5 unchanged sentences
Banking is generally a business of managing the maturity and repricing mismatch inherent in its asset and liability cash flows and to provide net interest income growth consistent with the Company’s profit objectives.
−Removed: During the year ended December 31, 2020, the Company's net interest income decreased by 1%, as a result of compression in the net interest margin largely offset by growth in average earnings assets.
+Added: During the year ended December 31, 2021, the Company's net interest income increased by 1%, as a result of balance sheet growth even in the face of compression in the net interest margin.
The Company believes it is able to continue to manage its overall interest rate risk position to a moderate level.
The Company, through its ALCO and ongoing financial management practices, monitors the interest rate environment in which it operates and adjusts the rates and maturities of its assets and liabilities to remain competitive and to achieve its overall financial objectives subject to established risk limits.
−Removed: In the current and expected future interest rate environment, the Company has been maintaining its investment portfolio to manage the balance between yield and prepayment risk in its portfolio of mortgage-backed securities should interest rates remain at current levels.
−Removed: Further, the Company has been managing the investment portfolio to mitigate extension risk and related declines in market values in that same portfolio should interest rates increase.
+Added: In the current and expected future interest rate environment, the Company has been maintaining its investment portfolio to manage the balance between yield and prepayment/extension risk in its portfolio of mortgage-backed securities should interest rates prove more volatile.
Additionally, the Company has limited call risk in its U.S.
agency investment portfolio.
−Removed: During the year ended December 31, 2020, the average investment portfolio balances increased by 17% as compared to balances at December 31, 2019, in the effort to maintain the overall proportion of AFS securities to total assets, while also prudently managing significant deposit growth that outpaced loan growth.
−Removed: Cash flows from mortgage backed securities and sales of U.S.
+Added: For the year ended December 31, 2021, the average investment portfolio balances increased by 82% as compared to the average balance at December 31, 2020, in the effort to deploy excess liquidity into higher earning assets in the face of reductions in loan volumes.
+Added: Cash flows from mortgage backed securities and calls of U.S.
agency securities were reinvested primarily into a similar combination of mortgage backed securities and agencies.
−Removed: Additional investments have been made in community bank sub-debt and SBA bonds.
−Removed: The percentage mix of municipal securities increased to 9% of total investments at December 31, 2020 from 8% at December 31, 2019, as the focus shifted to shorter duration instruments with more cash flow.
−Removed: The portion of the portfolio invested in mortgage backed securities increased to 72% at December 31, 2020 from 65% at December 31, 2019 while the portion of the portfolio represented in U.S.
−Removed: agency investments decreased from 22% to 16%.
−Removed: Shorter duration floating rate corporate bonds were 3% of total investments at December 31, 2020 and SBA bonds, which are included in mortgage backed securities, were 6% of total investments at December 31, 2020.
−Removed: The duration of the investment portfolio was 3.2 years at December 31, 2020 and 3.4 at December 31, 2019.
−Removed: The lower duration was due to the passage of time and maturity of the bond portfolio and the faster mortgage prepayment environment, mitigated by purchases of a higher mix and dollar amount of longer duration mortgage backed securities and municipal bonds.
+Added: Additional investments have been made in community bank sub-debt and US Treasury bonds.
+Added: The percentage mix of municipal securities decreased to 5% of total investments at December 31, 2021 from 9% at December 31, 2020, as the focus shifted to shorter duration instruments with more cash flow.
+Added: The portion of the portfolio invested in mortgage backed securities decreased to 62% at December 31, 2021 from 72% at December 31, 2020 while the portion of the portfolio represented in U.S.
+Added: agency investments increased from 16% to 24%.
+Added: Shorter duration floating rate corporate bonds were 2% of total investments at December 31, 2021 and SBA bonds, which are included in agency securities, were 3% of total investments at December 31, 2021.
+Added: The repricing duration of the investment portfolio was 4.3 years at December 31, 2021 and 3.2 years at December 31, 2020.
+Added: The higher duration was due to the new purchases made largely in the second half of the year in a higher rate environment where prepayment speeds are excepted to slow.
