Bank of America Corp.'s effort to stay below the national 10% market share cap on deposits is clearly evident in the California market, bankers and analysts say.
In September the Charlotte company suddenly cut its deposit rates in the state in a move many say was designed to shun deposits.
B of A "had the highest yields on deposits of anybody, consistently. And now they are almost the opposite of that," said Richard Smith, the president and chief executive of TriCo Bancshares in Chico, Calif.
Jeffrey Harte, an analyst with Sandler O'Neill & Partners LP, said B of A is unwilling "to pay on things that tend to be 'hot money.' " As regulators review its proposed acquisition of the credit card issuer MBNA Corp., B of A is under intense pressure to stem deposit growth. Federal law prohibits a merger if the combined companies' deposit share would exceed the 10% cap.
In Los Angeles, where it has 20% of the deposit market share, Bank of America's rate on two-year jumbo certificates of deposit hovered for six months between 3.28% and 3.61%. After staying close to the market average through August, the rate in September plunged to 2.46%, 105 basis points below the market average.
The rate drop in September on its five-year CDs was equally noteworthy. After staying above the market average from January through August, Bank of America cut its average rate to 3.48% - 2 basis points below the market average, according to data compiled by Bankrate Inc.
California competitors noticed Bank of America's rate swings.
John Hinrichs, the chief financial officer of the $3 billion-asset Farmers and Merchants Bank of Long Beach, said that for much of this year there "was a substantial difference" between Bank of America's high CD rates and what its rivals were offering.
"It was so far out of whack that I didn't pay any attention to it," Mr. Hinrichs said. Then, in the past couple months, Bank of America's rates "dropped suddenly."
Indeed, Bank of America's rates on several deposit products in California had been at the top or near the top of the market. Smaller competitors found the strategy curious given what many in California have described as "rational" deposit pricing amid the steady increases in short-term interest rates.
Bank of America would not discuss its deposit pricing.
"Strategies on our deposit rates, we consider to be proprietary," spokesman Michael Chee said Tuesday. Bank of America's reversal in September was just as eye-catching as its high rates in the first half of the year.
Observers say that with the $35 billion MBNA deal set to close this quarter, Bank of America pulled out all the stops to remain under the 10% deposit cap as of Sept. 30. According to Federal Deposit Insurance Corp. data from the end of June, B of A's $577 billion and MBNA's $29 billion would add up to 10.2% of domestic deposits.
In its July 25 merger application with the Federal Reserve Board for the MBNA deal, Bank of America said it had about 9.995% of the nation's deposits. It has insisted it will be below the cap, and analysts said they expect the merger to go through.
B of A had foreign and domestic deposits of $626 billion at the end of the third quarter, 1% less than it had after the second quarter. At MBNA, of Wilmington, Del., deposits fell 5%, to $29.24 billion. The pair's domestic deposits as of Sept. 30 were about $594 billion.
Richard X. Bove of Punk Ziegel & Co. Inc. said Tuesday that to stay below the 10% deposit limit B of A has "been on an active campaign to chase deposits out the door."
Alvaro G. de Molina, B of A's chief financial officer, said during its third-quarter earnings conference call on Oct. 19 that the company shied away from certain commercial deposits in the quarter and that most of the decline in deposits in the three months was "commercial-related, not consumer."
He said he was not concerned about B of A's relatively low deposit rates.
The consumer banking group "is committed to building that business with a balance toward market share - which means the clients get what they need - and profitability - which means that's what the shareholders have us here for," Mr. de Molina said.
Observers say the low deposit rates satisfy multiple objectives.
"While meeting a tactical objective like a 10% market-cap limitation, there probably also is an asset-liability management perspective," said Jeff K. Davis of First Horizon National Corp.'s FTN Midwest Research Securities Corp. As the yield curve gets flatter "and the spread is compressed on the bond portfolio, to the extent they can back off pricing a little bit on the core deposit-liability side, why not do that?"
Mr. Harte also said B of A may be letting "lower-margin deposits bleed away" because loan growth may have slowed.
While B of A waits for word from regulators on the merger, California bankers are enjoying the break in deposit pricing pressure.
"It wasn't fun to watch them raise the rates," TriCo's Mr. Smith said. "It's certainly a better feeling now that they are on the opposite end of the spectrum."
