Designing a Pandemic-Proof Compensation Plan

The ability to pivot and adapt to a changing landscape is critical to the success of an organization.

The coronavirus pandemic has created a unique challenge for banks in particular. Government stimulus through the Paycheck Protection Program tasked banks with processing loans at an unheard-of rate, turning bankers working 20-hour days into economic first responders. Simultaneously, the altered landscape forced businesses to adopt a remote work environment, virtual meetings and increase flexibility — amplifying the need for safe and reliable technology platforms, enhanced data security measures and appropriate cyber insurance programs as standard operating procedure.

Prior to Covid-19, a major driver of change was the demographic shift in the workforce as baby boomers retire and Generation X and millennials take over management and leadership positions. Many businesses were focused on ways to attract and retain these workers by adapting their cultures and policies to offer them meaningful rewards. The pandemic will likely make this demographic shift more relevant, as the workforce continues adapting to the impending change. 

Gen X and millennial employees are more likely than previous generations to value flexibility in when and where they work. They may seek greater  alignment in their career and life, according to Gallup. The pandemic has forced businesses to either adapt — or risk the economic consequences of losing their top performers to competitors.

Many employees find they are more productive when working remotely compared to the traditional office setting, which could translate into increased employee engagement. In fact, the Gallup’s “State of the American Workplace” study finds that employees who spend 60% to  80% of their time working remotely reported the highest engagement. Engagement relates to the level of involvement and the relationship an employee has with their position and employer. Gallup finds that engaged employees are more productive because they have increased autonomy, job satisfaction and desire to make a difference. Simply put, increase engagement and performance will rise.

The demographic shift and a force-placed virtual office culture means that designing programs to attract and retain today’s workers require a well thought out combination of strategies. An inexpensive — though not necessarily simple — method of employee retention includes providing recognition when appropriate and deserved. Recognition is a critical aspect in employee engagement, regardless of demographic. Employees who feel recognized are more likely to be retained, satisfied and highly engaged. Without appropriate recognition, employee turnover could increase, which contributes to decreased morale and reduced productivity.

In addition to showing appreciation and recognizing employees who perform well, compensating them appropriately is fundamental to attracting and retaining the best. The flexibility of a non-qualified deferred compensation program allows employers to customize the design to respond to changing needs.

Though still relevant, the traditional Supplemental Executive Retirement Plan has been used to attract and retain leadership positions. It is an unsecured promise to pay a future benefit in retirement, with a vesting schedule structured to promote retention. Because Gen X and millennials may have 25 years or more until retirement, the value of a benefit starting at age 65 or later could miss the mark; they may find a more near-term, personally focused, approach to be more meaningful.

Taking into consideration what a younger employee in a leadership, management, or production position values is the guide to developing an effective plan. Does the employee have young children, student loan debt or other current expenses? Using personalized criteria, the employer can structure a deferred compensation program to customize payments timed to coincide with tuition or student loan debt repayment assistance. Importantly, the employer is in control of how these programs vest, can include forfeiture provision features and require the employee perform to earn the benefits.

These benefits are designed to be mutually beneficial. The rewards must be meaningful to the recipient while providing value to the sponsoring employer. The employer attracts and retains top talent while increasing productivity, and the employee is engaged and compensated appropriately. Banks can increase their potential success and avoid the financial consequences of turnover.

Ultimately, the pandemic could be the catalyst that brings the workplace of tomorrow to the present day. Nimbleness as we face the new reality of a virtual office, flexibility, and reliance on technology will holistically increase our ability to navigate uncertainty.

A Rare Opportunity for Change

Jeff Rose believes there’s no rush to reopen his bank’s branches.

Davenport, Iowa-based AmBank Holdings’ eight branch lobbies have been closed since March, limiting physical interactions to drive-thru lanes and by appointment. Even then, the $373 million bank is exercising caution — customers who schedule appointments have to complete a questionnaire, have their temperature taken by an American Bank & Trust employee, wear a mask and socially distance.

“A lot of banks in our area did reopen their lobbies [around] mid-June,” says Rose, the bank’s CEO. “Many of those are now reclosing, some of them because of the spike in the virus.”

The Covid-19 pandemic has forced banks and other businesses to change their operations to remain open. But while the health crisis underlying the economic downturn may be temporary, it offers banks an opportunity to rethink the role of the branch in serving the customer.

For some financial institutions, Covid-19 has merely accelerated this shift.

Bank OZK, based in Little Rock, Arkansas, doesn’t focus singularly on branch strategy, explains Carmen McClennon, chief retail banking officer of the $26 billion bank. Instead, OZK considers how the combination of its digital, ATM, call center and branch channels can build a high-quality client experience. Its lobbies have remained open during the pandemic, but social distancing measures still limit in-person connection.

The reality is, we’re not face-to-face and having that critical contact with our clients on such a regular basis,” she adds. “What worries me is I’ve got to think about what we’re doing in these other channels so we’re at the top of the consideration when our client has their next financial need.”

