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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2026-03-02 compared with 2025-03-03 · 124 added, 53 removed, 8 unchanged (96% of the section changed)

Quantitative and Qualitative Disclosures about Market Risk

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”).

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.

This responsibility resides with the Asset Liability Committee (“ALCO”).

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.

The Company manages IRR by using two primary risk measurement techniques:

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.

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.

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.

The simulation of net interest income also requires a number of key assumptions such as (i) prepayment projections for loans and securities;

(ii) new business loan spreads;

and (iii) deposit pricing assumptions.

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.

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

Parallel Interest Rate Shock (basis points)

Estimated Percent Change in Net Interest Income

Market risk is the risk that the market value or estimated fair value of the Company's assets, liabilities, and derivative financial instruments will decline as a result of changes in interest rates or financial market volatility, or that the Company's net income will be significantly reduced by interest-rate changes.

The principal market risk facing the Company is interest-rate risk, which can occur in a variety of forms, including repricing risk, yield-curve risk, basis risk, and prepayment risk.

Repricing risk occurs when the change in the average yield of either interest-earning assets or interest-bearing liabilities is more sensitive than the other to changes in market interest rates.

Such a change in sensitivity could reflect a number of possible mismatches in the repricing opportunities of the Company's assets and liabilities.

Yield-curve risk reflects the possibility that changes in the shape of the yield curve could have different effects on the Company's assets and liabilities.

Basis risk occurs when different parts of the balance sheet are subject to varying base rates reflecting the possibility that the spread from those base rates will deviate.

Prepayment risk is associated with financial instruments with an option to prepay before the stated maturity, often a disadvantage to person selling the option;

this risk is most often associated with the prepayment of loans, callable investments, and callable borrowings.

Asset/Liability Management

Market risk and interest-rate risk management is governed by the Company's ALCO.

The ALCO establishes exposure limits that define the Company's tolerance for interest-rate risk.

The ALCO and the Company's Treasury Group measure and manage the composition of the balance sheet over a range of possible changes in interest rates while remaining responsive to market demand for loan and deposit products.

The ALCO monitors current exposures versus limits and reports those results to the Board of Directors.

The policy limits and guidelines serve as benchmarks for measuring interest-rate risk and for providing a framework for evaluation and interest-rate risk-management decision-making.

The Company measures its interest-rate risk by using an asset/liability simulation model.

The model considers several factors to determine the Company's potential exposure to interest-rate risk, including measurement of repricing gaps, duration, convexity, value-at-risk, market value of portfolio equity under assumed changes in the level of interest rates, the shape of yield curves, and general market volatility.

Management controls the Company's interest-rate exposure using several strategies, which include adjusting the maturities of securities in the Company's investment portfolio, limiting or expanding the terms of loans originated, limiting fixed-rate deposits with terms of more than five years, and adjusting maturities of FHLB advances.

The Company limits this risk by restricting the types of MBSs it invests into those with limited average life changes under certain interest-rate-shock scenarios, or securities with embedded prepayment penalties.

The Company enters into interest rate swaps as part of its interest rate risk management strategy.

These interest rate swaps are designated as cash flow hedges and involve the receipt of variable rate amounts from a counterparty in exchange for the Company making fixed payments.

Measuring Interest-Rate Risk

As noted above, interest-rate risk can be measured by analyzing the extent to which the repricing of assets and liabilities are mismatched to create an interest-rate sensitivity gap.

An asset or liability is said to be interest-rate sensitive within a specific period if it will mature or reprice within that period.

The interest-rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that same time period.

A gap is considered positive when the amount of interest-rate-sensitive assets exceeds the amount of interest-rate-sensitive liabilities.

A gap is considered negative when the amount of interest-rate-sensitive liabilities exceeds the amount of interest-rate-sensitive assets.

During a period of falling interest rates, therefore, a positive gap would tend to adversely affect net interest income.

Conversely, during a period of rising interest rates, a positive gap position would tend to result in an increase in net interest income.

The Company's interest-rate risk position is measured using both income simulation and interest-rate sensitivity "gap" analysis.

Income simulation is the primary tool for measuring the interest-rate risk inherent in the Company's balance sheet at a given point in time by showing the effect on net interest income, over a twelve-month period, of a variety of interest-rate shocks.

These simulations take into account repricing, maturity, and prepayment characteristics of individual products.

The ALCO reviews simulation results to determine whether exposure resulting from changes in market interest rates remains within established tolerance levels over a twelve-month horizon, and develops appropriate strategies to manage this exposure.

The Company's interest-rate risk analysis remains modestly asset-sensitive as of December 31, 2025.

The assumptions used in the Company’s interest-rate sensitivity simulation discussed above are inherently uncertain and, as a result, the simulations cannot precisely measure net interest income or precisely predict the impact of changes in interest rates.

