A difficult rate environment and unprecedented competition created high levels of uncertainty around financial institution performance in the year leading up to the COVID-19 outbreak. Now, extreme volatility in the financial markets — with wild intra-day swings in market indices and stock prices — along with high levels of other negative economic data (i.e., increase in unemployment) present new challenges for leaders in the banking industry, leaving some with more questions than answers.
Recently, Kaufman Hall convened virtual panel discussions of financial institution leaders to discuss the unique circumstances confronting the industry in the face of COVID-19 and economic turmoil. Following are key insights from these discussions.
Current Challenges and Priorities
Q: What are the biggest challenges your teams are dealing with?
VP and Controller, $3.3B Credit Union: We’re being asked to do a lot more diagnostic reporting, so we’re trying to stay ahead of liquidity issues by understanding the cash coming in and out of the credit union. Home equity lending, for example, is taking off quite a bit. We’re watching our credit-line draws, and looking at things like first-time delinquencies on credit cards and requests for payment extensions. Our focus is on stabilizing the institution to make sure we keep going.
Treasurer, $7.9B Bank: Our top priorities right now are shoring up credit and making sure we make good credit decisions. Now that the CARES Act gives the FDIC the ability to insure non-interest-bearing deposits in an unlimited amount — a low-cost funding source — being efficient and nimble with short-credit decisions will be critical so that when an opportunity arises, we can act on it.
One thing we did when the 10-year rate went down to 50 basis points was to enter into a forward-starting swap that gave us the opportunity to lock in low-cost funds at 74 basis points for the next 10 years, starting in 2022. Now, we’re going to have access to these low-cost funds, and if rates do go up — I assume they will at some point over the next 12 years — we will have locked in a significant low-cost funding source.
Director of Planning, $13B Bank: We’re trying to understand what we can do for our community — particularly under the CARES Act. We have a task force designed to help our institution be the first one out there to provide support for our communities at a critical time. Hopefully, COVID-19 will be a short-term event. I’m thankful that the CARES Act gives us some opportunities to explore interesting ideas to provide services for our customers and our communities when they need it most; this will help us establish and maintain long-term relationships. It positions the entire banking industry to be there at a critical time — and that’s an opportunity that doesn’t present itself very often. Exploring opportunities to create a long-term relationship is an essential strategy for relationship management and growth.
Liquidity and Deposit Rates
Q: As you look at liquidity, are you also preparing by keeping more cash on hand?
VP and Controller, $3.3B Credit Union: As far as overall liquidity, we have plenty of liquidity on hand to turn into cash. I think what consumers don’t realize is that financial institutions typically hold a small amount of currency. One of the first things we did when we saw how the market was moving in response to the coronavirus crisis was increase our vault amount quite a bit. Now, our branch network is fairly well supplied with currency. While we did see an initial increase in the number of customers who made large withdrawals, that group quickly waned, in part because no one wants to be touching currency right now.
One of the big concerns we have in the institution is we're planning on getting flooded with deposits. We're already starting to see it probably due to that flight to quality. Unfortunately, there are no viable investment options for the short term, unless you're going way out of the curve. I think that's going to be a challenge for many institutions with rates so low.
Q: Has anyone lowered deposit rates in the current environment, and did you see any pushback from your memberships?
VP, Finance and Capital Planning, $9.6B Credit Union: CD rates were fairly active going up, and we've been fairly active coming back down. We have also lowered rates on money market accounts to some extent.
Controller, $3.3B Credit Union: We have lowered them on our investors, money markets, and CD portfolio. We've had no pushback. In fact, we're seeing the pace of deposits speed up.
Short-term Monitoring and Analysis
Q: How are you using forecasting and scenario analyses to plan for the short term—and what metrics are being analyzed?
Controller, $3.3B Credit Union: Forecasting models enable us to play with those bigger levers with very high-level drivers to get a directional sense of where the market is headed. We’re never going to get to a level of precision that tells us what an annual operating budget will look like in this environment, but we can determine what types of large actions we should be taking — or not — to ensure we stay profitable.
We also conducted a quick forecast to give us an idea of what things will look like this year and next year, with scenario analyses in areas such as loan loss and non-interest income. We have a very large credit card and debit card usage group within our membership base, so that has a big impact on our operating expenses. With this data, we also examined our business plans for the year to determine whether we should hit the pause button on the big capital expenditures we planned or move forward.
