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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2024-02-23 compared with 2023-02-24 · 32 added, 18 removed, 28 unchanged (64% of the section changed)

5 unchanged sentences

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 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;

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.

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 and interest rate 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.

The Company’s Board maintains 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.

1 unchanged sentence

(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;

(2) attempting to reduce the overall interest rate sensitivity of liabilities by emphasizing stable relationship-based deposits 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;

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

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

1 unchanged sentence

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.

The following table sets forth the Company’s EVE and net interest income projections as of December 31, 2022 and 2021 (dollars in thousands).

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 methodologies and assumptions used in this analysis are periodically evaluated and refined in response to changes in the market environment, changes in the Company’s balance sheet composition, enhancements in the Company’s modeling and other factors.

Such changes may affect historical comparisons of these results.

During 2023, the Company refined certain fair value assumptions related to the loan portfolio, including prepayment rates.

This resulted in a modest increase to EVE and a decrease to its sensitivity, and had a marginal impact to the net interest income scenarios.

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

The following table sets forth sensitivity for a specific range of interest rate scenarios as of December 31, 2023 and 2022.

December 31, 2023 December 31, 2022

Interest Rates

in Basis Points Economic Value of Equity Net Interest Income Economic Value of Equity Net Interest Income

(Rate Shock) Amount %

Ratio Amount %

Change Amount %

Ratio Amount %

Change in Interest Rates in Basis Points Economic Value of Equity Net Interest Income Economic Value of Equity Net Interest Income

(Rate Shock) % Change % Change % Change % Change

300 (12.8) % (2.2) % (14.3) % 1.6 %

200 (9.1) (1.3) (8.5) 1.2

100 (5.2) (0.4) (4.3) 0.6

Static — — — —

(100) 7.0 (0.5) 2.5 (1.6)

The change in interest rate sensitivity was impacted by the deployment of cash into loans and securities, an increase in term borrowings, a slowdown in loan and securities prepayment speeds, use of increased derivatives, and a significant increase in market interest rates.

(200) 8.8 (1.9) 1.2 (5.4)

(300) 6.8 (4.2) (3.6) (10.4)

The net interest income sensitivity results indicate that at December 31, 2023, the Company was modestly asset sensitive to falling rates and modestly liability sensitive to rising rates compared to being modestly asset sensitive at December 31, 2022.

The change in sensitivity between these periods was impacted by a deployment of cash into floating rate loans as well as higher-yielding securities with interest rate caps, offset by the deposit mix shift into short-term time deposits and higher-yield savings deposits.

Overall, the measure of EVE at risk increased in all rate scenarios from December 31, 2022 to December 31, 2023.

This increase was the result of rising market rates resulting in lower market values in the loan and investment portfolios, along with the impact of an increase in deposit costs and a shift from lower cost, long-term non-maturity deposits to short-term higher cost time deposits and higher-yield savings deposits.

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

5 unchanged sentences

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.

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 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-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk