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Item 3. Quantitative and Qualitative Disclosures About Market Risk

2023-08-09 compared with 2023-05-10 · 33 added, 29 removed, 139 unchanged (31% of the section changed)

15 unchanged sentences

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.

The MVPE ratio continues to be an important measurement for management as we consider the changes in market rates, liquidity needs and portfolio balances.

MVPE represents a long-term view of the interest sensitivity of the Bank's balance sheet while our net interest income projections inform management of the short-term impacts of pricing decisions.

In addition to the interest rate environments presented below, management also reviews the impact of non-parallel rate shock scenarios on a quarterly basis.

38 unchanged sentences

liabilities as a percent of total Bank assets at:

June 30, 2023 (9.7) % (11.5) % (9.9) % 6.9 %

March 31, 2023 (8.0)

December 31, 2022 (10.3)

September 30, 2022 (11.9)

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

June 30, 2023 (11.6)

March 31, 2023 (8.6)

December 31, 2022 (10.6)

September 30, 2022 (12.1)

(1) Adjustable-rate loans are included in the period in which the rate is next scheduled to adjust or in the period in which repayments are expected to occur, or prepayments are expected to be received, prior to their next rate adjustment, rather than in the period in which the loans are due.

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(2) MBS reflect projected prepayments at amortized cost.

All other securities are presented based on contractual maturities, term to call dates or pre-refunding dates as of March 31, 2023, at amortized cost.

All other securities are presented based on contractual maturities, term to call dates or pre-refunding dates as of June 30, 2023, 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.

At March 31, 2023, the Bank's gap between the amount of interest-earning assets and interest-bearing liabilities projected to reprice within one year was $(803.5) million, or (8.0)% of total assets, compared to $(1.02) billion, or (10.3)% of total assets, at December 31, 2022.

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 March 31, 2023 compared to December 31, 2022 and an increase in the amount of asset cash flows coming due for the same time periods.

This was due primarily to a decrease in the amount of non-maturity deposits projected by the Bank's interest rate risk model to mature within one year as of March 31, 2023 compared to December 31, 2022, partially offset by an increase in cash flows projected to be received on loans as of March 31, 2023.

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 March 31, 2023, the Bank's one-year gap is projected to be $(862.4) million, or (8.6)% 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 as a result of lower prepayments on mortgage-related assets in the higher

rate environment.

This compares to a one-year gap of $(1.05) billion, or (10.6)% of total assets, if interest rates were to have increased 200 basis points as of December 31, 2022.

At June 30, 2023, the Bank's gap between the amount of interest-earning assets and interest-bearing liabilities projected to reprice within one year was $(1.00) billion, or (9.7)% of total assets, compared to $(803.5) million, or (8.0)% of total assets, at March 31, 2023.

The change in the one-year gap amount was due primarily to an increase in the amount of liability cash flows coming due in one year at June 30, 2023 compared to March 31, 2023, partially offset by an increase in the amount of asset cash flows coming due for the same time period.

This was due primarily to an increase in the amount of certificates of deposit and borrowings scheduled to mature within one year as of June 30, 2023 compared to March 31, 2023.

terminated early without a prepayment penalty.

If interest rates were to increase 200 basis points, as of June 30, 2023, the Bank's one-year gap is projected to be $(1.19) billion, or (11.6)% 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 as a result of lower prepayments on mortgage-related assets in the higher rate environment.

This compares to a one-year gap of $(862.4) million, or (8.6)% of total assets, if interest rates were to have increased 200 basis points as of March 31, 2023.

Change in Net Interest Income.

7 unchanged sentences

Change Net Interest Income At

(in Basis Points) March 31, 2023 September 30, 2022

(in Basis Points) June 30, 2023 September 30, 2022

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 March 31, 2023 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.

This was primarily driven by a faster increase in the cost of liabilities during the first six months of fiscal year 2023 which was caused by an increase in certificates of deposit at higher rates, an increase in the rates paid on our money market accounts, and an increase in the balance of higher-costing FHLB borrowings since September 30, 2022.

The net interest income projection was lower in the base case scenario at June 30, 2023 compared to September 30, 2022 due primarily to higher interest expense projections on the Bank's liabilities compared to the increase in the interest income projections on the Bank's assets.

