Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Quantitative Aspects of Market Risk. The Corporation does not maintain a trading account for any class of financial instrument nor does it purchase high-risk derivative financial instruments. Furthermore, the Corporation is not subject to foreign currency exchange rate risk or commodity price risk. The primary market risk that the Corporation faces is interest rate risk. 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. One of the Corporation's principal financial objectives is to achieve long-term profitability while reducing its exposure to fluctuating interest rates. The Corporation, through the Corporation's Asset-Liability Committee, has sought to reduce the exposure of its earnings to changes in interest rates by attempting to manage the repricing mismatch between interest-earning assets and interest-bearing liabilities. The principal element in achieving this objective is to increase the interest rate sensitivity of the Corporation's interest-earning assets by retaining new loan originations with interest rates subject to periodic adjustment to market conditions. 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. 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. For additional information, see Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-K.
Through the use of an internal interest rate risk model, the Corporation is able to analyze its interest rate risk exposure by measuring the change in net portfolio value (“NPV”) over a variety of interest rate scenarios. NPV is defined as the net present value of expected future cash flows from assets, liabilities and off-balance sheet obligations. 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, 2025, the targeted federal funds rate range was 4.25% to 4.50%.
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The following table sets forth as of June 30, 2025 the estimated changes in NPV based on the indicated interest rate environment (dollars in thousands):
Net
Portfolio
NPV as Percentage
Basis Points ("bp")
Portfolio
NPV
Value of
of Portfolio Value
Sensitivity
Change in Rates
Value
Change (1)
Assets
Assets (2)
Measure (3)
+300 bp
$
136,140
$
(18,905)
$
1,247,388
10.91
%
(124)
bp
+200 bp
$
149,344
$
(5,701)
$
1,263,834
11.82
%
(33)
bp
+100 bp
$
156,040
$
995
$
1,273,820
12.25
%
10
bp
-
$
155,045
$
—
$
1,276,171
12.15
%
—
-100 bp
$
153,594
$
(1,451)
$
1,278,122
12.02
%
(13)
bp
-200 bp
$
141,899
$
(13,146)
$
1,269,888
11.17
%
(98)
bp
-300 bp
$
141,857
$
(13,188)
$
1,273,364
11.14
%
(101)
bp
(1) Represents the (decrease) increase of the NPV at the indicated interest rate change in comparison to the NPV at June 30, 2025 (“base case”).
(2) Calculated as the NPV divided by the total portfolio value of 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 bp rate shock at June 30, 2025 and +200 bp rate shock at June 30, 2024 which has been determined to be the worst scenario to the interest rate risk of the Corporation in a -200, -100, +100 and +200 bp rate shock.
At June 30, 2025
At June 30, 2024
(-200 bp rate shock)
(+200 bp rate shock)
Pre-Shock NPV Ratio: NPV as a % of PV Assets
12.15
%
10.12
%
Post-Shock NPV Ratio: NPV as a % of PV Assets
11.17
%
9.17
%
Sensitivity Measure: Change in NPV Ratio
-98
bp
-95
bp
The pre-shock NPV ratio increased 203 basis points to 12.15% at June 30, 2025 from 10.12% at June 30, 2024, and the post-shock NPV ratio increased 200 basis points to 11.17% (-200 basis point rate shock) at June 30, 2025 from 9.17% (+200 basis point rate shock) at June 30, 2024. The increase of the NPV ratios was primarily attributable changes in asset and liability balances, interest rates, and portfolio composition. The sensitivity measure increased to 98 basis points at June 30, 2025 from 95 basis points at June 30, 2024.
