Mechanics Bancorp 10-Q

hmst-20220630 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ________________________________ FORM 10-Q ________________________________ ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: June 30, 2022 OR ☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _____ to _____ Commission file number: 001-35424 ________________________________ HOMESTREET, INC. (a Washington Corporation) 91-0186600 ________________________________ 601 Union Street , Suite 2000 Seattle , Washington 98101 (Address of principal executive offices) Telephone Number - Area Code ( 206 ) 623-3050 Securities registered pursuant to Section 12(b) of the Act: Title of each class Trading Symbol(s) Name of each exchange on which registered Common Stock HMST Nasdaq Global Select Market Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act: Large Accelerated Filer ☐ Accelerated Filer ☒ Non-accelerated Filer ☐ Smaller Reporting Company ☐ Emerging growth Company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ The number of outstanding shares of the registrant's common stock as of August 2, 2022 was 18,717,168 . PART I – FINANCIAL INFORMATION ITEM 1 FINANCIAL STATEMENTS Consolidated Balance Sheets at June 3 0 , 2022 and December 31, 2021 3 Consolidated Income Statements for the Quarter s a nd Six Months Ended June 3 0 , 2022 and 2021 4 Consolidated Statements of Comprehensive Income for the Quarters and Six Months Ended June 3 0 , 2022 and 2021 5 Consolidated Statements of Shareholders’ Equity for the Quarters and Six Months Ended June 3 0 , 2022 and 2021 6 Consolidated Statements of Cash Flows for the Six Month s Ended Jun e 3 0 , 2022 and 2021 7 Notes to Consolidated Financial Statements 9 ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 41 ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 59 ITEM 4 CONTROLS AND PROCEDURES 62 PART II – OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS 62 ITEM 1A RISK FACTORS 63 ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 65 ITEM 3 DEFAULTS UPON SENIOR SECURITIES 65 ITEM 4 MINE SAFETY DISCLOSURES 65 ITEM 5 OTHER INFORMATION 65 ITEM 6 EXHIBITS 66 SIGNATURES 67 Unless we state otherwise or the content otherwise requires, references in this Form 10-Q to "HomeStreet," "we," "our," "us" or the "Company" refer collectively to HomeStreet, Inc., a Washington corporation, HomeStreet Bank ("Bank"), HomeStreet Capital Corporation ("HomeStreet Capital") and other direct and indirect subsidiaries of HomeStreet, Inc. 2 PART I ITEM 1 FINANCIAL STATEMENTS HOMESTREET, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30, 2022 December 31, 2021 (in thousands, except share data) (Unaudited) ASSETS Cash and cash equivalents $ 75,277 $ 65,214 Investment securities 1,237,957 1,006,691 Loans held for sale ("LHFS") 47,314 176,131 Loans held for investment ("LHFI") (net of allowance for credit losses of $ 37,355 and $ 47,123 ) 6,722,382 5,495,726 Mortgage servicing rights ("MSRs") 114,611 100,999 Premises and equipment, net 54,213 58,154 Other real estate owned ("OREO") 1,753 735 Goodwill and other intangible assets 31,219 31,709 Other assets 298,160 268,732 Total assets $ 8,582,886 $ 7,204,091 LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Deposits $ 6,183,299 $ 6,146,509 Borrowings 1,458,000 41,000 Long-term debt 224,227 126,026 Accounts payable and other liabilities 136,593 175,217 Total liabilities 8,002,119 6,488,752 Commitments and contingencies Shareholders' equity: Common stock, no par value, authorized 160,000,000 shares, issued and outstanding, 18,712,789 shares and 20,085,336 shares 224,776 249,856 Retained earnings 419,254 444,343 Accumulated other comprehensive income (loss) ( 63,263 ) 21,140 Total shareholders' equity 580,767 715,339 Total liabilities and shareholders' equity $ 8,582,886 $ 7,204,091 . See accompanying notes to consolidated financial statements 3 HOMESTREET, INC. AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENTS (Unaudited) Quarter Ended June 30, Six Months Ended June 30, (in thousands, except share and per share data) 2022 2021 2022 2021 Interest income: Loans $ 59,825 $ 57,078 $ 112,779 $ 110,646 Investment securities 7,379 5,010 13,345 10,961 Cash, Fed Funds and other 487 159 595 331 Total interest income 67,691 62,247 126,719 121,938 Interest expense: Deposits 2,893 2,773 5,177 6,423 Borrowings 4,742 1,502 6,940 3,026 Total interest expense 7,635 4,275 12,117 9,449 Net interest income 60,056 57,972 114,602 112,489 Provision for credit losses — ( 4,000 ) ( 9,000 ) ( 4,000 ) Net interest income after provision for credit losses 60,056 61,972 123,602 116,489 Noninterest income: Net gain on loan origination and sale activities 5,292 21,271 13,566 54,730 Loan servicing income 3,661 1,931 6,965 2,679 Deposit fees 2,218 1,997 4,293 3,821 Other 1,842 3,025 3,747 5,827 Total noninterest income 13,013 28,224 28,571 67,057 Noninterest expense: Compensation and benefits 30,191 34,378 62,222 70,213 Information services 7,780 6,949 14,842 13,733 Occupancy 5,898 5,973 12,263 12,465 General, administrative and other 6,768 5,515 15,783 13,012 Total noninterest expense 50,637 52,815 105,110 109,423 Income before income taxes 22,432 37,381 47,063 74,123 Income tax expense 4,711 8,224 9,391 15,303 Net income $ 17,721 $ 29,157 $ 37,672 $ 58,820 Net income per share: Basic $ 0.95 $ 1.38 $ 1.97 $ 2.76 Diluted 0.94 1.37 1.95 2.72 Weighted average shares outstanding: Basic 18,706,953 21,057,473 19,143,925 21,345,969 Diluted 18,834,443 21,287,974 19,310,750 21,623,298 See accompanying notes to consolidated financial statements 4 HOMESTREET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) Quarter Ended June 30, Six Months Ended June 30, (in thousands) 2022 2021 2022 2021 Net income $ 17,721 $ 29,157 $ 37,672 $ 58,820 Other comprehensive income (loss): Unrealized gain (loss) on investment securities available for sale ("AFS") ( 42,545 ) 10,236 ( 110,732 ) ( 9,445 ) Reclassification for net (gains) losses included in income — ( 62 ) ( 71 ) ( 62 ) Other comprehensive income (loss) before tax ( 42,545 ) 10,174 ( 110,803 ) ( 9,507 ) Income tax impact of: Unrealized gain (loss) on investment securities AFS ( 10,211 ) 2,150 ( 26,383 ) ( 1,983 ) Reclassification for net (gains) losses included in income — ( 13 ) ( 17 ) ( 13 ) Total ( 10,211 ) 2,137 ( 26,400 ) ( 1,996 ) Other comprehensive income (loss) ( 32,334 ) 8,037 ( 84,403 ) ( 7,511 ) Total comprehensive income (loss) $ ( 14,613 ) $ 37,194 $ ( 46,731 ) $ 51,309 See accompanying notes to consolidated financial statements 5 HOMESTREET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited) (in thousands, except share data) Number of shares Common stock Retained earnings Accumulated other comprehensive income (loss) Total shareholders' equity For the quarter ended June 30, 2021 Balance, March 31, 2021 21,360,514 $ 269,942 $ 411,712 $ 19,809 $ 701,463 Net income — — 29,157 — 29,157 Share-based compensation expense — 855 — — 855 Common stock issued - Option exercise; stock grants 5,108 195 — — 195 Other comprehensive income (loss) — — — 8,037 8,037 Dividends declared on common stock ($ 0.25 per share) — — ( 5,378 ) — ( 5,378 ) Common stock repurchased ( 573,963 ) ( 10,218 ) ( 15,380 ) — ( 25,598 ) Balance, June 30, 2021 20,791,659 $ 260,774 $ 420,111 $ 27,846 $ 708,731 For the six months ended June 30, 2021 Balance, December 31, 2020 21,796,904 $ 278,505 $ 403,888 $ 35,357 $ 717,750 Net income — — 58,820 — 58,820 Share-based compensation expense — 1,665 — — 1,665 Common stock issued - Option exercise; stock grants 193,365 2,044 — — 2,044 Other comprehensive income — — — ( 7,511 ) ( 7,511 ) Dividends declared on common stock ($ 0.50 per share) ( 10,912 ) ( 10,912 ) Common stock repurchased ( 1,198,610 ) ( 21,440 ) ( 31,685 ) — ( 53,125 ) Balance, June 30, 2021 20,791,659 $ 260,774 $ 420,111 $ 27,846 $ 708,731 For the quarter ended June 30, 2022 Balance, March 31, 2022 18,700,536 $ 223,718 $ 408,442 $ ( 30,929 ) $ 601,231 Net income — — 17,721 — 17,721 Share-based compensation expense — 1,221 — — 1,221 Common stock issued - Stock grants 21,378 — — — — Other comprehensive income (loss) — — — ( 32,334 ) ( 32,334 ) Dividends declared on common stock ($ 0.35 per share) — — ( 6,633 ) — ( 6,633 ) Common stock repurchased ( 9,125 ) ( 163 ) ( 276 ) — ( 439 ) Balance, June 30, 2022 18,712,789 $ 224,776 $ 419,254 $ ( 63,263 ) $ 580,767 For the six months ended June 30, 2022 Balance, December 31, 2021 20,085,336 $ 249,856 $ 444,343 $ 21,140 $ 715,339 Net income — — 37,672 — 37,672 Share-based compensation expense — 2,297 — — 2,297 Common stock issued - Stock grants 126,218 — — — — Other comprehensive income (loss) — — — ( 84,403 ) ( 84,403 ) Dividends declared on common stock ($ 0.70 per share) — — ( 13,797 ) — ( 13,797 ) Common stock repurchased ( 1,498,765 ) ( 27,377 ) ( 48,964 ) — ( 76,341 ) Balance, June 30, 2022 18,712,789 $ 224,776 $ 419,254 $ ( 63,263 ) $ 580,767 See accompanying notes to consolidated financial statements 6 HOMESTREET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended June 30, (in thousands) 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 37,672 $ 58,820 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses ( 9,000 ) ( 4,000 ) Depreciation and amortization, premises and equipment 5,134 4,788 Amortization of premiums and discounts: securities, deposits, debt 2,036 3,204 Operating leases: excess of payments over amortization ( 2,158 ) ( 2,016 ) Amortization of finance leases 293 546 Amortization of core deposit intangibles 490 587 Amortization of deferred loan fees and costs ( 619 ) ( 4,825 ) Share-based compensation expense 2,297 1,665 Deferred income tax expense (benefit) 6,991 5,353 Origination of LHFS ( 476,350 ) ( 1,336,342 ) Proceeds from sale of LHFS 607,523 1,380,651 Net fair value adjustment and gain on sale of LHFS 5,478 ( 25,441 ) Origination of MSRs ( 8,975 ) ( 20,472 ) Net gain on sale of loans originated as LHFI — ( 4,613 ) Change in fair value of MSRs ( 8,686 ) 4,434 Amortization of servicing rights 4,049 3,477 Net change in trading securities ( 33,074 ) — (Increase) decrease in other assets 17,912 ( 6,414 ) Increase (decrease) in accounts payable and other liabilities ( 5,882 ) ( 4,227 ) Net cash provided by operating activities 145,131 55,175 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of investment securities ( 356,539 ) ( 86,333 ) Proceeds from sale of investment securities 962 28,187 Principal payments on investment securities 64,719 114,367 Proceeds from sale of OREO 952 — Proceeds from sale of loans originated as LHFI — 251,474 Net increase in LHFI ( 1,226,169 ) ( 272,051 ) Purchase of premises and equipment ( 2,014 ) ( 827 ) Proceeds from sale of Federal Home Loan Bank stock 31,683 86,321 Purchases of Federal Home Loan Bank stock ( 88,314 ) ( 76,726 ) Net cash provided by (used in) investing activities ( 1,574,720 ) 44,412 7 Six Months Ended June 30, (in thousands) 2022 2021 CASH FLOWS FROM FINANCING ACTIVITIES: Increase (decrease) in deposits, net 13,710 264,898 Changes in short-term borrowings, net 1,417,000 ( 322,800 ) Proceeds from other long-term borrowings — 50,000 Proceeds from debt issuance, net 98,036 — Repayment of finance lease principal ( 297 ) ( 613 ) Repurchases of common stock ( 75,000 ) ( 50,001 ) Proceeds from exercise of stock options — 263 Dividends paid on common stock ( 13,797 ) ( 10,912 ) Net cash provided by (used in) financing activities 1,439,652 ( 69,165 ) Net increase in cash and cash equivalents 10,063 30,422 Cash and cash equivalents, beginning of year 65,214 58,049 Cash and cash equivalents, end of period $ 75,277 $ 88,471 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 9,957 $ 9,517 Federal and state income taxes 310 23,367 Non-cash activities: Increase in lease assets and lease liabilities 3,858 467 LHFI foreclosed and transferred to OREO 1,018 — Loans transferred from LHFI to LHFS, net 7,834 128,824 Ginnie Mae loans derecognized with the right to repurchase, net 6,239 44,680 Repurchase of common stock-award shares 1,341 3,124 See accompanying notes to consolidated financial statements 8 HomeStreet, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) NOTE 1– SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: HomeStreet, Inc., a State of Washington corporation organized in 1921 (the "Corporation"), is a Washington-based diversified financial services holding company whose operations are primarily conducted through its wholly owned subsidiaries (collectively the "Company") HomeStreet Capital Corporation, HomeStreet Statutory Trusts and HomeStreet Bank (the "Bank"), and the Bank's subsidiaries, Continental Escrow Company, HomeStreet Foundation, HS Properties, Inc., HS Evergreen Corporate Center LLC, and Union Street Holdings LLC. The Company is principally engaged in commercial banking, mortgage banking and consumer/retail banking activities serving customers primarily in the Western United States. The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP"). The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation. The Company allocates resources and assesses financial performance on a consolidated basis and therefore has one reporting segment. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. Actual results could differ significantly from those estimates. Certain amounts in the financial statements from prior periods have been reclassified to conform to the current financial statement presentation. These unaudited interim financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the results for the periods presented. These adjustments are of a normal recurring nature, unless otherwise disclosed in this Quarterly Report on Form 10-Q. The results of operations in the interim financial statements do not necessarily indicate the results that may be expected for the full year. The interim financial information should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission ("2021 Annual Report on Form 10-K"). Recent Accounting Developments In March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2020-04, Reference Rate Reform (Topic 848). This ASU provides optional expedients and exceptions for contracts, hedging relationships, and other transactions that reference London Interbank Offered Rate ("LIBOR") rates expected to be discontinued because of reference rate reform. In January 2021, the FASB issued ASU 2021-01, "Reference Rate Reform (Topic 848)," which clarifies certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting applied to derivatives that are affected by the transition to alternative rates. The ASUs are effective for all entities as of March 12, 2020 through December 31, 2022. The adoption of these ASUs is not expected to have a material impact on the Company’s financial position or results of operations. In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments-Credit Losses (Topic 326). The amendments in this ASU eliminate the accounting guidance for Troubled Debt Restructuring ("TDRs") by creditors, while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower experiences financial difficulty. In addition, the amendments require that an entity disclose current period gross charge-offs by year of origination in a vintage table. We prospectively adopted the portion of ASU No. 2022-02 with respect to amendments about TDRs and related disclosure enhancements as of January 1, 2022. This adoption did not have a material impact on the Company’s financial position or results of operations. As the change is disclosure only in nature, we do not expect the vintage table disclosure requirement of ASU 2022-02 to have a material impact on the Company's financial position or results of operations when adopted. 