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Tag Archive for: Inflation

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News

Under Pressure: Cost of Funds Strategies in a Rising Rate Environment

By Achim Griesel and Dr. Sean Payant

When rates were at record lows for long periods of time, the true value of low-cost funding may have faded into the background; however, low-cost core deposits continue to be the driver of long-term franchise value. Now, with rates continuing to rise — the one-year treasury exceeded 4% in September 2022 — the importance of low-cost funding is once again at the forefront.

The chart below is for a financial institution with strong low- and no-cost funding. In record low-rate environments, its cost-of-funds advantage over its peers was relatively small at 20–30bp. When rates started to rise from 2017–2019, it tripled to 60bp. For a $1 billion institution, that represents a $6 million increase to the bottom line. The current rising rate environment will lead to similar increases in profit.

In addition, deposit growth has stagnated in Q2 of 2022. On the macro level, FDIC insured deposits were down for the first time in a long time, and they were down significantly at 1.85% from the prior quarter. On the micro level, our data for consumer and business checking account deposit balances shows balances are down 3% and 7%, respectively, from the beginning of 2022. Even more importantly, the entire balance decline happened in May and June 2022, a trend we anticipate will continue.

Large institutions are aware of the value created by low-cost deposits, and they have the budgets to target core relationships that drive these benefits. For example, Chase is back to its $600 offer for opening a checking and a savings account. BMO Harris pays up to $500, and Citi has an offer of up to $2,000 for relationships with extremely high balances.

In addition to the cost of the offer, these largest banks spend a significant amount of marketing dollars to gain new core relationships and the benefits that come with them. When a financial institution does not commit to an always-on marketing strategy, it must provide above market offers to “buy” new relationships.

Community-based financial institutions (FIs) cannot compete by following a similar strategy. Unlike their large competitors, community-based FIs do not have the budgets for acquisition incentives of $500+ or the expansive budgets associated with marketing to acquire these relationships.

Compared to community-based FIs, large banks generally have more products and services as well as marketing teams who dwarf their smaller competitors. Given this reality, what does a community-based FI need to do to thrive?

To grow low-cost deposits, it is essential you follow a disciplined approach:

Step One: Your Institution must have a Sales and Service Culture. Good products are the foundation of a sales and service culture. You cannot ask your teams to sell, or consumers to buy, inferior products. If you want to know if your institution has good products, ask your customer-facing employees; they can tell you how consumers respond. Equally important is ensuring your team members are well-trained, understand and believe in your products and consistently execute your service expectations.

Step Two: Your Institution must be Strategic. Large institutions have the staffing and marketing budgets that allow them to frequently change offers, products marketed and/or desired prospects. For community-based FIs to compete, they must make data-driven, always-on marketing part of their core growth strategy. Your always-on marketing strategy supported by your sales and service culture will drive tangible results even when large banks are in periods of very high offers.

Step Three: You Institution must be Aligned. Your FI’s training and execution at the branch and through online channels must be aligned with your strategic marketing. Aligning marketing and execution is what reduces the acquisition costs for new core relationships. Without this alignment, your FI is left trying to compete on the offer alone, making it expensive to match those large bank offers previously mentioned.

Step Four: Measure, Inspect, and Reward! Any strategic initiative needs to be measured. Your core relationship growth strategy should have periodic — quarterly at least — goals. In addition, determine benchmarks to evaluate success. Inspect what you expect in order to ensure your sales and service standards are being consistently executed. Reward success! When your team members are fully aware of where they stand compared to their goals, it possible to evaluate results and reward successes.

Growing core relationships in order to grow low-cost deposits should be of primary importance in any rate environment; however, it is paramount in the current rising rate environment. Ultimately, out-performing your peers by 60bp will be welcomed by your board and celebrated by your management team. When you strategically align your culture, products, and people, competing for core relationships becomes easier and the $500+ offers from large banks become less effective. David will beat Goliath!

 

Griesel is president and Dr. Payant is chief strategy officer at Haberfeld, a data-driven consulting firm specializing in core relationships and profitability growth for community financial institutions. Haberfeld is a WBA Associate Member.

January 17, 2023/by Hannah Flanders
https://www.wisbank.com/wp-content/uploads/2021/09/Triangle-Backgrounds_Blue-on-Lime-Green.jpg 972 1920 Hannah Flanders https://www.wisbank.com/wp-content/uploads/2021/09/Wisconsin-Bankers-Association-logo.svg Hannah Flanders2023-01-17 07:00:122023-01-17 08:58:35Under Pressure: Cost of Funds Strategies in a Rising Rate Environment
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News

Producer Price Index Steady in November 2022, Services Pressures Remain a Concern

By PNC Senior Economist Kurt Rankin

  • The Final Demand Producer Price Index (PPI) rose by 0.3% in November 2022
  • Core PPI, less Food & Energy, accelerated in November 2022 to 0.4% for the month
  • Energy PPI declined sharply in November 2022, down 3.3% for the month
  • Producer price pressures continue to center on Services (+0.4%), with Goods prices showing significant deceleration (+0.1%)

The Producer Price Index (PPI) for November 2022 rose versus the month prior, up 0.3% versus October. This translates to a 7.4% year-over-year gain, which is down from the peak pace of 11.7% mark posted in March 2022. November’s 7.4% is the slowest year-over-year pace recorded since May 2021 (+6.9%). More importantly, the November monthly rise equals 3.6% at an annualized pace, representing producer price inflation if current conditions were to be maintained for a one-year period. This metric has come in under 4.0% for the past five months consecutively, including two outright declines in the topline PPI measure in July & August. Further deceleration in the monthly annualized pace of gains in producer prices will be necessary before consumer price inflation concerns can be resolved.

Producers’ Energy prices declined in November 2022 versus October by 3.3%. The PPI Energy component index now sits below the March 2022 level reached after Russia’s invasion of Ukraine. This is a good sign for inflationary trends, broadly speaking, as energy costs filter through to all sectors of the economy – industrial and consumer. With oil prices falling further thus far in December, at least there appears to be no renewed threat of a reignition of energy costs that would prevent inflation from continuing to ease in the coming months.

On the other hand, Food prices surged in November 2022 according to that PPI component index. The Food cost measure of the PPI rose by 3.3% for the month versus October, offsetting the relief seen in the Energy segment.

Inflation across household necessities is the biggest concern for the U.S. economy as consumers continue to spend through their stimulus-supplemented savings and rapidly accumulate credit card debt — all while inflation eats away at real-time spending power since wage growth has not kept up with inflation. With Food PPI rising strongly in November, one can be sure to see continued upward pressure on household grocery bills as those producer prices are passed on to the retail level. The holiday shopping season will likely be accompanied by plenty of restaurant goers as well, meaning higher costs for the ‘Food Away from Home’ category.

Overall inflation is moving in the right direction, though at a slow pace. The Federal Reserve’s monetary policy tightening plans will remain aggressive until clear, consistent signs of inflation’s demise have been demonstrated.

The “Demand Destruction” among households that the Fed has aimed at through higher borrowing costs has been evident in the U.S. housing market, with Existing Single-Family Homes through October 2022 declining all the way to levels not seen since 2011. But consumers have not cut back on smaller, everyday goods and –even more so – services purchases thus far. U.S. households’ indomitable spending habits are set to contribute to a recession in 2023 after those same consumers hit a wall in their spending capacity by mid-year, coupled with higher debt levels and reduced savings cushions. And once the U.S. consumer does pull back in aggregate, an economic contraction is virtually unavoidable given that 70% of U.S. economic activity is dependent upon workers bringing home a paycheck, and then spending that paycheck.

Data from 12/9/22.

December 20, 2022/by Hannah Flanders
https://www.wisbank.com/wp-content/uploads/2021/09/Triangle-Backgrounds_Lime-Green.jpg 972 1921 Hannah Flanders https://www.wisbank.com/wp-content/uploads/2021/09/Wisconsin-Bankers-Association-logo.svg Hannah Flanders2022-12-20 07:52:562022-12-20 07:52:56Producer Price Index Steady in November 2022, Services Pressures Remain a Concern
Community, News

Ag Bankers Say… State Farmers Having Good Year, But Rising Costs Threaten 2023

Photo taken in Clinton, Wis. by Debra Hall, First National Bank and Trust Company

By Paul Gores

Many Wisconsin farmers are headed for a profitable year, but they’re already uneasy about 2023, ag bankers in the state say.

Coming off a strong 2021 that saw rising dairy and commodity prices, farmers entered the year financially fit and, in many cases, with locked-in input expenses that have blunted 2022’s surge in inflation.

But with the cost of fertilizer and diesel fuel ballooning, and livestock feed for those who don’t produce their own feed becoming more expensive, it’s hard to see how the next growing season can be as solid as this one has been so far, bankers said.

“I think there’s more anxiety about what next year looks like than there is over what this year looks like right now,” said Dave Coggins, senior vice president ag banking for Green Bay-based Nicolet National Bank.

With diesel fuel now topping $5 a gallon, and with fertilizer prices up in part because key ingredients come from embattled Ukraine and Russia, input costs are increasing.

“A number of farmers were able to contract prices last fall and early winter before they totally took off and escalated. So some of them have fuel locked in for this year less than $3,” said Jenny Jereczek, director of ag banking for Security Financial Bank in Durand. “So they’re doing all right for this season. What I’m hearing and seeing and in talking with people is 2023. Right now, there is not really a good opportunity to contract good pricing for next year, and will there be? No one has the crystal ball.”

Bradley J. Guse, senior vice president/agribusiness banking for BMO Harris Bank in Marshfield, said many farmers, coming off a good 2021, are having a strong 2022 in spite of the rocky economy. He cited record crop prices in the first three months of the year, when prices typically are low, and the benefit of farmers growing their own feed.

“In Wisconsin, we grow a lot of our feed. That’s a big advantage to our Wisconsin dairy guys,” Guse said. “Because of that, they are feeding feed that they grew last year now, and last year’s cost to grow was a lot cheaper than this year. So we’ve got low feed prices because we grew cheaper last year, and we’re running the into these high milk prices. And we’re seeing margins that are just phenomenal.”

Milk has been selling for about $25 per 100 pounds, hovering near record levels.

But he, too, is concerned about next season.

“I’m not so worried about my clients and my portfolio this year as I am next year,” Guse said.

Ag bankers said international events and circumstances often set the stage for prices farmers pay to produce their goods and the prices they get at market.

“There was a drought in South America, a pretty serious one. That’s impacted crops — corn, soybeans — that are big crops in South America, especially soybeans,” Coggins said. “So we’ve got really high soybean prices in part because of that. But also, the war in Ukraine has had a serious impact on supplies of grains in general, but basically corn, wheat, barley, sunflower oil. Russia exports a fair amount. Ukraine exports a fair amount. I think the Black Sea region produces about 12% of the world’s calories, and so that’s a big deal.”

That affects the availability of those grains and pushes up the price. In Wisconsin, that means dairy farms that buy their feed pay more. But, in turn, it provides higher prices for the state’s grain producers.

What happens in the Black Sea region also has an impact on fertilizer prices. Coggins said 47% of the world’s phosphate and potash, which are used in fertilizer, come out of Russia and Belarus.

“There’s not a lot of other alternatives for getting that fertilizer. Most farms were in OK shape this year. Might have been able to lock in some prices late last fall or winter,” Coggins said. “But there is a lot of anxiousness about what those prices and availability might look like for 2023.”

The rise and fall of energy prices also is an inescapable fact of life for farmers. According to the Diesel Technology Forum, diesel engines power about 75% of all farm equipment, transport 90%
of farm products, and pump about 20% of agriculture’s irrigation water in the U.S.

Lance Lansing, vice president-commercial and ag loans for Wisconsin Bank & Trust, said the price rise with diesel fuel is mostly a refining capacity issue.

“Investors don’t want to put new refineries up right now,” said Lansing, who works out of Monroe and Platteville. “With electric cars coming out, nobody’s running to put new refineries up and have that sort of investment, not knowing what their return’s going to be.”

Lansing described the current farm economy as “volatile.”

“There’s a lot of moving parts. One saving grace is we have had good commodity prices. The milk price has obviously been up, and futures still look good. Same with the row crops. The row crops are still looking good, and a lot of people are locked in at a profit in 2022,” Lansing said. “2023 might be a different story.”

Although there is worry about next year, many farms today are in a good position financially, Jereczek said. But they are being cautious.

