Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Management of Market Risk
Our most significant form of market risk is interest rate risk as the majority of our assets and liabilities are sensitive to changes in interest rates. A principal part of our operations is to manage interest rate risk and limit the exposure of our financial condition and results of operations to changes in market interest rates. Our Asset/Liability Committee is responsible for evaluating the interest rate risk inherent in our balance sheet, for determining the appropriate level of risk given our business strategy, operating environment, capital and liquidity, and for managing this risk consistent with our policies and guidelines.
Our strategy attempts to manage the impact of changes in interest rates on net interest income, which is our primary source of earnings. Among the actions taken are:
• Originate commercial and commercial real estate loans, which generally have shorter terms and higher yields than owner-occupied one-to four-family residential real estate loans.
• Sell substantially all longer-term fixed-rate residential real estate loans in the secondary market.
• Cultivate stable deposit relationships with business and consumer customers.
• Acquire longer-term, fixed-rate borrowings when appropriate to reduce our sensitivity to changing interest rates.
Interest Rate Risk. The Asset/Liability Committee monitors First Bank Richmond’s interest rate risk (“IRR”) position and meets quarterly to review pricing, liquidity needs, and to assess our interest rate risk. We currently utilize a third-party modeling program prepared quarterly to evaluate our sensitivity to changing interest rates.
The table below sets forth, as of December 31, 2025, the calculation of the estimated changes in our net interest income that results from the designated immediate changes in the United States Treasury yield curve.
Change in Interest Rates
(basis points) (1)
Net Interest Income
Year 1 Forecast Year 1 Change
from Level
(Dollars in thousands)
+300 $ 43,245 (12.96) %
+200 45,999 (7.42)
+100 48,137 (3.12)
Level 49,686 —
-100 50,225 1.08
-200 51,581 3.81
-300 52,773 6.21
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(1) Assumes an immediate uniform change in interest rates at all maturities.
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Economic Value of Equity. Interest rate risk is monitored through the use of a simulation model that also estimates the amounts by which the fair value of our assets and liabilities (Economic Value of Equity, or “EVE”) would change in the event of a range of assumed changes in market interest rates. The reports that are prepared quarterly in the simulation assist the Asset/Liability Committee in measuring and monitoring interest rate risk over a longer-term than the interest rate risk model does when looking at earnings simulations.
The table below sets forth, as of December 31, 2025, the estimated changes in our EVE that would result from instantaneous changes in market interest rates. This table assumes an instantaneous uniform change in interest rates at all maturities.
Basis Point (“bp”) Change in Interest Rates (1)
Estimated Increase (Decrease) in EVE
Estimated EVE (2)
Amount Percent
(Dollars in thousands)
+300 $ 101,336 $ (51,490) (33.69) %
+200 121,856 (30,970) (20.26)
+100 138,150 (14,676) (9.60)
Level 152,826 — —
-100 162,793 9,967 6.52
-200 180,630 27,804 18.19
-300 191,977 39,151 25.62
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(1) Assumes an instantaneous uniform change in interest rates at all maturities.
(2) EVE is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.
In evaluating our exposure to interest rate movements, certain shortcomings inherent in the method of analysis presented in the foregoing tables must be considered. For example, although certain assets and liabilities may have similar maturities or re-pricing periods, 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 interest rates. Additionally, certain assets, such as adjustable-rate mortgages, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a significant change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed above. Finally, the ability of many borrowers to service their debt may decrease in the event of an interest rate increase. We consider all of these factors in monitoring our exposure to interest rate risk.
The Asset/Liability Committee annually reviews reinvestment rate assumptions, along with the betas used in the IRR and EVE modeling. We generally manage our balance sheet based on potential changes to net interest income under various rate scenarios. The EVE ratio is useful in long-term planning; but management gives more weight to changes in net interest income under various rate scenarios. IRR projections are tested annually, and the model is subject to a third-party review annually.
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