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USDA Rural Development Programs Boost Rural Prosperity

The St. Croix Electric Cooperative receiving a $1 million loan through the Rural Economic Development Loan and Grant program.

By Veronica Hinke, public information officer, USDA Rural Development Wisconsin 

The U.S. Department of Agriculture Rural Development has programs that can help increase rural prosperity throughout rural America. Rural Development has partnered with businesses across Wisconsin that have helped create jobs and expand market access.

Rural Development programs promote economic development by supporting loans to businesses through banks and community-managed lending pools. The agency offers technical assistance to help agricultural producers and cooperatives get started and to improve the effectiveness of their operations.

“Our mission is to unleash the potential of rural Wisconsin,” said Rural Development Wisconsin State Director Andrew C. Iverson. “Rural Development’s programs under the leadership of President Trump and Secretary Rollins will support the economy and quality of life for people in rural Wisconsin.”

Investing in Rural Businesses

Rural Development’s business programs support the creation and preservation of high-quality jobs in rural Wisconsin. In fiscal year 2025, Rural Development invested more than $73 million to help rural businesses and cooperatives in Wisconsin build stronger, more resilient communities, creating or saving hundreds of jobs along the way.

Rural Economic Development Loan and Grant Program Highlight

• The Rural Economic Development Loan and Grant program provides funding for rural projects through local utility organizations. In Wilson, the St. Croix Electric Cooperative received a $1 million loan through the Rural Economic Development Loan and Grant program. The electric cooperative will reloan the funds to Sailer Food Market and Meat Processing Inc. to expand
its meat processing operation into the snack meats market. The project will save 28 jobs and create an additional five jobs.

Business and Industry Guaranteed Loan Program Highlight

• This Business and Industry Guaranteed Loan program offers loan guarantees to lenders for their loans to rural businesses. Farmer-owned Westby Cooperative Creamery, the only cottage cheese
manufacturer in Wisconsin, will expand and modernize its manufacturing facility with a nearly $15.5 million Business and Industry Guaranteed Loan through Security Financial Bank.

“Our current equipment is continuing to age. Before it meets end-of-life, we want to modernize and, just as important, we want to meet customer demand for this dairy food,” said Westby Cooperative Creamery’s Chief Executive Officer and President JD Greenwalt. “We’ve been making cottage cheese the same way for 100 years. This new system reduces the physical strain on employees and enhances consistency in product quality. By modernizing and investing in the plant, the creamery is protecting current jobs and ensuring long-term stability for our farmer-owners.”

Timber Production Expansion Guaranteed Loan Program Highlight

• The Timber Production Expansion Guaranteed Loan program provides financial support to qualified lenders to make loans to eligible borrowers seeking to establish, reopen, retrofit, expand
or improve a sawmill or other wood processing facility who uses ecosystem restoration byproducts from the USDA Forest Service National Forest System lands, along with Indian forest and
rangelands. In Tilleda, Timber Professionals Cooperative Enterprises will re-establish and expand the former Hoffman Wood Fiber LLC sawmill with an $800,000 Timber Production Expansion Guaranteed Loan. Six jobs will be created initially, with more added as the sawmill expands. The mill will help ease the strain of timber processing in Wisconsin, where multiple sawmills have closed in recent years.

“Transportation is a big cost, so the more mill capacity we can have at a local level, that reduces transportation, it brings the cost of raw material down, and it helps, overall, to keep the industries that are there operating,” said Great Lakes Timber Professionals Association and the Forest Industry Safety Training Alliance Executive Director Henry Schienebeck.

Value-Added Producer Grant Program Update

• The Value-Added Producer Grant program helps agricultural producers turn raw commodities into higher-value products, expand market opportunities, and strengthen rural economies. The
Value-Added Producer Grant program supports planning activities, such as feasibility studies, business plans, and marketing strategies, or working capital needs, including processing, packaging, advertising, inventory, and personnel.

For more information on the Value-Added Producer Grant program, contact wi-rd-bcp-so@usda.gov.

Contact Information

Rural Development programs help to expand access to high-speed internet, electricity, and infrastructure, and support economic growth, healthcare, education, housing and other community essentials. You can find contact information for local Rural Development staff in Wisconsin on our website at https://www.rd.usda.gov/contact-us/state-offices/wi or email us at RD.WI.General.Inquiries@usda.gov

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Experts Discuss Housing and Workforce at the 2026 Economic Forecast Luncheon

Elizabeth Fenton

By Elizabeth Fenton, WBA communications coordinator

On April 29, a top national economist took the stage at the Alliant Energy Center and opened with the following remark: “The economy today is good, not great.”

Robert Dietz is the chief economist at the National Association of Home Builders. He leads a team of 12 economists and serves as the nation’s leading analyst of the residential construction industry. He spoke to bankers, policymakers, builders, realtors, and business leaders at the 2026 Wisconsin Economic Forecast Luncheon in Madison.

“The economy has certainly suffered a lot from what we’ve called headline risks,” Dietz shared. “Volatility — whether you think it is a good thing or a bad thing — is a feature of the Trump 2.0 era.”

He pointed to basic measures of the state of the economy, noting 2.1% GDP growth in 2025 — underperforming the 3% growth anticipated following nationwide investment in the tech sector. What’s more, Dietz noted that his organization downgraded its 2026 forecast to 1.9%.

“We started the year saying recession risk was around 30%,” explained Dietz. “We have now raised that to 40%, and you can find plenty of economists who think the recession risk measures at 50%.”

One of the luncheon’s main focuses was housing and its connection to inflation. Dietz maintained that shelter costs continue to be one of the largest contributors to inflation in the United States.

“For the last three years, more than 50% of the gain in consumer inflation in the CPI has been housing, rent costs, and homeownership costs,” Dietz explained. “The cost of construction is too high relative to household incomes.”

Shelter inflation has been growing even faster than overall inflation. If the Fed wants to see inflation return to 2%, there’s one simple solution: increase the number of attainable houses for sale.

“My message to policymakers in D.C. and the state houses everywhere is to reduce the cost of construction and increase the amount of available inventory of housing,” said Dietz.

He further contended that at the crux of the nation’s housing shortage is a supply-side problem driven by labor shortages, regulatory costs, and rising construction costs. About a quarter of a typical new build single-family home’s purchase price is made up in regulatory costs.

“Taxes, fee permits, delays, land you can’t build on — there’s a whole stack of problems,” emphasized Dietz.

Despite those challenges, Wisconsin — and the broader Midwest — is a bright spot in the national housing market. While the national market dipped 7%, Wisconsin grew by 3% in single-family home building. Older, wealthier buyers are stabilizing the market in the Midwest, “even more than Texas and Florida,” Dietz explained.

A panel discussion followed featuring Wisconsin Department of Workforce Development (DWD) economist Scott Hodek and Bank Five Nine President and CEO Tim Schneider.

Despite the uncertainty that Dietz outlined to luncheon attendees, Schneider opened the discussion by saying he remains “modestly optimistic” about Wisconsin’s economy.

“I think the economy in the state is actually in pretty good condition,” said Schneider. He specifically noted how the housing market continues to expand in and around Oconomowoc. “We did nearly $400 million in activity last year in our mortgage department.”

Both Hodek and Schneider agreed that their respective fields are experiencing labor shortages, and these challenges persevere as some of Wisconsin’s longest-term economic concerns. Hodek shared that DWD continues to have trouble filling open skilled positions.

“We’ve seen offshore and automation hits throughout the last couple decades. We are seeing rising productivity. However, those don’t necessarily indicate the health of the industry.”

On a brighter note, Hodek praised the strong workforce training pipeline in the state. The federal government recently awarded Wisconsin a $7.3 million grant supporting the development of advanced manufacturing and AI skills.

“We do have a really good education system,” shared Hodek. “That’s not just K-12 and the UW system, but it’s also apprenticeship programs, registered apprenticeships, and youth apprenticeships.”

Schneider summed up the general uneasiness from recent headlines that continue to take swings at consumer and business confidence.

“The headline uncertainty these days is probably the biggest challenge we are facing. They keep coming at us,” he explained. “We had the presidential election. Then there were tariffs. Now there is the Iran war. There is always something that is preventing us from returning to normalcy.”

Despite the ongoing national and global challenges that may cause some consumers to pause, the luncheon’s speakers carried a message that was overall calm rather than alarmist. Many attendees left with the takeaway to lean into stability and long-term planning during these periods of slower growth.

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Latest FDIC Data Reflects Consistent Performance for Wisconsin Banks

Numbers released August 26, 2025, by the Federal Deposit Insurance Corporation (FDIC) showed consistent performance midway through 2025 by Wisconsin banks. Residential real estate lending (1.64%), farm lending (5.26%), and commercial lending (7.89%) all increased over the prior year. Deposits increased year over year (5.88%). The Q2 2025 net interest margin increased (3.40%) from the prior quarter (3.33%) and prior year (3.14%). Wisconsin banks remain well capitalized.

Notable indicators include:

  • Farm lending increased quarter over quarter (16.42%) which extended the pace year over year (5.26%) as banks continue to help farmers with their needs.
  • Commercial lending continued in growth quarter over quarter (3.39%) with year over year (7.89%) increase as commercial customers navigate impacts of changing global economics.
  • Residential real estate loan volume remained consistent year over year (1.64%) yet grew quarter over quarter (15.34%) with increased volumes in all areas of 1-4 family residential real estate lending.
  • Assets in nonaccrual status remained nearly the same quarter over quarter (0.10%) while elevated year over year (12.59%) as borrowers adjusted to higher costs of living.

Statement on the release of second-quarter 2025 Federal Deposit Insurance Corporation (FDIC) numbers from Rose Oswald Poels, president and CEO of the Wisconsin Bankers Association:  

“The second-quarter FDIC numbers reflect consistent performance by Wisconsin Banks at the mid-point of 2025 with all areas of lending increasing year over year. The increase in farm and commercial lending continued strong through the second quarter. The data also reflects that Wisconsin’s banks continued to meet consumers’ residential real estate needs. Banks continue to work with struggling borrowers as Wisconsin banks remain in strong position to help meet the needs of their customers and communities.”

FDIC-Reported Wisconsin Numbers (Dollar Figures in Thousands)

  06/30/2025 03/31/2025 QoQ Change 06/30/2024 YoY Change
Net loans and leases $118,240,433 $115,784,161 2.12% $112,720,434 4..90%
Total deposits $129,185,781 $129,733,193 -0.42% $122,006,654 5.88%
Commercial and industrial loans $19,589.002 $18,947,428 3.39% $18,156,064 7.89%
Residential real estate loans $37,831,105 $32,798,394 15.34% $37,219,630 1.64%
Farm loans $5,198,432 $4,465,311 16.42% $4,938,435 5.26%
Total assets $163,046,532 $160,833,420 1.38% $154,792,729 5.33%
Assets in nonaccrual status $631,375 $630,718 0.10% $560,757 12.59%

 

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A Steady Beginning to 2025 for Wisconsin Banks According to Latest FDIC Data

Numbers released May 28, 2025, by the Federal Deposit Insurance Corporation (FDIC) showed a steady start to 2025 by Wisconsin banks. Residential real estate lending (8.67%), farm lending (8.95%), and commercial lending (5.00%) all increased over the prior year. Deposits increased year over year (5.63%). The Q1 2025 net interest margin increased (3.33%) from the prior quarter (3.22%) and prior year (3.10%). Wisconsin banks remain well capitalized. 

Notable indicators include: 

  • Farm lending increased quarter over quarter (8.78%) which extended the pace year over year (8.95%) as banks continue to help farmers with their operational needs.  
  • Commercial lending slowed in growth slightly quarter over quarter (2.43%) from the year over year (5.00%) increase as commercial customers adjust to impacts of global economic challenges.  
  • Residential real estate loans increased year over year (8.67%) yet decreased quarter over quarter (-16.05%) as inventory remains limited and the marketplace competitive from non-traditional lenders.  
  • Assets in nonaccrual status increased both quarter over quarter (8.74%) and year over year (2.20%) as ongoing inflation and the high cost of living impact borrowers.  

Statement on the release of first-quarter 2025 Federal Deposit Insurance Corporation (FDIC) numbers from Rose Oswald Poels, president and CEO of the Wisconsin Bankers Association:  

“The first-quarter FDIC numbers reflect that 2025 has started off steady for Wisconsin Banks with all areas of lending increasing year over year. The increase in farm and commercial lending continued through the first quarter. The data also reflects that Wisconsin’s residential real estate market continues to be competitive. Across all categories of lending, banks continue to monitor credit quality and work with struggling borrowers as Wisconsin banks remain well positioned to continue to help meet the needs of their customers and communities.”

FDIC-Reported Wisconsin Numbers (Dollar Figures in Thousands)

    03/31/2025  12/31/2024  QoQ Change  03/31/2024  YoY Change 
Net loans and leases   $115,784,161  $114,571,863  1.06%  $110,786,153  4.51% 
Total deposits   $129,733,193  $128,607,041  0.88%  $122,823,065  5.63% 
Commercial and industrial loans  $18,947,428  $18,497,687  2.43%  $18,044,391  5.00% 
Residential real estate loans   $32,798,394  $39,070,601  -16.05%  $30,180,575  8.67% 
Farm loans   $4,465,311  $4,104,912  8.78%  $4,098,653  8.95% 
Total assets   $160,833,420  $159,392,728  0.90%  $153,075,799  5.07% 
Assets in nonaccrual status  $630,718  $580,044  8.74%  $617,124  2.20% 
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Goolsbee and Oswald Poels on webinar
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‘Golden Path’ to a Soft Landing Is Still Possible, Says Chicago Fed’s Goolsbee

Goolsbee and Oswald Poels on webinar

The Wisconsin Bankers Association’s Midwest Economic Forecast Forum featured a fireside chat with Federal Reserve Bank of Chicago President and CEO Austan Goolsbee, moderated by WBA President and CEO Rose Oswald Poels. The discussion spanned the Fed’s dual mandate (price stability and maximum employment), economic trends, supply chains, natural disasters, energy prices, Midwest industries, and the housing market — providing a detailed analysis of current economic conditions and forward-looking perspectives. Goolsbee is often asked whether he is a hawk or a dove, to which he jokingly replies, “I’m not a bird, I’m a data dog!” Throughout the program, Goolsbee provided an overview of the data the Fed monitors, accompanied by insightful analysis. 

Inflation Trends and Economic Outlook 

Goolsbee highlighted the Federal Reserve’s dual mandate of price stability and maximum employment. He noted that while employment has remained strong, the focus has been on curbing inflation, which has seen significant progress. The latest Consumer Price Index (CPI) showed a 2.9% year-over-year increase, reflecting improvements from previous peaks. Goolsbee emphasized the importance of analyzing long-term trends rather than monthly fluctuations, describing inflation as a “noisy series.” 

Goolsbee is still optimistic that the economy can continue growing in 2025 and have a soft landing. He has been describing it as the “golden path.” Recent months have provided encouraging signs across core components: services, goods, and housing. Goods and services inflation has come down, and recently, housing inflation — a key post-COVID challenge — has started to come down. Despite progress, Goolsbee acknowledged seasonal patterns that typically bring higher inflation in early quarters, emphasizing the need for continued vigilance. 

Policy Impacts and Scenario Planning 

When addressing the potential economic implications of changing administrations, Goolsbee underscored the Federal Reserve’s role in adapting to policy changes. Using a metaphor well known to Midwesterners, “there is no bad weather, only bad clothing,” he likened putting on the proper jacket for the weather to scenario planning for policy implications for inflation and employment. Fiscal policies, including tax cuts and government spending adjustments, were cited as areas requiring comprehensive analysis to understand net effects — not just the effects of individual policies. 

Supply Chains and Natural Disasters 

Goolsbee discussed supply chain disruptions and their role in recent economic cycles. Recovery from COVID-related supply chain breakdowns significantly contributed to lowering inflation without inducing a recession. However, natural disasters, such as wildfires in California, can pose ongoing risks to supply chains and regional economies. While these events often have devastating immediate local impacts, rebuilding efforts can stimulate economic activity. 

The increasing frequency of natural disasters has raised concerns about long-term economic adjustments, including shifts in where people choose to live and how they manage risks. Goolsbee noted that such supply-side shocks necessitate careful monitoring to mitigate broader economic disruptions. 

Employment, Consumer Behavior, and Sentiment 

The U.S. labor market has remained robust, with unemployment near 4%. Despite high wage growth, inflation has continued to decline, challenging traditional assumptions about their correlation. Goolsbee attributed this to nuanced sectoral dynamics and emphasized the importance of forward-looking indicators to guide monetary policy. 

Consumer sentiment has diverged from objective economic metrics, with political partisanism influencing perceptions. Goolsbee pointed out that while sentiment data historically predicted spending trends, recent shifts have reduced its predictive value. Despite this, consumer spending and income growth remain strong. 

Regional Economic Insights 

Manufacturing and Healthcare 

The Midwest’s economic health is closely tied to manufacturing, particularly durable goods and autos. Post-COVID shifts from goods to services spending have pressured the sector. Goolsbee noted that while manufacturing is not in crisis, it faces challenges as demand normalizes to include more services and phase out artificially high demand for goods. Healthcare, a major employer in the Midwest, is another area that Goolsbee pays attention to in terms of employment and consumer spending. While inflation in the healthcare and healthcare insurance industries has been lower than overall inflation, prices remain expensive. 

