Quantitative and Qualitative Disclosures About Market Risk
−Removed: Asset/Liability Management
−Removed: Management considers interest rate risk to be our most significant market risk.
−Removed: Market risk is the risk of loss from adverse changes in market prices and rates.
−Removed: Interest rate risk is the exposure to adverse changes in our net income as a result of changes in interest rates.
−Removed: Our primary earnings source is net interest income, which is affected by changes in the level of interest rates, the relationship between rates, the impact of interest rate fluctuations on asset prepayments, the level and composition of deposits and liabilities, and the credit quality of earning assets.
−Removed: Our asset and liability management objectives are to maintain a strong, stable net interest margin, to utilize our capital effectively without taking undue risks, to maintain adequate liquidity, and to reduce vulnerability of our operations to changes in interest rates.
−Removed: Our Asset and Liability Committee evaluates periodically, but at least four times a year, the impact of changes in market interest rates on assets and liabilities, net interest margin, capital and liquidity.
−Removed: Risk assessments are governed by policies and limits established by senior management, which are reviewed and approved by the full Board of Directors at least annually.
−Removed: The economic environment continually presents uncertainties as to future interest rate trends.
−Removed: The Asset and Liability Committee regularly utilizes a model that projects net interest income based on increasing or decreasing interest rates, in order to be better able to respond to changes in interest rates.
−Removed: At September 30, 2020, $478.0 million, or 84.3%, of our available for sale and held to maturity securities had fixed interest rates.
−Removed: At September 30, 2020, $2.9 billion, or 62.5%, of our loan portfolio had adjustable or floating interest rates.
−Removed: Changes in interest rates affect the value of our interest-earning assets and, in particular, our securities portfolio.
−Removed: Generally, the value of securities fluctuates inversely with changes in interest rates.
−Removed: Increases in interest rates could result in decreases in the market value of interest-earning assets, which could adversely affect our stockholders' equity and results of operations if sold.
−Removed: We are also subject to reinvestment risk associated with changes in interest rates.
−Removed: Changes in market interest rates also could affect the type (fixed-rate or adjustable-rate) and amount of loans we originate and the average life of loans and securities, which can impact the yields earned on our loans and securities.
−Removed: In periods of decreasing interest rates, the average life of loans and securities we hold may be shortened to the extent increased prepayment activity occurs during such periods which, in turn, may result in the investment of funds from such prepayments in lower yielding assets.
−Removed: Under these circumstances, we are subject to reinvestment risk to the extent that we are unable to reinvest the cash received from such prepayments at rates that are comparable to the rates on existing loans and securities.
−Removed: Additionally, increases in interest rates may result in decreasing loan prepayments with respect to fixed rate loans (and therefore an increase in the average life of such loans), may result in a decrease in loan demand, and may make it more difficult for borrowers to repay adjustable rate loans.
−Removed: We utilize the results of a detailed and dynamic simulation model to quantify the estimated exposure of net interest income to sustained interest rate changes.
−Removed: Management routinely monitors simulated net interest income sensitivity over a rolling two-year horizon.
−Removed: The simulation model captures the impact of changing interest rates on the interest income received and the interest expense paid on all assets and liabilities reflected on our consolidated balance sheet.
−Removed: This sensitivity analysis is compared to the asset and liability policy limits that specify a maximum tolerance level for net interest income exposure over a one-year horizon given 100 and 200-basis point upward shifts in interest rates and a 100-basis point downward shift in interest rates.
−Removed: A parallel and pro-rata shift in rates over a twelve-month period is assumed.
−Removed: In addition to the above scenarios, we consider other non-parallel rate shifts that would also exert pressure on earnings.
−Removed: The current low interest rate environment presents the possibility for a flattening of the yield curve, which presents a challenge to a bank, like us, that derives most of its revenue from net interest margin.
−Removed: During the nine months ended September 30, 2020, the yield on U.S.
−Removed: Treasury 5-year notes decreased 141 basis points from 1.69% to 0.28%, while the yield on 3-month Treasury bills decreased 145 basis points from 1.55% to 0.10%.
−Removed: The 3-month/5-year Treasury spread increased from 14 basis points at December 31, 2019 to 18 basis points at September 30, 2020, and continues to be considerably flat compared to the 3-month/5-year Treasury spread of 81 basis points at December 31, 2017.
−Removed: A continued flat or inverted yield curve in 2020 may adversely affect net interest income as borrowers tend to refinance higher-rate fixed rate loans at lower rates and we may not be able to reinvest those prepayments in assets earning interest rates as high as the rates on those prepaid assets.
−Removed: The following reflects our net interest income sensitivity analysis at September 30, 2020 and December 31, 2019:
−Removed: September 30, 2020
−Removed: Potential Change
−Removed: in Future Net
−Removed: Change in Interest
−Removed: Interest Income
−Removed: Rates in Basis Points
−Removed: (Dollars in thousands)
+Added: Quantitative and qualitative disclosures about market risk were presented at December 31, 2020 in Item 7A of the Holding Company’s Annual Report on Form 10-K, filed with the SEC on March 15, 2021.
+Added: The following is an update of the discussion provided therein.
+Added: The Company’s largest component of market risk remains interest rate risk.
+Added: The Company is not subject to foreign currency exchange or commodity price risk.
+Added: the three months ended March 31, 2021, the Company conducted zero transactions involving derivative instruments requiring bifurcation in order to hedge interest rate or market risk.
+Added: Interest Rate Risk Exposure Analysis
+Added: Economic Value of Equity ("EVE") Analysis .
+Added: In accordance with agency regulatory guidelines, the Company simulates the impact of interest rate volatility upon EVE using several interest rate scenarios.
+Added: EVE is the difference between the present value of the expected future cash flows of the Company’s assets and liabilities and the value of any off-balance sheet items, such as derivatives, if applicable.
+Added: Traditionally, the fair value of fixed-rate instruments fluctuates inversely with changes in interest rates.
+Added: Increases in interest rates thus result in decreases in the fair value of interest-earning assets, which could adversely affect the Company’s consolidated results of operations in the event they were to be sold, or, in the case of interest-earning assets classified as available-for-sale, reduce the Company’s consolidated stockholders’ equity, if retained.
+Added: The changes in the value of assets and liabilities due to fluctuations in interest rates measure the interest rate sensitivity of those assets and liabilities.
+Added: In order to measure the Company’s sensitivity to changes in interest rates, EVE is calculated under market interest rates prevailing at a given quarter-end ("Pre-Shock Scenario"), and under various other interest rate scenarios ("Rate Shock Scenarios") representing immediate, permanent, parallel shifts in the term structure of interest rates from the actual term structure observed in the Pre-Shock Scenario.
+Added: An increase in the EVE is considered favorable, while a decline is considered unfavorable.
+Added: The changes in EVE between the Pre-Shock Scenario and various Rate Shock Scenarios due to fluctuations in interest rates reflect the interest rate sensitivity of the Company’s assets, liabilities, and off-balance sheet items that are included in the EVE.
+Added: Management reports the EVE results to the Board of Directors on a quarterly basis.
+Added: The report compares the Company’s estimated Pre-Shock Scenario EVE to the estimated EVE calculated under the various Rate Shock Scenarios.
+Added: The Company’s valuation model makes various estimates regarding cash flows from principal repayments on loans and deposit decay rates at each level of interest rate change.
+Added: The Company’s estimates for loan repayment levels are influenced by the recent history of prepayment activity in its loan portfolio, as well as the interest rate composition of the existing portfolio, especially in relation to the existing interest rate environment.
+Added: In addition, the Company considers the amount of fee protection inherent in the loan portfolio when estimating future repayment cash flows.
+Added: Regarding deposit decay rates, the Company tracks and analyzes the decay rate of its deposits over time, with the assistance of a reputable third party, and over various interest rate scenarios.
+Added: Such results are utilized in determining estimates of deposit decay rates in the valuation model.
+Added: The Company also generates a series of spot discount rates that are integral to the valuation of the projected monthly cash flows of its assets and liabilities.
