1. North Carolina Capital Management Trust
Banking Costs: Fees vs. Balances vs. Blended
Presented by :
Gary Porter
Capital Management of the Carolinas, LLC

2. Disclaimer: None of us are bankers (although Jay was one once).
Banking services aren’t free, your bank has to be compensated for providing services.
This presentation is mainly about the compensation methods for your accounts: fee method vs. balance method vs. blended method.
Technology changes quickly, talk to your bank representative about new options.

3. Paying for Bank Services
Direct fees: Bank invoices the government based on the account analysis and is paid directly in the form of a deduction from the account (usually).
Compensating Balances: The government maintains deposits at the bank and earns a credit based on the earnings credit rate (ECR) to cover monthly charges.
Blended : A combination of direct fees and compensating balances. May be preferable when the government cannot earn interest on certain types of deposits.

4. “The Government Finance Officers Association (GFOA) generally recommends that governments use a direct fees approach or a blended approach.”
“Compensating-balance arrangements can offer convenience and seemingly low costs. However… compensating banks through fees or a combination of fees and balances is generally financially advantageous.”
Source: Banking Services: A Guide for Governments, Nicholas Greifer, Editor, GFOA

5. Why Should You Be Concerned With Monthly Banking Cost
Banking Cost Analysis
Why Should You Be Concerned With Monthly Banking Cost
Often a significant cost for local governments because of high transaction volumes.
Need to review your Earnings Credit Rate (ECR) as interest rates change.
Seasonal variations in volumes.
Banks change rate tables even though you have a set contract. (Oversight, merger)
Many line items are confusing, you don’t want to be charged for something not needed or not used.
Track FDIC charges, most banks levy this on all balances although you only receive $250,000 coverage. Effectively reduces your net ECR. May be - .13% or more.
It is just good business practice.

6. Banking Cost Analysis How to Pay for Banking Costs
Fee Basis – Paying for fees with cash, maintain low account balances.
Invest excess cash in higher yielding options.
More explicit and transparent.
Compensating Balance Method –
Maintain a balance that earns interest that will pay for fees.
Earnings credit rate (ECR) is used to calculate the interest earned.
Generally less transparent from budgetary perspective because costs are embedded in the relationship.
Compensating Balance Calculation – FDIC excluded from this example
Average Ledger Balance 45,000.00
- Average Daily Float 9,
Average Collected Balance 35,034.00
- Reserve Requirement (10.00%) 3,
Balance Available for Services 31,530.60
x Earnings Credit Rate (ECR) (.30%)
Net Monthly Earnings $7.88
*Remember – You are only paid on 90% of balances, Reserve Requirements take off 10%. Next, FDIC charges can be .13% or more, effectively reducing your ECR.

7. Banking Cost Analysis
Compensation – How will your bank be paid? Pros and Cons
Charges & Fees –
Direct expense
Direct control of cost
You invest excess cash (Pro)
Potential budgetary item (Possible Con)
Compensating Balances –
Maintain balances to pay bank charges
Hidden costs – low earnings rate, carry-over, excess FDIC charge (Con)
Easier from a budgetary standpoint; non-budget item (Possible Pro)
Should use external benchmark for interest calculation (T-bill) but generally bank sets rate (Con)

8. Banking Cost Analysis
This is how ECR’s used to be set, they are now generally administratively set (i.e.- the bank sets it however they want)

9. Bank Compensation #1 Banking Cost Analysis Compensating Balances
Daily ledger balance $100,000
- Avg Daily Float (7,000)
$93,000
- Fed. Reserve Require. (10%) (9,300)
Net Investable Balance $ 83,700
x Month. Earnings Credit (1.5%) $
- Monthly Charges (95)
Net Monthly Earnings $ 10*
* Bank keeps earnings unless “carried over”

10. Bank Compensation #2 Banking Cost Analysis Compensating Balances
Daily ledger balance $100,000
- Avg Daily Float (7,000)
$93,000
- Fed. Reserve Require. (10%) (9,300)
Net Investable Balance $ 83,700
x Month. Earnings Credit (.25%) $
- Monthly Charges (95)
Net Monthly Earnings $ (78)*
* You owe the bank this amount

11. Banking Cost Analysis
Compensating Balance Calculation (Difference between .15% & 1.50%)
Earnings Avail. To Cover Charges = Collected Balance x Earnings Credit Rate
*Same monthly charge but different Earnings Credit Rate
To Cover $1,000 monthly charge ($12,000 annual) at 1.50% earnings credit
$1,000 = Collected Balance x 1.5% (Collected Balance = $800,000)
To Cover $1,000 monthly charge ($12,000 annual) at .15% earnings credit
$1,000 = Collected Balance x .15% (Collected Balance = $8,000,000)
1.50% ECR = $ 800,000 Required Balance As Interest Rates go Up (like now),
your Required Balances should go
.15% ECR = $8,000,000 Required Balance Down

12. Banking Cost Analysis
Here are some tips for getting up close and personal with your account analysis statements:
  Check the Earnings Credit Rate.The earnings credit rate is applied to available balances and generates the monthly earnings allowance. You should understand how the rate is derived, and generally it should approximate the 3 month T-Bill rate. This item becomes a hidden fee if the rate is too low.
Fees or Balances? This is the perennial question. In general, one should pay for bank services with fees. This is primarily because the prevailing earnings credit rates are low compared to alternative investment returns, and they are further lowered by the 10 percent reserve requirement. With an increasing interest rate environment, it is imperative that agencies do the math regarding fees versus balances and make a policy decision about how they are going to compensate for banking services, so there are no surprises.
Source: Susan M. Cotton, Certified Treasury Professional

