Rates for deposits have plummeted in recent years in several states that used to be among the hottest for yields in the nation.
Such rates have fallen across the country since banking's most recent halcyon days, but the strongest declines have been in states such as Georgia, Florida and Illinois, based on March 2005 to March 2011 data from Market Rates Insight.
Industry observers said the results offer more proof that the recovery from the economy's downturn will be arduous in these states, as will be their banks' efforts to fund future loan growth.
"The risk going forward is if banks see deposits flow out … just as loan demand starts to pick up," said Greg McBride, senior financial analyst at Bankrate.com.
As Ken Thomas, an independent bank consultant and economist, put it: "When you call a bank now and ask for a rate, and [the response] starts with a 'point,' then you know you've got an issue."
In the new era of banking, everything has a catch, especially in the fundamentals of gathering deposits to fund loans. While banks cannot attract more depositors with a low rate, it does mean their cost of funds is lower. But with loan demand also slow, it creates a stagnant balance sheet rather than an unbalanced one.
Low deposit rates also leave banks vulnerable to poaching by out-of-state competitors with big pockets and wider, sounder geographic bases.
Banks such as Fifth Third Bancorp, PNC Financial Services Group Inc. and Toronto-Dominion Bank, have expanded in Florida to capture deposits.
Total deposits at insured institutions in Florida fell each quarter last year, sliding 6% from the previous year, to $122.1 billion at Dec. 31, according to the Federal Deposit Insurance Corp. Total loans fell twice as much, to $98.8 million.
And Florida had the third-largest decline in 12-month certificate of deposit yields, falling 233 basis points since March 2005. Georgia had the largest drop, at 236 basis points, followed by Illinois at 235 basis points.
Florida has something banks covet: potential. "Florida is the fourth-biggest state in the country" for consumer deposits," Thomas said. "Florida is a savings state."
Analysts pointed to a myriad of factors driving down rates in the most-ailing states. A main one was the economic slump, which caused loan demand to shrivel such that there was no need to seek funding with aggressive deposit rates.
"The lower rates on the depository side is an indication of a soft lending market, and the soft lending market is an indication of weak economic conditions," said Dan Geller, an executive vice president at Market Rates Insight.
This was true in Illinois, New Mexico, Florida and Nevada, which ranked with California among the states with the highest 12-month CD rates in 2005. Now, only California remains in the top 10.
There is a new paradox, where less-lucrative banking states now have the best rates, according to bestcashcow.com. States such as Oklahoma and Kansas topped the U.S. in one- and five-year CD yields at March 5, and eight of the top 12 states for one-year CD yields were in the Midwest.
Sol Nasisi, co-founder at Bestcashcow.com, said this shift is partly because the Midwest economies are more reliant on agriculture and are faring better than those of many other states. "Eight of the top 11 states with the highest rates are also in the top 10 of agriculture as a percentage of the economy," he said.
Nasisi said the Midwest tends to have a higher percentage of banks with less than $1 billion of assets. Smaller banks typically offer higher rates, inflating the averages.
Other observers said some of the banks that failed since 2005 had offered above-market yields. A rise in enforcement actions has also forced more banks to lower rates to align with the market.
Analysts said shorter-term yields would remain low for the rest of 2011. They expected a "modest" rise in five-year CDs to continue as banks try to lock in low-cost funds for loan growth several years out.
"Consumers haven't been tempted by the slightly higher yield on longer-term maturities," McBride said. "The real question [for banks] is what happens down the road when investors eventually start to dip their toe back into riskier assets."
