QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
−Removed: MANAGEMENT OF INTEREST RATE RISK AND MARKET RISK ANALYSIS
−Removed: Qualitative Aspects of Market Risk .
−Removed: The Company seeks to provide sustainable net interest income (NII) under varying economic conditions, while protecting the economic value of assets and liabilities from adverse effects of changes in market interest rates.
−Removed: 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: 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.
−Removed: 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.
−Removed: 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.
−Removed: The Company manages its interest rate risk by analyzing the sensitivity and mix of its assets and liabilities, including derivative financial instruments.
−Removed: The Company also uses secondary markets, brokerages, and counterparties to accommodate customer demand for long-term fixed rate loans and to provide it with flexibility in managing its balance sheet positions.
−Removed: Quantitative Aspects of Market Risk.
−Removed: The Company quantifies its NII sensitivity using an earnings simulation model that compares a baseline view of NII over 12 and 24 month horizons, based on a static view of the balance sheet and market interest rates, to a wide range of parallel and non-parallel rate shocks and ramps.
−Removed: In addition, the Company analyzes net income at risk and equity at risk from interest rate changes through discounted cash flow analysis.
−Removed: The baseline view includes the projected future impacts of previous interest rate changes that are projected based on contractual and behavioral assumptions.
−Removed: 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.
−Removed: Modeled assets and liabilities are assumed to reprice at respective repricing or maturity dates.
−Removed: Pricing caps and floors are included in the results, where applicable.
−Removed: The Company uses prepayment expectations set forth by market sources as well as Company generated data where applicable.
−Removed: Generally, cash flows from loans and securities are assumed to be reinvested to maintain a static balance sheet.
−Removed: Other assumptions about balance sheet mix are generally held constant.
−Removed: There were no material changes to the way that the Company measures market risk in 2022.
−Removed: 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.
−Removed: CHANGE IN NET INTEREST INCOME
+Added: Market risk represents the risk of loss to earnings and the economic values of certain assets and liabilities resulting from changes in interest rates.
+Added: The only significant market risk exposure for the Company is Interest Rate Risk (“IRR”).
+Added: This is a result of the Company’s core business activities of making loans and accepting deposits.
+Added: The effective management of IRR is essential to achieving the Company’s financial objectives.
+Added: The Company’s goal is to support the net interest margin and net interest income (“NII”) over entire interest rate cycles regardless of changes in either short- or long-term interest rates.
+Added: The Company manages IRR through simulations of NII and equity at risk (“EVE”).
+Added: These two measurements are complementary and provide both short-term and long-term risk profiles of the Company.
+Added: NII Sensitivity is used to measure the potential NII exposure to changes in market rates over a period of time, such as 12 or 24 months.
+Added: This simulation captures underlying product behaviors, such as asset and liability repricing dates, interest rate indices and spreads, and rate caps and floors, and it applies appropriate behavioral attributes such as prepayment assumptions.
+Added: Combined, these assumptions can be inherently uncertain, and as a result, actual results may differ from IRR modeling due to the timing, magnitude and frequency of interest rate changes, future business conditions, as well as unanticipated changes in management strategies.
+Added: The Company uses two sets of standard scenarios to measure NII Sensitivity.
+Added: Parallel shock scenarios assume instantaneous parallel movements in the yield curve compared to a flat yield curve scenario, while twist scenarios assume the shape of the curve flattens or steepens instantaneously.
+Added: The following tables set forth the estimated percent change in the Company’s NII Sensitivity over one-year simulation periods beginning December 31, 2023 and December 31, 2022.
