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Item 3. Quantitative and Qualitative Disclosures About Market Risk

2020-08-07 compared with 2020-05-08 · 59 added, 43 removed, 142 unchanged (42% of the section changed)

24 unchanged sentences

Qualitative Disclosure about Market Risk

At March 31, 2020, the Bank's gap between the amount of interest-earning assets and interest-bearing liabilities projected to reprice within one year was $508.6 million, or 5.43% of total assets, compared to $251.9 million, or 2.73% of total assets, at December 31, 2019.

The increase in the one-year gap amount was due primarily to lower interest rates as of March 31, 2020, compared to December 31, 2019.

As interest rates decrease, borrowers have more economic incentive to refinance their mortgages and agency debt issuers have more economic incentive or opportunity to exercise their call options in order to issue new debt at lower interest rates, resulting in lower projected cash flows on these assets.

At June 30, 2020, the Bank's gap between the amount of interest-earning assets and interest-bearing liabilities projected to reprice within one year was $857.3 million, or 8.97% of total assets, compared to $508.6 million, or 5.43% of total assets, at March 31, 2020.

The increase in the one-year gap amount was due primarily to a higher balance of cash and a lower balance of borrowings as of June 30, 2020 compared to March 31, 2020

The majority of interest-earning assets anticipated to reprice in the coming year are repayments and prepayments on one- to four-family loans and MBS, both of which include the option to prepay without a fee being paid by the contract holder.

The amount of interest-bearing liabilities expected to reprice in a given period is not typically impacted significantly by changes in interest rates, because the Bank's borrowings and certificate of deposit portfolios have contractual maturities and generally cannot be terminated early without a prepayment penalty, but did increase this quarter, as previously discussed.

If interest rates were to increase 200 basis points, as of March 31, 2020, the Bank's one-year gap is projected to be $(312.8) million, or (3.34)% of total assets.

The decrease in the gap compared to when there is no change in rates is due to lower anticipated cash flows in the higher rate environment.

This compares to a one-year gap of $(523.0) million, or (5.66)% of total assets, if interest rates were to have increased 200 basis points as of December 31, 2019.

The amount of interest-bearing liabilities expected to reprice in a given period is not typically impacted significantly by changes in interest rates, but did increase this quarter, because the Bank's borrowings and certificate of deposit portfolios have contractual maturities and generally cannot be terminated early without a prepayment penalty.

If interest rates were to increase 200 basis points, as of June 30, 2020, the Bank's one-year gap is projected to be $53.6 million, or 0.56% of total assets.

The decrease in the gap compared to when there is no change in rates is due to lower anticipated net cash flows primarily due to lower repayments on mortgage-related assets in the higher rate environment.

This compares to a one-year gap of $(312.8) million, or (3.34)% of total assets, if interest rates were to have increased 200 basis points as of March 31, 2020.

During the current quarter, loan repayments totaled $586.4 million and cash flows from the securities portfolio totaled $200.3 million.

The majority of these cash flows were reinvested into new loans and securities at current market interest rates.

Total cash flows from

term liabilities that matured and repriced into current market interest rates during the current quarter were $439.7 million, including $65.0 million in FHLB borrowings.

Total cash flows from term liabilities that matured and/or repriced into current market interest rates during the current quarter were $768.9 million, including

$200.0 million in FHLB borrowings.

These offsetting cash flows allow the Bank to manage its interest rate risk and gap position more precisely than if the Bank did not have offsetting cash flows due to its mix of assets or maturity structure of liabilities.

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These borrowings are laddered in order to prevent large amounts of liabilities repricing in any one period.

The WAL of the Bank's term borrowings as of March 31, 2020 was 1.9 years.

However, including the impact of interest rate swaps related to $640.0 million of adjustable-rate FHLB advances, the WAL of the Bank's term borrowings as of March 31, 2020 was 3.0 years.

The WAL of the Bank's term borrowings as of June 30, 2020 was 1.8 years.

However, including the impact of interest rate swaps related to $640.0 million of adjustable-rate FHLB advances, the WAL of the Bank's term borrowings as of June 30, 2020 was 2.9 years.

The interest rate swaps effectively convert the adjustable-rate borrowings into long-term, fixed-rate liabilities.

It is anticipated that the Bank will renew the upcoming advances to lower costing term advances, or not renew them based upon our assessment of lending opportunities and our liquidity position at that time.

The Bank may renew the upcoming advances to lower costing term advances based upon our assessment of deposit flows, lending opportunities and our liquidity position at that time.

The Bank uses the securities portfolio to shorten the average life of the Bank's assets.

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The Bank uses historical data pertaining to these accounts to estimate their future balances.

Additionally, to the extent we expand the commercial banking business, we expect to have the ability to obtain lower-costing commercial deposits, which could be used to reduce the cost of funds by replacing FHLB borrowings and wholesale deposits.

With the significant decrease in interest rates during the current quarter, the Bank has decreased the rates on certificates of deposit and money market accounts at a pace with competitors in its market areas.

