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

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

Since Bethpage was growing at a pace of three to four branches per year, it sought out a software solution. Over a period of eight months it rolled out the Deposit Reclassification and the Ceto Cash Calculator (C3) products from financial management consultants Ceto & Associates. The move resulted in most of its 13 branches cutting vault cash by “a few hundred thousand dollars” with the main Bethpage branch trimming approximately $800,000, Sabino said.

C3 tracks the minimum and maximum cash limits based on the branch/teller ATM intraday profile of daily cash ending, the cost associated with shipments and deliveries, and the opportunity costs of carrying cash, thus optimizing the use of cash. Real-time information and reporting options are provided to maintain optimum cash levels at each branch while freeing up resources that could otherwise be used in interest-earning opportunities.

Current regulations state that all financial institutions must maintain reserves against transaction deposits. Reserves against these deposits can take the form either of currency on hand–vault cash–or balances held at the Fed. At present, the required reserve ratio on non-transaction accounts is zero, while the requirement on transaction deposits is up to 10%.

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

All credit unions need to maintain a balance at the Fed and it's covered in two ways, explained Douglas Ceto, executive vice president of Ceto & Associates. The first is the amount of money residing in branches and ATMs. The rest is what is kept in cash at the Fed. As reserve requirements are declining the need to have that excess cash is diminishing and Ceto has found that financial institutions carry an average of 20% more vault cash than needed for their daily flow of cash.

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

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

“For the longest time, interest rates were so low. So reducing extra cash out of the vault didn't really impact the bottom line a whole lot. One of the large national banks is our cash depository institution here in town. As the rates got so low, our daily balance increased significantly in order for them to offset their vault costs and they had to pass on a monthly fee to us. We either had to do a very large deposit or our fees were going to go up.”

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

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

“It was a little bit of a learning curve, going from having complete control over the amount of cash on hand to relying on the help of a software package,” Ver Schuur admitted. “It took about a month or so before everyone got comfortable with it. We did a few things to entice them to use the software to get closer to the goal. We ran a promotion where the branch that could reduce its cash by the largest percentage won lunch. Or we offered blue jeans days.” “What's interesting is what you learn about human behavior,” added Bethpage FCU's Sabino. “Once you find out that you have too much cash you can't just bring it down overnight. Psychologically it takes time. Branches are very conservative because they're concerned that they won't have enough cash.”

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