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EXHIBIT 10(j)
BANCTEXAS, N.A.
FINANCIAL MANAGEMENT POLICIES
APPROVED: SEPTEMBER 15, 1994
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FINANCIAL MANAGEMENT POLICIES
TABLE OF CONTENTS
I. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
II. OBJECTIVES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
III. FINANCIAL MANAGEMENT PRICING OBJECTIVE . . . . . . . . . . . . . . . . . . . . . . .1
IV. INTEREST RATE RISK MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
V. ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
A. Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
B. Objective of Holding Securitized Assets . . . . . . . . . . . . . . . . . . . . . .3
1. Investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2. Liquidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
3. Regulatory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
4. Local Community Support . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
5. Pledging. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
C. Portfolios of Securitized Assets. . . . . . . . . . . . . . . . . . . . . . . . . .4
1. Securities Held To Maturity. . . . . . . . . . . . . . . . . . . . . . . . . . 4
2. Securities Carried at Market Value (Trading Securities) . . . . . . . . . . . . 4
3. Securities Available For Sale . . . . . . . . . . . . . . . . . . . . . . . . . 5
D. Mortgage Derivative Products. . . . . . . . . . . . . . . . . . . . . . . . . . . .5
1. Mortgage Derivative Products Held To Maturity . . . . . . . . . . . . . . . . . 5
2. Mortgage Derivative Products Carried at Market Value. . . . . . . . . . . . . . 5
3. Mortgage Derivative Products Held as Available For Sale . . . . . . . . . . . . 5
4. Internal Control of Derivative Products . . . . . . . . . . . . . . . . . . . . 6
a. Investment Limitations on High Risk Mortgage Derivative Products . . . . . . 6
b. Testing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
c. Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
d. Recordkeeping . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
e. Counterparty Limits . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
E. Portfolio of Non-Securitized Assets. . . . . . . . . . . . . . . . . . . . . . . .7
VI. LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
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FINANCIAL MANAGEMENT POLICIES
TABLE OF CONTENTS
(continued)
VII. HEDGE INSTRUMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
A. Futures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
1. Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2. Accounting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
a. Hedging Securities Carried at Market Value (Trading Securities . . . . . . 8
b. Hedging Securities Held as Available for Sale . . . . . . . . . . . . . . .8
3. Types of Permissible Contracts. . . . . . . . . . . . . . . . . . . . . . . . 9
4. Limits on Number of Permissible Contracts . . . . . . . . . . . . . . . . . . 9
5. Internal Controls of Futures Activity . . . . . . . . . . . . . . . . . . . . 9
B. Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
1. Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2. Types of Permissible Contracts. . . . . . . . . . . . . . . . . . . . . . . . 9
3. Limits on Number of Permissible Contracts . . . . . . . . . . . . . . . . . .10
a. Exchange Traded Options . . . . . . . . . . . . . . . . . . . . . . . . . 10
b. Over-the-Counter Options. . . . . . . . . . . . . . . . . . . . . . . . . 10
4. Internal Controls of Options Activity . . . . . . . . . . . . . . . . . . . .10
C. Interest Rate Exchange Agreements . . . . . . . . . . . . . . . . . . . . . . . 10
1. Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
2. Approved Counterparties . . . . . . . . . . . . . . . . . . . . . . . . . . .10
3. Counterparty Credit Exposure. . . . . . . . . . . . . . . . . . . . . . . . .11
D. Accounting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
VIII. RESPONSIBILITY FOR ASSET/LIABILITY MANAGEMENT. . . . . . . . . . . . . . . . . . 11
A. Asset/Liability Management Committee. . . . . . . . . . . . . . . . . . . . . . 11
B. Authorities, Duties and Responsibilities for Financial Transactions . . . . . . 11
C. Credit Criteria and Quality Ratings . . . . . . . . . . . . . . . . . . . . . . 13
D. Limitation of Transaction Amounts . . . . . . . . . . . . . . . . . . . . . . . 14
E. Diversification/Concentration . . . . . . . . . . . . . . . . . . . . . . . . . 14
F. Approved Brokers and Dealers. . . . . . . . . . . . . . . . . . . . . . . . . . 14
G. Safekeeping . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
IX. EXCEPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
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I. INTRODUCTION
The Board of Directors (the Board) of BancTEXAS, N.A. (the Bank)
acknowledges the Bank is a financial intermediary serving the
needs of consumers and companies throughout the State of Texas.
