2023 Risk Review | 57

SECTION 4

Market Risks 

Liquidity and Deposits

• Liquid asset levels among community banks declined during 2022 and continued to fall in first quarter 

2023, in part reflecting securities losses and higher loan growth reducing cash balances. Liquid assets 

remained above the pre-pandemic level. 

• Deposit levels grew among community banks, despite the decline in the industry overall. 

• Community banks increased holdings of brokered deposits and Federal Home Loan Bank (FHLB) 

borrowings in 2022 and first quarter 2023 compared with 2021, and high unrealized securities losses 

remain a concern. 

• Rising interest rates and changing economic conditions may contribute to increased liquidity risk. 

On-balance sheet liquidity includes noninterest-bearing cash, interest-bearing cash, unpledged securities, 

federal funds sold, and securities purchased under resale agreements. With interest rates rising, many 

community bank securities portfolios reflect unrealized losses, making those assets a less favorable primary 

liquidity option. 

Source: FDIC.

Note: Short-term liquid assets include all cash balances, securities with maturities less than one year, federal funds sold, and securities purchased 

under agreement to resell. 

Five Percent of Community Banks Report Low Levels of Short-Term Liquid Assets

Dots on the map represent the 198 community banks (4 percent of all banks) that report short-term liquid asset ratios below 

2 percent total assets in first quarter 2023 

• About 96 percent of community banks report some degree of unrealized losses in their

securities portfolio, with 36 percent of community banks reporting unrealized losses higher than 25 percent of 

tier 1 capital.

• Short-term liquid asset ratios among community banks increased slightly in first quarter 2023 due to increased 

cash holdings. 

• However, more community banks (198) report short-term liquid assets below 2 percent of total assets through 

first quarter 2023 compared to pre-pandemic 2019. 
58 | 2023 Risk Review

Liquid assets among community banks declined 

in 2022 and continued to fall in first quarter 2023. 

Among community banks, liquid assets to total 

assets declined to 20 percent at year-end 2022, down 

from nearly 27 percent in 2021 (Chart 38). This ratio 

continued to decline in first quarter 2023, with liquid 

assets falling to 19 percent of total assets and nearing 

the 2019 pre-pandemic level of 18 percent. Most 

liquid assets (more than 64 percent) were composed 

of securities, which depreciated considerably in 2022 

amid rising interest rates. Although reduced from the 

2021 level, the community bank liquidity ratio, which 

reflects the effects of unrealized losses, continued 

to exceed the 2019 pre-pandemic level through first 

quarter 2023. For many community banks, cash 

assets increased significantly early in the pandemic, 

with much of that increased liquidity the result of 

household stimulus money and proceeds from small 

business Paycheck Protection Program loans. 

The most readily available liquidity sources, such 

as cash and due from accounts and federal funds 

sold, decreased the most since 2021. However, cash 

balances rose in first quarter 2023 as banks increased 

wholesale funding in response to uncertainty caused 

by recent bank failures. This caused short-term 

liquidity to improve during the quarter despite 

the overall decline in total liquid assets. Among 

community banks, the median short-term liquid assets 

to total assets ratio decreased from 14.5 percent in 

2021 to 8.0 percent in 2022 before improving slightly 

to 8.6 percent in first quarter 2023. Noncommunity 

banks reported a similar trend in short-term liquid 

assets to total assets, with the ratio decreasing from 

12.1 percent in 2021 to 6.0 percent in 2022 before 

improving to 7.7 percent in first quarter 2023.

Community bank deposits grew, even as deposits 

declined for the total industry through first quarter 

2023. After unprecedented deposit growth during the 

pandemic, deposits reported by the banking industry 

began to normalize with total industry deposits 

declining by 4.9 percent between 2021 through 

early 2023, bringing total deposits to $18.7 trillion at 

first quarter 2023. High inflation and rising interest 

rates contributed to the decline in deposits, creating 

CHART 38

Community Bank Liquid Assets Decreased

Source: FDIC.

Note: The liquid assets to total assets ratio is a weighted average. Annual data except for first quarter 2023.

$ Billions Liquid Assets to Total Assets

Percent

275

406 375 329

106

282

119

141

21

18

22

27

20

19

0

5

10

15

20

25

30

0

100

200

300

400

500

600

700

800

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 1Q2023

Unpledged Securities (Le Axis)

Interest-Bearing Cash (Le Axis)

Noninterest-Bearing Cash (Le Axis)

Fed Funds & Repos Sold (Le Axis)

Liquid Assets to Total Assets (Right Axis)
2023 Risk Review | 59

increased deposit competition for some banks. A 

reduction in uninsured deposits in first quarter 2023 

contributed to the decline in total industry deposits. 

Although down considerably from the 2021 level, 

aggregate industry deposits remained much higher 

than the 2019 pre-pandemic level of $14.5 trillion. 

Despite the aggregate industry decline in deposits, 

community bank deposits grew 3.5 percent in 2022 

and 0.5 percent in first quarter 2023. The bank 

failures in March 2023 prompted depositor concerns 

and resulted in withdrawal pressures for uninsured 

deposits. Community banks tend to rely less on 

uninsured deposits than noncommunity banks and 

therefore tend to be less vulnerable to outflows of 

uninsured deposits.100 As of first quarter 2023, banks 

with assets under $10 billion, most of which are 

considered community banks, reported a median 

uninsured deposits to total assets ratio of 20 percent 

compared to the largest banks, which reported 

100 The estimated amount of uninsured domestic deposits is derived by subtracting the multiple of the standard maximum deposit insurance amount, as defined 

under 12 CFR 330.1(o) (currently $250,000), and the number of deposit and retirement accounts of more than the standard maximum deposit insurance amount 

(Schedule RC-O, Memoranda Items 1.b.(2) and 1.d.(2)) from the amount of deposit and retirement accounts of more than the standard maximum deposit 

insurance amount (Schedule RC-O, Memoranda Items 1.b.(1) and 1.d.(1)). Public deposits above the standard maximum deposit insurance amount equally are 

considered uninsured, even if the amounts are collateralized.

median uninsured deposits to total assets above 34 

percent in first quarter 2023 (Chart 39). In first quarter 

2023, noncommunity banks reported a 1.3 percent 

decline in total deposits, with most of that drop in 

uninsured deposit balances. Although community 

banks experienced a similar rate of uninsured deposit 

runoff, growth in insured balances of 3.7 percent more 

than offset a runoff of uninsured deposits during the 

quarter.

Community banks reported stronger loan growth 

and utilized cash balances. Loan growth increased 

for community and noncommunity banks in 2022, 

with community banks reporting loan growth of 14.4 

percent compared to noncommunity bank loan growth 

of 7.8 percent. Loan growth continued modestly into 

first quarter 2023, with community banks reporting 

loan growth at 1.8 percent compared to first quarter 

loan growth for noncommunity banks at 1.0 percent 

(see the Banking Industry section of this report for 

CHART 39

Small Banks Relied Less on Uninsured Deposits to Fund Assets

Source: FDIC.

Note: Most banks under $10 Billion in assets are classified as community banks. Annual data except for first quarter 2023.

Median Uninsured Deposits to Total Assets

Percent

33

34

16

20

0

5

10

15

20

25

30

35

40

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 1Q2023

Assets > $250 Billion

Assets $10 Billion–$250 Billion

Assets < $10 Billion
60 | 2023 Risk Review

CHART 40

Community Banks Relied More on Brokered Deposits and FHLB Borrowings

Source: FDIC.

Wholesale Funds

$ Billions

Wholesale Funding to Total Assets

Percent

16%

19%

13%

17%

18%

0

4

8

12

16

20

0

100

200

300

400

500

600

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 1Q2023

State and Municipal Deposits (Le Axis) FHLB Borrowings (Le Axis)

Brokered Dep (Less Recip) (Le Axis) Fed Funds/Repos Purch (Le Axis)

Internet Deposits (Le Axis) Other Borrowings (Le Axis)

Brokered Recip (Le Axis) Foreign Dep (Le Axis)

Wholesale Funding to TA (Right Axis)

more information on loan growth trends). As loan 

demand outpaced deposit growth, community banks 

used on-balance sheet liquidity to fund new loans in 

2022, primarily by drawing down interest-bearing cash 

accounts (Chart 38). On-balance sheet cash positions 

improved in first quarter 2023 as more community 

banks began building up cash from wholesale funding 

sources to safeguard liquidity. 

As liquid asset levels contracted, wholesale 

funding among community banks increased. 

