On Aug. 13, we celebrated the 15th Annual WBA Chairman’s Membership Appreciation Golf Outing, and it was an outing like we’ve never seen before. Despite the meticulous and thorough physical distancing and other health precautions, the 130+ bankers and vendors gathered enjoyed a day on the links full of great networking opportunities. Thank you to everyone who attended, and especially to our sponsors and Associate Members who helped make this event possible. Thank you all for your continued support. 

The purpose of the outing, as the name suggests, is to thank WBA’s member banks. To all of the banks and bankers present at the outing, I extend my sincere thanks for your decision to support our industry through your membership in our association. This dedication demonstrates your commitment to Wisconsin’s banking industry and to your customers and neighbors. Also, I would be remiss if I did not express my thanks and appreciation to the exceptional companies who partner with the WBA as Associate Members. These companies provide the products and services community banks need to serve our customers in an increasingly competitive and fast-changing marketplace.

Networking, like at the golf outing, is an important component of professional development. Few tactics are more effective for banks to recruit and retain employees than supporting the growth of bank staff. By equipping bank staff with the latest information, techniques, and peer connections in their area of expertise, banks help ensure their clients and customers have access to a pool of experts.

Our association’s education and training offerings are second-to-none, and the new live, virtual offerings have the added benefit of promoting networking with non-competitors. Whether the topic is marketing practices, security concerns, or strategic direction, it’s simpler to share and give advice with peers outside your bank’s footprint.

Investing in your institution’s up-and-coming talent is especially important. WBA’s BOLT group and upcoming Emerging Leaders Virtual Series is a perfect opportunity. Since the program is virtual and presented in partnership with the Arkansas Bankers Association, Michigan Bankers Association, New Hampshire Bankers Association, and Ohio Bankers League, not only will attendees gain access to engaging and informative speakers and sessions, but also a broader network of non-competing bankers to lean on throughout their careers.

Banks can also engage their young talent by designating an emerging leader as the institution’s Advocacy Officer. This volunteer leadership role provides exposure and learning opportunities for the banker and enhances the bank’s connection with the association as well as promotes a deeper understanding of political advocacy. Learn more and designate an Advocacy Officer at your bank at www.wisbank.com/advocacy/advocacy-officers.

By investing in the growth and development of our industry’s future leaders—including their professional networks, formal training, and leadership opportunities—Wisconsin’s banking industry will help secure a successful future through these volatile times.

Kohler is President of Charter Bank, Eau Claire and WBA Chair.


By, Amber Seitz

On July 7, 2020, the Bureau of Consumer Financial Protection (CFPB) issued two new frequently asked questions regarding Regulation C, Home Mortgage Disclosure Act (HMDA), reporting requirements for financial institutions. The FAQs discuss reporting of multiple data points when certain factors are relied upon in making a credit decision. 

Multiple Data Points 

The first question asks whether financial institutions are required to report the credit score, debt-to-income ratio (DTI), and combined loan-to-value ratio (CLTV) relied on in making a credit decision when such data is not the dispositive factor? CFPB responds that yes, credit underwriting data such as credit score, DTI, and CLTV must be reported if they were a factor relied on in making a credit decision—even if the data was not the dispositive factor.  
For purposes of Regulation C, it does not matter whether the application is approved or denied; if certain data was relied on in making a credit decision, such data must be reported. For example, if the credit score was relied on in making a credit decision, the credit score must be reported. If the financial institution denied the application because the application did not satisfy one or more underwriting requirements other than the credit score, the financial institution is still required to report the credit score relied on. The same analysis applies to the reporting of CLTV and DTI.  

The second question asks if, when income and property value are factors in the credit decision, though not the dispositive factor, should such data points be reported? CFPB responds that yes, when a credit decision is made, Regulation C requires reporting of the data “relied on in making the credit decision.” Hence, if these data are relied on in making a credit decision, such data must be reported.  

