High funding costs dragged on net interest income in the first part of the year, bringing down net interest margins.
Other facts of note:
- Aggregate net interest margin (NIM)—a key profitability ratio that measures the difference between interest income and interest expense normalized by average earning assets—declined at Sixth District state member banks with less than $10 billion in total consolidated assets, from 3.45 percent on December 31, 2023, to 3.39 percent on March 31, 2024. This decline in NIM during the quarter aligns with industry trends.
- Community bank earnings continue to be affected by higher interest expense paid on interest-bearing accounts, such as certificates of deposit as well as higher wholesale funding costs. Nationally, commercial bank aggregate cost of funding increased from 2.16 percent on December 31, 2023, to 2.62 percent on March 31, 2024. Many institutions have been unable to benefit from higher loan yields as a result of low loan growth in recent quarters. US commercial bank loans grew by only 1.33 percent from December 31, 2023, to March 31, 2024. Separately, increasing personnel costs contributed to higher non-interest expense, which further reduced earnings.
- During first quarter earnings calls, many publicly traded Sixth District financial institutions noted that they anticipate NIM to reach a trough during the second quarter before expanding during the second half of 2024.
- The Federal Reserve began raising interest rates during the first quarter of 2022, which corresponded with an expansion of NIM for the industry. The banking events of March 2023 drove significant competition among banks for deposits. Community banks engaged in deposit specials and increased borrowings, both of which increased their cost of funds and has resulted in a sustained downward trend in NIM year over year.
Saba Haq
Lead Financial Specialist, Risk Analyst Unit
The Federal Reserve Bank of Atlanta