+Added: ITEM 7 - 7A TABLE 3 - QUALITATIVE ASPECTS OF MARKET RISK
Parallel Interest Rate Shock (basis points)
−Removed: 1-12 Months 13-24 Months
−Removed: % Change % Change
−Removed: At December 31, 2022
+Added: Estimated Percent Change in Net Interest Income
+Added: December 31, 2023 December 31, 2022
+200 0.5 % 1.8 %
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-200 (2.1) (5.2)
−Removed: At December 31, 2021
+Added: Yield Curve Twist Interest Rate Shock December 31, 2023 December 31, 2022
+Added: Short End +100 (0.5) % 0.1 %
+Added: Short End -100 (0.5) (1.3)
+Added: Long End +100 1.1 1.0
+Added: Long End -100 (1.1) (1.2)
+Added: NII Sensitivity results indicate that the Company’s asset sensitivity has declined at year-end 2023 compared to year-end 2022.
+Added: This change reflected several factors, including continued growth of the residential mortgage portfolio, increased utilization of short-term borrowings, further deposit mix shift towards interest-bearing, and less flooring on non-maturity deposits in downward modeled scenarios.
+Added: EVE Sensitivity is conducted to ascertain a longer-term view of the Company’s exposure to changes in interest rates.
+Added: As with NII modeling, EVE Sensitivity captures product characteristics such as loan resets, repricing terms, maturity dates, rate caps and floors.
+Added: Key assumptions include loan prepayment speeds, deposit pricing elasticity and non-maturity deposit attrition rates.
+Added: Base case EVE Sensitivity is calculated by estimating the net present value of all future cash flows from existing assets and liabilities using current interest rates.
+Added: The current spot interest rate curve is shocked up and down to generate new interest rate curves for parallel rate shock scenarios.
+Added: These new curves are then used to recalculate EVE Sensitivity for rate shock scenarios.
+Added: The following table sets forth the estimated percent change in the Company’s EVE Sensitivity, assuming various instantaneous parallel shocks in interest rates.
+Added: Estimated Percent Change in Economic Value of Equity
+Added: Parallel Shock Rate Change (basis points December 31, 2023 December 31, 2022
+200 (3.9) % — %
-100 1.2 (1.5)
−Removed: The Company was significantly asset sensitive at year-end 2021, which benefited the Company in the 2022 environment of rising interest rates.
−Removed: 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.
−Removed: 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.
−Removed: 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.
−Removed: 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.
−Removed: 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.
−Removed: 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.
−Removed: The change to first year modeled net interest income was down 5.2% under this scenario.
−Removed: The Company also models net interest income sensitivity to interest rate ramps over a twelve month period.
−Removed: In all cases, these sensitivities were modestly lower than those modeled for interest rate shocks of the same magnitude.
−Removed: 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%.
−Removed: The Company also models sensitivity to yield curve twists, and sensitivity remained positive in most scenarios for widening and narrowing of the yield curve.
−Removed: 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.
−Removed: 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.
−Removed: 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.
−Removed: A critical component of modeling is the assumption of deposit interest rate sensitivity (deposit “beta”).
−Removed: 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.
−Removed: 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.
−Removed: Modeled interest rate sensitivity depends on other material assumptions.
−Removed: Market risk exposure is affected by the level and shape of the yield curve in markets for financial instruments including U.S.
−Removed: Treasury obligations, forward interest rate derivatives, the U.S.
−Removed: prime interest rate, and LIBOR related rates.
−Removed: 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.
−Removed: The behavior of markets under the historically unusual conditions currently prevailing may be different from modeling assumptions, and the Company continues to monitor the markets and the assumptions in its model.
+Added: -200 1.3 (5.4)
+Added: The Company’s EVE Sensitivity profile indicates that at December 31, 2023 the balance sheet has remained largely neutral compared to December 31, 2022.
+Added: EVE was impacted by the same factors that affected NII sensitivity discussed above, particularly the increase in residential mortgages and short-term borrowings.
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
3 unchanged sentences
Consolidated Balance Sheets as of December 31, 2023 and 2022
−Removed: Consolidated Statements of Operations for the years ended December 31, 2022, 2021, and 2020
+Added: Consolidated Statements of Income for the years ended December 31, 2023, 2022, and 2021
Consolidated Statements of Comprehensive Income/(Loss) for the years ended December 31, 2023, 2022, and 2021
4 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.