Item 7A. Quantitative and Qualitative Disclosures About Market Risk
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss to earnings and the economic values of certain assets and liabilities resulting from changes in interest rates. The only significant market risk exposure for the Company is Interest Rate Risk (“IRR”). This is a result of the Company’s core business activities of making loans and accepting deposits.
The effective management of IRR is essential to achieving the Company’s financial objectives. 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. The Company manages IRR through simulations of NII and equity at risk (“EVE”). These two measurements are complementary and provide both short-term and long-term risk profiles of the Company.
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. 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. 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.
The Company uses two sets of standard scenarios to measure NII Sensitivity. 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.
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.
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ITEM 7 - 7A TABLE 3 - QUALITATIVE ASPECTS OF MARKET RISK
Parallel Interest Rate Shock (basis points)
Estimated Percent Change in Net Interest Income
December 31, 2023 December 31, 2022
+200 0.5 % 1.8 %
+100 0.3 0.8
-100 (0.6) (1.6)
-200 (2.1) (5.2)
Yield Curve Twist Interest Rate Shock December 31, 2023 December 31, 2022
Short End +100 (0.5) % 0.1 %
Short End -100 (0.5) (1.3)
Long End +100 1.1 1.0
Long End -100 (1.1) (1.2)
NII Sensitivity results indicate that the Company’s asset sensitivity has declined at year-end 2023 compared to year-end 2022. 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.
EVE Sensitivity is conducted to ascertain a longer-term view of the Company’s exposure to changes in interest rates. As with NII modeling, EVE Sensitivity captures product characteristics such as loan resets, repricing terms, maturity dates, rate caps and floors. Key assumptions include loan prepayment speeds, deposit pricing elasticity and non-maturity deposit attrition rates.
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. The current spot interest rate curve is shocked up and down to generate new interest rate curves for parallel rate shock scenarios. These new curves are then used to recalculate EVE Sensitivity for rate shock scenarios.
The following table sets forth the estimated percent change in the Company’s EVE Sensitivity, assuming various instantaneous parallel shocks in interest rates.
Estimated Percent Change in Economic Value of Equity
Parallel Shock Rate Change (basis points December 31, 2023 December 31, 2022
+200 (3.9) % — %
+100 (1.8) —
-100 1.2 (1.5)
-200 1.3 (5.4)
The Company’s EVE Sensitivity profile indicates that at December 31, 2023 the balance sheet has remained largely neutral compared to December 31, 2022. EVE was impacted by the same factors that affected NII sensitivity discussed above, particularly the increase in residential mortgages and short-term borrowings.
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ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and supplementary data required by this item are presented elsewhere in this report beginning on page F-1, in the order shown below:
Management’s Report on Internal Control over Financial Reporting
Report of Independent Registered Public Accounting Firm (PCAOB ID 173 )
Consolidated Balance Sheets as of December 31, 2023 and 2022
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
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2023, 2022, and 2021
Consolidated Statements of Cash Flows for the years ended December 31, 2023, 2022, and 2021
Notes to Consolidated Financial Statements
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.