Bankers give positive signals on earnings, but omicron casts pall

Omicron. Threats to loan demand. Margin pressure. Labor shortages. M&A slowdowns.

Community banks face a seemingly endless list of challenges as they prepare to report fourth-quarter 2021 earnings and forecast the year ahead.

These curve balls came after bankers touted strong loan pipelines in the second half of 2021, leading investors to develop a bullish outlook for the year ahead. Bank stockseven outperformed the broader market last year.

Then the omicron variant of the coronavirus began to spread throughout the United States, renewing occupancy restrictions and packing hospitals. Thousands of U.S. schools have delayed in-person classes following the holiday break, and outbreaks have crippled airline staffing levels and forced employers to second-guess their 2022 return-to-office plans.

A resurgence of the pandemic could dash hopes for continued, uninterrupted economic recovery into 2022. Last month, Federal Reserve officials projected 4% growth for the year ahead but also cautioned that the virus lurks as a menace that could derail momentum.

“In a lot of places around the country, we have largely gotten back to normal or something close to it — and things look good. But this omicron suddenly creates a lot of uncertainty, and that drum beat of doubt is getting louder,” said Robert Bolton, a bank investor and president of Iron Bay Capital.

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The virus presents renewed challenges for banks.

Howard Bank in Baltimore, for example, recently closed two of its branches on a temporary basis and switched to drive-thru service at most branches. The $2.5 billion-asset bank is down to about two employees per branch, with some staffers out for holiday breaks and several others quarantining because of exposure to the virus.

M&F Bank in Durham, North Carolina, recently closed two branches for a day before switching temporarily to drive-thru operations as a pandemic response, according to Travis Rouse, chief sales and lending officer at the $300 million-asset bank.

Bankers say the challenges are disruptive but manageable. “If it does get worse, we feel very confident that we'll be able to … staff the bank but also take care of our customers,” Rouse said.

Even though most community banks are expected to post solid fourth-quarter results, fueled in part by loan growth and supported by ongoing credit quality strength, investors will focus more on what bankers have to say about their expectations for the first half of 2022, according to Bolton.

New restrictions to slow the omicron variant could rattle confidence, interrupt economic activity and decrease loan demand. Early studies suggest omicron is not as lethal as prior variants, but it is highly contagious, according to the U.S. Centers for Disease Control and Prevention.

Before omicron, which arrived about a month ago in the United States, a rapidly rebounding economy was fueling inflation and expectations for higher interest rates. Fed policymakers signaled they would increase rates in 2022 to curb inflation, a development that would make borrowing expensive but lending more profitable for banks. By extension, banks would bolster their net interest margins — the difference between what a bank pays for deposits and what it charges for loans. It is the key measure of profitability for most community banks, given that they rely on lending to drive income.

Matt Deines, president and CEO of the $1.8 billion-asset First Northwest Bancorp in Port Angeles, Washington, said higher rates in conjunction with loan growth and continued credit quality strength are the essential catalysts for community banks in 2022. He sees little threat — other than omicron unknowns.

“Our clients, almost across the board, are optimistic. They are looking to borrow and invest in growth,” Deines said. “If we can get a little boost in rates, make it gradual, I don’t think that deters demand and yet it helps us with our margins. And at the same time, credit quality is pristine — for us and across the industry.”

However, he added, the pandemic continues to present challenges and create uncertainty.

“One of the biggest problems that uncertainty creates is finding talented labor,” Deines said. “With every new variant, we see reticence among people to come back into the workforce. And that’s a particular problem for banks, because even with more and more digital banking, we still need to run our branches and, ideally, our lenders still need to be out meeting with clients in person.”

A pursuit of talent, scale and technology fueled mergers and acquisitions in 2021. Through Dec. 9, 201 deals were announced in 2021 — nearly twice as many as the 111 in 2020, according to S&P Global.

Tom Thiel, president of the investment bank and broker-dealer JWTT, said banks across the country remain acquisitive. Yet he noted a slowdown late in 2021 that will certainly be a topic of interest during earnings season.

At issue were lengthy delays in the regulatory approval process for several deals last year. Regulators struggled with pandemic-induced staffing shortages of their own as well as political pushback against larger acquisitions.

President Biden in 2021 issued an executive order calling for a closer examination of big mergers, and House Financial Services Committee Chair Maxine Waters, D-Calif., in December pressed regulators to nix any deal that would create a bank with more than $100 billion of assets.

Investment bankers say the calls for added scrutiny lengthened regulatory review periods of large deals and created apprehension that slowed some deal discussions among smaller lenders late in 2021.

“There are still a lot of management teams and boards out there ready and eager to pull the trigger on deals,” Thiel said. “But some of them may need some clarity from regulators before moving ahead.”