State of the State 2025: Banking officials are optimistic about the sector

Arkansas’ banks are financially strong, and some could be seeking to acquire out-of-state properties. A recent survey showed that bankers across the country are hopeful the regulatory environment will improve under the new presidential administration.

On the other side of the ledger, banks must combat an ever-changing landscape of cybersecurity and fraud.

Susannah Marshall, state bank commissioner and securities commissioner, said she is pleased with how Arkansas banking ended 2024. She said the industry “held its own” through the year, and she expects its financial metrics to be in line with previous years. Moreover, the state’s banks are outperforming the national level, as has often been the case. Arkansas banks’ capital levels are strong.

“I really feel like we’re going to be on solid footing as we enter 2025,” she said.

The Conference of State Bank Supervisors’ most recent Community Bank Sentiment Index reflects her optimism. The latest survey, which attracted responses from more than 250 community bankers across 42 states, produced the most upbeat results since the survey began in 2019. The score of 127 was an improvement of 17 points from the third quarter. A score of 100 is considered to be neutral.

The index had advanced for six straight quarters after dropping to 73 in mid-2023 following the failure of some regional banks, but this was the first time all seven of the survey’s components were above neutral. The regulatory burden component rose 80 points from the third quarter and reached its highest level of optimism since the survey began in 2019. In fact, it had not been above 30 since the first quarter of 2021. The business conditions component rose from 80 to 117 in one quarter.

Banks have been helped by a stable interest rate environment. Recent Federal Reserve rate decreases have been incremental enough to keep balance sheets stable. That’s a sharp contrast from the Federal Open Market Committee’s series of rapid rate increases in 2022 and 2023. That environment was challenging for an industry whose assets can be fixed for 30 years.

Banks will be looking to see what the FOMC does and how they need to structure their balance sheets for potential future rate cuts. They will do this in a market where customers have many choices.

“I will tell you that the liquidity environment is as challenging as ever, and I do not see that changing at all in 2025,” Marshall said. “In fact, I think conversations around liquidity and funding will become … even more focused in 2025, and a large part of that is driven by competitive factors – that there’s so much competition today for consumers’ dollars from all different sources.”

Agriculture lending has been the lone significant worry, said Lorrie Trogden, Arkansas Bankers Association president and CEO. Lenders have been watching to see how much aid is made available to farmers.

Bankers are hopeful for a new regulatory environment under the Trump administration. Trogden said the Biden administration tended to issue executive orders and to pressure agency heads to enact changes through rules and examinations. She said bankers are looking forward to having new leadership at the Federal Deposit Insurance Corporation, the Consumer Financial Protection Bureau (CFPB), and the Office of the Comptroller of the Currency.

“We are very hopeful that we’ll have some good agency heads that understand banks want to help their customers,” she said. “Yes, we need to be regulated. Yes, we need to go through examinations to make sure that we are safe and we are sound, and we are doing the right things. We agree wholeheartedly. But coming at it with such a punitive and retaliatory nature is not the way to do that. So we are hopeful that they will partner with us, and they will be reasonable in what their expectations are, and listen to us when we say, ‘This is actually not good for the customer. We need to do this differently.’”

In addition to regulatory reform, banks are hoping for legislative changes at the federal level. Trogden said bankers support the SAFE Banking Act, which would protect them when they serve state-approved marijuana businesses. The Access to Credit for our Rural Economy Act would provide more flexibility for lenders to offer lines of credit to rural and agricultural borrowers.

In Arkansas, the ABA is hoping to pass a state version of the ACRE Act, Senate Bill 73 by Sen. Blake Johnson, R-Corning, and Rep. Howard Beaty, R-Crossett. It’s also hoping to pass a bill to make mail theft a state crime so local prosecutors can charge for crimes involving smaller dollar figures.

Trogden said it’s been a solid year for the state’s 113 banks and their 1,333 branches, and some banks are looking to grow. While 2024 didn’t see many mergers and acquisitions, she expects more to happen this year. Banks are looking to acquire, and both she and Marshall said they’ll be looking out of state to do so.

“That’s one thing that’s been pretty consistent with our banks,” she said. “They are more of the acquirers versus being ‘acquirees,’ so we may see that start to pick up in 2025.”

Marshall said technology is helping banks respond to a lack of available labor. It’s helpful but costly.

Banks are spending significant dollars on cybersecurity. Marshall said the problem has “elevated and escalated over the last few years” and will continue to be a focus for the industry.

“Banks are working very hard to help offset and mitigate that, but it’s all hands on deck,” she said. “It’s the consumer, the customer, the bank and regulators all trying to come together to really ensure that we are being mindful and proactive as we can be in mitigating the increasing cyber risk.”

Trogden said cybersecurity isn’t the only kind of fraud banks are combating. One big problem is check washing, where rings steal mail, change the recipient’s name on the check to their own, and cash it. She said there are many other scams.

“They are just rampant, and artificial intelligence is making them better and better, unfortunately,” she said.

Editor’s note: The State of the State series provides reports twice a year on Arkansas’ key economic sectors. The series publishes stories to begin a year and around mid-year to provide an update on the state’s economy. Link here for the State of the State page and previous stories.