By Paul Davis
Bank mergers have long been a tool for strategic growth, allowing the acquiring institution an opportunity to expand its footprint, streamline operations and enhance its competitive standing in coveted markets. While M&A transactions can deliver long-term benefits, they also introduce challenges — one of the most significant being deposit runoff.
The recent announcement that Independent Bank Corp. in Rockland, Massachusetts, will buy Enterprise Bancorp in Lowell, Massachusetts, for $562 million highlights this issue. Alongside usual financial disclosures, the banks said they could lose up to 5 percent of their combined deposits following the merger. Taking into account an estimate of $19.6 billion of pro forma deposits — nearly $1 billion of deposits could be up for grabs.
“We have a lot of confidence that we have the right people continuing to stay on in the organization that will reassure relationships,” Mark Ruggiero, Independent’s CFO, said during a conference call with analysts to discuss the acquisition. “We just want to be realistic. We’ve seen most other deals have some … slight deposit runoff.”
While this forecast is not surprising — deposit attrition is a common byproduct of mergers driven by shifting customer behavior, competition and structural changes at the combined institution — it is extremely relevant as banks and nonbanks fight for a share of customers’ wallets.
The key question is how acquirers can anticipate and limit losses to protect a deal’s value.
What causes deposit runoff?
Runoff happens for several reasons. Uncertainty surrounding mergers often plays a major role. Customers who have banked with the seller for years may feel a strong connection to the brand, the people and the community presence. The possibility of branch closures, changes in relationship managers, or modifications to account terms can create hesitation, making depositors more open to switching banks. Relationship-driven customers are particularly susceptible and, if the transition is mishandled, they may take their business elsewhere.
Beyond emotional and service-related concerns, financial incentives influence runoff. Customers who prioritize rates and account terms are more likely to move funds when a merger occurs, especially if they perceive a risk that the acquirer will offer less-favorable conditions. Rate-sensitive depositors often account for a significant portion of runoff, as they are always on the lookout for better returns. When an acquisition is announced, competitors see an opportunity to target these customers with promotional rates or incentives. In an environment of fierce competition for core deposits, aggressive marketing from rivals can impact retention.
Uncertainty was a huge factor in 2014 when Bank of America sold dozens of branches to smaller banks. Many depositors, unsure about their circumstances at the acquiring bank, moved money to another Bank of America branch, or they made use of the national bank’s digital platform, before sales closed. As a result, buyers often obtained far fewer deposits than what they expected to gain.
Regulatory delays can cause complications because a prolonged approval process creates uncertainty. When deals drag on without clear communication, nervous depositors may explore alternatives, and employees — who play a key role in maintaining customer relationships — may leave before the merger closes. Such disruption has been seen in previous deals where uncertainty led to deposit attrition and talent loss.
Recent data shows that deposit runoff is real and measurable. A review of the 10 biggest bank deals that closed last year, using each seller’s call reports before a merger announcement and just prior to closing, found that the sellers on average lost 3 percent of their deposits. While the overall decline may seem modest, even a small loss of deposits can meaningfully affect funding strategy, particularly in an era where stable, low-cost deposits are more valuable than ever.
A lost deposit relationship could also mean missed opportunities to market other products and services, including mortgages, home equity lines, small-business loans, and wealth management services, that could generate loan growth or fee income.
How to minimize merger-related deposit runoff
The first order of business is to acknowledge the inevitability of some runoff, then determine the depositors and accounts you can’t afford to lose.
“We assume it’s likely higher-cost deposits” that will leave, Independent’s Ruggiero said. “It’s probably those that are a bit more rate-sensitive. Economically, it just gets replaced with some overnight or wholesale borrowings that are not that much more different.”
“The important thing is identifying the deposits that are truly the most valuable and focusing on those,” says Alberto Paracchini, president and CEO of Byline Bank in Chicago. “You try to focus on the relationship-based deposits. You have to think about what it would cost me to acquire those deposits in the market, relative to the transaction.”
Banks can take several steps to minimize losses and ensure smoother transitions. An effective approach involves focusing on internal readiness prior to completion. A well-prepared acquirer anticipates regulatory hurdles, aligns stakeholders and ensures that operational and technology transitions are as seamless as possible. Deals that proceed quickly and efficiently tend to inspire greater confidence among depositors and employees, reducing the risk of disruption.
Clear and consistent communication is another critical factor for success. Customers should feel reassured that their banking experience will not suffer; that starts with proactive engagement. Dedicated relationship managers can ease concerns for high-value clients, while town halls and personalized outreach can give depositors the opportunity to ask questions and gain clarity about what to expect. Ensuring that frontline staff are well-trained and equipped to address customer concerns is essential; uncertainty at branches can quickly erode trust.
Communication was a big part of the strategy at Burke and Herbert Financial in Alexandria, Virginia, as it finalized its merger with Summit Financial in West Virginia. While it was the first ever acquisition for Burke and Herbert, it wasn’t the first deal for Chairman and CEO David Boyle. “On the commercial side, we hosted webinars for Summit’s commercial customers and walked them through everything that was going to be different with they converted,” Boyle says.
Retention efforts that focus on incentives can make a big difference. While not always a cost-effective long-term strategy, certain efforts — such as maintaining legacy account terms or selectively offering competitive deposit rates — can retain customers who might otherwise leave. Nervous customers may be more willing to stay if they see tangible benefits in staying put.
Recent data shows that deposit runoff is real and measurable. A review of the 10 biggest bank deals that closed last year … found that the sellers on average lost 3 percent of their deposits.
The operational transition is another area that requires careful attention to detail. Customers will likely remain loyal if they experience minimal disruption to their accounts, online banking systems, and service expectations. Ensuring that integrations are as seamless as possible, that branch operations remain stable, and that employees are fully trained on any changes can go a long way toward maintaining customer confidence and account retention.
“We find that, when problems happen, you need a direct point of contact to resolve the issue,” Byline’s Paracchini says. “If you can remove as much uncertainty for your employees, and by extension your customers, the success rate goes up 100 percent.”
“After closing, there were things that didn’t work out the way we hoped, but we put a war room of 30 to 35 people in place to quickly step in whenever we had problems,” Boyle explains.
Burke and Herbert hired a call center company to provide 150 people for “the front end of triage” during the first post-closing month, handling issues such as password and PIN resets so bank employees could solve bigger problems. The company assigned “buddy bankers” from its branches, including CFO Roy Halyama, to help at Summit’s locations.
Ultimately, deposit retention requires a customer-centric approach. Banks that prioritize strong relationships, responsive service and community engagement have a better chance of keeping depositors. While some level of runoff is inevitable, banks that preserve the customer experience can prevent unnecessary losses and emerge from the merger in a stronger position.
Deposit retention will remain a critical consideration in M&A. As deals reshape the industry, institutions that take a proactive approach — through strategic planning, clear communication, and a commitment to service — will be best positioned to navigate the challenges and turn their acquisitions into long-term successes.
Contributing editor Paul Davis is editor of The Bank Slate.
