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INTEREST RATE RISK
−Removed: The primary source of income for the Company is net interest income, which is the difference between the interest income generated by interest-earning assets and the interest expense incurred for interest-bearing liabilities.
+Added: The primary source of income for the Bank is net interest income, which is the difference between the interest income generated by interest-earning assets and the interest expense incurred for interest-bearing liabilities.
The level of net interest income is a function of the average balance of interest-earning assets and interest-bearing liabilities and the difference between the yield on earning assets and the cost of interest-bearing liabilities.
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All else being equal, if the interest rates on the Company's interest-bearing liabilities increase at a faster pace than the interest rates on its interest-earning assets, the result would be a reduction in net interest income and with it, a reduction in net earnings.
+Added: Conversely, if the interest rates on the Company's interest-bearing liabilities decrease at a slower pace than the interest rates on its interest-earning assets, the result would be a reduction in net interest income and with it, a reduction in net earnings.
+Added: Interest rates, both in terms of their overall levels and volatility, can greatly influence our profitability.
+Added: Our goal in managing interest rate risk is to assess and control how changes in interest rates affect our net interest income, helping us achieve our financial objectives.
+Added: We mitigate exposure to interest rate fluctuations through actions determined by the Asset/Liability Management Committee ("ALCO").
+Added: This committee meets at least quarterly to establish asset/liability management policies, develop and implement strategies to enhance balance sheet positioning and earnings, and assess interest rate sensitivity.
+Added: The Company's Board oversees the asset/liability management process, reviews interest rate risk analyses prepared by ALCO, and annually approves the Financial Management policy.
Interest rate risk arises in part due to the Bank's significant holdings of fixed-rate single-family home loans, which are longer-term than customer accounts that constitute its primary liabilities.
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Shortening the maturity or repricing of the investment portfolio is one action that management can take.
−Removed: The composition of the investment portfolio was 45.9% variable rate and 54.1% fixed rate as of September 30, 2023 to provide some protection against rising rates.
+Added: The composition of the investment portfolio was 53.8% variable rate and 46.2% fixed rate as of September 30, 2024 to provide some protection against changing rates.
In addition, the Bank is producing more commercial loans that have shorter terms and/or variable rates.
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We estimate the sensitivity of our net interest income to changes in market interest rates using an interest rate simulation model that includes assumptions related to the level of balance sheet growth, deposit repricing characteristics and the rate of prepayments for multiple interest rate change scenarios.
−Removed: Interest rate sensitivity depends on certain repricing characteristics in our interest-earning assets and interest-bearing liabilities, including the maturity structure of assets and liabilities and their repricing characteristics during the periods of changes in market interest rates.
+Added: Interest rate sensitivity depends on certain repricing characteristics in our interest-earning assets and interest-bearing liabilities, including the maturity term structure, contractual rate changes and prepayment/attrition characteristics of assets and liabilities, all of which vary with changes in market interest rates.
The analysis presented below assumes a constant balance sheet.
−Removed: Actual results would differ from the assumptions used in this model, as management monitors and adjusts loan and deposit pricing and the size and composition of the balance sheet to respond to changing interest rates.
−Removed: In the event of an immediate and parallel increase of 200 basis points in both short- and long-term interest rates, the model estimates that net interest income would decrease by 2.0% in the next year.
−Removed: This compares to an estimated increase of 1.9% as of the September 30, 2022 analysis.
−Removed: It is noted that a flattening yield curve where the spread between short-term rates and long-term rates decreases would likely result in lower net interest income and vice versa for a steepening yield curve.
−Removed: Management estimates that a gradual increase of 300 basis points in short-term rates and 100 basis points in long-term rates over two years would result in a 0.2% increase in net interest income in the first year and a decrease of 1.0% in the second year, assuming a constant balance sheet and no management intervention.
−Removed: Alternatively, in the event of an immediate and parallel decrease of 100 basis points in both short and long-term interest rates, the model estimates that net interest income would increase by 4.94%.
+Added: Actual results would differ from the assumptions used in this model, as management monitors and adjusts loan and deposit pricing and the composition and overall size of the balance sheet to respond to changing interest rates.
+Added: In the event of an immediate and parallel decrease of 200 basis points across all interest rates, the model estimates that net interest income would decrease 1.0% in the next year.
+Added: This compares to an estimated increase of 7.8% for the same measure as of September 30, 2023.
+Added: It is noted that a steepening yield curve where the spread between short-term rates and long-term rates increases would likely result in higher net interest income.
