For Bankers Looking to Grow Deposits, Partnering With Rural Community Banks Might Hold the Key

Ryan Barrow

Senior Audit Manager

September 19, 2019

Originally published on BankNEWS

From the SunTrust-BB&T (now the recently announced Truist Bank) mega merger on down, the retail banking industry finds itself in a period of sustained consolidation. For many community and regional banks (particularly those in metropolitan areas) that are forced to compete with much larger banks and are looking to grow, an acquisition of a smaller institution or participation in a merger of equals has been the primary strategy for growing deposits.

The challenge that bankers must contend with, however, is ensuring that those deposits stick following the merger or acquisition. In a typical scenario, it is a smaller community bank being acquired – one that has built its business on close personal relationships with its customers. Those customers are loyal to the original institution and its staff, and all too often they choose to move their deposits elsewhere when the bank’s ownership changes. This underscores the need for acquiring banks to do more than simply replace the logo on the bank branch and focus their attention on incorporating favored processes and retaining key staff in order to maintain (and grow) those important established customer relationships.

While a well-executed strategy is a proven method for bankers to accelerate their institutions’ growth and expand into new geographic markets, for those bankers who simply want to grow their deposit base in order to better compete in their local markets, there is an alternative approach worth considering. Across the country, there are now rural banks that are literally drowning in liquidity and are keen to offload those deposits to protect their capital ratios. For many of these institutions, simply based on the population size of their local communities, there is a ceiling in terms of auto, mortgage or small business lending opportunity. Much of their business is based on providing money market accounts or certificates of deposit to their customers.

For example, if a rural bank knows it has a $10 million deposit coming in from a large, valued customer (like a municipal or public fund client), the reality is that it is going to be difficult to convert those deposits into loans because there just isn’t enough demand. From a business standpoint, the bank doesn’t want to take that large of a deposit, but it also wants to serve its customer and protect that relationship. Ideally, the rural bank would have a non-competitive “partner” bank that it could redirect its customer toward for instances like this.

For metro banks looking to grow their own deposit base, this provides a tremendous opportunity and a faster, more cost-effective strategy than a traditional M&A approach. Given this, what criteria are rural bankers flush with deposit liquidity looking for in a potential partner?

First and foremost, it needs to be a truly non-competitive partner relationship. There needs to be a formal understanding in place that the customer’s relationship with his or her local bank will not be threatened. The metro-area bank that is gaining the deposit must agree that it will not cross-sell products or services to the rural bank’s customer.

There must be cultural synergies in place between the two institutions as well. Rural bankers are seeking potential partner banks whose company culture and brand of customer service is similar or complementary to its own. Additionally, in many cases, rural residents may have limited access to high speed internet and tend to prefer to interact with their bank through the branch, telephone or even traditional mail over online or mobile banking. The rural bank will want to ensure consistency in meeting its customer’s preferences through their delivery channel of choice.

In evaluating potential rural bank partners, larger metropolitan urban bankers can begin by looking at banks whose geographic footprint falls outside of their branch network’s established market. Once they find a new potential market, they need to make a point to learn all about that local market, as well as take a vested interest in becoming involved in the community. As with most relationships, these partnerships are built on trust, and knowing the market and its people is an important piece in laying that foundation.

Additionally, all bankers, both rural and metro, should consider becoming involved in the industry’s trade organizations. As most of these deals and partnerships are often formed as a result of CEO/CFO roundtables facilitated by the various industry associations, participating in these groups can be the critical first step in establishing these relationships and building that initial trust. These roundtables not only provide a fertile ground for growing potential partnerships, but they also offer the opportunity to meet and learn from bankers of all sizes and markets. These conversations, while providing useful professional knowledge, can also often lead to discoveries of opportunities that could be mutually beneficial to the each other.

For the rural banks that do not necessarily wish to seek out an established partnership, another option is to take these larger deposits rather than sending the customer to another bank, but then use the deposits to take out a CD or money market account with a metro bank. While perhaps not as ideal or lucrative for the metro bank as a partnership, many will be willing given their need for deposits and may even be able to offer a slightly better rate than current alternatives.

As the race to gain deposits becomes more heated in highly competitive urban markets, bankers that employ a creative approach to deposit growth and look beyond traditional M&A by partnering with successful rural institutions may find themselves better armed to go toe-to-toe with their larger competitors.

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