"Which measurements would you consider highest priority in 2026?"

I’d say that Net Interest Margin (NIM) changes and Economic Value of Equity (EVE) should continue to be the primary focus of IRR management in 2026. Gap calculations rarely give the full picture (they're focused on timing of repricing, not magnitude), and Duration measurements can be difficult to understand. Given the rate drops we've seen so far and the expectations for further decreases, all financial institution managers and directors should have a clear understanding of how future market rate changes could impact both shorter-term earnings (i.e., NIM in the next one and two years) and longer-term capital values (i.e., EVE).

When market rates jumped dramatically in 2022, most financial institutions saw nice increases in their NIMs. Balance sheets were filled with shorter-term assets like Fed Funds sold, short-term securities, and variable rate loans. When market rates increased, income on these assets skyrocketed. At the same time, the liquidity in the banking system was still quite strong from the previous Pandemic-related stimulus programs and curtailed consumer spending. As a result, banks and credit unions were slow to increase deposit rates, which in turn led to widening margins and strong earnings for the better part of 2022.

However, that all dramatically reversed in 2023. Market liquidity seemed to evaporate in an instant as rates continued to rise, causing massive depreciation in investment portfolios. Inflation took hold, demanding increased commercial and consumer spending, and depositors “woke up” and began to discover alternatives to earn greater returns both inside and outside of the banking system. In simple economic terms, the demand for money exceeded the supply of money, causing a quick and material increase in the cost of money (i.e., deposit rates) and materially lower NIMs. Moreover, the run-up in market rates wreaked havoc on investment values, causing big drops in EVE calculations, both in “base-case” and rising rate scenarios.

While recent decreases in market rates have resulted in at least some rebound in securities values, tight market liquidity continues to put pressure on banks and credit unions to keep deposit rates up, "squeezing" NIMs throughout the industry. We'd all certainly like to think that this "lag" period is just about over and that we can go back to actively cutting deposit rates but, unfortunately, that too often is out of our control - especially now that depositors have become accustomed to shopping for the best rates they can find, both locally and online.

None of us can say for certain what rates will do in 2026, but it’s safe to say that we need to be sure that we’re closely monitoring both projected NIM shocks and EVE changes, and that we can trust the results of our IRR models.

Interest Rate Risk will undoubtedly remain a regulatory "hot button" in 2026, and rightly so.

Examiners will continue to look closely at the underlying assumptions driving the model, particularly deposit pricing, decay rates, and deposit trends. They most certainly will want to see that IRR models are regularly backtested and key model assumptions are stress tested (aka, “sensitivity” tested).

If you don’t have complete confidence in your IRR model, or if you’re not sure that you’ve been checking all the Regulatory “boxes,” reach out to us. We can help you identify any areas where your model and your management practices may be coming up short - before the examiners do.

Give us a call or email us at advisory@plansmith.com to discuss your organization’s individual needs.

Dave Wicklund
Director of ALM Advisory Services