The 249 state-chartered banks that operated throughout Wisconsin during the past year are working through a grim fact: The financial crisis that plagues the nation has not spared Wisconsin. A look at the banking industry in the state reveals some troubling news as well as some diamonds in the rough.

One troubling statistic comes from the IDC Financial Publishing Inc. report, Loan Performance Digest, which looks at FDIC data for fourth quarter 2008. According to this report, Wisconsin banks for the first time ever performed below the national average score of 62, with a score of 47. A perfect score is 300.

“Wisconsin is about even or underperforming the country. There is no sign of an advantage in Wisconsin to the rest of the country,” states John Rickmeier, CEO of Hartland-based IDC Financial Publishing, which analyzes government-reporting financial institutions.

On a positive note, Department of Financial Institutions Secretary Lorrie Keating Heinemann reports: “Our capital ratios are stronger than the national average as of Dec. 31, 2009 — 10 percent for Wisconsin banks under $1 billion versus the national average of 9.4 percent — but this does not mean we are out of the woods. There are many increasing demands on our bank financial statements in 2009 due to the increase in FDIC assessments and the increase in loan loss reserves.”

Seventy to eighty percent of all loans are mortgages. Examining mortgage delinquency rates can diagnose the health of banks throughout the nation.

In Wisconsin, mortgage delinquency rates among the state’s financial institutions in September and December 2008 matched the rest of the country as a percent of mortgage loans. “That didn’t happen in the late 1980s and 1990s, but the culture of Wisconsin banks has changed, causing them to take on higher risk loans than they have in the past,” says Rickmeier. “The problem is we have massive delinquency in real estate loans in paper that was securitized. It is non-agency securitized loans - excluding Freddie Mac, Fannie Mae and Ginnie Mae.”

The IDC Financial Publishing analysis of data from the Mortgage Bankers Association indicates delinquency rates nationally for all mortgage loans jumped from 3.5 percent in December 2007 to 6.1 percent in December 2008. IDC forecasts these rates to climb to 12 percent in 2010.

Mortgage delinquencies of 90 days or more of non-agency securitized loans, known as toxic assets, rose from 3.5 percent at the end of January 2008 to 17.3 percent at the end of January 2009, with a peak forecast of 24 percent.

The picture is not as extreme among commercial banks, S&Ls and savings banks, where delinquency rates rose from 1.9 percent in December 2007 to 4.4 percent in December 2008, with a forecasted peak of 8 percent.

Rickmeier points out that historically Wisconsin fared much better than the nation regarding delinquency rates. But today Wisconsin mirrors national totals. He credits this to changes in underwriting that has occurred in Wisconsin banks in recent years.

IDC rates banks from one to 300, with 300 being superior. Currently five Wisconsin savings and loan associations and 12 banks are rated below 75.

“Ninety-eight percent of all bank failures since 1984 have been ranked below 75 up to five months prior to failure,” Rickmeier says.

Holding their own
Banks are struggling nationwide, particularly the large national banks, who have dominated the news headlines for some time. One bright spot for Wisconsin may be a number of the smaller community banks that are holding their own throughout the financial crisis.

Among those banks is Racine-based Johnson Bank, established in the 1970s by Samuel Johnson of long-time family owned and operated S.C. Johnson & Sons.

“Our bank’s success is tied to both our culture and our mission, which is to know our client, know our community,” says Johnson Bank CEO Dick Hansen. “I think probably that is why most community banks tend to be more successful than the large ones. We are focused on our community. We know our clients. We know opportunities, and we know challenges. We can differentiate between them and make good local decisions.”

Michael Crowley, Jr., president and CEO of Bank Mutual Corp., with 79 locations throughout Wisconsin, cites three qualities of a strong community bank: High capital, good asset quality and liquidity.

Crowley attributes manageable-sized markets as one reason community banks have avoided some of the financial woes. “Because they have a smaller universe to watch over, I think they can keep a better finger on the pulse of what is happening in the market area where they have offices,” he says. “I think they are able to be on top of things sooner, should be able to adjust and be more nimble.”

Partnership Community Bancshares, Inc., started by Dean Fitting in 2007, has purchased small community banks in Tomah, Menomonie Falls and Watertown. Partnership Community Bancshares provides a shared-services model that includes high-level back room operations, finance, compliance and marketing support to local management teams.

“We believe that our model of partnering our strengths with the local management team and fostering community ownership creates long-term success for both the bank and the community it serves,” says Fitting.

“Our [Wisconsin’s] banks have done a good job of qualifying homeowners for mortgages that they can afford. This isn’t to say that we do not have an oversupply in certain areas but all in all, we are in much better shape than states like Illinois.”

