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Item 7. Management’s Discussion and Analysis

2022-03-04 compared with 2021-03-12 · 157 added, 369 removed, 513 unchanged (51% of the section changed)

1 unchanged sentence

Management’s discussion and analysis of results of operations and financial condition ("MD&A") is intended to assist the reader in understanding and assessing significant changes and trends related to the results of operations and financial position of our consolidated Company.

This discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying footnotes in Item 8 of Part II of this Annual Report on Form 10-K.

This discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying footnotes in Part II, Item 8 of Part II of this Annual Report on Form 10-K.

A comparison of the financial results for the year ended December 31, 2020 to the year ended December 31, 2019, is included in Part II, Item 7, "Management Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2020.

Management's Overview of 2021 Financial Performance

Results for 2019 and 2018 reflect the impact of the adoption in the first quarter of 2019 of a plan of exit or disposal with respect to the stand-alone home loan center-based mortgage origination and related servicing businesses, which comprised the bulk of our legacy mortgage banking business, as discontinued operations.

Discontinued operations reported in the first quarter of 2019 included our entire former mortgage banking business as did all prior periods presented.

Effective April 1, 2019, the newly organized bank location-based mortgage banking business commenced operations and the associated direct revenues and direct expenses were reported as part of the Company's continuing operations and thereafter ("Retained MB Business").

Discontinued operations accounting was concluded as of January 1, 2020.

Recent Developments

COVID-19 Pandemic

The outbreak of COVID-19 has adversely impacted a broad range of industries across the region where the Company’s customers operate and could impair their ability to fulfill their financial obligations to the Company.

The World Health Organization has declared COVID-19 to be a global pandemic and as a result almost all public commerce and related business activities have been and continue to be, to varying degrees, curtailed with the goal of decreasing the rate of new infections.

The spread of the outbreak has caused significant disruptions in the U.S.

economy and has disrupted business and other financial activity in the areas in which the Company operates.

The federal government, including the Federal Reserve have taken several actions designed to cushion the economic fallout related to the COVID-19 pandemic.

The CARES Act was signed into law at the end of March 2020 as a $2 trillion legislative package, which was further expanded in April 2020 by $484 billion.

The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors.

The package also includes extensive emergency funding for hospitals and health care providers.

On December 27, 2020 the Coronavirus Response and Relief Supplemental Appropriations Act, 2021 ("CRRSA Act") was signed into law, providing additional coronavirus aid for businesses and individuals.

This $2.3 trillion dollar legislative package includes $900 billion in additional stimulus relief for the COVID-19 pandemic.

While it is not possible to know the full extent of the impacts of COVID-19 on the Company’s operations, including any additional mitigation measures that may be imposed to curtail its spread, the Company is disclosing potentially material items of which it is aware.

Financial position and results of operations

The Company’s net interest income could be reduced due to COVID-19.

In keeping with guidance from regulators, the Company has worked with COVID-19 affected borrowers to defer their payments.

While loans will continue to accrue interest during the initial or extended deferral periods, should the economic downturn persist causing the borrowers’ financial situation to deteriorate, we would potentially need to reverse interest income and could sustain credit losses on these loans.

In such a scenario, interest income and provision for credit losses in future periods could be negatively impacted.

At this time, the Company is unable to project the materiality of such an impact but recognizes the breadth of the economic impact may affect certain borrowers’ ability to repay in future periods.

The Company is working with customers directly affected by COVID-19.

The Company has and is prepared to offer short-term assistance in accordance with banking regulatory guidelines.

As a result of the current economic environment caused by the COVID-19 pandemic, the Company is engaging in more frequent communication with borrowers to better understand their financial situation and the challenges faced, allowing it to respond proactively as needs and issues arise.

Should economic conditions worsen, whether due to the COVID-19 pandemic or otherwise, the Company could experience further increases in its required allowance for credit losses and record additional provision for credit losses.

It is possible that the Company’s asset quality measures could worsen at future measurement periods if the effects of COVID-19 pandemic are prolonged.

Goodwill Impairment Analysis

We evaluated goodwill for impairment at June 30, 2020 and based on our impairment assessment determined our goodwill assets were not impaired.

COVID-19 could cause a further and sustained decline in the Company’s stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to perform another goodwill impairment test which may result in an impairment charge being recorded to earnings for that period.

Processes, controls and business continuity plan

The Company has implemented a business continuity plan that includes a remote working strategy and a social distancing and sanitation plan.

The Company does not anticipate incurring material additional costs related to its continued deployment of the business continuity plan.

No material operational failures or internal control challenges have been identified to date.

The Company does not anticipate significant challenges to its ability to maintain its systems and controls in light of the measures the Company has taken to prevent the spread of COVID-19.

The Company does not currently face any material resource constraints through the implementation of its business continuity plans, but staffing remains a risk if key employees or a large number of employees were to become ill and unable to work.

The Company has taken significant measures to protect its employees, such as having most work remotely from home under stay at home orders and where remote work is not viable, implemented a social distancing and sanitation plan.

At March 1, 2021, all of our retail deposit branches were open and operating under the guidelines issued by Federal, state and regional health departments.

Lending operations and accommodations to borrowers

In keeping with regulatory guidance to work with borrowers during this unprecedented situation and as outlined in the CARES Act and the CRRSA Act, the Company has executed multiple assistance programs including loan forbearance programs for its lending customers that are adversely affected by the COVID-19 pandemic.

In accordance with the CARES Act and the CRRSA Act, loans granted forbearance due to COVID-19 are not currently considered TDRs.

With the passage of the PPP, administered by the Small Business Administration (“SBA”), the Company assisted its customers with applications for resources through the program.

PPP loans generally have a two-year term and bear interest at 1%.

Additionally, the Company is paid fees by the SBA based upon the sliding fee scale established for the PPP program.

The weighted average fee for these loans was 3.3% and the Company will recognize these fees over the contractual life of the related loan, which will be accelerated if the loan is paid off prior to its maturity.

The Company believes that a significant portion of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program at which time the SBA pays off the loans.

In 2020, the Company originated 1,822 PPP loans representing $298 million in outstanding balances, of which $277 million was still outstanding as of December 31, 2020.

The PPP program was extended in the first quarter of 2021.

Loans under this extended program have a five year term.

As of March 1, 2021, the Company has closed or approved 865 additional PPP loans representing $98 million in outstanding balances.

The loans funded through the PPP program are fully guaranteed by the U.S.

The extent to which the COVID-19 pandemic affects the Company’s future financial results and operations will depend on future developments which are uncertain and unpredictable, including new information which continues to emerge concerning the expected duration and broad impacts of the pandemic both social and economic, and current or future domestic and international actions in response to the pandemic and its effects.

In addition, due to these uncertainties, we do not know if dividends will be declared in future periods.

As part of our capital management strategy, in 2020, we repurchased a total of 2,205,665 shares of our common stock at an average price of $26.31 per share, representing 9.2% of the outstanding shares at December 31, 2019.

On January 28, 2021, the Board of Directors approved an extension of the Company's share repurchase program for up to $25 million of its common stock.

During 2021, the economy continued to generally improve with increased vaccination rates and business activity.

