SAMPLE 4 – Original
All of the Company’s securities with the exception of $35,000 in equities are issued by the U.S. Treasury or by a U.S. Government Agency. Therefore, little credit risk exists in the portfolio. The risk inherent in the Company’s security portfolio is interest rate risk and option risk. The U.S. Treasury Note and Agency debentures are purchased with a final maturity of no greater than four years. The Company owns a limited number of Agency callables. It is the Company’s policy not to buy callables with a final maturity of greater than five years. The Company owns a $35.0 million portfolio of Agency issued mortgage-backed securities. These are comprised of $5 million in Collateralized Mortgage Obligations with the remainder of the portfolio in mortgage-backed pass-through securities. These securities are subject to prepayment risk when rates decline, and to extension risk when rates increase. Prepayments can lower the yield on securities that were purchased at a premium. The Company manages prepayment risk by buying its mortgage-backeds with a variety of coupon rates and at a variety of price levels. Extension risk, on the other hand, increases the average life of the security without a corresponding increase in yield. The Company minimizes its extension risk by maintaining the majority of its mortgage-backed securities in balloon mortgage-backed securities with original maturities no greater than seven years.
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