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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2024-08-30 compared with 2023-09-05 · 25 added, 26 removed, 102 unchanged (33% of the section changed)

18 unchanged sentences

NPV is defined as the net present value of expected future cash flows from assets, liabilities and off-balance sheet contracts.

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.

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.

As of June 30, 2024, the targeted federal funds rate range was 5.25% to 5.50%.

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NPV as Percentage

Basis Points ("bp")

of Portfolio Value

Change in Rates

(1) Represents the decrease of the NPV at the indicated interest rate change in comparison to the NPV at June 30, 2023 (“base case”).

(1) Represents the (decrease) increase of the NPV at the indicated interest rate change in comparison to the NPV at June 30, 2024 (“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).

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:

The following table is derived from the internal interest rate risk model and represents the change in the NPV at a +200 bp rate shock at June 30, 2024 and -200 bp rate shock at June 30, 2023 which has been determined to be the most detrimental to the interest rate risk of the Corporation in a -200, -100, +100 and +200 bp rate shock scenario:

At June 30, 2024

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Change in NPV Ratio

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.

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.

The pre-shock NPV ratio increased 83 basis points to 10.12% at June 30, 2024 from 9.29% at June 30, 2023, and the post-shock NPV ratio increased 80 basis points to 9.17% (+200 basis point rate shock) at June 30, 2024 from 8.37% (-200 basis point rate shock) at June 30, 2023.

The increase of the NPV ratios was primarily attributable to the net income in fiscal 2024 and amortization of stock-based compensation, partly offset by a $7.0 million cash dividend distribution from the Bank to the Corporation in September 2023, an $824,000 CECL adoption charged to equity, and increases in market interest rates.

The sensitivity measure increased to 95 basis points at June 30, 2024 from 92 basis points at June 30, 2023.

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Furthermore, the NPV presented in the foregoing tables is not intended to present the fair market value of the Corporation, nor does it represent amounts that would be available for distribution to shareholders in the event of the liquidation of the Corporation.

The Corporation measures and evaluates the potential effects of interest rate movements through an interest rate sensitivity "gap"

The Corporation measures and evaluates the potential effects of interest rate movements through an interest rate sensitivity "gap" analysis.

Interest rate sensitivity reflects the potential effect on net interest income when there is movement in interest rates.

For loans, securities and liabilities with contractual maturities, the table presents contractual repricing or scheduled maturity.

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.

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.

The following table represents the interest rate gap analysis of the Corporation's assets and liabilities as of June 30, 2024:

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Loans held for investment

FHLB - San Francisco stock

FHLB - San Francisco and other equity investments

Repricing Liabilities and Equity:

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investment securities and loans held for investment are presented as contractual maturities or contractual repricing (without consideration for prepayments);

FHLB - San Francisco stock is presented as contractual repricing;

FHLB - San Francisco and other equity investments are presented as contractual repricing;

transaction accounts (checking, savings and money market deposits) are presented as estimated repricing;

while time deposits (without consideration for early withdrawals) and borrowings are presented as contractual maturities.

category, indicating more liabilities are sensitive to repricing than assets in the short and intermediate terms.

and time deposits (without consideration for early withdrawals) and borrowings are presented as contractual maturities.

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" category, indicating more liabilities are sensitive to repricing than assets in the short and intermediate terms.

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.

Interest-bearing checking deposits are considered more sensitive, followed by increased sensitivity

for savings and money market deposits.

For the purpose of calculating gap, a portion of these interest-bearing deposit balances are assumed to be subject to estimated repricing as follows:

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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.

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.

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.

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.

It is not uncommon for rates on certain assets or liabilities to lag behind changes in the market rates of interest.

Additionally, prepayments of loans and early withdrawals of certificates of deposit could cause interest sensitivities to vary.

As a result, the relationship between interest-earning assets and interest-bearing liabilities, as shown in the previous table, is only a general indicator of interest rate sensitivity and the effect of changing interest rates on net interest income is likely to be different from that predicted solely on the basis of the interest rate sensitivity analysis set forth in the previous table.

Additionally, prepayments of loans and early withdrawals of time deposits could cause interest sensitivities to vary.

Results are likely to be different from that predicted solely on the basis of the interest rate sensitivity analysis set forth in the previous table.

The Corporation also models the sensitivity of net interest income for the 12-month period subsequent to any given month-end assuming a dynamic balance sheet accounting for, among other items:

4 unchanged sentences

● Repricing characteristics for market rate sensitive instruments;

● Loan, investment, deposit and borrowing cash flows;

● Loan, investment security, deposit and borrowing cash flows;

● Loan prepayment estimates for each type of loan;

● Immediate, permanent and parallel movements in interest rates of plus 300, 200 and 100, minus 100, minus 200 and minus 300 basis points.

● Immediate, permanent and parallel movements in interest rates of +300, +200 +100, and -100, -200 and -300 bp.

The following table describes the results of the analysis at June 30, 2024 and 2023:

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Net Interest Income

At June 30, 2024, the Corporation was close to neutral with regard to the sensitivity of net interest income as projected net interest income declines slightly under rising or declining interest rates during the subsequent 12-month period.

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.

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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.

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.

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.

However, past experience has shown that immediate, permanent and parallel movements in interest rates will not necessarily occur.

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.

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.

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.

Financial Statements and Supplementary Data

2 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-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk