3 unchanged sentences
Management believes that the tax risk of the Company’s municipal investments associated with potential future changes in statutory, judicial and regulatory actions is minimal.
−Removed: Treasury, agency, mortgage-backed and CMO securities issued by government agencies comprise 91.5% of the total portfolio and are currently rated AAA by Moody’s Investor Services and AA+ by Standard & Poor’s.
−Removed: Municipals account for 8.3% of the total portfolio, of which, 94.7% carry a minimum rating of A-.
+Added: Treasury, agency, mortgage-backed and collateralized mortgage obligation securities issued by government agencies comprise 90.3% of the total portfolio and are currently rated AAA by Moody’s Investor Services and AA+ by Standard & Poor’s.
+Added: Obligations of state and political subdivisions account for 9.5% of the total portfolio, of which, 96.3% carry a minimum rating of A-.
The remaining 0.2% of the portfolio is comprised of other investment grade securities.
1 unchanged sentence
Therefore, almost all the market risk in the investment portfolio is related to interest rates.
−Removed: The ongoing monitoring and management of both interest rate risk and liquidity in the short and long term time horizons is an important component of the Company's asset/liability management process, which is governed by guidelines established in the policies reviewed and approved annually by the Company’s Board.
+Added: The ongoing monitoring and management of both interest rate risk and liquidity over the short and long term time horizons is an important component of the Company's asset/liability management process, which is governed by guidelines established in the policies reviewed and approved annually by the Company’s Board.
The Board delegates responsibility for carrying out the policies to the ALCO, which meets each month.
2 unchanged sentences
The primary tool used by the Company in managing interest rate risk is income simulation.
−Removed: While a wide variety of strategic balance sheet and treasury yield curve scenarios are tested on an ongoing basis, the following reflects the Company's estimated net interest income (“NII”) sensitivity over the subsequent twelve months based on:
−Removed: ● Asset and liability levels using December 31, 2021 as a starting point.
−Removed: ● Pending acquisitions are excluded from this model.
−Removed: ● The model assumes the Company’s average deposit balances will increase approximately 2.0% over the next twelve months.
−Removed: ● The model assumes the Company’s average earning asset balances will increase approximately 2.8% over the next twelve months.
+Added: This begins with the development of a base case scenario, which projects net interest income (“NII”) over the next twelve month period.
+Added: The base case scenario NII may increase or decrease significantly from quarter to quarter reflective of changes during the most recent quarter in the Company’s:
+Added: (i) earning assets and liabilities balances, (ii) composition of earning assets and liabilities, (iii) earning asset yields, (iv) cost of funds and (v) model projections, as well as current market interest rates, including the slope of the yield curve and projected changes in the slope of the yield curve over the twelve month period.
+Added: Due to the favorable impacts of increases in market interest rates on new loans and a significant increase in the Company’s loan balances during the fourth quarter of 2022, which were partially offset by the unfavorable impacts of higher costs on deposits and overnight borrowings, the base case NII projection increased between the third quarter income simulation and the fourth quarter income simulation.
+Added: While a wide variety of strategic balance sheet and treasury yield curve scenarios are tested on an ongoing basis, the following reflects the Company's estimated NII sensitivity as compared to the base case scenario over the subsequent twelve months based on:
+Added: ● Balance sheet levels using December 31, 2022 as a starting point.
+Added: ● The model assumes the Company’s average deposit balances will decrease approximately 4.6% over the next twelve months.
+Added: ● The model was adjusted for the sale of $733.8 million of available-for-sale U.S.
+Added: Treasury securities in the first quarter of 2023, resulting in a decrease in average earning assets of approximately 8.1% as the proceeds from the sale were used to pay down overnight borrowings.
● Cash flows on earning assets are based on contractual maturity, optionality, and amortization schedules along with applicable prepayments derived from internal historical data and external sources.
−Removed: The model assumes that all of the remaining first draw PPP loans originated during 2020 will be forgiven and repayment of the vast majority of the balances would occur over the next 6 months.
−Removed: The majority of the second draw PPP loans originated in 2021 are projected to be repaid over the next 6 months.
−Removed: All other loan balances, are generally projected to increase modestly throughout the forecast period.
−Removed: ● As of December 31, 2021, cash equivalents were just over $1.7 billion.
−Removed: The model assumes approximately 69% of the excess cash and cash flows from investment contractual maturities and prepayments, estimated at $1.4 billion, are to be invested in long-term securities over the next twelve months.