An analysis of consumer traffic trends by the advisory firm Novantas finds weekly branch visits down by 20% as of July 14, since the pre-pandemic period of Jan. 30 through Mar. 4, 2020. An earlier survey found branch activity unlikely to recover, with only 40% of consumers saying they’d return to their local branch once the pandemic abates.

Separately, Fidelity National Information Services (FIS) reported that new mobile banking registrations increased by 200% in April, and mobile banking activity rose by 85%.

McClennon believes that personalization across channels will be important. “We’re looking at things like smart offers when they’re logging in to pay a bill,” she explains. Also, “how do we personalize an ATM experience so we’re maintaining that relationship with our client? I think we’ve got to challenge ourselves [to do that].”

OZK plans to unveil mobile app enhancements soon, and will thoroughly train branch and call center staff on its features. “We want them to confidently promote it” to clients, says McClennon.

Covid-19 doesn’t appear to be driving OZK to close locations. These decisions will be made by branch and by market, McClennon explains, based on OZK’s ability to serve its clients and meet its strategic objectives.

It recently sold four branches — two each in South Carolina and Alabama. “Candidly, we didn’t have enough density to deliver a strong client experience. That’s really challenging in a low-density market,” says McClennon. But she points out that the bank opened as many branches as it closed — three — in 2019.

Rose says AmBank will soon field surveys to better understand customer preferences and help the bank’s leadership team plot a path forward. While drive-thru transactions have risen 10% over the past couple of months — which Rose partially attributes to the warmer weather — mobile and online usage are back to pre-pandemic levels.

Data will drive AmBank’s reopening plans, but Rose believes that some lobbies will remain closed in less-frequented locations where customers have adapted to drive-up service.

When its lobbies reopen, Rose believes it will be a rare opportunity to change how customers interact with his bank. AmBank has invested in new technology, including DocuSign and improved payment capabilities; they’re also looking at self-service technology, like interactive teller machines. Rose is inspired by Apple’s stores and the hair salon chain Great Clips, which let customers schedule service appointments digitally.

“We’ve got one shot at modifying the client experience for the betterment of our customer,” he says. “We love our customers, we want to see them, but if they can self-serve and not have to drive to the bank, it’s going to be a better experience for them overall. How do we take advantage of the pandemic situation to permanently upgrade the client experience?”

Exploring Customer Service in the Pandemic Age

Banks across the country are grappling with the right approach to branch banking as the Covid-19 pandemic lingers.

Management concerns surrounding logistics and safety must give way to longer-term considerations aimed squarely at the bottom line. Executives need to contemplate the future of their branch operations and  business model, incorporating the guidance that large-scale pandemics may persist in some shape or form in the future. Read on to explore key considerations relating to the long-term implication of pandemics on customer service delivery.

Will customers ever come back into our branches? How will that impact our bank?
Branch visits have irrevocably changed. A recent study asked consumers to rank their preference of seven different banking channels, before, during and post-pandemic. Six months after the start of the pandemic, branch banking has settled into sixth place. The study predicts “a rapid decrease in the importance of the physical branch as customers become more habituated to the use of digital, which is a behavior that will linger long term.”

Jimmy Ton, senior vice president and director of digital channels at Irvine, California-based First Foundation Bank, agrees. “For those who adopted digital services during this time, they’ll probably stick with them. It takes 60 days to form a habit and people have been reconditioned during the pandemic. There’s no reason to believe they will abandon these services,” said Ton.

Novantas highlights another concern. “The branch network’s competitive advantage for sales has been eliminated overnight, possibly forever. Although sales were already shifting away from branches, they will now need to be even more digital.”

Banks must prepare for a permanent, significant reduction of branch visits. They should discuss this impact on their business models and what changes, internally and customer-facing, will need to occur.

Highly personalized service is our hallmark. How can we possibly digitize that?
Many banks have long leveraged high-touch customer service as a differentiator when competing with national banks. This was often delivered through branch networks and sales teams — until now.

Bankers have witnessed pandemic-induced migration to digital channels. But this is no time to celebrate;  J. D. Power shows overall satisfaction has declined as customers transition from branch to digital channels. That’s because banks have so far been unable to replicate the personalized nature of in-branch experiences digitally.

But it can be done.

Think of it this way: branch staff can glance at a screen filled with information about the customer sitting in front of them to personalize the conversation. That same data can be used to craft a personalized conversation, delivered via email or text message instead. Both methods communicate to the customer that you know who they are, and can offer ways to help them.

Digital engagement platforms offering deep personalization delivered via individualized websites, text messages, video and online chats exist today. They deliver a positive, digital experience with minimal effort, even for data-challenged banks.

