Writer: Joshua Andino
2 min read October 2022 — While inflation remains a primary concern for businesses of all stripes, the Federal Reserve has made it clear that it will pursue its mandate to break inflation, with no signs of a potential pivot in the near future. In turn, banks have been on the front lines of managing a drastically changing rate environment.
At the end of last year, the Federal Reserve announced that it would aggressively shift its monetary policy heading into 2022. As the Consumer Price Index continued to climb, the initial assessment of inflation as transitory, requiring two or three rate hikes, was quickly readjusted. Four rate hikes have since transpired, including two in June and July that came in at a whopping 75 basis points. While the rate hikes stung for many, particularly those in the real estate sector where lending is often a key part of transactions and development, the rising rates seemed to offer banks a reprieve from the low-rate environment of the last decade, which saw margin compression and reduced profitability as the hallmark of the low-rate, low-growth trap of the last 15 years. The rate increases may yet prove to be a double-edged sword, however, as the cost of deposits has increased alongside the rates while lending has, predictably, declined.
In South Jersey, where banks of all sizes do business, the changing environment has had a mixed reception, with some breathing a little easier as they see the squeeze on their margins ease and others look to manage the rising costs of deposits. Invest: spoke to a number of leaders in the banking industry to hear their thoughts on the changing macroeconomic environment and what it means for them — and the economy, moving forward.
Ernest Huggard, President & CEO, First Harvest Credit Union
How are economic challenges like inflation and rising interest rates impacting your members?
If we roll back the clock 12 months ago, interest rates were at historical lows and everyone refinanced. Going forward, our biggest challenge will be helping our membership to pay their obligations, whether they are mortgages or auto loans. That is because with inflation their dollars will go toward other needs, like gasoline and food. Housing and foreclosures can take up to 36 months, so we fear delinquency rates will increase because our members have to apply for money elsewhere to stay afloat while everything is more expensive. The price of housing has skyrocketed to such heights that it’s almost impossible for the average consumer (member in the credit union world) to buy right now.
Louis Lombardi, SVP, Regional Commercial Executive for New Jersey & Greater Philadelphia, Fulton Bank
How has inflation impacted your clients?
Everybody is feeling inflation. Our clients are feeling it, you’re seeing it in the construction industry with material costs rising. It’s causing developers to rethink whether to move forward with the next construction project. You’re starting to hear about folks taking a second look at things in terms of the next project they might consider.
Oftentimes, fuel costs can be passed along. We are seeing the impact of inflation on labor costs continue, and I don’t see that changing or reversing any time soon. When you talk about labor and giving that raise to an employee, it’s basically impossible to pull that back.
When you see where companies are right now, they have more liquidity, lower leverage and less debt than they did pre-pandemic. Many companies did well during the pandemic. No doubt, some struggled, but many received PPP funds that they didn’t need as desperately as they thought they did when they applied. So now they’re in a good financial position and their backlogs are strong, which probably takes them through the rest of this year for the most part.
In the near term, I feel optimistic about the rest of 2022. But things get a bit murkier beyond this year, and it’s hard to imagine a situation where the economy isn’t going to cool. I would say that if we are headed towards a recession, we are starting from a healthy place with high demand, full employment and strong corporate balance sheets.
John Herring, New Jersey Market President, Liberty Bell Bank
What are the major challenges for the lending market right now?
With the increase in interest rates, we’re already seeing the impact on the residential side, and I think the refinance market has pretty much dried up at this point. Fortunately, our folks have really good connections, and the purchase volume is still moving at a reasonably healthy pace. We also do a fair amount of one-off residential construction lending, and I do expect that rising interest rates are going to impact that sector.
When you look at what’s happening with the cost of materials over the last year, year and a half, and the impact of mortgage rate increases on the purchasing power of their buyers, I think it’s a concern that we will see at least a little bit of a slowdown in (especially) speculative construction lending because the buyers are getting hit on both sides: Costs are going up, and at the same time potential buyers might not be able to afford to spend quite as much because their mortgage payments are going to be higher.
For more information, visit:
