How do I evaluate a bank's funding mix?

Look at where the bank gets its money and what it pays for it. The core question is how much of the bank's funding comes from stable, low-cost customer deposits versus more expensive or volatile sources like wholesale borrowings and brokered CDs.

A bank's funding mix describes where it gets the money it lends and invests. Every dollar a bank puts into loans, securities, or other assets has to come from somewhere, and the source of that funding shapes the bank's profitability, risk profile, and long-term franchise value.

The simplest way to start is by looking at the liability side of the balance sheet. Deposits, borrowings, and equity are the three broad funding categories. A bank that funds itself primarily through customer deposits operates in a fundamentally different way than one leaning on wholesale markets or Federal Home Loan Bank advances.

The Deposits-to-Assets Ratio

This ratio tells you what share of the bank's total assets are funded by deposits. A deposits-to-assets ratio of 80% or higher generally means the bank relies on its deposit franchise for most of its funding, which is the preferred structure for most community and regional banks.

Track how this ratio moves over time. A ratio that has been drifting lower over several years could mean the bank is losing depositors, facing competitive pressure in its markets, or substituting wholesale funding to support loan growth. Any of these warrant closer examination.

Breaking Down the Deposit Base

The total dollar amount of deposits doesn't tell you enough on its own. The composition within the deposit base matters just as much. Four categories deserve separate attention:

Non-interest-bearing deposits (checking accounts that pay no interest) represent the most valuable funding source. These are essentially free money for the bank. A bank where 25% to 40% of total deposits are non-interest-bearing typically has a meaningful cost advantage over peers.

Interest-bearing checking and savings accounts carry modest rates and tend to be relatively stable. Customers keep these accounts for transactional convenience, so they are less likely to chase higher rates elsewhere.

Money market accounts sit in the middle. They offer higher rates than standard savings but are still relationship-driven. Their rate sensitivity depends heavily on the competitive environment in the bank's local markets.

Time deposits (certificates of deposit) are the most rate-sensitive piece. Large-denomination CDs and brokered deposits, in particular, will leave when a competitor offers a better rate. A bank with 50% or more of its deposit base in CDs is working with funding that could reprice quickly or walk out the door at maturity.

A practical way to gauge deposit quality is to estimate the bank's non-interest-bearing deposit share and compare it to similar-sized banks. If a community bank has only 15% of deposits in non-interest-bearing accounts while peers average 30%, there is likely a structural weakness in the deposit franchise, and it will show up in a higher cost of deposits.

Cost of Deposits and Cost of Funds

The cost of deposits measures what the bank pays, on average, for its deposit funding. Compare this to peers operating in similar markets and of similar size. A bank with a cost of deposits that runs 20 to 40 basis points below its peer group has a real competitive edge, whether from deeper customer relationships, stronger brand presence, or a more favorable mix of account types.

The gap between cost of deposits and cost of funds tells a separate story. Cost of funds includes all interest-bearing liabilities, not just deposits. When cost of funds runs significantly higher than cost of deposits, the bank is paying a premium for non-deposit borrowings. A gap of more than 15 to 25 basis points often indicates meaningful reliance on wholesale funding.

Borrowings and Non-Deposit Funding

Federal Home Loan Bank (FHLB) advances, repurchase agreements, subordinated debt, and other borrowed funds all appear on the liability side of the balance sheet. Some borrowing is normal and even prudent. FHLB advances, for example, are a standard liquidity management tool, and borrowings in the range of 5% to 15% of total assets are typical.

Problems emerge when borrowings grow disproportionately. If borrowed funds make up 20% or more of total assets, the bank may be unable to generate enough deposits to support its lending activity. Heavy borrowing also tends to be more expensive than deposit funding and can introduce maturity mismatch risk if short-term borrowings fund longer-term loans.

Putting It Together with an Example

Consider two hypothetical community banks, both with $2 billion in assets and a loans-to-deposits ratio near 85%.

Bank A has deposits-to-assets of 88%, with 32% of those deposits in non-interest-bearing accounts and another 35% in interest-bearing checking and savings. Its cost of deposits is 1.10%, cost of funds is 1.20%, and FHLB borrowings total 4% of assets.

Bank B has deposits-to-assets of 74%, with only 14% of deposits in non-interest-bearing accounts and 48% in CDs (including a significant share of brokered CDs). Its cost of deposits is 2.30%, cost of funds is 2.75%, and FHLB borrowings total 18% of assets.

Both banks have the same loans-to-deposits ratio, but the funding behind those numbers is completely different. Bank A has a low-cost, stable deposit franchise that gives it flexibility on loan pricing and protects its net interest margin when rates move. Bank B is paying substantially more for its funding, relying on rate-sensitive deposits and wholesale borrowings, and would face significant margin pressure if deposit competition intensifies.

Red Flags in a Funding Mix

Several patterns should prompt deeper investigation:

A rising share of brokered deposits, especially if the bank is not rapidly growing. Brokered deposits are often a sign that the bank cannot attract enough local depositors and is buying funding through brokers at premium rates.

A deposits-to-assets ratio declining faster than peers in the same market. Some deposit migration is industry-wide during certain rate environments, but a bank losing ground faster than competitors may have a relationship problem.

Concentration in large, uninsured deposits. Deposits above the FDIC insurance limit are more flight-prone, especially during periods of banking stress. Banks with a high share of uninsured deposits face greater run risk.

Short-term borrowings that persistently represent a large share of funding. Using overnight or short-term borrowings to fund longer-term assets creates liquidity risk and maturity mismatch.

How Funding Mix Differs Across Bank Types

Community banks tend to rely most heavily on their local deposit base. Their funding mix is often straightforward: mostly deposits, minimal borrowings, and a healthy share of non-interest-bearing accounts from local businesses. The advantage is stability and low cost. The limitation is that deposit gathering capacity is constrained by the bank's geographic footprint.

Regional banks operate in broader markets and may have a more diverse funding profile. They often supplement core deposits with some wholesale funding and may access capital markets more readily. For a regional bank, the analysis should focus on whether deposit growth is organic or whether the bank is relying on purchased funding to keep pace with asset growth.

Large money center banks have the most complex funding structures, with significant wholesale funding, interbank borrowings, and capital markets activity. For these institutions, evaluating funding stability requires looking beyond deposits to assess the diversity and maturity profile of the entire liability structure.

Regardless of bank size, the question is the same: does this bank's funding give it a cost advantage, and can it sustain that funding base under stress? A bank with cheap, stable funding has a competitive moat. A bank that has to pay up for every dollar of funding is fighting an uphill battle on profitability.