Published June 2014

By The Capital Corporation

What To Look For In An Acquisition?

Today we are seeing more first time buyers in the market than we have seen in recent years.   We believe that this is driven by a combination of the media frenzy that banks must reach a certain size to survive along with low loan demand in many banks’ current markets. 

The reality is that costs are increasing and spreading those costs over a larger asset base may improve your bottom line, but that does not always mean an acquisition makes sense for you.  We are working with many first time buyers and thought it may be helpful to outline some key issues many buyers are faced with in today’s market.


The first step in considering an acquisition is strategic.  The idea of an acquisition should first be discussed at the management, board and ownership level to determine whether an acquisition will help you achieve the goals and objectives of the owners.  If the answer is no, then there is no reason to spend any time on analysis of an acquisition.

Occasionally owners and management are the same group of individuals, but many times there are significant owners outside of the management group.  In these cases it is important that the owners are brought into the acquisition conversation early to understand

everyone’s expectations.  Owners’ expectations for dividends may limit the ability of a bank to borrow for an acquisition.


If an acquisition does help advance the goals and objectives of the owners the second step is serious thought and discussion to better identify the right type of acquisition.  An acquisition can do a lot of positive things for an acquirer, but it needs to the right acquisition.

The bank should develop the criteria of a suitable target to narrow the potential options to a manageable number.  Most acquirers focus on several key items.  First is often asset size.  What size of an institution can you handle from a financial and management standpoint?  Do you have excess capital?  The capability to raise new capital? Or, how much can the holding company borrow for an acquisition?

The second factor is location.  How far from existing locations can you successfully manage a new operation?   Third is often what type of community fits the acquirer?  Do you want a similar market to your existing market(s) or a new type of market for diversity?   There are many more factors that can come into play but these are the most common.

For example, a bank which has $90,000,000 in assets located in two rural towns may determine that their ideal target will be between $30 and $50 million in assets, located in a county seat community that is within an hour’s drive of their main office.  This criteria is often not set in stone, but rather used to identify and narrow down possible targets for consideration.

Once the criteria is developed, the next step is evaluating specific acquisition targets. Again, there are a couple of key components to evaluating a target institution.  First is the similarity of the business plan.  Do the banks have comparable business strategies?  Unless the goal is diversification or the addition of a new line of business, it is important to determine if the acquirer will be comfortable with the target bank’s customer base. 

For example, what if the acquirer is primarily a collateral based lender with the majority of their loans  secured by mortgages on real estate, but the target is focused on C&I lending and a large base of their loans are secured by inventory and receivables?  Will the acquirer be comfortable with that line of business post acquisition?  If the acquirer is not comfortable with that line of business, how much of the existing customer base that they are acquiring will they retain post acquisition? 

In many markets different business plans are not a significant issue.  However, credit standards, documentation, and loan approval process can vary from bank to bank and can impact the customer retention post acquisition.

One way to determine quickly the business plan of a target institution is comparing the call report information with your bank.  This also ties into the financial analysis of an acquisition, a key component in evaluating an acquisition target.


When working with buyers one of the things we do early in the process is prepare a proforma balance sheet and income statement of the combined institutions.  This analysis provides a quick comparison of key items of each of the banks.  It allows you to compare the type of loans and deposits, the cost of funds and yield on earning assets, the non-interest income and expense items as well as many more significant items.

Additionally, this proforma allows for easy adjustments to the income statement to get a better understanding of the economics of a potential transaction.  Many acquisitions result in cost savings with the combination of two data processing systems, outside audits, professional fees, exam fees, etc.  Reduction of personnel may or may not be an anticipated cost savings that can be factored into the proforma.  Additionally, an increase in income may result from a larger loan limit or the addition of a new product or service of the combined institution. 

The financial modeling of one or more possible acquisition targets allows an acquirer to better understand the combined institution and the economic impacts of an acquisition.  In almost all cases, the goal of an acquisition is to increase earnings and make a good return on the investment.  A detailed analysis and understanding of a potential acquisition should drive the pricing of the acquisition.

Historically, buyers focused on multiples of capital when reviewing acquisition pricing.  While capital is still a key component in an acquisition, the earnings stream and return on investment are what should drive the valuation of a potential acquisition. 

Working with our clients we can develop a realistic proforma balance sheet and income statement which allows our client to determine what different purchase prices will do to return on the investment necessary for the acquisition.  This proforma can also be used at the holding company level to determine the impact of debt service if you borrow to fund the acquisition. 

Again, there are many things that come into play when considering an acquisition.  Although we typically represent sellers, in transactions where we are not on the seller’s side we often work with a buyer assisting them in analyzing the transaction.  If you are a buyer and need assistance in analyzing a transaction, we would be happy to help you with this process.


We have a proven track record in bank mergers and acquisitions evidenced by having been ranked in the top five nationally in number of deals in both 2012 and 2013.  If you are considering a transaction, either buying or selling, let us put our extensive range of transaction experience to use for you.