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Rising CD Rates Attract Scores of Investors Back to Banks


Charles Rinehart held a "sale" earlier this month, temporarily offering a 6.25% yield on 13-month certificates of deposit. Investors, once disenchanted by lackluster yields on savings accounts, flocked to Rinehart's Home Savings of America branches--in some cases queuing up in lines that snaked around the branch and down the block.

In 48 hours, the Irwindale-based thrift collected a stunning $800 million in new deposits.

"If we pay them, they will come," says Rinehart, Home Savings' chairman and chief executive.

For investors spooked by recent losses in the stock and bond markets, Home Savings' sale signals an encouraging trend. The naggingly low rates that banks and thrifts have been paying for deposits are getting boosted by financial institutions anxious for cash. That loan demand is also a promising sign for the state's economy.

For the first time in three years, rates paid for some deposits are rising faster than the rates charged on loans. The cost of a 30-year fixed mortgage has risen by 2.01 percentage points since the beginning of the year and loans tied to the prime rate have risen by 1.75 percentage points, for example.

At the same time, the nation's highest yields for one-year certificates of deposit have climbed 2.36 percentage points and the yield on 2 1/2-year deposits has jumped by 2.4 percentage points, says Martin Bradshaw, president of Bradshaw Financial Network, the San Francisco-based publisher of RateGram, a national compendium of deposit rates. To put this in dollars and cents, depositors are earning $236 to $240 more annually on a $10,000 account.

Of particular interest to Southern Californians is that you no longer have to go out of state to get a decent rate.

Where the top yields were offered by banks in New York, Virginia and Alabama a few months ago, today's top yields are increasingly local, offered by the likes of Southern California Thrift and Loan, First Bank of Beverly Hills, Home Savings of America and First Federal Bank in Santa Monica.

The sudden boost in deposit rates is easy to explain, experts note. After a long convalescence, loan volume is rising. And banks need cash--usually from savings deposits--to fund their loans. Where lending has been picking up for nearly a year in other parts of the country, it's just starting to hit in the Golden State, where economic ills proved persistent after aerospace and defense industry cutbacks.

"The California economy has finally turned the corner," says James Chessen, chief economist at the American Bankers Assn. in Washington, D.C. "It's not yet robust, but at least it's sitting up and eating solid food now."

The state is in the midst of a broadening loan recovery, adds Gary Schlossberg, senior economist at Wells Fargo Bank in San Francisco. Over the past three months, commercial and industrial loan volume has been growing at a 12.6% annual rate, he says. Consumer loans are up about 5%.

Mortgage lending is also showing a steady increase, adds Mary Trigg, spokeswoman for Home Savings. While the refinancing craze has clearly ended, new home purchases have caused Home Savings' mortgage portfolio to balloon by more than $3 billion since the beginning of 1994, she says.

Demand for loans was strong all through the national recession, but few loans were made simply because the economic slump ate away at the credit-worthiness of borrowers. Today, the picture is dramatically different. Loan delinquencies on both consumer and mortgage loans are at all-time lows, says Chessen. And steady economic gains in sales, employment and personal income statistics indicate that borrowers are better risks than ever.

The bottom line is that most banking experts believe that competition for deposits will continue throughout the year. And, in some cases, the need for cash may even spur the interest rate wars that made savings deposits the belle of the ball for many income-oriented investors in the past.

Still, some fear that it may be tough to woo back investors who have grown sour on savings accounts.

Over the past three years, Americans have been pulling money out of low-yielding bank accounts and pumping their funds into bonds, real estate investment trusts and a wide array of mutual funds.

The trend was particularly acute in California, where sinking yields spurred a slide in bank deposits that shrunk the state's commercial bank and trust company vaults by some $20 billion since 1991.

"There's a concern that a couple of factors could slow the inflow of deposits back into banks," says Schlossberg. "There's some lingering concern (among older investors) about the health of the banking system. And, at the other extreme, you have baby boomers who are investing in money funds instead of CDs because they're positioning themselves for the next uptick in the stock market."

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