The next time the Federal Reserve raises rates, which it’s expected to do in March, expect to hear more questions from investors about the cost of keeping depositors around — especially municipal depositors.

It’s not hard to see why. After all, city and county governments have a certain reputation for being high-maintenance customers. Winning those accounts often requires a lengthy and competitive bidding process, their deposits must be collateralized, and those clients are famously rate-sensitive.

Or are they?

Some bankers and analysts say it’s not that simple. Sure, some municipal clients likely will ask for higher rates on their deposits the day the Fed moves, but many won’t. But there is a more complicated story behind the numbers, said Chris Marinac, director of research at FIG Partners in Atlanta.

“Some of that is perceived, and some of that is real, and the reality is that we don’t know how much will happen because it’s still evolving,” he said.

Bar chart ranking banks by municipal deposits to total deposits

Bankers say that’s because many municipal clients keep their funds short-term and liquid, so they are less demanding when it comes to rate of return. Expectations depend on the municipality in question.

Still, there has already been some talk of rate pressure from municipal depositors on earnings calls, so investors’ concerns aren’t totally unfounded. And the questions will only mount. The Fed has raised rates five times and 125 basis points since late 2015, and Chairman Jerome Powell’s recent testimony before Congress boosted expectations that the central bank could raise rates as many as four times this year.

“Not all municipal deposits are created equal, but generally yes, we do think [rates on those deposits] are going to increase faster and frankly I think they already have,” said Michael Perito, a research analyst with Keefe, Bruyette & Woods. “We heard from multiple banks on conference calls and the conference circuit that one area where they were seeing pressure was in municipal deposits.”

Executives at Flushing Financial, FCB Financial Holdings and Civista Bancshares all fielded investor questions about municipal deposits on their third-quarter earnings calls in the fall.

John Buran, president and CEO of Flushing Financial, in New York, said that after keeping municipal deposit costs “considerably below market rates” for several months following several Fed rate increases, the $6.3 billion-asset bank eventually started paying up for those deposits to keep up with competitive pressure.

James Miller, president and CEO of Civista, of Sandusky, Ohio, said the $1.5 billion-asset bank did see some “limited pressure” from some municipal clients and extended rates on a few accounts, but he said that “had virtually no impact on our overall funding costs.”

Of course, there are still benefits to having a municipal banking business. For one thing, those banking relationships are hard to move and sometimes involve a bidding process, so a rate-shopping depositor probably won’t pack up their operating accounts and switch banks immediately.

Even after factoring in potentially higher rates, municipal deposits can still end up being more profitable than commercial deposits. Perito said that’s because the fixed expenses associated with commercial deposits — the credit team and support staff to handle a business relationship, the reserve against a loan associated with that relationship — are sometimes are much higher than those tied to municipal relationships.

“I find that [municipal depositors] are not quite as rate-sensitive as the corporates or big endowments,” Robert Mahoney, president and CEO of the $2.7 billion-asset Belmont Savings Bank in Massachusetts, said in an interview. “Their money is fairly short-cycled. They get quarterly tax payments. They get tax payments in January, they have a big slug of dough, and then it works its way down over the next 90 days.”

Charles Shaffer, the chief financial officer at the $5.8 billion-asset Seacoast Bank in Stuart, Fla., offered a similar assessment. Seacoast’s municipal banking business involves largely operational accounts that municipalities need to keep fairly liquid. He also attributes the lack of rate pressure in that business to the kinds of communities Seacoast banks: smaller, rural municipalities that have had longstanding relationships with the bank.

“If you’re focused on smaller, rural communities there’s just not a lot of rate pressure there,” he said in an interview.

It stands to reason that larger municipalities, with more cash to park, would be more rate-sensitive.

Describing municipal banking as a “mixed bag,” Jim Cantrell, the chief investment officer and treasurer at the $3.2 billion-asset MidWestOne Bank in Iowa City, Iowa, said that when municipal clients come calling for a better rate, they usually tend to be the clients with higher balances.

Marinac said that in evaluating a bank’s municipal deposit business, it’s worth understanding what proportion of those clients the bank considers to be longstanding relationships that aren’t likely to flee for a few more basis points.

Consider a bank’s loan-to-deposit ratio, too, he said. A bank with a lot of municipal deposits on its books might not necessarily have to pay extra to keep those as soon as the Fed moves if it has plenty of deposits to fund further growth in the form of loans. Banks with higher loan-to-deposit ratios, on the other hand, might feel they have less room to negotiate.

“You’ve got companies who have a high amount of municipal deposits but relatively moderate or low costs of deposits,” Marinac said. “It’s not always true, but it is true sometimes.”

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