Pub. 4 2015 Issue 1

The CommunityBanker 10 t seems a popular parlor game is in session amongst community bankers. The question at hand, and it’s a big one, is “when do you think the Fed is going to start raising rates?” Of course, it’s a subject that never really escapes the mind of a prudent manager. What’s changed this year is that the Fed has changed its tenor via press releases, statements and speeches. Anywhere from sec- ond quarter 2015 to second quarter 2016 is the market’s current guess. The asset/liability posture of your community bank has a lot to do with determining the next best move for your community bank’s investment portfolio. I am familiar with a number of risk-averse investment managers who stay away from amortizing securities, because of the long period between now and the final maturity. I also know a roughly equal number of risk-averse investment man- agers who purchase them specifically for the cash flow. Regardless, it’s telling that nearly 40 percent of all com- munity bank investments are fixed-rate mortgage securities. As cash flow and price volatility may well be tested later in 2015, perhaps it’s time to recall that the two are inversely re- lated. The sooner the principal is returned, the less the market value will fluctuate. But, as we shall see, this is not a linear correlation. Traditional bond math A typical investment with community banks is a callable I By Jim Reber Roll or Flow? Amortizing bonds require some analysis