By Roy Urrico
The importance of gaining deposits to fund loans and retaining branches as a viable channel to reach banking customers are subjects of a report – Outlook 2024: Industry Trends and the Challenges Ahead – from Bancography, as well as a discussion with Steven Reider, the founder and president of the Birmingham, Ala.-based financial services consulting firm that produced the analysis.
Published in March 2024, the report brings to light a number of developments favorable to credit unions and banks, including a decline in interest rates, unlocking of the currently stagnant first-mortgage market, and a revival of commercial loan demand. Reider, a 25-year veteran of the financial services industry, spoke with Finopatamus to provide industry observations and report insights.
“You ask a senior exec what keeps them up at night, and they'd give you a roster of half a dozen different topics from the rate environment to regulatory issues to fee issues and such,” said Reider. “But, on the delivery side, particularly for a smaller institution, it becomes challenging because for the community bank or for the local community credit union, the branch is a differentiator. It is a way to put our people out in front of the communities. It is a billboard for our awareness.”
Deposit Growth Patterns and Loan Funding
The report explained as deposit growth patterns normalized, credit unions and smaller banks realized a greater percentage deposit growth than larger banks. This may in part reflect larger banks deliberately allowing excess liquidity to run off, as banks in the largest asset tiers suffered deposit declines of about 5% over the past year.
In contrast, credit unions and the smallest tier of banks showed flat deposit growth in the most recent year. Over a longer four-year horizon, credit unions averaged 10% compound annual deposit growth, compared to 8% at smaller-tier banks and only 4% at larger-tier banks.
Among the challenges credit unions and banks face is finding the means to finance loan demand. The report noted while the industry overall loan-to-deposit ratio remains at relatively liquid levels, that average masks broad disparities within. Some credit unions and banks face ratios “approaching or even exceeding 100%, indicating an acute need to raise deposits.”
Nevertheless, overall industry deposits sit at a nearly $2 trillion, above the levels a pre-COVID trendline would have predicted for 2024. “And this suggests 2024 should see flat deposit growth, or perhaps a minimal increase propelled by a strong economy and soaring stock market.
“The scary part is if you were to plot the trend of U.S. deposits from 2003 to 2019, and then just kept that trend line going as if COVID never happened, we'd be at about $15.5 trillion in deposits,” Reider explained. “But in reality, we have about $17.2 trillion in deposits (closer to $18 trillion including credit unions) in the industry right now. That means that we are chasing what is likely to be a shrinking pool of deposits.”
Reider pointed out, there was a big deposit inflow during COVID from external sources, such as businesses receiving Paycheck Protection Program grants and Employee Retention Tax Credits and consumers receiving one-time stimulus payments.
The Outlook reported, “The mathematics of loan demand increasing at a faster pace than deposit growth indicates continued pressure for bankers striving to raise funds, and especially to do so at reasonable cost. This signifies a need for active marketing initiatives, innovative product offerings, and a disciplined approach to pricing, reserving premium rates for only the largest and most valuable overall relationships.”
Reider explained to Finopotamus that funding loans affects credit unions and banks differently. “The underlying cause for that is that the loan portfolios of the two institutions tend to be different. If you look at demand for automobile loans that never waned even during the trough of the pandemic and auto loan borrowing today is at all-time highs. And that tends to be a large part of credit union loan portfolios.”
Even mortgage borrowing, Reider said, continued on a steady and even accelerating trajectory through the pandemic and subsequent years. “But what declined and then plateaued was commercial and industrial (C&I) lending, which tends to be the bread and butter of a lot of commercial banks, but not so much the forte of credit unions. As a result, a lot of credit unions are facing liquidity challenges, right? We have plenty of credit union clients who are telling us we could grow our loan portfolio another 10% this year, if only we could find the deposits to fund it. Whereas a lot of banks have pretty broad capacity, have pretty significant liquidity right now.”
What About the Branches?
Branch closings abated in the past year, the Bancography Outlook reported. After the industry closed nearly 8,000 branches in 2021 and 2022 combined, 2023 saw about 2,500 branch closures. However, banks and credit unions added more than 1,000 branches in 2023, yielding a net decline of 1,500 branches ‒ notably less than the net declines of 2,700 and 3,100 branches in the two years prior. “Even with net consolidation, the presence of more than 1,000 new branches confirms bankers’ willingness to invest in branches where market conditions allow,” said Reider.
The Bancography president also observed, “There has never been channel replacement in the history of banking. The ATM did not replace the branch, the call center did not replace the ATM, online did not replace the call center. Mobile did not replace online. Anytime we have given the client or the member one more channel to use, they have simply said, ‘Hey, thanks, I'll take that too.’ But they have never been willing to forego anything,” Reider said.
The challenges for the CFO of a mid-size credit union for example then becomes having all these channels demanding investment, Reider noted. “You only have one pool of non-interest expense to allocate. Yet again, consumers still want branches that leads to different technology models, different footprints and different personnel models in our branches.”
Problem Resolution for Branches
“Think about a world in which there were no branches for a moment, and the only way to compete for clients was online. Well, then you would have a very small number of very well financed institutions that dominated the advertising spaces and garnered the attention of consumers,” Reider explained.
He added, “The advantage we have is that if I can put a branch up in this small town or in this little neighborhood or at this downtown intersection, suddenly to that little micro community, I am there, I am present, and people get to know the services and our support for the community and the investments that we provide.”
Reider said he believes the “bricks and clicks” business model which combines physical and online operations into a single retail strategy is back. “We need to offer an online branch and a telephone branch, but that cannot be to the exclusion of physical branches.”
The Year Ahead: Favorable Dynamics
Finally, the COVID-induced migration to work from home, partially offset by the rise of hybrid office/home work models, will continue to carry banking industry implications. The extent to which downtown districts return to full employment will bring myriad impacts, both adverse and beneficial. According to the Outlook 2024 report, “A limited return to full employment would impair commercial real estate loan quality as occupancy in office towers wanes, but could also create new financing opportunities as developers convert downtown office buildings to residential use.”
Conversely, suburban communities and residential neighborhoods may reap the benefit of greater work-from-home and hybrid models, as consumers, now present all day in those markets, frequent local stores and branch facilities to a greater degree than in the prior, commuter-centric era.
As bankers consider the industry landscape in 2024, Bancography said it can provide branch performance evaluations, branch network optimization services, branch staffing reviews and marketing research.