Fitting also believes that the diversity of industry in Wisconsin has spared it the fate of states like Michigan, who rely heavily on the auto industry.

“Now Janesville may have its problems due to the closing of the GM plant, but other communities tend not to have the same concentration,” he adds.

IDC’s Rickmeier believes rising unemployment will drive much of the mortgage delinquency problems in Wisconsin. In the past the delinquency rate stayed the same through peaks in unemployment. The current situation is different. As unemployment peaks to 5.5 million, the delinquency rate also rises dramatically.

Smaller is sometimes better
Independent Community Bankers of America (ICBA) 2008 statistics revealed 8,500 community banks in over 50,000 locations nationwide. Included in that statistic are commercial banks, thrifts, stock and mutual savings institutions. Fifteen percent of those are in the Midwest.

As the number of banking institutions nationwide declines, ICBA reports growth in the number of community banks, a critical source of small business lending in Wisconsin and nationwide.

Crowley says Bank Mutual’s conservative approach has enabled it to remain strong and continue lending to businesses and individuals in the same manner it always has. “Bank Mutual has always maintained a higher capital level than a lot of other larger banks,” he notes. “That has helped us provide a cushion right now, so we don’t have issues with regulators. We don’t have to take any bail out money from the government.”

That has helped Bank Mutual work with its customers during these more trying times.

“Our loan windows are wide open,” adds Crowley, who also warns that any individual or business with credit problems today will have fewer options. “We have a lot of cash to lend to homeowners, to families and to business people.”

Crowley says that Bank Mutual has actually added staff dedicated to business lending as more businesses opt for smaller community lenders over the troubled national banks. Customer service also draws customers back to smaller community banks for both business loans and mortgages.

DFI Secretary Heinemann says that though community banks continue to lend, particularly to existing business customers, “the large pools of working capital that have been available to businesses in the past, such as Commercial Paper and large lines of credits from correspondent banks, have to be restored in order to meet the full demand, particularly in a recession.”

The community bank approach
“Our promise is to treat our clients like family,” says Johnson Bank’s Hansen. “That means to fairly and properly underwrite loans, to explain options, to do the best we can to extend credit and to provide services in a way that is not only good for us, but is good for the client. We want long-term relationships. That is a strategy that I believe most community banks subscribe to and in the long run it is sustainable and works very well.”

In 2008, Johnson Bank received a $40 million allocation of tax credits through the New Market Tax Credit (NMTC) program from the U.S. Department of the Treasury. The NMTC program has a stringent application process, and successful applicants receive credits for loans targeted at specific areas across the country. For Johnson Bank that includes economically distressed areas throughout Wisconsin, where loans have led to the creation of more than 3,300 jobs. Terms for NMTC loans are typically longer — seven years or more — with more modest repayment in order to allow the businesses to get up and running.

“There are very few banks in the country that have received any of these allocations, and we have received more than almost any bank in the country,” says Hansen.

While the financial industry throughout the country pays the price for sub-prime lending, many Wisconsin banks, like Johnson Bank, avoided these “liar loans.”

“Subprime lending is making the loan to any borrower when you know it is going to be difficult or impossible for them to repay the loan,” says Hansen. “We have never thought that was the right thing to do for either us or the borrower.”

Instead Johnson Bank prides itself on working with municipalities and borrowers to make loans that help people purchase that first home.

“We sponsor seminars; we do education,” he says. “We go out of our way to do loans, but we make them to people that we believe can repay those loans. That is just one thing that has allowed us to be recognized as outstanding in the area of the Community Reinvestment Act.”

This act was established to encourage banks to lend to minorities and moderate-income borrowers. In 2008 Johnson Bank was the only Wisconsin chartered bank to receive an outstanding rating in three categories: lending, service and investment.

Grim predictions
Despite the success of Johnson Bank and other community banks, analyst Rickmeier has little optimism for the fate of the nation’s financial institutions both large and small.

“The 12 banks in trouble in Wisconsin are all small community banks,” he says. “And the five savings and loan associations in trouble are less than $5 billion. So they are not super big banks.”

Rickmeier expects mortgage delinquency rates to double in the next two years. “And we are going to lose 15 to 20 Wisconsin banks,” he predicts. “They will either have to be merged out or they have to be closed.”

Barring a sharp economic recovery and a significant decline in unemployment claims, IDC predicts rocky roads ahead for national and state financial institutions well into 2011.

“It looks like we don’t really get out of the woods on housing for the next ten years,” adds Rickmeier.

“I think we are going to still be in a very slow economy well into 2010,” says Crowley, echoing Rickmeier’s sentiment. “I don’t think that we will see much of an improvement. People should ride it out, be as conservative as they can, pay off their credit cards, get their interest costs down and be able to start saving some money.”

By Leah Call

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