Insights from Catalyst

Welcome to Catalyst Corporate's blog, where thought leaders share their insights on news, trends and events. Have a blog idea? Contact the Communications Team

Balance Sheet Management: Safely Walking a Tightrope

March 29, 2021
By Kathy Gensler, Senior Financial Solutions Consultant, Catalyst Strategic Solutions

Credit union management has been challenged to walk a tightrope, especially this past year, focusing simultaneously on member needs and changes to the balance sheet. It required striking a balance – without leaning too far in either direction – between member behavior and asset diversification.

Total balance sheet management is a dedicated responsibility, especially during times of volatility. Two questions are top of mind: 1) Are members saving, spending, or borrowing? 2) Are the assets in cash, term investments or loans? Optimizing the balance sheet while managing interest rate, liquidity and credit risk is much like a balancing act, and it’s important to have a safety net and a long balancing pole to cross this tightrope safely.Balance Sheet Management: Safely Walking a Tightrope

Are members saving, spending, or borrowing?

Well, hindsight is 20-20. Based on year end 2020 NCUA data, member deposits were up nearly 20 percent, while loans increased by only 4.9 percent. Loan-to-share ratio was 73.2 percent, down from 84 percent year end 2019. Consumer spending was down, unemployment benefits were extended, and there were two government stimulus payments – all leading to an influx of deposits.

Are the assets in cash, term investments or loans?

The balancing act continued as surge deposits got deployed and the need for loans decreased. The result was a significant increase in investments, specifically cash, and equivalents in a low-interest rate environment. This subsequently caused a negative impact on interest income. According to the NCUA, the return on average assets for federally insured credit unions was 70 basis points, down from 93 basis points a year ago. An increase in loan and lease loss provisions – together with decreased interest income – negatively impacted net income for the same period. While the need for loans was lower, mortgages and commercial loans increased, making it necessary for many credit unions to consider a hedging strategy to retain the loans to increase income. 

Managing the balance sheet with uncertainties surrounding member behavior, the economy, market conditions and interest rates, also became a balancing act that impacted the credit union industry. The capital safety net declined during 2020 with a net worth ratio of 10.32 percent, a reduction of 1.05 percent from a year ago, according to the NCUA data. Net worth increased 6.8 percent, but assets increased by 17.7 percent. This has heightened management’s focus on their balance sheet strategies, including seeking secondary capital opportunities for NCUA-designated low-income credit unions (LICUs).

The final question remains: how can credit union management walk a tightrope while serving their members? The answer could be an SEC-registered investment advisor (RIA). This solution provides the flexibility and time for management to focus on their members. More specifically, an advisor can offer:

  1. Comprehensive financial management consultancy
  2. In-depth analysis of a credit union’s financial operations
  3. Access to highly-skilled and knowledgeable financial professionals
  4. Specific balance sheet recommendations
  5. Investment portfolio management and trade execution
  6. Economic forecasting, education, training & back-office support
  7. Risk analytics & investment accounting

Additionally, an advisor can assist management with interest rate risk hedging strategies and seeking approval from NCUA to issue secondary capital. An advisor is an extension of your staff and is committed to your success.

Like a long balancing pole, a Catalyst Strategic Solutions Advisor can help you maintain stability while walking the tightrope of 2021 and beyond. For more information, contact us today.