A significant chunk of interactions can move to digital. A great parallel is what we saw happen with telehealth, moving routine physical in-person appointments to virtual ones,” said John Philpott, a partner at FINTOP Capital. “It’s a great example of how professional conversations can be digital; banks can absolutely do the same.”

Banks should plan to shift all or a significant portion of sales and service delivery away from their branch networks and to digital engagement and sales platforms that are ideally powered by insightful data to hyper-personalize the experience.

Strategically speaking, what else should we consider?
With branch-based account opening limited and most banks flush with cash, the pressure for new deposits has lessened. Now is an opportune time to focus on the existing customer base to minimize attrition and boost profitability of those relationships.

Ted Brown, CEO of Digital Onboarding, founded the company based on the idea that opening a new account does not mean you’ve established a relationship.

“[The ] number of new checking accounts is the wrong metric to obsess over,” Brown said. “Are your customers fully utilizing the products and services they’ve signed up for? Are they turning to your bank to satisfy additional needs? Starting with Day One, successful onboarding — and continuous engagement thereafter — increases product usage, cross-sell success and ultimately drives profits.”

Zeroing in on customer engagement and retention, instead of new customer growth, may be a smart, strategic and profitable move in the current environment. Responsible bank leadership must contemplate what changes and investments they will need to make to stay relevant with customers post-COVID 19.

The $700 Billion Credit Question for Banks

It’s the $700 billion question: How bad could it get for banks?

That’s the maximum amount of losses that the Federal Reserve modeled in a special sensitivity analysis in June for the nation’s 34 largest banks over nine quarters as part of its annual stress testing exercise.

Proportional losses could be devastating for community banks, which also tend to lack the sophisticated stress testing models of their bigger peers and employ a more straight-forward approach to risk management. Experts say that community banks should draw inspiration from the Fed’s analysis and broad stress-testing practices to address potential balance sheet risk, even if they don’t undergo a full stress analysis.

“It’s always good to understand your downsides,” says Steve Turner, managing director at Empyrean Solutions, an asset and liability tool for financial institutions. “Economic environments do two things: They tend to trend and then they tend to change abruptly. Most people are really good at predicting trends, very few are good at forecasting the abrupt changes. Stress testing provides you with insight into what could be the abrupt changes.”

For the most part, stress testing, an exercise that subjects existing and historical balance sheet data to a variety of adverse macroeconomic outlooks to create a range of potential outcomes, has been the domain of the largest banks. But considering worst-case scenarios and working backward to mitigate those outcomes — one of the main takeaways and advantages of stress testing — is “unequivocally” part of prudent risk and profitability management for banks, says Ed Young, senior director and capital planning strategist at Moody’s Analytics.

Capital & Liquidity
The results of the Fed’s sensitivity analysis underpinned the regulator’s decision to alter planned capital actions at large banks, capping dividend levels and ceasing most stock repurchase activity. Young says bank boards should look at the analysis and conclusion before revisiting their comfort levels with “how much capital you’re letting exit from your firm today” through planned distributions.

Share repurchases are relatively easy to turn on and off; pausing or cutting a dividend could have more significant consequences. Boards should also revisit the strategic plan and assess the capital intensity of certain planned projects. They may need to pause anticipated acquisitions, business line additions and branch expansions that could expend valuable capital. They also need to be realistic about the likelihood of raising new capital — what form and at what cost — should they need to bolster their ratios.

Boards need to frequently assess their liquidity position too, Young says. Exercises that demonstrate the bank can maintain adequate capital for 12 months mean little if sufficient liquidity runs out after six months.

Credit
When it comes to credit, community banks may want to start by comparing the distribution of the loan portfolios of the banks involved in the exercise to their own. These players are active lenders in many of the same areas that community banks are, with sizable commercial and industrial, commercial real estate and mortgage portfolios.

“You can essentially take those results and translate them, to a certain degree, into your bank’s size and risk profile,” says Frank Manahan, a managing director in KPMG’s financial services practice. “It’s not going to be highly mathematical or highly quantitative, but it is a data point to show you how severe these other institutions expect it to be for them. Then, on a pro-rated basis, you can extract information down to your size.”

Turner says many community banks could “reverse stress test” their loan portfolios to produce useful insights and potential ways to proceed as well as identify emerging weaknesses or risks.

They should try to calculate their loss-absorbing capacity if credit takes a nosedive, or use a tiered approach to imagine if something “bad, really bad and cataclysmic” happens in their market. Credit and loan teams can leverage their knowledge of customers to come up with potential worst-case scenarios for individual borrowers or groups, as well as what it would mean for the bank.

“Rather than say, ‘I project that a worst-case scenarios is X,’ turn it around and say, ‘If I get this level of losses in my owner-occupied commercial real estate portfolio, then I have a capital problem,’” Turner says. “I’ll have a sense of what actions I need to take after that stress test process.”

A key driver of credit problems in the past has been the unemployment rate, Manahan says. Unemployment is at record highs, but banks can still leverage their historical experience of credit performance when unemployment hit 9.5% in June 2009.

