Rate rises, mergers, loan growth top banking issues for new year
Higher interest rates, more mergers and acquisitions and improved organic loan growth seem to be dominant themes for the banking sector heading into 2022.
Bank OZK of Little Rock and Simmons First National Corp. of Pine Bluff are projected to be buyers in a more active mergers-and-acquisitions (M&A) market nationally.
Those are the chief issues outlined by the Stephens Inc. team of banking analysts, who reported last week that the sector is well positioned for overall growth this year.
Interest-rate hikes, of course, would be good news for the sector and would boost interest income and net-interest margins, which have been struggling to grow for more than a year.
However, earnings per share for the 113 banks covered by Stephens are projected to fall overall by minus 10% this year and gain 13% in 2023. The negative EPS growth forecast in 2022 is driven by loan loss provision changes, no fee income from the Paycheck Protection Program — it expired last year — and reduced mortgage income. Excluding the PPP loans, Stephens is predicting overall EPS growth of 0% for the sector.
The report includes a forecast of three interest rate increases, in line with other national projections and indications from Federal Reserve Bank policymakers. Rates are projected to rise by 0.75% through early 2023. The interest rate boost would be pushed by three individual 0.25% increases, one in the third quarter, another in the fourth quarter and a final increase in the first three months of next year.
“Top down, the economy is still recovering from the pandemic with organic loan growth set to accelerate over the next 12 months to a high-single-digit clip, and the Fed is messaging three hikes in 2022 while bank balance sheets look exceedingly well prepared; busting with cash, plentiful low cost-deposits and excess capital to boot,” the Stephens report said.
As interest rates dropped to about 0%, banks were challenged with excess liquidity and have stockpiles of cash on hand. With expected increases in interest rates, the financial institutions are ready to use the cash to boost
consumer and business lending, which will in turn raise net interest income for the banks.
Stephens’ bank coverage includes Bank OZK, Simmons and Home BancShares Inc. of Conway. The report notes that Home BancShares is one of the top 30 banks that would benefit most from an interest rate hike by the Fed.
M&A activity is projected to continue and Stephens predicts more than 220 deals this year, which would be a return to more normalized levels. There were 190 deals announced over the past year, down 17% from 2019. The note also cites a survey of banking-sector investors where 42% of those surveyed expected M&A activity to pick up this year vs. last year.
OZK and Simmons are both listed as potential buyers of other banks this year. Bank OZK has been quiet in the M&A market since 2016, when it closed on two transactions on back-toback days in July: Community & Southern Holdings, an $800.3 million deal, on July 20 and C1 Financial the next day for approximately $376.1 million.
Simmons, however, was active last year with three acquisitions totaling nearly $859 million, deals that would make the bank the largest in Arkansas by asset size. Simmons paid nearly $280 million for two Tennessee-based community banks — Landmark Community Bank and Triumph Bancshares Inc. in separate transactions. Those transactions closed last year.
In November, Simmons agreed to purchase Spirit of Texas Bancshares Inc. for $581 million in a deal that is expected to close in the second quarter this year. Simmons Chairman George Makris has not ruled out other acquisitions though he was adamant on a third-quarter earnings call that the bank likely would not make another deal before the Spirit purchase is completed.
In the weeks ahead, earnings announcements will give us the full picture of last year as banks report fourth-quarter and full-year 2021 results. OZK and Home BancShares both report on Jan. 20 and Simmons announces on Jan. 27.
PERSONAL INCOME RISES
Personal income for Arkansas increased at an annual rate of 2.9% in the third quarter, ranking the state 17th in income growth and above the national average.
Federal statistics released last week show the Arkansas increase followed a secondquarter decline of nearly 27%, according to the report from the Bureau of Economic Analysis.
In the quarter ending Sept. 30, the U.S. overall posted a 2.6% increase in personal income, led by Kentucky at 6.7%. The report noted that states with the highest growth rates also recorded the best improvements in earnings.
Annualized earnings in Arkansas were up 8.8%, with improvements in almost every sector; only construction and military showed slight declines.
RECOMMEND TOP BUSINESSES
There’s still time to recommend the Arkansas small business that deserves recognition for its services and commitment to the state. The U.S. Small Business Administration will hand out awards during national Small Business Week — May 1-7 — to recognize top performers in Arkansas and across the nation.
Applicants for the awards must have received SBA assistance to qualify for recognition. Nominees also must have a three-year track record with the SBA. Small business awards will be handed out in several categories, including businessperson of the year, exporter of the year and young entrepreneur of the year, among others.
Nomination are due Tuesday by 2 p.m. More information is available at sba.gov/nsbw.
TEMPUS PURCHASES
Tempus Realty Partners, an Arkansas-based real estate investment partnership, ended 2021 on a strong note, purchasing three industrial properties totaling 610,120 square feet in Michigan and Tennessee.
The three buildings, located in Auburn Hills and Westland, Mich., and Jackson, Tenn., house the operations of US Farathane, which designs and produces plastic-fabricated parts for the automotive industry.
“This deal represents a real win-win for our investors and for US Farathane,” said Dan Andrews, Tempus Realty Partners chief executive officer. “We’re pleased to add these high-quality facilities to our portfolio.”
In 2021, Tempus acquired 19 buildings totaling nearly 2.2 million square feet for a combined price of $184.8 million.