Third Quarter 2025
This report outlines key bank performance trends and strategic recommendations to help your bank capitalize on the current economic environment.
Q3 2025 vs Q2 2025 Bank Trends*:
Bank results did not disappoint in the third quarter, with solid growth in deposits, consistent asset quality, and strong PPNR and ROATCE growth. A large majority of banks beat earnings estimates this quarter, up slightly from last quarter, and investor sentiment entering Q4 remains optimistic that bank performance will continue to gain momentum.
- Deposit growth outpaced loans. Banks utilized excess liquidity from deposit growth along with declines in loans and securities portfolios to pay down wholesale funding and other borrowings.
- NIM expansion continues. Earning asset yields improved 12 basis points, a result of favorable asset repricing within both loan and securities portfolios. Cost of funds remained relatively flat despite some rate relief from paying down more expensive wholesale funds. Banks are seeing limited opportunities to lower deposit rates as competition for deposits continues to build.
- Double-digit pre-provision net revenue growth. Top-line revenue growth of 3.50% was partially offset by expense growth of 0.70%, leading to a robust 7.8% increase in PPNR. Net interest margin expansion and fee income growth contributed to the strong net revenue performance.
- Solid ROATCE trends. ROATCE increased to 12.21% from 11.68% linked quarter and 10.23% in the fourth quarter of 2024, reflecting positive 2025 trends in NIM, operating leverage, and credit.
- Favorable credit metrics. Overall, credit was little changed with reserve levels holding steady at 1.30%, while NPAs, NCOs, and provisioning increased slightly compared to last quarter.
- Deregulation actions. Late in 2025, bank deregulation for community banks continues to expand with regulatory agencies introducing new guidance amid a supportive political climate.
- The OCC is reducing regulatory burdens by tailoring examinations based on risk profiles, eliminating fixed requirements, reducing frequency of model validations, and simplifying examination procedures for retail non-deposit investment products.
- The Federal Reserve is considering reducing stress testing and capital requirements for banks under $10 billion in assets, expanding simplified reporting, and offering more flexibility in compliance programs.
- The CFPB has reversed some rules, including its open banking rule, and is revisiting its small business lending data collection rule. Congress also repealed the overdraft rule capping overdraft fees.
- Legislative and executive actions include lowering the community bank leverage ratio and streamlining bank merger approvals.
Bank Strategies For The Third Quarter 2025 and Beyond:
Although economic data has been somewhat limited due to the government shutdown, evidence of a cooling labor market and elevated inflation prompted the Fed to move forward with a 25 bp rate cut at its FOMC meeting on October 29. Another 25 bp rate cut before year-end hangs in the balance as the Fed reevaluates key data following the recent reopening of the government. Regardless of timing, what is starting to emerge is a steeper yield curve – positive news for the banking sector.
In our Strategies in the Spotlight segment, we turn our attention to deposits as community banks look for ways to ramp up deposit growth to support loan demand while, at the same time, lower deposit costs in step with Fed rate cuts. Striking a balance between growth and rate requires careful planning and communication.
Let’s face it, we all strive to build a reliable core deposit base that consistently matches loan portfolio growth at a cost that supports a strong and stable net interest margin. Achieving that outcome year after year is not easy when you consider the external factors over which we have no control. These outside factors might include the competitive environment, changes in the economic cycle, and, as we have seen in recent years, unusual events that can change market dynamics in a hurry.
However, you can focus on internal factors you have control over. Here’s some suggestions:
Deconstruct your core deposit base
- Distinguish between relationship and non-relationship clients. Understand their preferences and behaviors during periods of change or disruption.
- Build a strong treasury management team to study these client preferences within each of your markets.
- Design strategies and set goals that drive product growth and client loyalty.
Develop a deposit-centric culture
- Design direct production and calling goals for all bankers.
- Establish deposit-focused individual lender incentive compensation plans and train lenders to self-fund their loan production.
- Set corporate-level deposit growth goals that align with your long-term strategic plan and are cascaded throughout the company.
- Incent lenders to have a “deposits-first” mindset when establishing a new loan relationship by placing a value on the deposits to achieve a more profitable product spread or risk-adjusted return on capital (RAROC).
Establish a robust deposit pricing process
- Build an active deposit pricing committee with finance playing a key role in communicating and measuring the impact of pricing decisions.
- Study prior rate cycles and impact on average deposit betas. It’s valuable insight to know to what extent you can lag or lead market rates. Additionally, such studies provide a basis for beta assumptions used in ALM modeling.
- Always compare deposit betas to loan betas to understand how deposit rate decisions are impacting NIM.
- Determine your bank’s competitive position in the market. Are you a price leader, middle of the pack, or follower? Client loyalty goes a long way in determining how to price competitively.
- Use exception pricing to maintain strong client relationships and set pricing parameters for the sales team at some level below wholesale funding rates.
The following summarizes other ALM strategies and best practices:
Investment portfolio restructurings
- Q4 is a great time to consider a loss/earn back strategy by taking losses against strong earnings this year to boost earnings in 2026 and beyond.
- Pre-investing future principal maturities ahead of rate cuts can also boost future earnings. Funding off the swap curve currently provides arbitrage opportunities.
- Pair gains from asset sales or other strategies like sale/leaseback or BOLI restructuring against securities losses.
Maintain a stable and strong net interest margin with a neutral balance sheet. Use wholesale funding to match fixed-rate loan maturities, lock in spreads, and limit exposure to long-term interest rates. Match floating rate loans to non-maturity deposits to limit short-term interest rate sensitivity.
Utilize derivatives to efficiently manage interest rate risk. Commercial loan interest rate swaps can add a floating rate element to the loan portfolio, lessening exposure to a growing non-maturity deposit portfolio with an added benefit of fee income. On the other side of the balance sheet, adding a cash flow borrowing hedge can extend liability maturities to match-fund long term fixed-rate loans at a lower rate than wholesale borrowings.
Prepare for year-end. These are some of our year-end planning recommendations as you position your balance sheet for 2026:
- Review ALM policies for compliance
- Update deposit decay rate studies
- Evaluate exposure to prepayments
- Implement bond restructuring opportunities
- Review status of outstanding strategies
In the third quarter, community banks continued to experience favorable performance trends. As an uncertain economy persists, banks need to stay focused on the fundamentals — a neutral balance sheet, strong and steady growth, and increasing pre-provision net revenue. Building a deposit culture centered around strong client relationships strengthens liquidity and allows for a more structured and strategic approach to product pricing and growth.
*Source: S&P Capital IQ, US Banks < $10B
Date: 12/1/2025
