The Funding Gap — Q2 2025

The Deposit Slowdown

We read the first quarter's 3.1% deposit surge as seasonal, the tax refunds and year-end bonuses that arrive early in the year, and it reversed on schedule. Share and deposit growth fell to 0.08% in the second quarter, while loan growth accelerated to 1.66% as the spring lending season opened. With lending running more than twenty times faster than deposit-gathering, the difference showed in the loans-to-assets ratio, which rose 81 basis points to 70.7%.

Outside the first-quarter spikes, deposit growth has been flat to modest for several quarters, too slow by our reading to fund on its own the loan growth the system is now running. The series is not seasonally adjusted, so that reading rests on the pattern of the quarters.

The Wholesale Floor

For more than a year, credit unions had been paying down wholesale funding: system borrowings fell 27% year-over-year, the deleveraging that followed the deposit flood of 2023–24. Borrowings then rose 3.1% in the second quarter, a small increase and the first in over a year. On our reading, the easy phase of the funding repair is ending. There is only so much wholesale debt left to retire, and once that floor is reached, soft deposit growth has to be met by adding borrowings rather than by borrowing less. One quarter's increase does not establish that the floor has been reached.

The Margin

Funding mix reaches earnings through the cost of funds. We read the NIM recovery of 2024–25 as resting on core deposits that repriced more slowly than assets. Borrowed funds cost more than member shares, so replacing marginal deposit growth with wholesale borrowings would compress the margin at a time when the repricing tailwind is already fading (see System Signals — Q2 2025). The report shows no cost-of-funds or margin figure to measure that effect. With ample cash in the system, we read the funding gap as a slow drag on the margin that builds if deposit growth does not recover, rather than a liquidity problem.

Connecting the Lines

The funding gap is the balance-sheet side of the earnings picture. While deposits grow with loans, the margin holds; when loans outrun deposits and the wholesale floor is reached, the marginal cost of funding rises and the margin gives ground. Second-half deposit growth is the quantity to watch: we read a return toward 1% a quarter as enough to keep the gap closed, and another two quarters near zero as enough to push the funding mix back toward borrowings. The Q2 2025 Ledger has the quarter's full balance sheet.