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The general objective of our interest rate risk management program is to determine and manage an appropriate level of interest rate risk while maximizing net interest income in a manner consistent with our policy to manage, to the extent practicable, the exposure of net interest income to changes in market interest rates.
−Removed: The Board of Directors and ALCO regularly review the Bank's interest rate risk exposure by forecasting the impact of hypothetical, alternative interest rate environments on net interest income and the market value of portfolio equity ("MVPE") at various dates.
−Removed: The MVPE is defined as the net of the present value of cash flows from existing assets, liabilities, and off-balance sheet instruments.
−Removed: The present values are determined based upon market conditions as of the date of the analysis, as well as in alternative interest rate environments, providing potential changes in the MVPE under those alternative interest rate environments.
−Removed: Net interest income is projected in the same alternative interest rate environments with both a static balance sheet and management strategies considered.
−Removed: The MVPE and net interest income analyses are also conducted to estimate our sensitivity to rates for future time horizons based upon market conditions as of the date of the analysis.
−Removed: In addition to the interest rate environments presented below, management also reviews the impact of non-parallel rate shock scenarios on a quarterly basis.
−Removed: These scenarios consist of flattening and steepening the yield curve by changing short-term and long-term interest rates independent of each other, and simulating cash flows and determining valuations as a result of these hypothetical changes in interest rates to identify rate environments that pose the greatest risk to the Bank.
+Added: The Board of Directors and Asset and Liability Management Committee ("ALCO") regularly review the Bank's interest rate risk exposure by forecasting the impact of hypothetical, alternative interest rate environments on net interest income and the market value of portfolio equity ("MVPE") at various dates.
+Added: In addition to the interest rate environments presented below, management reviews the impact of non-parallel rate shock scenarios on a quarterly basis.
This analysis helps management quantify the Bank's exposure to changes in the shape of the yield curve.
−Removed: The ability to maximize net interest income is dependent largely upon the achievement of a positive interest rate spread that can be sustained despite fluctuations in prevailing interest rates.
−Removed: The asset and liability repricing gap is a measure of the difference between the amount of interest-earning assets and interest-bearing liabilities which either reprice or mature within a given period of time.
−Removed: The difference provides an indication of the extent to which an institution's interest rate spread will be affected by changes in interest rates.
−Removed: A gap is considered positive when the amount of interest-earning assets exceeds the amount of interest-bearing liabilities maturing or repricing during the same period.
−Removed: A gap is considered negative when the amount of interest-bearing liabilities exceeds the amount of interest-earning assets maturing or repricing during the same period.
−Removed: Generally, during a period of rising interest rates, a negative gap within shorter repricing periods adversely affects net interest income, while a positive gap within shorter repricing periods positively affects net interest income.
−Removed: During a period of falling interest rates, the opposite would generally be true.
−Removed: The shape of the yield curve also has an impact on our net interest income and, therefore, the Bank's net interest margin.
−Removed: Historically, the Bank has benefited from a steeper yield curve as the Bank's mortgage loans are generally priced off of long-term rates while deposits are priced off of short-term rates.
−Removed: A steeper yield curve (one with a greater difference between short-term rates and long-term rates) allows the Bank to receive a higher rate of interest on its new mortgage-related assets relative to the rate paid for the funding of those assets, which generally results in a higher net interest margin.
−Removed: As the yield curve flattens or becomes inverted, the spread between rates received on assets and paid on liabilities becomes compressed, which generally leads to a decrease in net interest margin.
General assumptions used by management to evaluate the sensitivity of our financial performance to changes in interest rates presented in the tables below are utilized in, and set forth under, the gap table and related notes.
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Qualitative Disclosure about Market Risk
−Removed: At September 30, 2020, the Bank's gap between the amount of interest-earning assets and interest-bearing liabilities projected to reprice within one year was $435.0 million, or 4.58% of total assets, compared to $487.4 million, or 5.22% of total assets, at September 30, 2019.
−Removed: The decrease in the one-year gap amount was due to a shift in the cash flow projections on the Bank's non-maturity deposits compared to the prior year, related to the implementation of a new interest rate risk model.
−Removed: This change shortened the life of these liabilities and thus increased the amount of projected cash flows in the 12-month horizon compared to the previous model.
−Removed: This change was largely offset by lower interest rates as of September 30, 2020 compared to September 30, 2019, which increased the cash flow projections related to the Bank's mortgage-related assets.
−Removed: As interest rates fall, 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 higher projected cash flows on these assets.
−Removed: 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.
−Removed: 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.
−Removed: If interest rates were to increase 200 basis points, as of September 30, 2020, the Bank's one-year gap is projected to be $(611.0) million, or (6.44)% of total assets.
−Removed: 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.
