QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
−Removed: As a financial institution, the Corporation’s primary source of market risk is interest rate risk, which is the exposure to fluctuations in the Corporation’s future earnings resulting from changes in interest rates.
−Removed: This exposure is correlated to the repricing characteristics of the Corporation’s portfolio of assets and liabilities.
−Removed: Each asset or liability reprices either at maturity or during the life of the instrument.
−Removed: The principal purpose of asset/liability management is to maximize current and future net interest income within acceptable levels of interest rate risk while satisfying liquidity and capital requirements.
−Removed: Net interest income is enhanced by increasing the net interest margin and the growth in earning assets.
−Removed: As a result, the primary goal of interest rate risk management is to maintain a balance between risk and reward such that net interest income is maximized while risk is maintained at an acceptable level.
−Removed: The Corporation uses an asset-liability management model to measure the effect of interest rate changes on its net interest income.
−Removed: The Corporation’s management also reviews asset-liability maturity gap and repricing analyses regularly.
−Removed: The Corporation does not always attempt to achieve a precise match between interest sensitive assets and liabilities because it believes that an actively managed amount of interest rate risk is inherent and appropriate in the management of the Corporation’s profitability.
−Removed: Asset-liability modeling techniques and simulation involve assumptions and estimates that inherently cannot be measured with precision.
−Removed: Key assumptions in these analyses include maturity and repricing characteristics of assets and liabilities, prepayments on amortizing assets, non-maturing deposit sensitivity, and loan and deposit pricing.
−Removed: These assumptions are inherently uncertain due to the timing, magnitude, and frequency of rate changes and changes in market conditions and management strategies, among other factors.
−Removed: However, the analyses are useful in quantifying risk and provide a relative gauge of the Corporation’s interest rate risk position over time.
−Removed: Management reviews interest rate risk on a quarterly basis and reports to the ALCO.
−Removed: This review includes earnings shock scenarios whereby interest rates are immediately increased and decreased by 100, 200, 300, and 400 basis points.
−Removed: These scenarios, detailed in the table below, indicate that there would not be a significant variance in net interest income over a one-year period due to interest rate changes;
−Removed: however, actual results could vary significantly.
−Removed: At December 31, 2022 and 2021, all interest rate risk levels according to the model were within the tolerance limits of ALCO-approved policy.
−Removed: In addition, the table does not take into consideration changes that management would make to realign its assets and liabilities in the event of an unexpected changing interest rate environment.
−Removed: The 300 and 400 basis point declining interest rate scenarios have been excluded in the following table.
+Added: The disclosures set forth in this item are qualified by Item 1A.
+Added: Risk Factors and the section captioned “Forward-Looking Statements and Factors that Could Affect Future Results” included in Item 7.
+Added: Management’s Discussion and Analysis of Financial Condition and Results of Operations, of this report, and other cautionary statements set forth elsewhere in this report.
+Added: As a financial institution, the Corporation's primary source of market risk exposure is interest rate risk, which influences fluctuations in the Corporation's future earnings due to changes in interest rates.
+Added: This risk is closely correlated to the repricing characteristics of the Corporation's portfolio of assets and liabilities, with each asset or liability repricing either at maturity or during the instrument's life cycle.
+Added: The Corporation’s interest rate risk measurement philosophy focuses on maintaining an appropriate balance between the theoretical and the practical, especially given that the primary objective of the Corporation’s overall asset/liability management process is to assess the level of interest rate risk in the Corporation’s balance sheet.
+Added: Therefore, the Corporation models a set of interest rate scenarios capturing the financial effects of a range of plausible rate scenarios.
+Added: The collective impact of these scenarios is designed to enable the Corporation to understand the nature and extent of its sensitivity to interest rate changes.
+Added: Doing so necessitates an assessment of rate changes over varying time horizons and of varying/sufficient degrees such that the impact of embedded options within the balance sheet are sufficiently examined.
+Added: The Corporation has designed its interest rate risk measurement activities to include the following core elements:
+Added: (i) interest rate ramps and shocks, (ii) parallel and non-parallel yield curve shifts, and (iii) a set of alternative rate scenarios, the nature of which change based upon prevailing market conditions.
+Added: The Corporation’s primary tools in managing Interest Rate Risk (“IRR”) are income simulation models.
+Added: The income simulation models are utilized to quantify the potential impact of changing interest rates on earnings and to identify expected earnings trends given longer-term rate cycles.
+Added: Standard gap reports are also utilized to provide supporting detailed information.
+Added: The Corporation also recognizes that a sustained environment of higher/lower interest rates will affect the underlying value of the Corporation’s assets, liabilities and off-balance sheet instruments since the present value of their future cash flows (and the cash flows themselves) change when interest rates change.
+Added: In order to monitor the long-term structural and economic position of the balance sheet, the ALCO reviews the Economic Value of Equity measure on a quarterly basis.
+Added: IRR considerations include inherent assumptions and estimates, including the maturity and repricing characteristics of assets and liabilities, prepayments on amortizing assets, non-maturing deposit sensitivity, and loan and deposit pricing.
+Added: These assumptions are subject to uncertainty due to the timing, magnitude, and frequency of rate changes, market conditions, and management strategies.
+Added: The following table demonstrate the annualized result of an interest rate simulation and the estimated effect that a parallel interest rate shift, or “shock,” in the yield curve and subjective adjustments in deposit pricing might have on the Corporation’s projected net interest income over the next 12 months.
+Added: This simulation assumes that there is no growth in interest-earning assets or interest-bearing liabilities over the next 12 months.
+Added: The changes to net interest income shown below are in compliance with the Corporation’s policy guidelines.
December 31, 2023 December 31, 2022
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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.