Tag: loan

The question of the quarter: Are we entering a recession? One key indicator of a future recession can be inflation, which hit a 40-year high this year.

Between June 2021 and June 2022, the consumer price index increased by 9.1%, according to the U.S. Bureau of Labor Statistics. One of the first tangible signs for many consumers were gas prices at the pump, which exceeded $5 a gallon earlier this year, although prices dipped to a statewide average of $3.45 per gallon in Virginia by mid-September.

The Federal Reserve Bank has also taken actions to cool inflation this year, enacting two 0.75-point interest rate hikes in a row, after two years of 0% interest rates during the pandemic.

The Fed did this to break the “grip of inflation,” as Atlantic Union Bank CEO John Asbury puts it, designed to create “demand destruction” for products with soaring prices.

In late September (after this issue went to press), the Fed’s voting body was set to meet, with some traders predicting that it could raise interest rates again by as much as a percentage point.

Although the word “recession” strikes fear in the hearts of Americans who suffered losses during the 2008 Great Recession, the technical definition is two consecutive quarters of decline in GDP, which occurred during the start of the COVID-19 pandemic, as well as other periods throughout the past 25 years.

In a Henrico County town hall meeting in June, Richmond Fed President and CEO Tom Barkin said, “Historically, eight of the last 11 Fed tightening cycles have been followed by some sort of a recession.” He predicted that supply chain and labor shortage issues would subside in coming months. “That means inflation should come down over time,” Barkin said, “but it will take time.”

Nonetheless, Virginia businesses and bankers are keeping a watchful eye on their budgets as they plan for the end of the year and 2023.

“We’re in a little bit of new-ground territory,” says Brian Schools, president and CEO of Chartway Federal Credit Union, noting the combination of inflation and labor shortages in today’s market. “But I will tell you the loan volume has been really good of recent.”

This counteracts worries that rising interest rates would cause a slowdown in loans, both on the consumer and commercial side. What bankers have seen so far in the marketplace is bucking that logic.

“It’s an intuitively natural assumption that as interest rates rise, loan demand will go down,” says Virginia Bankers Association President and CEO Bruce Whitehurst. However, he notes, “loan demand is pretty good on the commercial side. Everyone’s looking for the potential of a slowdown but [we’re] really not seeing it at the moment.”

Strong commercial demand

Coming out of COVID, banks expected business would be a little soft, says Cecilia Hodges, M&T Bank’s regional president for Greater Washington and Virginia. But her bank has seen just the opposite.

“We’re having a really strong year in all areas of our business right now,” she says. “Demand for commercial loans is very strong. Business banking activity has been very strong.”

In fact, one trend that has emerged in commercial loans has been that more businesses are borrowing now to expand their inventories because they believe prices may continue to rise with inflation — or they’re trying to avoid even higher interest rates in the months to come. More companies are also “doubling down” by making capital investments, considering acquisitions and growing their businesses, Hodges adds.

Truist’s commercial and middle-market clients remain “generally positive” about current economic conditions, says Thomas Ransom, the bank’s Virginia regional president, but there are also growing concerns about labor shortages and margin pressure amid rising interest rates and higher input costs.

“Given all of this, we remain generally positive about our prospects for continued loan growth,” Ransom says. “At the same time, we acknowledge that there’s increased uncertainty associated with the softening economic environment, which may cause loan growth to soften, but currently we’re continuing to help our clients understand the marketplace and their options.”

In the University of Michigan’s U.S. consumer sentiment survey for August, 55.1% of people polled felt positively about the economy, marking a three-month high after June’s low of 50%, and consumers predicted prices to increase at an annual rate of 3% over the next five to 10 years.

Asked whether now is the right time for businesses to take out loans, Hodges says it depends on how a particular company is faring in the current economic environment. Some businesses thrived during the pandemic, adopting new technologies and figuring out ways to increase productivity and demands for their products and services. Other businesses, though, have felt more pressure to increase wages and pricing, she says.

“For some of those companies, it’s been a struggle for them, and it’s been hard for them to spend money and make investments,” Hodges says.

Ransom says Truist has seen its corporate finance and mergers and acquisitions (M&A) business pick up this year.

“We are actively having conversations with our clients to understand how inflation and rising rates impact their businesses so that we can work with them on ways to strengthen their companies’ positioning for any down cycle,” he says.

Atlantic Union has also seen some commercial clients rely more on cash reserves when investing in new inventory.

“We’re starting to see some borrowers use more cash instead [of taking out loans],” says David Ring, an executive vice president and commercial banking group executive with Atlantic Union Bank. “For equipment purchases in particular, [clients are] starting to use cash rather than financing or even vendor financing because it’s a more productive use of their cash.”

On the consumer side

When looking at consumer loan demands, two areas have become sticky for low- to middle-income consumers in particular: mortgages and car loans. The two-point increase in interest rates since the start of the year has caused a slowdown in home sales and mortgage applications, says Ryan Price, chief economist with Virginia Realtors.

In June, home sales dropped by nearly 19% statewide compared with June 2021, Virginia Realtors reported, affecting the whole state, with the largest declines in the Shenandoah Valley, the Northern Neck, the Eastern Shore and suburban Richmond and Northern Virginia.

Higher interest rates are “complicating a lot of potential buyers’ — and even sellers’ — budgets,” Price says. “It’s adding a lot of cost to the mortgages, and it’s also reducing their purchasing power.”

Credit unions in particular may start to feel the effects of a decline in home loan applications. Mortgage lending typically accounts for about 50% of all credit union loans, including first mortgages, refinances and home equity lines, says JT Blau, chief advocacy officer of the Virginia Credit Union League, which represents 108 member-owned credit unions.

“We’re hearing from a lot of our credit unions that originations or new mortgage loans have reduced fairly quickly,” he says. “This is due to the rise in interest rates and home prices. It’s making that monthly payment harder and harder to obtain for people.”

Steven Yeakel, president and CEO of the Virginia Association of Community Banks, says bankers are still watching how interest rate hikes could affect consumer loan demands for the rest of 2022 and 2023.

“Certainly, what’s going on now does not compare to the concerns over the economy in 2019 and 2020 or the concerns in banking-customer relationships and the challenges hitting consumers primarily,” he says. “[Community banks are] just very carefully examining the data that’s there and staying in close touch with borrowers and ready to make the adjustments as they present themselves.”

Hodges notes that M&T’s homebuilding clients have also reported fewer people visiting model homes or looking to purchase. Plus, the construction of new homes is slowing down because of affordability issues, mostly around mortgage rates, Asbury adds.

On the commercial real estate side, Atlantic Union is seeing large real estate sales starting to slow down, but that can work out well for banks, Ring says. “That stuff is staying on our books longer, which is really good for us and seeing our balances be more stable.”

Similarly, refinancing has slowed down since interest rates rose above zero, VBA’s Whitehurst says. In August, the national Mortgage Bankers Association reported that mortgage applications and refinancing fell to their lowest levels in 22 years.

“If someone is interested in refinancing their home, they might be now at a rate that is higher than what they currently have, and that can make that not a good option for people,” Blau notes.

The mortgage slump has not carried over to auto loans, though, at least in the state’s credit unions. As of the first half of 2022, auto loan balances grew 12%, Blau says, and if the pace continues, it would be the biggest year for auto loan growth since 1994. In Virginia, according to a Federal Reserve report released in August, the average auto debt per capita was $5,210.

However, Blau notes, there’s still plenty of uncertainty in the vehicle market, from microchip disruptions to fluctuating gas prices.

“Inflation plays a huge part in the household budget,” he says. “Our members are weighing gas, car payments, all these factors, along with all the other elements of a budget. Finding a car payment that works can be difficult.”

Credit card crunch

Although some consumers may be wary about taking out loans, they’re increasingly leaning on credit. In the second quarter of the year, credit card balances jumped by 13%, the biggest year-over-year spike in 20 years, the Federal Reserve Bank of New York reported.

“People are tapping into credit to cover for some of those inflationary pressures,” Schools says. M&T is also starting to see balances creeping up on consumer credit cards, Hodges says.

“We’re seeing a little bit of the more moderate-income individuals and families are getting stretched thin due to inflation, and they’re starting to rely on credit for their needs,” she says. “The higher-income individuals and families are still sitting on a fairly nice cash cushion, and they really haven’t been impacted.”

What will be important to watch is credit scores, Blau says, because those heavily impact consumers’ ability to get loans with desirable interest rates. Asbury says, though, that Atlantic Union has seen an absence of credit defaults or other payment problems.

“As a bank, one of the things that is the best indicator of health is what are loan losses and credit defaults doing?” he says. “And the answer is they’re not doing anything.”

Another benchmark that banks will need to keep an eye on as interest rates continue to rise is deposit levels. In September, the Federal Deposit Insurance Corp. (FDIC) reported that deposits fell 1.9% to $19.6 trillion in the second quarter of the year, the first time that deposits have declined since 2018, although the report notes that stimulus money during the pandemic prompted “unprecedented growth” in deposits.

In late 2020 and 2021, “we all lived in an excess deposit world, perhaps from stimulus money,” Schools says. “Well, that has all subsided and now it’s about [banks] marketing for deposits.”

Hodges notes that competition for deposits was “pretty fierce” when interest rates were at zero, and now is even more so.

“In this rising rate environment, [deposits are] extremely valuable to banks, and it’s also opened up an opportunity for businesses to actually shop for rates,” she says. “All banks are hungry for deposits right now.”