The Board also acknowledges the Bank is a regulated entity
operating under the rules and regulations of the State of Texas,
the Federal Deposit Insurance Corporation and the Office of the
Comptroller of the Currency. With these acknowledgments in mind,
the Board establishes certain financial management policies, as
detailed in the following sections.
II. OBJECTIVES
BancTEXAS, as a full-service commercial bank operating in Texas,
is organized to meet the following objectives:
A. To serve the financial service needs of its customers,
which includes accepting deposits and making loans.
B. As a financial intermediary, the primary source of income
will be net interest income.
C. Because the Bank is a subsidiary of a stockholder-owned
corporation, the Board anticipates the Bank will only
engage in activities that are profitable and consistent
with the stockholders' objective of providing superior
returns on equity.
D. As the Bank is a regulated entity with benefit of Federal
Insurance on certain of its liabilities, the Board
directs management to engage only in activities
consistent with such regulations.
III. FINANCIAL MANAGEMENT PRICING OBJECTIVE
As a financial intermediary, the Bank acts simultaneously as a
borrower and a lender. In order to produce and maintain a positive
net interest income, the Bank must exercise certain disciplines in
the pricing of its assets and liabilities. It is the Bank's
objective to acquire financial assets, financed by financial
liabilities, such that a stable net interest margin (or expected
total rate of return over and above funding costs, in the case of
securities carried at market value) of at least 50 basis points
will be received under a broad range of economic scenarios. This
objective is achievable if the following facts are true:
A. Liabilities are acquired at a "gross cost" not in excess of
the cost of "wholesale funding" sources of like maturity.
B. Acquired assets provide a "minimum net yield" of 50 basis
points above the cost of comparable duration wholesale
funding sources.
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Definitions:
A. Gross Cost - The total cost associated with servicing a
liability, to include both interest expense and operational
overhead.
B. Wholesale Funding - The London Interbank Offering Rate
(LIBOR) for maturities of up to one year (adjusted to bond
equivalent yields), and the offered interest rate swap rate
for maturities beyond one year (or alternatively, the bond
equivalent yields implied by the Eurodollar futures
contract traded on the Chicago Mercantile Exchange).
C. Minimum Net Yield - The excess yield expected to be
received after adjusting for costs associated with credit
risk, optionality and administration.
The minimum net interest margin of 50 basis points is a target, but
is not a requirement. Some assets, such as U. S. Government or
Agency securities, may not be available at sufficiently high
minimum net yields to meet this net interest margin target.
IV. INTEREST RATE RISK MANAGEMENT
The Board recognizes that the following conditions exist with
regard to interest rate risk:
A. Interest rates are subject to change and do change in a
manner that is not predictable.
B. If the weighted average duration of financial assets varies
materially from that of financial liabilities, the success
of the objective to earn a positive net interest margin
will be at risk when interest rates change.
Therefore, the Board directs Management to monitor, at least
monthly, the potential variability in the Bank's Net Market Value
(defined as GAAP equity adjusted for market value gains or losses
on all assets and liabilities, and recognition of deferrals). In
addition, variability in net interest margin over a one year
horizon is to be monitored at least quarterly. In each case, the
measures of variability will be based upon interest rates rising
and declining 100 to 400 basis points, in 100 basis point
increments. Management is further directed to pursue all cost
justified means to control the projected changes in both Net Market
Value and Net Interest Margin to an amount not to exceed the
following limits:
Prospective Interest
Rate Change +/- 100 bp +/- 200 bp +/- 300 bp +/- 400 bp
Maximum Change in
Value Expressed As A
Percentage Of Base -15% -30% -60% -100%
The Board directs Management to report to the Board, at each
meeting, its compliance with the preceding directive. The Board
recognizes the potential exists to exceed such limitations due to
shifts in interest rates between the measurement periods.
Consequently,
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Management will be deemed in compliance with this policy if, on the
date of each Board meeting, interest rate risk exposure is within the
aforementioned limits.
V. ASSETS
A. Introduction
The Bank's primary source of interest income will be
derived from various types of loans. While loans are
subject to the Financial Management Pricing Objective
previously stated, other lending policies and procedures
are covered under separate policy statements. The
remainder of this section deals with assets in securitized
form.
B. Objective of Holding Securitized Assets
The investment in securitized assets is appropriate for
the following purposes:
1. Investment
The Bank may invest in securitized assets whose net
interest margin (or total rate of return for trading
assets) is consistent with the Financial Management
Pricing Objective.
2. Liquidity
The Bank may invest in short-term, high-quality assets
that meet liquidity needs. The net interest margin
from these assets will typically be less than that
consistent with the Financial Management Pricing
Objective. The Board directs Management to maintain
such assets to ensure compliance with all applicable
regulations at all times. The Board anticipates
Management will seek to optimize the return on such
investments in a manner consistent with their short-
term, high-quality nature.
3. Regulatory
The Bank may invest in those assets that are acquired
pursuant to regulation. An example of such assets is
stock in a Federal Home Loan Bank.
4. Local Community Support
Because of its position in various communities within
which it operates, the Bank is called upon to support
financing requirements of municipal, county and state
governments. Rated securities may be evaluated
similar to other types of investments. However,
unrated securities may also be purchased if the
underlying credit of the issuer is deemed to be
acceptable. The credit risk of such securities should
be carefully evaluated, with the assistance of lending
personnel when appropriate.
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5. Pledging
Associated with its liquidity objective, the portfolio
should include a sufficient amount of securities that
can be pledged to obtain public deposits and
repurchase agreements. Although public deposits and
repurchase agreements are not viewed as the primary
sources of the Bank's funding, they can be
supplemental sources of liquidity when needed.
C. Portfolios of Securitized Assets
1. Securities Held To Maturity
a. Securities the Bank purchases with the positive
intent and ability to hold to maturity shall be
designated as such at the time of purchase, and
accounted for at amortized cost in the statement of
financial position.
b. Securities classified as held to maturity will not
be disposed of except, for example, upon transfer to
the portfolio of securities available for sale
pursuant to the strict guidelines set forth in this
policy, upon the exercise of an imbedded call or put
option, or due to a material downgrade in credit
rating of two rating levels or more. Sales of
securities that have experienced such a credit
downgrade are not deemed mandatory by this policy.
2. Securities Carried at Market Value (Trading Securities)
a. Securities the Bank purchases for the purpose of
active management shall be designated as such at the
time of purchase, and accounted for at market value
in the statement of financial position. All
realized and unrealized gains and losses will,
therefore, be recognized in the current period's
earnings.
b. It is the policy of this Bank that all assets and
purchase commitments within the trading portfolio
will be hedged against interest rate risk to the
extent deemed prudent by Management. Management is
directed to pursue a trading strategy whereby
securities are purchased at a relatively wide net
hedged spread to funding cost, and sell securities
when this net hedged spread is relatively narrow.
It is Management's responsibility to determine the
conduct of this portfolio. It is the Board's
expectation that the total rate of return of this
portfolio will, over time, be superior to that of a
short-term money market portfolio, a proxy for which
shall be the London Interbank Offering Rate (LIBOR)
of one month maturity.
c. The portfolio of securities carried at market value
is limited in the sum of total assets and purchase
commitments to an aggregate market value equal in
amount to 25% of assets. Additionally, the
estimated loss exposure of the portfolio shall be
limited to an amount equal to the Bank's loans-to-
one borrower limit.
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d. In order to demonstrate the Bank's active management
of securities carried at market value, those
securities which remain in the portfolio for one
year, as of their purchase anniversary date, will be
transferred, at market value, to the portfolio of
securities available for sale. All such decisions
will be subject to review and concurrence at the
appropriate Asset/Liability meeting and will be
documented in the meeting minutes.
3. Securities Available For Sale
a. Securities the Bank purchases without the intent of
active management, or without the positive intent
and ability to hold to maturity, or such securities
transferred pursuant to this policy, shall be
designated as available for sale and accounted for
at market value with tax-effected unrecognized
market value gains or losses reflected in the equity
section of the statement of financial position.
b. It is the policy of this Bank that all assets within
the available for sale portfolio will be hedged
against interest rate risk to the extent deemed
prudent by Management.
D. Mortgage Derivative Products
1. Mortgage Derivative Products Held To Maturity
Mortgage derivative products the Bank purchases with the
positive intent and ability to hold to maturity shall,
prior to purchase, be tested in accordance with the
FFIEC Policy Statement on Securities Activities
(February 10, 1992). Securities passing the three-phase
test are acceptable investments in the portfolio of
securities held for investment. Such a security shall
be accounted for at amortized cost in the statement of
financial position.