Rising interest rates contributed to high unrealized 

losses on securities during 2022, and market stress 

concerns in first quarter 2023 led more banks to 

secure precautionary borrowing. Instead of liquidating 

securities and realizing losses, more community banks 

supported growing loan demand with increased 

wholesale funding, such as FHLB borrowings and 

brokered deposits. Through first quarter 2023, 

community banks reported that wholesale funding 

101 For more information, see the Federal Reserve’s description of the Bank Term Funding Program.

102 Many states require banks to secure the uninsured or entire balance for deposits of government entities such as state or local municipalities, with some states 

also imposing placement requirements that include minimum condition standards, such as specific capital levels, for the bank receiving the deposits. 

made up more than 18 percent of total assets, up from 

13 percent in 2021 and above the 2019 pre-pandemic 

level (Chart 40). 

For those banks with significant unrealized losses, 

certain counterparties such as the FHLB and large 

municipal or institutional depositors may impose 

restrictions on funding. To manage these and 

other risks to bank liquidity arising from securities 

depreciation, the Federal Reserve created the Bank 

Term Funding Program (BTFP) in March 2023. The 

BTFP provides liquidity to deposit institutions by 

lending at par against eligible collateral.101

The composition of wholesale funds held by banks 

tends to vary between community and noncommunity 

banks. Traditionally, community banks report a higher 

proportion of municipal and state funds compared to 

noncommunity banks (noncommunity banks report 

more in brokered deposits).102 Through first quarter 
2023 Risk Review | 61

2023, municipal and state funds accounted for more 

than 46 percent of wholesale funds reported by 

community banks, followed by FHLB borrowings at 

22 percent and brokered deposits at 20 percent. In 

comparison, noncommunity bank wholesale funds 

tend to be more widely sourced, led by brokered 

deposits at 25 percent, FHLB borrowings at 19 percent, 

and other borrowings at 15 percent. In response to 

the bank failures in March 2023, both community 

banks and noncommunity banks reported increased 

precautionary borrowings in the first quarter as many 

banks looked to build up cash.

Rising interest rates and changing economic 

conditions may contribute to increased liquidity 

risk. Continued inflationary concerns and 

expectations for sustained higher interest rates may 

heighten liquidity risk among community banks, 

particularly if securities portfolios depreciate further, 

loan growth continues, and core deposits recede 

from pandemic highs. In addition, social media 

and increased digitalization may amplify the speed 

and severity of deposit outflow, which may shorten 

available reaction time at points of deposit stress. 

The FDIC continues to focus on liquidity risks across 

the banking industry, including the impacts of bank 

failures on liquidity at institutions and implementing 

appropriate supervisory actions. 
62 | 2023 Risk Review

Net Interest Margins and Interest Rate Risk 

• Rising interest rates benefited full-year net interest margin (NIM) in 2022, which increased sharply from 

2021. But funding pressures intensified for many banks in first quarter 2023, causing NIM to decline.

• Many banks increased the share of long-term securities on their balance sheets in 2020 and 2021 amid 

weak loan demand (net of Paycheck Protection Program loans), contributing to greater interest rate risk 

across the industry. 

• Banks with a higher share of long-term assets have reported more depreciation in investment portfolios 

and less NIM improvement than other institutions.

• Banks could find managing NIM more difficult in 2023 should interest rates remain elevated or continue to 

rise amid increasing competition for deposits. 

103 See the first quarter 2023 FDIC Quarterly Banking Profile for asset size groupings. 

104 The “pre-pandemic average” refers to the period first quarter 2015 through fourth quarter 2019.

105 SOFR is the Secured Overnight Financing Rate. LIBOR is the London Interbank Offered Rate. 

106 Angela Hinton and Chester Polson, “The Historic Relationship Between Bank Net Interest Margins and Short–Term Interest Rates,” FDIC Quarterly 15, no. 2 

(2021), article 1.

107 The discrepancy between the increase in yields minus the increase in funding costs and the change in NIM is due to rounding.

The banking industry’s annual NIM rose last year 

from the record low set in fourth quarter 2021, 

but quarterly NIM declined slightly in first quarter 

2023. Industry-wide full-year NIM rose from a record 

low 2.54 percent in fourth quarter 2021 to 2.95 percent 

in fourth quarter 2022, reflecting higher asset yields 

and strong loan growth in the final three quarters 

of 2022. Noncommunity banks reported a greater 

increase in NIM than did community banks, with a 45 

basis point increase to 2.89 percent in 2022, and more 

than 80 percent of noncommunity banks reporting an 

increase. NIM at community banks rose 17 basis points 

to 3.45 percent, with nearly two-thirds of community 

banks reporting an increase (Chart 41). 

While annual NIM performance was strong in 2022, 

quarterly trends showed mounting pressure from 

rising funding costs in late 2022 and early 2023. 