+Added: In the event of an immediate and parallel increase of 200 basis points across all interest rates, the model estimates that net interest income would increase by 2.8% in the next year.
+Added: This compares to an estimated decrease of 2.0% for the same measure as of September 30, 2023.
Net Portfolio Value ("NPV") Sensitivity.
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The sensitivity of the NPV to changes in interest rates provides a longer-term view of interest rate risk of the current balance sheet as it incorporates all future expected cash flows.
+Added: As of September 30, 2024, in the event of an immediate and parallel decrease of 200 basis points in interest rates, the NPV is estimated to increase by $273,000,000, or 9.2%, and the NPV-to-total assets ratio to increase to 11.6% from a base of 11.0%.
+Added: As of September 30, 2023, in the event of an immediate and parallel decrease of 200 basis points in interest rates, the NPV was estimated to increase by $583,000,000, or 22.1%, and the NPV-to-total assets ratio to increase to 14.3% from a base of 12.4%.
+Added: The change in the sensitivity of the NPV ratio to this assumed change in interest rates is primarily due to the steepening of the yield curve and changes in balance sheet mix year over year.
+Added: Prepayment speeds for single family mortgages are increasing though still low at September 30, 2024 with the Bank's conditional payment rate ("CPR") for this portfolio segment at 8.6%, up slightly from 7.0% the year before.
As of September 30, 2024, in the event of an immediate and parallel increase of 200 basis points in interest rates, the NPV is estimated to decrease by $741,000,000, or 24.9%, and the NPV-to-total assets ratio to decline to 8.7% from a base of 11.0%.
As of September 30, 2023, in the event of an immediate and parallel increase of 200 basis points in interest rates, the NPV was estimated to decrease by $723,000,000, or 27.4%, and the NPV-to-total assets ratio to decline to 9.5% from a base of 12.4%.
−Removed: The change in the sensitivity of the NPV ratio to this assumed change in interest rates is primarily due to the
−Removed: flattening of the yield curve and changes in balance sheet mix year over year.
−Removed: Prepayment speeds for single family mortgages are low at September 30, 2023 with the Bank's conditional payment rate ("CPR") for this portfolio segment at 7.0%, down from 8.1% the year before.
−Removed: As of September 30, 2023, in the event of an immediate and parallel decrease of 100 basis points in interest rates, the NPV is estimated to increase NPV by $327,000,000, or 12.38%, and increase the NPV to total assets ratio to 13.59% from a base of 12.4%.
+Added: Opposite to the down scenario above, this change in the sensitivity of the NPV ratio to the assumed change in interest rates is due to the flattening of the yield curve and changes in balance sheet mix year over year in this scenario.
Interest Rates.
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As of September 30, 2024, the weighted-average rate on interest-earning assets increased by 4 basis points to 5.11% compared to September 30, 2023.
−Removed: The higher rate on interest-earning assets is due primarily to the Federal Reserve Bank's rate increases which have led to higher rates on adjustable rate loans, investment securities and cash as well as asset mix shifting to loans receivable.
+Added: The higher rate on interest-earning assets is due primarily to the Federal Reserve Bank's rate increases from March 2022 until September 2024, which have led to higher rates on adjustable rate loans, investment securities and cash as well as asset mix shifting to loans receivable.
As of September 30, 2024, the weighted-average rate on interest-bearing liabilities increased by 74 basis points to 3.20% compared to September 30, 2023.
−Removed: The higher rate on interest-bearing liabilities primarily resulted from customer deposits repricing and higher rates on new borrowings.
+Added: The higher rate on interest-bearing liabilities primarily resulted from the addition of higher yielding deposits in the Merger which also had a higher concentration of the rate sensitive time deposits, customer deposits repricing and higher rates on new borrowings.
The period end interest rate spread for the last eight fiscal quarters is shown below:
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The net interest margin is measured using net interest income divided by average interest-earning assets for the period.
−Removed: The net interest margin increased to 3.40% for the year ended September 30, 2023, from 3.16% for the year ended September 30, 2022.
+Added: The net interest margin decreased to 2.69% for the year ended September 30, 2024, from 3.40% for the year ended September 30, 2023.
The yield on interest-earning assets increased 46 basis points to 5.59% and the cost of interest-bearing liabilities increased by 128 basis points to 3.46%.
The higher yield on interest-earning assets was primarily due to the impact of rising rates on adjustable rate assets and cash.
−Removed: The higher rate in interest-bearing liabilities was primarily due to replacing maturing borrowings at higher rates.
