Every bank must develop plans to increase its deposit growth. A frequently misunderstood goal is the amount of new balances required to meet growth objectives for loans and deposits. One of the keys to developing a sound strategy is to understand your customers’ banking and savings activities, behaviors, and patterns.

Consider the following scenario: as the stock market reaches record levels, the cost of deposits will increase if customers change their savings habits by increasing allocations to mutual funds. Their belief is that the equity market will provide higher consistent returns than a bank deposit. This could also prompt a wholesale reallocation of funds from bank deposits to the equities market.

The result is that the banking system’s demand for replacement deposits will accelerate and cause an increase in the cost of funds based on the theory of supply and demand. When interest rates increase, the industry will most likely experience a change in deposit mix. Over the past four years, CDs under $100,000 have increased marginally, while savings and MMDA accounts have enjoyed record increases, as customers waited patiently for interest rates to increase and equity markets to recover. 

The implications for cost of funds and retention are noteworthy. Every dollar that leaves the bank has to be replaced. It could easily become an environment where deposits grow at a lethargic pace while equity markets command the lion’s share of your customers’ investable funds. 

Here are some measures banks can consider taking to address the pricing and retention dilemma for loans and deposits:

• Track the retention rate for renewing loans and CDs by product or lender.
• Establish how much loan and deposit volume your bank must generate in order to achieve a no-growth scenario.
• Require each lender and customer service person to have goals for acquiring new business.
• Evaluate the merits of a sales training program.
• Determine whether your program for notifying customers of maturing CDs should be modified to let customers know of bank CD specials.
• Track how much of the increase in outstanding CDs is attributable to transfers from other deposits within the bank. 
• Develop a system for monitoring the financial institutions to which deposits are being transferred. It could be other banks, credit unions, mutual funds, etc. This will help you evaluate and address the competitive advantages they may have over your bank.
• Carefully evaluate your tiers and the rate differentials associated with each loan and deposit tier.
• Consider offering CD specials when there are no significant maturities in your existing CDs.
• Identify your most competitive deposit product and determine whether it is profitable.
• Identify your most competitive and profitable loan product.
• Explore why customers do business with your bank: price, convenience, relationship with your people, products offered, other. Understand the reasons and do what you can to replicate them.
• Determine the reasons why people stop doing business with your bank.
• Determine the average length of time customers who have closed accounts have banked with your institution.

These are simple suggestions. However, the reality is that if you have $50 million in deposits and an 85% retention rate, the bank must replace $7.5 million of deposits each year to achieve no increase in the outstanding deposit balances. Whether the funds are replaced in your market or from some other source, it requires a plan.