As of December 31, 2025, net interest income simulation indicated that the Company's exposure to changing interest rates was within tolerance.

The ALCO reviews the methodology utilized for calculating interest-rate risk exposure and may periodically adopt modifications to this methodology.

The following table presents the estimated impact of interest-rate changes on the Company's estimated net interest income over the twelve-month periods indicated while maintaining a flat balance sheet.

Estimated Exposure to Net Interest Income

over Twelve-Month Horizon Beginning

December 31, 2025 December 31, 2024

+200 2.2 % 0.5 %

-100 (1.4) (0.6)

-200 (2.9) (2.1)

Yield Curve Twist Interest Rate Shock December 31, 2024 December 31, 2023

Short End +100 (0.4) % (0.5) %

Short End -100 0.3 (0.5)

Long End +100 1.6 1.1

Long End -100 (1.7) (1.1)

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.

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.

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.

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.

Economic Value of Equity ("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 and amortization dates, rate caps and floors.

Gradual Change in Interest Rate Levels Dollar

Change Percent

Change Dollar

Change Percent

(Dollars in Thousands)

Up 400 basis points shock $ 78,074 9.4 % $ 14,574 3.9 %

Up 200 basis points ramp 29,174 3.5 % 7,911 2.1 %

Up 100 basis points ramp 14,849 1.8 % 4,431 1.2 %

Down 100 basis points ramp (14,389) (1.7) % (3,537) (1.0) %

Down 200 basis points ramp (30,008) (3.6) % (8,900) (2.4) %

Down 400 basis points shock (58,232) (7.0) % (34,637) (9.3) %

The estimated impact of a 400 basis points increase in market interest rates on the Company's estimated net interest income over a twelve-month horizon was a positive 9.4% as of December 31, 2025, compared to a positive 3.9% as of December 31, 2024.

The balance sheet became more asset sensitive due to an increase in cash balances and a higher percentage of floating rate loans primarily driven by the Transaction.

EVE at Risk Simulation is conducted in tandem with net interest income simulations to ascertain a longer term view of the Company’s interest-rate risk position by capturing longer-term repricing risk and options risk embedded in the balance sheet.

It measures the sensitivity of the economic value of equity to changes in interest rates.

The EVE at Risk Simulation values only the current balance sheet and does not incorporate growth assumptions.

As with the net interest income simulation, this simulation captures product characteristics such as loan resets, repricing terms, maturity dates, and rate caps and floors.

Key assumptions include loan prepayment speeds, deposit pricing elasticity, and non-maturity deposit attrition rates.

These assumptions can have significant impacts on valuation results as the assumptions remain in effect for the entire life of each asset and liability.

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.

The current spot interest rate curve is shocked up and down.

These new interest rate 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 from the base case scenario, assuming various instantaneous parallel shocks in interest rates.

The Company conducts non-maturity deposit behavior studies on a periodic basis to support deposit assumptions used in the valuation process.

All key assumptions are subject to a periodic review.

EVE at Risk is calculated by estimating the net present value of all future cash flows from existing assets and liabilities using current interest rates as well as parallel shocks to the current interest-rate environment.

The following table sets forth the estimated percentage change in the Company’s EVE at Risk, assuming various shifts in interest rates.

Estimated Percent Change in Economic Value of Equity

Parallel Shock Rate Change (basis points 12/31/2024 12/31/2023

Parallel Shock in Interest Rate Levels At December 31, 2025 At December 31, 2024

Up 400 basis points (1.8) % (7.1) %

Up 200 basis points (0.7) % (4.1) %

Up 100 basis points 0.1 % (1.3) %

Down 100 basis points (1.1) % (0.8) %

Down 200 basis points (3.2) % (3.2) %

Down 400 basis points (10.1) % (10.2) %

The Company's EVE asset sensitivity increased from December 31, 2024 to December 31, 2025 driven by change in deposit mix and loan growth related to the Transaction.

The Company also uses interest-rate sensitivity "gap" analysis to provide a more general overview of its interest-rate risk profile.

The interest-rate sensitivity gap is defined as the difference between interest-earning assets and interest-bearing liabilities maturing or repricing within a given time period.

The table below shows the Company's interest-rate sensitivity gap position as of December 31, 2025.

or Less More than

Two Years More than

Years More than

to Five Years More than

Five Years Total

(Dollars in Thousands)

Interest-earning assets (1) :

Short-term investments $ 1,840,188 $ — $ — $ — $ — $ 1,840,188

Weighted average rate 3.64 % — % — % — % — % 3.64 %

Investment securities (1) (3)

285,838 198,372 165,566 342,466 696,526 1,688,768

Weighted average rate 2.73 % 2.84 % 2.75 % 2.50 % 2.53 % 2.62 %

Commercial real estate loans (1)

5,814,499 1,319,517 1,167,527 1,171,960 538,592 10,012,094

Weighted average rate 5.80 % 5.04 % 5.18 % 5.71 % 5.55 % 5.60 %

Commercial loans and leases (1)

2,453,246 491,226 412,966 444,065 145,862 3,947,363

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

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, 2024 and 2023

Consolidated Statements of Income for the years ended December 31, 2024, 2023, and 2022

Consolidated Statements of Comprehensive Income/(Loss) for the years ended December 31, 2024, 2023, and 2022

Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2024, 2023, and 2022

Consolidated Statements of Cash Flows for the years ended December 31, 2024, 2023, and 2022

Notes to Consolidated Financial Statements

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Weighted average rate 6.62 % 7.47 % 7.37 % 7.58 % 5.46 % 6.87 %

Consumer loans (1)

1,483,455 447,789 346,800 745,373 1,046,677 4,070,095

Weighted average rate 5.86 % 4.70 % 4.75 % 4.72 % 4.81 % 5.16 %

Total interest-earning assets 11,877,225 2,456,904 2,092,858 2,703,864 2,427,657 21,558,507

Weighted average rate 5.57 % 5.29 % 5.35 % 5.34 % 4.36 % 5.35 %

Interest-bearing liabilities (1) :

NOW accounts $ — $ — $ — $ — $ 1,445,894 $ 1,445,894

Weighted average rate — % — % — % — % 0.92 % 0.92 %

Savings accounts — — — — 2,954,029 2,954,029

Weighted average rate — % — % — % — % 1.83 % 1.83 %

Money market savings accounts 6,515,306 — — — — 6,515,306

Weighted average rate 2.65 % — % — % — % — % 2.65 %

Certificates of deposit (1)

3,856,195 266,649 21,781 11,649 266 4,156,540

Weighted average rate 3.60 % 3.27 % 2.06 % 0.62 % 0.49 % 3.57 %

Brokered deposits 404,773 — — — 5,585 410,359

Weighted average rate 4.28 % — % — % — % 4.00 % 4.28 %

Borrowed funds (1)

640,043 27,773 2,343 8,697 109,505 788,360

Weighted average rate 4.52 % 3.63 % 1.10 % 0.57 % 4.86 % 4.48 %

Total interest-bearing liabilities 11,416,317 294,422 24,124 20,346 4,515,280 16,270,489

Weighted average rate 3.13 % 3.26 % 1.94 % 0.57 % 1.61 % 2.67 %

Interest sensitivity gap (2)

$ 460,908 $ 2,162,482 $ 2,068,734 $ 2,683,517 $ (2,087,623) $ 5,288,018

Cumulative interest sensitivity gap $ 460,908 $ 2,623,390 $ 4,692,124 $ 7,375,642 $ 5,288,019

Cumulative interest sensitivity gap as a percentage of total assets 1.98 % 11.30 % 20.21 % 31.76 % 22.77 %

Cumulative interest sensitivity gap as a percentage of total interest-earning assets 2.14 % 12.17 % 21.76 % 34.21 % 24.53 %

_______________________________________________________________________________

(1) Interest-earning assets and interest-bearing liabilities are included in the period in which the balances are expected to be redeployed and/or repriced as a result of anticipated prepayments, scheduled rate adjustments and contractual maturities.

(2) Interest sensitivity gap represents the difference between interest-earning assets and interest-bearing liabilities.

(3) Investment securities include all debt, equity and restricted equity securities and unrealized gains and losses on investment securities.

As of December 31, 2025, interest-earning assets maturing or repricing within one year amounted to $11.9 billion and interest-bearing liabilities maturing or repricing within one year amounted to $11.4 billion, resulting in a cumulative one-year positive gap position of $0.5 billion or 2.14% of total interest-earning assets.

As of December 31, 2024, the Company had a cumulative one-year negative gap position of $1.0 billion, or 9.31% of total interest-earning assets.

The change in the cumulative one-year gap position from December 31, 2024 was due to an increase of borrowed funds and non-maturity deposits.

Interest rates paid on NOW accounts, savings accounts and money market accounts are subject to change at any time and such deposits are available for immediate withdrawal.

A review of rates paid on these deposit categories over the last several years indicated that the amount and timing of rate changes did not coincide with the amount and timing of rate changes on other deposits when the FRB adjusted its benchmark federal funds rate.

Management views NOW and savings accounts to be less sensitive to interest rates than money market accounts and these accounts are therefore characterized as stable long-term funding sensitive beyond five years.

Management views money market accounts to be more volatile deposits and these accounts are therefore characterized as sensitive to changes in interest rates within the first year.

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.

What changed 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk