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Interest rate risk is our most significant market risk, and our ability to adapt to changes in interest rates is known as interest rate risk management.
−Removed: On a weekly basis, management reviews deposit flows, loan demand, cash levels, and changes in several market rates to assess all pricing strategies.
−Removed: The Bank's pricing strategy for first mortgage loan products includes setting interest rates based on secondary market prices and competitor pricing for our local and correspondent lending markets.
−Removed: Pricing for commercial loans is generally based on competitor pricing and the credit risk of the borrower with consideration given to the overall relationship of the borrower.
−Removed: Generally, deposit pricing is based upon a survey of competitors in the Bank's market areas, and the need to attract funding and retain maturing deposits.
−Removed: The majority of our loans are fixed-rate products with maturities up to 30 years, while the majority of our retail deposits have stated maturities or repricing dates of less than two years.
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.
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In the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the gap table below.
−Removed: A positive gap indicates more cash flows from assets are expected to reprice than cash flows from liabilities and would indicate, in a rising rate environment, that earnings should increase.
−Removed: 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.
+Added: A positive gap generally means more cash flows from assets are expected to reprice than cash flows from liabilities and suggests in a rising rate environment, that earnings should increase.
+Added: A negative gap generally means more cash flows from liabilities are expected to reprice than cash flows from assets and suggests, in a rising rate environment, that earnings should decrease.
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.
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interest-bearing liabilities $ (1,018,666) $ 1,756 $ 188,721 $ 1,543,119 $ 714,930
−Removed: Cumulative excess of interest-earning assets over
+Added: Cumulative excess (deficiency) of interest-earning assets over
interest-bearing liabilities $ (1,018,666) $ (1,016,910) $ (828,189) $ 714,930
−Removed: Cumulative excess of interest-earning assets over interest-bearing
+Added: Cumulative excess (deficiency) of interest-earning assets over interest-bearing
liabilities as a percent of total Bank assets at:
−Removed: June 30, 2022 (14.0) % (14.5) % (6.8) % 8.1 %
−Removed: March 31, 2022 (15.3)
+Added: December 31, 2022 (10.3) % (10.2) % (8.3) % 7.2 %
September 30, 2022 (11.9)
Cumulative one-year gap - interest rates +200 bps at:
−Removed: June 30, 2022 (14.4)
−Removed: March 31, 2022 (16.2)
+Added: December 31, 2022 (10.6)
September 30, 2022 (12.1)
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(2) MBS reflect projected prepayments at amortized cost.
−Removed: Investment securities are presented based on contractual maturities, term to call dates or pre-refunding dates as of June 30, 2022, at amortized cost.
+Added: All other securities are presented based on contractual maturities, term to call dates or pre-refunding dates as of December 31, 2022, 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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The repricing for these liabilities is projected to occur at the maturity date of each interest rate swap.
−Removed: At June 30, 2022, the Bank's gap between the amount of interest-earning assets and interest-bearing liabilities projected to reprice within one year was $(1.33) billion, or (14.0)% of total assets, compared to $(1.46) billion, or (15.3)% of total assets, at March 31, 2022.
−Removed: The change in the one-year gap amount was due primarily to a decrease in the amount of liability cash flows projected at June 30, 2022 compared to March 31, 2022, specifically due to lower deposit balances.
−Removed: In addition, the Bank projected higher cash flows on mortgage-related assets at June 30, 2022 compared to March 31, 2022, despite higher interest rates.
−Removed: As interest rates rise, 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, which would typically result in lower projected cash flows on these assets.
−Removed: However, during the current quarter, the Bank upgraded its interest rate risk model, which resulted in the third-party mortgage prepayment model projecting faster prepayment speeds for mortgage-related assets, even though
−Removed: interest rates were higher at June 30, 2022.
−Removed: The prepayment speeds in the upgraded interest rate risk model are more reflective of the Bank's actual experience at current market interest rates.
+Added: At December 31, 2022, the Bank's gap between the amount of interest-earning assets and interest-bearing liabilities projected to reprice within one year was $(1.02) billion, or (10.3)% of total assets, compared to $(1.14) billion, or (11.9)% of total assets, at September 30, 2022.
