Faced with low interest rates, an abundance of deposits, and a pandemic-induced slowdown in business lending, many Wisconsin banks are wrestling with net interest margin (NIM) compression. 

While NIM compression is a long-term trend in banking, the effect of the still-spreading novel coronavirus on the economy has heightened concern over net interest margin, which essentially is the difference between what banks pay for deposits and earn on loans and investments. 

At a time when many banks have plenty of money to lend, the appetite for borrowing by good businesses is diminished and there’s not a lot of room for banks to further trim how much they pay depositors. 

“Suddenly you’ve got less loan demand,” said Jim Reber, president and chief executive of ICBA Securities. “You’ve got less that you can charge on your loans. The investments that banks own have gone down in yield as well because the Fed has purchased somewhere around $3 trillion worth of investments in 2020. And then, finally, banks have just been flooded with liquidity.” 

While the cost of funds is down, yields on assets have retreated faster than on deposits, he said. 

“That’s just mashed all the room for any net interest margin,” Reber said. 

Marc Gall, vice president and asset/liability strategist at BOK Financial, put it this way: “The downward push is really just that we’re in a very low rate environment where everything is getting compressed.” 

Data from the Federal Deposit Insurance Corp. shows how NIM has narrowed for Wisconsin banks. 

In the first half of 2018, the net interest margin average at Wisconsin-based banks was 3.51%. In the first half of 2019 it was 3.49%, and fell to 3.31% in the first six months of this year. Nationally, in those same periods, the NIMs for banks were 3.36%, 3.40%, and 2.97%, respectively. 

With no end to the low rate environment on the horizon, bank consultants expect the net interest margin squeeze to persist. 

In fact, said Ryan Hayhurst, managing director of The Baker Group, data for this year’s third quarter shows it’s getting worse. 

“The third-quarter margin compression was significantly more than the first and second quarter, and it’s probably going to continue because now you don’t have the benefit of the PPP (Payroll Protection Program) fees coming in anymore,” Hayhurst said.  

Looking at banks with assets of less than $10 billion nationally, NIM went from 3.68% in first quarter this year to 3.60% in the second quarter, and then lost another 20 basis points in the third quarter, Hayhurst said. 

The net interest margin compression is worse for community banks that do little or no mortgage lending. Mortgage lending and refinancing have been bright spots in banking. 

“If you’ve got an active mortgage department, an active mortgage presence, you’ve been able to refinance a whole lot of loans this year,” Reber said. 

Hayhurst said NIM compression can be tougher on community banks than on larger institutions.  

“The community banks receive approximately 80% of their income from margin sources,” Hayhurst said. “And bigger banks, it’s closer to 60%. So the larger institutions get a lot more of their revenue from non-margin sources like fee income, trust department, insurance activity, brokerages, investment banking – those kinds of things. The bigger banks also have lower overhead expenses because of economies of scale.” 

As nice as it was to derive fee income from PPP loans when the economy drastically slowed at the start of the pandemic, the loans could contribute to some NIM compression as they are forgiven. 

A decent amount of PPP is still sitting in banks, and once it’s forgiven, the return on it goes from 1% as a loan to only 5 to 10 basis points as cash. 

PPP loans might also be used by a borrower to pay down other loans on the books that have higher interest rates, said Kent A. Musbach, senior vice president for the BOK Financial Institutions Group. 

“So that’s a bit of margin headwind, if you will,” Musbach said. 

What can banks do to minimize NIM compression? 

One thing is to closely look at rates being paid for deposits like CDs, and cut them further. 

According to Reber, at this point, depositors aren’t expecting their money will earn very much anyway. 

Reber said banks have learned “they can be pretty aggressive on cutting their deposit costs because the depositors have very low expectations for any return.” 

“A lot of individuals, a lot of small business, have been able to refinance debt. They know they’re paying less on whatever they’ve borrowed from their bank, and they therefore reason, ‘Well, the bank is going to have to pay me less,’” Reber said. 

Gall said although cutting rates won’t have much of an impact over the last couple months of this year, it sets the stage for 2021. 

“It’s really going to have a whole impact when you have 12 months of that lower cost,” Gall said. “It’s really trying to get yourself at a good starting point for the next year. And that’s why banks have to really take a hard look at every account.” 

