Mirroring the rest of the country, the roller coaster ride of the economy has created some chills and screams in Wisconsin’s financial sector. However, state economy watchers remark the ride here has been less scary than in other parts of the country and the stretch ahead remains a slow and steady climb to regain momentum.

Wisconsin is home to 276 banks and 222 credit unions, the major sources of lending in our state. Dominated by small-to mid-sized institutions, the overall financial health of Wisconsin’s financial institutions is much better than other areas of the country. And it is steadily improving.

“We are working out of an economic downturn and recession,” reports Rose Oswald Poels, president/CEO at the Wisconsin Bankers Association. “In the first quarter of 2011, FDIC [Federal Deposit Insurance Corporation] statistics show we are seeing a slow improvement in a number of banking institutions. Seven out of eight banks are profitable, compared with only five out of six being profitable this time last year. This trend will continue in 2011 and into 2012.”

James Johannes, director of the Puelicher Center for Banking Education, Associate Dean for Executive Education, Wisconsin School of Business at the University of Wisconsin-Madison, agrees. However, he paints a less vibrant picture.
“In general, there has indeed been modest improvement in the overall health of Wisconsin FDIC-insured institutions. Capital and profits have improved marginally since 2009 and loan growth has stabilized, but is low relative to 2008 levels,” he explains.

“The overall numbers for Wisconsin belie the true health of the state’s banks. Banks are generally doing much better in 2011 than in 2009 and 2010,” he continues. “The aggregate numbers include data for a few larger banks that are not doing well; M&I was the most visible of these poorly performing banks. The poor performance of a few large banks makes the overall numbers look worse than the true story for most Wisconsin banks.”

However, Johannes believes Wisconsin banks are not yet out of the woods. “There remains serious concern about mortgage loans, home equity lines that are no longer backed by any tangible equity and troubled commercial real estate that will continue to create losses for banks,” he says.
 
The other concern is future interest rates, which might be good or bad news, says Johannes. The good news: if interest rates increase, bank margins should increase; the bad news: banks with full portfolios of fixed rate mortgages may see their margins and profitability shrink as funding costs increase. The other rising rate downside: How many homeowners with variable rate loans will find themselves in trouble as rates rise?

All sources agree that banks have tightened lending practices to realign their balance sheets for the new economic climate. That tighter rein means many small- to mid-sized businesses have been squeezed out of the lending cycle and are scrambling for new sources of credit.

According to Brett Thompson, president/CEO of the Wisconsin Credit Union League, small- to mid-sized businesses are increasingly turning to credit unions. “Several credit unions report that smaller customers are being told by lending institutions that if the loan is less than $1 million, they probably aren’t interested in lending to them. We are seeing a greater number of small businesses coming in to credit unions for business loans,” he says.

Because larger banks are becoming less likely to make smaller loans to customers, it may be good news to smaller banks and credit unions, Thompson says. “As banks see greater restrictions and regulations on loans, I think larger banks will be less interested in smaller loans. That could be good news for smaller banks and credit unions. They will likely see an increase in demand for lending from smaller businesses.”

Increasing regulation increases cost
While the financial industry has a history of heavy regulation, the recent downturn and increase in bank closings and sales has spurred yet another round of regulation.

The Dodd–Frank Wall Street Reform and Consumer Protection Act that was signed into law in July 2010, is the most sweeping change to financial regulation in the United States since the Great Depression, says Oswald Poels. The 2,319-page law implements more watchdogs, safety valves and compliance requirements than ever before.

“The trend to an ever-growing number of new regulations isn’t sustainable and financial institutions — banks or credit unions — will have to be more focused on regulations instead of meeting customer needs. I think this will be an issue for all financial institutions. The regulatory burden will have a significant impact on smaller banks and credit unions that don’t have the resources to handle this added burden and serve customers,” Thompson says.

“The Dodd-Frank Act will have a huge impact on the banking industry, but the full effects aren’t yet known. It is just starting to get implemented, but without a question, compliance as a financial institution will require extensive data collection for additional consumer protection. There is a real expense to be in compliance, but there are also many other aspects that will affect lending costs,” says Oswald Poels.

She says it will require careful study to identify the appropriate capitalization levels needed by financial institutions. “It may mean financial institutions may be required to keep even more capital on hand. That could mean less money available to lend,” she says.

“Dodd-Frank will slap all sorts of new compliance regulations on banks but also calls for changes in interchange income which comes from processing credit and debit card transactions. These will have the effect, all else fixed, of reducing bank profits, especially for smaller institutions,” says Johannes. 

“This change in regulation may now favor larger banks and it will make all banks reconsider their current practices. As investors demand higher stock prices and as regulators demand higher capital ratios, banks will have to figure out how to offset the increase in regulatory costs and the reduction in interchange income. This probably means bank customers will see higher loan rates, lower deposit rates and more fees relative to what the world would have been like absent these Dodd-Frank changes,” Johannes explains.

Unlike banks that have only internal limits on their asset-to-lending ratio, credit unions are capped to lend up to 12.25 percent of their assets, says Thompson. ”There is a bill in Congress aiming to allow credit unions to lend up to 27.5 percent of assets. The bill also includes limits on the amount of per-year lending growth a credit union can have. When this passes, it will allow credit unions to step up even more to fill the gap in available credit.”  


Banking Tips for Businesses
As the economy strives to gain momentum, the financial experts offer some advice to help Wisconsin businesses secure credit that can in turn help improve the economic climate. Thompson suggests:

1. Build rapport with your lender. “Develop a strong relationship. Lending institutions will require more jumps through hoops and more show-and-tell sessions. This scrutiny will help you hone your business plan and better define what you need to do to grow,” he says.

2. Stick to your business model but revise it periodically. “Be careful not to offer too many products or services that distract you from your core business,” he says.

3. Understand your business plan. “If you hired someone to write your business plan, make sure you understand it so you know when it needs to be updated or changed,” he says.

4. Build a strong team of experts. “That team should include a CPA and a lawyer. This gives you added credibility when you apply for a loan or even as it’s reviewed,” Thompson says.

5. Similarly, Oswald Poels suggests getting to know your banker better. If rumors abound about the health of your financial institution, she suggests you be upfront with them. If you have a question about the financial health of the bank you deal with, ask them. After all, they are your friends and neighbors and you are their customer. It’s important that banks with issues get to a better place, and talking to them will help you gauge your course with them.

6. “If you have a lending need or extra debt, go in with as much information as possible and talk with the lender. When you have a well-thought out plan, you’ll have a better chance for a loan. The standards for loans aren’t dramatically different from they were three years ago, it’s just that the source of funding aren’t as available, Oswald Poels says.

By Clair Urbain

Clair Urbain of Urbain Communications provides marketing services to a variety of business-to-business clients in Wisconsin and across the country.

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