CB Financial Services, Inc. 10-Q

Item 3. Quantitative and Qualitative Disclosure about Market Risk. General. The majority of the Company’s assets and liabilities are monetary in nature. Consequently, the Company’s most significant form of market risk is interest rate risk and a principal part of its business strategy is to manage interest rate risk by reducing the exposure of net interest income to changes in market interest rates. Accordingly, the Company’s Board has established an Asset/Liability Management Committee, which is responsible for evaluating the interest rate risk inherent in the Company’s assets and liabilities, for determining the level of risk that is appropriate given the Company’s business strategy, operating environment, capital, liquidity and performance objectives; and for managing this risk consistent with the guidelines approved by the Board. Senior management monitors the level of interest rate risk and the Asset/Liability Management Committee meets on a quarterly basis to review its asset/liability policies and position and interest rate risk position, and to discuss and implement interest rate risk strategies. Economic Value of Equity . The Company monitors interest rate risk through the use of a simulation model that estimates the amounts by which the fair value of its assets and liabilities (its economic value of equity, or “EVE”) would change in the event of a range of assumed changes in market interest rates. The quarterly reports developed in the simulation model assist the Company 52 Table of Contents in identifying, measuring, monitoring and controlling interest rate risk to ensure compliance within the Company’s policy guidelines. The table below sets forth, as of September 30, 2020, the estimated changes in EVE that would result from the designated instantaneous changes in market interest rates. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results. (Dollars in thousands) Economic Value of Equity EVE as a Percent of Portfolio Value of Assets Earnings at Risk Change in Interest Rates in Basis Points ("bp") Dollar Amount Dollar Change Percent Change NPV Ratio Change Dollar Amount Dollar Change Percent Change +300 bp $ 143,389 $ 7,252 5.3 % 11.07 % 132 bp $ 45,995 $ 9,177 24.9 % +200 bp 143,822 7,685 5.6 10.82 107 43,504 6,686 18.2 % +100 bp 142,697 6,560 4.8 10.45 70 40,052 3,234 8.8 % Flat 136,137 — — 9.75 — 36,818 — — % -100 bp 140,703 4,566 3.4 9.97 22 34,449 (2,369) (6.4) % Certain shortcomings are inherent in the methodology used in the above interest rate risk measurement. Modeling changes in EVE require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the EVE tables presented assume that the composition of the Company’s interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured, and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the EVE tables provide an indication of the Company’s interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on EVE and will differ from actual results. EVE calculations also may not reflect the fair values of financial instruments. For example, changes in market interest rates can increase the fair values of the Company’s loans, deposits and borrowings.