Money is moving out of low- and no-interest bank accounts in favor of higher-yielding money markets, CDs and other fixed‑income products available elsewhere. Deposits that swelled in the wake of unprecedented government stimulus are steadily declining as consumers and businesses spend down cash accounts.

“We’re all chasing the same deposits as the large commercial banks, and the higher interest rates have made it tougher,” says Morgan Larson, president and CEO of $1.3 billion-asset First Savings Bank in Beresford, S.D.

The numbers bear this out. Deposits held by domestically chartered small U.S. banks were hovering at $5.3 trillion as of mid‑February, a more than $86 billion drop compared with December 2022, according to the Federal Reserve.

Community banks are getting competitive, adds Andrew Silsby, president and CEO of $1.7 billion‑asset Kennebec Savings Bank in Augusta, Maine. “There’s enormous pressure on deposits right now,” he says. “We’re bumping elbows in the crowd trying to differentiate ourselves.”

The added challenge for banks in the high-rate environment is to attract deposits—without breaking the bank, so to speak. “I can fix our deposits in a moment’s notice,” says Silsby. “All I need to do is put an ad in the paper saying we’re doing a 7% APY, seven-year CD, and I will have all the money across the country coming into the bank. But I won’t be able to afford it.”

Deposits are a critical component needed to grease the wheels for lending activity. Banks also need to bring in low-cost deposits in a world where customers have become more educated and more informed about interest rates. Here are seven realistic strategies that banks are using to maintain and grow their deposit base.

1. Leverage your commercial lending

In a market where liquidity is tighter, especially for commercial real estate loans, community banks are using their commercial lending to attract new deposits.

For example, First Savings Bank requires commercial customers to establish a payment reserve account at the bank that might range from 90-day payment reserves up to six months depending on the borrower and the loan. In some cases, that reserve deposit might be upwards of $200,000.

2. Expand into new markets

Opening a branch in a new market is a traditional avenue for growing the deposit base. Given the high cost of such moves, it’s important to take a strategic approach to expansion.

Last year, Kennebec Savings Bank opened a new branch in Portland, Maine, and offered a premium rate on new accounts to attract new deposits. The caveat was that a person had to come into the bank in person to get that premium rate, versus opening an account online.

“We wanted them to meet our staff, and we wanted to be able to have a face-to-face conversation and build a lasting relationship,” says Silsby. The “Your Choice” promotion allowed the customer to choose whether they received a premium rate on either a CD or a money market account. To qualify, they had to open or have a checking account at the bank. The premium rate also was only good up to a maximum amount of $250,000.

During the first six months, the new branch raised $17.5 million in new deposits.

3. Play defense

It’s an ideal time to increase customer outreach to protect existing deposits, particularly among your biggest deposit customers. “We’re a very traditional bank, so the best way for us to grow our deposits is really by focusing on who our customer is,” says Jill Sung, CEO of $322 million‑asset Abacus Federal Savings Bank in New York City.

For example, a segment of Abacus’ customer base is recent immigrants, who tend to have very different banking needs than the typical customer. “We want to understand that segment better and then make sure we’re addressing their particular needs,” Sung says.

Many of those immigrants have gone on to start small businesses, and the community bank is taking a similar targeted approach to be more in tune with what those customers need, which also can help to generate referral business. 

“As a small bank, I think that’s our advantage,” Sung adds.

4. Host a “block party”

Community banks can attract new deposits by getting in front of both existing and potential customers. In addition to tried-and‑true methods—such as networking and being involved in their communities—some banks are taking a more curated and targeted approach.

First Savings Bank organizes what it calls “block parties” that focus on specific neighborhoods or geographic areas within its markets. Staff members canvas the area, doing walk‑ins to say hello to different business owners.

“We just say here’s who we are, here’s what we do. And if you’re looking for a change, or looking to do something, then come and see us,” says Larson.

5. Introduce a promotional rate

Customers have become savvy when it comes to understanding the rate environment and how to find the best rates on CDs and money market accounts.

One strategy banks are using is to offer their own special promotional rates. Those “specials” are often characterized by an odd month term, such as a special nine- or 15-month CD, which allows a bank to offer a temporary promotional rate while keeping their sheet rates low. Another strategy is to offer customers a premium rate on money market accounts for customers that bring new money to the bank.

6. Leverage PPP relationships

Community banks are continuing to take advantage of new business opportunities that were created from making Paycheck Protection Program (PPP) loans. A lot of the big banks dropped the ball on the PPP program, which drove customers to smaller community banks for assistance with those loans. Banks on the receiving end of those PPP loans made new relationships and captured data on businesses within their markets that they are still using today to generate new business.

7. Train and incentivize your staff

Banks are finding ways to incentivize their staff to sell and cross-sell existing and new products. The cornerstone of that starts with training frontline staff to talk to customers about their banking needs and explain the different products the bank offers.

“Training is [always] a huge part of this,” says Sung. She notes that many Abacus Federal employees came from non-banking backgrounds, which makes training essential to the community bank’s success.

A sales environment can often be high-pressure for employees, so certain community banks would rather choose to emphasize customer service and relationships as a pathway to deposit growth. However, some banks are now offering incentive and bonus compensation programs to motivate their staff and further new accounts or deposit growth.

Across its 24 branch locations, First Savings Bank uses incentive compensation and sets up friendly competitions between different divisions, such as South Dakota versus Arizona. “Some people are really motivated by money, and then others aren’t,” says Larson. “So, we also try to make it fun and also create some team building.”

Bank Deposit Chart
Shaded areas indicate U.S. recessions. Source: Board of Governors of the Federal Reserve System (U.S.)

Banks battle shrinking deposit levels

Bank deposits that soared following unprecedented COVID-related government stimulus are coming back down. Pre-pandemic deposit levels of nearly $13.4 trillion peaked at $18.1 trillion in May 2022. Falling bank deposit levels are now attributed to the combination of customers spending those cash reserves coupled with competition from high-rate financial products.