From the President's Desk

If I had a nickel for every time someone asked me how I thought interest rates were going to behave, I'd certainly have a hefty pile, but I haven't kept count. When you’re a banker it comes with the territory, but given the level of interest rate volatility we’ve been experiencing lately a lot more people are paying attention. How high are rates going to go? Have rate hikes ended? Is the Federal Reserve going to keep rates higher for longer? When will they start cutting rates, and by how much?  As I’ve pointed out in a prior President’s Message, these questions are not answerable with any consistent degree of accuracy. Of course, this minor detail has never stopped a fair number of people from trying. If precision was a prerequisite for employment as a television talking head, there would certainly be fewer channels to consume.

While I don’t have answers to those questions that are any better than the next person in line, I’m pretty sure about one thing: interest rates are not very high right now. Okay, before people start firing off nasty emails in my direction, let me plead my case. We’ll start with the following graph:

Even if you squint this is a hard one to read, so I’ll walk through what we’re trying to look at here. This chart displays the market yield on the United States 10 Year Treasury over a range of about 43 years. I added the great big arrow to help focus on the specific timeframe between 1980 and 2020. Interesting side note, a period of twenty years is known as a vicennium. The direction of said arrow illustrates the obvious: Treasury yields decreased during this time, with the 10 year yield dropping from a high of 15.84% in September 1981, to a low of .52% in August 2020. As I’m writing this (January 22nd, 2024) the current yield on the 10 Year Treasury is 4.10% - a far cry from the nearly 16% yield from days of yore. The defense rests.   

Many people remember the 1970’s and 1980’s and the economic circumstances that caused interest rates to soar. I can’t imagine it felt great to be a borrower during those days. The passage of time has apparently dulled the pain, because now there are quite a few of these folks who practically boast about the fact that their first loan was approved at 20%. A badge of honor if you will. Discussing the current interest rate environment usually includes a bit of, “You think rates are high now? You should have seen the interest rate on my first home loan!” Technically, I was present during this time of elevated interest rates, but it’s a bit hard for me to recollect. In 1980, I was 2 years old.

Whether you are someone who experienced those higher interest rates firsthand, or someone who arrived later on the scene, all of us have something in common: for the last 40 years, we’ve been conditioned to expect interest rates to fall. Moreover, from about 2010 to 2020 we also became awfully comfortable with interest rates at near-zero levels. I didn’t go dig up the actual data, but my hunch is most of the adults in this country joined the workforce during the last 40 years.  Some who began working in 1980 might even be retired by now. If you joined it around 2010, you’ve probably never thought of your savings account as an earning asset or witnessed a 30 year mortgage rate over 6%.

Everything abruptly changed in early 2022. When the Federal Reserve finally woke up to the fact that inflation was a real threat, the days of ever-declining interest rates came to an end. For the 2010’ers, the concept of inflation was a bit like the legend of bigfoot: you’ve heard about it, but no one had ever actually seen it. That extended period of declining interest rates allowed this country to do some amazing things. Specifically, borrowers were granted an incredible subsidy - largely to the detriment of savers and lenders. This subsidy allowed agricultural and business enterprises to invest in inventory, facilities, or equipment at increasingly accommodative interest rates. Inexpensive capital isn’t the only factor necessary to run a profitable business, but it certainly helps. Overall, ever-cheapening borrowing costs helped enhance economic growth in the United States for decades.

Evaluating the current economic landscape, it does appear the Federal Reserve’s interest rate policy is taking the edge off inflation. This takes us back to where this message started: what happens next? Well, just because I don’t know what interest rates are going to do, doesn’t mean I don’t have an opinion. I think interest rates will likely stay higher for longer. This belief is heavily influenced by the stubbornly tight labor market, the surprisingly resilient U.S. economy, and the sense that globalization is rapidly going out of fashion. Globalization is impossible to quantify but has likely helped keep a collar on inflation for a good long while. Most importantly, I think the Federal Reserve isn’t about to make a policy mistake in the opposite direction and will go to great lengths to ensure inflation is licked. It also makes sense for them to keep rates higher to provide breathing room in case the economy needs a kickstart sometime in the future.

That last paragraph was my CNBC business news anchor audition. Again, only my opinion, for what it’s worth. By my calculations, it’s worth about a nickel.

Final Thought: If you’re a saver, I commend you for your patience. You’ve waited a long time to have your day in the sun.

Final Final Thought: I worked with a guy who swears he hit bigfoot with his car. Never got around to asking him if his insurance policy covered that.  

Good Luck and Happy Hunting,

The first inkling that Father Time might be hot on my heels occurred about a month ago. I was catching myself leaning back whenever I began reading something, so I decided to go to the optometrist and get my eyes checked out. After the standard, “which is better: one or two, two or three” rigamarole, the doc declared that I needed reading glasses. Yep, cheaters. It must have been the sour, and perhaps squinty, look on my face because he could sense the disappointment resulting from his diagnosis. “It’s pretty common when you get to be about 45”, he said. Then asked, “Hey, how old are you anyway?” I explained that I’d been 45 for about two months. “Well, there you go”, he said in the most irritatingly sagacious manner. Time and tide wait for no man - especially those who burn out their eyeballs staring at computer screens, apparently.  

Later, while reading my way down a rabbit hole, I came across the concept of a desired obituary. The timing couldn’t have been better as it coincided nicely with the little optically induced, mid-life crisis I had warming up in the bullpen. The notion behind the desired obituary is to write down how you would want it to read, then figure out the best way to live up to it. Interesting idea - what would I want mine to say? Probably something to the effect of: He was a good father to his two sons, devoted spouse to a loving wife, admired by friends, gave more than he took, respected member of his community, and well regarded in the banking industry. Plus, he had the eyesight of an eagle.

Obviously, everybody would write their own obit differently. However, I suspect some variation of those common themes would pop up in a lot of them. What’s more interesting about working through this exercise is recognizing which aspects of our lives that don’t make it into the final draft. Absent would be just about anything related to financial success or the amassment of worldly possessions. There would be no detailed inventory of houses, or cars, or boats, or jewelry, or airplanes. I can even say with a high degree of certainty that nobody is going to mention the size of their bank account or the performance of their portfolio of stocks and bonds. The line between what folks have or think they need, and what they truly aspire to be is often very blurry. 

With that last point in mind, I’ll put my banker hat on for just a moment (but only a moment). As bankers, we interact with a lot of people. All at different stages of life, and each one facing unique financial conditions. We witness successes as well as mistakes. I’m not even going to try and define what either of those looks like because both are debatable, and completely subjective. I will, however, try and point out a few things to consider that may help you unblur your life a little bit:

1. The fear of missing out (FOMO) is a hazardous attribute in general, but especially where financial matters are concerned. Many examples abound, but a recent one is the cryptocurrency craze. As the saying goes, just because your friend jumps off a cliff, doesn’t mean you should follow.   
2. Regarding #1, if FOMO is gasoline, then social media is a lit match. Remember you’re only seeing someone’s life through rose colored glasses.
3. I touched on this in January's message, but check the track record of anybody peddling forecasts and predictions. If you can’t find it, run.
4. Remember that admiration and envy are not the same thing.  

This looks like a good spot to wrap up; especially since this message is about two months past due. Hopefully some of these concepts resonate and assist with identifying where real priorities exist – and just as important - where they don’t. Because my next message will likely be just as tardy as this one, I’ll take the time now to wish everyone a happy holiday season, and good fortune in the final quarter of 2023.   

Final thought: Many of you may have noticed by now, but I’m veering away from the standard president letter format. We’ll see how far this goes.

