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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2022-02-28 compared with 2021-03-01 · 25 added, 50 removed, 69 unchanged (52% of the section changed)

2 unchanged sentences

Market risk is the risk of loss from adverse changes in market prices and rates.

The Company’s market risk arises primarily from the IRR inherent in its lending, investment and deposit-taking activities.

The Company’s market risk arises primarily from the IRR inherent in its lending, investment, deposit-taking, and funding activities.

The Company’s profitability is affected by fluctuations in interest rates.

A sudden and substantial change in interest rates may adversely impact the Company’s earnings to the extent that the interest rates borne by assets and liabilities do not change at the same speed, to the same extent or on the same basis.

Changes in interest rates may negatively or positively impact the Company’s earnings to the extent that the interest rates borne by assets and liabilities do not change at the same speed, to the same extent or on the same basis.

To that end, management actively monitors and manages IRR.

The principal objectives of the Company’s IRR management function are to evaluate the IRR inherent in certain balance sheet accounts;

The extent of the movement of interest rates, higher or lower, is an uncertainty that could have a substantial impact on the earnings of the Company.

The principal objectives of the IRR management function are to evaluate the IRR inherent in the Company’s business;

determine the level of risk appropriate given the Company’s business focus, operating environment, capital, and liquidity requirements and performance objectives;

and manage the risk consistent with Board approved guidelines.

Through such management, the Company seeks to reduce the exposure of its operations to changes in interest rates.

The Company monitors its IRR as such risk relates to its operating strategies.

The Bank’s Board has established an Asset Liability Committee (“ALCO”) consisting of members of the Bank’s management, responsible for reviewing the Bank’s asset liability policies and the Bank’s IRR position.

ALCO meets monthly and reports trends and the Company’s IRR position to the Board on a quarterly basis.

The extent of the movement of interest rates, higher or lower, is an uncertainty that could have a substantial impact on the earnings of the Company.

The Bank utilizes the following strategies to manage IRR:

(1) emphasizing the origination for portfolio of fixed-rate consumer mortgage loans generally having terms to maturity of not more than fifteen years, adjustable-rate loans, floating-rate and balloon maturity commercial loans, and consumer loans consisting primarily of home equity loans and lines of credit;

The Company’s Board has established an Asset Liability Committee (“ALCO”) consisting of members of management, responsible for reviewing asset liability policies and the IRR position.

ALCO meets monthly and reports the Company’s IRR position and trends to the Board on a regular basis.

The Company utilizes a number of strategies to manage IRR including, but not limited to:

(1) managing the origination, purchase, sale, and retention of various types of loans with differing IRR profiles;

(2) attempting to reduce the overall interest rate sensitivity of liabilities by emphasizing core and longer-term deposits;

and (3) managing the maturities of wholesale borrowings.

The Bank may also sell fixed-rate mortgage loans into the secondary market.

In determining whether to retain fixed-rate mortgages or to purchase fixed-rate MBS, management considers the Bank’s overall IRR position, the volume of such loans originated or the amount of MBS to be purchased, the loan or MBS yield and the types and amount of funding sources.

The Bank may retain fixed-rate mortgage loan production or purchase fixed-rate MBS in order to improve yields and increase balance sheet leverage.

During periods when fixed-rate mortgage loan production is retained, the Bank generally attempts to extend the maturity on part of its wholesale borrowings.

During 2018 and 2019, the Bank generally retained newly originated mortgage loans in its portfolio.

However, given the decline in the interest rate environment, in late 2019 and early 2020, the Bank determined to sell most of its 30 year fixed-rate residential real estate loan originations in the secondary market.

The Company currently does not participate in financial futures contracts, interest rate swaps or other activities involving the use of off-balance-sheet derivative financial instruments, but may do so in the future to manage IRR.

(3) selectively purchasing interest rate swaps converting the rates for customer loans to manage individual loans and the Bank’s overall IRR profile;

(4) managing the investment portfolio IRR profile;

and (5) managing the maturities and rate structures of borrowings.

During 2021, the Company generally retained newly originated mortgage loans in its portfolio.

However, in 2020, the Company sold most of its 30-year fixed-rate residential real estate loan originations in the secondary market.

The Company currently does not participate in financial futures contracts, interest rate swaps (other than for commercial loans for customers), or other activities involving the use of off-balance-sheet derivative financial instruments, but may do so in the future to manage IRR.

The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest rate sensitive” and by monitoring an institution’s interest rate sensitivity “gap.” An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period.

5 unchanged sentences

Conversely, during a period of falling interest rates, an institution with a negative gap might experience a repricing of its assets at a slower rate than its interest-bearing liabilities, which, consequently, may result in its net interest income growing at a faster rate than an institution with a positive gap position.

The Company’s interest rate sensitivity is monitored through the use of an IRR model.

The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 2020, which were anticipated by the Company, based upon certain assumptions, to reprice or mature in each of the future time periods shown.

Interest rate sensitivity is monitored through the use of an IRR model.

Prepayment, rate sensitivity, and average life assumptions can have a significant impact on the IRR model results.

There can be no assurance that those assumptions will be realized.

The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 2021, which were estimated by the Company, based upon certain assumptions, to reprice or mature in each of the future time periods shown.

At December 31, 2021, the Company’s one-year gap was positive 14.15%, as compared to positive 18.05% at December 31, 2020.

The increase was primarily due to the increase in cash liquidity.

Except as stated below, the amount of assets and liabilities which reprice or mature during a particular period were determined in accordance with the earlier of term to repricing or the contractual maturity of the asset or liability.

The decrease was primarily due to deployment of cash into loans and debt and equity securities.

The table is intended to provide an approximation of the projected repricing of assets and liabilities at December 31, 2021 on the basis of contractual maturities, anticipated prepayments, scheduled rate adjustments, and the rate sensitivity of non-maturity deposits within a three month period and subsequent selected time intervals.

Loans receivable reflect principal balances expected to be redeployed and/or repriced as a result of contractual amortization and anticipated prepayments of adjustable-rate loans and fixed-rate loans, and as a result of contractual rate adjustments on adjustable-rate loans.

Loans were projected to prepay at rates between 6% and 26% annually.

Mortgage-backed securities were projected to prepay at rates between 14% and 25% annually.

Money market deposit accounts, savings accounts and interest-bearing checking accounts are assumed to have average lives of 7.3 years, 6.3 years and 8.3 years, respectively.

Prepayment and average life assumptions can have a significant impact on the Company’s estimated gap.

There can be no assurance that projected prepayment rates for loans and mortgage-backed securities will be achieved or that projected average lives for deposits will be realized.

At December 31, 2021 3 Months

7 unchanged sentences

Interest-earning deposits and short-term investments $ 51,454 $ 1,430 $ 1,730 $ — $ — $ 54,614

$ 1,022,405 $ 1,225 $ 2,219 $ — $ — $ 1,025,849

Investment securities

78,233 78,334 132,972 62,977 138,158 490,674

Mortgage-backed securities

90,759 136,520 241,877 127,622 35,016 631,794

Debt securities 457,897 204,791 332,641 273,661 444,432 1,713,422

Equity investments — 250 30,241 34,817 35,847 101,155

— — — — 107,079 107,079

Restricted equity investments — — — — 53,195 53,195

Loans receivable, net (2)

Loans receivable (1)

2,305,614 1,303,970 2,208,622 1,462,527 1,342,137 8,622,870

Total interest-earning assets 2,814,965 1,510,441 2,573,234 1,771,005 1,875,611 10,545,256

3,275,225 1,747,467 2,660,617 1,311,489 1,113,933 10,108,731

Interest-bearing liabilities:

Interest-bearing checking accounts 1,514,309 204,188 471,815 382,170 1,629,254 4,201,736