SVP Finance and Investor Relations, $5B Bank: We’re doing things like monitoring online draws and the amount of cash leaving deposit accounts to spot signs of unusual activity. For example, maybe the customer is having a liquidity issue or is seeking to use credit to plug sudden gaps in income. It’s paramount that we find those customers now so we can help them gain relief. Additionally, if there are loans that were light on the numbers at the time of approval, we’re paying special attention to those loans now so we can proactively respond at the first signs of trouble.
Director of Planning, $13B Bank: One thing I’ve been doing is to tell the people I interact with, personally and professionally: “If your kid or your kid’s friends are having a problem because they lost their jobs, make sure they reach out to their bank or their credit card company or loan company before a payment becomes past due.” Banks will work with customers during times of economic distress, but they need to know that assistance is needed. In addition to proactively reaching out to customers who exhibit signs of distress, having these conversations with people in your network can help prevent default.
VP Finance, $13B Bank: It is more important than ever to identify customers who are struggling before they miss a payment. We’re looking at the history of lines of credit as well as deposits to try to get an idea of their level of liquidity. It becomes a lot harder to offer relief packages if a customer is 30 days past due.
Q: How has the frequency of data updates in your institution changed during this crisis?
SVP Financial Planning and Analysis, $11B Bank: Typically, we update our data on a monthly basis, but given the volatility of the market, we’ve begun to update our balance sheet daily. We have a couple of commercial lenders that want to see their loan balances on a day-by-day basis.
VP Finance, $13B Bank: We started pulling daily data a year ago for another reason, and we’re glad we have this practice in place now. We refresh our reports every morning and send them to all key stakeholders.
VP and Controller, $3.3B Credit Union: When it comes to margin, we've got that data pretty well dialed in. We have an asset and loan liability model that we can use to run various rate shocks and twists. When we're moving loan balances and we're moving rates and earnings, the reality is that our operating expenses and noninterest income are moving, too. So, the ability to connect these data so that we can run multiple scenarios quickly at a higher-driver basis positions us to be much more nimble.
Q: Are you then trending that data over time?
VP Finance, $13B Bank: We have a 45-day rolling table where we load our loan and deposit system data every day. In the past, we’ve used this table to watch for customers who may be exiting. For example, if you’ve got a customer that had half a million dollars in the money market account yesterday and they have $20,000 in the account today, that is likely someone who is taking their business away from you. We’ve found those types of reports to be useful in this environment as well. The ability to go in and look, on a day-to-day basis, for changes in the largest loans — such as who has drawn more than $500,000 of their line — gives us much more timely intelligence than a snapshot at month’s end.
We also snapshot that data at the end of the month, looking at things such as monthly high and low commitment usage balance and average commitment usage balance. We save this information to our monthly table so that as we analyze our commitment information, we know the average unused commitment amount.
Long-term Planning and Opportunities
Q: How are you planning for the long term?
VP and Controller $3.3B Credit Union: All of the forecasts we’ve done so far are definitely looking at the long play, not a short play. That’s what we’re dealing with, in our mind. We’re looking at the rest of 2020 and at least 2021.
VP Accounting and Performance Analytics, $9.8B Credit Union: Our forecasts are definitely looking into next year. Depending on how long [the coronavirus crisis] lasts, the first half of this year looks like it’s not going to be as pleasant as we had hoped, so we definitely want to take a long view. The forecast I’m currently working on goes through December 2021.
Q: How are you keeping an eye out for different investment opportunities so that you’re able to jump on a new opportunity that may not last long in the current environment?
VP, Finance and Capital Planning, $9.6B Credit Union: We hammered municipals fairly hard, which is not typical for a credit union. But the reality is that we’ve bought them at a spread of 250-400 basis points on Treasuries. They were very attractive. Even toward longer-term play, they give you the ability to buy short floaters to offset some of that interest rate risk. The nice thing about some of the short floaters is that they have floors of 50 basis points, 75 basis points — which, if “negative rates” do happen, you could have a one-way floater that has floored out. When rates go the other way, you move back up.
There are opportunities. You just have to be prepared to take advantage of them.