Pub. 5 2014 Issue 2

www.wvbankers.org 10 West Virginia Banker markets move. Savvy portfolio managers will take advantage of the changing relationships and do swaps that sell what is rich and buy what is cheap compared to historical averages. As always, each bank will have a different sector allocation that is optimal for them given their liquidity and cash flow needs, tax position, etc. Here again, a big-picture view of the balance sheet is necessary. Muni Tax-Loss Swap: Banks should always be looking at their tax position and working with their accountants to optimize their after-tax performance. Each bank has its own unique set of circumstances, but generally the Tax Code allows for a loss on the sale of securities to be deducted for tax purposes. Moreover, for a taxable bank, the interest income from reinvestment is allowed to be earned tax free if the proceeds are used to purchase munic- ipals. The bottom line is that the bank can recoup a tax-deduct- ible loss with tax-free income. This strategy in particular is best executed at the turn of the year in order to have an entire twelve months to recover any loss. Cash Flow/Liquidity Management Swap: To a large extent, investment portfolio management is simply the management of cash flows. Just as we look at rate sensitivity for the overall balance sheet, we must also take a macro view of the portfo- lio and pay close attention to the positioning of cash flows for reinvestment. This involves creating and maintaining a schedule of maturities, prepayments, and other sources of principal return that will optimize the risk and reward of reinvestment in future months and years, regardless of the direction of interest rates. Cash flows for many securities, callable bonds, and MBS in par- ticular, are moving targets because of the options risk. This makes it critical that the profile be monitored and measured for changes in rates, and adjusted with bond swaps when necessary. The Baker Group has always maintained that active portfolio management has distinct advantages if it is done properly. We work with clients to develop a sound decision-making process and well-defined goals as well as reporting systems that allow for pre-trade analysis or scenario simulations. The tools and process- es for making better decisions and achieving optimal performance are available, and now is the time to take advantage of them. Since 1979, we’ve helped our clients improve decision-making, manage interest rate risk, and maximize investment portfolio performance. Our proven approach of total resource integration utilizing software and products developed by Baker’s Software Solutions* — combined with our solid investment experience and advice — makes us the investment firm of choice for many community financial institutions. For more information, contact Jeff Caughron at The Baker Group: 800-937-2257, www.GoBaker.com, or email: jcaughron@GoBaker.com. *The Baker Group LP is the sole au- thorized distributor for the products and services developed and provided by The Baker Group Software Solutions, Inc. n  Strategic Bond Swaps — continued from page 8