9 NOTE 2– INVESTMENT SECURITIES: The following table sets forth certain information regarding the amortized cost basis and fair values of our investment securities AFS and held-to-maturity ("HTM"): At June 30, 2022 (in thousands) Amortized cost Gross unrealized gains Gross unrealized losses Fair value AFS Mortgage backed securities ("MBS"): Residential $ 131,458 $ 137 $ ( 2,664 ) $ 128,931 Commercial 70,076 — ( 6,503 ) 63,573 Collateralized mortgage obligations ("CMOs"): Residential 314,451 175 ( 18,577 ) 296,049 Commercial 131,781 75 ( 5,265 ) 126,591 Municipal bonds 582,262 826 ( 47,735 ) 535,353 Corporate debt securities 31,792 — ( 1,462 ) 30,330 U.S. Treasury securities 23,178 — ( 2,248 ) 20,930 Total $ 1,284,998 $ 1,213 $ ( 84,454 ) $ 1,201,757 HTM Municipal bonds $ 3,118 $ 3 $ ( 32 ) $ 3,089 At December 31, 2021 (in thousands) Amortized cost Gross unrealized gains Gross unrealized losses Fair value AFS MBS: Residential $ 32,905 $ 396 $ ( 338 ) $ 32,963 Commercial 62,094 933 ( 235 ) 62,792 CMOs: Residential 186,703 2,012 ( 1,321 ) 187,394 Commercial 135,102 1,890 ( 333 ) 136,659 Municipal bonds 516,693 24,154 ( 924 ) 539,923 Corporate debt securities 18,918 699 ( 1 ) 19,616 U.S. Treasury securities 23,348 — ( 173 ) 23,175 Total $ 975,763 $ 30,084 $ ( 3,325 ) $ 1,002,522 HTM Municipal bonds $ 4,169 $ 136 $ — $ 4,305 At June 30, 2022, the Company held $ 33.1 million of trading securities, consisting of US Treasury notes used as economic hedges of our mortgage servicing rights, which are carried at fair value and included as investment securities on the balance sheet. Unrealized gains, net, on trading securities, which are included in loan servicing income, were $ 45 thousand at June 30, 2022. For the three and six months ended June 30, 2022, trading losses of $ 3.1 million and $ 3.9 million, respectively, were recorded in servicing income on the consolidated income statements. MBS and CMOs represent securities issued by government sponsored enterprises ("GSEs"). Most of the MBS and CMO securities in our investment portfolio are guaranteed by Fannie Mae, Ginnie Mae or Freddie Mac. Municipal bonds are comprised of general obligation bonds (i.e., backed by the general credit of the issuer) and revenue bonds (i.e., backed by either 10 collateral or revenues from the specific project being financed) issued by various municipal corporations. As of June 30, 2022 and December 31, 2021, all securities held, including municipal bonds and corporate debt securities, were rated investment grade, based upon external ratings where available and, where not available, based upon internal ratings which correspond to ratings as defined by Standard and Poor's Rating Services or Moody's Investors Services. Investment securities AFS that were in an unrealized loss position are presented in the following tables based on the length of time the individual securities have been in an unrealized loss position: At June 30, 2022 Less than 12 months 12 months or more Total (in thousands) Gross unrealized losses Fair value Gross unrealized losses Fair value Gross unrealized losses Fair value AFS MBS: Residential $ ( 2,106 ) $ 60,558 $ ( 558 ) $ 2,089 $ ( 2,664 ) $ 62,647 Commercial ( 6,503 ) 63,553 — — ( 6,503 ) 63,553 CMOs: Residential ( 14,699 ) 263,668 ( 3,878 ) 19,095 ( 18,577 ) 282,763 Commercial ( 4,410 ) 98,776 ( 855 ) 7,267 ( 5,265 ) 106,043 Municipal bonds ( 44,369 ) 449,658 ( 3,366 ) 10,638 ( 47,735 ) 460,296 Corporate debt securities ( 1,462 ) 30,259 — — ( 1,462 ) 30,259 U.S. Treasury securities ( 2,248 ) 20,930 — — ( 2,248 ) 20,930 Total $ ( 75,797 ) $ 987,402 $ ( 8,657 ) $ 39,089 $ ( 84,454 ) $ 1,026,491 HTM Municipal bonds $ ( 32 ) $ 2,443 $ — $ — $ ( 32 ) $ 2,443 At December 31, 2021 Less than 12 months 12 months or more Total (in thousands) Gross unrealized losses Fair value Gross unrealized losses Fair value Gross unrealized losses Fair value MBS: Residential $ ( 38 ) $ 5,324 $ ( 300 ) $ 2,406 $ ( 338 ) $ 7,730 Commercial ( 235 ) 18,127 — — ( 235 ) 18,127 CMOs: Residential ( 1,007 ) 53,068 ( 314 ) 7,116 ( 1,321 ) 60,184 Commercial ( 135 ) 14,806 ( 198 ) 5,132 ( 333 ) 19,938 Municipal bonds ( 914 ) 64,237 ( 10 ) 1,058 ( 924 ) 65,295 Corporate debt securities ( 1 ) 3,164 — — ( 1 ) 3,164 U.S. Treasury securities ( 173 ) 23,175 — — ( 173 ) 23,175 Total $ ( 2,503 ) $ 181,901 $ ( 822 ) $ 15,712 $ ( 3,325 ) $ 197,613 The Company has evaluated AFS securities that are in an unrealized loss position and has determined that the decline in value is temporary and is related to the change in market interest rates since purchase. The decline in value is not related to any issuer- or industry-specific credit event. The Company has not identified any expected credit losses on its debt securities as of June 30, 2022 or December 31, 2021. In addition, as of June 30, 2022 and December 31, 2021, the Company had not made a decision to sell any of its debt securities held, nor did the Company consider it more likely than not that it would be required to sell such securities before recovery of their amortized cost basis. 11 The following tables present the fair value of investment securities AFS and HTM by contractual maturity along with the associated contractual yield: At June 30, 2022 Within one year After one year through five years After five years through ten years After ten years Total (dollars in thousands) Fair Value Weighted Average Yield Fair Value Weighted Average Yield Fair Value Weighted Average Yield Fair Value Weighted Average Yield Fair Value Weighted Average Yield AFS Municipal bonds $ 4,122 3.55 % $ 16,348 3.02 % $ 73,618 3.46 % $ 441,265 2.99 % $ 535,353 3.05 % Corporate debt securities — — % 5,463 3.50 % 24,867 4.34 % — — % 30,330 4.20 % U.S. Treasury securities — — % — — % 20,930 1.16 % — — % 20,930 1.16 % Total $ 4,122 3.55 % $ 21,811 3.14 % $ 119,415 3.22 % $ 441,265 2.99 % $ 586,613 3.04 % HTM Municipal bonds $ 646 3.49 % $ 2,443 2.06 % $ — — % $ — — % $ 3,089 2.35 % At December 31, 2021 Within one year After one year through five years After five years through ten years After ten years Total (dollars in thousands) Fair Value Weighted Average Yield Fair Value Weighted Average Yield Fair Value Weighted Average Yield Fair Value Weighted Average Yield Fair Value Weighted Average Yield AFS Municipal bonds $ 4,933 3.79 % $ 14,366 3.26 % $ 68,025 3.60 % $ 452,599 3.23 % $ 539,923 3.28 % Corporate debt securities — — % 6,563 3.60 % 13,053 5.03 % — — % 19,616 4.55 % U.S. Treasury securities — — % — — % 23,175 1.27 % — — % 23,175 1.27 % Total $ 4,933 3.79 % $ 20,929 3.37 % $ 104,253 3.23 % $ 452,599 3.23 % $ 582,714 3.24 % HTM Municipal bonds $ 1,684 2.86 % $ 2,621 2.12 % $ — — % $ — — % $ 4,305 2.42 % The weighted-average yield is computed using the contractual coupon of each security weighted based on the fair value of each security and does not include adjustments to a tax equivalent basis. MBS and CMOs are excluded from the tables above because such securities are not due on a single maturity date. The weighted average yield of MBS and CMOs as of June 30, 2022 and December 31, 2021 was 2.30 % and 1.82 %, respectively. Sales of AFS investment securities were as follows: Quarter Ended June 30, Six Months Ended June 30, (in thousands) 2022 2021 2022 2021 Proceeds $ — $ 28,187 $ 962 $ 28,187 Gross gains — 288 71 288 Gross losses — ( 226 ) — ( 226 ) 12 The following table summarizes the carrying value of securities pledged as collateral to secure public deposits, borrowings and other purposes as permitted or required by law: (in thousands) At June 30, 2022 At December 31, 2021 Washington, Oregon and California to secure public deposits $ 195,497 $ 206,153 Other securities pledged 4,787 5,258 Total securities pledged as collateral $ 200,284 $ 211,411 The Company assesses the creditworthiness of the counterparties that hold the pledged collateral and has determined that these arrangements have little credit risk. Tax-exempt interest income on investment securities was $ 3.1 million and $ 2.5 million for the quarters ended June 30, 2022 and 2021, respectively, and $ 5.8 million and $ 5.0 million for the six months ended June 30, 2022 and 2021, respectively. 13 NOTE 3 - LOANS AND CREDIT QUALITY: The Company's LHFI is divided into two portfolio segments, commercial loans and consumer loans. Within each portfolio segment, the Company monitors and assesses credit risk based on the risk characteristics of each of the following loan classes: non-owner occupied commercial real estate ("CRE"), multifamily, construction and land development, owner occupied CRE and commercial business loans within the commercial loan portfolio segment and single family and home equity and other loans within the consumer loan portfolio segment. LHFI consists of the following: (in thousands) At June 30, 2022 At December 31, 2021 CRE Non-owner occupied CRE $ 711,077 $ 705,359 Multifamily 3,475,697 2,415,359 Construction/land development 569,896 496,144 Total 4,756,670 3,616,862 Commercial and industrial loans Owner occupied CRE 470,259 457,706 Commercial business 393,764 401,872 Total 864,023 859,578 Consumer loans Single family 822,389 763,331 Home equity and other 316,655 303,078 Total (1) 1,139,044 1,066,409 Total LHFI 6,759,737 5,542,849 Allowance for credit losses ("ACL") ( 37,355 ) ( 47,123 ) Total LHFI less ACL $ 6,722,382 $ 5,495,726 (1) Includes $ 6.5 million and $ 7.3 million at June 30, 2022 and December 31, 2021, respectively, of loans where a fair value option election was made at the time of origination and, therefore, are carried at fair value with changes in fair value recognized in the consolidated income statements. Loans totaling $ 3.3 billion and $ 2.8 billion at June 30, 2022 and December 31, 2021, respectively, were pledged to secure borrowings from the Federal Home Loan Bank ("FHLB") and loans totaling $ 466 million and $ 419 million at June 30, 2022 and December 31, 2021, respectively, were pledged to secure borrowings from the Federal Reserve Bank of San Francisco ("FRBSF"). Credit Risk Concentrations LHFI are primarily secured by real estate located in the Pacific Northwest, California and Hawaii. At June 30, 2022 and December 31, 2021, multifamily loans in the state of California represented 36 % and 33 % of the total LHFI portfolio, respectively. Credit Quality Management considers the level of ACL to be appropriate to cover credit losses expected over the life of the loans for the LHFI portfolio. The cumulative loss rate used as the basis for the estimate of credit losses is comprised of the Bank’s historical loss experience and eight qualitative factors for current and forecasted periods. During the second quarter of 2022, the historical expected loss rates decreased from December 31, 2021 due to minimal charge-offs, improving portfolio credit distribution and favorable product mix risk composition. During the second quarter of 2022, the qualitative factors decreased significantly due to the continued favorable performance and outlook of the impact of the COVID-19 pandemic on our loan portfolio, which resulted in no COVID-19 management overlay. As of June 30, 2022, the Bank expects that the markets in which it operates will have declining collateral values and a stable economic outlook over the two-year forecast period. 14 In addition to the ACL for LHFI, the Company maintains a separate allowance for unfunded loan commitments which is included in accounts payable and other liabilities on our consolidated balance sheets. The allowance for unfunded commitments was $ 2.8 million and $ 2.4 million at June 30, 2022 and December 31, 2021, respectively. The Bank has elected to exclude accrued interest receivable from the evaluation of the ACL. Accrued interest on LHFI was $ 20.6 million and $ 17.8 million at June 30, 2022 and December 31, 2021, respectively, and was reported in other assets in the consolidated balance sheets. Activity in the ACL for LHFI and the allowance for unfunded commitments was as follows: Quarter Ended June 30, Six Months Ended June 30, (in thousands) 2022 2021 2022 2021 Beginning balance $ 37,944 $ 64,047 $ 47,123 $ 64,294 Provision for credit losses ( 216 ) ( 4,145 ) ( 9,439 ) ( 4,516 ) Net (charge-offs) recoveries ( 373 ) ( 5 ) ( 329 ) 119 Ending balance $ 37,355 $ 59,897 $ 37,355 $ 59,897 Allowance for unfunded commitments: Beginning balance $ 2,627 $ 1,959 $ 2,404 $ 1,588 Provision for credit losses 216 145 439 516 Ending balance $ 2,843 $ 2,104 $ 2,843 $ 2,104 Provision for credit losses: Allowance for credit losses - loans $ ( 216 ) $ ( 4,145 ) $ ( 9,439 ) $ ( 4,516 ) Allowance for unfunded commitments 216 145 439 516 Total $ — $ ( 4,000 ) $ ( 9,000 ) $ ( 4,000 ) Activity in the ACL for LHFI by loan portfolio and loan sub-class was as follows: Quarter Ended June 30, 2022 (in thousands) Beginning balance Charge-offs Recoveries Provision Ending balance CRE Non-owner occupied CRE $ 2,294 $ — $ — $ ( 114 ) $ 2,180 Multifamily 8,427 — — 1,647 10,074 Construction/land development Multifamily construction 456 — — 110 566 CRE construction 184 — — 1 185 Single family construction 7,735 — — 2,952 10,687 Single family construction to permanent 990 — — 169 1,159 Total 20,086 — — 4,765 24,851 Commercial and industrial loans Owner occupied CRE 3,536 — — ( 2,444 ) 1,092 Commercial business 6,910 ( 649 ) 45 ( 2,728 ) 3,578 Total 10,446 ( 649 ) 45 ( 5,172 ) 4,670 Consumer loans Single family 3,762 — 136 129 4,027 Home equity and other 3,650 ( 33 ) 128 62 3,807 Total 7,412 ( 33 ) 264 191 7,834 Total ACL $ 37,944 $ ( 682 ) $ 309 $ ( 216 ) $ 37,355 15 Quarter Ended June 30, 2021 (in thousands) Beginning balance Charge-offs Recoveries Provision Ending balance CRE Non-owner occupied CRE $ 9,218 $ — $ — $ ( 141 ) $ 9,077 Multifamily 6,969 — — 276 7,245 Construction/land development Multifamily construction 3,936 — — ( 3,436 ) 500 CRE construction 1,908 — — 114 2,022 Single family construction 5,007 — — 646 5,653 Single family construction to permanent 1,124 — — ( 77 ) 1,047 Total 28,162 — — ( 2,618 ) 25,544 Commercial and industrial loans Owner occupied CRE 5,266 — — 252 5,518 Commercial business 17,105 — 24 ( 1,255 ) 15,874 Total 22,371 — 24 ( 1,003 ) 21,392 Consumer loans Single family 6,735 ( 44 ) 2 470 7,163 Home equity and other 6,779 ( 35 ) 48 ( 994 ) 5,798 Total 13,514 ( 79 ) 50 ( 524 ) 12,961 Total ACL $ 64,047 $ ( 79 ) $ 74 $ ( 4,145 ) $ 59,897 Six Months Ended June 30, 2022 (in thousands) Beginning balance Charge-offs Recoveries Provision Ending balance CRE Non-owner occupied CRE $ 7,509 $ — $ — $ ( 5,329 ) $ 2,180 Multifamily 5,854 — — 4,220 10,074 Construction/land development Multifamily construction 507 — — 59 566 CRE construction 150 — — 35 185 Single family construction 6,411 — — 4,276 10,687 Single family construction to permanent 1,055 — — 104 1,159 Total 21,486 — — 3,365 24,851 Commercial and industrial loans Owner occupied CRE 5,006 — — ( 3,914 ) 1,092 Commercial business 12,273 ( 660 ) 69 ( 8,104 ) 3,578 Total 17,279 ( 660 ) 69 ( 12,018 ) 4,670 Consumer loans Single family 4,394 — 140 ( 507 ) 4,027 Home equity and other 3,964 ( 66 ) 188 ( 279 ) 3,807 Total 8,358 ( 66 ) 328 ( 786 ) 7,834 Total ACL $ 47,123 $ ( 726 ) $ 397 $ ( 9,439 ) $ 37,355 16 Six Months Ended June 30, 2021 (in thousands) Beginning balance Charge-offs Recoveries Provision Ending balance CRE Non-owner occupied CRE $ 8,845 $ — $ — $ 232 $ 9,077 Multifamily 6,072 — — 1,173 7,245 Construction/land development Multifamily construction 4,903 — — ( 4,403 ) 500 CRE construction 1,670 — — 352 2,022 Single family construction 5,130 — — 523 5,653 Single family construction to permanent 1,315 — — ( 268 ) 1,047 Total 27,935 — — ( 2,391 ) 25,544 Commercial and industrial loans Owner occupied CRE 4,994 — — 524 5,518 Commercial business 17,043 — 98 ( 1,267 ) 15,874 Total 22,037 — 98 ( 743 ) 21,392 Consumer loans Single family 6,906 ( 114 ) 122 249 7,163 Home equity and other 7,416 ( 91 ) 104 ( 1,631 ) 5,798 Total 14,322 ( 205 ) 226 ( 1,382 ) 12,961 Total ACL $ 64,294 $ ( 205 ) $ 324 $ ( 4,516 ) $ 59,897 17 The following table presents a vintage analysis of the commercial portfolio segment by loan sub-class and risk rating or delinquency status. At June 30, 2022 (in thousands) 2022 2021 2020 2019 2018 2017 and prior Revolving Revolving-term Total COMMERCIAL PORTFOLIO Non-owner occupied CRE Pass $ 60,429 $ 68,503 $ 49,985 $ 142,238 $ 121,467 $ 264,425 $ 3,187 $ 843 $ 711,077 Special Mention — — — — — — — — — Substandard — — — — — — — — — Total 60,429 68,503 49,985 142,238 121,467 264,425 3,187 843 711,077 Multifamily Pass 1,183,994 1,294,761 523,758 223,254 59,858 161,060 501 — 3,447,186 Special Mention — — 8,676 19,835 — — — — 28,511 Substandard — — — — — — — — — Total 1,183,994 1,294,761 532,434 243,089 59,858 161,060 501 — 3,475,697 Multifamily construction Pass ( 179 ) 17,954 25,601 — — — — — 43,376 Special Mention — — — — — — — — — Substandard — — — — — — — — — Total ( 179 ) 17,954 25,601 — — — — — 43,376 CRE construction Pass — 14,146 3,957 — 1,887 534 — — 20,524 Special Mention — — — — — — — — — Substandard — — — — — — — — — Total — 14,146 3,957 — 1,887 534 — — 20,524 Single family construction Pass 89,586 108,460 22,717 12,438 — 76 113,846 — 347,123 Special Mention — — — — — — — — — Substandard — — — — — — — — — Total 89,586 108,460 22,717 12,438 — 76 113,846 — 347,123 Single family construction to permanent Current 21,192 107,448 19,654 9,856 723 — — — 158,873 Past due: 30-59 days — — — — — — — — — 60-89 days — — — — — — — — — 90+ days — — — — — — — — — Total 21,192 107,448 19,654 9,856 723 — — — 158,873 Owner occupied CRE Pass 41,637 70,204 46,819 74,726 42,438 175,013 149 1,368 452,354 Special Mention — — — — 2,439 11,916 — — 14,355 Substandard — — — — 1,111 2,383 — 56 3,550 Total 41,637 70,204 46,819 74,726 45,988 189,312 149 1,424 470,259 Commercial business Pass 52,389 48,098 48,079 34,689 17,952 23,204 141,298 1,999 367,708 Special Mention — 201 26 — 194 3,523 756 201 4,901 Substandard — 7,448 2,915 2,284 1,787 2,091 4,620 10 21,155 Total 52,389 55,747 51,020 36,973 19,933 28,818 146,674 2,210 393,764 Total commercial portfolio $ 1,449,048 $ 1,737,223 $ 752,187 $ 519,320 $ 249,856 $ 644,225 $ 264,357 $ 4,477 $ 5,620,693 18 The following table presents a vintage analysis of the consumer portfolio segment by loan sub-class and delinquency status: At June 30, 2022 (in thousands) 2022 2021 2020 2019 2018 2017 and prior Revolving Revolving-term Total CONSUMER PORTFOLIO Single family Current $ 123,677 $ 194,198 $ 149,161 $ 47,744 $ 48,522 $ 256,738 $ — $ — $ 820,040 Past due: 30-59 days — — — — — 462 — — 462 60-89 days — — — — — 173 — — 173 90+ days — — — 432 452 830 — — 1,714 Total 123,677 194,198 149,161 48,176 48,974 258,203 — — 822,389 Home equity and other Current 1,188 1,307 242 238 175 2,085 306,225 4,457 315,917 Past due: 30-59 days 3 3 13 — — — 191 — 210 60-89 days — 3 — — — 94 99 — 196 90+ days — 4 — — — 95 233 — 332 Total 1,191 1,317 255 238 175 2,274 306,748 4,457 316,655 Total consumer portfolio (1) $ 124,868 $ 195,515 $ 149,416 $ 48,414 $ 49,149 $ 260,477 $ 306,748 $ 4,457 $ 1,139,044 Total LHFI $ 1,573,916 $ 1,932,738 $ 901,603 $ 567,734 $ 299,005 $ 904,702 $ 571,105 $ 8,934 $ 6,759,737 (1) Includes $ 6.5 million of loans where a fair value option election was made at the time of origination and, therefore, are carried at fair value with changes in fair value recognized in the consolidated income statements. 