Housing Market Dynamics 

Housing affordability and inflation remain pressing concerns, with the relative prices of homes compared to other durable goods shifting dramatically over decades. Goolsbee projected interest rates to stay above pre-pandemic lows but below current levels. He highlighted the structural issues driving housing inflation, including decades of insufficient building, which have exacerbated affordability challenges in both urban and rural areas. He noted that no matter where he goes, employers will say their biggest hiring problem is that the cost of housing is so high that people won’t move there. 

Agriculture and Energy 

The agricultural sector has faced a challenging year following blockbuster periods. Food inflation has declined, but input costs remain high, squeezing farm incomes. Energy prices, particularly in the Upper Midwest during winter, pose concerns for households but are less emphasized in core inflation metrics. Goolsbee acknowledged the broader economic implications of volatile energy prices, especially in the context of geopolitical tensions. 

Reflections on Two Years at the Fed 

Reflecting on his tenure, Goolsbee expressed admiration for the mission-driven culture of Federal Reserve employees. He described Federal Open Market Committee (FOMC) meetings as highly deliberative and impactful. Operationally, he highlighted the Reserve Bank’s role in managing significant cash volumes and supporting member banks. 

Goolsbee reaffirmed the Federal Reserve’s commitment to its 2% inflation target, emphasizing its role as a cornerstone of public confidence. He noted that while the path to achieving this target involves navigating uncertainties, the Fed remains steadfast in its mission. 

In closing, Goolsbee commended the robust partnership between the Chicago Fed and regional stakeholders such as the Wisconsin Bankers Association, emphasizing the importance of communication in addressing economic challenges. 

The Midwest Economic Forecast Forum was presented by the Wisconsin Bankers Association in partnership with the Illinois Bankers Association, Michigan Bankers Association, Minnesota Bankers Association, South Dakota Bankers Association, and Wisconsin Bankers Foundation. A special thank you to 2025 event sponsors BOK Financial Capital Markets and Wipfli.

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Strategic Budgeting for 2025: Key Considerations

By Katie Reiser

As banks across Wisconsin begin their budgeting process for 2025, it is a tumultuous time with uncertainty on many fronts. WBA interviewed three experts whose insights can guide bank leadership as they plan for the year ahead.

Augustine Faucher, Ph.D. is senior vice president and chief economist at PNC Financial Service Group. Faucher addressed WBA members during the 2023 Midwest Economic Forecast Forum. Look for more information in the PNC Fall Economic Outlook Survey.

Prepare for Slower Growth
Faucher cautioned that banks should expect slower growth in consumer spending and business investment growth, but still expects economic expansion, sharing, “I think we’ll see consumer spending increase, but at a slower pace than what we saw in 2023 and so far in 2024.” Faucher added, “banks need to be prepared for the fact that we may still see some softer demand for borrowing out there.”

“As the labor markets soften, we’re witnessing both smaller job gains as well as slower wage growth…I think we’re going to see more pressure at the lower end of the income distribution,” which Faucher explained is, “having more of an impact for low-wage workers and workers with less formal education.” But, he points out that upper income households are still benefiting from rising home values and stock prices that have been up over the past year, “I think higher income households are generally doing better, so retailers that are appealing to upper income households will hold up better than retailers focused on middle income or lower income households.”

Goods prices are down slightly over the past year, and Faucher points to progress over the last few months, particularly with less housing inflation. “We’ve seen a lot of supply come online in the multifamily market, and that’s slowing housing inflation,” he stated.

Commercial Real Estate Worries
Faucher underscored concerns about the commercial real estate market, especially the office market, “there’s a lot of debt that was rolled over from when interest rates were low in 2020–2021 that is going to be coming due.” This places stress on borrowers and office values are down from where they were before the pandemic. Said Faucher, “we just have lower structural demand for office space out there, so I think that banks should be prepared for distress in commercial real estate, in particular in the office real estate market.” He predicts that it will take time for that market to get through some of these structural issues and envisions a lot of ups and downs for another couple of years.

Fed’s Goals
Faucher believes the Federal Reserve won’t need to see inflation at 2% before cutting rates, stating “I think as long as we’re making progress there, we’ll see the Fed cut rates in September, maybe in November or December later this year.” He added, “but I think we will see, in particular, the short end of the yield curve move lower over the next year or so, with the Fed cutting fed funds rate and pushing down short-term rates.”

Marc Gall is senior vice president and asset/liability strategist, BOK Financial Capital Markets. BOK Financial Capital Markets is a WBA Gold Associate Member and specializes in balance sheet and investment strategy for financial institutions. Gall has been a frequent presenter at WBA seminars, webinars, and conferences.

