Cost of US community bank deposits jumped across all regions in Q4 2022

While community banks across the country reported higher deposit costs in the fourth quarter of 2022, some regions' deposit costs increased faster than others as the Federal Reserve raised interest rates.

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 all quarters ended between Dec. 31, 2021, and Dec. 31, 2022. Banks with parent companies above $10 billion for any of the quarters were also removed, as were banks with a foreign banking organization charter, industrial banks, nondepository trusts and banker's banks.

Median cost of deposits more than doubles YOY

During the fourth quarter of 2022, the median cost of deposits — which is the annualized quarterly interest expense on deposits as a percentage of total average deposits — at US community banks under $10 billion in assets was 0.54%, more than double the median of 0.25% reported in the final quarter of 2021. This equated to a roughly 8% deposit beta, which is the change in the cost of deposits as a percentage of the change in the average effective federal funds rate, as the federal funds rate jumped from an average of 0.08% in the fourth quarter of 2021 to an average of 3.65% in the fourth quarter of 2022.

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Over that same time frame, the median cost-of-deposits ratio among community banks in the Northeast climbed 34 basis points year over year to 0.60%, the largest increase among the five US regions. The Midwest was the next-most expensive region by cost of deposits at 0.55% in the 2022 fourth quarter.

At the other end of the spectrum, community banks in the West region reported a median 0.41% cost of deposits, up from 0.16% a year earlier.

Loan-to-deposit ratios increase

Community banks in the Northeast region also posted the highest median loan-to-deposit ratio in the country at 84.76% in the fourth quarter of 2022, which was over 11 percentage points higher than the national median and up from 77.98% in the year-ago quarter. Meanwhile, the four South Central states posted the lowest median loan-to-deposit ratio at 69.25% as of Dec. 31, 2022, up from 63.95% at the end of 2021.

Higher deposit costs, lower net interest margin

Perhaps not surprisingly given its higher cost of deposits, the Northeast region also had the lowest net interest margin (NIM) in the 2022 fourth quarter at 3.34%, compared to the national median of 3.60%.

Community banks in the West region posted both the highest median NIM in the fourth quarter at 4.00%, and the largest year-over-year increase, 70 basis points, among all five regions.

Largest community banks by assets

Topeka, Kan.-based Capitol Federal Savings Bank, the largest US community bank under $10 billion in assets, reported a 37-basis-point drop in its NIM year over year to 1.62% in the fourth quarter of 2022. The bank's deposits and other borrowings repriced higher and its mortgage-heavy loan portfolio repriced more slowly as higher interest rates made home purchases and refinancing less attractive for borrowers.

Deposits at Capitol fell 8.7% year over year in the fourth quarter of 2022 as loans rose 9.7%, which pushed the thrift's loan-to-deposit ratio up 21 percentage points in 2022 to 126.17% as of Dec. 31, 2022.

The company raised rates on certificates of deposit and money market accounts in an effort to slow deposit outflows, and expects its NIM compression to continue and potentially even increase in 2023, according to a fourth-quarter 2022 earnings release from Capitol Federal Financial Inc., Capitol FSB's parent company.

Chico, Calif.-based Tri Counties Bank, the second-largest US community bank under $10 billion in assets, had its NIM jump 74 basis points year over year to 4.29% in the fourth quarter as it kept a tight lid on deposit costs. The bank's 6-basis-point increase in cost of deposits year over year was by far the lowest among the top 20 community banks by assets.

Tri Counties' deposits increased 13% year over year in the 2022 fourth quarter and its loans increased by 31% thanks in part to parent company TriCo Bancshares' acquisition of Bakersfield, Calif.-based Valley Republic Bancorp, which closed in the first quarter of 2022.

According to TriCo's fourth-quarter 2022 earnings release, the bank only started raising some deposit rates in December 2022.