As Winston Churchill famously quipped, democracy is the worst form of government — except for every other option that’s been tried.
Uncertainty around the 2024 national election helped create a shifting landscape for financial institutions in 2024. We can’t know for sure what 2025 will bring, but an educated look at current trends and recent data might give us a glimpse of the future. We interviewed PCBB President Mike Dohren about the key trends he thinks will affect community financial institutions (CFIs) in 2025.Regulatory ChangesWith the Republican party set to take charge of both the executive and legislative branches of the federal government in January 2025, expectations for regulatory reform have shifted, according to Dohren. “It’s too soon to determine specifics, but some of the things that were going to occur next year are likely to be tabled,” he says. Open banking, both as a compliance necessity and a business risk, will affect CFIs in the coming year. “Open banking makes it easier for customers to leave a bank, and I think we’ll see more individuals and small and medium businesses having relationships with multiple banks. It will be challenging for CFIs to keep market share,” Dohren says.CFIs that have used debt at the holding company level may need to reengineer it in 2025. Many CFIs took on trust-preferred debt at the holding company level between 1998 and 2008. As some of these near maturity, banks need to develop a repayment or replacement capital strategy. “Early users are within that five-year window,” Dohren says. Those that haven’t paid off the loans may look to refinance. They may not find new debt that’s as affordable or as accessible as the old debt, because rates are higher and bank-to-bank credit isn’t as readily available.Mergers & Acquisitions (M&A)The coming year will likely see more M&A activity, in part because CFI stock values have gone up. “Many boards have an expectation around what their bank is worth, and when valuations go up, the new numbers are more likely to square with their own ideas,” Dohren says. Higher stock prices also mean that sellers can deliver more value to their stockholders. That may be especially true for CFIs that haven’t found other ways to grow. They might lack a business niche, have lost customers to competitors, or have aging leadership teams without clear successors. In these and other circumstances, M&A could be the clearest path to growth. Increasing numbers of bank M&A deals involve credit unions buying banks, a trend that continued in 2024. Dohren expects it to last into 2025, unless regulations slow the trend. Without the tax burden of a bank, credit unions are often able to pay more for a CFI than other bidders can offer. Loan Quality and SMB Lending TrendsCFI loan volume has been growing slowly over the past few years, at a modest annual rate of 1% or 2%. Dohren thinks that loan demand will increase in the coming year. That’s partly because of the relieved uncertainty around the 2024 election. “Borrowers and banks tend to sit on their hands in the runup to the presidential election every four years,” he says. “There’s usually a lag in all kinds of decisions, a little bit of a backlog that occurs before the election.” With more certainty around election results, businesses move ahead with projects, and that often means borrowing.An upturn in borrowing also follows the Fed’s interest rate cut and intention to slash rates further. “The long end of the curve on 10-year Treasury bills has moved up while the short end moves down, which is normal when the Feds start cutting,” Dohren says. The overnight rate has also gone down; borrowers with adjustable-rate loans and financial sector firms will likely benefit, as will construction businesses, revolving-loan borrowers, and commercial and industrial customers.Interest rates will also affect borrowers with loans coming up to maturity. “A lot of past transactions happened at the bottom of the rate cycle,” Dohren says. “Unless the cash flow or value of the asset they financed has improved, borrowers won’t be able to refinance and have the same outcome. Borrowing is more expensive than it was, and some borrowers will have trouble refinancing loans, even at lower rates.Ultimately, Dohren says, CFIs won’t successfully compete on interest rates against big banks. Instead, they need to figure out how they’ll use digital methods to deliver the high-touch service their customers want.Commercial real estate had rough patches in 2024, particularly for office properties, which will probably continue to struggle in many markets during 2025. Industrial, warehouse, and distribution businesses are all opportunities, thriving as consumers order more goods for home delivery and firms need places to warehouse the orders. The multifamily residential market is frothy, Dohren says, with demand in the many places that don’t have sufficient housing. “The demand for middle-market housing is strong,” he says, adding that there is less call for luxury housing. With an aging US population, senior living and its many categories that transition from active living to situations offering more care are a growing asset class.Technology and AICFIs are just beginning to tap the possibilities of artificial intelligence (AI) and machine learning, and larger CFIs in particular can find a lot of value in it. Dohren sees “a lot of focus on how we can get better insight from customer data around behavior and transactions” in 2025.For instance, AI has the potential to help CFIs connect data that’s spread between different silos. “Banks have struggled with data housed in legacy systems that weren’t built or designed for the current operating environment,” Dohren says. “I’d start by looking at a CRM solution and a system that contains transaction data. See where you make more money. Why do you make more money there? Maybe you should get more of those.”AI can also help free employees from rote and repetitive tasks so that they’re free to take on more valuable and interesting projects. It can help CFIs detect fraud and make credit decisions. The new technology is an implementation challenge for most organizations. “You need a person or a team that’s devoted to finding opportunities,” Dohren says. “Existing employees already have full-time gigs.”From increased M&A and borrowing to marked shifts in regulation and interest rates, what’s in store for 2025 won’t be seen for a bit longer, but is sure to be impactful.
Uncertainty around the 2024 national election helped create a shifting landscape for financial institutions in 2024. We can’t know for sure what 2025 will bring, but an educated look at current trends and recent data might give us a glimpse of the future. We interviewed PCBB President Mike Dohren about the key trends he thinks will affect community financial institutions (CFIs) in 2025.Regulatory ChangesWith the Republican party set to take charge of both the executive and legislative branches of the federal government in January 2025, expectations for regulatory reform have shifted, according to Dohren. “It’s too soon to determine specifics, but some of the things that were going to occur next year are likely to be tabled,” he says. Open banking, both as a compliance necessity and a business risk, will affect CFIs in the coming year. “Open banking makes it easier for customers to leave a bank, and I think we’ll see more individuals and small and medium businesses having relationships with multiple banks. It will be challenging for CFIs to keep market share,” Dohren says.CFIs that have used debt at the holding company level may need to reengineer it in 2025. Many CFIs took on trust-preferred debt at the holding company level between 1998 and 2008. As some of these near maturity, banks need to develop a repayment or replacement capital strategy. “Early users are within that five-year window,” Dohren says. Those that haven’t paid off the loans may look to refinance. They may not find new debt that’s as affordable or as accessible as the old debt, because rates are higher and bank-to-bank credit isn’t as readily available.Mergers & Acquisitions (M&A)The coming year will likely see more M&A activity, in part because CFI stock values have gone up. “Many boards have an expectation around what their bank is worth, and when valuations go up, the new numbers are more likely to square with their own ideas,” Dohren says. Higher stock prices also mean that sellers can deliver more value to their stockholders. That may be especially true for CFIs that haven’t found other ways to grow. They might lack a business niche, have lost customers to competitors, or have aging leadership teams without clear successors. In these and other circumstances, M&A could be the clearest path to growth. Increasing numbers of bank M&A deals involve credit unions buying banks, a trend that continued in 2024. Dohren expects it to last into 2025, unless regulations slow the trend. Without the tax burden of a bank, credit unions are often able to pay more for a CFI than other bidders can offer. Loan Quality and SMB Lending TrendsCFI loan volume has been growing slowly over the past few years, at a modest annual rate of 1% or 2%. Dohren thinks that loan demand will increase in the coming year. That’s partly because of the relieved uncertainty around the 2024 election. “Borrowers and banks tend to sit on their hands in the runup to the presidential election every four years,” he says. “There’s usually a lag in all kinds of decisions, a little bit of a backlog that occurs before the election.” With more certainty around election results, businesses move ahead with projects, and that often means borrowing.An upturn in borrowing also follows the Fed’s interest rate cut and intention to slash rates further. “The long end of the curve on 10-year Treasury bills has moved up while the short end moves down, which is normal when the Feds start cutting,” Dohren says. The overnight rate has also gone down; borrowers with adjustable-rate loans and financial sector firms will likely benefit, as will construction businesses, revolving-loan borrowers, and commercial and industrial customers.Interest rates will also affect borrowers with loans coming up to maturity. “A lot of past transactions happened at the bottom of the rate cycle,” Dohren says. “Unless the cash flow or value of the asset they financed has improved, borrowers won’t be able to refinance and have the same outcome. Borrowing is more expensive than it was, and some borrowers will have trouble refinancing loans, even at lower rates.Ultimately, Dohren says, CFIs won’t successfully compete on interest rates against big banks. Instead, they need to figure out how they’ll use digital methods to deliver the high-touch service their customers want.Commercial real estate had rough patches in 2024, particularly for office properties, which will probably continue to struggle in many markets during 2025. Industrial, warehouse, and distribution businesses are all opportunities, thriving as consumers order more goods for home delivery and firms need places to warehouse the orders. The multifamily residential market is frothy, Dohren says, with demand in the many places that don’t have sufficient housing. “The demand for middle-market housing is strong,” he says, adding that there is less call for luxury housing. With an aging US population, senior living and its many categories that transition from active living to situations offering more care are a growing asset class.Technology and AICFIs are just beginning to tap the possibilities of artificial intelligence (AI) and machine learning, and larger CFIs in particular can find a lot of value in it. Dohren sees “a lot of focus on how we can get better insight from customer data around behavior and transactions” in 2025.For instance, AI has the potential to help CFIs connect data that’s spread between different silos. “Banks have struggled with data housed in legacy systems that weren’t built or designed for the current operating environment,” Dohren says. “I’d start by looking at a CRM solution and a system that contains transaction data. See where you make more money. Why do you make more money there? Maybe you should get more of those.”AI can also help free employees from rote and repetitive tasks so that they’re free to take on more valuable and interesting projects. It can help CFIs detect fraud and make credit decisions. The new technology is an implementation challenge for most organizations. “You need a person or a team that’s devoted to finding opportunities,” Dohren says. “Existing employees already have full-time gigs.”From increased M&A and borrowing to marked shifts in regulation and interest rates, what’s in store for 2025 won’t be seen for a bit longer, but is sure to be impactful.
