UNITED STATES OF AMERICA
BEFORE THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE
SYSTEM
WASHINGTON, D.C.
AND
STATE OF FLORIDA
DEPARTMENT OF BANKING AND FINANCE
DIVISION OF BANKING
TALLAHASSEE, FLORIDA
Written Agreement by and among
SOUTHERN SECURITY BANK
Hollywood, Florida
FEDERAL R)SERVE BADocket No. 98-021-WA/XX-XX
Atlanta, Georgia
STATE COMPTROLLER AND BANKING
COMMISSIONER OF THE STATE
OF FLORIDA
Tallahassee, Florida
WHEREAS, in recognition of their common goal to restore and maintain the
financial soundness of the Southern Security Bank, Hollywood, Florida (the
"Bank"), a State chartered bank that is a member of the Federal Reserve System,
the Bank, the Federal Reserve Bank of Atlanta (the "Reserve Bank") and the State
Comptroller and Banking Commissioner of the State of Florida (the "Comptroller")
have mutually agreed to enter into this Written Agreement (the "Agreement"),
which supersedes the Written Agreement, dated March 17, 1992;
WHEREAS, this Agreement is being executed in accordance with the Rules
Regarding Delegation of Authority of the Board of Governors of the Federal
Reserve System (the "Board of Governors"), specifically 12 C.F.R. 265.11(a)(15),
and the Reserve Bank has received the prior approval of the Director of the
Division of Banking Supervision and Regulation (the "Director") and the General
Counsel of the Board of Governors to enter into this Agreement with the Bank;
and
WHEREAS, on October 28, 1998, the board of directors of the Bank, at a duly
constituted meeting adopted a resolution authorizing and directing Chairman
Xxxxxx X. Xxxxxx to enter into this Agreement on behalf of the Bank and
consented to compliance by the Bank and its institution-affiliated parties, as
defined by section 3(u) of the Federal Deposit Insurance Act, as amended (12
U.S.C. 1813(u)) (the "FDI Act"), with each and every provision of this
Agreement.
NOW, THEREFORE, before the taking of any testimony or adjudication of or
finding on any issue of fact or law herein, and without this Agreement
constituting an admission of any allegation made or implied by the Board of
Governors or the Comptroller, the Bank, the Reserve Bank, and the Comptroller
agree as follows:
6. Management Review
(a) Within 30 days of this Agreement, the Bank's board of directors shall engage
an outside consultant, acceptable to the Reserve Bank and the Comptroller, to
conduct an independent review of the functions and performance of the executive
officers of the Bank and prepare a written report of findings and
recommendations to the Bank's board of directors. The review shall focus on an
assessment of the duties performed by each executive officer and the ability of
each officer to perform competently his or her assigned duties. The primary
purpose of this review shall be to aid in the development of a management
structure that is suitable to the Bank's needs and is adequately staffed by
qualified and trained personnel. At a minimum, the qualifications of management
shall be assessed for its ability to (1) restore and maintain all aspects of the
Bank to a safe and sound condition, and (2) comply with the requirements of this
Agreement.
(b) Within 30 Days of the Bank's receipt of the consultant's written report of
findings and recommendations required by paragraph 1(a) hereof, the Bank shall
submit a written management plan to the Reserve Bank and the Comptroller
describing specific actions that the board of directors proposes to take in
order to strengthen Bank management and to improve the board of directors'
supervision over the Bank's officers. The management plan shall fully address
the consultant's findings and recommendations and include written detailed
descriptions of the responsibilities of each executive officer of the Bank,
including reporting lines of authority and the responsibilities of subordinates.
A copy of the consultant's written report shall also be forwarded to the Reserve
Bank and the Comptroller.
1. Dividends and Management Fees
(a) The Bank shall not declare or pay any dividends without the prior written
approval of the Reserve Bank, the Comptroller, and the Director.
(b) The Bank shall not pay to its parent bank holding company, Southern Security
Corporation, Hollywood, Florida, any fee or fees that represent service or
management fees of any nature without the prior written approval of the Reserve
Bank and the Comptroller. Any request for prior approval pursuant to this
paragraph shall be accompanied by documentation adequate to provide the Reserve
Bank and the Comptroller with the details of each fee proposed to be paid by the
Bank and a description of the benefits proposed to be derived by the payment of
the fee, the type of services to be rendered, and the identity of the person or
persons who will supply the services or advice covered by the fee.
2. Capital Adequacy
(a) Within 60 days of this Agreement, the Bank shall submit to the Reserve Bank
and the Comptroller an acceptable written plan to achieve and maintain
sufficient capital. The plan shall, at a minimum, address and consider: (1) the
Bank's current and future capital requirements, including compliance with the
Capital Adequacy Guidelines of the Board of Governors (12 C.F.R. Part 208, App.
A and B); (2) any planned growth in the Bank's assets; (3) the Bank's level
of concentrations of credit; (4) the volume of the Bank's adversely classified
assets; (5) the Bank's anticipated level of retained earnings; and (6) the
source and timing of additional funds to fulfill the future capital needs of the
Bank.
(b) Notwithstanding the provisions of paragraph 3(a) hereof, the Bank shall,
from the date of this Agreement through December 31, 1998, maintain its tier 1
leverage ratio at a level of no less that 6.25 percent. At all times thereafter
during the term of this Agreement, the Bank shall maintain its tier 1 leverage
ratio at a level of no less than 7 percent.
3. Compliance with Applicable Laws and Regulations
(a) The Bank shall immediately take all necessary steps to eliminate or correct
all violations of State and Federal law, rule, and regulation cited in the State
of Florida Examination Report, dated April 4, 1998 (the "Report of
Examination").
(b) The Bank shall immediately initiate an affirmative compliance program in
order to ensure compliance with the provisions of all applicable laws, rules,
and regulations and this Agreement. Pursuant thereto, the management of the Bank
shall familiarize itself with the applicable provisions of the Federal Reserve
Act and the regulations promulgated thereunder, the laws of the State of
Florida, and the provisions of this Agreement.
4. Brokered Deposits
The Bank shall not accept brokered deposits except in compliance with the
provisions of section 29 of the FDI Act (12 U.S.C. 1831e). The Bank shall notify
the Reserve Bank and the Comptroller if the Bank requests any waiver of the
restrictions imposed by section 29 from the Federal Deposit Insurance
Corporation (the "FDIC"), and shall notify the Reserve Bank and Comptroller of
the FDIC's disposition of any request for such a waiver.
5. Asset/Liability Management
(a) Within 60 days of this Agreement, the Bank shall submit to the Reserve Bank
and the Comptroller an acceptable revised written asset/liability management
policy designed to improve management of the Bank's liquidity and sensitivity to
market risk.
(b) The revised policy regarding liquidity shall, at a minimum, address the
following: (1) a minimum level of temporary assets; (2) a maximum level of
volatile liabilities; (3) an appropriate level of core deposits; (4) an
appropriate level of loans relative to deposits and capital; (5) parameters for
off-balance sheet risk; (6) the number and amount of large deposits; (7) the
Bank's borrowing availability; and (8) appropriate standards for volume, mix and
maturity of the Bank's loans, investments, and deposits.
(c) The revised policy regarding sensitivity to market risk shall, at a minimum,
address the following parameters for interest rate risk: (1) appropriate
guidelines for "GAP" management; (2) an adequate system to model and control the
vulnerability of net interest income to changes in interest rates; and (3)
appropriate parameters governing the economic risk to the Bank's capital due to
changes in interest rates.
(d) The Asset/Liability Committee (the "ALCO") of the Bank shall be responsible
for providing the necessary reports to the board of directors on a monthly basis
so that the board of directors can make informed decisions regarding the Bank's
management of market risk.
(e) The ALCO shall, at all times, be comprised of at least two outside
directors. The ALCO shall be responsible for monitoring compliance with the
Bank's asset/liability policies and procedures, and shall review, on a monthly
basis, all decisions made by the Bank's management with regard to such policies
and procedures, paying particular attention to whether each decision was made in
accordance with the established policies and procedures. Any exceptions to the
policies and procedures shall be documented by the ALCO as to the reason for the
exception, and the continuance of any exception must be approved by a majority
of both the ALCO and the Bank's board of directors.
6. Funds Management
(a) Within 60 days of this Agreement, the Bank shall submit to the Reserve Bank
and the Comptroller an acceptable written funds management plan and procedures
to provide for the maintenance of an adequate liquidity position. The plan and
procedures shall, at a minimum, address and consider:
(1) Identification of potential sources of liquidity if the Bank were to
experience an erosion of its deposit base;
(2) establishment of contingency plans for meeting large, unexpected
withdrawals, which shall, at a minimum, include: (A) the sale of assets, and (B)
establishing lines of credit with other financial institutions to advance funds
on short notice; and
(3) a monthly review by the Bank's board of directors to determine how best to
allocate the Bank's available funding sources among various asset categories
after reviewing: (A) the Bank's liquidity position; (B) outstanding commitments
such as loan commitments and letters of credit; and (C) the Bank's
rate-sensitivity position and net interest margin.
(b) The funds management plan shall be coordinated with the Bank's loan,
investment, operating, and strategic plan and budget policies.
7. Concentrations
Within 60 days of this Agreement, the Bank shall submit to the Reserve Bank and
the Comptroller an acceptable written policy and procedures to monitor and
control concentrations of credit. The policy and procedures shall, at a minimum,
address and consider: (a) methods used to identify assets or groups of assets or
contingent claims with common risk elements that, in the aggregate, represent 25
percent or more of the Bank's tier 1 capital; (b) the establishment by the board
of directors of acceptable limits on concentrations of credit; (c) monitoring
procedures to control concentrations of credit; and (d) written monthly
reporting of concentration levels to the Bank's board of directors, copies of
which shall be retained for subsequent supervisory review.
8. Policy Revisions
Within 90 days of this Agreement, the Bank shall submit to the Reserve Bank and
the Comptroller acceptable revised written policies for the following areas:
(a) Loan Policy: revisions to the loan policy shall include, but not be limited
to: (1) the annual review of the loan policy by the board of directors; (2) the
establishment of the duties, responsibilities, and procedures for the Bank's
Loan and Discount Committee; (3) a requirement that real estate appraisals and
bank management inspections be updated annually, and that appraisals be at "fair
value" estimates; and (4) the board of directors' annual adoption of a list of
approved real estate appraisal firms.
(b) BSA/Suspicious Activity Report/Know Your Customer: revisions to these
policies shall include, but not be limited to: (1) maintenance of a sample
Currency Transaction Report (Form 4789) and preparation instructions; (2)
establishment of procedures for the detection and review of off-line and
multiple transactions; (3) maintenance of a sample Suspicious Activity Report
and preparation instructions; and (4) maintenance of a written record of the
training received by Bank personnel, including the frequency of training and the
names of personnel trained.
(c) Wire Transfer: revisions to the wire transfer policy shall include, but not
be limited to: (1) the specification of the positions responsible for performing
the various wire transfer functions; (2) required written agreements between the
Bank and the customer for requests received by facsimile; (3) a record of the
institutions through which incoming and outgoing wire transfers are processed
and the instances when these institutions are used for the processing of wire
transactions; (4) a requirement that "call-back" procedures are performed and
documented when telephone and/or facsimile wire transfer requests are received
form customers; and (5) a contingency plan in the event of a disaster or
emergency.
9. Loan Committee
(a) A majority of the Bank's Loan Committee shall, at all times, be comprised of
outside directors, who are not executive officers of the Bank. The prior
approval of the Loan Committee shall be required for any extension of credit
made or acquired by the Bank (1) that in the aggregate will exceed $100,000 to
any borrower, including related interest(s) of such borrower, except those
collateralized by cash and cash equivalents; (2) to any institution-affiliated
party of the Bank, including any related interest(s) of such borrower; or (3)
for any loan acquisition aggregating 25 percent or more of the Bank's tier 1
capital. All loan approvals by the Loan Committee shall be made in accordance
with the requirements of section 658.48 of the Florida Statutes. The Loan
Committee shall have the responsibility for monitoring compliance with the
Bank's written loan policies and procedures and shall review, on a monthly
basis, all loans made by the Bank and the activities of all personnel of the
Bank involved in its lending functions and operations. At each meeting of the
Loan Committee, the Committee shall review the current status of all loans in
excess of $50,000 that are in default as to principal or interest for 30 days or
more as of the date of the Committee meeting, that are adversely classified or
listed for special mention by State or Federal examiners in the Bank's latest
report of examination or that are to an institution-affiliated party of the
Bank. The Committee shall specifically address whether the extension of credit
was made in accordance with the Bank's written loan policies and procedures and
whether the collection actions undertaken by Bank management to reduce the
volume of past due loans were in full compliance with the Bank's collection
procedures as set forth in its written loan policies and procedures. The Loan
Committee shall maintain accurate written minutes of its meetings, which shall
be available for subsequent supervisory review.
(b) At least once every 30 days from the date of this Agreement, but no less
than five days before a board of directors' meeting, the Loan Committee shall
submit to the board of directors a written report regarding all actions it has
taken.
(c) For the purpose of this Agreement, the terms (1) "related interest" shall be
defined as set forth in section 215.2(k) of Regulation O of the Board of
Governors (12 C.F.R. 215.2(k)); (2) "extension of credit" shall be defined as
set forth in section 215.3 of Regulation O of the Board of Governors (12 C.F.R.
215.3); and "executive officer" shall be defined as set forth in section
215.2(d) of Regulation O of the Board of Governors (12 C.F.R. 215.2(d)).
10. Loan Documentation
(a) Within 45 days of this Agreement, the Bank shall take all necessary steps to
correct all exceptions of the Bank's loan files reflected in the loans adversely
classified and the loans listed for technical exceptions in the Report of
Examination, including, but not limited to, obtaining accurate and current
financial statements, updating insurance coverage, and obtaining income/cash
flow information.
(b) Within 60 days of this Agreement, the Bank shall submit to the Reserve Bank
and to the Comptroller a written report detailing the actions taken pursuant to
paragraph 11(a) hereof.
11. Allowance for Loan and Lease Losses
(a) Within 10 days of this Agreement, the Bank shall eliminate from its books,
by charge-off or collection, all assets or portions of assets classified "Loss"
in the Report of Examination that have not been previously collected in full or
charged-off.
(b) The Bank shall continue to maintain, through charges to current operating
income, an adequate allowance for loan and lease losses (the "ALLL"). The
adequacy of the ALLL shall be determined in light of the current level of
nonperforming loans, the current level of concentrations of credit within the
loan portfolio of the Bank, past loss experience, evaluation of the potential
losses in the loan portfolio of the Bank, especially the potential for
unidentified losses in loans adversely classified, current economic conditions
and examiners' criticisms or other comments contained in the Bank's most recent
report of examination, and the requirements of the Interagency Policy Statement
on the Allowance for Loan and Lease Losses, dated December 21, 1993. A written
record shall be maintained indicating the methodology used in determining the
amount of the ALLL needed.
12. Loan Review
The board of directors shall take all actions necessary to ensure the Bank's
compliance with its established written loan review policy and procedures and
shall not amend such policy and procedures without the prior written approval of
the Reserve Bank and the Comptroller.
13. Strategic Plan and Budget
(a) Within 60 days of this Agreement, the Bank shall submit to the Reserve Bank
and the Comptroller a written strategic plan and budget concerning the Bank's
proposed business activities for 1999. This plan shall, at a minimum, provide
for or describe: (1) the responsibilities of the Bank's board of directors
towards the definition, approval, implementation and monitoring of the strategic
plan and budget, and the procedures designed to ensure that the board of
directors fulfills such responsibilities; (2) management, lending, and
operational objectives, given the condition of the Bank as reflected in the
Report of Examination and subsequent reports; (3) an earnings improvement plan,
with emphasis on the net interest margin and overhead expenses; (4) the
operating assumptions that form the bases for major projected income and expense
components, and the sources and uses of new funds; (5) financial performance
objectives, including plans for asset growth, earnings, liquidity, and capital
supported by detailed quarterly and annual pro forma financial statements,
including projected budgets, balance sheets and income statements; (6) the
establishment of a monthly review process to monitor the actual income, expenses
and net cash flow of the Bank in comparison to budgetary projections; (7) the
quarterly revision of projected financial statements, including projected
quarterly and annual budgets and quarter-end and year-end balance sheet and
income statements for the Bank; and (8) the submission to the Reserve Bank and
the Comptroller of a revised strategic plan or budget 60 days prior to the
occurrence of planned material changes to the strategic plan or budget. (b) A
strategic plan and budget for each calendar year subsequent to 1999 shall be
submitted to the Reserve Bank and the Comptroller at least one month prior to
the beginning of that calendar year. The revised quarterly and annual financial
statements required by paragraph 14(a)(7) hereof shall be submitted to the
Reserve Bank and the Comptroller within 30 days of the end of each calendar
quarter.
14. Call Reports
The Bank shall take such actions as are necessary to ensure that all
Consolidated Reports of Condition and Income filed or published by the Bank
accurately reflect the Bank's condition on the date(s) for which such reports
are filed or published, that all such reports are filed or published in a timely
manner, and that all records indicating how such reports are prepared are
adequately maintained for subsequent supervisory review.
15. Approval of, and Compliance with, Submissions
(a) The plans, policies, and procedures required by paragraphs 3(a), 6(a), 7(a),
8, and 9 hereof shall be submitted to the Reserve Bank and to the Comptroller
for review and approval. The Reserve Bank and the Comptroller may comment on the
plans, policies, and procedures. Acceptable plans, policies, and procedures
shall be submitted to the Reserve Bank and to the Comptroller within the time
periods set forth in this Agreement. The Bank shall adopt all approved plans,
policies, and procedures within 10 days of approval by the Reserve Bank and the
Comptroller and then shall fully comply with them. During the term of this
Agreement, the Bank shall not amend or rescind the approved plans, policies, and
procedures without the prior written approval of the Reserve Bank and the
Comptroller.
(b) The Bank's board of directors shall review all policies and procedures
annually, and review compliance with all policies and procedures quarterly.
16. Quarterly Reports
Within 30 days of the end of reach calendar quarter (September 30, December 31,
March 31, and June 30) following the date of this Agreement, the Bank shall
furnish to the Reserve Bank and the Comptroller written progress reports
detailing the form and manner of all actions taken to ensure compliance with
this Agreement and the results thereof. The board of directors of the Bank
shall certify in writing to the Reserve Bank and to the Comptroller that each
director has reviewed each quarterly progress report required by this paragraph.
Such reports may be discontinued when corrections required by this Agreement
have been accomplished, and the Reserve Bank and the Comptroller, have, in
writing, released the Bank from making further reports.
17. Communications
All communications regarding this agreement shall be sent to:
(a) Xx. Xxxxxx X. Xxxxxx, III
Assistant Vice President
Federal Reserve Bank of Atlanta
000 Xxxxxxxx Xxxxxx, XX
Xxxxxxx, Xxxxxxx 00000-0000
(b) Xx. Xxxxxx X. Xxxxxxxx
State Comptroller and Banking Commissioner
Office of the Comptroller - The Capital
State of Florida
Tallahassee, Florida 32399-0350
(c) Xx. Xxxxxxx X. Xxxxxx
Chairman
Southern Security Bank
0000 Xxxxxxxx Xxxxxx
Xxxxxxxxx, XX 00000
Miscellaneous
19. Not withstanding any provision of this Agreement to the contrary, the
Reserve Bank and the Comptroller may, in their sole discretion, grant written
extensions of time to the Bank to comply with any provision of this Agreement.
20. The provisions of this Agreement shall be binding upon the Bank and all of
its institution-affiliated parties, in their capacities as such, and their
successors and assigns.
21. Each provision of this Agreement shall remain effective and enforceable
until stayed, modified, terminated or suspended by the Reserve Bank and the
Comptroller.
22. The provisions of this Agreement shall not bar, estop, or otherwise prevent
the Board of Governors or the Comptroller from taking any other action affecting
the Bank or any of its current or former institution- affiliated parties and
their successors and assigns.
23. This Agreement is a "Written Agreement" for the purpose of section 8 of
the FDI Act (12 U.S.C. 1818).
24. As of the date of this Agreement, the Written Agreement by and among the
Bank, the Reserve Bank, and the Comptroller dated March 17, 1992, is terminated
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
as of the 13th day of November, 1998. ---- --------
Southern Security Bank Federal Reserve Bank of Atlanta
By: s/Xxxxxx X. By: s/Xxxxxx X. Xxxxx, III
State Comptroller and Banking
Commissioner of the State of Florida
By: s/Xxxxxx X. Xxxxxxxx
The undersigned directors of the Bank individually acknowledge reading the
foregoing Agreement and approve of the consent thereto by the Bank.
s/ Xxxxxx X. Xxxxxx s/Xxxxxx X. Xxxxxx
Xxxxxx X. Xxxxxx Xxxxxx X. Xxxxxx
s/Xxxxxxx X. Xxxxxx s/Xxxxxx X. Xxxxxxxx
Xxxxxxx X. Xxxxxx Xxxxxx X. Xxxxxxxx, M.D.
s/Xxxxx X. Xxxxxxxxxxx s/Xxxxx X. Xxxxxx
Xxxxx X. Xxxxxxxxxxx Xxxxx X. Xxxxxx
SOUTHERN SECURITY BANK
ASSET/LIABILITY MANAGEMENT POLICY
REVIEWED & APPROVED SEPTEMBER 29, 1998
Southern Security Bank is a full service banking institution organized and
operated to meet the financial needs of individuals and businesses throughout
the Bank's defined market area.
I. STATEMENT OF ASSET/LIABILITY MANAGEMENT POLICY
X. Xxxxx/Liability Management is the coordination of all balance sheet
categories so as to maximize shareholder wealth. The actual practice of
Asset/Liability Management focuses on the narrower asset/liability
relationship between variable rate assets and variable rate liabilities.
The advent of deregulation caused financial institution management to
assess their ability to reinvest variable cost funds into profitable
investments to maintain stable profitability. Because banking is an
industry that is changing together with the fluctuating nature of the local
and national economies, this policy is subject to change as needed. The
asset/liability management objectives of Southern Security Bank include the
following.
1. Managing net interest margins.
2. Managing profitability
3. Controlling interest rate risk exposure (GAP analysis).
4. Insuring liquidity
5. Performing balance sheet planning (maintaining the ability to meet
loan demand and deposit withdrawals).
6. Perform tax planning.
7. Plan bank funding.
B. It shall be the policy of the Bank's management to achieve the above
objectives in the functioning of its Asset/Liability Management Policy.
Quantitative goals shall be established to fit these objectives in light of
the operating environment and long-term planning goals.
X. Xxxxxxxx among the policies to govern Asset/Liability Management is that of
requiring full compliance with all state and federal laws.
II. AUTHORITY FOR ASSET/LIABILITY MANAGEMENT COMMITTEE
Asset/Liability management policies of the Bank are under the purview
of the Board of Directors who shall delegate authority for their
formulation and administration to the Asset/Liability Management
Committee (ALCO).
III. ASSET/LIABILITY MANAGEMENT COMMITTEE
X. Xx Xxxxx/Liability Management Committee shall be appointed by the Board of
Directors to:
1. monitor business conditions, financial markets and regulatory change
on a continuing basis.
2. manage mix of rate sensitive sources and uses of funds over interest
rate cycles.
3. evolve key loan deposit investment and funds management strategies
consistent with profit planning and long-range goals and objectives.
B. The composition of this committee shall include the President, the Chief
Executive Officer, the Cashier, and the Senior Lending Officer. As the
staff of Southern Security Bank increases in size and additional officers
are employed, the committee may decide to include additional members, which
may also include directors. The Chairman of the committee shall be the
President of the Bank who shall be responsible for carrying out the
Asset/Liability management subject to not less than quarterly review by the
Board of Directors, or more often if conditions dictate.
C. The Asset/Liability Management Committee shall meet at least monthly or
more frequently as conditions require, such as in times of increased rate
volatility and unexpected economic changes.
D. At its monthly meetings, committee members will review:
1. minutes of the previous meetings.
2. monthly Asset/Liability funds budget in relation to the actual flow of
funds as well as peer group comparisons. The committee will also
conduct a spread analysis and determine how well the allocation of
sources and uses of funds as well as related strategies and programs
are working to meet the Bank's longer range targets.
3. alternative scenarios developed through sensitivity or what if
analysis. These scenarios may incorporate such variables as expected
loan demand, investment opportunities, core deposit growth within
specific categories, regulatory changes, monetary policy adjustments
and the overall state of the economy and, in addition, interest rates
on particular sources and uses of funds.
4. ratio of the amount of rate-sensitive assets to the amount of
rate-sensitive liabilities which are sensitive within defined time
frames, (e.g., 90, 365 days). The committee may also examine and
discuss funds gap reports which itemize rate-sensitive assets and
rate-sensitive liabilities and the maturity distribution. Furthermore,
it may review rate-sensitivity reports as well as mix/spread analysis
to assess the effects of anticipated interest rates and of the volume
and mix of asset/liability items on net interest margin.
5. current and prospective liquidity position both on the asset and
liability sides of the balance sheet and in relation to rate
sensitivity.
6. results of the implementation of funding strategies which are designed
to insure that the Bank has adequate funds for loans, investments,
deposit coverage, debt repayment and the expansion of service
capability when they are necessary. Prospective assessment of the
availability of funds both for shorter term and capital purposes at a
price that will give a reasonable and consistent return on investment
in relation to the risk involved. To review the weighted average
maturity distribution on money market certificates and $100,000 and
larger certificates of deposits.
7. balances maintained with correspondent banks and other non- earning
assets.
8. ratio of loan loss reserve to outstanding loans.
9. capital levels to determine whether they are sufficient to support
asset growth; to underwrite interest rate risk; to match the
expectations of rating agencies and the marketplace, and to meet
long-and short-term funding needs. To periodically review the Bank's
dividend policy.
10. tax position.
11. recommendations on asset/liability allocations, current months funds
budget and action plan.
E. Discussion of information recommendations and actions taken by the
committee will be recorded and reported in the minutes of the meeting.
Copies of these minutes will be distributed to the committee members and
other key personnel. A copy of the minutes for each meeting will be
maintained on file by the Cashier.
F. This committee will be involved in all operations and functions of the
Bank. It requires a management information system providing thorough and
useful information quickly available.
G. The committee shall attempt to be proactive rather than reactive in
implementing and accomplishing balance sheet goals. Such strategy may
include:
1. establishing loan pricing closely paralleling the Bank's cost of
funds.
2. providing variable/renegotiable rate loan products which will change
based upon an appropriate index. It will be the intention of the
committee to have these variable rate products reflect, as much as
possible, changes in the Bank's own cost of funds.
3. utilizing secondary mortgage market capabilities through loan
origination and pass through arrangements to maintain liquidity.
4. assessing the role of the investment portfolio in light of interest
rates and tax issues.
5. maximizing investment yield subject to risk and maturity
considerations. In addition, certain hedging devices, e.g., interest
rate swaps, options and loss programs may be used from time to time to
more effectively manage the portfolio.
6. developing an investment portfolio that is responsive to fluctuating
levels of interest rates by emphasizing shorter maturities and money
market instruments to better match funding liabilities.
H. Asset/Liability Management affects all bank activities. The remaining
policy areas discussed herein interrelate with Asset/Liability management.
IV. ANNUAL PROFIT PLAN
A. Long-range plans serve as the basis for profit plans and the ALCO will
review variances from the budget segments of these plans so that timely
corrective action can be taken or adverse variances with regard to interest
rates, volume levels, and mix of assets and liabilities.
B. The committee will also review performance measures not less than
quarterly. Based on discernible changes and trends or patterns, it will
make alterations and strategies for loan policies, investment portfolio
structure and funds acquisitions in order to achieve year-end goals.
C. On an operating level, management will have sufficient authority to react
to contingencies daily.
D. Sufficient flexibility will be built into the budgeting process so that
variance analysis input and rolling forecasts can be factored on an ongoing
basis.
E. The Board of Directors will review no less than each calendar quarter
comparisons of actual versus planned results in the annual profit plan.
These reviews will focus on dollar as well as percentage variances for the
month being reviewed in the results.
V. LIQUIDITY POLICY
A. Liquidity represents the ability to accommodate the most efficient
decreases in deposits and/or the run-off of other liabilities as well as
fund increases in the loan portfolio, lines and letters of credit and
fulfill short-term credit needs. A bank has adequate liquidity potential
when it can obtain sufficient cash promptly at a reasonable cost. Liquidity
is essential to compensate for expected and unexpected balance sheet
fluctuations and to provide funds for growth. The price of liquidity is a
function of market conditions and the degree of interest rate and credit
risk. If liquidity needs are met through holdings of high quality,
short-term assets, the price is income sacrificed by not holding longer
term and/or lower quality assets. If liquidity needs are not met through
liquid asset holdings, the Bank may be forced to acquire additional
liabilities under adverse market conditions at excessively high rates.
Determination of the adequacy of the Bank's liquidity position depends on
the analysis of:
1. historical funding requirements.
2. current liquidity position.
3. anticipated future funding needs.
4. options for reducing funding needs or attracting additional funds.
5. sources of funds.
B. To insure adequate liquidity or a safe pattern of cash flows in a
fluctuating rate environment, the ALCO will consider the implementation of
three strategies:
1. Extending the maturities of the Bank's liabilities unless interest
rates are heading downward.
2. Diversifying the Bank's sources of funds, including the development of
new funding sources.
3. Matching the maturity of assets and liabilities, recognizing that this
strategy usually causes a higher cost of funding assets than maturity
mismatching.
C. In assessing liquidity, the committee will consider current position and
future outlook. It will especially monitor those Key Indicators in Section
"F" that follows.
D. To provide funds to satisfy liquidity needs, the Bank must do one or more
of the following.
1. Dispose of liquid assets.
2. Increase short-term borrowing or issue additional short-term deposit
liabilities.
3. Decrease holdings of non-liquid assets.
4. Increase liabilities of a term nature.
5. Increase capital funds.
E. The ALCO will guide the Bank's funding operations according to the
following principles:
1. Compete for stable deposit money by building multi- service customer
relationships.
2. Lengthen the maturity of purchased liabilities unless longer term
rates so far exceed current or prospective short-term rates as to make
this option unfeasible.
3. Diversify sources of funds by maintaining an active presence in as
many money markets as possible for a bank of equivalent size.
4. Promote buyer/seller relations and market reputations so that investor
confidence will enable the Bank to raise funds it needs when it needs
them at reasonable rates.
5. Plan and arrange for contingency funding through a variety of sources
before adverse market conditions cause difficulty.
6. Conduct frequent profitability analysis of deposit accounts
relationship and compare funds cost with those of alternative sources.
F. Key Indicators; Targets and Guidelines. It should be understood that
Targets are suggestions and if not met, an acceptable explanation will
follow, whereas Guidelines are required and should not be violated unless
prior approval is obtained. These key indicators are as follows:
LIQUIDITY, GAP & RATE RISK DATA:
1. Volatile Liability Dependence Ratio; not less than +10%, preferably a
negative ratio. (Target)
2. Temporary Investments to Average Total Assets; range between 10% to
20% (Guideline). Temporary investments are interest bearing balances
due from depository institutions, federal funds sold and securities
purchased under agreements to resell, trading-account assets, and debt
securities with remaining maturities or earliest repricing opportunity
of one year or less.
3. Certificates of Deposits, Borrowing and Public Funds to Total Assets;
less than 50% Ratio (Target).
4. Borrowing to Tier 1 Capital; less than 200% (Guideline).
5. Total Rate Sensitive Asset to Rate Sensitive Liability; ratio between
.80 to 1.20 (Target).
6. Rate Sensitive Asset to Rate Sensitive Liability ratio 0-365 days;
range between .80 to 1.20. (Target)
7. Rate Sensitive Asset to Rate Sensitive Liability ratio 0-90 days;
range between .80 to 1.20 (Target).
8. Rate Sensitive Asset to Rate Sensitive Liability ratio 91-365 days;
range between .80 to 1.20. (Target)
9. Zero to 365 day GAP to Total Assets (Month End); range between -10% to
+10%. (Guideline)
10. Zero to 90 day GAP to Total Assets (Month End); range between -10% to
+10%. (Target)
11. 91 - 365 day GAP to Total Assets (Month End); range between -10% to
+10%. (Target)
12. Riskless Assets to Total Assets; range between 10% to 25%. (Guideline)
Riskless Assets are cash & due from, U.S. treasuries and government
agency securities less pledge amount, FDIC insured certificates of
deposits, cash and federal funds sold.
13. Net Liquidity to Net Liability; ratio greater than 20% (Target). Net
Liquidity is cash, due from banks, fed funds sold, interest-bearing
deposits maturing in 30 days or less, and market value of all
unencumbered, rated, investment-grade securities. Net Liability is
total deposits less due from banks.