“If you’ve done scenarios that show you that an increase in unemployment from 10% to 15% will have this dollar impact on the balance sheet — that is a hugely useful data point,” he says. “That’s essentially a sensitivity analysis, to say that a 1 basis point increase in unemployment translates into … an increase in losses or a decrease in revenue perspective to the balance sheet.”

After identifying the worst-case scenarios, banks should then tackle changing or refining the data or information that will serve as early-warning indicators. That could be a drawdown of deposit accounts, additional requests for deferrals or changes in customer cash flow — anything that may indicate eventual erosion of credit quality. They should then look for those indicators in the borrowers or asset classes that could create the biggest problems for the bank and act accordingly.

Additional insights

  • Experts and executives report that banks are having stress testing conversations monthly, given the heightened risk environment. In normal times, Turner says they can happen semi-annual.
  • Sophisticated models are useful but have their limits, including a lack of historical data for a pandemic. Young points out that the Fed’s sensitivity analysis discussed how big banks are incorporating detailed management judgement on top of their loss models.
  • Vendors exist to help firms do one-time or sporadic stress tests of loan portfolios against a range of potential economic forecasts and can use publicly available information or internal data. This could be an option for firms that want a formal analysis but don’t have the time or money to implement a system internally.
  • Experts recommend taking advantage of opportunities, like the pandemic, to enhance risk management and the processes and procedures around it.

Pandemic Offers Strong Banks a Shot at Transformative Deals

It’s a rule of banking that an economic crisis always creates winners and losers. The losers are the banks that run out of capital or liquidity (or both), and either fail or are forced to sell at fire-sale prices. The winners are the strong banks that scoop them up at a discount.

And in the recent history of such deals, many of them have been transformative.

The bank M&A market through the first six months of 2020 has been moribund – just 50 deals compared to 259 last year and 254 in 2018, according to S&P Global Market Intelligence. But some banks inevitably get into trouble during a recession, and you had better believe that well-capitalized banks will be waiting to pounce when they do.

One of them could be PNC Financial Services Group. In an interview for my story in the third quarter issue of Bank Director magazine – “Surviving the Pandemic” – Chairman and CEO William Demchak said the $459 billion bank would be on the lookout for opportunistic deals during the downturn. In May, PNC sold its 22% stake in the investment management firm BlackRock for $14.4 billion. Some of that money will be used to armor the bank’s balance sheet against possible losses in the event of a deep recession, but could also fund an acquisition.

PNC has done this before. In 2008, the bank acquired National City Corp., which had suffered big losses on subprime mortgages. And three years later, PNC acquired the U.S. retail business of Royal Bank of Canada, which was slow to recover from the collapse of the subprime mortgage market.

Together, these deals were transformational: National City gave PNC more scale, while Royal Bank’s U.S. operation extended the Pittsburgh-based bank’s franchise into the southeast.

“We’re more than prepared to do it,” Demchak told me in an interview in late May. “And when you have a safety buffer of capital in your pocket, you can do so with a little more resolve than you otherwise might. The National City acquisition was not for the faint of heart in terms of where we were [in 2008] on a capital basis.”

One of the most profound examples of winners profiting at the expense of the losers occurred in Texas during the late 1980s. From 1980 through 1989, 425 Texas banks failed — including the state’s seven largest banks.

The root cause of the Texas banking crisis was the collapse of the global oil market, and later, the state’s commercial real estate market.

The first big Texas bank to go was actually Houston-based Texas Commerce, which was acquired in 1986 by Chemical Bank in New York. Texas Commerce had to seek out a merger partner after absorbing heavy loan losses from oil and commercial real estate. Through a series of acquisitions, Chemical would later become part of JPMorgan Chase & Co.

Two years later, Charlotte, North Carolina-based NCNB Corp. acquired Dallas-based First Republicbank Corp. after it failed. At the time, NCNB was an aggressive regional bank that had expanded throughout the southeast, but the Texas acquisition gave it national prominence. In 1991, CEO Hugh McColl changed NCNB’s name to NationsBank; in 1998, he acquired Bank of America Corp. and adopted that name.

And in 1989, a third failed Texas bank: Dallas-based MCorp was acquired by Bank One in Columbus, Ohio. Bank One was another regional acquirer that rose to national prominence after it broke into the Texas market. Banc One would also become part of JPMorgan through a merger in 2004.

You can bet your ten-gallon hat these Texas deals were transformative. Today, JPMorgan Chase and Bank of America, respectively, are the state’s two largest banks and control over 36% of its consumer deposit market, according to the Federal Deposit Insurance Corp. Given the size of the state’s economy, Texas is an important component in their nationwide franchises. 