“At least in this area, we’re seeing some expansion, but maybe not like we’ve seen in the past when commodity prices have gotten to these levels,” Jereczek said. “I think farmers and bankers alike are more strategic this go-round, and have learned a lot from the past in regards to now is the time for improving leverage positions, paying down debt, paying down lines of credit and maybe stacking some cash away in savings for liquidity purposes, and those kinds of things.”

Still, some are making strategic equipment purchases they delayed when finances were tighter four or five years ago, she said.

Lansing said he isn’t seeing many farmers interested in spending to expand herds or land right now, even though commodity prices are high.

“I’m just a small section of the state here, but a lot of people aren’t reinvesting as far as in growth mode. They are more in, ‘Let’s find out what’s going to happen, pay down debt, right-size debt type’ mode,” Lansing said.

Higher interest rates might be dampening some spending by farmers, but it’s hard to say how much.

“I think the interest rates are maybe a little bit inhibiting some of that stuff,” Jereczek said.

But she said a lot of operating lines already were done over the winter and early spring.

“So they are not necessarily impacted by the rate increases we’ve see more recently,” Jereczek said.

Ag bankers said crop conditions generally look good around the state, but rain will be needed in early August.

“Rain in July makes corn, rain in August makes beans,” Guse said.

Coggins said it appears soybeans are likely to be a winning crop this year.

“Soybeans are really at all-time highs for price right now, in large part because of what happened in South America,” he said. “And the input costs of soybeans are less than corn, so that’s a crop that has the potential to be a winner this year, absent any major weather events.”

As for how farmers fare next year, much will depend on inflation and its upward pressure on input expenses, ag bankers said.

“Financing of inputs for next year could be a completely different story,” Jereczek said.

A recession might also be looming. While demand for Wisconsin farm products is high right now, a recession could change the outlook.

“I think every ag banker right now is worried about a recession destroying that demand,” Guse said. “I think we’re all concerned about that — what’s on the horizon.”

Gores is a journalist who covered business news for the Milwaukee Journal Sentinel for 20 years.

August 3, 2022/by Hannah Flanders
https://www.wisbank.com/wp-content/uploads/2022/07/Hall_Golden-Fall_Clinton_October-scaled.jpg 1706 2560 Hannah Flanders https://www.wisbank.com/wp-content/uploads/2021/09/Wisconsin-Bankers-Association-logo.svg Hannah Flanders2022-08-03 08:11:492022-08-03 09:07:37Ag Bankers Say… State Farmers Having Good Year, But Rising Costs Threaten 2023
News

Mostly Cloudy, Chance of Storms… What Could a Recession Mean for Your Bank?

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August 2, 2022/by Hannah Flanders
https://www.wisbank.com/wp-content/uploads/2021/09/Untitled-3_Light-Blue.jpg 972 1920 Hannah Flanders https://www.wisbank.com/wp-content/uploads/2021/09/Wisconsin-Bankers-Association-logo.svg Hannah Flanders2022-08-02 07:53:152022-08-02 08:42:13Mostly Cloudy, Chance of Storms… What Could a Recession Mean for Your Bank?
News

Wisconsin Bank CEOs Weigh in on Inflation and Possibility of Recession

WBA Releases Results of Bank CEO Economic Conditions Survey

In the Wisconsin Bankers Association’s biannual Economic Conditions Survey of Wisconsin bank CEOs, 71% of respondents rated Wisconsin’s current economic health as “excellent” or “good.” This marks a decline from the mid-year 2021 survey, when 91% of survey respondents gave “excellent” or “good” ratings. Nearly all (over 98%) of the Wisconsin bank CEOs who completed the most recent survey predict that the economy will stay the same or weaken in the next six months. 

“Wisconsin bank CEOs have a unique vantage point in that they are both financial experts and highly involved individuals in their local communities,” said WBA President and CEO Rose Oswald Poels. “While the economy remains relatively stable, bankers are keeping a close eye on important indicators and stand ready to support their customers through possible economic challenges over the coming months.“ 

Among the economic bright spots cited by bank CEOs in the survey were strong tourism, construction, manufacturing, and agricultural industries. Survey results indicate that the hiring market and real estate market are cooling down. Top economic concerns reported by bank CEOs were inflation, cost of living/childcare/education, rising interest rates, oil and gas prices, staffing shortages, and the war in Ukraine.