14. Short Term Liquidity to Total Assets; range should be greater than
20%. (Target)
15. Net Yield on Earning Assets (N.I.M.); In determining the spread (rate
differential) between marginal liability cost and marginal yield,
reserve requirements, taxes and deposit insurance must be considered
incremental costs for cost of funds calculations. The resulting net
spread should not be less than 3%. (Target)
LENDING DATA:
1. Net Loan & Discount to Total Deposits; ratio not greater than 75%
maximum. (Guideline, refer to loan policy)
2. Net Loans & Discount to Total Assets; not greater than 75% (Target,
defer to loan policy).
3. Commercial Loans to Total Loans & Discount; not to exceed 60% (Target,
defer to loan policy).
4. Consumer Loans to Total Loans & Discount; not to exceed 60%. (Target,
defer to loan policy).
5. Real Estate Loans to Total Loans & Discount; not to exceed 60%.
(Target, defer to loan policy).
6. Zero to 180 day Rate Sensitive Loans to Total Loans & Discount, 50% to
70%. (Guideline)
7. Gross Off Balance Sheet Items / Total Assets; not to exceed +10%
(Target)
8. Net Loans & Leases (x Tier 1 Capital); not greater than 14x (Target,
defer to loan policy
G. A bank of equivalent size runs an extreme risk of illiquidity quickly due
to the risk of loans transferred from other institutions inherently
exceeding the transfer of deposits. Therefore, it is imperative that the
established policy be adhered to as it relates to prudent maximum loan
limits rather than the legal maximum limits which relate to the amount of
capital, not liquidity. A loan & discount policy has been adopted and is
referenced hereto.
H. Similarly, long-range investment strategies based on the investment policy
incorporated herein must have regard for liquidity needs. Liquidity is
sought while at the same time minimizing the cost of those funds. It must
be expected to experience cyclical deposit fluctuations particularly in the
Florida economy and to a lesser degree, loan demand fluctuations. The ALCO
will endeavor to make educated predictions for funding requirements and
investments which can be purchased with these requirements in mind.
I. There should be established unsecured (preferably) or secured lines of
credit with correspondent banks. A minimum of one and preferably at least
two lines should be established as diversification reduces dependency on
any single supplier. The Bank should not exceed its capacity to borrow in
any one area or market. The committee shall determine an appropriate level
of borrowing that the Bank may have. These lines of credit shall include,
but not be limited to fed funds, repurchase agreements, reserve discount
window, etc.
VI. PRIMARY FUNDING NEEDS AND SOURCES
Primary funding needs and sources are measured by the need and ability to raise
cash at a reasonable cost or minimum loss. The Bank must be capable of meeting
all customer obligations at all times. Specifically, the Bank must meet cash
withdrawal requirements, fund lines and letters of credit, and fulfill
short-term credit needs. Practically, the Bank will achieve sufficient liquidity
by the following procedures:
1. Pursuit of core deposits.
2. The Bank should have part of the investment portfolio maturing within
one year. As these investments mature, they will be used to meet the
Bank's cash needs or they will be reinvested to maintain a desired
liquidity position.
3. The Bank will attempt to define volatile deposits existing in the
certificate accounts (i.e., accounts over $100,000). This balance in
the account will be classified as volatile money and the Bank will
keep at least an amount equal to this in the fed funds sold account to
offset volatile deposits. This money in fed funds would then become a
temporary source of liquidity if needed.
4. The Bank may apply for a seasonal line of credit from the Federal
Reserve or a correspondent to be used if needed.
5. Should the Bank experience temporary high loan demand, the Bank will
attempt to meet it by selling loans to correspondent banks.
6. In terms of illiquidity, the Bank could explore the possibility of
raising money by buying money from such sources as the CD market.
7. For liquidity purposes the Bank is classifying the investment
portfolio into liquidity and income designations. Government agency,
and other short-term investments maturing within two years, and
municipal securities maturing within one year, will be designated as
"liquid" investments, while investments with maturities greater than
the above criterion will be considered "income" investments.
8. The Bank will attempt to forecast loan and deposit expectations
through the use of historical trends and future economic expectations.
These projections will enable the Bank to plan for seasonal liquidity
needs rather than react hastily to liquidity pressures.
9. Should the Bank become illiquid in spite of these steps, the Bank will
curtail lending. The first step is to curtail making loans to non
customers, the second step is to curtail making real estate mortgage
loans; the third step is to curtail making commercial loans; the
fourth step will be to slow consumer loans; and the fifth step is to
refuse loans to new customers; and the sixth step is to refuse
short-term working capital loans to existing commercial customers or
short-term loans to individual customers.
VII. INTEREST RATE RISK MANAGEMENT
The authority and responsibility for interest rate risk management rests with
the Bank's Board of Directors. The Board delegates the responsibility for day to
day interest rate risk management to ALCO. The goals and objectives for the
interest rate risk management of the Bank is enacted to meet the following
goals:
A) Ensure management and Board awareness of the Bank's interest rate risk
exposure;
B) Enable dynamic measurement and management of interest rate risk;
C) Select strategies that optimize the ability of the Bank to meet its
long-range financial goals while maintaining interest rate risk within
policy limits established by the Board of Directors;
D) Use both income and market value oriented techniques to select
strategies that optimize the relationship between risk and return;
E) Establish interest rate risk exposure limits for fluctuations in net
income.
The responsibilities of the ALCO as it relates to interest rate risk management
will include:
A) Develop, review and modify as needed the primary asset-liability
strategy of the Bank. The strategy developed will be consistent with
the interest rate risk management objectives, strategic plan and
primary operating strategy of the Bank and will ensure that Bank meets
all board and regulatory requirements.
B) Evaluate the Bank's current interest rate risk position (static
analysis) and the potential effect of the Bank's primary
asset-liability strategy (dynamic analysis) to insure that the
risk/return tradeoffs are consistent with the interest rate risk
objectives of the Bank. Static analysis is the testing of the current
balance sheet whereas dynamic analysis is the forecasting of the
balance sheet.
C) Regular review of pricing of assets and liabilities. Actions taken in
pricing loans and deposits will be designed to optimize loan mix and
yields, minimize funding costs, while keeping a balance sheet
structure consistent with the current asset-liability strategy of the
Bank. When the marginal cost of needed wholesale funding is lower than
the marginal cost of raising this funding in retail markets. The Bank
may supplement retail funding with funding from wholesale sources
(e.g., the Federal Home Loan Bank of Atlanta). Reverse repurchase
agreements and dollar rolls may be done through brokers.
D) Review of investment actions (purchases, sales, calls, transfers, and
designations to held-to- maturity, available-for-sale or
held-for-trading) taken by the Investment Committee to insure that the
investment portfolio has risk/return characteristics consistent with
the Bank's current asset-liability strategy.
E) On at minimum a quarterly basis, review any deviations between actual
performance and policy limits and strategic plans. Make any
modifications to Bank's interest rate risk strategy resulting from
this review. Although the interest rate risk objectives are set, the
management of interest rate risk is an on-going process which must be
reviewed and modified as conditions change.
F) Inform the Board of any regulatory developments that affect
asset/liability policies and strategies.
G) In addition, the ALCO Committee will review the following on a regular
basis:
1) Progress on previously determined strategies;
2) Economic conditions (local, regional and national);
3) Interest rate outlook (local, regional and national);
4) Loan and deposit demand;
5) Deposit pricing and maturity structure;
6) Loan pricing and maturity structure;
7) Liquidity position; and
8) Regulatory capital position.
At least quarterly, a report which outlines Bank's interest rate risk exposure
will be presented to the Board. The Board shall review the results of the
operational decisions and shall make adjustments as it considers necessarily and
appropriate, including adjustments to the authorized level of interest rate
risk. The report and subsequent actions of the Board shall be recorded in the
minutes of the regular board meetings.
Guidelines for Control of Interest Rate Risk:
It is the intention of this policy to promote the Bank's long standing
philosophy of safe and sound conservative management. The policy will provide
the ALCO with the needed guidelines to address interest rate risk. However, this
policy is also intended to provide the flexibility needed to permit a prompt
response to economic and other conditions.
The ALCO will review both deposit and loan goals, using dynamic analysis
techniques to determine which strategies will meet the institution's growth and
interest rate risk goals. The analysis will evaluate whether to use retail or
wholesale strategies to fund this growth. It will also evaluate whether
investments or loans offer the best returns after adjusting for risks and costs.
