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In recognition of this, we actively manage our assets and liabilities to minimize the impact of changing interest rates on our net interest margin and maximize our net interest income and the return on equity, while maintaining adequate liquidity and capital.
−Removed: Our board of directors has established a Board Risk Committee that, among other duties, sets broad asset and liability management policy (“ALM”
−Removed: policy) and directives for asset/liability management, as well as establishes review and control procedures to ensure adherence to this policy.
−Removed: The board of directors has delegated authority for the development and implementation of all asset and liability management policies, procedures, and strategies to the Asset/Liability Committee (“ALCO”).
+Added: Our board of directors has established a Board Risk Committee that, among other duties, sets broad asset and liability management policy (“ALM” policy) and directives for asset/liability management, as well as establishes review and control procedures to ensure adherence to this policy.
+Added: The board of directors has delegated authority for the development and implementation of all asset and liability management policies, procedures, and strategies to the Asset/Liability Committee (“ALCO”).
ALCO is comprised of various members of senior management responsible for interpreting the longer range objectives established by the board of directors.
−Removed: As such ALCO sets basic direction for the Corporation’s sources and uses of funds, establishes numerical ranges for primary and secondary objectives, monitors risk and the delivery of services, establishes subs to manage specific ALM activities, and monitors the counterparties engaged in ALM activities.
+Added: As such ALCO sets basic direction for the Corporation’s sources and uses of funds, establishes numerical ranges for primary and secondary objectives, monitors risk and the delivery of services, establishes subs to manage specific ALM activities, and monitors the counterparties engaged in ALM activities.
Our ALM policy is reviewed by at least annually, which includes an evaluation of the ALM policy limits and guidelines in light of our risk profile, business strategies, regulatory guidelines and overall market conditions.
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These assumptions are inherently uncertain and, as a result, the models cannot precisely predict the fluctuations in market interest rates or precisely measure the impact of future changes in interest rates.
−Removed: Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and the application and timing of various management strategies.
+Added: Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and the application and timing of various management strategies.
Gap analysis.
−Removed: Management measures and evaluates the potential effects of interest rate movements on earnings through an interest rate sensitivity “gap”
+Added: Management measures and evaluates the potential effects of interest rate movements on earnings through an interest rate sensitivity “gap” analysis.
Given the size and turnover rate of the originated mortgage loans held for sale, loans held for sale are treated as having a maturity of 12 months or less.
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Cash and investments
−Removed: Loans, net (1)
−Removed: Noninterest-bearing deposits
+Added: Non-interest bearing deposits
Interest bearing deposits
Time deposits
+Added: FHLB advances
Other Liabilities
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Repricing gap-positive
−Removed: (Negative) Positive
+Added: Positive (Negative)
Cumulative repricing gap:
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(1) Loans include portfolio loans and loans held-for-sale
−Removed: Under the repricing gap analysis, we are liability-sensitive for maturity/repricing 2 years or less.
−Removed: This reflects management’s shift in focus to short term time deposits and borrowings in a falling rate environment.
+Added: Under the repricing gap analysis, we are modestly (1%) asset-sensitive for maturity/repricing 2 years or less.
+Added: This reflects a shift in deposit maturities as customers show preference for shorter term products.
The gap results presented could vary substantially if different assumptions are used or if actual experience differs from the assumptions used in the preparation of the gap analysis.
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-200 basis points over next 12 months
−Removed: The above interest rate simulation suggests that the Corporation’s balance sheet is asset sensitive as of December 31, 2019 and liability sensitive as of December 31, 2018.
−Removed: Read in conjunction with our gap analysis, you can see that although 19.4% more liability balances reprice in the short term, the spread is high enough to continue to improve earnings in a rising rate environment.
−Removed: However in a falling rate environment the scenario implies that net interest income will be negatively affected by up to 2.3%.
+Added: The above interest rate simulation suggests that the Corporation’s balance sheet is asset sensitive as of December 31, 2020 and December 31, 2019, which will improve net interest income in a rising rate environment.
+Added: The simulation projects a decrease in net interest income in a falling rate scenario.
Simulation of economic value of equity .
To quantify the amount of capital required to absorb potential losses in value of our interest-earning assets and interest-bearing liabilities resulting from adverse market movements, we calculate economic value of equity on a quarterly basis.
−Removed: We define economic value of equity as the net present value of our balance sheet’s cash flow, and we calculate economic value of equity by discounting anticipated principal and interest cash flows under the prevailing and hypothetical interest rate environments.
+Added: We define economic value of equity as the net present value of our balance sheet’s cash flow, and we calculate economic value of equity by discounting anticipated principal and interest cash flows under the prevailing and hypothetical interest rate environments.
Potential changes to our economic value of equity between a flat rate scenario and hypothetical rising and declining rate scenarios, measured as of December 31, 2020 and 2019, are presented in the following table.
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-200 basis points
−Removed: This economic value of equity profile at December 31, 2019 suggests that we would experience a positive effect from an initial increase in rates, and that the impact would become greater as rates continue to rise due to the duration of our interest-earning assets and conversely we would experience a negative effect from an initial decrease in rates.
+Added: This economic value of equity profile at December 31, 2020 suggests that we would experience a positive effect from an increase in rates, and that the impact would become greater as rates continue to rise due to the duration of our interest-earning assets and conversely we would experience a negative effect from a decrease in rates.
While an instantaneous shift in interest rates is used in this analysis to provide an estimate of exposure, we believe that a gradual shift in interest rates would have a much more modest impact.
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For example, if the timing and magnitude of interest rate changes differ from that projected, our net interest income might vary significantly.
−Removed: Non-parallel yield curve shifts or changes in interest rate spreads would also cause our net interest income to be different from that projected.
+Added: yield curve shifts or changes in interest rate spreads would also cause our net interest income to be different from that projected.
An increasing interest rate environment could reduce projected net interest income if deposits and other short-term interest-bearing liabilities reprice faster than expected or faster than our interest-earning assets.
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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.