19 The following table presents a vintage analysis of the commercial portfolio segment by loan sub-class and risk rating or delinquency status: At December 31, 2021 (in thousands) 2021 2020 2019 2018 2017 2016 and prior Revolving Revolving-term Total COMMERCIAL PORTFOLIO Non-owner occupied CRE Pass $ 68,647 $ 50,571 $ 169,711 $ 130,877 $ 100,674 $ 183,024 $ 963 $ 892 $ 705,359 Special Mention — — — — — — — — — Substandard — — — — — — — — — Total 68,647 50,571 169,711 130,877 100,674 183,024 963 892 705,359 Multifamily Pass 1,315,204 561,666 286,826 60,372 26,065 165,225 1 — 2,415,359 Special Mention — — — — — — — — — Substandard — — — — — — — — — Total 1,315,204 561,666 286,826 60,372 26,065 165,225 1 — 2,415,359 Multifamily construction Pass 7,825 22,863 7,173 — — — — — 37,861 Special Mention — — — — — — — — — Substandard — — — — — — — — — Total 7,825 22,863 7,173 — — — — — 37,861 CRE construction Pass 7,694 3,960 — 1,962 — 556 — — 14,172 Special Mention — — — — — — — — — Substandard — — — — — — — — — Total 7,694 3,960 — 1,962 — 556 — — 14,172 Single family construction Pass 146,595 35,640 14,509 — — 77 99,206 — 296,027 Special Mention — — — — — — — — — Substandard — — — — — — — — — Total 146,595 35,640 14,509 — — 77 99,206 — 296,027 Single family construction to permanent Current 90,311 42,636 13,362 1,775 — — — — 148,084 Past due: 30-59 days — — — — — — — — — 60-89 days — — — — — — — — — 90+ days — — — — — — — — — Total 90,311 42,636 13,362 1,775 — — — — 148,084 Owner occupied CRE Pass 70,902 47,536 57,423 47,716 67,042 106,659 798 2,839 400,915 Special Mention — — — 2,196 6,019 145 — 60 8,420 Substandard — — 18,665 1,111 10,151 18,444 — — 48,371 Total 70,902 47,536 76,088 51,023 83,212 125,248 798 2,899 457,706 Commercial business Pass 88,139 51,453 44,882 24,711 11,859 21,258 112,759 2,104 357,165 Special Mention — — 7,396 — 4,396 — 5,613 134 17,539 Substandard 9,716 3,399 1,667 5,928 1,096 1,328 3,932 102 27,168 Total 97,855 54,852 53,945 30,639 17,351 22,586 122,304 2,340 401,872 Total commercial portfolio $ 1,805,033 $ 819,724 $ 621,614 $ 276,648 $ 227,302 $ 496,716 $ 223,272 $ 6,131 $ 4,476,440 20 The following table presents a vintage analysis of the consumer portfolio segment by loan sub-class and delinquency status: At December 31, 2021 (in thousands) 2021 2020 2019 2018 2017 2016 and prior Revolving Revolving-term Total CONSUMER PORTFOLIO Single family Current $ 176,110 $ 156,360 $ 62,369 $ 66,063 $ 95,988 $ 204,229 $ — $ — $ 761,119 Past due: 30-59 days — — 291 — — — — — 291 60-89 days — — — — 314 471 — — 785 90+ days — — 561 452 — 123 — — 1,136 Total 176,110 156,360 63,221 66,515 96,302 204,823 — — 763,331 Home equity and other Current 2,005 474 393 532 516 2,609 290,512 5,273 302,314 Past due: 30-59 days — 3 — — — 94 40 — 137 60-89 days — — — — — — 12 62 74 90+ days 3 — — — — 6 544 — 553 Total 2,008 477 393 532 516 2,709 291,108 5,335 303,078 Total consumer portfolio (1) $ 178,118 $ 156,837 $ 63,614 $ 67,047 $ 96,818 $ 207,532 $ 291,108 $ 5,335 $ 1,066,409 Total LHFI $ 1,983,151 $ 976,561 $ 685,228 $ 343,695 $ 324,120 $ 704,248 $ 514,380 $ 11,466 $ 5,542,849 (1) Includes $ 7.3 million of loans where a fair value option election was made at the time of origination and, therefore, are carried at fair value with changes in fair value recognized in the consolidated income statements. 21 Collateral Dependent Loans The following table presents the amortized cost basis of collateral-dependent loans by loan sub-class and collateral type: At June 30, 2022 (in thousands) Land 1-4 Family Non-residential real estate Other non-real estate Total Commercial and industrial loans Owner occupied CRE $ 1,111 $ — $ 1,410 $ — $ 2,521 Commercial business 362 — 562 4 928 Total collateral-dependent loans $ 1,473 $ — $ 1,972 $ 4 $ 3,449 At December 31, 2021 (in thousands) Land 1-4 Family Non-residential real estate Other non-real estate Total Commercial and industrial loans Owner occupied CRE $ 1,111 $ — $ 2,456 $ — $ 3,567 Commercial business 362 27 562 286 1,237 Total 1,473 27 3,018 286 4,804 Consumer loans Single family — 1,598 — — 1,598 Home equity loans and other — 19 — — 19 Total — 1,617 — — 1,617 Total collateral-dependent loans $ 1,473 $ 1,644 $ 3,018 $ 286 $ 6,421 Nonaccrual and Past Due Loans The following table presents nonaccrual status for loans: At June 30, 2022 At December 31, 2021 (in thousands) Nonaccrual with no related ACL Total Nonaccrual Nonaccrual with no related ACL Total Nonaccrual Commercial and industrial loans Owner occupied CRE $ 2,521 $ 2,521 $ 3,568 $ 3,568 Commercial business 928 1,405 1,210 5,023 Total 3,449 3,926 4,778 8,591 Consumer loans Single family 495 4,186 1,324 2,802 Home equity and other 4 970 23 808 Total 499 5,156 1,347 3,610 Total nonaccrual loans $ 3,948 $ 9,082 $ 6,125 $ 12,201 22 The following tables present an aging analysis of past due loans by loan portfolio segment and loan sub-class: At June 30, 2022 Past Due and Still Accruing (in thousands) 30-59 days 60-89 days 90 days or more Nonaccrual Total past due and nonaccrual (3) Current Total loans CRE Non-owner occupied CRE $ — $ — $ — $ — $ — $ 711,077 $ 711,077 Multifamily — — — — — 3,475,697 3,475,697 Construction/land development Multifamily construction — — — — — 43,376 43,376 CRE construction — — — — — 20,524 20,524 Single family construction — — — — — 347,123 347,123 Single family construction to permanent — — — — — 158,873 158,873 Total — — — — — 4,756,670 4,756,670 Commercial and industrial loans Owner occupied CRE — — — 2,521 2,521 467,738 470,259 Commercial business 870 7 — 1,405 2,282 391,482 393,764 Total 870 7 — 3,926 4,803 859,220 864,023 Consumer loans Single family 2,384 1,505 7,010 (2) 4,186 15,085 807,304 822,389 Home equity and other 38 197 — 970 1,205 315,450 316,655 Total 2,422 1,702 7,010 5,156 16,290 1,122,754 1,139,044 (1) Total loans $ 3,292 $ 1,709 $ 7,010 $ 9,082 $ 21,093 $ 6,738,644 $ 6,759,737 % 0.05 % 0.03 % 0.10 % 0.13 % 0.31 % 99.69 % 100.00 % 23 At December 31, 2021 Past Due and Still Accruing (in thousands) 30-59 days 60-89 days 90 days or more Nonaccrual Total past due and nonaccrual (3) Current Total loans CRE Non-owner occupied CRE $ — $ — $ — $ — $ — $ 705,359 $ 705,359 Multifamily — — — — — 2,415,359 2,415,359 Construction/land development Multifamily construction — — — — — 37,861 37,861 CRE construction — — — — — 14,172 14,172 Single family construction — — — — — 296,027 296,027 Single family construction to permanent — — — — — 148,084 148,084 Total — — — — — 3,616,862 3,616,862 Commercial and industrial loans Owner occupied CRE — — — 3,568 3,568 454,138 457,706 Commercial business 198 — — 5,023 5,221 396,651 401,872 Total 198 — — 8,591 8,789 850,789 859,578 Consumer loans Single family 892 820 6,717 (2) 2,802 11,231 752,100 763,331 Home equity and other 118 74 — 808 1,000 302,078 303,078 Total 1,010 894 6,717 3,610 12,231 1,054,178 1,066,409 (1) Total loans $ 1,208 $ 894 $ 6,717 $ 12,201 $ 21,020 $ 5,521,829 $ 5,542,849 % 0.02 % 0.02 % 0.12 % 0.22 % 0.38 % 99.62 % 100.00 % (1) Includes $ 6.5 million and $ 7.3 million of loans at June 30, 2022 and December 31, 2021, respectively, where a fair value option election was made at the time of origination and, therefore, are carried at fair value with changes in fair value recognized in our consolidated income statements. (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) Includes loans whose repayments are insured by the FHA or guaranteed by the VA or SBA of $ 10.2 million and $ 8.4 million at June 30, 2022 and December 31, 2021, respectively. 24 Loan Modifications The Company provides modifications to borrowers experiencing financial difficulty which may include delays in payment of amounts due, extension of the terms of the notes or reduction in the interest rates on the notes. In certain instances, the Company may grant more than one type of modification. The granting of modifications in the quarter and six months ended June 30, 2022 did not have a material impact on the ACL. The following tables provide information related to loans modified during the quarter and six months ended June 30, 2022 to borrowers experiencing financial difficulty, disaggregated by class of financing receivable and type of concession granted: (in thousands) Significant Payment Delay Quarter Ended June 30, 2022 Six Months Ended June 30, 2022 Loan Type Amortized Cost Basis at Period End % of Total Class of Financing Receivable Amortized Cost Basis at Period End % of Total Class of Financing Receivable Single family $ 340 0.04 % $ 340 0.04 % Home equity and other — — % 70 0.02 % (in thousands) Term Extension Quarter Ended June 30, 2022 Six Months Ended June 30, 2022 Loan Type Amortized Cost Basis at Period End % of Total Class of Financing Receivable Amortized Cost Basis at Period End % of Total Class of Financing Receivable Commercial business $ 1,578 0.40 % $ 1,578 0.40 % Single family 236 0.03 % 272 0.03 % (in thousands) Interest Rate Reduction and Term Extension Quarter Ended June 30, 2022 Six Months Ended June 30, 2022 Loan Type Amortized Cost Basis at Period End % of Total Class of Financing Receivable Amortized Cost Basis at Period End % of Total Class of Financing Receivable Single family $ — — % $ 823 0.10 % (in thousands) Significant Payment Delay and Term Extension Quarter Ended June 30, 2022 Six Months Ended June 30, 2022 Loan Type Amortized Cost Basis at Period End % of Total Class of Financing Receivable Amortized Cost Basis at Period End % of Total Class of Financing Receivable Single family $ 4,048 0.49 % $ 10,084 1.23 % Home equity and other — — % 52 0.02 % (in thousands) Interest Rate Reduction, Significant Payment Delay and Term Extension Quarter Ended June 30, 2022 Six Months Ended June 30, 2022 Loan Type Amortized Cost Basis at Period End % of Total Class of Financing Receivable Amortized Cost Basis at Period End % of Total Class of Financing Receivable Single family $ 2,775 0.34 % $ 6,898 0.84 % 25 The following table describes the financial effect of the modifications made to borrowers experiencing financial difficulty: Interest Rate Reduction Quarter Ended June 30, 2022 Six Months Ended June 30, 2022 Single family Reduced weighted-average contractual interest rate from 4.79 % to 3.56 %. Reduced weighted-average contractual interest rate from 4.35 % to 3.36 %. Significant Payment Delay Quarter Ended June 30, 2022 Six Months Ended June 30, 2022 Single family Provided payment deferrals to borrowers. A weighted average 0.51 % of loan balances were capitalized and added to the remaining term of the loan. Provided payment deferrals to borrowers. A weighted average 0.20 % of loan balances were capitalized and added to the remaining term of the loan. Home equity and other — Provided payment deferrals to borrowers. A weighted average 3.41 % of loan balances were capitalized and added to the remaining term of the loan. Term Extension Quarter Ended June 30, 2022 Six Months Ended June 30, 2022 Commercial business Added a weighted average 0.8 years to the life of loans, which reduced the monthly payment amounts to the borrowers. Added a weighted average 0.8 years to the life of loans, which reduced the monthly payment amounts to the borrowers. Single family Added a weighted average 6.4 years to the life of loans, which reduced the monthly payment amounts to the borrowers. Added a weighted average 4.5 years to the life of loans, which reduced the monthly payment amounts to the borrowers. Home equity and other — Added a weighted average 16.1 years to the life of loans, which reduced the monthly payment amounts to the borrowers. Upon determination that a modified loan (or portion of a loan) has subsequently been deemed uncollectible, the loan (or portion of the loan) is written off. Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the allowance for credit losses is adjusted by the same amount. In the quarter ended June 30, 2022 there were no loans that were modified to borrowers experiencing financial difficulty during the three months ended March 31, 2022 that subsequently had a payment default. The following table depicts the payment status of loans that have been modified to borrowers experiencing financial difficulty during the three months ended March 31, 2022: Payment Status (Amortized Cost Basis) at June 30, 2022 Loan Type Current 30-89 Days Past Due 90+ Days Past Due Single family $ 11,018 $ — $ — Home equity and other 122 — — Total $ 11,140 $ — $ — 26 NOTE 4– DEPOSITS: Deposit balances, including their weighted average rates, were as follows: At June 30, 2022 At December 31, 2021 (dollars in thousands) Amount Weighted Average Rate Amount Weighted Average Rate Noninterest-bearing demand deposits $ 1,640,651 — % $ 1,617,069 — % Interest-bearing demand deposits 590,889 0.10 % 513,810 0.10 % Savings 302,359 0.06 % 302,389 0.06 % Money market 2,679,865 0.35 % 2,806,313 0.15 % Certificates of deposit 969,535 0.48 % 906,928 0.51 % Total $ 6,183,299 0.24 % $ 6,146,509 0.15 % Certificates of deposit outstanding mature as follows: (in thousands) June 30, 2022 Within one year $ 856,617 One to two years 94,266 Two to three years 13,974 Three to four years 2,964 Four to five years 1,708 Thereafter 6 Total $ 969,535 The aggregate amount of certificate of deposits in denominations of more than the FDIC limit of $250 thousand at June 30, 2022 and December 31, 2021 were $ 91 million and $ 108 million, respectively. There were $ 270 million and $ 145 million of brokered deposits at June 30, 2022 and December 31, 2021, respectively. NOTE 5– LONG-TERM DEBT: At June 30, 2022 the Company had outstanding $ 98 million of subordinated notes (the "Sub Notes") that were issued in January 2022. Interest on the Notes accrue at a rate equal to 3.5 % per annum until 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 Secured Overnight Financing Rate plus 215 basis points, payable quarterly in arrears. At June 30, 2022 and December 31, 2021, the Company had outstanding $ 64 million of Senior Notes which bear interest at a rate of 6.50 % and mature in 2026. The Company issued trust preferred securities during the period from 2005 through 2007, resulting in a debt balance of $ 62 million that remains outstanding at June 30, 2022 and December 31, 2021. In connection with the issuance of trust preferred securities, HomeStreet, Inc. issued to HomeStreet Statutory Trust Junior Subordinated Deferrable Interest Debentures. The sole assets of the HomeStreet Statutory Trust are the Subordinated Debt Securities I, II, III, and IV. 27 The Subordinated Debt Securities outstanding as of June 30, 2022 and December 31, 2021 are as follows: HomeStreet Statutory Trust (dollars in thousands) I II III IV Date issued June 2005 September 2005 February 2006 March 2007 Amount $ 5,155 $ 20,619 $ 20,619 $ 15,464 Interest rate 3 MO LIBOR + 1.70 % 3 MO LIBOR + 1.50 % 3 MO LIBOR + 1.37 % 3 MO LIBOR + 1.68 % Maturity date June 2035 December 2035 March 2036 June 2037 Call option (1) Quarterly Quarterly Quarterly Quarterly (1) Call options are exercisable at par and are callable, without penalty on a quarterly basis, starting five years after issuance. NOTE 6– DERIVATIVES AND HEDGING ACTIVITIES: To reduce the risk of significant interest rate fluctuations on the value of certain assets and liabilities, such as single family mortgage LHFS and MSRs, the Company utilizes derivatives as economic hedges . The notional amounts and fair values for derivatives, which are included in other assets or accounts payable and other liabilities on the consolidated balance sheet, consist of the following: At June 30, 2022 Notional amount Fair value derivatives (in thousands) Asset Liability Forward sale commitments $ 224,930 $ 1,058 $ ( 902 ) Interest rate lock commitments 56,757 737 ( 415 ) Interest rate swaps 260,362 9,211 ( 9,211 ) Futures 36,800 — ( 143 ) Options 26,000 199 — Total derivatives before netting $ 604,849 11,205 ( 10,671 ) Netting adjustment/Cash collateral (1) ( 10,035 ) ( 93 ) Carrying value on consolidated balance sheet $ 1,170 $ ( 10,764 ) At December 31, 2021 Notional amount Fair value derivatives (in thousands) Asset Liability Forward sale commitments $ 793,208 $ 723 $ ( 640 ) Interest rate lock commitments 115,025 2,487 ( 3 ) Interest rate swaps 287,352 4,381 ( 4,541 ) Futures 139,900 334 — Total derivatives before netting $ 1,335,485 7,925 ( 5,184 ) Netting adjustment/Cash collateral (1) 1,355 3,921 Carrying value on consolidated balance sheet $ 9,280 $ ( 1,263 ) (1) Includes net cash collateral received of $ 10.1 million and paid of $ 5.3 million at June 30, 2022 and December 31, 2021, respectively. 