As a federally regulated financial institution, Peace Hills Trust Company (the Company) is required to provide public disclosure concerning its capital and certain components of risk. These disclosures are consistent with the recommendations of the Basel Committee on Banking Supervision, the body that formulated the Basel framework to strengthen the soundness and stability of the international banking system.
Peace Hills Trust Company was founded with the objective of providing financial and trust services, on a national basis, for First Nations and their communities. The Company has a primary market in First Nations’ administrations, their businesses and in their members. In addition to First Nations’ business, the Company continues to pursue business opportunities with non-First Nations’ customers. The Company is federally incorporated under the Trust and Loan Companies Act of Canada and is wholly owned by the Samson Cree Nation of Maskwacis, Alberta.
As part of the Company’s ongoing management, risks that are significant to the business are identified, monitored, and controlled. These risks include credit risk, market risk (which includes interest rate risk, currency risk and other price risks), liquidity risk, and operational risk. The Company, together with its Board of Directors, has established policies and procedures to manage these risks.
Market risk is the impact on earnings resulting from changes in financial market variables, such as interest rates and foreign exchange rates. Market risk arises when making loans, taking deposits and making investments. The company does not undertake trading activities and therefore, does not have risks related to activities such as market making, arbitrage or proprietary trading. The Company does not hold or trade in foreign currencies and, consequently, is not exposed to foreign exchange risk. The Company’s material market risk is confined to interest rates.
Interest rate risk arises from changes in interest rates that affect the securities and net interest income. Exposure to this risk directly impacts the Company’s income from its securities and loan and deposit portfolios. The Company’s objective is to earn an acceptable return on these portfolios, without taking unreasonable risk, while meeting customer needs.
The Company’s risk position is measured based on rates charged to customers. Senior management manages day-to-day interest rate risk within approved policies and reports to management’s Asset/Liability Committee (ALCO) to ensure policy compliance. Management provides reports on these matters to the Board of Directors. Tools to measure this risk include gap analysis, which shows the sensitivity between interest sensitive assets and interest sensitive liabilities, duration analysis and income sensitivity analysis.
Senior management is responsible for managing the Company’s interest rate risk, monitoring approved limits and compliance with policies. The Company manages interest rate risk by developing and implementing asset and liability management policies. The policies are approved by the Board of Directors and monitored by the ALCO. The Company’s goal is to achieve satisfactory and consistent profits, liquidity and safety. The Company makes use of financial modeling based on possible scenarios and matching analysis to measure and manage its market risk. At least annually, the Board of Directors reviews the Company’s investment and interest rate risk policies.
Liquidity risk is the risk that the Company will not have sufficient cash to meet its obligations as they come due. This risk arises from fluctuations in cash flows from lending, deposit taking, investing and other activities. Effective liquidity management ensures that adequate cash is available to honour all cash outflow obligations while limiting the opportunity cost of holding short-term assets. Maintenance of a prudent liquidity base also provides flexibility to fund loan growth and react to other market opportunities.
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