Big Acquisition Create Opportunities to Purchase Branches

When First Bank System Inc. completes its acquisition of Metropolitan Financial, the Minneapolis-based regional won't be the only one increasing market share.

As its acquisition nears completion, First Bank is auctioning off 63 branches spread across eight states that do not fit the company's customer profile or strategy. It promises to be a bonanza for dozens of smaller buyers eager for a piece of an estimated $960 million in deposits that are for sale.

"It's kind of like a garage sale," said Steve Johnson, a banking lawyer at the Minneapolis firm of Lindquist & Vennum, which is advising several consortia of banks anxiously bidding for the pieces.

The business was once consigned to buyers of remnants of failed institutions, but the decision by a healthy bank to sell pieces from its own acquisition or to simply shed undesirable locations is increasingly common. Indeed, a burgeoning cottage industry of consultants has sprung up to advise banks on the value of buying or selling competitors' branches.

"The branch transactions have increased, and with the advent of interstate banking, there will be even more," said Anita Newcombe, a principal in the Secura Group, a leading adviser in branch sales. "There is also a revolution going on on the retail side of the business, and banks and thrifts are rationalizing their branches for the first time."

The number of deals hit a record 188 last year, with some $21.9 million in deposits changing hands, according to SNL Securities in Charlottesville, Va. While it is not clear how many branches changed hands in 1994, observers say that most deals were for fewer than five branches, with the majority involving the transfer of one location.

Deals like the one at First Bank are unique, but analysts say they could become more common. The size of the planned branch sale has not deterred interest. An estimated 250 inquiries poured into Montgomery Securities, which is advising First Bank on the sale, after it announced plans to award bids this month.

"Frenzied may be going too far, but it's fair to say there is a lot of interest," said Mr. Johnson. "It's obvious that these are not the premium properties, but it provides an opportunity for smaller institutions to get a branch that could be important to them.

"If you are a $50 million-asset community bank in the Dakotas and you have a chance to buy $20 million in deposits from a branch just down the street, that is a major opportunity that just doesn't happen every day," he said.

The plan to sell the branches has created such strong interest that many competing banks have attempted to form buying groups so they can bid for all the branches in one or more states, rather than individually make a grab for select branches.

Under the arrangement, the consortium develops a pre-arranged plan for dividing up the branches among the buying group so that everyone gets what they want. One group seeking Minnesota branches had 22 members.

Another consortia was reportedly lead by rival Norwest Corp., which was offering acquisition financing through a correspondent banking operation that ironically competes with First Bank.

"Some strange bedfellows have been thrown together here," said one Minneapolis banker. "It wasn't hard to get everybody to check their egos at the door because this was, after all, business."

It is not clear which is more difficult, buying or selling branches. Both sides have similar objectives: getting a fair price, buying or selling the right customers, and doing it in a way that makes the franchise stronger.

Ms. Newcombe said the buyer risks acquiring a branch only to have too many of its customers leave after the transfer is complete, while the seller may be getting rid of customers without realizing it. Because customers don't always use the branch closest to their home, it is important to understand how a customer banks.

"The tricky thing may be to determine where a customer is actually transacting their business," she said. "You may be selling customers you don't realize you're selling."

Ms. Newcombe said that in advising a client, she focuses on demographics and other special factors that may affect customer loyalty. She recently brokered the sale of a New York State branch of Israel-based Bank Leumi to Latin-owned First Bank of the Americas.

"Both of those banks have a very strong ethnic identification, and you have to factor that in when you are buying," said Ms. Newcombe, who represented the seller. "You have predominantly Jewish customers whose accounts have been sold to a bank headquartered in Latin America."

That is a far cry from the dilemma buyers faced in the late 1980s as they picked through the remains of failed banks and thrifts. By the time the Resolution Trust Corp. or Federal Deposit Insurance Corp. sold branches with deposits, any customers that were still around were not likely to leave if acquired by a solvent bank.

"If you consider a Texas thrift, it may have failed a couple of times. So if a customer stuck around for that, they were either pretty damn loyal or they just didn't know they could move to another bank," said a lawyer who specialized in the sale of bank parts. "That's not the case any more. You are liable to buy a customer base that feels betrayed. Maybe they banked with the seller (of the branch) because they had certain products or they just liked the bank's logo."

And, with deposit premiums staying high, buyers had better be certain they can earn back the purchase price quickly. In 1994 the median premium paid for deposits was 2.82%, up from 2% the previous year. Regionally, prices reached an average of 4.5% in the Midwest last year, but were as low as 0.89% in the Southwest, according to SNL Securities.

All the signs indicate that prices will stay high for a while yet.

In New Jersey, privately owned Berkeley Federal Savings Bank earlier this month sold $910 million in deposits to Sovereign Bancorp. for a healthy 7.5% premium.

"I've been around this business for 10 years, and the prices go up and down, but it pretty much tracks the (whole bank) M&A market," said David Lazar, managing director at Philadelphia-based Berwind Financial, which represented Berkeley in the deal. "Banks like these kinds of deals because there are no social issues, no stock issues because the currency is cash, and few employee concerns."

He doesn't see branch deals slowing. In New Jersey, Chemical Banking Corp. was expected to sell some of its operations, but then decided to sell the deposits as a whole bank. Meanwhile Pittsburgh-based PNC Bank Corp. has said it will close nearly one-third of its branches as it expands its telebanking centers.

"Banks have a lot of alternatives," said Secura's Ms. Newcombe. "The last alternative is to close the branch, because the net effect is zero."

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