Gathering core deposits continues to be a challenge, and the massive
growth in bank branches lies partially to blame. Community banks have
started exploring new channels—such as internet deposit outreach—and
they have also started reemphasizing old standards. While business-side
deposits continue to be important, some bankers hope to reinvigorate
the consumer segment flow, as well.
By Lauren Bielski,
Pulling in deposits: in competitive times, value proposition and execution counts
In recent years, core deposit gathering has been extremely competitive,
especially so for community banks, which can’t necessarily resort to
tactics like acquisition in order to grow. The fine art of making the
balance sheet work won’t get any easier, either.
Threat of recession and the consumer-hailing habits of
large and foreign-owned banks will make finding cheap and stable
funding ever more a game for the stalwart and innovative.
Deposit growth—checking accounts, savings, money market funds, and
CDs—has averaged from 5% to 6% in most markets annually since 2000 with
a few dramatic blips up and down along the way, says Gordon J.
Goetzmann, managing vice-president, First Manhattan Consulting Group,
New York. On average, the typical mid-sized bank relies on
wholesale funding for 10% of its balance sheet assets.
Growth of core deposits is generally tied to rate of
inflation, net new formation of households, and net business growth,
Goetzmann points out, making for regional variation.
Not all community banks are losers in their efforts to
reach out to consumers and small businesses, as indicated in following
• Bank deposits in Atlanta, spurred by population
growth, flowed mostly into de novo and community banks in 2005,
although a recent article in the Atlantic Business Chronicle pointed
out that banks of all sizes were stepping up efforts to attract funds
between 2006 and 2007.
• In Massachusetts, as reported in the Boston Globe in October 2007,
Bank of America’s market share fell from 19.3% to 18.2%, and
Citizens Bank of Massachusetts and Sovereign Bank also
experienced market share declines as consumers looked for a more
• In Michigan, deposits grew just 1.3% in the year
between June of 2006 and 2007 as reported in Business Review of Western
Michigan. In that state, regional bank Huntington Bancshares, with 46
offices in 12 counties, was the second performer regionally, with $1.93
billion in deposits as compared to market share leader Fifth Third,
which held $6.34 billion in deposits but has, at 117 offices, a much
larger physical network.
Still, Anat Bird, formerly with Wells Fargo and founder
of SCB Forums, San Francisco, thinks that regional and community banks
fail to get a fair share. And yet attracting deposits will be a
necessary activity, says Bird, who notes that commercial and industrial
lending is still outpacing deposit growth in most places. “Deposit
gathering,” she says, “will be the primary driver of earnings in 2008.”
The market for deposit pricing was especially turbulent in the early
part of 2007 and has settled down since. Consultant Bird describes
prices as steady “but not yet rational.”
Thomas Kohlmann, chairman, president, and CEO, of $1.4 billion assets Suffolk County National Bank, Riverhead, N.Y., agrees.
“The liquidity issue is part of the problem facing the
industry,” Kohlmann says. “The untenable rate-setting practices
of some institutions are making things difficult,” he adds. He notes
that his bank, despite its status as the second-largest independent
commercial bank headquartered on Long Island, has only experienced a
modest deposit growth in the last year.
Kohlmann explains that most of the deposit growth comes
from business customers and that his bank has kept pace with recent
service and technology changes, offering net deposit capture in recent
months as one example.
Tied to that business niche, Suffolk County faces three
distinct markets. The first is in the western end of Long Island, which
is primarily industrial and commercial. The second is the South Fork of
the East end, whose fortunes are linked to bonus income earned by
high-net-worth professionals from the New York financial markets. The
third comprises the more agricultural communities of the North Fork.
A sometime borrower of the Federal Home Loan Bank,
Suffolk County National, which has relied on its network of 27 offices
to do business, is developing an internet site that it may launch as
early as the end of the first quarter as a sort of low-key supplemental
funds gathering mechanism.
“This isn’t anything that we will promote in a big
way,” says Kohlmann. “Some that know us well would consider the
internet project out of character, but it will be another source of
picking up funds,” he notes, adding,“we don’t think of using the
internet as a big shift in approach or values; it’s more like a
Time for a new engine?
In the short-run, sub-prime
reverberations are partially to blame for the current situation.
Countrywide, for instance, had—prior to the acquisition
announcement by Bank of America—been trying to shore up its balance
sheets by flooding cyberspace with comparatively high-rate offers. A
few who spoke to ABA BJ described these actions with the phrase,
“zombie mortgage lender,” referring to those who price CDs and other
accounts at high—some think untenable—rates in an attempt to meet
short-term objectives. (This was a variation on the term “zombie
thrift,” of the S&L crises.)
