Pub. 6 2011-2012 Issue 6

March/April 2012 13 Extraordinary Service for Extraordinary Members. Define, measure, and manage the interest rate risk of the balance sheet, then structure the investment portfolio in a manner that will protect the earnings and economic value of the institution. Security Selection – Once the optimal bond type or sector is determined, we turn to the specific security selection process. This step involves close scrutiny of unique charac- teristics of individual bonds. For agencies, it’s largely about the call or step-up features. For municipals, credit analysis is paramount. For mortgage-backed securities, it’s about the loan attributes of the pool that tell us what to expect in terms of prepayment risk. In all cases, it’s about having a clear understanding of the unique risk/reward characteristics of different bonds, and how they compare to alternatives. Cash Flows – Investment decisions also should be driv- en by an awareness of balance sheet liquidity needs and the projected cash flows required to meet those needs. A bond purchase decision should involve an understanding of when principal will be returned to the balance sheet and, if it’s subject to prepay or call risk, the degree of uncertainty sur- rounding that return of principal. We have always believed that stable, predictable cash flow is a necessary requirement for prudent portfolio management. This is a rate environment that requires constant and active management of the balance sheet. Excess liquidity must be prudently deployed and community bankers should use the portfolio as a means of achieving optimal perfor- mance for the bank overall. Define, measure, and manage the interest rate risk of the balance sheet, then structure the investment portfolio in a manner that will protect the earnings and economic value of the institution. Z Since 1979, The Baker Group LP has helped its clients improve decision-making, manage interest rate risk, and maximize investment portfolio performance. For more information, contact Jeff Caughron at The Baker Group at (800) 937-2257 or jcaughron@GoBaker.com . You also may visit The Baker Group at www.GoBaker.com .