13. Large County (during RFP)
Negotiated No FDIC Charges
No Required Reserves
ECR of .60% since 2012

16. Medium Sized Municipality
Rate Paid After Charges Are Covered
FDIC Charge $ = 55% of Total Charges
Total Serv Charge $656.55
FDIC Charge

18. In June 2017, the Fed raised the interest rate it pays on reserves from 1.00% to 1.25%.
The ECR only went up from .35% to .45%

19. Smaller Population County

20. Reserve Backed Out
Highest Earnings Credit We’ve Seen
Recoupment Fee/FDIC

22. Smaller Population Municipality
No Reserves

25. Some Items To Consider Almost everything is negotiable.
Reserves and Recoupment (FDIC) can sometimes be negotiated away.
ECR vary widely, size is sometimes an advantage.
We have seen multiple ECR’s to 2.25%
Interest Rate on Excess Balances is generally much lower than ECR, so don’t keep any more cash on hand than necessary.
“Banks offer an administered rate, which is slow to respond to changes, generally rising only around half as much (i.e., if market rates increase 100 basis points, bank rates rise on average 50 basis points).” – Federated Investors

26. Some Items To Consider
Check your statements routinely, mistakes can be made.
It may be more work, but generally, fees are the preferred method to compensate your bank. You invest your cash balances to best benefit your unit.
Some Things You May Expect From Your Bank:
Reasonable service pricing compared to other banks and customers.
Reasonable FDIC charges compared to other banks.
Earnings Credit Rate that is market and formula based.
No Reserve Reduction.

27. Earnings Credit Rate Example (Balance vs. Fee Method)
Banking Cost Analysis
Earnings Credit Rate Example (Balance vs. Fee Method)
Book Balance $1,000,000
Required Reserves (10%) -$ 100,000 (Banks are currently paid 1.50% on
Net Earning Balance $ 900,000 reserves)
Stated Earnings Credit Rate = % or 55 basis points
Net Earnings on Earning Balance ($900,000 x .55%) $ 4,950/yr.
Effective ECR on Book Balance ($4,950/$1,000,000) %
If you choose the fee method, you invest the entire balance at market rates:
Ex: $1,000,000 x 1.20% = $12,000/yr. vs. $4,950/yr. under balance method.
That is a difference of $7,050/year per million or $70,500/year per $10 million.
*If you consider the FDIC charge under the Balance Method, your Effective ECR is reduced even further (i.e.- generally another 13 basis points)

28. GFOA Recommended Practice Procurement of Banking Services 2010
The local unit should:
…reevaluate banking services on a periodic basis
…periodically initiate competitive-bidding process
…process should include RFP’s and should cover services, fees, earnings credit rates, and availability schedules
…establish a relationship manager
…evaluate relative benefits and costs of paying for services through direct fees, compensating balances or a combination
… factors to consider are the earnings credit rate, reserve requirements and insurance fees on deposits

29. Banking Cost Analysis

30. Banking Cost Analysis
- Cont.

31. Banking Cost Analysis
- Cont.

32. Banking Cost Analysis
- Cont.

33. Banking Cost Analysis
From NC Treasurer’s Policy Manual – Gives you a list of core services to review.
PROPOSERS MUST HIGHLIGHT ALL NEW LINE ITEMS IN YELLOW.
Volumes were averaged or estimated from the bank analysis statements and other information. Certain volumes may not be represented since many services are offered in packages. Unlisted or zero volume may not indicate transactions did not occur.
All volumes are monthly except those one-time implementation & setup fees which are denoted by an " * ". Some services will not have volumes.
Proposer Name:
Insert Name of Proposer
>> VOLUMES ARE SUBJECT TO CHANGE <<
Average or Estimated Monthly Volume
FOR BANK USE ONLY
Core Banking Service
[Entity]
Bank Bid Amount ***
Bank Comments
FICO/FDIC CHARGE
---
ACCOUNT MAINTENANCE
FINANCIAL MANAGEMENT ACCOUNT (SWEEP)
ZERO-BALANCE ACCOUNTS
DEPOSITS, RETURNS, COIN & CURRENCY
COIN/CURRENCY DEPOSITED-BRANCH-NC
COIN/CURRENCY DEPOSITED-VAULT-NC
DEPOSITS PAPER
DEPOSITS-EFT
CURRENCY PROVIDED
ROLLED COIN PROVIDED
NIGHT DEPOSIT BAGS-CANVAS

34. Banking Cost Analysis

35. Mandatory Minimum Requirements
Banking Cost Analysis
NC Dept of State Treasurer is a Great Source of Information –
Mandatory Minimum Requirements
Federal Deposit Insurance Corp (FDIC) insured.
Online with the Federal Reserve Bank for funds and securities.
Experience w/large volume customers of similar complexity.
Be an Equal Opportunity Employer.
Comply w/mandatory requirements of RFP.
Comply w/all other requirements specified in RFP.

36. Banking Cost Analysis
Discounted Rate

37. Banking Cost Analysis
Now generally called “Recoupment Fee”