Artisan Unfiltered: 2025 Outlook - Jim and Jeff Talk Economics, Interest Rates and Regulatory Events

The first Artisan Unfiltered episode of the year is now available. "2025 Outlook: Jim and Jeff Talk Economics, Interest Rates and Regulatory Events" takes a deep dive into the outlook for each so far this year and offers a few recommendations for what bankers can do now to prepare for what the rest of the year may bring.

Jeff Voss weighed in on possible rate cuts: "I think rate cuts are going to be data dependent. I think the one thing about the Fed is, relatively speaking, it's as independent as you can come and they're focused on analyzing the data, interpreting the data and making decisions."

Jim Adkins offered a few words of advice: "I do think that, in terms of enterprise risk management, you could  - in your procedure and policies and how you model things out - you might want to model some changes into your risk management process."

Reach out to Jim or Jeff if you have questions or want to discuss any issues or challenges your financial institution is facing.

Transcript

Welcome to Artisan Unfiltered, a podcast series featuring frank and insightful

conversations about banking. If you've met Artisan founders Jim Atkins and Jeff Voss,

you know that Artisans advisors can talk. So that's what they're going to do. Talk

candidly with a panel of industry experts about issues that matter to you and your

financial

- Welcome to Artisan and Filtered. I'm Jim Atkins along with Jeff Voss. And today,

Jeff and I are gonna talk some economics, discuss some interest rates, and then

discuss some regulatory events that happened. A lot of things going on, Jeff. So we

got what, 30 days into the new administration. Away we go, huh? Let's talk a little

bit about what do you think in terms of the economy? I know there's a lot of

noise out there right now with just tariffs and, you know, all these things that

are, you know, I think it's probably keeping people from understanding really what

the direction of where the economy is going. So what's your take on the first 30

days and right now where we are economically? I think the administration is in its

attempts to take control of the situation in Washington has created a fair amount of

confusion, certainly among the bankers that are out there. I think everybody thought

initially coming into the election that Trump gets elected,

we're going to see significant reductions in interest rates, and what's actually

happened is there have been a was an interest rate reduction.

Certainly for now, a wait and see attitude from the Fed before they start lowering

rates. And as a result of that, I think bankers were hoping to see a favorable

reduction in rates that would impact their cost of funds. And now what we've you

know, continued short rates above four long rates are still up,

you know, a little bit, a little bit higher than where the short rates are.

So we've got a positively sloped interest rate curve, which is good. Yeah,

I think the two years what the two year today was 4, 4 .2. And I think the 10

year was four or five. So it's just barely, you know, upward sloping, but it is

upward sloping. So I mean, I think accommodation of things are impacting the economy

too. You're talking about unemployment, you're talking about GDP,

the numbers that have come out for unemployment, been still lower unemployment.

The last last numbers that that popped out, I think we're in that 4 % range.

That that the issue still though is the price of the services. You're still seeing

increases in the price of services, price of goods. You know anybody going to the

grocery store today and we'll know if you buy try to buy eggs you're paying over

four or five bucks a dozen. Surcharges being attached at restaurants to your egg

orders if you're going out for breakfast, just a variety of things that I think are

confusing to the general public out there right today. Lots of promises for lower

prices, but we've not seen it yet. It's certainly not anywhere to be found in the

grocery store. - Yeah, you know, I remember we were talking in December after the

election and we were kind of getting our own viewpoints at Artisan in terms of the

economy and what we thought would be next year. And I remember we came up with,

you know, a base scenario and then we had like an upside scenario and a downside

scenario. And I remember when we did the base scenario, we were thinking about a

tariffs. We're going to have some tariffs, Probably not the maximum amount of tariffs

that were being discussed. We were talking about Congress passing the TCGA,

the tax extending it rather, extending the existing tax legislation. We were thinking

about a little bit of an increase in inflation, but we're kind of kicking around. I

remember about 2 .4 % GDP. Do you see anything That is going to take us away from

