Mechanics Bancorp

03/17/2026 | Press release | Distributed by Public on 03/17/2026 04:04

Annual Report for Fiscal Year Ending December 31, 2025 (Form 10-K)

ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Management
The primary objective of the following information is to provide forward-looking quantitative and qualitative information
about our potential exposure to market risks. Market risk is defined as the sensitivity of income, fair value measurements
and capital to changes in interest rates, foreign currency exchange rates, commodity prices and other relevant market rates
or prices. The primary market risks that we are exposed to are price and interest rate risks. Price risk is defined as the risk
to current or anticipated earnings or capital arising from changes in the value of either assets or liabilities that are entered
into as part of distributing or managing risk. Interest rate risk is defined as risk to current or anticipated earnings or capital
arising from movements in interest rates. This forward-looking information provides an indicator of how we view and
manage our ongoing market risk exposures.
Mechanics is engaged primarily in the business of investing funds obtained from deposits and borrowings in interest
earning loans and investments, and our primary component of market risk is sensitivity to changes in interest rates.
Consequently, our earnings depend to a significant extent on our net interest income, which is the difference between
interest income on loans and investments and our interest expense on deposits and borrowings. To the extent that our
interest-bearing liabilities do not reprice or mature at the same time as our interest-bearing assets, we are subject to interest
rate risk and corresponding fluctuations in net interest income.
For the Company, price and interest rate risks arise from the financial instruments and positions we hold. This includes
loans, MSRs, investment securities, deposits, borrowings, long-term debt and derivative financial instruments. Due to the
nature of our current operations, we are not subject to foreign currency exchange or commodity price risk. Our real estate
loan portfolio is subject to risks associated with the local economies of our various markets, in particular, the regional
economy of the western United States, including Hawaii.
The spread between the yield on interest-earning assets and the cost of interest-bearing liabilities and the relative dollar
amounts of these assets and liabilities are the principal items affecting net interest income. Changes in net interest rates
(interest rate risk) are influenced to a significant degree by the repricing characteristics of assets and liabilities (repricing
risk), the relationship between various rates (basis risk), customer options (optionality risk) and changes in the shape of the
yield curve (yield curve risk). We manage the available-for-sale investment securities portfolio while maintaining a balance
between risk and return. The Company's funding strategy is to grow core deposits while we efficiently supplement using
wholesale borrowings.
We estimate the sensitivity of our net interest income to changes in market interest rates using an interest rate simulation
model that includes assumptions related to the level of balance sheet growth, deposit repricing characteristics and the rate
of prepayments for multiple interest rate change scenarios. Interest rate sensitivity depends on certain repricing
characteristics in our interest-earnings assets and interest-bearing liabilities, including the maturity structure of assets and
liabilities and their repricing characteristics during the periods of changes in market interest rates. Effective interest rate
risk management seeks to ensure both assets and liabilities respond to changes in interest rates within an acceptable
timeframe, minimizing the impact of interest rate changes on net interest income and capital. Interest rate sensitivity is
measured as the difference between the volume of assets and liabilities, at a point in time, which are subject to repricing at
various time horizons, known as interest rate sensitivity gaps.
The following table presents sensitivity gaps for these different intervals:
At December 31, 2025
(dollars in thousands)
3 Mos.
or Less
More Than
3 Mos.
to 6 Mos.
More
Than
6 Mos.
to 12 Mos.
More Than
12 Mos.
to 3 Yrs.
More Than
3 Yrs.
to 5 Yrs.
More Than
5 to 15 Yrs.
More
Than
15 Yrs.
Total
Interest-earning assets:
Cash & cash equivalents
$1,029,983
$-
$-
$-
$-
$-
$-
$1,029,983
Investment securities (1)
925,733
153,829
282,686
894,978
957,194
1,923,059
242,056
5,379,535
Loans held for sale
5,967
-
-
-
-
-
-
5,967
Loan receivables(1) ,(2)
3,327,784
777,271
1,405,259
4,083,443
2,272,713
2,193,716
116,750
14,176,936
FHLB stock and other
investments
-
-
-
-
-
-
147,428
147,428
Total rate sensitive
assets
$5,289,467
$931,100
$1,687,945
$4,978,421
$3,229,907
$4,116,775
$506,234
$20,739,849
Interest-bearing liabilities:
Demand deposits (2), (3)
$478,262
$-
$-
$-
$-
$8,144,288
$-
$8,622,550
Savings (2)
1,316
-
-
-
-
1,366,159
-
1,367,475
Money market accounts (2)
5,558,329
-
-
-
-
692,035
-
6,250,364
Certificates of deposit
1,826,728
608,878
293,006
46,731
8,005
1,228
2,784,608
Long-term debt (4)
112,388
-
