How do I calculate cost of deposits for a bank?

Cost of deposits is calculated by dividing interest expense on deposits by average total deposits. The result is an annualized percentage representing the blended rate a bank pays across all deposit accounts, including those that pay no interest at all.

The formula for cost of deposits is:

Cost of Deposits = Interest Expense on Deposits / Average Total Deposits

The result is expressed as an annualized percentage.

Finding the Inputs

Start with interest expense on deposits from the income statement or the notes to the financial statements. This is the interest paid specifically on deposit accounts: savings, money market, certificates of deposit (CDs), and interest-bearing checking. It does not include interest on borrowings, subordinated debt, or other non-deposit liabilities. If the income statement groups all interest expense together, the notes will typically break out deposit interest separately.

Total deposits appear on the balance sheet and include every deposit category: non-interest-bearing demand deposits, interest-bearing checking, savings, money market, and time deposits. Calculate the average by adding beginning-of-period and end-of-period totals and dividing by two. If daily or monthly average balance data is available, use that for a more precise result.

Divide deposit interest expense by average total deposits to get the annualized cost of deposits.

Worked Example

A bank pays $80 million in deposit interest expense during the year. Its total deposits were $7.2 billion at the start of the year and $7.8 billion at year-end, for an average of $7.5 billion.

Cost of Deposits = $80M / $7.5B = 1.07%

That 1.07% represents the blended rate paid across every deposit dollar, including checking accounts that pay nothing. If a peer bank runs at 1.55%, the 48-basis-point gap flows directly through to net interest margin and ultimately to earnings.

Which Deposits Belong in the Denominator

This is the most common source of confusion with the formula. Two versions circulate widely, and they produce meaningfully different numbers.

The total deposits version (shown above) uses all deposits in the denominator, including non-interest-bearing accounts. The result is lower because those free balances dilute the average cost. This version captures the full benefit of a bank's non-interest-bearing deposit franchise.

The interest-bearing deposits version excludes non-interest-bearing accounts from the denominator. A bank with $80 million in deposit interest expense and $5.5 billion in average interest-bearing deposits has a cost of interest-bearing deposits of 1.45%, compared to the 1.07% using total deposits. This version isolates the rate actually paid on accounts that bear interest.

Both are valid. The key is knowing which version you're working with and staying consistent when comparing across banks. If one bank reports using total deposits and another uses interest-bearing deposits, the comparison is misleading.

What Drives Cost of Deposits

The overall cost of deposits is a weighted average of rates paid on each deposit category, pulled down by the accounts that pay nothing. A few factors shape the number:

Deposit mix: A bank with 30% of deposits in non-interest-bearing checking has a structural cost advantage over one with 15% in that category. Every dollar in a zero-cost account lowers the blended rate. Shifts toward higher-cost categories like CDs and money market accounts push the number up even if rates on individual products stay flat.

Rate sensitivity by product: CDs reset on their contractual maturity date. Savings and money market accounts reprice at the bank's discretion, usually with a lag. Non-interest-bearing deposits never reprice. This mix of fast and slow repricing determines how quickly total cost of deposits moves when market rates change.

Competitive environment: Banks operating in markets with aggressive rate competition, or competing with online banks for rate-sensitive depositors, pay more for the same deposit types than banks with entrenched local franchises and less competitive overlap.

Deposit Betas and Repricing Behavior

Deposit beta measures how much of a change in market interest rates passes through to deposit costs. A deposit beta of 40% means that for every 100-basis-point increase in the fed funds rate, the bank's deposit costs rise by roughly 40 basis points.

Different deposit types carry very different betas. CDs typically have the highest because they reprice at maturity and customers shop rates aggressively. Money market and savings accounts carry moderate betas, with repricing happening at the bank's discretion and typically lagging market moves. Non-interest-bearing deposits have a beta of zero.

A bank's overall deposit beta depends heavily on its deposit composition. A bank with 40% of deposits in CDs will see its cost of deposits climb much faster during a rate-hiking cycle than one with 40% in non-interest-bearing checking. Tracking deposit beta alongside cost of deposits reveals whether a bank's deposit franchise is sticky or rate-sensitive, which has real implications for margin stability over full interest rate cycles.

Differences Across Bank Types

Community banks with deep local relationships and long-tenured customers often carry lower costs of deposits because their depositors tend to be less rate-sensitive. The convenience of a nearby branch and an established relationship keeps many customers from chasing higher rates elsewhere. A well-positioned community bank might maintain a cost of deposits below 1.00%, while a competitor relying on CD specials and brokered deposits could run above 2.00%.

Larger regional and national banks face more rate-aware customers, particularly on the commercial side. Corporate treasurers actively manage cash balances and will move deposits to capture even small rate differences, putting upward pressure on deposit costs for those accounts even when retail costs remain moderate.

Online-only banks operate with a different model entirely. Without branches, their overhead is lower, but they attract almost exclusively rate-sensitive depositors who chose the bank for its yield. Their cost of deposits may run above peers with branch networks, but lower operating expenses can offset that gap at the profitability level.

Common Calculation Mistakes

Forgetting to annualize quarterly data. If you use one quarter's deposit interest expense, multiply by four before dividing by the quarterly average deposits. Better yet, use trailing twelve months of interest expense for a smoother figure.

Mixing denominator versions when comparing banks. If one bank's reported figure uses total deposits and another's uses interest-bearing deposits, the comparison overstates or understates the true gap between them.

Using end-of-period deposits instead of the average. A bank that ran a CD promotion in the final month of the quarter will show inflated period-end balances that were not generating interest expense for most of the period.

Overlooking deposit mix shifts. A stable cost of deposits can mask underlying changes if the bank is losing non-interest-bearing balances and replacing them with rate-sensitive money market accounts. The blended number may hold steady while funding quality deteriorates underneath.

Where to Find the Inputs

Interest expense on deposits may appear as a standalone line item on the income statement or may be bundled into total interest expense with a breakdown in the notes. Total deposits are on the balance sheet, usually with a summary of deposit categories.

The most detailed source is the interest rate sensitivity table in the 10-K annual filing. This table typically provides average balances and average rates paid for each deposit category, giving you everything needed to calculate cost of deposits and understand what each component contributes. Quarterly earnings releases and investor presentations sometimes report cost of deposits directly, saving you the calculation entirely.