Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
The Company’s assessment of market risk at March 31, 2026 indicates there have been no material changes in the quantitative and qualitative disclosures from those made in the Company’s 2025
Form 10-K.
Market risk is the risk of loss in a financial instrument arising from adverse changes in market prices and rates, foreign currency exchange rates, commodity prices and equity prices. Our
market risk arises primarily from interest rate risk inherent in our lending and deposit taking activities. Management actively monitors and manages our interest rate risk exposure. We do not have any market-risk sensitive instruments
entered into for trading purposes. In monitoring interest rate risk, we continually analyze and manage our earning assets and funding liabilities based on their payment streams and interest rates, the timing of their maturities and/or
prepayments, and their sensitivity to actual or potential changes in market interest rates.
Management uses various asset/liability strategies to manage the re-pricing characteristics of our assets and liabilities designed to ensure that exposure to interest rate fluctuations is
limited within our guidelines of acceptable levels of risk-taking. Hedging strategies, including the terms and pricing of loans and deposits, and managing the deployment of our securities, are considered to reduce mismatches in interest
rate re-pricing opportunities of portfolio assets and their funding sources.
Since our earnings are primarily dependent on our ability to generate net interest income, we focus on actively monitoring and managing the effects of adverse changes in interest rates on our
net interest income. Our Asset Liability Management Committee (“ALCO”), which is comprised of members of the Board of Directors and Executive Officers, manages market risk. ALCO monitors interest rate risk by analyzing the potential impact
on net interest income from potential changes in interest rates, and considers the impact of alternative strategies or changes in balance sheet structure. ALCO manages our balance sheet in part to maintain the potential impact of changes in
interest rates on net interest income within acceptable ranges despite changes in interest rates. ALCO and management utilize a third party to assist with asset liability management including the use of simulation models.
Our exposure to interest rate risk is reviewed on at least a quarterly basis by ALCO. Interest rate risk exposure is measured using interest rate sensitivity analysis to determine our change
in net interest income in the event of hypothetical changes in interest rates. If potential changes to net interest income resulting from hypothetical interest rate changes are not within risk tolerances determined by ALCO, and approved by
the full Board of Directors, Management may make adjustments to the Company’s asset and liability mix to bring interest rate risk levels within the Board approved limits.
Net Interest Income Simulation. In order to measure interest rate risk, we use a simulation model to project changes in net interest income that
result from forecasted changes in interest rates. This analysis calculates the difference between net interest income forecasted using a rising and a falling interest rate scenario and a net interest income forecast using a base market
interest rate derived from the current Treasury yield curve. The income simulation model includes various assumptions regarding the re-pricing relationships for each of our products. Many of our assets are floating rate loans, which are
assumed to re-price immediately, and to the same extent as the change in market rates according to their contracted index.
Some loans and investment vehicles include the opportunity of prepayment (embedded options), and accordingly the simulation model uses various proprietary models to estimate these prepayments
and assumes the reinvestment of the proceeds at current yields. Our non-term deposit products generally re-price more slowly, usually changing less than the change in market rates and at our discretion.
This analysis indicates the impact of changes in net interest income for the given set of rate changes and assumptions. It assumes the balance sheet size remains static throughout the
simulation horizon by replacing existing cash flows/amortization into similar products at current rates to try and capture the ongoing activity of the balance sheet without forecasting any level of growth. It does not account for all
factors that affect this analysis, including changes by management to mitigate the effect of interest rate changes or secondary impacts such as changes to our credit risk profile as interest rates change.
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Furthermore, loan prepayment-rate estimates and spread relationships change regularly. Interest rate changes create changes in actual loan prepayment rates that will differ from the market
estimates incorporated in this analysis. Changes that vary significantly from the assumptions may have significant effects on our net interest income.
For the rising and falling interest rate scenarios, the base market interest rate forecast was increased or decreased, on an instantaneous and sustained basis, by 100, 200 and 300 basis
points. We then evaluate the simulation results using two approaches: Net Interest Income at Risk (“NII at Risk”) and Economic Value of Equity (“EVE”). Under NII at Risk, the impact on net interest income from the changes in interest rates
on interest earning assets and interest-bearing liabilities is modeled using various assumptions of assets and liabilities. EVE measures the period-end present value of assets minus the present value of liabilities. Management uses this
value to measure the changes in the economic value of the Company under various interest rate scenarios.
Based on our quarterly simulations, our net interest margin exposure related to these hypothetical changes in market interest rates was within the current guidelines established by ALCO. In the rising rate scenarios, the simulation
model indicates the Company is slightly liability sensitive, as interest-bearing liabilities reprice more quickly than interest-bearing assets. This results in a modest decline in net interest income. In the falling rate scenarios, the
Company exhibits mixed sensitivity. It remains liability sensitive in the -100 bps scenario, but becomes asset sensitive in the -200 bps and -300 bps scenarios. Asset sensitivity in declining rate environments leads to reduced net
interest income, as interest-bearing assets reprice downward more rapidly than liabilities. The primary driver of this shift in sensitivity at deeper rate cuts (-200 bps and -300 bps) is the presence of rate floors on interest-bearing
liabilities, which limit further repricing. At the same time, interest-bearing assets experience increased prepayment activity, accelerating cash flows into lower-yielding reinvestments. This combination compresses net interest income.
The ratio of variable to fixed-rate loans in our loan portfolio, the ratio of short-term (maturing at a given time within 12 months) to long-term loans, and the ratio of our demand, money
market and savings deposits to CDs (and their time periods), are the primary factors affecting the sensitivity of our net interest income to changes in market interest rates. Our short-term loans are typically priced at prime plus a margin,
and our long-term loans are typically priced based on a specific term of the Treasury Curve for comparable maturities, plus a margin. The composition of our rate-sensitive assets or liabilities is subject to change and could result in a
more unbalanced position that would cause market rate changes to have a greater impact on our net interest margin. As of March 31, 2026, our loan and lease portfolio was comprised of 57.84% fixed rate and 42.16% variable rate loans. An
additional component of managing our interest rate risk is the use of loan floors when structuring our variable loan products. At loan origination, a loan floor rate, typically equal to or slightly below the initial rate on the loan, is
established. This is particularly beneficial in a declining interest rate environment.
The following table presents the projected change in the Company’s net interest income over the next twelve months and the economic value of equity at March 31, 2026, that would occur upon an
immediate change in interest rates based on the models discussed above, but without giving effect to any steps that management might take to counteract such change:
Estimated Change in
Net Interest Income (NII)
(as a % of NII)
Estimated Change in
Economic Value of Equity
(EVE)
(as a % of EVE)
March 31, 2026
+300 bps
(1.3
%)
(8.7
%)
+200 bps
(1.2
%)
(5.6
%)
+100 bps
(0.7
%)
(2.1
%)
0 bps
-
-
-100 bps
0.1
%
(0.1
%)
-200 bps
(0.6
%)
(2.7
%)
-300 bps
(1.0
%)
(7.3
%)
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