Bank Analysis School eBook

Internal Use Only

Does the Term Structure of the Balance Sheet Present Interest Rate Risk?

• Very long-term as nearly 60% of assets reprice/mature beyond 5 years (peer average is 21%) • Significant optionality with large amounts of residential home loans and callable bonds. • Deposit base appears stable and not sensitive to interest rate changes. • In the last rising rate period, savings and money market deposit costs rose only 11% of the increase in Fed Funds Rate.

Asset Structure:

Funding Structure:

Internal Use Only

Option Risk – Callable Bonds

Bank is stuck with a relatively low yield investment

Interest rates rise

Bond is not called

Bank invests in a callable bond

Funds must be redeployed in a lower-yield environment

Interest rates fall

Bond is called