By the end of this page you should be able to look at a bank's loan mix and deposit base, with the margin covered up, and call its net interest margin to within a point. Then we will mark the exact line where structure stops predicting and judgment takes over.
A bank is a simple machine. Money comes in as funding, goes out as earning assets, and the bank keeps the spread between what the assets yield and what the funding costs.
Net interest margin (NIM) is that net interest income expressed as a percentage of the earning assets that produced it, annualized. It is the single most mechanical number on a bank's income statement, because it is set almost entirely by two structural choices the balance sheet already tells you.
Two levers move those two terms. Learn to read each one off the balance sheet and you can predict the margin.
Loans yield more than securities. Within loans, commercial and consumer credit yields more than residential mortgages. A bank that puts 80% of its assets into loans earns a high asset yield almost by construction. A bank that parks a third of its assets in bonds earns a low one. So: loan-heavy means high yield; securities-heavy means thin yield.
Not all deposits cost the same. Non-interest-bearing deposits, ordinary checking balances, cost the bank essentially nothing. Interest-bearing savings and CDs cost real money, and borrowings cost the most. A bank funded heavily by non-interest-bearing checking pays almost nothing for its money. A bank funded by CDs and borrowings pays up. So: cheap deposits mean low cost; CD-funded means high cost.
The two levers compound. A loan-heavy bank funded by free checking earns a fat yield and pays almost nothing, so its margin is wide. A securities-heavy bank funded by CDs earns little and pays a lot, so its margin is thin. Most banks sit between. To predict a bank's NIM, read both levers off the balance sheet and net them.
To estimate a margin you need a feel for what each piece earns and costs. Below are typical ranges for the elevated-rate environment of early 2026. Treat them as orientation, not precision.
| What assets earn | Typical yield |
|---|---|
| Cash & fed funds sold | 4 – 5% |
| Treasury & agency securities | 2.5 – 4% |
| Residential mortgages | 4 – 5.5% |
| Commercial real estate | 5.5 – 7% |
| C&I (commercial) | 6.5 – 8% |
| Agricultural | 6.5 – 8% |
| Consumer & auto | 7 – 9% |
| Credit card (specialty) | 12%+ |
| What funding costs | Typical cost |
|---|---|
| Non-interest-bearing deposits | ~0% |
| Savings & interest checking | 0.1 – 1.5% |
| Money market | 1.5 – 3% |
| Retail CDs (time deposits) | 3.5 – 4.5% |
| FHLB advances / borrowings | 4 – 5% |
| Brokered deposits | 4.5 – 5%+ |
Read down those two columns and the levers turn into arithmetic. A bank with most of its assets in commercial real estate and C&I, funded by 40% free checking, is stacking a 6%-plus yield on a sub-1.5% cost. A thrift holding residential mortgages and low-coupon bonds, funded by CDs, is putting a 4%-ish yield against a 2%-plus cost. The structure sets the margin before management does anything.
The whole-universe figures confirm the anchors. Across the roughly 3,500 banks above $100M in this dataset for Q1 2026, the median bank's earning assets yielded 5.5% and cost 1.7% to fund, for a net interest margin of 3.8%, with the middle half running 3.3% to 4.3%. Split the universe and each lever is worth about 1.3 points on its own: loan-heavy banks yielded a median 6.0% against 4.7% for the securities-heavy, and cheap-deposit banks paid 1.1% against 2.3% for the CD-funded.
Here is the structure of a real bank, taken from its Q1 2026 FDIC call report. The margin is covered. Read the two levers and commit to a number before you open the reveal.
| Earning-asset mix (Lever 1) | |
| Loans, % of assets | 77.7% |
| Securities, % of assets | 8.2% |
| Loan mix: real estate / C&I / other | 63 / 33 / 4 |
| Funding mix (Lever 2) | |
| Non-interest-bearing, % of deposits | 41.9% |
| Interest-bearing, % of deposits | 58.1% |
| Core deposits, % of deposits | 96.4% |
| Loan / deposit ratio | 87.5% |
Reveal the margin
| Component | Q1 2026, annualized |
|---|---|
| Asset yield (interest income ÷ earning assets) | 6.61% |
| Funding cost (interest expense ÷ earning assets) | −1.43% |
| Net interest margin | 5.18% |
| Reported NIM (FDIC NIMY) | 5.22% |
5.22%. Top decile for a US community bank. Both levers delivered exactly as the structure promised. The 78% loan book, tilted toward commercial credit, produced a 6.6% asset yield. The 42% slug of free checking held the funding cost to 1.4%, even in a high-rate environment. The wide margin is not a surprise once you read the balance sheet. It is the mechanical consequence of it.
The small gap between the 5.18% we derived and the 5.22% the FDIC reports is just averaging: the FDIC divides by average earning assets over the quarter, we used the period-end figure. The decomposition reconciles to within a rounding error, which is the point. The margin is not mysterious. It is the yield minus the cost, and you read both off the structure.
