Lenders head toward spring expecting further hikes in interest rates and with increased prospects for a mild economic recession beginning later this year.
Those and other factors have commercial lenders taking a little closer look at loan requests and client financials, but they say they have not altered underwriting standards and continue to see solid loan demand, although it is softening in some areas.
Some lenders report they’re maintaining closer contact with clients, asking how they’re adjusting to the higher rates and preparing the businesses for an economic downturn that many economists are predicting. That includes double-checking cash-flow projections, giving a little more scrutiny to financial statements and balance sheets, and examining a company’s sensitivity to higher interest rates.
Phil Koning, president and CEO of Hudsonville-based West Michigan Community Bank, describes the approach as “open for business” while “probably being a little more diligent and more careful that we are doing business with the right people and the right businesses.”
“We want to make sure people have liquidity if they hit a slow patch and they aren’t right against the wall,” Koning said.
As with other commercial lenders MiBiz contacted for a perspective on the lending market, United Federal Credit Union has taken “a little bit more thorough dive into current and historical financials and trends,” said Tim Dyer, group manager for commercial lending across the St. Joseph-based credit union’s six-state footprint.
“Increased interest rates are tough on them, so we’re just doing a little bit closer monitoring, more phone calls, more site visits, making sure all of our borrowers have their plan in place, have an understanding of what rates might do and just making sure they are approaching this the right way and have the plans and everything in place that we think they need,” Dyer said.
Rick Dyer, Tim’s father who retired March 3 as the credit union’s market president, describes United Federal’s approach as proactive to keep “people from panicking” and ensure they “plan accordingly” for any economic downturn that may occur.
At a January outlook on private equity hosted by the Association for Corporate Growth in Grand Rapids and during a February roundtable MiBiz hosted on M&A, participants described how banks today are scrutinizing deals a little more and taking a more cautious approach than they have recently.
Many economic outlooks predict the U.S. will move into recession in the second half of 2023.
In their latest outlook last month, University of Michigan economists said they expect a “mild contraction” in the U.S. economy in the second half of 2023 as consumer spending wanes. Economic growth will “moderate” through midyear but remain positive at 0.3 percent for the first six months of 2023, then fade to a 0.1-percent contraction in the latter half of the year, according to an updated outlook by University of Michigan’s Research Seminar in Quantitative Economics.
Even as business remains solid now and credit quality stays strong, the economic outlooks have lenders reinforcing to borrowers the need to prepare for a downturn.
That’s a practice bankers say they’ve always followed. Some say they’re now giving it extra attention to ensure clients plan for a potential recession and sales decline.
“That’s just being a prudent business owner, being prepared for what might be around the next corner,” said Joel Rahn, executive vice president for commercial lending at Grand Rapids-based Independent Bank Corp. “If that’s a slowdown, know how you’re going to react if all of a sudden you start to see revenues drop by 20 percent. What does that mean for your business and what are the likely levers that you pull to make adjustments for it?”
Looking ahead, Independent Bank is “certainly not anticipating any repeat of the conditions that we experienced during the Great Recession” back in 2008 and 2009, Rahn said. “It’s hard to envision that kind of scenario.”
Independent Bank continues to have a strong lending pipeline, although there has been “a little bit of softening” in sectors such as commercial real estate that are sensitive to interest rates, Rahn said. He noted the quick rise in interest rates in the last year has led to delays or pauses in some projects.
“There’s still a lot of commercial real estate activity. We’ve just seen some slowdown with new product launches on the commercial real estate side,” he said. “Aside from that, the loan demand has been steady.”
Construction, real estate cools
Grand River Bank has seen the effects higher rates have had on the construction and commercial real estate industries, as developers slow projects, said Executive Vice President and Chief Lending Officer Mark Martis. He describes a “dip off” in commercial loan demand as borrowers pause expansion projects or capital purchases to “wait and see where things are at this summer.”
Like others, Grand River Bank is preparing for any downturn by “having more conversations with our customers,” and requiring more frequency in reporting and more “work-in-progress reports so you can get an idea of what their pipeline is heading into this year,” Martis said.
Martis and others say clients generally have been planning for a recession.
“You just need to be a little more careful, a little bit more guarded, and be more laser-focused on your due diligence,” Martis said he advises clients. “You just have to prepare, and if it doesn’t happen, fine. You just put your company in a healthier position.”
Businesses that have navigated through the pandemic and adjusted to higher labor and material costs, supply chain snags, high inflation and rising interest rates “have become a little more nimble and recognize the need to think strategically and forecast out and ask those ‘what if’ questions,” said Michael Sytsma, West Michigan president at KeyBank, which recently opened an office on downtown Grand Rapids.
Out of the pandemic and resulting economic turmoil, businesses have learned to better prepare for uncertainty and potential future shocks to the economy and markets, Sytsma said.
“I think a lot of our clients have actually gotten at that over the last three years as a result of the dynamics in the market,” he said. “A lot of companies went into COVID, which is nothing that they had planned for, and now they look at it and realize, ‘These things can happen so how do I prepare for the unexpected situations? How do I prepare for the black swan event?’ And they’re more readily doing that. Our interests are very well aligned.”
A semi-annual survey that PNC Bank conducted in February found that “resilient Michigan business owners appear to be defying predictions of an economic downturn later this year.” More than half of the owners of small- and mid-sized businesses answering the survey told PNC that they “feel highly optimistic about the prospects for their own company in the next six months despite remaining cautious about the national economy.”
A little more than a quarter of respondents were “highly optimistic” about the state economy and 23 percent felt the same way about U.S. economic prospects, according to survey results from PNC, which expects a mild recession in the second half of 2023. About one-third also said they were hesitant to take on debt right now and more than seven out of 10 had no plans to seek credit this year.
“I do think people are a little more cautious right now than they were before,” said Sean Welsh, regional president in Grand Rapids for PNC Bank.
Welsh emphasized that PNC has not changed how it underwrites risk to “build a company and a client experience that is consistent through the cycles.”
“We can’t be too aggressive when the economy is strong and then have to turn around and have to change our behavior when the economy is challenging because we have a responsibility to our clients to be a consistent source of capital,” he said. “The decisions that we make every day don’t change.”