28 The following table presents gross fair value and net carrying value information for derivative instruments: (in thousands) Gross fair value Netting adjustments/ Cash collateral (1) Carrying value At June 30, 2022 Derivative assets $ 11,205 $ ( 10,035 ) $ 1,170 Derivative liabilities ( 10,671 ) ( 93 ) ( 10,764 ) At December 31, 2021 Derivative assets $ 7,925 $ 1,355 $ 9,280 Derivative liabilities ( 5,184 ) 3,921 ( 1,263 ) (1) Includes net cash collateral received of $ 10.1 million and paid of $ 5.3 million at June 30, 2022 and December 31, 2021, respectively. The collateral used under the Company's master netting agreements is typically cash, but securities may be used under agreements with certain counterparties. Receivables related to cash collateral that has been paid to counterparties is included in other assets. Payables related to cash collateral that has been received from counterparties is included in accounts payable and other liabilities. Interest is owed on amounts received from counterparties and we earn interest on cash paid to counterparties. Any securities pledged to counterparties as collateral remain on the consolidated balance sheets. At June 30, 2022 and December 31, 2021, the Company had liabilities of $ 10.2 million and zero , respectively, in cash collateral received from counterparties and receivables of $ 0.1 million and $ 5.3 million, respectively, in cash collateral paid to counterparties. The following table presents the net gain (loss) recognized on economic hedge derivatives, within the respective line items in the consolidated income statements for the periods indicated: Quarter Ended June 30, Six Months Ended June 30, (in thousands) 2022 2021 2022 2021 Recognized in noninterest income: Net gain (loss) on loan origination and sale activities (1) $ 2,650 $ ( 7,267 ) $ 7,263 $ ( 3,409 ) Loan servicing income (loss) (2) ( 2,190 ) 5,024 ( 11,629 ) ( 7,567 ) Other (3) 1 ( 35 ) 160 264 (1) Comprised of IRLCs and forward contracts used as an economic hedge of loans held for sale. (2) Comprised of interest rate swaps, interest rate swaptions, futures, US Treasury options and forward contracts used as economic hedges of single family MSRs. (3) Impact of interest rate swap agreements executed with commercial banking customers. The notional amount of open interest rate swap agreements executed with commercial banking customers at June 30, 2022 and December 31, 2021 were $ 260 million and $ 287 million, respectively. 29 NOTE 7– MORTGAGE BANKING OPERATIONS: LHFS consisted of the following: (in thousands) At June 30, 2022 At December 31, 2021 Single family $ 35,853 $ 128,041 CRE, multifamily and SBA 11,461 48,090 Total $ 47,314 $ 176,131 Loans sold consisted of the following for the periods indicated: Quarter Ended June 30, Six Months Ended June 30, (in thousands) 2022 2021 2022 2021 Single family $ 187,623 $ 627,282 $ 510,693 $ 1,200,322 CRE, multifamily and SBA 50,292 138,421 99,429 396,138 Total $ 237,915 $ 765,703 $ 610,122 $ 1,596,460 Gain on loan origination and sale activities, including the effects of derivative risk management instruments, consisted of the following: Quarter Ended June 30, Six Months Ended June 30, (in thousands) 2022 2021 2022 2021 Single family $ 3,949 $ 15,836 $ 10,118 $ 42,023 CRE, multifamily and SBA 1,343 5,435 3,448 12,707 Total $ 5,292 $ 21,271 $ 13,566 $ 54,730 The Company's portfolio of loans serviced for others is primarily comprised of loans held in U.S. government and agency MBS issued by Fannie Mae, Freddie Mac and Ginnie Mae. The unpaid principal balance of loans serviced for others is as follows: (in thousands) At June 30, 2022 At December 31, 2021 Single family $ 5,535,691 $ 5,539,180 CRE, multifamily and SBA 1,998,335 2,031,087 Total $ 7,534,026 $ 7,570,267 The Company has made representations and warranties that the loans sold meet certain requirements. The Company may be required to repurchase mortgage loans or indemnify loan purchasers due to defects in the origination process of the loan, such as documentation errors, underwriting errors and judgments, appraisal errors, early payment defaults and fraud. The following is a summary of changes in the Company's liability for estimated single-family mortgage repurchase losses: Quarter Ended June 30, Six Months Ended June 30, (in thousands) 2022 2021 2022 2021 Balance, beginning of period $ 1,638 $ 1,941 $ 1,312 $ 2,122 Additions, net of adjustments (1) 133 ( 26 ) 491 ( 46 ) Realized (losses) recoveries, net (2) ( 280 ) ( 303 ) ( 312 ) ( 464 ) Balance, end of period $ 1,491 $ 1,612 $ 1,491 $ 1,612 (1) Includes additions for new loan sales and changes in estimated probable future repurchase losses on previously sold loans. (2) Includes principal losses and accrued interest on repurchased loans, "make-whole" settlements, settlements with claimants and certain related expenses. 30 The Company has agreements with certain investors to advance scheduled principal and interest amounts on delinquent loans. Advances are also made to fund the foreclosure and collection costs of delinquent loans prior to the recovery of reimbursable amounts from investors or borrowers. Advances of $ 2.0 million and $ 1.9 million were recorded in other assets as of June 30, 2022 and December 31, 2021, respectively. When the Company has the unilateral right to repurchase Ginnie Mae pool loans it has previously sold (generally loans that are more than 90 days past due), the Company records the balance of the loans as other assets and other liabilities. At June 30, 2022 and December 31, 2021, delinquent or defaulted mortgage loans currently in Ginnie Mae pools that the Company has recognized on its consolidated balance sheets totaled $ 6.1 million and $ 12.3 million, respectively. Revenue from mortgage servicing, including the effects of derivative risk management instruments, consisted of the following: Quarter Ended June 30, Six Months Ended June 30, (in thousands) 2022 2021 2022 2021 Servicing income, net: Servicing fees and other $ 9,507 $ 9,245 $ 17,828 $ 18,158 Amortization of single family MSRs (1) ( 2,515 ) ( 5,181 ) ( 5,940 ) ( 10,874 ) Amortization of multifamily and SBA MSRs ( 2,337 ) ( 2,133 ) ( 4,049 ) ( 3,477 ) Total 4,655 1,931 7,839 3,807 Risk management, single family MSRs: Changes in fair value of MSRs due to assumptions (2) 4,323 ( 5,024 ) 14,626 6,439 Net gain (loss) from economic hedging ( 5,317 ) 5,024 ( 15,500 ) ( 7,567 ) Total ( 994 ) — ( 874 ) ( 1,128 ) Loan servicing income (loss) $ 3,661 $ 1,931 $ 6,965 $ 2,679 (1) Represents changes due to collection/realization of expected cash flows and curtailments. (2) Principally reflects changes in model assumptions, including prepayment speed assumptions, which are primarily affected by changes in mortgage interest rates. The changes in single family MSRs measured at fair value are as follows: Quarter Ended June 30, Six Months Ended June 30, (in thousands) 2022 2021 2022 2021 Beginning balance $ 72,378 $ 62,352 $ 61,584 $ 49,966 Additions and amortization: Originations 2,295 7,725 6,211 14,341 Amortization (1) ( 2,515 ) ( 5,181 ) ( 5,940 ) ( 10,874 ) Net additions and amortization ( 220 ) 2,544 271 3,467 Changes in fair value assumptions (2) 4,323 ( 5,024 ) 14,626 6,439 Ending balance $ 76,481 $ 59,872 $ 76,481 $ 59,872 (1) Represents changes due to collection/realization of expected cash flows and curtailments. (2) Principally reflects changes in model assumptions, including prepayment speed assumptions, which are primarily affected by changes in mortgage interest rates. Key economic assumptions used in measuring the initial fair value of capitalized single family MSRs were as follows: Quarter Ended June 30, Six Months Ended June 30, (rates per annum) (1) 2022 2021 2022 2021 Constant prepayment rate ("CPR") (2) 11.42 % 8.33 % 10.14 % 8.35 % Discount rate 9.83 % 8.48 % 8.90 % 8.43 % (1) Based on a weighted average. (2) Represents an expected lifetime average CPR used in the model. 31 For single family MSRs, we use a discounted cash flow valuation technique which utilizes CPRs and discount rates as significant unobservable inputs as noted in the table below: At June 30, 2022 At December 31, 2021 Range of Inputs Average (1) Range of Inputs Average (1) CPRs 6.01 % - 11.85 % 8.55 % 7.90 % - 17.35 % 10.35 % Discount Rates 8.76 % - 15.91 % 9.65 % 6.94 % - 13.96 % 7.97 % (1) Weighted averages of all the inputs within the range. To compute hypothetical sensitivities of the value of our single family MSRs to immediate adverse changes in key assumptions, we computed the impact of changes to CPRs and in discount rates as outlined below: (dollars in thousands) At June 30, 2022 Fair value of single family MSR $ 76,481 Expected weighted-average life (in years) 7.64 CPR Impact on fair value of 25 basis points adverse change in interest rates $ ( 1,003 ) Impact on fair value of 50 basis points adverse change in interest rates $ ( 2,338 ) Discount rate Impact on fair value of 100 basis points increase $ ( 3,430 ) Impact on fair value of 200 basis points increase $ ( 6,597 ) The changes in multifamily and SBA MSRs measured at the lower of amortized cost or fair value were as follows: Quarter Ended June 30, Six Months Ended June 30, (in thousands) 2022 2021 2022 2021 Beginning balance $ 39,279 $ 39,626 $ 39,415 $ 35,774 Originations 1,188 1,620 2,764 6,816 Amortization ( 2,337 ) ( 2,133 ) ( 4,049 ) ( 3,477 ) Ending balance $ 38,130 $ 39,113 $ 38,130 $ 39,113 NOTE 8– GUARANTEES AND MORTGAGE REPURCHASE LIABILITY: In the ordinary course of business, the Company sells loans through the Fannie Mae Multifamily Delegated Underwriting and Servicing Program ("DUS"®) that are subject to a credit loss sharing arrangement. The Company services the loans for Fannie Mae and shares in the risk of loss with Fannie Mae under the terms of the DUS contracts. Under the DUS program, the Company and Fannie Mae share losses on a pro rata basis, where the Company is responsible for losses incurred up to one-third of principal balance on each loan with two-thirds of the loss covered by Fannie Mae. For loans that have been sold through this program, a liability is recorded for this loss sharing arrangement under the accounting guidance for guarantees. As of June 30, 2022 and December 31, 2021, the total unpaid principal balance of loans sold under this program was $ 1.8 billion and $ 1.9 billion, respectively. The Company's reserve liability related to this arrangement totaled $ 0.7 million and $ 0.6 million at June 30, 2022 and December 31, 2021, respectively. There were no actual losses incurred under this arrangement during the quarters or six months ended June 30, 2022 and 2021. In the ordinary course of business, the Company sells residential mortgage loans to GSEs and other entities. Under the terms of these sales agreements, the Company has made representations and warranties that the loans sold meet certain requirements. The Company may be required to repurchase mortgage loans or indemnify loan purchasers due to defects in the origination process of the loan, such as documentation errors, underwriting errors and judgments, early payment defaults and fraud. The total unpaid principal balance of loans sold on a servicing-retained basis that were subject to the terms and conditions of these representations and warranties totaled $ 5.5 billion at both June 30, 2022 and December 31, 2021. At June 30, 2022 and December 31, 2021, the Company had recorded a mortgage repurchase liability for loans sold on a servicing-retained and 32 servicing-released basis, included in accounts payable and other liabilities on the consolidated balance sheets, of $ 1.5 million and $ 1.3 million, respectively. NOTE 9– EARNINGS PER SHARE: The following table summarizes the calculation of earnings per share: Quarter Ended June 30, Six Months Ended June 30, (in thousands, except share and per share data) 2022 2021 2022 2021 Net income $ 17,721 $ 29,157 $ 37,672 $ 58,820 Weighted average shares: Basic weighted-average number of common shares outstanding 18,706,953 21,057,473 19,143,925 21,345,969 Dilutive effect of outstanding common stock equivalents 127,490 230,501 166,825 277,329 Diluted weighted-average number of common shares outstanding 18,834,443 21,287,974 19,310,750 21,623,298 Net income per share: Basic earnings per share $ 0.95 $ 1.38 $ 1.97 $ 2.76 Diluted earnings per share 0.94 1.37 1.95 2.72 NOTE 10– FAIR VALUE MEASUREMENT: The term "fair value" is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The Company's approach is to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements. Fair Value Hierarchy A three-level valuation hierarchy has been established under ASC 820 for disclosure of fair value measurements. The valuation hierarchy is based on the observability of inputs to the valuation of an asset or liability as of the measurement date. A financial instrument’s categorization within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement. The levels are defined as follows: • Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date. An active market for the asset or liability is a market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. • Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. This includes quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability for substantially the full term of the financial instrument. • Level 3 – Unobservable inputs for the asset or liability. These inputs reflect the Company's assumptions of what market participants would use in pricing the asset or liability. The Company's policy regarding transfers between levels of the fair value hierarchy is that all transfers are assumed to occur at the end of the reporting period. 33 Estimation of Fair Value Fair value is based on quoted market prices, when available. In cases where a quoted price for an asset or liability is not available, the Company uses valuation models to estimate fair value. These models incorporate inputs such as forward yield curves, loan prepayment assumptions, expected loss assumptions, market volatilities and pricing spreads utilizing market-based inputs where readily available. The Company believes its valuation methods are appropriate and consistent with those that would be used by other market participants. However, imprecision in estimating unobservable inputs and other factors may result in these fair value measurements not reflecting the amount realized in an actual sale or transfer of the asset or liability in a current market exchange. The following table summarizes the fair value measurement methodologies, including significant inputs and assumptions and classification of the Company's assets and liabilities valued at fair value on a recurring basis. Asset/Liability class Valuation methodology, inputs and assumptions Classification Investment securities Trading securities Fair Value is based on quoted prices in an active market. Level 1 recurring fair value measurement. Investment securities AFS Observable market prices of identical or similar securities are used where available. Level 2 recurring fair value measurement. If market prices are not readily available, value is based on discounted cash flows using the following significant inputs: • Expected prepayment speeds • Estimated credit losses • Market liquidity adjustments Level 3 recurring fair value measurement. LHFS Single family loans, excluding loans transferred from held for investment Fair value is based on observable market data, including: • Quoted market prices, where available • Dealer quotes for similar loans • Forward sale commitments Level 2 recurring fair value measurement. When not derived from observable market inputs, fair value is based on discounted cash flows, which considers the following inputs: • Benchmark yield curve • Estimated discount spread to the benchmark yield curve • Expected prepayment speeds Estimated fair value classified as Level 3. Mortgage servicing rights Single family MSRs For information on how the Company measures the fair value of its single family MSRs, including key economic assumptions and the sensitivity of fair value to changes in those assumptions, see Note 7 , Mortgage Banking Operations . Level 3 recurring fair value measurement. Derivatives Futures and Options Fair value is based on closing exchange prices. Level 1 recurring fair value measurement. Forward sale commitments Interest rate swaps Fair value is based on quoted prices for identical or similar instruments, when available. When quoted prices are not available, fair value is based on internally developed modeling techniques, which require the use of multiple observable market inputs including: • Forward interest rates • Interest rate volatilities Level 2 recurring fair value measurement. Interest rate lock commitments The fair value considers several factors including: • Fair value of the underlying loan based on quoted prices in the secondary market, when available. • Value of servicing • Fall-out factor Level 3 recurring fair value measurement. 