How is Cost of Deposits calculated for banks?

The formula is: Cost of Deposits = Interest Expense on Deposits / Average Total Deposits. The numerator is interest expense on deposits only, excluding interest on borrowings, subordinated debt, and other non-deposit liabilities. This figure is typically disclosed as a separate line item in bank income statements and can also be found in Call Report Schedule RI. The denominator is average total deposits across the measurement period. This includes all deposit categories: Non-interest-bearing demand deposits (business operating accounts, basic checking) NOW accounts (interest-bearing checking) Savings and money market deposit accounts Time deposits, including certificates of deposit (CDs) Using average balances rather than period-end balances prevents distortion from seasonal or month-end fluctuations. Including non-interest-bearing deposits in the denominator is what distinguishes Cost of Deposits from the narrower "cost of interest-bearing deposits" metric. It also produces a lower rate than Cost of Funds, which divides by interest-bearing liabilities only and excludes the free-funding benefit. This metric is calculated using data from SEC EDGAR filings, including 10-K and 10-Q reports.

What metrics are related to Cost of Deposits?

Cost of Deposits is commonly analyzed alongside Cost of Funds, Net Interest Margin (NIM), Deposits to Assets Ratio, Loans to Deposits Ratio, Return on Average Assets (ROAA), Efficiency Ratio, Interest Income to Average Earning Assets. Together, these metrics provide a more complete picture of a bank's financial health and help investors make informed comparisons.

Cost of Deposits

Category: Efficiency & Funding Ratio

Overview

Cost of Deposits tells you the average interest rate a bank pays across all of its deposit accounts. If a bank holds $10 billion in total deposits and pays $200 million in deposit interest expense over the course of a year, its Cost of Deposits is 2.0%.

The calculation divides interest expense on deposits by average total deposits, including both interest-bearing and non-interest-bearing deposits in the denominator. This is an important distinction. Non-interest-bearing deposits (like business operating accounts and basic checking accounts) cost the bank nothing in interest. Including them in the denominator lowers the blended rate and captures the real benefit of having free funding.

Cost of Deposits is one of the most direct measures of deposit franchise quality. Two banks that price their savings accounts and CDs identically can have very different Cost of Deposits if one has 40% of its deposits in non-interest-bearing accounts and the other has 15%. That gap translates directly into net interest margin, and it compounds quarter after quarter.

Formula

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

Result is typically expressed as a percentage.

The numerator is interest expense on deposits only, excluding interest on borrowings, subordinated debt, and other non-deposit liabilities. This figure is typically disclosed as a separate line item in bank income statements and can also be found in Call Report Schedule RI.

The denominator is average total deposits across the measurement period. This includes all deposit categories:

Non-interest-bearing demand deposits (business operating accounts, basic checking)

NOW accounts (interest-bearing checking)

Savings and money market deposit accounts

Time deposits, including certificates of deposit (CDs)

Using average balances rather than period-end balances prevents distortion from seasonal or month-end fluctuations. Including non-interest-bearing deposits in the denominator is what distinguishes Cost of Deposits from the narrower "cost of interest-bearing deposits" metric. It also produces a lower rate than Cost of Funds, which divides by interest-bearing liabilities only and excludes the free-funding benefit.

Interpretation

A lower Cost of Deposits signals a stronger deposit franchise. Banks that collect a large share of their deposits through non-interest-bearing accounts (like business checking and payroll accounts) pull the blended cost down significantly, because those balances contribute to the denominator without adding any interest expense to the numerator.

To put the numbers in perspective: a Cost of Deposits of 1.0% means the bank pays an average of $1 per year for every $100 of total deposits. On a $10 billion deposit base, each 0.10% (10 basis points) shift in Cost of Deposits represents $10 million in annual interest expense. Small differences in this metric translate into meaningful dollar amounts.

Tracking Cost of Deposits over time reveals how quickly a bank's deposit pricing is responding to changes in market interest rates. A bank whose Cost of Deposits rises slowly when the Federal Reserve is raising rates has a stickier, more valuable deposit base than one whose costs jump immediately.

Typical Range for Banks

Cost of Deposits tracks closely with prevailing interest rates and can shift dramatically across rate cycles.

During near-zero rate environments, the industry average Cost of Deposits can fall below 0.20%, since banks have little reason to offer meaningful rates on savings and money market accounts. During higher-rate environments, average Cost of Deposits can rise to 1.5% to 3.0% or beyond, as banks compete for deposits by raising rates on CDs, high-yield savings, and money market products.