The mirror image
To prove the framework rather than the example, run it backwards on a bank built the opposite way: a conservative New Hampshire mutual savings bank.
| Earning-asset mix (Lever 1) | |
| Loans, % of assets | 53.3% |
| Securities, % of assets | 33.0% |
| Loan mix: real estate / other | 99 / 1 |
| Funding mix (Lever 2) | |
| Non-interest-bearing, % of deposits | 2.6% |
| Interest-bearing, % of deposits | 97.4% |
| Loan / deposit ratio | 67.6% |
Reveal the margin
| Component | Q1 2026, annualized |
|---|---|
| Asset yield (interest income ÷ earning assets) | 4.01% |
| Funding cost (interest expense ÷ earning assets) | −2.38% |
| Net interest margin | 1.63% |
| Reported NIM (FDIC NIMY) | 1.62% |
1.62%, against Grandview's 5.22%. The same framework explains a 3.6-point gap with no appeal to management quality or luck. Lever 1 worked against Piscataqua: only half its assets are loans, and those loans are 99% residential real estate, the lowest-yielding kind, so the asset yield is just 4.0%. Lever 2 worked against it too: almost none of its deposits are free checking, so it pays 2.4% for its money. Low yield minus high cost equals a thin margin. Both levers pointed down, and the margin sat where they put it.
Hold the two banks side by side and the decomposition does all the work. The yield gap (6.6% vs 4.0%) comes from the asset mix. The cost gap (1.4% vs 2.4%) comes from the funding mix. Add them and you have the whole 3.6 points. Nothing else is needed to explain the difference in margin.
A third bank, structure only, Q1 2026. This one does not have both levers pulling the same way, so you will have to net them. Commit to a number and a one-line reason before you reveal.
| Earning-asset mix (Lever 1) | |
| Loans, % of assets | 71.9% |
| Securities, % of assets | 10.3% |
| Loan mix: real estate / C&I / other | 92 / 9 / 0 |
| Funding mix (Lever 2) | |
| Non-interest-bearing, % of deposits | 23.4% |
| Interest-bearing, % of deposits | 76.6% |
| Core deposits, % of deposits | 89.5% |
| Loan / deposit ratio | 83.3% |
Reveal the margin + score yourself
| Component | Q1 2026, annualized |
|---|---|
| Asset yield (interest income ÷ earning assets) | 5.35% |
| Funding cost (interest expense ÷ earning assets) | −1.59% |
| Net interest margin | 3.76% |
| Reported NIM (FDIC NIMY) | 3.80% |
3.80%. Squarely between the other two, exactly where the structure says it should be. The loan-heavy balance sheet gave a 5.4% yield, below Grandview's 6.6% because the book is residential real estate rather than commercial. The 23% slug of free checking gave a 1.6% funding cost, above Grandview's 1.4% but well below the thrift's 2.4%. Good yield, good cost, neither extreme. A margin in the high 3s.
4.5%+ — You over-weighted the loan-heavy asset side and forgot the book is residential, not commercial, and that funding is not free.
under 3.0% — You under-weighted a genuinely loan-heavy bank with solid core deposits.
The exact 3.80% was never the target. A range in the high 3s was. That gap between the range you can predict and the basis point you cannot is the whole subject of the next section.
Everything above is the measurable part, and it is most of the margin. Structure sets the range. Read the two levers and you can rank any bank's structural margin potential and predict its NIM to within a point. That is real, and most people never learn to do it.
But the framework predicts a range, not a number, and the gap between the two is exactly what structure cannot see:
- Deposit pricing power. Two banks with identical non-interest-bearing percentages can pay very different rates on the deposits that do bear interest. That spread is franchise strength and pricing discipline. It does not appear in the mix. It is the difference between a margin you can defend and one you are renting from the rate cycle.
- What the yield is made of. A high asset yield can mean strong loan pricing or it can mean reaching for risk. The margin looks the same either way. A bank earning 7% on its loans may be the best underwriter in its county or the one financing the deals everyone else passed on. NIM is silent on which. Credit quality, a later lesson, is where that question gets answered, and a fat margin earned by taking hidden risk is the most expensive kind.
- Whether the margin survives the rate cycle. NIM is a snapshot. A bank whose assets reprice slowly while its deposits reprice fast can watch a wide margin compress in a few quarters. Duration and rate sensitivity, covered with securities and interest-rate risk later, decide whether today's margin is durable or borrowed.
- Whether the spread becomes profit. NIM is gross. It says nothing about the overhead, the fee income, or the credit losses that stand between the margin and the bottom line. A wide margin run by an inefficient bank, or one with heavy losses, can still earn a poor return. That is the income cascade, the next lesson, and where this slice plugs in.
So the honest statement of what you have learned: the numbers tell you the structural earning power of a bank's spread machine, and they tell you with enough precision to predict the margin to within a point. They do not tell you whether management is pricing well, whether the yield hides risk, or whether the margin will last. Those take the later lessons, and in the end, judgment. Knowing exactly where that line sits is most of what separates reading a bank from guessing at one.
Next: No. 2 — The income cascade, where this margin becomes the first line of the return on assets.