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Item 3. Quantitative and Qualitative Disclosures About Market Risk

2022-02-09 compared with 2021-08-09 · 29 added, 62 removed, 136 unchanged (40% of the section changed)

Quantitative and Qualitative Disclosure about Market Risk

Quantitative and Qualitative Disclosures About Market Risk

Asset and Liability Management and Market Risk

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Qualitative Disclosure about Market Risk

At June 30, 2021, the Bank's gap between the amount of interest-earning assets and interest-bearing liabilities projected to reprice within one year was $(478.2) million, or (5.0)% of total assets, compared to $(652.3) million, or (6.7)% of total assets, at March 31, 2021.

The change in the one-year gap amount was due primarily to a decrease in the amount of liabilities projected to reprice at June 30, 2021.

During the current quarter, the Bank replaced $200.0 million of adjustable-rate FHLB advances with long-term fixed-rate advances with maturities greater than one year.

In addition, the amount of assets projected to reprice decreased due to a lower balance of cash and investment securities at June 30, 2021 compared to March 31, 2021.

This was somewhat offset by lower interest rates as of June 30, 2021 compared to March 31, 2021.

As interest rates decrease, borrowers have more economic incentive to refinance their mortgages, resulting in higher projected cash flows on these assets.

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 significantly impacted 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.

If interest rates were to increase 200 basis points, as of June 30, 2021, the Bank's one-year gap is projected to be $(1.12) billion, or (11.7)% of total assets.

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.

This compares to a one-year gap of $(1.32) billion, or (13.6)% of total assets, if interest rates were to have increased 200 basis points as of March 31, 2021.

During the current quarter, loan repayments totaled $511.2 million and cash flows from the securities portfolio totaled $211.3 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/or repriced into current market interest rates during the current quarter were $457.3 million.

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.

The Bank primarily uses long-term fixed-rate borrowings with no embedded options to lengthen the average life of the Bank's liabilities.

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.

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 June 30, 2021 was 2.6 years.

However, including the impact of interest rate swaps related to $440.0 million of adjustable-rate FHLB advances, the WAL of the Bank's term borrowings as of June 30, 2021 was 3.5 years.

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

In addition to these wholesale strategies, the Bank has benefited from an increase in non-maturity deposits.

As market interest rates rise, rates paid on non-maturity deposits are not expected to increase as quickly.

Specifically, checking accounts and savings accounts have had minimal interest rate fluctuations throughout previous interest rate cycles, though no assurance can be given that this will be the case in future interest rate cycles.

The balances and rates of these accounts have historically tended to remain very stable over time, giving them the characteristic of long-term liabilities.

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

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 calendar year 2020, the Bank decreased its rates on certificates of deposit and money market accounts on pace with competitors in its market areas, and the low rate environment has continued midway through calendar year 2021.

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.

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.

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.

More Than More Than

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liabilities as a percent of total Bank assets at:

June 30, 2021 (4.96) % (2.71) % 1.96 % 7.96 %

December 31, 2021 (9.66) % (6.56) % (0.03) % 7.92 %

September 30, 2021 (6.90)

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

June 30, 2021 (11.66)

December 31, 2021 (14.97)

September 30, 2021 (13.40)

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(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 June 30, 2021, at amortized cost.

Investment securities are presented based on contractual maturities, term to call dates or pre-refunding dates as of December 31, 2021, 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.

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(4) Borrowings exclude deferred prepayment penalty costs.

Included in this line item are $440.0 million of FHLB adjustable-rate advances with interest rate swaps.

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.

At December 31, 2021, the Bank's gap between the amount of interest-earning assets and interest-bearing liabilities projected to reprice within one year was $(928.0) million, or (9.7)% of total assets, compared to $(664.1) million, or (6.9)% of total assets, at September 30, 2021.

The change in the one-year gap amount was due primarily to an increase in the amount of non-maturity deposits projected to reprice at December 31, 2021 compared to September 30, 2021.

In addition, the amount of assets projected to reprice decreased due to higher interest rates at December 31, 2021 compared to September 30, 2021 which resulted in slower prepay projections on the Bank's mortgage-related assets.

If interest rates were to increase 200 basis points, as of December 31, 2021, the Bank's one-year gap is projected to be $(1.44) billion, or (15.0)% of total assets.

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.

This compares to a one-year gap of $(1.29) billion, or (13.4)% of total assets, if interest rates were to have increased 200 basis points as of September 30, 2021.

Change in Net Interest Income.

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Change Net Interest Income At

(in Basis Points) June 30, 2021 September 30, 2020

(in Basis Points) December 31, 2021 September 30, 2021

in Interest Rates (1)

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

The net interest income projection was lower in the base case scenario at June 30, 2021 compared to September 30, 2020 due to a decrease in the interest income projection on the Bank's loan portfolio.

As a result of the low level of interest rates during the current fiscal year, the Bank continued to see a decrease in the yield on loans receivable due to refinances and endorsements.

In addition, the Bank experienced a decrease in the overall balance of the loans receivable portfolio, resulting in these cash flows being deployed into lower yielding securities.

The decrease in interest income was somewhat offset by a decrease in the interest expense projection on deposits and borrowings.

The decrease in the deposit expense projection was due primarily to a decrease in the cost of deposits at June 30, 2021 compared to September 30, 2020.

This was partially offset by an increase in the balance of deposits.

The decrease in projected expense on borrowings was due primarily to the restructuring of the borrowings portfolio and a lower balance of borrowings compared to September 30, 2020.

The Bank terminated two interest rate swaps during the March 31, 2021 quarter, and replaced them with lower costing fixed-rate advances.

This resulted in a decrease in the effective cost of the borrowings portfolio.

In addition, the Bank modified $200.0 million of fixed-rate advances during the fiscal year into lower costing long-term fixed-rate advances.

The net interest income projection was higher in the base case scenario at December 31, 2021 compared to September 30, 2021 due to an increase in the income projections on loans receivable and FHLB stock.

The interest income projection on loans receivable was higher due to a higher balance and interest rates at December 31, 2021 compared to September 30, 2021.

The increase in the dividend income projection on FHLB stock was due to an increase in the regular quarterly dividend yield on FHLB stock during the quarter ended December 31, 2021.

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.

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Change Market Value of Portfolio Equity At

(in Basis Points) June 30, 2021 September 30, 2020

(in Basis Points) December 31, 2021 September 30, 2021

in Interest Rates (1)

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

The percentage change in the Bank's MVPE at June 30, 2021 and September 30, 2020 was negative in all scenarios.

The negative impact to the Bank's MVPE is greater at June 30, 2021 compared to September 30, 2020.

This change was due primarily to an increase in the duration of the Bank's mortgage-related assets at June 30, 2021 compared to September 30, 2020.

This was due in part to higher interest rates at June 30, 2021.

The percentage change in the Bank's MVPE at December 31, 2021 and September 30, 2021 was negative in all scenarios.

The negative impact to the Bank's MVPE is greater at December 31, 2021 compared to September 30, 2021 due primarily to an increase in the duration of the Bank's mortgage-related assets at December 31, 2021 compared to September 30, 2021.

This was due in part to higher interest rates at December 31, 2021.

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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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 June 30, 2021.

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

1 unchanged sentence

The WAL presented for term borrowings includes the effect of interest rate swaps.

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)

Investment securities $ 496,677 0.60 % 4.0 24.7 % 5.4 %

MBS - fixed 1,377,325 1.39 4.0 68.3 14.9

MBS - adjustable 141,703 2.05 3.7 7.0 1.5

Total securities 2,015,705 1.24 3.9 100.0 % 21.8

Securities $ 1,890,653 1.15 % 4.0 — % 20.5 %

Loans receivable:

Fixed-rate one- to four-family 5,563,567 3.11 5.6 78.3 % 60.4

<= 15 years 1,266,125 2.71 3.6 18.0 % 13.7

> 15 years 4,219,769 3.35 5.6 59.8 45.7

Fixed-rate commercial 454,400 4.15 3.6 6.4 4.9

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Adjustable-rate one- to four-family 535,284 2.39 4.1 7.5 5.8

<= 36 months 168,705 1.81 4.9 2.4 1.8

> 36 months 454,734 2.86 3.2 6.4 4.9

Adjustable-rate commercial 415,074 4.07 7.2 5.8 4.5

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FHLB stock (1)

75,261 6.56 3.1 0.8

Cash and cash equivalents 135,475 0.12 — 1.5

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Public unit certificates of deposit 196,951 0.17 0.4 3.2 2.6

Total deposits 6,638,294 0.66 3.8 100.0 % 80.7

Total interest-bearing deposits 6,048,035 0.58 3.7 100.0 % 79.2

Term borrowings 1,590,000 1.90 3.1 20.8

Total interest-bearing liabilities $ 7,638,035 0.86 3.5 100.0 %

(1) The FHLB stock yield as of December 31, 2021 includes a special year-end dividend paid by FHLB.

Excluding this special year-end dividend, the FHLB stock yield as of December 31.2021 would have been 5.59%.

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