Inflation, high interest, wary consumers set mood ahead of bank reports

The nation’s banks continue to struggle with preserving financial prosperity heading into 2024’s earnings season and forecasts indicate a gloomy start to first-quarter earnings reports before a more upbeat turnaround into 2025.

Top issues that have plagued lenders over the past couple of years won’t change much early this year: inflation and high costs will continue, elevated interest rates will persist while businesses and consumers cautiously approach borrowing.

Last week’s report that inflation is resisting the Federal Reserve Bank’s efforts to stem price increases could further dampen the outlook for this year, when many observers projected three rate cuts beginning in June. Those forecasts, however, are in jeopardy with rising inflation.

Arkansas banks are scheduled to begin reporting first-quarter earnings this week, with Bank OZK leading the way Wednesday afternoon followed by Home BancShares Inc. on Thursday. Simmons First National Corp. is scheduled to release financial results April 24.

Leading into the announcements, industry analysts at Stephens Inc. of Little Rock reported on projected earnings for the Arkansas lenders and the overall sector. Bottom line: a rough beginning before rebounding with more positive financial trends later this year and in 2025.

The Stephens team is projecting reduced profitability from 2023, net interest income declines in the first quarter before stabilizing, net income margins for the year will dip slightly then improve next year, loans will dip nearly a point and deposits also will decline. Loans and deposits will gain momentum next year, Stephens reports.

That will lead to an 11% drop in operating earnings per share this year and an improvement of 11% in 2025. Stephens also is predicting three rate cuts this year and two in 2025, which will end with a Federal Funds rate ranging from 4%-4.25%. Again, those projections were calculated before the inflation surprise last week.

Home BancShares is predicted to rise above the median and is expected to grow earnings per share by 1% above prior projections and deliver $1.85 in earnings per share this year. The Conway bank is forecast by Stephens to achieve earnings per share of $1.88 in 2025.

Bank OZK of Little Rock and Simmons of Pine Bluff are on the flip side, with both expected by Stephens to see earnings per share fall 1% below previous predictions both this year and next.

OZK is predicted to deliver earnings per share of $6.01 this year and $6.25 cents in 2025. Likewise, earnings per share at Simmons falls to $1.40 in 2024 and climbs to $1.72 next year.

For the sector, Stephens is predicting net interest margins will be at 3.23% this year, down from 3.35% in 2023, and improve to 3.34% in 2025. Margins have been dropping since peaking at 3.7% in the fourth quarter of 2022 in a post-pandemic high. Net interest income will drop to -0.1% this year and jump to

7.4% in 2025.

Loans will drop to 5% in 2024 from 6.4% in 2023 and remain relatively flat through 2025, finishing at 5.1%. Similarly, deposits are projected to decline to 3.3% growth this year, decreasing from 3.9% in 2023, and then bump up to 3.8% in 2025.

WORKFORCE DEVELOPMENT GRANT

Arkansas State University-Mountain Home will receive $450,000 in federal funding to establish an extrusion and injection molding program.

Funding is provided as part of $10 million in workforce investments by the Delta Regional Authority. Grants support employment and training needs of local and regional workforces.

Chancellor Bentley Wallace noted the grant indicates the school “is a leader in advanced manufacturing,” adding that the money will be used to expand technology and enhance workforce development in extrusion and injection molding.

Extrusion and injection molding training will be industry-driven initiatives and will help build a trained workforce pipeline in the Twin Lakes Area. Training will give students the tools they need to be successful in a manufacturing career.

“There are several companies in our area that use extrusion and plastic injection molding,” said Karen Heslep dean of the School of Business and Technology. “These partnerships benefit our students through handson training, using the same equipment in use in our local manufacturing facilities, giving them a leg-up over job applicants without expertise and positioning them for promotions.”

SMALL BUSINESS CONFIDENCE ERODES

The nation’s small businesses are losing confidence in the U.S. economy and optimism has reached its lowest point in more than a decade, a leading trade group reports.

The National Federation of Independent Businesses notes that small business optimism fell to 88.5 in March, down nearly a full percentage point from February and the lowest since December 2012. The rating is below the 50-year average of 98 for the 27th consecutive month.

The group’s state director Katie Burns warned that inflation remains a top problem in Arkansas and is making it more difficult to own and operate a small business.

“To keep up with elevated costs, small business owners must pass higher prices onto their customers,” she added. “This puts Main Street in a difficult position, as inflation continues to rob the purchasing power of hardworking families.”

The survey reports that 25% of owners say inflation is their top worry; hiring is slowing with only 11% indicating they will add jobs over the next few months; higher costs for supplies and labor remain challenging; and 38% of owners raised compensation, up slightly from February.

The federation has reported on quarterly economic trends since the fourth quarter of 1973 and has conducted monthly surveys since 1986.