Investment Management NCBA School of Banking 2019 Bob Doby, Jr D. J. Consulting, Inc. Investment Management

Investment Management Why do you have an Investment Portfolio? Liquidity Earnings Mainly Liquidity. Earnings need depends on Loan Demand.

Investment Management Balance Sheet Assets – Cash/Loans/Investments/Fixed Assets Liabilities – Deposits/Borrowings/Payables Equity – Equity/Retained Earnings/Reserves Investment Management

Investment Management Assets Cash – Amount on hand depends on need Loans – Usually 60% to 90% of Assets Investments – Usually 10% to 25% of Assets Fixed Assets – Usually 5% to 10% of Assets Investment Management Cash or Liquidity is generally mandated by liquidity policy.

What Size. Depends on each individual financial institution What Size? Depends on each individual financial institution. Portfolio’s are first used for liquidity purposes. Meeting those daily and monthly cash needs of the institution. Also determined by loan and deposit growth. High loan growth generally means a shrinking investment portfolio. Low loan growth generally means a growing portfolio. High deposit growth indicates larger portfolio. Low deposit growth or outflow indicates a smaller portfolio. Investment Portfolio

Investment Portfolio What to invest in? Determined by Investment Policy. Policy should outline all products that can be purchased and by whom. Usually the purchaser is the CEO, CFO or the portfolio manager. Also, it should outline all limits as to the amount of any one investment or product or sector that can be purchased by the portfolio manager. Normal products that you will find in a portfolio are: Treasuries, Agencies, Mortgage- Backs, and Municipals. Investment Portfolio

Investment Portfolio Who does the investing? Generally it depends on the size of the institution. In smaller institutions, the CEO or CFO are generally the managers of the investment portfolio. Once the portfolio gets to around $500 million, it is usually desirable to have a full time manager for the portfolio. Investment Portfolio

Investment Portfolio Sectors/Products Treasuries – 3 month to 30 year maturities- auctioned on a weekly/monthly/quarterly basis-all are bullet bonds-fixed rate structures-safest of all investments-easily priced-lowest yield, easy analytics Agencies – Issued by agencies of the Federal Government-can be 1 year to 15 year maturities- generally fixed rate structures-can be bullets or callable bonds-has direct or implied backing of the Untied States Government-easily priced-little better yield than Treasuries, depending on type the analytics can be easy or hard Mortgage-Backs – Issued by Agencies of the Federal Government and also private issuers- maturities can be from 5 year to 30 years-fixed and floating rate structures-not as easy to price- more yield than Treasuries and Agencies, analytics harder due to the assumptions you have to make. Investment Portfolio

Investment Portfolio Products Municipals – Issued by State and Local Governments-maturities from 1 year to 30 years- usually fixed rate bullet structures-longer maturities can have call features-can be harder to price-can have more credit risk-generally smaller size issued CMO’s – Products that are created using Mortgage-backed securities. Can be very simple and can be very complicated. Yield will depend on structure and average life. Can be created out of Government backed mortgages or Private Label. Private Label Securities – Securities that are not backed by the US Government. These securities are generally done by large security firms and most also have ratings done by a rating agency. These are the one’s that had major issues during the mortgage crisis of 2007 to 2009 (Lair Loans). Investment Portfolio

Economist Predictions Every year the Wall Street Journal surveys top economists as to their view on the future direction of interest rates… Economist Predictions

Economist Predictions An economic forecaster is like a cross-eyed javelin thrower; they do not win many accuracy contests, but they keep the crowd’s attention. ANONYMOUS

Economist Predictions Wall Street Journal 11/24/2017

Key Takeaway Seeking fixed-income outperformance is not about guessing future interest rates.