Within any rate environment, the spread between banks with strong deposit franchises and weaker ones can be 50 to 150 basis points or more. A bank with 35% non-interest-bearing deposits might report a Cost of Deposits of 1.5% while a competitor with 10% non-interest-bearing deposits pays 2.5%, even if both institutions offer similar rates on their interest-bearing products. The FDIC Quarterly Banking Profile publishes aggregate deposit cost data that provides a useful industry benchmark.

Generally Favorable

Cost of Deposits consistently below the peer median points to a deposit franchise that competitors would find very difficult to replicate. Low-cost deposits create a structural advantage in net interest margin that persists across rate cycles.

During periods when the Fed is raising rates, the best deposit franchises show Cost of Deposits rising at a slower pace than benchmark rates. This slow repricing (low deposit beta) means the bank retains more of the rate increase as additional spread income. Stable or growing deposit balances alongside low costs are the strongest signal, since they confirm the bank isn't simply keeping rates too low and losing depositors as a result.

Potential Concern

Cost of Deposits above the peer median typically indicates either a rate-sensitive deposit base or a heavy reliance on higher-cost deposit products like CDs and brokered deposits. Banks that attract deposits primarily through rate competition rather than relationship-based convenience tend to see costs that track market rates more closely.

Rapidly rising Cost of Deposits during Fed tightening cycles is a warning sign for margin compression. If deposit costs are rising faster than earning asset yields are adjusting, NIM will narrow. Watch for quarter-over-quarter acceleration in Cost of Deposits, particularly if deposit balances are flat or declining at the same time, which may indicate the bank is paying more just to keep its existing funding in place.

Important Considerations

Two definitions are commonly used: "cost of interest-bearing deposits" (interest on deposits divided by average interest-bearing deposits) and "cost of total deposits" (interest on deposits divided by average total deposits). This metric uses the total deposits definition because it captures the free-funding benefit from non-interest-bearing accounts. When comparing across data sources or analyst reports, verify which definition is being used. The difference can be significant: a bank with 30% non-interest-bearing deposits will show a Cost of Deposits roughly 30% lower under the total deposits definition than the interest-bearing-only version.
Non-interest-bearing deposit mix is the single largest driver of Cost of Deposits differences between banks. A bank with 40% non-interest-bearing deposits will have a dramatically lower Cost of Deposits than one with 10%, even if both price their interest-bearing products identically. This makes the non-interest-bearing deposit percentage the first thing to check when comparing Cost of Deposits across institutions.
Deposit betas measure how much of a market rate change passes through to deposit pricing. A deposit beta of 0.40 means that for every 1.00% increase in the federal funds rate, deposit costs rise by 0.40%. Different deposit products carry very different betas: online savings accounts often have betas above 0.80, while relationship-based operating accounts may have betas below 0.20. A bank's aggregate deposit beta (the weighted average across all products) determines how quickly its Cost of Deposits responds to Fed rate changes.
Cost of Deposits should always be evaluated alongside deposit growth trends. A bank achieving low Cost of Deposits while maintaining or growing deposit balances demonstrates genuine franchise strength. Conversely, low Cost of Deposits accompanied by shrinking balances may indicate the bank is underpricing relative to the market and losing depositors to competitors offering better rates. The combination of cost and volume tells the full story.
Brokered deposits and listing service deposits can obscure the true quality of a bank's deposit franchise. These are rate-purchased deposits that behave more like wholesale funding than relationship-based core deposits. When a bank reports a rising share of brokered deposits alongside stable Cost of Deposits, the brokered deposits may not yet have fully repriced. Evaluating the mix between core and non-core deposits alongside the aggregate cost metric provides a more complete picture of funding quality and stability.

Related Metrics

Cost of Funds — Cost of Funds includes all interest-bearing liabilities (deposits plus borrowings), while Cost of Deposits focuses only on the deposit franchise.
Net Interest Margin (NIM) — Deposit costs are the largest component of total funding costs, making Cost of Deposits a primary driver of NIM.
Deposits to Assets Ratio — Higher deposits-to-assets ratios indicate greater reliance on deposit funding, making Cost of Deposits more influential to overall profitability.
Loans to Deposits Ratio — When loans-to-deposits ratios are low, the bank has excess deposits relative to lending, potentially allowing it to be more selective on deposit pricing.
Return on Average Assets (ROAA) — Lower Cost of Deposits supports wider NIM and higher ROAA through lower funding costs.
Efficiency Ratio — Branch networks that generate low-cost deposits are expensive to operate; the efficiency ratio captures whether the cost of maintaining the deposit franchise is justified by the funding benefit.
Interest Income to Average Earning Assets — Earning asset yield is the revenue side of the NIM equation. Comparing Cost of Deposits to the earning asset yield reveals the gross spread the bank earns between its lending and investing returns and its core deposit funding cost.

