A Bank Board’s Role During a Pandemic

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Don’t just sit there — do  something!

This is probably the normal emotional reaction of many bank directors as the COVID-19 pandemic consumes large chunks of the U.S. economy, possibly putting their institutions at risk if the crisis leads to a deep and enduring recession.

The role of the board, even in a crisis of this magnitude, is still to provide oversight rather than manage. The board’s role doesn’t change during a crisis, but certainly the governance process must become more focused and strategic, the pace of deliberations must quicken and communication becomes even more important.

Bank boards are ultimately responsible for the safety and soundness of their institutions. While senior management devotes their full attention to running the bank during a time of unprecedented economic turmoil, the board should be looking ahead to anticipate what might come next.

“I think the challenge for [directors] is to gauge the creeping impact on their bank over the next few months,” says James McAlpin, who heads up the banking practice at Bryan Cave Leighton Paisner in Atlanta. “The board’s role is oversight … but I believe that in certain times — and I think this is one of them — the oversight role takes on a heightened importance and the board needs to focus on it even more.”

Many economists expect the U.S. economy to tip into a recession, so every board needs to be looking at the key indicia of the health of their bank in relation to its loan portfolio. “I’ve spoken to a few CEOs and board members over the past couple of weeks where there are active conversations going on about benchmarks over the next few months,” says McAlpin. “‘If by, say, the end of April, certain events have occurred or certain challenges have emerged, this is what we’ll do.’ In other words, there’s pre-planning along the lines of, ‘If things worsen, what should be our response be?’”

This is not the first banking crisis that David Porteous, the lead director at Huntington Bancshares, a $109 billion regional bank in Columbus, Ohio, has lived through. Porteous served on the Huntington board during the previous banking crisis, recruiting a new executive management team and writing off hundreds of millions of dollars in bad loans. That experience was instructive for what the bank faces now.

Porteous says one of the board’s first steps during the current crisis should be to take an inventory of the available “assets” among its own members. Are there directors whose professional or business experience could be helpful to the board and management team as they work through the crisis together?

Communication is also crucial during a crisis. Porteous says that boards should be communicating more frequently and on a regular schedule so directors and senior executives can organize their own work flow efficiently. Given the social distancing restrictions that are in effect throughout most of the country, these meetings will have to occur over the phone or video conferencing.

“You may have meetings normally on a quarterly or monthly basis, but that simply is not enough,” Porteous says. “You need to have meetings in between those. What we have found at Huntington that served us very well in 2008 and 2009 and is serving us well now, we have set a time — the same day of the week, the same time of the day, every other week — where there’s a board call. So board members can begin to build their plans around that call.”

Porteous says the purpose of these calls is for select members of the management team to provide the board with updates on important developments, and the calls should be “very concise, very succinct” and take “an hour or less.”

Porteous also suggests that either the board’s executive committee or a special committee of the board should be prepared to convene on short notice, either virtually or over the phone, if a quick decision is required on an important matter.

C. Dallas Kayser, the non-executive chairman at City Holding Co., a $5 billion regional bank headquartered in Charleston, West Virginia, says that when the pandemic began to manifest itself in force, the board requested reports from all major divisions within the bank. “The focus was to have everybody drill down and tell us exactly how they’re responding to customers and employees,” he says. Like Porteous at Huntington, Kayser has asked the board’s executive committee to be available to meet on short notice. The full board, which normally meets once a month, is also preparing to meet telephonically more often.

As board chair, Kayser says he feels a special responsibility to support the bank’s chief executive officer, Charles “Skip” Hageboeck. “I’ve been in constant conversations with Skip,” he says. “I know that he’s stressed. Everyone is, in this situation.” Being a CEO during a crisis can be a lonely experience.  “I recognize that, and I’ve made myself available for discussions with Skip 24/7, whenever he needs to bounce anything off of me,” Kayser says.

One of the things that every board will learn during a crisis is the strength of its culture. “The challenges that we all face in the banking industry are unprecedented, and it really becomes critical now for all directors, as well as the senior leadership of the organizations that they oversee, to work together,” says Porteous. One sign of a healthy board culture is transparency, where neither side holds back information from the other. “You should have that all the time, but it’s even more critical during a crisis. Management and the board have got to have a completely open and transparent relationship.”

Banks Brace for Exploding SBA Loan Demand

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It’s hard to run a small business in the best of times. Right now, it’s all but impossible.

“It took me 11 years to get comfortable and make enough money to create a cushion so I didn’t have to worry if the pub had a slow period,” wrote Natasha Hendrix in a recent Facebook post. Hendrix owns McCreary’s Irish Pub & Eatery in Franklin, Tennessee; she’s also my sister-in-law. Business was doing so well that she closed the restaurant to remodel its bathrooms in advance of St. Patrick’s Day — the Super Bowl for Irish pubs.

The complete evaporation of revenue for a small business like McCreary’s is mind-boggling. In 2016, a JPMorgan Chase & Co. study found that the median small business can survive without cash flow for a little less than a month; a quarter of them can make it just two weeks.

Small business owners are left questioning whether they can survive this severe and sudden downturn. “Everyone in this position has to START OVER. Build again,” wrote Hendrix. “Sure, people CAN do it but the real question I have for myself is … do I WANT to?”

“It’s a time for banks to be heroes,” said Curt Queyrouze, CEO of $827 million TAB Bank Holdings, during a recent digital conference hosted by MX.

A number of banks have announced deferrals on loan payments and are offering additional loans; Queyrouze tells me loan growth for term loans to small and mid-sized businesses had already tripled by late March at Ogden, Utah-based TAB, mostly to bridge expenses to weather the crisis.

But a lot of the relief — up to $349 billion — promises to come through the “Paycheck Protection Program,” a special Small Business Administration loan created through the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

Small businesses can access PPP loans through existing SBA lenders and other participating financial institutions effective April 3; independent contractors and self-employed people can take advantage of the program beginning April 10. The terms are the same for all borrowers — two-year terms at 0.5% interest — and loan payments are deferred for six months. Use of the loans are restricted to payroll costs, including benefits; rent or interest on mortgage obligations; and utilities. The U.S. Treasury has supplied an information sheet for borrowers. (In a late press conference on April 2, Treasury Secretary Steve Mnuchin announced the interest rate on these loans would be raised, to a still-low 1%. The SBA then released an interim final rule with more information.)

Demand promises to be strong for these new SBA loans — many small businesses need cash now. But implementation is proving to be a challenge, and there’s a limited amount of time for small businesses to apply; June 30 is the deadline for the PPP loans. Additionally, there’s concern that the $349 billion in available funds won’t be enough.

At $239 million Farmers State Bank, Small Business Lending President Chris Healy has put in long hours to stay abreast of these changes and get information out to the small businesses in his markets, using email marketing, the bank’s website and videos on its social media channels.

The bank, based in Alto Pass, Illinois, is already an SBA lender and is familiar with the intricacies of the agency’s process. It has also shifted its technology to prioritize these new loans. The process has been iterative, with Healy uploading and sharing new requirements with customers as information provided by the SBA and Treasury evolves. The entire process is digital; Farmers was able to pivot quickly because it already had the technology in place.

Healy tells me roughly 300 small business customers started applications before April 3. That’s 12 times the volume in a normal year — the bank typically closes around 25 SBA loans. However, some worry the industry won’t be able to meet this influx of demand.

In a statement released April 2, the Independent Community Bankers of America cited key barriers for financial institutions. The low interest rate means banks won’t be able to break even on the loans, the two-year terms are incredibly short, and the guidelines are restrictive.

The low interest rate and abbreviated term could limit the availability of these loans, said Chris Hurn, the CEO of Lake Mary, Florida-based Fountainhead Commercial Capital, a nonbank commercial lender, in a recent webinar. Secondary markets won’t be interested in purchasing the loans. The U.S. Treasury has indicated it will purchase them, but a mechanism for doing so hasn’t been made clear.

“We’re still awaiting the final rules of how to do this, but being an experienced SBA lender already, we’re familiar with following their intricate procedures and guidelines and so forth, and this is going to be a significantly stripped-down version of that,” Healy says. However, “the Treasury did shock us … with laying out the terms on the two-year basis and a 0.5% interest [rate].”

A key provision for small businesses is that these loans can be forgiven under certain conditions: if the proceeds are used as required, and employee and compensation levels are maintained over the eight-week period after the loan is made. The intent is to ensure Americans still have jobs after nearly 10 million have filed for unemployment in the past two weeks alone. (Small businesses employ 47% of working Americans, according to the SBA.)

However, guidance is needed on the documentation and calculations that will be required to determine loan forgiveness, said Hurn.

But without the new SBA program, Healy says Farmers wouldn’t be able to support small businesses to the degree necessitated by the crisis. He expects the government to ultimately buy these loans back. “If we do a $5 million loan to help a small business, that’s a big loan for us but we can sell it back to SBA immediately, and they’ll buy it from us at the principal value of the loan,” says Healy.

Small businesses need relief. Long after this crisis has passed, those that survive will remember how banks helped them through it.

Coronavirus Underlines Digital Transformation Urgency

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The passage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act means up to $350 billion in loans guaranteed by the Small Business Administration is set to flow to small businesses by the June 30 funding deadline.

Community and regional institutions are, of course, the logical partners for distribution of this capital. But a challenge remains: How will those financial institutions reach out to the market when their lobbies may not be open, and businesses may not be comfortable with face-to-face interactions?

Banks have done little to change the way they interact with their business customers in the digital age. In good times, this lack of transformation allowed large technology companies like Amazon.com, PayPal Holdings and Square to siphon customers away. The current environment complicates efforts for banks that have not already transformed to be responsive to their customers immediate needs.

Customers prioritized convenience — now banks will be forced to. Even prior to social distancing, consumers prioritized speed and convenience, whether it came to new technology or where they banked.

Winning at business banking was always going to require banks to offer business customers a frictionless experience. But the ability to operate business banking functions digitally has taken on new meaning — from defining quality service to becoming a necessity during a pandemic.

Three Critical Points of Friction in Business Banking
Now more than ever, it should be every institution’s goal to make working with businesses as easy as possible, especially when distribution of SBA dollars is at stake.

To meet this moment, banks need to remove three critical friction points from their business banking experience:

  • The Application: Paper applications are long and tedious, and the process is even more difficult for SBA 7(a) loans. To remove friction, institutions need to focus on data and access. They should use available data and technology to pre-fill applications as much as possible, and provide them digitally either for self-service or with banker assistance.
  • The Decisioning: Underwriting loans is a labor-intensive process that can delay decisions for weeks. An influx of Paycheck Protection Program loan applications will only compound the inefficiencies of the underwriting process. Banks need to automate as much of the underwriting and decisioning process as possible, while keeping their risk exposure in mind. It’s critical that banks select companies that allow them to use their own, unique credit policies.
  • The Account Opening: Banks also need to think about long-term relationships with the businesses they serve during this time. That means eliminating common obstacles associated with opening a business deposit account. For example: If a business has already completed a loan application, their bank should have all the information they need for a new account application and shouldn’t ask for it twice. They need to ensure businesses can complete as much of this process remotely as possible.