Said Hayhurst: “Because deposits have surged, I don’t believe most community banks are going to lose deposit relationships by cutting their deposit costs. Banks only have so many levers they can pull to fight margin compression.” 

In addition to reducing deposit expense, banks must make sure they deploy their assets as effectively as possible to combat NIM compression, consultants said. 

“Action step No. 1 is do something with the cash other than just have it sit at 10 basis points,” said Gall. 

Right now, many banks are sitting on a lot of cash. 

“Banks are holding that cash for a couple of reasons,” Hayhurst said. “One is the uncertainty – they saw a surge of deposits this year – and some of them are uncertain about if those deposits are going to surge back out. I don’t believe that they are. But there is a level of uncertainty there, so they’re holding cash for that reason.” 

Hayhurst continued: “Two, they don’t like the yields they can get in say, the bond market. So they are holding that cash earning 10 basis points because they don’t like that they can only buy a bond at 1% and they remember when they could buy a bond at 2% or 2.5%” 

“But 8% of your assets earning just 10 basis points is destroying margin. So first and foremost they need to deploy those assets,” Hayhurst said. 

Reber said some banks are selectively investing longer term than they normally would. 

“That 12-year bond that yields 2% is a better than a 5-year bond that yields 75 basis points,” Reber said. 

Gall said, depending on its position, each bank may have a little different approach.  

“The easy answer is the investment portfolio,” Gall said. 

In addition, he said, banks that are doing mortgage originations may choose to hold some mortgages. A bank might also opt to become more aggressive in lending. 

“The problem with that is in an uncertain economy you don’t really want to be leaning into potentially bad credits at lower rates,” Gall said. “You kind of pick your spot. But if you’re saying, ‘I’m going to earn 10 basis points for what the Fed has indicated is going to be three years if not longer, that’s going to be a huge hindrance on margin if you don’t do something with it.” 

Gall said some banks have the philosophy that they always need to price at the low end in their market or they’ll lose the deal.  

“Try to get a little bit more out of those loans, whether it’s 5 basis points or 10 basis points or 3 or 7,” Gall said. “Again, every additional couple of basis points you can get is probably what’s going to help banks succeed for the long run. Even though it doesn’t seem like a lot, when you start aggregating $250 million of assets and you start squeezing out 5 extra basis points, it becomes real dollars.” 

Musbach and Gall said bankers could be better off to not focus so much on NIM. 

“Is it the margin percentage that’s important, or is it the absolute net income interest number?” Musbach said. 

Consultants said banks also must keep becoming more efficient. 

It appears low rates are going to linger, and margins will remain under pressure, they said. 

“The Fed’s own projections show that rates aren’t going to be moving until 2023,” said Reber. “Now, they can change their mind, but the last time they put the numbers on a piece of paper, it said 2023.” 

The situation shouldn’t be anywhere near as bad as during the Great Recession, however. 

“You’re not going to have these bank failures in the numbers we did back then,” Reber said. “It’s going to be an environment where banks are just going to have to muddle along with very modest earnings but pretty secure, pretty safe balance sheets until whatever normal is returns.” 

Paul Gores is a journalist who covered business news for the Milwaukee Journal Sentinel for 20 years. Have a story idea? Contact him at paul.gores57@gmail.com

Interested in this topic? Check out WBA's Margin Management Workshop recording! Seven hours of content, on-demand. Learn more by clicking here.


By, Eric Skrum

An interagency proposal was issued oSeptember 1, 2020, to reorganize, revise, and expand the questions and answers regarding flood insurance. WBA filed comments in support of the interagency efforts to help lenders meet their responsibilities under Federal flood insurance law and increase understanding of the flood insurance regulations. Additionally, WBA urged the agencies to issue supervisory expectations regarding private flood insurance and sought additional clarity regarding exemptions for detached structures. Click here to view the letter. 

By, Ally Bates

By Rose Oswald Poels

A few weeks ago, I wrote about how the country is divided for many reasons, and how bankers’ role as leaders has never been more important to help tackle our varied issues. My focus then was primarily on helping to improve the economic status of the unbanked by committing to provide products to bring those individuals into the protection and trust of the banking system.