Non-performing loans will also have the ambient effect of requiring
community banks to put aside more cash in reserves, according to Alan
Friesen, president and CEO, Haberfeld Associates, Lincoln Neb.
All in all, the consumer and small business deposit,
typically taken for granted in most markets, has been moved to a top
action item for the average bank CEO, notes Friesen.
“There are many ways to make money in banking—on fees,
spread, and investments,” he says. “Recent events should force more
bankers to really consider both sides of the balance sheet.”
At a recent gathering of dozens of community bank CEOs,
however, Friesen relates that many, when quizzed by him, didn’t have
ready knowledge of key stats such as their most, or least, profitable
branch. Nor did any appear to have a working knowledge of profitable
Friesen says that this is a time for thoughtful
pricing, promotion, and—in general—for thinking more like retailers,
measuring and managing profitability and other key benchmarks. He urged
bankers in attendance to get a good handle on opportunities for
additional product sales among their existing customer base.
“Most community bank CEOs grew up in the loan side of
the business and they still tend to think of the loans as the engine of
profits,” says the consultant. “This period will have many rethinking
Certainly, looking hard at demographic data can help.
Michael Quick, executive vice-president and group
executive, Susquehanna Bank DV (which stands for Delaware Valley),
Camden, N.J., part of $12-billion assets Susquehanna Bancshares, based
in Lititz, Pa., says that his bank has felt the heat of recent
competition when it comes to growing deposits. However, it managed to
stay in the kitchen, so to speak, by “executing the basics of service
consistently,” says Quick.
The senior executive acknowledges a new set of defining
dynamics evident in this cycle of relatively scarce cheap funds. “With
the eTrades and Merrills and INGs out there, it can be hard for smaller
institutions, even diversified ones, to hold onto business,” he admits.
Still, Quick believes that doing well by the
customer can lead to profitable referral business, which helped
his bank grow deposits by 2% last year.
“Word of mouth has always helped me in this business
and I’m teaching our people how to make referrals work for them and
support some organic growth for us,” says Quick. “In our training, we
emphasize relationship selling and the importance of generating leads
through happy customers.”
Also key for the bank holding company in general has been the
understanding of product requirements for a mix of clients throughout
its four-state footprint of West Virginia, southern New Jersey, central
Pennsylvania, and Maryland.
“Central Pennsylvania, for instance, is largely a
retirement community with fixed income folks that are concerned about
asset preservation and income,” says Quick. “Other markets rely more on
a mix of working professionals and small businesses.”
This year, the bank used segmentation analysis to
leverage segment distinctions in offer messaging and products
emphasized, picking up $270 million in additional deposits over two
The bank’s third direct mail campaign, which was in the
planning stages as of this writing, was to be aimed at a mix of
customers (15%) and prospects, some of which were identified through
Why deposits ebb—and flow
Other conditions-of-the-moment include the perception of recession, a
creeping personal cost-of-living index, and stock market
volatility—some of which might nibble at deposits, some of which could
go in the industry’s favor, notes Greg McBride, senior financial
“In a recession, consumers tend to remember the value
of money and care more about having an emergency fund,” he explains.
“Certainly, bank customers with the means to play in the market will
pull back if there is a sudden drop in return.”
This pullback into safety, after all, was one driver of
bank profitability after 2001. “The only thing that might work in the
industry’s favor is the consumer quest for a safe haven if the stock
market gets super volatile again,” agrees William J. McGuire, president
and CEO, Scottsdale-Ariz.-based McGuire Performance Solutions.
But Terry S. Key, president and CEO, Lubbock National
Bank, in Lubbock, Tex., questions the value of such gains. “Customers
aren’t loyal anymore,” he says. When asked why consumers seemed more
rate conscious and prone to switch over business, Key answered: “The
time has passed since members of a community felt their bank could make
or break them. The perception among many business people and consumers
is that they don’t need our acumen. Any source of funding will do and
anyone can price a loan or offer bank services.” Key says that
performance chasers make the business tougher for everyone. To cope,
the $488 million assets Lubbock National has offered internet CDs
through National CD Rateline, limiting amounts raised to $95,000, “so
it counts as core deposits.”
Meanwhile, experts say, there are also steady-state factors affecting competition for deposits for the foreseeable future.
“The internet has empowered the consumer to rate shop
and served as a venue for all sorts of bank offers. The environment is
consumer and business friendly. It can pull deposits out of a given
region,” says Greg McBride. “And, I would argue, it’s made everyone
more price sensitive.”
