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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2025-03-07 compared with 2024-03-08 · 79 added, 92 removed, 2 unchanged (99% of the section changed)

Quantitative and Qualitative Disclosures about Market Risk.

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).

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 in U.S.

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.

Interest rate risk is the exposure of a banking

institution’s financial condition and results 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

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.

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 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.

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;

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 2023 and 2022 the Company

entered into interest rate swap agreements as an accommodation to certain loan customers (see Note 8 to the Consolidated Financial Statements).

The Company may purchase such instruments in the future if market conditions are favorable.

The Company manages its interest rate risk by

the employment of strategies to assure that desired levels of both interest-earning assets and interest-bearing liabilities mature or

reprice with similar time frames.

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.

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

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 in U.S.

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 and results 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.

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 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.

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.

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.

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

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 2024 and 2023 the Company entered into interest rate swap agreements as an accommodation to certain loan customers

(see Note 8 to the Consolidated Financial Statements).

The Company may purchase such instruments in the future if market conditions are

Company manages its interest rate risk by the employment of strategies to assure that desired levels of both interest-earning assets

and interest-bearing liabilities mature or reprice with similar time frames.

Such strategies include:

1) loans receivable which are renewed (and repriced) annually, 2) variable

rate loans, 3) certificates of deposit with terms from one month to six years, 4) securities available-for-sale which mature at various

times primarily from one through ten years, 5) federal funds borrowings with terms of one day to 90 days, and 6) FHLB borrowings with

terms of one day to ten years.

Management believes the most significant impact

on financial results is the Company’s ability to react to changes in interest rates.

Management seeks to maintain an essentially

balanced position between interest sensitive assets and liabilities and actively manages loan, security, and liability maturities in order

to protect against the effects of wide interest rate fluctuations on net income and shareholders’ equity.

For additional quantitative and qualitative information

regarding the Company’s interest rate risk, refer to the section captioned “Liquidity” under Item 7.

Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-K, which is incorporated herein by reference.

1) loans receivable which are renewed

(and repriced) annually, 2) variable rate loans, 3) certificates of deposit with terms from one month to six years, 4) securities available-for-sale

which mature at various times primarily from one through ten years, 5) federal funds borrowings with terms of one day to 90 days, and

6) FHLB borrowings with terms of one day to ten years.

believes the most significant impact on financial results is the Company’s ability to react to changes in interest rates.

seeks to maintain an essentially balanced position between interest sensitive assets and liabilities and actively manages loan, security,

and liability maturities in order to protect against the effects of wide interest rate fluctuations on net income and shareholders’

additional quantitative and qualitative information regarding the Company’s interest rate risk, refer to the section captioned

“Liquidity” under Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

in this Form 10-K, which is incorporated herein by reference.

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