Arkansas banks are adjusting to an uncertain financial environment that could produce slower growth and reduced loan opportunities.

The Federal Reserve cut interest rates by a full percentage point Sunday to help ward off a potential recession and economic challenges presented by the coronavirus outbreak. Rate cuts eat into bank earnings.

On Monday morning, Stephens Inc. of Little Rock announced it has revised estimates for the nation’s banking sector, with the firm dropping its earnings-per-share estimates for banks by 13% this year and by 15% in 2021.

Forecasts for earnings per share and stock price targets were reduced for Bank OZK of Little Rock, Home BancShares Inc. of Conway and Simmons First National Corp. of Pine Bluff.

Stephens said in a note issued Monday that revisions reflect “the drastic negative shift of the interest rate environment over recent weeks” and attempt to “address potential COVID-19 impacts including slower loan growth, higher credit costs” and other regulatory adjustments.

“Specifically, we now incorporate the surprise 50bps rate cut earlier this month and the additional 100 bps cut last night to 0%,” Stephens said. Bps refers to basis points, or the percentage change related to the rate reductions from the Fed.

From December 2008 to December 2015, the rate remained in a range of 0 to 0.25%, the lowest rate in the Federal Reserve’s history, in reaction to the recession of 2007-08.

Arkansas bankers said they are evaluating the unexpected changes and adjusting to the new economic environment.

“Prospects for an economic recession have increased recently, but our conservative, disciplined business strategy is serving us well,” said Tim Hicks, chief operating officer at Bank OZK. “Our unwavering commitment to credit quality and lending discipline have us well-positioned for whatever economic scenario unfolds, even an extremely adverse scenario.”

Stephens dropped its estimate of OZK’s earnings per share this year to $2.45 from $2.77. For 2021, earnings per share is estimated at $2.48 instead of the $2.80 in the original forecast, Stephens said. The investment firm set a $25 price target for OZK shares, down from $31. The stock fell $1.50 Monday, or 7%, to close at $19.99.

Likewise, Stephens dropped earnings estimates for other Arkansas public banks it follows.

Home BancShares’ 2020 earnings per share was reduced to $1.48 from $1.64. Earnings per share for 2021 was estimated at $1.48, a decrease from $1.70. Stephens set a stock price target of $18, a drop from $24 per share. The bank’s stock fell $1.20, or 8.6%, on Monday to close at $12.77.

Stephens’ estimate for Simmons’ earnings per share was $2.35 this year, and that’s now down to $2.01. Earnings per share for 2021 was estimated at $2.45 but dropped to $2.04. Share price was revised down to $22 from the original $29 target. Simmons shares fell $1.17, or 6.9%, to close at $15.92 on Monday.

Arvest Bank is privately held and is not part of the revised Stephens analysis.

Bank officials said Monday it’s too early to tell how sweeping an impact the Fed rate cuts and the spreading coronavirus will have on the financial sector.

“We expect some impact on almost every consumer or business within our footprint, however it is too early to tell the extent to which they will be affected,” said Jason Kincy, senior vice president and director of marketing at Arvest.

“Our lending teams are researching possible effects on our commercial lending customers and will be reaching out and working with them as needed,” he said.

The interest rate cut announced Sunday follows a half-point reduction the Fed announced two weeks ago in an emergency move to buoy the economy.

New, lower interest rates will reduce what consumers can earn on savings products as well.

“Given the magnitude of the Federal Reserve rate cut — 150 basis points in less than two weeks — depositors should expect rates to decline in line with market rates on short-term market instruments like checking accounts and money-market accounts,” Kincy said. “It is also likely that rates for many types of new loans or adjustable-rate loans could also decline.”

Also Sunday night, the Financial Services Forum announced that the eight largest U.S. banks will suspend share buybacks for the first half of 2020. That move, Stephens said, “could have a trickle-down effect to smaller banks and is likely another blow to bank valuations” in the near term.

Home BancShares and Simmons both have buyback programs in place.

Simmons will evaluate its program, said Elizabeth Machen, director of marketing and communications at the bank. Ten days ago, Simmons said it would increase its maximum stock repurchase amount from $60 million to $180 million.

“We continue to believe that our stock, particularly at current trading prices, represents an attractive investment,” Machen said in a statement. “That said, we are constantly evaluating our company’s capital needs, and we will work to responsibly manage those needs to ensure that we remain strongly positioned for any long-term changes in the economy.”

Officials with Home BancShares could not be reached for comment Monday.

To assist customers affected by the virus, Bank OZK is implementing a disaster-relief payment program that defers interest and grants short-term payment extensions to borrowers. The initiative is similar to offerings the bank has made after natural weather disasters.

For now, state banks have not changed their operating hours, either at the main offices or at branches.

Business on 03/17/2020



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