At Numerated, the sense of urgency we hear from bank leaders is palpable. Our team has been working overtime — remotely — to provide banks with a quick-to-implement CARES Act Lending Automation solution. Banks have been working just as fast to understand the current environment and build strategies that will help them meet their customers’ rapidly shifting needs.

In many ways, the COVID-19 pandemic has forced banks to consider digital transformation as a solution to this problem. Still, many firms have held off for any number of reasons. Institutions that have focused on digital transformation will be the most successful in improving the business banking customer experience and will lead the way during this pandemic as a result.

From Eastern Bank Corp. in Boston that used digital lending to become the No. 1 small to midsized business lender in their competitive market, to First Federal Lakewood, in Lakewood, Ohio, that is using digital experiences to retain and grow strategic relationships, institutions of all sizes have launched new digital capabilities, better positioning them to face what’s ahead.

As the nation’s businesses grapple with this new reality, these financial institutions are examples for others exploring how to serve business customers when they can’t see them face to face. Doing so will require a reimagining of the way we do business banking.

Coronavirus Sparks CECL Uncertainty

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Even before COVID-19, the first quarter of 2020 was shaping up to be an uncertain one for large public banks. Now, it could be a disaster.

There is broad concern that the current expected credit loss standard, which has been effective since the start of 2020 for big banks, will aggravate an already bad situation by discouraging lending and loan modification efforts just when the new coronavirus is wreaking havoc on the economy. Congress is poised to offer banks temporary relief from the standard as a part of its broader relief act.

Section 4014 of the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, would give insured depository institutions and bank holding companies the option of temporarily delaying CECL implementation until Dec. 31, 2020, or “the date on which the public emergency declaration related to coronavirus is terminated.”

Congress’ bill comes as the Financial Accounting Standards Board has already rebuffed the efforts of one regulator to delay the standard.

On March 19, Federal Deposit Insurance Corp. Chairman Jelena McWilliams sent a letter to the board seeking, among other requests, a postponement of CECL implementation for banks currently subject to the standard and a moratorium for banks with the 2023 effective date.

McWilliams wrote that a moratorium would “allow these financial institutions to focus on immediate business challenges relating to the impacts of the current pandemic and its effect on the financial system.”

FASB declined to act on both proposals. “We’re continuing to work with financial institutions to understand their specific challenges in implementing the CECL standard,” wrote spokesperson Christine Klimek in an email to me later that day.

It’s not an overstatement to say that the standard’s reporting effective date could not come at a worse time for banks — or that a potential delay necessitating a switch back to the incurred loss model may be a major undertaking for banks scheduled to report results in the next several weeks.

“Banks are being tasked with something pretty complex in a very short timeframe. And of course, this is the first period that they’re including these numbers and a lot of the processes are brand new,” says Reza Van Roosmalen, a principal at KPMG who leads the firm’s efforts for financial instruments accounting change. “They’ve practiced with parallel runs. But you’re immediately going to the finals without having had any other games. This is the hardest situation you could be in.”

CECL has been in effect since the start of the new year for large banks and its impact was finally expected to show up in first-quarter results. But the pandemic and related economic crisis creates major implications for banks’ allowances and could potentially influence their lending behavior.

The standard requires banks to reserve lifetime loan losses at origination. Banks took a one-time adjustment to increase their reserves to reflect the lifetime losses of all existing loans when they switched to the standard, deducting the amount from capital with the option to phase-in the impact over three years. Afterwards, they adjusted their reserves using earning as new loans came onto the books, or as their economic forecasts or borrowers’ financial conditions changed. The rapid spread and deep impact of COVID-19, the bulk of which has been experienced by the U.S. in March, has led to a precipitous economic decline and interest rate freefall. Regulators are now encouraging banks to work with borrowers facing financial hardship.

“For banks, [CECL is] going to be a true test for them. It’s not just going through this accounting standard in the macroeconomic scenario that we’re in,” says Will Neeriemer, a partner in DHG’s financial services group, pointing out that the change comes as many bankers adjust to working from home or in shifts to keep operations running. “That is almost as challenging for them as going through the new standard for the first time in a live environment.”

The concern is that CECL will force allowances to jump once more at the beginning of the standard as once-performing loans become troubled all at the same time. That could discourage new lending activity — leading to procyclical behavior that mirrors, rather than counters, economic peaks and troughs.

It remains to be seen if that would happen if Congress doesn’t provide temporary accounting and provisioning relief, or if some banks decline the temporary relief and report their results under CECL. Regardless, the quarter will be challenging for banks.

“It’s temporary relief and it’s only for this year. It keeps the status quo, which I think is important,” says Lawrence Kaplan, chair of the bank regulatory group in Paul Hasting’s global banking and payments systems practice. “You don’t have to have artificial, unintended consequences because we’re switching to a new accounting standard during a period where there are other extraordinary events.”

Why This Crisis Is Different

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The USS Economy is steaming into dangerous waters and the country’s banks are trapped aboard with the rest of the passengers.

A public health policy of social distancing and lockdowns in response to the COVID-19 virus is creating a devastating impact on the U.S. economy, which in recent years has been driven by consumer spending and a historically low unemployment rate. According to the Bureau of Labor Statistics, the U.S. labor market added 273,000 jobs in February, while private sector wages grew 3%. Moody’s Investors Service also says that the U.S. economy grew 2.3% last year, with personal consumption expenditures contributing 77% of that growth.

That is changing very quickly. Brace yourself for the virus economy.

Wall Street firms are forecasting that the U.S. economy will contract sharply in the second quarter — with Goldman Sachs Group expecting a 24% decline in gross domestic product for the quarter.

“The sudden stop in U.S. economic activity in response to the virus is unprecedented, and the early data points over the last week strengthened our confidence that a dramatic slowdown is indeed already underway,” Goldman’s chief economist Jan Hatzius wrote in a March 20 research note.

My memory stretches back to the thrift crisis in the late 1980s, and there are others that have occurred since then. They’ve all been different, but they generally had one thing in common: They could be traced back to particular asset classes — commercial real estate, subprime mortgages or technology companies that were grossly overfunded, resulting in dangerous asset bubbles. When the bubbles burst, banks paid the price.

What’s different this time around is the nature of the underlying crisis.

The root cause of this crisis isn’t an asset bubble, but a public health emergency that is wreaking havoc on the entire U.S. economy. Enforced governmental policies like social distancing and sheltering in place have been especially hard on small businesses that employ 47.5% of the nation’s private workforce, according to the U.S. Small Business Administration. It puts a lot of people out of work when those restaurants, bars, hardware stores and barber shops are forced to close. Economists expect the U.S. unemployment rate to soar well into double digits from its current rate of just 3.5%.   

Bank profitability will be under pressure for the remainder of the year. It began two weeks ago when the Federal Reserve Board began cutting interest rates practically to zero, which will put net interest margins in a vice grip. One bank CEO I spoke to recently told me that every 25-basis-point drop in interest rates clips 4 basis points off his bank’s margin — so the Fed’s 150 basis point rate cut reduced his margin by 20 basis points. Worse yet, he expects the low-rate environment to persist for the foreseeable future.

Making matters worse, banks can expect that loan losses will rise over time — perhaps precipitously, if we have a long and deep recession. Many banks are prepared to work with their cash-strapped borrowers on loan modifications to get them through the crisis; federal bank regulators have said lenders will not be forced to automatically categorize all COVID-19 related loan modifications as troubled debt restructurings, or TDRs.

Unfortunately, a prolonged recession is likely to outpace most banks’ abilities to temporarily forego principal and interest payments on their troubled loans. A sharp rise in loan losses will reduce bank profitability even more.

There is another way in which this crisis is different from previous crises that I have witnessed. The industry is much stronger this time around, with roughly twice the capital it had just 12 years ago at the onset of the subprime mortgage crisis.

Think of that as first responder capital.

During the subprime mortgage crisis, the federal government injected over $400 billion into the banking industry through the Troubled Asset Relief Program. The government eventually made a profit on its investment, but the program was unpopular with the public and many members of Congress. The full extent of this banking crisis remains to be seen, but hopefully this time the industry can finance its own recovery.

Coronavirus Strategies, Considerations for Banks

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Over the past two weeks, we have received numerous inquiries from financial institutions on what actions should be taken or considered to address the COVID-19, or the new coronavirus, pandemic. While the current situation is evolving each day, we have engaged in numerous discussions with banks on various strategies and considerations that are being reviewed or implemented during this uncertain time.

Business Continuity Plan

Every financial institution should have implemented pandemic planning contingencies contained in its business continuity plan. In response to the burgeoning public health crisis, the Federal Financial Institutions Examination Council issued revised guidance on March 6 on how to address pandemic planning in a bank’s business continuity plans. The revision updates previous guidance issued in response to the avian flu pandemic of 2007.

Although there are no substantive updates contained in the revised Pandemic Planning Guidance, the FFIEC’s update reiterates and emphasizes the importance of maintaining a pandemic response plan that includes strategies to minimize disruptions and recover from a pandemic wave. The updated guidance states that banks should consider minimizing staff contact, encouraging employees to telecommute and redirecting customers from branch to electronic banking services. We anticipate that regulators will review an institution’s utilization of its business continuity plan at upcoming safety and soundness examinations.

Branch Operations

Based on our discussions, we believe that many banks have taken or plan to take actions related to their branch operations. Below is a summary of various actions that a bank may wish to take regarding its branch operations.

Branches Remain Open, with Caveats. A number of banks have elected to close branch lobbies and direct customers to utilize drive-up facilities, walk-up teller lines and ATM machines where possible. In addition, they are also directing customers to their online platforms. Some banks are requesting customers who require physical or in-person assistance, such as access to a safe deposit box, to schedule an appointment with bank employees.

Branch Closures. To the extent a bank may be readying a branch closure strategy, below are federal and state requirements that must be satisfied.

Federal Requirements. On March 13, the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency and the Federal Reserve Board issued corresponding guidance addressing COVID-19’s impact on customers and bank operations indicating that they expect bank branch closures, or changes to branch hours. In such an event, they recommend that a bank (i) notify the applicable federal banking regulator as soon as practicable of the closure/change in bank hours, (ii) comply with any notice or filing requirements with applicable state banking regulators and (iii) place a customer notice on the front entrance of the impacted branch describing the reason for the closure and/or change in hours.

State Law Requirements. Closing lobbies and redirecting customers to drive-ups does not generally require a bank to obtain the approval of state banking authorities, but some state banking authorities have requested that banks provide notice of such changes. For example, Illinois-chartered banks seeking to fully close a branch or change branch hours must provide prior notice to the Illinois Department of Financial and Professional Regulation, Division of Banking, and obtain an official proclamation from the IDB under the Illinois Banking Emergencies Act (205 ILCS 610). In addition, the bank must post notice of the temporary closing or change in branch hours and the authorization for such change on the main entrance doors of the applicable branch.

ATM/Cash-On-Hand Strategies. In a push to increase customer traffic to ATMs and minimize direct customer contact, some banks have increased or plan to increase ATM daily allowable cash withdrawal limits. The size of the increase depends on the individual circumstances of the institution. Banks may experience greater cash withdrawal requests from depositors and may wish to keep higher levels of cash in its branch offices.

