GRAND FORKS – Peter Stenehjem, president of First International Bank and Trust, Fargo, is grateful to be part of a privately held bank. His company serves communities across North Dakota, South Dakota, Minnesota and Arizona.

“A lot of the banks in the region here are privately held, so everything happening out in Silicon Valley and California is not what’s happening here. I’m thankful we’re geographically diverse, customer diverse and privately held,” he said. “We’ve got 34 locations spread across four states.”

For a year, economists have predicted the U.S. is headed for a recession, but the economy has defied forecasts of a turndown. Although housing prices are starting to decline, consumer spending is healthy, up 0.5% in April after adjusting for inflation. The most important economic indicator – employment – has remained strong, with private and public sectors adding 283,000 per month from March through May. Although economists expect a recession in the second half of this year, local finance professionals say they see potential for growth through 2024.

The National Association for Business Economics’ survey of 45 economists, conducted May 2-9, found the median forecast for inflation to average 4.2% this year, well above the Federal Reserve’s inflation target of 2%. The Fed raised the key interest rate in early May by a quarter point to 5-5.25%. 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 bring down inflation.

“Interest rates are expected to decline and inflation is expected to slow in 2024, while job growth is anticipated to moderate, and the unemployment rate to rise,” NABE President Julia Coronado said. Coronado is the founder and president of MacroPolicy Perspectives LLC.

The survey also indicated that the banking crisis is ongoing but contained, with only one-fifth believing it will worsen.

Most personal loans have fixed rates, so current borrowers don’t need to worry about interest rates changing. But those in the market for a loan – whether to buy a car, a home or even for a business need – should be prepared for higher rates.

Throughout March and April, home mortgage rates hovered around the 6% mark, well above where they were a year ago. Experts predict mortgage rates will continue going up and down until there’s a consensus about when the Federal Reserve will stop raising interest rates, which could be as soon as July. The Fed kept its key interest rate unchanged Wednesday, June 14.

Some regional and community bank leaders report that – unlike the failed Silicon Valley Bank, Signature Bank and First Republic Bank – they’re in a position strength.

Stenehjem said he’s seeing 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 longer period of time.

“They’re also pausing on projects instead of purchasing or moving forward just due to higher costs, which the construction industry is feeling. We’re seeing developers who are unable to get an income-producing property to pencil out. Because of that, we’re seeing more borrowers starting to preserve more cash and liquidity just because they’re not necessarily sure they’ll get the return they’re hoping for,” Stenehjem said.

Commercial projects are still busy, and those started last year are finishing in 2023. But new projects may be slowed or be completed in phases.

“What we’re hearing from contractors is I think they’re a little bit more skeptical coming into this fall and winter,” Stenehjem said.

Chris Wolf, of Grand Forks, the northern valley market president with Alerus, said the rising interest rates haven’t affected people’s decision to purchase or invest in equipment, but they’re 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 become depleted, it can result in more loan demand in the future,” he said.

Educating his clients on the current economic conditions includes providing guidance and advice to help them achieve their objectives. They may want to update their short- and long-term goals, as well, he said.

“We can work with them to develop and implement a plan to maximize short- and long-term yields and help manage risks and exposures,” Wolf said.

Although it’s more expensive to borrow money right now, banks are offering better interest rates on deposits. Consumers could make significant gains over the long term by shopping around.

Jennifer White, senior director of banking and payment intelligence at J.D. Power, shared data results from the company’s annual retail banking satisfaction study, which examined more than 170 banks.

“The high-profile bank failures have stoked misconceptions among retail bank customers about bank failure risk and deposit protection,” the report states. “Notably, consumers banking with smaller regional and mid-size banks show consistently lower levels of concern about bank stability than those banking with larger, national institutions.”

Although reports show deposits are shifting, it’s primarily business deposits, White said.

“There’s nothing in our study that tells us it’s part of the crisis. If they’re shifting, it’s because people are in search of that higher interest rate so they’re going to move whatever hard-earned deposits that they have, maybe to a high-yield account, but not leave their bank. They’ll still stay with their bank on the corner, but they may shift a pile of deposits over to Capital One or Chase or whoever might be offering a high-yield account,” said White, of Commerce, Michigan.

The data in the study shows, for the upper Midwest region, there’s been a significant decline – 13 points – in customer satisfaction with their primary bank partner year over year.

“What we’re seeing in the data is a decrease in satisfaction with the account offerings meeting customers’ needs,” White said.

Reasons for the decrease in satisfaction include customers believing the account they’re in isn’t the right one for them. The dissatisfaction could also be from a lack of reassurance in the current interest rate environment, she said.

White said consumers need to investigate whether they’re in the right account that provides them the best value, which can be more than the points that come along with rates.

“That value can be in customer experience, it can be in improving financial health, in helping someone make a spending plan or having tools available allowing them to monitor how they are spending their money or in helping them figure out how to pay down debt,” White said.

The second note of the decline in the survey, at 16 points, was in the level of trust that the customers have in their bank.

“If you combine this question of ‘Am I in the right account?’ with the possibility of easily shifting money to other secondary accounts, maybe to earn interest rates, you start to have customers wonder about the value proposition,” she said.

The biggest risk for community banks, White said, is losing deposits to the digital solutions offered by the big banks, like Chase, even if there’s not a branch in town.

“If that community bank isn’t helping them learn how to grow their money, helping them set a spending plan, helping them look at their spending habits, helping them avoid paying fees, helping them sign up for fraud protection, all those value propositions that community banks offer that have nothing to do with rate, if they’re not shouting those from the rooftops, they’re more at risk of losing deposits,” White said.

She encourages people with deposits available to make sure they’re growing their money as best as they can. For those on the opposite end of the financial health spectrum, look for non-predatory solutions to bridge the gap.

Wolf said he’s seeing near-record liquidation in the deposit base in the region. He also sees community banks in a strong financial position and robust commercial economic activity.

“We’ve got strong balance sheets, strong credit profiles and we’re in a position of strength,” he said.

Stenehjem said First International Bank and Trust earns a portion of its income from a fund financial company, KotaPay, which is used in all 50 states and primarily helps with payroll systems. During times of rising interest rates, he said it helps banks to have non-interest sources of income such as KotaPay.

“I’m very thankful to be in the upper Midwest,” Stenehjem said. “I think a lot more people are more worried about getting in the fields and scratching around than what’s happening out in Silicon Valley. Plus, we have that Midwest work ethic and it’s fun to have a clientele that works hard. You’ve always got to have a reputation of integrity and I think as long as we continue to do the relationship banking, that’s what’s continuing to set regional banks apart from those big national ones.”

Prairie Business is a monthly magazine that highlights business trends and people in the Dakotas and western Minnesota. To receive a free subscription for the digital version of the monthly magazine, go to grandforksherald.com, scroll to the bottom of the page and click on “Prairie Business.” From there, click “Subscribe” and scroll down to check the box for “Prairie Business.”