Banking Money: How banks invest to strengthen their investment portfolio.

• Author: Barbour, Tracy

Alaska banks employ a variety of approaches to build their own investment portfolio and maintain a healthy balance sheet. While their strategies and tactics may differ, their primary objective is the same: to diversify their investments, minimize risk, and generate income.

Historically, financial regulators limited the types of investments that banks can pursue because they are essentially investing depositors' funds. This helps to reduce risk and minimize the chance that banks are gambling away deposits on hedge funds or other higher-risk investments. Today many banks focus on fixed-income investments like government and corporate bonds, certificates of deposit. and money market funds to earn a steady stream of revenue with less risk than stocks. However, regulatory restrictions have been loosening over the years to allow financial institutions to broaden their investments options.

For financial institutions, the investment portfolio represents an important asset for their operation. At most banks, the investment portfolio serves as a secondary source of both earnings and liquidity. And at some banks, it's a primary generator of investment earnings.

Maintaining a Healthy Balance Sheet

Having the right assortment of fixed income and other investments helps banks maintain a healthy balance sheet, which is the financial statement that shows their assets, liabilities, and capital. A bank's balance sheet differs considerably from that of a typical company. It often shows assets such as loans, securities, and a small percentage of cash, with liabilities being deposits and borrowings. However, the typical balance sheet might include assets like cash, accounts receivable, inventory, and property/equipment, with liabilities being accounts payable, accrued expenses, and loans.

The difference in balance sheets, of course, reflects how banks operate compared to businesses in other industries. A bank generates profits from managing the spread between deposits paid to consumers and the rate it receives from their loans. Banks also earn revenue from fees they charge for their products and services, which include wealth management advice, checking account fees, overdraft fees, ATM fees, interest, and fees on credit cards. On the other hand, a nonfinancial company produces income by selling goods or services to another business or other customers.

Northrim Bank's Balance Sheet and Investing

Northrim Bank has more than 400 employees, branches from Fairbanks to Southeast, and more than $1.6 billion in assets. Northrim's balance sheet primarily lists loans and investments on the assets side and customer deposits as liabilities, according to CFO Jed Ballard. The loan portfolio has a relatively higher level of risk; therefore the bank uses its investment portfolio to mitigate and diversify that risk. 'We have just under $300...