Final Final thought: If you’re someone who thirsts for the same old boring banking newsletter, then please check out my prior letter, where I commissioned a robot to write a perfectly acceptable one.

Happy Hunting,

Tom Moran 

President & CEO 

I recently ice-skated my rig over to Eugene, Oregon to attend an Oregon Bankers Association conference. There aren’t many of us left; Community Bank is one of only 15 banks still chartered in the State of Oregon. I pointed out to the folks running the show that based on the current rate of banker-attrition, we could probably save everyone a lot of time and money if we just hold the conference in the back room of a Denny’s somewhere. They were not amused.

A conference full of bankers is exactly as fun as it sounds. The agenda is generally chock full of topics like “The Future of Debit Cards and Faster Payments”, and “The Common Pitfalls of Data and System Integrations”, and of course everyone’s favorite, “A Frank and Candid Discussion with your Bank Regulator”. Usually wedged somewhere between these edge-of-your-seat presentations, is a timeslot reserved for an economist. The economist’s role is to rehash every economic phenomenon and obscure data point from the prior year, then conjure up a fresh set of predictions and economic forecasts for the year to come.

During the Q&A portion of this year’s economic presentation, folks from the crowd asked several questions: Will the economy fall into a recession in 2023? What will happen when the war in Ukraine ends? Has inflation peaked?  What will be the impact of the 2022 elections going forward? What will the price of fuel look like next year?  How much higher will interest rates go? Will China invade Taiwan? Will the stock markets go up or down? The economist offered up answers to as many of these as time allowed, then it was off to lunch. By the way, Heaven help the poor soul scheduled to present to the snoozing audience during the after-lunch sessions.     

On the trip home, I had plenty of time to ponder all these questions between periods of whitening my knuckles on the steering wheel. By the time I coasted past Troutdale it occurred to me that nobody in that room (myself included) had any idea what was really going to happen, when it was going to happen, and what the potential outcomes would be. While there presumably weren’t any authorities on foreign or political affairs in the assembled group, there were certainly quite a few folks well versed in finance and economics sitting in the room. Nevertheless, even the opinions conveyed on these matters didn’t seem any more compelling than those of others expressed. And this was a room full of bankers - finance is what we do!

Everyone is bombarded with forecasts and predictions every day, yet very few of them are of any actual use, much less consistently reliable over time. Consider the talking heads on a news channel confidently telling us when inflation will subside, or the guys picking the winners during an NFL pregame show, or just the 10-day weather forecast. In each of these scenarios, a simple coin-flip would produce similar results. Add the element of time, and I suspect the coin may have a superior track record. One of the best examples of this in recent times is the forecasting of interest rates. Roll back the calendar to September 2021. At that time, a market poll of leading economists, as well as members of the Federal Reserve, predicted that interest rates would increase by about 25 basis points during 2022. What actually happened? Interest rates skyrocketed by 425 basis points during the year. Not only is that a big miss by alleged market experts, but it’s also a major whiff by the Federal Reserve – the governing body responsible for moving the interest rates.

The problem is the future is unknowable. Therefore, assumptions based on what may or may not happen have to be made in order to formulate even the most basic prediction. These assumptions can break down pretty quickly once applied to something as complex as, say, forecasting trends in global inflation. There are just too many factors that must be incorporated into these forecasting exercises to make them remotely coherent.

So, if forecasting is so hard to get right, why is it such a constant part of our lives? Personally, I think it’s because people are uncomfortable saying things like, “I don’t know”, or “I’m not sure”. It’s probably hard to get a paying job as a news anchor, journalist, consultant, or doctor if your reply to every other question is, “beats me”. We’re conditioned to avoid these responses early on in life; imagine how far you’d get in grade school if you answered, “I haven’t the foggiest idea” on all your tests. Admitting that we don’t know something has an exceptionally bad reputation.          