2. Mortgage Derivative Products Carried at Market Value
Mortgage derivative products the Bank purchases with the
intent of active management will be assigned to the
portfolio of securities carried at market value. There
is no restriction on the types of mortgage derivative
products that can be purchased for this purpose, except
that imposed by regulation.
3. Mortgage Derivative Products Held as Available For Sale
Some mortgage derivative products provide mortgage
assets with protection from interest rate risk. For
example, principal-only stripped mortgage-backed
securities (POs) stripped from moderately discount-
priced MBS provide net call protection for mortgage
asset portfolios hedged with Treasury-based instruments
such as interest rate swaps or futures. The purchase
and sale of mortgage derivative products is authorized
to the extent the hedging characteristics of such
products are documented at the time of purchase and such
products provide protection from
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interest rate risk. Mortgage derivative products qualifying
under this section are limited to the following:
a. Principal-only securities derived from collateral
priced below par in the market at purchase, or
principal-only tranches derived from principal-only
securities;
d. Any other derivative product with unambiguous
hedging properties that can be demonstrated at
purchase, as permitted by applicable regulations.
The purchase of such an asset will lead to a
revision of this policy wherein the specified
derivative security type will be listed above.
4. Internal Control of Derivative Products
a. Investment Limitations on High Risk Mortgage
Derivative Products
1) Total investment in high risk derivative products
shall not exceed 25% of Unimpaired capital;
2) Specific investment in any one high risk mortgage
derivative product shall not exceed the
limitation above or the limitation on loans-to-
one borrower, whichever is less.
b. Testing
Prior to purchase, all mortgage derivative products
will be tested in accordance with the FFIEC Policy
Statement on Securities Activities (February 10,
1992). Securities passing the applicable tests may
be held-to-maturity. Securities failing any one of
the applicable tests will be deemed "high risk," and
must be held as available for sale or trading, based
on management's intent. All mortgage derivative
products will be re-tested in July of each year.
Additionally, high risk securities will be re-tested
in January, April and October of each year to ensure
quarterly testing in accordance with the FFIEC
Policy Statement. Any securities held for
investment that fail a subsequent test must be
reclassified as available for sale or trading, as
appropriate.
Assumptions used for conducting the tests must be
retained with the test results. The following
methods of testing are acceptable:
1) Tests using Bloomberg analytics based on
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median prepayments of Wall Street dealers;
2) Tests using models developed by, or approved
by, BancTEXAS personnel based on reasonable
and documented prepayment assumptions.
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c. Reporting
All purchases and sales of high risk mortgage
derivative products will be reported to the
President and the Board of Directors with a
description of the product. Such reports will
include the economic rational for the transaction
and its impact on the Bank's Net Market Value over
an 8% range of interest rate shifts. Additionally,
their combined impact on the Bank's Net Market
Value, covering the same span of interest rates,
will be reported to the Board of Directors on a
monthly basis.
d. Recordkeeping
Records shall be maintained detailing the rationale
for transactions, as well as an evaluation regarding
the expected and actual performance of such
securities. Such records are to be sufficiently
detailed so as to enable internal auditors and
examiners to verify:
1) the intent of the initial purchase was consistent
with the objectives embodied within this policy,
and;
2) the Board has reviewed, at least quarterly, all
high-risk mortgage securities to determine
whether these instruments are adequately
satisfying the interest rate risk reduction
objectives of this policy.
e. Counterparty Limits
The approved counterparties and aggregate limits
listed in this policy for counterparties to interest
rate exchange agreements shall apply to the
aggregate agreements, OTC options and applicable
off-balance sheet mortgage derivative products per
counterparty.
E. Portfolio of Non-Securitized Assets
Due to pricing decisions in its own loan markets, net
shrinkage on interest-earning assets, or relatively
attractive pricing from time to time in other markets,
Management may choose to invest in purchased whole loans.
Such a purchase will be conducted consistent with the
Financial Management Pricing Objective with full
consideration of the credit risk present in such an asset.
All purchases of whole loans, unless specifically indicated
and documented otherwise, are done so with the positive
intent and ability to hold such whole loans to maturity.
Therefore, all such whole loans will be accounted for at
amortized cost in the statement of financial position.
