Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company’s financial condition and operations are influenced significantly by general economic conditions, including the absolute level of interest rates as well as changes in interest rates and the slope of the yield curve. The Company’s profitability is dependent to a large extent on net interest income, which is the difference between interest received on interest-earning assets and interest paid on interest-bearing liabilities. Interest rate risk is the risk that changes in market interest rates will adversely affect the Company’s earnings and underlying economic value and is the primary market risk affecting the Company’s financial performance. Interest rate risk is determined by the maturity and repricing characteristics of the Company’s assets, liabilities and off-balance-sheet contracts.
The Company’s Asset/Liability Management Committee (“ALCO”) is responsible for monitoring and managing interest rate risk exposure to determine the level of risk appropriate given our operating environment, business plan strategies, performance objectives, capital and liquidity constraints, and asset and liability allocation alternatives; and to manage our interest rate risk consistent with regulatory guidelines and policies approved by the Board of Directors. The ALCO monitors interest rate sensitivity, asset and liability allocation, liquidity and capital positions, and local and national economic conditions, and seeks to structure the loan and investment portfolios and funding sources to maximize earnings within acceptable risk tolerances. The Company does not maintain a trading account for any class of financial instrument, nor does it engage in hedging activities or purchase high-risk derivative instruments. The Company is not subject to foreign currency exchange rate risk or commodity price risk.
The Company's interest rate risk simulation model measures the impact on net interest income of changes in market interest rates over 12 and 24-month horizons under several instantaneous rate change scenarios. Key assumptions in the model include cash flows and maturities of financial instruments, changes in market conditions, loan volumes and pricing, deposit sensitivity, consumer preferences and management’s capital leverage plans. These assumptions are inherently uncertain and the model cannot precisely estimate net interest income or predict the impact of interest rate changes on net interest income. Actual results may differ significantly from simulated results due to the timing, magnitude and frequency of interest rate changes and changes in market conditions and management strategies.
The following table shows the approximate percentage change in net interest income over 12 and 24-month periods under several instantaneous interest rate change scenarios as of March 31, 2026:
Percent change in net
Percent change in net
interest income (12
interest income (24
Change in interest rates
months)
months)
Up 400 basis points
(13.2)
%
1.4
%
Up 300 basis points
(10.0)
%
2.1
%
Up 200 basis points
(6.8)
%
2.8
%
Up 100 basis points
(3.1)
%
4.8
%
Base case
—
—
%
Down 100 basis points
1.4
%
3.0
%
Down 200 basis points
1.8
%
(1.1)
%
Down 300 basis points
2.1
%
(1.4)
%
As of March 31, 2026, the Company’s interest rate risk simulation model indicates that net interest income is more negatively affected by rising interest rates than positively impacted by falling rates over the near term. In a rising interest rate environment, net interest income is projected to decline over the first 12 months, as interest-bearing liabilities are expected to reprice more quickly than interest-earning assets, reflecting the significant proportion of fixed-rate loans in the portfolio. For example, a 200 basis point increase in rates is projected to reduce net interest income by 6.8% over the first 12 months. Over a 24-month horizon, however, the model projects net interest income to recover and improve across all rising rate scenarios as interest-earning assets reprice, with a 200 basis point increase projected to produce a 2.8% improvement in net interest income. In a falling interest rate environment, net interest income is projected to increase modestly over the near term as interest-bearing liabilities reprice downward more rapidly than interest-earning assets, though in steeper rate decrease scenarios over 24 months, the benefit is reduced or reversed as interest-earning assets also reprice lower.
The simulation model is subject to inherent limitations. Assets and liabilities with similar maturities or repricing characteristics may respond differently to changes in market interest rates. Some rates may change in anticipation of or lag behind market rate
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movements, while others, such as ARM loans, include caps and floors that limit near-term rate adjustments. Changes in interest rates may also materially alter client behavior, such as prepayment speeds on loans or early withdrawals from time deposits, which may deviate significantly from the assumptions used in the model. As such, actual results could differ materially from those projected by the model.
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