Banking on Deposits Requires More Than Acquisitions

Many small banks are trying to increase their core deposits, relying less on fees to generate revenue. And while this is a good thing for many banks, there needs to be a retention component to the core deposit growth strategy.

In the article Small Charlotte-area banks get creative in boosting core deposits, Adam O’Daniel makes the point that small banks in the Carolinas are attempting to increase core deposits (i.e., local deposits) to help fund growth because of their stable nature; remember that cash that comes in from loans or short-term investments creates more variability, uncertainty, and risks for banks than cash from core deposits.

The way many of these banks are growing core deposits is through acquisition. The concept is that if the small banks buy even smaller banks in small towns, the acquirer would have that stable cash flow for a long period of time to fund other activities. Without getting too much into the minutia, here’s the key customer retention-related point – just as banks have acquisition strategies to buy other banks, they need culture-oriented strategies and client retention and growth strategies which address the employees and customers they acquire.

Internally, these banks need to be looking at how they retain the small town staff that have formed the relationships with the customers – because the customer relationship and loyalty may be more with “my Teller, Betty” than with “Bank XYZ.” The banks need to ensure that executives are incented for retention just as much as profits, since the acquisition assumed that the core deposits would be retained. And the banks need to have processes in place to quickly analyze and get to know their new customers, build relationships with them, and proactively seek to grow those relationships once retention is solid.

When trying to grow through acquisition, make sure you’re not going to lose the good employees and solid clients you acquire. Understand what drives loyalty at the local level.

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