The Keys to Completing a Successful Bank Acquisition

The economy is slowly improving and most banks have cleaned up their loan portfolios from the impact of the recent “economic crisis.” The banking industry is healthy again and many banks are looking for ways to grow and effectively utilize their capital. At the same time, many institutions may be looking to sell. Management and the Board of Directors have become just plain tired having spent the last few years working through problem credits. There also continues to be a downward pressure on net interest margins and many institutions are finding it increasingly difficult to absorb the cost of the excessive regulatory burden being imposed upon them. Lastly, as discussed below, closely held smaller banks located in rural communities are often struggling to hire and retain qualified leaders and will be facing more competition. All these circumstances should lead to an increase in merger and acquisition (“M&A”) activity in the next 3 to 5 years. The following data was extracted from the Federal Deposit Insurance Corporation’s (“FDIC”) Quarterly Profile reports for the first quarters of 2015, 2014, 2013, and 2012 as published on the FDIC’s web site located at

For the years ending

Number of FDIC

insured institutions

Number of merger


Number of



Number of new

FDIC insured


Net interest margin

























The increase in the number of M&A transactions will likely involve smaller institutions (less than $200 million in total assets) being acquired by larger institutions. This opinion is based on:

  • Smaller institutions tend to be located in communities that are rural and have smaller populations (less than 5,000 residents). Many of the banks in these communities are family owned or closely held. Experience tells us that these banks often struggle persuading the next generation (the children of the current owners) of family and or younger talent to locate to these smaller communities and lead these institutions.
  • The increasing cost of complying with regulatory directives focused on risk management and compliance with laws and regulations is making it very difficult for smaller institution to earn a reasonable return for their shareholders. More institutions are receiving “recommendations” from their lead regulator to have an independent third party loan review performed, implement an internal audit function, or complete other risk management type reviews performed by third parties which adds to their overhead. When coupled with the aforementioned downward pressure on net interest margins and the fact that many smaller institutions do not have as much opportunity to generate non-interest income these institutions are seeing their bottom lines go down.
  • The level of competition continues to escalate as more non-depository institutions offer loans and other products traditionally offered by only banks or credit unions. Additionally, technology is making it easier for depository institutions to expand their geographic footprint without adding brick and mortar.

If your institution is looking to grow through acquisition here are five things you should consider to increase the likelihood of your success in both finding a suitable target to acquire and completing an acquisition that adds shareholder value to your institution.

  1. Prepare an M&A strategic plan. Before you begin your search for an acceptable target to acquire, develop a plan which will add discipline to the process and keep the desire to win from leading you to making a bad decision. In this plan you should:
    1. Define the asset size of your idea acquisition;
    2. Determine the maximum price you are willing to pay (obtain data on recent transactions so that you are realistic);
    3. Decide if the target needs to have management in place or whether you will relocate someone in your existing shop to the new market;
    4. Discuss the possible structures for the transactions (stock versus asset purchase) and the potential impact they may have on the income tax consequences, future regulatory capital calculations, and any carry over liabilities associated with the seller’s corporate entity;
    5. Prepare a plan on who is going to contact what targets and when. Also, define the selling points to be used in persuading targets to begin negotiations with you; and,
    6. List out the deal breakers. If they arise during the negotiations or due diligence phase you will walk away from the transaction completely.
  2. Focus on the cultural issues. Culture is as important, if not more important, then the target’s balance sheet. You can work through problem assets in 2 to 3 years. If the employees who remain post acquisition don’t buy into your philosophy of banking you may be battling cultural issues for 5 to 10 years. One or two bad apples can be terminated. You can’t let go of the entire team at the target without losing the customer base.
  3. Develop a comprehensive due diligence approach. It is a given that you will review the asset quality of a target’s loan portfolio. Other key issues to consider are:
    1. Do they have any termination or merger clauses in any of their vendor contracts? This is especially common in data processing contracts and can be very costly.
    2. How do the pricing and features of their products and services compare to yours? Will you have differences in the different markets and how will that impact your data processing systems or marketing efforts? If you don’t allow differences, how will it impact your ability to retain existing customers?
    1. Is their information technology equipment compatible with yours? What will it cost to bring the two systems together? What is the plan for data conversion?
    2. How does the target’s compensation structure and employee benefits compare to yours? If you offer less benefits than the target will it impact your ability to retain their staff?
    3. What does the asset liability position of the target look like when compared to yours? Do they have any long-term fixed interest rate assets or liabilities you need to worry about?

There are more questions than this. This gives you an idea of the issues that go into the due diligence process.

  1. Utilize qualified outside experts. Completing an acquisition is complex and requires knowledge of a myriad of regulatory, legal, income tax, and other issues. You should benefit from utilizing people who have years of experience with M&A deals to help you with pitfalls. Plus, using a third party to contact the targets takes the emotions out of the call and often makes you appear more credible and serious about your intentions. You should assemble and include your attorney and M&A consultant in the preparation of the M&A strategic plan.
  2. Create a plan to retain customers and employees post acquisition. Does the target have non-solicitation agreements in place with its key customer serving employees? If not, you may want to consider using retainage agreements with the target’s key employees that include these provisions. We suggest that you make it a condition to closing that the seller help you entice these employees to sign these agreements. You should also have a plan in place prior to executing the purchase agreement as to when and how you will inform and retain employees and key customers after the acquisition. Consider adding a provision regarding the seller’s role in this process to the purchase agreement.

There should be more opportunities to grow your institution by acquiring another bank in the next 3 to 5 years. Make sure you use a disciplined approach, hire the right experts to help, and perform thorough due diligence so that the process is enjoyable and adds to the long-term shareholder value of your bank.