Regular and Periodic Cleaning of Branches. Each bank we spoke with also indicated that they have implemented enhanced periodic cleaning of their branches and offices. Some banks have indicated that “deep” cleanings are being completed on a weekly basis.

Employee Considerations

Flexible Work-from-Home Arrangements. We have also discussed the potential for implementing flexible work-from-home or telecommuting arrangements for specific business line employees with institutions. Whether or not this is a viable option for a specific institution is dependent upon a number of specific circumstances: whether the bank’s information technology systems can support an increased number of employees utilizing the bank’s server remotely, ensuring that each employee who remotely accesses the bank’s systems can do so in a confidential manner that protects that bank’s data and whether there are geographic and business-line specific considerations that prevent working remotely, among others. Nonetheless, a bank should plan to test their IT systems and update policies prior to implementing such arrangements.

Utilization of Split-Staff and Split-Location Strategies. In addition, we’ve discussed split-staff and split-location strategies;  a number of banks indicated that they are currently utilizing a split-staff strategy. Under a split-staff strategy, an institution staggers its employees on any given day. For instance, half of the institution’s employees come in on Monday, Wednesday and Friday, and the other half of the employees come in on Tuesday, Thursday and Saturday. The aim is that limiting employee interaction with customers on any given day allows a bank to maintain operations on a much more limited basis if only one group of employees is potentially exposed to COVID-19.

In addition, some institutions also indicated that they plan to utilize a split-location strategy, distributing staff across various branches and offices. If one location is potentially exposed to COVID-19, a bank’s operations can continue through its other locations.

Employee Training. Banks have also implemented staff training on how to properly interact with customers during this troubling time. Following guidance from the World Health Organization and Centers for Disease Control and Prevention, banks have implemented new procedures meant to limit physical contact (like prohibiting handshakes) and eliminating or reducing scheduled meetings.

Liquidity and Capital Considerations

During times of uncertainty and financial market volatility, like the financial crisis, banks have often found it difficult to enhance liquidity and raise additional capital when they may need it the most. Based on our discussions, we recommend that financial institutions review their current and near-term liquidity/capital strategies. Below are a few items to consider.

Subordinated Debt and Equity Issuances. Banks may need to weather a prolonged economic slowdown. Bankers agree that reviewing the firm’s capital strategies in uncertain times is a critical consideration to address any potential need to enhance immediate or near-term liquidity or to shore up capital. Other banks may also wish to review various alternatives available to issue debt for additional liquidity, to potentially refinance outstanding debt arrangements at lower rates, or to provide additional capital.

Lines of Credit. As lenders, banks are aware that their borrowers may be considering a draw down on existing lines of credit. Banks may also wish to consider potentially drawing down on their existing lines of credit (such as Federal Home Loan Bank advances or holding company lines of credit) as an effective tool to increase the holding company’s or bank’s liquidity. Before either drawing down any existing line of credit or utilizing the proceeds for any purpose other than increasing cash-on-hand, a bank should carefully review the covenants in the underlying loan agreements.

Securities Portfolio. Reviewing current strategies pertaining to an institution’s securities portfolio is also a consideration for banks. Many banks have built-in gains in their portfolio. Consequently, institutions are reviewing their portfolios to determine whether to realize existing gains to boost liquidity in the short-term or maintain its current strategy to assist earnings in the longer-term.

Stock Repurchase Programs. Many publicly traded banks have suspended their stock repurchase programs as part of a capital conservation strategy. While no bank has announced plans to cut dividends, now is the time to review contingency plans and consider when such action may be warranted.

Federal Reserve Discount Window. Bankers should also discuss potentially using the Federal Reserve’s short-term emergency loans dispensed through the discount window if necessary. While many institutions consider using the discount window as a last resort and could indicate dire financial straits, senior bank management should revisit their policies and procedures to ensure their institution can access the discount window should circumstances require it.

Importantly, on March 17, the Federal Reserve and eight of the largest financial institutions in the U.S. worked together to provide these large financial institutions access to the discount window. Largely symbolic, the actions are being viewed by banks as an effort to remove the stigma of accessing the discount window. Whether these coordinated efforts will be a success remains to be seen.

Stress Testing of Loans. We anticipate that many institutions will consider the need to begin stress testing their portfolios, and some already are. For some, stress testing may be centered on specific industries and sectors of the loan portfolio that may have been more substantially impacted by COVID-19 (such as hospitality/restaurants, travel, entertainment and companies with supply chains dependent upon China or Europe). For others, the entire loan portfolio may be tested, under the assumption it could be subject to pandemic-related stress.

Review Insurance Policies. Another consideration we’ve discussed with banks is the need to review in-place insurance policies for business disruption coverage to determine if they would cover matters resulting from the COVID-19 pandemic.

Assist Impacted Customers. Consistent with the recent guidance issued by the Fed, FDIC and OCC, banks are considering offering a variety of relief options related to specific product/service lines to customers. Some banks may waive late fees on loan payments or credit cards and others may waive ATM- and deposit-related fees. We expect these relief options will be limited to specific product and service lines, and to a certain period of time.

On March 19, the FDIC issued a set of Frequently Asked Questions for banks impacted by the coronavirus. The FAQs provide insight into how the FDIC, and potentially other federal banking regulators, will view payment accommodations, reporting of delinquent loans, document retention and reporting requirements, troubled debt restructurings, nonaccrual loans and the allowance for loan and lease losses. Banks should review the FAQs in connection with providing any financial assistance to impacted customers.

