After a year in which the coronavirus pandemic brought bank mergers and acquisitions to a halt in Wisconsin, it’s likely deals will resume in 2021.

Only six bank mergers were announced in the state last year as the pandemic, with its economic shockwaves and uncertainty, forced potential buyers to focus internally rather than look to expand. One of the proposed deals in the state – Nicolet National Bank’s purchase of Commerce State Bank – was called off amid the pandemic.

Acquirers needed to make sure they themselves were girded for the rapid recession spurred by the spread of COVID-19. At the same time, the economic disruption made it more difficult to evaluate a potential seller’s loan portfolio and financial strength. 

The small number of mergers was in contrast to 2019, when there were 17 in Wisconsin.

While there still are many unknowns as the new year begins and the pandemic lingers, Wisconsin attorneys who specialize in bank mergers and acquisitions think banks that have wanted to buy or sell could make those decisions in 2021.

“I think so,” said Peter Wilder, a shareholder with the banking and financial institutions practice group of the law firm Godfrey & Kahn in Milwaukee. “I think we’re still in the same posture as the second half of last year, where there’s some openness to it – there are discussions but there’s still some hesitancy.”

But if 2021 is relatively stable, pent-up demand left over from 2020 could help drive bank mergers this year, he said.

John T. Reichert, shareholder in the banking and finance practice of the Milwaukee law firm Reinhart Boerner Van Deuren, said bankers are talking about potential deals again.

“In ’21, I don’t believe there have been any deals announced in the first three weeks, but I certainly think I won’t be surprised if we get back to double digits this year based on the early activity,” Reichert said. “We are working on five or six things in the hopper. I think two or three can be announced in the first quarter. Things are starting to come back online. The fundamentals haven’t changed at all.”

Among those fundamentals are aging bank executives, some in their 60s and 70s, who want to retire, travel, and spend time with their grandchildren, Reichert said.

Another factor is shareholders seeking liquidity from their investment.

“You’ve got so many shareholders that are also older and looking to sell their shares. Or people have inherited them and they don’t have the same connections to the community, and so you have a lot of pent-up shareholder demand,” Reichert said.

Wilder said in some cases, older leaders of banks without succession plans just want to retire from the business.

“I mean, they’ve owned this for a long time. They’re ready to retire and do something else,” Wilder said.

The ongoing costs of technology and cybersecurity to run a competitive bank also weigh on the minds of longtime bankers, especially those operating smaller community banks.

“Everything’s got to be digital and mobile, and remote this and remote that – plus security. Cyber fraud and cybersecurity are huge,” Reichert said. “So the amount of resources it takes for technology increases constantly, and if you’re a smaller bank, that’s a hard burden.”

Banks looking to sell likely will face additional scrutiny from buyers, given the effects – potential and real – of the COVID-caused downturn, and could mean a lower sale price.

Buyers will be concerned about the pandemic’s impact on credit quality and loan portfolios, an issue that last year made it difficult to value sellers, Wilder said.

Reichert said the COVID credit concern is the variable that has the biggest chance of tempering banker mergers and acquisitions this year.

“It’s very challenging to get your arms around credit right now, both yours and the target’s,” Reichert said, adding that it’s possible the avalanche of Payroll Protection Program loans might have hidden impacts of the downturn on some banks.

“The question mark – and it’s a big one – is what, if anything, is it masking?” Reichert said. “Are these stimulus programs actually helping or are they just delaying and deferring a lot of eventual credit pain. And nobody knows.”

Still, Wilder said, in spite of uncertainty, it appears banks that wanted to acquire last year but held off still are in the market. He cited comments from a Jan. 19 conference call between executives at Old National Bancorp and Wall Street analysts as one piece of early evidence.

On that call, according to a transcript by Seeking Alpha, Old Bancorp Chairman Jim Ryan said: “I suspect there will be M&A opportunities that will present themselves during the year. We are getting more comfortable that we could put a credit mark on somebody else's loan portfolio, but we will continue to be an active looker and a selective buyer.”

Along with the pandemic’s fallout, a new administration in Washington D.C. and the potential for higher taxes could figure into whether a bank will want to sell, Wilder said.

With Democrats controlling the presidency and Congress, for instance, an increase in capital gains rates could shift the calculus for potential sellers, Wilder said. In addition, other types of changes to the tax code could affect estate and tax planning strategies for family-owned institutions, perhaps causing them to sell or hold depending on their situation, he said.

While the outlook for higher taxes and when they would take effect is unclear, Reichert said, “If you plan to sell in the next three years, you may be inclined to sell this year.”

For some banks, finding another bank willing to buy might not be easy, Reichert said. For starters, the sheer number of banks has been decreasing. Data from the

Federal Deposit Insurance Corp. shows the number of insured institutions based in Wisconsin has shrunk by almost 100 in the last decade – to 180 through September 2020 from 279 banks at the same time in 2010.

Any acquisition has to make sense for a buyer’s growth plan. For rural community banks, it’s often tougher to attract buyers, Reichert said. That’s a reason that some banks will end up being purchased with cash by credit unions.

“That trend will continue, undoubtedly,” he said.

There were a lot of discussions about deals in 2020 before the pandemic hit, and some of those banks are likely determined to sell in 2021.

“I think people who were on the fence this time last year no longer are on the fence,” Reichert said. “So even if multiples and pricing have come down – and they have – there a number of people who have called me, and I know they’ve called others, who have said. “I’m ready to sell, we’re ready to sell.’ Because they remember what it took to get through the Great Recession and nobody knows what the next three to five years look like.”