+Added: The higher rate in interest-bearing liabilities was primarily due to higher rates on interest-bearing customer accounts combined with the higher interest rates on borrowings and customer accounts obtained in the Merger.
For the year ended September 30, 2024, average interest-earning assets increased by 20.8% to $24,559,665,000, up from $20,327,301,000 for the year ended September 30, 2023.
−Removed: Balance sheet growth in 2023 was primarily due to the growth in loans receivable.
−Removed: During 2023, average loans receivable increased $2,011,903,000, or 13.3%, while the combined average balances of mortgage-backed securities, other investment securities and cash decreased by $536,288,000 or 14.7%.
−Removed: Management views organic loan growth as the highest and best use of capital, thus the focus on primarily growing loans receivable.
−Removed: During 2023, average interest-bearing customer deposit accounts increased $167,664,000 or 1.3% and the average balance of borrowings increased by $1,530,807,000, or 88.4%, from 2022.
+Added: Balance sheet growth in 2024 was primarily due to the Merger.
+Added: During 2024, average loans receivable increased $3,405,267,000, or 19.9%, while the combined average balances of mortgage-backed securities, other investment securities and cash increased by $822,850,000 or 26.5%.
+Added: During 2024, average interest-bearing customer deposit accounts increased $3,420,825,000 or 26.5% and the average balance of borrowings increased by $980,514,000, or 30.1%, from 2023, primarily due to the Merger.
The following table sets forth the information explaining the changes in the net interest income and net interest margin.
−Removed: Net Interest Income Summary
+Added: Net Interest Income and Margin Summary
Year Ended September 30,
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Mortgage-backed securities 1,597,566 59,782 3.74 1,362,415 43,184 3.17 1,141,501 26,332 2.31
−Removed: Cash and other investment securities (2) 1,742,806 91,058 5.22 2,500,008 33,555 1.34 3,412,263 23,051 0.68
+Added: Cash & Investments (2) 2,330,505 133,608 5.73 1,742,806 91,058 5.22 2,500,008 33,555 1.34
FHLB & FRB stock 131,313 12,471 9.50 127,066 8,645 6.80 87,861 4,879 5.55
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Interest-bearing customer accounts $ 16,327,208 532,434 3.26 % $ 12,906,383 237,233 1.84 % $ 12,738,719 43,041 0.34 %
−Removed: FHLB advances 3,261,917 115,488 3.54 1,731,110 28,729 1.66 2,234,027 44,188 1.98
−Removed: Other borrowings — — — 10 — 2.49 11 — 0.69
+Added: Borrowings 4,242,431 178,444 4.21 3,261,917 115,488 3.54 1,731,120 28,729 1.66
Total interest-bearing liabilities 20,569,639 710,878 3.46 % 16,168,300 352,721 2.18 % 14,469,839 71,770 0.50 %
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Potential Increase (Decrease) in Net Interest Income
−Removed: Basis Point Increase (Decrease) in Interest Rates September 30, 2023 September 30, 2022
+Added: Basis Point Increase (Decrease) in Interest Rates September 30, 2024
(In thousands, except percentages)
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In a rising interest rate environment, it is likely that the Company will grow its balance sheet to offset margin compression that may occur.
−Removed: Improvement in the net interest income sensitivity during the year is primarily the result of interest rate swap activity and extension of the maturity of certain borrowings.
+Added: Improvement in the net interest income sensitivity during the year is primarily the result of interest rate swap activity, as well as increased time deposits and an increased federal funds balances which help reduce sensitivity in rising shock scenarios.
Another method used to quantify interest rate risk is the NPV analysis.
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100 2,472,251 (505,028) 9.41
−Removed: 100 2,276,765 (362,365) 11.00
No change 2,977,279 — 10.99
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(200) 3,249,949 272,670 11.56
−Removed: September 30, 2022
−Removed: Interest Rates Estimated
−Removed: NPV Amount Estimated Increase/(Decrease) in NPV Amount NPV as
−Removed: (Basis Points) (In thousands) (In thousands)
(300) 3,232,362 255,083 11.32
−Removed: 200 2,327,875 (616,588) 12.57
−Removed: 100 2,647,946 (296,517) 13.86
−Removed: No change 2,944,463 — 14.93
−Removed: (100) 2,981,579 37,115 14.77
−Removed: (200) 3,163,345 218,882 15.08
As of September 30, 2024, the Company was in compliance with all of its interest rate risk policy limits.
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.