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CEO Roundtable: Banking

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Springfield Business Journal Executive Editorial Vice President Eric Olson discusses banking trends with local presidents Jason England, Arvest Bank; Christian Lewis, Simmons Bank; and Brian Riedy, Mid-Missouri Bank.

Eric Olson: What is the temperature of the industry?
Brian Riedy: Dynamic is the word I’ll use – and, really maybe that’s more in line with the economic spot that we’ve been in and continue to be in since the recession. Whether it be flip-flops to rates, inflation, whatever it may be. But a very dynamic point that we continue to find ourselves operating within right now, our businesses and our economy, both local and national.
Christian Lewis: It’s, you know, 18 months ago, 24 months ago, the banking system was very liquid. Deposits weren’t highly sought after in the banking industry just due to a lot of the stimulus that was outlaid and, and now that we’ve recognized the extreme inflation and the (Federal Reserve is) trying to pull some of that liquidity back, it’s like Brian said, it’s flipped from trim-line growth to now trying to capture extreme deposit growth and keep those deposits in the banking system.
Jason England: Bankers like rules and plans for the long term. The last three years, it’s been, you know, as it’s thrown at you, you deal with it. Now, it seems like at least the world has calmed down and we can start to think about things in a realistic way and make some plans. However, with the Fed making their changes – now that there’s some substantial changes in rates, the velocity of the change of the rates, it has been something we’ve been trying to get our arms around. Hopefully, the change in rates will slow down here in the next few months. Then we can have some consistency. We’re really not at historically high rates; it’s just the move has been substantial. The velocity’s been insane, just how fast they move.
Olson: With one more expected (Nov. 2), right? And then December one more? That would be number six?
Riedy: There’s a market tool by the CME Group that kind of predicts based on (Federal Open Market Committee) what Fed funds is going to be and the Fed fund futures, and it actually raised (Nov. 1). They had a high end for Fed funds at 5%; when I looked today it’s at five and a quarter by early next year, meaning prime would be 300 basis points higher than that, so a quarter. That has moved up and that’s continued to fluctuate. The market’s gauge on where the economy’s going and what rates are going to do has obviously moved a lot this year, starting at the end of the first quarter, early second quarter.
Olson: Does that tool show you, or have you guys seen any other forecasts of the next one in December where that will settle?
Riedy: It’s based on Fed fund futures, and so it shows based on a probability by each meeting where it’s going to move. So when I looked, I looked earlier today, it was almost 88% probability of 75 basis points (Nov. 2), and then, then another three-quarter basis-point move in December. And they had another, I think quarter – in January, I believe, is the next one.
England: You’re starting to see some dissent, though, from the Fed. It was lockstep, and you’re starting to hear some people now say, where do we start trailing off? You’ll have some early dissenters; you’ll have some people that’ll hold out. That’s where the dot plot, where the projections, come in.
Lewis: I think the next November report, on all the statistics that FOMC looks at, will be critical in determining whether or not December’s going to be another 75 basis-point rate hike. Or if they start to slow down, maybe scale it back to 50 and start to taper going into next year.
Olson: It felt like we’ll get through to the end of the year and then that’s when things can normalize and we can get the plans in place for 2023. But when you said a January meeting and maybe raising it there, are you guys nervous about that?
Lewis: Yeah, I mean, I think we’re all expecting rates to continue to rise going into next year through mid next year, just at what level of increases those are going to be.
Riedy: And the big thing is what’s the priority? The economy’s not the Fed’s No. 1 priority right now; it’s inflation.
England: Are we nervous? I think I speak for all of us, but we just know to take what the Fed gives; I mean, you just deal with whatever number they select. It does have an effect, but you cannot fight the Fed. If they want to slow down the economy to a point, that is something that they win at. Hopefully, they’ll move to a fact-driven decision base starting in January. But the rates take a little while to work their way into the economy. I think we’re just now getting to the point where we’re starting to see the effects of the first rate moves slowing down the economy. Hopefully, the numbers will start reflecting that and that will then go to their data-driven decisions.
Olson: The fallout is that you have to deal with your customers and the impact on them. What are those conversations or what’s the trend? Are you seeing them delay projects as a result?
Lewis: I think we all saw a strong loan growth through the second quarter. And then as everybody really started feeling the impact of third-quarter increases, the cost of borrowing, and then the continued heightened cost of material supply chain issues, really put a damper on the projects that developers had in mind that were feasible at the time, but just have become unattainable at this point. Industrywide, you see a squeeze on pipelines.
England: Projects work out at a certain rate, right, based on the cost and by cash flow. That has changed. The math has changed for everybody – so, as long as they can go back and pencil out the change, right, carrying costs, your input costs with the supply chain. There’s been lots of movements where we’re starting to see supply chains theoretically come back in line a little bit better. I think you’ll pick up some tailwind for your material cost depending on what you’re in. Shipping from China’s slowed down, so shipping costs have come down the line so that there’s still commerce to be had. We are still looking at rate shocks. When we underwrite a deal, we look at, OK, rates go up, what does it look like at a higher rate? As long as you do the math, people still need to build and buy homes. There’s still manufacturing that needs to happen. It’s just, you need to make sure to sharpen your pencil and plan for those increases.

