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Wisconsin banks grew in 2023, but it wasn’t a year without challenges.

At year end, net loans and leases were up 4.2% from the prior year to $109.8 billion and total deposits were up 2% to $122.4 billion.

However, at the bottom line, net income decreased more than 20% to $1.39 billion, according to FDIC data.

Like all businesses, banks faced challenges from inflation as noninterest expense increased as a percentage of average assets from 3.31% to 3.39%.

The Federal Reserve’s tool for combatting inflation, increasing interest rates, also hampered profitability for banks.

While rising rates meant banks could make more on their loans – the yield on earning assets for Wisconsin banks was 5.14% in 2023, up from 3.75% the prior year – customers were also seeking higher rates on their deposits.  

The cost of funding earning assets grew from 0.48% in 2022 to 1.94% this past year.

The end result of higher interest rates was a downward trend in net interest margin for Wisconsin banks from 3.27% in 2022 to 3.2% in 2023.

“The year 2023 ended on a positive note with banks in a solid position. Residential loans are picking up, while many business owners are tending more toward a ‘wait-and-see’ approach on borrowing,” said Rose Oswald Poels, president and CEO of the Wisconsin Bankers Association. “Bankers, consumers, and business owners alike are hopeful that the Federal Reserve will lower interest rates in 2024. Inflation, the potential for a recession, and geopolitical issues remain top concerns for the year ahead.”

Several bank leaders who spoke to BizTimes pointed to competition for deposits as one of the top challenges of the year. On the lending and credit side, many said their business customers are healthy and in position to repay loans but many are taking a wait-and-see approach when it comes to additional borrowing to fund expansion and growth.

“I told our shareholders, 2023 was just a good old fashioned rock fight in banking,” said Jim Popp, president and chief executive officer of Racine-based Johnson Financial Group.

Banks went through a couple of years in which gathering and retaining deposits was not a primary focus for the industry. The cost of funding across all banks in the state has been above 1% just once since 2011. As recently as 2021, it was just 0.29% as government stimulus in the wake of the pandemic ended up in customer deposit accounts.

“Deposits were there and we had them,” Popp said. “And then as rates rose and rose and rose … retaining your deposits and collecting deposits became really, really important.”

Fred F. Schwertfeger, chairman and CEO of Horicon Bank, said the Federal Reserve’s 550 basis point increase in interest rates across 2022 and 2023 had a dramatic impact on the industry.

“Adjusting to that was really important for us and for other community banks or banks in general and probably continues to influence our thinking in this year,” he said.

Schwertfeger noted the cost of funding is still relatively high and higher rates on loans continue to work through the system.

“We are adjusting those upwards as well, but they haven’t really fully caught up to the dramatic and forceful increase in deposit rates,” he said.

“There’s an extent to which the interest rate environment is going to limit what you can do to outrun or offset margin compression,” said Bill Bruss, CEO of Wauwatosa-based WaterStone Bank.

Popp said in addition to upward pressure on deposit rates, the current environment also puts pressure on banks to develop and maintain strong relationships with their customers.

“Those that jump and jump and jump for rates are always going to be rate shoppers. That’s kind of the hot money in the system,” he said. “We have to be competitive, but we also have to have good relationships that allow us to continue to take great care of customers for a long time.”

Beyond competitive rates and a focus on relationships, there are other things banks can do to navigate the current environment.

“You’ve got to be effectively managing expenses, you need to have a clean credit portfolio so you’re not adding unnecessarily to loan loss reserves and things like that, that would just kind of exacerbate the issues that you have with net interest margin,” said Bruss.

Wisconsin banks did see an uptick in the value of loans either 30 to 89 days past due and in the value of noncurrent loans. In total, around $543 million in assets were more than 90 days past due or in nonaccrual status, up from $411 million at the end of 2022.

However, many banking leaders BizTimes spoke to expressed confidence in the health of business borrowers in the region.

Jeff Standafer, president and CEO of Mukwonago-based Citizens Bank said the bank had recently completed an analysis of loans coming due over the next 12 to 18 months.

“We were actually very pleased to look at and see that generally, for the most part, obviously their payments potentially are going up, which isn’t something people want, that it didn’t put them in trouble. That was what we were concerned about,” Standafer said.

He noted higher rates are tough for everyone to deal with.

“Obviously if you’re paying interest you can’t use that money for expansion or wages or income to the owner, so there’s that pressure,” he said. “We don’t have any sectors we feel for us are in trouble.”

Standafer acknowledged there are some more one-off situations where loans have problems, but noted most banks saw an uptick in past due loans last year.

“We don’t feel the sky is falling for ’24 though,” he said.

There is also the potential for the Federal Reserve to begin cutting interest rates, although multiple bank leaders commented on how the consensus for cuts has changed. Speaking before the Fed’s decision Wednesday to not cut rates, they noted that in the fourth quarter last year, the outlook was for something like five to seven cuts this year to now expecting around three cuts, likely coming toward the second half of the year.

While net loans and leases at Wisconsin banks increased 2% for the year, the fourth quarter did see a decrease of 1.6% from the end of the third quarter.

Commercial and industrial loans were a weak spot for both the quarter – down 0.6% – and the year – up just 0.2%. Residential real estate loans, meanwhile, picked up with 7.6% growth in the quarter and 5.6% growth for the year.

Bruss said lending demand has generally been slower to start the year.

“I think we kind of expected that coming into this year,” he said. “You may see some activity pick up later in the year, but I think for the first half of the year it’s likely to remain a little bit more quiet.”

Greg Larson, CEO of Ixonia Bank, said businesses are generally being more cautious when it comes to borrowing.

“They are analyzing things more closely,” he said. “Costs are up, interest rates are up. So they’re more cautious to make sure that as they make these investments in real estate or equipment or working capital to expand.”

Ixonia Bank had a strong year in 2023, growing net loans and leases to $494 million, a 38% increase, according to FDIC data. Larson said it was a strong year and 2024 is shaping up even better, which he credited to the bank’s decision to not speculate on interest rates and instead match fund the loans it makes.

“We actually did a capital raise. Our shareholders put another $10 million in the bank over the last three months to continue to facilitate our growth. That capital raise was not because we were short on capital, the capital raise was to be able to keep pace with the growth of the bank,” Larson said.

Jay McKenna, CEO of Brookfield-based North Shore Bank, also said he senses businesses, while healthy, are being “a little bit cautious right now.”

“That could be higher cost of money, interest rates, and perhaps some of the uncertainty that happens in every election year,” McKenna said.

Popp shared a similar sentiment of business customers taking a wait-and-see approach, adding many are also focusing in on the basics and fundamentals of their business.

The approach is similar for banks.

“This is a year where we get back to basics and really focus on making sure everything we have is running, making sure that we’re out in front of our best customers, out in front of our best prospects and staying really connected so that if and when the market turns, and it will, we’ve done everything the right way to be prepared to take advantage of that,” Popp said.

He also said it is a time to guard against too aggressively pursuing business.

“These kind of markets are markets where deal desperation creeps in a little bit too,” Popp said. “Where you sit and say ‘well, I’ve got to make my numbers for the quarter so I’m going to do this deal and I don’t love it, but I’m going to do it anyway because I’ve got to get one under my belt.’ We don’t do that. We’re not interested in that because those are the deals you wake up two years from now and say, ‘Oh boy, I wish I hadn’t done that one.’”

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