Pub. 6 2011-2012 Issue 2

www.nebankers.org 20 Extraordinary Service for Extraordinary Members. Jeffrey F. Caughron is an associate partner and portfolio strategist for The Baker Group LP. You may reach him at (800) 937-2257 or jcaughron@ gobaker.com . flow also determine such things as duration and convexity, key measures of price risk for bonds. In a very real sense, financial assets are simply streams of cash flow to be man- aged for optimal reward and acceptable risk. Along those same lines, banks always should remember the role of the investment portfolio as a vehicle for man- aging liquidity. Proper identification of bonds and bond types that provide reasonably consistent and predictable cash flow, as well as securities that are readily sold in the secondary market is critical. The risk/reward relation- ship for securities should be viewed with an eye toward liquidity risk. When purchasing a bond or considering alternatives, portfolio managers should take a hard look at the cash flow uncertainty or optionality as well as the underlying price sensitivity. Stay Sharply Focused on Municipal Credit Bank managers must view the purchase of municipal bonds in the same way they look at loans. Sound credit analysis is critical. This includes pre-purchase as well as ongoing access to available measures of risk and creditwor- thiness. [Note: The Baker Group LP provides clients with thorough portfolio analytics and a reporting system that details credit metrics which are available for municipal bond issues. Among other things, this systemprovides hyperlinks to the original official statement of bonds as well as the most recently issued financial statements.] Portfolio managers should have usable information that gives them comfort that the municipal issuer to whom they are lending money is an acceptable risk, and that they are being adequately compensated in terms of reward or yield. Don’t Reach for Yield Bankers continue to operate in a historically unprec- edented rate environment with excess liquidity and in- creasing margin pressures. This is when bankers can be tempted to reach for yield without adequate regard for the cost in terms of price or liquidity risk. In this kind of environment, there are many types and structures of bonds that show attractive nominal yields, but often they contain greater risk than is desired or acceptable. Be careful to think through the risks of long-maturity callable or step-up structures, for example. Now is when investment officers and portfolio managers should concentrate on high-grade credit and reasonable returns, rather than high nominal yield and unreasonable options risk. Remember that often the highest “stated” yield does not produce the best all-in return. To use a baseball analogy, hit singles and doubles right now. Don’t swing for the fence. Z Q Liability Management — continued Now is when investment officers and portfolio managers should concentrate on high-grade credit and reasonable returns, rather than high nominal yield and unreasonable options risk. ATTENTIVE Nebraska banks are attentive to the needs of the communities they serve. We are here to give you the same attention. Loan Participations Bank Mergers and Acquisitions Succession Planning for Owners Commercial Litigation General Business Representation Regulatory Consultation and Compliance Loan Origination and Workout Loan Default Remedies and Bankruptcy Representation Real Estate Purchase, Sale and Leasing www.woodsaitken.com D E N V E R L I N C O L N OM A H A