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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2022-02-28 compared with 2021-02-26 · 14 added, 38 removed, 20 unchanged (72% of the section changed)

1 unchanged sentence

Interest Rate Sensitivity

The Company faces market risk to the extent that its net interest income and its fair market value of equity are affected by changes in market interest rates.

The asset/liability management discipline as applied by the Company seeks to limit the volatility, to the extent possible, of both net interest income and the fair market value of equity that can result from changes in market interest rates.

The Company faces market risk to the extent that its net interest income is affected by changes in market interest rates.

The asset/liability management discipline as applied by the Company seeks to limit the volatility, to the extent possible, that can result from changes in market interest rates.

This is accomplished by limiting the concentration of maturities of fixed rate investments, loans, and deposits;

1 unchanged sentence

and optimizing the mix of fees and net interest income.

However, as discussed below, the Company's asset/liability position often differs significantly from most other financial holding companies with significant positive cumulative "gaps"

shown for each time horizon presented.

This asset sensitive position is caused primarily by the operations of the Company, which generate large balances of accounts and drafts payable.

These balances, which are noninterest bearing, contribute to the Company’s historical high net interest margin but cause the Company to become susceptible to changes in interest rates, with a decreasing net interest margin and fair market value of equity in periods of declining, like the Company is currently experiencing, interest rates and an increasing net interest margin and fair market value of equity in periods of rising interest rates.

The Company’s ALCO measures the Company's interest rate risk sensitivity on a quarterly basis to monitor and manage the variability of earnings and fair market value of equity in various interest rate environments.

The ALCO evaluates the Company's risk position to determine whether the level of exposure is significant enough to hedge a potential decline in earnings and value or whether the Company can safely increase risk to enhance returns.

The ALCO uses gap reports, 12-month net interest income simulations, and fair market value of equity analyses as its main analytical tools to provide management with insight into the Company's exposure to changing interest rates.

Management uses a gap report to review any significant mismatch between the re-pricing points of the Company’s rate sensitive assets and liabilities in certain time horizons.

However the Company's asset/liability position often differs from other financial holding companies with positive cumulative "gaps." This asset sensitive position is caused primarily by the operations of the Company, which generate large balances of accounts and drafts payable.

These balances, which are noninterest bearing, can cause the Company to become susceptible to changes in interest rates, with a decreasing net interest margin in periods of declining interest rates, like the Company is currently experiencing, and an increasing net interest margin in periods of rising interest rates.

The Company’s ALCO measures the Company's interest rate risk sensitivity on a quarterly basis to monitor and manage the variability of earnings in various interest rate environments.

The ALCO evaluates the Company's risk position to determine whether the level of exposure is significant enough to hedge a potential decline in earnings or whether the Company can safely increase risk to enhance returns.

Management uses a gap report to review any significant mismatch between the re-pricing points of the Company’s rate sensitive assets and liabilities in certain time horizons.

A negative gap indicates that more liabilities re-price in that particular time frame and, if rates rise, these liabilities will re-price faster than the assets.

2 unchanged sentences

Basis risk involves the potential for the spread relationship between rates to change under different rate environments and embedded options risk relates to the potential for the alteration of the level and/or timing of cash flows given changes in rates.

Another measurement tool used by management is net interest income simulation, which forecasts net interest income during the coming 12 months under different interest rate scenarios in order to quantify potential changes in short-term accounting income.

Another measurement tool used by management is net interest income simulation, which forecasts net interest income during the coming 12 months under different interest rate scenarios.

Management has set policy limits specifying acceptable levels of interest rate risk given multiple simulated rate movements.

These simulations are more informative than gap reports because they are able to capture more of the dynamics within the balance sheet, such as basis risk and embedded options risk.

A table containing simulation results as of December 31, 2020, from an immediate and sustained parallel change in interest rates is shown below.

A table containing simulation results as of December 31, 2021, from an immediate and sustained parallel change in interest rates in three varying scenarios is shown below.

While net interest income simulations do an adequate job of capturing interest rate risk to short term earnings, they do not capture risk within the current balance sheet beyond 12 months.

3 unchanged sentences

Treasury curve plus appropriate credit spreads.

This representation of the change in the fair market value of equity under different rate scenarios gives insight into the magnitude of risk to future earnings due to rate changes.

This representation of the change in the fair market value

of equity under different rate scenarios gives insight into the magnitude of risk to future earnings due to rate changes.

Management has set policy limits relating to declines in the market value of equity.

The economic impact of the COVID-19 pandemic has introduced significant uncertainty and market volatility.

The table below contains the analysis, which illustrates the effects of an immediate and sustained parallel change in interest rates as of December 31, 2020:

Change in Interest Rates

% Change in Net Interest Income

% Change in Fair Market Value of Equity

+200 basis points

The table below illustrates the projected impact of interest rate shocks on net interest income as of December 31, 2021:

Change in Interest Rates % Change in Net Interest Income

+200 basis points 24%

1 unchanged sentence

-100 basis points (3%)

Interest Rate Sensitivity Position

The following table presents the Company’s interest rate risk position at December 31, 2020 for the various time periods indicated:

(In thousands)

Interest-earning assets:

Investment securities (1) :

government agencies

Investments in the FHLB and FRB

Federal funds sold and other short-term investments

Total interest-earning assets

Interest-sensitive liabilities:

Money market accounts

Savings deposits

Time deposits:

$250K and more

Less than $250K

Total interest-sensitive liabilities

Interest sensitivity gap:

Ratio of interest-earning assets to interest-sensitive liabilities:

Balances shown reflect earliest re-pricing date.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk