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With the intensifying need to control deposit costs, we continue to see tremendous interest in bidding on branch transactions from our base of community bank clients. Branch transactions are unique, taking on characteristics of M&A transactions, new branch formation, and team lift-outs. As the most experienced firm in branch transactions in the nation, our attorneys have collectively the following top ten list of considerations for branch bidders. Any bank desiring to purchase a branch or branches in the future should keep these tips in mind as it approaches bid submission
- Know Your Customer. Our top tip goes beyond the traditional notion of Know Your Customer from a compliance standpoint. In branch transactions, the key “asset” being acquired is customers (in the form of deposit liabilities). It is imperative to focus on the type of customers you are buying in the transaction. An article in the Wall Street Journal earlier this year profiled an unfortunate situation in which a community bank purchased branches from a mega-bank only to see a tremendous number of the acquired customers leave them immediately. That situation might have been avoided if the community bank had understood that many of those customers were “mobile-first” consumers of banking services, relying on the selling bank’s mobile application rather than conducting in-branch transactions. While that fact is not fatal to a branch transaction, it should signal to the bidder that it will need to have a competitive mobile solution for the acquired customers in order to retain them.
Any branch transaction brings with it some assumed run-off of deposits. Studying the profiles of the customers will help a bidder accurately model that run-off. The diligence involved should include the basic analysis of whether customers are properly coded as customers of the branch being sold and, if possible, should include information regarding the number of transactions conducted by those customers in the branch as opposed to using virtual means. That information will help the bidding bank understand whether it will be able to properly serve and retain those customers.
- Do the Math. Assistance from an experienced financial advisor is critical to developing an appropriate bid. While some banks have this expertise internally, most will need to seek outside assistance. Advisors should be quizzed on their experience in modeling branch bids. In a recent auction of a number of branches, the bids received varied wildly. While that fact could indicate a lack of properly modeling, it more likely reflects this key fact: deposits are worth different amounts to different banks. Bidders should study their ability to utilize the additional liquidity through increasing loan volume or by replacing higher-cost funding sources. At the end of the day, a branch acquisition should be a strategic fit, but it should also be priced in a manner that is likely to produce tangible financial benefits to the buyer.
- The “IT” Factor. In today’s business environment, it is important for bidders to understand the “IT” factor in acquiring or establishing new branches, with “IT” meaning information technology. Particularly for banks acquiring a branch in a more rural market, bidders should ensure that the information technology infrastructure accessible to the branch is compatible with the bidder’s needs. For example, if a bidder has a sophisticated infrastructure using fiber technology and various fail-over sites, it should ensure that the new branch can be connected to that infrastructure with relative ease. Unfortunately, we are aware of some banks that have invested in the latest imaging technology without ensuring they have the communications infrastructure to match it. The latest technology will only cause frustration if it is too slow to utilize.
- The Team Approach. Many M&A transactions are negotiated in a shroud of secrecy for very good reason. Branch acquisitions should vary from that theme a bit. Given the operational challenges of moving customers from one bank to another while the selling bank is still in existence, bidders should include the leaders of their operational teams in diligence and negotiations. Post-closing operational agreements should be constructed in a pragmatic fashion. Experienced attorneys can propose and negotiate typical operational covenants, but bidders should ensure that their operational personnel are comfortable implementing those agreements.
- Trust the Process, but Build it First. Branch acquisitions require bringing together a number of different processes, including legal negotiations, regulatory applications, customer communications, employee integration, and operational conversions. Too frequently we see branch buyers pick a closing date, usually in accordance with the schedule provided by their data processing providers, then take the other required actions on an ad hoc basis. It is important for designated project leaders to build a collaborative and documented process that leads to a smooth closing and conversion for the benefit of all parties involved.
- Work the Refs. While branch transactions may not seem to be as significant as whole bank acquisitions, they implicate many of the same regulatory requirements. Before submitting a bid, potential acquirers should communicate with their regulators to ensure they support the bank’s entry into that type of expansionary activity. Even banks with strong regulatory ratings may find out that regulatory follow-up is needed prior to and during the application process. Building those timing expectations into the project plan will provide realistic insight into the time needed for closing and associated costs.
- Know Your Limits. Frequently branch transactions also offer the buyer the opportunity to purchase loans associated with the branch. In many respects, bidders should think of the bid on loans as a separate transaction. Consideration should be given as to whether the loan types fit with the bidder’s lending parameters, even if credit quality appears strong. Particularly when smaller banks buy branches from larger banks, the bidder should also give attention to whether any lending limit issues are presented, whether with regard to legal lending limits or the bidder’s house limits. Sometimes participation arrangements with the buyer can be negotiated, but those should be approached with care.
- Throw out the Welcome Mat. Almost any branch transaction will also bring with it the hiring of new employees who work in the branch. Buyers should consider that these employees are often confused and nervous about the transition. Attention should be given to making these new employees feel confident and welcome, especially by ensuring that the buyer has access to the employees for training prior to closing. On the other hand, buyers should be equally vigilant about ensuring that headcount in the branch is right-sized and that the new employees are capable of assimilating into the buyer’s culture. Finally, buyers should work with their benefit providers to ensure a smooth transition for the new employees, particularly as it relates to carry-over of insurance deductibles, service credit, and waiver of pre-existing conditions to the extent possible.
- Don’t get CRAzy. Buying a branch in a new market area often expands a bank’s CRA assessment area and reasonably expected market area for fair lending purposes. If the revised assessment area resulting from any branch acquisition obviously excludes nearby majority-minority census tracts, or if the bidder will have difficulty achieving loan penetration in those areas based upon available resources and product offerings, then the acquisition could result in redlining allegations. Even where there are no actual redlining allegations, this type of expansion can result in examination criticism relating to “increased redlining risk.” Bidders should carefully consider these implications prior to submitting a bid.
- Location, location, location. In evaluating a purchase of real estate (or assumption of a lease) in connection with a branch acquisition, bidders should consider the fit of the new facility with their existing approach to facilities management. Some community banks consider their branch facilities to be the face of the bank in the community, while others prioritize efficient use of space. Either approach can be effective, and both speak to the value of the facility to the individual bank. If the branch facility to be acquired does not fit with the bidder’s approach to its facilities, that fact should be factored into the amount the bidder is willing to pay. Appraised value is not always a true indicator of what a particular facility is worth to a given bidder.
Consideration of these points should lead to a better constructed bid for a branch acquisition. Prices of recent transactions are often a good check for the competitiveness of a bid, but they certainly should not be the primary driver of a bank’s approach to pricing a bid. Win or lose, bidders should feel confident that they have submitted a bid that will lead to short- and long-term success.
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With offices in Texas, Missouri, and Georgia, FENIMORE, KAY, HARRISON & FORD, LLP represents community banks across the country in a wide variety of legal and regulatory matters and is recognized as one of the national leaders in banking transactions. Contact any of the attorneys listed here for more information regarding our capabilities to serve community banks.