4 unchanged sentences
While a number of market factors affect the level of NII and the economic value of our assets and liabilities, changes in interest rates is the most significant aspect of our market risk.
−Removed: As such, the Company maintains a regular cadence for review and oversight of its asset-liability policies and interest rate risk positioning with oversight from senior management and the Board of Directors.
+Added: Berkshire’s general objective is to maintain a neutral or asset sensitive interest rate risk profile, as measured by the sensitivity of net interest income to market interest rate changes.
+Added: The Company maintains a regular cadence for review and oversight of its asset-liability policies and interest rate risk positioning with oversight from senior management and the Board of Directors.
The manner and extent of the movement of interest rates is an uncertainty that could have a positive or negative impact on the Company’s earnings.
4 unchanged sentences
In addition, the Company analyzes net income at risk and equity at risk from interest rate changes through discounted cash flow analysis.
−Removed: The chart below shows an analysis of a scenario where interest rates ramp in a parallel manner over a period of 12 months compared to a base case of flat interest rates.
+Added: The baseline view includes the projected future impacts of previous interest rate changes that are projected based on contractual and behavioral assumptions.
+Added: The chart below shows an analysis of scenarios where there is a parallel shock to interest rates and the impacts are measured for the first year and second year after the shock.
Modeled assets and liabilities are assumed to reprice at respective repricing or maturity dates.
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There were no material changes to the way that the Company measures market risk in 2022.
−Removed: Item 7-7A - Table 2 - Qualitative Aspects of Market Risk
−Removed: Interest Rates-Basis
−Removed: Points (Rate Ramp)
+Added: The Company has changed its summary presentation of interest rate sensitivity from an analysis of ramped changes to interest rate shocks in order to better focus on the dynamics and uncertainties of the current markets.
+Added: CHANGE IN NET INTEREST INCOME
+Added: Parallel Interest Rate Shock – Basis Points
1-12 Months 13-24 Months
−Removed: $ Change % Change $ Change % Change
−Removed: (In thousands)
+Added: % Change % Change
At December 31, 2022
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-100 (0.1) (1.2)
−Removed: -100 5,408 1.73 6,769 2.22
−Removed: At year-end 2021, a 200 basis point parallel upward interest rate increase results in approximately a 7% increase in modeled NII compared to the static baseline view in the first year, and approximately a 15% increase in the second-year horizon.
−Removed: The Company has shifted towards asset sensitive positioning throughout 2021, and remains well-positioned for the forecast rate cycle ahead.
−Removed: Asset sensitivity is driven by elevated cash balances from loan payoffs, a predominantly floating-rate loan portfolio, and modeled assumptions for deposit pricing and beta.
−Removed: For purposes of NII sensitivity reporting, a weighted average deposit beta of 35-45% is assumed in asset-liability modeling.
−Removed: Our positioning to downward changes in market rates remains limited due to a smaller effective shock for assets and liabilities to reprice lower from the current rate environment.
−Removed: In addition to parallel shocks and ramps, the Company analyzes the impact of non-parallel shocks (i.e., yield curve twist scenarios).
−Removed: At this time, the primary driver of asset sensitivity is on the short-end of the yield curve, though upward changes in the long-end are also expected to be accretive to NII.
−Removed: Economic value of equity is modeled to increase by 4.5% in the event of a 200 basis point upward parallel shock in interest rates.
−Removed: Based on market expectations for higher interest rates in 2022 and beyond, and on commentary from monetary authorities about easing monetary stimulus, it is anticipated that the Company’s positive sensitivity to rising rates may contribute to its BEST goals for improved profitability.
−Removed: A critical component of modeling this scenario is the assumption of deposit interest rate sensitivity, which the Company continues to model at a 40% beta level after an initial low beta for the first 50 basis points of rising rates.
−Removed: Due to the low level of interest rates, the modeled sensitivity of a downward shift in interest rates is affected by assumptions related to market influences on spreads and floors.
−Removed: Prime, mortgage rates, and deposits are floored.
−Removed: All other rates are zero bound.
+Added: The Company was significantly asset sensitive at year-end 2021, which benefited the Company in the 2022 environment of rising interest rates.
+Added: This environment also contributed to growing sensitivity during the year to negative earnings impacts in the unexpected situation of interest rate decreases, as asset yields increased while deposit costs remained well-controlled.
+Added: Over the course of the year, the Company increased the duration of assets with the growth of the mortgage portfolio, and in the second half of the year the Company employed hedging strategies with interest rate swaps and collars.
+Added: As a result, year-end 2022 interest rate sensitivity was much closer to neutral, while remaining modestly asset sensitive, in line with the market expectation of further interest rate increases in 2023.
+Added: Changes to first year modeled net interest income were under 2% in modeled scenarios of 100 basis point shocks in both up and down scenarios.
+Added: This sensitivity was also under 2% for a 200 basis point upward shock, compared to the modeled 13.1% sensitivity at the start of the year.
+Added: At year-end 2022, a down 200 basis point shock scenario was added to the model due to the increase in interest rates during the year.
+Added: The change to first year modeled net interest income was down 5.2% under this scenario.
+Added: The Company also models net interest income sensitivity to interest rate ramps over a twelve month period.
+Added: In all cases, these sensitivities were modestly lower than those modeled for interest rate shocks of the same magnitude.
+Added: At year-end 2022, the modeled year one sensitivity to a +100 basis point interest rate ramp was 0.6% and the year two sensitivity was 2.6%.
+Added: The Company also models sensitivity to yield curve twists, and sensitivity remained positive in most scenarios for widening and narrowing of the yield curve.
+Added: While the sensitivity of net interest income is the primary driver of the sensitivity of net income, the latter is more sensitive than the former since it is net of expenses.
+Added: In the case of the first year of a 100 basis point scenario, the modeled shock sensitivity of net income is 1.7% in an upward shock and -3.3% in a downward shock.
+Added: Economic value of equity sensitivity to changes in market rates at year-end 2022 was neutral for a 200 basis point upward shock and was -5.4% for a similar downward shock.
+Added: A critical component of modeling is the assumption of deposit interest rate sensitivity (deposit “beta”).
+Added: The Company expects the total deposits beta through the duration of an interest rate cycle to be in the area of 30-40%, which includes an assumption that non-interest bearing deposit balances remain unchanged for modeling purposes.
+Added: The actual cost of deposits in 2022 has been less sensitive than the Company’s traditional modeling assumptions due to the rapid increase in interest rates and high liquidity in the economy in the unusual conditions prevailing in 2022.
Modeled interest rate sensitivity depends on other material assumptions.
1 unchanged sentence
Treasury obligations, forward interest rate derivatives, the U.S.
−Removed: prime interest rate, and LIBOR rates.
+Added: prime interest rate, and LIBOR related rates.
Also, the economic impact on customer and market behaviors of the COVID-19 pandemic remains uncertain and may cause actual events to differ from assumptions.
12 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.