Quarterly NIM growth slowed from a record high 35 

basis point increase in third quarter 2022 to a 23 basis 

point increase in the fourth quarter before declining 7 

basis points in first quarter 2023 as the rise in funding 

costs more than offset higher asset yields (Chart 42). 

NIM compression affected all bank asset size groups 

in first quarter 2023 except for the smallest asset size 

group, those banks with total assets less than $100 

million.103 Although down from the prior quarter, 

the banking industry’s first quarter 2023 NIM of 3.31 

percent remained above the pre-pandemic average. 

Community bank NIM, which declined by a larger 

amount than the industry overall, remained higher 

than that of noncommunity banks.104 The last time 

quarterly NIM declined was first quarter 2022, when it 

declined by 1 basis point.

In contrast to first quarter 2023, bank funding costs 

did not rise as fast as short-term market rates last year, 

allowing banks to benefit from higher NIMs despite 

an inverted yield curve. During 2022, the increase in 

NIM was primarily due to two factors: the steep rise 

in asset yields that outpaced rising funding costs and 

strong growth in loan balances throughout 2022. 

Higher interest rates in 2022 lifted asset yields, which 

drove the increase in NIM. Reference rates of various 

maturities, such as the prime rate, SOFR, LIBOR, and 

the ten–year Treasury, all rose in 2022 as the Federal 

Reserve continued to raise its target rate.105 As is 

typical in rising interest rate environments, most 

banks were able to reprice their assets upward more 

quickly than their liabilities.106 Industry-wide quarterly 

annualized asset yields rose 183 basis points year 

over year to 4.54 percent in fourth quarter 2022, while 

quarterly annualized funding costs rose only 100 

basis points in the same period. As a result, between 

fourth quarter 2021 and fourth quarter 2022, NIM 

for the banking industry rose 82 basis points, setting 

another record as the largest year–over–year increase 

in quarterly NIM in available data. 107 All components of 

interest income contributed to the increase in industry 

yield, but the largest driver of the increase was interest 
2023 Risk Review | 63

CHART 41

NIM Rose in 2022 for the First Time Since 2018

Source: FDIC.

Note: Full-year weighted average net interest margin as of fourth quarter each year.

Full-Year Net Interest Margin

Percent

3.45

2.89

2.95

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022

Community Banks

Noncommunity Banks

Industry

Quarter-Over-Quarter Change in Industry NIM Components

Basis points Percent

Source: FDIC.

Note: Quarterly weighted average yield on earning assets and cost of funds; quarterly data through first quarter 2023. Target Federal 

Funds Rate is upper limit of target.

CHART 42

NIM Declined in First Quarter as the Average Cost of Funds Rose More Than

the Average Yield on Earning Assets 

-5

-3

-1

1

3

5

7

-80

-60

-40

-20

0

20

40

60

80

100

Mar-18 Sep-18 Mar-19 Sep-19 Mar-20 Sep-20 Mar-21 Sep-21 Mar-22 Sep-22 Mar-23

Yield on Earning Assets (Le Axis)

Cost of Funds (Le Axis)

NIM (Le Axis)

Target Federal Funds Rate (Right Axis)
64 | 2023 Risk Review

income on loans. Among loan categories, loans 

secured by non-1–4 family real estate and commercial 

and industrial loans contributed the most to the 

increase in asset yields. After loans, the next largest 

contributor to the increase in industry asset yields 

between December 2021 and December 2022 was 

cash and balances due from depository institutions. 

Total loans and cash and due from balances were also 

the largest contributors to the increase in asset yields 

reported in first quarter 2023.

Strong loan growth during 2022 shifted earning 

asset composition and enhanced the positive 

effect of higher loan yields on NIM before slowing 

in first quarter 2023. The industry reported strong 

nominal loan growth of 8.7 percent in 2022, well 

above historical annual loan growth rates. Strong 

loan growth in 2022 shifted the industry composition 

of bank assets away from record-level holdings of 

lower-yielding cash and securities back toward greater 

proportions of higher-yielding loans. By first quarter 

2023, the industry ratio of cash and securities to assets 

had declined from a record high 41.3 percent in fourth 

quarter 2021 to 35.6 percent, and the industry ratio 

of loans to assets had risen from a record low 47.0 

percent in third quarter 2021 to 51.5 percent (Chart 

43). In contrast to loan growth during 2022, loan 

balances declined 0.1 percent in first quarter 2023, 

moderating the positive effects of lending activity on 

NIM. This contributed to the slowing of growth in asset 

yields in first quarter: growth in asset yields declined 

from more than 70 basis points per quarter in third 

and fourth quarter 2022 to 38 basis points in first 

quarter 2023.