There is no requirement in Regulation C for either of these data points to be the dispositive factor in order to be reported. Specifically, the commentary explains that when a financial institution evaluates income as part of a credit decision, it must report the gross annual income relied on in making the credit decision. For example, if an institution relies on the verified gross income of an applicant to make a credit decision, the institution is required to report the verified gross income. The comment does not state that verified gross annual income must be dispositive in the credit decision.  

The commentary also provides a similar narrative for property value. Income and property value apply the relied-on standard in a similar way to credit score, DTI, and CLTV and should, therefore, be reported if relied on in making a credit decision.  


The FAQs emphasize specific factors that, when relied upon in making a credit decision, must be reported. The data points are required even when the information is not the dispositive factor in a credit decision. 
The FAQs can be found here. 

By, Ally Bates

The below article is the Special Focus section of the August 2020 Compliance Journal. The full issue may be viewed by clicking here.

On August 3, 2020, the Financial Crimes Enforcement Network (FinCEN) issued three new frequently asked questions regarding customer due diligence (CDD) requirements for financial institutions. The new FAQs clarify the regulatory requirements related to obtaining customer information, establishing a customer risk profile, and performing ongoing monitoring of the customer relationship. 
Risk-Based Procedures 
The first question in the FAQs asks whether financial institutions must request certain information at account opening and on an ongoing basis. Specifically, must a financial institution: 

  • collect information about expected activity on all customers at account opening, or on an ongoing or periodic basis; 
  • conduct media searches or screening for news articles on all customers or other related parties, such as beneficial owners, either at account opening, or on an ongoing or periodic basis; or  
  • collect information that identifies underlying transacting parties when a financial institution offers correspondent banking or omnibus accounts to other financial institutions (i.e., a customer’s customer)? 

FinCEN responds that the CDD Rule does not categorically require: 

  1. the collection of any particular customer due diligence information (other than that required to develop a customer risk profile, conduct monitoring, and collect beneficial ownership information);  
  2. the performance of media searches or particular screenings; or 
  3.  the collection of customer information from a financial institution’s clients when the financial institution is a customer of a covered financial institution.  

FinCEN explains that a financial institution must make a risk assessment of the customer to determine whether additional information is necessary in order to develop its understanding of the nature and purpose of the customer relationship. Financial institutions must establish policies, procedures, and processes for determining whether and when, on the basis of risk, to update customer information to ensure that customer information is current and accurate.  

Customer Risk Profile 

The second question asks whether covered financial institution must: 

  • use a specific method or categorization to risk rate customers; or 
  • automatically categorize as “high risk” products and customer types that are identified in government publications as having characteristics that could potentially expose the institution to risks? 

FinCEN responds that it is not a requirement for financial institutions to use a specific method or categorization to establish a customer risk profile. Further, financial institutions are not required or expected to automatically categorize as “high risk” products or customer types listed in government publications.  
Various government publications provide information and discussions on certain products, services, customers, and geographic locations that present unique challenges and exposures regarding illicit financial activity risks. However, even within the same risk category, a spectrum of risks may be identifiable and due diligence measures may vary on a case-by-case basis. 

A covered financial institution should have an understanding of the money laundering, terrorist financing, and other financial crime risks of its customers to develop the customer risk profile. Furthermore, the financial institution’s program for determining customer risk profiles should be sufficiently detailed to distinguish between significant variations in the risks of its customers. There are no prescribed risk profile categories, and the number and detail of these categories can vary. 
Ongoing Monitoring of the Customer Relationship 

The third question asks whether it is a requirement that financial institutions update customer information on a specific schedule. FinCEN answers that there is no categorical requirement that financial institutions update customer information on a continuous or periodic schedule.  

The requirement to update customer information is risk-based and occurs as a result of normal monitoring. Should a financial institution become aware, as a result of its ongoing monitoring of a change in customer information (including beneficial ownership information) that is relevant to assessing the risk posed by the customer, the financial institution must update the customer information accordingly. Additionally, if the customer information is relevant to assessing the risk of a customer relationship, then the financial institution should reassess the customer risk profile/rating and follow its established policies, procedures, and processes for maintaining or changing the customer risk profile/rating. However, financial institutions, on the basis of risk, may choose to review customer information on a regular or periodic basis. 

