Does banking have too many balance sheet managers?

When you are the CEO of a very large financial institution, managing the balance sheet of the bank probably occupies a very large amount of your time. You may be four to seven levels from customer contact personnel, except for possibly the very large customers.

But if you are the CEO of a community bank, thrift, or credit union, one would think to spend much more time with customers, brainstorming with your senior management team on how to get more customers, or making calls on customers. Based on my experiences with community bank executives, this is generally true: Smaller bank CEO’s spend more time with customers than larger ones.

I have found there are two types of managers within community banks: customer managers, and balance sheet managers. Customer managers typically rise to the top through customer-contact lines of business, such as commercial lending or trust. Balance sheet managers typically climb the corporate ladder through operational areas, such as finance or operations. A CEO, in my opinion, needs to have both skills. A community bank CEO should probably focus more on customer management, without ignoring balance sheet management (see illustration).

I am not so sure many share my opinion. When I participate in strategic planning sessions, we spend a lot of time discussing balance sheet management issues. We give lip service to the customer aspect, and then move on to such issues as, “we have $50 million in CDs coming due in the next three months and have to develop a strategy to replace that funding.” News flash: If you don’t create a long-term strategy on how to acquire or deepen relationships with customers that tend to bring deposits, you will remain in the less-than-virtuous cycle of creating the next rate promotion to keep and grow funding.

This attitude perpetuates itself in the personnel complement of the bank. I was recently in a strategic planning retreat where the CEO said that only five percent of his workforce has responsibilities for relationship management and business development. The other 95% were operations personnel and balance sheet managers. I understand that operations personnel occasionally take care of customers, but I would not characterize customer relationships as their primary responsibility. The quote below by management guru Ken Blanchard is truer in banking than, say, in Wal-Mart:

"Profit is the applause you get for taking care of your customers and creating a motivating environment for your people." – Ken Blanchard

Balance sheet management is very important to manage many types of risks inherent in banking. A good example is a client that hired a former construction foreman that eventually became their top producing lender. Not surprisingly, the bank became overweight in construction lending and is experiencing difficulties in today’s economy. So I am not suggesting ignoring balance sheet management. But your strategy has to identify the types of customers you want to serve better than competitors, and structure your bank, including your personnel, to pursue those customers passionately.

While doing so, you must recognize and hedge against risk. Perhaps look to customer segments that are counter-cyclical in terms of when they flounder in economic downturns. Or perhaps you can use participations, the investment portfolio, or some other means to hedge against exposure to one industry segment. Another strategy would be to get top-notch personnel that specialize in different industry groups. Whatever the strategy, I think you should consider that customer management should be front and center. Focusing on balance sheet management could be the proverbial tail wagging the dog.

- Jeff