Funding Balance Sheets
A challenge for banks will be looking at deposit rates. Gall asked, “If the Fed cuts interest rates, how much cost savings can banks reasonably assume, and how quickly can they assume that they’re going to get it?” Gall posed more questions for banks to consider, “what actions will banks need to take to reduce deposit costs? Is it going to be subject to whatever the rest of the market does?” For example, if competitors don’t start lowering rates on deposits and your bank still has CD specials at higher rates, will your bank aggressively move rates down and be an outlier, risking the loss of those deposits?

These are challenges from a strategic standpoint that management teams are going to have to figure out as they formulate their budget for 2025, because that cost side is going to be particularly important.

Yield Curve Pressures
As the front of the yield curve has inverted more, reinvestment rates on term loans and investments have declined from the beginning of summer. Gall suggests management teams take a hard look at loan growth assumptions for 2025: With a potentially slowing economy, where will loan demand come from? What loan rates are reasonable in this environment? With inconsistent pricing in the market, what growth and pricing strategy is best for our bank? Gall explained that many are feeling the pinch of margin pressures in 2024, but it might potentially get worse, or not get meaningfully better until significant movements from the Fed. “The initial 25 basis points or 50 basis points may feel like a movement in the right direction.” But, he warned, “the inverted yield curve is still going to be painful until we get that to normalize.”

Gall shared,“while the two-to-10- year part of the curve has uninverted or become more flat, we still have a huge inversion on the short end between zero and two years, which to me creates more of the margin pressure for a lot of community banks and it’s almost getting worse right now versus getting better. For many, margins will likely improve with a more favorable curve and time passing, allowing for repricing of legacy assets.”

Bank Term Funding Program
Some banks ended up utilizing the Bank Term Funding program from the Federal Reserve in response to the bank failures of early 2023, Gall explained, “with the attractive borrowing rate, call option and favorable collateral treatment, some of the banks that we work with borrowed or refinanced it in December or January of last year, which means those are coming due December 2024 or January 2025.”

Many banks will need to consider how they want to refund those borrowings, advised Gall, adding “Given the program isn’t currently available, a thoughtful, strategic funding plan will be critical for banks, incorporating current cost, diversification and contingency funding needs in the decision process.”

Frank Kelly, founder and managing partner Fulcrum Macro Advisors, will be the Keynote Speaker at the WBA Management Conference on September 24 in Green Bay. His presentation, The U.S. Economic, Financial, and Political Outlook 2025–2026, will provide more insights to use in budgeting.

Capital Rules, Cannabis, and Cybersecurity
Kelly described large banks’ efforts to stave off increased capital requirements, “there’s this question of ‘too big to fail’ that still lingers after the 2008 financial crisis,” which factors into the debate about Basel III minimum capital requirements. “It’s been one of the more brutal lobbying battles I have ever seen in my life, and I’m a fifth generation Washingtonian who grew up on this stuff.”

When asked to comment on how the election might influence regulatory issues, Kelly responded, “The first one would be the bank capital rules impacting the largest banks. If Trump wins, I predict that the federal regulators would probably stop pursuing it. If Harris wins, they will continue to press for it.”

A potential huge shift and possible opportunity for many banks is banking for cannabis, although, as Kelly pointed out, “it’s fraught with a lot of concern.” Kelly went on to predict that Congress may try a last-minute push to legalize cannabis banking this fall. Which as Kelly predicts, could then “be a very large business for banks of all sizes because they’ll be able to take the deposits, they’ll be able to make the business loans to them.” He likens it to the lifting of Prohibition in terms of new financial opportunities.

Kelly’s final issue on his “big three” list of issues for bankers to consider is cybersecurity. He points out that it is getting increasingly more perilous for every business, but particularly banks becoming a target of not just cyber thieves, but also foreign governments. He gave the cautionary examples of disruptions in Paris’ transit system on opening day of the Olympics and an elaborate deepfake video call netting scammers $25 million from a multinational firm in Hong Kong, even when employees had made efforts to avoid fraud.

Cyber criminals could target smaller banks in the heartland, Kelly warns, because “that will really shake people up more and create confusion.” Criminals and bad actors in foreign governments could reason, “don’t do it in the big cities where there’s always confusion… do it at a smaller, more vulnerable bank.”

Anxiety and Emotions
WBA spoke to Kelly on the morning of the dramatic market drop, and he remarked, “The market is very emotional, which is never a good thing in finance.”

