Vendor contracts, time and emotion surprise bankers in recent deals

Bankers share their M&A experiences at the Bank Holding Company Association Fall Seminar. From left are: Pete Haddeland, FIrst National Bank, Mahnomen, Minn.; James Williams III, Bank North, Casselton, N.D., and Wade Gort, Premier Bank, Rock Valley, Iowa.

While acquisitions are often driven by a desire for growth and the need to obtain local deposits, navigating data processing company escape clauses can add overwhelming cost to a dynamic process. Bank transactions can also be lengthier than expected — and emotionally fraught. These are some of the conclusions drawn by James Williams III, Bank North Casselton, N.D., Wade Gort, Premier Bank, Rock Valley, Iowa, and Pete Haddeland, First National Bank of Mahnomen Twin Valley, Minn., all recently involved in a bank deal. The three bankers shared their experiences Oct. 1 at the Bank Holding Company Association Fall Seminar, a two-day M&A-focused meeting in Bloomington, Minn. Their discussion was facilitated by Blake Crow and Jeff Campbell of Eide Bailly.

Getting out of a data processing contract three years early can cost several hundred thousand dollars, said Haddeland, whose $102 million bank was acquired by the holding company for United Valley Bank in Cavalier, N.D. “It’s a huge consideration.”

Gort’s bank acquired the $122 million State Bank in Alcester, S.D., a Fiserv bank with approximately 28 months left on its contract. “I don’t think the seller realized the severe penalties for getting out,” Gort said. The purchase agreement the banks negotiated stipulated the selling bank would pay one quarter of the penalty and the acquirer would pay the balance. “I took on the negotiations myself. Premier Bank had recently signed a seven-year deal with Fiserv. “To lessen the pain, we agreed to sign up for another year, plus we got flex credits where I will get about 90 percent back.”

Williams admitted vendor contracts would have been a huge impediment for his bank’s deal had the dollar figures on buyout clauses been large. “We negotiated with the sellers to help with that,” he said. “Our provider, Modern Banking Systems, had converted numerous disparate banks, so we knew it wouldn’t be an issue, and it wasn’t.”

Conducting due diligence when negotiating a bank deal can be a delicate process. For Gort, the process was exacerbated by a reluctant seller. “He stopped the transaction three times between July and December,” Gort said of the third generation banker at the bank he was acquiring. After the third change-of-heart, Gort said he gave the seller an additional 30 days to rethink the deal before proceeding with due diligence. “Just getting him to be sure took time,” he said.

Keeping staff and the community from learning of an agreement added to the challenge.  “We hired a CPA firm to conducted a loan review so it looked as if he was doing it,” Gort explained.

Melding cultures once a deal closes can also be a challenge. “It’s tougher than you think and that takes time too,” Gort said. “Staffing, job roles, assigning duties, it’s not easy to figure it out.”

Williams said banks in negotiations can save time and money if they sometimes just pick up the phone and talk their issues through with their transaction counterpart rather than relying on attorneys to be an intermediary. “I was surprised by the amount of time it took,” Williams said. “If it’s a family-owned bank, it can get emotional. Let them come to terms; be patient.”

Haddeland echoed that sentiment. “Tim [Siegle] and I had many similar thought processes,” Haddeland said. While Haddeland said he understands that some deals blow up, he suggested bankers who are negotiating “keep an open mind, be civil and don’t get angry.”

Once the ink is dry on the purchase agreement and the deal gets announced, it’s important to take staff emotions into account. “We underestimated the human element,” Gort said. On the day Gort and his team came into their acquired bank to announce the sale, Gort said he was taken back by the sight of tears streaming down the faces of employees. The emotional factor is one acquirers need to recognize.

Williams likened the process for an acquired institution choosing its acquirer to a father being able to choose his daughter’s husband. The First State Bank of Warner, S.D. did as much due diligence on Williams’ bank as Bank North did on them. “They knew it wasn’t part of our strategy to go in and terminate people,” he said. “They were happy to become part of a larger organization and we could take the HR and technology challenges off of their plate.”