In the loan portfolio, the repricing duration was 18 months at December 31, 2021 and 21 months at December 31, 2020, with fixed rate loans amounting to 43% of total loans at December 31, 2021 and 45% at December 31, 2020.
Variable and adjustable rate loans comprised 57% of total loans at December 31, 2021 and 55% for 2020.
−Removed: Variable rate loans are generally indexed to either the one month London Interbank Offered Rate (“LIBOR”) or the Wall Street Journal prime interest rate, while adjustable rate loans are indexed primarily to the five year U.S.
+Added: Variable rate loans are generally indexed to either the one month London Interbank Offered Rate (“LIBOR”) with fallback language to reference the Secured Overnight Funding Rate ("SOFR") or the Wall Street Journal prime interest rate, while adjustable rate loans are indexed primarily to the five year U.S.
Treasury interest rate.
−Removed: The duration of the deposit portfolio lengthened to 42 months at December 31, 2020 from 27 months at December 31, 2019.
−Removed: The change since December 31, 2019 was due to measured nonmaturity deposit decay rates extending due to an economic slowdown and a resulting lack of deposit competition as rates fell.
−Removed: The Company experienced $2.0 billion in total deposit growth for the year ended December 31, 2020 as compared to total loan growth of $214.5 million.
−Removed: While loan growth was impacted in 2020 due to the COVID-19 pandemic, the Company has continued its emphasis on funding loans in its marketplace, and has continued to achieve discplined loan pricing, even at the expense of growing new loans.
+Added: The duration of the deposit portfolio slightly decreased to 41 months at December 31, 2021 from 42 months at December 31, 2020.
+Added: The Company experienced $792.3 million in total deposit growth for the year ended December 31, 2021 as compared to a total loan decrease of $694.6 million.
+Added: While loan growth was impacted in 2021 due to the continuing COVID-19 pandemic and the sale of SBA PPP loans, the Company has continued its emphasis on funding loans in its marketplace, and has continued to achieve disciplined loan pricing, even at the expense of growing new loans.
A disciplined approach to loan pricing has resulted in a loan portfolio yield of 4.62% for the year ended December 31, 2021 as compared to 4.66% for the same period in 2020.
−Removed: In the competitive interest rate environment of 2020, the interest rates on new loan originations have been well below the rates of loan paydowns and payoffs.
−Removed: Additionally, significant amounts of variable and adjustable rate loans have repriced down as market interest rates decreased.
−Removed: Table o f Contents
−Removed: The net unrealized gain before income tax on the investment portfolio was $22.0 million at December 31, 2020 as compared to a net unrealized gain before tax of $4.2 million at December 31, 2019, with $1.8 million of realized net gains recorded during the year ended December 31, 2020.
−Removed: The higher net unrealized gain on the investment portfolio was due primarily to lower interest rates at year end 2020 as compared to year end 2019.
+Added: In the competitive interest rate environment of 2021, the interest rates on new loan originations have been below the rates of loan paydowns and payoffs.
+Added: Additionally, significant amounts of variable and adjustable rate loans have repriced down to meet market interest rates.
+Added: The net unrealized loss before income tax on the investment portfolio was $18.6 million at December 31, 2021 as compared to a net unrealized gain before tax of $22.0 million at December 31, 2020, with $3.0 million of realized net gains recorded during the year ended December 31, 2021.
+Added: The net unrealized loss on the investment portfolio was due primarily to higher interest rates at year end 2021 as compared to year end 2020.
At December 31, 2021, the unrealized gain position represented 0.7% of the portfolio’s book value.
−Removed: The Company is a party to interest rate swaps as part of its interest rate risk management strategy intended to mitigate the potential risk of rising interest rates on the Bank’s cost of funds.
−Removed: As of both December 31, 2020 and 2019, the Company had one interest rate swap transaction outstanding that had a notional amount of $100.0 million associated with the Company’s variable rate deposits.
