A sound investment policy must be tailored to meet the individual characteristics of each bank. In developing a policy, some basic factors that should be considered are economic environment, expected and possible deposit movement, loan demand, management strengths and weaknesses, liquidity, earnings, and capital position. The investment policy must provide the flexibility to accommodate changing market conditions. A policy that is too vague and general will serve no purpose; on the other hand, a policy that is too specific and restrictive may have a negative effect on the financial performance of the bank.

Basic Objectives of an Investment Policy

A written investment policy should integrate the bank's investment activity with its other activities, thus, consideration must be given to cash position, borrowed funds, loan demand and commitments, the nature and stability of deposits, and other liquidity factors, both short and long term. Following are some of the primary objectives of an investment policy.

1. To provide an investment media for funds which represent a minimum of risk.

2. To provide the liquidity necessary to meet day to day, cyclical and long-term needs and requirements.

3. To provide an investment media for funds which are not currently needed to fulfill loan demand.

4. To provide a flow of dependable earnings.

The investment policy should establish responsibility for administration of the investment portfolio, list acceptable types of investments, specify approximate quality and quantity, giving consideration to legal requirements, liquidity needs, and bank's tax status. Some of the generally accepted guidelines to be used in formation of an investment policy are as follows:

1. A portion of the account should be designated as secondary reserves and invested in highly liquid securities that can be quickly converted to cash with minimum risk of market loss. These investments usually consist of U.S. Treasury obligations, federal agencies, and tax-exempt, federally-guaranteed project notes.

2. The remainder of the investment account may be placed in investment securities of longer maturity. These investments usually consist of state and municipal tax-exempt bonds and quality corporate issues.

3. Quality of the municipal account should be of prime concern. A program for obtaining and evaluating current information on securities in the portfolio should be an integral part of bank's investment policy, and should include requirements for credit reviews and updates on all non-rated issues, municipal obligations with a credit rating that has declined, revenue, and other debt obligations with limited or no marketability.

4. A reasonable distribution of maturities should be established and tailored to the bank's liquidity requirements. A maximum allowable maturity should also be defined for each type of investment.

5. The investment policy should include guidelines on the quality and quantity of each type of security to be held.

6. Diversification of the portfolio should be sought to avoid concentrations by issuer, type of investment, and locale.

7. Sufficient analytical data must be provided for review, on a regular basis, to allow the Board and senior management to make an informed judgment of the investment policy s effectiveness.

8. The investment policy should also designate the officer or officers to whom the Board delegates responsibility for day-to-day management of the portfolio, and those officers to whom authority has been granted for purchasing and selling of securities.

Signed:	Richard J. Francis, Commissioner
	Gifford Knudsen, Director, Bank & Trust Division
Dated:	July 10, 1980