Liquidity Management in the New Era

Liquidity Management in the New Era Tampa AFP Jeff Avers Treasury & Payment Solutions Liquidity Strategy & Consulting June 2013

Corporate Cash Management Short-Term Investments Wire – ACH – Card Lockbox – Branch – Card Liquidity Payments Deposits/Receipts Checks/Controlled Disbursement Wire – ACH – Cash Concentration Short-Term Borrowing

Regulatory Reform – A Sampling Increased Customer Expenses Increased Bank Expenses

Liquidity Management in the New Era Agenda: • Past, Present & Future of Short-Term Investing • Risk and Return • Efficient Frontier • Today’s Investing Opportunity • Treasury Yield Curve • The Reward for Credit Risk • Market Rates • Key Insights from 2012 AFP Liquidity Survey • 25 Year Trend in Corporate Cash • The Perfect Storm • Unlimited FDIC and the DDA Bubble • The Impact of Reg Q Repeal • Past and Future Role of Sweep • The New Role of Liquidity • Change in Allocation of Investments

Objective of Today’s Discussion Make These Three Key Points: • The basic principals of liquidity investing are no different today than in the past • The dynamics of today’s short-term investment environment should lead you to construct a portfolio whose composition is different than pre-2008 • Financial Regulatory Reform has already had an impact on liquidity management practices, and will continue to do so going forward

Risk & Return – Past, Present & Future of Short-Term Investing Investopedia defines the risk-return tradeoff as “the principle that potential return rises with an increase in risk. Low levels of risk are associated with low potential returns, whereas high levels of risk are associated with high potential returns. According to the risk-return tradeoff, invested money can render higher profits only if it is subject to the possibility of being lost. Because of the risk-return tradeoff, you must be aware of your risk tolerance when choosing investments for your portfolio.” As investment risk increases, so does the expected return RETURN % Cash investors should strive to understand the concept of risk-return when managing their short-term cash portfolio. The risk-return tradeoff implies that higher yielding investments carry a higher level of risk, with US Treasuries (UST) generally being considered to offer the ‘risk-free’ rate. All other short-term investments are considered to carry a higher degree of risk than UST’s, and should therefore offer a higher rate of return RISK % • Investors should consider the risk-return tradeoff as they view the yields associated with each investment option • For investment products that involve an underlying portfolio of securities, such as money market mutual funds and/or Local Government Investment Pools (LGIPs), investors should review the portfolio holdings before investing to make sure they are comfortable with the portfolio’s (1) issuers and (2) asset classes for all of the securities held in the portfolio • Some investors may not be comfortable with foreign issuers, broker-dealers or finance companies, while others may not be comfortable with asset-backed securities (ABS) or commercial paper • A review of the portfolio’s holdings will reveal any discrepancies with the investor’s risk tolerances

Risk & Return – AAA Rated LGIPs Fees 2.9 bp 3.3 bp 2.4-3 bp Source: State Treasurer’s Website for each State

Risk & Return - The Efficient Frontier* • The upward sloped curve (BCD), called the efficient frontier, is the optimal set of portfolios for every given level of risk and expected return • From the portfolios that have the same return, the investor will prefer the portfolio with lower risk • B is the efficient portfolio for Return Level 1 • From the portfolios that have the same risk level, an investor will prefer the portfolio with higher rate of return • C is the efficient portfolio for Risk Level 2 Return C D ● Return 2 B ● ● A Return 1 Risk Risk 1 Risk 2 * Developed by Harry Markowitz, a Nobel Prize winning economist, as a component of Modern Portfolio Theory

Today’s Investing Opportunity: The Yield Curve The World Isn’t Flat… But Yields Sure Are Liquidity investors have historically focused on the 0-24 month segment Source: NYT Treasury Yield Curve as of May 7, 2013 The 0-24 month portion of the fixed-income yield curve is extremely flat, offering very little incentive to extend investment maturities or portfolio duration

Today’s Investing Opportunity: Reward for Credit Risk The Market is not offering much return for taking on additional credit risk Source: WSJ Money Rates as of May 7, 2013 • Investor reward for taking on credit risk is minimal, providing very little incentive to do so • Today’s liquidity investors are focused on principal preservation and liquidity, with very little emphasis on yield • Liquidity investors have taken advantage of the generous ECR offered by the banking industry • Bank deposits have replaced money market mutual funds as the primary liquidity investment vehicle • Considering the Fed expects rates to remain at similar levels until late 2014 or 2015, we should continue to expect this to be “the new normal”

