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The primary market risk that the Corporation faces is interest rate risk.
−Removed: For information regarding the sensitivity to interest rate risk of the Corporation's interest-earning assets and interest-bearing liabilities, see “Interest Rate Risk” below and Item 1, “Business - Lending Activities - Maturity of Loans Held for Investment,” “- Investment Securities Activities,” and “- Deposit Activities and Other Sources of Funds - Time Deposits by Maturities” in this Form 10-K.
+Added: For information regarding the sensitivity to interest rate risk of the Corporation's interest-earning assets and interest-bearing liabilities, see “Interest Rate Risk” below and Item 1, “Business - Lending Activities - Maturity of Loans Held for Investment,” “- Investment Securities Activities,” and “- Deposit Activities and Other Sources of Funds - Time Deposits by Remaining Maturity” in this Form 10-K.
Interest Rate Risk.
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government agency MBS and U.S.
−Removed: government sponsored enterprise MBS and CMOs with contractual maturities of up to 30 years that reprice frequently or have a relatively short-average life.
−Removed: The Corporation relies on retail deposits as its primary source of funds while utilizing FHLB - San Francisco
−Removed: advances as a secondary source of funding.
−Removed: Management believes retail deposits, unlike brokered deposits, reduce the effects of interest rate fluctuations because they generally represent a more stable source of funds.
+Added: government sponsored enterprise MBS and CMO with contractual maturities of up to 30 years that reprice frequently or have a relatively short-average life.
+Added: The Corporation relies on retail deposits as its primary source of funds while utilizing brokered certificates of deposit and FHLB - San Francisco advances as secondary sources of funding.
+Added: Management believes retail deposits, unlike brokered certificates of deposit, reduce the effects of interest rate fluctuations because they generally represent a more stable source of funds.
As part of its interest rate risk management strategy, the Corporation promotes transaction accounts and time deposits with terms up to seven years.
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The calculation is intended to illustrate the change in NPV that would occur in the event of an immediate change in interest rates of -300, -200, -100, +100, +200 and +300 basis points (“bp”) with no effect given to steps that management might take to counter the effect of the interest rate movement.
−Removed: As of June 30, 2022, the targeted federal funds rate range was 1.50% to 1.75%, making an immediate change of minus 300 basis points or more unlikely.
+Added: As of June 30, 2023, the targeted federal funds rate range was 5.00% to 5.25%.
The following table sets forth as of June 30, 2023 the estimated changes in NPV based on the indicated interest rate environment (dollars in thousands):
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Change in Rates
−Removed: (1) Represents the increase (decrease) of the NPV at the indicated interest rate change in comparison to the NPV at June 30, 2022 (“base case”).
+Added: (1) Represents the decrease of the NPV at the indicated interest rate change in comparison to the NPV at June 30, 2023 (“base case”).
(2) Calculated as the NPV divided by the portfolio value of total assets.
(3) Calculated as the change in the NPV ratio (NPV as a Percentage of Portfolio Value Assets) from the base case amount assuming the indicated change in interest rates (expressed in basis points).
−Removed: The following table is derived from the internal interest rate risk model and represents the change in the NPV at a -100 basis point rate shock at June 30, 2022 and 2021:
+Added: The following table is derived from the internal interest rate risk model and represents the change in the NPV at a -200 basis point rate shock at June 30, 2023 and -100 basis point rate shock at June 30, 2022:
At June 30, 2023
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Change in NPV Ratio
−Removed: The pre-shock NPV ratio decreased 367 basis points to 8.87 percent at June 30, 2022 from 12.54 percent at June 30, 2021 and the post-shock NPV ratio decreased 271 basis points to 8.54 percent at June 30, 2022 from 11.25 percent at June 30, 2021.
−Removed: The decrease of the NPV ratios was primarily attributable to increases in market interest rates and a $7.5 million cash dividend distribution from the Bank to the Corporation in September 2021, partly offset by the net income in fiscal 2022 and amortization of stock-based compensation expense.
+Added: The pre-shock NPV ratio increased 42 basis points to 9.29% (-200 basis point rate shock) at June 30, 2023 from 8.87% (-100 basis point rate shock) at June 30, 2022, while the post-shock NPV ratio decreased 17 basis points to 8.37% (-200 basis point rate shock) at June 30, 2023 from 8.54% (-100 basis point rate shock) at June 30, 2022.
+Added: The decrease of the NPV ratios was primarily attributable to increases in market interest rates and a $9.5 million cash dividend distribution from the Bank to the Corporation in September 2022, partly offset by the net income in fiscal 2023 and amortization of stock-based compensation.
+Added: The sensitivity measure increased to 92 basis points at June 30, 2023 from 33 basis points at June 30, 2022.
As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing tables.
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Further, in the event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from time deposits could likely deviate significantly from those assumed when calculating the results described in the tables above.
−Removed: It is also possible that,
−Removed: as a result of an interest rate increase, the higher mortgage payments required from ARM borrowers could result in an increase in delinquencies and defaults.
+Added: It is also possible that, as a result of an interest rate increase, the higher mortgage payments required from ARM borrowers could result in an increase in delinquencies and defaults.
Accordingly, the data presented in the tables in this section should not be relied upon as indicative of actual results in the event of changes in interest rates.
