Which Way Will the Wind Blow You in 2026?
- Ryan King
- 3 hours ago
- 7 min read
"One ship drives east and the other drives west by the same winds that blow. It's the set of the sails and not the gales that determines the way they go."
Ella Wheeler Wilcox
2025 was a strong year for the banking industry; many institutions outperformed budgets as credit quality remained strong, funding stabilized, and margin expansion helped lift earnings. As it draws to a close, attention is quickly shifting to 2026 and the uncertainties that lie ahead.
The question now is whether these tailwinds continue into next year, and if so, for how long?
Perhaps the answer resides in the “set of sails” of your balance sheet and not the “gales.”
From the Editor
"And surely you'll buy your pint cup!
and surely I'll buy mine!
And we'll take a cup o' kindness yet,
for auld lang syne."
Auld Lang Syne, Robert Burns
Did you know that Auld Lang Syne is a Scottish poem authored by Robert Burns way back in 1788? The phrase roughly translates to "old long since" or "for the sake of old times" and likely reminds us of the year gone by.
My guess is most bankers will reflect kindly on 2025 and might be reveling in a beverage of choice when they hear this song in a few weeks! Earnings were strong, margins improved, credit remained stable, liquidity improved, and deposit costs receded.
Indeed, it was a great year for many.
And most expect an even better 2026.
In the final Bulletin of 2025, DCG Senior Analyst Ryan King writes about what institutions need to consider as they enter the new year with significant tailwinds at their back. He questions how long these tailwinds might last and discusses the balancing act of preserving current earnings momentum while maintaining a realistic view of potential risks ahead.
It’s a terrific read to end the year and well worth any risk manager’s time. On behalf of myself and everyone here at DCG, thank you for your readership and Happy New Year!
Vinny Clevenger, Managing Director
As institutions plan for 2026, the challenge is how to balance current earnings momentum with disciplined scenarios and a realistic view of potential risks ahead.
Here are some key considerations that might help you properly “adjust your sails” for what lies ahead.
Loans
While 2025 got off to a slow start for some, it appears as if pipelines are “refilled” once again. The uncertainty of the first several months of the year gave way to increased demand and loan growth for many.
And despite lingering concerns about the economy, credit performance remained resilient nationwide. Delinquencies and charge-offs have so far remained within manageable ranges, helping reinforce broader balance sheet stability heading into 2026.
So, what are the key variables that might influence lending success in 2026?
Interest Rate Environment: Three Fed rate cuts have lowered benchmark rates, easing funding costs but simultaneously introducing new questions on asset yields. Should rates continue to drift lower in 2026, institutions with large variable-rate portfolios will see faster compression in loan yields. Furthermore, the shape of the yield curve also matters tremendously! From late summer to today, the term structure of rates declined by almost 50bps (crest to trough). Clearly, this may impact assumed asset reinvestment rates and, therefore, volumes needed to reach income goals for 2026. A broader economic slowdown or rally in longer-term rates could also pressure spreads on new fixed-rate originations.
Competition & Pricing Pressure: Competition from banks and non-bank lenders remains elevated. Many institutions expect higher NII next year due to ongoing repricing of assets at today’s higher yields, but the incremental lift is diminishing.
Aggressive loan pricing and credit spread tightening could further erode these gains. If spreads compress meaningfully, NII projections may need to be revisited. It’s probable that the degree to which loan yields are repriced upward may be less than experienced during 2025.
Volume Expectations vs. Reality: A recent DCG client poll showed institutions budgeting approximately 5% loan growth. While industry loan growth often exceeds GDP, such periods typically coincide with strong consumer demand, easier credit conditions, and falling rates. Given concerns around the state of the consumer and subsequent tightening of credit standards of late, signs are pointing to increased competition for the most creditworthy borrowers.
Has your institution quantified the combined impact of loan contraction at rate levels below what is expected?
Investments
A popular internal visual at DCG shows two salesmen at side-by-side kiosks: one selling 2% bonds with a line out the door, and the other selling 5% bonds with little demand. While simplistic, it’s a reminder of how many institutions became over allocated to low-yielding bonds just a few years ago, and more recently, how the appetite for bonds declined as liquidity tightened. So, what is the right path forward in 2026?
Liquidity, First and Foremost: Beyond NII support, the most valuable characteristic of the investment portfolio is its pledgeability as collateral versus future borrowings. This is an important consideration, particularly for institutions that have redeployed cashflows into loan growth over the past several years and have seen a commensurate decline in their liquidity profile. At some point, bonds will need to be replaced. Management needs to determine the minimal level of investments they are willing to operate with and manage to those levels accordingly.
And to beat the drum for what seems like the one thousandth time in a DCG Bulletin, institutions should establish a discount window relationship with the Federal Reserve.
Loss Absorption/Protection if Rates Fall: While not perhaps the primary incentive to purchase investments, bonds purchased in the current environment could theoretically generate meaningful unrealized gains if rates decline in 2026.