The items noted above should not be considered definitive or exclusive. A financial institution should carefully consider the above items, among others, and determine how to tailor any proposed changes to its operations in light of the very fluid circumstances surrounding the current COVID-19 pandemic.

Click here to review the March 13 OCC Bulletin 2020-15 (Pandemic Planning: Working With Customers Affected by Coronavirus and Regulatory Assistance).

Click here to review the March 13 FDIC FIL-17-2020 (Regulatory Relief: Working with Customers Affected by the Coronavirus).

Click here to review the March 13 FRB SR 20-4/CA 20-3 (Supervisory Practices Regarding Financial Institutions Affected by Coronavirus).

Crafting a Last-Minute Telecommuting Policy

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As the COVID-19 pandemic evolves, more banks are asking their employees to stay home and work.

Capital One Financial Corp. asked employees who could do so to begin working remotely effective March 12. JPMorgan Chase & Co. asked its managers around the world to allow employees to work from home, where possible, less than a week later.

“We understand that this may be a disruptive decision, but we believe that is in the best interests of our associates and our communities,” said Capital One Chairman and CEO Richard Fairbank in an internal memo. “And it will create more space and distance for those who still need to come into work.”

Some employees — those in customer-facing positions, for example — can’t work from home. But remote work can keep others safe and enable in-branch workers to better practice so-called social distancing, helping to prevent the spread of the novel coronavirus while still keeping the business running.

The pandemic promises to disrupt all workplaces, at least temporarily. Yet, few banks are prepared for this mode of work. Directors and executives responding to Bank Director’s 2018 Compensation Survey indicated less than one-third offered telecommuting options to at least some of their employees.

So, what do banks need to know about putting a remote-work plan in place? To find out, Bank Director reached out to a few banks to see how their telecommuting program has evolved.

Ensure a secure workplace
Memphis, Tennessee-based Triumph Bank limited telecommuting to its mortgage division before the pandemic hit, and it was a natural place to start when the $837 million bank began implementing social-distancing measures.

Triumph doesn’t have a set policy in place for remote work, but it has established guidelines — starting with ensuring that the employee’s workplace is safe from a data security perspective. The bank doesn’t want sensitive information easily accessed by an employee’s spouse, child, roommate or anyone visiting that person’s home.

With that in mind, the bank asked loan officers and some loan processors to work from home in response to the pandemic — a decision made, for the processors, based on each employee’s at-home environment. “You evaluate each situation: Does [the employee] have an area that they can work from at home that is a secure spot, where you don’t have to worry about customer information, [and] they won’t be distracted by young children or a spouse,” says Catherine Duncan, the bank’s vice president of human resources. Those factors are taken into consideration. “We were able to send those [employees] home, and we separated everybody else.”

Port Angeles, Washington-based First Northwest Bancorp is allowed to examine employees’ at-home workspaces to ensure data security, if needed. The $1.3 billion bank’s remote-work policy also outlines equipment usage, and what to do if something goes wrong — if the internet goes down, for example. “Whatever that is, expectations of you as an employee, what you’re expected to do at that moment,” says Chief Human Resources and Marketing Officer Derek Brown. 

Get the technology in order
TAB Bank Holdings was able to shift to remote work quickly — from about 10% of staff roughly three weeks ago to 96% as of March 18. The $827 million digital bank unit operates out of one location: its Ogden, Utah headquarters.

The fact that the bank has digital onboarding in place for loans and deposits, and moved from paper-based processes five years ago, enabled it to move rapidly.

“It was really just a matter of setting up VPNs and machines, because the workloads are the same no matter where you sit,” says President Curt Queyrouze. A VPN is a virtual private network, which allows the user to send and receive data as if their computer were operating on a private network.

Following the bank’s disaster recovery meeting about the pandemic almost a month ago, staff identified where they needed more VPN licenses, and which employees lacked a personal computer or access to the internet at their home. This gap wasn’t limited to older employees; younger workers tend to rely on smartphones when they’re not in the office.

In response, TAB Bank ordered $400 laptops to distribute to select employees and granted stipends so staff could access the internet at home. That early move was critical — Queyrouze says a later trip to purchase a few more laptops came up empty, as stores wrestled with demand.

Banks need to consider all the technology required by the employee. For example, Duncan says Triumph Bank updated its payroll system so employees can now clock in remotely. That’s necessary for those that are eligible for overtime pay.

Enable communication between employees and teams
Technology facilitates communication and collaboration. Both TAB Bank and First Northwest use Microsoft Teams, a communication and collaboration platform tied to Office 365.

“To the extent that [employees] have video capabilities on their laptop or desktop [computer], we’re really encouraging them to use those so that we can see each other and feel more connected,” says Queyrouze. “We’re finding that it actually makes a difference.” He regularly emails staff, and they’re clearly communicating tasks that need to be accomplished as the situation evolves. “We have some employees whose actual work activity is going down because of reduced activity in some of our areas; for instance, loan demand’s down,” he says. “We’re trying to be purposeful about getting them engaged in other projects.”

Enabling communication is particularly critical for employees at this uncertain time.

“It’s been so fast moving that I’ve been just working to create communications and a sense of security for our employees,” says Brown. The situation is evolving rapidly, as new guidance comes from government agencies, legislative and executive bodies pass new rules, and banks work to digest it all and react appropriately for their employees, customers and communities. “We’re meeting every day to assess the situation.”

Teresa Tschida, a senior practice expert at Gallup, recommends setting clear expectations for staff, communicating frequently and gaining feedback along the way. Great managers “help people know what’s expected,” she says. And in a period of intense uncertainty — as schools and businesses close, and people are asked to isolate themselves in their homes — the daily grind of work can be a source of comfort.

