The Federal Reserve’s recent cuts in its benchmark short-term interest rate has helped to improve the net interest margins of banks across New Hampshire, putting them in a stronger and more profitable position heading into the New Year

But the big unknown of 2025 is whether the Fed will continue to lower rates or hold them steady amid fears of inflation flaring back up next year.

Meanwhile, some bankers are also nervous about the potential economic impact of new tariffs on imported products that President-elect Donald Trump has vowed to impose after he takes office on Jan. 20.

The net result: guarded confidence among local bankers as 2024 ends and 2025 begins.

“I do think there is reason for optimism at some levels,” said James Brannen, CEO of First Seacoast Bank of Dover and chairman-elect of the New Hampshire Bankers Association. “The Fed has lowered rates and may lower them more. But there are factors at work other than the Fed lowering rates. We’re seeing a little uncertainty about the economic environment. There’s some slowness tied to nervousness.”

‘Inverted Yield Curve’ – the Rise and Fall

Clearly, banks are happy that the Fed has now lowered short-term rates a couple of times since September, moves that have crucially impacted net interest margins for institutions big and small.

For nearly two years, banks had been dealing with an historic financial anomaly known as an inverted yield curve, triggered by the Fed’s aggressive 2022-2023 increases in short-term rates as part of its strategy to combat post-Covid inflation.

An inverted yield curve occurs when short-term rates are actually higher than long-term rates, leading to banks’ short-term borrowing costs outpacing returns on many of their long-term loans. The bottom line: the distance between “profitable” and “unprofitable” shrank worryingly for many of the nation’s banks.

“The inverse yield curve nailed banks,” said Frank Farone, managing director of the Darling Consulting Group, a Boston-based risk management consulting firm that helps banks and credit unions manage their balance sheets and risk model. “Their numbers were upside down.”

“There was a mismatch between assets and liabilities,” said G. Frank Teas, CEO of Nashua’s Millyard Bank. “It forced banks to reprice their liabilities and it hurt. Everyone was experiencing narrowing margins.”

The picture began to change somewhat in September when the Fed lowered its benchmark rate for the first time in years, amid signs inflation was finally coming under some semblance of control.

“We now have a more positive slope to the curve – and that’s good,” said Farone, noting that longer-term loan rates have recently risen as short-term rates have fallen.

But there’s still plenty of nervousness and uncertainty over how much more the Federal Reserve will cut rates with inflation now hovering above the 2 percent level regulators previously said was their target goal.

A Cautiously Upbeat Outlook

If and when the Fed lowers rates again is anyone’s guess.

But bankers say they’re seeing enough economic momentum to be optimistic about next year.

Teas said his bank has experienced an uptick in loan applications of late, driven partly by a growing confidence in the economy by businesses in general.

“We have enough in our pipeline to meet our budget for next year,” he said.

Joe Reilly, CEO of BankProv, a Massachusetts-based bank with a large presence in New Hampshire, agreed that commercial customers seem more confident.

“They all seem to have a good backlog of orders through the first quarter,” said Reilly.

And he noted that consumer spending also seems strong, as evidenced by crowded local restaurants that he’s seen while dining out.

“After we’ve all gone through tremendous pressures, the outlook for 2025 is encouraging,” said Reilly.

Lingering Doubts and Concerns

Joan Gile, CEO of Piscataqua Savings Bank, which focuses on residential mortgage lending in the Portsmouth area, agreed that the Federal Reserve’s recent interest-rate moves have helped banks – and her bank’s customers.

“Things are definitely improving,” said Gile, current chair of the New Hampshire Bankers Association. “But we still have mortgages on the books that will take a while to reprice. It’s going to take time.”

She said her bank has already planned for interest rates changes next year.

“We’ve budgeted for a slight decline,” she said.

But it looks like, at least for now, the Fed won’t be lowering rates as fast and far as many bankers had expected and hoped, she said.

She also noted that the housing industry still faces major challenges, including a lack of homes for sale that has caused a drop in residential mortgage activity.

“There’s not a whole lot of inventory out there,” she said.

While encouraged by what he sees for 2025, ProvBank’s Reilly said there are still concerns about the economy and how it might be impacted by Trump’s planned tariffs.

He also noted that New England in general still has too many banks competing for the same business – and it’s hurting everyone’s margins

Future consolidations next year, such as the recently announced planned takeover of Enterprise Bank by the parent company of Eastern Bank in Boston, could conceivably help local banks’ net-interest margins, he said.

‘Good News, Bad News’

All in all, Farone of Darling Consulting said there’s “good news and bad news” as 2024 draws to a close and 2025 starts.

The bad news is that many banks’ net-interest margins will remain tight in 2025, thanks largely to super-low interest rates issued to borrowers in the years before the recent Fed cuts.

But the good news is that many of those loans booked at 3 to 4 percent are now coming due next year – and their loan rates could go as high as 6 to 7 percent, he said.

“It’s like getting a pay raise,” he said. “Some banks’ revenues could be screaming up next year.”