WisBusiness: Execs confident in financial institutions but state administrator sees potential for limited lending in ’09

By David A. Wise

For WisBusiness.com

Despite facing challenges, Wisconsin banks and credit unions are safe, strong and ready to lend, financial industry representatives told the state Senate Committee on Veterans and Military Affairs, Biotechnology, and Financial Institutions today.

Michael Mach, the administrator of the Division of Banking for Wisconsin’s Department of Financial Institutions, delivered testimony at the Wauwatosa meeting that largely concurred with that assessment, but pointed to a high loan-to-deposit ratio that could limit future lending. He also predicted 2009 would continue to be a tough year for banks.

Using figures from Sept. 30 (he noted that year-end figures would not be available until mid-February), Mach said state banks had a strong capital ratio, but had seen decreased earnings in 2008 due to increased delinquencies and smaller interest rate margins on loans. Because of the strong capital reserves, Mach said Wisconsin banks are in a position to weather periods of decreased earnings.

“The good news is Wisconsin banks have aggressively lent in their communities, ” Mach said. “The bad news is that the high loan-to-deposit ratio requires banks to use wholesale funding sources which may be both expensive and volatile.”

“With the loan-to-deposit ratio already on the high end of the scale, additional capacity may be strained,” Mach said.

While capital reserves are higher than the national average, the state’s banks overall have a 112 percent loan-to-deposit ratio, significantly higher than the national average of 89 percent. For state-chartered banks with less than $1 billion in assets, known as community banks, that ratio was 96 percent, Mach said.

Committee Chair Sen. Jim Sullivan expressed concern about that figure, but Mach pointed out it doesn’t mean the banks lent money without proper underwriting practices.

Wisconsin Bankers Association President Kurt Bauer said the fourth quarter for banks “may be the worst that we’ve seen in quite some time in Wisconsin.”

But Bauer noted that low earnings are reflective of the broader economy, and do not mean that banks lent irresponsibly or are about to collapse

“The fortunes of banks and the general economy are tied together,” Bauer said.

Bauer pointed out that institutions that wrote risky loans went out of business and deposits are increasing as people flee the stock market. These factors are helping banks capture market share for both deposits and loans, he said.

Mach said so far that only five or six Wisconsin banks have received federal bailout money, and that the DFI has assisted in recommending whether those applications should be approved.

Joanne Whiting, chief advocacy officer for Wisconsin Credit Union League, noted that the DFI data does not include credit unions, but that deposits and loans have both increased from credit unions and they are experiencing a 1.21 percent delinquency rates on loans.

Financial industry representatives in testimony today pointed out that Wisconsin banks and credit unions did not participate in the subprime mortgage market as Wall Street investment banks had, but still face challenges.

Stephen Eager, chairman of the Community Bankers of Wisconsin, said that only 5 percent of the foreclosures in Wisconsin in 2008 were for loans that originated with community banks. Eager said 96 percent of Wisconsin headquartered banks are considered community banks.

The Wisconsin Bankers Association’s James Podewils, president of Continental Savings Bank in Greenfield, said the high loan-to-deposit ratio shows banks are lending to consumers, but noted that in some cases lending standards have increased and some people’s creditworthiness has deteriorated, leading to a drop in loan demand.

Podewils said a recent WBA survey showed about half of the state’s banks have increased lending standards, while fewer businesses are qualifying for loans due to the economic downturn

Podewils noted banks are feeling pressure from Congress to lend, and from regulators to be prudent.