareholders got concerned that when the pooling-of-interests disappeared, the value (of the bank) would drop,” McAllister said. “It became less clear whether to stay independent or possibly consider a sale or merger. At that point in time, the board of directors wanted to go talk to Norwest.”

McAllister obliged and in the early fall, met with Norwest Colorado chairman and CEO John Nelson.

The courtship begins

“We had admired this organization for some time and valued the record and results that Darrell and his associates have built,” Nelson said. “His bank locations were a good fit for us.”

The $218 billion financial-services company, through both its Norwest and Wells Fargo identities, has made numerous acquisitions in recent years and hundreds over the last half-century — both before and after the historic Norwest-Wells Fargo merger of November 1998.

McAllister left the meeting with Nelson confident of the compatibility of the two institutions’ business philosophies.

“I sort of thought it was a possibility then,” McAllister said and, after discussions with his board of directors, decided to pursue a merger.

1st Choice went back to Sheshunoff, this time recruiting the investment banking firm’s expertise as a sort of dating service — to see if there were other, bigger fish in the sea.

“We wanted to see what would be the best value for our shareholders,” McAllister said.

Sheshunoff solicited bids from banks across the industry and gauged the market’s over-all interest in 1st Choice.

“They found that the values were dropping, that there would be fewer potential buyers (in the future) and we decided that Wells Fargo philosophically and financially were the best — they were talking the best numbers.”

Wells Fargo worked up an acceptable preliminary purchase offer and, in October 1999, the banks signed a letter of intent.

“That’s when a lot of the rumors started leaking out,” McAllister said.

A secret engagement

Due-diligence proceedings followed in November with a team of 50 experts poring over 1st Choice’s books and assets. When the appraisal process was complete, Wells Fargo pitched its final offer — a number very close to the preliminary figure, McAllister said.

During the following months, with rumors and speculation following at every turn, 1st Choice moved through the deal’s end-game negotiations and signed a definitive agreement on Feb. 4.

Ironically, when all was said and done, Wells Fargo’s acquisition did not involve pooling-of-interests accounting and instead used the alternative “purchase method” of accounting, which discourages high purchase prices and soon will be the FASB standard for mergers and acquisitions.

“From our standpoint it doesn’t bare on whether we do or don’t, or when we make a purchase,” Nelson said of Wells Fargo’s indifference to the upcoming changes in FASB’s pooling-of-interest policies.

But the FASB rule change was nevertheless a driving force in 1st Choice’s decision, McAllister said.

A year from now, when the pooling-of-interest-inflated purchase-prices are no more, no one — including Wells Fargo — is likely to offer bids as high as they’re offering now. And already — particularly with a volatile financial-commodities market — the values are falling.

“It was a very fair number both ways,” McAllister said of the purchase price, “but the pie in the sky number had disappeared. We weren’t quite as handsome and good looking as we thought we were.”

The honeymoon is over

Wells Fargo has yet to announce when McAllister’s seven regional locations will nail up the Wells Fargo banner and drop the 1st Choice name, but filings with the Office of the Currency Comptroller and Colorado Division of Banking are expected by month’s end. One way or the other, 1st Choice customers soon will have a new bank — Weld County’s new biggest bank on the block.

“Large business will stay with large banks,´ said Bill Farr, president of Centennial Bank Holdings Inc., which prior to the 1st Choice-Wells Fargo merger boasted the largest share of Weld County’s total volume of deposits. “But we specialize in small business.”

And not all small businesses will want to bank with a large institution, he said.

“We share a lot of the same philosophy as 1st Choice,” Farr said. “If customers were inclined to go with Darrell, they might be inclined to come to us. How many will switch to us? I don’t know, several million dollars worth maybe.”

Evidence suggests Farr’s banks already are feeling the effect: Centennial’s total assets have increased by $50 million since the first of the year.

“You’ve got to know that some of that is from people who would have gone to 1st Choice,” he said.

But only time will tell where customers will settle. When Norwest bought Pitkin County independent Bank of Aspen in 1991, “they did a surprisingly good job of not losing customers in the beginning,´ said Kurt Adam, who was president of Bank of Aspen at the time of its acquisition.

Adam is now the president of Community Banks of Colorado, which operates Aspen’s only remaining independent bank.

“In a town like ours it wasn’t the name of the bank or the services (that attracted customers), it was the individuals delivering the services,” he said. “As the officers and staff left, that’s when Norwest saw erosion of its customers and loyalties.”

At least one high ranking officer and a number of other employees have left 1st Choice since the Feb. 4 announcement.

“We’ve had a few people who don’t want to go through a merger,” McAllister said, but noted that “the margin of turnover is small.”

As McAllister and 1st Choice bow out from the region’s field of independent banks, a narrow niche in the industry could be widening.

“It’s a big-fish theory or the law of the jungle,” Farr said. “We all feed off each other to a certain degree.”