When a consumer goes to a car dealer, does she accept the sticker price on a car or does she ask the salesman, "What's your best price?" More likely, she asks for a better price and also mentions the quote she got on the same car model from other dealers. As likely, a house hunter bids on a house below the asking price.
Credit unions we visit tell us the same is true with loans and deposits. Reportedly, on many services credit unions offer the best rate (according to research by Data Trac and others), but this type of research does not reflect what the member/customer actually pays for loans or earns on deposit. Specifically, surveys of "offered rates" typically examine a short time frame and don't capture prevalent market practices such as relationship pricing, tiered deposit pricing based on amount deposited, and the willingness of the bank or credit union to "meet the market."
Sandler O'Neill research indicates what credit union managers tell me frequently: "Our rates are usually amongst the best, but banks are very competitive and get plenty of business." Because of much higher share insurance costs for credit unions than for community banks, credit unions will likely find it more difficult to remain competitive.
The related graph illustrates just one example of why offered-rate surveys, while useful, are not the best way of determining individual bank/credit union market or industry competitiveness. The graph represents a 15-year look at "cost on deposits" for community banks and credit unions. Borrowings are removed so that the data reflects interest paid solely on deposit balance. Also, please note that the blue line is bank cost of deposit with DDAs removed. Largely, DDAs are deposits made by small-business borrowers that are non-interest-bearing. Small-business lending remains a small percentage of credit union industry loans (data is all institutions with assets of $100 million to $40 billion; National Credit Union Administration/Federal Deposit Insurance Corp. statistics).
Thus, the blue line better reflects cost of consumer deposits at banks and indicates that community banks deliver a higher deposit rate. One reason the community bank deposit cost is higher is product mix — that is, a larger percentage of community bank deposits is in higher-cost product.
As the pie charts on deposit types imply, community banks seem to capture a larger share of the CD (time deposit) consumer. (This is interesting when considering the offered-rate surveys that indicate credit unions "offer" higher CD rates.) Apparently, consumers in large numbers achieve rates from community banks that satisfy their needs. Time deposits at banks are comparable to share certificates at credit unions and, as you can see, time deposits are 50% of community bank deposits while share certificates are 32% of credit union shares (deposits).
For years banks have maintained roughly a 95% share of U.S. deposits. Given the propensity and ease by which consumers "shop" for rates, many credit unions tell us they don't believe the rhetoric that banks are not "competitive."
In discussions with credit union boards conducting due diligence on the credit union and mutual savings bank charter, we have been tracking the same analysis for converted credit unions that are now MSBs.
Converted credit unions' cost of deposits was higher than the credit union movement 51% of the time before charter change. After charter change and as an MSB, their cost of deposits was higher than the credit union movement 82% of the time, as they funded higher asset growth with deposits (NCUA/FDIC statistics).
With the base range of insurance cost for healthy community banks lowered to 2.5-9 bps and NCUA's announced range of assessments of 20-35 bps for 2011, healthy credit unions conducting charter due diligence may see this math as a tipping point, considering future year assessments are unknown.
