Spring 2013

Uncertainty is high and interest rates are low:

Is cash concentration your best bet?

Concentrate your energies, your thoughts and your capital.

The wise man puts all his eggs in one basket and watches the basket.
Andrew Carnegie

We certainly are living in extraordinary financial times. Consider:

Interest rates are at historic lows and are likely to stay there for the foreseeable future.
In fact, the Federal Reserve has announced its intention to keep short-term interest
rates near zero until at least late 2014 and quite possibly until the middle of 2015.

New rules for money market funds (MMFs) have emerged from the Prime
Reserve Funds breaking of the buck during the financial crisis and they are
impacting returns.

The game has changed for short-term investing, due to the expiration of the FDICs
Transaction Account Guarantee (TAG) program for noninterest-bearing accounts. Now
that the once unlimited coverage cap has dropped back down to $250,000, about $1.5
trillion in deposits are no longer FDIC insured.

Its a brave new world for the financial professionals charged with maintaining the safety and
liquidity of, and yield on, their organizations finances including the cash reserves that have
accumulated to unprecedented levels in recent years.
Fortunately, there are steps that todays treasurers can take to safeguard their principal, to ensure
as much liquidity as they need and perhaps even to enjoy a return on their investments.
Lets take a closer look.

ITS BEEN A PERFECT STORM

NOW WHAT?
Theres no doubt that weve been through some
difficult economic times in this country. But
thats yesterdays news. Were now on the path
to recovery, and what matters is where we go
from here in all phases of financial management
including, perhaps most significantly in the
current financial environment, what corporate
treasury managers do with the excess cash in
their charge.

slowdown in the pharmacy realm, as new stores

continue to pop up on corners across the nation.
And many Internet-based businesses are doing
very well for themselves in some cases, driving
their brick-and-mortar competitors to rethink
their strategies.
For many American enterprises, challenges
remain. Consider just a few of the most crucial:
Some whose profits are razor-thin in the
best of times are learning to live on even
slimmer margins.
Factors such as rising fuel prices continue to
escalate the cost of doing business.
Many jobs are going unfilled as employers
hesitate to add anyone to the payroll
just now.

Few are making quick decisions on this score

nor is there any need to. Instead, its a good
time to take stock of where we are today and
to determine what can be done to get the best
possible results for our organizations.

ITS A MIXED BAG

In fact, wait and see has become the watchword

for American enterprise.

Some companies, and some industries, are

experiencing tremendous growth in this
economy. For instance, there seems to be no

CASH IS PILING UP
But this economy is far from stagnant. One of the
most striking characteristics of American finance
today is the amount of cash that corporations are
accumulating. Faced with uncertainty in every
direction, organizations have taken to sitting on
their money to the tune of more than $1.7 trillion
by year-end 2012 a 170 percent increase since
the turn of the millennium.

2011 and an annualized 10.3 percent in the first

quarter of 2012; but by the second quarter, it
had slowed to an annualized 6.5 percent only
slightly higher than the average 4.9 percent
growth rate before the financial crisis hit.1
That still leaves American corporations with a lot
of cash. While waiting for the future to unfold,
what should a corporate money manager do with
it all?

This trend does seem to be stabilizing. Total

corporate cash grew more than 11.2 percent in

Total US Corporate Cash ($T)

Source: Federal Reserve, Treasury Strategies, Inc.

Organizations nationwide have been letting their cash accumulate at unparalleled rates over the last decade. The $1.73 trillion reported as of
September 30, 2012, represented a 2.5 percent increase over the previous quarter.
1

Quarterly Liquidity & Deposit Study, Q2 2012 Participant Report, November 2012, Treasury Strategies, Inc., p. 8.

SAFETY, LIQUIDITY AND YIELD

The goal of most corporate treasurers is to
maintain a positive cash flow through effective
collection, management and disbursement of
funds. Thats easier said than done these days,
as just about everyone is struggling to do more
with less. Companies are asking hard questions
about everything from minimizing inventory to
speeding up receivables.

Safety of Principal (%)

2% Yield
21% Liquidity
77% Safety of
principal

In this climate, professionals top priorities for

cash management have not changed:
Protecting principal: How can we preserve
and safeguard our principal in a post-TAG
environment?
Maintaining liquidity: Will the money be
available when we need it?
Achieving maximum return: Is it possible to
get any return these days?

Source: 2012 AFP Liquidity Survey

The vast majority of corporate treasurers surveyed in 2012 named
safety of principal their #1 concern for managing their cash.

