Banking & Finance

Higher for longer. Banking industry professionals say that is the message for the coming year from the Federal Reserve with respect to interest rates, which have increased significantly to keep a lid on inflation. "I think our member banks across the state, as they project into next year and maybe beyond, are planning for the higher for longer which we keep hearing from the Fed and other regulators," Kristy Merrill, president of the New Hampshire Bankers Association in Concord, said. "We had zero percent interest rates for a long term, and I don't think anyone sees that happening any time soon." The Fed has increased interest rates 11 times since March 2022 with the current rate, charged to borrowing banks, at 5.25 to 5.50 percent. Higher interest rates affect a bank's lending practices and consequently there has been a decline in both residential and commercial lending in the past year. The current 30-year fixed rate for a mortgage was around 7 percent in late November, which is down slightly from October but still high enough to price many new buyers out of the housing market and keep existing homeowners from considering a move. Mark Bodin, president of the Savings Bank of Walpole, agrees with Merrill's assessment. "We believe in higher for longer," Bodin said. "Even if there is a rate pause, the Fed is not taking rates down." Both Merrill and Bodin say the pace of the Fed rate hikes during 2023 likely surprised many. "I think there were a lot more rate hikes than folks expected," Merrill said. Bodin called 2023 a "difficult year" for the industry because of the rapid increases that raised borrowing and lending costs. "More than anything, it was the pace of the interest rate increases — 5-1/4 percent over 18 months. I don't think anyone was prepared for a change that rapid." The rate increases, along with low inventory and escalating prices, have dampened the residential housing market in the area. "People don't want to give up their 3 percent loan to buy a new house at 8 percent," Bodin said. On the commercial side, Bodin said business was brisk early in the year at the Savings Bank of Walpole, but it slowed as the year went on, something he believes all banks experienced. "Commercial loans used to be 3 or 4 percent, now they are 8 percent," Bodin said. "Everything has gotten more expensive." Businesses looking to invest in new equipment or expand may decide to pause because of higher repayment and the need for additional capital. Christopher D'Elia, president of the Vermont Bankers Association based in Montpelier, agrees with "higher for longer" and said the interest rate climb has brought the banking industry into a different world. "There is no question it is a very different environment that we were operating in today than a few short years ago," D'Elia said. "The economy is a big part of that and what the Fed has been doing with interest rates the last couple of years, and that is challenging financial institutions as they figure out how to manage those rates." D'Elia said a lot of banks have 30-year mortgages on the books at 3 percent interest while the current rates keep increasing. "As consumers, everybody got used to low rates in the marketplace, and that is not where we find ourselves today," he said, adding that few remember the days of 15 percent to 17 percent mortgage rates of a few decades ago. "For banks, it is now a challenge on how you manage these funds," D'Elia continued. "What is the interest rate risk that you are willing to accept? What are your liquidity issues if you want to lend in the marketplace and you don't have the capital to do that?" To keep the "loan portfolio rolling," banks might have to borrow from the Federal Reserve, look to increase deposits by offering more attractive rates or find other sources of capital, D'Elia said. Another factor to toss into the mix is the end of the pandemic money that was flowing into banks, whether it was from the Paycheck Protection Program for businesses or individual stimulus checks, D'Elia said. "Those deposits went to our institutions, increasing their capital dramatically but now have run through the system so that excess capital is not there," D'Elia said. Bodin sees more of the same for banks in 2024 with a chance for interest rates to tick up a bit. "I think the challenges banks are facing today will continue next year, and I think for most banks, it will be a tough year," Bodin said. "We are planning for more of the same." Many banks in Vermont and New Hampshire are small institutions that serve their local communities. Keeping their focus on that mission has helped them stay strong during uncertain times, say two area banks. "I think the banking industry will face challenges due to the slowing global economy and economic landscape, but a community bank like ours, if we stay focused on managing our balance sheet and continue to build relationships with our community, will have another good year," said Deb Stephenson, president and CEO of Brattleboro Savings and Loan. Stephenson said as a smaller institution, the bank is still seeing a fairly steady loan activity and those loans that are repricing at a higher interest rate (because of the term expiration) are also being sustained. "For our particular bank, we are doing extremely well," Stephenson said. "We had a profitable year and weathered the industry storms pretty well. Our loan portfolio performed very well." Like others, Stephenson said the bank's mortgage business is off because of the interest rates and lack of housing stock for sale. As for next year, Stephenson said she expects the Fed to hold rates steady for the foreseeable future, even though she has heard some economists forecasting a possible cut. "I think the Fed has paused and will be holding steady for longer. We may not see the decrease people would like to see as it takes a stance of pausing and making sure the economy is doing what they want it to do," Stephenson said. At the Savings Bank of Walpole, with three branches in Keene and seven total in Cheshire County, Bodin said they have always been a "deposit rich" bank, which provides capital for lending and helped them have a good 2023. "A lot [of banks] are lending more than they have brought in, in deposits, so they have to borrow the money, and borrowing costs are really high," Bodin said. "We really have not had additional borrowing costs. "We actually had a record earnings year," Bodin continued. "We are seeing the strength of our model, the local focus. Our deposit balance is so strong, and we really have a loyal group of customers locally." Stephenson and D'Elia also think the election year could impact Fed action. "I think what overlays 2024 is the general election," D'Elia said. "It is just going to be a mess leading up to it, so you have politics on top of a difficult economy."