FDIC data show that net interest margins (NIMs) are at their highest since 2018, and bank executives are optimistic about further growth. However, to sustain strong performance, they need to address the low-yielding mortgage loans they originated during COVID. The Federal Housing Finance Agency (FHFA) reports that nearly half of mortgage loans carry interest rates below 4% (Slide 1). Thanks to low-cost deposits, even fixed-rate loans paying 300 basis points below the current mortgage rate still offer a 300-basis-point spread over deposit costs (Slide 2).

Americans are moving less often than in the past (Slide 3), largely because relocating is expensive. Home prices surged after COVID (Slide 4), and although the growth rate has slowed and homes stay on the market longer, homeowners still hold the upper hand with prospective buyers. This is partly because, despite having 150 million housing units, the supply remains insufficient to meet demand (Slide 5). Additionally, fewer homes are being listed because, unlike during the financial crisis, Americans can afford their mortgages and are not compelled to sell for financial reasons (Slide 6).

The industry’s cost of funding, including noninterest-bearing deposits, was 2.3% last quarter (Slide 7), the lowest it has been since 2022, and even as money market funds increased by $1 trillion over the last year, the banking industry is still growing deposits (Slide 8). Deposits at $21 trillion exceed total loans by $7 trillion. Banks with fewer deposits and more loans also have significant capacity to fund loans in the wholesale markets, thanks in part to the FDIC’s increase in the reciprocal deposit cap (Slide 9). Lending is a good problem to have, but bank treasurers worry that as loans grow, deposit costs will rise. Casinos are one of the fastest-growing loan segments in some markets (Slide 10), a sign of the consumer’s robust financial condition.