This year has been more tumultuous than many before it, with unprecedented economic gyrations. Short rates have remained stable, while long-term debt has reflected the unique economic uncertainties of our time. While this yielded lots of agonizing and stomach acid, it also helped steepen the curve somewhat, and contributed to some margin relief among many banks.
Industry leaders shared their main concerns last year as NIM, core funding pressures (both rates and magnitude), credit quality and regulatory pressures. The next six months portend a similar picture. Tariff fears ebb and flow, and with them so do the markets. Market volatility is generally less impactful for our SuperCommunity Banks than their larger brethren, but heavy Wealth banks are experiencing similar pains as those who are engaged in market-related activities. Borrowers are also meaningfully impacted by the tariffs, which affects our loan risk ratings and capital allocation (reserves).
The general consensus is the NIM has bottomed out in many banks, and others expect it to get there by year-end.
Interestingly, concerns for major credit deterioration, persistent since COVID, have not materialized. Certain sectors have clearly been suffering and loans appropriately downgraded, but collapse of a portfolio or a segment has not been widespread. The market for troubled loans is not super-active, and balance sheet cleanups are not nearly as commonplace as they have been in past downturns.
Similarly, AOCI hasn’t brought about widespread bank securities portfolios restructuring. Instead, banks are using this option based upon individual balance sheet and capital considerations, and it has not turned into a trend among community or SuperCommnunity banks.
In addition, larger community banks are turning their attention to capital management and optimization toward improving their stock prices and facilitating further buyback activities. Securities portfolio optimization is giving way to capital structure optimization where public companies are evaluating capital levels relative to regulatory expectations, earnings generation power and optimized market premiums at different core and risk-based capital levels. This shift makes sense in light of modest organic growth expectations for the rest of 2025 and 2026, reflecting a cautious view of economic stability.
Funding concerns, which started with the Silicon Valley Bank and Signature failures and continued through the rising rate environment, remain. And yet, among our banks, deposit price elasticity seems to reign. Many a CFO have diligently lowered rates to maximize the deposit betas on the way down, and deposits remain stubbornly in place. The rush to higher rates and, earlier, to safety (too big to fail banks) has turned into a trickle. Deposit pricing remains an issue, but market sensitivity to moderate rate reductions is low, in line with prevalent expectations for upcoming rate reductions. I’m seeing Earnings Credit Rates declining as well as overall consumer deposit pricing with little market backlash across most of the country.
No conversation about our industry is complete without considering the regulators. There doesn’t appear to be a significant change in regulator attitudes across the board from last year. Most Examiners-In-Charge continue the course and are issuing more MRAs than in recent years. Average MRA count for midsize banks has risen significantly, as regulators return to using them as a communication tool to reflect their priorities. However, a whiff of optimism is in the air. Like Rodg Cohen and Gene Ludwig, the best readers I know of the regulatory tea leaves, I believe we will see reason (a.k.a “Common Sense”) return to the regulatory scene later this year and in 2026. Initial indications from CFPB and even BSA guidance are that tangible consumer harm will be central to regulatory action going forward. M&A regulatory approval is expected to be more timely and less difficult. It is not surprising that many banks leaders anticipate at least one M&A transaction. Industry the coming 12 months. Overall, though, change is slow inside the DC Beltway, but it is coming. In the meantime, continued vigilance and precise and timely compliance with regulatory requirements are the call of the day.
In sum:
1. NIM has turned the corner for most
2. Deposits remain stable during reasonable repricing
3. Capital management is replacing AOCI balance sheet restructuring
4. Credit remains surprisingly resilient
5. Regulatory relief is anticipated but hasn’t been detected by and large