However, there still remains much uncertainty around containment of the pandemic and the trajectory of the broader economic recovery, particularly in light of the spread of the Omicron variant that has caused the number of cases to increase in the United States.

We cannot predict at this time the scope and duration of the pandemic, which will depend on a variety of factors, including but not limited to, the extent and spread of the Omicron variant and other variants of the virus;

the availability, adoption and efficacy of vaccines and vaccine booster shots, as well as government and other actions to mitigate the spread of COVID-19, such as stay at home orders, vaccination and mask mandates, restrictions on business activities, health and safety guidelines, economic relief for individuals and businesses, and monetary policy measures.

The economic, market and business conditions impacted by COVID-19 may be slow to recover or may worsen if the pandemic continues for a prolonged period of time.

Even if the pandemic subsides, there may be additional variants of the virus or a resurgence of the pandemic, as we have seen domestically and internationally.

We may be subject to heightened business, operational, market, credit and other risks related to the COVID-19 pandemic environment, which may have an adverse effect on our business, financial condition and results of operations.

(See “Risk Factors” under Part I, Item 1A of this Annual Report).

Economic and Market Conditions

Inflationary pressures can adversely impact our operations by increasing our costs, including compensation costs which we expect to be higher in 2022.

Increases in market interest rates, resulting in part from increases in the Federal Reserve target federal funds rate, can impact our operations by increasing the yields we receive on our loans and investments and increasing the rates by pay on our deposits and borrowings.

We attempt to maintain an interest-neutral balance sheet position so that our results are not as impacted by changes in interest rates.

On January 19, 2022, we completed a $100 million subordinated notes offering due in 2032 (the “Notes”).

Interest on the Notes initially will accrue at a rate equal to 3.50% per annum from and including the date of original issuance to, but excluding, January 30, 2027, payable semiannually in arrears.

From and including January 30, 2027, to, but excluding, the maturity date

or the date of earlier redemption, the Notes will bear interest equal to the three-month term SOFR plus 215 basis points, payable quarterly in arrears.

Net proceeds to the Company were $98 million, after deducting underwriting discounts and offering expenses.

The Company intends to use a significant portion of the net proceeds from the Notes offering to repurchase shares of its common stock through open market purchases, with the remainder of the net proceeds used for working capital and other general corporate purposes, including support for growth of its assets.

On January 27, 2022, the Board of Directors approved a $75 million expansion of the share repurchase program, subject to the approval or nonobjection of our regulators and a dividend of $0.35 per common share.

The dividend is payable on February 23, 2022 to shareholders of record at the close of business on February 9, 2022.

As part of our capital management strategy, in 2021, we repurchased a total of 1,873,294 shares of our common stock at an average price of $44.92 per share, representing 8.6% of the shares outstanding at December 31, 2020.

Critical Accounting Policies and Estimates

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Actual market conditions could vary significantly from current conditions which could result in the estimated life of the underlying loans being different which would change the fair value of the MSR.

We measure our single family residential mortgage servicing assets at fair value and report changes in fair value through earnings.

MSRs for loans other than single family loans are adjusted to fair value if the carrying value is higher than fair value and are amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets.

We carry our single family residential mortgage servicing assets at fair value and report changes in fair value through earnings.

MSRs for loans other than single family loans are adjusted to fair value if the carrying value is higher than fair value and are amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets.

Summary Financial Data

For the Years Ended December 31,

(dollars in thousands, except per share data) 2020 2019 2018

(dollars in thousands, except per share data and FTE data) 2021 2020

Select Income Statement data:

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Noninterest expense 215,343 235,663

Net income 79,990 17,512 40,027

Income from continuing operations:

Before income taxes 146,689 101,894

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Return on average equity 15.9 % 11.3 %

Net income 11.3 % 2.5 % 5.7 %

Income from continuing operations 11.3 % 5.9 % 3.7 %

Return on average tangible equity (1)

Net income 12.1 % 2.9 % 6.2 %

Income from continuing operations 12.1 % 6.4 % 4.1 %

16.8 % 12.1 %

Return on average assets 1.58 % 1.10 %

Net income 1.1 % 0.3 % 0.6 %

Income from continuing operations 1.1 % 0.6 % 0.4 %

Efficiency ratio (1)

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Full time equivalent employees 991 1,003

1,013 1,071 2,036

(1) Discontinued operations accounting was terminated effective January 1, 2020.

(1) Return on average tangible equity and the efficiency ratio are non-GAAP financial measures.

See “Non-GAAP Financial Measures” elsewhere in this MD&A.

(3) For the fourth quarter of the corresponding year.

For a reconciliation of return on average tangible equity to the nearest comparable GAAP financial measure and the computation of the efficiency ratio, see “Non-GAAP Financial Measures” elsewhere in this Management's Discussion and Analysis of Financial Condition and Results of Operations.

Summary Financial Data (continued)

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Selected Balance Sheet Data:

Loans held for sale $ 361,932 $ 208,177 $ 77,324

Loans held for investment, net 5,179,886 5,072,784 5,075,371

Loans held for sale ("LHFS") $ 176,131 $ 361,932

Loans held for investment ("LHFI"), net 5,495,726 5,179,886

ACL 47,123 64,294

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Tangible book value per share (1)

31.42 27.02 26.36

Total equity to total assets 9.9 % 9.9 %

Tangible common equity to tangible assets (1)

9.5 % 9.5 % 10.1 %

Shares outstanding at period end 20,085,336 21,796,904

Loans to deposit ratio 96.3 % 99.7 % 106.3 %

Loans to deposits ratio 93.0 % 96.3 %

Credit quality:

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Nonaccrual loans to total loans 0.22 % 0.40 %

Nonperforming assets/total assets 0.31 % 0.21 % 0.17 %

Nonperforming assets to total assets 0.18 % 0.31 %

Nonperforming assets $ 12,936 $ 22,097

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(1) Tangible book value per share and tangible common equity to tangible assets are non-GAAP financial measures.

See “Non-GAAP Financial Measures” elsewhere in this MD&A.

(2) This ratio excludes balances insured by the FHA or guaranteed by the VA or SBA, including PPP loans.

(3) Prior to January 1, 2020 and the adoption of ASU 2016-13 CECL, the allowance for loan losses was used in this calculation in place of ACL.

For a reconciliation to the nearest comparable GAAP financial measure, see “Non-GAAP Financial Measures” elsewhere in this Managements' Discussion and Analysis of Financial Condition and Results of Operations.

(2) The reserve rate is calculated excluding balances related to loans that are insured by the FHA or guaranteed by the VA or SBA, including Paycheck Protection Program ("PPP") loan balances.

Results of Operations

2021 Compared to 2020

Our income from continuing operations and income from continuing operations before income taxes were $80.0 million and $101.9 million, respectively, in 2020, as compared to $40.7 million and $48.7 million, respectively, in 2019.

The $53.2 million increase in income from continuing operations before income taxes was due to higher net interest income and noninterest income, which was partially offset by a higher provision for credit losses and higher noninterest expenses.

Our net income and income before income taxes were $115.4 million and $146.7 million, respectively, in 2021, as compared to $80.0 million and $101.9 million, respectively, in 2020.

The $44.8 million increase in income before taxes was due to higher net interest income, a lower provision for credit losses and lower noninterest expense, partially offset by lower noninterest income.

Income Taxes:

Our effective tax rate during 2020 was 21.5% as compared to 16.4% in 2019 for continuing operations and a statutory rate of 23.5%.

Our effective tax rate during 2021 was 21.3% as compared to 21.5% in 2020 and a statutory rate of 23.3%.

Our effective tax rate was lower than our statutory rate due primarily to the benefits of tax advantaged investments.

In 2019, the benefits of tax advantaged investments were a higher proportion of total earnings, resulting in a lower effective tax rate.

Net Interest Income:

The following table presents, for the periods indicated, information regarding (i) the total dollar amount of interest income from interest-earning assets and the resulting average yields on those assets;

(ii) the total dollar amount of interest expense and the average rate of interest on our interest-bearing liabilities;

The following table presents, for the periods indicated, information regarding (i) the total dollar amount of interest income earned from interest-earning assets and the weighted average yields on those assets;

(ii) the total dollar amount of interest expense paid on interest-bearing liabilities and the weighted average costs of those liabilities;

(iii) net interest income;

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Noninterest-earning assets 547,742 555,929

Discontinued operations, net — 105,347

$ 7,318,505 $ 7,250,634

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Net yield on interest-earning assets 3.38 % 3.13 %

(1) Cost of deposits, including noninterest bearing demand deposits, was 0.60% and 1.30% for 2020 and 2019, respectively.

(1) Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain loans and securities of $3.4 million and $3.5 million for 2021 and 2020, respectively.

The estimated tax rate used was 21% for both 2020 and 2019.

The estimated federal statutory tax rate was 21% for both 2021 and 2020.

(2) Cost of all deposits, including noninterest-bearing demand deposits, was 0.18% and 0.60% for 2021 and 2020, respectively.

Rate and Volume Analysis

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$ 11,613 $ 6,692 $ 18,305

Net interest income was higher in 2020 as compared to 2019 due to a $412 million increase in interest earning assets and an increase in our net interest margin from 3.05% in 2019 to 3.13% in 2020.

The increase in interest earning assets was primarily due to higher levels of loan originations and purchases of investment securities in 2020.

The increase in our net interest margin was due to a 21 basis point increase in our net interest rate spread which was partially offset by the reduced benefit of noninterest bearing deposits in a lower interest rate environment.

Our net interest rate spread increased because decreases in the rates paid on interest bearing liabilities were greater than the decrease in yields on interest earning assets.

The 67 basis point decrease in yield on interest earning assets was due to the origination of loans and purchases of securities at current market rates which were below our portfolio rates, the ongoing repricing down of variable rate loans and the prepayment and paydown of higher yielding loans and investment securities in our portfolios.

Our cost of interest-bearing liabilities decreased 88 basis points from 1.73% in 2019 to 0.85% in 2020 due to a decrease in market interest rates which allowed us to reprice our deposits and borrowings at lower rates.

Net interest income was higher in 2021 as compared to 2020 primarily due to an increase in our net interest margin from 3.13% in the 2020 to 3.38% in 2021.

The increase in our net interest margin was due to a 34 basis point increase in our net interest rate spread as decreases in the rates paid on interest-bearing liabilities were greater than the decreases in yields on our interest-earning assets.

The 15 basis point decrease in yield on interest-earning assets was due to the origination of loans and purchases of securities at current market rates which were below our portfolio rates, the repricing down of variable rate loans and the prepayment and paydown of higher yielding loans and investments in our portfolios.

Our cost of interest-bearing liabilities decreased from 0.85% in 2020 to 0.36% in 2021 due to a decrease in market interest rates which allowed us to reprice our deposits and borrowings at lower rates.

Provision for Credit Losses:

The provision for credit losses was $20.5 million for 2020 as compared to a reversal of $0.5 million in 2019.

Due to adverse economic conditions related to the COVID-19 pandemic, we recorded additional provisions for credit losses in 2020 as an estimate of the potential adverse impact of those conditions on our loan portfolio.

The estimate included an evaluation of the credit risk related to the commercial business loans and commercial real estate loans granted COVID-19 modifications during 2020 which we believe will experience a higher probability of default and increased credit losses.

As a result of the favorable performance of our loan portfolio, a stable low level of nonperforming assets and an improved outlook of the estimated impact of COVID-19 on our loan portfolio, we recorded a $15.0 million recovery of our allowance for credit losses in 2021.

Due to adverse economic conditions related to the COVID-19 pandemic, in 2020, we recorded a $20.5 million provision for credit losses as an estimate of the potential adverse impact of those conditions on our loan portfolio.

Noninterest income consisted of the following:

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Single family $ 66,850 $ 100,795

Commercial real estate, multifamily and SBA 21,769 17,492

Amounts attributed to discontinued operations — (60,056)

CRE, multifamily and SBA 25,468 21,769

Loan servicing income 7,233 9,491

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(in thousands) 2021 2020

Single family servicing income, net:

Single family servicing income (loss), net:

Servicing fees and other $ 15,658 $ 17,477

1 unchanged sentence

(19,669) (17,754)

Net (277) 7,772

Risk management, single family MSRs:

Changes in fair value due to assumptions (2)(3)

(19,955) (16,224)

Net gain from derivatives hedging 20,820 14,435

Subtotal (4,011) (277)

Single family servicing income $ 588 $ 5,983

Commercial loan servicing income:

Servicing fees and other $ 14,560 $ 11,119

Amortization of capitalized MSRs (5,657) (5,214)

Total 8,903 5,905

Amounts attributed to discontinued operations — (2,103)

Total loan servicing income $ 9,491 $ 9,785

(1) Represents changes due to collection/realization of expected cash flows and curtailments.

(2) Principally reflects changes in market inputs, which include current market interest rates and prepayment model updates, both of which affect future prepayment speeds and cash flow projections.

(3) Includes pre-tax loss of $0.9 million in 2019 from sales of single family MSRs.

The increase in noninterest income for 2020 as compared to 2019, was due to an increase in gain on loan origination and sale activities.

This increase was due to higher volumes of single family mortgage rate locks and an increase in related profit margins, an increase in the volumes and profit margins on the sale of CRE loans and the classification of $18 million of gain on loan sales associated with the legacy mortgage business as discontinued operations in the first quarter of 2019.

Noninterest expense consisted of the following.

Years Ended December 31,

(in thousands) 2020 2019

Noninterest expense

Compensation and benefits $ 136,826 $ 124,354

Information services 30,004 31,603

Occupancy 35,323 27,119

General, administrative and other 33,510 32,538

Total noninterest expense $ 235,663 $ 215,614

The $20 million increase in noninterest expense in 2020 as compared to 2019 was due to increases in compensation and benefits, occupancy costs and general, administrative and other costs which were partially offset by lower information services costs.

The increase in compensation and benefits costs was due to increased commissions and bonuses paid on higher loan originations levels, including loans made under PPP and the classification of $7 million of compensation and benefits costs associated with the legacy mortgage business as discontinued operations in the first quarter of 2019 which were partially offset by reduced levels of staffing and lower costs of our self-insured medical benefits.