As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing tables. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets and liabilities may lag behind changes in market interest rates. Additionally, certain assets, such as ARM loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. 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. 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. 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" 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
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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, 2025:
Term to Contractual Repricing, Estimated Repricing, or Contractual
Maturity (1)
As of June 30, 2025
Greater than
Greater than
Greater than
12 months or
1 year to 3
3 years to
5 years or
(Dollars In Thousands)
less
years
5 years
non-sensitive
Total
Repricing Assets:
Cash and cash equivalents
$
45,856
$
—
$
—
$
7,234
$
53,090
Investment securities
6,154
—
—
104,852
111,006
Loans held for investment
292,650
229,190
214,724
309,181
1,045,745
FHLB - San Francisco and other equity investments
10,298
—
—
—
10,298
Other assets
4,215
—
—
21,259
25,474
Total assets
359,173
229,190
214,724
442,526
1,245,613
Repricing Liabilities and Equity:
Checking deposits - noninterest-bearing
—
—
—
83,566
83,566
Checking deposits - interest bearing
36,090
72,179
72,179
60,149
240,597
Savings deposits
46,122
92,244
92,244
—
230,610
Money market deposits
10,852
10,851
—
—
21,703
Time deposits
278,268
28,283
5,397
348
312,296
Borrowings
163,000
40,073
10,000
—
213,073
Other liabilities
1,534
—
—
13,689
15,223
Stockholders' equity
—
—
—
128,545
128,545
Total liabilities and stockholders' equity
535,866
243,630
179,820
286,297
1,245,613
Repricing gap positive (negative)
$
(176,693)
$
(14,440)
$
34,904
$
156,229
$
—
Cumulative repricing gap:
Dollar amount
$
(176,693)
$
(191,133)
$
(156,229)
$
—
$
—
Percent of total assets
(14)
%
(15)
%
(13)
%
—
%
—
%
(1) Cash and cash equivalents are presented as estimated repricing; investment securities and loans held for investment are presented as contractual maturities or contractual repricing (without consideration for prepayments); 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; 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. For the purpose of calculating gap, a portion of these interest-bearing deposit balances are assumed to be subject to estimated repricing as follows: interest-bearing checking deposits at 15% per year, savings deposits at 20% per year and money market deposits at 50% in the first and second years.
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The gap results presented above are based on specific assumptions and represent a static view of interest rate risk at a point in time. Actual experience may vary if assumptions differ or if customers’ behaviors and market conditions change.
The impact of changes in prevailing interest rates on the Corporation’s net interest margin will depend on how quickly interest-earning assets and interest-bearing liabilities adjust to rate changes. Rates on certain assets or liabilities may lag behind market rates, and factors such as loan prepayments or early deposit withdrawals can further affect cash flows. Management believes the results of the interest rate sensitivity analysis reflect the Corporation’s current asset-liability positioning, but the projected changes in net interest income assume immediate and sustained shifts in market rates and do not include any actions management might take in response. Actual results could differ materially due to variations in customer behavior, market conditions, and competitive pressures.
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:
● The Corporation’s current balance sheet and repricing characteristics;
● Forecasted balance sheet growth consistent with the business plan;
● Current interest rates and yield curves and management estimates of projected interest rates;
● Embedded options, interest rate floors, periodic caps and lifetime caps;
● Repricing characteristics for market rate sensitive instruments;
● Loan, investment security, deposit and borrowing cash flows;
● Loan prepayment estimates for each type of loan; and
● 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, 2025 and 2024:
At June 30, 2025
At June 30, 2024
Basis Point (bp)
Change in
Basis Point (bp)
Change in
Change in Rates
Net Interest Income
Change in Rates
Net Interest Income
+300 bp
-1.35%
+300 bp
-8.12%
+200 bp
+2.01%
+200 bp
-3.45%
+100 bp
+2.23%
+100 bp
-0.51%
-100 bp
-1.80%
-100 bp
-0.67%
-200 bp
-3.24%
-200 bp
-1.15%
-300 bp
-6.38%
-300 bp
-1.86%
At June 30, 2025, the Corporation was asset sensitive as its interest-earning assets are expected to reprice more quickly than its interest-bearing liabilities during the subsequent 12-month period; while 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.
Therefore at June 30, 2025, in a rising interest rate environment, the model projects an increase in net interest income over the subsequent 12-month period, except at the +300 basis point scenario. 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. 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. 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.
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Item 8. Financial Statements and Supplementary Data
Please refer to the Consolidated Financial Statements and Notes to Consolidated Financial Statements in this Form 10-K and incorporated into this Item 8 by reference.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.