that. No, not today. I mean, I still think, I think the forecast right now,

GDP now says forecast in February is 2 .3. So,

you know, I think we're, we're still looking in that two, three, two, four range,

um, slow growth, you know, for sure. And, uh,

it's not like we're going to ramp this thing up to three and four percent. Yeah, I

mean, there's signs out there that the the economy in the consumer sentiment are

kind of weakening. We saw a pretty healthy decline in the University of Michigan

consumer sentiment index that that dropped off significantly. Home sales,

home sales are down, you know, again, but January is usually a tough month anyway,

and if the weather has any impact on it, it also has reasoning behind it.

Well, that's true. We've had a lot of weather this month. And I think also, to the

housing inventory, people are on, they're sitting on very low rates and people don't

want to move. When you've got a 3 .2 % interest rate on your mortgage and you want

to buy a new house and you look at, and it might be a six and a half percent or

seven percent rate, makes it a different decision, right? You know, I know my, you

know, my son's thinking, you know, he wants to buy a new house and that's, he's

like, dad, I've got a 3 .2 % rate or I think it might even be lower than that.

And he said, that's gonna cost me a lot more. And I said, well, yeah, I wish I

could help you out on that, but you have to go on your on your own. But you

know, we were talking about the upside downside, I remember, we had an upside

scenario. So you had a baseline, I think we're at 2 .4 % on the baseline, we had

an upside, which really wasn't that much up. I mean, we were thinking that okay, if

things all go great, you know, we might have a GDP of about 2 .8 2 .7 2 .8%.

And that included, you know probably more minimal tariffs inflation was probably going

to be kind of in the two and a half Percent range things like that and that all

kind of when we put it in our magic box It all kind of came out at 2 .8 percent

So the the upside wasn't that much up the downside if you remember Was you know,

we were thinking okay if things are just you know if the tariffs come in full

blown and all these things come in and and we have really deep spending cuts almost

I think we said 1 .3 trillion in spending cuts you know just everything goes really

extreme you know we would have a GDP of something like 1 .6 percent I know there's

a lot of noise out there and you might say well it sounds like the downside is

going to be the the scenario for this year but I I still think there's still a

lot of noise. I still think, like you said, I think that the 2 .4 % our baseline

scenario is probably where we're going to be. Yeah, I agree. I mean, that's why I

think-- And I see, right now, the concerning thing is, to me,

the business activity numbers that are out there, we've seen-- this is the lowest--

There's a S &P global marker out there for services and manufacturers.

And that's hit the lowest point in the last 17 months here in February.

And my hope is that comes back. I think the noise would doge out there cutting

government expenditures. You know, the employment that that could create out there.

Again, that's all noise at this point. I do think that that'll have a life of its

own. Right now, it's it's shock and awe in Washington, right?

They're they're trying to shock the system into doing things, shock other countries

into doing things that that we want them to do that'll fit us which is appropriate.

No, I think you're I think there's a lot of negotiation a lot of positioning it'll

be interesting to see you know there's and I don't want to get in the geopolitical

stuff because you know that would be yeah on that qualified to talk about the

geopolitical world but you know if there's some progress made in some of these

geopolitical issues of Ukraine and Middle East things like that. I mean, that could

definitely have a big effect on our economy, optimism, things like that.

So we'll let smarter people figure that out. But it's again,

I've never been in my long and in happy life. This has been probably one of the

most noisy situations I've been in. Now, I wouldn't say it's the noisiest thing you

know, like Jeff, remember, you know, October 87, 2007 and all those things.

But this is up there. It's on the list that a lot of noise going on. So, so with

that, you know, talking about interest rates a little bit, you know, big thing in

the banking business interest rates, of course, all that ties into liquidity and

balance sheets. Are you do you feel like we're basically higher for longer when it

comes to a straight environment right now? - I still think the propensity is to have

lower rates. I don't think we're gonna see higher rates out there.