34 The following tables presents the levels of the fair value hierarchy for the Company's assets and liabilities measured at fair value on a recurring basis: At June 30, 2022 (in thousands) Fair Value Level 1 Level 2 Level 3 Assets: Trading securities - U.S. Treasury securities $ 33,081 $ 33,081 $ — $ — Investment securities AFS Mortgage backed securities: Residential 128,931 — 126,843 2,088 Commercial 63,573 — 63,573 — Collateralized mortgage obligations: Residential 296,049 — 296,049 — Commercial 126,591 — 126,591 — Municipal bonds 535,353 — 535,353 — Corporate debt securities 30,330 — 30,258 72 U.S. Treasury securities 20,930 — 20,930 — Single family LHFS 35,853 — 35,853 — Single family LHFI 6,508 — — 6,508 Single family mortgage servicing rights 76,481 — — 76,481 Derivatives Forward sale commitments 1,058 — 1,058 — Options 199 199 — — Interest rate lock commitments 737 — — 737 Interest rate swaps 9,211 — 9,211 — Total assets $ 1,364,885 $ 33,280 $ 1,245,719 $ 85,886 Liabilities: Derivatives Futures $ 143 $ 143 $ — $ — Forward sale commitments 902 — 902 — Interest rate lock commitments 415 — — 415 Interest rate swaps 9,211 — 9,211 — Total liabilities $ 10,671 $ 143 $ 10,113 $ 415 35 At December 31, 2021 (in thousands) Fair Value Level 1 Level 2 Level 3 Assets: Investment securities AFS Mortgage backed securities: Residential $ 32,963 $ — $ 30,556 $ 2,407 Commercial 62,792 — 62,792 — Collateralized mortgage obligations: Residential 187,394 — 187,394 — Commercial 136,659 — 136,659 — Municipal bonds 539,923 — 539,923 — Corporate debt securities 19,616 — 19,541 75 U.S. Treasury securities 23,175 — 23,175 — Single family LHFS 128,041 — 128,041 — Single family LHFI 7,287 — — 7,287 Single family mortgage servicing rights 61,584 — — 61,584 Derivatives Futures 334 334 — — Forward sale commitments 723 — 723 — Interest rate lock commitments 2,487 — — 2,487 Interest rate swaps 4,381 — 4,381 — Total assets $ 1,207,359 $ 334 $ 1,133,185 $ 73,840 Liabilities: Derivatives Forward sale commitments $ 640 $ — $ 640 $ — Interest rate lock commitments 3 — — 3 Interest rate swaps 4,541 — 4,541 — Total liabilities $ 5,184 $ — $ 5,181 $ 3 There were no transfers between levels of the fair value hierarchy during the quarters and six months ended June 30, 2022 and 2021. Level 3 Recurring Fair Value Measurements The Company's level 3 recurring fair value measurements consist of investment securities AFS, single family MSRs, single family LHFI where fair value option was elected, certain single family LHFS and interest rate lock commitments, which are accounted for as derivatives. For information regarding fair value changes and activity for single family MSRs during the quarters and six months ended June 30, 2022 and 2021, see Note 7, Mortgage Banking Operations of this Quarterly Report on Form 10-Q. The fair value of IRLCs considers several factors, including the fair value in the secondary market of the underlying loan resulting from the exercise of the commitment, the expected net future cash flows related to the associated servicing of the loan (referred to as the value of servicing) and the probability that the commitment will not be converted into a funded loan (referred to as a fall-out factor). The fair value of IRLCs on LHFS, while based on interest rates observable in the market, is highly dependent on the ultimate closing of the loans. The significance of the fall-out factor to the fair value measurement of an individual IRLC is generally highest at the time that the rate lock is initiated and declines as closing procedures are performed and the underlying loan gets closer to funding. The fall-out factor applied is based on historical experience. The value of servicing is impacted by a variety of factors, including prepayment assumptions, discount rates, delinquency rates, contractually specified servicing fees, servicing costs and underlying portfolio characteristics. Because these inputs are not observable in market trades, the fall-out factor and value of servicing are considered to be level 3 inputs. The fair value of IRLCs decreases in value upon an increase in the fall-out factor and increases in value upon an increase in the value of servicing. Changes in the fall-out factor and value of servicing do not increase or decrease based on movements in other significant unobservable inputs. 36 The Company recognizes unrealized gains and losses from the time that an IRLC is initiated until the gain or loss is realized at the time the loan closes, which generally occurs within 30-90 days. For IRLCs that fall out, any unrealized gain or loss is reversed, which generally occurs at the end of the commitment period. The gains and losses recognized on IRLC derivatives generally correlates to volume of single family interest rate lock commitments made during the reporting period (after adjusting for estimated fallout) while the amount of unrealized gains and losses realized at settlement generally correlates to the volume of single family closed loans during the reporting period. The Company uses the discounted cash flow model to estimate the fair value of certain loans that have been transferred from held for sale to held for investment and single family LHFS when the fair value of the loans is not derived using observable market inputs. The key assumption in the valuation model is the implied spread to benchmark interest rate curve. The implied spread is not directly observable in the market and is derived from third party pricing which is based on market information from comparable loan pools. The fair value estimate of single family loans that have been transferred from held for sale to held for investment are sensitive to changes in the benchmark interest rate which might result in a significantly higher or lower fair value measurement. The Company transferred certain loans from held for sale to held for investment. These loans were originated as held for sale loans where the Company had elected fair value option. The Company determined these loans to be level 3 recurring assets as the valuation technique included a significant unobservable input. The total amount of held for investment loans where fair value option election was made was $ 6.5 million and $ 7.3 million at June 30, 2022 and December 31, 2021, respectively. The following information presents significant Level 3 unobservable inputs used to measure fair value of certain assets: (dollars in thousands) Fair Value Valuation Technique Significant Unobservable Input Low High Weighted Average June 30, 2022 Investment securities AFS $ 2,160 Income approach Implied spread to benchmark interest rate curve 2.00 % 2.00 % 2.00 % Single family LHFI 6,508 Income approach Implied spread to benchmark interest rate curve 2.80 % 5.04 % 3.40 % Interest rate lock commitments, net 322 Income approach Fall-out factor 0.10 % 20.56 % 7.67 % Value of servicing 0.52 % 1.25 % 0.96 % December 31, 2021 Investment securities AFS $ 2,482 Income approach Implied spread to benchmark interest rate curve 2.00 % 2.00 % 2.00 % Single family LHFI 7,287 Income approach Implied spread to benchmark interest rate curve 2.39 % 7.96 % 3.56 % Interest rate lock commitments, net 2,484 Income approach Fall-out factor 0.15 % 21.93 % 8.44 % Value of servicing 0.35 % 1.46 % 1.15 % 37 We had no LHFS where the fair value was not derived with significant observable inputs at June 30, 2022 and December 31, 2021. The following table presents fair value changes and activity for certain Level 3 assets for the periods indicated: (in thousands) Beginning balance Additions Transfers Payoffs/Sales Change in mark to market (1) Ending balance Quarter Ended June 30, 2022 Investment securities AFS $ 2,307 $ — $ — $ ( 49 ) $ ( 98 ) $ 2,160 Single family LHFI 6,981 — — — ( 473 ) 6,508 Quarter Ended June 30, 2021 Investment securities AFS $ 2,490 $ — $ — $ ( 48 ) $ 108 $ 2,550 Single family LHFI 4,324 785 — — 98 5,207 Six Months Ended June 30, 2022 Investment securities AFS $ 2,482 $ — $ — $ ( 97 ) $ ( 225 ) $ 2,160 Single family LHFI 7,287 — — — ( 779 ) 6,508 Six Months Ended June 30, 2021 Investment securities AFS $ 2,710 $ — $ — $ ( 96 ) $ ( 64 ) $ 2,550 Single family LHFI 7,108 1,145 — ( 3,191 ) 145 5,207 (1) Changes in fair value for single LHFI are recorded in other noninterest income on the consolidated income statements. The following table presents fair value changes and activity for Level 3 interest rate lock commitments: Quarter Ended June 30, Six Months Ended June 30, (in thousands) 2022 2021 2022 2021 Beginning balance, net $ 78 $ 6,488 $ 2,484 $ 17,392 Total realized/unrealized gains (losses) 1,338 7,282 ( 839 ) 3,813 Settlements ( 1,094 ) ( 7,877 ) ( 1,323 ) ( 15,312 ) Ending balance, net $ 322 $ 5,893 $ 322 $ 5,893 Nonrecurring Fair Value Measurements Certain assets held by the Company are not included in the tables above, but are measured at fair value on a periodic basis. These assets include certain LHFI and OREO that are carried at the lower of cost or fair value of the underlying collateral, less the estimated costs to sell. The estimated fair values of real estate collateral are generally based on internal evaluations and appraisals of such collateral, which use the market approach and income approach methodologies. We have omitted disclosure related to quantitative inputs given the insignificance of assets measured on a nonrecurring basis. The fair value of commercial properties is generally based on third-party appraisals that consider recent sales of comparable properties, including their income-generating characteristics, adjusted (generally based on unobservable inputs) to reflect the general assumptions that a market participant would make when analyzing the property for purchase. The Company uses a fair value of collateral technique to apply adjustments to the appraisal value of certain commercial LHFI that are collateralized by real estate. The Company uses a fair value of collateral technique to apply adjustments to the stated value of certain commercial LHFI that are not collateralized by real estate and to the appraisal value of OREO. Residential properties are generally based on unadjusted third-party appraisals. Factors considered in determining the fair value include geographic sales trends, the value of comparable surrounding properties as well as the condition of the property. These adjustments include management assumptions that are based on the type of collateral dependent loan and may increase or decrease an appraised value. Management adjustments vary significantly depending on the location, physical characteristics and income producing potential of each individual property. The quality and volume of market information available at the time of the appraisal can vary from period-to-period and cause significant changes to the nature and magnitude of the unobservable 38 inputs used. Given these variations, changes in these unobservable inputs are generally not a reliable indicator for how fair value will increase or decrease from period to period. For the quarter and six months ended June 30, 2022, no assets classified as Level 3 had changes in their recorded fair value. The following table presents assets classified as Level 3 that had changes in their recorded fair value for the periods indicated and what we still held at the end of the respective reporting period: (in thousands) Fair Value Total Gains (Losses) At or for the Quarter and Six Months Ended June 30, 2021 LHFI (1) $ 741 $ ( 62 ) (1) Represents the carrying value of loans for which adjustments are based on the fair value of the collateral. Fair Value of Financial Instruments The following presents the carrying value, estimated fair value and the levels of the fair value hierarchy for the Company's financial instruments other than assets and liabilities measured at fair value on a recurring basis: At June 30, 2022 (in thousands) Carrying Value Fair Value Level 1 Level 2 Level 3 Assets: Cash and cash equivalents $ 75,277 $ 75,277 $ 75,277 $ — $ — Investment securities HTM 3,118 3,089 — 3,089 — LHFI 6,715,874 6,473,097 — — 6,473,097 LHFS – multifamily and other 11,461 11,552 — 11,552 — Mortgage servicing rights – multifamily and SBA 38,130 42,324 — — 42,324 Federal Home Loan Bank stock 66,992 66,992 — 66,992 — Other assets - GNMA EBO loans 6,102 6,102 — — 6,102 Liabilities: Certificates of deposit $ 969,535 $ 956,983 $ — $ 956,983 $ — Borrowings 1,458,000 1,457,994 1,457,994 Long-term debt 224,227 209,842 — 209,842 — At December 31, 2021 (in thousands) Carrying Value Fair Value Level 1 Level 2 Level 3 Assets: Cash and cash equivalents $ 65,214 $ 65,214 $ 65,214 $ — $ — Investment securities HTM 4,169 4,305 — 4,305 — LHFI 5,488,439 5,588,719 — — 5,588,719 LHFS – multifamily and other 48,090 48,425 — 48,425 — Mortgage servicing rights – multifamily and SBA 39,415 43,199 — — 43,199 Federal Home Loan Bank stock 10,361 10,361 — 10,361 — Other assets-GNMA EBO loans 12,342 12,342 — — 12,342 Liabilities: Certificates of deposit $ 906,928 $ 906,064 $ — $ 906,064 $ — Borrowings 41,000 41,000 — 41,000 — Long-term debt 126,026 116,845 — 116,845 — 39 Fair Value Option Single family loans held for sale accounted under the fair value option are measured initially at fair value with subsequent changes in fair value recognized in earnings. Gains and losses from such changes in fair value are recognized in net gain on mortgage loan origination and sale activities within noninterest income. The change in fair value of loans held for sale is primarily driven by changes in interest rates subsequent to loan funding and changes in fair value of the related servicing asset, resulting in revaluations adjustments to the recorded fair value. The use of the fair value option allows the change in the fair value of loans to more effectively offset the change in fair value of derivative instruments that are used as economic hedges of loans held for sale. The following table presents the difference between the aggregate fair value and the aggregate unpaid principal balance of loans held for sale accounted for under the fair value option: At June 30, 2022 At December 31, 2021 (in thousands) Fair Value Aggregate Unpaid Principal Balance Fair Value Less Aggregated Unpaid Principal Balance Fair Value Aggregate Unpaid Principal Balance Fair Value Less Aggregated Unpaid Principal Balance Single family LHFS $ 35,853 $ 35,684 $ 169 $ 128,041 $ 124,933 $ 3,108 NOTE 11– SUBSEQUENT EVENT: On July 28, 2022 the Board authorized a dividend of $ 0.35 per share, payable on August 23, 2022 to shareholders of record on August 9, 2022. On July 29, 2022, we closed a sale of five retail deposit branches in eastern Washington, including the branches' lending businesses and employees, for an estimated gain of $ 4 million. The balance of deposits, loans and other assets sold were $ 185 million, $ 42 million and $ 2 million, respectively. 40 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements and Notes presented elsewhere in this report and in HomeStreet, Inc.'s 2021 Annual Report on Form 10-K. FORWARD-LOOKING STATEMENTS Statements contained in this Quarterly Report on Form 10-Q that are not historical facts or that discuss our expectations, beliefs or views regarding our future operations or future financial performance, or financial or other trends in our business or in the markets in which we operate, anticipated completion of loan forbearances with respect to customer loans, our future plans and the credit exposure of certain loan products and other components of our business that could be impacted by the COVID-19 pandemic, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Many forward-looking statements can be identified as using words such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan," "potential," "should," "will" and "would" and similar expressions (or the negative of these terms). Such statements involve inherent risks and uncertainties, many of which are difficult to predict and are generally beyond the control of the Company and are subject to risks and uncertainties, including, but not limited to, those discussed in our Annual Report on Form 10-K for the year ended December 31, 2021 and the risks and uncertainties discussed below and elsewhere in this Quarterly Report on Form 10-Q that could cause actual results to differ significantly from those projected. In addition, many of the risks and uncertainties are, and will be, exacerbated by the COVID-19 pandemic and any worsening of the global, national, regional and local business and economic environment as a result. Although we believe that expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We undertake no obligation, and expressly disclaim any such obligation to update; or clarify any of the forward-looking statements after the date of this Quarterly Report on Form 10-Q to reflect changed assumptions, the occurrence of anticipated or unanticipated events, new information or changes to future results over time or otherwise, except as required by law. Readers are cautioned not to place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q. Except as otherwise noted, references to "we," "our," "us" or "the Company" refer to HomeStreet, Inc. and its subsidiaries that are consolidated for financial reporting purposes. Statements of knowledge, intention or belief reflect those characteristics of our executive management team based on current facts and circumstances. You may review a copy of this Quarterly Report on Form 10-Q, including exhibits and any schedule filed therewith on the Securities and Exchange Commission's website (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants, such as HomeStreet, Inc., that file electronically with the Securities and Exchange Commission. Copies of our Securities Exchange Act reports also are available from our investor relations website, http://ir.homestreet.com. Information contained in or linked from our websites is not incorporated into and does not constitute a part of this report. Critical Accounting Estimates We have identified two estimates as being critical because they require management to make particularly difficult, subjective, and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These policies relate to the allowance for credit losses (“ACL”) and the valuation of single family mortgage servicing rights (“MSRs"). The ACL is calculated based on quantitative and