Quarterly Economic Report – Q1 2025

Economic activity increased slightly to moderately across the twelve Federal Reserve Districts in late November and December. Consumer spending moved up moderately, with most Districts reporting strong holiday sales that exceeded expectations. Vehicle sales grew modestly. Construction activity decreased overall, with several Districts indicating that high costs for materials and financing were weighing on growth. Manufacturing decreased slightly on net, and a number of Districts said manufacturers were stockpiling inventories in anticipation of higher tariffs. Residential real estate activity was unchanged on balance, as high mortgage rates continued to hold back demand. Commercial real estate sales edged up. The nonfinancial services sector grew slightly overall, with Districts highlighting growth in leisure and hospitality and transportation, notably air travel. Truck freight volumes, however, were down. Financial service providers reported modest growth in lending and little change in asset quality overall, though lenders and community organizations voiced concerns about delinquencies among small businesses and lower-income households. Nonprofit social service agencies faced high demand amidst uncertainty about future funding levels. Agricultural conditions remained weak overall, with generally lower farm incomes and weather-related struggles in some areas. The spread of avian flu reduced egg supplies and pushed up prices. Energy activity was mixed. More contacts were optimistic about the outlook for 2025 than were pessimistic about it, though contacts in several Districts expressed concerns that changes in immigration and tariff policy could negatively affect the economy.
The Federal Reserve Beige Book, January 2025

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Community Banks to See Improved M&A, Capital Markets Activity in 2025

The expectation of a more favorable regulatory environment, pent up deal demand, stronger equity valuations and stable debt markets are likely to drive significantly higher M&A and capital markets activity among community banks in 2025, Fitch Ratings says. These and other topics were recently discussed by the panel of industry experts at Fitch’s recent community bank forum, “The Future of Community Banks and why it Matters,” which included representatives from investment banking, the Independent Community Bankers Association, as well as the Head of North American Banks for Fitch. The panelists highlighted expectations for a more accommodative regulatory oversight and potential reform from the incoming Trump administration and how they are likely to affect community banks. Interest rate uncertainty was also noted as a possible motivation for sellers if lower rates fail to materialize and provide the expected relief to asset marks. As stated in Fitch’s U.S Bank 2025 outlook, House Financial Services Committee members recently proposed measures to reduce obstacles for M&A in the banking sector under a more general community banking plan. Key measures include the automatic approval of bank M&A applications unless denied by federal regulators within 120 days and allowing regional Federal Reserve banks to approve mergers of small and mid-sized banks if they meet certain regulatory criteria, among others. Sentiment for 2025 among the panelists was largely optimistic, but they also highlighted potential challenges to community banks in 2025 and beyond, including the continued need for scale to increase efficiency and banks’ ability to absorb higher regulatory and technology costs. Community banks, especially those with less than $5 billion in assets, are facing the burdens posed by the increased regulatory rulemaking of recent years. Panelists at the forum also noted the costs and challenges faced by rural banks in attracting qualified personnel to comply with these rules could also drive consolidation. Also discussed was the potential for deposit reform. Panelists expected more robust debt capital markets activity in 2025. The typical five-year fixed-to-floating structure of community bank subordinated debt and the rate structure of maturing and callable issuances is expected to drive activity in 2025. Notably, banks with assets at or below $65 billion had approximately $2 billion of maturing and $9.7 billion of callable notes in 2025. Demand for bank debt is also increasing as investor sentiment has strengthened following the recent election. An interesting driver of higher demand has been that banks themselves have been active buyers, seeking to add yield in the absence of more robust loan demand. Insurance companies and other institutional investors have also been regular buyers. The return of preferred stock issuance activity was also discussed. Competition from fintech competitors was viewed as having diminished somewhat, given the hurdles involved in attaining traditional bank charters, although the use of possible use of novel charters by these competitors was viewed as potential threat. Additionally, with many community banks focused on rural agricultural communities, the potential blowback from tariffs proposed by the incoming administration was seen as another possible threat. “Community Banks to See Improved M&A, Capital Markets Activity in 2025.” Fitchratings.com, 17 Dec 2024

Did You Know?

• Bob Shifflett has joined Artisan Advisors as Director, Enterprise Solutions. Bob is well-known throughout the banking industry for bringing thoughtful technology and operational solutions to community banks and credit unions. Contact Bob via email.
• Artisan recently assisted with two bank purchase regulatory applications, which included the development of business plans, loan and operational due diligence, and multi-year financial projections. Contact Jim Adkins or Jeff Voss for more information.
• Is your organization structured and staffed for optimum performance? Artisan recently completed an organizational analysis for a billion-dollar-plus institution that streamlined reporting relationships, improved workflow, and saved the institution several million dollars.