Increased Insurance Agency Activity While the community bank transaction market was relatively quiet in 2023, transactions involving independent insurance agencies were numerous. Sellers of insurance agencies have found many willing buyers, including several national insurance conglomerates that are aggressively expanding. Competition among buyers, coupled with increased insurance premium prices in the industry, produced increased sale premiums for insurance agencies in 2023. Capitalizing on these trends, some community banks with affiliate agencies have chosen to sell such agencies2 at these elevated valuations and contribute the sale proceeds to bank capital to strengthen their balance sheets.3 This has been a popular capital-raising strategy across banks of all sizes in 2023.4 There have also been several insurance agency acquisitions from non-financial institution sellers in Nebraska and the surrounding states in 2023. Part Two: Factors to Consider when Contemplating Selling an Affiliate Agency Local and national buyers will likely continue to call on Nebraska banks with affiliate insurance agencies in 2024 in hopes of putting together transactions. These transactions present exciting capital-raising opportunities but may also present post-closing operational risks for the selling bank. To assess these risks, potential sellers should consider a number of factors when contemplating whether to pursue a transaction. 1. Impact on Bank Earnings Affiliate insurance agencies may provide a boost to bank earnings from a non-core business segment.5 While an immediate capital injection from transaction proceeds is appealing, it is important to also assess the loss of future earnings. Pro forma financial statements should be prepared to reflect the overall impact of the transaction and should be evaluated by bank management and its external accountants. Banks should also consider the amount of bank business generated by insurance agency customers. Incremental bank business may be lost if agency customers move their insurance business elsewhere following a transaction. 2. Scope of Restrictive Covenants Customer relationships are the foundation of any insurance agency business. Agency buyers will require non-competition and non-solicitation agreements from sellers in acquisition transactions. While a deal is unlikely to be completed without some restrictive covenants, there is usually some room to maneuver. A seller bank must carefully consider the scope of the restrictive covenants to which it can agree. In doing so, a seller bank needs to consider not only its own future business plans as they relate to the insurance industry but also whether any non-compete provision would burden a future acquirer or merger partner of the bank. To the greatest extent possible, these restrictive covenants should exclude the activities of future transaction parties from their scope. Without this exclusion, a potential future acquirer of a seller bank that operates its own insurance agency business may be unwilling to pursue a transaction during the restricted period. Members of bank management may also be required to sign restrictive covenants if they are equity owners of the affiliate agency or provide services to the agency. These individuals also must consider, among other things, whether their restrictive covenants would prevent them from providing services to a future bank acquirer with insurance agency operations. 3. Future of Shared Employees Many individuals providing services for bank-affiliated insurance agencies are not direct employees of the insurance agency itself. When an insurance agency is a division of the bank, such persons are likely to be employed by the bank. If the insurance agency is a subsidiary of the parent holding company, such persons are likely leased employees from the affiliate bank. An agency buyer, particularly an out-of-market buyer, will likely require that these individuals become employees of the buyer following the closing of a transaction. Sellers must consider whether the bank will require the services of these individuals following closing. If any will be required, the selling bank should make this known to a potential buyer at a very early stage. 4. Shared Information Technology and Co-Mingled Records Banks must consider how the insurance agency’s technology and records would transfer to a potential buyer. If the information technology resources are provided to the insurance agency by the bank, the bank should contemplate whether (and for how long) this service will continue following closing. Many insurance agencies utilize servers, computers, phone systems and other equipment owned or leased by affiliate banks. Additionally, some banks co-mingle the digital records of the bank and its affiliate insurance agency through storage on common servers. In these instances, the seller bank will need to consider whether segregation of such information is possible and ensure that it can be done without jeopardizing bank records and data. Oftentimes, transaction parties will negotiate a Transition Services Agreement whereby the seller bank 18 NEBRASKA BANKER
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