What has changed is the emphasis placed on

these priorities. Managing risk has become
even more critical, and for the vast majority of
companies, safety of principal tops the priority
list by a wide margin.

Uses of Cash (U.S.)

Sep-10 Sep-11 Sep-12

Capital expenditures

34%

37%

41%

Acquisitions

20% 18% 13%

Equity repurchase, stock buyback

11%

8%

13%

Debt redemption (medium and long-term)

18%

16%

14%

Paydown of short-term borrowing

20%

22%

20%

Negative cash flow from operations

54%

25%

31%

Increased inventories

9%

12%

9%

Increased dividends or special dividends

12%

5%

9%

Increased pension fund contributions

9%

3%

7%

Source: Treasury Strategies, Inc. Corporate Cash Report, September 2010, 2011 and 2012
While acquisitions and capital investments continue to top most lists of corporate spending plans, were seeing some shifts in other categories
most notably, a drop in the need to use cash to stabilize the balance sheet.

BACK TO THE BASICS,

WITH A TWIST
But instead of spreading their wealth (and the
associated risk) across multiple banks, these days
many are pursuing a Cash Concentration strategy
pooling their cash at a single bank in order to
enhance its safety, liquidity and yield. Its proving
to be a good solution for organizations with
multiple stores, offices or agents in the field, and
especially when those representatives are spread
out over large geographic areas.

The highest levels of safety are obviously

critical anytime especially in the current
environment. Liquidity requirements may be
more restrictive, depending upon the individual
organizations need to cover short-term
expenses, respond to emergencies or capitalize
on unexpected opportunities for capital
investment or acquisitions.
To address these requirements, many
organizations are going back to the basics of
commercial banking to manage their cash.

Putting all of ones cash in one institution

may seem counterintuitive, particularly from
the standpoint of safety. However, cautious
evaluation of each financial institution under
consideration can alleviate concern over
principal protection, while paving the way for
both maintaining the necessary liquidity and
achieving the best possible yield.

automation. If your bank is equipped with the

right technology, you can maintain a clear,
virtually real-time picture of your cash position
and its distribution in various instruments all
without the need to use multiple logins to enter
multiple portals. This technology allows you
to transfer funds effortlessly and to generate
invaluable reports with a few clicks of the mouse.

Whats more, this approach can give corporate

treasurers unprecedented visibility into, and
control over, the availability and location of their
cash balances at any given moment.

Even further, these capabilities enable

considerable savings of time and money by
automating reconciliation, for example, and
eliminating wire-transfer costs.
But they promise to have even more far-reaching
effects on your treasury, because of the level of
visibility and control they make possible.

Core Capital (Leverage) Ratio*

2007 . . . . . . . . . . . . . . 7.97%

For instance:

2008 . . . . . . . . . . . . . . 7.47%

Could Cash Concentration reduce your need

for external borrowing by allowing you to
quickly and easily move funds from one
account to another?
Could pooling of your cash give you
access to a wider variety of investment
instruments?
Might there be a possibility of earning a
higher yield on aggregated cash?

2009 . . . . . . . . . . . . . . 8.60%
2010 . . . . . . . . . . . . . . 8.89%
2011 . . . . . . . . . . . . . . . 9.07%
2012** . . . . . . . . . . . . . 9.28%

Sources: *FDIC Quarterly Banking Profile (3rd Quarter 2012);

**YTD 9/30/12
The banking industry has become a safer place for cash in recent
years, as the core capital leverage ratio of FDIC institutions has
increased each year since 2008.

The answers to these questions will depend

on your circumstances and on the capabilities
and policies of your bank. It should be noted,
for example, that some banks actually penalize
customers for exceeding balance thresholds in
some interest-bearing accounts. Additionally,
some are so rigid in their procedures that its
difficult to establish a system thats easy for
remote employees to use. It certainly pays to look
beyond the hype and be wary of the fine print.

THE BENEFITS OF CASH

CONCENTRATION
There are a number of benefits to be gained from
aggregating your cash in a single bank.
It starts with the most efficient possible
management of, and control over, your
money, thanks at least in part to advances in

FAMILIAR TOOLS
Bank products have evolved over the years, but
they still fall into one of these general categories:

cash reserves or simply wanting to earn

some interest on excess funds without
compromising their access to the money.
Sweep accounts build on these instruments
by sweeping surplus balances from checking
accounts into interest-earning vehicles at
frequencies that meet your requirements
usually at the end of each business day.
Popular options include repurchase (repo)
and commercial paper sweeps.*
Certificates of Deposit (CDs), aka Time
Deposits, generally provide a better rate
of return at the cost of liquidity for the
instruments contracted term; the longer
the term, the higher the interest.