Occupancy expenses in 2020 included $10.2 million of impairments related to ongoing restructuring of our facilities and staffing.

Information services costs decreased as a result of our cost savings initiatives implemented in 2019 and 2020.

The increase in general and administrative costs was due primarily to a $1.5 million charge related to the prepayment of certain FHLB advances in 2020.

2019 Compared to 2018

Our income from continuing operations and income from continuing operations before income taxes were $40.7 million and $48.7 million, respectively in 2019, as compared to $26.2 million and $28.3 million, respectively, for 2018.

The $20.5 million increase in income from continuing operations before income taxes was due to higher noninterest income and a lower provision for credit losses which was partially offset by higher noninterest expense.

Income Taxes:

Our effective tax rate during 2019 was 16.4% as compared 7.2% for 2018 for continuing operations and a statutory rate of 23.5%.

Our effective income tax rate was lower than our statutory rate due primarily to the benefits of tax advantaged instruments.

In addition, in 2018, we recognized a benefit of $4.9 million for the revaluation our net deferred tax liability position related to a reduction in corporate tax rates.

Net Interest Income:

The following table presents, for the periods indicated, information regarding (i) the total dollar amount of interest income from interest-earning assets and the resultant average yields on those assets;

(ii) the total dollar amount of interest expense and the average rate of interest on our interest-bearing liabilities;

(iii) net interest income;

(iv) net interest rate spread;

and (v) net yield on interest-earning assets:

Years Ended December 31,

(dollars in thousands) Average

Balance Interest Average

Yield/Cost Average

Balance Interest Average

Interest-earning assets:

$ 5,366,839 $ 256,752 4.78 % $ 4,941,372 $ 229,188 4.64 %

Investment securities (2)

840,493 22,027 2.62 912,279 24,685 2.71

FHLB Stock, Fed Funds and other 75,436 1,032 1.37 53,736 467 0.87

Total interest-earning assets

6,282,768 279,811 4.45 5,907,387 254,340 4.31

Noninterest-earning assets 502,603 374,603

Discontinued operations, net 105,347 333,098

$ 6,890,718 $ 6,615,088

Interest-bearing liabilities

Demand deposits $ 382,333 $ 1,414 0.37 % $ 426,610 $ 1,678 0.39 %

Money market and savings 2,280,455 27,785 1.22 2,188,174 18,004 0.82

Certificates of deposit 1,846,709 41,190 2.23 1,436,883 22,313 1.55

Total deposits 4,509,497 70,389 1.56 4,051,667 41,995 1.04

Borrowings 461,244 11,005 2.39 882,146 12,858 1.46

Long-term debt 125,550 6,822 5.41 125,362 6,646 5.30

Total interest-bearing liabilities

5,096,291 88,216 1.73 5,059,175 61,499 1.22

Noninterest-bearing liabilities

Demand deposits (1)

891,529 724,509

Other liabilities 207,995 131,524

Total liabilities 6,195,815 5,915,208

Shareholders' equity 694,903 699,880

Total liabilities and shareholders’ equity $ 6,890,718 $ 6,615,088

Net interest income $ 191,595 $ 192,841

Net interest rate spread 2.72 % 3.09 %

Net yield on interest-earning assets 3.05 % 3.26 %

(1) Cost of deposits, including noninterest-bearing deposits, was 1.30% and 0.88% in 2019 and 2018, respectively.

(2) Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain loans and securities of $2.2 million and $2.9 million for 2019 and 2018, respectively.

The estimated tax rate used was 21% for both 2019 and 2018.

Rate and Volume Analysis.

The following table presents the extent to which changes in interest rates and changes in the volume of our interest-earning assets and interest-bearing liabilities have affected our interest income and interest expense, excluding interest income from nonaccrual loans.

Information is provided in each category with respect to:

(1) changes attributable to changes in volume, (2) changes attributable to changes in rate and (3) the net change.

Increase (Decrease) Due to Total Change

(in thousands) Rate Volume

Interest-earning assets

Loans $ 7,378 $ 20,186 $ 27,564

Investment securities (759) (1,899) (2,658)

FHLB stock, Fed Funds and other 333 232 565

Total interest-earning assets 6,952 18,519 25,471

Demand deposits (96) (168) (264)

Money market and savings 8,992 789 9,781

Certificate of deposit 11,415 7,462 18,877

Total interest-bearing deposits

20,311 8,083 28,394

Borrowings 5,955 (7,808) (1,853)

Long-term debt 166 10 176

Total interest-bearing liabilities

26,432 285 26,717

Total changes in net interest income

$ (19,480) $ 18,234 $ (1,246)

Net interest income was lower in 2019 as compared to 2018 as a decrease in the net interest margin was partially offset by an increase in interest-earnings assets.

The increase in interest-earning assets was due to higher levels of average loan balances.

The decrease in the net interest margin was due to a 37 basis point decrease in the net interest rate spread which was partially offset by an increase in the average balance of noninterest-bearing deposits.

The decrease in our net interest rate spread was due to an increase in our cost of interest-bearing liabilities which was only partially offset by an increase in the yield on interest-earning loans.

The 14 basis point increase in our yield on loans was due to an increase in market interest rates which resulted in the origination of loans with rates above our current portfolio rates and the ongoing repricing of variable rate loans.

The 52 basis point increase in our deposit costs was due to increases in the average balances of higher costing money market, savings and certificate of deposit accounts and increases in the costs of money market, savings and certificate of deposit accounts as rates on these types of deposit accounts were increased to attract new deposits and to respond to increases in market interest rates.

Provision for Credit Losses:

The provision for credit losses in 2019 was a reversal of $0.5 million as compared to a provision of $3.0 million 2018.

In 2019 and 2018, we realized net recoveries of $0.4 million and $0.8 million, respectively.

While no additional provision was needed in 2019 because loans held for investment remained stable, the provision in 2018 was due to an increase in loans held for investment.

Noninterest income consisted of the following.

Years Ended December 31,

(in thousands) 2019 2018

Noninterest income

Gain on loan origination and sale activities (1)

Single family $ 86,686 $ 174,473

Commercial 17,492 11,776

Amounts attributed to discontinued operations (60,056) (174,383)

Loan servicing income 9,785 4,823

Deposit fees 7,926 8,019

Other 12,599 11,825

Total noninterest income $ 74,432 $ 36,533

(1) Includes loans originated as held for investment.

Loan servicing income , a component of noninterest income, consisted of the following.

Years Ended December 31,

(in thousands) 2019 2018

Single family servicing income, net:

Servicing fees and other $ 28,442 $ 60,885

Changes - amortization (1)

(20,670) (34,705)

Net 7,772 26,180

Risk management, single family MSRs:

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Subtotal (859) 865

Single family servicing income $ 5,983 $ 25,054

Total $ (4,870) $ 588

Commercial loan servicing income:

2 unchanged sentences

Total 12,103 8,903

Amounts attributed to discontinued operations (2,103) (25,054)

Total loan servicing income $ 7,233 $ 9,491

(1) Represents changes due to collection/realization of expected cash flows and curtailments.

(2) Principally reflects changes in market inputs, which include current market interest rates and prepayment model updates, both of which affect future prepayment speeds and cash flow projections.

