State of the State Mid-2022: As inflation climbs, bankers offer industry assessment

Inflation is here, and some analysts say a recession is coming next. Which is more concerning? Some of Arkansas’ top bank executives were candid in responses to that question when offering an outlook for the rest of 2022.

Brad Crain is president and CEO of Arvest Benton County, the largest of the company’s 14 locally managed markets in Arkansas, Kansas, Missouri and Oklahoma. He said he has concerns about both, but because the Federal Reserve has shown no signs of slowing its fight against inflation, a potential recession may be a little more troubling.

The Fed raised interest rates by 0.75 percentage points in June, its first move of that size since 1994. A similar increase and possibly more is expected when the central bank meets today (July 26) and Wednesday.

“I think they [Fed] are going to use every trick in the book they’ve got [to slow inflation], and that includes rate increases we haven’t seen the likes of in decades,” Crain said. “I think there is a possibility of 100 basis points [at the next meeting]. That would not shock me.”

He said that in terms of banking and consumers, a recession would be more detrimental to employment in terms of job losses, loan repayment and business health.

“Of course, that is a high-level perspective, and certain economic sectors or businesses or individual families can have different experiences based on their unique situations,” Crain said. “The sooner we can get inflation under control, the greater opportunity we have for people to understand that we are still in a pretty healthy environment. Particularly as it relates to business.”

George Makris Jr. is president and CEO of Simmons First National Corp. of Pine Bluff. He said rising inflation reflects supply and demand imbalances that are unprecedented.

“Have you bought a car lately,” he said. “We need supply to catch up with demand. The supply chain issue is a phenomenon we have not seen. We need to be able to invest in production — particularly here in the U.S. — which can fulfill some of the issues we have with foreign reliance.

“In a time when we need new startup production to stem the supply shortage, we should be promoting investment, not restricting it.

“Now is a great opportunity for those that believe in themselves and are willing to do what it takes to succeed.  Coming out of COVID lockdowns, there is a wave of ‘more for less’ that creates this opportunity.”

Makris said the biggest challenge for state banks moving forward is the marketplace uncertainty in general.

“Both as a business owner and as individuals,” he said. “We see it daily in the headlines — soft landing versus recession. The pace of interest rate increases. Low unemployment but the request for additional stimulus payments. Even during turbulent times, the economy works best when there is certainty driven by market fundamentals, not knee-jerk reactions to an event that cause a domino effect and don’t consider the longer-term impact.

“The result is that capital dollars are sitting on the sideline because they can’t guess when or what will happen.”

To combat the risky market conditions, Makris said banks that are diversified in geography and business mix would be positioned favorably for success.

“We offer a wide variety of products and services and are not heavily concentrated in any specific area. Mortgage, for example,” Makris said. “We are also building out our digital capabilities, which offer our customers a more efficient delivery channel.”

Dale Cole, the chairman and CEO of Batesville-chartered First Community Bank, said he expects his bank to remain profitable as rates go up. Loan growth is up by $166 million this year, and assets have increased by $96 million this year.

“Inflation is something we all have to live with,” he said. “Like most banks, we try to manage assets and liabilities, and we are managing that [profit] margin.”

Crain said community banks generally are coming off a strong year in 2021, and indicators point to continued growth, particularly from a deposit standpoint. Collectively, as of March 31, FDIC data showed Arkansas banks’ total deposits grew by $7.9 billion, or 6.9%, year-over-year to $121.5 billion.

“When we see that, it tells us consumers are in a stronger position than they feel they are [with a] higher deposit base to work with through this inflationary period,” he said. “If we get that under control, they can continue to put those [deposits] to work.”

Crain echoed Makris’ thoughts about the continued importance of digital capabilities. It’s become a critical trend in retail banking since the pandemic arrived in 2020 when most banks entered a crisis mode of building or expanding digital capabilities that allowed customers to conduct banking business without stepping foot inside a brick-and-mortar branch. Capitalizing on customer habits will be a focus.

“I think we’ve learned that more and more customers are choosing to conduct business via digital channels,” Crain said. “Our online banking and app usage numbers continue to rise. I think a lot is due to the speed and convenience those channels provide, and I don’t see that slowing down.”

Crain also noted a “bit of a slowdown” in mortgage activity, but he is encouraged by the fact that commercial projects are increasing and moving forward.

“We may be a bit of an anomaly (in Northwest Arkansas) from a community banking perspective, but I am not seeing anything on the coasts yet that would lead to me believe that other areas aren’t also thriving,” he said.

Editor’s note: Link here to connect to the State of the State section.