2024 Journal of Community Bank Case Studies

SECOND PLACE: University of Illinois Springfield

INB has an Asset and Liability Committee (ALCO), including an interest rate subcommittee, that meets quarterly and reports to the board. They plan for interest rate risk by conducting case studies, evaluating how much runoff of deposits they would see at various interest rate changes. They also conduct shock studies, essentially evaluating if they could survive, if there is anything that could cause material harm or failure at a given interest rate change. The studies typically look at 200–300% changes or 500 basis points up or down. In the period that caused the failures of three large banks, “we saw the largest interest rate jump in such a short time in modern history,” according to Donovan, and while INB was “caught out on budgetary expectations,” they survived—even prospered. Keep It Short INB also mitigates interest rate risk through its investment strategies. Donovan puts their investment strategy succinctly: “Keep it short.” When flooded with deposits during the pandemic, SVB invested in 10-year treasury securities. Scott Sowers, INB’s Assistant Controller, notes that while INB also invested in treasuries, buying $100 million shortly after the pandemic, INB chose to invest in short-term treasuries that matured in two to three years. Despite taking a book loss, INB was able to use these securities as pledged funds for government accounts and hold them to maturity so they would not be forced to take a loss as SVB did. The failure of FRB, an otherwise well-run bank, was also closely tied to the interest rate risk inherent to long-maturity assets. In order to compete for the business of high-net-worth

Government deposits may be backed by collateral, but business and large individual accounts require other methods of protection.

clients, FRB issued a lot of 30-yr fixed mortgages during the low-interest-rate period. Unrealized losses on FRB’s loans alone had increased to $22 billion by the end of 2022, which drew comparisons to SVB and ultimately led to FRB’s failure ( FRB 15). ALCO & Contingency Planning The ALCO also performs a local competitor analysis. According to Newton, they track their concentrations of who they are lending money to and in what areas—primary areas for INB are CRE and C&I. They make sure they are loaning to quality borrowers and track what they will be funding over the next six months, making sure they have funds for projects they have committed to. As mentioned before, they also create a large liability dependency report, tracking their largest depositors. They identify them; track them as percent of total deposits and total capital; risk rate them based on how the client’s business is doing, the stability of

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