The FAQs help to further shape the requirements of the CDD rule. In summary, they provide that financial institutions are not automatically required to collect particular categories of information, perform screenings, or gather information for a customer’s customer (when working with another financial institution). The rule also does not set a method for establishing risk profile, or require certain risk profiles based upon listings in government publications. Lastly, there is no requirement to update customer information on a continual basis. 

While the FAQs clarify certain activities that are not specifically required, it is important to note that under certain circumstances, the concepts discussed above might be appropriate. Financial institutions must set policies and procedures to meet CDD requirements. Those policies must guide, in accordance with the considerations above, determinations as to what information the financial institution collects at account opening, how a customer relationship is risk-weighted, and what, if any, ongoing monitoring is performed. Thus, financial institutions should still review existing CDD policies and procedures considering the new FAQs. 
The FAQs can be found here.

By, Ally Bates

The below article is the Special Focus section of the August 2020 Compliance Journal. The full issue may be viewed by clicking here.

The Board of Governors of the Federal Reserve System (FRB), Federal Deposit Insurance Corporation (FDIC), Office of the Comptroller of the Currency (OCC), and National Credit Union Administration (NCUA) (collectively, the agencies) recently issued a joint statement to provide prudent risk management and consumer protection principles for financial institutions to consider while working with borrowers as loans near the end of initial loan accommodation periods applicable during the Coronavirus Disease 2019 (COVID event). The principles are consistent with the agencies’ Interagency Guidelines Establishing Standards for Safety and Soundness and are generally applicable to both commercial and retail loan accommodations. The principles are intended to be tailored to a financial institution’s size, complexity, and loan portfolio risk profile, as well as the industry and business focus of its customers. The following is a summary of the release.  

In the new guidance, the agencies recognize that while some borrowers will be able to resume contractual payments at the end of an accommodation, others may be unable to meet their obligations due to continuing financial challenges. The agencies also recognize that some financial institutions may face difficulties in assessing credit risk due to limited access to borrower financial data, COVID event-induced covenant breaches, and difficulty in analyzing the impact of COVID event-related government assistance programs. 

The agencies provide several principles to illustrate prudent practices for financial institutions in working with borrowers as loans near the end of accommodation periods, including: prudent risk management practices, well-structured and sustainable accommodations, consumer protection, accounting and regulatory reporting, and internal control systems.   

As outlined by the agencies, prudent risk management practices include identifying, measuring, and monitoring the credit risks of loans that receive accommodations. Sound credit risk management practices include applying appropriate loan risk ratings or grades and making appropriate accrual status determinations on loans affected by the COVID event. Further, the agencies believe effective management information systems and reporting helps to ensure that bank management understands the scope of loans that received an accommodation, the types of initial and any additional accommodations provided, when the accommodation periods end, and the credit risk of potential higher-risk segments in the portfolios.  

When working with borrowers who continue to experience financial challenges after an initial accommodation, the agencies believe it may be prudent for a financial institution to consider additional accommodation options to mitigate losses for the borrower and the financial institution. The effectiveness of accommodations improves when they are based on a comprehensive review of how the hardship has affected the financial condition and current and future performance of the borrower.  

When considering whether to offer additional accommodation options to a borrower, the agencies stated it is generally appropriate for the institution to assess each loan based upon the fundamental risk characteristics affecting the collectability of that particular credit. The new guidance further identifies what financial institutions should consider in its evaluation of the borrower’s financial condition and repayment capacity. The agencies also note that the COVID event may have a long-term adverse impact on a borrower’s future earnings and therefore bank management may need to rely more heavily on projected financial information for both commercial and retail borrowers when making underwriting decisions as supporting documentation may be limited, and cash flow projections may be uncertain.  
The agencies also encourage financial institutions to provide consumers with available options for repaying any missed payments at the end of their accommodation to avoid delinquencies or other adverse consequences. The agencies also encourage institutions, where appropriate, to provide consumers with options for making prudent changes to the terms of the credit product to support sustainable and affordable payments for the long term. Eight examples of generally effective approaches to risk management in this context are included in the guidance.  