+Added: The change in the one-year gap amount was due primarily to a decrease in the amount of liability cash flows coming due in one year at December 31, 2022 compared to September 30, 2022.
+Added: This was due primarily to a decrease in the amount of non-maturity deposits and certificates of deposit projected to mature within one year as of December 31, 2022 compared to September 30, 2022, partially offset by an increase in borrowings projected to reprice within one year as of December 31, 2022.
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.
−Removed: If interest rates were to increase 200 basis points, as of June 30, 2022, the Bank's one-year gap is projected to be $(1.36) billion, or (14.4)% of total assets.
−Removed: 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.
−Removed: This compares to a one-year gap of $(1.54) billion, or (16.2)% of total assets, if interest rates were to have increased 200 basis points as of March 31, 2022.
+Added: If interest rates were to increase 200 basis points, as of December 31, 2022, the Bank's one-year gap is projected to be $(1.05) billion, or (10.6)% 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 as a result of lower prepayments on mortgage-related assets in the
+Added: higher rate environment.
+Added: This compares to a one-year gap of $(1.17) billion, or (12.1)% of total assets, if interest rates were to have increased 200 basis points as of September 30, 2022.
Change in Net Interest Income.
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Projected cash flows for each scenario are based upon varying prepayment assumptions to model likely customer behavior changes as market rates change.
−Removed: At September 30, 2021, multiple yields along the yield curve were less than one percent, so the -100 basis points scenario was not applicable.
Estimations of net interest income used in preparing the table below were based upon the assumptions that the total composition of interest-earning assets and interest-bearing liabilities does not change materially and that any repricing of assets or liabilities occurs at anticipated product and market rates for the alternative rate environments as of the dates presented.
3 unchanged sentences
Change Net Interest Income At
−Removed: (in Basis Points) June 30, 2022 September 30, 2021
+Added: (in Basis Points) December 31, 2022 September 30, 2022
in Interest Rates (1)
1 unchanged sentence
(Dollars in thousands)
−Removed: -100 bp $ 189,186 $ (17) (0.01) % N/A N/A N/A
-200 bp $ 160,196 $ 134 0.08 % $ 182,458 $ (775) (0.42) %
2 unchanged sentences
+100 bp 158,931 (1,131) (0.71) 182,737 (496) (0.27)
+Added: +200 bp 157,539 (2,523) (1.58) 182,081 (1,152) (0.63)
+Added: +300 bp 156,129 (3,933) (2.46) 181,394 (1,839) (1.00)
(1) Assumes an instantaneous, parallel, and permanent change in interest rates at all maturities.
−Removed: The net interest income projection was higher in the base case scenario at June 30, 2022 compared to September 30, 2021 due to higher income projections on the Bank's assets than expense projections on the Bank's liabilities as a result of higher interest rates at June 30, 2022.
−Removed: In the rising rate scenarios, fewer assets reprice to higher interest rates, resulting in a decrease in projected net interest income.
−Removed: This was not the case at September 30, 2021, as interest rates were lower than June 30, 2022, resulting in more mortgage-related cash flows projected to reprice than at June 30, 2022.
−Removed: In the decreasing rate scenario at June 30, 2022, the net interest income projection remained relatively flat as the projected increase in mortgage-related assets repricing to lower interest rates was largely offset by liability cash flows repricing to lower interest rates as well.
+Added: The net interest income projection was lower in the base case scenario at December 31, 2022 compared to September 30, 2022 due to higher interest expense projections on the Bank's liabilities compared to the increase in the interest income projections on the Bank's assets.
+Added: This was primarily driven by a faster increase in the cost of liabilities during the quarter ended December 31, 2022 compared to the prior quarter, which was caused by a decrease in the balance of the Bank's lower-costing retail deposits being replaced with higher-costing FHLB borrowings.
+Added: In addition, higher short-term interest rates over the past year have resulted in a steady increase in the rate paid on the Bank's deposit portfolio during the quarter.
+Added: This was partially offset by higher projected income on loans receivable due to a higher balance and yield on the portfolio compared to the prior quarter.
+Added: In the rising interest rate scenarios, the cost of liabilities is projected to continue to increase at a faster pace than asset yields, resulting in a projected decrease in net interest income in these interest rate scenarios.
