Banks in Michigan entered 2023 in good shape financially and positioned well even if the economy enters into a recession as predicted later this year.
Data from federal regulators through the fourth quarter of 2022 show Michigan banks continued to record good earnings, strong credit quality and low loan losses as interest rates rapidly increased throughout the year and slowed the economy.
Banks today “are in much better condition than we were going into the last recession” with “no big bubble in our state that I think is going to burst,” said Michael Tierney, CEO of the Community Bankers of Michigan.
Nearly “every single credit metric that you could look at” is in good shape right now, Tierney said. Non-performing loans and loan delinquencies are “really low” and loan-loss reserves at lenders are “really high.”
“Michigan banks are very well positioned for whatever comes our way. The difference between where they are now and where some banks were before the last recession is much improved,” Tierney said. “Banks have more capital, more loan loss reserves, and more liquidity than they had going into the last recession. The credit quality stats for year end 2022 were exceptional for the industry with very minimal loan losses and very minimal delinquencies.”
That positions banks in the state “as well as they can be” compared to past periods when the economy was headed toward a recession, Tierney said. While there are always outliers, bank underwriting “has been very solid during this whole economic cycle so there will not be big losses from poorly underwritten loans” that caused deep problems for some banks in prior downturns.
Still, there are some concerns to keep an eye on, including “rapidly changing liquidity as there is less money in the system” as the Federal Reserve runs down its huge balance sheet, “which is taking money out of the economy,” Tierney said.
Office building valuations and vacancy rates also “will continue to be an area that will be closely watched and may be soft for a while,” he said.
The 79 federally insured banks in Michigan collectively had just 0.01 percent in net loan charge-offs at the end of 2022, a level that was consistent with 2021 and well below the 0.11 percent they reported at the end of 2019 before the pandemic, according to the FDIC’s quarterly state profile that came out this month. Non-performing assets as a percentage of total assets at the end of 2022 were half of what they were a year earlier, and about a third of the level from 2019.
The percentage of loans that are 30 days to 98 days past due also was well below prior years, according to the FDIC data for Michigan.
With many economic outlooks predicting a mild U.S. recession starting by midyear or in the latter half of 2023, banks should maintain a solid footing, Tierney said.
“You’re going to be fine if you’re running a business,” he said. “If you have growth opportunities, the banks are going to be able to lend to you to be able to take advantage of those growth opportunities. And if you run into some trouble, the banks are well-capitalized enough to be able to work with you. They have very few troubled debts on their balance sheet now, so they are able to be a little more flexible.”
However, given the present economic outlooks, Tierney has noticed some lenders beginning to take a more cautious approach to lending. Credit demand also “is really starting to soften up,” as some businesses hold off on investments and credit requests until they “know where things are going” with the economy, he said.
As well, a prolonged recession of 18 months or more could cause regulators to get tougher and tighten up on banks if loan losses or non-performing loans accelerate and get too high, he said. Banks would then have to tighten up accordingly, Tierney said.
While banks presently are in a “good spot,” he said, “we do expect that there will be some issues over the next 18 months.”
Nationally, the American Bankers Association said the FDIC profile for the fourth quarter indicates that the “banking industry remains well-capitalized and highly liquid. That strength will help the nation’s banks weather potential headwinds as inflation and geopolitical risk persist.”
FDIC Chair Martin Gruenberg said in remarks accompanying the Feb. 28 release of the quarterly banking profile that “key banking industry metrics remain favorable at this time.”
The Community Bankers of Michigan expects a mild recession in 2023, “but the problem is you can never predict with any accuracy how deep or how long a recession turns out once the economy starts to slide,” Tierney said.
“If the Fed does begin to ease off rate increases by year end, then we will likely see a mild and shorter duration recession,” he said. “If inflation turns out to be more persistent and the Fed has to move rates higher for longer, then I think you see a much more impactful recession and perhaps a longer downturn.”