Banks Eye More Lending Opportunities in 2025

Banks are hopeful that the new year will bring a renewed chance for lending.

Throughout 2024, lenders have taken a somewhat cautious approach, leading to what experts described as adequate loan growth. Loans at large and mid-cap banks — those with market capitalizations of at least $1 billion — ticked up a median 3.1% in the third quarter from the same period a year earlier, according to an analysis of publicly traded banks by the capital markets firm Janney Montgomery Scott. For small-cap banks — those with market capitalizations of less than $1 billion — that figure was 4.7%.

But industry observers are optimistic that 2025 will greet bankers with a better operating environment. That has led to higher estimates for annual loan growth. Large and mid-cap banks are expected to post a median 5.4% in loan growth from the fourth quarter of this year to the same period in 2025, according to an analysis from Janney of analyst estimates. The smallest institutions could increase their loan portfolios by 5.8%, according to the analysis.

Still, bank board members need to be careful not to get swept into a rush to make new loans simply for the sake of growth, experts warn.

“The economy will be a little better in 2025,” says Christopher Marinac, director of research at Janney. “We will see a little bit more loan growth. It’s like turning the volume up in your car. My hunch is as we get into January, particularly late January, companies will be talking about their guidance and these numbers will ratchet up again.”

Loan growth was muted in 2024 in part because banks lacked the liquidity to meaningfully expand their portfolios, says Greyson Tuck, president of the law firm Gerrish Smith Tuck. Selling securities is one way to free up funding but many institutions’ cannot afford to take the losses associated with selling securities that have decreased in value. Over the past 90 days, long-term rates have generally increased, even as short-term rates have declined, meaning the problem remains.

Additionally, many banks have not been able to generate the low-cost deposits they need to support growth. These are issues that could persist into 2025, Tuck warns. Because of that, boards will need to think carefully about how they will deploy available liquidity next year.

“All of that is making it difficult to achieve significant loan growth for the vast majority of banks, but the vast majority of banks are OK with that,” Tuck says.

Loan demand has also been limited due to lingering effects from the COVID-19 pandemic. Business owners used federal stimulus money to pay down debt and to avoid taking on new credit, Marinac says.

But that could improve next year. The presidential election brings clarity to what business owners should expect in terms of the regulatory environment while the economy remains relatively strong. The U.S. Bureau of Labor Statistics reported last week that the country added 227,000 jobs last month, higher than the 200,000 economists had expected. And declining interest rates could spur loan demand.

“To me, we should expect loan demand to pick up,” Marinac says. “The election is behind us. People can transition to the new year. There is still positive economic activity, which we can see through the employment data.”

Lakeland Financial Corp. in Warsaw, Indiana, is already seeing its loan demand improve. During the pandemic, the $6.6 billion bank saw the utilization of available lines of credit drop to a historic low of 39% when businesses took advantage of the Paycheck Protection Program. Now that figure has inched up to the 43% range, says Chairman and CEO David Findlay. Analyst estimates predict that Lakeland’s loans will grow 6% over the next year, according to the Janney data.

Findlay is anticipating that the Federal Reserve will implement two more rate cuts of 25 basis points each next year. That will lower the cost of capital investment enough so that businesses “feel comfortable borrowing,” he adds.

And Findlay is hopeful that the regulatory environment should be better for banks, too. It’s widely assumed that the Consumer Financial Protection Bureau will be less active under a Trump administration. Institutions with less than $10 billion in assets, such as Lakeland, are not directly regulated by the CFPB, though there are frequent complaints that the agency’s actions trickle down and affect smaller banks.

“I don’t see any significant headwinds,” Findlay adds.

Much of the loan growth for community banks in 2025 could come from commercial real estate. Historically, CRE has been the bread-and-butter of community bank commercial lending. At the median, roughly 35% of small bank loan portfolios were in CRE. CRE loans in total grew by a median 5.6% in the third quarter from a year earlier for small banks, according to the Janney data. However, these loans have been heavily scrutinized recently, and regulators have warned banks about having a concentration in this area.

But experts emphasized that executives and board members need to avoid viewing these loans with broad strokes, and instead, judge the health of their portfolios based on their individual markets. Additionally, owner-occupied CRE loans, where the borrower’s business is located in the building, are generally seen as a safer bet than nonowner-occupied, which tends to be more speculative.

Commercial and industrial loans is another category that community banks are expected to focus on next year. Those loans ticked up by a median 4.3% for small banks in the third quarter from a year earlier, according to the Janney data.

In general, originating C&I loans requires more specialized knowledge, making it harder for smaller institutions. At Lakeland, these commercial credits are an important business line, making up about 35% of its loan portfolio as of the third quarter, according to S&P Global Market Intelligence. Lending to the manufacturing sector has been a staple for the bank for decades, Findlay says. Most of this money is used by business owners to expand production capabilities to meet demand or to invest in new equipment and technology.

Despite his optimism about lending next year, Findlay still recommends that board members stick to their credit culture. He noted that Lakeland always adheres to the same underwriting standards to avoid getting caught up in the desire to grow the loan portfolio.

“I think board members should always think about the credit environment and their credit culture,” Findlay says. “It really comes down to the experience level of your commercial bankers making the loans and credit officers approving the loans. Consistently applying the same standards to lending is critical.”