The election results should resolve the intense political divide we’ve experienced leading up to this election, but many issues raised to show contrast between the parties during the campaign will linger. One of these issues, racial injustice, is another area where bankers are, and need to continue, stepping up to show leadership for their own institutions as employers, and for their communities as a service business.

Wisconsin’s communities are not isolated from events like George Floyd’s death. Simply look at the unrest in Kenosha and other peaceful demonstrations across the state to see how these tensions run deep in every area of the Badger State. There is no simple or overnight solution to solving racial inequity; however, as leaders, bankers once again have a unique opportunity to join the conversation if you haven’t already, and lead by example to help move us toward racial equity.

I recognize that for some, this conversation can be uncomfortable. However, I believe it is important for WBA to partner with its member banks to care for our minority bankers, support our minority customers, and bring more of our disenfranchised community members into the economic shelter that the banking industry provides.

In many ways, 2020 has been a year of much change and new experiences challenging the “comfort” of each one of us. This is true for myself, and for WBA. Both WBA staff and our Board of Directors are committed to addressing racial equity through discussion and action. We want to empower you, the leaders in your communities, to do the same.

WBA was recently one of three groups asked to represent financial institutions during a virtual town hall meeting in La Crosse, fielding direct questions about the difficulties minorities have in achieving home ownership. While the conversation was uncomfortable at times, it also provided the opportunity to showcase what banks are currently doing to improve the situation while acknowledging there is still room for improvement.

I’m also thrilled to announce a special event on December 9 to help all of us learn more about unconscious bias and racial equity. I am excited to share the details once they are finalized but look forward to the industry’s broad participation in this next step on our journey together.

Now, more than ever, as leaders in your communities, it is vitally important to have these conversations, learn how we can all improve, and then act on a path toward positive change. As always, I welcome your thoughts on how WBA can do more, and help the industry through these many, challenging issues.

Split Government in Wisconsin Continues 

Rep. Kind Wins and the Wisconsin Legislature Stays in GOP Hands

The state of Wisconsin took center stage in a showdown that places election margins for president and several other local contests on a razor’s edge. Wisconsin Democrats had a major funding and polling advantage that yielded little change in six months on both a state-wide and local scale with Democrats spending 4-1 in some parts of the state.   

Voter turnout appears to have exceeded the 2012 high of 3.1 million people and late absentee ballots in urban areas propelled Joe Biden ahead of President Donald Trump in a harrowing media-fueled clash where many expected different results. As of 8 a.m. this morning, Biden maintained a lead of approximately 20,750 votes or 0.63 percentage points. A recount is not automatic in Wisconsin, but the second-place candidate can request one. The campaign doesn’t have to pay for the cost of the count if the margin is within .25 percentage points.  

Congressman Ron Kind held on in a close race, beating Derrick Van Orden in the 3rd Congressional District (La Crosse/Western Wisconsin) by 11,000 votes. Kind released a statement trumpeting his future work: “I am committed to fighting for the farmers, veterans, families, businesses, and workers who move our state forward.” The banking industry is counting on Kind, who supported a tax fairness measure (ECORA) to continue his work next Congress.  

The other Wisconsin Congressional races mainly hit the mark of predictability and current Senate Majority Leader Scott Fitzgerald easily won his race and will replace Rep. Jim Sensenbrenner

Wisconsin continues to hold on to its purple battleground reputation nationally but voted locally to hold on to incumbents giving Republicans a continued strong hold on the legislature. There were no major upsets, simply many close races that will set the stage for future elections to promote early/absentee voting. 

The Wisconsin state Senate Republicans increased their majority by winning seats in the Northwestern part of the state (Rob Stafsholt) and in Brown County (Eric Wimberger) and held on to a key seat in the Milwaukee area held by Sen. Alberta Darling.  

Republicans in the Assembly maintained a commanding majority of 61 seats (before recounts and the final canvas), but Assembly Democrats look to pick up two seats in suburban Milwaukee. As of this morning, Democrat challenger Sara Rodriguez was at 51 percent and sitting Rep. Rob Hutton, R-Brookfield, was at 49 percent. While Democrat Candidate Deb Andraca was leading Rep. Jim Ott (R-Mequon) 2 percent.  

