2024 Journal of Community Bank Case Studies

2024 COMMUNITY BANK CASE STUDY COMPETITION

their deposits, and the likelihood that they might leave INB under various scenarios. They then develop contingency plans for covering the loss of funding if a large depositor suddenly withdraws their funds. Contingency planning for INB begins with testing their borrowing lines, especially with the Federal Home Loan Bank (FHLB), INB’s first line of defense for short-term liquidity concerns. Donovan says that they test their lines of credit “just to check operations, make sure we remember how to do it.” If they had to take out an advance from the FHLB, they would then, if necessary, backfill that with brokered deposits and then, finally, with organic products by picking up sales activity, bringing in deposits by offering promotions on CDs or checking and savings accounts. In a crisis, external secondary funding options would be buying brokered CDs on the open market then liquidating investments. This would be dependent on whether the crisis was just affecting INB or if it was industry wide, as brokered deposits may not be available if the whole industry is affected. Likewise, choosing to liquidate deposits would depend on their mark to market and how much of a haircut they would have to take on their investment. Internal funding sources to increase liquidity would include trying to bring off-balance sheet clients back to more traditional bank products and picking up sales activity to bring in new deposits. When asked which of these funding sources INB has used, Donovan says they have used FHLB, who he notes has been a true partner to banks over the years and can be used for both crisis and strategy. They have not, however, used the

...the INB team has noted that there has been a renewed focus on the deposit side of things since the crisis.

Federal Reserve Discount Window in his 22 years with the bank; for INB, it would be a last resort. Funding Sources It is evident from our time with the INB team that they consider the founders and board members of the bank to be one of their most important and stable sources of funding. For the founders, INB and the community-focused banking that it practices is a passion, and they have been there whenever INB has needed to grow. Donovan also points to the depositors as the “primary and most healthy funding source.” That is what was proven out of this crisis, he says, the importance of a strong and diverse set of clients as a bank’s source of funds to make loans and investments. Newton also echoes this, saying that “the best funding source is obviously the community” (Donovan, et al. 1 March). There is also a pragmatic side to this statement, as deposits are usually also one of the cheapest sources of funding, and INB seems intent to use this to their advantage, as deposits make up a higher percentage of total assets than their peers: 89.86% vs. 83.73% (UBPR).

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