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VI. LIABILITIES
A. In the selection of various funding sources to support the
asset base of the Bank, the Board acknowledges a bias in
favor of retail deposits. This bias is caused by the
inherent stability, collateral efficiency and the typical
cost benefit of using such funds. This bias
notwithstanding, the Board supports a practice of utilizing
the funding source with the lowest all-in cost.
B. Due to marginal pricing decisions, the potentially negative
economic impact of rapid growth in the retail deposit base,
or attractive pricing from time to time in other markets,
the Board anticipates that Management will augment its
deposit-oriented source of funds with other liability
types. These types will include, but not be limited to:
1. Federal Home Loan Bank Advances;
2. Federal Funds Purchased under Agreement to be Resold
3. Secured or Unsecured Debt;
4. Reverse Repurchase Agreements;
5. Dollar Reverse Repurchase Agreements.
VII. HEDGE INSTRUMENTS
A. Futures
1. Purpose
The purpose for the use of financial futures contracts
is to hedge assets in portfolios of securities carried
at market value or held as available for sale. The
Board expressly forbids the use of futures contracts for
speculative purposes.
2. Accounting
a. Hedging Securities Carried at Market Value (Trading
Securities)
All market value gains or losses will be reflected
in the statement of income.
b. Hedging Securities Held as Available for Sale
All unrecognized gains will be reflected as a tax-
effected adjustment to equity section of the
statement of position. Recognized gains will be
reflected in the statement of income to the extent
that the asset(s) being hedged has been liquidated.
If the hedged asset(s) has not been liquidated,
recognized gains will be reflected as a tax-effected
adjustment to the equity section of the statement of
position. Such recognized gains will be amortized
over the original term of the hedge and reflected in
the statements of income over the amortization
period.
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3. Types of Permissible Contracts
It is the Bank's policy to limit financial futures
transactions to interest rate contracts listed on
either the Chicago Board of Trade or the Chicago
Mercantile Exchange.
4. Limits on Number of Permissible Contracts
a. Treasury Bond Futures - 2,000 contracts, or
$200,000,000 face amount
b. Treasury Note Futures - 3,000 contracts, or
$300,000,000 face amount
c. Treasury Bill Futures - 5,000 contracts, or
$5,000,000,000 face amount
d. Eurodollar Futures - 5,000 contracts, or
$5,000,000,000 face amount
5. Internal Controls of Futures Activity
The following principles will be applied by Management
to ensure futures positions and activities are conducted
in a safe and sound manner:
a. The individuals that execute futures transactions
will be different from those individuals recording
the futures transactions;
b. The Bank will independently track daily settlement
amounts for comparison with broker calculated
amounts to ensure accuracy;
c. A summary of the Bank's futures positions will be
presented to the Board of Directors at each
regularly scheduled meeting.
B. Options
1. Purpose
The Bank acknowledges that the price sensitivity of most
mortgage-related assets, as well as callable and
structured securities, will change disproportionately
for interest rate swings of greater than 100 basis
points. Such asymmetrical sensitivities give rise to
the need for options. It will be the policy of the Bank
to make the purchase of options deemed prudent by
Management, subject to the review by the Board of
Directors. Sales of options are permitted only to the
extent that sales are offset by existing long positions
having either the same strike price or one that is
closer "to-the-money." Additionally, the Board
expressly forbids the use of options contracts for
speculative purposes.
2. Types of Permissible Contracts
It is the Bank's policy to purchase options from one of
two sources: Exchange traded options contracts listed
on either the Chicago Board of Trade or the Chicago
Mercantile Exchange; or over-the-counter (OTC) options
written by corporate entities that have long-term debt
ratings of no lower than "A", as determined by either
Moody's or Standard and Poor's Ratings Services. The
permissible
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exchange-traded contracts are limited to options on Treasury
Bond Futures, Treasury Note Futures, Treasury Bill Futures, and
Eurodollar Futures.
3. Limits on Number of Permissible Contracts
a. Exchange Traded Options
1) Treasury Bond Futures - 10,000 contracts, or
$1,000,000,000 face amount;
2) Treasury Note Futures - 10,000 contracts, or
$1,000,000,000 face amount;
3) Treasury Bill Futures - 10,000 contracts, or
$10,000,000,000 face amount;
4) Eurodollar Futures - 5,000 contracts, or
$5,000,000,000 face amount.
b. Over-the-Counter Options
Because of the wide diversity of OTC options, the
limitations on such options will relate to the
degree of counterparty credit risk assumed. The
approved counterparties and aggregate limits
established pursuant to this policy for
counterparties of interest rate exchange agreements
shall additionally be applied to the aggregate
notional amount of interest rate exchange agreements
and OTC options for each counterparty. For each
such counterparty, aggregate exposure shall be
limited to the applicable loans-to-one borrower
limit.
