Grand Forks – Peter Stenehjem, President of First International Bank & Trust, Fargo, is grateful to be a part of a privately held bank. His company serves communities in North Dakota, South Dakota, Minnesota, and Arizona.
“A lot of the banks in this area are privately held, so what is happening in Silicon Valley and California is not happening here. I am grateful that we are geographically diverse, client diverse and personally diverse,” he said. “We’ve got 34 locations spread across four states.”
For over a year, economists have predicted that the US is headed for a recession, but the economy defies recessionary forecasts. Although housing prices are starting to decline, consumer spending is healthy, rising 0.5% in April after adjusting for inflation. The most important economic indicator – employment – remained strong, with the private and public sectors adding 283,000 per month from March to May. Although economists fear a recession in the second half of this year, local finance professionals say they see growth until 2024.
The National Association for Business Economics poll of 45 economists, conducted May 2-9, found that the median forecast for inflation this year would be 4.2%, well above the Federal Reserve’s inflation target of 2%. The Fed raised the key interest rate by a quarter point to 5-5.25% in early May. The annual inflation rate fell from a 40-year high of 9% last June to 4.9% in April. In fact, over the past 14 months the Federal Reserve has raised interest rates at the fastest pace in 40 years to try to tame inflation.
NABE President Julia Coronado said, “Interest rates are expected to decline and inflation is expected to slow in 2024, while job growth is projected to moderate and the unemployment rate to rise.” Coronado is the founder and president of Macropolicy Perspectives LLC.
The survey also indicated that the banking crisis is ongoing but contained, with only a fifth believing it will get worse.
Most personal loans have fixed rates, so existing borrowers need not worry about changes in interest rates. But those who are in the market for a loan – be it to buy a car, a home or even for any business need – should be prepared for higher rates.
Throughout March and April, home mortgage rates hovered around 6%, up significantly from a year earlier. Experts expect mortgage rates to move up and down until a consensus is reached about when the Federal Reserve will stop raising interest rates, which could happen in July. The Fed kept its key interest rate unchanged on Wednesday, June 14.
Some regional and community bank leaders report that — unlike failed Silicon Valley banks, Signature Bank and First Republic Bank — they are in a stronger position.
Stenehjem said he sees a significant drop in loan demand due to a number of factors.
From a business owner or developer perspective, people are keeping their equipment and their vehicles for a long time.
“They are stalling projects instead of buying or moving ahead simply because of the high cost, as the construction industry is feeling. We are looking at developers who are unable to get income-generating assets. Because of this, we are seeing more borrowers starting to conserve more cash and liquidity, as they are not sure that they will get the returns they are expecting,” Stenehjem said.
Business projects are still busy, and those started last year are due out in 2023. But new projects may go slow or be completed in phases.
“What we’re hearing from contractors is that I think they’re a little more skeptical coming into this fall and winter,” Stenehjem said.
Chris Wolf of Grand Forks, Alerus’ North Valley market president, said rising interest rates haven’t affected people’s decisions to buy equipment or invest, but they are using more cash reserves for those needs. Alerus has banking, mortgage and wealth management offices in Grand Forks and Fargo, North Dakota, the Minneapolis-St. Paul, Minnesota metro area, and Phoenix, Scottsdale and Mesa, Arizona.
“If their funds run out, it could result in increased credit demand in the future,” he said.
Providing guidance and advice to help your clients achieve their objectives includes educating them about current economic conditions. That said, they might also want to update their short and long term goals.
“We can work with them to develop and implement a plan to help them maximize short- and long-term yields and manage risks and exposures,” Wolf said.
Although it is more expensive to borrow money now, banks are offering better interest rates on deposits. Consumers can make significant profits by buying over the long term.
Jennifer White, Senior Director of Banking and Payments Intelligence at J.D. Power, shared data results from the company’s annual Retail Banking Satisfaction Study, which examined more than 170 banks.
“High-profile bank failures have fueled misunderstandings among retail bank customers about bank failure risk and deposit safety,” the report said. “Specifically, consumers banking with small regional and medium-sized banks consistently show lower levels of concern about bank stability than those banking with large, national institutions.”
Although reports suggest deposits are turning up, it’s primarily commercial deposits, White said.
“There is nothing in our study that tells us this is part of the crisis. If they’re moving, it’s because people are looking for that higher interest rate, so they’re moving their hard-earned money, perhaps into a higher-yielding account, but not leaving their bank. They’ll still be with their bank on the corner, but they can move that pile of deposits to Capital One or Chase or whoever can offer a higher-yield account,” said White, Commerce, Michigan. .
The study’s data shows that, for the Upper Midwest region, there was a significant decline in customer satisfaction with their primary bank partner year over year — 13 points.
“What we’re seeing in the data is a decrease in satisfaction with offering an account that meets customer needs,” White said.
Reasons for the lack of satisfaction include customers perceiving that the account they are in is not the right one for them. He added that the discontent could also be due to lack of assurance in the current interest rate environment.
White said consumers need to check whether they’re on the right account that offers them the best value, which may be higher than the points they come up with.
“That value could be in the customer experience, it could be in improving financial health, it could be in helping someone plan their spending or providing tools to help them monitor how much they spend. How are they spending their money or are they getting help figuring out how to pay off debt.” White said.
Another note of the 16-point decline in the survey was customers’ level of trust in their bank.
“If you add to the question ‘Am I on the right account?’ With the possibility of easily transferring money to other secondary accounts, perhaps to earn interest rates, you start to wonder about the value proposition to customers,” she said.
The biggest risk for community banks, White said, is losing deposits due to digital solutions offered by large banks like Chase, even if there is no branch in the city.
“If that community bank isn’t helping them learn how to stretch their money, isn’t helping them set up a spending plan, helping them look at their spending habits, they Helping them avoid paying fees, helping them sign up for fraud protection, all of these value propositions. White said, “Community banks offer rates that have nothing to do with— Don’t give up, if they aren’t shouting it from the rooftops, they are at high risk of losing their deposits.”
She encourages those with deposits available to make sure they grow their money as best as possible. For those on opposite ends of the financial health spectrum, look for non-predatory solutions to bridge the gap.
Wolf said he is seeing near-record liquidations in the deposit base in the region. He also sees community banks in strong financial condition and strong commercial economic activity.
“We have strong balance sheet, strong credit profile and we are in a strong position,” he said.
Stenehjem said First International Bank and Trust earns a portion of its income from Copay, a fund financial company that is used in all 50 states and primarily helps with the payroll system. During rising interest rates, he said it helps banks to keep non-interest sources of income like quotas.
“I’m so grateful to be in the Upper Midwest,” Steinhejme said. “I think a lot more people are worried about going out in the fields and scratching around than what’s happening in Silicon Valley. Plus, we have a Midwest work ethic and make serving customers hard working and fun. You must always have a reputation for integrity and I think that will continue to differentiate regional banks from the larger national banks as long as we continue to do relationship banking.
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