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Item 3. Quantitative and Qualitative Disclosures About Market Risk

2023-05-01 compared with 2022-11-09 · 39 added, 46 removed, 13 unchanged (87% of the section changed)

Quantitative and Qualitative Disclosures About Market Risk

The Company’s interest rate sensitivity is monitored through the use of interest rate risk (“IRR”) modeling.

The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at September 30, 2022, which were estimated by the Company, based upon certain assumptions, to reprice or mature in each of the future time periods shown.

At September 30, 2022, the Company’s one-year gap was positive 7.90% as compared to positive 14.15% at December 31, 2021.

The table is intended to provide an approximation of the projected repricing of assets and liabilities at September 30, 2022 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.

At September 30, 2022 3 Months

or Less More than

1 Year More than

3 Years More than

5 Years More than

5 Years Total

(dollars in thousands)

Interest-earning assets:

Interest-earning deposits and short-term investments $ 24,618 $ 2,877 $ 1,637 $ — $ — $ 29,132

Debt securities 428,968 116,384 257,157 246,065 502,106 1,550,680

Equity investments — 1,976 — — 79,746 81,722

Restricted equity investments — — — — 77,556 77,556

Loans receivable (1)

2,867,647 906,276 2,012,915 1,708,759 2,226,712 9,722,309

Total interest-earning assets 3,321,233 1,027,513 2,271,709 1,954,824 2,886,120 11,461,399

Interest-bearing liabilities:

Interest-bearing checking accounts 1,363,083 193,502 447,123 362,170 1,543,986 3,909,864

Money market deposit accounts 49,750 51,889 120,292 331,950 195,348 749,229

Savings accounts 110,277 127,553 288,159 225,694 818,789 1,570,472

Time deposits 319,431 547,092 497,972 29,314 10,548 1,404,357

FHLB advances 514,200 — — — — 514,200

Securities sold under agreements to repurchase and other borrowings 166,100 145 123,875 525 558 291,203

Total interest-bearing liabilities 2,522,841 920,181 1,477,421 949,653 2,569,229 8,439,325

Interest sensitivity gap (2)

$ 798,392 $ 107,332 $ 794,288 $ 1,005,171 $ 316,891 $ 3,022,074

Cumulative interest sensitivity gap $ 798,392 $ 905,724 $ 1,700,012 $ 2,705,183 $ 3,022,074 $ 3,022,074

Cumulative interest sensitivity gap as a percent of total interest-earning assets 6.97 % 7.90 % 14.83 % 23.60 % 26.37 % 26.37 %

(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, unamortized discounts and deferred loan costs and fees.

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

Certain shortcomings are inherent in gap analysis.

For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates.

Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market interest rates.

Additionally, certain assets, such as adjustable-rate loans, have features which restrict changes in interest rates both on a short-term basis and over the life of the asset.

Further, in the event of a change in interest rates, loan prepayment rates and average lives of deposits would likely deviate significantly from those assumed in the calculation.

Finally, the ability of many borrowers to service their adjustable-rate loans may be impaired in the event of an interest rate increase.

Additionally, the table below sets forth the Company’s exposure to IRR as measured by the change in economic value of equity (“EVE”) and net interest income under varying rate shocks as of September 30, 2022 and December 31, 2021.

All methods used to measure interest rate sensitivity involve the use of assumptions, which may tend to oversimplify the manner in which actual yields and costs respond to changes in market interest rates.

Management of Interest Rate Risk (“IRR”)

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, deposit-taking, and funding activities.

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

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.

Changes in interest rates may also negatively or positively impact the market value of the Company’s investment securities, in particular fixed-rate instruments.

Net gains or losses in available-for-sale securities can increase or decrease accumulated other comprehensive income or loss and total stockholders’ equity.

To that end, management actively monitors and manages IRR.

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

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 regularly 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;

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

(4) managing the investment portfolio IRR profile;

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

and (6) purchasing interest rate swaps to manage overall balance sheet interest rate risk.

The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest rate sensitive.” Interest rate sensitivity is monitored through the use of an IRR model, which measures the change in the institution’s economic value of equity (“EVE”) and net interest income under various interest rate scenarios.

EVE is the difference between the net present value of assets, liabilities and off-balance-sheet contracts.

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.

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.

Modeled assets and liabilities are assumed to reprice at respective repricing or maturity dates.

Pricing caps and floors are included in the results, where applicable.

The Company uses prepayment expectations set forth by market sources as well as Company generated data where applicable.

Generally, cash flows from loans and securities are assumed to be reinvested to maintain a static balance sheet.

Other assumptions about balance sheet mix are generally held constant.

The Company’s interest rate sensitivity should be reviewed in conjunction with the financial statements and notes thereto contained in the 2022 Form 10-K.

September 30, 2022 December 31, 2021

The Company performs a variety of EVE and twelve-month net interest income sensitivity scenarios.

The following table sets forth sensitivity scenarios for a specific range of interest rate scenarios as of March 31, 2023 and December 31, 2022 (dollars in thousands).

March 31, 2023 December 31, 2022

Change in Interest Rates in Basis Points (Rate Shock) Economic Value of Equity Net Interest Income Economic Value of Equity Net Interest Income

3 unchanged sentences

100 1,445,725 (7.3) 11.8 400,033 1.5 1,646,301 (4.3) 13.9 438,280 0.6

100 1,650,035 (6.7) 14.4 432,993 1.6 1,621,984 11.1 14.2 325,960 3.7

Static 1,559,654 — 12.3 394,125 — 1,719,619 — 14.1 435,492 —

(100) 1,700,426 9.0 13.0 384,961 (2.3) 1,762,678 2.5 14.0 428,519 (1.6)

The change in interest rate sensitivity was impacted by the deployment of cash into loans, a shift out of overnight borrowings into short-term borrowings, a slowdown in loan and securities prepayment speeds, and a significant increase in market interest rates.

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.

(200) 1,810,221 16.1 13.4 371,839 (5.7) 1,740,837 1.2 13.5 412,038 (5.4)

The change in interest rate sensitivity was impacted by an increase in cash on hand position, floating rate loan growth and an increase in longer term fixed rate funding, partially offset by the deposit mix shift into short-term certificate of deposits.

Certain shortcomings are inherent in the methodology used in the EVE and net interest income IRR measurements.

The model requires the making of certain assumptions which may tend to oversimplify the manner in which actual yields and costs respond to changes in market interest rates.

2 unchanged sentences

Third, the model does not take into account the Company’s business or strategic plans or any steps it may take to respond to changes in rates.

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

Lastly, the model utilizes data derived from historical performance.

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, given the unique nature of the post-pandemic interest rate environment and the speed with which interest rates have been changing, the projections noted above on the Company’s EVE and net interest income and can be expected to significantly 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-Q

Item 3. Quantitative and Qualitative Disclosures About Market Risk