-
79,626
-
-
-
192,014
Total rate sensitive
liabilities
$7,977,023
$608,878
$293,006
$126,357
$8,005
$10,203,710
$32
$19,217,011
Interest sensitivity gap
(2,687,556)
322,222
1,394,939
4,852,064
3,221,902
(6,086,935)
506,202
Cumulative interest
sensitivity gap
$(2,687,556)
$(2,365,334)
$(970,395)
$3,881,669
$7,103,571
$1,016,636
$1,522,838
Cumulative ratio of interest-
earning assets to interest-
bearing liabilities
66%
72%
89%
143%
179%
105%
108%
Ratio of interest sensitivity
gap to total assets
(12)%
1%
6%
22%
14%
(27)%
2%
Ratio of cumulative gap to
total assets
(12)%
(11)%
(4)%
17%
32%
5%
7%
(1)Based on contractual maturities, repricing dates and forecasted principal payments assuming normal amortization and, where applicable,
prepayments.
(2)Interest-bearing deposits with a rate less than 25 basis points are included in the More than 5 to 15 Years category.
(3)Non-interest bearing demand accounts are included in the More than 5 to 15 Years category based on the projected weighted average life of those
deposits.
(4)Based on repricing dates, except for the Senior Notes, which reflects the redemption date of March 1, 2026.
The negative gap in the interest rate analysis indicates that net interest income would decline if rates increase. Because of
the inherent limitations in the interest rate gap analysis, Mechanics employs multiple interest rate risk measurement
approaches. Mechanics runs interest rate simulations to the existing repricing conditions to rising and falling interest rates
in increments and decrements of 100 basis points to determine the effect on net interest income changes for the next twelve
months. In addition, Mechanics also measures the effects that changes in interest rates on the economic value of equity by
discounting future cash flows. We believe that the simulation analysis presents a more accurate picture than the gap
analysis. Our simulation analysis recognizes that deposit products may not react to changes in interest rates as quickly or
with the same magnitude as earning assets contractually tied to a market rate index. The sensitivity to changes in market
rates varies across deposit products.
The estimated impact on our net interest income over a time horizon of one year and the change in net portfolio value as of
December 31, 2025are provided in the table below. For the scenarios shown, the interest rate simulation assumes an
instantaneous and parallel shift in market interest rates and no change in the composition or size of the balance sheet.
At December 31, 2025
Change in Interest Rates
(basis points)
Percentage Change
Net Interest
Income (1)
Net Portfolio
Value (2)
-300
(0.7)%
(1.5)%
-200
(0.7)%
1.4%
-100
(0.2)%
1.8%
+100
(0.5)%
(4.6)%
+200
(1.4)%
(11.9)%
+300
(2.5)%
(19.8)%
(1)This percentage change represents the impact to net interest income for a one-year period, assuming there is no change in the structure of the balance
sheet.
(2)This percentage change represents the impact to the net present value of equity, assuming contractual runoff of the balance sheet.
The projected changes in the table above were in compliance with established internal policy guidelines and are based on
numerous assumptions. The timing and magnitude of future interest rate movements, along with changes to the balance
sheet composition, may impact projected changes in net interest income, but may not necessarily reflect the manner in
which actual cash flows, yields and costs respond to changes in market interest rates. We continue to evaluate the interest
rate risk position and may reposition the banking segment's balance sheet in the future to better align with management's
target rate risk position. The impact of rate movements will change with the shape of the yield curve, including any
changes in steepness or flatness and inversions at any points on the yield curve. Since the assumptions used relative to
changes in interest rates are uncertain, the simulation analysis may not be indicative of actual results, particularly in times
of stress and uncertainty. In addition, this analysis does not consider actions that management might employ in the future in
response to changes in interest rates, as well as changes in earning asset and interest bearing liability balances.
Current Banking Environment
Market conditions and external factors may unpredictably impact the competitive landscape for deposits in the banking
industry. Additionally, the higher interest rate environment has increased competition for liquidity and the premium at
which liquidity is available to meet funding needs. Reliance on secondary funding sources could increase the Company's
overall cost of funding and reduce net interest income. As of December 31, 2025, the Company had available liquidity of
$17.1 billionwhich is equal to 90%of its total deposits and the level of uninsured deposits was 36%of total deposits. The
Company believes it has sufficient liquidity to meet its current needs.
Mechanics Bancorp published this content on March 17, 2026, and is solely responsible for the information contained herein. Distributed via EDGAR on March 17, 2026 at 10:04 UTC. If you believe the information included in the content is inaccurate or outdated and requires editing or removal, please contact us at [email protected]