Anat Bird agrees. With internet-only banks currently
taking about 10% of deposits off the table (other experts disagreed
with her estimates, saying the figure was far lower at present, but
admitting that it could grow rapidly in short order), and that
share likely growing into the future, community banks will have to be
creative to get their fair share of deposits going forward.
“Community bank management has been too nice in the
past,” says Bird. “The leadership will need to push their frontline
people to follow through and they need to find ways to parlay their
community involvement into business.”
Mike Carlino, president and CEO, Cambridge Bank, Lake
Zurich, Ill., says his bank has made use of the Qwickrate internet
service to manage liquidity. The $400 million assets institution has
hung in despite Chicago’s ruthless branching development by having a
classic, service-oriented focus that includes small businesses.
“Chicago’s always been a tough town,” he says. “That’s why it’s
important to zero in on very specific opportunities here.”
Indeed that other real estate matter—the branch build
out—which was an extensive, some say, extravagant, feature in most
regions of the country between 2002 and 2006 now puts pressure on all
core deposit gatherers.
“The average U.S. branch is only at a third of its
capacity,” says Friesen. “At a time when we have three times as many
branches as we need to support the population, it’s pretty clear that
everyone is on the hunt for customers and new sales opportunities.”
William McGuire agrees it’s been a market of scarce
funding and it will hit smaller institutions hard. “It’s tough for
community banks. On the lending side, the loans have leaner margins,
yet there is a lag and banks are forced to pay more to consumers for
Not everyone thinks the current cycle was especially
troublesome. “The need for deposits is currently outpacing supply in
many markets, but it’s cyclical and not especially pronounced or
problematic,” says Bob Wiseman, president, Agiletics, a Longwood,
Fla.-based firm that teaches banks how to reduce deposit gathering
expense as well as an expert in non-volatile funding such as escrow
What’s different now?
Whether you believe this scarce funds cycle is like any other or a
doozy to be reckoned with, there are other considerations. Gordon
Goetzmann points out that a complicating factor in the
deposit-gathering game is the fact that many banks are offering what’s
viewed as a commodity.
“Eventually, somebody will figure out how to move
beyond free checking, which nearly everyone has already copied,” says
After all, says Goetzmann, it was free checking as an
innovation that allowed a bank such as Washington Mutual to five years
ago push into Manhattan, a notoriously hard-nosed place to pick up
“Differentiation—and solid execution against that value proposition—is what gets customers to switch banks and stay,” he says.
Tom Farin, president and CEO, Farin Associates,
Fitchburg, Wis., believes that in the future banks will need to rely on
non-CD products with a palette of interesting features.
“Generation X and Y doesn’t understand or gravitate toward CDs the way previous generations did,” he says.
“And in the short run, we advise our clients not to
chase the hot money. We tell clients that can go to the Home Loan Banks
or other wholesale sources to do so, because it will be cheaper, at a
current rate of 3.95% than having to pay 4.50% or 4.75%,” Farin adds.
Beyond current rate fluctuations, banks will need to
evaluate customer segments and price accordingly, setting up rules that
reward customers with basis points if they keep balances, for instance.
“In an ideal world, you’d price each retail deal one at
a time, like you do with business accounts,” says Farin.“While the
volume of retail customers makes it impractical to work this way,
definitely reward your most valuable customers as part of an overall
deposit retention strategy.”
The consultant advises banks to look at holes in their
product set and devise offerings that fill those gaps to reach a new
segment of the market or sell more to existing customers.
“Set up, for instance, a rewards checking account that
has a minimum debit transaction requirement,” says Farin. “You’ll
pull in some interchange as a way to shave off some of the expense.”
Not everyone agrees that such rules-based accounts can do all that much
for banks, but nearly all the sources who spoke with ABA BJ agreed that
as a general rule, banks need to think about the basics of execution
and communicate to the market how they add value to attract and retain
Gwenn Bezard, an analyst at Aite Group, Boston, issued
a report this summer called Why Money Can’t Buy Love, which studied how
the best performers went about growing deposits, based on Harland
Financial Solutions Benchmarking Database.
“The most effective achieved deposit growth through retention and cross selling an existing customer base,” says Bezard.
In this case, the numbers gleaned from transactional
data supported conventional wisdom touted for the last decade: It’s
costly to replace today’s customers with tomorrow’s, so leverage
The electronic version of this article available at: http://lb.ec2.nxtbook.com/nxtbooks/sb/ababj0208/index.php?startid=38