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Item 3. Quantitative and Qualitative Disclosures About Market Risk

2025-02-07 compared with 2024-08-07 · 36 added, 32 removed, 135 unchanged (33% of the section changed)

29 unchanged sentences

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 earnings should increase.

A positive gap generally means more cash flows from assets are expected to reprice than cash flows from liabilities and suggests that in a rising rate environment 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.

24 unchanged sentences

liabilities as a percent of total Bank assets at:

June 30, 2024 (14.6) % (16.8) % (9.2) % 5.5 %

March 31, 2024 (11.3)

December 31, 2024 (16.6) % (20.1) % (10.9) % 5.4 %

September 30, 2024 (15.9)

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

June 30, 2024 (16.6)

March 31, 2024 (12.5)

December 31, 2024 (18.4)

September 30, 2024 (17.9)

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

December 31, 2024 (12.3)

September 30, 2024 (12.5)

(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.

2 unchanged sentences

(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 June 30, 2024, at amortized cost.

All other securities are presented based on contractual maturities, term to call dates or pre-refunding dates as of December 31, 2024, 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.

4 unchanged sentences

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

At June 30, 2024, the Bank's gap between the amount of interest-earning assets and interest-bearing liabilities projected to reprice within one year was $(1.40) billion, or (14.6)% of total assets, compared to $(1.19) billion, or (11.7)% of total assets, at September 30, 2023.

The change in the one-year gap amount was due to a net increase in the amount of liability cash flows coming due in one year, partially offset by an increase in the amount of interest-earning asset cash flows coming due in one year as of June 30, 2024, compared to September 30, 2023.

The net increase in liability cash flows coming due in one year primarily related to the Bank's retail certificate of deposit portfolio, partially offset by a decrease in borrowings coming due in one year as the Bank repaid its BTFP amount outstanding in conjunction with the securities strategy.

The increase in the one-year cash flow for retail certificates of deposit was due to the Bank continuing to offer higher rates on shorter-term certificates of deposit.

The increase in interest-earning assets projected to mature or reprice within one year was due primarily to an increase in the amount of loans expected to mature or reprice, as well as to an increase in the balance of cash between periods.

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, 2024, the Bank's one-year gap is projected to be $(1.59) billion, or (16.6)% of total assets.

The change in the gap compared to when there is no change in rates was 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 $(1.21) billion, or (11.9)% of total assets, if interest rates were to have increased 200 basis points as of September 30, 2023.

At December 31, 2024, the Bank's gap between the amount of interest-earning assets and interest-bearing liabilities projected to reprice within one year was $(1.58) billion, or (16.6)% of total assets, compared to $(1.51) billion, or (15.8)% of total assets, at September 30, 2024.

The change in the one-year gap amount was due to an increase in the amount of projected liability cash flows coming due in one year, as of December 31, 2024, partially offset by an increase in the amount of asset cash flows coming due during the same time period, as compared to September 30, 2024.

The increase in liability cash flows was due primarily to a net increase in non-maturity deposits between periods.

The increase in projected asset cash flows was due primarily to an increase in the balance of adjustable-rate loans, partially offset by a decrease in the balance of cash and a decrease in the projected amount of fixed-rate mortgage-related asset cash flows due to a decrease in projected prepayment speeds from September 30, 2024, as a result of an increase in intermediate and long-term interest and mortgage rates.

The amount of interest-bearing liabilities expected to reprice in a given period typically is not 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 December 31, 2024, the Bank's one-year gap would have been projected to be $(1.75) billion, or (18.4)% of total assets.

If interest rates were to decrease 200 basis points, as of December 31, 2024, the Bank's one-year gap would have been projected to be $(1.17) billion, or (12.3)% of total assets.

The changes in the gap amounts compared to when there is no change in rates was due to changes in the anticipated net cash flows primarily as a result of projected prepayments on mortgage-related assets in each rate environment.

In higher rate environments, prepayments on mortgage-related assets are projected to be lower and, in lower rate environments, prepayments are projected to be higher.

This compares to a projected one-year gap of $(1.71) billion, or (17.9)% of total assets, if interest rates were to have increased 200 basis points as of September 30, 2024, and a projected one-year gap of $(1.19) billion, or (12.5)% of total assets, if interest rates were to have decreased 200 basis points as of the same date.

Change in Net Interest Income.

2 unchanged sentences

Projected cash flows for each scenario are based upon varying prepayment assumptions 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.

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 do 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.

1 unchanged sentence

These do not reflect the earnings expectations of management.

Estimates for the -300 basis point scenario were not prepared at September 30, 2023.

Change Net Interest Income At

(in Basis Points) June 30, 2024 September 30, 2023

(in Basis Points) December 31, 2024 September 30, 2024

in Interest Rates (1)

1 unchanged sentence

(Dollars in thousands)

-300 bp $ 159,739 $ (7,258) (4.4) % N/A N/A N/A

-300 bp $ 192,673 $ 8,239 4.5 % $ 188,322 $ 11,696 6.6 %

4 unchanged sentences

+200 bp 173,515 (10,919) (5.9) 165,422 (11,204) (6.3)

+300 bp 167,343 (17,091) (9.3) 158,758 (17,868) (10.1)

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

In general, increases/(decreases) in the Bank's net interest income projections under the various interest rate scenarios presented are due to the degree to which rates earned on funds received through loan and securities repayments, in each scenario, are greater/(less) than the projected change in deposit and borrowing rates in the next 12 months.

The net interest income projection was higher in the base case scenario at June 30, 2024 compared to September 30, 2023, due primarily to transactions associated with the securities strategy, which resulted in a decrease in interest expense on borrowings due to the Bank repaying the BTFP borrowing and an increase in interest income on cash and securities.

These interest income benefits were partially offset by higher interest expense projections on the Bank's deposit portfolio, primarily on its retail certificate of deposit portfolio, due to increases in both the balance and rate between the two periods.

In general, increases/(decreases) in the Bank's net interest income projections under the various interest rate scenarios presented are due to the degree in which cash flows are realized and the rates projected to be earned on funds received through loan and securities repayments, in each scenario, are greater/(less) than the rates projected to be paid on deposits and borrowings in the next 12 months.

The net interest income projection was higher in the base case scenario at December 31, 2024 compared to September 30, 2024, due primarily to a steepening of the yield curve between the two periods.

The benchmark U.S.

Treasury yield curve dis-inverted during the current quarter and was largely positively sloped as of December 31, 2024.

As a result, interest income projections associated with the Bank's interest-earning asset cashflows, primarily the loan portfolio, increased by more than increases in interest expense projections on its interest-bearing liability cashflows.

Change in MVPE.

5 unchanged sentences

The table below presents the effects of the changes in interest rates on our assets and liabilities as they mature, repay, or reprice, as shown by the change in the MVPE for alternative interest rates.

Estimates for the -300 basis point scenario were not prepared at September 30, 2023.

Change Market Value of Portfolio Equity At

(in Basis Points) June 30, 2024 September 30, 2023

(in Basis Points) December 31, 2024 September 30, 2024

in Interest Rates (1)

1 unchanged sentence

(Dollars in thousands)

-300 bp $ 1,193,185 $ 218,302 22.4 % N/A N/A N/A

-300 bp $ 1,378,031 $ 377,739 37.8 % $ 1,460,440 $ 359,922 32.7 %

4 unchanged sentences

+200 bp 663,504 (336,788) (33.7) 797,497 (303,021) (27.5)

+300 bp 507,232 (493,060) (49.3) 634,145 (466,373) (42.4)

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

The Bank's MVPE decreased from $1.02 billion at September 30, 2023 to $974.9 million at June 30, 2024.

The decrease was due primarily to model enhancements associated with the calculation of the Bank's estimated MVPE, partially offset by decreases in market interest rates between the two periods, most notably across the intermediate and long-term tenors of the yield curve, as well as to balance sheet composition changes resulting from the securities strategy.

The decrease in market interest rates resulted in an increase in the value of the Bank's interest-earning assets more than it increased the value of its interest-bearing liabilities.

The Bank's MVPE decreased from $1.10 billion at September 30, 2024 to $1.00 billion at December 31, 2024.

The decrease was due primarily to an increase in market interest rates between the two periods across the intermediate and long-term tenors of the curve as the yield curve steepened.

These increases in market interest rates resulted in a decrease in the estimated values of the Bank's interest-earning assets by more than it decreased the estimated values of its interest-bearing liabilities.

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.

2 unchanged sentences

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 June 30, 2024.

Conversely, as interest rates decrease, borrowers who obtained or issued credit in a higher rate environment have more economic incentive to prepay or to refinance their mortgages, and agency debt issuers have more economic incentive and opportunity to exercise their call options in order to re-issue debt at lower interest rates, resulting in higher projected cash flows on these assets.

The then shorter expected average lives of these assets decrease the sensitivity of their market value to changes in interest rates.

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

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

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

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

25 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.

What changed 10-Q

Item 3. Quantitative and Qualitative Disclosures About Market Risk