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. EVE measures the extent that the estimated economic values of our
assets, liabilities, and off-
balance sheet items will change as a result of interest rate changes. Economic values
are estimated by discounting expected
cash flows from assets, liabilities, and off-balance sheet
items, which establishes a base case EVE. In contrast with our
earnings simulation model, which evaluates interest rate risk over a 12-month
timeframe, EVE uses a terminal horizon
which allows for the re-pricing of all assets, liabilities, and off-balance
sheet items. Further, EVE is measured using values
as of a point in time and does not reflect any actions that ALCO might take in responding
to or anticipating changes in
interest rates, or market and competitive conditions.
To help limit interest rate risk, we have
stated policy guidelines for an
instantaneous basis point change in interest rates, such that our EVE should not decrease
from our base case by more than
the following:
●
35% for an instantaneous change of +/- 400 basis points
●
30% for an instantaneous change of +/- 300 basis points
●
25% for an instantaneous change of +/- 200 basis points
●
15% for an instantaneous change of +/- 100 basis points
At June 30, 2026, our EVE model indicated that we were in compliance
with our policy guidelines.
Each of the above analyses may not, on its own, be an accurate indicator of how our
net interest income will be affected by
changes in interest rates. Income associated with interest-earning
assets and costs associated with interest-bearing liabilities
may not be affected uniformly by changes in interest rates.
In addition, the magnitude and duration of changes in interest
rates may have a significant impact on net interest income. For example,
although certain assets and liabilities may have
similar maturities or periods of repricing, they may react in different
degrees to changes in market interest rates, and other
economic and market factors, including market perceptions. Interest
rates on certain types of assets and liabilities fluctuate
in advance of changes in general market rates, while interest rates on other types
of assets and liabilities may lag behind
changes in general market rates. In addition, certain assets, such as adjustable-rate
mortgage loans, have features (generally
referred to as “interest rate caps and floors”) which limit changes in interest rates.
Prepayments
and early withdrawal levels
also could deviate significantly from those assumed in calculating the maturity of
certain instruments. The ability of many
borrowers to service their debts also may decrease during periods of rising interest
rates or economic stress, which may
differ across industries and economic sectors. ALCO reviews each
of the above interest rate sensitivity analyses along with
several different interest rate scenarios in seeking satisfactory,
consistent levels of profitability within the framework of the
Company’s established liquidity,
loan, investment, borrowing, and capital policies.
The Company may also use derivative financial instruments to improve
the balance between interest-sensitive assets and
interest-sensitive liabilities, and as a tool to manage interest rate sensitivity while continuing
to meet the credit and deposit
needs of our customers. From time to time, the Company also may
enter into back-to-back interest rate swaps to facilitate
customer transactions and meet their financing needs. These interest rate swaps qualify
as derivatives, and may be
designated as hedging instruments. At June 30, 2026, the Company had
two derivative contracts designated as part of a
hedging relationship to assist in managing its interest rate sensitivity compared
to one such derivative contract at December
Liquidity Risk Management
Liquidity is the Company’s ability to
convert assets into cash equivalents in order to meet daily cash flow requirements,
primarily for deposit withdrawals, loan demand and maturing obligations.
The Company seeks to manage its liquidity to
manage or reduce its costs of funds by maintaining liquidity believed
adequate to meet its anticipated funding needs, while
balancing against excessive liquidity that likely would reduce earnings
due to the cost of foregoing alternative higher-
Liquidity is managed at two levels. The first is the liquidity of the Company.
The second is the liquidity of the Bank. The
management of liquidity at both levels is essential, because the Company and
the Bank are separate and distinct legal
entities with different funding needs and sources, and each are subject
to regulatory guidelines and requirements.
The
Company depends upon dividends from the Bank for liquidity to pay its operating
expenses, debt obligations and
dividends,
and Federal Reserve Regulation W restricts Company borrowings from, and other
transactions with, the Bank.
The Bank’s payment of dividends
depends on its earnings, liquidity,
capital and the absence of regulatory restrictions on
The primary source of funding and liquidity for the Company has been dividends
received from the Bank.
If needed, the
Company could also borrow money,
or issue common stock or other securities.
Primary uses of funds by the Company
i
nclude payment of Company expenses, dividends paid to stockholders
and Company stock repurchases.