Quarterly Banking Trends & Strategies Report

Fourth Quarter 2025

This report outlines key bank performance trends and strategic recommendations to help your bank capitalize on the current economic environment.

Fourth Quarter vs Third Quarter Banking Trends*:

Strong bank performance continued in the fourth quarter with solid mid-single digit loan and core deposit growth, further NIM expansion, and stable credit, driving a positive earnings outlook for the industry as we wrap up 2025 and start 2026. Some notable trends are summarized below:

Balanced loan and deposit growth. Core deposit growth and a decrease in investment securities funded a 5.7% annualized increase in loans for the quarter. Borrowing balances were relatively flat, impacted by the added liquidity from strong deposit growth.
NIM expands as Fed cuts interest rates. After peaking in the third quarter, the earning asset yield declined 3 basis points as Fed rate cuts began to take root and asset repricing benefits slowed. Cost of funds declined 11 basis points following a flattish trend in the first three quarters of the year and was the primary driver of a 5-basis point improvement in NIM.
Pre-provision net revenue growth moderates. Top-line revenue grew 3.06% due to solid growth in both net interest income and fee income. The revenue increase was offset by an increase in operating expenses primarily due to technology spending.
Credit remains resilient. NPA and NCO ratios of 0.72% and 0.34%, respectively, increased slightly for the quarter as credit continues to normalize from historically low levels.
Regulatory update. In early 2026, regulators continue their active pursuit of bank deregulation for community banks, focusing on capital requirements, streamlining compliance, and reducing examination burdens.

Bank Strategies For 2026 and Beyond:

Our bank strategies are designed to increase NIM to target level performance and keep it there by creating a neutral interest rate sensitivity position. In our Strategies in the Spotlight segment, we address two topics we believe are key to improving long-term performance: 1) hedge strategies to lessen interest rate risk and 2) connecting ALM to the long-term strategic plan (“the Plan”).

Strategies in the Spotlight:

Gaining proficiency in executing hedge transactions can add a valuable tool to your ALM toolbox. Whether you are addressing an asset or liability-sensitive position on the balance sheet, match funding a fixed-rate asset, or optimizing funding costs as asset spreads tighten, hedging structures provide an efficient and effective solution to building a strong and resilient NIM. Here are a few of our recommendations:

Swapping floating-rate loans to fixed and back to floating using a back-to-back swap can provide fixed-rate loans to clients and floating-rate loans to the bank with fee income generation. This structure also has built-in prepayment penalties from the economics of the swap market valuation.
Restructuring pay-fixed swaps by unwinding current position(s) and extending out on the curve with new swap transaction effectively positions the balance sheet for down-rate scenarios.
Purchasing 15-to-20-year municipal bonds and swapping to floating rate with a pay-fixed swap eliminates up-rate market risk and provides curve rolldown opportunities from the higher investment yield and steep municipal yield curve.
Using cash flow hedges to fund the balance sheet with three-month wholesale funding and entering pay-fixed swaps can reduce wholesale borrowing costs and match fund higher priced loans on the balance sheet to maintain margin in different rate environments.
Portfolio layer swaps can reduce downside net income risk, and upside risk is partially mitigated by the increased valuation of the swap.
Use of Caps and Floors, either current or forward starting, can reduce interest rate risk in either falling or rising interest rate environments.

On the topic of connecting ALM to the Plan, it’s crucial that ALCO has a detailed understanding of the long-term goals and objectives of the company and ensures these elements are embedded in ALM assumptions, strategies, and reporting. Here are some thoughts to help draw that connection:

Deconstruct the Plan. Plan goals, objectives, and initiatives should flow to all levels of the organization with the ALM process central to building many of the key assumptions the bank will use in its long-term forecasting. ALCO should have a clear understanding of the planning process, including the extent to which the Plan has been articulated throughout the organization, management’s involvement in the process, and timelines to complete various elements of the Plan. This understanding of the planning process helps ALCO align priorities and set strategies.
Reverse Engineer Plan Goals. We like to see banks take their most important top-of-house goals (perhaps ROA or ROE) and work in reverse to extract a comprehensive set of goals and measurements that drive P&L and balance sheet performance. For example, consider the “R” in ROE. What is the optimal mix of efficiency ratio, expenses, fee income, net interest income, and NIM needed to achieve the ROE goal? Then, move to the balance sheet to determine growth, portfolio mix and pricing goals that meet P&L expectations. This detailed set of interconnected goals and measurements become the foundation for ALM modeling. The process of reverse engineering also helps ALCO establish risk tolerance levels for interest rate sensitivity, wholesale funding utilization, liquidity, and use of hedges such as those mentioned above.
Elements of a Successful Planning Process.
- Credibility. From the start of the planning process, the senior team and Board should first ask if Plan objectives, goals, and strategies are realistic and achievable. To sort this out, we find it helpful to perform a SWOT analysis. The planning process should be inclusive, consisting of managers assigned to key roles in Plan implementation. Additionally, the company should demonstrate that it has a systematic approach to accurately and efficiently manage the Plan and its progress at all levels over time.
- Cascade. The Plan should be broken down into smaller plans, each with a unique set of objectives, goals, strategies, initiatives, and measurements. These mini plans should cascade throughout the company’s organizational structure to lines of business, markets, and operational centers. Then, to complete the connection to ALM, we encourage stakeholders to attend and participate in ALCO meetings.
- Accountability. From the top down, it’s essential to assign responsibility for executing Plan initiatives and strategies. Equally important is identifying specific measurements for each initiative and strategy to determine progress. ALCO should follow a similar process: set strategies, assign responsibility, and measure results.
- Communication. This is perhaps the most important element of the planning process. We have found that routinely communicating the Plan’s goals and objectives along with status reports of major initiatives, at least quarterly, represents an opportunity to not only celebrate wins but to identify areas that require greater attention.

Other ALM strategies:

Investment portfolio restructurings. Consider strategies to boost earnings, such as a loss/earn back strategy, pre-investing future principal maturities ahead of rate cuts, or pairing gains from asset sales or other strategies like sale/leaseback or BOLI restructuring against securities losses.
Match fund long-term fixed-rate loans. Use wholesale funding to match fixed-rate loan maturities, lock in spreads, and limit exposure to long-term interest rates. As described above in the Strategies in the Spotlight segment, consider using cash flow hedges to match fund long-term assets and reduce borrowing costs.
Establish a pricing discipline. At times, pricing can become quite irrational, requiring a strong loan and deposit pricing discipline to protect NIM. RAROC is a useful tool in pricing new loans and deposits to ensure client relationships remain profitable.

Banks remain well positioned for balance sheet and earnings growth in 2026. Nevertheless, the economic environment and the Fed’s posture on cutting rates in 2026 remains uncertain as policy adjustments teeter between inflation and labor data. It’s a good reminder that banks need to prepare for interest rates to move in either direction or not at all. Our focus on hedge instruments arms ALCO with another tool to neutralize interest rate risk and improve NIM performance, regardless of changes in interest rates. Coupling that with a best practice of aligning ALM with strategic planning helps ALCO better understand the broader long-term goals of the company and implement strategies that drive toward that mission.

chart of US Banks < 10B Total Assets - NIM, Earning Asset Yield and Cost of Funds