Publications & Resources

February/March 2007
Focus: Balance Sheet Management

Best Practices for Increasing Core Deposits

By Donald P. Johnson

The phrase “core deposits” is bandied about constantly with the regulators, analysts, banking publications and at stockholder meetings. Today, funding sources are abundant, from brokered deposits, borrowings from the Federal Home Loan Bank, title and escrow accounts, as well as retail and commercial accounts. There seems to be a constant dialogue as to the growth or contraction of the dollars in the banking system and a sub-text that always follows is this question: How much was in core deposits?

At American Business Bank, we have a simplistic view of core deposits because they are the operating funds of our business accounts. We view growth in core deposits as an increase in the amount of customers and in their willingness to leave funds at our bank, rather than the multitude of investments sources available to them today. Every bank is working to get more accounts, but the fact is that access to those deposits has to be earned.

One key approach that all banking professionals should consider is to strive to avoid being viewed by your customers as vendors. By hiring relationship managers who have 10-20 years of experience in banking and are trained to understand a company’s financial services needs, the bank can truly get to know the owner and his business model - rather than just trying to sell them the product of the day. In our case, by creating an old-fashioned bank to fill the void between larger and smaller banks, we have found customers who not only contribute to our asset growth, but also finance our expansion into new markets.

Another key best practice for increasing core deposits is to make your relationship managers visible inside your customers’ offices. It is no wonder with the business “silos” of today and the constant cross-sells of different services from life insurance to money management, that business owners have devalued their banker and have sought to find a reservoir for their funds that return the highest interest rate. This is especially true when their banker may be based in a different state and they have to call toll-free numbers and wait in queue to talk to someone.

We want our relationship managers to be familiar faces around their customer’s executive suites and inside their physical plants. When presenting a credit situation at the bank, relationship managers are expected to discuss the company in depth, understand the strengths and weaknesses of the business, and explain how the owner has managed through good and bad times. This can only come from spending time with the customer and not from just looking at a balance sheet to get the quick and current ratios.

Third, it’s important that your customers perceive a genuine and abiding interest in their business from your bank. A customer can tell if there is an interest in his business or if the bank is just trying to send out their sharpest salesperson to try to close the latest new deal. If a relationship manager is not absolutely fascinated by the opportunity to work with successful business and professional people, then they will not cultivate a relationship with their customers. When you bank entrepreneurial business, you are banking “The American Dream” - customers who took a chance at some point in time and started their own business or professional firm - and they will have to sense your genuine interest in their dream or the relationship will not grow.

Why does this “old fashioned” approach of relationship cultivation generate an increase in core deposits? Consider these three proven central factors:

  • Customers value the experience of their relationship managers and the access to senior management;

  • Customers seek advice from their bank, and are given the courtesy of a studied answer, because they view their banker as an advisor, as opposed to a product salesman;

  • Customers believe they can make more money by good business decisions aided by the bank, rather than constantly grinding for a few cents more or sweeping dollars to the Cayman Islands .

While this approach seems simple, it has been abandoned by most of the big banks and many of the smaller banks don’t have the people or resources to pull it off. For smart banking professionals, the customer count is just the tip of the iceberg, but core deposits have to be earned, just as lawyers or CPAs have to justify their fees.

Don Johnson is president and chief executive officer of American Business Bank, a Los Angeles-based bank founded in 1998 that serves privately owned businesses in the middle market. For more information, please email djohnson@americanbusinessbank.com or go to www.americanbusinessbank.com.

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