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For loans, securities and liabilities with contractual maturities, the table presents contractual repricing or scheduled maturity.
−Removed: For transaction accounts (checking, money market and savings deposits) that have no contractual maturity, the table presents estimated principal cash flows and, as applicable, the Corporation's historical experience, management's judgment and statistical analysis concerning their most likely withdrawal behaviors.
+Added: For transaction accounts (checking, money market and savings deposits) that have no contractual
+Added: maturity, the table presents estimated principal cash flows and, as applicable, the Corporation's historical experience, management's judgment and statistical analysis concerning their most likely withdrawal behaviors.
The following table represents the interest rate gap analysis of the Corporation's assets and liabilities as of June 30, 2023:
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Repricing Liabilities and Equity:
−Removed: Checking deposits - non interest-bearing
+Added: Checking deposits - noninterest-bearing
Checking deposits - interest bearing
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while time deposits (without consideration for early withdrawals) and borrowings are presented as contractual maturities.
−Removed: The static gap analysis under 12 months or less duration shows a positive position in the "Cumulative repricing gap - dollar amount"
−Removed: category, indicating more assets are sensitive to repricing than liabilities in the short term.
−Removed: Management views non interest-bearing deposits to be the least sensitive to changes in market interest rates and these accounts are therefore characterized as long-term funding.
+Added: The static gap analysis under “12 months or less” duration, “Greater than 1 year to 3 years” duration and “Greater than 3 years to 5 years” duration show negative positions in the "Cumulative repricing gap - dollar amount"
+Added: category, indicating more liabilities are sensitive to repricing than assets in the short and intermediate terms.
+Added: Management views noninterest-bearing deposits to be the least sensitive to changes in market interest rates and these accounts are therefore characterized as long-term funding.
Interest-bearing checking deposits are considered more sensitive, followed by increased sensitivity for savings and money market deposits.
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The gap results presented above could vary substantially if different assumptions are used or if actual experience differs from the assumptions used in the preparation of the gap analysis.
−Removed: Furthermore, the gap analysis provides a static view of interest rate risk exposure at a specific point in time without taking into account redirection of cash flows activity and deposit fluctuations.
+Added: Furthermore, the gap analysis provides a static view of
+Added: interest rate risk exposure at a specific point in time without taking into account redirection of cash flows activity and deposit fluctuations.
The extent to which the net interest margin will be impacted by changes in prevailing interest rates will depend on a number of factors, including how quickly interest-earning assets and interest-bearing liabilities react to interest rate changes.
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● Loan prepayment estimates for each type of loan;
−Removed: ● Immediate, permanent and parallel movements in interest rates of plus 300, 200 and 100, minus 100 and minus 200 basis points.
+Added: ● Immediate, permanent and parallel movements in interest rates of plus 300, 200 and 100, minus 100, minus 200 and minus 300 basis points.
The following table describes the results of the analysis at June 30, 2023 and 2022:
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Net Interest Income
−Removed: At June 30, 2022 and 2021, the Corporation was asset sensitive as its interest-earning assets at those dates are expected to reprice more quickly than its interest-bearing liabilities during the subsequent 12-month period.
+Added: At June 30, 2023, the Corporation was liability sensitive as its interest-bearing liabilities are expected to reprice more quickly than its interest-earning assets during the subsequent 12-month period.
+Added: Therefore, in a rising interest rate environment, the model projects a decrease in net interest income over the subsequent 12-month period.
+Added: In a falling interest rate environment, the results project an increase in net interest income over the subsequent 12-month period at the -100 basis point scenario and a decrease in net interest income over the subsequent 12-month period for the -200 and -300 basis point scenarios.
+Added: At June 30, 2022, the Corporation was asset sensitive as its interest-earning assets were expected to reprice more quickly than its interest-bearing liabilities during the subsequent 12-month period.
Therefore, in a rising interest rate environment, the model projects an increase in net interest income over the subsequent 12-month period.
−Removed: In a falling interest rate environment, the results project a decrease in net interest income over the subsequent 12-month period, except for the -100 and -200 basis point scenarios at June 30, 2021.
+Added: In a falling interest rate environment, the results project a decrease in net interest income over the subsequent 12-month period.
Management believes that the assumptions used to complete the analysis described in the table above are reasonable.
−Removed: However, past experience has shown that immediate, permanent and parallel movements in interest rates will not
−Removed: necessarily occur.
+Added: However, past experience has shown that immediate, permanent and parallel movements in interest rates will not necessarily occur.
Additionally, while the analysis provides a tool to evaluate the projected net interest income to changes in interest rates, actual results may be substantially different if actual experience differs from the assumptions used to complete the analysis, particularly with respect to the 12-month business plan when asset growth is forecast.
−Removed: Therefore, the model results that the Corporation discloses should be thought of as a risk management tool to compare the trends of the Corporation’s current disclosure to previous disclosures, over time, within the context of the actual performance of the treasury yield curve.
+Added: the model results that the Corporation discloses should be thought of as a risk management tool to compare the trends of the Corporation’s current disclosure to previous disclosures, over time, within the context of the actual performance of the treasury yield curve.
Financial Statements and Supplementary Data
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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.