The Bank currently expects it will continue to lower rates as market conditions allow.

Additionally, as we expand the commercial banking business, we expect to have the ability to obtain lower-costing commercial deposits, which could be used to reduce the cost of funds by replacing FHLB borrowings and wholesale deposits.

With the significant decrease in interest rates during the current year, the Bank has decreased the rates on certificates of deposit and money market accounts on pace with competitors in its market areas.

The Bank will continue to adjust rates as market conditions allow.

The following gap table summarizes the anticipated maturities or repricing periods of the Bank's interest-earning assets and interest-bearing liabilities based on the information and assumptions set forth in the notes below.

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For additional information regarding the impact of changes in interest rates, see the following Change in Net Interest Income and Change in MVPE discussions and tables.

to Five Years

More Than More Than

Within One Year to Three Years Over

One Year Three Years to Five Years Five Years Total

Interest-earning assets:

1 unchanged sentence

Loans receivable (1)

$ 1,982,093 $ 2,121,554 $ 1,215,262 $ 2,079,489 $ 7,398,398

Securities (2)

592,334 309,028 143,989 140,874 1,186,225

Other interest-earning assets 381,730 — — — 381,730

2 unchanged sentences

Non-maturity deposits (3)

234,048 336,181 277,343 2,277,919 3,125,491

Certificates of deposit 1,461,834 1,231,382 339,478 466 3,033,160

Borrowings (4)

403,000 675,000 615,000 339,971 2,032,971

Total interest-bearing liabilities 2,098,882 2,242,563 1,231,821 2,618,356 8,191,622

5 unchanged sentences

liabilities as a percent of total Bank assets at:

March 31, 2020

June 30, 2020 8.97 % 10.94 % 12.27 % 8.11 %

September 30, 2019 5.21

Cumulative one-year gap - interest rates +200 bps at:

March 31, 2020

June 30, 2020 0.56

September 30, 2019 (3.88)

3 unchanged sentences

(2) MBS reflect projected prepayments at amortized cost.

Investment securities are presented based on contractual maturities, term to call dates or pre-refunding dates as of March 31, 2020 , at amortized cost.

Investment securities are presented based on contractual maturities, term to call dates or pre-refunding dates as of June 30, 2020, at amortized cost.

(3) Although the Bank's checking, savings, and money market accounts are subject to immediate withdrawal, management considers a substantial amount of these accounts to be core deposits having significantly longer effective maturities.

13 unchanged sentences

These do not reflect the earnings expectations of management.

Net Interest Income At

(in Basis Points)

March 31, 2020

September 30, 2019

Change Net Interest Income At

(in Basis Points) June 30, 2020 September 30, 2019

in Interest Rates (1)

Amount ($) Change ($) Change (%) Amount ($) Change ($) Change (%)

(Dollars in thousands)

000 bp $ 193,341 $ — — % $ 193,329 $ — — %

+100 bp 201,074 7,733 4.00 194,093 764 0.40

+200 bp 201,481 8,140 4.21 192,111 (1,218) (0.63)

+300 bp 200,529 7,188 3.72 188,752 (4,577) (2.37)

(1) Assumes an instantaneous, parallel, and permanent change in interest rates at all maturities.

The net interest income projection was higher in the base case scenario at March 31, 2020 compared to September 30, 2019 due primarily to a larger projected decrease in interest expense than interest income.

The decrease in interest expense was driven primarily by a decrease in the actual cost of deposits and borrowings.

During the current quarter, the Bank modified $350.0 million of term borrowings into new long-term borrowings with a lower cost.

As a result, the cost on the Bank's term borrowings portfolio decreased by 12 basis points.

The Bank was also able to lower the cost of its deposit portfolio by two basis points due to lower money market rates and a decrease in the interest rates offered on certificates of deposit.

In addition, during the current quarter management changed the way that future certificate of deposit rates are forecasted in the Bank's interest rate risk model.

The net interest income projection was relatively unchanged in the base case scenario at June 30, 2020 compared to September 30, 2019.

The one-year gap was higher at June 30, 2020 compared to September 30, 2019 due to lower interest rates at June 30, 2020, resulting in a higher amount of assets repricing.

In the rising interest rate scenarios, interest income is higher at June 30, 2020 due a higher amount of assets repricing in these scenarios than at September 30, 2019.

During the current fiscal year, the Bank also modified $350.0 million of term borrowings into new long-term borrowings with a lower cost.

As a result, the cost on the Bank's term borrowings portfolio decreased 12 basis points and they are no longer projected to reprice in the 12-month horizon.

The Bank was also able to lower the cost of its deposit portfolio by two basis points due to lower money market rates and a decrease in the interest rates offered on retail/business certificates of deposit.

In addition, during the second quarter management changed the way that future certificate of deposit rates are forecasted in the Bank's interest rate risk model.

This change was made to more closely align the forecasted rates with the current rates offered, thus lowering the projected interest expense.

The net interest income projections increase from the base case in the +100 and +200 basis point scenarios at March 31, 2020.

