SUWANNE, Ga. — Prior to 2005, the $2.3 billion Bethpage FederalCredit Union was holding an excessive amount of cash in reserve inits vaults. An internal auditor was concerned from a securityperspective, but the New York-based FCU was also missing out ontrimming the fat and turning its excess into an earning asset.

“We simply had no way to manage our cash at our branches and wehad no real idea of where we were or where we should be with cashbalances by branch, recalled Rocco Sabino, assistant vice presidentof finance at Bethpage. “The hot topic around the industry has beenthat as the Fed [surplus] funds continue to rise, if you have toomuch cash on hand, you're losing money. It's as simple asthat.”

Since Bethpage was growing at a pace of three to four branchesper year, it sought out a software solution. Over a period of eightmonths it rolled out the Deposit Reclassification and the Ceto CashCalculator (C3) products from financial management consultants Ceto& Associates. The move resulted in most of its 13 branchescutting vault cash by “a few hundred thousand dollars” with themain Bethpage branch trimming approximately $800,000, Sabinosaid.

C3 tracks the minimum and maximum cash limits based on thebranch/teller ATM intraday profile of daily cash ending, the costassociated with shipments and deliveries, and the opportunity costsof carrying cash, thus optimizing the use of cash. Real-timeinformation and reporting options are provided to maintain optimumcash levels at each branch while freeing up resources that couldotherwise be used in interest-earning opportunities.

Current regulations state that all financial institutions mustmaintain reserves against transaction deposits. Reserves againstthese deposits can take the form either of currency on hand–vaultcash–or balances held at the Fed. At present, the required reserveratio on non-transaction accounts is zero, while the requirement ontransaction deposits is up to 10%.

Deposit Reclassification lowered Bethpage's federal requirementsto zero and reduced the money at its branches. The FCU was able totake a portion of that excess cash and invest it ininterest-earning assets including its loan portfolio.

All credit unions need to maintain a balance at the Fed and it'scovered in two ways, explained Douglas Ceto, executive vicepresident of Ceto & Associates. The first is the amount ofmoney residing in branches and ATMs. The rest is what is kept incash at the Fed. As reserve requirements are declining the need tohave that excess cash is diminishing and Ceto has found thatfinancial institutions carry an average of 20% more vault cash thanneeded for their daily flow of cash.

“The benefits of implementing cash management software vary fromcredit union to credit union,” Ceto said. “What we seetypically–and this is a very conservative number–we see creditunions reduce their cash between 20-25%. A very large credit unionwith lots of branches and ATMs might have a greater reduction or avery small credit union might have a 15-20% reduction. It varies bythe size of the institution, how big their branching network is,and how big their ATM network is. If you have a very large ATMnetwork, there's a strong likelihood that there's going to be a lotof excess cash.”

After the $450 million Heritage Credit Union in Austin, Texasimplemented the Ceto Cash Calculator it reduced the average cash onhand among its eight branches from 15-40%, according to Michael VerSchuur, executive vice president of the CU. Heritage reduced cashon hand at its main vault by 35%.

“For the longest time, interest rates were so low. So reducingextra cash out of the vault didn't really impact the bottom line awhole lot. One of the large national banks is our cash depositoryinstitution here in town. As the rates got so low, our dailybalance increased significantly in order for them to offset theirvault costs and they had to pass on a monthly fee to us. We eitherhad to do a very large deposit or our fees were going to goup.”

The first thing the CU did was to switch from the bank to adirect cash order from the Fed. In the last 18 months, as the Fedcontinued to increase rates, Heritage started to look at keepingits vault at a minimum to earn some extra interest on its funds.Its initial effort involved tracking cash levels on an Excelspreadsheet, obviously not the best option, Ver Schuur said.

For many branch managers and tellers, the numbers projected bythe software are quite shocking initially since they are much lowerthan the cash levels they typically maintain.

“It was a little bit of a learning curve, going from havingcomplete control over the amount of cash on hand to relying on thehelp of a software package,” Ver Schuur admitted. “It took about amonth or so before everyone got comfortable with it. We did a fewthings to entice them to use the software to get closer to thegoal. We ran a promotion where the branch that could reduce itscash by the largest percentage won lunch. Or we offered blue jeansdays.” “What's interesting is what you learn about human behavior,”added Bethpage FCU's Sabino. “Once you find out that you have toomuch cash you can't just bring it down overnight. Psychologicallyit takes time. Branches are very conservative because they'reconcerned that they won't have enough cash.”

Cash, as a whole in the industry, has always been something withwhich all institutions–specifically credit unions–have wrestled,Ceto concluded. Branch managers often err on the high side sincethey never want to run out of cash, but now senior management hasaccess to tools to maintain and analyze the levels of vault cash.It's no longer a matter of branch managers relying on “their gut orbest guess effort to determine how much money to be carrying at abranch,” Ceto said. –[email protected]