While the interest rate risk management strategy will normally attempt to match
the repricing characteristics of the institution's assets to those of its
liabilities, this policy recognizes that from time to time it may be in the
institution's best interest to take on a moderate amount of interest rate risk.
Strategies that increase interest rate risk are allowable under this strategy as
long as they have been evaluated using both static and dynamic interest rate
risk measurement techniques. The evaluation must show that the Bank will remain
in compliance with its interest rate risk policy limits before such a strategy
can be approved.
Measuring risk to net interest income:
After the Bank has stratified it's assets and liabilities and determined how it
will treat embedded options (if any), it must measure net interest income (NII)
at risk. The formula to translate Gaps into the amount of net interest income at
risk, measuring exposure over several periods is:
(periodic Gap) x (change in rate) x (time over which the periodic Gap is in
effect) = change in NII
This formula is applied to the Gap report and calculates the change in the
Bank's net interest income for an immediate 100 and 200 basis-point increase in
rates. If the Bank has a positive Time Band Gap, this means that more assets
than liabilities will reprice or mature during this time frame. The cumulative
earnings effect of the Bank's potential repricing imbalances would result in the
total column under impact on annualized net interest income.
This method of measuring the Bank's net interest income at risk employs numerous
basic assumptions, which may include the following.
1. Assumes all repricings occur at the midpoint of the time band.
Non-maturity deposits (including Savings accounts, NOW accounts, and
Money Market accounts)are Beta Adjusted at 25% in both the less than 1
month as well as the 1 to 3 months time band. Each of the foregoing
non-maturity deposits (including non-interest bearing demand deposits)
are Beta adjusted at 12.5% for the 3 - 6 month and also the 6 - 12
month time bands;
2. All maturing assets and liabilities are reinvested at overnight rates;
3. No other new business is booked;
4. There is an instantaneous change in the overnight rate to a new and
constant level;
5. All interest rates move the same amount.
The impact of Gap on the net interest income will have one of the following
impacts:
A) NEUTRAL GAP: Regardless of what rates do, there should be no change in
the net interest margin.
B) POSITIVE GAP: A positive Gap in a rising rate environment will
increase the net interest margin, Conversely, a declining rate
environment will decrease the net interest margin.
C) NEGATIVE GAP: A negative Gap in a rising rate environment will
decrease the net interest margin, Conversely, a declining rate
environment will increase the net interest margin.
The effect of the market rate shocks on the NII may also be reviewed for the
more extreme rate shocks outward to the plus or minus 200 basis points immediate
and permanent rate shocks. This allows management to monitor that the Bank will
maintain an adequate capital level even in an extremely adverse rate shock
environment. The Bank's ALCO will report the to the Board of Directors the
effect of changes on NII not less than quarterly.
Gap Analysis:
Gap analysis is a static interest rate risk measurement tool because it measures
the level of interest rate risk in an existing balance sheet. The completed gap
report compares how quickly an institution's assets respond to changes in market
rates as compared to its liabilities. Presumably, if one side of an
institution's balance sheet responds more quickly to changes in market rates
than the other, interest income will change faster (or slower) than interest
expense. The gap is the mismatch between the quantity of assets and liabilities
repricing in a given period of time.
As an interest rate risk management tool Gap has shortcomings identified by
three factors. First, it doesn't directly measure the effect of changes on rates
on income. Rather it delivers an index of rate sensitivity. Second, its not a
very accurate tool for measuring the interest rate risk in complex financial
instruments with imbedded options like fixed and adjustable-rate mortgages.
Third, because it is a static measurement tool, it can only evaluate the
interest rate risk in historical balance sheets. Gap is an ineffective tool for
measuring the risk/return tradeoffs between strategies an institution is
considering.
While Gap is an indicator of the level of interest rate risk in the balance
sheet, it can not measure the impact of a change in market rates on earnings.
The effect of the placement of the deposits significantly impacts the analysis.
Gap analysis provides only rough indicators of interest rate risk. While dollar
maturity mismatches are identified, the effects of different repricing rates,
periodic repricing limits, floor or ceiling rates, or other factors are not
included. Caution is warranted in interpreting the gap estimates. Even though
gap is only a rough indicator of interest rate risk, the Bank will review and
monitor the gap ratios outlined previously in Section F (Key Indicators). Any
gap ratio exception will warrant an explanation to the Board from the ALCO in
its recorded minutes. The Bank will primarily rely on the net income simulation
to measure and monitor interest rate risk.
The Board recognizes that no policy can anticipate all the conditions,
situations and opportunities which may arise in the normal course of operations.
Management, therefore is expected to exercise prudent judgement in the
implementation of this policy. All deviations from the guidelines established by
this policy will be approved in advance by the ALCO with such deviations
promptly reported to the Board.
VIII. OFF BALANCE SHEET POLICY
The Off Balance Sheet items (contingent liabilities) of the Bank will consist
primarily of unused portions of committed lines of credit where the Bank has a
legal obligation to fund these unused portions when called upon. Said legal
obligations arise from the acceptance of a commitment fee from the borrower
whether or not the facility has actually closed.
Additionally, while the Bank is not at this time seeking to engage in the
issuance of standby or trade letters of credit, the Bank recognizes the
possibility of being called upon to do so by existing customers. Any letter of
credit activity will be subject to the same policy, procedures, credit and
collateral requirements that any loan request is subject to and once paid for,
will become an Off Balance Sheet Item until it is called upon or expires.
Due to liquidity considerations and their generally lower profit potential,
total exposure in letters of credit will be reviewed monthly by the Director's
Loan & Discount Committee. Because of liquidity considerations, all unused
portions of lines of credit and commitments will be reviewed as quantified in
the Loan & Discount Policy, which is incorporated herein by reference.
IX. INTERBANK LIABILITIES (REGULATION F)
Credit Exposure that may exist between the Bank and its correspondent banking
relationship with outside correspondents, as that term is defined in the Federal
Reserve's Regulation F, shall at all times be monitored and controlled as
required by that regulation.
A. No less frequently than quarterly, the Bank's Cashier, or in his absence
the Senior Loan Officer, or such designated "Responsible Officer" as
specified and directed by the Board of Directors, shall review the call
reports, annual reports, or such other publicly available information as
the Responsible Officer shall deem appropriate concerning each
correspondent to which this Bank has a "significant exposure". For purposes
herein, "significant exposure" shall be deemed to exist whenever the
exposure of this Bank with a correspondent is more than $150,000 on a
monthly average basis. Exposure shall be measured by using the actual
amount owed to the Bank on all exposure types. This is to include the sale
of federal funds (exclusive of agent status).
B. The Responsible Officer shall conduct such reviews more frequently than
quarterly if prudent to do so, based upon the size and type of the Bank's
exposure and the financial condition of such correspondent. In assessing
the financial condition of each correspondent, the Responsible Officer
shall consider at a minimum the following financial characteristics of the
correspondent's:
1. Capital level;
2. Level of non-accruals and past due loans and leases;
3. Level of earnings;
4. Factors affecting the correspondent financial condition.
In such assessments, the Responsible Officer may also take into account the
rating of the correspondent by a bank rating agency whose general
assessment and selection criteria have been reviewed and approved by the
Board of Directors. At present, this board has reviewed and approved the
criteria of the following bank rating agency:
Xxxxx Financial Reports, Inc.
P.O. Drawer 145510
Coral gables, Florida 35114
This board recognizes the need to establish a current list of acceptable
correspondents. The list of institutions initially identified is neither
all inclusive or deemed an approval of a non-qualifying institution as
required by this policy:
Federal Reserve Bank of Atlanta - Atlanta, Georgia
Independent Bankers Bank - Orlando, Florida
Compass Bank - Birmingham, Alabama
First Union National Bank, Charlotte, North Carolina
Chase Manhattan Bank - New York, New York
Nation Bank of Commerce - Lincoln, Nebraska
C. The Responsible Officer shall determine whether the correspondent qualifies
as at least "adequately capitalized" as defined in Regulation F. At
present, that standard requires the correspondent to have at a minimum:
1. - Total Risk Based Capital Ratio of 8.0%;
- Tier 1 Risk Based Capital Ratio of 4.0%; and
- Leverage Ratio of 4.0%.
2. If the numerical values as defined above are not equal to or exceed
those minimum requirements as defined by Regulation "F" for an
"Adequately Capitalized" correspondent, those minimum requirements
stipulated in Regulation "F" shall be the applicable qualifications.
The Responsible Officer shall:
a. begin applying the amended standards immediately; and
b. bring such changes to the attention of the ALCO immediately, and
to the Board of Directors at its next regular meeting after the
Responsible Officer becomes aware of the changes, so that it may
revise this policy.
3. Additionally, the Bank should limit exposure to correspondent banks in
the form of noninterest and interest bearing FDIC insured accounts and
federal funds (exclusive of agent status). The limit for these
balances on inter-day and intra-day transactions are 10% of total
assets. The maturity of such exposure should be daily but may
occasionally extend to seven days (except for FDIC insured time
deposits which should not exceed one year). The correspondent should
also meet the following quantitative measures:
a. Nonperforming Assets/ Assets equal to or less than 1.25%.
b. Repossessed Assets/Total Assets equal to less than 1.25%.
c. Return on Assets equal to or more than .75%.
D. The Bank shall neither establish nor (to the extent possible) continue a
significant exposure to a correspondent in which the form or maturity of
the exposure and the financial condition of the correspondent create a
significant risk that the payments expected by the Bank will not be made in
full or on time.
1. If a correspondent relationship which initially complied with the
Bank's policy later becomes non-complying because of deterioration of
the financial condition of the correspondent, market changes, or any
other reason, the Responsible Officer shall terminate and close out
the relationship, or reduce it to an insignificant level as rapidly as
possible, consistent with prudent banking standards.
2. The Responsible Officer shall report all such situations, the remedial
action taken, and the results of that action, immediately to the
Executive Committee of the Board of Directors, and/or to the Board of
Directors at its next scheduled meeting.
E. The Bank's internal financial limit for its exposure to any institutional
correspondent shall be established and recorded on the "Bank's Interbank
Liability (Regulation F) Control Records". (See Appendix for Control Record
format.)
1. The Board of Directors shall review these limits from time to time
upon recommendations of management or upon its own motion, and revise
those limits up or down either as a global change applicable to all
correspondent relationships, or for any or each specific
correspondent(s), as it deems appropriate.
2. Bank management shall use only the most current revision of each form
in determining what are the internal limits of the Bank for exposures
to correspondents. Each officer responsible for a correspondent
relationship of the Bank shall structure that relationship so as to
preclude the possibility of the relationship growing to a size in
excess of the applicable internal limit unless such growth is merely
an occasional anomaly, resulting from unusual market disturbances,
market movements favorable to the Bank, increases in activity,
operational problems, or other unusual circumstances.
F. Procedure to determine the Bank's internal financial limit for its exposure
to any institutional correspondent.
1. At least quarterly, determine the size of the exposure in each present
or proposed correspondent relationship of the Bank.
2. If the exposure is not "significant" as defined herein, go to Step 3.
if the exposure is "significant" as defined, go to Step 4.
3. Monitor the size of the exposure retroactively on a monthly basis, or
more frequently if appropriate. If the exposure becomes significant,
to Step 4.
4. Review each correspondent's latest call report, annual report, rating
by any bank rating service approved in this Policy, or any other
available financial information about the correspondent to determine
whether it has at least the capital as defined in item C of this
section.
5. If the correspondent does not meet all of those three requirements,
determine how best to reduce the Bank's exposure to that correspondent
below the level defined as "significant" in the Policy. Alternatively,
determine how to eliminate that exposure completely. Weigh the risks
and costs of each alternative against the risks and costs of
continuing the relationship at its present level or some level higher
than the lowest figure which constitutes a "significant" exposure
under the Policy until its normal liquidation, if it is one which will
liquidate normally at a fixed time in the future. Document these
processes and report them to the Board of Directors.
6. If the correspondent does not meet all three of those requirements,
compare the size of the Bank's exposure to that correspondent with the
limits stated in the Bank's interbank liability control record
established by the Policy.
7. If the exposure is less than the applicable limit on the control
record, note that fact in the working papers and repeat the above
steps at the next regular monitoring.
8. If the exposure is greater than the applicable limit in the Bank's
control record, the Responsible Officer shall reduce the exposure at
or below the level limit amount, unless the excess is merely an
occasional one, resulting from unusual market disturbances, market
movements favorable to the Bank, increases in activity, operational
problems, or other unusual circumstances. Document these actions.
G. To override internal limits as to Interbank Liabilities will require
documenting the processes and the situation. Authority is vested with the
Chief Executive Officer or President to override the limitations herein
established.
Interbank Liability (Regulation F) Control Record
Correspondent Name: Independent Bankers Bank
Address: P.O. Box 4998
Orlando, FL 00000-0000
Telephone Number: 0-000-000-0000
Contact Person: Xxxxx X. XxXxxxxx III
Exposure Limits: Type Maximum Amount
All $150,000
Most Recent Revision Date: March 23, 1995
Correspondent Name: Compass Bank
Address: 00 Xxxxx 00 Xxxxxx
Xxxxxxxxxx, Xxxxxxx 00000
Telephone Number: 0-000-000-0000
Contact Person: Xxxxxxxx Xxxxxxxxxx
Exposure Limits: Type Maximum Amount
All $150,000
Most Recent Revision Date: March 23, 1995
Correspondent Name: National Bank of Commerce
Address: Lincoln, Nebraska
Telephone Number:
Contact Person:
Exposure Limits: Type Maximum Amount
All $150,000
Most Recent Revision Date: September 22, 1998
X. INVESTMENT ACCOUNT STATEMENT OF OBJECTIVES
1. To furnish an investment vehicle for funds which may be required for
liquidity purposes, especially in periods of deposit decline and/or
increased loan demand.
2. To utilize funds not needed for loan demand.
3. To maximize income derived from investments in accord with liquidity
and quality criteria, advantageously benefitting from applicable tax
law.
4. Florida statutes governing reserve requirements of state chartered
banks direct that a state bank must maintain a daily liquidity
position equal to at least 15 percent of its total transaction
accounts and 8 percent of its total non-transaction accounts, less
those deposits of public funds for which security has been pledged as
provided by law. Bank assets eligible to meet the liquidity
requirement are cash on hand, demand deposits due from correspondent
banks, and other investments and short-term marketable securities.
5. To provide security meeting necessary criteria for public funds
liability composition.
6. To balance the market credit risks of the Bank's asset and liability
composition.
7. To provide for a dependable and steady source of income.
XI. INVESTMENT ACCOUNT RESPONSIBILITY
1. The responsibility of establishing an investment policy and reviewing
transactions is vested with the Bank's Board of Directors.
2. The Bank's Chief Executive Officer or President (or in their absence,
other designated officer) are responsible for executing and carrying
out the investment policy, subject to approval of the Board of
Directors.
3. The Chief Executive Officer or President (or designee) may elect to
implement investment account policy or may appoint a portfolio manager
to do so with duties to include:
a. Active investment account management;
b. Recommend investment strategy;
c. Recommend modifications to the portfolio policy.
4. The Chief Executive Officer or President (or designee) is to establish
the size and composition of the investment account including the
maximum amount to be invested in acceptable portfolio investments
based on total resources as further expounded in the section titled
"Investment Portfolio Considerations".
5. The Chief Executive Officer or President (or designee) shall cause to
be maintained documentation to support the credit responsibility of
all issuers of securities owned by the Bank.
6. In those situations when it may be prudent to make investment
decisions which would differ from current investment policy and when
it would be impossible to convene the Bank's Board of Directors or
Executive Committee, the Chief Executive Officer or President (or
other officer with investment authority) may make such investments.
The purchase is to be reported to the Board of Directors at its next
regular meeting for ratification.
XII. INVESTMENT ACCOUNT REVIEW
1. The Board of Directors will review the investment account not less
than quarterly which will include:
a. Securities maturities;
b. Current market value of securities held;
c. Current quality ratings of issuers of political subdivisions;
d. Current yields of the investment account;
e. Securities purchased, sold or called since date of last review.
f. Pledged / unpledged status
2. An interest rate sensitivity stress test for mortgage backed and
derivative securities should be reviewed at least annually by the
Board of Directors.
XIII. ACCEPTABLE PORTFOLIO INVESTMENTS
The following instruments are acceptable portfolio investments. The Bank will
adhere to the specific guidance or requirements from its regulators covering
suitable investment practices.