Commercial checking offers excellent

safety of principal and complete liquidity.
There are numerous variations on this
theme, in terms of accumulating credits
against service fees, tapping into specialized
features for tax-exempt entities or estates,
and potentially earning interest.
Money-market and savings accounts
meet the same liquidity requirements in
an interest-bearing fashion. Requiring
minimum balances in individual or
aggregated accounts, they can be ideal
for businesses wanting to build up their

Change in Average Account Size (Q1 2012 to Q2 2012)

4.0%
3.0%
2.0%
1.0%
0.0%
-1.0%
-2.0%
-3.0%
-4.0%
-5.0%
-6.0%

ECR MMDA NIB* IB**

DDA DDA DDA

TD Sweeps

Source: Quarterly Liquidity & Deposit Study, Q2 2012 Participant Report, November, 2012, Treasury Strategies, Inc.
With the exception of ECR DDA and sweep accounts, all account types saw declines in average balances.
* Non-Interest-Bearing
** Interest-Bearing

The key to successful Cash Concentration is

to select the right instruments and then tailor
them, to the extent possible, to meet your needs.

as an overnight deposit account or commercial

paper sweep account, or investing some or all of
it in short-term investments.

For example, if you have reason to maintain

multiple analyzed accounts, you might
appreciate being able to group them into a family
in order to maximize your Earnings Credit Rate
(ECR). If your bank allows it, this strategy can
reduce or eliminate your service fees.

Some interesting trends have become apparent

in recent months. For instance, money market
deposit accounts have become increasingly
popular in the last couple of years. So, too, have
noninterest-bearing ECR accounts.
Many perhaps most corporate treasurers
use a variety of these vehicles to address varying
safety, liquidity and yield requirements.

Or, if you are gathering money daily from widely

dispersed locations into a single account, you
may want to have your Cash Concentration bank
initiate the sweep automatically, or leave that
responsibility in the hands of local institutions.

For instance, its often possible to invest some

portion of cash reserves for longer periods of
time; laddering to accommodate various time
horizons can be a smart approach to managing
these funds.

Additional instruments have emerged as well,

including some to provide extra assurances of
principal protection. For example, Certificate of
Deposit Account Registry Service (CDARS) is a
Certificate of Deposit program working through
a single bank but syndicated with other banks to
achieve 100 percent FDIC coverage. Repos, on
the other hand, are repurchases of government
securities another good way to supplement
the safety of your FDIC coverage. Repo sweeps
make it especially easy to take advantage of
this product.

Similarly, if your risk appetite is sufficient, it

might sometimes be wise to invest a limited
portion of cash in higher-risk, higher-yield
investments.
Bottom line? This is an excellent time to take a
fresh look at your cash management portfolio,
to reassess its performance against your current
safety, liquidity and yield objectives, and to
consider a Cash Concentration strategy.

Whichever instruments you choose, making

them deliver an outstanding performance for
your organization will undoubtedly be one of
your top priorities. It should also be your banks.

If this approach makes sense for you, youll want

to conduct careful risk analyses of the banks that
are your best candidates for Cash Concentration,
comparing each ones ratings for stability, capital
for strength and balance sheets for risk levels.

WHICH TOOLS ARE IN YOUR

BEST INTEREST?

Then ask for, and evaluate, each candidates

Cash Concentration recommendations for your
situation; these bankers should be able to help you
sort through all your options up front, to make the
wisest possible decisions for your organization.

Youll first start with an operating account. From

that point on, your cash management choices
boil down to letting the money sit idle in this
account, having it swept into such instruments

THE ONLY CONSTANT

six months from now, so youll have to continue

reassessing strategy and tactics alike as this
economy unfolds. Dont hesitate to demand
plenty of help from your bank in this ongoing
activity and in adapting to technology as it
continues to evolve into entirely new realms,
including cloud computing.

Change is the only constant, they say and

thats never been more true than it is in our
current financial climate.
What works for you today may not be optimal

RETURN

Want to increase your yield?

Treasury
bills

Deposits
<$250

CDARS

Deposits
>$250

Money
market
funds

tional

Institu

Commercial
paper

risk

Treasury
bonds

st rate
Intere
risk

sured

FDIC in

RISK
Source: Cash Landing, AFP Exchange, January/February 2013, p. 36.