Bank-Specific Context

Deposits represent the primary funding source for the vast majority of banks, typically accounting for 80% or more of total liabilities. The interest paid on those deposits is usually the largest single expense category affecting net interest margin, which makes Cost of Deposits one of the most consequential metrics for understanding bank profitability.

Why Deposit Franchise Quality Matters

A bank's deposit franchise refers to its ability to attract and retain deposits at costs below the market rate. The strength of this franchise comes from customer relationships, branch convenience, payment processing services, and simple inertia. Customers who use a bank for their primary checking account, direct deposit, and bill payments are far less likely to move their money for a modest rate advantage elsewhere.

This stickiness creates a competitive moat. A bank with a strong deposit franchise can fund loans at a lower cost than a competitor relying on rate-purchased deposits, producing wider margins on identical loan portfolios.

The Rate Cycle Amplifier

Cost of Deposits differences between banks widen during rising rate environments. When the Fed raises rates, banks with rate-sensitive deposit bases (heavy CD and online savings reliance) must reprice quickly to prevent outflows. Banks with relationship-based, non-interest-bearing-heavy deposit mixes can delay and moderate rate increases because their depositors are less rate-sensitive.

This dynamic means that a bank with a 0.30% Cost of Deposits advantage over peers in a low-rate environment might see that gap expand to 0.80% or more during a tightening cycle. The resulting NIM expansion compounds into meaningfully higher earnings.

Metric Connections

Cost of Deposits feeds directly into net interest margin (NIM) because interest expense on deposits typically represents 60% to 80% of total interest expense for most banks. The simplified relationship is:

NIM = Yield on Earning Assets - Blended Funding Cost + Free Funding Benefit

The free funding benefit comes from non-interest-bearing deposits and equity capital, which fund a portion of earning assets at zero cost. This is also what creates the gap between Cost of Deposits and the broader Cost of Funds metric. Cost of Funds divides interest expense by interest-bearing liabilities only, while Cost of Deposits includes all deposits in the denominator, producing a lower rate that reflects the true blended cost.

Cost of Deposits also connects to the efficiency ratio through the branch network tradeoff. Physical branches are expensive to operate (increasing non-interest expense), but they generate low-cost relationship deposits (reducing interest expense). Whether the deposit cost savings justify the branch operating costs is a core strategic question that the combination of these two metrics helps answer.

Common Pitfalls

Ignoring Non-Interest-Bearing Deposit Mix

Comparing Cost of Deposits across banks without accounting for differences in non-interest-bearing deposit mix is the most common analytical error. Two banks with identical pricing on interest-bearing products will report very different Cost of Deposits if one has 35% non-interest-bearing deposits and the other has 15%. Always examine the non-interest-bearing percentage alongside the cost metric to understand whether a bank genuinely prices deposits well or simply benefits from a favorable deposit mix.

Overlooking CD Repricing Lag

Cost of Deposits can be temporarily depressed when a bank has a large book of CDs that were originated at lower rates and have not yet matured. As those CDs come due and customers either withdraw or roll into new CDs at higher prevailing rates, the reported Cost of Deposits will rise even if the bank makes no pricing changes. Checking the maturity schedule of time deposits (often disclosed in 10-K footnotes) helps assess how much of the current Cost of Deposits reflects sustainable pricing versus a lagging artifact of older CD vintages.

Confusing the Two Definitions

As noted in the considerations above, there are two common definitions of this metric. Mixing up which version a data source is reporting can lead to flawed peer comparisons. If one bank's Cost of Deposits looks significantly higher than a competitor's, confirm both are calculated using the same denominator before drawing conclusions.

Across Bank Types

Community Banks

Community banks with strong local relationships frequently achieve some of the lowest Cost of Deposits figures in the industry. Their advantage comes from relationship stickiness: small business owners and retail customers who bank locally tend to maintain operating accounts, payroll accounts, and personal checking accounts that are either non-interest-bearing or very low cost. These customers stay because of convenience, personal service, and established banking relationships, not because of the rate. In markets with limited competition, community banks can maintain particularly low deposit costs.

