M&A in Wisconsin (Ambassador Group)

Notes from the Ambassador Bank Vault - October 12, 2017

Mergers & Acquisitions: A Look at Wisconsin
Investment Thesis

E Pluribus Unum (“Out of Many, One” – words inscribed on the state flag)


Bank consolidation activity in Wisconsin has slowed from last year’s torrid pace, but should maintain a steady course given the abundance of smaller community banks that may lack the necessary scale to successfully overcome industry-wide earnings, regulatory, and technological challenges. Along with succession issues, all of these hurdles may be overcome through mergers. We also believe that growing concerns that the dysfunctional political environment may delay (or prevent) many pro-growth/business policies from being enacted will convince some bankers that selling out may be the better option. Credit quality generally remains very good and should not impede consolidation activity for the foreseeable future.

Although banks are sold and not bought, the desire among all community banks to improve funding supports merger activity. Some institutions will find it more economical to gain new customers through acquisitions compared with organic growth. Although there are relatively few larger in-state banks with the capacity to acquire, several out-of-state banks appear to be willing buyers. Potential buyers, moreover, generally possess strong currencies that can justify higher acquisition premiums, although anecdotal evidence suggests there is a pricing disparity between the value that potential sellers expect to receive and that which buyers are willing to pay. Merger of equals often make financial sense, but social factors have historically limited these transactions.

Wisconsin, the focus of this Industry Report, is a fragmented banking market as there are numerous smaller community banks, and only a handful with assets greater than $1 billion. Please see Appendix A. The nation’s largest banks have a lower overall deposit market share in the Badger State (vs. other states); and much of that presence is confined to the Milwaukee and Madison metropolitan areas. Wisconsin’s community banks also face tough competition from credit unions and other non-bank financial companies.

Deals, therefore, are likely to be smaller in size given that there are fewer mid-sized banks in Wisconsin. Smaller banks – for a variety of reasons – have generally received lower acquisition premiums compared with larger community banks. The median price-to-trailing 12-month earnings and price-to-tangible book value ratios were 22.1 times and 156% for banks with assets below $1 billion for the nine months ending September 30, 2017. The same ratios over the same time-period for banks with assets between $1 and $2 billion were 21.1 times and 209%, respectively, and 22.7 times and 244% for banks with assets between $2 and $10 billion.

Read the entire report here

Source: Karl Ostby, Ambassador Financial Group