Armchair economists
Olson: Let’s be armchair economists. How about a prediction as far as the recession goes? What’s your forecast on if and when?
England: Out of a weatherman and an economist, the weatherman’s at least right some of the time. So take that with a grain of salt. Who knows? It seems like everybody’s kind of calling for a recession and the Feds kind of want a little bit of a recession. Not anywhere past the most recent two that we had, which is the pandemic related and the Great Recession. Those were systemic issues. There’s no systemic issue that’s causing recession, just oversupply of money, basically.
Lewis: Huge housing shortage still. I don’t foresee a massive real estate bubble, (but) we’re starting to see some on the homeownership side, and as they become less affordable, those developers need to start lowering their prices to help compensate for that. General sentiment with the consumer, people are wanting to spend money right now. And then we had positive gross domestic product growth last quarter, third quarter.
Riedy: The good news going into whatever the future looks like is that there is still a lot of liquidity on the marketplace, and unemployment’s still extremely low, local, statewide and nationwide. So those are big wins and strengths that we have going into whatever the next two, three years look like.
Olson: Statistically, haven’t we already experienced a recession this year? Isn’t it two quarters of no GDP growth?
England: They tried not to call it a recession. By definition, we just exited or are still in a recession. In theory, back-to-back quarters of economic decline is the definition of recession.

Customer relations
Olson: How are you getting to know your customers these days? That’s a process that seems to have shifted with the advance in mobile banking. Statistically, the usage of digital payments and mobile devices is continuing to increase and crossed the $500 billion mark in 2020; that’s from studies by Business Insider, Square and Fortune Business.
Lewis: I think over the course of COVID, it allowed a lot of financial institutions to really spend a lot of time on enhancing their digital focus. It creates a ton of efficiencies for transactional-type business. At the core of banking, it is relationship driven. We’ll never lose sight of that. We need to have our, whatever frequency, sit down, review historical financials and what are they projecting in the future? What do we need to do from the banking side to help mitigate something that they see coming or be ready to strike when they need our support? I don’t think that aspect will ever change. I think the digital enhancements are definitely from a consumer perspective, but I personally can’t envision an environment where relationship, commercial business is strictly data-driven through technology or online, mobile banking and whatever that might be.
England: Plans changed for us. What we used to do, it’s probably not how we’re going to do it in the future. COVID really showed us that we were probably a little slow to move at first, and we were forced to move, which moved us down the digitization of our interactions with customers. We have moved to a lot of trials. We hired a chief transformation officer. So we are trying interactions with more digital for small business. It’s going to be different; it’s relationship driven, but for small business, the return on time is a key measure for us, for our customers. If they come into the bank and it takes a very long time, we’ve failed. We’re trying to speed up that process, and some of that’s because of the digitization of the payment process of making decisions quickly, consistently, and delivering at a good cost to our customers in a quick manner. That is super important for us. We have not figured it out yet. We’re working really hard at it, though. We’ve got a pilot going on in Springfield right now for that, but we’re learning and then we’ll iterate that learning process and come out with a second trial until we get that process down. For us, COVID drove us to change what we’re doing.
Olson: Is there a name for that pilot or initiative?
England: It’s the Emerging Market Trial. There’s us, Kansas City and Bentonville [Arkansas], the three markets that we’re trying for three different experiences. We did a lot of research, and small-business customers are the CEO, the chief, everything in their organization. When it comes to banking, that may happen after hours; we are approaching them at the right time of day, because eight to five may be when they’re busy. There’s lots of those things that we are really focused on to make sure we are where they are. To do that after hours requires a different philosophy than what we’ve had, which is a branch model. So, you have a physical presence, but a digital approach as well. You marry the two together so that they do need to come in, you have a location, but if not, they can go multiple streams to contact the bank. We’re making those changes. We’ve gone to Google Cloud – that has now become instantaneous, where we don’t have that daily processing.
Riedy: We all have a different approach as to what a bank looks like and what that experience should be with our customers. It’s our job to stay in front of where our customers want us to be. That’s a heavy investment with technology for all three of our institutions. As it should be. I also do believe in the brick and mortar that Jason talked about. They both are critically important. The brick and mortar has changed. It exists not for transactions as it used to. Our customer preference for transactional banking has changed. The reasons for our locations are more on the relationship side. It’s no different than an Apple store, honestly. It’s consultative sales. It’s ensuring we get our customers the right product for their needs.
Olson: An Accenture study found that 31% of consumers would consider nonfinancial platforms like Facebook, Amazon, and Google for their banking needs. What does that say to you? Why they would trust such platforms with their financial needs?
Lewis: I would say ease of doing business. The experience, anytime you go to Amazon and go to buy something, it’s the easiest process there is. That engagement they have with the customer base, I think that earns their trust and their belief that they could do anything for them at that point. If they can serve a constant need all the time and be consistent with it, I think that kind of bleeds into other aspects of life.
England: Friction – that’s a buzz word for us. The person who causes the least friction in someone’s life potentially could win. So if you’re already fully engaged in some of these platforms and then they make the ease of getting a payment system, a credit card or whatever – all you do is click here – friction is very little because they’re already on that. They don’t have to go to the bank and sign up for these things. I think that is an advantage. Once again, we’re working on friction, right? That’s a thing that we’re trying to eliminate, make it as easy as possible and deliver quick and reliable decisions. But they are not experts in the finance industry. So, at some point, like a payment system, is one thing, but then they get into financial planning or if there’s other things that they would, then you come into bank charter. I don’t know if the chartering process will allow them to become full-fledged banks.
Olson: Do you consider it a legitimate threat?
Riedy: I mean, having competitors isn’t anything new for any industry out there. That’s something that we deal with every single day. So you always got to go back to basics. Why should your customer bank with you? Why should they do business with you? You got to understand, provide those customer experiences, provide the services that they want, provide the benefits to the account or banking product that they need or are looking for. Again, we’re always going to have competitors out there. We need to understand our customers, understand the preference, understand how they want to interact and engage with their finances.

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