qualitative factors to estimate credit losses over the life of the loan. The inputs used to determine quantitative factors include estimates based on historical experience of probability of default and losses given default. Inputs used to determine qualitative factors include changes in current portfolio characteristics and operating environments such as current and forecasted unemployment rates, capitalization rates used to value properties securing loans, rental rates and single family pricing indexes. Qualitative factors may also include adjustments to address matters not contemplated by the model and to assumptions used to determine qualitative factors. Although we believe that our methodology for determining an appropriate level for the ACL adequately addresses the various components that could potentially result in credit losses, the processes and their elements include features that may be susceptible to significant change. Any unfavorable 41 differences between the actual outcome of credit-related events and our estimates could require an additional provision for credit losses. For example, if the projected unemployment rate was downgraded one grade for all periods, the amount of the ACL at June 30, 2022 would increase by approximately $12 million. This sensitivity analysis is hypothetical and has been provided only to indicate the potential impact that changes in assumptions may have on the ACL estimate. The valuation of MSRs is based on various assumptions which are set forth in Note 7– Mortgage Banking Operations of the financial statements. Note 7 also provides sensitivity analysis based on the assumptions used. The sensitivity analyses are hypothetical and have been provided to indicate the potential impact that changes in assumptions may have on the estimate of the fair value of MSRs. 42 Summary Financial Data Quarter Ended Six Months Ended June 30, (in thousands, except per share data and FTE data) June 30, 2022 March 31, 2022 2022 2021 Select Income Statement data: Net interest income $ 60,056 $ 54,546 $ 114,602 $ 112,489 Provision for credit losses — (9,000) (9,000) (4,000) Noninterest income 13,013 15,558 28,571 67,057 Noninterest expense 50,637 54,473 105,110 109,423 Net income: Before income taxes 22,432 24,631 47,063 74,123 Total 17,721 19,951 37,672 58,820 Net income per share - diluted 0.94 1.01 1.95 2.72 Select Performance Ratios: Return on average equity - annualized 11.8 % 11.6 % 11.7 % 16.4 % Return on average tangible equity - annualized (1) 12.6 % 12.2 % 12.4 % 17.3 % Return on average assets - annualized 0.89 % 1.10 % 0.99 % 1.62 % Efficiency ratio (1) 68.5 % 77.0 % 72.7 % 61.3 % Net interest margin 3.27 % 3.27 % 3.28 % 3.37 % Other data Full time equivalent employees 956 962 956 997 (1) Return on average tangible equity and the efficiency ratio are non-GAAP financial measures. For a reconciliation of return on average tangible equity to the nearest comparable GAAP financial measure, see “Non-GAAP Financial Measures” elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations. 43 As of (in thousands, except share and per share data) June 30, 2022 December 31, 2021 Selected Balance Sheet Data Loans held for sale $ 47,314 $ 176,131 Loans held for investment, net 6,722,382 5,495,726 ACL 37,355 47,123 Investment securities 1,237,957 1,006,691 Total assets 8,582,886 7,204,091 Deposits 6,183,299 6,146,509 Borrowings 1,458,000 41,000 Long-term debt 224,227 126,026 Total shareholders' equity 580,767 715,339 Other data: Book value per share $ 31.04 $ 35.61 Tangible book value per share (1) $ 29.37 $ 34.04 Total equity to total assets 6.8 % 9.9 % Tangible common equity to tangible assets (1) 6.4 % 9.5 % Shares outstanding at period end 18,712,789 20,085,336 Loans to deposit ratio 110.1 % 93.0 % Credit Quality: ACL to total loans (2) 0.56 % 0.88 % ACL to nonaccrual loans 411.3 % 386.2 % Nonaccrual loans to total loans 0.13 % 0.22 % Nonperforming assets to total assets 0.13 % 0.18 % Nonperforming assets $ 10,835 $ 12,936 Regulatory Capital Ratios: Bank Tier 1 leverage ratio 9.78 % 10.11 % Total risk-based capital 12.29 % 13.77 % Company Tier 1 leverage ratio 8.38 % 9.94 % Total risk-based capital 11.49 % 12.66 % (1) Tangible book value per share and tangible common equity to tangible assets are non-GAAP financial measures. For a reconciliation to the nearest comparable GAAP financial measure, see “Non-GAAP Financial Measures” elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations. (2) This ratio excludes balances insured by the FHA or guaranteed by the VA or SBA. 44 Current Developments As part of our business strategy, we are focusing on growing our loan portfolio and leveraging our existing operating expense infrastructure. Increases in our loan portfolio will have the effect of increasing our level of net interest income in future periods, a more stable source of revenues as compared to gain on loan origination and sale activities. As part of this strategy, we did not sell any multifamily portfolio loans in the first six months of 2022. In July 2022, we closed a sale of five retail deposit branches in eastern Washington, including the branches' lending businesses and employees. This sale allows us to focus our retail banking branch strategy on the larger metropolitan markets in the western United States. Management's Overview of the Second Quarter 2022 Financial Performance Second Quarter of 2022 Compared to the First Quarter of 2022 General: Our net income and income before taxes were $17.7 million and $22.4 million, respectively, in the second quarter of 2022, as compared to $20.0 million and $24.6 million, respectively, in the first quarter of 2022. The $2.2 million decrease in income before taxes was due to lower recovery of our allowance for credit losses and lower noninterest income, partially offset by higher net interest income and lower noninterest expense. Income Taxes: Our effective tax rate was 21.0% in the second quarter of 2022 as compared to 19.0% in first quarter of 2022 and a statutory rate of 23.9%. Our effective tax rate was lower than our statutory rate due to the benefits of tax advantaged investments. Additionally, our effective tax rate in the first quarter of 2022 was lower than the second quarter of 2022 due to reductions in taxes on income related to excess tax benefits resulting from the vesting of stock awards during the first quarter. 45 Net Interest Income: The following tables set forth, 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 interest margin: Quarter Ended June 30, 2022 March 31, 2022 (in thousands) Average Balance Interest Average Yield/Cost Average Balance Interest Average Yield/Cost Assets: Interest-earning assets: Loans (1) $ 6,231,081 $ 60,008 3.82 % $ 5,691,316 $ 53,135 3.74 % Investment securities (1) 1,134,929 8,415 2.97 % 1,028,971 6,671 2.59 % FHLB Stock, Fed Funds and other 80,998 487 2.38 % 65,918 108 0.65 % Total interest-earning assets 7,447,008 68,910 3.68 % 6,786,205 59,914 3.54 % Noninterest-earning assets 498,290 577,384 Total assets $ 7,945,298 $ 7,363,589 Liabilities and shareholders' equity: Interest-bearing deposits: (2) Demand deposits $ 552,749 $ 177 0.13 % $ 525,608 $ 143 0.11 % Money market and savings 3,050,173 1,615 0.21 % 3,101,607 1,121 0.15 % Certificates of deposit 961,052 1,101 0.46 % 886,416 1,020 0.47 % Total 4,563,974 2,893 0.25 % 4,513,631 2,284 0.21 % Borrowings: Borrowings 761,606 2,338 1.21 % 64,557 91 0.56 % Long-term debt 224,167 2,404 4.28 % 204,553 2,107 4.12 % Total interest-bearing liabilities 5,549,747 7,635 0.55 % 4,782,741 4,482 0.38 % Noninterest-bearing liabilities: Demand deposits (2) 1,668,631 1,744,202 Other liabilities 123,256 138,048 Total liabilities 7,341,634 6,664,991 Shareholders' equity 603,664 698,598 Total liabilities and shareholders' equity $ 7,945,298 $ 7,363,589 Net interest income $ 61,275 $ 55,432 Net interest rate spread 3.13 % 3.16 % Net interest margin 3.27 % 3.27 % (1) Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain loans and securities of $1.2 million and $0.9 million for the quarters ended June 30, 2022 and March 31, 2022. The estimated federal statutory tax rate was 21% for the periods presented. (2) Cost of all deposits, including noninterest-bearing demand deposits was 0.19% and 0.15% for the quarters ended June 30, 2022 and March 31, 2022, respectively. Net interest income was $5.5 million higher in the second quarter of 2022 as compared to the first quarter of 2022 due to a 10% increase in average interest earning assets. The increase in the average balance of interest-earning assets was due to the high level of loan originations and purchases of investment securities during the second quarter. Our net interest margin stayed constant at 3.27% as a 14 basis point increase in the yield on interest-earning assets was offset by a 17 basis point increase in the cost of interest-bearing liabilities. Yields on interest-earning assets increased as the rates on loan originations and investment securities purchased during the second quarter were higher than the rates of our existing portfolios of loans and investment securities, respectively. Our cost of borrowings increased 65 basis points during the second quarter while the cost of deposits increased 4 basis points. Additionally, our average borrowings increased by $697 million to fund the growth of our interest-earning assets. The increases in yields on interest-earning assets and the rates paid on interest-bearing liabilities was due to the significant increase in market interest rates during the first half of 2022. 46 Provision for Credit Losses: No provision for credit losses was recorded during the second quarter of 2022 as the benefits of the continuing favorable performance of our loan portfolio was used to offset any required ACL resulting from the significant growth in our loan portfolio. As a result of the favorable performance of our loan portfolio during the first quarter, 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 $9 million recovery of our allowance for credit losses in the first quarter of 2022. Noninterest Income consisted of the following: Quarter Ended (in thousands) June 30, 2022 March 31, 2022 Noninterest income Gain on loan origination and sale activities (1) Single family $ 3,949 $ 6,169 CRE, multifamily and SBA 1,343 2,105 Loan servicing income 3,661 3,304 Deposit fees 2,218 2,075 Other 1,842 1,905 Total noninterest income $ 13,013 $ 15,558 (1) May include loans originated as held for investment. Loan servicing income, a component of noninterest income, consisted of the following: Quarter Ended (in thousands) June 30, 2022 March 31, 2022 Single family servicing income, net Servicing fees and other $ 3,952 $ 3,871 Changes - amortization (1) (2,515) (3,425) Net 1,437 446 Risk management, single family MSRs: Changes in fair value due to assumptions (2) 4,323 10,303 Net gain (loss) from economic hedging (5,317) (10,183) Subtotal (994) 120 Single Family servicing income (loss) 443 566 Commercial loan servicing income: Servicing fees and other 5,555 4,450 Amortization of capitalized MSRs (2,337) (1,712) Total 3,218 2,738 Total loan servicing income $ 3,661 $ 3,304 (1) Represents changes due to collection/realization of expected cash flows and curtailments. (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 in the second quarter of 2022 as compared to the first quarter of 2022 was due to a $3.0 million decrease in gain on loan origination and sale activities due primarily to a $2.2 million decrease in single family gain on loan origination and sale activities. The decrease in single family gain on loan origination and sale activities was due to a decrease in rate lock volume as a result of the effects of increasing interest rates. 47 Noninterest Expense consisted of the following: Quarter Ended (in thousands) June 30, 2022 March 31, 2022 Noninterest expense Compensation and benefits $ 30,191 $ 32,031 Information services 7,780 7,062 Occupancy 5,898 6,365 General, administrative and other 6,768 9,015 Total noninterest expense $ 50,637 $ 54,473 The $3.8 million decrease in noninterest expense in the second quarter of 2022 as compared to the first quarter of 2022 was primarily due to lower compensation and benefits and general, administrative and other costs, partially offset by higher information services costs. The decrease in compensation costs was due to the seasonality of certain employee benefit costs, such as employer taxes, 401k match and vacation accruals, which are higher in the first quarter of the year, and the deferred cost benefit resulting from the significantly higher level of originations in the second quarter. The increase in information services costs was due to the implementation of new systems in the second quarter and higher activity levels. Legal costs, which are included in general, administrative and other costs, were $1.7 million lower in the second quarter of 2022 as compared to first quarter of 2022 due to nonrecurring costs expended on litigation activities and legal matters in the first quarter. Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021 General: Our net income and income before taxes were $37.7 million and $47.1 million, respectively, in the six months ended June 30, 2022, as compared to $58.8 million and $74.1 million, respectively, in the six months ended June 30, 2021. The $27.1 million decrease in income before taxes was due to lower noninterest income, partially offset by higher net interest income, a larger recovery of our allowance for credit losses in 2022 and lower noninterest expense. Income Taxes: Our effective tax rate during six months ended June 30, 2022 was 20.0% as compared to 20.6% in the six months ended June 30, 2021 and a statutory rate of 23.9%. Our effective tax rate for both periods was lower than our statutory rate due to the benefits of tax advantaged investments and reductions in taxes on income related to excess tax benefits resulting from the exercise and vesting of stock awards during the periods. Net Interest Income: The following tables set forth, 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 interest margin: 48 Six Months Ended June 30, 2022 2021 (in thousands) Average Balance Interest Average Yield/Cost Average Balance Interest Average Yield/Cost Assets: Interest-earning assets: Loans (1) $ 5,962,689 $ 113,143 3.79 % $ 5,635,181 $ 111,020 3.93 % Investment securities (1) 1,082,243 15,302 2.83 % 1,049,091 12,268 2.34 % FHLB Stock, Fed Funds and other 73,499 595 1.61 % 77,315 331 0.85 % Total interest-earning assets 7,118,431 129,040 3.62 % 6,761,587 123,619 3.65 % Noninterest-earning assets 537,619 564,602 Total assets $ 7,656,050 $ 7,326,189 Interest-bearing liabilities: Interest-bearing deposits: (2) Demand deposits $ 539,253 $ 320 0.12 % $ 517,456 $ 355 0.14 % Money market and savings 3,075,616 2,736 0.18 % 2,936,982 2,285 0.16 % Certificates of deposit 924,062 2,121 0.46 % 1,128,904 3,783 0.68 % Total 4,538,931 5,177 0.23 % 4,583,342 6,423 0.28 % Borrowings: Borrowings 415,007 2,429 1.16 % 191,422 303 0.32 % Long-term debt 214,414 4,511 4.20 % 125,878 2,723 4.32 % Total interest-bearing liabilities 5,168,352 12,117 0.47 % 4,900,642 9,449 0.39 % Noninterest-bearing liabilities: Demand deposits (2) 1,706,217 1,487,708 Other liabilities 130,612 212,664 Total liabilities 7,005,181 6,601,014 Shareholders' equity 650,869 725,175 Total liabilities and shareholders' equity $ 7,656,050 $ 7,326,189 Net interest income $ 116,923 $ 114,170 Net interest spread 3.15 % 3.26 % Net interest margin 3.28 % 3.37 % (1) Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain loans and securities of $2.3 million and $1.7 million for the six months ended June 30, 2022 and 2021, respectively. The estimated federal statutory tax rate was 21% for the periods presented. (2) Cost of deposits including noninterest-bearing deposits, was 0.17% and 0.21% for the six months ended June 30, 2022 and 2021, respectively. Net interest income for the six months ended June 30, 2022 increased $2.1 million as compared to the six months ended June 30, 2021 due to increases in the average balance of interest earning assets, partially offset by a decrease in our net interest margin. Our net interest margin decreased from 3.37% in the six months ended June 30, 2021 compared to 3.28% in the six months ended June 30, 2022 due to an eight basis point increase in the rate paid on interest-bearing liabilities, primarily due to increases in our cost of borrowings. Our cost of borrowings increased from 32 basis points during the first six months of 2021 to 116 basis points during the first six months of 2022 due to the significant increase in market interest rates during the first half of 2022 and the impact of the $100 million subordinated notes offering completed in January 2022. The increase in interest-earning assets was due to the high level of loan originations and purchases of investment securities during the second quarter of 2022. Provision for 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 $9 million recovery of our allowance for credit losses in the six months ended June 30, 2022 compared to a $4 million recovery of our allowance for credit losses in the six months ended June 30, 2021. 