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Wisconsin banks look to prove community banks do MOEs better

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Wisconsin banks look to prove community banks do MOEs better

A pair of Wisconsin-based community banks are pursuing a merger-of-equals with minimal targeted cost savings.

Both banks are located near the attractive college town of Madison, Wis., which boasts a median household income of nearly $75,000 and a compound annual growth rate in households of 1.19% for 2019, besting the national average marks of roughly $63,000 for income and 0.77% in household growth.

That meant McFarland State Bank, a unit of Northern Bankshares Inc., had plenty of interested suitors, especially considering the bank's above-average profitability metrics and near-zero credit issues. But instead, the bank pursued a merger-of-equals with Oregon Community Bank, a unit of Bosshard Financial Group Inc. While the banks did not disclose deal terms, MOE deals tend to carry a significantly lower premium than a sale to a larger bank.

"Some of the larger institutions that I've talked with over the last several years have had very attractive offers. They like our market and our footprint and our scale — and they offer a publicly traded stock — so those are attractive terms," said McFarland State Chairman and CEO E. David Locke in an interview.

"But, to me, because of my community-banking background, that gets trumped by the benefits of two community-based, family-owned institutions coming together," said Locke, who has worked at McFarland State Bank since 1975.

From Oregon Community's perspective, the bank was on the hunt this year for a deal that would grow its footprint, said Steve Peotter, president and CEO.

"We were considering 2019 as a great year for us to look at an external merger with another bank," Peotter said in an interview. "We were hoping to find what we would call a merger of equals. We thought that an MOE that leads to a $1 billion organization would be the perfect fit for us."

Near the start of the year, bankers and analysts speculated that 2019 might be the year of the MOE given numerous factors such as weak equity valuations and a pressing need to invest in technology. Further fueling speculation were a couple of large MOEs in the first quarter: TCF Financial Corp.–Chemical Financial Corp. and BB&T Corp.–SunTrust Banks Inc. But MOEs have not occurred at a greater rate than previous years, according to S&P Global Market Intelligence data.

"They're tough deals to pull off," said Stephen Nelson, managing director for the investment bank D.A. Davidson. He said social issues, such as board composition of the combined bank or the banking's operating name, tend to be the biggest hurdles.

In Wisconsin, McFarland State Bank will shed its name in favor of Oregon Community Bank, and McFarland State CEO Locke will take a board seat. While MOE deals are often financially attractive because of the ability to close branches that service the same market — and there is significant overlap between the footprints in Wisconsin — the two banks do not anticipate any branch closures. Locke said Oregon Community's commitment to keep all offices open and to retain all full-time employees was key in agreeing to the deal.

"A lot of my staff in this bank, some of which have been with me for decades, will keep their jobs," Locke said. "When a big, huge bank comes in and buys you, the first thing they look at is cost saves, and I didn't want to do that."

Nelson said community banks tend to consider an MOE as one of their strategic options. He said the factors that led to those first-half predictions of more large deals — poor equity valuations, a need for scale to compete on fintech and to combat a tough rate environment — remain very much in place.

While those factors mean MOEs have a higher likelihood of occurring than if bank stocks were richly valued, Nelson said the inherently tricky nature of MOEs make it difficult to predict an influx. The market has also reacted negatively to MOEs due to a poor reputation from some unsuccessful deals involving large players in the 1990s. Nelson said large-scale MOEs carry more risk than community bank MOEs.

"For small community banks, it's their money. The CEO and the board have very real investments in these companies," Nelson said. "The community banks do a very effective job of pulling this off because it's their money at stake and it's their community where they live."