Lettre du président corrigée, puis réduite à une version Web de 600 mots

I am pleased to forward our Annual Report for fiscal 2026 highlighting our financial results. Last year I noted in the Chairman’s Message that “… the market is expecting the easing of monetary policy to resume later this calendar year but we are cognizant of the weaker employment data that was recently released and its potential downstream impact on the economy. We are also observing some weaknesses in the California real estate market.”  A year later, after three successive quarter-point reductions in the federal funds rate in the latter part of 2025, the Federal Open Market Committee, or FOMC, has held rates steady. At present, the market does not appear to expect additional interest rate cuts for the remainder of this year and possibly into 2027. Indeed, some market observers believe a rate hike is possible later this year. We have also seen an important shift in the bond market. The U.S. Treasury yield curve emerged from its extended inversion and returned to a more normal upward slope. As short-term rates have been anchored by the federal funds rate, longer-term bond yields have been steadily rising, further steepening the yield curve. This movement reflects continued uncertainty regarding inflation, the state of the federal budget deficit and the potential for geopolitical developments to create supply-chain or energy-related pressures.

For banks, a steeper yield curve can be beneficial. A bank’s net interest margin benefits from the widening spread between the cost of deposits and other short-term funding and yields earned on loans. New loans are being originated at higher rates, and adjustable-rate loans are repricing upward. At the same time, higher long-term rates weigh on the real estate market, especially in high-cost markets such as California. Mortgage payments have become increasingly unaffordable for prospective buyers, while many existing homeowners remain locked into mortgages with rates well below current levels. At the current level of mortgage rates, residential purchase and refinancing activities have been curtailed. Even so, California real estate values have been resilient. Prices have generally held up well across the markets we serve, reflecting the underlying strength in the economy and limited housing supply in our local communities.¶

In this evolving market, one thing remains constant: we are well positioned, supported by a strong capital position and pristine credit quality. Our long-standing credit culture has served us well and positioned the Company among the top performers across key credit quality metrics. Our goal is to remain good stewards of our capital by executing a strategy of disciplined, sustainable growth, conservative credit underwriting, and consistent returns of capital to our shareholders.¶

During fiscal 2026, as the yield curve normalized, we adjusted our strategy to support increased loan production. Following a 61 percent% increase in loan production during fiscal 2025, we achieved an additional 32 percent% increase in fiscal 2026. However, these production gains were fully offset by higher-than-normal levels of loan prepayments. As a result, our loans held for investment decreased by approximately one percent for the fiscal year. The deposit landscape remained challenging, as competition for deposits continued to be intense. Competitors of all sizes, including large national banks, aggressively marketed promotional deposit rates that remain elevated today, even as the FOMC lowered short-term rates in 2025. We made accommodations, as appropriate, to our pricing based on our evaluation of the customer relationships, while maintaining our pricing discipline, and augmented our funding needs with certificates of deposit and borrowings. Total deposits increased two percent during the fiscal year although transaction accounts declined three percent. Our net interest margin exceeded three percent for the year, reaching 3.09 percent1% for the fiscal year. Total deposits increased 2% during the fiscal year although transaction accounts declined 3%. Our net interest margin exceeded 3% for the year, reaching 3.09%, driven primarily by the repricing of Federal Home Loan Bank advances to lower rates as they matured. Despite inflationary pressures, operating expenses increased by less than one percent1% for the fiscal year. Finally, we recorded no loan charge-offs during fiscal 2026 — our eighth consecutive year without reporting a net charge-off.

As we look to fiscal 2027, our priorities remain consistent: measured growth in loans and retail deposits; disciplined expense management; and sound capital management. We believe this approach is the right course in an economy that continues to expand, while recognizing the need to remain cautious amid ongoing market and geopolitical uncertainties. We expect to continue returning capital to shareholders through dividends and share repurchases while maintaining sufficient capital to support our business strategy and withstand potential losses under adverse conditions. We remain committed to single-family residential, multi-family, and commercial real estate mortgage lending as our primary sources of asset growth and our retail branch network will continue to serve as the primary source of the Bank’s funding.