Industry funding costs continued to rise through 

first quarter 2023, driven by expense on time 

deposits. Industry-wide quarterly funding costs rose 

100 basis points to 1.16 percent between December 

2021 and December 2022. At that time, this was the 

CHART 43

Bank Balance Sheet Compositions Began to Normalize in 2022

Source: FDIC.

Note: Quarterly data through first quarter 2023.

Percent of Assets

79

51

36

0

10

20

30

40

50

60

70

80

90

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Deposits

Total Loans and Leases

Cash, Balances Due From Depository Institutions, and Securities
2023 Risk Review | 65

largest year-over-year increase since third quarter 

2006.108 The largest contributors to the increase 

in funding costs throughout 2022 were savings 

deposits and interest–bearing transaction accounts. 

Noncommunity banks, which typically hold greater 

shares of rate-sensitive deposit accounts, reported a 

much larger increase in the cost of interest-bearing 

deposits than community banks (126 basis points 

versus 70 basis points). Deposit balances declined 

in the final three quarters of 2022 and first quarter 

2023, bringing their share relative to assets closer to 

pre-pandemic levels and pressuring banks to raise 

rates on deposit products. Funding costs rose 45 basis 

points in first quarter 2023 as banks attempted to 

stem deposit outflows or sought alternative sources of 

funding. In contrast to 2022, the largest contributor to 

the increase in funding costs in first quarter 2023 was 

time deposits. As was the case in 2022, noncommunity 

banks reported a larger increase in their total funding 

costs and cost of interest-bearing deposits in first 

quarter 2023 than did community banks. 

Banks with a higher share of long–term assets to 

total assets reported a smaller increase in NIM and 

larger depreciation in securities portfolios than 

their counterparts.109 Banks that started 2022 with 

the highest share (top one-third) of long–term assets 

to total assets reported a 19 basis point increase in 

quarterly NIM between fourth quarter 2021 and first 

quarter 2023. Banks with the lowest share (bottom 

one-third), on the other hand, reported an increase 

of 98 basis points. Banks with a higher proportion of 

long-term assets that were locked in at lower rates had 

fewer opportunities to benefit from rising rates. 

The sharp rate hikes in 2022 caused significant 

depreciation in the market value of bank investment 

portfolios, reducing the value of long-term securities 

the most. (See the Banking Industry section of this 

report for more information on unrealized losses on 

securities).Banks with the highest share of long-term 

securities (those maturing or repricing in three years 

or more) to total assets reported a rate of depreciation 

108 Industry-wide quarterly funding costs rose 102 basis points year over year in third quarter 2006.

109 Long–term assets are those maturing or repricing in more than three years. Banks with the lowest share of long-term assets to total assets are those in the 

bottom third of institutions, with a share of 39.7 percent or less as of fourth quarter 2021. Banks with the highest share of long-term assets to total assets are 

those in the top third of institutions, with a share of 51.8 percent or more.

on those securities of 9.8 percent in first quarter 

2023, while banks with the lowest share reported 

depreciation of only 6.3 percent. Although 2022 proved 

to be a challenging year in terms of unrealized losses 

on bank investment portfolios, pressure lessened in 

first quarter 2023 as medium- and long-term interest 

rates declined and securities issued during lower 

interest rate environments continued to mature.

Banks could find managing NIM more difficult 

in 2023 should interest rates remain elevated or 

continue to rise amid increasing competition for 

deposits. For the greater part of 2022, banks were 

generally able to pass interest rate increases on to 

borrowers while maintaining low funding costs. 

However, toward the end of 2022, bank funding costs 

began to rise more steeply, and growth in asset yields 

moderated. By first quarter 2023, the increase in 

funding costs outpaced the increase in asset yields. 

As depositors seek stability and search for yield, it is 

plausible that increased deposit runoff could pressure 

banks to continue to raise deposit rates from last 

year’s low levels to remain competitive for deposits, 

which would add further upward pressure on funding 

costs. Given the uncertainty surrounding interest rates 

and the economy in 2023, loan growth may continue 

to be subdued and therefore provide less support to 

net interest income and NIM than was the case in 2022. 

While upward pressure on bank funding costs suggests 

a weak outlook for NIM in 2023, unrealized losses on 

investment portfolios may abate, absent additional 

rate shocks.