What actually happened to community institution funding, and why the answer is sitting in data you already own.

On September 16, the Fed raised a quarter point, the first increase since July 2023, with one more projected before year end. If that second one lands, banks are funding 50 basis points above where they sat in August.

Let’s start with what is at risk, because it is more than most people think. The last two years were good to you. Median net interest margin at institutions under $10 billion went from 3.36% in 2024 to 3.66% in 2025.

There were two things that helped to produce this: loans booked in 2020 and 2021 kept maturing into higher rates, so loan yields rose from 6.35% to 6.47% even while the Fed was cutting. Second, deposits repriced down with those cuts, so funding costs fell from 2.32% to 2.13%.

That first tailwind has run out. In the first quarter of this year, with the Fed sitting still, loan yields fell 18 basis points while funding costs eased only 13. Median net interest margin gave back four, the first down quarter after three straight up. Now the Fed is pushing on the funding side too, and funding reprices faster than a loan book does.

Funding costs also do not come back the way they went out. 25-point increase. Since that peak, the Fed has cut 175 basis points and cost of funds has come down 38, closer to 22%. It passes through faster going up than coming down.

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