Mastering the Two-Step Merger

In a “traditional” bank merger, the closing and data conversion flow is (theoretically) straightforward:  the deal closes on a Friday afternoon, the office and data conversions take place over the weekend, and the acquired bank’s branches open under the buyer bank’s shiny new signage and core processing system on Monday morning. No muss, no fuss (again, theoretically). However, with conversion schedules for core processing vendors booking out increasingly further (sometimes 12-18 months!), two-step bank mergers are becoming increasingly common. Under this scheme, the “legal merge” takes place on the closing date, but the “operational merge” doesn’t take place until sometime post-closing—that is to say, while the new name might take effect on the legal merger date, the acquired bank’s offices run on the legacy core processing system for a period of time, and customers’ access to both the new and existing branches might be limited. While this might seem like a great solution, banks considering a two-step merger must take into account and carefully plan for a lengthy list of legal, operational, and regulatory issues.

Using Branch Names

The practice of using temporary “doing business as” names, “branch names,” or tradenames while the legally merged bank churns through the operational merger has become more popular, but be aware that the requirements for doing so can vary by regulator. If the buyer bank plans to operate an acquired bank as “Anytown Bank, a division of Anystate Bank” or something similar for some period of time post-closing, it is important to review this approach with regulators first. Some regulators require preclearance of these tradenames, and certain states require filings with the secretary of state. Regardless of who the buyer’s primary federal regulator is, care must be taken to ensure there is no confusion among depositors for FDIC insurance purposes. In any event, it is important to remember that the tradename is not a legal name and does not represent a separate legal entity, so the legal name of the surviving bank must be used for legal and official purposes.

Managing Vendors

Managing vendor contracts is tricky in any transaction, but two-step mergers can prove particularly complicated. When contemplating a two-step merger, due diligence on contracts and effective communication with both the buyer’s and the seller’s vendors are critical. Which services can be combined at the time of the legal merger, and which services will temporarily require two separate systems (and two separate invoices)? What assignment and/or consent requirements do the contracts contain? What early termination and deconversion fees apply, and can the timing of the operational merger be strategically structured to minimize them? Do any of the contracts contain exclusivity provisions that would prevent the use of a parallel vendor, even temporarily? Will the two sets of vendors and systems be able to effectively “talk” to one another, and how much manual processing and amalgamation of data will be necessary? What will be required in terms of tri-party confidentiality agreements? Transparency among the buyer bank, acquired bank, and vendors is essential, and starting conversations early can save misunderstandings, headaches, and unexpected consequences.

Shared Services Agreements

In certain situations, the buyer bank may not be able to take control of the acquired bank’s core processing agreement or other key support services immediately upon closing. For example, the acquired bank might be covered under a core system shared by a sister bank and managed by a common holding company, or the acquired bank may rely on the support services of a shared administrative team (think human resources, accounting services, or business continuity planning). In these situations, the buyer will need to negotiate with the seller and other involved parties for continued services until the conversion date. These arrangements should be carefully thought out and always documented in writing (with appropriate confidentiality and data security requirements included). While an amicable agreement can usually be reached, both parties must consider regulatory and operational risk elements.

Call Reports and Other Regulatory Filings

Even if it looks like the buyer is running two banks operationally, for purposes of regulatory reporting, the buyer bank and the acquired bank are one and the same as of the legal merger date—one bank filing one Call Report. The manual merging of Call Report data flowing from two different core systems comes with its own set of risks and challenges, and the buyer must make sure its systems and personnel are up to the task.

Customer Communications

Two-step mergers can cause a great deal of customer confusion, especially when both banks operate in the same market. While the name, signage, website, and official documents all might reflect one combined bank after the legal merger, until the operational merger takes place, customers of the acquired bank may not be able to access their accounts and services at the branches of the buyer bank and vice versa. The combining institutions must work together to develop a communications plan explaining to both sets of customers how they will be impacted and when. Where can they deposit checks? Which ATMs can they use? When will they receive new debit cards? Will their online banking logins change? Step into the shoes of the customer to brainstorm potential pain points and develop answers and workarounds well before they are actually needed—and make sure the bank’s operations team is involved in this conversation.

Customer Agreements and Official Documents

Signage, account statements, disclosures, bank forms, and letterhead generally should be flipped to reflect the buyer bank’s name at the time of the legal merger. If the acquired bank will be operated with a branch name or tradename, the tradename can be used on certain materials, but it is important to remember that the two banks legally become one on the legal merger date. The acquired bank is no longer a separate entity, and therefore, all customer agreements, disclosures, collateral filings, contracts, and other official documents going forward after the legal merger date should be executed in the name of the buyer bank and not the tradename. This often becomes a significant point of confusion for both customers and bankers alike.

Demands on Personnel

Given the above, it should come as no surprise that two-step mergers can pose a significant challenge for a bank’s management and operations team. Before committing to this approach, management must honestly evaluate the bank’s ability to carry it out successfully. Just as this process can be confusing for customers, it can also be confusing for employees. A two-step merger impacts every bank employee from the C-suite to the tellers, so it is key to marshal a thorough communication and training plan to help all employees understand the nuances of the process, how to communicate with customers, and what extra steps might be required in their day-to-day operations. Much of the compliance, operational, and reputational risk exposure involved in two-step mergers ultimately comes down to human error.

This is by no means an exhaustive list of issues to navigate in a two-step merger. There are experienced acquirors out there who have this process down to a science, but for those banks that might be considering this approach for the first time, be careful not to underestimate the amount of advance planning, expense, and extra hoops it entails. Combining banks is never easy, and every transaction has its own unique aspects. Two-step mergers can be a great way to sidestep conversion timing issues and still get the deal done on the desired schedule—they just require careful choreography.