The mid–year 2022 survey was conducted May 24–June 10 with 56 respondents. Sums may not equal 100 percent due to rounding. Below is a breakdown of the survey questions and responses.

Wisconsin Bank CEO Economic Conditions Survey Results
How would you rate the current health of the Wisconsin economy. . .  Mid-Year 2022  End-of-Year 2021  Mid-Year 2021 
Excellent  7%  6%  15% 
Good  64%  73%  76% 
Fair  29%  20%  10% 
Poor  0%  1%  0% 
         
In the next six months, do you expect the Wisconsin economy to. . .        
Grow  2%  21%  48% 
Weaken  63%  15%  39% 
Stay the same  36%  64%  13% 
         
Over the next six months, do you expect inflation to. . .       
Rise  50%  –  – 
Fall  22%  –  – 
Stay about the same  28%  –  – 
       
How likely would you say a recession is in the next six months?       
Very unlikely  4%  –  – 
Unlikely  16%  –  – 
Neutral  20%  –  – 
Likely  45%  –  – 
Very likely  16%  –  – 
       
Rate the current demand in the following categories:        
Business Loans        
Excellent  2%  9%  10% 
Good  48%  48%  30% 
Fair  48%  39%  52% 
Poor  2%  5%  8% 
         
Commercial Real Estate Loans        
Excellent  7%  11%  13% 
Good  52%  44%  44% 
Fair  36%  41%  33% 
Poor  5%  4%  10% 
         
Residential Real Estate Loans        
Excellent  2%  25%  40% 
Good  20%  48%  48% 
Fair  50%  24%  12% 
Poor  29%  3%  0% 
         
Agricultural Loans        
Excellent  2%  1%  2% 
Good  37%  22%  34% 
Fair  51%  58%  56% 
Poor  10%  18%  8% 
         
Deposit       
Excellent  5%  –  – 
Good  55%  –  – 
Fair  38%  –  – 
Poor  2%  –  – 
       
In the next six months, do you anticipate the demand for the following categories will. . .        
Business Loans        
Grow  11%  28%  43% 
Weaken  48%  14%  7% 
Stay the same  41%  59%  51% 
         
Commercial Real Estate Loans        
Grow  13%  24%  31% 
Weaken  48%  21%  8% 
Stay the same  39%  55%  31% 
         
Residential Real Estate Loans        
Grow  4%  11%  14% 
Weaken  63%  56%  41% 
Stay the same  34%  33%  46% 
         
Agricultural Loans        
Grow  6%  15%  18% 
Weaken  31%  14%  6% 
Stay the same  63%  71%  76% 
         
Deposit       
Grow  11%  –  – 
Weaken  36%  –  – 
Stay the same  53%  –  – 
       
In the next six months, are the businesses in your bank’s market area likely to. . .        
Hire employees  31%  68%  82% 
Maintain current staffing levels  61%  33%  15% 
Lay off employees  7%  0%  3% 
         
In the next six months, is your bank likely to. . .        
Hire employees  34%  55%  48% 
Maintain current staffing levels  63%  43%  45% 
Lay off employees  4%  3%  6% 
June 21, 2022/by Cassandra Krause
https://www.wisbank.com/wp-content/uploads/2022/06/Current-Economy.png 1260 2400 Cassandra Krause https://www.wisbank.com/wp-content/uploads/2021/09/Wisconsin-Bankers-Association-logo.svg Cassandra Krause2022-06-21 08:00:362022-06-21 09:24:37Wisconsin Bank CEOs Weigh in on Inflation and Possibility of Recession
Community, News

Retail Sales Belie Weak Consumer Confidence, With Strong Growth in April Retail Sales, Big Upward Revision to March

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May 18, 2022/by Jaclyn Lindquist
https://www.wisbank.com/wp-content/uploads/2021/09/Triangle-Backgrounds_Dark-Blue-on-Light-Blue.jpg 972 1921 Jaclyn Lindquist https://www.wisbank.com/wp-content/uploads/2021/09/Wisconsin-Bankers-Association-logo.svg Jaclyn Lindquist2022-05-18 08:21:192022-05-18 08:43:33Retail Sales Belie Weak Consumer Confidence, With Strong Growth in April Retail Sales, Big Upward Revision to March

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