Intense public scrutiny. Competitive bidding processes. Sometimes pricey deposits.

Government banking is not for the faint of heart, but People’s United Financial in Bridgeport, Conn., has found the rewards have outweighed the negatives after committing to this niche several years ago.

In its most recent earnings call, the $43 billion-asset company attributed a linked-quarter dip in its deposit base to seasonal quirks associated with its municipal banking business. Yet CEO Jack Barnes also took the opportunity to tout a recent win for People’s in that same category: the core banking accounts of the Commonwealth of Massachusetts.

Once that relationship has been fully phased in, it should add around $300 million — $350 million in deposits, company leaders said.

The rewards for such accounts extend beyond the stable deposit funding, said Robin Russell, a partner with the Texas law firm Andrews Kurth Kenyon who is an expert on depository relationships with municipalities.

“It’s a very high-profile account to have,” Russell said. “So you have that implicit approval that you are a bank who has undergone this intense, extensive review of your services and your financial strength and your diversity and you have had a state or municipality select you. That’s a pretty great reward.”

Grace Lee, the regional manager of government banking at People’s United, attributed the Massachusetts relationship to “a lot of sweat equity” on the part of the bank’s employees there. Moreover, People’s also recently won the operating accounts of the state of Vermont, which in the most recent fiscal year carried a daily cash balance of about $346 million, according to Vermont Business Magazine. Yet not all the government clients are high profile, running the gamut from states to small towns and everything in between.

Russell, who specializes in advising banks on this very type of business, broke down just what winning the bid for a state’s operating accounts can entail: extensive discussions not just about the products and services People’s would offer, but also about the bank’s financial strength, its diversity initiatives, its Community Reinvestment Act program and its involvement in the community whose business it’s trying to win.

That easily adds up to thousands of hours, she said, because governments are essentially trying to find financial institutions that are beyond reproach.

“It’s very high profile,” Lee said. “Simply put, there is a headline risk there and the two go hand in hand. If you’re passionate about serving the public, then by virtue of your collaboration with the public entity … that is a heavy burden for any private entity because that is not a natural assumption that most bankers walk into.”

For example, efforts at responsible-lending ordinances that tie municipal deposit business to minimum requirements for lending in low-income neighborhoods frequently pop up nationwide and have at times been successful, especially after the financial and foreclosure crises. More recently, numerous state and local governments — including California, Illinois, New York City, Chicago and Seattle — made a public show of taking away or threatening to take away bond sale and other banking business from Wells Fargo after its phony-accounts scandal erupted and its CRA rating was lowered.

Government business can be won back, as Wells Fargo proved this spring in being awarded a financing deal with the state of California for infrastructure repair, but such battles are hard fought.

Municipal banking has always been a part of People’s United’s business, but in 2013 the bank decided to expand that business line and made the necessary internal technological changes to facilitate the effort, said Karen Hayden, its executive vice president of treasury management services.

People’s has invested in its staff, particularly relationship managers with deep connections to their local markets, often bankers retained after acquisitions.

As a result of that initiative, People’s United had built state and municipal deposits to nearly $2.3 billion at March 31, up 120% from four years earlier.

It largely pursues governments’ core banking accounts and doesn’t go after lending relationships with quite the same intensity, though it does sometimes bid on financing opportunities, Lee said. For People’s, municipal banking also includes the same kind of fee-based cash management, payroll and treasury services the bank would offer to any corporate client, but with some nuances. For instance, public deposits require collateralization, and People’s offers different forms of it.

“Quirkiness is part of any type of business, and you have to understand that when you go after any type of business,” Hayden said. “I wouldn’t necessarily say that government is unique in that regard, but it’s probably more visible because if particular items don’t go well, it’s very public.”

As many other bankers are finding out, municipalities’ fiduciary duties to their constituents often means they’re going to expect banks to pay up a little more for those deposits now that interest rates are on the move. Seacoast Banking Corp. of Florida and FCB Financial Holdings, also in Florida, both cited municipal clients seeking higher interest rates on deposits. Richard Murray, CEO of National Commerce Corp. in Alabama, told analysts that his company had let go of a few municipal certificates of deposit because the renewal rates for those clients were simply too competitive.

Those demands come with the territory, in the view of People's. “Anybody that has a fiduciary duty would be asking those questions,” Lee said.

Those headaches are arguably worth it. For one thing, once you have the operating accounts of a government or municipality, you usually have that relationship for a predetermined period, Russell said. In the case of Massachusetts, that’s three to five years. That differs from most banking relationships with corporations, whose boards of directors could switch banks on a moment’s notice.

It’s true that government banking can also be a good source of fee income, and to have that guaranteed for a fixed period is an attractive proposition for many banks, Russell said. People’s did not disclose how much fee income it makes from its government banking business.

Russell said she wouldn’t be surprised if she saw more banks taking a look at the government field in the years to come. Community banks can easily win the business of smaller towns and municipalities, but given the depth of expertise and intense scrutiny needed to bid on those bigger city and state accounts, she wouldn’t expect to see too many banks pursuing them.

“Sometimes, there can be a runway of 10 years or more to get you to that point where people know that you’re a contender in this space,” Russell said. “It’s not like you can just wake up one morning and decide to go bid on the state of Massachusetts.”

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.