“If done right, management and the company itself can be a respite from some of the stuff that we’re facing in our inboxes, or with our families and whatnot,” she says. “At least with our companies, we feel well taken care of.”

Whipsawed by Interest Rates

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One of the things that bankers hate most is uncertainty and abrupt changes in the underlying economics of their business, and the emerging global crisis caused by the COVID-19 pandemic is confronting them with the perfect storm.

You can blame it all on the Federal Reserve.

Indeed, the higher rates that the Fed gave in 2018, it is now taken away — and that is creating a big challenge for banks as they scramble to adapt to a very different interest rate scenario from what they were dealing with just 15 months ago.

On March 3, as the economic impact of the coronavirus both globally and in the United States was becoming more apparent and fears about a possible recession were mounting, the Fed made an emergency 50 basis-point cut in interest rates, to a range of 1% to 1.25%. The Fed’s action was dramatic not only because of the size of the reduction, but also because this action was taken “off cycle” — which is to say two weeks prior to the next scheduled meeting of the Federal Open Market Committee, which is the Fed’s rate-setting body.

And as this article was being posted, many market observers were expecting that the Fed would follow with another rate cut at its March 17-18 meeting, which would drive down rates to their lowest levels since the financial crisis 12 years ago. Needless to say, banks have been whipsawed by these abrupt shifts in monetary policy. The Fed increased rates four times in 2018, to a range of 2.25% to 2.50%, then lowered rates three times in 2019 when the U.S. economy seemed to be softening, to a range of 1.50% to 1.75%.    

Now, it appears that interest rates might go even lower.

What should bank management teams do to deal with this unexpected shift in interest rates? To gain some insight into that question, I reached out to Matt Pieniazek, president of the Darling Consulting Group in Newburyport, Massachusetts. I’ve known Pieniazek for several years and interviewed him on numerous occasions, and consider him to be one of the industry’s leading experts on asset/liability management. Pieniazek says he has been swamped by community banks looking for advice about how to navigate this new rate environment.

One of Pieniazek’s first comments was to lament that many banks didn’t act sooner when the Fed cut rates last year. “It’s just disappointing that too many banks let their own biases get in the way, rather than listen to their balance sheets,” he says. “There are a lot of things that could’ve been done. Now everyone’s in a panic, and they’re willing to talk about doing things today when the dynamics of it are not very encouraging. Risk return or the cost benefit are just nowhere near the same as what they were just six months ago, let alone a year, year and a half ago.”

So, what’s to be done?

Pieniazek’s first suggestion is to dramatically lower funding costs. “No matter how low their funding costs are, very few banks are going to be able to outrun this on the asset side,” he says. “They’ve got to be able to [be] diligent and disciplined and formalized in their approach to driving down deposit costs.”

“In doing so, they have to acknowledge that there could be some risk of loss of balances,” Pieniazek continues. “As a result, they need to really revisit their contingency liquidity planning. They have to also revisit with management and the board the extent to which they truly are willing to utilize wholesale funding. The more you’re willing to do that, the more you would be willing to test the water on lowering deposits. I think there is a correlation to comfort level and challenging yourself to lower deposits and well thought out contingency planning that incorporates the willingness and ability to prudently use the wholesale market. Aggressively attacking deposit costs has to be accompanied by a real hard, fresh look at contingency liquidity planning and the bank’s philosophy toward wholesale markets.”

This strategy of driving down funding costs might be a hard sell in a market where competitors are still paying relatively high rates on deposits. “Well, you know what?” Pieniazek says. “You’ve got two choices. You either let village idiots drive your business, or you do what makes sense for your organization.”

Most banks will also feel pressure on the asset side of their balance sheets as rates decline. Banks that have a large percentage of floating rate loans may not have enough funding to offset them. As those loans reprice in a falling rate environment, banks will feel pressure to correspondingly lower their funding costs to protect their net interest margins as much as possible. And while community banks typically don’t have a lot of floating rate loans, they do have high percentages of commercial real estate loans, which Pieniazek estimates have an average life span of two and a half years. The only alternative to lowering deposit costs to protect the margin would be to dramatically grow the loan portfolio during a time of great economic uncertainty. But as Pieniazek puts it, “There’s not enough growth out there at [attractive] yield levels to allow people to head off that margin compression.”

Pieniazek’s second suggestion is to review your loan documents. “While I’m not suggesting [interest] rates are going to go negative, most banks do not have loan docs which prevent rates from going negative,” he says. “They need to revisit their loan docs and make sure that there’s lifetime floors on all of their loans that will not enable the actual note rate to go zero. They could always negotiate lower if they want. They can’t negotiate up.”

His final suggestion is that community banks need to strongly consider the use of derivatives to hedge their interest rate exposure. “If you think in an environment like this that your customers are going to allow you to dictate the structure of your balance sheet, you better think again,” he says. “Everyone’s going to want to shorten up … What you’re going to find is retail customers are going to keep their money short. In times of uncertainty, what do people want to do? They want to keep their cash close to them, don’t they?”

Of course, while depositors are going to keep their money on a short leash, borrowers “are going to want to know what the 100-year loan rate is,” Pieniazek says. And this scenario creates the potential for disaster that has been seen time and again in banking — funding long-term assets with short-term deposits.

“The only thing you can do is augment customer behavior through the use of derivatives,” Pieniazek says. “Interest rate caps are hugely invaluable here for banks to hedge against rising rates while allowing their funding costs to remain or cycle lower if rates go lower. In a world of pressure for long-term fixed rate assets, being able to do derivatives … allows banks to convert fixed-rate loans in their portfolio to floating for whatever time period they want, starting whenever they want.”

During times of uncertainty and volatility, Pieniazek says it’s crucial that bank management teams make sound judgments based on a clear understanding of their ramifications. “Don’t let panic and fear result in you changing your operating strategy,” he says. “The worst thing to do is make material changes because of fear and panic. Let common sense and a clear understanding of your balance sheet, your risk profile, drive your thought process. And don’t be afraid to take calculated risks.”

What Regulators Are Doing About Coronavirus

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For the last few weeks, bank regulators have been gearing up their responses and preparations as the U.S. financial industry and broader economy confront the impact of the coronavirus pandemic.

On March 13, President Donald Trump declared a national state of emergency that freed billions in aid as cities and sectors grappled with the pandemic. The announcement capped off a tumultuous week of market freefalls and rallies, the cancelation of major sporting events, closed college campus and the start of millions of Americans voluntary and involuntary quarantining and national social distancing. It remains to be seen how long the outbreak will last and when it will peak, as well as the potential economic fallout on businesses and consumers.

Already, the Federal Open Market Committee has lowered the federal funds rate twice; the most recent was a surprise 100-basis point decline on March 15, to the range of 0 to 25 basis points. The Fed last lowered interest rates to near zero back in late 2008. The move is intended to support economic activity and labor market conditions, and the benchmark rate will stay low until the Fed is confident the economy has weathered recent events.

Additionally, the Fed announced it would increase its holdings of both Treasury securities by at least $500 billion and agency mortgage-backed securities by at least $200 billion.

Bank executives and directors must now contend with near-zero rates as they work with borrowers to contain the economic implications of the coronavirus.

“The adverse economic effects of a pandemic could be significant, both nationally and internationally,” the Federal Financial Institutions Examination Council wrote in recently updated guidance on how banks can minimize the adverse effects of a pandemic. “Due to their crucial financial and economic role, financial institutions should have plans in place that describe how they will manage through a pandemic event.”

The ongoing events serve as a belated reminder that pandemic preparedness should be considered as part of board’s periodic review of business continuity planning, according to a March 6 interagency release. These plans should address how a bank anticipates delivering products and services “in a wide range of scenarios and with minimal disruption.”

The FFIEC’s guidance says pandemic preparation in a bank’s business continuity plan should include a preventive program, a documented strategy that is scaled to the stages of an outbreak, a comprehensive framework outlining how it will continue critical operations and a testing and oversight program. The plan should be appropriate for the bank’s size, complexity and business activities.

A group of agencies including prudential bank regulators are encouraging financial institutions to work constructively with customers in communities impacted by the new coronavirus, according a statement released on March 9. They also pledge to provide “appropriate regulatory assistance to affected institutions,” adding that prudent accommodations that follow “safe and sound lending practices should not be subject to examiner criticism.”

The regulators also acknowledged that banks may face staffing and other challenges associated with operations. The statement says regulators will expedite requests to provide “more convenient availability of services in affected communities” where appropriate, and work with impacted financial institutions for scheduling exams or inspections.

The Federal Deposit Insurance Corp and the Office of Comptroller of the Currency highlighted more specific ways banks can work with customers in a set of releases dated March 13. Some of the suggested potential accommodations, made in a safe and sound manner and consistent with bank laws, include:

  • waiving ATM, overdraft, early time deposit withdrawal and late credit card or loan fees
  • increasing ATM daily cash withdrawal limits
  • reducing restrictions on cashing out-of-state and non-customer checks
  • increasing card limits for creditworthy borrowers
  • payment accommodations that could include deferring or skipping payments or extending the payment due date to avoid delinquencies and negative reporting if a disruption is related to COVID-19.

The OCC points out that lending accommodations for existing or new customers can help borrowers facing pressured cash flows, improve their ability to service debt and ultimate help the bank collect on the loans. It adds that banks should individually evaluate whether a loan modification would constitute a troubled debt restructuring.

The regulator also acknowledged that some banks with customers impacted by issues related to the coronavirus may experience an increase in delinquent or nonperforming loans, and says it will consider “the unusual circumstances” these banks face when reviewing their financial condition and weighing the supervisory response.

The FDIC specifically encouraged banks to work with borrowers in industries that are “particularly vulnerable to the volatility” stemming from COVID-19 disruption, as well as the small business and independent contractors reliant on those industries.

“A financial institution’s prudent efforts to modify the terms on existing loans for affected customers will not be subject to examiner criticism,” the FDIC wrote in its release.

Some of the largest and most dramatic regulatory accommodation related to the new coronavirus has come from the Federal Reserve, given its role in the funding market and its role overseeing large bank holding companies.

The Fed announced on March 12 that it would inject $1.5 trillion into the U.S. market for repurchase agreements over the course of two days. The increased purchases, which serve as short-term loans for banks, were not meant to directly stimulate the economy. Instead, they were done to “address the unusual disruption” in Treasury financing markets from the coronavirus and help ensure it would continue functioning properly.

The Fed also announced several more changes to accommodate banks on March 15. It is now allowing depository institutions to borrow from the discount window for as long as 90 days and is encouraging banks to use its intraday credit. It is explicitly encouraging banks to use their capital and liquidity buffers to lend to customers impacted by the coronavirus and lowered the reserve requirement ratio to 0%, effective at the start of the next reserve maintenance period on March 26.

For more information from the regulators, check out their websites

FDIC: Coronavirus (COVID-19) Information for Bankers and Consumers
OCC: COVID-19 (Coronavirus)
Federal Reserve Board: Coronavirus Disease 2019 (COVID-19)
Conference of State Bank Supervisors: Information on COVID-19 Coronavirus and State Agency Nonbank Communication/Guidance on Coronavirus/COVID-19