“Inflation has really impacted folks. It’s very uneven around the country in terms of those feelings. Meaning some people think things are great, but there’s a lot of people with a lot of anxiety.” Fueling that anxiety is a lack of understanding about what’s going on politically and economically. Kelly reflected, “So much of the market is psychological and when people are feeling that anxiety, at some point it sort of bursts out.”

Look to WBA for More Information on Factors Influencing Budgets
While there are numerous complex considerations for banks as they work to create budgets that are resilient and adaptable, some factors are becoming more significant. Banks are expected to increase their technology spending with a focus on enhancing digital banking platforms, improving cybersecurity, and leveraging artificial intelligence (AI) for customer service and risk management. Other areas requiring a larger piece of the budget pie are wage growth and costs associated in upskilling or reskilling, particularly in specialized areas such as cybersecurity, data analytics, and digital transformation. WBA endeavors to keep members abreast of developments with these ever-evolving issues impacting budgeting and will continue to share informed insights, data, and best practices.

 

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Community Banking and Risk Premia

By Corey Chambas, CEO, First Business Financial Services, Inc.

Corey Chambas

As a fundamental economic principle, there is typically a fair trade-off between risk and return. In the investment world, where risks are taken on various asset classes, risk premia are the returns received above the risk-free rate earned in exchange for taking that risk. Where there are sufficient buyers and sellers of assets/securities, the market is assumed to generally be efficient, with an appropriate level of reward for a commensurate level of risk. For example, a company’s bonds pay a lower expected return than the same company’s equity because bondholders are paid first in a liquidation, and thus, equity has higher risk. Therefore, the equity will have a higher return to fairly compensate for the higher risk.

When it comes to risks taken in banking, however, this risk/return trade-off does not always hold. I posit that there are three major categories of risk for community banks — credit risk, operational risk, and balance sheet risk — and the compensation for these risks is not necessarily commensurate with the degree of risk taken.

In community banking, credit risk is the one risk that follows the rule of providing a proportionate return for the risk taken. Fundamentally, banks take in deposits that are relatively risk-free for the depositor — either explicitly insured by the FDIC or, based on most historical precedents, implicitly backed by the FDIC. Therefore, depositors accept a fairly low risk-free rate on their deposits for both convenience reasons and for reasons of risk and return. On the other hand, when banks lend money, they are taking on real risk of loss. Therefore, they earn a higher rate than they pay on deposits and thus generate spread income. This net interest margin is the fundamental earnings stream of community banks.

Since the vast majority of community banks’ income is earned via spread income, their business model dictates accepting credit risk by lending money to local businesses and individuals.  Therefore, they must be expert at pricing for the risk they are underwriting. It is necessary for banks to take this risk and earn the fair/market reward to generate a return for their shareholders, pay their employees, and support their communities.

On an editorial note, this fundamental aspect of banking makes community banking an honorable and critical endeavor, as this local lending activity is the financial lubricant that allows businesses to grow and individuals to fulfill their dreams. Healthy community banks help create prosperous local businesses and thriving communities.

On the other end of the spectrum is operational risk, which is a risk that has no return. It is simply the ante for being in the banking business. This area includes things like compliance, fraud protection, cybersecurity – the list goes on. This cost of doing business is an ever-increasing challenge. Banks are not only prime targets for the bad guys because, as Great Depression-era bank robber Willie Sutton famously quipped when asked why he robs banks, “That’s where the money is”, banks are now also where the potentially even more valuable data is.

For this uncompensated risk, community banks need to diligently mitigate operational risk in the most effective and efficient manner possible.

The third risk area, balance sheet risk, encompasses interest rate risk, liquidity risk, and risk of capital loss. The first two risks discussed are mandatory – banks cannot make money without taking credit risk and, by virtue of the industry, they take on operational risk. Balance sheet risk is more interesting because much of it is optional, and the associated return is relatively small and can even be negative. So, the question to be answered is whether this risk is worth taking.

In a “normal” upward-sloping yield curve environment, banks earn additional return by taking interest rate risk – funding short with floating-rate deposits and lending long with fixed-rate loans. However, much of the time, the differential earned is really not very significant and clearly not as substantial as the premium earned by taking credit risk. Lending spreads for most banks are typically in the 3% to 4% range. However, the spread between the three-month Treasury bill and the five-year Treasury has averaged a much less 0.50% over the last 10 years. This spread, which is indicative of the interest rates in the part of the yield curve in which banks most often fund and lend, has varied widely from negative 1.91% to plus 2.24% over that timeframe and sits at negative 1.35% as I write this.