1. U.S. Treasury obligations (Bills, Notes, Bonds).
2. Federal agency securities including pass through bonds.
3. Federal National Mortgage Association securities.
4. State, County and Municipal Obligations.
a. General obligations (a prospectus and analysis is required)
b. Revenue obligations
c. Public Housing Authority
d. Ratings equal to A or higher
5. Mortgage derivative products including CMOs, REMICs, CMO, and REMIC
residuals and stripped mortgage backed securities. The Bank recognizes
that the stress testing of these products has significant value for
managing risk and should be obtained whenever possible.
6. Corporate Bonds and Commercial Paper with ratings of AA or higher.
7. Certificates of deposit issued by FDIC insured institutions.
XIV. INVESTMENT PORTFOLIO CONSIDERATIONS
1. Cash position and Asset/Liability Policy.
2. Seasonal loan & deposit fluctuations and liquidity requirements.
3. Pledging requirements.
4. Reserve requirements.
5. Tax position and strategy.
6. Dealers
a. Those banks designated as correspondents of the Bank or other
reputable dealer banks.
b. Non-bank dealers shall be firms of national or regional
recognition and reputation.
7. Issuer quality.
8. Following these considerations, longer maturities shall be stressed
during periods of higher yields with shorter maturities considered
during periods of lower yields.
XV. INVESTMENT LIMITATION AS TO TERM
The maturity distribution criteria of the Bank is based on factors including,
but not exclusively limited to, liquidity, yield, and the Bank's "Gap" position.
Longer maturities shall be stressed during periods of higher yields with shorter
maturities considered during periods of lower yields.
1. U.S. Treasury obligations - preferably seven years, maximum of twenty
years.
2. Federal agency and federal corporation obligations - preferably five
years, maximum of twenty-five years.
3. U.S. Government guaranteed pass through securities - maximum of twenty
years.
4. State, county and municipal obligations - maximum of ten years.
5. Mortgage Derivative Products - Has an expected average life of less
than ten years.
6. Public Housing Authority - maximum of ten years.
7. Corporate bonds - maximum of five years.
8. Certificates of deposit - maximum of one year.
XVI. INVESTMENT LIMITATIONS AS TO AMOUNT
Maturity strategy within the foregoing scope of limitations is to be based on
the portfolio considerations and prudent liquidity requirements.
1. U.S. Treasury Obligations - no limitations.
2. Federal agency or federal corporation securities - 50% of total
deposits except maturities of one year or less.
3. Federal agency securities (Government guaranteed) - no limitations.
4. State, county and municipal obligations - not to exceed $250,000 in
any one issue or $500,000 in any issuing agency to a maximum aggregate
of any one state of $500,000 with exception to the State of Florida
which will be limited to aggregate maximum of $2,000,000. The total
municipal portfolio is not to exceed 30% of average year-to-date
deposits.
5. Mortgage Derivative Products - 30% of total deposits except maturities
of one year or less.
6. Public Housing Authority - not to exceed $250,000 of any one issue or
issuing agency.
7. Corporate bonds and commercial paper - not to exceed $250,000 of any
single issuing corporation.
8. Certificates of Deposit - $100,000 with any single federally insured
financial institution.
9. State of Israel Bonds - not to exceed $100,000
XVII. ACCEPTABLE DENOMINATIONS OF PORTFOLIO INVESTMENTS
Exceptions to the following would include additional purchases of issuers
previously purchased in smaller lot sizes.
1. U.S. Treasury Obligations - minimum of $500,000 and in denominations
thereof, whenever possible.
2. Federal agency, federal corporation securities and mortgage derivative
products minimum of $100,000 and in denominations thereof, whenever
possible.
3. State, county and municipal obligations - minimum of $100,000 and
denominations thereof, whenever possible.
4. Public Housing Authority - minimum of $100,000 whenever possible.
5. Corporate bonds/commercial paper - minimum of $100,000.
6. Special purchases that are bank eligible may be specifically approved
by the Board or Asset/Liability from time to time - maximum not to
exceed $100,000 by any one issuer and $250,000 in aggregate.
7. Certificates of Deposit - $100,000 denomination.
XVII. ACCEPTABLE GEOGRAPHIC SPREAD OF STATE, COUNTY AND MUNICIPAL
INVESTMENTS
1. Emphasis of the State, County and Municipal investment portfolio shall
be placed in those issues of the State of Florida, Florida counties
and its municipalities. Florida securities are exempt from the
intangible personal property tax.
2. Obligations of other states, counties and municipalities should be of
higher quality, better known issues.
XVIII. UNACCEPTABLE INVESTMENT SECURITIES
1. Securities issued by the Commonwealth of Puerto Rico or foreign
securities are not acceptable except as approved specifically by the
Board.
XIX. INVESTMENT PORTFOLIO COMPOSITION & TRADING ACTIVITIES
All investments are designated as hold-to-maturity unless otherwise noted or
identified.
1. The Bank's securities portfolio will consist of the following
classifications with each carried on the Bank's financial statements
as required by generally accepted accounting principles.
a. The "investment" portfolio which consists of securities intended
to be held to maturity.
b. The "trading" portfolio which has securities that are bought and
held principally for the purpose of selling them in the near
term.
c. The "available-for-sale" portfolio in which securities are
purchased and sold for holding gains and other asset/liability
management purposes. Securities held in this portfolio shall be
for the purpose of taking advantage of any one or more of the
following opportunities (with consideration given to the Bank's
earnings, liquidity, tax and capital status):
1. Improve yields
2. Quality grades
3. Maturities
4. Tax position
5. Marketability
6. Gains
XX. INVESTMENT PLEDGING STRATEGY
1. When possible and necessary, the pledging of long or medium term
state, county and municipal obligations should be carried out rather
than those securities acceptable for meeting the statutory reserve
requirements or maturing in the near future. 2. Securities pledged
should be those held for the permanent investment account rather than
securities acquired for liquidity or trading considerations.
XXI. FED FUNDS PURCHASED & SECURITY REPO AGREEMENTS - BANKS
1. Short term liquidity requirement can be met by purchasing federal
funds from correspondent banks that have approved credit lines for the
Bank.
2. Generally, these banks require that a fed funds purchased position not
exceed seven days and every effort should be made to adhere to this
requirement. If for some reason the Bank cannot, steps should be taken
to liquidate securities sufficient to meet the repayment requirement.
Correspondent banks may extend the period if the Bank discusses the
situation with them. It may be appropriate to collateralize such
borrowing by instituting a Securities Repurchase Agreement to the
correspondent bank rather than selling securities, especially if a
loss would be incurred. These instruments are for longer terms and
often have lower interest rates.
XXXX.XXXXXXXX REPURCHASE AGREEMENTS (REPO'S) - SALES TO CUSTOMERS
1. Minimum amount of $100,000 in $25,000 increments thereafter.
2. Securities sold shall be government agency securities or, if not
available, U.S. Treasury obligations.
3. Sale shall be based on current market value of the security.
4. Issued on "running open" basis at fluctuating daily rate.
5. Interest shall be paid as negotiated but at least monthly and on
termination of repurchase agreement. Interest expense should be
accrued on a daily basis.
XXIII. FEDERAL FUNDS - SALES
1. Excess funds after determination of daily cash position shall be
invested in fed funds on a "running open" arrangement on immediate
availability basis.
2. Sales shall be to domestic banks only which are of sound financial
strength. Current financial information of banks meeting the criteria
of purchasing banks shall be on file at all times.
3. Funds sold to any one institution shall not exceed $250,000.
4. The Bank's other correspondent institutions are to be excluded from
purchasing fed funds from Southern Security Bank's agent bank.
5. Maximum interest earnings should be obtained, but not at the expense
of safety and liquidity.
6. Interest is to be paid on next day basis.
XXIV. INVESTMENT SAFEKEEPING AND PORTFOLIO ACCOUNTING
1. All definitive securities (certificates with ownership registered or
bearer bonds with coupons attached) are to be maintained in
safekeeping with one or more correspondent banks providing the
service. Safekeeping banks should provide prompt processing of coupon
interest and matured bonds.
2. Book entry securities are to be maintained with a safekeeping bank or
the Federal Reserve Bank.
3. Portfolio accounting shall be attained from a service bureau bank or
correspondent bank offering the service to provide information
necessary for proper investment account review.
