One Important Question to Ask About Growing Your Balance Sheet

< Back to the C&I Series 

You’ve heard the saying, “bigger is better.” If a bank has $100 million in assets, then surely, $200 million must be better. 


That may be true – but only if you can answer this important question.




*   *   *   *   *   *   *   *   *   *   *   *   *

When the assets on your balance sheet are growing, the important question you must ask is:


“Is the income statement keeping up?”


Growth in assets is a great thing, but unbalanced growth is not. If capital is not growing in step with assets, your bank could find itself with a downgraded capital rating, an inability to pay dividends to shareholders, or scrambling to add equity, fast.


You could always employ strategies to slow the growth in assets and achieve better equilibrium. Participating with other banks and passing up lending opportunities are two options. But does that sound like a recipe for long-term success? Once business starts flowing to other banks, it’s hard to get back.


Instead of growing lopsidedly or slowing your growth, let’s look at growing assets and income together with different lending strategies that improve return on assets.


In previous articles, we discussed the emphasis many community banks have on commercial real estate (CRE) lending, even though it comes at a disadvantage to earnings. Banks with a focus on commercial real estate lending had an average ROA of .64%, according to the 2012 community banking study by the FDIC. Banks with a focus on commercial & industrial (C&I) lending had a significantly higher average ROA of 1.03%.


Let’s use these averages and look at two banks that grow their assets by 10% from $100 million to $110 million. One bank has a CRE focus, and one has a C&I focus.


CRE Bank


Assets: $100 million --> $110 million = 10% growth
ROA (64 basis point average): $640,000 --> $704,000 = $64,000 profit


C&I Bank


Assets: $100 million --> $110 million = 10% growth
ROA (103 basis point average): $1,030,000 --> $1,133,000 = $103,000 profit


For the same $10 million growth in assets, the C&I-focused bank received 60% higher profits.


Let's take this example even further.


Now, let’s say the C&I bank’s $10 million of new loans were focused exclusively SBA/USDA lending, and 75% of the balance ($7.5 million) was sold on the secondary market. This changes the growth in assets to $102.5 million, but look at what happens to profits. The noninterest income generated from the sale of the guaranteed portion added $750,000.


ROA on $102.5 million (103 basis point average): $1,055,750 + 750,000 = $1,805,750

$1,030,000 --> $1,805,750 = $775,750 profit


Take your pick. For the same 10% growth in assets, your profits can increase $64,000$103,000, or $775,750


I know which one I'd choose. 


If your income statement could use a boost, we’re here to help. We’ll use our expertise in C&I and SBA lending strategies to make sure your capital position remains strong. Reach out to us for more information.