The Funding Gap — Q2 2025
The Deposit Slowdown
The first quarter's 3.5% deposit surge was seasonal — tax refunds and year-end bonuses — and it reversed on schedule. Share and deposit growth fell to 0.2% in Q2, while loan growth accelerated to 1.79% as the spring lending season opened. When lending runs almost nine times faster than deposit-gathering, the balance sheet has to make up the difference somewhere, and the loans-to-assets ratio did the visible work, rising 81 basis points to 70.7%.
Source: NCUA 5300 Call Report; FINASENSE analysis.
The slowdown is not a one-quarter blip. The underlying deposit trajectory has been flat-to-modest for several quarters once the Q1 seasonal spikes are stripped out — not enough, on its own, to fund the loan pipeline the system is now running.
The Wholesale Floor
For more than a year, credit unions had been paying down wholesale funding: system borrowings fell roughly 27% year-over-year, the deleveraging that followed the deposit flood of 2023–24. Q2 marks the turn. Borrowings rose 3.1% in the quarter — small in absolute terms, but the first quarterly increase in over a year, and a signal that the easy phase of the funding repair is ending. There is only so much wholesale debt left to retire; once that floor is reached, soft deposit growth has to be met by adding borrowings rather than simply borrowing less.
Why It Matters for the Margin
This is where funding mix meets earnings. The NIM recovery of 2024–25 was built on cheap core deposits repricing more slowly than assets. Replacing marginal deposit growth with wholesale borrowings reverses that advantage: borrowed funds cost more than member shares, so a shift back toward wholesale funding compresses the margin directly — and it would arrive just as the repricing tailwind is already fading (see System Signals — Q2 2025). The funding gap is not a liquidity emergency; the system holds ample cash. It is a slow drag on the margin that builds if deposit growth does not recover.
Connecting the Lines
The funding gap is the balance-sheet mirror of the earnings story. As long as 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. The variable to watch is second-half deposit growth: a return toward 1% a quarter keeps the gap closed; another two quarters near zero forces the funding mix the wrong way. For the full quarter's balance-sheet detail, see the Q2 2025 Ledger.