−Removed: The interest rate swap is designated as a cash flow hedge and involves the receipt of variable rate amounts from a counterparty in exchange for the Company making fixed payments that began in April 2016.
−Removed: The net unrealized loss before income tax on the interest rate swap was $516 thousand at December 31, 2020 as compared to a net unrealized loss before income tax of $202 thousand at December 31, 2019, and is included in accumulated other comprehensive income (net of taxes) on the Consolidated Balance Sheet.
−Removed: The increased unrealized gain in value since year end 2019 was due to the declines in market interest rates.
−Removed: During the third quarter of 2018, the Company entered into credit RPAs with institutional counterparties, under which the Company assumes its pro-rata share of the credit exposure associated with a borrower’s performance related to interest rate derivative contracts.
+Added: The Company has credit Risk Participation Agreements ("RPAs") with institutional counterparties, under which the Company assumes its pro-rata share of the credit exposure associated with a borrower’s performance related to interest rate derivative contracts.
The fair value of RPAs is calculated by determining the total expected asset or liability exposure of the derivatives to the borrowers and applying the borrowers’ credit spread to that exposure.
11 unchanged sentences
For the analysis presented below, at December 31, 2021, the simulation assumes a 50 basis point change in interest rates on money market and interest bearing transaction deposits for each 100 basis point change in market interest rates in a decreasing interest rate shock scenario with a floor of 10 basis points, and assumes a 50 basis point change in interest rates on money market and interest bearing transaction deposits for each 100 basis point change in market interest rates in an increasing interest rate shock scenario.
−Removed: As quantified in the table below, the Company’s analysis at December 31, 2020 shows a moderate effect on net interest income over the next 12 months, as well as a moderate effect on the economic value of equity when interest rates are shocked both down 100 and 200 basis points and up 100, 200, 300, and 400 basis points.
+Added: As quantified in the table below, the Company’s analysis at December 31, 2021 shows a moderate effect on net interest income over the next 12 months, as well as a modest effect on the economic value of equity when interest rates are shocked both down 100 and 200 basis points and up 100, 200, 300, and 400 basis points.
This moderate impact is due substantially to the significant level of variable rate and repriceable assets and liabilities and related shorter asset and liability durations.
The repricing duration of the investment portfolio at December 31, 2021 is 4.3 years, the loan portfolio 1.5 years, the interest bearing deposit portfolio 2.65 years and the borrowed funds portfolio 5.8 years.
−Removed: Table o f Contents
The following table reflects the result of simulation analysis on the December 31, 2021 asset and liability balances:
14 unchanged sentences
Due to the level of market rates at December 31, 2021, all down interest rate shocks (-100, -200, -300 and -400 basis points) leave the Bank with zero and negative rate instruments and are not considered practical or informative.
−Removed: The changes in net interest income, net income and the economic value of equity in both a higher and lower interest rate shock scenario at December 31, 2020 are not considered to be excessive.
−Removed: The positive impact of +1.6% in net interest income and +2.8% in net income given a 100 basis point increase in market interest rates at December 31, 2020 compares to +5.1% in net interest income and +8.8 in net income for the same period in 2019 and reflects in large measure the impact of variable and adjustable rate loans that are at floor rates at December 31, 2020 and won’t reprice above floors without more significant rate movements as compared to December 31, 2019.
+Added: The changes in net interest income, net income and the economic value of equity in both a higher and lower interest rate shock scenario at December 31,
+Added: 2021 are not considered to be excessive.
+Added: The positive impact of +4.7% in net interest income and +8.1% in net income given a 100 basis point increase in market interest rates at December 31, 2021 compares to +1.6% in net interest income and +2.8% in net income for the same period in 2020 and reflects in large measure the repricing of cash on hand and tempered by the impact of variable and adjustable rate loans that are at floor rates at December 31, 2021 and won’t reprice above floors without more significant rate movements.
Generally speaking, the loss of economic value of portfolio equity in a lower interest rate environment is due to lower values of core deposits more than offsetting the gains in loan and investment values;
while the gain of economic value of portfolio equity in a higher interest rate environment is due to higher value of core deposits more than offsetting lower values of fixed rate loans and investments.
+Added: Recent increases in deposit decay rates, however, have lowered the modeled valuation of core deposits.
+Added: As a result, the model shows that the value increase of more rate sensitive core deposits in a rising rate environment does not rise fast enough to overcome the valuation decline in assets.
+Added: If decay rates return to more normal historical speeds, the normal pattern of increasing income correlating with an increasing EVE (Economic Value of Equity) would return.
The Company believes its balance sheet is well positioned in the current interest rate environment.
−Removed: During 2020, largely as a result of the COVID-19 pandemic, the Company experienced sharply lower market interest rates together with significantly higher levels of deposit growth as compared to loan growth.
−Removed: This resulted in extraordinary levels of liquidity which was able to be invested in overnight funds which yielded a weighted average rate over the course of the year of just 0.22%.
+Added: During 2021, largely as a result of the COVID-19 pandemic, the Company continued to experience higher levels of deposit growth as compared to loan growth.
+Added: This resulted in extraordinary levels of liquidity which management was able to invest in overnight funds and marketable securities.
This event resulted in a decline in the net interest spread.
Additionally, while a significant mix of the deposit growth was in noninterest bearing funds, the value of these interest free funds decreased in the lower market rate environment.
−Removed: In this challenging interest rate environment in 2020, the Company continued to manage its interest rate sensitivity position to moderate levels of risk, as indicated in the simulation results above.
−Removed: The interest rate risk position at December 31, 2020 was dissimilar to the interest rate risk position at December 31, 2019.
−Removed: As compared to December 31, 2019, the sum of federal funds sold, interest bearing deposits with banks and other short-term investments and loans held for sale increased by $1.5 billion at December 31, 2020, and as noted above, significant amounts of variable rate loans were below floor levels at December 31, 2020.
+Added: The interest rate risk position at December 31, 2021 was dissimilar to the interest rate risk position at December 31, 2020, in that there was more expected net interest income in rising rates as a percentage.
+Added: This is partly a mathematical consequence of starting from a low level for the Net Interest Margin at the end of 2021.
+Added: As compared to December 31, 2020, the sum of federal funds sold, interest bearing deposits with banks and other short-term investments and loans held for sale decreased by $120 million at December 31, 2020, and as noted above, there is still a significant amount of variable rate loans that are below floor levels at December 31, 2021.
Certain shortcomings are inherent in the method of analysis presented in the foregoing table.
4 unchanged sentences
Finally, the ability of many borrowers to service their debt may decrease in the event of a significant interest rate increase.
−Removed: Table o f Contents
−Removed: During 2020, average market interest rates declined sharply, and resulted in a flattening of the yield curve.
+Added: During 2021, average market interest rates were mixed , and resulted in a steepening of the yield curve.
As compared to the year 2020, the average two year U.S.
1 unchanged sentence
The average five year U.S.
−Removed: Treasury rate decreased by 142 basis points from 1.96% to 0.53% while the average ten year U.S.
−Removed: Treasury rate decreased by 127 basis points from 2.15% to 0.88%.
+Added: Treasury rate increased by 32 basis points from 0.54% to 0.86% while the average ten year U.S.
+Added: Treasury rate increased by 55 basis points from 0.88% to 1.43%.
In that environment, the Company was able to achieve a net interest spread for 2021 of 2.59% compared to 2.81% for the year of 2020.
5 unchanged sentences
The Company’s net interest margin was 2.81% for the year ended December 31, 2021, as compared to 3.19% for the year ended December 31, 2020.
−Removed: The decline in net interest margin for the year ended December 31, 2020 as compared to the year ended December 31, 2019, was due to increased funding costs from term deposits gathered early in the year, new loan and variable rate loans adjusting downward as market rates fell, exacerbated by a decrease in the average loan to deposit ratio, as the Bank experienced high levels of on balance sheet liquidity.
