Pub. 11 2020 Issue 3

www.wvbankers.org 16 West Virginia Banker Continued from page 15 Scott Hildenbrand is a Managing Director and Head of Balance Sheet Analysis and Strategy in the Financial Services Group at Piper Sandler. Hildenbrand heads the Balance Sheet Analysis and Strategy Group, working with financial institutions on balance sheet strategy development, which includes interest rate risk management, investment portfolio strategy, retail and wholesale funding management, capital planning, budgeting, and stress testing. Mr. Hildenbrand can be contacted at Scott.Hildenbrand@psc.com . Matthew Forgotson was the Director of Balance Sheet Analysis and Strategy in the Financial Services Group at Piper Sandler. Previously, Forgotson served as a Director in Sandler O’Neill’s Balance Sheet Analysis and Strategy Group since 2018. Prior thereto, Forgotson served as Senior Analyst and Director in Sandler O’Neill’s Equity Research Department covering small and mid-cap banks and thrifts across the United States since 2010. The Final Decision Once the strategies are built, evaluate them side-by-side. Strategy 1 (Delever) delivers slight core net income and EPS accretion, but powerful lift in relative profitability metrics. Strategy 2 (Delever/ Relever) generates more core net income and EPS accretion, but less improvement in relative profitability metrics. Critically, Strategy 1 is capital accretive, while Strategy 2 is capital neutral. Based exclusively on the numbers, management would prefer to execute Strategy 2. However, management understands that in these uncertain times, capi- tal is king. For this reason, management executes Strategy 1. Additional Considerations We have structured this case study to focus on two narrowly tailored strategies, but there is so much more that banks can do right now. Three strategies come to mind straight away: 1. Banks can sell MBS or CMBS into the Federal Reserve’s strong bid. Again, realized gains bolster regulatory capital, though they’re most likely neutral to GAAP capital. Realized gains can also be used to anchor a portfolio repositioning to curtail credit risk, premium risk, and reinvestment risk (i.e., fast paying bonds). 2. Institutions that are participating in the Pay- check Protection Program might view the net income from the program as a “backdoor” capital raise. Banks that are comfortable with their credit and capital profiles might choose to leverage the proceeds. 3. Depositories that are bracing for a decelera- tion in loan demand could pre-invest projected principal cash flows expected, say, over the next year. This strategy would require sourcing short-term wholesale funding, which would put temporary downward pressure on capital ratios. Still, the principal cash flows would be used to pay down the short-term debt, ultimately returning the balance sheet to its original size. Concluding Thoughts The key is to think holistically about your options, as- sessing each strategy’s impact on your institution’s asset-liability, earnings, credit, convexity, capital and liquidity profiles. Make sure that the strategy resonates in a world in which safety and soundness matter so much more than profitability and growth. If so, move forward. If not, revisit your options.  Strategy 1 (Delever) delivers slight core net income and EPS accretion, but powerful lift in relative profitability metrics. Strategy 2 (Delever/Relever) generates more core net income and EPS accretion, but less improvement in relative profitability metrics. Critically, Strategy 1 is capital accretive, while Strategy 2 is capital neutral. Based exclusively on the numbers, management would prefer to execute Strategy 2. However, management understands that in these uncertain times, capital is king.