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Home>Insights>Core Deposit Growth Strategy: Part 2

Core Deposit Growth Strategy: Part 2

Jun 26, 2023Growth

What are the growing performance trends for Credit Unions and Community Banks?

Analyzing Credit Union and Community Bank Performance Trends: A Decade in Review

Previously in this article series, Core Deposit Growth Strategy: Part 1, we looked back over a period of 20 plus years to learn the history of what led the financial services industry to today’s environment. Now, we’ll zoom our lens further in to the past 10 years in particular, focusing on key credit union and community bank performance trends, and how recent large-scale change in the world affects your institution’s next stage of growth.

Peer Group Analysis: How Credit Union and Community Bank Asset Size Influences Growth

Furthermore, for a comprehensive comparison, let’s start by breaking down financial institutions into six peer groups based on asset size:

Assets < $2 million
Assets $2 million – $10 million
Assets $10 million – $50 million
Assets $50 million – $100 million
Assets $100 million – $500 million
Assets > $500 million

The Impact of the Great Recession and COVID-19 on Credit Union and Community Bank Assets

Graph of Assets for 6 asset size categories from under $2 million to $500 million and up showing the 4 lowest categories at the very bottom with a barely visible increase beginning in 2021, the $50-$100 million category showing a little more noticeable increase beginning in 2019, and the $500 million and up category with a steady increase until 2019 when steeper increase begins until 2022 when the original rate of increase begins again..

By 2013, the Great Recession was a fading memory, but its influence is still evident.

As of then, things are moving along pretty well, rates are low, and we’ve never heard of covid.

That’s our point of origin for this discussion.

Graph of Asset Growth for 6 asset size categories from under $2 million to $500 million and up showing all categories generally moving in parallel with a slight decrease from 2014-2019, a steep increase from 2019-2020 then decreasing to 2023.

Asset growth was pretty consistent through about 2018, and then the ride got bumpy. Once the pandemic is underway, we see assets in a near-vertical climb.

Also, asset growth within a peer group correlates to the asset size of the peer group, resulting in bigger institutions growing faster.

Graph of Deposit Growth for 6 asset size categories from under $2 million to $500 million and up showing all categories generally moving in parallel slightly decreasing from 2014-2018 with a steep increase from 2019-2020 then decreasing to 2023.

Deposit growth trends

Of course, deposit growth was the real driver of asset growth at that time, fueled by various forms of government stimulus being pumped into the economy during COVID as well consumers playing it safe by stockpiling savings as the stock market looked like a scary place to park one’s hard-earned money.

This trend peaked in 2020, and deposit growth returned to something close to normal by 2022.

Graph of Loan Growth for 6 asset size categories from under $2 million to $500 million and up showing all categories generally moving in parallel slightly decreasing from 2014-2020 with the lowest 3 categories going below 0 for 2020, slightly increasing from 2020-2021, a spike in 2022, and all categories returning to approximately the same level in 2023.

Loan growth trends

Loan growth tells a similar story with a couple of plot twists along the way. As with assets and deposits, the loan growth rates are almost perfectly correlated with asset size.

Prior to the pandemic, loan growth rates were stable (or declining a bit for the largest financial institutions). The pandemic’s impact on loan growth is almost a mirror image of deposit growth. During the pandemic, consumer uncertainty and rising interest rates combined to quash loan demand.

Post-pandemic, pent-up demand and lower interest rates drove more loan demand, which continued even as rates began rising in mid-2021 (perhaps with some borrowers rushing to close loans before rates rose even higher).

Loan-to-Deposit Ratio: A Key Indicator of Financial Institution Performance

Graph of Loan/Share Ratio Growth for 6 asset size categories from under $2 million to $500 million and up showing all categories generally moving in parallel slightly decreasing from 2014-2016, slightly increasing from 2016-2018, a sharp decline from 2018-2020 when it goes below 0%, a sharp increase from 2020-2022, and a sharp decline from 2022-2023.

The nature of the banking industry is a balancing act between deposit acquisition and loan dispersal. Accordingly, the loan to deposit ratio is one of the fundamental measures of any institution’s performance. The loan to deposit ratio gradually grew 2013 – 2018, and then things got interesting.

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Exploring Net Interest Margin Trends in the Credit Union and Community Bank Sector

Graph of Change in Net Interest Margin for 6 asset size categories from under $2 million to $500 million and up showing all categories generally moving in parallel around 0% from 2014-2016, slightly increasing from 216-1018 to above 0%, decreasing from 2018-2021 to below 0%, a sharp increase from 2021-2022, and all categories diverging in different directions from 2022-2023.

As you know, similar to the loan to deposit ratio, net interest margin is a key metric that tracks the combined effectiveness of the institution’s deposit-gathering and loan-granting activities.

Loan and deposit rates are both set by the individual institution but are also constrained by the Federal Reserve’s activity too as competitive response. But, as you also know, loan and deposit volumes are influenced not only by pricing, but also by an institution’s strategic day-to-day and long-term performance in marketing, reputation, customer service, and convenience.

With this in mind, this is a great place to reflect and ask yourself “what can my institution do next to achieve our net interest margin goals?”

Navigating the “New Normal”: Challenges and Strategies for Financial Institutions

The takeaway from of all this is that it’s too soon to tell exactly what the “new normal” will look like, but we can certainly use our experience and assessment to confidently project:

Higher rates will raise the cost of funds, putting the spotlight on core deposits and other low-cost deposits.
Higher rates may also dampen loan demand, at least in the short to intermediate term (sooner or later, cars have to be replaced, families need to move, and unexpected life events happen!).

Previously, some institutions have created high performance lending teams over the low-interest rate era, but diminished loan demand in the present and near future may constitute a refocusing of your strategy.

So, what can be done?

Our next and final post in this series will examine some strategies to pursue core deposits as one way of managing the “new normal” and boosting your net interest margin.

Leveraging Technology and Strategic Planning for Credit Union and Community Bank Success

In this dynamic landscape, financial institutions must adapt to changing member or customer expectations and leverage technology to deliver exceptional retail bank customer experiences. Embracing data-driven retail financial institution consulting and strategic planning can position your credit union or community bank to thrive in the evolving market.

At LEVEL5, we understand the unique challenges faced by financial institutions and offer expert guidance in financial institution strategy and planning. Our 20 years of experience as pioneers in modern bank design and retail bank consulting, enables us to deliver innovative solutions tailored to your institution’s needs.

Whether you’re exploring credit union or community bank branch construction, credit union or community bank branch design, or branch transformation, our national design build services ensure a seamless process from start to finish. We specialize in strategic planning for financial institutions, market analysis, and designing the branch of the future.

Contact Level5 For Help with Your Core Deposit Growth Strategy

Contact us today to learn more about how LEVEL5 can help you navigate the changing landscape of the financial industry and achieve your growth objectives. Let’s build the future together.