−Removed: ● In the rising rates scenarios, the prime rate and federal funds rates are assumed to move up by the amounts listed below over a 12-month period while moving the long end of the treasury curve to spreads over the three month treasury that are more consistent with historical norms based on the last three years (normalized yield curve).
+Added: All loan balances are generally projected to increase modestly throughout the forecast period.
+Added: ● The model assumes no additional investment security purchases over the next twelve months.
+Added: Investment cash flows will be used to pay down overnight borrowings and fund loan growth.
+Added: ● In the rising rates scenarios, the prime rate and federal funds rates are assumed to move up by the amounts listed below over a 12-month period while moving the long end of the treasury curve to spreads over the three month treasury that are more consistent with historical norms, including a reversion to a positively-sloped yield curve (normalized yield curve) with an average spread of 95 basis points between the three month Treasury yield and the ten year Treasury yield.
Deposit rates are assumed to move in a manner that reflects the historical relationship between deposit rate movement and changes in the federal funds rate.
−Removed: In the -100 basis point model, the prime and federal funds rate are held at current levels and the treasury yield curve is assumed to move to the narrow spread levels experienced during the 3 rd quarter of 2020 during the early stages of the COVID-19 pandemic.
+Added: In the -100 basis point model, the prime and federal funds rates are dropped one hundred basis points each, and the treasury curve assumes the same slope as the rising rate scenarios, with all points normalizing off of the three month treasury rate, which is lowered by one hundred basis points from the flat rate scenario.
+Added: The same method is applied for the -200 basis point scenario, with the rate moves being down 200 basis points for prime, federal funds, and the three month treasury rate.
Net Interest Income Sensitivity Model
Calculated annualized increase
+Added: Calculated annualized increase
(decrease) in projected net interest
+Added: (decrease) in projected net interest
income at December 31, 2022
+Added: income at December 31, 2022
Interest rate scenario
3 unchanged sentences
-100 basis points
−Removed: Projected NII over the 12-month forecast period increases in the rising rate environments largely due to higher rates earned on significant levels of cash equivalents, investment purchases, and assumed higher rates on new loans, including variable and adjustable rate loans.
−Removed: These increases are partially offset by anticipated increases in deposit and borrowing costs.
−Removed: Over the longer time period, the growth in NII continues to improve in both rising rate environments as lower yielding assets mature and are replaced at higher rates.
−Removed: In the -100 basis points scenario, the Company shows interest rate risk exposure to lower rates on terms of one month and greater.
−Removed: During the first twelve months, net interest income declines largely due to lower assumed rates on investment purchases and new loans, including adjustable and variable rate assets.
−Removed: Modestly lower funding costs associated with deposits and borrowings only partially offset a small proportion of the decrease in interest income.
+Added: -200 basis points
+Added: Projected NII over the 12-month forecast period decreases in the up 200 rate environment largely due to deposits and overnight borrowings repricing higher in year 1, which are mostly offset by loans repricing higher.
+Added: Projected NII increases in the up 100 rate environment largely due to the impact of loans repricing higher outweighing the increases to deposit and overnight borrowing costs.
+Added: Over the longer time period, the growth in NII begins to improve in all rising rate environments as the impact from lower yielding assets maturing and being replaced at higher rates is significantly more material than the increase in funding costs.
+Added: Projected NII increases in the down 100 and down 200 rate environments due to lower funding costs which are partially offset by lower income on loans.
The analysis does not represent a Company forecast and should not be relied upon as being indicative of expected operating results.
1 unchanged sentence
the nature and timing of interest rate levels (including yield curve shape), prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment/replacement of asset and liability cash flows, and other factors.
−Removed: While the assumptions are developed based upon a reasonable outlook for economic and local market conditions, the Company cannot make any assurances as to the predictive efficacy of these assumptions, including how customer preferences or competitor influences might change.
−Removed: Furthermore, the sensitivity analysis does not reflect actions that the ALCO might take in responding to or anticipating changes in interest rates.
+Added: While the assumptions are developed based upon a reasonable outlook for national and local economic and market conditions, the Company cannot make any assurances as to the predictive efficacy of these assumptions, including how customer preferences or competitor influences might change.
+Added: Furthermore, the sensitivity analysis does not reflect actions that the ALCO might take in responding to or anticipating changes in interest rates and other developments.
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.