4. Internal Controls of Options Activity
The same controls that have been mandated by the Board
in the previous section relating to futures activity
shall apply to options activity.
C. Interest Rate Exchange Agreements
1. Purpose
Interest rate exchange agreements serve to protect the
Bank from interest rate risk by extending the maturity
of short-term liabilities. The Board expressly forbids
the use of such agreements for speculative purposes.
2. Approved Counterparties
Management is permitted to enter into interest rate
exchange agreements with any counterparty that is an
Approved Broker or Dealer, as named in this policy, or
is identified as a "Primary Dealer" as determined by the
Federal Reserve Bank of New York, provided such
counterparties have long-term debt ratings, as
determined by Moody's or Standard and Poor's, of no
lower than A/A. If a primary dealer who is unnamed in
this policy is selected as a counterparty, the policy
will be amended to add said dealers name, and said
dealer will be subject to the same level of credit
scrutiny as required in this policy for named
counterparties.
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3. Counterparty Credit Exposure
Any interest rate exchange agreement, or OTC option,
carries the potential of loss due to the counterparty's
failure to fulfill its obligation under such agreement.
For this reason, minimizing counterparty credit risk is
of great importance. Since the degree of credit risk
does not relate directly to the aggregate notional
amount of positions with a given counterparty, it is
impractical to assign counterparty limits relating to
notional amount. Consequently, Management is charged
with the responsibility of minimizing counterparty
credit risk by assessing the incremental credit impact
of any anticipated transaction, as it relates to
existing or potential counterparties. Further,
Management should actively seek, whenever economically
practical, to conduct prospective transactions with
counterparties such that the resulting aggregate
exposure is less than that which would exist prior to
the transaction, or such that the resulting aggregate
exposure of the Bank, if greater, is minimized.
Explicit in this mandate is the prudent diversification
of swap and OTC option positions among approved
counterparties that comprise efficient market-makers.
If the aggregate exposure of a given counterparty
exceeds the applicable loans-to-one borrower limit,
Management is directed to modify an existing position(s)
such that the counterparty exposure is reduced below the
loans-to-one borrower limitation. However, this
requirement is waived when counterparty credit exposure
is adequately covered by collateral held by BancTEXAS or
with an acceptable third party. Management will report
quarterly on existing aggregate positions with each
counterparty and their respective applicable limits.
D. Accounting
Accounting for Financial futures, options, and interest
rate exchange agreements will be consistent with Generally
Accepted Accounting Principles.
VIII. RESPONSIBILITY FOR ASSET/LIABILITY MANAGEMENT
A. Asset/Liability Management Committee
The overall Asset/Liability and Investment affairs of the
Bank are the responsibility of the Board and President of
the Bank. The Board and President will base its decisions
regarding asset/liability management upon information and
recommendations formulated by the Asset/Liability
Management Committee of First Banks, Inc, acting as
consultant. Minutes of any meetings held to decide
asset/liability policy and strategy will be maintained.
B. Authorities, Duties and Responsibilities for Financial
Transactions
1. The Bank has retained Messrs. Allen H. Blake, Stan
C. Faries and Edward D. Furman, officers of First
Banks, Inc., to give investment advice to the Bank.
Subject to prior approval by the President and Chief
Investment Officer of the Bank, Nathan C. Collins,
or in his absence by the Regional President and
Investment Officer of the Bank, David F. Weaver,
Messrs. Allen H. Blake, Stan C. Faries and Edward D.
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Furman, officers of First Banks, Inc., are hereby
jointly and severally authorized on the behalf of
the Bank:
a. To purchase and sell for any Bank Portfolios, on a
current or forward settlement basis, securities and
other investments as listed below. Such securities
shall include mortgage derivative products as
defined in the FFIEC Policy Statement on Securities
Activities (February 10, 1992), to the extent
permitted by regulation.