I don't think the economy's gonna explode on us where Fed's gonna sit there and try

to have to raise interest rates. I think they're gonna drag on interest rate cuts.

I think where we are is positioned in a slightly positively sloped curve,

which would indicate no recession right now. I guess there's a risk that what

they're doing could cause some type of a recession down the road. But for now,

I think what I've heard from our clients is they're all forecasting one rate cut

this upcoming year, 25 basis points. And I'll call it the more aggressive people out

there are saying two rate cuts, one in mid -year, one later in the year.

I would probably say I'd be looking at the Fed numbers that are out there as a

judge and where they think things are going to go. If you're a banker out there,

I'd focused on on that. And I think using a 25 basis point rate cut is probably a

conservative thing to do at this point in time. I mean, if you were modeling and

you've done this a million times in your life, you know, modeling your balance sheet

for 2025. So you're saying you would you would model a 25 one rate cut mid year

coming in time in July. And beyond that,

I think hold rates steady. I think the shape of the curve is probably more

important than just one rate cut from the feds, from the fed itself.

And the hope is that we're going to see a continued positively sold curve.

It doesn't bear well for the mortgage market out there, as you know. But I think,

you know, banks have to be paid if they're going to make loans and put any type

of a fixed rate on it. And that's where the curve will provide them with the risk

premium to be able to go out there and make fixed rate loans beyond, you know,

a year. And I think Right now, that's going to bear its fruits,

hopefully, for the banks. I think on the deposit side,

that's where their challenge is going to be. They've been hoping for rate cuts to

be able to lower their cost of funds. I think what will determine that is demand

out there in various markets. There's heavy demand on the lending side and there's

guys that want to pay up for deposits that could create competition and force rates

to continue to stay up. I have seen our banks, our client banks lower their rates,

their market rates, get rid of the specials altogether. And what they're saying by

doing that is they don't have a heavy demand for loans right now, which,

you which, again, I think it's going to be demand driven more than it's going to

be banks trying to just fish for deposits out there. I think from a liquidity

perspective, I think banks have been very focused on making sure that they've got

excess liquidity in this timeframe. Right. And the regulators, our friends,

the regulators, they've been beating on the banks for the last well almost two years

now since March of what 2023 and when all of that happened all the liquidity issues

happened and so I think bank balance sheets are pretty liquid and I think overall

our clients because they listened to you Jeff our clients have good liquidity you

know they have that they yeah I think so yeah I think they do but you know the

Fed minutes you know we talked about this you know they Jeff you know the Fed has

been pretty independent historically. I mean, yes, I'm sure they get influenced by

the politicians and things like this. But overall, I think this Fed has been fairly

independent. I know that President Trump, once he sets his sights on a rate

reduction, he must not think it's that important right now because when he does

think it's important, he'll start jaw boning the fed. And, you know, that's what he

does. And I don't think that's the wrong thing to do because, you know, but right

now, I don't hear a lot from Washington on that. So right now, they must be

comfortable with this. And, you know, Powell has, you know, you can criticize,

I don't want to get into criticizing the Fed because it's sometimes it's, you know,

maybe not fair, it's it's a tough job. But I think they're going to remain fairly

independent this year. I'm with you. If we have more than one rate cut,

I would be really, really surprised. Yeah. And I think it's, I think those rate

cuts are going to be data dependent. Right. So I think the one thing about the Fed

that I did I tend to agree with you on is,

you know, they are relatively speaking as independent as you can come. And they're

focused analyzing the data, interpreting the data, and then making decisions. And

there's enough Fed board governors out there from all the different,

different 12 districts that have, you know, their opportunity to weigh in on what

the Fed and Washington is actually doing. But the end result is,

I think it's all of these different districts are data dependent. And they're going

to all weigh in based on the data that's presented to them, not based on opinions,

not based on somebody job owning them. Right. Kind of wrapping up this little

section of the discussion. What do you So, bankers should be focused on in terms of

their balance sheets, how they're managing their interest rate exposure, what are a

couple of things that you would have them just double check? Yeah, I think I would

be focused on margin management. Most community banks still make the majority of

their income on their margin. And what they've seen the last couple years are

challenges to the margin on the cost of fundside. We have some clients that are

benefiting today from this stability in where rates are at and the slight reduction

we've seen in short rates. We have others that are out there that are looking

forward and saying, "Hey, we took advantage of it the last few years.

We we locked into some excellent rates before things shot up. And now we're going

to be forced with repricing deposits the other way. So they're looking at down years

next year in the margin. I think that's going to be critical to understand where

your margin is going to be. And I'd be focused, having them focus on those

elements. On the On the investment side, it's all tailored to the liquidity needs of

every bank, whether you're short or long an investment site. We have some banks that

have virtually no investment portfolio, it's all in Fed funds. Those banks are

usually loaned up and then we've got other banks that are less loaned up and

they've got a portfolio of securities that are out there that unfortunately are still

under water, getting better and time has a way of curing these fixed rate

situations, but right now they're still under water from a market value perspective.

And, you know, I think this is where sometimes you see business plans or just,

yeah, I guess business plans or how you're structured affect your liquidity.

You know, We have banks, we have clients that have one branch or two branches and

then we have clients that have multiple branches and during these times,

if you've really got to make your branch network work for you, especially if you're

sitting on, we've got banks that have 20, 30 branches and things like that and

you've really got to well, you know, you've got to be running well to make your,

you know, those core deposits, you know, if you're always out buying, yeah, you're

buying these these broker deposits, and it, it just really, you know, it, I say it

hurts you, but it hurts your margin. And if you have sometimes you had the

advantage of a really strong branch network, you know, that can really help.

Sometimes, you know, this branch network, obviously, can be expensive. But Sometimes

it's your best friend in a liquid liquidity situation where you need liquidity.

No question. You want to shift gears and talk about the regulatory side of things,

which, you know, again, with the change in the administration, a lot of thoughts

going on of bankers about, well, what's going to change? Are we going to see

regulatory relief. What are your thoughts on that, Jim? Again,

a lot of noise, but actually more than noise. You know, Gruenberg has resigned as

chairman of the OCC, which is usually expected when you have a change in

administration. You've got Travis Hill in there. You've got someone, you've got

Russell Voight running the CFPB or what's left of it. So there are some really

interesting things happening. I think everybody that I talked to in our client base,

you know, you know, everyone always wants a more gentle regulator. That's just goes

without saying that that happens all the time. And I think some of the things that

they're talking about, which are going to take a while to hit to the, you know,

the troops on the ground. Some of these things are good, you know, making, making M

&A deals go faster, you know, you shouldn't wait a year to get an M &A deal

approved, right? I mean, that's just, that's just crazy. And some of these things to

make, make the business encourage de novo's, right? We haven't had very many de

novo's over the last probably decade, Jeff, maybe even longer than that. And I think

making it more encouraging for people to put a bank group together and get investors

together and have a de novo, I think would be kind of a neat thing. But those

things take time. You know, I don't know how much the some of these regulatory

things that they're talking about are really going to affect the day to day lives

of bankers. I will say this about the CFPB. I mean, that is a full stop situation

that they did. You know, it basically said no more rulemaking, no more investigations

and all of that. And I don't know, I don't think the bankers are going to cry too

much about the CFP being not doing, not in business. You know, there's certainly

that organization, especially for larger banks, but it affects all banks and,

and some non bank institutions as well. There's been some criticism. Some of it has

been deserved, for sure, Because it's just just really has been I I don't know I'm

not I don't want to say I'm not a fan of it, but I probably'm not a fan of the

CFPB But can it be reconstituted in a different way? Maybe but I don't think you're

gonna get a lot of sympathy from the bankers that The CFPB is not doing what

they're they should be doing or that they were called to do So - That's an

interesting thing. That's probably one of the most interesting things on a regulatory

basis that I saw. - So what do you think, do you think the other three agencies,

the Fed, the OCC, FDIC, along with the state counterparts, do you think they're

ready to take on the role of consumer regulator? - I don't know if they,

there are a lot of states, states have their own regulatory laws in this regard.

States might embrace this to be honest with you. Yeah, they may, you know, I mean,

maybe, you know, there's each state has, in many cases, their own, you know,

consumer protection laws and use, are you back in the day that you say usury laws?

Remember that? I guess there's probably still usury laws out there in certain states.

But I don't know if an overriding entity like that is really needed.

Now, I'm sure I would get great pushback from Elizabeth Warren and some of the

people who put that together. And maybe I'm wrong, but I don't know if it's really

needed given the number of laws and regulations that are out there.

And I think the problem with the CFPB was just that they were kind jury and

executioner, you know, they could make the law, they could audit, audit the banks

and see if you violated the law and then they could find you. And it seemed un,

it just didn't seem like that was a fair concept. And, but,

you know, certainly there's a lot of smart people up there at the CFPB and, and

maybe they can reconstitute it. I think as far as one of the things that I'm

hearing in the regulatory world from this new, you know, kind of the new, I guess,

the new administration is more Coordination amongst the all the various regulators I

think that would be very helpful because I think over the last not just this past

four years But probably even you know over the last decade or so it seems like you

know Everybody has more gotten all the regulators the various regulators of Fed the

FDIC the OCC, they all have gotten more siloed. And I think sometimes,

you know, some of the policies they put together, it's clear that they haven't

really thought of how this would affect, say, the Fed. You know, if the FDIC did

something, how is it going to affect the Fed? And so I would like more

coordination. Instead of a CFPB, I'd just like more coordination, I think, than we

have now. I would agree with you. I think the other thing that that that I would

ask is what so so we've had a change in in guard in Washington.

There might be a change in the tenor of the regulatory approach to things and how

they how they deal with things. Today Many banks are sitting with regulatory

comments, regulatory action steps that need to be taken. If you're a bank out there

today, what do you tell them to do, right? You say, "Well, guess we don't have to

do this now," or, "What are they supposed to do in light of these changes given

not really knowing yet how the new regulatory leadership is going to approach things.

Well, we're all of 30 days into it, right? And usually, you know, when I back in

the day when, you know, when we were working in private industry and that didn't

have our own company, you know, it took me 30 days to find a bathroom, you know,

so it's not that long, long of a time. I think that what I would, my attitude

would be, you know, first of all, your exam is your exam. You know,

the issues that are in your exam, things that the regulators want you to concentrate

on, you continue to block and tackle and do all the things that you are supposed

to do. And don't think that if you're under some kind of order or under some kind

of written memorandum or something like that, don't think those are going away. Those

are not going away, you've got to do the work. And I don't think even if there's

big changes in from the administration at the agencies, these things are not going

to trickle down for probably a couple years. So do the work. Don't think you're

going to be, the regulators are going to come in and bring you muffins and stuff.

No, they're going to come in and continue to look for things that you should have

fixed in your exam. So I think the blocking and tackling is important to keep in

mind. And these big things are going to probably shake out,

you know, amongst themselves. - Yeah, I think the term I would use is we gotta

clear the decks, meaning if there's regulatory comments that are out there in a

bank, deal with them, right? resolve the regulatory comments.

If you're under an order, get yourself out of the order. That's the highest priority

that you've got, even if it's a soft order, not in public. You don't know where

this thing's going to shake out, but clearly the last few years that what's happened

is the regulators have become more attuned to banks ignoring their comments.