Market Rates for Cash Investment InstrumentsAlternative Cash Investment Options • Market rate movements have been mixed • As of the end of May overnight rates have contracted slightly, while 30 and 90-day rates have shown mixed movement versus December 2012 • One-month and three-month Libor are at their 52-week lows • This implies the market has both lowered its perception of bank risk, and implies demand for bank borrowing has declined… confirming that banks are long on deposits • Rates obtained from (1) WSJ Money Rates, (2) Crane Data (money funds) and (3) State-specific LGIPs

Past, Present & Future of Short-Term Investing Findings from 2012 Association of Financial Professionals (AFP) Liquidity Survey 1 1Refer to Whitepaper published by SunTrust entitled Why Businesses Need to Reassess Their Investment Policies Now

Corporate Cash Has Been Increasing Trends In Corporate Cash • Grew from $500 Billion in 1988 to more than $2 Trillion at the end of 2012 • Checkable deposits as a percent of Corporate Cash have increased steadily since 2008 • Relative Value of ECR • Unlimited FDIC through 12/31/2012 • January Fed data indicates no significant change since • December 2012

Corporate Cash Percent Has Been Declining Corporate Cash Pct. • Long-term Trend • Declining over time • Declined from 20% to 13% over 25 year period • Increases during and after a recession • Five-Year Trend • Slight uptick in 2009 in response to the recession, but seems to be stabilizing 16% 14.1% 13.2% 13.1% 2007-09 Recession 2001 Recession 1990-91 Recession

The Perfect Storm • Expiration of Unlimited FDIC • Economic Recovery • Rising Rates • Repeal of Reg Q • 2A-7 Money Fund Reform • Redeployment of Corporate Cash There is a potential “Perfect Storm” brewing Each event individually is likely to reduce the portion of corporate cash held in bank deposits. This combination of events, slated to happen within a 12-24 month period of one another ,will serve to reduce and redistribute bank deposits in favor of the following destinations: Likely Future Destinations of Corporate Cash Likely Future Destinations of Corporate Cash • Alternative Cash Investment Options • Money Market Funds • Investment Sweep • US Treasuries and Government Agencies • Commercial Paper and other cash investment Instruments • Non-interest-bearing DDA will convert to interest-bearing DDA and/or investment sweep • Cash will be used to fund Capital Expenditures, Acquisitions, and for other strategic purposes • The percent of corporate cash maintained in bank deposits will likely begin to revert to pre-2008 levels • 2007 – 27% of corporate cash held in bank deposits • 2012 – 51% of corporate cash held in bank deposits Bank Deposits

Impact of Reg Q Repeal ¹ When Interest Rates Rise, The Repeal of Reg Q1 plus Money Fund Reform Could Drive $1T+ onto Bank Balance Sheets… Provided the Banks Want the Liquidity In countries allowed to pay interest on checking, corporates maintain 60-70% of their liquidity in the banking system Percent of Total Corporate Liquidity Held in Bank Deposits* This is a positive outcome for U.S. banks only if loan demand and deposit growth are in synch ¹ Repealed in 2011, Regulation Q was a 1930s Depression Era regulation that disallowed banks from paying interest on commercial checking accounts

Impact of Reg Q Repeal A Likely Unintended Consequence of Reg Q Repeal

The Economic Recovery May be Funded by Cash Redeploying Cash vs. Borrowing to Fund Capital Expenditures Percent of Companies Self-Funding their 2010 and 2011 Capital Expenditures and Planning to Self-Fund in 2012 Source: Greenwich Market Pulse, January 2012 Given the build-up of cash over the last 3-4 years, companies have been self-funding a major portion of their capital expenditures… and are likely to do so going forward Banks usually benefit from an economic recovery through the expansion of their lending and/or underwriting activity… which may be slow in coming this time

The Future of Sweep Post Reg Q Repeal, the Primary Purpose of Sweep Has Changed

Deposit Investment Allocations May Return to Pre-2008 Levels 1 Source: 2012 AFP Liquidity Survey • Cash investors have been increasing their allocation to bank deposits over the last six years, while simultaneously decreasing their allocation to money market mutual funds • If there is more certainty around the future of money market funds, when rates begin to rise cash investors might reallocate their portfolios to be weighted no more than 25-35% in bank deposits, which is consistent with pre-2009 levels

Summary of Today’s Discussion • The basic principals of liquidity investing are no different today than in the past • The dynamics of today’s short-term investment environment should lead you to construct a portfolio whose composition is different than pre-2008 • Financial Regulatory Reform has already had an impact on liquidity management practices, and will continue to do so going forward SunTrust Bank, Member FDIC. SunTrust is a federally registered service mark of SunTrust Banks, Inc. 04/13

Liquidity Management in the New Era