Market Information

What’s New?

Posted on January 18, 2023 Published by

Well, it is 2023! What’s New? The good news is that we made it through 2022. Unfortunately, our starting point for 2023 has some strong headwinds when compared to 2022. The following chart tells quite a story of the ride that was 2022. It will take serious attention by all commercial credit professionals during 2023 to deal with the new reality.

INDEX 2022 START 2022 END
Dow 36,321.59 33,123.77        (8.9%)
S&P 4,766.18 3,839.58          (19.4%)
NASDAQ 13,201.98 10,466.30        (33.1%)
Fed Funds 0.25% 4.5%
Prime Rate 3.25% 7.5%
10-year Treas 1.52% 3.88%
30-year mortgage (avg) 3.22% 6.42%
Unemployment 4.0% 3.7%
Labor Participation 62% 62.3%

Inflation rate for the year was 7.7% (avg).

Labor Participation Rate

The labor participation rate deserves a little more “color.” The pre-pandemic rate in January 2020 was 63.3% so, two years later, we have not returned to pre-pandemic levels. Also, it is very difficult to determine how many people have “dropped out” of the labor market and quit looking for work due to generous government benefits and high cost to get to work due to significant increases in fuel costs.

Another area of concern is the increase in consumer debt levels. As of the third quarter of 2022, mortgage balances were up $1 trillion dollars from the previous year to $11.67 trillion. Credit card balances were up $38 billion in 2023, posting a 15% year-over-year increase; the largest in 20 years. Further, according to creditcard.com, credit card interest rates hit record highs with retail store cards averaging 26.72% and general-purpose cards hitting an average of 22.6%. Auto loan balances were up, as well, by $22 billion. It would appear that given the increased debt levels, dwindling value of savings, and significant interest rate increases (past and future), the capacity of the consumer to move the economy forward is in doubt.

Predictions

Albert Einstein stated that the definition of insanity is doing the same thing over and over and expecting different results. I think an appropriate corollary to this insanity statement is that the people who have created this economic misery are the same people in charge of solving it. I have my doubts! Not surprisingly, the vast majority of economists at 23 large financial institutions surveyed by The Wall Street Journal predict that the United States will fall into recession in 2023 and that millions of Americans will lose their jobs (Tom Ozimek, January 4, 2023, “2023 Spells Big Trouble for US Economy, Majority of Large Banks Report”).

Clearly commercial credit and lending staff will need to focus on any early warning signs in the portfolio, including delinquencies, covenant defaults, and delayed financial reporting. New loan requests should put increased focus on financial projections, as the past is unlikely to be an accurate representation of the future as we come into the new year. An analysis of the borrower or prospective borrower’s customer base is appropriate, as not all industries have felt the same level of pain from inflation, labor shortages, wage increases, and supply chain issues.

Effects

Be alert to clients that may have “products” that have a high potential for “substitutes.” As an example, as the family budget gets tighter due to higher costs, dining out options may shift. Instead of going to a fine dining restaurant, they may go to a casual dining venue; casual diners may opt to go to quick service; and so on. Travel and hospitality are likely to be hit hard again as people reduce vacation travel and businesses reduce offsite convention, training, and/or award travel. Ripple effects in the investment real estate arena may include higher vacancies, shorter renewals, and certainly higher interest rates as loans mature putting additional strain on cash flow.

Avoiding surprises requires forward thinking and increased diligence on credit reporting. In addition, targeted portfolio loan reviews based on higher-risk industries can also help your institution get out ahead of potential problems. Certainly, the professionals at Enlighten Financial can assist in this undertaking in addition to helping in design of remedial strategies. Or perhaps there is a need to bring in expertise for a specific underwriting engagement. Maybe because of staffing shortages you are falling behind in completing critical annual reviews. We can be of assistance.

What’s New?

Each year the calendar tells us it is a new year. So What’s New? It appears that 2023 will present some risks that have not been present in the economy in some time. There is a lot that is new. It will not be the year to rest on doing the same thing over (and over again). It will be a good year to schedule your loan review with Enlighten Financial!

 

Richard Rudolph is Senior Consultant at Enlighten Financial, a specialized consulting firm that focuses on loan review and risk management services to community banks and credit unions. Enlighten Financial has made it our business to shed light on the complex financial landscape. We lead clients in the right direction. We work with financial institutions and other providers to mitigate risk. To talk to Rick directly, please call: 920.445.8133.

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— Meghann Kasper, Chief Credit Officer, Bank First
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— Bill Beardsley, President, Michigan Business Connection
“By questioning some of our methodologies, Enlighten has helped us say, ‘Okay, this is where we need to train staff better and focus on so that they understand what they're doing better.”
— Robert McPherson, VP of Risk Management, Peoples State Bank
“The organization of the communication — before, during, and after the reporting process — was certainly better with Enlighten than what I've experienced with a lot of auditors.”
— Bill Beardsley, President, Michigan Business Connection
“The staff at Enlighten have been available for questions, in addition to the engaged work that they do. They've been very helpful as a resource beyond the major audit.”
— Meghann Kasper, Chief Credit Officer, Bank First
“Enlighten gives us a very good second set of eyes on our transactions. They're not afraid to challenge us on some of the work that we've done, which is what is needed. I don't need to pay somebody to tell me I'm good, I need to pay somebody to tell me where I've made mistakes.”
— Robert McPherson, VP of Risk Management, Peoples State Bank
“Enlighten provided industry best practices that weren’t going to show up in an audit report. They would say, ‘Hey, I noticed you do this. This is really unique, you do a really great job of it.’ And then they might add, ‘Some other clients that I have are doing something like this.’”
— Bill Beardsley, President, Michigan Business Connection
“By questioning some of our methodologies, Enlighten has helped us say, ‘Okay, this is where we need to train staff better and focus on so that they understand what they're doing better.”
— Robert McPherson, VP of Risk Management, Peoples State Bank
“The organization of the communication — before, during, and after the reporting process — was certainly better with Enlighten than what I've experienced with a lot of auditors."
— Bill Beardsley, President, Michigan Business Connection