Indeed, the history of banking in the United States is littered with examples of where strong banks were able to grow by acquiring weak or failed banks during an economic downturn. This phenomenon of Darwinian banking occurred again during the subprime lending crisis when JPMorgan Chase acquired Washington Mutual, Wells Fargo & Co. bought out Wachovia Corp. and Bank of America took over Merrill Lynch.

Each deal was transformative for the acquirer. Buying Washington Mutual extended JPMorgan Chase’s footprint to the West Coast. The Wachovia deal extended Wells Fargo’s footprint to the East Coast. And the Merrill Lynch acquisition gave Bank of America the country’s premier retail broker.

If the current recession becomes severe, there’s a good chance we’ll see more transformative deals where the winners profit at the expense of the losers.

Revisiting the Post-Pandemic Strategic Plan

The coronavirus pandemic has tossed any strategic plans for 2020 — which bank management teams created in late 2019 — out the window.

The banking industry has been directly affected by unprecedented challenges stemming from the Covid-19 crisis, and have quickly addressed emerging issues and adapted their procedures and operations. Revisiting the strategic plan will require executives to holistically reassess risks, challenges, potential opportunities and future goals. While banks will need to re-examine their strategic plans for operational initiatives, it is prudent to also reassess their plans for capital adequacy and approach to M&A.

Capital Planning for Defense and Offense
When reassessing the strategic plan and the impact of Covid-19, banks should consider if current capital ratios provide enough flexibility to both play defense by protecting the balance sheet in a prolonged adverse scenario, and play offense with enough capital to execute on growth opportunities. We believe it is prudent to evaluate multiple scenarios and raise capital when you can — not when you need to.

The capital markets are open today, and many banks have proactively raised subordinated debt in the second quarter. Sub-debt is an attractive form of capital due to its regulatory treatment, no dilution to ownership and relatively low cost in the current rate environment. From a regulatory perspective, sub-debt can qualify as Tier 2 capital at the holding company; proceeds can be down streamed to the bank subsidiary, which qualifies as Tier 1 capital at the bank level, strengthening regulatory capital ratios. The interest expense is tax-deductible, which reduces the effective cost.

The market appetite for sub-debt has been robust: since the beginning of April, commercial banks have raised over $3.5 billion at an average interest rate of approximately 5.50%. Historically, institutional investors were the most active buyers of sub-debt, but the buyer mix has shifted to rely on community and regional banks, insurance companies and asset managers — all looking for attractive yields.

Mergers and Acquisitions        
M&A activity has come to a screeching halt as banks prioritized an internal focus to assess risk. Only nine whole-bank M&A transactions were announced in the second quarter, compared to 67 transactions during the same timeframe in 2019. It seems reasonable to expect valuation multiples will trend lower and deal activity will be subdued until acquirers’ currencies rebound and parties have more visibility and confidence with credit quality and earnings.

On a more positive note, we expect banks to warm to the idea of mergers as strategic partnerships to strengthen the combined company with operational scale and synergies. Of course, these transactions can be challenging to complete and dependent upon similar cultures and management compatibility; however, suppressed M&A valuations provide a window of opportunity since the usual bank buyers aren’t paying rich premiums in the current environment. Economic consideration in a strategic partnership is typically majority stock, not cash, so both parties are reinvesting and have potential to increase the combined company’s value for a more-advantageous positioning when the market recovers.

If you were planning on being a buyer in the next 12 to 18 months, it is important to evaluate how your M&A strategy and priorities may have changed. Buyers with a strong public currency or excess capital will maintain their competitive advantage, but need to be highly selective and strategic for their next deal. Among other things, acquirers will need to bolster the due diligence process to address new challenges and risks.

If you were planning on being a seller in the next 12 to 18 months, focus on identifying your potential buyers, how your valuation may have changed and how you can position the bank to improve the valuation. It is prudent to engage with external advisors in this process, including an investment banker and legal counsel to evaluate these scenarios in detail, even if there is no urgency for a transaction.

These are unprecedented times, and every day seems to bring a new challenge. While it is impossible to predict what will transpire in the next six to 12 months, it is important to update the strategic plan to position your bank to protect shareholder value and take advantage of opportunities.

Information contained herein has been obtained by sources we consider reliable, but is not guaranteed and we are not soliciting any action based upon it. Any opinions expressed are based on our interpretation of data available to us at the time of the original publication of the report. These opinions are subject to change at any time without notice.

The Quiet Crisis You May Be Overlooking

“In the Covid-19 Economy, You Can Have a Kid or a Job,” reads a recent headline in The New York Times. “You Can’t Have Both.”

As leadership teams consider how they’ll return to some version of “business as usual” when the pandemic abates, there’s one factor they may be overlooking: When daycares and schools close, working parents without effective support systems are forced to prioritize between their children and their career.

“The pandemic has made a bad situation worse,” says Simon Workman, director of early childhood policy at the Center for American Progress.

The supply of high-quality child care couldn’t keep up with demand before the pandemic, and it’s expensive, accounting for 20% to 30% of a family’s monthly income, he says. Providers that are already financially strapped are now earning even less, due to safety and health guidelines that can be costly to comply with. Some providers won’t endure the economic fallout from Covid-19.

Amid the myriad worries facing companies today, child care may seem minor. But it’s a huge stressor for employees, impacting their ability to work. Inadequate child care resources cost working parents and the companies that employ them tens of billions of dollars annually, according to a Care.com study, with parents losing $37 billion in wages and companies experiencing $13 billion in lost productivity. And the problem is larger than those numbers suggest: Care.com’s research only accounts for parents of children under the age of three.

Child care benefits could be an effective tool in a company’s arsenal when it comes to attracting and retaining talent. Roughly half of bank employees are 45 or younger, according to Bank Director’s 2020 Compensation Survey, meaning that many are focused on building families as well as their careers. Yet only 12% of banks offer child care benefits, according to our survey.

Sterling National Bank, a subsidiary of Sterling Bancorp, chose to subsidize backup child care for its employees following conversations between CEO Jack Kopnisky, Chief Human Resources Officer Javier Evans and Margaret Wortley, director of benefits, HR operations and compliance, exploring how Sterling could better compete for talent in New York City.  

“Jack talked to Margaret and [me] and said, ‘I want us to offer contemporary, forward-looking benefits to keep us right there at the leading edge,’” Evans says. The $30 billion bank based in Montebello, New York, competes for customers and talent with the likes of JPMorgan Chase & Co. and Citigroup.

“[They’re] all here in our backyard,” Evans continues. “So, we’ve got to make sure that we stay at least contemporary, from a benefit offering, so we can be competitive from that point of view.”

One provider the bank chose was Helpr, a startup offering a range of services for employees, including backup care, online classes and tutoring for kids, as well as consulting and concierge services.

Sterling initially subsidized 16 hours of backup child care annually, intending to offer employees a chance to take a date night, for example. This grew to 80 hours due to the pandemic. Up to that limit, an employee pays no more than $6 per hour with the bank covering the rest.

For employees seeking long-term care, Sterling also subsidizes the cost to recruit and screen candidates. Employees pay a one-time $500 fee; a similar service would cost $2,500, says Wortley.

“We’re hearing back from companies that primary care is the biggest stressor for their employees right now,” says Sarah Bystrom, a business development executive at Helpr. “That’s causing this anxiety and stress around how to continue to balance family and work life.”

In addition to Helpr, Sterling works with Bright Horizons, another care provider.

In response to the pandemic, the bank increased hourly pay for front-line staff and awarded a $750 bonus to non-executive employees, according to Evans. They also received extra paid time off, which many used to care for children, and Sterling has worked with employees to create more flexible schedules. Virtual education goes beyond banking to cover topics like working at home with children.

Sterling also provided access to Headspace, an app focused on mindfulness and mental health. “We knew right at the beginning of the pandemic that this would take a mental toll on folks,” Evans says.

Working parents need support in these unique times; they’ll also need it after this crisis is in the rearview mirror. According to Workman, about 2 million families experience a job disruption — missed work or even quitting — due to child care challenges.

“That’s bad for the family, but it’s also bad for the employer,” he says. “As a society, as an economy, we all benefit when families have access to high-quality, early childhood education they can afford and access on a reliable schedule.”

Recalibrating Bank Stress Tests to a New Reality

Any bank that stress tested its loan portfolios prior to the Covid-19 pandemic probably used a worst-case scenario that wasn’t nearly as bad as the economic reality of the last five months.

Stress tests are an analysis of a bank’s loans or revenue stream against a variety of adverse computer-generated scenarios. The results help management teams and their boards of directors gauge whether the bank has adequate reserves and capital to withstand loan losses of various magnitudes. One challenge for banks today that incorporate stress tests into their risk management approach is the lack of relevant historical data. There is little modern precedent for what has befallen the U.S. economy since March, when most of the country went into lockdown to try to flatten the pandemic’s infection rate. The shutdowns tipped the U.S. economy into its steepest decline since the Great Depression.

Does stress testing still have value as a risk management tool, given that we’re navigating in uncharted economic waters?

“I would argue absolutely,” says Jay Gallagher, deputy comptroller for systemic risk identification support and specialty supervision at the Office of the Comptroller of the Currency. “It is not meant to be an exercise in perfection. It’s meant to say within the realm of possibility, these are the scenarios or variables we want to test against. Could we live with what the outcome is?”

The Dodd-Frank Act required banks with assets of $10 billion or greater to run annual stress tests, known as DFAST tests, and report the results to their primary federal regulator. The requirement threshold was raised to $100 billion in 2018, although Gallagher believes that most nationally chartered banks supervised by the OCC still do some form of stress testing.