+Added: The decline in net interest margin for the year ended December 31, 2021 as compared to the year ended December 31, 2020, was due to decreasing average loan balances and the balance sheet asset mix skewing towards lower yielding marketable securities, as the Bank continued to experience high levels of on balance sheet liquidity.
In falling interest rate environments, net interest income is maximized with longer term, higher yielding assets being funded by lower yielding short-term funds, or what is referred to as a negative mismatch or negative gap.
3 unchanged sentences
A negative gap indicates the degree to which the volume of repriceable liabilities exceeds repriceable assets in given time periods.
−Removed: At December 31, 2020, the Company had a positive gap position of approximately $464 million or 4.2% of total assets out to three months and a positive cumulative gap position of $352 million or 3% of total assets out to 12 months;
+Added: At December 31, 2021, the Company had a negative gap position of approximately $267 million or 2% of total assets out to three months and a positive cumulative gap position of $102 million or 0.86% of total assets out to 12 months;
as compared to a positive gap position of approximately $464 million or 4% of total assets out to three months and a positive cumulative gap position of approximately $352 million or 3% of total assets out to 12 months at December 31, 2020.
−Removed: The change in the positive gap position at December 31, 2020, as compared to December 2019, was minimal and contributed to the neutral interest rate risk position of the Company.
+Added: The change in the positive gap position at December 31, 2021, as compared to December 2020, was due to the increase in savings and money market accounts and moving those balances into the securities portfolio rather than holding them all in short term cash accounts.
The change in the gap position at December 31, 2021 as compared to December 31, 2020 is not deemed material to the Company’s overall interest rate risk position.
4 unchanged sentences
These factors have been discussed with the ALCO and management believes that current strategies are appropriate to current economic and interest rate trends.
−Removed: If interest rates increase by 100 basis points, the Company’s net interest income and net interest margin are expected to increase modestly due to the repricing of variable rate assets and the assumption of an increase in money market interest rates by 70% of the change in market interest rates.
+Added: If interest rates increase by 100 basis points, the Company’s net interest income and net interest margin are expected to increase due to the repricing of variable rate assets and the assumption of an increase in money market interest rates by 50% of the change in market interest rates.
If interest rates decline by 100 basis points, the Company’s net interest income and margin are expected to decline modestly as the impact of lower market rates on a large amount of liquid assets more than offsets the ability to lower interest rates on interest bearing liabilities.
1 unchanged sentence
If this were to occur, the effects of a declining interest rate environment may not be in accordance with management’s expectations.
−Removed: Table o f Contents
December 31, 2021
11 unchanged sentences
Noninterest bearing demand (3)
+Added: $ 117,696 $ 327,398 $ 710,692 $ 524,335 $ 1,597,834 $ 3,277,955
Interest bearing transaction 777,255 — — — — 777,255
15 unchanged sentences
(2) Nonaccrual loans are included in the over 60 months category
−Removed: The sum of federal funds sold, interest bearing deposits with banks and other short-term investments increased by $1.6 billion at December 31, 2020 as compared to December 31, 2019.
−Removed: The Company was able to curtail some short term liabilities at year end 2020 as compared to 2019, but was holding more time deposits that are due to mature and reprice in the 4-12 month time horizon.
−Removed: This change resulted in the cumulative gap position within 12 months decreasing to 3.2% of total assets at December 31, 2020 from 3% of total assets at December 31, 2019.
−Removed: Although NOW and money market accounts are subject to immediate repricing, the Bank’s gap model has incorporated a repricing schedule to account for a lag in rate changes based on our experience, as measured by the amount of those deposit rate changes relative to the amount of rate change in assets.
−Removed: Table o f Contents
+Added: (3) Non-Interest Bearing demand, while assumed to be non-rate sensitive, are displayed based on the expected deposit decay period
+Added: The sum of federal funds sold, interest bearing deposits with banks and other short-term investments decreased by $80 million at December 31, 2021 as compared to December 31, 2020.
+Added: Although NOW and money market accounts are subject to immediate repricing, the Bank generally expects there to be a lag in rate changes based on our experience that could change the actual results from what is modeled here.
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.