49 Noninterest Income consisted of the following: Six Months Ended June 30, (in thousands) 2022 2021 Noninterest income Gain on loan origination and sale activities (1) Single family $ 10,118 $ 42,023 Commercial 3,448 12,707 Loan servicing income 6,965 2,679 Deposit fees 4,293 3,821 Other 3,747 5,827 Total noninterest income $ 28,571 $ 67,057 (1) May include loans originated as held for investment. Loan servicing income, a component of noninterest income, consisted of the following: Six Months Ended June 30, (in thousands) 2022 2021 Single family servicing income, net Servicing fees and other $ 7,823 $ 7,910 Changes - amortization (1) (5,940) (10,874) Net 1,883 (2,964) Risk management, single family MSRs: Changes in fair value due to assumptions (2) 14,626 6,439 Net gain (loss) from economic hedging (15,500) (7,567) Subtotal (874) (1,128) Single Family servicing income (loss) 1,009 (4,092) Commercial loan servicing income: Servicing fees and other 10,005 10,248 Amortization of capitalized MSRs (4,049) (3,477) Total 5,956 6,771 Total loan servicing income $ 6,965 $ 2,679 (1) Represents changes due to collection/realization of expected cash flows and curtailments. (2) Principally reflects changes in model assumptions, including prepayment speed assumptions, which are primarily affected by changes in mortgage interest rates. 50 The decrease in noninterest income for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021 was due to a decrease in gain on loan origination and sale activities, which was partially offset by higher loan servicing income. The $41.2 million decrease in gain on loan origination and sale activities was due to a $31.9 million decrease in single family gain on loan origination and sale activities and a $9.3 million decrease 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 to a decrease in rate lock volume and margins as a result of the effects of increasing interest rates. The decrease in CRE and commercial gain on loan origination and sale activities was primarily due to an 75% decrease in the volume of loans sold. The $4.3 million increase in loan servicing income was primarily due to lower levels of prepayments. Noninterest Expense consisted of the following: Six Months Ended June 30, (in thousands) 2022 2021 Noninterest expense Compensation and benefits $ 62,222 $ 70,213 Information services 14,842 13,733 Occupancy 12,263 12,465 General, administrative and other 15,783 13,012 Total noninterest expense $ 105,110 $ 109,423 The $4.3 million decrease in noninterest expense in the six months ended June 30, 2022 as compared to the six months ended June 30, 2021 was due to lower compensation and benefit costs, partially offset by increases in information services and general, administrative and other expenses. The $8.0 million decrease in compensation and benefits expense is primarily due to reduced commission expense on lower loan origination volumes in our single family mortgage operations. The increase in information services costs was due to the implementation of new systems in the second quarter of 2022 and higher activity levels. The increase in general, administrative and other costs was primarily due to a $1.9 million reimbursement of legal costs received from our insurance carrier in the first six months of June 30, 2021and nonrecurring costs expended on litigation activities and legal matters in 2022. 51 Financial Condition During the six months ended June 30, 2022, our total assets increased $1.4 billion due primarily to a $1.2 billion increase in loans held for investment and a $231 million increase in investment securities which were partially offset by a decrease of $129 million in loans held for sale. Loans held for investment increased due to $2.1 billion of originations, which were partially offset by prepayments and scheduled payments of $831 million. Total liabilities increased $1.5 billion due to increases in borrowings and long-term debt. The $1.4 billion increase in borrowings was used to fund the growth in our loans and investment securities. Long-term debt increased due to our $100 million subordinated notes offering completed in January 2022. 52 Credit Risk Management As of June 30, 2022, our ratio of nonperforming assets to total assets remained low at 0.13% while our ratio of total loans delinquent over 30 days to total loans was 0.31%. The Company recorded a $9 million recovery of our allowance for credit losses for the six months ended June 30, 2022 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. As a result of the recovery of COVID-19 reserves, and the change in the composition of our portfolio to lower credit risk loans, specifically a higher proportion of multifamily permanent loans, our overall ratio of ACL to LHFI decreased from 0.88% at December 31, 2021 to 0.56% at June 30, 2022. Management considers the current level of the ACL to be appropriate to cover estimated lifetime losses within our LHFI portfolio. The following table presents the ACL by product type: At June 30, 2022 At December 31, 2021 (in thousands) Amount Rate (1) Amount Rate (1) CRE Non-owner occupied CRE $ 2,180 0.31 % $ 7,509 1.06 % Multifamily 10,074 0.29 % 5,854 0.24 % Construction/land development Multifamily construction 566 1.30 % 507 1.34 % CRE construction 185 0.90 % 150 1.06 % Single family construction 10,687 3.08 % 6,411 2.16 % Single family construction to permanent 1,159 0.73 % 1,055 0.71 % Total 24,851 0.52 % 21,486 0.59 % Commercial and industrial loans Owner occupied CRE 1,092 0.23 % 5,006 1.10 % Commercial business 3,578 0.91 % 12,273 3.39 % Total 4,670 0.54 % 17,279 2.11 % Consumer loans Single family 4,027 0.56 % 4,394 0.68 % Home equity and other 3,807 1.20 % 3,964 1.31 % Total 7,834 0.76 % 8,358 0.88 % Total ACL $ 37,355 0.56 % $ 47,123 0.88 % (1) The ACL rate is calculated excluding balances related to loans that are insured by the FHA or guaranteed by the VA or SBA. Liquidity and Sources of Funds Liquidity risk management is primarily intended to ensure we are able to maintain sources of cash to adequately fund operations and meet our obligations, including demands from depositors, draws on lines of credit and paying any creditors, on a timely and cost-effective basis, in various market conditions. Our liquidity profile is influenced by changes in market conditions, the composition of the balance sheet and risk tolerance levels. The Company has established liquidity guidelines and operating plans that detail the sources and uses of cash and liquidity. The Company's primary sources of liquidity include deposits, loan payments and investment securities payments, both principal and interest, borrowings, and proceeds from the sale of loans and investment securities. Borrowings include advances from the FHLB, federal funds purchased and borrowing from other financial institutions. Additionally, the Company may sell stock or issue long-term debt to raise funds. While scheduled principal repayments on loans and investment securities are a relatively predictable source of funds, deposit inflows and outflows and prepayments of loans and investment securities are greatly influenced by interest rates, economic conditions and competition. The Company’s contractual cash flow obligations include the maturity of certificates of deposit, short-term and long-term borrowings, interest on certificates of deposit and borrowings, operating leases and fees for information technology related 53 services and professional services. Obligations for certificates of deposit and short-term borrowings are typically satisfied through the renewal of these instruments or the generation of new deposits or use of available short-term borrowings. Interest payments and obligations related to leases and services are typically met by cash generated from our operations. The Company has $64 million of Senior Notes which mature in 2026 which it expects to pay off from available cash or from the issuance of new debt. At June 30, 2022 and December 31, 2021, the Bank had available borrowing capacity of $809 million and $1.8 billion, respectively, from the FHLB, and $323 million and $274 million, respectively, from the FRBSF and $1.0 billion and $1.0 billion under borrowing lines established with other financial institutions. Cash Flows For the six months ended June 30, 2022, cash and cash equivalents increased by $10 million compared to an increase of $30 million during the six months ended June 30, 2021. As excess liquidity can reduce the Company’s earnings and returns, the Company manages its cash positions to minimize the level of excess liquidity and does not attempt to maximize the level of cash and cash equivalents. The following discussion highlights the major activities and transactions that affected our cash flows during these periods. Cash flows from operating activities The Company's operating assets and liabilities are used to support our lending activities, including the origination and sale of mortgage loans. For the six months ended June 30, 2022, net cash of $145 million was provided by operating activities, primarily from cash proceeds from the sale of loans exceeding cash used to fund LHFS. For the six months ended June 30, 2021, net cash of $55 million was provided by operating activities, primarily from cash proceeds from the sale of loans exceeding cash used to fund LHFS. We believe that cash flows from operations, available cash balances and our ability to generate cash through short-term debt borrowings are sufficient to fund our operating liquidity needs. We are currently not aware of any 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 capital needs during or beyond the next 12 months. Cash flows from investing activities The Company's investing activities primarily include AFS investment securities and loans originated as held for investment. For the six months ended June 30, 2022, net cash of $1.6 billion was used in investing activities primarily from the origination of LHFI net of principal repayments and the purchase of AFS investment securities. For the six months ended June 30, 2021, net cash of $44 million was provided by investing activities primarily from principal payments and the proceeds from the sale of LHFI and AFS securities, which were partially offset by the origination of LHFI and the purchase of AFS securities. Cash flows from financing activities The Company's financing activities are primarily related to deposits and net proceeds from borrowings. For the six months ended June 30, 2022, net cash of $1.4 billion was provided by financing activities, primarily due to an increase in short-term borrowings and proceeds from the issuance of the subordinated notes, partially offset by repurchases of and dividends paid on our common stock. For the six months ended June 30, 2021, net cash of $69 million was used in financing activities, primarily due to net repayment of short-term borrowings, repurchases of and dividends paid on our common stock, which was partially offset by growth in deposits. 54 Off-Balance Sheet Arrangements In the normal course of business, we are a party to financial instruments that carry off-balance sheet risk. These financial instruments (which include commitments to originate loans and commitments to purchase loans) include potential credit risk in excess of the amount recognized in the accompanying consolidated financial statements. These transactions are designed to (1) meet the financial needs of our customers, (2) manage our credit, market or liquidity risks, (3) diversify our funding sources and/or (4) optimize capital. These commitments include the following: (in thousands) At June 30, 2022 At December 31, 2021 Unused consumer portfolio lines $ 474,796 $ 405,992 Commercial portfolio lines (1) 836,296 820,131 Commitments to fund loans 59,450 90,852 Total $ 1,370,542 $ 1,316,975 (1) Within the commercial portfolio, undistributed construction loan proceeds, where the Company has an obligation to advance funds for construction progress payments, were $576 million and $584 million at June 30, 2022 and December 31, 2021, respectively. Capital Resources and Dividend Policy The capital rules applicable to United States based bank holding companies and federally insured depository institutions (“Capital Rules”) require the Company (on a consolidated basis) and the Bank (on a stand-alone basis) to meet specific capital adequacy requirements that, for the most part, involve quantitative measures, primarily in terms of the ratios of their capital to their assets, liabilities, and certain off-balance sheet items, calculated under regulatory accounting practices. In addition, prompt corrective action regulations place a federally insured depository institution, such as the Bank, into one of five capital categories on the basis of its capital ratios: (i) well capitalized; (ii) adequately capitalized; (iii) undercapitalized; (iv) significantly undercapitalized; or (v) critically undercapitalized. A depository institution’s primary federal regulatory agency may determine that, based on certain qualitative assessments, the depository institution should be assigned to a lower capital category than the one indicated by its capital ratios. At each successive lower capital category, a depository institution is subject to greater operating restrictions and increased regulatory supervision by its federal bank regulatory agency. The following table sets forth the capital and capital ratios of HomeStreet Inc. (on a consolidated basis) and HomeStreet Bank as compared to the respective regulatory requirements applicable to them: At June 30, 2022 Actual For Minimum Capital Adequacy Purposes To Be Categorized As "Well Capitalized" (dollars in thousands) Amount Ratio Amount Ratio Amount Ratio HomeStreet, Inc. Tier 1 leverage capital (to average assets) $ 673,552 8.38 % $ 321,579 4.0 % NA NA Common equity Tier 1 capital (to risk-weighted assets) 613,552 8.66 % 318,688 4.5 % NA NA Tier 1 risk-based capital (to risk-weighted assets) 673,552 9.51 % 424,917 6.0 % NA NA Total risk-based capital (to risk-weighted assets) 814,000 11.49 % 566,557 8.0 % NA NA HomeStreet Bank Tier 1 leverage capital (to average assets) $ 781,155 9.78 % $ 319,539 4.0 % $ 399,424 5.0 % Common equity Tier 1 capital (to risk-weighted assets) 781,155 11.66 % 301,423 4.5 % 435,388 6.5 % Tier 1 risk-based capital (to risk-weighted assets) 781,155 11.66 % 401,897 6.0 % 535,863 8.0 % Total risk-based capital (to risk-weighted assets) 823,005 12.29 % 535,863 8.0 % 669,828 10.0 % 55 At December 31, 2021 Actual For Minimum Capital Adequacy Purposes To Be Categorized As "Well Capitalized" (dollars in thousands) Amount Ratio Amount Ratio Amount Ratio HomeStreet, Inc. Tier 1 leverage capital (to average assets) $ 723,232 9.94 % $ 291,098 4.0 % NA NA Common equity Tier 1 capital (to risk-weighted assets) 663,232 10.84 % 275,281 4.5 % NA NA Tier 1 risk-based capital (to risk-weighted assets) 723,232 11.82 % 367,041 6.0 % NA NA Total risk-based capital (to risk-weighted assets) 774,695 12.66 % 489,388 8.0 % NA NA HomeStreet Bank Tier 1 leverage capital (to average assets) $ 727,753 10.11 % $ 287,990 4.0 % $ 359,988 5.0 % Common equity Tier 1 capital (to risk-weighted assets) 727,753 12.87 % 254,442 4.5 % 367,527 6.5 % Tier 1 risk-based capital (to risk-weighted assets) 727,753 12.87 % 339,256 6.0 % 452,341 8.0 % Total risk-based capital (to risk-weighted assets) 778,723 13.77 % 452,341 8.0 % 565,426 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. In addition to the minimum capital ratios, both HomeStreet Inc. and HomeStreet Bank are required to maintain a capital conservation buffer consisting of additional Common Equity Tier 1 Capital of more than 2.5% above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses. The required ratios for capital adequacy set forth in the above table do not include the Capital Rules’ additional capital conservation buffer, though each of the Company and Bank maintained capital ratios necessary to satisfy the capital conservation buffer requirements as of the dates indicated. At June 30, 2022, capital conservation buffers for the Company and the Bank were 3.49% and 4.29%, respectively. The Company paid a quarterly cash dividend of $0.35 per common share in the second quarter of 2022. It is our current intention to continue to pay quarterly dividends, and on July 28, 2022 we declared another cash dividend of $0.35 per common share payable on August 23, 2022 to shareholders of record as of the close of business on August 9, 2022. The amount and declaration of future cash dividends are subject to approval by our Board of Directors and certain regulatory restrictions. We had no material commitments for capital expenditures as of June 30, 2022. However, we intend to take advantage of opportunities that may arise in the future to grow our businesses, which may include opening additional offices or acquiring complementary businesses that we believe will provide us with attractive risk-adjusted returns. As a result, we may seek to obtain additional borrowings and to sell additional shares of our common stock to raise funds which we might need for these purposes. There is no assurance, however, that, if required, we will succeed in obtaining additional borrowings or selling additional shares of our common stock on terms that are acceptable to us, if at all, as this will depend on market conditions and other factors outside of our control, as well as our future results of operations. 