Business — Banking — Management — Marketing & Sales


Category: Risk Management in Banking


A. Introduction

The purpose of this policy is to provide the basis for the bank to responsibly manage the investments in accordance with the philosophy and objectives stated below. Unless stated otherwise, the terms “investment” and “investment portfolio” will refer to both cash management activities and longer-term investment securities. The term “capital “ will refer to the sum of Undivided Earnings, Paid in Capital, Regular Reserve, and the Allowance for Loan Losses.

B. Investment Philosophy

The bank recognizes a fiduciary responsibility to customers to invest all funds prudently and in accordance with ethical and prevailing legal standards. It recognizes that the investment portfolio must complement the loan portfolio and together they must be matched with liabilities. In addition, the policy will support the overall business and asset/liability strategies of the institution.

Certain general tenets apply to the investment portfolio. Safety of assets is of primary concern. In all cases, only high quality investments will be purchased. The investment portfolio should provide adequate, but not excessive liquidity in meeting member demand for funds. Reasonable portfolio diversification should be pursued to ensure that the bank does not have excessive concentration of individual securities, security types or security characteristics. The investment portfolio will be managed on a “buy and hold” basis. However, periodic sales of investment securities are permissible to meet operational cash needs or to restructure the portfolio mix in accordance with changes in investment strategy. In all cases, investments must meet all criteria stated in the Federal Law, the Rules and Regulations of the Regulators, and all requirements of our bonding company. Investment performance in all classifications will be monitored on a frequent and regular basis to ensure that objectives are attained and guidelines adhered to.

C. Investment Authority

Authority for investments is the responsibility of the Board Directors. The Board shall designate the Chief Executive Officer and the Chief Financial Officer to act on its behalf and in accordance with this policy. The Chief Financial Officer, in conjunction with wither the Controller or the Financial Analysis Manager, shall oversee the day-to-day operations of the investment portfolio and have specific investment and transaction execution authority. Quarterly, the activity for safety and sound the Chief Executive Officer, Chief Financial Officer and the Financial Consultants will review the past quarter’s investment activity for safety and soundness.

D. Investment Objectives and Guidelines

Firm investments shall be managed at two levels: cash management needs and longer-term investment activities. In all cases, safety of funds shall take precedence over yield and its attendant risks, and the only financial instruments which may be purchased are those which in the opinion of the Chief Financial Officer pose no significant credit risk. All investment activity is to be guided by the criteria specified in this policy.

1. The funds of the bank can be invested in the following types of instruments with qualifications as provided:

a. United States Treasury obligations will have a maximum maturity of three years.

b. United States Agency Securities (excluding MBS) shall be limited to a maximum maturity of three years.

c. Mortgage Backed Securities issues by or fully guaranteed as to principal and interest by the Federal National Mortgage Association, Government National Mortgage Association, or the Federal Home Loan Mortgage Corporation.

These investments will primarily be one year ARMs and five year balloons, but three year ARMs and seven year balloons may be purchased. Individual issues shall not exceed $50 million in value at the time of purchase.

d. Private Issue Mortgage Back Securities. Before authorizing a purchase of this type, the Chief Financial Officer shall review a prospectus to determine whether the investment is permissible. Total private issue Mortgage Related Securities purchased shall not exceed $50 million. The minimum credit rating of these securities at the time of purchase must be AA or equivalent.

Individual securities shall not exceed $10 million in value at the time of purchase.

e. Repurchase and Reverse Repurchase Agreements, but only with a Federally Insured Bank on the approved bank list, with both parties acting in the capacity of principal. Maturities will be no longer than 180 days and the securities will be delivered to a third-party safekeeping agent.

f. Fed Funds sold shall be conducted only with approved banks. Total Fed Funds sold to a single institution shall not exceed $50 million. Term Fed Funds shall not exceed one year in maturity.

g. Certificates of Deposit issued only by approved banks with a maximum maturities not to exceed one (1) year. Total certificates deposited in a single institution shall not exceed $50 million.

h. Bankers’Acceptances issues only by approved banks. Total Bankers’ Acceptances purchased from a single issuing institution shall not exceed $50 million.

i. Yankeedollar or Eurodollar deposits only in approved banks. Total Yankeedollar or Eurodollar deposits in a single institution shall not exceed $50 million.

j. Money Market mutual funds that invest in CDs, Repurchase Agreements, Banker’s Acceptances, Agency Notes, etc., and that which conform to Federal rules and regulations. Mortgage Backed Securities mutual funds that invest in agency and private issue MBS. The objective of the MBS fund must be current income, capital preservation, and minimal fund price volatility. Investments in the money market mutual fund will be limited to $100 million on and investments in the MBS mutual fund will be limited to $25 million.

