QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
−Removed: 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: Market risk represents the risk of loss to earnings, capital and the economic values of certain assets and liabilities resulting from changes in interest rates and equity prices.
The only significant market risk exposure for the Company is Interest Rate Risk (“IRR”).
−Removed: This is a result of the Company’s core business activities of making loans and accepting deposits.
+Added: This is a result of the Company’s core business activities of making loans and accepting deposits, as well as investments and funding activities.
The effective management of IRR is essential to achieving the Company’s financial objectives.
−Removed: 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.
−Removed: The Company manages IRR through simulations of NII and equity at risk (“EVE”).
+Added: This responsibility resides with the Asset Liability Committee (“ALCO”).
+Added: The ALCO’s role is to establish an effective asset/liability decision-making process to aid in managing risk exposures and achieving strategic objectives and corporate financial goals.
+Added: The Company manages IRR by using two primary risk measurement techniques:
+Added: simulation of net interest income and simulation of economic value of equity.
These two measurements are complementary and provide both short-term and long-term risk profiles of the Company.
−Removed: 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.
−Removed: 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.
−Removed: 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: Net Interest Income (“NII”) at Risk Simulation is used to measure the sensitivity of net interest income to changes in market rates over a 12 month period assuming a static balance sheet.
+Added: This simulation captures underlying product behaviors, such as asset and liability repricing dates, balloon dates, interest rate indices and spreads, rate caps and floors, as well as other behavioral attributes.
+Added: The simulation of net interest income also requires a number of key assumptions such as (i) prepayment projections for loans and securities;
+Added: (ii) new business loan spreads;
+Added: and (iii) deposit pricing assumptions.
+Added: Combined, these assumptions can be inherently uncertain, and as a result, actual results may differ from simulation forecasts 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.
−Removed: 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: The following tables set forth the estimated percent change in the Company’s NII Sensitivity compared to the flat rate scenario over one-year simulation periods beginning December 31, 2024 and December 31, 2023.
ITEM 7 - 7A TABLE 3 - QUALITATIVE ASPECTS OF MARKET RISK
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Long End -100 (1.7) (1.1)
−Removed: NII Sensitivity results indicate that the Company’s asset sensitivity has declined at year-end 2023 compared to year-end 2022.
−Removed: 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.
−Removed: EVE Sensitivity is conducted to ascertain a longer-term view of the Company’s exposure to changes in interest rates.
−Removed: As with NII modeling, EVE Sensitivity captures product characteristics such as loan resets, repricing terms, maturity dates, rate caps and floors.
+Added: The Company’s NII sensitivity results at period-end were mostly little changed from the start of the year, with modest asset sensitivity in parallel shock simulations.
+Added: The slight increase in asset sensitivity year-over-year was due to the impact of the December 2024 $100 million equity raise along with the approaching maturities of some fixed rate hedges in 2025.
+Added: Yield curve twist simulations were mostly little changed from the prior year-end, with slight liability sensitivity in the short end of the yield curve and modest asset sensitivity on the long end.
+Added: In the situation of a normalization of the yield curve to a positive slope due to both lower short-term rates and higher long-term rates, the result is modeled to be positive to net interest income in the framework of a static balance sheet.
+Added: Economic Value of Equity ("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 and amortization dates, rate caps and floors.
Key assumptions include loan prepayment speeds, deposit pricing elasticity and non-maturity deposit attrition rates.
+Added: These assumptions can have significant impacts on valuation results as the assumptions remain in effect for the entire life of each asset and liability.
+Added: All key assumptions are subject to periodic review.
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.
−Removed: The current spot interest rate curve is shocked up and down to generate new interest rate curves for parallel rate shock scenarios.
−Removed: These new curves are then used to recalculate EVE Sensitivity for rate shock scenarios.
−Removed: The following table sets forth the estimated percent change in the Company’s EVE Sensitivity, assuming various instantaneous parallel shocks in interest rates.
+Added: The current spot interest rate curve is shocked up and down.
+Added: These new interest rate 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 from the base case scenario, assuming various instantaneous parallel shocks in interest rates.
Estimated Percent Change in Economic Value of Equity
−Removed: Parallel Shock Rate Change (basis points December 31, 2023 December 31, 2022
+Added: Parallel Shock Rate Change (basis points 12/31/2024 12/31/2023
+200 (1.4) % (3.9) %
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-200 (0.1) 1.3
−Removed: The Company’s EVE Sensitivity profile indicates that at December 31, 2023 the balance sheet has remained largely neutral compared to December 31, 2022.
−Removed: EVE was impacted by the same factors that affected NII sensitivity discussed above, particularly the increase in residential mortgages and short-term borrowings.
+Added: The Company’s EVE Sensitivity profile indicates that at December 31, 2024 the balance sheet was modestly liability sensitive, with this sensitivity decreasing compared to December 31, 2023.
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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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.