Balance Sheet Management Styles

The task of balance sheet management involves, well…balance.  You must have the right type and amount of earning assets to provide as much income as possible with enough assets that are safe to avoid losses and also keep the regulators happy, while keeping enough liquidity to take handle operational needs and take advantage of new earning asset opportunities.  This has to be accomplished while you have enough of your assets in items to run your business like buildings, computers, and equipment, while keeping as many assets as possible as earning assets. Successful execution is not unlike the tightrope walker across Niagara Falls.

 The balancing act can cause even the best CFO to go crazy at times.  It can also be maddening since different stakeholders all have different goals on how your balance sheet should look.  The head of investments would like a large emphasis in investments.  A chief loan officer wants a well-managed loan portfolio and enough liquidity to seize new opportunities.  The personal loan manager may measure success by how many people they can give loans to without much thought of the overall rate.  The head of facilities wants a large devotion of assets to buildings and equipment.  Your customers want the highest rates on their deposits and the lowest rates on their loans.  All these goals are also different from how your regulators want your balance sheet to look like.  Many times their position is one that has minimal risk, according to their definition, while making sure a plethora of their rules are followed.

 In my position, I see a lot of balance sheets of different credit unions.  It is interesting to see such variation in managing them.  Each management strategy has different consequences and results.

 Some institution are run by Linus Liquidity.  Keeping cash and short term assets that can be turned to cash quickly are the ultimate goals in managing the sheet.  Even when prime earning opportunities avail themselves, concern comes over the CFO in how much liquidity will be eaten up with the new loan.  This will typically result in low risk, but also low earnings and ROA.  Great improvement here can come with using some of that equity to add some good earning assets.  The good earnings will ultimately increase liquid assets with earnings.

 I have seen those CUs managed by Gus Gunslinger.  These guys will take advantage of every high earnings opportunity possible.  Loan growth can shoot off like a rocket.  Earnings also rise to stratospheric heights, until, the liquidity runs out.  Then, the growth plateaus and earnings tend to flatline as new loans cannot be added.  A possible cure here is to sell off loans, either all or parts of them, to free up more liquidity.  This can be accomplished through well-managed participations or selling off guaranteed portion of any government guaranteed loan.  Midwest Business can assist you with either of these actions.


Some institutions are run by Seth Security.  This gent believes that a well-managed security portfolio is the sacred key to success.  Many have run their institutions quite successfully using this strategy during a decreasing rate environment when the value of the securities increase as the interest rates decrease.  But Seth’s strength may also become his weakness when the rate environment changes and rises.  Then the value of the portfolio drops and must be reported if these are all available for sale securities.  ROA could increase with the sale of some of the securities and addition of prudent loans. 

 The institutions that will survive and thrive over the long haul are those that are run by a Barbara Balance. Her approach is to provide a mixed balance sheet that allows the CU to take advantage of adding earning assets in a smart way, while maintaining liquidity.  The balance sheet is balanced in terms of duration of assets and liabilities.  All stakeholders are satisfied with no one group overly ecstatic. 

 Midwest Business can be the missing piece to your balance sheet management challenges.  For those institutions that are swimming in a mass of cash, we have opportunities to put some of that to work with well underwritten and managed loan participations that may help diversify your lending by geography and industry.  Solid earnings are required to keep your institution in a position of serving your members for the future or you will become a target for a merger with a higher-earning asset institution. 

 For some of you on the other end of the scale with challenges with liquidity, MWBS can help free up some of that by selling off loans with participation lending or into the secondary market that takes government guaranteed loans and long term farm land loans.  These CUs have tasted success of a high performing institution and understand how that allows for a greater reach of services to be provided for their members.  We can help that institution continue to grow.