assocbank hc whtpaper cash concentration

8/18/2019 AssocBank HC WhtPaper Cash Concentration

1/12

Uncertainty is high and interest rates are low:

Is cash concentration your best bet?

— Andrew Carnegie

Concentrate your energies, your thoughts and your capital.

Te wise man puts all his eggs in one basket and watches the basket.

Spring 2013


2/12

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 Fund’s “breaking of the buck” during the nancial crisis — and they areimpacting returns.

• e game has changed for short-term investing, due to the expiration of the FDIC’s

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.

It’s a brave new world for the nancial professionals charged with maintaining the safety and

liquidity of, and yield on, their organizations’ nances — including the cash reserves that have

accumulated to unprecedented levels in recent years.

Fortunately, there are steps that today’s 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.

Let’s take a closer look.


3/12

IT’S BEEN A PERFECT STORM…

NOW WHAT?

ere’s no doubt that we’ve been through some

difficult economic times in this country. But

that’s yesterday’s news. We’re now on the path

to recovery, and what matters is where we go

from here in all phases of nancial management

— including, perhaps most signicantly in the

current nancial environment, what corporate

treasury managers do with the excess cash in

their charge.

Few are making quick decisions on this score— nor is there any need to. Instead, it’s 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.

IT’S A MIXED BAG

Some companies, and some industries, are

experiencing tremendous growth in this

economy. For instance, there seems to be no

– 3 –

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 prots 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 unlled as employers

hesitate to add anyone to the payroll

just now.

In fact, “wait and see” has become the watchword

for American enterprise.


4/12

– 4 –

Total US Corporate Cash ($T)

Source: Federal Reserve, reasury Strategies, Inc.

Organizations nationwide have been letting their cash accumulate at unparalleled rates over the last decade. Te $1.73 trillion reported as of

September 30, 2012, represented a 2.5 percent increase over the previous quarter.

CASH IS PILING UP

But this economy is far from stagnant. One of themost striking characteristics of American nance

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.

is trend does seem to be stabilizing. Total

corporate cash grew more t han 11.2 percent in

2011 and an annualized 10.3 percent in the firstquarter 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 nancial crisis hit.1

at still leaves American corporations with a lot

of cash. While wait ing for the future to unfold,

what should a corporate money manager do with

it all?

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


5/12

SAFETY, LIQUIDITY AND YIELD

e goal of most corporate treasurers is tomaintain a positive cash flow through effective

collection, management and disbursement of

funds. at’s 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.

In th is 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?

• Maintaini ng liquidity: Will the money be

available when we need it?

• Achieving maximum return: Is it possible to

get any return these days?

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 prioritylist by a wide margin.

– 5 –

Source: 2012 AFP Liquidity Survey

Te vast majority of corporate treasurers surveyed in 2012 named

safety of principal their #1 concern for managing their cash.

Safety of Principal (%)

2% Yield

21% Liquidity

77% Safety of

principal


6/12

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. It’s proving

to be a good solution for organizations with

multiple stores, oces or agents in the eld, and

especially when those representatives are spreadout over large geographic areas.

BACK TO THE BASICS,

WITH A TWIST

e highest levels of safety are obviously

critical anytime — especially in the current

environment. Liquidity requirements may be

more restrictive, depending upon the individual

organization’s 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.

– 6 –

Source: reasury Strategies, Inc. Corporate Cash Report™, September 2010, 2011 and 2012

While acquisitions and capital investments continue to top most lists of corporate spending plans, we’re seeing some shifts in other categories —

most notably, a drop in the need to use cash to stabilize the balance sheet.

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%


7/12

– 7 –

THE BENEFITS OF CASH

CONCENTRATION

ere are a number of benets to be gained fromaggregating 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

automation. If your bank is equipped with the

right technology, you can maintain a clear,

virtually real-ti me picture of your cash position

and its distribution in various instruments — all

without the need to use multiple logins to enter

multiple portals. is technology allows you

to transfer fu nds eortlessly and to generate

invaluable reports with a few clicks of the mouse.

Even furt her, these capabilities enable

considerable savings of t ime and money — by

automating reconciliation, for example, and

eliminating wire-transfer costs.

But they promise to have even more far-reaching

eects on your treasur y, because of the level of

visibility and control they make possible.

For instance:

• Could Cash Concentration reduce your need

for external borrowing by allowing you to

quickly and easily move fu nds from one

account to another?

• Could pooling of your cash give youaccess to a wider variety of investment

instruments?

• Might there be a possibility of earning a

higher yield on aggregated cash?

e answers to these questions w ill 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 t hresholds in

some interest-bearing accounts. Additionally,some are so rigid in their procedures that it’s

dicult to establish a system that’s easy for

remote employees to use. It certainly pays to look

beyond the hype and be wary of the ne print.

Putting all of one’s cash in one institution

may seem counterintuitive, particularly from

the standpoint of safety. However, cautious

evaluation of each nancial 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.

What’s 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.

