Commercial lenders head toward the end of 2022 in an uncertain economic environment with rising interest rates and predictions for a mild U.S. recession in the second half of next year.
Economists generally expect the Federal Open Market Committee to increase interest rates at least twice more — in December and in early 2023 — to address inflation that’s running at 40-year highs.
Bankers say commercial lending remained strong through the third quarter and into the fourth. Many banks have registered double-digit annualized growth rates this year for commercial lending, although bankers have begun to see some easing in loan demand in the market because of the slowing economy and higher interest rates.
“It wouldn’t say it’s fallen off, but you can feel softness in the pipeline,” said Mike Chaffin, senior commercial banking executive for Fifth Third Bank who covers much of the state outside of Detroit and Ann Arbor. “We still have volume, but you can definitely see just a little bit more caution. Basically, measure twice and cut once, versus before where it was a little easier process of getting to a decision for most of our clients.”
Chaffin describes 2022 as “a tale of two halves” as Fifth Third “got an incredible running start in the first half.” The present fourth quarter will “be OK, but not great,” as “we see the credit markets tightening and we see our clients tightening the purse strings as well,” he said.
“Before we started seeing some of the inflationary pressures, it was a really robust market,” Chaffin said. “It’s still a good market, albeit we are starting to see a little more strain in credit and we’re obviously seeing many of our clients and prospects that are still struggling with labor costs and supply chain. Throw inflation in there and you have strike three. It’s a challenging market.”
Across its 10-state footprint, the Cincinnati, Ohio-based Fifth Third grew commercial loans 13.1 percent to $75.74 billion from the third quarter of 2021 to the third quarter of 2022. From the second quarter to the third quarter of this year, commercial loans grew 1.8 percent corporatewide.
Fifth Third’s commercial loan growth in West Michigan has “done a little bit better as far as percentages go,” although it’s “not terribly different,” Chaffin said, who added that much of the growth has come from new clients.
“This year is fine. I expect we’ll be a little softer next year, but I don’t expect it to die on the vine. If we can get inflation under control, we’ll see businesses wanting to move again,” Chaffin said.
Leaders at other banks in West Michigan describe the present lending environment similarly. They describe strong or solid growth through much of the year — driven by business expansions, capital equipment purchases, and mergers and acquisition — with recent easing from high inflation, rising interest rates and a slowing economy.
Even so, credit demand at Wells Fargo “is still very active and there’s a lot of appetite” for commercial loans to finance expansions and capital equipment, said Charles Lott, the bank’s senior vice president and commercial banking leader in Grand Rapids.
“Business is pretty good, (although) it’s certainly shifting a little bit in the last month or two with a lot going on” as consumer demand begins to wane, Lott said. “We feel good about where we sit in the West Michigan market. We’ve been through cycles before.”
The present combination of factors in the economy has begun to affect loan demand in certain areas. Lenders specifically point to the commercial real estate sector and M&A as beginning to feel some softening in demand.
“As money gets more expensive, sometimes the numbers don’t work at the higher interest rate,” Lott said.
Likewise, commercial lenders say they’re beginning to see commercial real estate clients delay projects because of high inflation, combined with the high cost of materials and labor.
“Some of the economics on the projects just aren’t hitting the metrics, so we’re seeing some of the new construction projects being tabled. I think that’s pretty consistent out there,” said David Quade, regional president in West Michigan for Michigan City, Ind.-based Horizon Bank.
Horizon Bank has been having a “great” year for commercial lending in West Michigan with steady deal flow, Quade said. In its third quarter earnings report, the bank said commercial lending grew 13.8 percent year-to-year, and 7.2 percent from the second quarter to the third, across its footprint in Michigan and Indiana.
Horizon’s West Michigan growth has been consistent with the corporate rate, Quade said. Part of the growth in the region has come from acquiring 14 offices in the central and northern Lower Peninsula in June 2021 from the former TCF Bank following its merger into Huntington Bancorp Inc.
A lot of the growth has also come from clients refinancing existing debt, said Quade, who expects commercial lending to ease in 2023 as the economy slows with rising interest rates.
“It’s inevitable the economy’s going to slow,” he said. “The question is: How long and how soon?”
University of Michigan economists last week projected a mild U.S. recession in the second half of 2023 with 0.3 percent Real GDP growth in the first six months followed by negative 0.8 percent from July to December. The U.S. should then return to 0.8 percent Real GDP growth for all of 2024 as the Federal Reserve eases monetary policy.
Even with the rise in rates and inflation through 2022, Kalamazoo-based First National Bank of Michigan has been “having a really good year” with core commercial loan growth of 13 percent, said President and CEO Dan Bitzer.
FNB’s pipeline for commercial loans “continues to be very strong” going into 2023, said Bitzer, who credits federal economic stimulus and infrastructure with driving activity.
Despite the economic headwinds, “everyone is cautiously optimistic,” although “we’re seeing a slowdown across the board, but no one’s stopping. But there is a little bit of a pause, a little bit of a slowdown,” he said.
One negative has been slowing construction projects with inflation and material costs “going through the roof,” and interest rates rising, Bitzer said. Banks should feel that slowdown in 2023 and 2024, he added.