Pub. 4 2015 Issue 4

June 2015 27 l e a d i n g a d v o c a t e f o r t h e b a n k i n g i n d u s t r y i n k a n s a s August 25 ‐ 26, 2015 Topeka ‐ KBA O ffi ce 610 SW Corporate View SUPERVISOR Educa � onal Resources 785 ‐ 232 ‐ 3444 www.ksbankers.com Presented by: Honey Shelton, Interac � on Training One of KBA’s most popular instructors If your bank strives to keep supervisors on the compe �� ve edge, then this two day program is exactly what you are looking for! Come prepared to work and learn, share and listen and go back eager to implement and make a di ff erence. Limited to 30 par Ɵ cipants (up two per bank) Plan the Work, Work the Plan To be sure, there are always multiple, potential strategies, and there is never a guarantee that one’s chosen strategy will produce the most successful outcome. Conversely, not having a strategy will go a long way towards locking in unsuccessful outcomes; trying to outguess the market is not an effective strategy. For a community bank, the development and implementation of a successful, workable investment strategy involves more than just accumulating the highest yields available. While income generation is an important element to consider, a bank portfolio needs to do more than provide coupons to clip. A portfolio’s risk profile, its potential depreciation, and its cash flow characteristics are some of the other considerations, besides yield, that go into making strategic plans. Managing a portfolio whose risk profile meshes well with other major balance sheet elements, like loans and deposits, is an ongoing process that precludes one from just waiting on the sidelines for rates to rise. The creation and maintenance of a stable, predictable cash flow stream can be a community bank’s best defense against rising rates, and the right cash flow distribution doesn’t just happen all by itself, it has to be built and managed. When carried out effectively, a strategy that spreads cash flows throughout future periods is one that doesn’t require speculation, but it does require a bit of planning. A manager that utilizes the various security selection alternatives at his or her disposal in order to foster those stable, predictable cash flows is one that is ready for any interest rate environment. If rates begin to rise, the liquidity elements are available to provide transactional ammunition with which to participate in a higher rate environment. If rates don’t rise, longer term cash flows deployed in higher yielding elements like tax-free munis help maintain yield during rate troughs. If something happens in-between, amortizing elements like the right kind of mortgage-backed securities provides that steady, monthly drip of principal and interest while avoiding the damage to current income that characterizes hyper-liquidity. Investment decisions, like pretty much all decisions, are made in a setting of incomplete information. The missing information is usually unknowable because it is derived from events that have yet to occur. That information will never be available. If it were, the appropriate course of action would be obvious and no decision would be necessary. Until that happens, having a well-reasoned, prudent, and methodical plan of action that is flexible enough to adapt to changing conditions is your best bet. Actually, that’s not a bet at all. That’s a strategy. Lester F. Murray, Associate Partner of The Baker Group LP, came to the Baker Group in 1986 following his work with the OCC as an assistant National Bank Examiner. His focus is on developing community bank portfolio and interest rate risk management strategies. Contact: 800-937-2257, lester@GoBaker.com.