System Signals — Q2 2025

FINASENSE Research · September 14, 2025

Data: Q2 2025 Fed Funds: 4.33% · 10Y: 4.24% · 2Y: 3.72%

The seasonal reprieve is over: The Q1 seasonal reprieve is over. Delinquency rebounded to 0.91%, and the year-over-year floor keeps rising — every Q2 reading since 2023 has come in higher than the last. Loan growth reaccelerated to 1.79% QoQ, outpacing deposit growth of just 0.2% and reopening the funding gap that seasonal Q1 inflows had briefly closed. NIM reached 3.28%, the highest of the recovery, but the sequential gains are shrinking — the easy repricing is largely captured.

Signal 1: Delinquency Approaching 1% — No Sign of Stabilization

The 60+ day delinquency ratio rose to 0.91%, up 11 bps from Q1's seasonally depressed 0.80% and 6 bps above Q2 2024's 0.84%. The over-$10B cohort reached 1.25%.

The Q1 seasonal curing was temporary, as expected. Consumer lending portfolios — particularly indirect auto and credit card — continue to drive the deterioration. Used-vehicle values remain depressed, trapping borrowers in negative equity. The key development: delinquent loans are not just growing, they are migrating deeper into late-stage buckets rather than curing.

At the current trajectory, the system-wide ratio breaches 1.00% by Q4. The over-$10B cohort is already well past that mark. More important, the aging composition suggests the charge-off pipeline is building — these loans convert to realized losses over the next two to four quarters.

What to watch

Pressure: Q3 delinquency test — if Q3's reading exceeds Q3 2024's 0.91%, the ratchet continues toward the 1% threshold
Watch: NCO acceleration — charge-offs should begin accelerating as aged delinquencies resolve into realized losses
Pressure: ACL coverage — a declining ACL / delinquent-loans ratio signals under-provisioning

Signal 2: The Funding Gap Reopens

Deposit growth slowed to 0.2% QoQ after Q1's 3.5% seasonal surge. Loan growth accelerated to 1.79%. The loans-to-assets ratio ticked up to 70.7%.

Q1 deposit growth was seasonal. The underlying deposit trajectory is flat to slightly positive — not enough to fund the loan-growth pipeline. This quarter institutions leaned back on wholesale funding: borrowings ticked up 3.1% QoQ, the first increase in over a year, though they remain 27% below year-ago levels.

If deposits don't accelerate in Q3–Q4, institutions face a choice: slow loan growth (forfeiting interest income) or lean further on wholesale funding (raising interest expense and compressing margins). Either path pressures the earnings trajectory.

What to watch

Watch: Q3 deposit growth — needs to exceed 1% to keep pace with lending; below that, the gap widens
Pressure: Borrowings trajectory — the Q2 uptick is the first in over a year; sustained increases confirm the deleveraging cycle has turned
Watch: Certificate competition — if institutions raise rates to attract deposits, the funding-cost advantage narrows

Signal 3: Margin Gains Are Decelerating

NIM reached 3.28% (annualized), the highest of the recovery — but the sequential gains are shrinking quarter by quarter as the repricing cycle matures, up just 26 bps year-over-year.

The asset-yield repricing cycle is maturing. New loan originations are pricing closer to the portfolio average. Meanwhile, deposit costs continue to creep higher as older, lower-rate certificates mature and renew at current market rates. The repricing asymmetry that powered the NIM recovery is narrowing.

Decelerating margin improvement means the earnings tailwind is weakening just as credit costs rise. If the NIM expansion stalls entirely — which the deceleration pattern suggests could happen within two to three quarters — provision expense becomes the sole driver of ROAA direction.

What to watch

Watch: NIM direction — a flat or negative sequential reading would signal the expansion is effectively over
Pressure: Cost of funds — if accelerating, margin compression begins regardless of asset yields
Watch: Yield convergence — new-loan yield vs. portfolio average; when these converge, the repricing benefit is exhausted

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