1) Direct obligations of the U. S. Treasury
2) Obligations of U. S. Government agencies and
corporations:
a) General obligation and debt issues
b) Mortgage-backed and mortgage derivative
securities
3) Obligations of states and political
subdivisions, subject to the credit limitations
detailed below:
a) General obligations
b) Industrial revenue bonds
c) Other revenue bonds
4) Certificates of deposit and time deposits,
including:
a) Regular domestic certificates of deposit
which are direct placements and are
insured for principal and interest by BIF
or SAIF
b) Eurodollar certificates of deposit and
time deposits
c) Domestic certificates of deposit and time
deposits of foreign banks
5) Bankers' acceptances and commercial paper
6) Corporate bonds and notes
7) Mortgage-backed securities and mortgage
derivative securities issued by private issuers
8) Asset-backed securities
9) Mutual funds, whose underlying assets are
solely comprised of assets that can be invested
directly in under this policy
b. To purchase or sell securities and money-market
instruments under repurchase, reverse repurchase or
dollar reverse repurchase agreements. Collateral
for repurchase agreements shall be held by the Bank,
the Bank's custodian, or a third party custodian.
In no circumstances is such collateral to be held by
a dealer who is counterparty to the repurchase
agreement transaction.
c. To purchase or sell financial futures and options on
financial futures as governed by this policy
statement.
d. To enter into interest rate exchange agreements and
interest rate protection agreements as governed by
this policy statement.
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e. To enter into advances from banks within the Federal
Home Loan Bank System and to negotiate other
borrowings.
2. All purchases and sales made shall be agreed upon by
any two individuals named above prior to the
transaction. Exceptions to this are short-term
investments and short-term borrowing transactions that
may be made by any one person in order to assure
maintenance of proper levels of liquidity.
Additionally, any transaction listed below requires the
prior approval of Mr. Blake:
a. Any transaction with a principal or notional amount
in excess of $25 million;
b. Any transaction involving a high risk mortgage
derivative security as defined in the FFIEC Policy
Statement on Securities Activities (February 10,
1992);
c. Any interest rate swap or futures transaction
creating over $2 million of average sensitivity for
rate movements of +/- 100 basis points.
3. All transactions and commitments, except for short-
term investments and short-term borrowing
transactions, will be submitted to the Board for
ratification at the next meeting.
4. The individuals named above are prohibited from
conducting personal transactions of a similar nature
as those conducted on the Bank's behalf with the
same securities dealer. The Corporate Secretary is
directed to provide certified copies of this
prohibition to the Approved Securities Dealers, as
named in this policy.
C. Credit Criteria and Quality Ratings
1. Rated municipal securities must be rated Baa/BBB or
higher if the security is a general obligations
security. Revenue bonds and corporate bonds must be
rated at least A/A. Insured bonds must be analyzed to
determine the underlying creditworthiness of the
insurer. The minimum acceptable underlying rating is
Baa/BBB.
2. Instate general obligation bonds that are non-rated
will be purchased only after the creditworthiness of the
issuer has been established. Out-of-state non-rated
general obligation bonds will not be purchased, unless
prior approval of the Board has been received. These
should be evaluated by lending personnel to determine
creditworthiness.
3. Industrial development revenue bonds may also be
purchased by the Bank. These should be evaluated by
lending personnel to determine creditworthiness, since
the bonds are the obligation of the underlying
corporation rather than that of the municipality.
4. Certificates of deposit, time deposits, Eurodollar
deposits, Federal funds sales and bankers' acceptances
will be limited to obligations of selected institutions
(foreign and domestic). These institutions will be
selected based on their creditworthiness
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and their ability to serve our money market asset needs. The
credit exposure to Correspondent Banks, including Federal funds
sales, time deposits and demand deposits are reviewed no less
frequently than quarterly by the Board, as outlined in the
bank's Regulation "F" policy - Interbank Liability Risk
Management
5. Collateralized mortgage obligations, REMICs, or
passthrough securities that are privately issued will
only be purchased if rated no lower than Aa/AA.
Collateralized mortgage obligations, REMICs, or
passthrough securities issued by GNMA, FNMA or FHLMC, or
securities backed by GNMA, FNMA or FHLMC mortgage
securities require no credit analysis.
D. Limitation of Transaction Amounts
1. The purchase of loans or securities on a current or
future basis shall not be in excess of reasonably
anticipated sources of funds.
2. The purchase of forward commitment contracts shall not
exceed limitations imposed by applicable regulations.
3. The amount of borrowing under reverse repurchase
agreements shall not exceed the amount of collateral
owned by the Bank which is considered eligible by those
firms designated as Approved Brokers and Dealers in
this policy and/or banks within the Federal Home Loan
Bank System.
E. Diversification/Concentration
The investment portfolio should be structured to provide
diversification of securities and risks. This includes not
only avoiding undue concentration in securities of a single
issuer or type of security, but also spreading maturities
to avoid excessive maturities in a single period and
varying the geographic area of the underlying collateral,
structure, weighted average maturity and weighted average
coupon of mortgage-backed and mortgage derivative
securities to alter the effect of prepayments.
Generally, not more than 100% of Unimpaired Capital should
be invested in any single obligation of the U. S. Treasury
or U. S. Government agencies or corporations. Investments
in the debt obligations of any non-Government or non-
Governmental agency issuer will be limited to 20% of the
bank's Unimpaired Capital. Investments in obligations of
states and political subdivisions will be limited to an
aggregate of not more than 5% of assets for instate issuers
and 2% of assets for issuers from other states.
F. Approved Brokers and Dealers
1. The firms listed below are approved for all securities
transactions. They are chosen from the list of
"Primary Dealers" as determined by the Federal Reserve
Bank of New York. In order to qualify as a "Primary
Dealer," a firm is expected to make markets in the full
range of Treasury Issues. In addition, each firm must
exceed the minimum capital standards for their industry
and demonstrate the internal systems
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to manage their positions and credit risks. In looking at a
firm's capital strength, capital is related to the risk
exposure of positions taken. Additionally, the
experience and capability of a firm and its key
personnel are also considered. A Primary Dealer is
expected to have strong management, experienced trading
personnel, an efficient sales staff and operational
capabilities to process and account for its
transactions efficiently and accurately. Proper
controls of all operations by management and auditing
staffs are also essential. These aspects of a firm,
among others, are reviewed in on-site inspections by
the Federal Reserve Bank of New York's Dealer
Surveillance Staff. Each of these dealers has
demonstrated a consistent willingness to provide
complete and timely disclosure of financial
information.
Management is charged with the responsibility of
formalizing and documenting the broker and counterparty
review process and establishing exposure limits based
on each firm's financial strength. Compliance with
these exposure limits will be documented and reported
quarterly to the Board. First Banks, Inc. personnel
have had long-standing relationships with each firm,
and have found each to have a reputation for fair and
honest dealings. However, First Banks, Inc. and Bank
personnel shall not rely upon advice of any
representatives of said firms due to potential
conflicts of interest that may be detrimental to the
Bank.
a. Merrill Lynch Government Securities, Inc.;
b. Salomon Brothers, Inc. and its affiliate, Salomon
Swapco;
c. Prudential Securities, Inc.;
d. CS First Boston and its parent, Credit Suisse;
e. Lehman Brothers Government Securities, Inc.
f. Bankers Trust;
g. J. P. Morgan and its affiliate, Morgan Guaranty
Trust;
h. Kidder Peabody & Co., Inc.
2. Management is authorized to deal with any other Primary
Dealer without the credit review required above,
provided that no transaction with such a dealer creates
a commitment or obligation that extends for a period
exceeding four months.
3. Management is authorized to deal with other firms that
are not Primary Dealers if such transactions are
conducted on a "delivery versus payment" basis through
a Primary Dealer or a Federal Reserve Bank.
4. In addition to those firms listed above, Management is
authorized to deal with:
a. Any bank in the Federal Home Loan Bank System;
b. Any bank in the Federal Reserve Bank System;
c. Federal Home Loan Mortgage Corporation;
d. Federal National Mortgage Association;
e. Government National Mortgage Association.
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G. Safekeeping
The approved safekeeping agents for BancTEXAS are:
1. Any Federal Reserve Bank;
2. Any bank in the Federal Home Loan Bank System;
3. Any banking organization considered "adequately
capitalized" by regulatory authorities;
4. Approved Broker / Dealers listed in section F.1. above
5. Eurodollar CD's may be held in safekeeping by the
issuing bank.
IX. EXCEPTIONS
It is recognized that circumstances will arise in which
exceptions to this policy are in the best interest of the Bank.
When this occurs, the exceptions will be reviewed by the
President and the reasons therefore documented. These
exceptions will then be reported to the Board of Directors at
the next scheduled meeting.
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