Deliverable securities purchased will be delivered (either physically or via the Federal Reserve Bank wire system) simultaneously with the release of cash. Such delivery will be made to a third party for safekeeping, whether to a custodian or to a trust account maintained. At a minimum, the contracted safekeeping agent or trustee will provide written confirmation of each transaction to us and a monthly listing of all securities in its account.

The Chief Financial Officer shall maintain an approved list(s) of banks and other financial institutions with which the bank may conduct investment transactions. The list may include several of the largest domestic banks and U.S. domiciled subsidiaries of foreign institutions which are federally insured and carry a minimum credit rating of “B/C” by Keefe, Bruyette and Woods. The bank will minimize the risk associated with executing securities transactions by limiting the securities brokers/dealers with which it does business to those who are primary dealers recognized and approved by the Federal Reserve System. The Chief Financial Officer will make additions/deletions from the list(s) as appropriate.

2. Cash Management

a. The objective of the firm’s cash management policy is to provide sufficient liquidity each day to meet operating cash needs, member demand for funds, and minimum balance requirements for the Federal Reserve Account.

b. Cash management funds shall be maintained to meet the withdrawal and lending needs of the customers. The amount of funds will be continually evaluated depending upon lending trends and withdrawal experience, and other external factors deemed appropriate.

c. The Chief Financial Officer, Financial Analysis Manger, or Controller, or Accounting Supervisor shall execute these cash management activities and the Chief Financial Officer shall review these transactions.

3. Investment Portfolio

The management objective of the firm’s Investment Portfolio is to provide maximum return within the bounds of safety of principal and interest, liquidity, and asset liability management demand. Each specific investment decision will be evaluated with respect to such issues as expected return, credit risk, liquidity, effect on the investment portfolio, impact on asset/liability needs, and proper safekeeping. The Chief Financial Officer, Controller, or Financial Analysis manager will execute investment portfolio transactions.

4. Prohibited Activities

The following activities are prohibited:

a. Cash forward agreements to buy when the delivery date is in excess of ninety (90) days from the trade date.

b. Standby commitments to purchase or sell a security at a future date whereby the buyer is required to accept delivery of the security at the option of the seller.

c. Adjusted to trading, meaning any method or transaction used to defer a loss whereby the bank sells a security to a vendor at a price above its current market price and simultaneously purchases or commits to purchase from that vendor another security above its current market price.

d. Short sales of securities not owned by the bank.

e. Futures trading.

E. Maturity Structure

The maturity structure of the investment portfolio will be managed in accordance with asset liability management needs, market conditions, and the objectives of this Policy Statement. It is the responsibility of the Chief Financial Officer to constantly monitor the maturity structure of the investment portfolio and implement modifications in the average maturity and makeup of the portfolio. These modifications will be based on Asset/Liability Management concerns (i.e., price risk, liquidity risk, reinvestment risk) and changing market conditions.

F. FASB 115 Compliance

In order to comply with the FASB 115, the bank will classify its investments as Trading, Held-to-Maturity, and Available-for-Sale. All Fed Funds and mutual fund accounts will be classified as Trading Accounts. All balloon MBS securities, FHLB stock, and other fixed rate investments with a maturity of greater than one year at the time of purchase will be classified as Held-to-Maturity.

The remainder of the portfolio will be classified as Held-to-Maturity. The bank has the positive intent and ability to hold these to maturity. These securities will not be sold in response to changes in market interest rates. The bank normally has $20 million in Fed Funds and has a line of credit with the FHLB of over $50 million. Given our asset size, $200 million of instantly accessible cash is more than adequate liquidity for any possible scenario.

G. Sovereign and Exchange Rate Risk

The bank will not invest in any foreign banking institutions or securities denominated in currencies other that U.S. Dollar and therefore will not incur any Sovereign or Exchange Rate Risk.

H. Modifications to Policy

The Chief Financial Officer is responsible for recommending changes to this policy. Approved by the Board of Directors

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