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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2023-11-29 compared with 2022-11-23 · 43 added, 38 removed, 144 unchanged (36% of the section changed)

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The rates of interest the Bank earns on its assets and pays on its liabilities are generally established contractually for a period of time.

Fluctuations in interest rates have a significant impact not only upon our net income, but also upon the cash flows and market values of our assets and liabilities.

Fluctuations in interest rates have a significant impact not only upon our net income, but also upon the cash flows and market values of our financial assets and liabilities.

Our results of operations, like those of other financial institutions, are impacted by changes in interest rates and the interest rate sensitivity of our interest-earning assets and interest-bearing liabilities.

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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.

Net interest income is projected in the same alternative interest rate environments with both a static balance sheet and management strategies considered.

Net interest income is projected in the same alternative interest rate environments with both a static balance sheet and with management strategies considered.

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 interest 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.

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Certain assets, such as adjustable-rate loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset.

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.

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.

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.

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.

In the event of a change in interest rates, prepayment rates would likely deviate significantly from those assumed in calculating the gap table below.

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 net interest income should increase.

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 net interest income 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.

More Than More Than

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The repricing for these liabilities is projected to occur at the maturity date of each interest rate swap.

At September 30, 2022, the Bank's gap between the amount of interest-earning assets and interest-bearing liabilities projected to reprice within one year was $(1.14) billion, or (11.89)% 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 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.

At September 30, 2023, the Bank's gap between the amount of interest-earning assets and interest-bearing liabilities projected to reprice within one year was $(1.19) billion, or (11.7)% of total assets, compared to $(1.14) billion, or (11.9)% of total assets, at September 30, 2022.

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 September 30, 2023 compared to September 30, 2022, 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 September 30, 2023 compared to September 30, 2022.

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.

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If interest rates were to increase 200 basis points, as of September 30, 2023, the Bank's one-year gap is projected to be $(1.21) billion, or (11.9)% 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 interest rate environment.

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.

The Bank's net interest income projections are a reflection of the response to interest rates of the assets and liabilities that are expected to mature or reprice over the next year.

The Bank's net interest income projections are a reflection of the response to interest rates of assets and liabilities that are expected to mature or reprice over the next year.

Repricing occurs as a result of cash flows that are received or paid on assets or due on liabilities which would be replaced at then current market interest rates or on adjustable-rate products that reset during the next year.

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For each date presented in the following table, the estimated change in the Bank's net interest income is based on the indicated instantaneous, parallel and permanent change in interest rates.

The change in each interest rate environment represents the difference between estimated net interest income in the 0 basis point interest rate environment ("base case," assumes the forward market and product interest rates implied by the yield curve are realized) and the estimated net interest income in each alternative interest rate environment (assumes market and product interest rates have a parallel shift in rates across all maturities by the indicated change in rates).

Projected cash flows for each scenario are based upon varying prepayment assumptions to model likely customer behavior changes as market rates change.

At September 30, 2021, multiple yields along the yield curve were less than one percent, so the -100 basis points and -200 basis points scenarios were not applicable.

The change in each interest rate environment represents the difference between estimated net interest income in the zero basis point interest rate environment ("base case," assumes the forward market and product interest rates implied by the yield curve are realized) and the estimated net interest income in each alternative interest rate environment (assumes market and product interest rates have a parallel shift in rates across all maturities by the indicated change in rates).

Projected cash flows for each scenario are based upon varying prepayment assumptions in an effort to model anticipated customer behavior changes as market rates change.

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.

The estimation of net interest income does not include any projected gains or losses related to the sale of loans or securities, or income derived from non-interest income sources, but does include the use of different prepayment assumptions in the alternative interest rate environments.

environments.

It is important to consider that estimated changes in net interest income are for a cumulative four-quarter period.

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(Dollars in thousands)

-200 bp $ 182,458 $ (775) (0.4) % N/A N/A N/A

-100 bp 183,363 130 0.1 N/A N/A N/A

-200 bp $ 126,495 $ (6,963) (5.2) % $ 182,458 $ (775) (0.4) %

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+100 bp 136,147 2,689 2.0 182,737 (496) (0.3)

+200 bp 138,804 5,346 4.0 182,081 (1,152) (0.6)

+300 bp 141,494 8,036 6.0 181,394 (1,839) (1.0)

(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 September 30, 2022 compared to September 30, 2021 due to higher interest expense projections on the Bank's liabilities than interest income projections on the Bank's assets as a result of higher interest rates at September 30, 2022.

