REFLECTION AND PROJECTION

As we close out 2024 and forge ahead into 2025, it is appropriate to reflect on how the industry has fared over the past twelve months and how industry participants feel about the upcoming year. 2024 brought with it a leveling of the interest rate challenges we encountered in 2023. I believe the stability in the interest rate environment throughout most of the year allowed institutions to appropriately adjust on both sides of the balance sheet and that stability has allowed for some improvement in profitability of our Arkansas banks. However, the earnings component remains the area in which most downgrades have occurred during the examination process. Although the FOMC initiated rate decreases in the latter part of the year, it will take time for those actions to flow through the system and impact borrowers and depositors.

Despite national commentary about increasing performance issues and pressure on the office sector within Commercial Real Estate portfolios and certain consumer portfolios like credit card and automobiles, we have not yet identified holistic Asset Quality issues in our Arkansas banks. Capital levels remain strong with 85 percent of our state-chartered banks posting a Tier One Leverage ratio in excess of 9.00 percent. The Liquidity pressures of 2023 and early 2024 have subsided overall and banks have been successful in stabilizing, and to some degree enhancing, their on-balance sheet funding. Arkansas banks are beginning to see the results of their patience in relation to their investment portfolios and how the portfolios were impacted from the dramatic rate increases in recent years.

Projections are always a challenge in this industry. I do believe we will see additional rate cuts in the short term, albeit smaller adjustments and in my opinion, we are entering a time where on average, the rate environment will be higher overall compared to the historically low levels we experienced for many years. I believe we will still witness a true decline in Asset Quality and its related performance metrics, but I remain optimistic that our banks will not experience widespread loan portfolio issues as we experienced during the Great Financial Crisis. As I referenced above, capital levels are strong across the industry both locally and nationally; however, it is always appropriate to be forward-looking and conservative when evaluating your bank’s capital position. I project that the attraction of new capital will remain a commodity throughout 2025.

I am very cautious about discussions at the federal level regarding the future of the FHLB system, specifically FHLB advances, and treatment and structure of brokered deposits. Both are tools that banks have utilized for many years in order to enhance their funding base. In today’s extremely competitive marketplace, deposits and funding are under more pressure than ever before and any actions or change at the federal level must be very thoughtfully implemented in order to not result in harm to our community banks.

The non-financial concerns I have expressed throughout 2024 remain as we focus our attention on 2025. The increasing cyber threat environment will remain and likely continue to escalate as consumers become more reliant on and expectant of technology to conduct their financial activities. In 2025, I project we will also begin to evaluate how artificial intelligence will bring change to our industry in the next year and beyond. This change will be impactful and a potentially seismic shift in how our industry operates. As banks adopt more technology-focused tools to meet consumer demand and address rising costs and availability for talent, the use of third-party applications and tools will also become more prevalent. Thus, third-party risk management will continue to receive regulatory attention with expectations increasing for board and management oversight.

At year-end 2024, the vast majority of Arkansas state-chartered banks are operating in safe and sound condition, and I am hopeful that we will experience continuing strong performance in 2025. I am also hopeful that changes at the federal level within the regulatory sphere may bring much needed relief in relation to regulatory burden and the avalanche of new regulatory guidance and rule-making that has been present in recent years. Here’s to projecting a strong banking sector in 2025!