Item 7A. Quantitative and Qualitative Disclosures About Market Risk
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on net interest income and capital, while maximizing the yield/cost spread on our asset/liability structure. Interest rates are partly a function of decisions by the Federal Open Market Committee (FOMC) on the target range for the federal funds rate, and these decisions are sometimes difficult to anticipate. The FOMC lowered the federal funds target rate three times in 2025 for a total of 75 basis points and three times in 2024 for a total of 100 basis points after they increased the target rate four times in 2023 for a total of 100 basis points. In order to manage the risks associated with changes or possible changes in interest rates, we rely primarily on our asset/liability structure.
The matching of maturities or repricing periods of interest rate-sensitive assets and liabilities to promote a favorable interest rate spread and mitigate exposure to fluctuations in interest rates is our primary tool for achieving our asset/liability management strategies. We regularly review our interest rate sensitivity and adjust the sensitivity within acceptable tolerance ranges. At December 31, 2025, interest-earning assets exceeded interest-bearing liabilities that mature or reprice within one year (interest-sensitive gap) by $1.8 billion. Our interest-sensitive assets as a percentage of interest-sensitive liabilities within the one-year window was 120.45% at December 31, 2025 compared with 105.28% at December 31, 2024. In addition, the one-year interest-sensitive gap as a percentage of total assets was 8.37% at December 31, 2025 compared to 2.26% at December 31, 2024.
Market risk is the risk of loss from adverse changes in market prices and rates. Our market risk arises primarily from interest rate risk inherent in our lending, investing, and funding activities. To that end, we actively monitor and manage our interest rate risk exposure. One measure, which we are required to perform by federal regulation, measures the impact of an immediate change in interest rates in 100 basis point increments on the economic value of equity ratio. The economic value of the equity ratio is defined as the net economic value of the estimated cash flows from assets and liabilities as a percentage of economic value of cash flows from total assets.
The following table shows the estimated impact of immediate changes in interest rates on our net interest margin and economic value of equity at the specified levels at December 31, 2025 and December 31, 2024.
Change in Interest Rate (Basis Points) December 31, 2025 December 31, 2024
% Change in Net Interest Margin (1)
Economic Value
of Equity (2)
% Change in Net Interest
Margin (1)
Economic Value of
Equity (2)
300 19.7% 23.88% 14.9% 18.60%
200 13.4% 24.02% 9.8% 19.15%
100 7.0% 24.10% 4.8% 19.82%
50 4.1% 24.08% 2.3% 20.05%
25 2.7% 24.04% 1.1% 20.17%
— —% 23.60% —% 20.31%
(25) (0.7)% 23.56% (0.9)% 20.32%
(50) (1.3)% 23.46% (1.7)% 20.33%
(100) (2.5)% 23.20% (3.2)% 20.30%
(200) (5.1)% 22.50% (6.1)% 19.70%
(300) (7.5)% 21.20% (9.0)% 18.30%
(1) The percentage difference between net interest income in a stable interest rate environment and net interest margin as projected under the various rate change environments.
(2) The economic value of equity ratio in a stable interest rate environment and the economic value of equity projected under the various rate change environments.
We also engage in other business activities that are sensitive to changes in interest rates. For example, mortgage banking revenues and expenses can fluctuate with changing interest rates. These fluctuations are difficult to model and estimate.
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