The new guidance also includes a discussion regarding accounting and regulatory reporting that financial institutions need to consider for all loan modifications, including additional modifications for borrowers who may continue to experience financial hardship at the end of the initial accommodation period. Institutions are reminded to consider regulatory reporting instructions, section 4013 of the CARES Act regarding temporary relief from troubled debt restructuring, and the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised).  

Lastly, the guidance sets forth the importance of internal control functions, commensurate with the size, complexity, and risk of a financial institution’s activities. The internal control functions typically include appropriate targeted testing of the process for managing each stage of the accommodation. Included in the new guidance are six examples of the type of activity the agencies believe can be confirmed through prudent testing by a financial institution’s internal control functions.  

As financial institutions work to determine whether certain borrowers need additional accommodations due to the effects of the COVID event, and in preparation of federal and state examinations resuming, the new guidance provides examples of prudent risk management and consumer protection principles that each financial institution need weigh. Additionally, the new guidance provides factors to consider when working through accounting and regulatory reporting requirements as it relates to each particular credit. The new interagency statement may be viewed at: www.ffiec.gov/press/PDF/Statement_for_Loans_Nearing_the_End_of_Relief_Period.pdf

By, Ally Bates

Statement on the release of second quarter 2020 FDIC numbers from Rose Oswald Poels, president/CEO of the Wisconsin Bankers Association   

  • Overall lending increased (10.1%) due to huge growth in commercial loans (41.4%) driven by PPP loans. 
  • Clients continue to seek safety and security by increasing their bank deposits (12.6%) 
  • An increase in noncurrent loans and leases (13%) highlights the negative financial effect of COVID-19 on Wisconsin. 

Wisconsin banks offered strength and stability for their clients during the coronavirus crisis according to the latest FDIC quarterly numbers. 

Deposits soared by 12.6% compared to a year ago as customers sought the safety and security found in building their savings account during uncertain times. 

Fueled by Paycheck Protection Program loans (PPP), commercial loan growth, with a 41.4% increase, drove the overall increase in lending in Wisconsin (10.1%). Residential, farmland, and farm loans all experienced a modest decrease, ranging from 1.3% to 1.4% over the same time period.  

These trends are reflective of the overall strength and stability of Wisconsin’s banking industry as we navigate the pandemic. Businesses and families continue to leverage that strength to stabilize their quality of life. 

Banks continue to prepare for and work through issues caused by the pandemic as illustrated by the 13% increase in noncurrent loans and leases. 

While not immune to the negative economic effects of the coronavirus, Wisconsin banks continue to stand ready to serve businesses and families during these unprecedented times. 

FDIC Reported Wisconsin Numbers* 





Net loans and leases   




Total deposits   




Commercial and industrial loans   




Residential loans   




Farmland loans   




Farm loans   




Total assets   




Noncurrent loans and leases   




* dollar figures in thousands   


By, Eric Skrum

Homeowners hoping to take advantage of low mortgage rates by refinancing are in for sticker shock. Freddie Mac and Fannie Mae are imposing a new “adverse market refinance fee” on all mortgage refinances, which means those homeowners will be paying more at the loan close. On average, this fee adds $1,400 to the cost of refinancing. This could result in some consumers being priced out of their opportunity to lower their monthly mortgage payments according to the Wisconsin Bankers Association.  

“We were surprised that Freddie Mac and Fannie Mae would raise fees at a time when the economy is fragile and unemployment is high,” said Rose Oswald Poels, WBA president and CEO. “This move only hurts consumers at a time when they need all the help they can get.” 

“It’s frustrating because low mortgage rates meant consumers, especially low- and moderate-income homeowners, could improve their financial situations by lowering their monthly mortage payments by refinancing their loan. This fee increase jeopardizes that effort.” 

The Federal Housing Finance Agency (FHFA) announced last week a new loan-level price adjustment fee of 0.5% basis points to be imposed on cash-out and non-cash-out refinance mortgage transactions that Fannie Mae and Freddie Mac purchase. FHFA stated the fee is a result of risk management and loss forecasting by Fannie and Freddie related to economic and market uncertainty as a result of COVID-19 effects. 

The fee is effective for loans purchased or delivered on or after Sept. 1, 2020. Loan-level price adjustment fees are typically part of the loan rate or costs associated with the refinancing that consumers pay. 

The result is increased fees to homeowners and a slowdown of a white-hot refinancing marketing, one of the bright spots in the economy. Why would Freddie and Fannie do this? It’s simple: to increase their own capital levels as a hedge against future risk. 

By, Eric Skrum

You’ve heard it before, and chances are you’ll hear it again: the branch is dying. If that’s true, why are so many financial institutions investing in their branch networks, either through remodeling or new construction? 

The answer: the branch is more than a building—and it always has been. Community banks connect with their customers and neighbors through their branch networks. Those networks are evolving to meet the needs and preferences of a new generation of customers, but branches are still an essential channel for delivering banking services. 

At a virtual session held during Fiserv’s Forward Forum in July, Connected Experiences: Branch Transformation Trailblazers Blend Talent and Technology, Fiserv Senior Product Manager David Johnson, who leads product management for self-service banking automation, explained that existing branch optimization challenges have evolved further in 2020 due to the pandemic, but that transforming their branches is a successful strategy banks can use to adapt. “Finding the next normal of service delivery falls squarely in the realm of branch transformation,” he said. “The changing nature of our interactions changes how we deliver products and services to customers.” 

Branches are designed to provide the best customer experience possible, but what constitutes the “best experience” has changed over time. According to new research from Fiserv (July 2020), since the pandemic began 33% of survey respondents had increased use of mobile payment apps, 27% increased use of mobile check deposits, and 46% do not plan to visit a branch within 30 days. Many of these trends started before anyone had heard of COVID-19, but the pandemic has accelerated and magnified their impact. 

To get a close-up look at what tomorrow's branches are designed to do, WBA spoke with five member banks that recently opened a new or renovated branch. 

State Bank of Cross Plains 

New branch location: Middleton 
Opened: May 30, 2019 

Peoples State Bank, Wausau 

New branch location: West Allis 
Opened: March 11, 2020 

Denmark State Bank 

New branch location: Sheboygan 
Opened: Feb. 17, 2020 

Bank First, Manitowoc 

New branch location: Oshkosh 
Opened: Jan. 6, 2020 

Bay Bank, Green Bay 

New branch location: Keshena, Menominee Reservation/County 
Opened: December 2020 (anticipated) 

While diverse in how they accomplish it, each of these banks’ branch investments exemplifies how the industry can build a new recipe for branch success. Some key ingredients: 

1: Strategic Growth 

New branches follow growth, not the other way around. Many new offices open because the bank’s strategic plan calls for organic growth and senior leadership has identified the community as an opportunity. For example, Peoples State Bank President/CEO Scott Cattanach said the bank made a strategic decision to pursue new market growth, and because they had already achieved significant market share in their home footprint of northern Wisconsin, they began looking to other areas of the state for opportunities. “From a broad perspective, we were looking to break into a higher-growth area of Wisconsin,” he explained. “Though we started it as a loan office, we always intended for it to become a full-service branch, because that’s when we, as a community bank, are most effective.” 

Sometimes that location is specified in the plan itself, as is the case with Bay Bank’s newest branch in Menominee County. “This branch is executing on our strategic plan,” said Bay Bank President Jeff Bowman. “It’s in writing in our plan that we will assist other tribal communities of Wisconsin.” In doing so, Bay Bank is bringing the first full-service bank branch to Menominee County, which was the only one of Wisconsin’s 72 counties that did not have a bank branch. 

2: The Right People 

“A lot of this centers around the people we hired,” said Denmark State Bank President and CEO Scot Thompson. “Without the right people, it’s difficult to grow.” The same pattern emerged, in most cases, for the launch of a new branch location. After determining which market was the best fit to target, the bank built relationships with key individuals in that market who then built up a portfolio of accounts, and eventually the community expressed demand for a full-service branch. “It’s part of our strategy and it all starts with people,” said Bank First CEO Mike Molepske. “Assemble a team, build some accounts, then open a branch.” 

By building the new branch’s team from within the community, the bank not only leverages existing client connections, but also demonstrates its commitment to bolstering the local economy, which can be a considerable component of success. “We’ve made the commitment to hire and train members of the Menominee community to work at the bank,” said Bowman. “We will create some new local jobs and launch some new careers in banking.” 

3: Community Engagement 

Investment in a new branch demonstrates the bank’s strength and ability to serve the community. “When you build a significant building on a significant corner—100,000 cars drove by daily, before COVID—it's a sign of the bank’s success and strength,” said State Bank of Cross Plains President & CEO Jim Tubbs. “Beyond it demonstrating an investment in the community, it shows that things are going well.” 

The physical presence of a branch is also how banks forge a connection with a new community. “People bank with people,” Thompson explained. “It’s a relationship you build over time. There is a benefit to still having face-to-face communication along with automation and technology. That’s where community banking has its niche.” The hallmark of community banking is relationships, and branches facilitate that advantage. “If we can’t deliver a personal touch we can’t deliver our best value,” said Cattanach. “We’re only successful if our customers are successful.” 

Also, each bank highlighted the goal of community engagement and support in talking about the motivation for the new branch. “Over the long haul, we will be able to increase home ownership, play a role in developing new housing, and providing access to capital in the form of small dollar consumer loans and small business loans,” explained Bowman. “We have 25 years of experience making mortgage loans on Tribal land. We’re transferring that unique skillset to a new community.” 

4: Brand with the Building 

Tubbs said the new State Bank of Cross Plains building was designed to communicate the bank’s tremendous commitment to the city of Middleton. “I believe, especially in the community bank space, the branch network is much more than a channel to do business with your customers,” he explained. “It’s a recognition of your brand and a huge part of your marketing for your organization.” 

Bank First’s newly opened branch in Oshkosh was designed with lots of natural light, built with recycled materials, and decorated with artwork from local artists, just like Bank First’s other branches, which means customers know what to expect when they walk in. “Whether it’s new or retrofitted, it needs to fit our brand,” Molepske explained. “When you walk into the building, you feel comfortable. It feels strong and professional. It’s a great place for customers to visit and our employees to work in.” 

With less foot traffic in branches, every interaction counts more. “You have to provide what consumers are looking for,” said Cattanach. “That requires your staff to be more multifunctional.” Universal bankers and ITMs are part of that transformation and are (or will be) featured at many of the new branches highlighted in this article. The ITM is a good example of the dichotomy of current customer demand; they want high-tech digital solutions and the ability to meet face-to-face with a trusted advisor. “Especially in the Midwest, a significant part of our customer-base still wants to come to the bank,” said Tubbs. “Without a doubt technology has changed people’s habits, but there’s still that desire.” 

A recent global survey by Deloitte showed consumers prefer to visit a bank branch for more complex banking services, such as opening an account, and this preference is fairly similar across generations: 64% of Baby Boomers, 54% of Gen Xers, 48% of Millennials, and 56% of Gen Z consumers surveyed said they prefer to visit branches when opening a new checking account. Despite branch traffic trending down, this shows the value of a branch—and its ability to deepen customer relationships—grows over time. “A new location is an investment,” said Thompson. “It doesn’t turn around Day One or even Year One. It's an investment in future growth and income.” 

So, while bank clients of all ages may visit branches less often—as few as five times per year according to some surveys—most don’t want branches to go away. “The branch will be with us forever,” said Molepske. “It’s the heart of community banking.” 

Seitz is WBA operations manager and senior writer.

By, Amber Seitz

WBA submitted 13 comment letters to various federal regulators in the first seven months of this year. But why? That seems like a lot of time and effort for the legal department. The answer is actually pretty simple: because comment letters matter. 

The federal rulemaking process, as governed by the Administrative Procedure Act, requires agencies to give notice of any proposed rule that they intend to enact. The proposal must allow for interested parties to submit comments on the proposed rule that are then taken into consideration. Upon conducting a comment analysis, agencies then must decide whether to proceed with the rulemaking process or issue a new or modified proposal. In some cases, they will even withdraw the proposal. 

The comment period on these proposed rules is an important democratizing process. It’s an opportunity for those who are going to be impacted by a rule to tell agencies how it would impact them and make suggestions. That is why WBA submits comments on your behalf; we want to make sure that your regulators are acutely aware of how their rules will affect banking in Wisconsin. We make a point to comment consistently on large rulemakings, both on ones we are for and those we are against. 

WBA is dedicated to advocating for the banking industry in all facets. While submitting comment letters may not seem as cool as meeting with legislators and testifying before committees, it has a large impact on the rules governing the day-to-day operations of your banks. Because of that, we love to hear from you on proposed rules! If you have any thoughts on a proposed rule or are interested in writing your own comment letter, email us at wbalegal@wisbank.com to let us know what you think. Having input from you helps us craft a better comment letter. 

Those 13 comment letters we submitted from the beginning of January through the end of July are 13 points of contact that regulatory agencies had with Wisconsin’s banks. That’s 13 times they received and considered your concerns, and we’ll make sure they hear your concerns many more times.

By, Ally Bates

Today, WBA commented on CFPB's interim final rule to amend Regulation X to temporarily permit mortgage servicers to offer certain loss mitigation options based on the evaluation of an incomplete loss mitigation application. WBA's comments generally supported the rule for its temporary solutions offered to borrowers in forbearance as a result of COVID-19. WBA also recommended that the options be expanded, so that they might be utilized in the event of future emergencies. 

Read the full letter.

By, Ally Bates

It's not exactly a bubble, but there are dark clouds on the horizon for commercial real estate. Commercial real estate (CRE) loans are under pressure, squeezed between two external forces brought on by the novel coronavirus pandemic: shutdowns and work-from-home (WFH) arrangements. And the long-term effects could strain bank portfolios as they work to provide “prudent accommodations” to struggling borrowers. Are we in the calm before the storm? 

Several sectors—most notably hospitality, retail, and food and beverage—are still reeling from forced closures and additional government ordinances and cleaning requirements designed to slow the spread of the virus. The initial hit to the hospitality sector was the immediate impact of the pandemic on transportation and business travel, according to Michael Wear, CRC, owner and principal of 39 Acres Corporation, which specializes in bankers education and consulting in the areas of credit risk and loan portfolio risk management. “The second punch came from local government ordinances prohibiting groups and requiring extra cleaning procedures.” According to data from the Bureau of Labor Statistics, about 4.8 million leisure and hospitality jobs have been lost since February, and the sector could lose over $120 billion this year—half its revenue. 

This spring, government-ordered lockdowns forced the global business world into the largest-ever WFH experiment, with (surprisingly, to some) positive results. “There likely will be a large shift in demand for office space in the future,” said Stanley Koopmans, senior vice president – commercial relationship manager at the State Bank of Cross Plains. Regarding WFH, “Many of my customers are saying they’ve not seen a decrease in productivity, and in some cases, they’ve seen an increase. They still want office space for those employees who want to come in, but they may not need as big of a building.” Allowing employees to work from home results in significant cost-savings for businesses, especially considering office redesigns to accommodate physical distancing requirements are more costly (more space per employee). Nationwide, demand for office space could drop by up to 15%, even after the pandemic is over. 

Despite ongoing COVID-19 challenges, the CRE situation doesn’t look dire… yet. “So far, there hasn’t been a huge impact,” Koopmans said, indicating while State Bank of Cross Plains has done deferrals, many customers haven’t needed them. Associated Bank, the largest bank headquartered in Wisconsin, had completed $638 million in commercial real estate deferrals as of June 30 but expects over 90% of corporate banking and small business deferrals to resume making payments. The true difficulty for bankers will be the severity of the pandemic’s future impact on consumers. 