Some financial laws never change: The only

The disadvantages include both lack of

liquidity and the risk of loss should interest
rates rise quickly; the current rates may not
be impressive enough to make up for such
an eventuality.

way to increase your return on investment is to

increase your risk.
There are a couple of relatively safe ways to
increase your return on investment these days.

A third possibility and perhaps the most

sensible for the risk-averse and very patient
investor is to wait for interest rates to rise.
Unfortunately, that probably wont happen
before late 2014, at the earliest.

The most apparent is to put your money in

instruments such as conventional or prime
money market funds or commercial paper.
The downside, of course, is higher risk.

The moral of the story? If safety and

liquidity are your top priorities, be satisfied
with todays lower returns and hope for a
brighter tomorrow.

When liquidity is not a primary concern,

another choice is to invest in instruments with
longer maturities for instance, Treasury
securities with long-term maturities.

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Your Ass o c ia te d Ba nk
Treasur y Ma na g em ent Conta c t

Edward P. Banas, MBA, CTP

Vice President, Product Manager
Commercial Deposits & Treasury Management
414-278-1995
Edward.Banas@AssociatedBank.com

A Certified Treasury Professional and recipient of the prestigious Alexander Hamilton Award
for his efforts in working-capital management, Ed joined Associated in 2011 to bring our
customers the benefits of his extensive financial services experience experience gained on
behalf of companies headquartered on Wall Street, as well as on the worldwide web.
Eds background includes serving as treasurer of PayPal Inc., president of PayPal Asset
Management Company and chief financial officer of PayPal Funds. He has also held senior
management, treasury and product positions with companies ranging from Sallie Maes
Business Office Solutions Group to Fidelity Investments, from JP Morgan Chase to the Pershing
Division of Donaldson, Lufkin and Jenrette Securities Corporation.
Among his accomplishments:
Implementing the first multibillion dollar, multicurrency, global secured, committed credit
facility to allow high-yield securities as a form of collateral
Managing the highest yielding money market fund in the U.S.
Creating the treasury infrastructure for the largest global P2P Internet payment network
Ed earned his BS in Business Management from Purdue University and his MBA in Finance from
Indiana University.

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CHOOSING THE RIGHT BANK

a treasury workstation and readily accessible,
easily applied tools such as those found within
Associated Connect (AssociatedBank.com/
AssociatedConnect).

The expiration of the FDICs TAG program is

focusing renewed attention on the relative safety
of various counterparties. With the federal
government re-capping its coverage on virtually
all deposits at $250,000, your banks strength is
more important than ever.

Associated Bank is committed to meeting your

expectations for a broad portfolio of commercial
banking products. Our products are tailored
to help you achieve the highest levels of
safety, the needed liquidity levels and the best
possible return even in todays low-interest
environment.

Indeed, strength has become absolutely critical

once again, particularly for those hoping to reap
the highest rewards from a Cash Concentration
strategy. If that describes your organization, be
sure to select a bank offering:
Sound financial metrics that are easily
monitored
Attractive credit ratings
Strong capital levels
Improving earnings and credit trends
A low-risk profile, for example with a low
exposure to Europe, to suspect industries,
and to proprietary-risk and naked-derivative
positions

If youre interested in exploring the possibilities

of Cash Concentration at Associated, lets get
together soon. Please call Ed Banas, Liquidity
Product Manager for Commercial Deposits
and Treasury Management at 414-278-1995 to
schedule a meeting at your earliest convenience.

Another quality thats critical to evaluate is each

candidates automation strategies and tools.
If they wont dovetail with your own systems,
you could face communications bottlenecks.
Its best to have system-wide visibility with
tools for automated, daily reporting, including

Fiduciary, administrative and planning services are provided by Associated Trust Company, N.A. (ATC). Investment management services are provided to ATC
by Kellogg Asset Management, LLC (KAM), an SEC-registered investment adviser. ATC and KAM are affiliates of AB-C.
*Non-deposit investment products are NOT deposits or obligations of, insured or guaranteed by Associated Bank, N.A. or any bank or affiliate, are NOT insured by
the FDIC or any agency of the United States and involve INVESTMENT RISK, including POSSIBLE LOSS OF VALUE.
Associated Bank, N.A. (AB) is a Member FDIC and Associated Banc-Corp (AB-C). Equal Housing Lender. Equal Opportunity Lender. Loans are subject to credit
approval and involve interest and fees. Please ask for further details. (6/13) 3303

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