The Federal Reserve raised rates 25 basis points last week, its first increase since 2023, after three straight cuts. Most of the coverage will focus on what it means for borrowing costs. That’s the easy story. The harder question, and the one that matters more for community and regional banks, is what a reversal like this does to a bank’s deposit base and its bottom line, and whether the relationship a bank believes it has with its customers is strong enough to hold up under pressure.

That answer depends on visibility most banks are still building. Not because they lack solid relationships, but because they lack the tools to tell which relationships are load-bearing and which ones are no more than a rate on a screen.

Bankers already track this kind of moment through four key KPIs: cost of deposits, deposit growth, non-interest income, and loan-to-deposit ratio. The recent rate move touches all four, and some harder than others.

Key Takeaways

• Fed rate hikes reveal deposit stability risk. Banks need clearer visibility into which deposits are operational, sticky, and relationship driven.
• Rate-based retention has limits. High-rate CDs can replace balances temporarily, but they may raise funding costs without improving long-term deposit quality.
• Fee income deserves board-level attention. Non-interest income can help offset margin pressure when deposit costs rise faster than loan yields.
• Loan-to-deposit pressure makes deposit intelligence essential. Account-level insight helps banks protect liquidity, profitability, and relationship banking strength.

Sticky Deposits Vs. Rate-Sensitive Deposits

Every institution talks about deposit retention as if it’s a single problem with a single lever: offer a competitive rate, keep the money. That framing misses something that the recent rate hike makes obvious.

Deposits split into two very different behaviors. Some balances are functionally tied to how a business or household operates: payroll funding, receivables, recurring bill pay, the working cash a business can’t move without disrupting itself. Those deposits are sticky because moving them to another institution costs more than the rate difference is worth. Other balances are parked cash with no operational tie to the bank at all. Those deposits move the moment a better rate appears somewhere else—and they move fast.

Bank regulators already treat this as fact. Operational deposits get more favorable liquidity treatment under Basel III, precisely because they don’t run during stress. Non-operational deposits do.

That migration is already underway, and banks are responding to it in a way that buys time rather than solving the problem in the long term. Money market fund yields track the market closely and are the most sensitive to Fed rate changes: the 10-year Treasury hit 5.04% on September 15, the highest level since July 2007. Non-operational deposits followed the yield, exiting community and regional banks. Recent data from the S&P Global Market Intelligence shows a direct response to win that money back with a spike in banks offering one-year term CDs with rates above 3.5%.

But a CD priced to compete with a money market fund is still rate-driven money. Winning it back doesn’t convert it into a stable operational deposit. When the CDs mature, now that there’s been a rate hike, the same depositor shops again. The institution hasn’t corrected the deposit mix. The deposit has been rented for twelve months—and at a high cost.

The Margin Story Is Bigger Than It Looks

There’s a second layer here that deserves more attention than it’s getting.

Many banks are still carrying the fallout from the 2022-2023 rate spike: fixed-rate securities bought when yields were low, still sitting below the rate that they were purchased at. The 2025 cutting cycle offered some relief. Unrealized losses across FDIC-insured institutions fell from a 2023 peak to roughly $306.1B by the end of last year, but long-term yield stayed higher than the Fed’s short-term cuts would suggest, so that relief was partial at best. This rate reversal now interrupts the recovery that was still underway.

Combine that with deposit costs repricing faster than loan yields adjust, plus standard margin compression, and a bank is facing pressure from both sides of the balance sheet at once.

This is where fee income stops being a side conversation. A recent analysis by SouthState Correspondent Division of community bank performance data found that fee income has a stronger correlation to return on assets and return on equity than net interest margin, asset size, or nearly a dozen other variables tested. Community banks still generate a smaller share of revenue from fees than regional or national institutions, so the opportunity to grow fee income is significant. Fee income is resilient; it doesn’t reprice with changing Fed rates, doesn’t carry duration risk, and keeps generating revenue whether rates rise, fall, or sit still. A bank exposed on margin and duration at the same time needs a revenue source that isn’t exposed to either. That’s what fee income provides right now and why it deserves board-level attention.

The Loan-to-Deposit Squeeze

There’s a fourth number on the move that’s worth watching. When deposits leave for higher-yielding alternatives faster than a bank’s loan book shrinks, loan-to-deposit ratios (LDRs) climb, leaving a funding gap that banks need to close.

Commercial banks are already doing exactly that. Federal Home Loan Bank (FHLB) advances rose 20% in the second quarter to $810.7B. Commercial banks accounted for roughly 90% of the $134B increase. That borrowing is a direct response to depositors moving toward money market funds as Treasury yields climbed.

The FHLB advances were designed for this kind of moment, when banks need a reliable source of liquidity. But every basis point that a bank pays for a wholesale advance instead of organic customer deposits is margin that doesn’t come back.

Making the Relationship Advantage Hold

Community and regional banks have spent years telling a story about relationship banking being their advantage over larger institutions and fintechs. This is the moment that will test whether it’s an advantage or a comfortable assumption.

A relationship only functions as a retention tool if the institution can act on it before the customer acts first. That requires knowing, at the account level, which deposits are operational and which aren’t, which customers are rate-sensitive and which are anchored by daily workflow, and which business relationships are one phone call away from strengthening and one silence away from leaving.

That level of visibility is still a work in progress for most institutions. CSI’s 2026 Banking Priorities Executive Report found that only 11 percent of community banking leaders rate their institution’s data strategy as highly effective. Many will read that as a technology statistic, but it’s more of a readiness statistic; it shows that most banks find out who their flight risks were after they’ve already left. That gap makes deposit risk hard to anticipate, but it’s not hard to manage once it’s visible.

The Question Every Banking CEO Should Be Asking

Don’t spend this quarter reacting to a rate. Spend it asking a harder question: if 10 percent of your non-operational deposits walked in the next 60 days, would you know which accounts those were before they left, or would you find out from a balance report at month end?

That’s the actual risk sitting inside this Fed rate hike, and it has very little to do with the 25 basis points themselves. It has more to do with whether a community financial institution’s relationships with its customers are as concrete as they assume, or if it’s just wishful thinking.

That work comes down to the same four factors now in play. Deposit visibility and intelligence tells a bank which relationships are operational and durable versus which are parked cash waiting for a better offer. Deposit mix determines how much of the balance sheet behaves like committed capital instead of hot money, regardless of what the Fed does next. Fee income gives a bank a source of revenue that holds steady while margin and duration are under strain. Lastly, LDR pressure shows the cost of not putting enough attention on the first two factors: funding gaps filled with wholesale borrowing instead of local deposits.

Banks that treat this rate policy reversal as a signal to strengthen deposit intelligence and embed themselves into clients’ daily workflows will come out of this cycle with a stronger, more diversified balance sheet. The ones that treat it as a pricing problem alone will have addressed the symptom, but not the structural shift underneath it.