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

What Really Drives Bank Value—and What To Do Next

Earlier this month, I attended Bank Director’s Acquire or Be Acquired conference. As always, the sessions were strong and the hallway conversations even stronger. But the most thought‑provoking insights I carried with me didn’t start at the conference—they started on the plane ride there.

I was listening to Street Talk by S&P Capital IQ, hosted by longtime industry colleague and friend Nathan Stovall. His guest was Jonah Marcus, a buy‑side fund manager with deep experience evaluating banks—and someone I’ve had the privilege of working with as a board member at one of our strategic planning clients.

I’ve seen Jonah operate up close. He understands what creates real value in banking—and more importantly, what doesn’t. His perspective is worth paying attention to.

Valuations: The Market Isn’t Coming to Save You

One message Jonah was unequivocal about: banks should not expect valuation multiples to rise in the near term.

Institutions trading at 10–11x earnings are unlikely to suddenly revert to historical averages of 12–14x. The same holds true for price‑to‑tangible book. In today’s market, valuation expansion is not a given—it is earned.

So what separates banks that trade at a premium?

• High‑quality, durable earnings
• Consistent profitability
• A clear specialty or niche that drives growth
• Strong core funding
• Superior, sustainable expense management that produces best‑in‑class efficiency ratios

In other words, the market rewards banks that execute exceptionally well—not those waiting for macro conditions to improve.

If your strategy depends on “multiple expansion,” it’s time to revisit the plan. Value creation today comes from disciplined execution, not market optimism.

Recession Watch: Two Perspectives Worth Weighing

Jonah also pointed to meaningful economic and credit tailwinds. Non‑performing loans remain historically low. Capital levels are far stronger than they were heading into the 2008 financial crisis. Banks have improved loan concentrations and overall risk discipline.

Nathan echoed this view at the conference, noting that there are few—if any—early warning “cockroaches” signaling an imminent recession.

I’m slightly more cautious.

We’re beginning to hear about “one‑time” or “isolated” credit events in third‑ and fourth‑quarter earnings calls, particularly from more aggressive lenders—those making larger loans or expanding outside their core markets. Historically, recessions often begin with asset bubbles bursting. Today, we still have a high‑flying stock market and residential real estate prices at elevated levels.

Reasonable people can disagree—and they do.

Whether you’re optimistic or cautious, now is the time to stress‑test assumptions, re‑examine concentrations, and ensure your balance sheet can withstand headwinds should they come. Hope is not a strategy.

Technology: Where Banks Are Falling Behind—and How to Catch Up

The most compelling part of the discussion centered on technology.

Jonah sees technology as a key differentiator today—and an even bigger one tomorrow. In his view, technology should deliver four outcomes:

1. Lower costs
2. Greater scalability
3. Delighted customers
4. Data‑driven, personalized sales and service

Here’s the reality check:

• Banks are generally doing well on cost reduction.
• They’re doing okay on scalability.
• They are largely failing at delighting customers and leveraging data.

Too many banks remain overly dependent on their core processors. Too few are using customer data to meet clients where they are—in an increasingly digital, personalized world.

Jonah’s point was simple but powerful:

If banks can leverage technology to achieve all four outcomes—even competently rather than perfectly—growth becomes easier, margins improve, customer satisfaction rises, and powerful network effects begin to take hold.

That’s how banks lift their heads above an increasingly commoditized competitive landscape.

Fintechs have already proven this model. Many are now seeking bank charters for a reason.

Jonah supports a crawl‑walk‑run approach to technology adoption—avoiding shiny objects and infrastructure strain. But in his view, given where financial technology stands today, banks should be much closer to walk‑to‑run than crawl.

If your technology strategy is still focused primarily on cost containment, you’re missing the bigger opportunity. The real upside is growth, differentiation, and customer relevance.

 

What This Means for You—and How We Can Help

For readers who know me, you’re aware that The Kafafian Group recently merged with Wolf & Company, P.C., a Boston‑based CPA and advisory firm. Together, we now bring deeper capabilities and broader execution support to financial institutions.

What does that mean in practice?

• Strategic plans that don’t just sit on shelves—but get executed
• AI and technology advisory aligned with business outcomes
• Deeper profitability analysis at the product, line‑of‑business, and center level
• Process improvement informed by internal audit and best‑practice insights
• Financial advisory that goes beyond negotiating the deal and running the numbers

Simply put: we can do more, and we can go deeper.

If these themes resonate—valuation pressure, technology differentiation, disciplined growth—I’d welcome the conversation.

You can reach me through this blog, at Jeffrey.Marsico@WolfandCo.com, or at (717) 468‑3208.

And yes—we’re continuing our This Month in Banking podcast, which celebrated its 10‑year anniversary in January 2026. Thanks for keeping us in your listening lineup.

Let’s keep the dialogue going.

~ Jeff

 

 

Note: This post was written by me, and improved by AI, which methodically is breaking my propensity for run-on sentences. Sister Mary Ryan would be pleased. 

 

Interest Rate Caps: Long History of Failure

President Trump called for a temporary, nationwide cap on credit card interest rates at 10% APR for one year, beginning January 20, 2026. He announced the proposal publicly through posts on Truth Social and reiterated it in remarks to reporters and in public speeches. His logic: it's a consumer‑protection measure aimed at reducing what he described as “excessive” credit card interest rates—often 20% to 30%, and higher for subprime borrowers.

Most bad ideas offered by government officials sound good. What's not to like? Champion the consumer that pays that level of interest rates while carrying credit card balances. To heck with the banks! I could see the pithy slogan on the protester sign. 

The problem is that in less time than it would take our hypothetical protester to grab his sharpie and scribble his sign, he could have asked his favorite AI tool to research when the US tried rate caps in its history and what was the result. You would think a reporter would do it and ask any proposer "didn't we try interest rate caps through various state usury laws and, according to a peer-reviewed New York Fed study that credit access declined sharply for high-risk borrowers and delinquency rates did not decline?"

The reporter could have entered the query as the populist, yet foolhardy proposal was coming out of the politician's mouth. In fact, going back through US history, using peer-reviewed studies to feed the summary table, it is clear that interest rate caps restrict credit, particularly for riskier borrowers. But that doesn't fit well on our protesters sign.

Period	Government Action	Result
Colonial-Early Republic	Statutory Usury Caps	Credit Shortages, off-book lending
19th Century	State Usury Ceilings	Slower growth, elite credit access
1933 - 1980s	Reg Q Deposit Caps	Bank disintermediation, loan contraction
2007 - present	Federal and State APR Caps	Reduced access for high-risk borrowers

Overarching Scholarly Consensus

Across four centuries of U.S. economic history, peer‑reviewed research consistently finds that: Interest‑rate caps reduce the supply of credit more reliably than they reduce the price of credit.

The empirical pattern—observed repeatedly in different eras, legal frameworks, and financial systems—is:

• Credit rationing

• Market exit by lenders

• Disproportionate harm to higher‑risk and lower‑income borrowers

• Minimal or no improvement in default outcomes

The evidence is clear and accessible. The question is, should policy be driven by observable facts and common sense, or by what sounds good?

~ Jeff

Sources:

Less for You, More for Me: Credit Reallocation and Rationing Under Usury Limits

THE EFFECTS OF USURY LAWS: EVIDENCE FROM THE ONLINE LOAN MARKET on JSTOR

Economic Conditions - Dallas Fed

The Political Economy of Financial Regulation: Evidence from U.S. State Usury Laws in the 19th Century

What tool helped me find all of this peer-reviewed research without having to scroll through mountains of BS on a search engine? Copilot.