Profitability
Cost of Funds
Also known as CoF
Cost of Funds measures the bank's total interest expense as a percentage of average interest-bearing liabilities. It is the liability-side input to net interest margin.
Formula
Interest-bearing liabilities include interest-bearing deposits (savings, money market, time deposits, NOW accounts), federal funds purchased, FHLB advances, and subordinated debt. Non-interest-bearing demand deposits are not in the denominator — they're essentially free funding.
Why it matters
Cost of Funds is the second half of NIM math. Banks with large non-interest-bearing deposit franchises (consumer checking, commercial DDA) enjoy structurally lower funding costs and higher NIM. Cost of Funds rises quickly in rising-rate environments as deposit competition heats up — the deposit beta dynamic.
How to interpret
Most US community banks report cost of funds between 1.5% and 3.0% in current rate environments. Above 3% suggests heavy reliance on time deposits, FHLB borrowings, or brokered deposits (more rate-sensitive funding). Below 1.5% indicates a strong core deposit franchise.
Thresholds
| Range | Label | Interpretation |
|---|---|---|
| < 1.5% | Low | Strong core deposit franchise. |
| 1.5–2.5% | Normal | Typical funding mix. |
| 2.5–3.5% | Watch | Rate-sensitive funding heavy. |
| > 3.5% | High | Substantial wholesale funding reliance. |
Worked example
Frequently asked
What is deposit beta?
Deposit beta is the proportion of a Fed rate change that a bank passes through to its depositors. A bank with a 30% deposit beta would raise deposit rates by 30bp for every 100bp Fed hike. Lower beta = stickier deposits = better NIM in rising-rate environments.
Why isn't non-interest-bearing deposit cost in the calculation?
Demand deposits pay no interest, so they have a 0% direct cost. They are 'free funding' that boosts NIM by displacing rate-paying liabilities. The metric measures the cost of paid funding only.
Sources
- FFIEC Call Report Schedule RI (Interest Expense)
- FFIEC Call Report Schedule RC-E (Deposit Liabilities)
See CoF across 4,394 US banks
BankRegReports ranks every FDIC-insured institution by CoF, refreshed quarterly within 48 hours of FFIEC release.