The banking and financial sectors, like nearly every other financial sector, face unpredictable headwinds during 2022. Volatile supply chain issues, waning COVID-19, inflation, and war in Europe will have an impact on banking, but rising interest rates could have the biggest effect.
First Community Bank Northeast Arkansas Market President J. Allen Williams told Talk Business & Politics it is near certain that federal interest rates will rise, but how much throughout the year is uncertain.
“Rising interest rates will have an impact on business,” he said. “It could put a squeeze on business and customers.”
The economy will grow modestly in 2022 and then slow in 2023, Arkansas Economic Development Institute State Economic Forecaster Dr. Michael Pakko said. The Federal Reserve will raise interest rates two or three times during the next year and maybe even more. Debt market pressures will be one long-term issue, and further supply chain issues are to be expected and all will affect the financial sectors, he added.
“We’re in a weird situation. We can see that the economy is not hitting on all cylinders yet,” he said.
Indeed, the Federal Reserve on March 16 approved a federal funds rate hike from 0.25% to 0.5%, with an uncharacteristic suggestion that rate hikes are likely at the six other policy meetings in 2022. The hikes could push the funds rate as high as 2% by year end. The rate move was the first rate increase since Dec. 19, 2018, when the target rate rose from 2%-2.25% to 2.25%-2.5%.
Based on Fed data provided March 16, the federal funds rate could rise to 2.8% by the end of 2023. Also, Fed economists collectively lowered the 2022 U.S. economic growth estimate from 4% to 2.8%.
One trend that was prevalent in 2021 and is expected to continue through 2022 is bank consolidations, ConnectOne Bank CEO Frank Sorrentino III said in a commentary for Forbes. There were at least $61 billion of reported bank mergers in the U.S. alone by November of 2021, he said.
“In 2022, we can expect to see continued consolidation. Scale will be critical in order for companies to navigate changing regulatory landscapes, recruit top talent, and continue to make significant investments in digital infrastructure and new technologies,” Sorrentino said. “Banks will push more capital toward product advancements and partnerships and continue to consolidate to manage the increasing costs of tech investments and the regulatory needs for those businesses. We’ll also see bank/fintech M&A increase.”
One lasting trend from the COVID pandemic in the banking industry has been the reduction of in-person services offered at brick-and-mortar locations. Automation has reduced the number of services provided by in-person tellers and many people bank with applications on smart phones or computers. This trend will inevitably lead to a reduction in the number of bank buildings and branches.
Williams said he understands this phenomenon is taking hold, but believes there might be pushback, meaning some customers will want to return to a traditional banking experience.
Despite these trends, First Community Bank continues to expand its brick-and-mortar operations in Arkansas and in southern Missouri. Founded in Batesville in 1997, the bank has more than $2 billion in assets, and more than 500 employees making it the 10th largest bank in the state. When it first opened the bank started with $3.4 million in assets and 14 employees.
It opened an operations center beside the financial institution’s main bank in Batesville last November. The three-story operations center is 28,809 square feet and is connected to the main bank by a 170-foot sky bridge. The building complex provides space for 125 employees.
The bank has about 30 locations and recently expanded operations in Little Rock and Conway. First Community expanded its footprint in Northeast Arkansas when it opened a branch in Brookland in March. It’s the fifth location in the region, joining the three banks in Jonesboro and one in Lepanto.
“I have a special interest in this community, and we are so proud to be a part of it,” said Jamie Whitehead, the Brookland bank’s assistant vice president, branch manager and lender for Brookland. “We’ve watched the area as it continues to grow, and we feel like it is an ideal place to expand our footprint in the region.”
Williams has been in the banking industry for many years. He worked for Liberty Bank when it started in 2003, and when it sold to Centennial Bank he decided to make a move. He and six of his colleagues decided to open a bank in Jonesboro. When they started in November 2013, the bank had $3.5 million in capital and virtually no assets. Months later a story appeared in the Jonesboro Sun that ranked the 16 banks in the city by their number of assets. Centennial ranked first, and they ranked 16th. Williams said he has kept a copy of that story on a wall in his office.
“We used that for motivation to move up. We take a lot of pride in the work we do,” he said.
First Community now has more than $400 million in assets in the Jonesboro market and it now ranks third. As of June 30, 2021, the bank reported $11.715 million in net income, with much of that driven by $39.274 million in interest income.
“We are proud of the work we’ve done, but we still have more to do,” he said. “We have really good employees.”
Williams noted the company hasn’t acquired other banks to grow its customer base; it’s done it organically in communities across Arkansas and Missouri. First Community Bank Northeast Arkansas vice president Gabe Roberts told Talk Business & Politics the lending market in Jonesboro remains robust, driven by strong real estate sales. Houses in the $200,000 to $350,000 range don’t typically stay on the market for more than a week or two, he added.
“The real estate market is booming. Prices continue to climb. Demand is high,” he said.
Commercial lending has been solid through the last year, and the number of ongoing building projects is a testament to that, he said. There are no real identifiable trend lines. The projects are a mix of traditional retail, restaurant, warehouse, business and other types of space, he said.
Interest rate hikes are the one thing that could slow growth, Roberts said. Inflation has already hit consumers in their pocketbooks, and interest rate hikes could cause people to borrow less money for businesses and homes. Williams has dealt with uncertainties in the economy in the past, and no matter what he thinks, he believes the banking industry will continue to flourish in Northeast Arkansas. The company has bought land in Greensborough Village and plans to build another branch.