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

**YD 9/30/12

Te banking industry has become a safer place for cash in recent

years, a s the core capit al leve rage ratio of F DIC instit utions ha s

increased each year since 2008.

Core Capital (Leverage) Ratio*

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

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

2009 . . . . . . . . . . . . . .8.60%

2010 . . . . . . . . . . . . . . .8.89%

2011 . . . . . . . . . . . . . . .9.07%

2012** . . . . . . . . . . . . .9.28%


8/12

– 8 –

Source: Quarterly Liquidity & Deposit Study, Q2 2012 Participant Report, November, 2012, reasury Strategies, Inc.

With the exception of ECR DDA and sweep accounts, all account types saw declines in average balances.

* Non-Interest-Bearing

** Interest-Bearing

FAMILIAR TOOLS

Bank products have evolved over the years, butthey still fall into one of these general categories:

• Commercial checking offers excellent

safety of principal and complete liquidity.

ere 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

cash reserves or simply wanting to earnsome interest on excess funds without

compromising t heir 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 requi rements

— usually at t he 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

instrument’s contracted term; t he longer

the term, the higher the interest.

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** TD Sweeps

DDA DDA DDA


9/12

– 9 –

e key to successful Cash Concentration is

to select the right instruments and then tailor

them, to the extent possible, to meet your needs.

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.

Or, if you are gathering money daily from widely

dispersed locations into a single account, you

may want to have your Cash Concentration bankinitiate the sweep automatically, or leave that

responsibility in the hands of local institutions.

Additional instruments have emerged as wel l,

including some to provide extra assurances of

principal protection. For example, Certicate of

Deposit Account Registry Service (CDARS®) is a

Certicate of Deposit program working through

a single bank but syndicated with other banks to

achieve 100 percent FDIC coverage. Repo’s, on

the other hand, are repurchases of governmentsecurities — another good way to supplement

the safety of your FDIC coverage. Repo sweeps

make it especially easy to take advantage of

this product.

Whichever instruments you choose, mak ing

them deliver an outstanding performance for

your organization wi ll undoubtedly be one of

your top priorities. It should also be your bank’s.

WHICH TOOLS ARE IN YOUR

BEST INTEREST?

You’ll rst 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

as an overnight deposit account or commercial

paper sweep account, or investing some or all of

it in short-term investments.

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 t reasurers

use a variety of these vehicles to address vary ing

safety, liquidity and yield requirements.

For instance, it’s 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.

Similarly, if your risk appetite is sucient, it

might sometimes be wise to invest a l imited

portion of cash in hig her-risk, higher-yield

investments.

Bottom line? is is an excellent time to take a

fresh look at your cash management portfolio,

to reassess its performance against your current

safety, liquidity and y ield objectives, and to

consider a Cash Concentration strateg y.

If this approach makes sense for you, you’ll want

to conduct careful risk analyses of the banks that

are your best candidates for Cash Concentration,

comparing each one’s ratings for stability, capital

for strength and balance sheets for risk levels.

en ask for, and evaluate, each candidate’s

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.


10/12

– 10 –

THE ONLY CONSTANT

Change is the only constant, they say — and

that’s never been more true than it is in our

current financial climate.

What works for you today may not be optimal

Some financial laws never change: The only

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.

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.

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.

Want to increase your yield?

six months from now, so you’ll have to continuereassessing strategy and tactics alike as this

economy unfolds. Don’t 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.

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.

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 won’t happen

before late 2014, at the earliest.

The moral of the story? If safety and

liquidity are your top priorities, be satisfied

with today’s lower returns and hope for a

brighter tomorrow.

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

R E T U R N

RISK

Treasurybills

Deposits$250

Moneymarketfunds

Commercialpaper

Treasurybonds

F D I C i n s u r

ed

I n s t i t u t io n

a l r i s k

I n te re s t ra t

e

r i s k


11/12


12/12

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

CHOOSING THE RIGHT BANK

e expiration of the FDIC’s TAG program isfocusing 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 bank’s strength is

more important than ever.

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 oering:

• Sound financial metrics that are easily

monitored

• Attractive credit ratings

• Strong capital levels

• Improving earnings and credit trends

• A low-risk prole, for example with a low

exposure to Europe, to suspect industries,

and to proprietary-risk and naked-derivative

positions

Another qualit y that’s crit ical to evaluate is each

candidate’s automation strategies and tools.

If they won’t dovetail with your ow n systems,

you could face communications bottlenecks.

It’s best to have system-wide visibilit y with

tools for automated, daily reporting, including

– 12 –

a treasury workstation and readily accessible,easily applied tools such as those found withi n

Associated Connect® (AssociatedBank.com/

AssociatedConnect).

Associated Bank is committed to meeting your

expectations for a broad portfolio of commercial

banking products. Our products are tai lored

to help you achieve the highest levels of

safety, the needed liquidity levels and the best

possible return — even in today’s low-interest

environment.

If you’re interested in ex ploring the possibilities

of Cash Concentration at Associated, let’s 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.

assocbank hc whtpaper cash concentration

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