Massachusetts community banker John H. Pearson Jr. could not be happier about the pending sale of Countrywide Financial Corp.
Countrywide has a reputation for paying some of the highest rates in the country on certificates of deposit, causing banks like Mr. Pearson's Butler Bancorp Inc. in Lowell to pay up for deposits as well just to stay competitive. Countrywide's sale to Bank of America Corp. could ease pressure on deposit pricing, he said.
"I think it's going to be a tremendous relief," said Mr. Pearson, the $350 million-asset Butler's president and chief executive.
It was a sentiment echoed at community banks across the country Friday as news broke that Bank of America was buying Countrywide for $4.1 billion in stock. While B of A is a tough competitor in its own right, it is not known for paying above-market rates on its retail deposits.
Community bankers also welcomed the news that JPMorgan Chase & Co. is in preliminary talks to acquire another company noted for paying above-market rates on CDs, Washington Mutual Inc. of Seattle.
Some bankers and analysts are skeptical that the sale of Countrywide and Wamu would result in any meaningful relief in deposit pricing, because the marketplace is still crowded with online competitors including ING Direct and aggressive small banks — mainly start-ups — trying to make names for themselves.
But Steve Brown, the CEO of the Pacific Coast Bankers' Bancshares in San Francisco, said that practically every bank offering certificates of deposit would benefit if top payers like Countrywide and Wamu were bought.
"Countrywide has a lot of concentration in Western markets, and Wamu has a very large footprint all down the Western seaboard," Mr. Brown said. "You can find pretty high rates from them in all of the local papers, and so" mergers could "take the heat off many of the independent banks in the West to pay up to compete."
Mr. Brown said community banks in these markets could also benefit from any customer runoff during merger integrations by receiving more core deposits, which means less need to find other, more high-cost funding sources.
Countrywide, of Calabasas, Calif., is not just a West Coast company. It is the nation's largest mortgage lender and has been actively marketing its CDs nationwide, thanks to the Internet.
Mr. Pearson said Countrywide has been advertising its rates heavily in the Boston area. He said an ad Friday touted a 5.25% yield on a six-month CD with a $10,000 minimum. "They are hammering us here," Mr. Pearson said.
John C. Roman, the president and CEO of the Naugatuck Valley Financial Corp. in Naugatuck, Conn., said that neither Countrywide nor Wamu has operations in the markets where Naugatuck operates, but they cause a ripple effect. "We don't see either of them directly," he said. "Some of the banks we compete with see them, and that drags their rates up. We're reacting to the banks that are really butting heads with them."
He said local residents also can see the higher rates on the Internet. "Consumers are smart. They're doing a lot of shopping."
Because of the competitive pressure, Naugatuck is offering rate of 4.25% on a one-year certificate of deposit, even though it could borrow funds from a Federal Home Loan bank for a year at 3.78%.
"We're paying up for deposits where theoretically we could go to the Federal Home Loan bank and get the money cheaper," he said.
Andrew D. Littlejohn, the president of the $200 million-asset City National Bank of Taylor in Texas, said he has the same issue with Countrywide pushing CD rates higher than the cost of Home Loan bank borrowings.
"They have kept jumbo CD rates artificially high," he said.
John R. Buran, the president and CEO of the $3.3 billion-asset Flushing Financial Corp. in Lake Success, N.Y., said deposit pricing pressure is one reason his company started an Internet bank, iGObanking.com, in November 2006.
If Countrywide's deposit rates come down, it should help ease the pressure, Mr. Buran said. "Countrywide has been out there as No. 1 for a long time and is significantly above the pack."
But other factors such as the spread between the London interbank offered rate and Treasury rates also pinch banking companies, Mr. Buran said.
Robin B. Freeman, the CEO of the $197 million-asset Community First Bank in Prineville, Ore., said that his bank, which offers a one-year CD at 4.04% yield, could avoid paying higher rates after sales of Countrywide and Wamu.
However, the bank still has to contend with what many bankers say are irrational rates offered by start-ups desperate to build assets.
"There's been a lot of growth in branches here in central Oregon, and so we're getting pressure on rates from the new banks, too," Mr. Freeman said.
In places like Los Angeles' Koreatown, start-ups are particularly aggressive in their pricing of certificates of deposit in the banking market. For example, the $156 million-asset First Standard Bank, which opened in Koreatown in 2005, offers a one-year CD at 5% yield.
Mr. Roman and Mr. Littlejohn said deposit rates are starting to come down, at least in their areas. "The sale of Countrywide or Wamu would probably help that process along," Mr. Roman said.
But several others said it could be several months or even several quarters before pressure on deposit pricing softens.
"This is not an event that is going to affect deposit pricing in 2008," said David Darst, an analyst at First Horizon National Corp.'s FTN Midwest Securities.
A few were skeptical that ownership changes at Countrywide and Wamu would affect pricing at all.
"It may have a bit of an impact, but I don't think it's going to totally change the landscape," said Damon DelMonte, of KBW Inc.'s Keefe, Bruyette & Woods Inc. "I think banks are still going to be fighting for deposits."