+Added: In the decreasing interest rate scenarios at December 31, 2022, the net interest income projection remained relatively flat as the projected increase in mortgage-related assets repricing to lower interest rates was largely offset by liability cash flows repricing to lower interest rates as well.
Change in MVPE.
2 unchanged sentences
Projected cash flows for each scenario are based upon varying prepayment assumptions to model likely customer behavior as market rates change.
−Removed: At September 30, 2021, multiple yields along the yield curve were less than one percent, so the -100 basis points scenario was not applicable.
The estimations of the MVPE used in preparing the table below were based upon the assumptions that the total composition of interest-earning assets and interest-bearing liabilities does not change, that any repricing of assets or liabilities occurs at current product or market rates for the alternative rate environments as of the dates presented, and that different prepayment rates were used in each alternative interest rate environment.
2 unchanged sentences
Change Market Value of Portfolio Equity At
−Removed: (in Basis Points) June 30, 2022 September 30, 2021
+Added: (in Basis Points) December 31, 2022 September 30, 2022
in Interest Rates (1)
1 unchanged sentence
(Dollars in thousands)
−Removed: -100 bp $ 841,710 $ 94,738 12.68 % N/A N/A N/A
-200 bp $ 1,436,543 $ 434,151 43.31 % $ 1,299,340 $ 404,353 45.18 %
2 unchanged sentences
+100 bp 856,127 (146,265) (14.59) 759,165 (135,822) (15.18)
+Added: +200 bp 713,190 (289,202) (28.85) 625,864 (269,123) (30.07)
+Added: +300 bp 578,563 (423,829) (42.28) 500,730 (394,257) (44.05)
(1) Assumes an instantaneous, parallel, and permanent change in interest rates at all maturities.
−Removed: The percentage change in the Bank's MVPE at June 30, 2022 and September 30, 2021 was negative in all rising rate scenarios.
−Removed: The negative impact to the Bank's MVPE is greater at June 30, 2022 compared to September 30, 2021 due primarily to an increase in the duration of the Bank's mortgage-related assets at June 30, 2022 compared to September 30, 2021.
−Removed: This was due to higher interest rates at June 30, 2022.
+Added: The percentage change in the Bank's MVPE at December 31, 2022 and September 30, 2022 was negative in all rising interest rate scenarios.
+Added: The negative impact to the Bank's MVPE, as a percentage change, was slightly lower at December 31, 2022 compared to September 30, 2022 due primarily to higher MVPE at December 31, 2022.
+Added: The increase in the MVPE was due to lower mortgage rates at December 31, 2022 which resulted in an increase in the market value on the Bank's mortgage-related assets.
+Added: In addition, the increase in short-term interest rates resulted in a decrease in the market value of the Bank's deposits compared to the prior quarter.
+Added: The MVPE ratio continues to be negatively impacted in the rising interest rate scenarios at December 31, 2022.
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.
−Removed: 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.
+Added: As interest rates increase in the rising interest 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.
Similarly, call projections for the Bank's callable agency debentures decrease as interest rates rise, which results in cash flows related to these assets moving closer to the contractual maturity dates.
−Removed: 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.
−Removed: 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.
−Removed: In the decreasing interest rate scenario at June 30, 2022, the Bank's MVPE increased due to a larger increase in the market value of the Bank's asset than the Bank's liabilities.
−Removed: This is because the Bank's mortgage-related assets continue to have a higher duration in this scenario which results in greater sensitivity in market value as rates change.
−Removed: 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, 2022.
+Added: The longer expected average lives of these assets increases the sensitivity of their market value to changes in interest rates.
+Added: In the decreasing interest rate scenarios at December 31, 2022, the Bank's MVPE increased due to a larger increase in the market value of the Bank's assets than the Bank's liabilities.
+Added: This is because the Bank's mortgage-related assets continue to have a longer duration in these interest rate scenarios which results in greater sensitivity in market value as interest rates change.
+Added: 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 December 31, 2022.
Yields presented for interest-earning assets include the amortization of fees, costs, premiums and discounts, which are considered adjustments to the yield.
27 unchanged sentences
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.