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Dick Hensley cannot recall a time in his career when the banking and financial services sector was quite so competitive.
Part of the challenge is that banks are increasingly competing with new financial technology firms that may not have even existed five or 10 years ago. Then there’s the increased adoption of technology at banks themselves.
“Technology has taken banking to a new level, but it’s also made it even more of a commodity,” said Hensley, president for southeastern Wisconsin at Fond du Lac-based National Exchange Bank & Trust.
Jay Mack, president and chief executive officer of Hartland-based Town Bank, agreed that the market is competitive.
“Right now, there’s fierce competition among banks. We’ve got a lot of healthy banks in the marketplace,” he said.
But there are also looming challenges for banks. Interest rates remain low and it may be 2023 before the Federal Reserve moves to increase rates. Fed chair Jerome Powell said in late August that there is “much ground to cover to reach maximum employment, and time will tell whether we have reached 2% inflation on a sustainable basis.”
Mack said the longer rates stay low, the more banks will offset them with strategic moves.
“The longer the low-rate environment lasts, the more of a focus you’ll see banks have on non-interest income, non-interest expense to offset the low rates,” he said, pointing to fee income through investment or treasury management and mortgage refinancing and controlling non-interest expenses like salaries and brick-and-mortar buildings.
Hensley said the need to control costs will be particularly prevalent for banks with too many branches.
“They’re going to get to a point where if this is prolonged, the only way they become sustainable is they cut their costs,” he said.
Both Hensley and Mack said the current environment could mean more banks will look to join forces.
“It could lead to more consolidation, which would not necessarily be good for the industry,” Mack said.
Banking has already seen a fair amount of consolidation. Associated Bank acquired Bank Mutual in 2018, First Midwest Bank acquired Park Bank in 2020 and First Midwest is now merging with Old National, to name just a few deals impacting the Wisconsin market in recent years.
While not all the result of mergers or acquisitions, the Wisconsin market went from 296 banks in 2011 down to 216 in 2020. The number of branches also dropped from 2,320 to 1,853 from 2011 to 2020, an average of more than 50 net branch closings per year.
In metro Milwaukee, the market has gone from 57 banks to 48 and lost an average of nearly 13 branches per year since 2011.
Hensley predicted community banking would continue to see consolidation in the next two or three years.
“You’re going to see a lot of smaller banks sell because they’re struggling with their profitability, and as banks merge and become bigger, you start to see economies of scale and if they’re really efficient, the more you can run through the pipe, the more profitable it will be,” he said.
It’s not that Wisconsin banks are facing a particularly challenging time. The Paycheck Protection Program, while a lot of work to establish and process, did offer banks a chance to earn fee income. Home sales have been robust, leading to new mortgages, and home refinancing activity has also been strong.
Three-quarters of Wisconsin bank CEOs say the current economy is good, according to a recent Wisconsin Bankers Association survey, and nearly half expect it to grow in the next six months.
In addition to low interest rates, part of the challenge for banks is where to go from here. Government support like PPP and stimulus checks allowed businesses and consumers to pay down debts, which isn’t necessarily a bad thing, but also leaves banks with the challenge of putting the money back to work.
“As a banker, you have to celebrate that with your client, because they’re strengthening their balance sheet,” Hensley said of business clients. “What is the reciprocal of that is now banks find themselves flush with cash and have to get out and find opportunities to lend that money.”
In the WBA survey, 52% of bank CEOs said demand for business loans is “fair” while 30% described it as “good” and 10% said it is “excellent.” A majority expect business loan demand to stay the same over the next six months. The CEOs said commercial and residential real estate lending is in better shape, with a plurality rating it as “good” for both categories, at 44% and 48% respectively.
“Banks do have a lot of cash right now and it is hard to find places to deploy that cash that allows the bank to make some money,” said Rose Oswald Poels, president and chief executive officer of the Wisconsin Bankers Association. “Nobody has really told me the magic bullet that they’ve found for that.”
She said there is still a steady flow of commercial lending deals in the Milwaukee, Madison and Fox Valley markets, and banks are also branching into other areas like financing recreational vehicles or auto lending.
Mack said commercial real estate has been a positive area, particularly for multi-family buildings, but also industrial and some suburban office. He also pointed to involvement in financing for mergers and acquisitions as another bright spot.
There’s also a growing opportunity in trust and wealth management services, Mack, Hensley and Oswald Poels all said.
A competitive environment and the need to put cash to work would naturally seem to increase the pressure on banks to deviate from their preferred approach to lending, but Mack and Hensley said it is important to remain disciplined.
“I think the banks that are healthy, and most are right now, are adhering to consistent credit standards. You have to be consistent with your credit standards and not compromise those standards just because you have liquidity that you want to loan out,” Mack said. “Now that might impact interest margins and earnings in the short run, but in the long run it will keep the bank healthier by adhering to consistent credit standards and guidelines, so I think that’s really the key, is not to get too motivated to loan the extra deposit dollars out and forsake your credit quality.”
“If you want to lend money, there’s opportunities to lend money every day of the week,” Hensley said. “You can finance apartments, you can finance commercial construction, but it’s very transactional and it’s all about the interest rate.”
He said it is more important for banks to focus on developing and maintaining relationships with customers.
“There’s a lot of uncertainty and so many people have paid off debt that now you’re having to get out and knock on a lot of doors, looking for those clients that are really looking for a banking relationship, versus just ‘hey, I need to borrow a million bucks, what’s your price and what’s your terms?’” Hensley said, adding that the relationship payoff is in the long run.
Oswald Poels said it is also important for businesses and consumers to remember that banks are in a heavily regulated industry.
“We want to make more loans certainly, we have the liquidity right now, ... but it doesn’t mean you can walk in and get a loan right away without presenting the right type of documentation, so it’s still important to build good relationships with your local bankers,” she said. “I think if a borrower comes in fully prepared, with all of the documentation they need, I think they’ll actually find the decision-making turnaround can be extremely quick.”