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Business Strategy

State of the Economy and Commercial Lending

Bill Roen
Jan 17, 2023

As a Regional Manager for the Lending and Deposit Solutions team at Jack Henry™, I’m tasked with working with our financial institution clients across the U.S. to help them grow revenue, reduce risk, and attract and grow commercial accountholders. Another part of my job is to meet with the financial institution’s lending executives and discuss successful strategies to help them fund working capital lines of credit.

A few questions that never fail to come up include:

“What are other financial institutions doing?”

“What are you seeing out in the market?”

Because nearly every lending executive I meet with asks these two questions, I thought it would make sense to answer the questions based on what I saw last year and what I expect to see in 2023 from both a financial institution perspective and an accountholder perspective:

Q1 2022: GDP Growth Was -1.6%, Prime Was Raised to 3.5%, and Inflation Averaged 7.94%

From a financial institution perspective: Early last year, deposits were high and loan demand was up in many banks and credit unions. Increasing consumer and commercial loans was a primary objective. On the commercial side, requests for additional working capital lines increased because many businesses recently used up what remained of their Paycheck Protection Program (PPP) funds. The housing market was hot but financial institutions were seeing less demand for commercial real estate (CRE) loans. Inflation was also becoming a big concern.

From a commercial accountholder perspective: At this time, businesses were also experiencing growth in sales and needed working capital to be able to keep up with demand and order fulfillment. Business owners felt the constraints of accounts receivable (A/R) turns. Efficiency was going down as payments were extended by customers which caused an even greater reliance on working capital from financial institutions.

Q2 2022: GDP Growth Was -.6%, Prime Was Raised to 4.75%, and Inflation Average 6.21%

From a financial institution perspective: In a continuation of Q1, working capital and commercial loan demand increased in Q2. Additionally, the housing market was still hot but concerns over inflation, increases to the prime rate, supply chain issues, and CRE loan demand became an urgent concern in financial institutions.

From a commercial accountholder perspective: The great resignation made finding and retaining employees to support growth a challenge. Supply chain issues and the rising cost of goods negatively impacted many businesses. This had a lasting effect on cash flow causing A/R turns to creep out and requiring more working capital from financial institutions.

Q3 2022: GDP Growth Was 2.9%, Prime Was Raised to 6.25%, and Inflation Averaged 8.33%

From a financial institution perspective: Because of inflation, supply chain issues, and rising rates many expected loan demands to diminish. Moreover, the CRE market remained soft while rising concerns regarding a possible recession caused credit issues. In addition, financial institutions were looking to put more structure around working capital lending as accountholders were seeking larger lines of credit.

From a commercial accountholder perspective: Growth opportunities were sustained but many businesses had slow A/R turns, supply chain issues, increased input costs, and hiring and retention challenges. Accountholders still relied on working capital support from their financial institutions.

Q4 2022: Expected GDP Growth of Around 1%, Prime Was Raised to 7.5%, and Inflation Has Averaged About 7.5%

From a financial institution perspective: Concerns over stressors of inflation and higher rates are causing further credit concerns while the need for deposits is creeping into conversations. Furthermore, financial institutions are still looking for more structure for working capital deals.

From a commercial accountholder perspective: Increased accountholder requests roll in for working capital lines or larger working capital facilities from their financial institutions. In 2023, inflation may slow but the Fed believes it will take a few years to reach central bank's target of 2 percent annual inflation. GDP is expected to grow 1.6 percent in 2023. And, according to the Fed’s current forecasts, the Prime Rate will continue to increase. Businesses are likely to rely on financial institutions to help them survive a potential recession.

Prepare to serve these commercial accountholders by exploring commercial finance solutions – beyond traditional lines of credit – and services to meet their needs.

As we work with financial institutions on 2023 planning, we turn to the Jack Henry 2022 Strategic Priorities Benchmark Study to understand what financial institutions are looking for help with from their technology provider. Study results indicate 67% of CEOs said their top strategic priority in the next two years is growing loans.

There are many ways the Jack Henry team can partner with your financial institution, here are a few things that stand out as ways we can help drive success in 2023 and beyond:

  • Grow commercial and industrial loans to offset a soft CRE market in 2023
  • Acquire and retain commercial accountholders
  • Grow loans effectively and efficiently without adding significant overhead to Operations
  • Increase digital lending offerings to meet the expectations of a changing market
  • Leverage data to increase accountholder insights and mitigate risk

We exist to help community and regional financial institutions compete effectively and deepen relationships with accountholders.

Jack Henry is here with strategies and solutions to help you grow your commercial banking offerings. Contact us anytime here.

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