We reviewed the investment portfolio, balance sheet, and both the funds management and investment policy as well as the FDIC “consent order” under which the bank was operating. After a thorough review of all the above, we concluded that we could add value without taking any quality risk by identifying the potential opportunities available in the market. The trigger points that surfaced were as follows:
The bank’s Consent Order mandated that the bank be invested in ‘zero risk weighted’ instruments only, to include over-night funds.
The bank had a $4 million tax loss carry forward that was approaching the 5 year limit on $800,000
The bank’s investment policy had not been updated in over 8 years and many of the products allowed for purchase either no longer existed or were not in compliance with the Consent Order.
The bank had a portfolio of odd positions in Federal Agencies, FNMA & FHLMC bonds, US Treasury obligations, and several tax exempt municipal bonds. The average life of the portfolio was 1.8 years with an average yield of 3.8% with unrealized gains of $220,000.
The bank had over 20% of its assets at the Federal Reserve Bank in overnight funds with a yield of 15 basis points.
The investment policy did not allow for more than 20% of the portfolio to be invested in mortgage related securities.