The net interest income projection was more adversely impacted in the rising interest rate scenarios at September 30, 2019 compared to March 31, 2020, due primarily to higher interest rates at September 30, 2019.

In addition, the modification of $350.0 million of borrowings during the current quarter lengthened the Bank's liabilities, thus reducing the risk to higher interest rates.

The positive impact of rising interest rates diminished as interest rates increase until turning negative in the +300 basis point scenario.

The net interest income projections increase from the base case in all rising interest rate scenarios at June 30, 2020.

The net interest income projection was more adversely impacted in the rising interest rate scenarios at September 30, 2019 compared to June 30, 2020, due primarily to higher interest rates at September 30, 2019.

In addition, the modification of $350.0 million of borrowings during the current fiscal year lengthened the Bank's liabilities, thus reducing the risk to higher interest rates.

The positive impact of rising interest rates diminished as interest rates increase until turning negative in the +200 basis point and +300 basis point scenarios at September 30, 2019.

Higher interest rates decreased the projected cash flows from the Bank's mortgage-related assets, thus increasing the negative impact of rising interest rates.

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The table below presents the effects of the changes in interest rates on our assets and liabilities as they mature, repay, or reprice, as shown by the change in the MVPE for alternative interest rates.

Market Value of Portfolio Equity At

(in Basis Points)

March 31, 2020

September 30, 2019

Change Market Value of Portfolio Equity At

(in Basis Points) June 30, 2020 September 30, 2019

in Interest Rates (1)

Amount ($) Change ($) Change (%) Amount ($) Change ($) Change (%)

(Dollars in thousands)

000 bp $ 1,054,207 $ — — % $ 1,283,429 $ — — %

+100 bp 1,157,315 103,108 9.78 1,286,446 3,017 0.24

+200 bp 1,093,330 39,123 3.71 1,162,151 (121,278) (9.45)

+300 bp 968,281 (85,926) (8.15) 992,060 (291,369) (22.70)

(1) Assumes an instantaneous, parallel, and permanent change in interest rates at all maturities.

The percentage change in the Bank's MVPE at March 31, 2020 was positive in the +100 and +200 basis point scenarios and negative in the +300 basis point scenario.

The percentage change in the Bank's MVPE at June 30, 2020 was positive in the +100 and +200 basis point scenarios and negative in the +300 basis point scenario.

At September 30, 2019 the percentage change in the Bank's MVPE was negative in the +200 and +300 basis point scenarios.

This change was due primarily to lower interest rates at March 31, 2020 and the modification of $350.0 million of borrowings during the current quarter into long-term liabilities which reduced the Bank's risk to higher interest rates.

This change was due primarily to lower interest rates at June 30, 2020 and the modification of $350.0 million of borrowings during the current fiscal year into long-term liabilities which reduced the Bank's risk to higher interest rates.

As interest rates increase, borrowers have less economic incentive to refinance their mortgages and agency debt issuers have less economic incentive or opportunity to exercise their call options in order to issue new debt at lower interest rates, resulting in lower projected cash flows on these assets.

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This results in a larger decrease in the market value of assets than liabilities in this scenario.

The following table presents the weighted average yields/rates and WALs (in years), after applying prepayment, call assumptions, and decay rates for our interest-earning assets and interest-bearing liabilities as of March 31, 2020 .

Yields presented for interest-earning assets include the amortization of fees, costs, premiums and discounts, which are considered adjustments to the yield.

2 unchanged sentences

The maturity and repricing terms presented for one- to four-family loans represent the contractual terms of the loan.

% of Category

Amount Yield/Rate WAL % of Category % of Total

(Dollars in thousands)

Investment securities $ 237,467 1.23 % 0.6 19.4 % 2.6 %

MBS - fixed 741,364 2.22 3.2 60.8 8.1

MBS - adjustable 241,223 2.73 2.5 19.8 2.6

2 unchanged sentences

Fixed-rate one- to four-family:

<= 15 years 1,113,247 3.04 3.5 15.0 % 12.2

> 15 years 4,413,013 3.77 5.1 59.6 48.4

Fixed-rate commercial 542,857 4.18 3.6 7.3 5.9

2 unchanged sentences

Adjustable-rate one- to four-family:

<= 36 months 198,477 2.47 2.6 2.7 2.2

> 36 months 716,614 3.20 2.2 9.7 7.9

Adjustable-rate commercial 269,432 4.81 6.1 3.6 3.0

2 unchanged sentences

Total loans receivable 7,407,442 3.65 4.4 100.0 % 81.3

FHLB stock 102,782 4.68 1.9 1.1

Cash and cash equivalents 396,219 0.10 — 4.3

5 unchanged sentences

Term borrowings 1,993,000 2.29 2.9 24.7

Line of credit borrowings

Total borrowings

Total interest-bearing liabilities $ 8,062,684 1.35 6.9 100.0 %

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-Q

Item 3. Quantitative and Qualitative Disclosures About Market Risk