Liability management is one of the most critical aspects of successfully operating a community bank. All businesses in order to be successful must be keenly aware of not only efforts to build assets, but just as importantly, the liabilities held by a corporation. The definitional concepts of assets and liabilities are somewhat unique in the banking industry, in that liabilities are considered to be the obligations a bank has to its depositors and a loan made to another entity is deemed to be an asset of the financial institution.
A community bank’s ability to make loans is a crucial component of the organization’s profitability strategy, so it is imperative that a bank establishes monetary funding sources for its loans that are efficient and cost effective. There are a number of avenues in which a community bank can develop financial products to sell in order to raise money for the purpose of funding loan programs.
Retail – Consumer Checking, Savings, Money Markets, CD’s
Commercial – Business Checking, Money Markets, CD’s
Wholesale - Other banks, mortgage brokers deposits, CD’s, Rate Board
The Importance of Asset & Liability Management (ALM)
In order for a community bank to develop a profitable loan portfolio, it’s important to keep in mind that lending activities are only a piece of the success puzzle. Because the interest earned on loans is limited and dictated largely by regulation and the competitive marketplace, there must be an adequate margin between a bank’s cost of its source funding and the loan income generated by borrowers.
The highly knowledgeable partners at Artisan Advisors have decades of experience at the executive level of community banks. They have firsthand expertise in the area of asset and liability management and can help banks develop an ALM program that is both cost effective and profitable.
Here are some of the services that Artisan Advisors offers to our clients with regard to asset and liability management.
The purpose of an ALM policy is to establish operating guidelines with regard to a bank’s asset and liability practices. Artisan Advisors can review a community bank’s ALM policy to ensure that regulations are being met and that the policy’s provisions in light of the bank’s long and short term goals are appropriate.
Utilizing each bank’s unique data, we can evaluate the overall performance of the ALM program with regard to the margins that have been achieved. Both the cost of source funding as well as the income derived from loans will be analyzed to determine if maximum outcomes are occurring. Artisan Advisors can also help our clients achieve the proper funding source mix in order to gain optimal cost efficiencies, while minimizing risk.
The partners at Artisan Advisors have extensive experience in designing and implementing a wide range of competitive financial products that community banks can market to their customers. Providing such offerings not only delivers value to the bank’s customer, but it also protects the financial institution from unexpected funding losses. Focusing on features such as design, penalty policies and other considerations, community banks can provide attractive products to customers, while at the same time discouraging them from removing their money from the bank prematurely.
The banking experts at Artisan Advisors can create tailor fit asset and liability management practices to successfully meet each community bank’s unique business objectives. No matter what goals our customers are trying to achieve, we can help them maximize margins and minimize risk.
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