Consolidations will continue, but banks are ready to lend

Wisconsin financial institutions continue to become healthier with the passage of each calendar quarter. However, the headwinds against banks remain strong and the shape of the industry will begin to change in more apparent ways in 2014.

Wisconsin banks play a significant role in the economic development and growth of their communities. Not only do banks finance local businesses, schools and municipalities, but they also generously donate both money and time to a myriad of charitable and other worthwhile community organizations. It is in the community’s interest that Wisconsin remains home to a large number of diverse financial institutions.

The prolonged low interest rate environment we’ve endured for the past few years (and will continue to endure for the next few with the confirmation of Janet Yellen as the new Fed chairman) puts undue pressure on the industry’s earnings. Banks of all sizes are experiencing lower net interest margins, with the most significant impact affecting banks under $100 million in assets. This pressure will only grow as interest rates remain artificially low.

At the same time, banks are experiencing rising expenses, primarily in the areas of compliance and technology. Regulatory burden has grown exponentially. One clear example of this burden is in the sheer number of items required to be filed as part of the quarterly Call Report, which has grown from 775 in the year 2000 to 1,955 data points in 2012. Banks are also spending a significant amount of money on technology to keep up with growing customer demands, particularly in the area of mobile banking and electronic commerce.

The need for meaningful economic growth is critical and requires bipartisan congressional action. The continued slow yet steady recovery may, in part, be fueling the lack of loan demand that Wisconsin bankers continue to experience. A gradual recovery can produce a cautious approach to borrowing by businesses. Add to the mix many of the unknowns that businesses are struggling with (health care law changes, tax policies, federal deficit, etc.) and you have an environment where there is a lack of willingness to expand despite the fact that Wisconsin’s banks are more than ready to lend. With the political environment in Washington not expected to meaningfully change, the sluggish recovery will continue to the detriment of economic recovery.

All of these factors lead to an expectation that the banking industry will continue to consolidate. The impact of losing a meaningful number of bank charters nationally within the next few years (some experts claim the loss could be as high as 25 percent), goes well beyond the loss of an individual bank. The very shape of the community itself will be altered.

Over the past few years, the number of financial institutions headquartered in Wisconsin has declined from 279 as of Sept. 30, 2010, to 260 as of Sept. 30, 2013. As of this writing, four more applications for charter cancellations are pending with the Wisconsin Department of Financial Institutions. There continues to be a great deal of talk among the industry about mergers and acquisitions, and I would expect to see another 3 to 5 percent decline (in Wisconsin bank charters) over the next couple of years.

Wisconsin bankers have long demonstrated traits of both entrepreneurship and public service to their communities. Without question, the industry faces serious challenges in the near term. Yet I am confident that the industry will master the regulatory burden it is experiencing as well as find innovative ways to manage expenses so that it remains a vibrant, trusted partner in the Wisconsin economic landscape.

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