HVBC 2016 Annual Report

17 Investment Activities General. Our investment policy is established by the board of directors. Our current investment policy authorizes us to invest in debt securities issued by the United States Government, agencies of the United States Government or United States Government-sponsored enterprises. The policy also permits investments in mortgage- backed securities, including pass-through securities, issued and guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae, as well as investments in federal funds and deposits in other insured institutions. In addition, management is authorized to invest in investment grade state and municipal obligations, commercial paper and corporate debt obligations within regulatory parameters. We do not engage in any investment hedging activities or trading activities, nor do we purchase any high-risk mortgage derivative products, corporate junk bonds, and certain types of structured notes. The objectives of the policy are to: • enhance profitability within our overall asset/liability management objectives; • absorb funds when loan demand is low and infuse funds when demand is high; • provide liquidity necessary to conduct our day-to-day business activities; • add high credit quality assets to our balance sheet; • improve our interest rate risk management by providing a method for maintaining an appropriate balance between the sensitivity to changes in interest rates of: 1) interest income from loans and investments; and 2) interest expense from deposits and borrowings; • provide collateral for pledging requirements; • generate a favorable return on investments without compromising other investment objectives; and • evaluate and take advantage of opportunities to generate tax-exempt income when it is appropriate given our tax position. Generally accepted accounting principles require that, at the time of purchase, we designate a security as held- to-maturity, available-for-sale, or trading, depending on our ability and intent to hold such security. Securities designated as available-for -sale are reported at fair value, while securities designated as held- to-maturity are reported at amortized cost. We do not maintain a trading portfolio. Establishing a trading portfolio would require specific authorization by the board of directors. At June 30, 2017, the held-to-maturity portfolio, which is carried at amortized cost, totaled $11.8 million, or 5.4% of total assets and the available-for-sale portfolio, which is carried at fair value, totaled $42.8 million, or 19.7% of total assets. United States Governmental Securities . We maintain these investments, to the extent appropriate, for liquidity purposes, at zero risk weighting for capital purposes and as collateral for borrowings. At June 30, 2017, United States government securities consisted of fixed-rate Small Business Administration (“SBA”) Participation Certificates. Corporate Notes . At time of purchase, we invest in investment grade corporate bonds, both fixed and floating rate instruments, and generally consisting of corporate bonds issued by large financial institutions. Collateralized Mortgage Obligations . We invest in fixed rate collateralized mortgage obligations (“CMOs”) issued by Ginnie Mae, Freddie Mac or Fannie Mae. A CMO is a type of mortgage-backed security that creates separate pools of pass-through rates for different classes of bondholders with varying maturities, called tranches. The repayments from the pool of pass-through securities are used to retire the bonds in the order specified by the bonds’ prospectus.