Small banks struggle to keep deposits as consumers shop for high rates
If banks are going to be able to lend the hundreds of billions of dollars that the U.S. economy needs them to lend, those banks need deposits. And, according to the Federal Deposit Insurance Corporation, bank deposits have been growing for more than a year and a half.
But the rising tide of deposits doesn’t seem to be lifting all banks equally. Many smaller community banks report that they’re having trouble hanging on to them.
At Bankwell, a community bank in New Caanan, Connecticut, Chief Innovation Officer Ryan Hildebrand noticed something was up with deposits when the Federal Reserve began raising interest rates a few years ago.
“Customers started to look at who’s going to pay the highest amount,” Hildebrand said.
The competition to win depositors by paying them higher interest rates started heating up.
“And it wasn’t necessarily just other community banks,” Hildebrand said. “You had a lot of fintechs that were paying the highest rates in the country. You had Treasuries and money market accounts that were paying high rates.”
Ever since then, many smaller banks have been having a harder time holding on to deposits. Big banks have big marketing budgets, sophisticated technology, and big footprints in large, urban markets, said Julie Hill, dean of the University of Wyoming’s College of Law.
“And so that means community banks — particularly in smaller communities that just aren’t growing as rapidly — just have fewer deposits to attract,” she said. That is a problem for those smaller banks.
“We can’t lend if we don’t have deposits,” said Andrew Silsby, CEO of Kennebec Savings Bank in Augusta, Maine.
Silsby said his bank has been feeling pressure to raise deposits because customers have been clamoring for bigger loans. “We do about 1,500 mortgage loans a year, and the average size of those mortgages have gone up substantially.”
Banks use a few strategies to ensure they can keep lending money.
“We’re not necessarily chasing a lot of new customers and trying to bring in new relationships,” Silsby said. “We’re more likely focusing on existing customers who are expanding their business, or folks who are already doing business with us.”
Smaller community banks are also asking their borrowers to park money with them.
“My area of the bank is deposits,” said Kevin Boyce, founder of Adelphi Bank in Columbus, Ohio. “So I may say to the chief loan officer, ‘Hey, have we asked if they can open up a deposit account here?’”
Boyce said the bank isn’t forcing its borrowers to deposit money with the bank; it’s playing the long game.
“When you come in our doors, you want a loan, that’s what we’re going to focus on,” he said. “Yes, we want your deposit, but it is not core to us giving you a loan. It is a hope that we want to earn that, so it’s a meaningful relationship for both of us.”
Pulling in deposits can also be a matter of simply paying the right interest rate.
“Generally speaking, the best option you can have is you can pay more,” said Dominik Mjartan, CEO of American Pride Bank in Macon, Georgia.
Even though the Federal Reserve has been cutting interest rates over the past couple of years, Mjartan said his bank has kept rates relatively steady.
“We actually have an opportunity in a declining rate environment to maybe pick up some customers that are very rate-sensitive and want to join a bank that’s paying a good, strong rate,” he said.
Mjartan added that the last few years have taught people to be a lot savvier about interest rates.