In the event of a slowdown or emerging credit issues, these gains could be realized to help offset losses elsewhere on the balance sheet, providing flexibility.
A Tool for Interest Rate Risk Management: For institutions exposed to falling rates, selectively adding duration within the investment portfolio may help tighten rate sensitivities. This is especially relevant for asset sensitive positions, which lose deposit pricing relief and need assets with call protection to insulate margin compression.
Deposits
Many institutions are ending 2025 with a lower cost of funds and a stabilizing deposit base. Industrywide, deposit balances expanded at a healthy pace this year, aided by a trio of Fed rate cuts that provided flexibility in deposit pricing strategies.
Further rate relief from the FOMC could create additional opportunities to reduce funding costs, though the timing and magnitude remain uncertain.
At the same time, 2026 is expected to bring a new set of dynamics, including ongoing competition for deposits, shifting consumer preferences, and significant CD maturities that will test retention strategies.
Here are some key considerations for 2026:
Deposit Growth Trends: Core deposits grew steadily through 2025 industry-wide, while brokered deposits subsequently declined. Deposit growth is expected to continue into 2026, though much of the new money may likely flow into higher-cost premium-rate accounts. DCG’s Deposits360°® forecasted analytics are projecting anywhere from 4.5% - 6% deposit growth, dependent upon the rate scenario (rates unchanged to down 100bps).
Funding Costs: Competition may continue to require promotional rates to attract or retain balances. For example, as of mid-December, there are still many institutions with CD promotions at 4% or above. In effect, the spread to Fed Funds is higher now than when Fed Funds reached its peak during the last cycle. Admittedly, rates have just moved lower recently, and institutions might be busy planning the Holiday party, but how long will this continue?
Although CD rollover relief should continue and future Fed cuts could provide cover for banks to lower deposit rates, deposit betas could remain sticky on the way down.
NMD costs have also deceased, but to a lesser degree than CDs. This is the by-product of institutions offering higher rate MMDAs or Savings accounts to siphon off CD maturities and perhaps alleviate the constant “lumpiness” of short-term CD promotions that all mature together.
Ultimately, institutions need to focus on whether ongoing mix shifting could jeopardize rate relief from rate cuts.
Lending Considerations: If deposit growth outpaces loan demand, institutions may have an opportunity to more aggressively reduce deposit rates without disrupting funding plans.
Wholesale Funding
The focus for risk managers should remain on overall capacity limits, how much/how fast liquidity can be raised if the need arises, and operational comfort levels. What are the key questions that need to be answered?
Total Capacity vs. Operational Needs: While wholesale capacity may be substantial on paper, institutions must define what ongoing utilization level is acceptable given their balance sheet growth goals, realistic budget expectations, and the dry powder potentially needed should something unexpected arise.
In other words, even if your policy permits 35% wholesale funds, are you comfortable at 25%-30%? Do you stop at 34%? Is that sustainable?
Term Structure for Interest Rate Risk: A benefit of utilizing wholesale funds is the flexibility of term structure. This can be a great tool when it comes to shaping funding duration and managing potential rate risk exposures, especially when the path of rates is uncertain. As the yield curve (and by extension wholesale borrowing “curves”) “un-inverts,” is it time to entertain different term structures for your balance sheet? Or to stay the course and fund short? The answer should reside in the inherent risk profile of your balance sheet.
Derivatives
If there ever was a time to get properly acquainted (or “re-acquainted”) with derivatives, the time is now. For some, it might be an opportune time to layer in “catastrophe” insurance.
For others, derivatives can play a part in wholesale funding strategies. Combining overnight borrowing with a pay-fixed swap can often produce the same impact as locking in a fixed rate borrowing, but at a lower overall cost.
And make no mistake, for some institutions that have beaten their budgets, the purchase of insurance versus a rainy day could make sense.
“Position the Sails”
2026 will require institutions to navigate uncertainty, but it also presents meaningful opportunity. As the industry moves into what appears to be an incrementally lower-rate environment with potentially slowing economic momentum, success will hinge on disciplined pricing, realistic growth expectations, and a willingness to rebalance where necessary.
While accurately predicting the economic forecast is an impossible task, thoughtful planning and intentional balance sheet management will determine who can keep the tailwinds of 2025 at their back.
For more insights from Darling Consulting Group, click here.
Ryan King is a Senior Financial Analyst at Darling Consulting Group, where he works closely with both the Consulting and New Client Implementation teams to build and enhance ALCO models for institutions across the country. Since joining DCG in 2018, Ryan has supported a wide range of client engagements to help institutions optimize their asset/liability management frameworks.
Ryan holds a B.A. in Finance from Salisbury University and is currently pursuing his MBA at the Isenberg School of Management at UMass Amherst.
© 2025 Darling Consulting Group, Inc.