They see value in the exercise and not having the regulatory framework around it makes it even more nimble for them to focus on what’s really important to them as opposed to checking all the boxes from a regulatory exercise,” says Gallagher. “We still see a lot of banks that used to have to do DFAST still use a lot of the key tenets in their risk management programs.”

Amalgamated Bank, a $5.8 billion state chartered bank headquartered in New York, has been stress testing its loan portfolios on an individual and macro level for several years even though it sits well below the regulatory threshold. For the first time ever, the bank decided to bring in an outside firm to do its own analysis, including peer comparisons.

President and CEO Keith Mestrich says it is as much a business planning tool as much as it is a risk mitigation tool. It gives executives insight into its loan mix and plays an important role in decisions that Amalgamated makes about credit and capital.

It tells you, are you going to have enough capital to withstand a storm if the worst case scenario comes true and we see these loss rates,” he says. “And if not, do you need to go out and raise additional capital or take some other measures to get some risk off the balance sheet, even if you take a pretty significant haircut on it?”

Banks that stress test have been forced to recalibrate and update their economic assumptions in the face of the economy’s sharp decline, as well as the government’s response. The unemployment rate spiked to 14.7% in April before dropping to 11.1% in June when the economy began to reopen, according to the Bureau of Labor Statistics. But the number of Covid-19 cases in the U.S. has surged past 3 million and several Western and Southern states are experiencing big increases in their infection rates, raising the possibility that unemployment might spike again if businesses are forced to close for a second time.

“I feel like the unemployment numbers are probably the most important ones, but they’re always set off by how the Covid cases go,” says Rick Childs, a partner at the consulting firm Crowe. “To the extent that we don’t get [the virus] back under control, and it takes longer to develop a vaccine and/or effective treatment options for it, I think they’ll always be in competition with each other.”

Another significant difference between the Great Recession and the current situation is the unparalleled level of fiscal support the U.S. Congress has provided to businesses, local governments and individuals through the $2 trillion CARES Act. It is unclear another round of fiscal support will be forthcoming later this year, which could also drive up the unemployment rate and lead to more business failures. These and other variables complicate the process of trying to construct a stress test model, since there aren’t clear precedents to rely on in modern economic history.

Stress testing clearly still has value despite these challenges, but Childs says it’s also important that banks stay close to their borrowers. “Knowing what’s happening with your customer base is probably going to be more important in terms of helping you make decisions,” he says.

Covid-19, Compensation and Corporate Performance

Covid-19 has created a literal life-and-death struggle for many; the resultant economic slowdown has imperiled businesses, employees and shareholders. A few lessons have already emerged from the pandemic’s fallout.

How companies manage employment and compensation through the Covid-19 crisis is already under intense scrutiny; positive and negative case studies will undoubtedly emerge offering insight into best (and worst) practices when it comes to human capital and non-financial risk management. 

Human capital is an intangible company asset, often thought of as the economic value of an employee’s experience and skills. Already, investors focused on environmental, social and governance issues, commonly known as ESG, are tracking how companies address human capital issues in light of the pandemic and economic shutdown. 

Aon and McLagan have tracked corporate reactions to Covid-19 since the start of the crisis, recording a wide array of pandemic responses through May 2020 from 66% of companies in the Russell 3000. 

We found that firms had already taken steps to curtail executive (14.7%) and board (9.5%) compensation, work hours (2.1%), hiring (2%), and dividend payouts (3.9%), while others have gone further and closed locations (12.1%) and furloughed (6.2%) or terminated (1.9%) employees. 

By May, 387 diversified financial services firms reported making executive compensation changes; however, none were community banks, which have mostly taken a wait-and-see approach.  

Because human capital is a major driver of corporate profits in any industry, how companies manage workforce issues during a crisis and on a daily basis is important. In the banking and financial services industry, however, human capital is even more critical. 

Human capital issues rank in the top material ESG risks that commercial banks should proactively manage, along with data security, business ethics, systemic risk management and product-related considerations such as access and design. And that was before Covid-19. In a post-pandemic world, several urgent human capital issues have taken center stage at banks and financial institutions. 

Customer Access, Workplace Safety 
Financial institutions are considered essential businesses and must simultaneously balance remaining open to maintain market liquidity with workplace safety for front-line staff. While organizations should do all they can to maintain strict social distancing and cleaning regimes, some have gone further by offering hazard pay to customer-facing employees. When evaluating hazard pay options, it is also important to weigh one-time versus ongoing pay adjustments, or whether to include this compensation in hourly wage figures. While one-time or periodic bonuses may impact short-term cash flow, executives should consider the effect of needing to potentially roll back pay increases in the future. 

Staff Compensation 
While hazard pay is one component of Covid-19 compensation, it is certainly not the only one. Many banks have faced a staggering increase in loan application processing due to both the Coronavirus Aid, Relief, and Economic Security (CARES) Act and mortgage refinancing. Planning for any overtime or performance bonus payments during the pandemic period will be a critical element of human capital and cash flow management. These decisions should be made in consideration of pay equity laws and best practices, which are additional focuses of ESG. 

Executive Compensation
In light of the Covid-19 economic slowdown, many financial institutions may decide to reevaluate and make material changes to the performance metrics used in their incentive compensation plans. 

Proxy advisory firms Institutional Shareholder Services (ISS) and Glass Lewis have offered guidance on such changes. ISS encourages boards “to provide contemporaneous disclosure to shareholders of their rationales for making such changes.” Glass Lewis cautioned companies that proposals “that take a proportional approach to the impacts on shareholders and employees look more likely to be widely supported.”  

No one knows for sure how long the pandemic and economic fallout will last; how companies manage their human capital through the crisis will be a key differentiator, both from an economic and a public relations standpoint.

Pivoting to Offense to Endure the Covid-19 Economy

Banks must plan for the economic conditions looming on the other side of Covid-19.

Banks must simultaneously figure out how to weather the public health crisis and serve their clients in almost entirely remote environments while preserving their financial health for months of economic uncertainty. The depth and longevity of this crisis requires banks to strategically reassess the immediate negative impacts, project probabilities of further disruption and re-engineer their delivery models.

We believe that the banks that take bold and decisive action around these key issues will emerge from this period with more-durable relationships, greater agility and resilience, steeper market growth and better profitability compared to their peers. Banks should prioritize a set of five stabilizing actions that will set the stage for resilience in any potential downturn. 

Help Customers Confront the Crisis
Adversity contains implicit opportunity for customer outreach. Banks should contact customers to communicate that their bank is open and available for support. They should devise strategic outreach programs to solidify customer confidence and build long-term relationships.

Banks should then immediately focus on helping customers find ways to ease cash flow constraints and shortfalls in working capital and liquidity reserves. They should consider relief programs and creative, beneficial adjustments to loan structures such as permitting deferred payments, interest-only payments, re-amortizing payments or waiving select fees. Aligning their clients’ new needs with bank solutions and products will establish a foundation for post-crisis revenue growth.

Surgical Expense Reductions
Often, the immediate reaction during economic turmoil is to cut staff without strategic approach. While this can lower costs by the next financial period, this approach fails to strategically position the bank for post-downturn recovery and risks misaligned skill-sets or understaffing.

We recommend that banks understand which levers can be strategically pulled to quickly reduce costs. These levers range from identifying and evaluating paper-based processes, robotic process automation and aligning operations and personnel to the revised sales volume estimates. There are significant cost savings available even in credit risk management — simply by optimizing credit processes and better leveraging data.

Credit Risk Management Tailored to the Crisis
Banks had no visibility into the recession, and must assess not only the immediate impact on borrower financial and implied repayment performances but also the delayed impact on various segments of the economy. Ensure your risk management strategy reflects the new credit reality:

  • Consider proactively managing the portfolio renewal cycle by implementing mass short-term extensions on lines of credit, re-evaluating credit policy exception limits and increasing monitoring through frequently conversations with borrowers.
  • Leverage data to scale the identification of emerging portfolio risk and related triggers.
  • Consider creating a Covid-19 financial health assessment to facilitate financial relief and to identify potential credit downgrades.
  • Assess industry-based impacts on your portfolio to predict deteriorating credits in order to right-size loan loss reserves. 
  • Increase the frequency and detail of credit monitoring procedures for sectors that have been immediately impacted and those that will be impacted in the near term.

Align Resources with Client Need
Changes in spending will impact the creditworthiness of many loan applicants, so banks must take a hard look at realistic expectations for new business goals in 2020 and 2021. Realign banker-relationship manager priorities and shift from new business development with prospective customers to selling deeper into the existing portfolio, where possible. Client engagement will enable banks to manage risk while providing the client with much-needed attention, solutions and assistance. 

It will also be critical to scale up certain operational functions quickly to meet shifting client demand. Realigning  branch staff to handle call center volume and line resources to assist with spiking credit action volumes allow you to redeploy and scale your workforce to the new reality.

Create a Balanced Remote Workplace Strategy
Banks must leverage all available tools not just to maintain, but further, customer relationships and generate new business activity where possible. Empower customers to make deposits digitally by providing remote deposit capture hardware and services and consider waiving a portion of RDC equipment or service fees for a trial period.

Proactively run and distribute bank statement reports through digitally secure methods, rather than requiring customers to create and distribute these reports. Collaborate with bank customers to send check payable files to the bank for check printing and distribution.

We believe a bank’s actions in the next 90 days are vital to the survival, sustainability and long-term positioning for regrowth. Responding to customers with needed outreach sets the stage for new levels of customer loyalty. Shifting the bank’s focus inward toward operations with a keen focus on streamlining processes, proactively changing procedures and aligning the right people to the right tasks will ultimately lead to both a sustained and improved financial ecosystem.