Regional and Large Banks

Regional banks with developed commercial banking operations benefit from treasury management relationships that generate significant non-interest-bearing deposits. Businesses that use a bank for payroll processing, cash management, and payment services keep large operating balances in accounts that pay little or no interest. The largest banks benefit from massive scale in payments and transaction processing, attracting commercial deposits from national and multinational clients. However, large banks may also carry higher-cost deposits in their consumer divisions, where they compete on rate with online banks.

Online Banks and Neobanks

Online-only banks and neobanks typically show the highest Cost of Deposits because they attract depositors primarily through competitive interest rates. Without branch networks or deep relationship ties, these institutions must continuously price at or near the top of the market to attract and retain funding. Their Cost of Deposits tends to move almost in lockstep with changes in the federal funds rate, resulting in very high deposit betas.

Geographic Factors

Deposit costs also vary by geography. Banks operating in highly competitive urban markets with many institutions competing for the same customers generally face higher deposit costs than banks in rural or suburban markets with fewer alternatives. This geographic pricing dynamic means that Cost of Deposits comparisons are most meaningful between banks serving similar markets.

What Drives This Metric

Interest Rate Environment

The prevailing level of interest rates is the single largest external factor affecting Cost of Deposits. When the Federal Reserve raises the federal funds rate, market rates on savings accounts, money market deposits, and new CDs increase, pulling Cost of Deposits upward. When the Fed cuts rates, deposit costs decline. Notably, the decline tends to happen faster than the increase: banks quickly reduce rates on variable-rate savings and money market accounts, while the higher-rate CDs originated during the tightening cycle take months or years to mature and roll off.

Deposit Product Mix

A bank's mix of deposit types is the primary internal driver. The four major categories behave differently:

Non-interest-bearing deposits contribute zero to interest expense and reduce the blended cost

Savings and money market accounts have moderate cost and moderate rate sensitivity

NOW accounts (interest-bearing checking) typically carry low rates but add some cost

Time deposits (CDs) carry the highest rates and are the most rate-sensitive category

Banks can influence their product mix over time through relationship banking strategies, branch network decisions, and product design, but shifts in mix happen gradually.

Competitive Conditions

Local and national competition for deposits directly affects pricing. When a competitor opens a new branch or an online bank launches a high-yield savings product in the market, other institutions may need to raise rates to prevent outflows. Markets with many banks competing for a limited deposit base will show higher Cost of Deposits than less competitive markets.

Deposit Pricing Strategy

Management decisions on how aggressively to price deposits play a significant role. Some banks intentionally price below market, accepting slower deposit growth in exchange for lower costs. Others price aggressively to build deposit market share, accepting higher Cost of Deposits as an investment in future franchise value. The chosen strategy should align with the bank's lending capacity and liquidity needs.

Related Valuation Methods

Peer Comparison Analysis — Evaluating whether a bank stock is fairly priced by measuring its financial performance and valuation multiples against a group of comparable banks.

Frequently Asked Questions

What is cost of funds and how does it differ from cost of deposits?

Cost of Funds measures the rate on all interest-bearing liabilities, while Cost of Deposits focuses on the deposit franchise specifically, including the benefit of zero-cost non-interest-bearing deposits. Read more →

What does it mean when a bank relies heavily on wholesale funding vs core deposits?

Core deposits are stable, relationship-based, and typically low-cost. Wholesale funding is rate-sensitive and more expensive, directly raising Cost of Funds and compressing margins. Read more →

How do I calculate cost of deposits for a bank?

The calculation divides interest expense on deposits by average total deposits, but which deposits go in the denominator changes the result significantly. Read more →

How do I evaluate a bank's deposit franchise?

Deposit franchise evaluation goes beyond the cost metric to assess relationship depth, non-interest-bearing mix, deposit stickiness across rate cycles, and geographic concentration. Read more →

Where to Find This Data

Interest expense on deposits is reported on the income statement in 10-Q/10-K filings and in Call Reports (FFIEC 031/041) on Schedule RI. Many banks break out interest expense by deposit type (savings, time deposits, money market) in the footnotes or supplemental tables of their quarterly earnings releases.

Average total deposits, including non-interest-bearing demand deposits, can be found in the average balance sheet tables that most banks publish in earnings releases and 10-K filings. If average balance tables are not available, you can approximate the average by taking the simple average of the beginning and ending period balances from quarterly balance sheet data.

The FFIEC Uniform Bank Performance Report (UBPR) reports cost of total deposits with peer group comparisons, making it one of the most useful tools for benchmarking. The FDIC Quarterly Banking Profile provides aggregate industry-level deposit cost data by institution size.