November 25, 2023 / VOLUME NO. 289

What Makes a Bank

Keith Costello, the cofounder and CEO of digitally savvy Locality Bank in Fort Lauderdale, Florida, helped launch the $163 million bank in mid-2022 with a priority that’s common for de novos: Deposits. “I was afraid I was going to get called by the regulators because we came out with a 2% money market, and that was higher than anybody out there at the time,” he says. 

My, how things have changed. Almost every bank, not just startups, is prioritizing deposits and deposit strategies right now. 

It’s a huge change from just a year ago. Last July, Chris Marinac, director of research for the investment bank Janney Montgomery Scott, was quoted in this newsletter saying: “We have excess liquidity in the financial system. It has to get to work … It’s not healthy for it to sit there forever.” The Covid-19 pandemic and government relief programs flooded bank balance sheets with surplus deposits. Big and small banks alike saw deposits rise 25% to 30% in aggregate in 2020 and early 2021, according to a Moody’s Investors Service Oct. 5 report. 

As of the second quarter of 2023, banks saw five straight quarters of deposit declines, a record since the data was collected starting in 1984, according to Moody’s. As this newsletter was prepped for publication, the Federal Deposit Insurance Corp. had not reported third quarter figures.

Many big and small banks alike are rolling out certificates of deposits yielding above 5%. As each bank decides who to prioritize, some are offering specials or cash incentives for new customers; others are privileging their more profitable and loyal base.

The industry’s about-face is reflected in Bank Director’s 2024 M&A Survey, too. Although interest in mergers and acquisitions has waned this year in the face of low stock prices and economic uncertainty, 85% of respondents said an attractive deposit base was a top quality for a potential acquisition target. That’s up from 58% who said so in September of last year and only 36% who said so in 2021.

For Costello, it’s back to the basics in banking. “When you think about it, it's really one of the only reasons to become a bank and go through the process that we went through, is to be able to get low-cost funds on your balance sheet to be able to lend out,” he says.  

• Naomi Snyder, editor-in-chief for Bank Director

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• Kiah Lau Haslett, banking & fintech editor for Bank Director

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