Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Market Risk
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.
62
Table of Contents
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
Gradual Change in Interest Rate Levels Dollar
Change Percent
Change Dollar
Change Percent
Change
(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. 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 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.
63
Table of Contents
One Year
or Less More than
One Year to
Two Years More than
Two Years
to Three
Years More than
Three Years
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
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.
64
Table of Contents
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.