Weathering Uncertainty: A Chief Risk Officer and Bank Advisor Speak Out

So far, 2025 has been characterized by economic uncertainty as tariffs threaten local economies. Interest rates remain elevated, which further complicates the picture for bank profitability and credit quality.  

Stress testing is a practice that, done well, can help banks prepare for the worst. To discuss this and other risks facing banks today, Bank Director Vice President of Editorial & Research Emily McCormick recently sat down with two risk experts. Kristina Schaefer is general counsel, chief risk officer and chief administrative officer at $4.6 billion Fishback Financial Corp. in Brookings, South Dakota, the holding company for First Bank & Trust. Sal Inserra is a senior advisor with Bank Director’s BDPlus. 

The transcript below has been edited for brevity, clarity and flow. The full webinar addresses cybersecurity and fraud as well as interest rates and credit. 

BD: In Bank Director’s 2025 Risk Survey, more than half expect to see a moderate increase in core deposits. Kristina, what are you seeing in terms of deposit competition?

Schaefer: There is still fairly fierce competition for deposits right now. It’s not just the other banks that we’re competing with. We also saw some of that money leaving for the brokerage firms, for digital assets. The competition for deposits isn’t just the bank down the street. 

One of the things that we’ve really been focusing on is thinking about the whole customer relationship. We want to have the deposit account, we want to have the wealth management, we want to be doing their cash management. 

The other thing that we’re trying to do is make it easy for people to get deposit accounts. Of course, you have to have fraud mitigation; you can’t make it too easy. But making sure — if somebody wants to find you online at night, when they’re scrolling on the internet trying to find the best bank — that they’re able to open a deposit account in a relatively painless fashion. 

BD: Most community banks do some form of stress testing. Kristina, how are you leveraging those results?

Schaefer: We stress test on capital funding and liquidity, earnings and market values. We do that at least annually, and if a stress test indicates that something is outside our risk tolerance, then we turn to plan B. And that is, ‘What is your contingency plan, based on what that stress test is revealing?’ 

If it’s indicating possible stress on capital, which is possible but not probable, then you use the results of that to inform your plans on growth or on whether you’re going to pay a dividend. 

Inserra: One of the things that we see as a miss is that the stress test identifies a risk, the bank identifies a contingency plan, but then there is no test of it. 

If my [net interest margin] is going to miss, what is that going to do to my capital, and how does that affect my growth plan? Often, when our margins decrease, [banks] believe they can grow out of that. 

If that’s your plan, are you going to have enough capital to get there? Not that I would put a for-sale sign out the door for purposes of capital, but talking to investment bankers to understand when you say, ‘I can always go get $50 million more capital; the market likes us.’ Have you talked to investment bankers to find out that there is that desire? And, do you want to do that? In the current market, any stock I sell is about one times book, which means all your shareholders are going to be diluted if you do that. 

It’s great to identify the risk, but you’re going to have to test to see that you have plans that are going to work on the other side.

BD: So far, we haven’t seen a ton of stress on credit, but where could we be headed?

Inserra: When these loans were made, they were made in a low-interest rate environment. 

Most loans have an average maturity of five years, and they’re getting close to maturity. The borrower was able to make payment at 4%. Will the entity be able to make payment at 7.5% to 8%, which is the going rate for that kind of credit now? Or, are you going to have to dumb down your rate and then eat your margin? 

The other part that often gets missed is the fair value of your collateral. 

When you discount the cash flows at the current interest rates, although you had an 80% loan-to-value on day one, and nothing has changed — you’ve got the same tenants, you got the same building, it’s in good shape, you have the same rent roll — but now instead of using a present value factor of 6.5% to 7%, you’re using a present value factor of 10.5% to 11%. Your loan-to-value has gone from 80% to 100%. Now, you have a 100% loan-to-value on a loan that was debt service of 1.2 times; that’s now a debt service of one. 

That is not a good loan. It was a good loan yesterday, but it’s not a good loan today.