Bank Board Exchange Ideas: Deposits and Liquidity

During a recent banking conference, my colleague and I led a peer exchange with community bank board members. To guide the conversation, we selected topics based on our experience and prior board surveys. The list included:

 - Liquidity and Deposits

- Credit Risk and Commercial Real Estate Stress

- Fraud

- Cybersecurity

- Economic and Geopolitical Uncertainty

- Strategic Execution

- Artificial Intelligence

- Succession Planning

- Wild Card (an open category)

 

Interestingly, no groups chose to discuss credit risk, CRE stress, geopolitical uncertainty, strategic execution, or any wild-card topics. Whether these felt too routine or too sensitive, they stayed untouched.

What captured the most attention—rightfully so—was liquidity and deposits. Since 2009, the number of U.S. bank branches has declined from nearly 100,000 to about 76,000 today, reflecting industry consolidation and branch profitability. Over the same period, the number of FDIC-insured institutions has nearly halved. Given this backdrop, branch consolidation, especially through mergers, is unsurprising.

As branches consolidated, the average deposits per branch grew dramatically. Using profitability data gathered across hundreds of community bank branches from my firm's profitability outsourcing service, reading right to left, we found that typical branch deposit levels more than doubled over the past decade. And these were community bank branches. No Wells Fargo, no Citi.

 

A similar trend appeared in deposit accounts, using retail money market accounts as an example. Ignoring the temporary spike during COVID, average balances rose from under $50,000 to roughly $80,000. Operationally, supporting an $80,000 account requires no more effort than supporting a $50,000 one, but it generates more spread income although it comes with more liquidity risk. The loss of one larger depositor hurts more.

The larger challenge for community banks is that they are not generating many net new deposit accounts. Big banks, fintech firms, and credit unions are winning the competition for new customers, creating constant headwinds. In response, community banks have increasingly pursued larger accounts—large commercial and municipal deposits. While helpful in the short term, these relationships tend to be volatile, especially in rising-rate environments, as recent Fed tightening demonstrated.

This is why banks must strengthen their marketing, sales strategies, and messaging about the value of depositing with a local institution. Deposits at community banks fund small businesses, local homeowners, and the broader community. In fact, a community bank can lend approximately $10 into its local economy for every dollar it earns in profit. By contrast, the destination of a fintech deposit is lost in translation.

 

Community banks have done well to grow and fund their balance sheets, but the concerns expressed by directors regarding future deposit gathering are well-founded. Chasing only large accounts while neglecting retail and small business depositors is risky. Don't do it.

 

Below is a blackboard of the ideas board members shared for strengthening community bank liquidity and deposit gathering:

~ Jeff