(3) Includes pre-tax loss of $0.9 million and pre-tax gain of $0.6 million resulting from the sales of single family MSRs for 2019 and 2018, respectively.

The $37.9 million increase in noninterest income in 2019 as compared to 2018 was due to $31.0 million of noninterest income related to the Retained MB Business, all of which was classified as discontinued operations in 2018, and a $5.7 million increase in gains on loans sales of multifamily loans resulting from increases in the volume of loans sold and the profit margin on loans sold.

Noninterest expense from continuing operations consisted of the following.

(2) Principally reflects changes in model assumptions, including prepayment speed assumptions, which are primarily affected by changes in mortgage interest rates.

The decrease in noninterest income for 2021 as compared to 2020 was due to decreases in gain on loan origination and sale activities and loan servicing income, which was partially offset by higher deposit fees and higher other income.

The $30.2 million decrease in gain on loan origination and sale activities was due to a $33.9 million decrease in single family gain on loan origination and sale activities which was partially offset by a $3.7 million increase in CRE and commercial gain on loan origination and sale activities.

The decrease in single family gain on loan origination and sale activities was due primarily to a 30% decrease in rate locks.

The increase in CRE and commercial gain on loan origination and sale activities was due to a 17% increase in the realized gain on sale which was partially offset by a 15% decrease in the volume of loans sold.

The $2.3 million decrease in loan servicing income was due to a $5.5 million decrease in single family servicing income which was partially offset by a $3.2 million increase in commercial loan servicing income.

The decrease in single family servicing income was due primarily to a decline in the servicing portfolio balance due to high levels of prepayments and a $1.7 million decrease in risk management results.

The increase in commercial loan servicing income was primarily due to higher levels of prepayment fees.

The higher deposit fees were due to higher demand deposit balances and increased customer activity levels.

The $2.1 million increase in other income was due to higher income from investments and a gain on sale of OREO realized in 2021.

Noninterest expense consisted of the following:

Years Ended December 31,

6 unchanged sentences

Total noninterest expense $ 215,343 $ 235,663

The $20.4 million increase in noninterest expense in 2019 compared to 2018 was due to $26.3 million of expenses related to the Retained MB Business, all of which was classified as discontinued operations in 2018, and $4.5 million in restructuring costs which were partially offset by reductions in compensation and benefits and general, administrative and other costs due to cost saving initiatives which reduced our staff levels and other costs.

The $20.3 million decrease in noninterest expense in 2021 as compared to 2020 was due to lower compensation and benefit costs, information services expense, occupancy expense and general, administrative and other expenses.

The $4.8 million decrease in compensation and benefits expense is primarily due to lower levels of staffing.

The $2.1 million decrease in information services costs is primarily due to lower core processing costs related to a renegotiation of our contract which became effective at the beginning of 2021.

The occupancy expenses in 2020 included $10.2 million of impairments related to ongoing restructuring of our facilities and staffing, with no similar charges in 2021.

The remaining decrease in occupancy costs relates to a reduction in leased space.

The decrease in general, administrative and other costs was due to charges related to our efficiency improvement initiatives incurred in 2020 and lower FDIC fees, which were partially offset by higher marketing costs in 2021.

Review of Financial Condition – December 31, 2021 compared to December 31, 2020

During 2020, total assets increased by $425 million primarily due to increases in our investment securities and loan portfolios.

Loans held for sale increased due to high levels of activity in both our single family and multifamily loans originated for sale.

Loans held for investment increased due to $2.8 billion of originations and advances, including the origination of $298 million of loans under PPP, which was partially offset by sales of $569 million and prepayments and scheduled payments of $2.1 billion.

Total liabilities increased by $387 million primarily due to a $482 million increase in deposits which was partially offset by a $149 million decrease in borrowings.

The increase in deposits was due to a $544 million increase in business and consumer accounts, due in part to the funding of PPP loans to customer accounts and the addition of new customers through PPP, which was partially offset by a $62 million decrease in wholesale deposits.

The decreases in wholesale deposits and borrowings reflect the reduced need for wholesale funding resulting from the increase in deposits.

During 2021, total assets decreased by $33 million due to decreases in investment securities and other assets, partially offset by a $316 million increase in LHFI.

LHFI increased due to $3.3 billion of originations, which were partially offset by prepayments and scheduled payments of $2.6 billion and transfer of loans to LHFS of $393 million.

The $282 million decrease in borrowings reflects the reduced need of wholesale funding resulting from a $325 million increase in deposits.

The growth in deposits was due to new customers and increases in existing customer balances.

Investment Securities

14 unchanged sentences

Total $ 1,002,522 $ 1,072,093

The following table details the composition of our loans held for investment ("LHFI") portfolio by dollar amount.

The following table details the composition of our LHFI portfolio by dollar amount:

At December 31,

(in thousands) 2021 2020

Commercial real estate loans:

Non-owner occupied commercial real estate $ 829,538 $ 895,546

Non-owner occupied CRE $ 705,359 $ 829,538

Multifamily 2,415,359 1,428,092

Construction/land development 496,144 553,695

Total commercial real estate loans 2,811,325 2,596,448

Total 3,616,862 2,811,325

Commercial and industrial loans

Owner occupied commercial real estate 467,256 477,316

Owner occupied CRE 457,706 467,256

Commercial business 401,872 645,723

Total commercial and industrial loans 1,112,979 892,026

Total 859,578 1,112,979

Consumer loans

2 unchanged sentences

Home equity and other 303,078 404,753

Total consumer loans 1,319,876 1,626,082

Total 1,066,409 1,319,876

Total LHFI 5,542,849 5,244,180

ACL (47,123) (64,294)

Net $ 5,179,886 $ 5,072,784

Total LHFI less ACL $ 5,495,726 $ 5,179,886

(1) Includes $7.3 million and $7.1 million of loans at December 31, 2021 and 2020, respectively, where a fair value option election was made at the time of origination and;

therefore, are carried at fair value with changes recognized in the consolidated income statements.

(2) Net deferred loans fees and costs of $24.5 million are now included within the carrying amounts of the loan balances as of December 31, 2019, to conform with the current period presentation.