In what looked to be a potential recount, Rep. Nick Milroy (D-South Range) was leading challenger Republican Keith Kern, by only 139 votes.  

The WBA Advocacy Team is preparing a video and preliminary analysis about how the elections are likely to impact the banking industry on local, state, and federal levels. It will be sent around once it’s available.

By, Alex Paniagua

Getting to that next level in a career path can be daunting, exhausting, and quite often both. To make it a bit easier, we’ve asked WBA member executives to share how they managed to take that next step in their banking career and the qualities that they look for when considering those promotions.  

Take Initiative 

Shane Ilstrup, president and CEO of Citizens First Bank, Viroqua, has worked with a range of different employees with various skill sets. He noted that many of the individuals making strides in their careers are the ones who are constantly seeking knowledge from peers, mentors, and their community.  

“Openness to learning is the biggest thing,” said Ilstrup. “The ones who are successful are the ones who are constantly involved, always learning, and interested in being part of the trade. They’re willing to grow. Everyone that continues to push themselves seems to be a good leader for our industry.” 

That willingness is echoed by Kevin Piette, COO and CIO of State Bank of Cross Plains. Not only does he see this in successful candidates; it was a skill that got him to the position he is in today. 

“What helped me the most was initiative, education, and hard work,” Piette said. “It’s the age-old phrase, ‘You can lead a horse to water, but you can’t make them drink’. You can teach someone all the right things, but without that initiative, nothing will come of it.” 

Along with the proper initiative, the ability to adapt can set you apart from others. Julie Redfern, executive vice president and COO of Monona Bank, reminded that it’s a skill more employers are looking for, especially in this constantly changing industry.  

“A lot of qualities most community banks want are ones that can be used across many facets of life,” said Redfern. “It’s important to be engaged and eager to learn. You can truly learn just about anything, but that information is only as good as the inner drive that comes with it. You can give someone all the tools to succeed, but they need to want that success." 

Make Connections 

Figuring out how to access new connections in the industry isn’t always easy. As members and founders of WBA’s Building Our Leaders of Tomorrow (BOLT) section, all three executives realize the significance of creating those platforms to give individuals the opportunity to achieve that next step in their career. 

“Leadership programs are incredibly important because they give you a lot of those soft skills,” said Ilstrup. “It’s a great asset that banks are able to take advantage of.” 

These programs not only provide participants with necessary skills but allow them to meet others in the industry as well. This goes beyond a simple business connection – it could lead to meeting the people who will help your ideas develop, thrive, and be noticed.  

“We could talk all day about hard work and education because those are the crucial building blocks,” said Piette, “but you also need to have the right individuals — especially managers and mentors — that you align with.” 

And on top of everything else being attained at the end of the day, these programs and community connections are allowing participants to grow and better understand the issues in their industry.  

“If you actively engage and advocate within your bank, within your industry, and within your community, good things will come to you,” said Redfern. “Be present. That’s a huge key to success in any career.” 

Break Expectations 

All three executives had a similar message regarding how to learn these critical skills, build connections, and get to that next point in any career: Be flexible, embrace challenges, and absorb everything. This will allow the constant growth that is necessary to defy expectations and, ultimately, further your career. 

“Keep up with emerging issues,” said Redfern. “Enlighten yourself to things that are outside the traditional scope of banking so you’re thinking about what’s going on outside of your industry, because that’s a lot of what is going to have further disruption if it’s on the fringe.” 

“Opportunity is everywhere,” Ilstrup said. “The talent pool is hard to pull from, and if you can prove your worth, there’s going to be reward for that. Keeping your options open will help you realize opportunity when it’s there, and that’s how you get to that next step.” 

Piette did exactly this, and for him it was lifechanging. He began his education in sciences but discovered through the help of one of his mentors that he loved working with people and customers. His ability to adapt and willingness to keep his options open led him to a career he hadn’t anticipated, but now is one he is proud to provide leadership in.     

“The best plans are changed,” Piette concluded. “You have to go with the flow and figure things out along the way.”

To learn more about topics like this, join WBA's BOLT Winter Leadership Summit 

By, Alex Paniagua