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Community Bankers Association of Illinois
Bank
notes
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.
n
THE BAKER GROUP is a preferred service provider of
Community BancService Corporation, Inc. (CBSC). Murray
can be contacted at 800-937-2257 or
.
