By the end of this page you should be able to look at a bank's loan mix and deposit base and estimate its net interest margin to within a point. Then we will briefly discuss the 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 a mechanical number on a bank's income statement, because it is determined almost entirely by two structural choices that the balance sheet already shows you.
Two levers move those two terms. Once you learn to read each one off the balance sheet, 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. 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 a lot. 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 |
|---|---|
| Treasury & agency securities | 2.5 – 4% |
| Cash & fed funds sold | 4 – 5% |
| 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%+ |
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. Based on the dataset for Q1 2026, across the roughly 3,500 banks above $100M, 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%.
Each lever carries about 1.3 points of NIM on its own. On the asset side, loan-heavy banks earned a median yield of 6.0% versus 4.7% for securities-heavy banks - a 1.3-point gap from mix alone. On the funding side, banks with cheap deposit bases paid a median 1.1% versus 2.3% for the CD-funded - a 1.2-point gap from funding mix alone.
Here is the structure of a bank, taken from its Q1 2026 FDIC call report. You have to estimate the margin. 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% |
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.
The 96% core deposit ratio explains why the funding cost stayed that low under rate pressure. Core deposits - local checking, savings, and relationship CDs - price slowly and don't bolt for a better rate. A bank with brokered deposits or FHLB advances as a meaningful share of funding would have paid 4.5-5%+ on that slice, compressing the margin by a full point or more. Grandview has almost none of that. Nearly all of its funding is sticky, relationship-based money, which is why 58% of deposits are interest-bearing yet the all-in funding cost is still just 1.4%.
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.
3.5% – 4.5% - You landed in the average range. You likely saw the strong asset side but underweighted the 42% free checking, which is exceptional and holds funding cost to ~1.4% even in a high-rate environment.
6.0%+ - Even with both levers maxed, the structure doesn't support a margin above 6% for a conventional community bank. You pushed the yield or minimized the cost beyond what the data warrants.
The exact 5.22% is not the target. The target is a range in the high 4s to low 5s. The bank structure points you to the range; getting to the exact basis point requires knowing what rate the bank is paying on each deposit tier, and that is not in the mix percentages.
The mirror image
To understand the framework rather than the example, let's run it 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% |
| Core deposits, % of deposits | 82.8% |
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.
The 83% core deposit ratio means the funding base is not expensive wholesale money - but it does not rescue the margin either, because almost all of those core deposits are interest-bearing. Core vs. brokered tells you whether the bank is paying relationship rates or market rates on the deposits that cost something. Piscataqua is paying relationship rates, which keeps costs from going higher, but with 97% of deposits interest-bearing, there is no free-checking offset to absorb the cost. The result is a 2.4% all-in funding cost: not the worst possible outcome, but no margin support either.
Look at the two banks side by side and the decomposition is clear. 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.
2.5% – 3.5% - You underweighted how hard both levers work against this bank. The 99% residential mortgage book and near-zero free checking both depress the margin; together they push it well below the community bank median of ~3.8%.
under 1.0% - Even with both levers pointing down, a solvent bank still earns some spread. You pushed too hard; a margin below 1% implies near-zero yield or near-market funding cost, and this bank has neither at that extreme.
The exact 1.62% is not the target. The target is a range in the low 1s to mid 2s. While the structure points you to the right neighbourhood, the precise number depends on the actual rates on each loan vintage and each deposit tier.
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% |
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, in line with the structure. 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 and a margin in the high 3s.
The 90% core deposit ratio confirms the funding cost stays moderate: almost none of Timberland's interest-bearing deposits are brokered or wholesale. Brokered CDs reprice at market (4.5-5%+) and would have pushed the all-in funding cost well above 2%. Because Timberland's deposits are relationship-based, the 77% that do bear interest price slowly, and the all-in cost lands at 1.6% rather than 2%+. Core deposits % is the check on whether a bank's good-looking non-interest-bearing percentage holds up - a bank can show 20% free checking and still pay up if the other 80% is brokered. Timberland's 90% core ratio says it is not doing that.
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.
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.
But the framework predicts a range, not a number, and the gap between the two is 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. A bank with pricing power holds its margin when rates shift. A bank without it only looks good because rates happen to be favorable right now.
- 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 cannot tell you which. Credit quality can help answer that question. 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 waterfall.
What have you learned: the numbers tell you the structural earning power of a bank's spread machine. 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.
Next: No. 2 - The income waterfall, where this margin becomes the first line of the return on assets.
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