They may not have been written as MRAs or hard comments that needed to be fixed,

but they've come in as recommendations and they've been, you know, given soft pedal

to by the banks and not ignored, but they just haven't implemented them. And what

banks need to do is to really focus on that. And I think they need to take the

regulatory comments that have been out there, Take him serious get him fixed. Yeah,

I mean it's You know nothing Don't make the exam or self -inflict a wound You know

don't make the exam or do do and even if you get it wrong say you don't do it

right say They want you to do something you didn't do it, right? That's a lot

better than we just didn't do it You know so so you know back to the the bigger

question of you know You got to continue to do the do the basic work, making sure

that you're doing all the things that make a good, a bank run well, you got to

continue to do that. And these other things probably will take hold of themselves. I

do think that in terms of risk management, enterprise risk management, you know,

you could in your risk management procedures and policies and how you model things

out, you know, you might want to model some changes into your risk management

process, you know, if certain things change, you can certainly model that out and

have some scenarios. I think that's probably a good management. I think that's going

to be expected. I think the regulatory framework is going to want you to do that,

you know, they're going to want you to model out, could be changes in laws, could

be changes in certain regulatory things like capital, regardless of whether they

actually take place, it shows that management is taking a proactive approach rather

than a reactive approach. And that always bodes well from a regulatory side.

If you're thinking about things ahead of them, that means you're thinking ahead of

them and they're gonna look at it positively, whether it happens or not, right? And

I think they'll give you kudos for that and give you the points on the scorecard.

So, right. And I would, I would add to that, you know,

the risk management side, you know, kind of modeling things out. I would also, you

know, we're big into strategic planning, you know, we say that all the time, people

see us and we walk down the street and they Okay, yeah, strategic planning, because

they know we're going to say, say that, but we do say it. And, and I think you

got to pull in, you know, compliance and regulatory risk into your strategic plan,

because, you know, it can certainly affect what you're doing, you know,

at the wrong time. I would say that is another area that, you know, it's caused

some of the greatest concerns right now in the regulatory framework, you know,

from cybersecurity to internal controls over the systems, just pure fraud going on

out there in FinTech, all those different things, vendor management,

all those things need to be focused on.

You know, back to, you know, are there going to be big changes. If you think, if

a banker thinks that all of a sudden cryptocurrency is going to be good in the

banking space right now, because President Trump has made some comments on

cryptocurrency. He wants to push that technology and push that payment system.

Those are all positive things, but if you're a bank and you think that now that

President Trump's in, that we can do cryptocurrencies and hold crypto assets and

things like that, don't do that because that is not a place to go.

Right now, that's all talk and I can't see any time in the near future where the

word cryptocurrency is not a four -letter word in the banking business. I just don't

see it and it may eventually be that. I mean, it's kind of like that in cannabis

where, you know, you go back, Jeff, you know, 10, 15 years ago and people were

talking about cannabis banking are like, Oh, my gosh, this is never going to happen.

Well, drip, drip, drip over the years. And, you know, we're probably closer now to

full scale national cannabis banking than we ever have been. But it's taken a long

time. I don't think it'll take as long with crypto because I do think that tech,

you know, I personally, I think we're going to have a crypto dollar. I think the

US is going to have its own cryptocurrency, and that's going to be a game changer.

But don't run out there and start putting crypto in your your your plans. That's

what I would say. I would say, say, you know, you're still focused on the

traditional banking products and services that we have out there. You know, if you've

got niches that are out there, make sure you've vetted them, make sure that you

focused on internal controls, that you've understand the risks,

risks, and you've assessed them appropriately. When you do, then that's all part of

your strategic planning approach too. Well, I think we're getting close to the end.

We wanted to make sure we don't take up a lot everybody's time. Hopefully, everybody

found this informative. You know, if you need any kind of help, Get in touch with

Jeff or me or any of our artisan advisor consultants at artisanadvisors .com You can

see our website and there's a way to connect with us through that website. Happy

banking everybody This is our send advisor signing off. Have a great day Thanks for

listening. Be sure to subscribe so you don't miss our next episode and please visit

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