The following tables show the contractual maturity of our loan portfolio by loan type:

6 unchanged sentences

rate Adjustable-

Commercial real estate loans:

Non-owner occupied commercial real estate $ 9,600 $ 160,614 $ 659,324 $ 829,538 $ 119,032 $ 700,906

Non-owner occupied CRE $ 21,514 $ 150,110 $ 533,735 $ 705,359 $ 87,050 $ 596,795

Multifamily 17,826 50,693 2,346,840 2,415,359 5,028 2,392,505

1 unchanged sentence

418,649 77,495 — 496,144 31,654 45,841

Total commercial real estate 522,853 250,907 2,037,565 2,811,325 151,365 2,137,107

Total 457,989 278,298 2,880,575 3,616,862 123,732 3,035,141

Commercial and industrial loans

Owner occupied commercial real estate 2,904 53,265 411,087 467,256 135,111 329,241

Owner occupied CRE 11,481 94,284 351,941 457,706 120,047 326,178

Commercial business 77,268 184,279 140,325 401,872 120,077 204,527

Total commercial and industrial 62,684 461,294 589,001 1,112,979 506,234 544,061

Total 88,749 278,563 492,266 859,578 240,124 530,705

Consumer loans

Single family 206 503 762,622 763,331 318,756 444,369

Home equity and other 33 34 303,011 303,078 6,909 296,136

Total consumer 2,266 1,300 1,316,310 1,319,876 282,864 1,034,746

Total loans held for investment

$ 587,803 $ 713,501 $ 3,942,876 $ 5,244,180 $ 940,463 $ 3,715,914

Total 239 537 1,065,633 1,066,409 325,665 740,505

Total LHFI $ 546,977 $ 557,398 $ 4,438,474 $ 5,542,849 $ 689,521 $ 4,306,351

December 31, 2020 Loans due after one year

5 unchanged sentences

rate Adjustable-

Commercial real estate:

Non-owner occupied commercial real estate $ 5,551 $ 106,457 $ 783,538 $ 895,546 $ 133,399 $ 756,596

Non-owner occupied CRE $ 9,600 $ 160,614 $ 659,324 $ 829,538 $ 119,032 $ 700,906

Multifamily 8,035 42,416 1,377,641 1,428,092 14,416 1,405,641

1 unchanged sentence

505,218 47,877 600 553,695 17,917 30,560

Total commercial real estate 613,154 238,877 1,744,417 2,596,448 232,417 1,750,877

Commercial and industrial:

Owner occupied commercial real estate 11,975 45,515 419,826 477,316 133,105 332,236

Total 522,853 250,907 2,037,565 2,811,325 151,365 2,137,107

Commercial and industrial loans

Owner occupied CRE 2,904 53,265 411,087 467,256 135,111 329,241

Commercial business 59,780 408,029 177,914 645,723 371,123 214,820

Total commercial and industrial 95,187 197,931 598,908 892,026 203,876 592,963

Total 62,684 461,294 589,001 1,112,979 506,234 544,061

Consumer loans

Single family 2,238 1,235 911,650 915,123 256,515 656,370

Home equity and other 28 65 404,660 404,753 26,349 378,376

Total consumer 6,698 1,980 1,617,404 1,626,082 328,995 1,290,389

Total loans held for investment $ 715,039 $ 438,788 $ 3,960,729 $ 5,114,556 $ 765,288 $ 3,634,229

Total 2,266 1,300 1,316,310 1,319,876 282,864 1,034,746

Total LHFI $ 587,803 $ 713,501 $ 3,942,876 $ 5,244,180 $ 940,463 $ 3,715,914

Loan Roll-forward

2 unchanged sentences

Originations and advances 3,279,593 2,846,270

Sales (569,214) (761,002)

Transfers to LHFS (392,555) (569,534)

Payoffs, paydowns and other (2,586,525) (2,145,893)

2 unchanged sentences

$ 5,542,849 $ 5,244,180

(1) Net deferred loans fees and costs of $24.5 million and $23.1 million are included within the carrying amounts of the respective loan balances as of December 31, 2019 and January 1, 2019, respectively to conform with the current period presentation.

Loan Originations and Advances

1 unchanged sentence

(in thousands) 2021 2020

Commercial real estate loans

Non-owner occupied commercial real estate $ 82,975 $ 280,490

Non-owner occupied CRE $ 86,167 $ 82,975

Multifamily 1,600,133 1,097,555

Construction/land development 721,059 621,591

Total commercial real estate loans 1,802,121 1,902,633

Total 2,407,359 1,802,121

Commercial and industrial loans

Owner occupied commercial real estate 58,689 128,890

Owner occupied CRE 81,066 58,689

Commercial business 334,315 484,903

Total commercial and industrial loans 543,592 430,010

Total 415,381 543,592

Consumer loans

1 unchanged sentence

Home equity and other 116,490 129,073

Total consumer loans 500,557 544,186

Total 456,853 500,557

Total $ 3,279,593 $ 2,846,270

Production Volumes for Sale to the Secondary Market

13 unchanged sentences

25,468 21,769

Amounts attributed to discontinued operations — (60,056)

Total $ 92,318 $ 122,564

(1) May include loans originated as held for investment.

(2) Includes both continuing and discontinued operations.

Capitalized Mortgage Servicing Rights ("MSRs")

5 unchanged sentences

23,908 19,424

Changes - amortization (1)

Amortization (1)

(19,669) (17,754)

2 unchanged sentences

7,379 (19,813)

Sale of servicing rights — (176,944)

Ending balance $ 61,584 $ 49,966

Ratio to related loans serviced for others 1.11 % 0.85 %

Multifamily and SBA MSRs

Beginning balance $ 35,774 $ 29,494

11,222 11,587

(7,581) (5,307)

Ending balance $ 39,415 $ 35,774

15 unchanged sentences

Noninterest-bearing accounts - other 183,503 — % 244,275 — %

Total deposits $ 5,821,559 0.29 % $ 5,339,959 1.23 %

Total $ 6,146,509 0.15 % $ 5,821,559 0.29 %

The following table presents the schedule of maturities of certificates of deposit as of December 31, 2021:

(in thousands) Three Months or Less Over Three Months to Twelve Months Over One Year through Three Years Over Three Years Total

Time deposits of $250,000 or less $ 207,025 $ 428,470 $ 157,676 $ 5,912 $ 799,083

Time deposits of $250,000 or more 28,650 54,693 23,831 671 107,845

Total $ 235,675 $ 483,163 $ 181,507 $ 6,583 $ 906,928

Credit Risk Management:

1 unchanged sentence

As of December 31, 2021, our ratio of nonperforming assets to total assets remained low at 0.18% while our ratio of total loans delinquent over 30 days to total loans was 0.38%.

The Company recorded provision for credit losses of $20.5 million in 2020, and the ACL for loans increased by $22.5 million.

Due to adverse economic conditions related to the COVID-19 pandemic, we recorded additional provisions for credit losses in 2020 as an estimate of the potential impact of those conditions on our loan portfolio, including an evaluation of the credit risk related to the commercial business loans and commercial real estate loans granted COVID-19 modifications during 2020 which we believe have a higher probability of default and increased credit losses.

The Company recorded a recovery of our allowance for credit losses of $15.0 million in 2021, and the ACL for loans decreased by $17.2 million, as a result of the favorable performance of our loan portfolio, a stable low level of nonperforming assets and an improved outlook of the estimated impact of COVID-19 on our loan portfolio.

Delinquent loans by loan type consisted of the following:

5 unchanged sentences

Current Total loans

Commercial real estate loans

Non- owner occupied commercial real estate $ — $ — $ — $ — $ — $ 829,538 $ 829,538

Non- owner occupied CRE $ — $ — $ — $ — $ — $ 705,359 $ 705,359

Multifamily — — — — — 2,415,359 2,415,359

1 unchanged sentence

Multifamily construction — — — — — 37,861 37,861

Commercial real estate construction — — — — — 27,285 27,285

CRE construction — — — — — 14,172 14,172

Single family construction — — — — — 296,027 296,027

2 unchanged sentences

Commercial and industrial loans

Owner occupied commercial real estate — — — 4,922 4,922 462,334 467,256

Owner occupied CRE — — — 3,568 3,568 454,138 457,706

Commercial business 198 — — 5,023 5,221 396,651 401,872

15 unchanged sentences

Current Total loans

Commercial real estate loans

Non- owner occupied commercial real estate $ — $ — $ — $ — $ — $ 895,546 $ 895,546

Non- owner occupied CRE $ — $ — $ — $ — $ — $ 829,538 $ 829,538

Multifamily — — — — 1,428,092 1,428,092

Construction and land development

Multifamily construction — — — — — 115,329 115,329

CRE construction — — — — — 27,285 27,285

Single family construction — — — — — 259,170 259,170

Single family construction to permanent — — — — — 151,911 151,911

Total — — — — — 2,811,325 2,811,325

Commercial and industrial loans

Owner occupied commercial real estate — — — 2,891 2,891 474,425 477,316

Owner occupied CRE — — — 4,922 4,922 462,334 467,256

Commercial business — — 9,183 9,183 636,540 645,723

8 unchanged sentences

(2) FHA-insured and VA-guaranteed single family loans that are 90 days or more past due are maintained on accrual status if they are determined to have little to no risk of loss.

(3) Net deferred loans fees and costs of $24.5 million were included within the carrying amounts of the loan balances in order to conform with the current period presentation.

(3) Includes loans whose repayments are insured by the FHA or guaranteed by the VA or SBA of $14.7 million.

2 unchanged sentences

Forbearances Approved (2)

Initiated in the Fourth Quarter 2020 Second Request Total Outstanding

(in thousands) Number of loans Amount Number of loans Amount Number of loans Amount Number of loans Amount

Total Expired Outstanding

(in thousands) Number of loans Amount Number of loans Amount Number of loans Amount

Commercial and CRE

2 unchanged sentences

CRE nonowner occupied 14 59,327 13 45,289 1 14,038

Multifamily 1 5,734 — — 1 5,734 1 5,734

Total 140 $ 176,985 139 $ 162,947 1 $ 14,038

1 unchanged sentence

Single family 24 $ 12,068

HELOCs and consumer 53 6,116

Home equity and other 16 1,898

Total 40 $ 13,966

(1) Does not include any SBA guaranteed loans for which the government made payments as provided for under the CARES Act, or single family loans that are guaranteed by Ginnie Mae.

(2) This schedule does not include $18 million of constructions loans (5 loans) that were modified as a result of COVID-19 related construction delays to extend the construction or lease-up periods.

(1) Does not include any single family loans that are guaranteed by Ginnie Mae.

(2) Does not include constructions loans that were modified as a result of COVID-19 related construction delays to extend the construction or lease-up periods.

Each of these loans continued to perform under the existing or modified payment terms.

The forbearances approved for commercial and industrial loans and CRE nonowner occupied loans were generally for a period of three months while the forbearances for single family, HELOCs and consumer loans were generally for a period of three to six months.

During the third and fourth quarters of 2020, second forbearances were approved for $70 million of loans.

These second forbearances were to borrowers whose businesses continue to be impacted by the effects of the COVID-19 pandemic.

At December 31, 2021, two of these loans with $2 million in balances were still operating under the terms of their modifications.

The forbearances approved for commercial and industrial loans and CRE nonowner occupied loans were generally for a period of three months while the forbearances for single family, home equity and consumer loans were generally for a period of three to six months.

As of December 31, 2021, excluding the loans with forbearances still in place, 99% of the commercial and CRE loans approved for a forbearance have completed their forbearance period and have resumed payments.

Based on information obtained through discussions with these borrowers, we believe almost all of them are able to conduct their businesses as a going concern, and they have advised us that they do not currently foresee the need for additional forbearances.

The forbearance periods for the majority of single family and consumer loans granted forbearance that were not complete as of December 31, 2020 are scheduled to be completed in the first quarter of 2021.

In light of the recently passed Coronavirus Response and Relief Supplemental Appropriations Act, we anticipate that some single family loans may request an additional forbearance in 2021.

The forbearance periods for the majority of single family and consumer loans that were not completed as of December 31, 2021 are scheduled to be completed in the first quarter of 2022.

The following table presents the ACL by product type at the dates indicated:

December 31, 2020 January 1, 2020 (2)

(in thousands except reserve rate) Amount Reserve Rate (1)

Amount Reserve Rate (1)

Commercial real estate loans

Non-owner occupied commercial real estate $ 8,845 1.07 % $ 3,853 0.43 %

December 31, 2021 December 31, 2020

(in thousands) Amount Rate (1)

Amount Rate (1)

Non-owner occupied CRE $ 7,509 1.06 % $ 8,845 1.07 %

Multifamily 5,854 0.24 % 6,072 0.43 %

1 unchanged sentence

Multifamily construction 507 1.34 % 4,903 4.25 %

Commercial real estate construction 1,670 6.12 % 509 0.92 %

CRE construction 150 1.06 % 1,670 6.12 %

Single family construction 6,411 2.16 % 5,130 1.98 %

2 unchanged sentences

Commercial and industrial loans

Owner occupied commercial real estate 4,994 1.08 % 1,180 0.25 %

Owner occupied CRE 5,006 1.10 % 4,994 1.08 %

Commercial business 12,273 3.39 % 17,043 4.72 %

5 unchanged sentences

Total ACL $ 47,123 0.88 % $ 64,294 1.33 %

(1) The reserve rate is calculated excluding balances related to loans that are insured by the FHA or guaranteed by the VA or SBA, including PPP loans.

(2) On January 1, 2020 we adopted ASC 326 ("CECL").

As a result, the ACL as of January 1, 2020 is presented.

The following table presents the allowance for credit losses, including reserves for unfunded commitments, by loan class.

At December 31, 2019

(in thousands except reserve rate) Amount

Reserve Rate (1)

Commercial real estate loans

Non-owner occupied commercial real estate $ 7,249 0.81 %

Multifamily 7,015 0.70 %

Construction/land development 8,679 1.24 %

Total 22,943 0.89 %

Commercial and industrial loans

Owner occupied commercial real estate 3,640 0.77 %

Commercial business 2,961 0.72 %

Total 6,601 0.74 %

Consumer loans

Single family 6,450 0.66 %

Home equity and other 6,843 1.24 %

Total 13,293 0.87 %

Total allowance for credit losses $ 42,837 0.86 %

(1) The reserve rate is calculated excluding balances related to loans that are insured by the FHA or guaranteed by the VA or SBA, including PPP loans.

(1) The rate is calculated excluding balances related to loans that are insured by the FHA or guaranteed by the VA or SBA, including PPP loans.

Liquidity and Sources of Funds

9 unchanged sentences

Interest payments and obligations related to leases and services are typically met by cash generated from our operations.

The Company does not have any obligation to repay long term debt within the next five years.

At December 31, 2020, the Bank had available borrowing capacity of $550 million from the FHLB, $406 million from the FRBSF and $1.2 billion under borrowing lines established with other financial institutions.

For 2020, 2019 and 2018, cash and cash equivalents increased $0.2 million, decreased $0.7 million and decreased $15 million, respectively.

