Financial Considerations as Rates Plummet and Coronavirus Concerns Escalate
March 10, 2020
7 minute read – We are working daily with many institutions on strategic thinking and financial modeling focused on these topics. In this article, we address some general talking points we thought you would find helpful and some specific ideas being considered/tested, a number of which may need to be decided on quickly. Later this week we will post some strategic scenarios we are seeing institutions test.
Mindset – you can make a difference. Times of great uncertainty present opportunities for your institution to contribute in a meaningful way to the well-being of your members, employees, and community. Approach these issues with a determination to make a real difference.
Define success in advance. It is important to define, ahead of time, what success means for your organization on the other side of these events.
Make decisions in light of your strategic plan. In other words, don’t just consider the short-term impact. If you have various options, where possible, choose the options that help in the short-term and that most align with your strategy.
Think through things now. Work through decisions before you need to actually implement the decisions. Your mind will be clearer, which can lead to better short- and long-term decisions. Test driving various scenarios can be helpful. This process should include conscious decisions about what you may need to stop doing or delay.
Get all senior management involved. There is not one area of the organization that will remain untouched. Talk through the strategic financial levers you can pull. For a quick view of the possible impact, use our Strategy Lever Calculator to help people visualize the financial impact. For scenarios you prioritize and/or may want to vet further, test them for the ALM impact and profitability. Note, NEV and margin volatility reporting will not adequately address bottom-line profitability.
Consider time frames. As you are testing the financial impacts, make sure to consider different time frames for how long these external forces could be in play. Also, don’t forget to talk about the range of rates to evaluate. At some point things will settle. Keep in mind that after these historical lows, even a 100 bp increase in rates can hurt.
Redefine financial performance expectations, if necessary, and keep the board up to speed. Multiple external forces can hit financial performance simultaneously, some can help and some can hurt.
Here are some examples of ideas being considered/tested:
- Stopping CD promotions and materially lowering CD rates
- Lowering non-maturity deposit rates
- Mortgage strategy – materially lower mortgage rates could cause many first and second mortgages to refinance. A number of institutions have reported mortgage refi applications reaching record levels, which is likely also linked to homeowners having ample equity and low unemployment. While this brings volume, it does not necessarily bring a boost in profitability. Also consider service level agreements and consumer communication as volumes increase:
- Testing materially higher prepayment speeds
- Adjusting which mortgages are kept in the portfolio and which are sold
- Accessing structured borrowings or derivatives as a hedge for low-rate mortgages
- Possible flight to safety:
- Changing deposit mix to more non-maturity deposits
- Declining loan-to-asset ratio
- Fast growth can lower the net worth ratio, especially if earnings are lower, understand your position
- Investment strategy – keep in mind it is important to agree on the time frame for which you are planning/preparing
- Investment analysis – mortgage-based investments will likely include large premiums due to rate drops. It will be critical to understand the underlying prepayment assumptions that are included in any yield analysis. Going forward, it is possible that we will see prepayments far in excess of any in recent history. Minimally test very high prepayments and understand the impact on yield prior to purchasing investments
- Interchange income – is it likely to go up, down, or stay the same? People might cut back on spending
- Increasing credit card and HELOC limits to provide some peace of mind should people experience a reduction in pay. Alternatively, some are considering tightening underwriting in anticipation of higher losses
- Micro loans for people affected by work outages
- Making Skip-A-Pay available and easy to access through the mobile app
- Increasing/decreasing limits on remote deposit capture and ODP
- Waiving ATM fees for members and/or increasing ATM fees for non-members
- Keeping more cash on hand in anticipation of increased demand from your members
- Limiting cash at ATMs for non-members – try to understand how your competitors are prepared so that their actions don’t unintentionally hurt your brand should consumers want to stockpile cash
- Launching a coordinated effort to promote digital experience and usage, as well as, expanding call center hours
- Employee needs:
- Jump starting employees working remotely. Keep in mind that employees may need to be trained on how to work from home
- PTO concessions for employees who may need to be out for extended time frames due to school closures and/or illness
Brainstorm, prioritize, vet, and implement as appropriate. There are hundreds of possible scenarios and responses. Don’t get overwhelmed. This process can help people feel there is an organized approach to decision-making, which can calm fears.
Agree on triggers. For the things you don’t believe you need to act on just yet, determine what would trigger a decision to act.
Document the effect on the strategic plan. If you feel you need to make decisions that don’t align with your strategy or that affect the timing of strategic initiatives, call it out and document the rationale. Memories may be vague when the dust settles.
Call us. We are here to help. We work with hundreds of institutions and can help you think and explore options. We can appreciate how recent events are impacting the normal course of business and are happy to schedule time outside of normal business hours – early in the morning, late at night, or on the weekend, as needed.
You can reach us at 800.238.7475 or email firstname.lastname@example.org.