1,446,820 154,681 399,057 331,147 1,315,161 3,646,866

Money market deposit accounts 70,139 48,349 112,434 91,943 413,225 736,090

73,252 53,129 124,264 101,738 431,138 783,521

Savings accounts 85,891 134,368 300,813 235,604 851,257 1,607,933

157,779 106,840 278,829 227,246 720,557 1,491,251

Time deposits 170,811 381,855 178,053 29,956 14,326 775,001

406,053 567,373 328,800 61,459 9,098 1,372,783

Securities sold under agreements to repurchase and other borrowings 223,068 156 450 123,493 743 347,910

231,840 195 425 130,461 1,004 363,925

Total interest-bearing liabilities 2,064,218 768,916 1,063,565 863,166 2,908,805 7,668,670

2,315,744 882,218 1,131,375 852,051 2,476,958 7,658,346

Interest sensitivity gap (2)

1 unchanged sentence

Cumulative interest sensitivity gap $ 750,747 $ 1,492,272 $ 3,001,941 $ 3,909,780 $ 2,876,586 $ 2,876,586

$ 959,481 $ 1,824,730 $ 3,353,972 $ 3,813,410 $ 2,450,385 $ 2,450,385

Cumulative interest sensitivity gap as a percent of total interest-earning assets 7.12 % 14.15 % 28.47 % 37.08 % 27.28 % 27.28 %

9.49 % 18.05 % 33.18 % 37.72 % 24.24 % 24.24 %

(1) Interest-earning assets are included in the period in which the balances are expected to be redeployed and/or repriced as a result of anticipated prepayments, scheduled rate adjustments and contractual maturities.

(2) For purposes of the gap analysis, loans receivable includes loans held-for-sale and non-performing loans gross of the allowance for credit losses for loans, unamortized discounts and deferred loan fees.

(1) For purposes of the gap analysis, loans receivable includes loans held-for-sale and non-performing loans gross of the allowance for loan credit losses for loans, unamortized discounts, and deferred loan fees.

(2) Interest sensitivity gap represents the difference between interest-earning assets and interest-bearing liabilities.

8 unchanged sentences

The EVE ratio, in any interest rate scenario, is defined as the EVE in that scenario divided by the fair value of assets in the same scenario.

The Company’s interest rate sensitivity is monitored by management through the use of an IRR model which measures IRR by modeling the change in EVE and net interest income over a range of interest rate scenarios.

Interest rate sensitivity is monitored by management through the use of a model which measures IRR by modeling the change in EVE and net interest income over a range of interest rate scenarios.

The following table sets forth the Company’s EVE and net interest income projections as of December 31, 2021 and 2020 (dollars in thousands).

For purposes of this table, the Company used prepayment and average life assumptions similar to those used in calculating the Company’s gap.

December 31, 2021 December 31, 2020

10 unchanged sentences

(100) 1,230,947 (15.7) 10.3 299,994 (4.6) 1,074,346 (21.3) 9.2 284,763 (2.7)

The change in interest rate sensitivity at December 31, 2020, as compared to December 31, 2019, was primarily due to the addition of Two River and Country Bank, the significant decline in interest rates during the period and the increase in cash liquidity.

The change in interest rate sensitivity year over year was impacted by the deployment of cash into loans and investments.

As is the case with the gap calculation, certain shortcomings are inherent in the methodology used in the EVE and net interest income IRR measurements.

3 unchanged sentences

Third, the model does not take into account the Company’s business or strategic plans.

Accordingly, although the above measurements do provide an indication of the Company’s IRR exposure at a particular point in time, such measurements are not intended to provide a precise forecast of the effect of changes in market interest rates on the Company’s EVE and net interest income and can be expected to differ from actual results.

Accordingly, although the above measurements provide an indication of the Company’s IRR exposure at a particular point in time, such measurements are not intended to provide a precise forecast of the effect of changes in market interest rates on the Company’s EVE and net interest income and can be expected to differ from actual results.

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.

What changed 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk