CFI Deposit Strategy in a Shifting Rate Environment

Each year, migratory birds follow routes shaped by instinct and familiarity. When conditions change, such as shifts in temperature, food availability, or habitat, those patterns adjust quickly. Any deviation from the normal route isn’t random; it reflects a response to new incentives, as flocks redistribute toward more favorable environments, often before the reasons why become clear to observers on the ground.

Today’s deposit environment offers parallels with bird migration strategies. Much like those shifting migration patterns, depositor behavior is being reshaped by changing conditions, namely, new alternatives, evolving rate dynamics, and increased awareness of where funds can earn or do more. With the GENIUS Act and ongoing competitive rate pressures, depositors will soon face a broader and more compelling range of options across transactional, savings, and investment needs. Forward-looking financial institutions are preparing now for a more competitive deposit landscape by strengthening their value proposition and ensuring clear differentiation in the eyes of customers.

Now, rate pressures are subsiding a bit with the Fed having cut 75bp in 2025 and a potential cut slated for the second half of 2026. However, the deposit base many community financial institutions (CFIs) are sitting on looks very different from what it was three years ago. In other words, while the recovery in net interest margin (NIM) is real, so is the fragility beneath it.

For CFIs, here are five priorities worth considering for your deposit strategy before the rate environment does the deciding.

Community bank NIM reached 3.77% in Q4 2025 — its highest level since 2018, according to the FDIC's Quarterly Banking Profile. That's an encouraging headline, but the deposit mix data tells a more complicated story. 

Indeed, noninterest-bearing deposits (i.e., the most stable, lowest-cost funding available) fell to just 21.8% of total domestic deposits by the end of 2024. This proportion is the lowest share of noninterest-bearing deposits since 2010.

Meanwhile, the share of brokered and reciprocal deposits at community banks remains elevated. While reliance on brokered deposits has declined from its peak in Q1 2020, current balances as of Q4 2025 remain well above pre-COVID-19 historical levels.

A NIM recovery driven by this deposit mix remains highly exposed to elevated deposit betas, with funding costs likely to reprice quickly as rate dynamics shift. Rate-sensitive balances, including time deposits and brokered funds, will continue to reprice in line with market conditions, while reciprocal deposits introduce additional variability in funding stability. As these balances mature or reprice, institutions should expect increased pricing pressure and potential outflows, particularly among rate-driven customers. This dynamic stands in contrast to relationship-based deposits, where integrated operating accounts, treasury services, and credit relationships create meaningful switching costs and contribute to more stable, lower-beta funding.

Institutions should consider segmenting their deposit base distinguishing rate-sensitive balances from relationship-anchored ones and build a realistic picture of runoff risk for each before repricing pressure accelerates. 

One of the most consequential decisions CFIs will make over the next 12 months is the pace and timing of deposit rate reductions as the Fed continues its easing cycle. However, moving early and aggressively to lower rates carries different implications than adjusting in line with or behind the market. Depositors notice. Rate-sensitive balances acquired during the high-rate era remain attuned to available alternatives. Abrupt or outsized repricing actions risk accelerating attrition rather than preserving margin. 

The CSBS 2025 Annual Survey of Community Banks found that 84% of community bankers named core deposit growth as a critical external risk. Funding costs for community banks fell 24bp from Q4 2024 to Q1 2025, a sign that repricing is already underway. NIM was cited as the most important external risk.

Meanwhile, Angel Oak Capital's 2026 financial outlook noted community banks are "gathering core deposits and reducing excess liquidity" as dual strategies for both earnings improvement and balance sheet quality. This underscores that leading institutions are not simply focused on lowering deposit costs, but are actively reshaping their funding mix to replace rate-driven balances with more stable, relationship-based deposits. Pricing discipline in the early stages of a cutting cycle can buy time to grow the lower-cost, relationship-based deposits that will hold up longer.

The structural shift away from noninterest-bearing deposits over the past three years is not simply a cyclical phenomenon that will reverse on its own. Lower rates reduce the opportunity cost of holding funds in checking accounts, and the FDIC reported that core deposits rose in Q1 2025 while reliance on expensive wholesale funding declined.

However, depositors who discovered high-yield alternatives during the rate-hike cycle don't entirely forget those options exist. Rebuilding a durable core deposit base requires more than waiting for rates to fall far enough.

Cash management services along with integrated payment processing features are the foundation of stable, low-cost funding. These accounts are stickier not because of the rate, but because of operational integration. The greater the share of a business’ primary operating account, particularly those supporting payroll, vendor payments, and integrated sales receipts within a single institution, the higher the associated switching costs to move elsewhere. 

The Kansas City Fed has documented that the edge CFIs have over big banks comes from exactly this kind of relationship depth. The challenge is that the competitive landscape, which includes larger banks with greater digital capabilities and fintech-enabled alternatives, has made it harder to win these accounts. Smarter banks stay focused on their local niche markets, and focus on the depository and payment products that help them compete. For specialty deposit processing, a selective addition of regulatorily approved partners may help round out the institution’s depository product offerings.

Every CFI already has the raw materials for a meaningful deposit retention strategy: transaction data, account tenure records, product utilization history, and relationship depth metrics. The CFIs that successfully navigate the next 12–18 months will use this information proactively to identify accounts that show signs of rate sensitivity, customers with single-product relationships, and accounts at risk of repricing.

Proactive outreach is consistently more effective than reactive retention. A banker who calls a business customer to discuss their operating account structure before a CD matures creates a different conversation than one who responds to a customer who has shopped alternatives.

The good news is that the data identifying these moments exists in core banking systems; however, accessing it and turning it into actional data may require assistance. The discipline to act on this data prudently and systematically is what separates CFIs that retain relationships from those that win them back at a premium.

The most effective deposit-retention strategy available to a CFI is also the oldest: make yourself indispensable. Customers who use multiple products are less likely to reprice or leave when rates shift. The costs involved in switching banks isn't only a rate differential, either. That friction is a genuine competitive advantage, and it can compound over time if you continue to add value to the relationship. 

This is where CFIs have a structural edge that large banks and fintech platforms struggle to replicate. A relationship manager who communicates effectively and knows a business customer's unique cash flow patterns, credit history, ownership transition timeline, and horizon years' plans is providing something no rate-matching algorithm can replicate.

Indeed, CSBS survey data consistently shows that community banks compete most effectively against larger institutions in terms of relationship depth, local knowledge, and advisory capability. Pricing deposits is only part of the value provided and should be explicitly discussed with your client.

The NIM recovery of 2025 is real and worth protecting. The way to protect it isn't to ride it out, but to build up the underlying deposit foundation that will hold up with future environmental changes. The institutions that succeed will be those that recognize these shifts early, respond to them deliberately, and position themselves as the most compelling destination within this new landscape. That means building relationships that anchor funds beyond rate, using data to anticipate movement before it happens, and reinforcing the value proposition that keeps customers from looking elsewhere in the first place.