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Net interest income is our most significant component of earnings and we consider interest rate risk to be our most significant market risk.
+Added: Our net interest income results from the difference between the yields we earn on our interest-earning assets, primarily loans and investments, and the rates that we pay on our interest-bearing liabilities, primarily deposits and borrowings.
+Added: When interest rates change, the yields we earn on our interest-earning assets and the rates we pay on our interest-bearing liabilities do not necessarily move in tandem with each other because of the difference between their maturities and repricing characteristics and which can negatively impact net interest income.
+Added: Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve.
+Added: Changes in monetary policy, including changes in interest rates, influence not only the interest we receive on loans and investments and the amount of interest we pay on deposits and borrowings, but such changes could also affect the average duration of our mortgage portfolio, investment securities and other interest-earning assets.
Our goal is to structure our asset/liability composition to maximize net interest income while managing interest rate risk so as to minimize the adverse impact of changes in interest rates on net interest income and capital in either a rising or declining interest rate environment.
Profitability is affected by fluctuations in interest rates.
−Removed: A sudden and substantial change in interest rates may adversely impact our earnings because the interest rates of the underlying assets and liabilities do not change at the same speed, to the same extent or on the same basis.
+Added: A sudden and substantial change in interest rates will generally impact our earnings adversely because the interest rates of the underlying assets and liabilities do not change at the same speed, to the same extent or on the same basis.
Interest rate risk is monitored through the use of three complementary modeling tools:
29 unchanged sentences
- 400 (4.3)% (15.1)%
−Removed: (1) - The percentage change represents the projected net interest income for 12 months on a flat balance sheet in a stable rate environment as compared to the projected net interest income in the various rate scenarios.
+Added: (1) - The percentage change represents the projected net interest income for 12 months on a flat balance sheet in a stable rate environment as compared to the projected net interest income in the various rate scenarios with immediate and parallel shocks applied to the yield curve.
From a net interest income perspective, the Company has been fairly neutral historically with no significant change in the short-term (within a 12-month period) and within the lower ranges (+ - 100-200 basis points) of interest rate changes.
−Removed: The Company was more asset sensitive at December 31, 2021 as compared to its position at December 31, 2022.
−Removed: Asset sensitivity generally indicates that in a rising interest rate environment the Company’s net interest income would increase and in a decreasing interest rate environment the Company’s net interest income would decrease.
−Removed: However, the Company's sensitivity position has shifted such that, in the short-term it is projected that net interest income will likely be essentially flat or fall in both a rising and falling rate environment.
−Removed: This shift is due in part to the changing market characteristics of certain loan and deposit products as well as to the shift in the yield curve.
−Removed: Prior to the recent Federal Reserve actions to raise short-term interest rates, the yield curve was very low and rather flat.
−Removed: The rate increases in 2022 resulted in a steepening of the yield curve on the short end (within 1 year), while the longer end of the curve continues to be flat and has actually inverted between 1 and 10 years, meaning that the yield on short-term instruments (1 year) are higher than longer-term instruments (10 years).
+Added: Starting in 2022 and continuing in 2023, the Company's sensitivity position shifted such that in the short-term it is projected that net interest income will likely fall in both a rising and falling rate environment.
+Added: This position is due in part to the changing market characteristics of certain loan and deposit products as well as to the current shape of the yield curve.
+Added: The Company's current position is now more liability-sensitive which generally implies that net interest income would be expected to rise in a falling rate environment and fall in a rising rate environment.
+Added: However, the rapid rate increases experienced beginning in 2022 through mid-2023 resulted in a steepening of the yield curve on the short end (within one year), while the longer end of the curve inverted between one and ten years, meaning that the yield on short-term instruments (less than one year) are higher than longer-term instruments (ten years).
A flat or inverted interest rate curve is an unfavorable interest rate environment for many financial institutions, including the Bank, as short-term interest rates generally drive our deposit pricing and longer-term interest rates generally drive loan pricing.
When these rates converge or invert, the profit spread we realize between loan yields and deposit rates narrows, which pressures our NIM.
−Removed: As demonstrated in the above table, we would expect net interest income to decline in a decreasing interest rate environment, as interest-earning assets reprice to lower rates and interest-bearing deposits remain at or near their floors.
−Removed: With regard to rising rates with an immediate increase or shock in market rates over the short-term (12-month horizon), we would also expect to realize a decline in net interest income, although not to the extent projected in a declining rate environment.
−Removed: This is due in part to the composition of our loan portfolio which is comprised of 20% variable rate loans which could immediately reprice, thus limiting the magnitude of the impact of rate increases.
−Removed: In addition, the model includes an assumption of a quick repricing up of the funding base in a rising rate environment, and our recent shift to higher-cost brokered deposits and short-term borrowings in our funding mix has lead to a narrowing of the interest rate spread in the projection.
+Added: In January 2022, due to elevated levels of inflation and corresponding pressure to raise interest rates, the Federal Reserve announced, after several periods of historically low federal funds rates and yields on Treasury notes, that it would be slowing the pace of its bond purchasing and increasing the target range for the federal funds rate over time.
+Added: Therefore, the FOMC increased the target range eleven times throughout 2022 and 2023.
+Added: As of December 31, 2023, the target range for the federal funds rate had been increased 525 basis points to 5.25% - 5.50%.
+Added: It remains uncertain whether the FOMC will further increase the target range for the federal funds rate to attain a monetary policy sufficiently restrictive to return inflation to its target level, begin to reduce the federal funds rate or leave the rate at its current elevated level for a lengthy period of time.
+Added: As demonstrated in the above table, we expect net interest income to decline in a rising interest rate environment, as has been experienced over the last year.
+Added: This is due in large part to the composition of our loan portfolio which consists of approximately 19% variable rate loans that could immediately reprice, thus limiting the magnitude of the impact of rate increases.
+Added: In addition, the model includes an assumption of an immediate repricing up of the funding base in a rising rate environment due to the current competitive deposit market, combined with a continued utilization of wholesale funding in the form of short-term borrowings at our current level in order to maintain a similar balance sheet composition which has led to a narrowing of the interest rate spread in the projection.
+Added: With regard to
+Added: declining rates, assuming an immediate decrease or shock in market rates over the short-term (12-month horizon), we also expect to realize a decline in net interest income, although not to the extent projected in the prior year.
+Added: The declining net interest income in a falling rate scenario is related to the repricing of interest-earning assets to lower rates while non-maturity interest-bearing deposits are projected to be at or near their floor within a -200 basis point shock, thus limiting our ability to keep pace with asset rate declines.
+Added: The improvement in our position in the falling rate scenario as compared to the prior year is related to the actual rate increases experienced in 2023 providing additional repricing opportunity on the liability side of the balance sheet in a declining rate scenario.
+Added: The model results demonstrated in the above table are based on the immediate shock of each of the various rate scenarios and assume a continued inversion of the yield curve (i.e.
+Added: a parallel shift of the yield curve) in both a rising and falling rate scenario.
As previously noted, these assumptions are inherently uncertain, and actual results may differ from simulated results.
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The same assumptions are used in the economic value simulation as in the earnings simulation.
−Removed: The economic value simulation uses instantaneous rate shocks to the balance sheet.
+Added: The economic value simulation uses instantaneous rate shocks to the balance sheet and assumes a static average life of deposits in all interest rate scenarios.
The following table presents the estimated change in net economic value for the specified change levels presented.
10 unchanged sentences
- 400 (18.6)% (18.2)%
−Removed: (1) - The percentage change represents our economic value of equity in a stable rate environment as compared to the economic value of equity in the various rate scenarios.
−Removed: As of December 31, 2022, the Company’s economic value of equity is generally liability sensitive in a rising interest rate environment compared to its position as of December 31, 2021, while the extent of exposure to falling rates has improved from the prior year end.
−Removed: The increase in exposure to rising rates in the current year in primarily due to the composition of the consolidated balance sheets combined with the pricing characteristics and assumptions of certain deposits.
−Removed: Specifically, during 2022, non-maturity deposits, generally with lower betas, have runoff and have been replaced with short-term FHLB advances and short-term brokered deposits.
+Added: (1) - The percentage change represents our economic value of equity in a stable rate environment as compared to the economic value of equity in the various rate scenarios with immediate and parallel shocks applied to the yield curve.
+Added: As of December 31, 2023, the Company’s economic value of equity continued to be generally liability sensitive in both a rising and falling interest rate environment, similar to its position as of December 31, 2022, while the extent of exposure to rising rates has improved somewhat from the prior year end.
+Added: The decline in EVE under a rising rate environment is driven by the composition of the loans and investment portfolios, primarily related to CRE fixed rate loans and fixed rate mortgage-back securities.
+Added: In a rising rate environment, these portfolios tend to extend due to slower prepayments, thus lowering their relative valuation in the EVE calculation.
+Added: With regard to the falling rate scenario, the non-maturity deposits, generally with lower betas, continue to be at or near floor rates assumed in the model, thus within the -200 shocked interest rate scenario, essentially all on the non-maturity deposits are at or near their floor thus negatively impacting their value in the EVE calculation while variable rate assets continue to price downward in all falling rate scenarios.
Refer also to the discussion above under Earnings Simulation Analysis.
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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.