−Removed: This compares to a one-year gap of $(361.8) million, or (3.87)% of total assets, if interest rates were to have increased 200 basis points as of September 30, 2019.
−Removed: During the current fiscal year, loan repayments totaled $1.89 billion and cash flows from the securities portfolio totaled $668.0 million.
−Removed: The majority of these cash flows were reinvested into new loans and securities at current market interest rates.
−Removed: Total cash flows from term liabilities that matured and/or repriced into current market interest rates during the current fiscal year were $2.97 billion, including $1.16 billion in term borrowings, of which $640.0 million was tied to interest rate swaps.
−Removed: 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.
−Removed: The Bank primarily uses long-term fixed-rate borrowings with no embedded options to lengthen the average life of the Bank's liabilities.
−Removed: The fixed-rate characteristics of these borrowings lock-in the cost until maturity and thus decrease the amount of liabilities repricing as interest rates move higher compared to funding with lower-cost short-term borrowings.
−Removed: These borrowings are laddered in order to prevent large amounts of liabilities repricing in any one period.
−Removed: The WAL of the Bank's term borrowings as of September 30, 2020 was 1.9 years.
−Removed: 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 September 30, 2020 was 3.0 years.
−Removed: The interest rate swaps effectively convert the adjustable-rate borrowings into long-term, fixed-rate liabilities.
−Removed: In addition to these wholesale strategies, the Bank has benefited from an increase in non-maturity deposits.
−Removed: Rates paid on non-maturity deposits are not expected to increase as market interest rates rise.
−Removed: Specifically, checking accounts and savings accounts have had minimal interest rate fluctuations throughout historical interest rate cycles, though no assurance can be given that this will be the case in future interest rate cycles.
−Removed: The balances and rates of these accounts have historically tended to remain very stable over time, giving them the characteristic of long-term liabilities.
−Removed: The Bank uses historical data pertaining to these accounts to estimate their future balances.
−Removed: 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.
−Removed: 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.
−Removed: 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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A negative gap indicates more cash flows from liabilities are expected to reprice than cash flows from assets and would indicate, in a rising rate environment, that earnings should decrease.
−Removed: 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.
+Added: For additional
+Added: information regarding the impact of changes in interest rates, see the following Change in Net Interest Income and Change in MVPE discussions and tables.
More Than More Than
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interest-bearing liabilities $ (664,107) $ (349,442) $ 178,606 $ 821,952
−Removed: More Than More Than
−Removed: Within One Year to Three Years Over
−Removed: One Year Three Years to Five Years Five Years Total
Cumulative excess of interest-earning assets over interest-bearing
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(4) Borrowings exclude deferred prepayment penalty costs.
−Removed: Included in this line item are $640.0 million of FHLB adjustable-rate advances with interest rate swaps.
+Added: Included in this line item are $365.0 million of FHLB adjustable-rate advances tied to interest rate swaps.
The repricing for these liabilities is projected to occur at the maturity date of each interest rate swap.
+Added: At September 30, 2021, the Bank's gap between the amount of interest-earning assets and interest-bearing liabilities projected to reprice within one year was $(664.1) million, or (6.9)% of total assets, compared to $436.4 million, or 4.6% of total assets, at September 30, 2020.
+Added: The change in the one-year gap amount was due primarily to a decrease in the amount of assets projected to reprice as higher interest rates resulted in lower prepayment projections on the Bank's mortgage-related assets.
+Added: In addition, the lower balance of cash at September 30, 2021 compared to September 30, 2020 resulted in a decrease in the assets repricing in the one-year horizon.
+Added: 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.
+Added: 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.
+Added: If interest rates were to increase 200 basis points, as of September 30, 2021, the Bank's one-year gap is projected to be $(1.29) billion, or (13.4)% of total assets.
+Added: The change 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.
+Added: This compares to a one-year gap of $(609.6) million, or (6.4)% of total assets, if interest rates were to have increased 200 basis points as of September 30, 2020.
Change in Net Interest Income.
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(1) Assumes an instantaneous, parallel, and permanent change in interest rates at all maturities.
−Removed: The net interest income projection was lower in the base case scenario at September 30, 2020 compared to September 30, 2019 due to lower interest rates at September 30, 2020 compared to September 30, 2019.
−Removed: Because the Bank's gap was positive during the current year, assets have repriced downward at a faster pace than liabilities, resulting in a lower base case net interest income projection at September 30, 2020.
−Removed: The net interest income projections increase from the base case in all rising interest rate scenarios at September 30, 2020.
−Removed: The net interest income projection was more adversely impacted in the rising interest rate scenarios at September 30, 2019 compared to September 30, 2020, due primarily to higher interest rates at September 30, 2019.
−Removed: The positive impact of rising interest rates is diminished as interest rates increase.
−Removed: Higher interest rates decreased the projected cash flows from the Bank's mortgage-related assets, thus decreasing the positive impact of rising interest rates compared to the base case.
+Added: The net interest income projection was higher in the base case scenario at September 30, 2021 compared to September 30, 2020 due to a larger decrease in the projected interest expense than interest income compared to the prior year.
+Added: This was caused by the decrease in the cost of the Bank's deposits and borrowings during the year, mostly offset by a decrease in the yield on loans receivable.
+Added: Despite a negative gap, net interest income increases in all rising interest rate scenarios due to the assumption that the Bank's deposit balances are not expected to reprice to the full extent of the interest rate change.
+Added: This assumption is based on a historical analysis of the Bank's deposit pricing behavior.
Change in MVPE.
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(1) Assumes an instantaneous, parallel, and permanent change in interest rates at all maturities.
−Removed: The percentage change in the Bank's MVPE at September 30, 2020 was negative in all scenarios.
−Removed: At September 30, 2019 the percentage change in the Bank's MVPE was negative in the +200 and +300 basis point scenarios.
−Removed: This change was due primarily to a change in the Bank's interest rate risk model, of which the most significant impact was on the valuation of the Bank's non-maturity deposit portfolio.
−Removed: The model changes resulted in a shorter duration for these liabilities than was modeled at September 30, 2019, which reduced their sensitivity to changes in interest rates.
−Removed: The Bank's MVPE decreases as interest rates rise, as the market value for assets decreases at a faster pace than these liabilities.
−Removed: The negative impact to the MVPE in the rising interest rate scenarios is due to slower prepayment projections on the Bank's mortgage-related assets and investments.
−Removed: 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.
+Added: The percentage change in the Bank's MVPE at September 30, 2021 and September 30, 2020 was negative in all scenarios.
+Added: The negative impact to the Bank's MVPE is greater at September 30, 2021 compared to September 30, 2020 due primarily to an increase in the duration of the Bank's mortgage-related assets at September 30, 2021 compared to September 30, 2020, due in part to higher interest rates at September 30, 2021.
+Added: 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
+Added: order to issue new debt at lower interest rates, resulting in lower projected cash flows on these assets.
As interest rates increase in the rising rate scenarios, repayments on mortgage-related assets are more likely to decrease and only be realized through significant changes in borrowers' lives such as divorce, death, job-related relocations, or other events as there is less economic incentive for borrowers to prepay their debt, resulting in an increase in the average life of mortgage-related assets.
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The higher expected average lives of these assets, relative to the assumptions in the base case interest rate environment, increases the sensitivity of their market value to changes in interest rates.
+Added: In addition, as mortgage loans are refinanced or endorsed to lower interest rates, their average lives also increase as further prepayments are expected to be diminished.
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 September 30, 2021.
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The WAL presented for term borrowings includes the effect of interest rate swaps.
−Removed: The maturity and repricing terms presented for one- to four-family loans represent the contractual terms of the loan.
Amount Yield/Rate WAL % of Category % of Total
(Dollars in thousands)
−Removed: Investment securities $ 380,147 0.65 % 1.0 24.3 % 4.2 %
−Removed: MBS - fixed 970,369 1.82 3.3 62.2 10.7
−Removed: MBS - adjustable 210,434 2.49 3.1 13.5 2.3
−Removed: Total securities 1,560,950 1.62 2.7 100.0 % 17.2
+Added: Securities 2,014,608 1.16 3.9 21.8 %
Loans receivable:
Fixed-rate one- to four-family 5,553,556 3.14 5.4 78.3 % 60.2
−Removed: <= 15 years 1,130,538 2.98 3.1 15.6 % 12.5
−Removed: > 15 years 4,287,229 3.67 4.2 59.3 47.3
Fixed-rate commercial 451,166 4.21 3.8 6.3 4.9
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Adjustable-rate one- to four-family 579,647 2.46 4.0 8.2 6.3
−Removed: <= 36 months 189,591 2.25 4.8 2.6 2.1
−Removed: > 36 months 639,461 3.09 3.2 8.9 7.1
Adjustable-rate commercial 378,202 4.12 7.2 5.3 4.1
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Non-maturity deposits $ 3,853,805 0.11 5.9 58.4 % 47.1 %
−Removed: Retail/business certificates of deposit 2,766,461 1.83 1.5 44.7 34.6
+Added: Retail certificates of deposit 2,341,531 1.41 1.3 35.5 28.6
+Added: Commercial certificates of deposit 190,215 0.66 0.5 2.9 2.3
Public unit certificates of deposit 211,845 0.21 0.5 3.2 2.6
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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.