Florida banks could soon be hit with another wave of municipal deposits as cities and towns pull more of their money out of a state-run investment pool that has lost roughly $17 billion since November.
Last week Florida's investment arm, the State Board of Administration, increased the amount of funds that municipalities can remove from a local government investment pool to at least half their funds remaining in the pool.
Those funds are likely to flow as deposits into the state's banks, some of which have already received tens of millions of municipal deposits since November, when cities and towns started yanking money out of the investment pool as the value of their investments — particularly those in mortgage-backed securities — plummeted. The additional funds have come in handy for banking companies such as Capital City Bank Group Inc. and Seacoast Banking Corp. of Florida, which have used them to shore up capital as loan losses have mounted and to invest in short-term securities.
Public funds tend to be costlier for banks, however, because they have to hold additional collateral against them. Consequently, banks where these funds have flowed in say their net interest margins have been squeezed.
Though most states have some sort of local government investment pool, to date only Florida's has experienced a run. The State Board of Administration froze withdrawals temporarily in November to try to stem the run, before allowing cities and towns to withdraw some of their funds in early December.
The surge of deposits into banks began late in the fourth quarter and picked up in the first quarter, after the state board decided in January to allow cities and towns to withdraw as much as 37% of their investment, whichever is greater.
Anthony DiMarcos, the Florida Bankers Association's executive vice president of government affairs, said the state board's move last week could lead to another influx of deposits into Florida banks.
Kim Davis, the chief financial officer at Capital City, in Tallahassee, agreed there might be a "little increase, but nothing of the magnitude of what we got the first time through."
The $2.6 billion-asset Capital City has always had its fair share of municipal deposits, but in the last two quarters it had an influx of $250 million from various local and county governments looking for a safe place to park their funds.
The company has invested the funds in short-term securities, though it is being cautious.
"We don't want to tie it up in long-term investments until we understand how long we may have that money in the bank," Mr. Davis said.
The deposits helped provide a capital cushion in the first quarter, but also contributed to a 37-basis-point decline in Capital City's net interest margin from the previous quarter, to 4.73%.
Capital City also netted some loan business as a result of the investment pool's troubles. When the state board temporarily froze withdrawals after the fund lost more than $12 billion in two weeks, some cities and towns that could not access their funds had to borrow from local banks to meet payroll.
The Leon County School district, for example, borrowed $10 million from Capital City.
Bill Hahl, the chief financial officer at the $2.4 billion-asset Seacoast, in Stuart, said that in November some of Seacoast's municipal customers, including St. Lucie County, Martin County, the City of Stuart, and smaller communities around the Okeechobee Lake region, deposited about $30 million from the investment pool into the bank.
Seacoast has been hard hit by the real estate downturn, and the municipal deposits have helped keep the company well capitalized.
Still, Mr. Hahl said public funds cost more than other deposits, because state requires banks to buy U.S. government agency securities as collateral for accepting public funds. This is in case a bank fails, and to ensure a municipality is made whole.
It is hard to predict how long will these funds will remain with the banks.
Mr. DiMarcos said he doubts municipalities will be pulling money out of banks anytime soon given all the problems in the credit markets.
But, he said, "once the crisis passes, they'll start looking for the best return. Someone will complain that they're not make enough money."
