Market conditions drive deposit costs at US community banks higher in Q2

The cost of deposits at community banks continued their uptrend in the second quarter, with the median cost at such banks in all regions rising to over 1%.

The aggregate analysis includes operating and historical US commercial banks, savings banks, and savings and loan associations that reported less than $10 billion in assets for quarters that ended between March 30, 2022, and June 30, 2023. Banks with current parent and middle-tier companies above $10 billion for each respective quarter were also removed, as were banks with a foreign banking organization charter, industrial banks, nondepository trusts and banker's banks.

Median cost of deposits jumps

US community banks' national median cost of deposits — which refers to the annualized quarterly interest expense on deposits as a percentage of total average deposits — was 1.17% in the second quarter, compared with 0.85% in the first quarter and 0.23% in the first quarter of 2022, the quarter in which the Federal Reserve started hiking interest rates.

The second-quarter national median translates to a deposit beta, or the percentage of change in fed funds passed on to depositors, of 66.6% in the period, versus 36.8% in the previous quarter.

On June 14, prior to the end of the second quarter, the Fed decided against raising rates for the first time since it started its push to tame spiking inflation. The central bank did increase rates again on July 26, with officials likely to keep interest rates intact this week.

Among the five US regions, the Northeast region recorded the highest median cost of deposits ratio for community banks at 1.31%, up 37 basis points from the previous quarter. The median ratio for community banks in the South Central region rose 33 basis points quarter over quarter to 1.22%, the second-highest among the regions.

Meanwhile, the median deposit cost continued to be the lowest for community banks in the West region. The ratio was 1.06% in the second quarter, up about 37 basis points sequentially.

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Interest-bearing deposit costs

The median cost of interest-bearing deposits — or the annualized quarterly interest expense on deposits as a percentage of average interest-bearing deposits — was the highest at community banks in the South Central region at 1.76%, an increase of 48 basis points from the prior quarter. The Northeast and Southeast logged the second-highest ratio at 1.63%.

On the other hand, the Midwest region booked the lowest median cost of interest-bearing deposits at 1.49%, up 38 basis points from the first quarter.

Loan-to-deposit ratios

Median loan-to-deposit ratios rose in all five regions in the second quarter, with the Northeast logging the highest at 88.02%, an approximately 223-basis-point increase quarter over quarter. The median ratio was the lowest in the South Central at 74.11%.

The national median loan-to-deposit ratio surged about 274 basis points sequentially to 76.85%.

Lower net interest margin in most regions

All regions but the South Central region reported lower median net interest margins (NIMs) in the second quarter.

The South Central region's median NIM was the highest at 3.80%, up 0.50 basis points quarter over quarter. The median NIM was the lowest in the Northeast region at 2.98%, a decrease of 16 basis points sequentially.

The national median NIM declined 5 basis points to 3.41%.

Largest community banks by assets

Read about how migration into high-cost time deposits moderated in the second quarter as US banks continued to raise the rates they pay across a variety of account types to hold onto core funding. Read about how funding costs continued to rise at a faster clip than earning-asset yields as liquidity pressures persisted in the marketplace and US banks increased their reliance on higher-cost funding sources.

Newark, Ohio-based Park National Bank, the largest community bank with $9.86 billion in assets, recorded a 0.93% cost of deposits in the second quarter, up 83 basis points year over year.

Chico, Calif.-based Tri Counties Bank, the second-largest community bank, logged a 53-basis-point hike in its cost of deposits to 0.57%, the lowest in the group. That equates to a deposit beta of 12.5%.

"We were pleased by our ability to grow deposits during the quarter, while doing so without the use of brokered funding sources and at rates that were favorable to the bank," said Rick Smith, the chairman, president and CEO of Tri Counties Bank and parent TriCo Bancshares, in an earnings release.

The cost of deposits at Greenwood Village, Colo.-based NBH Bank jumped 112 basis points to 1.27%. The cost reflects "more aggressive deposit pricing" demanded by market conditions, NBH Bank and parent National Bank Holdings Corp. CFO Aldis Birkans said on the company's second-quarter earnings call.

"Cost of deposits appears to be stabilizing, and knock on wood, we won't see any more kind of dramatic action in the marketplace," National Bank Holdings and NBH Bank Chairman, President and CEO G. Timothy Laney said on the call.

Santa Ana, Calif.-based Banc of California NA, a subsidiary of Banc of California Inc., booked a cost of deposits of 1.63%, a 146-basis-point jump year over year. Banc of California is in a pending deal to merge with PacWest Bancorp.

Among the 20 biggest community banks, Fort Lee, NJ-based Cross River Bank's cost of deposits was the highest at 3.51%, up 289 basis points from a year earlier. That translates to a deposit beta of 68.5%.