The Company does not have any obligation to repay long term debt within the next four years.

At December 31, 2021, the Bank had available borrowing capacity of $1.8 billion from the FHLB, $274 million from the FRBSF and $1.0 billion under borrowing lines established with other financial institutions.

We believe that our current unrestricted cash and cash equivalents, cash flows from operations and borrowing capacity will be sufficient to meet our liquidity needs for at least the next 12 months.

We are currently not aware of any other trends or demands, commitments, events or uncertainties that will result in or that are reasonably likely to result in our liquidity increasing or decreasing in any material way that will impact our liquidity needs during or beyond the next 12 months.

For 2021 and 2020, cash and cash equivalents increased $7.2 million and $0.2 million, respectively.

As a banking institution, the Company has extensive access to liquidity.

3 unchanged sentences

The Company's operating assets and liabilities are used to support our lending activities, including the origination and sale of mortgage loans.

For 2020, $26 million of cash was used in operating activities, primarily to fund an increase in our LHFS which was partially offset by cash generated from our operations.

For 2019, cash of $259 million was provided by operating activities, primarily from proceeds from the sale of LHFS and cash generated from our operations which were partially offset by the payment of deferred taxes from the sale of mortgage servicing rights.

For 2018, cash of $286 million was provided by operating activities primarily from proceeds from the sale of LHFS and cash generated from our operations.

For 2021, $173 million of cash was provided by operating activities, primarily from cash proceeds from the sale of loans exceeding cash used to fund LHFS.

For 2020, cash of $26 million was used in operating activities, primarily to fund an increase in our LHFS which was partially offset by cash generated from our operations.

Cash flows from investing activities

The Company's investing activities are primarily related to AFS securities and LHFI.

For 2020, cash of $233 million was used in investing activities for the origination of LHFI and the purchase of AFS securities, which were partially offset by principal payments and the proceeds from sale of LHFI and AFS securities.

For 2019, cash of $107 million was provided by investing activities from principal payments and the proceeds from sale of LHFI and AFS securities and the proceeds from our disposal of discontinued operations which were partially offset by the use of cash for the origination of LHFI and the purchase of AFS securities.

For 2018, cash of $564 million was used in investing activities for the origination of LHFI and the purchase of AFS securities and premises and equipment, which were partially offset by principal payments and the proceeds from sale of LHFI and AFS securities.

The Company's investing activities are primarily related to investment securities and LHFI.

For 2021, cash of $126 million was used in investing activities for the origination of LHFI and the purchase of investment securities, partially offset by principal repayments and the proceeds from the sale of LHFI and investment securities.

For 2020, cash of $233 million was used in investing activities for the origination of LHFI and the purchase of investment securities, which were partially offset by principal payments and the proceeds from sale of LHFI and investment securities.

Cash flows from financing activities

The Company's financing activities are primarily related to customer deposits, borrowings and equity transactions.

For 2020, cash of $258 million was provided by financing activities from growth in deposits, which was partially offset by net repayment of short term borrowings, repurchases of our common stock and the payment of dividends on our common stock.

For 2019, cash of $367 million was used in financing activities as the net repayment of short term borrowings and repurchases of our common stock were partially offset by growth in deposits.

For 2018, cash of $263 million was provided by financing activities from the growth in deposits which was partially offset by net repayment of short term borrowings.

The Company's financing activities are primarily related to deposits, net proceeds from borrowings and equity transactions.

For 2021, cash of $40 million was used in financing activities from net repayment of short-term borrowings, repurchases of and dividends paid on our common stock, partially offset by growth in deposits.

For 2020, cash of $258 million as provided by financing activities from growth in deposits, which was partially offset by net repayment of short-term borrowings, repurchases of our common stock and the payment of dividends on our common stock.

Capital Resources and Dividends

13 unchanged sentences

Adequacy Purposes To Be Categorized As

"Well Capitalized" Under

Prompt Corrective

Action Provisions

(in thousands except ratios) Amount Ratio Amount Ratio Amount Ratio

"Well Capitalized"

(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio

HomeStreet, Inc.

11 unchanged sentences

Adequacy Purposes To Be Categorized As

"Well Capitalized" Under

Prompt Corrective

Action Provisions

(in thousands except ratios) Amount Ratio Amount Ratio Amount Ratio

"Well Capitalized"

(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio

HomeStreet, Inc.

8 unchanged sentences

Total risk-based capital (to risk-weighted assets) 778,479 14.76 % 421,880 8.0 % 527,350 10.0 %

As of each of the dates set forth in the above table, the Company exceeded the minimum required capital ratios applicable to it and the Bank’s capital ratios exceeded the minimums necessary to qualify as a well-capitalized depository institution under the prompt corrective action regulations.

At each of the dates set forth in the above table, the Company exceeded the minimum required capital ratios applicable to it and the Bank’s capital ratios exceeded the minimums necessary to qualify as a well-capitalized depository institution under the prompt corrective action regulations.

In addition to the minimum capital ratios, both the Company and the Bank are required to maintain a "conservation buffer" consisting of additional Common Equity Tier 1 Capital which is at least 2.5% above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses.

12 unchanged sentences

To supplement our unaudited condensed consolidated financial statements presented in accordance with GAAP, we use certain non-GAAP measures of financial performance.

In this annual report on Form 10-K, we use (i) tangible common equity and tangible assets as we believe this information is consistent with the treatment by bank regulatory agencies, which exclude intangible assets from the calculation of capital ratios;

and (ii) an efficiency ratio which is the ratio of noninterest expense to the sum of net interest income and noninterest income, excluding certain items of income or expense and excluding taxes incurred and payable to the state of Washington as such taxes are not classified as income taxes and we believe including them in noninterest expense impacts the comparability of our results to those companies whose operations are in states where assessed taxes on business are classified as income taxes.

For the purposes of computing returns on tangible common equity, we exclude from earnings the amortization of intangible assets.

These supplemental performance measures may vary from, and may not be comparable to, similarly titled measures provided by other companies in our industry.

8 unchanged sentences

In the information below, we have provided a reconciliation of, where applicable, the most comparable GAAP financial measures to the non-GAAP measures used in this annual report on Form 10-K, or a reconciliation of the non-GAAP calculation of the financial measure.

For the purposes of computing returns on tangible common equity, we exclude from earnings the amortization of intangible assets.

Reconciliations of non-GAAP results of operations to the nearest comparable GAAP measures:

As of or for the Year Ended

(in thousands, except share data) 2020 2019 2018

For the Year Ended

(in thousands, except ratio) 2021 2020

Return on average tangible equity (annualized)

10 unchanged sentences

16.8 % 12.1 %

Net income from continuing operations $ 79,990 $ 40,720 $ 26,223

Adjustments (tax effected):

Amortization on core deposit intangibles (per above) 1,082 1,367 1,284

Tangible income applicable to shareholders $ 81,072 $ 42,087 $ 27,507

Ratio 12.1 % 6.4 % 4.1 %

Efficiency ratio

2 unchanged sentences

Restructuring related charges — (11,837)

Legal fees recovery 1,900 —

Prepayment fee on FHLB advances — (1,492)

33 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 7. Management’s Discussion and Analysis