Yup. I have the same issue on 1 of my sites. It ranks nationally on page 1 for a 22,000 SM keyword but the problem is I only service New Jersey.
So the site gets a bunch of garbage traffic from states we don't even serve. That's why anytime we get calls from area codes we don't know, we just don't answer the phone.
And FTR, I have TONS of citations, reviews, geotargeted content and I'm in GWT.
I will tell you what I think the problem *might be*, and I'm just experimenting with it. But one thing I noticed was my homepage was extremely overoptimized, as in I had the keyword "service + state" about 14 times on my homepage. I did not keyword stuff, I just used my main phrase wayyy too much.
I use to actually rank #1 for that keyword, but then Google deranked me for my main local keyword and ranked me nationally instead.
The ONLY thing I can possibly think of is Google applied some type of penalty on my site for that specific phrase. I know that sounds crazy but I can't think of anything else that makes sense. I really don't think it's my links are anchor text because my anchor text is perfect. It has to be something about the way my on page was done.
A few days ago I reoptimized my site, so I'm just gonna wait and see what happens. For all I know, this could just be some random glitch in Google that is out of my control. Because you're like the 10th person I've heard saying this.
-BB