2024 Journal of Community Bank Case Studies

FIRST PLACE: Commonwealth University of Pennsylvania

(CZFS 46). Liability sensitivity means the bank’s liabilities reprice more rapidly than its assets. Being liability-sensitive poses challenges in a rising interest rate environment because it squeezes banks’ margins, leading to lower NII and resultingly, lower NIM. However, when interest rates decline, liability sensitivity would benefit the bank. Of course, an asset-sensitive bank would have the opposite relationship, with assets repricing more quickly than liabilities, resulting in higher NII and NIM as rates increase. ALM is necessary for banks to navigate variable interest rate risks successfully. The bank uses multiple methods to model and manage this interest rate risk, including maturity gap analysis and computer simulation models (CZFS 46). Maturity gap analysis is used to measure exposure to interest rate changes over different maturity buckets and their resulting

impact on the bank’s NIM (a summary of this analysis is provided in Table 2 above). The bank’s modeling efforts are supported by the BASIS® modeling software from Darling Consulting Group (Guillaume). This software is used to gain a better understanding of the impact of interest rate changes on NII, and it is also used to test parallel interest rate shock scenarios of up to ± 400 basis point shifts (CZFS 47). Overall, FCCB’s interest rate management strategy is less focused on trying to predict where interest rates are going and more focused on trying to adapt to fluctuations. Instead, as Guillaume explains, “[w]e want to make sure that whatever scenario happens, we’re prepared to respond to it to have enough earnings to provide for a reasonable return for our shareholders.” This proactive approach allows FCCB to adapt to interest rate changes in a way that ensures the bank’s success.

Table 2 - FCCB’s Maturity Gap Analysis ($ in 000s)

4 to 12 Months

1 to 2 Years ($ in 000s)

2 to 3 Years

3 to 5 Years ($ in 000s)

> 5 Years Growth

≤ 3 Months

Total Interest-Earning Assets

$550,331 $378,506 $501,557

$417,262

$558,453 $315,225

Total Interest-Bearing Liabilities

$1,120,254 $188,547 $143,116

$53,343

$54,455 $560,018

Excess Interest-Earning Assets (Liabilities)

$(569,923)

$189,959 $358,441

$363,919

$503,998

$(244,793)

Cumulative Interest-Earning Assets

$550,331 $928,837 $1,430,394 $1,847,656 $2,406,109 $2,721,334

Cumulative Interest-Earning Liabilities

$1,120,254$1,308,801 $1,451,917 $1,505,260 $1,559,715 $2,119,733

Cumulative Gap

$(569,923) $(379,964) $(21,523)

$342,396

$846,394 $601,601

Cumulative Interest Sensitivity Ratio (ISR)

0.49

0.71

0.99

1.23

1.54

1.28

Source: 2023 SEC 10-K report, CZFS, p. 46.

15