There is tremendous interest in bidding on branch transactions among our community bank clients.
These transactions are unique, having characteristics of M&A transactions, new branch formation and team lift-outs. Our experienced attorneys collected the top 10 considerations that branch bidders should keep in mind as they approach bid submissions.
- Know Your Customer. In branch transactions, the key “assets” acquired are customers. Any transaction carries some assumed deposit run-off; studying customer profiles will help a bidder accurately model that. Buyer’s diligence should include the basic analysis to see if customers are properly coded and, if possible, the number of transactions conducted by those customers in the branch compared to virtual means.
- Do the Math. Assistance from an experienced financial advisor is critical to developing an appropriate bid. Deposits are worth different amounts to different banks, and bidders should know their ability to utilize the additional liquidity. A branch acquisition should be a strategic fit and should be priced in a manner that is likely to produce tangible financial benefits to the buyer.
- The “IT” Factor. Bidders should ensure that the information technology infrastructure accessible to the branch is compatible with its needs, especially when acquiring rural branches. If a bidder has a sophisticated infrastructure, it should ensure that the new branches can connect to it with relative ease.
- The Team Approach. 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. Experienced attorneys can propose and negotiate typical operational covenants, but bidders should ensure that operational personnel are comfortable implementing those agreements.
- Trust the Process, but Build it First. Branch acquisitions bring a number of different processes together, including legal negotiations, regulatory applications, customer communications, employee integration and operational conversions. Too frequently, we see branch buyers pick a closing date, then take the other required actions on an ad hoc basis. It is important for project leaders to build a collaborative and documented process that leads to a smooth closing and conversion for all parties involved.
- Work the Refs. Branch transactions have many of the same regulatory requirements as whole bank acquisitions. Before submitting a bid, potential acquirers should communicate with their regulators to ensure they support the expansionary activity. Banks may need some regulatory follow-up 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. Branch transactions may also come with the opportunity to purchase loans associated with the branch. Bidders should think of the bid on loans as a separate transaction, considering whether the loan types fit with the bidder’s lending parameters or if there are lending limit issues, even if credit quality appears strong. 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 brings along new employees. Buyers should make these new employees feel confident and welcome, but they should be equally vigilant about right-sizing the acquired branch’s headcount. Buyers should also work with their benefit providers to ensure a smooth transition for the new employees, including the 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 obviously excludes nearby majority-minority census tracts, or if the bidder will have difficulty achieving loan penetration in those areas, then the acquisition could result in redlining allegations. Bidders should carefully consider these implications prior to submitting a bid.
- Location, location, location. Bidders should consider how the new facility will fit in with its approach to facilities management. 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 indicative of what a particular facility is worth to a bidder.
Following these tips should lead to a better-constructed bid for a branch acquisition. Prices of recent transactions are often a good check for a bid’s competitiveness, but they 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.
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.