Pandemic Makes Budget Planning Tougher for Bankers

As Wisconsin bankers prepare their 2021 budgets amid a pandemic, the biggest question marks – aside from the persistence of the novel coronavirus itself – are how they’ll handle shrinking net interest margins and how much to add to loan-loss reserves.

And if they had their wish, many bankers would gladly welcome a sustained hot mortgage market and another dose of economic stimulus to help them and their customers through the new year.

With the coronavirus and its effects on business and consumers still hampering the state’s economy, bankers are adjusting budgeting and strategic planning this fall.

The weak interest rate environment is a top concern.

“The interest margin has been shrinking because of the low interest rates and the excess liquidity banks are sitting on,” said Paul Kohler, president and chief executive officer of Eau Claire’s Charter Bank.

With overnight funds paying only five basis points, margins are compressed and will hurt earnings, said Kohler, who is chair of the Wisconsin Bankers Association.

The latest quarterly report from the Federal Deposit Insurance Corp. shows the overall net interest margin for banks headquartered in Wisconsin was 3.31% in the first half of 2020, down from 3.49% at the same time in 2019. Nationally, the first half net interest margin for banks was 2.97%, tumbling from 3.40% during the same span in 2019.

Bankers are being told Interest rates are likely to stay low for a few years, said Paul Northway, president and CEO of American National Bank Fox Cities in Appleton.

“Typically when we start hearing things like that we start worrying about margin compression,“ said Northway, a member of the WBA board. “And so banks are going to certainly budget based on a near-zero interest rate environment and lower margins.”

As the pandemic lingers, more loans are expected to become delinquent, meaning banks will have to add to loan-loss reserves.

Noncurrent loans and leases at Wisconsin-based banks totaled $754.9 million in the first half of 2020, up about 13% from $668.2 million in the first six months of 2019, according to the FDIC.

“The other thing that is a big concern is what will loan losses look like in the future,” said Kohler.

FDIC data shows banks are starting to boost reserves, but some bankers say their portfolios have been holding up reasonably well, thanks in no small measure to economic stimulus like the Paycheck Protection Program and the fact that the mortgage business has been robust in many communities.

While interest income at Wisconsin banks was down about 6% through June compared with the first half of 2019, non-interest income was up 34%.

“I think our biggest unknown relative to the budget next year is going to be will we have fee income to offset lower margins – and a lot of it is going to have to do with the mortgage market – and will the pandemic and the economy have a significant impact on asset quality,” Northway said.

Brennen Clark, senior vice president of bank operations for Peoples State Bank in Prairie du Chien, said nothing is finalized yet for the 2021 budget.

“We’re in concurrence that the biggest factors for ‘20 and ‘21 will be net interest margin and continued rate pressure, and probably the provision for loan loss expense, which is largely still uncertain at this point as to what impact that will have on our bank,” Clark said.

Ken Thompson, WBA chair-elect and the president and CEO of Capitol Bank in Madison, said the uncertainty around the pandemic has delayed the bank’s strategic planning and budgeting process by a month in order to simply give bank executives more time to collect information.

“If they roll out a vaccine in November, that might set our economy on a different path,” Thompson said. “You just don’t know. So everything is being pushed back at least 30 days. We want to gather as much information as possible this year – even more so than most – so we’re making good decisions.”

Another budget consideration in 2021 for some banks could be spending for technology. At a time when people are being told to stay home as much as possible to avoid coming in contact with the coronavirus, it’s important for banks to offer mobile technology. While most have added consumer technology to their offerings by now, those that haven’t – or provide less than customers want – might have to budget for it in 2021.

“Do your clients have the ability to do things mobile? If not, you may have some costs related to that,” said Northway. “All of those things add up.”

Bankers say a variety of wild cards, ranging from the production of a safe vaccine to the outcome of the presidential election, could affect the 2021 economy.

The latest report from the Federal Reserve Bank of Philadelphia’s survey of 35 economic forecasters, issued in mid-August, shows the group predicted the economy will expand at an annual rate of 19.1% in the current quarter, which was more optimistic than the 10.6% pace predicted for the third quarter in their previous survey. On an annual-average over annual-average basis, the Philly Fed’s forecasters expect real GDP to decrease 5.2% this year but recover and grow at an annual rate of between 2.2% and 3.5% over each of the following three years.

Some bankers said the federal government’s economic stimulus has worked, and they be happy to see another round to boost businesses and consumers.

“We do a lot of agricultural loans and there’s been quite a bit of stimulus pumped into the ag end, whether it’s dairy or cattle or crops,” said Mark Forsythe, president of Peoples State Bank in Prairie du Chien. “That’s probably helped a lot as far as income from the agricultural end. This year there’s a lot of lower prices as far as commodities, grain.”

Christopher Del Moral-Niles, executive vice president and chief financial officer of Associated Banc-Corp, said of the potential for more stimulus: “We’ll take whatever they put on the table. It makes our customers likely better positioned to withstand the current storm, which will make it easier for us to work with them to find the right answers for them.”

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

By, Ally Bates