It's a new year, and this is the time when forecasting and predictions frequently occur. If you are planning for the future, where are you getting your information? Have you ever checked back to see how often these sources were correct? Have you figured out which sources you should ignore? The evidence to answer these questions is generally difficult to find and in short supply. Which is curious considering the vast number of people involved in producing it.     

I’ll end with this: not knowing something isn’t a sign of weakness or failure. On the contrary, it’s an excellent opportunity to start developing a stronger decision-making process. The hardest part is admitting it. Mark Twain summed it up best when he said “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”     

Final thought: If you happen to be at a Denny’s and see a room full of bankers in the back, swing over and I’ll spring for your Moons over My Hammy.

Good luck and happy hunting,

Tom Moran
CEO/President

As I write this, the talking heads on a business news channel are informing viewers that the rate of inflation in the United States jumped up to over 9% during the month of June. This marks the highest pace for inflation going all the way back to November of 1981. Simply defined, inflation is a broad increase in the price of goods and services in an economy, accompanied with a fall in the purchasing value of money. It's hard to ignore, because it's everywhere you turn: fuel, diapers, furniture, microchips, even hot dogs. The eye-watering prices at the pump are probably most evident, but I want to dig a little deeper into the pricing behavior on that last item - hotdogs. It's a topic that's a bit more on our minds around here at Community Bank, because after a 2-year hiatus we're dusting off the grills and getting the Customer Appreciation Barbeques at our branches back on track (click here for BBQ dates).

About hotdogs and inflation. It’s hard to believe, but I’ve worked for Community Bank for a little over 20 years now. This got me thinking - what was the cost of a hotdog when I started at the Bank in 2001 compared to 2022? Luckily there's this little contraption called the Internet where the answer to this most critical question resides. According to Mr. Google, the average price for hotdogs in 2001 was $2.27 per lb. Fast forward to 2022, and it’s now $5.22 per lb. That's an increase of 130%! To throw a few more numbers at it, competitive eater (yes, that’s a job) Joey Chestnut recently won the 2022 Nathan’s Hot Dog Eating Contest by eating 63 hot dogs in 10 minutes. At 10 hot dogs per pound, that works out to a cost of $32.88 in 2022, versus $14.30 in 2001. Imagine if he showed up and did this at all 10 of our Customer Appreciation BBQ's. Consequently, he won't be getting an invite.

Many folks have little experience in facing the challenges created by elevated levels of inflation. Afterall, the country hasn’t experienced this in 40 years. While it impacts everyone differently, here are some general recommendations that will hopefully help take the edge off. 

First, put together a budget. For several of our customers, this can be a difficult exercise, and an even harder one to stick to once it’s completed. Nevertheless, in an economic environment where costs are skyrocketing, a budget can be crucial in identifying where expenses are increasing, and to support spending decisions. If you need help getting started, check out our new My Financial Toolkit service that we offer through our online banking platform. Alternatively, just give us a call and we’d be happy to assist.

Second, try to pay-off your floating (variable) debt. What in the world? Isn’t Community Bank in the business of lending money? Of course we are, but we’re also in the business of helping our customers make smart financial decisions. If you haven’t noticed, interest rates have gone up. Fast. That means many debt instruments tied to a variable rate – credit cards, HELOC’s, lines of credit – are much more expensive now than they were even a recently as a few months ago. Again, everyone’s financial situation is different, but prioritizing the payment of your variable debt over your debt with fixed interest rates should get a hard look right now.

Lastly, maintain a good old-fashioned savings account. Honestly, this is a good idea even during non-inflationary times. I know, easier said than done in an environment where inflation leaves a painful mark. However, setting aside money now will help to cushion any future unexpected expenses or other painful financial situations.    

This country will likely feel the effects of inflation for a good long while. With that said, following a few of these time-tested practices will help you navigate through it. Hope to see everyone (except Joey Chestnut) at our BBQ's this summer. The rainy weather appears to be over for now - get out there and enjoy some sunshine.

Tom Moran

CEO/President