This was primarily driven by faster increases in the cost of liabilities during the first nine months of fiscal year 2023, compared to the increase in asset yields.

The increase in the cost of liabilities was due mainly to an increase in the balance and rate of the certificate of deposit portfolio, an increase in the rates paid on money market accounts, and an increase in the balance of higher-costing borrowings since September 30, 2022.

This was partially offset by higher projected income on loans receivable due to a higher balance and yield on the portfolio compared to September 30, 2022.

In the rising and declining interest rate scenarios, the variability of net interest income projections is not significant.

Generally, the increase in net interest income in the rising rate scenarios is due to the degree to which loan repayments that are projected to reprice upward is greater than the projected increase in rates on deposits in the next twelve months.

In the declining rate scenarios, loan repayments are repriced at rates that do not offset the higher cost of liabilities that are not expected to reprice in the next twelve months.

In the rising and declining interest rate scenarios, the variability of net interest income projections has become more significant due to the composition of the balance sheet and the elevated interest rate environment.

At June 30, 2023, the Bank's balance of cash and cash equivalents was $329.4 million with an average yield of 4.82% compared to a balance of $49.2 million with an average yield of 1.75% at September 30, 2022.

As a result, in each interest rate scenario, there was a greater impact on net interest income at June 30, 2023 compared to September 30, 2022 due to the higher cash balance.

Additionally, due to compositional changes in the Bank's deposit portfolio between periods (increase in certificates of deposit and decrease in non-maturity deposits), the impact from instantaneous, parallel and permanent changes in the various interest rate scenarios was less pronounced.

Generally, however, the increase in net interest income in the rising rate scenarios is due to the degree to which loan repayments that are projected to reprice upward is greater than the projected increase in deposit rates in the next 12 months.

In the declining rate scenarios, loan repayments are repriced at rates that do not offset the higher cost of liabilities that are not expected to reprice in the next 12 months.

Change in MVPE.

6 unchanged sentences

Change Market Value of Portfolio Equity At

(in Basis Points) March 31, 2023 September 30, 2022

(in Basis Points) June 30, 2023 September 30, 2022

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 March 31, 2023 and September 30, 2022 was negative in all rising interest rate scenarios.

The negative impact to the Bank's MVPE, as a percentage change, was slightly lower at March 31, 2023 compared to September 30, 2022 due primarily to higher MVPE at March 31, 2023.

The increase in the MVPE was due in part to lower long-term rates at March 31, 2023 which resulted in an increase in the market value of the Bank's loan portfolio.

In addition, the increase in the balance of certificates of deposit and borrowings during the six-month period resulted in less of an increase in the market value of the Bank's deposits compared to the prior year-end.

The offsetting impacts of these factors increased our MVPE in the base case and led to less sensitivity to changes in rates.

The MVPE ratio continues to be an important measurement for management as we consider the changes in market rates, liquidity needs and portfolio balances.

MVPE represents a long-term view of the interest sensitivity of the Bank's balance sheet while our net interest income projections inform management of the short-term impacts of pricing decisions.

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.

The percentage change in the Bank's MVPE at June 30, 2023 compared to September 30, 2022 was negative in all rising interest rate scenarios.

The negative impact to the Bank's MVPE, as a percentage change, was slightly lower at June 30, 2023 compared to September 30, 2022 due primarily to higher MVPE at June 30, 2023.

The higher MVPE was due, in part, to the increase in the balance of certificates of deposit and borrowings between periods, which resulted in less of an increase in the market value of those portfolios compared to September 30, 2022, coupled with an increase in the balance of the loan portfolio.

As a result of long-term rates being relatively unchanged at each period end, the impact of interest rates on the market value of the loan portfolio was fairly muted;

therefore, the impacts of the other factors resulted in an increase to our MVPE in the base case and led to lower sensitivity to changes in rates.

As interest rates increase, borrowers have less economic incentive to prepay or 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.

As interest rates increase in the rising interest rate scenarios, prepayments 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.

4 unchanged sentences

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.

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, 2023.

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

23 unchanged sentences

Term borrowings 2,990,246 3.30 2.0 35.1

Line of credit borrowings 203,400 4.99 — 7.5 2.5

Total borrowings 2,701,064 3.08 2.2 100.0 % 32.8

Total interest-bearing liabilities $ 8,515,322 2.47 3.4 100.0 %

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