The only way to really win is if the bank can accurately predict what is going to happen with rates, and studies have shown it is extremely hard to predict future inflation and interest rates. In fact, it could be called a fool’s errand. See the graph below, which shows that even the Fed — who sets the fed funds rate — cannot accurately predict the fed funds rate!

I remember how very sure I was after the Great Financial Crisis that rates had to go up, and the rate forecasts all showed rising rates. That position was wrong for over a decade.

More recently, banks were caught wrong-footed as very few anticipated and prepared for a 500 basis point rate increase, as evidenced by Accumulated Other Comprehensive Income (“AOCI”) adjustments and mismatched loan books that resulted in severely squeezed margins.

As Yogi Berra said, “It is difficult to make predictions, especially about the future.”

When doing a risk assessment, ranking a risk in terms of its likelihood and severity is often used. The real concern when taking interest rate risk is the severity, not just because of the impact on net interest margin but also because of the correlation with the other balance sheet risks. The compounding issue is the confluence of the timing of risks, whereby margins are squeezed, and thus earnings accumulation is degraded, precisely when securities portfolios lose value, both putting pressure on capital levels. In addition, as we have seen, this type of environment can potentially cause concern for the health of the bank and a resultant loss of funding and liquidity. There is also no quick fix to the situation, as it takes a significant amount of time to unwind this mismatched position during an inverted yield curve. While you can liquidate a mismatched and underwater securities portfolio, it comes with an additional hit to capital. As for the mismatched and underwater loan portfolio, even beyond the capital impact, liquidating those assets is not really an accessible option.

Making matters worse, the typically available option of selling the bank is also likely off the table, as an acquirer not only needs to pay something for the bank but will also need to raise enough new dilutive capital to fill the mark-to-market hole, as the whole balance sheet of the acquired bank is marked in the acquisition. This creates a perfect storm of losing a valuable strategic option on top of a poor future performance outlook and a degradation of capital.

Consequently, while there is often an incremental return to be gained from taking interest-rate risk, the overall balance sheet risk and the resultant risk of impairing the inherent value of the business, may be analogous to the concept of picking up pennies in front of a steamroller.

In many ways, community banking is simple but not easy. Discipline and diligence are necessary. Choosing which risks to take and which to avoid, and how to manage and mitigate the risks taken, are key decisions for bank management teams and their boards. Community banks are the backbone of local communities, their businesses, and their citizens. Consequently, prudent management of community banks is not only important for their shareholders, but for all the stakeholders relying on them to facilitate local prosperity.

Corey Chambas is CEO of First Business Financial Services, Inc., parent company of First Business Bank. Member FDIC. For additional information on balance sheet risk management strategies for your bank, visit firstbusiness.bank/bank-consulting.

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Executive Letter: New WBA Grant Opportunity for Housing and Economic Development

By Rose Oswald Poels

WBA has an opportunity to provide five (5) grants of $10,000 each for member banks to use for housing, economic development, and certain financial literacy purposes in 2024. The WBA Board is excited to offer members this new funding opportunity to help support affordable housing and economic development initiatives your bank may engage in this year. The criteria for the grants are outlined below and applications must be received by WBA no later than 5:00 p.m. Central Time on Friday, March 15, 2024.

There are three broad categories for which the grant proceeds may be used: housing and housing literacy, economic development/community investment, and financial or cyber literacy. The funds must be used for one of these purposes and directly benefit consumers and/or businesses in Wisconsin. Grant recipients will be asked to submit an impact report about how the funding was used, a description of the program or project and goals achieved, and specific metrics to illustrate the consumer/business impact of the program or project. The impact report must be provided within 30 days from the date the grant proceeds were used.

Some examples of programs that may qualify for a grant include:

  • Provide financial education and housing counseling to consumers as a means of improving home ownership opportunities.
  • Conduct a housing study in your community to help leaders identify housing needs to sustain population numbers and/or manage population growth.
  • Fund expert speakers at a meeting (e.g., rotary event) or community event on housing, housing literacy, lowering barriers to affordable housing, expanding housing supply, or economic development through the growth of small business.
  • Create tools (e.g. brochures, videos, other) that raise awareness of the benefits of home ownership for Wisconsin consumers.
  • Hold events or create educational resources intended to increase consumer or business awareness of financial health and well-being, cyber literacy, and/or credit building and repair strategies.

Please complete the grant application found here by March 15, 2024 to be considered. WBA will provide all applicants with a response no later than April 19, 2024. If you have any questions on this grant opportunity you may contact me or Daryll Lund.

Apply Now
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