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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2021-03-08 compared with 2020-03-06 · 94 added, 90 removed, 84 unchanged (69% of the section changed)

Quantitative and Qualitative Disclosures about Market Risk.

liability management involves developing, executing and monitoring strategies to maintain appropriate liquidity, maximize net

interest income and minimize the impact that significant fluctuations in market interest rates would have on current and future

The business of the Company and the composition of its balance sheet consist of investments in interest-earning assets

(primarily loans, mortgage-backed securities, and securities available-for-sale) which are primarily funded by interest-bearing

liabilities (deposits and borrowings).

With the exception of specific loans which are originated and held for sale, all of the

financial instruments of the Company are for other than trading purposes.

All of the Company’s transactions are denominated

dollars with no specific foreign exchange exposure.

In addition, the Company has limited exposure to commodity prices

related to agricultural loans.

The impact of changes in foreign exchange rates and commodity prices on interest rates are assumed

to be insignificant.

The Company’s financial instruments have varying levels of sensitivity to changes in market interest

rates resulting in market risk.

Interest rate risk is the Company’s primary market risk exposure;

to a lesser extent, liquidity

risk also impacts market risk exposure.

rate risk is the exposure of a banking institution’s financial condition to adverse movements in interest rates.

this risk can be an important source of profitability and shareholder value;

however, excessive levels of interest rate risk could

pose a significant threat to the Company’s earnings and capital base.

Accordingly, effective risk management that maintains

interest rate risks at prudent levels is essential to the Company’s safety and soundness.

a financial institution’s exposure to changes in interest rates includes assessing both the adequacy of the management process

used to control interest rate risk and the organization’s quantitative level of exposure.

When assessing the interest rate

risk management process, the Company seeks to ensure that appropriate policies, procedures, management information systems and

internal controls are in place to maintain interest rate risks at prudent levels of consistency and continuity.

Evaluating the

quantitative level of interest rate risk exposure requires the Company to assess the existing and potential future effects of

changes in interest rates on its consolidated financial condition, including capital adequacy, earnings, liquidity and asset quality

(when appropriate).

FRB together with the OCC and the FDIC adopted a Joint Agency Policy Statement on interest rate risk effective June 26, 1996.

The policy statement provides guidance to examiners and bankers on sound practices for managing interest rate risk, which will

form the basis for ongoing evaluation of the adequacy of interest rate risk management at supervised institutions.

statement also outlines fundamental elements of sound management that have been identified in prior Federal Reserve guidance and

discusses the importance of these elements in the context of managing interest rate risk.

Specifically, the guidance emphasizes

the need for active board of director and senior management oversight and a comprehensive risk management process that effectively

identifies, measures and controls interest rate risk.

institutions derive their income primarily from the excess of interest collected over interest paid.

The rates of interest an

institution earns on its assets and owes on its liabilities generally are established contractually for a period of time.

market interest rates change over time, an institution is exposed to lower profit margins (or losses) if it cannot adapt to interest

rate changes.

For example, assume that an institution’s assets carry intermediate or long-term fixed rates and that those

assets are funded with short-term liabilities.

If market interest rates rise by the time the short-term liabilities must be refinanced,

the increase in the institution’s interest expense on its liabilities may not be sufficiently offset if assets continue

to earn at the long-term fixed rates.

Accordingly, an institution’s profits could decrease on existing assets because the

institution will either have lower net interest income or possibly, net interest expense.

Similar risks exist when assets are

subject to contractual interest rate ceilings, or rate-sensitive assets are funded by longer-term, fixed-rate liabilities in a

declining rate environment.

are several ways an institution can manage interest rate risk including:

1) matching repricing periods for new assets and liabilities,

for example, by shortening or lengthening terms of new loans, investments, or liabilities;

2) selling existing assets or repaying

certain liabilities;

and 3) hedging existing assets, liabilities, or anticipated transactions.

An institution might also invest

in more complex financial instruments intended to hedge or otherwise change interest rate risk.

Interest rate swaps, futures contracts,

options on futures contracts, and other such derivative financial instruments can be used for this purpose.

Because these instruments

are sensitive to interest rate changes, they require management’s expertise to be effective.

The Company has not purchased

derivative financial instruments in the past, but during 2019 and 2018 the Company entered into interest rate swap agreements

as an accommodation to certain loan customers (see Note 6 to the Consolidated Financial Statements).

The Company may purchase

such instruments in the future if market conditions are favorable.

following table details quantitative disclosures of market risk and provides information about the Company’s financial instruments

used for purposes other than trading that are sensitive to changes in interest rates as of December 31, 2019.

The table does not

present when these items may actually reprice.

For loans receivable, securities, and liabilities with contractual maturities,

the table presents principal cash flows and related weighted-average interest rates by contractual maturities as well as the historical

impact of interest rate fluctuations on the prepayment of loans and mortgage backed securities.

For core deposits (demand deposits,

interest-bearing checking, savings, and money market deposits) that have no contractual maturity, the table presents principal

cash flows and applicable related weighted-average interest rates based upon the Company’s historical experience, management’s

judgment and statistical analysis, as applicable, concerning their most likely withdrawal behaviors.

The current historical interest

rates for core deposits have been assumed to apply for future periods in this table as the actual interest rates that will need

to be paid to maintain these deposits are not currently known.

Weighted-average variable rates are based upon contractual rates

existing at the reporting date.