Watch for ‘False Positives’ 

Government relief programs may be artificially postponing, not eliminating, fallout from the virus. Federal programs alone have poured over a trillion dollars into businesses through direct lending, guaranteed loans, grants, and tax breaks. “Because of all the stimulus that was put in place so fast, we haven’t seen as large of an impact as we could have,” said Koopmans. “For a lot of the multifamily businesses, they’ve not yet been affected significantly because of all the money that’s been going in, but it’s definitely something that may change going forward.” 

On top of business aid, individual consumers have received a financial bump via stimulus checks and/or increased unemployment benefits. “As those programs dry up, we’ll see a lot more outcomes where people can’t make mortgage payments or don’t get take-out as often,” Koopmans said, predicting more negative impacts this winter. Sustained record unemployment numbers are a big part of that. Wisconsin’s unemployment spiked from a record-low near 3% in late 2019 to 13% in April 2020 and remains high (8.5%). 

Continued high unemployment means lots of consumer buying power is removed from the market, which negatively impacts many of the same industries already hit hard by the virus. For example, community commercial properties (a.k.a. strip malls) are another type of CRE loan that banks should anticipate struggling, even if they’re performing now. “It takes a bit of time for the tenants to burn through their cash and capital before they are late with rent,” Wear explained, calling these properties “the next wave” in risk as discretionary spending drops off the longer the recession lasts. 

Batten Down the Hatches 

Whether a storm is on the horizon or not, banks should invest time and energy in evaluating their current CRE portfolios and begin evaluating prospective clients more thoroughly. “In order to quantify risk, you first have to identify risk,” said Wear. He recommends reviewing clients’ liquidity and capital positions as well as debt structures. “For current loans, it all depends on the liquidity of your borrower and your guarantors,” he said. 

Some general best practices for weighing your portfolio’s risk: 

Review every loan 
Banks, especially community banks, should assess their risk exposure loan by loan for the most accurate read on the situation. The pandemic’s impact on businesses has varied widely, according to Koopmans, so bankers should assess each loan’s performance on an individual basis. “Some restaurants in smaller communities have hardly skipped a beat because of an outpouring of support from their community,” he explained. “Restaurants that are chains or have drive-through service weren’t affected nearly as much, and some are even up year-over-year.” 

Stress test prospects 
While organic loan demand and expectations for business development fell off sharply during the height of the pandemic, the University of Wisconsin-Madison's Center for Research On the Wisconsin Economy (CROWE) found a strong rebound in early-stage business formation in the state through the end of June, reaching levels seen in prior years. Businesses are also resuming growth plans stalled this spring. “We’ve been surprisingly busy with new opportunities,” said Koopmans, explaining that low rates are enticing new projects and word-of-mouth referrals from PPP lending are bringing in additional business. “With PPP, there was an opportunity to help non-clients who couldn’t get a loan because their existing financer didn’t offer them, and now they’re moving their whole relationship to us. We quickly helped over 1,000 customers and non-customers, which generated a lot of positive buzz for State Bank of Cross Plains.” 

Price for relationships 
To avoid adverse selection, Wear recommends stress testing prospects’ liquidity and capital access. “Use realistic assumptions about the projected depth and breadth of economic impact in their sector as well as the timing and slope of their industry sector recovery,” he advised. With interest rates at historic lows, using relationship-based pricing packages can help community banks compete. “It’s a bidding war,” said Wear. “Relationship-based pricing will hopefully help banks get the value of a total relationship as opposed to low-bid on a transaction.” 

The ongoing COVID-19 pandemic has—and will continue to—reshape the world in many ways, but disruption makes space for opportunity. Commercial lenders who are able to accurately assess their prospects’ and current clients’ needs will be able to forge new and deeper relationships between clients and the bank. As Wear put it: “Where there’s adversity, there’s opportunity.” 

Seitz is WBA operations manager and senior writer.

By, Amber Seitz