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 of loss from adverse changes in market prices and rates. We believe the principal market risk to the Company is the interest rate risk inherent in our lending, investing, deposit taking and borrowing activities, due to the fact that interest-earning assets and interest-bearing liabilities do not re-price at the same rate, to the same extent, or on the same basis.
As part of our asset and liability management, we monitor and manage our interest rate risk through analyzing the re-pricing characteristics of our loans, securities, deposits, and borrowings on an on-going basis. The primary objective of our asset and liability management is to manage and minimize the adverse effects of changes in interest rates on our earnings, cash flows, values of our assets and liabilities, and ultimately the underlying market value of our equity, while structuring our asset-liability composition to seek to obtain the maximum spread in a safe and sound manner. Many factors affect the spread between interest earned on assets and interest paid on liabilities, including economic and financial conditions, movements in interest rates, consumer preferences and regulatory actions.
Management meets regularly to monitor the interest rate risk, the sensitivity of our assets and liabilities to interest rate changes, the book and fair values of assets and liabilities, our investment activities, and changes in the composition of our interest earning assets and interest-bearing liabilities. Our strategy has been to seek to reduce the sensitivity of our earnings to interest rate fluctuations by more closely matching the effective maturities or repricing characteristics of our assets and liabilities. Certain assets and liabilities, however, may react in different degrees to changes in market interest rates. Further, interest rates on certain types of assets and liabilities may fluctuate prior to changes in market interest rates, while interest rates on other types may lag behind.
We use a net interest income simulation model to measure the extent of the differences in the behavior of the lending and funding rates to changing interest rates, to project future earnings or market values under alternative interest rate scenarios. Interest rate risk arises primarily through the Company’s traditional business activities of extending loans and accepting deposits. Many factors, including but not limited to economic, market and financial conditions, movements in interest rates, and consumer preferences, affect the spread between interest earned on assets and interest paid on liabilities. The net interest income simulation model is designed to measure the volatility of net interest income and net portfolio value, defined as net present value of assets and liabilities, under immediate rising or falling interest rate scenarios in 25 basis points increments.
We establish a tolerance level in our policy for net interest income volatility of plus or minus 5% when the hypothetical rate change is plus or minus 200 basis points. When the net interest rate simulation projects that our tolerance level will be met or exceeded, we seek corrective action after considering, among other things, market conditions, client reaction, and the estimated impact on profitability. At December 31, 2023, if interest rates were to increase instantaneously by 100 basis points, the simulation indicated that our net interest income over the next twelve months would increase by 6.9%, and if interest rates were to increase instantaneously by 200 basis points, the simulation indicated that our net interest income over the next twelve months would increase by 13.7%. Conversely, if interest rates were to decrease instantaneously by 100 basis points, the simulation indicated that our net interest income over the next twelve months would decrease by 4.4%, and if interest rates were to decrease instantaneously by 200 basis points, the simulation indicated that our net interest income over the next twelve months would decrease by 9.1%.
Our simulation model also projects the economic value of equity. We have established a tolerance level in our policy to a change of not less than 0% when the hypothetical rate change is plus or minus 200 basis points. At December 31, 2023, if interest rates were to increase instantaneously by 200 basis points, the simulation indicated that the economic value of equity would decrease by 8.4%, and conversely, if interest rates were to decrease instantaneously by 200 basis points, the simulation indicated that the economic value of equity would increase by 12.5%.
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Although we believe our simulation modeling is helpful in managing interest rate risk, the model does require significant assumptions for, among other factors, the projection of loan prepayment rates on mortgage related assets, loan volumes and pricing, and deposit and borrowing volume and pricing, that might prove inaccurate. Because these assumptions are inherently uncertain, the model does not necessarily represent our forecast, and the simulated results may not be indicative of actual changes to our net interest income. Actual results will differ from simulated results due to the timing, magnitude, and frequency of interest rate changes, the differences between actual experience and the assumed volume, changes in market conditions, and management strategies, among other factors.
Quantitative Information about Interest Rate Risk
The following table shows the carrying value of our financial instruments that are sensitive to changes in interest rates, categorized by expected maturity, as well as the instruments’ total fair values at December 31, 2023, and 2022. For assets, expected maturities are based on contractual maturity. For liabilities, we use our historical experience and decay factors to estimate the deposit runoffs of interest-bearing transactional deposits. We use certain assumptions to estimate fair values and expected maturities that are described in Note 17 to the Consolidated Financial Statements. Off-balance sheet commitments to extend credit, letters of credit, and bill of lading guarantees represent the contractual unfunded amounts. Off-balance sheet financial instruments represent fair values. The results presented may vary if different assumptions are used or if actual experience differs from the assumptions used.
December 31,
Average
2023
2022
Interest
Expected Maturity Date at December 31,
Fair
Fair
Rate
2024
2025
2026
2027
2028
Thereafter
Total
Value
Total
Value
(In thousands)
Interest-Sensitive Assets:
Mortgage-backed securities and collateralized mortgage obligations
2.58
%
$
—
$
143
$
133
$
126
$
475
$
813,890
$
814,767
$
814,767
$
898,155
$
898,155
Other investment securities
4.81
%
$
524,948
$
38,076
$
87,298
$
68,599
$
20,984
$
49,898
$
789,803
$
789,803
$
575,193
$
575,193
Loans
6.00
%
$
4,004,864
$
1,143,140
$
1,232,422
$
889,150
$
1,650,621
$
10,627,943
$
19,548,140
$
19,605,152
$
18,254,024
$
17,944,588
Interest Sensitive Liabilities:
Other interest-bearing deposits
2.21
%
$
1,795,815
$
1,073,418
$
927,844
$
386,692
$
748,748
$
1,527,125
$
6,459,642
$
6,459,642
$
7,322,920
$
7,322,920
Time deposits
3.75
%
$
9,312,877
$
18,429
$
3,203
$
2,230
$
23
$
25
$
9,336,787
$
9,358,410
$
7,013,370
$
7,080,478
Advances from the Federal Home Loan Bank
5.64
%
$
540,000
$
—
$
—
$
—
$
—
$
—
$
540,000
$
536,996
$
485,000
$
482,737
Other borrowings
0.00
%
$
—
$
—
$
—
$
—
$
—
$
15,787
$
15,787
$
13,978
$
22,600
$
18,385
Long-term debt
5.44
%
$
—
$
—
$
—
$
—
$
—
$
119,136
$
119,136
$
72,304
$
119,136
$
68,231
Off-Balance Sheet
Financial Instruments:
)
)
Commitments to extend credit
$
1,727,188
$
969,656
$
297,979
$
181,402
$
230,263
$
402,132
$
3,808,620
$
(14,344
)
$
3,630,304
$
(14,797
)
Standby letters of credit
$
214,392
$
34,616
$
24,860
$
36,084
$
1,571
$
57,095
$
368,618
$
(2,821
)
$
315,821
$
(2,738
)
Other letters of credit
$
11,308
$
—
$
—
$
—
$
—
$
—
$
11,308
$
(10
)
$
29,416
$
(33
)
Item 8. Financial Statements and Supplementary Data
For financial statements, see “Index to Consolidated Financial Statements” on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not Applicable.
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