Asset liability management involves developing,

executing and monitoring strategies to maintain appropriate liquidity, maximize net interest income and minimize the impact that

significant fluctuations in market interest rates would have on current and future earnings.

The business of the Company and the

composition of its balance sheet consist of investments in interest-earning assets (primarily loans, mortgage-backed securities,

and securities available-for-sale) which are primarily funded by interest-bearing liabilities (deposits and borrowings).

exception of specific loans which are originated and held for sale, all of the financial instruments of the Company are for other

than trading purposes.

All of the Company’s transactions are denominated in U.S.

dollars with no specific foreign exchange

In addition, the Company has limited exposure to commodity prices related to agricultural loans.

The impact of changes

in foreign exchange rates and commodity prices on interest rates are assumed to be insignificant.

The Company’s financial

instruments have varying levels of sensitivity to changes in market interest rates resulting in market risk.

Interest rate risk

is the Company’s primary market risk exposure;

to a lesser extent, liquidity risk also impacts market risk exposure.

Interest rate risk is the exposure of a

banking institution’s financial condition to adverse movements in interest rates.

Accepting this risk can be an important

source of profitability and shareholder value;

however, excessive levels of interest rate risk could pose a significant threat

to the Company’s earnings and capital base.

Accordingly, effective risk management that maintains interest rate risks at

prudent levels is essential to the Company’s safety and soundness.

Evaluating a financial institution’s

exposure to changes in interest rates includes assessing both the adequacy of the management process used to control interest rate

risk and the organization’s quantitative level of exposure.

When assessing the interest rate risk management process, the

Company seeks to ensure that appropriate policies, procedures, management information systems and internal controls are in place

to maintain interest rate risks at prudent levels of consistency and continuity.

Evaluating the quantitative level of interest

rate risk exposure requires the Company to assess the existing and potential future effects of changes in interest rates on its

consolidated financial condition, including capital adequacy, earnings, liquidity and asset quality (when appropriate).

The FRB together with the OCC and the FDIC

adopted a Joint Agency Policy Statement on interest rate risk effective June 26, 1996.

The policy statement provides guidance to

examiners and bankers on sound practices for managing interest rate risk, which will form the basis for ongoing evaluation of the

adequacy of interest rate risk management at supervised institutions.

The policy statement also outlines fundamental elements of

sound management that have been identified in prior Federal Reserve guidance and discusses the importance of these elements in

the context of managing interest rate risk.

Specifically, the guidance emphasizes the need for active board of director and senior

management oversight and a comprehensive risk management process that effectively identifies, measures and controls interest rate

Financial institutions derive their income

primarily from the excess of interest collected over interest paid.

The rates of interest an institution earns on its assets and

owes on its liabilities generally are established contractually for a period of time.

Since market interest rates change over time,

an institution is exposed to lower profit margins (or losses) if it cannot adapt to interest rate changes.

For example, assume

that an institution’s assets carry intermediate or long-term fixed rates and that those assets are funded with short-term

If market interest rates rise by the time the short-term liabilities must be refinanced, the increase in the institution’s

interest expense on its liabilities may not be sufficiently offset if assets continue to earn at the long-term fixed rates.

an institution’s profits could decrease on existing assets because the institution will either have lower net interest income

or possibly, net interest expense.

Similar risks exist when assets are subject to contractual interest rate ceilings, or rate-sensitive

assets are funded by longer-term, fixed-rate liabilities in a declining rate environment.

There are several ways an institution can

manage interest rate risk including:

1) matching repricing periods for new assets and liabilities, for example, by shortening or

lengthening terms of new loans, investments, or liabilities;

2) selling existing assets or repaying certain liabilities;

hedging existing assets, liabilities, or anticipated transactions.

An institution might also invest in more complex financial instruments

intended to hedge or otherwise change interest rate risk.

Interest rate swaps, futures contracts, options on futures contracts,

and other such derivative financial instruments can be used for this purpose.

Because these instruments are sensitive to interest

rate changes, they require management’s expertise to be effective.

The Company has not purchased derivative financial instruments

in the past, but during 2019 and 2018 the Company entered into interest rate swap agreements as an accommodation to certain loan

customers (see Note 10 to the Consolidated Financial Statements).

The Company may purchase such instruments in the future if market

conditions are favorable.

The following table details quantitative

disclosures of market risk and provides information about the Company’s financial instruments used for purposes other than

trading that are sensitive to changes in interest rates as of December 31, 2020.

The table does not present when these items may

actually reprice.

For loans receivable, securities, and liabilities with contractual maturities, the table presents principal

cash flows and related weighted-average interest rates by contractual maturities as well as the historical impact of interest

rate fluctuations on the prepayment of loans and mortgage backed securities.

For core deposits (demand deposits, interest-bearing

checking, savings, and money market deposits) that have no contractual maturity, the table presents principal cash flows and applicable

related weighted-average interest rates based upon the Company’s historical experience, management’s judgment and

statistical analysis, as applicable, concerning their most likely withdrawal behaviors.

The current historical interest rates

for core deposits have been assumed to apply for future periods in this table as the actual interest rates that will need to be

paid to maintain these deposits are not currently known.

Weighted-average variable rates are based upon contractual rates existing

at the reporting date.

Principal/Notional Amount Maturing or Assumed to be Withdrawn

37 unchanged sentences

Average interest rate

of 2019 to 2018

Comparison of 2020 to 2019

($ in thousands)

43 unchanged sentences

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