Sector Update

April 13, 2020

Last week started with a tone of optimism in markets and it continued throughout the week. The yield curve steepened by 13 bps and the S&P ended the week up 12.1%, its single best week since 1974. A common theme growing in markets over the past two weeks or so was state and local governments seeking aid from the Federal government. On Friday, the Federal Reserve announced a Municipal Liquidity Facility which will consist of a SPV enabled to purchase eligible notes with maturities of 24 months or less from issuance. The Fed announced other notable programs on Friday as well. I invite you to read our Strategic Insight we published on the matters.

ICBA: Detailing the Community Bank Provisions of the CARES Act

SBA: Coronavirus (COVID-19): Small Business Guidance & Loan Resources

SBA: Paycheck Protection Program

FDIC: The FDIC Announces a 30-Day Grace Period for the Call Report for the First Quarter of 2020

Federal Reserve: Agencies announce changes to the community bank leverage ratio (CBLR)

Federal Reserve: Paycheck Protection Program Lending Facility (PPPLF) Term Sheet

Federal Reserve: PPPLF Frequently Asked Questions

OCC: Revisions to the FFIEC Call Reports and FFIEC 101 for the March 31, 2020, Report Date

OCC: Capital Treatment for Paycheck Protection Program: Interim Final Rule

Treasury: PPP Loans Frequently Asked Questions

Notable news from this past week includes:

• FHFA says they’re not bailing out servicers of MBS, see our Prepay Commentary.

• McDonald’s global same store sales were down 22% in March, domestically they were down 13%.

• Mortgage applications were down 17.9% for the week ending April 3^rd.

• According to a report from the National Multifamily Housing Council, nearly 33% of American renters failed to pay rent in the first week of April.

• OPEC+ cuts output by 9.7mm barrels a day; however, demand is estimated to be down nearly 20mm barrels a day.

The general mood in markets this morning seems one of caution, perhaps cautious optimism. Officials across the world are weighing how and when to gradually start to reopen economies. The obvious downside is that easing off social distancing measures will certainly lead to more cases of COVID-19 though. For example, some travel restrictions were relaxed in Wuhan last week and in a short time increased cases were announced. This week will surely feature more dour economic news, but so much of it is already expected that it’s unlikely, by itself, to move markets. Stimulus checks, announced in the CARES Act on March 27^th (which feels like an eternity ago), are reported to begin this week by the IRS. So far today, U.S. equity indices are down between 1-2% and Treasury yields are virtually flat from Thursday’s close.

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Tuesday (4/14): Banks: Balance Sheet Management and Your Loan Portfolio (1 CPE)

Thursday (4/16): Credit Unions: Loan Participation Market Overview (1 CPE)

Tuesday (4/21): Banks: Balance Sheet Management in the Current Markets (2 CPE)

Thursday (4/23): Credit Unions: Balance Sheet Management in the Current Markets (1 CPE)

Food for Thought: Prepay Speeds Did What?

• Prepay speeds reported in April (for activity in March), were markedly higher than the previous month.
• How could prepayments have increased given all that is going on? Basically, it boils down to timing.
• I think there is a good case to be made for elevated prepays reported next month as well.
• Hard for me to imagine them not slowing down in June though, time will tell.

What We’re Reading

Market Today | Daily

Weekly Recap | Weekly, Friday

Brokered Deposit Rate Indications | Weekly, Monday

Investment Alternatives Matrix | Weekly, Tuesday

MBS Prepay Commentary (April) | Monthly, 5^th business day

SBA Prepay Commentary (March) | Monthly, 10^th business day

Strategic Insight: Fed Announces $2.3 Trillion of Additional Support to the Economy

This Strategic Insight looks at additional measures the Federal Reserve took on April 9^th and describes them while providing a takeaway for how we think they will affect financial institutions.

Strategic Insight: Potential for Selling Held-to-Maturity Securities for Liquidity Purposes

Based on this guidance from the FDIC, we believe financial institutions that have been negatively impacted by a reduction of liquidity due to COVID-19 may be able to sell securities classified as HTM without tainting a portfolio or jeopardizing the ability to use this classification in the future. However, each bank should check with its financial statement auditor for further clarification.

Strategic Insight: Defending Your Bottom Line – Phase II: Wholesale Borrowings and Leverage

In terms of depositories defending their bottom lines, Phase I of deploying excess cash seems to be winding down. This Strategic Insight addresses different ways to fund leverages (traditional and otherwise) and uses of those proceeds. Notably, the Paycheck Protection Program (PPP) to be operated under the SBA 7(a) umbrella.

VS Interest Rate Products: Hedging Short-Term or Floating Rate Funding

Here is a presentation explaining a short-term funding hedge strategy. The current dislocation in LIBOR results in a negative funding cost for the first 3-month period (assuming we use 3-month FHLB advances as the borrowing source). Those executing this strategy should expect their funding cost to approximate the fixed rate on the swap plus/minus the normal spread between 3-month LIBOR and their borrowing source. Normal spreads can be seen in the presentation. The presentation also includes information on the accounting for this transaction. Of course, we provide all the accounting support.

Vining Sparks: Coronavirus Chartbooks

PowerPoint: Coronavirus Chartbook (PWPT)  

PDF/Mobile: Coronavirus Chartbook (PDF/Mobile)

Sector Updates