+Added: The valuation model employs discount rates that it considers representative of prevailing market rates of interest with appropriate adjustments it believes are suited to the heterogeneous characteristics of the Company’s various asset and liability portfolios.
+Added: No matter the care and precision with which the estimates are derived, actual cash flows could differ significantly from the Company’s estimates resulting in significantly different EVE calculations.
+Added: The analysis that follows presents, as of March 31, 2021 and December 31, 2020, the estimated EVE at both the Pre-Shock Scenario and the +100 Basis Point Rate Shock Scenario.
+Added: March 31, 2021
December 31, 2020
−Removed: Potential Change
−Removed: in Future Net
−Removed: Change in Interest
−Removed: Interest Income
−Removed: Rates in Basis Points
(Dollars in thousands)
−Removed: As noted in the table above, a 200-basis point increase in interest rates is projected to increase net interest income by 6.12% in year 1 and increase net interest income by 1.62% in year 2.
−Removed: Our balance sheet sensitivity to such a move in interest rates at September 30, 2020 increased as compared to December 31, 2019 (which was an increase of 0.70% in net interest income over a twelve-month period).
−Removed: This increase is the result of a higher portion of our loans repricing to market rates in addition to the increase in our floating rate portfolio over the last year.
−Removed: We also continue to show the ability to hold the costs of interest-bearing deposits to below market rates .
−Removed: Overall, our strategy has been to proactively take advantage of the falling rate cycle in aggressively lowering deposit costs, ultimately dampening the effect of variable and adjustable rate loan repricing and additional fixed rate loan refinancing.
−Removed: Over the intervening year, the effective duration (a measure of price sensitivity to interest rates) of the bond portfolio decreased from 2.35 years at December 31, 2019 to 2.03 years at September 30, 2020.
−Removed: The preceding sensitivity analysis does not represent a Company forecast and should not be relied on as being indicative of expected operating results.
−Removed: These hypothetical estimates are based on numerous assumptions including, but not limited to, the nature and timing of interest rate levels and yield curve shapes, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, and reinvestment and replacement of asset and liability cash flows.
−Removed: While assumptions are developed based on perceived current economic and local market conditions, we cannot make any assurances as to the predictive nature of these assumptions including how customer preferences or competitor influences may change.
−Removed: Also, as market conditions vary from those assumed in the sensitivity analysis, actual results will also differ due to prepayment and refinancing levels likely deviating from those assumed, the varying impact of interest rate change caps or floors on adjustable rate assets, the potential effect of changing debt service levels on customers with adjustable rate loans, depositor early withdrawals, prepayment penalties and product preference changes and other internal and external variables.
−Removed: Furthermore, the sensitivity analysis does not reflect actions that management might take in responding to, or anticipating, changes in interest rates and market conditions.
+Added: Rate Shock Scenarios
+Added: + 100 Basis Points
+Added: Pre-Shock Scenario
+Added: The Company’s Pre-Shock Scenario EVE increased from $593.4 million at December 31, 2020 to $1.04 billion at March 31, 2021.
+Added: The primary factor contributing to the significant increase in EVE at March 31, 2021, was the completion of the Merger in the first quarter.
+Added: The Company’s EVE in the +100 Basis Point Rate Shock Scenario increased from $597.4 million at December 31, 2020 to $1.16 billion at March 31, 2021.
+Added: Income Simulation Analysis .
+Added: As of the end of each quarterly period, the Company also monitors the impact of interest rate changes through a net interest income simulation model.
+Added: This model estimates the impact of interest rate changes on the Company’s net interest income over forward-looking periods typically not exceeding 36 months (a considerably shorter period than measured through the EVE analysis).
+Added: Management reports the net interest income simulation results to the Company’s Board of Directors on a quarterly basis.
+Added: The following table discloses the estimated changes to the Company’s net interest income over the 12-month period beginning March 31, 2021 assuming gradual changes in interest rates for the given rate scenarios:
+Added: Percentage Change in
+Added: Gradual Change in Interest rates of:
+Added: Net Interest Income
+Added: + 200 Basis Points
+Added: + 100 Basis Points
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.