This was driven primarily by a faster increase in the cost of liabilities during fiscal year 2022 compared to the rate of increase in asset yields.

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.

This was not the case at September 30, 2021, as interest rates were lower than at September 30, 2022, resulting in more mortgage-related cash flows projected to reprice as interest rates increased.

In the decreasing interest rate scenarios at September 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.

The net interest income projection was lower in the base case scenario at September 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 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 during the current year.

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 has become more significant due to the composition of the balance sheet and the elevated interest rate environment.

At September 30, 2023, the Bank's balance of cash and cash equivalents was $245.6 million with an average yield of 4.70% 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 September 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 at September 30, 2023.

More generally, however, increases in net interest income in the rising rate scenarios are due to the degree to which loan repayments that are projected to reprice upward are 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 fully offset the higher cost of liabilities that are expected to reprice in the next 12 months.

Change in MVPE.

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The change in each interest rate environment represents the difference between the MVPE in the base case (assumes the forward market interest rates implied by the yield curve are realized) and the MVPE in each alternative interest rate environment (assumes market interest rates have a parallel shift in rates).

Projected cash flows for each scenario are based upon varying prepayment assumptions to model likely customer behavior as market rates change.

At September 30, 2021, multiple yields along the yield curve were less than one percent, so the -100 basis points and -200 basis points scenarios were not applicable.

Projected cash flows for each scenario are based upon varying prepayment assumptions to model anticipated customer behavior as market rates change.

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.

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(Dollars in thousands)

-200 bp $ 1,299,340 $ 404,353 45.2 % N/A N/A N/A

-100 bp 1,024,167 129,180 14.4 N/A N/A N/A

-200 bp $ 1,302,781 $ 283,093 27.8 % $ 1,299,340 $ 404,353 45.2 %

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+100 bp 888,642 (131,046) (12.9) 759,165 (135,822) (15.2)

+200 bp 757,870 (261,818) (25.7) 625,864 (269,123) (30.1)

+300 bp 632,716 (386,972) (38.0) 500,730 (394,257) (44.1)

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

The percentage change in the Bank's MVPE at September 30, 2022 and September 30, 2021 was negative in all rising interest rate scenarios.

The negative impact to the Bank's MVPE was greater at September 30, 2022 compared to September 30, 2021 due primarily to an increase in the duration of the Bank's mortgage-related assets at September 30, 2022 compared to September 30, 2021.

This was a result of higher interest rates at September 30, 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.

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.

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

The Bank's MVPE increased from $895.0 million at September 30, 2022 to $1.02 billion at September 30, 2023.

The increase was primarily a result of refinements made during the current year in calculating the estimated fair value of the Bank's balance sheet;

specifically, related to the treatment of unrealized gains and losses associated with its AFS securities portfolio.

Previously, at September 30, 2022, net unrealized losses associated with the Bank's AFS securities portfolio were included in both the calculation of the estimated market value of assets and the estimated market value of securities.

Unrealized gains and losses associated with the Bank's AFS securities portfolio are now only reflected in the estimated market value of its securities.

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.

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.

The higher expected average lives of these assets increases the sensitivity of their market value to changes in interest rates.

In the decreasing interest rate scenarios at September 30, 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.

This is because the Bank's mortgage-related assets continue to have a higher duration in these interest rate scenarios which results in greater sensitivity in market value as interest rates change.

The longer expected average lives of these assets increases the sensitivity of their market value to changes in interest rates.

In the increasing rate scenarios, the sensitivity reflects the negative impacts of rates on the value of the Bank's loan and securities portfolios more so than on its deposit and borrowings portfolios.

In the decreasing interest rate scenarios, the Bank's MVPE increased due to a larger increase in the market value of the Bank's assets than the Bank's liabilities.

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 September 30, 2023.

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Term borrowings 2,882,828 3.34 1.8 34.4

Line of credit borrowings 75,000 3.15 — 3.5 1.0

Total borrowings 2,137,500 2.47 2.4 100.0 % 27.6

Total interest-bearing liabilities $ 8,375,722 2.65 3.2 100.0 %

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-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk