Banking Snapshot: Trends in NIM, Credit Quality, & Fed Data

Homeostasis refers to how a system — whether a living thing or a mechanical process — self-regulates to achieve specific conditions for continued survival. For example, a human’s body temperature can trigger specific processes that optimize and conserve the person’s most crucial biological resources, adjusting everything from breathing rate to perspiration to blood sugar levels until the body reaches an average temperature again. The banking industry has seen a lot of disruption to its own system since 2020. It seems, though, based on recent data, that some of the metrics that were outside the norm are starting to find their equilibrium again. Q3 Earnings TrendsBanks turned in solid third-quarter results, with earnings increasing. The uptick in earnings wasn’t a result of higher loan yields, but was actually due to improving net interest margin (NIM) as funding costs continued to ease. Lower deposit costs are giving many institutions a bit more breathing room, but how much still depends on how quickly each bank’s loans reprice. The broader picture painted by recent call report data shows something encouraging: margins are stabilizing after a turbulent rate cycle, which is a welcome development for the financial industry as we head into 2026.Credit Conditions: Normalizing, Not StressedCredit quality remains in good shape overall. There is some increasing stress, but it’s mostly concentrated in office commercial real estate and pockets of commercial and industrial lending. Highly publicized credit events at a few larger regional institutions have not spilled over into widespread problems for community banks, yet delinquencies and charge-offs are expected to drift higher from unusually low levels. Many risk managers regard this shift as a gradual return to long-term historical averages rather than the beginning of a broad credit downturn.Cybersecurity and Tech InvestmentAccording to surveys by Bank Director and the Conference of State Bank Supervisors, cybersecurity now sits at the top of many bank risk dashboards, and community financial institutions (CFIs) feel that pressure acutely. Attack volumes and the sophistication of the tools used by cybercriminals continue to grow, making it difficult for CFIs to keep pace without dedicating more of their annual budgets to defenses, monitoring, and training. At the same time, banks are planning significant investments in digital channels and core modernization so they can meet customer expectations for fast, convenient, technology-enabled service, even though these projects can weigh on near-term earnings.Economic Data, Fed Policy, and PlanningThe end of the government shutdown has restarted the flow of key economic reports, but delays — such as the September jobs data arriving roughly six to seven weeks late — have complicated planning for institutions that rely on that data to make key decisions. The latest labor numbers point to a softer but still resilient job market, which helps explain why markets see less than even odds of another Federal Reserve rate cut during the FOMC meeting on December 9th and 10th. With the Fed balancing inflation and employment, CFIs will be watching the “catch-up” data closely as they refine assumptions about next year’s rate path, loan demand, and funding strategies.What It Means for CFIsFor CFIs, the current message is straightforward: earnings are being supported by better funding dynamics and still solid credit, but the risk spotlight is shifting toward cybersecurity, technology execution, and an uncertain interest rate path. Leadership teams can use this period to sharpen pricing discipline on both deposits and loans, refresh stress tests for vulnerable sectors like office and select C&I segments, and ensure cyber and modernization plans are sized realistically for their institutions. With more data and policy signals coming in the months ahead, staying flexible and keeping boards engaged will be key to navigating 2026 with confidence.