Had Royal Palm Bank of Florida not regained its well-capitalized status this month, the $38 million in core deposits that it has spent roughly the last two years building could have been in jeopardy.

Or so its president feared.

That's because starting Jan. 1 institutions that are less than well-capitalized must comply with new restrictions on deposit rates. They will not be allowed to pay more than 75 basis points over a national average calculated by the Federal Deposit Insurance Corp.

"We've really worked on bringing those relationships here, and having to comply with this national rate would make it problematic to keep those," said J. Gregory Murphy, Royal Palm's president. "We are working hard to fix our problems, and this is another issue that we don't want to have to address."

Thanks to an $11 million capital infusion it received Thursday, the $149 million-asset Royal Palm in Naples, Fla., a unit of Mercantile Bancorp Inc. in Quincy, Ill., dodged the bullet. Many others will not be so lucky.

A study released last month by Market Rates Insight, a San Anselmo, Calif., research firm, found that average deposit rates in nine states exceed the FDIC's new cap. Those nine states include hotbeds of troubled banks like California, Florida, Nevada, Oregon and Washington.

"Most depositors gravitate toward the highest rate of return," said Dan Geller, an executive vice president at Market Rates Insight and the author of the study. "So the banks affected by this cap will have to resort to other means, other things that add value, because they won't be able to compete on rates alone."

But competing by other means is easier said than done. Terry Cochran, chief executive of the $1.1 billion-asset Columbia Bancorp in The Dalles, Ore., said service rarely trumps rate. Columbia's banking unit was significantly undercapitalized at Sept. 30.

"We already provide a very high level of service, and it would be hard to do any more than what we already do," Cochran said. "Some banks might be able to increase their service as an alternative, but for us, I don't see that as a way to offset paying a lower rate."

Of course, the new rule could help healthier banks by keeping deposit rates under control.

Anita Gentle Newcomb, the president and managing director of A.G. Newcomb & Co., a bank consulting firm in Columbia, Md., said she is unsure whether tying rates to a national average is the best approach and is glad that exceptions are going to be allowed.

But the goal of keeping deposit pricing in check is worthwhile, Newcomb said.

"I do think it is a positive in the sense that it will rein in irrational pricing that has been perpetuated by failing banks," she said. "Rogue pricing can certainly be disruptive to the well-capitalized banks in the market. As well, that kind of pricing is to the detriment of the FDIC, should the bank ultimately fail."

Since the early 1990s, regulators have restricted how much ailing banks can pay for deposits. Currently, banks that are less than well capitalized may not pay rates higher than the average in their local market.

David Barr, a spokesman for the FDIC, said that rule was too ambiguous and open to interpretation.

The new 75-basis-point cap above the national average would be easier to comply with and fairer to all institutions, since they will be held to the same standard around the country, Barr said.

Some ailing banks might benefit; if the rates in their area are below the national average, these strugglers will be able to pay more for deposits than they did previously.

However, experts said they don't expect to see that happen much.

"Those banks will have to find equilibrium," Geller said.

"Luckily, though, they are limited to the expense level they can afford."

In May the FDIC said institutions could get an exception if they can demonstrate that their market rates exceed the national average. On Friday the agency detailed the process for seeking such exemptions.

But Cochran said the likelihood of getting an exception to anything involving regulators is tough to predict.

"It is a mixed bag when it comes to exemptions," he said. "Sometimes they are very responsive; sometimes it could be months before you hear back."

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