56 Non-GAAP Financial Measures To supplement our unaudited condensed consolidated financial statements presented in accordance with GAAP, we use certain non-GAAP measures of financial performance. In this Quarterly Report on Form 10-Q, we use the following non-GAAP measures: (i) tangible common equity and tangible assets as we believe this information is consistent with the treatment by bank regulatory agencies, which excluded intangible assets from the calculation of capital ratios; and (ii) an efficiency ratio which is the ratio of noninterest expenses 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 tax expenses and we believe including them in noninterest expenses impacts the comparability of our results to those companies whose operations are in states where assessed taxes on business are classified as income tax expense. These supplemental performance measures may vary from, and may not be comparable to, similarly titled measures provided by other companies in our industry. Non-GAAP financial measures are not in accordance with, or an alternative for, GAAP. Generally, a non-GAAP financial measure is a numerical measure of a company’s performance that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with GAAP. A non-GAAP financial measure may also be a financial metric that is not required by GAAP or other applicable requirements. We believe that these non-GAAP financial measures, when taken together with the corresponding GAAP financial measures, provide meaningful supplemental information regarding our performance by providing additional information used by management that is not otherwise required by GAAP or other applicable requirements. Our management uses, and believes that investors benefit from referring to, these non-GAAP financial measures in assessing our operating results and when planning, forecasting and analyzing future periods. These non-GAAP financial measures also facilitate a comparison of our performance to prior periods. We believe these measures are frequently used by securities analysts, investors and other parties in the evaluation of companies in our industry. Rather, these non-GAAP financial measures should be considered in addition to, not as a substitute for or superior to, financial measures prepared in accordance with GAAP. In the information below, we have provided reconciliations of, where applicable, the most comparable GAAP financial measures to the non-GAAP measures used in this Quarterly Report on Form 10-Q, or a reconciliation of the non-GAAP calculation of the financial measure. 57 Reconciliations of non-GAAP results of operations to the nearest comparable GAAP measures: As of or for the quarter ended As of or for the six months ended June 30, (in thousands) June 30, 2022 March 31, 2022 2022 2021 Return on average tangible equity (annualized) Average shareholders' equity $ 603,664 $ 698,598 $ 650,869 $ 725,175 Less: Average goodwill and other intangibles (31,380) (31,624) (31,501) (32,631) Average tangible equity $ 572,284 $ 666,974 $ 619,368 $ 692,544 Net income $ 17,721 $ 19,951 $ 37,672 $ 58,820 Adjustments (tax effected) Amortization on core deposit intangibles 191 191 382 465 Tangible income applicable to shareholders $ 17,912 $ 20,142 $ 38,054 $ 59,285 Ratio 12.6 % 12.2 % 12.4 % 17.3 % Efficiency ratio Noninterest expense Total $ 50,637 $ 54,473 $ 105,110 $ 109,423 Adjustments: Legal fees recovery — — — 1,900 State of Washington taxes (579) (506) (1,085) (1,181) Adjusted total $ 50,058 $ 53,967 $ 104,025 $ 110,142 Total revenues Net interest income $ 60,056 $ 54,546 $ 114,602 $ 112,489 Noninterest income 13,013 15,558 28,571 67,057 Total $ 73,069 $ 70,104 $ 143,173 $ 179,546 Ratio 68.5 % 77.0 % 72.7 % 61.3 % Effective tax rate used in computations above 22.0 % 22.0 % 22.0 % 21.0 % As of (in thousands, except share data) June 30, 2022 December 31, 2021 Tangible book value per share Shareholders' equity $ 580,767 $ 715,339 Less: goodwill and other intangibles (31,219) (31,709) Tangible shareholder's equity $ 549,548 $ 683,630 Common shares outstanding 18,712,789 20,085,336 Computed amount $ 29.37 $ 34.04 Tangible common equity to tangible assets Tangible shareholder's equity (per above) $ 549,548 $ 683,630 Tangible assets Total assets 8,582,886 7,204,091 Less: Goodwill and other intangibles (31,219) (31,709) Net $ 8,551,667 $ 7,172,382 Ratio 6.4 % 9.5 % 58 ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market Risk Management 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. 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 (timing risk), the relationship between various rates (basis risk), customer options (option risk) and changes in the shape of the yield curve (time-sensitive 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, that are subject to repricing at various time horizons, known as interest rate sensitivity gaps. 59 The following table presents sensitivity gaps for these different intervals: At June 30, 2022 (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. Non-Rate- Sensitive Total Interest-earning assets: Cash & cash equivalents $ 75,277 $ — $ — $ — $ — $ — $ — $ — $ 75,277 FHLB Stock 58,401 — — — — — 8,591 — 66,992 Investment securities (1) 153,374 66,719 43,195 126,415 98,153 578,104 171,997 — 1,237,957 LHFS 47,314 — — — — — — — 47,314 LHFI (1) 1,335,906 355,752 496,392 1,325,569 1,598,687 1,627,374 20,057 — 6,759,737 Total 1,670,272 422,471 539,587 1,451,984 1,696,840 2,205,478 200,645 — 8,187,277 Non-interest-earning assets — — — — — — — 395,609 395,609 Total assets $ 1,670,272 $ 422,471 $ 539,587 $ 1,451,984 $ 1,696,840 $ 2,205,478 $ 200,645 $ 395,609 $ 8,582,886 Interest-bearing liabilities: Demand deposit accounts (2) $ 590,889 $ — $ — $ — $ — $ — $ — $ — $ 590,889 Savings accounts (2) 302,359 — — — — — — — 302,359 Money market accounts (2 ) 2,679,865 — — — — — — — 2,679,865 Certificates of deposit 266,924 264,622 325,071 108,240 4,672 — 6 — 969,535 FHLB advances 1,458,000 — — — — — — — 1,458,000 Long-term debt (3) 61,120 — — — 163,107 — — — 224,227 Total 5,359,157 264,622 325,071 108,240 167,779 — 6 — 6,224,875 Non-interest bearing liabilities — — — — — — — 1,777,244 1,777,244 Shareholders' Equity — — — — — — — 580,767 580,767 Total liabilities and shareholders' equity $ 5,359,157 $ 264,622 $ 325,071 $ 108,240 $ 167,779 $ — $ 6 $ 2,358,011 $ 8,582,886 Interest sensitivity gap $ (3,688,885) $ 157,849 $ 214,516 $ 1,343,744 $ 1,529,061 $ 2,205,478 $ 200,639 Cumulative interest sensitivity gap Total $ (3,688,885) $ (3,531,036) $ (3,316,520) $ (1,972,776) $ (443,715) $ 1,761,763 $ 1,962,402 As a % of total assets (43) % (41) % (39) % (23) % (5) % 21 % 23 % As a % of cumulative interest-bearing liabilities 31 % 37 % 44 % 67 % 93 % 128 % 132 % (1) Based on contractual maturities, repricing dates and forecasted principal payments assuming normal amortization and, where applicable, prepayments. (2) Assumes 100% of interest-bearing non-maturity deposits are subject to repricing in three months or less. (3) Based on contractual maturity. As of June 30, 2022, the Company is considered liability-sensitive as exhibited by the gap table and our net interest income sensitivity analysis. Changes in the mix of interest-earning assets or interest-bearing liabilities can either increase or decrease the net interest margin, without affecting interest rate sensitivity. In addition, the interest rate spread between an earning asset and its funding liability can vary significantly, while the timing of repricing for both the asset and the liability remains the same, thereby impacting net interest income. This characteristic is referred to as basis risk. Varying interest rate environments can create unexpected changes in prepayment levels of assets and liabilities that are not reflected in the interest rate sensitivity analysis. These prepayments may have a significant impact on our net interest margin. Because of these factors, an interest sensitivity gap analysis may not provide an accurate assessment of our actual exposure to changes in interest rates. 60 The estimated impact on our net interest income over a time horizon of one year and the change in net portfolio value as of June 30, 2022 and December 31, 2021 are provided in the table below. For the scenarios shown, the interest rate simulation assumes an instantaneous and sustained shift in market interest rates and no change in the composition or size of the balance sheet. At June 30, 2022 At December 31, 2021 Change in Interest Rates (basis points) (1) Percentage Change Net Interest Income (2) Net Portfolio Value (3) Net Interest Income (2) Net Portfolio Value (3) +200 (4.6) % (23.0) % 7.8 % (5.0) % +100 (2.1) % (11.7) % 3.5 % (2.8) % -100 0.9 % 10.7 % (1.3) % 1.9 % -200 5.3 % 18.7 % (2.5) % (4.9) % (1) For purposes of our model, we assume interest rates will not go below zero. This "floor" limits the effect of a potential negative interest rate shock in a low rate environment like the one we are currently experiencing. (2) 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. (3) This percentage change represents the impact to the net present value of equity, assuming there is no change in the structure of the balance sheet. The changes in interest rate sensitivity between December 31, 2021 and June 30, 2022 reflected the impact of higher market interest rates, a flatter yield curve and changes to overall balance sheet composition. Some of the assumptions made in the simulation model may not materialize and unanticipated events and circumstances will occur. We do not allow for negative rate assumptions in our model, but actual results in extreme interest rate decline scenarios may result in negative rate assumptions which may cause the modeling results to be inherently unreliable. In addition, the simulation model does not take into account any future actions that we could undertake to mitigate an adverse impact due to changes in interest rates from those expected, in the actual level of market interest rates or competitive influences on our deposits. 61 ITEM 4 CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures The Company carried out an evaluation, with the participation of our management and under the supervision of our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined under Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2022. Changes in Internal Control over Financial Reporting As required by Rule 13a-15(d), our management, including our Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of our internal control over financial reporting to determine whether any changes occurred during the quarter ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. There were no changes to our internal control over financial reporting that occurred during the quarter ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. PART II - OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS Because the nature of our business involves, among other things, the collection of numerous accounts, the validity of liens and compliance with various state and federal laws, we are subject to various legal proceedings in the ordinary course of our business related to foreclosures, bankruptcies, condemnation and quiet title actions and alleged statutory and regulatory violations. We are also subject to legal proceedings in the ordinary course of business related to employment and other consumer matters. We do not expect that these proceedings, taken as a whole, will have a material adverse effect on our business, financial position or our results of operations. There are currently no matters that, in the opinion of management, would have a material adverse effect on our consolidated balance sheet, results of operations or liquidity, or for which there would be a reasonable possibility of such a loss based on information known at this time. 62 ITEM 1A RISK FACTORS Refer to Item 1A of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 and the updated Risk Factors below for a discussion of factors that could materially and adversely affect our business, financial condition, liquidity, results of operations and capital position. HomeStreet’s operational systems and networks, and those of our third-party vendors, have been, and will continue to be, subject to continually evolving cybersecurity risks that have resulted in or could result in the theft, loss, misuse or disclosure of confidential client or customer information or otherwise disrupt or adversely affect our business. As a financial institution, we are susceptible to fraudulent activity, operational and informational security breaches and cybersecurity incidents that are committed against us or our customers, employees, third-party vendors and others, which may result in financial losses or increased costs, disclosure or misuse of our information or customer information, misappropriation of assets, data privacy breaches, litigation or reputational damage. Related risks for financial institutions have increased in recent years in part because of proliferation and use of new and existing technologies to conduct financial transactions and transmit data, as well as the increased sophistication and unlawful or clandestine activities of organized crime, state-sponsored and other hackers, terrorists, activists, and other malicious external parties to engage in fraudulent activity such as phishing or check, electronic or wire fraud, unauthorized access to our controls and systems, denial or degradation of service attacks, malware and other dishonest acts. Within the financial services industry, the commercial banking sector has generally experienced, and will continue to experience, increased electronic fraudulent activity, security breaches and cybersecurity-related incidents. The nature of our industry sector exposes us to these risks because our business and operations include the protection and storage of confidential and proprietary corporate and personal information, including sensitive financial and other personal data, and any breach thereof could result in identity theft, account or credit card fraud or other fraudulent activity that could involve their accounts and business with us. The risk to our organization may be further elevated over the near term because of recent geopolitical events in Eastern Europe and Asia, which may result in increased attacks against U.S. critical infrastructure, including financial institutions. Our computer systems, software and networks are subject to ongoing cyber incidents such as unauthorized access; loss or destruction of data (including confidential client information); account takeovers; unavailability of service; computer viruses or other malicious code; cyber-attacks; and other events. While we have experienced and continue to experience various forms of these cyber incidents in the past, we have not been materially impacted by them. There can be no assurance that cyber incidents will not occur again, and they could occur more frequently and on a more significant scale. Our business and operations rely on the secure processing, transmission, protection and storage of confidential, private and personal information by our computer operation systems and networks, as well as our online banking or reporting systems used by customers to effect certain financial transactions, all of which are either managed directly by us or through our third-party data processing vendors. The secure maintenance and transmission of confidential information, and the execution of transactions through our systems, are critical to protecting us and our customers against fraud and security breaches and to maintain customer confidence. To access our products and services, our customers may use personal computers, smartphones, tablet PCs, and other mobile devices that function beyond our control systems. Although we believe we have invested in, and plan to continue investing in, maintaining and routinely testing adequate operational and informational security procedures and controls, we rely heavily on our third-party vendors, technologies, systems, networks and our customers' devices, all of which are the target of cyber-attacks, computer viruses, malicious code, unauthorized access, hackers or information security breaches that have resulted in and could again in the future result in the unauthorized release, gathering, monitoring, misuse, loss, theft or destruction of our confidential, proprietary and other information or that of our customers, or that could disrupt our operations or those of our customers or third parties. Even though we have taken those actions, we may fail to anticipate or sufficiently mitigate security breaches, or we may experience data privacy breaches, that could result in losses to us or our customers, damage to our reputation, incurrence of significant costs, business disruption, our inability to grow our business and exposure to regulatory scrutiny or penalties, litigation and potential financial liability, any of which could adversely affect our business, financial condition, results of operations or capital position. Our computer systems could be vulnerable to unforeseen problems other than cybersecurity related incidents or other data security breaches, including the potential for infrastructure damage to our systems or the systems of our vendors from fire, power loss, telecommunications failure, physical break-ins, theft, natural disasters or similar catastrophic events. Any damage or failure that causes interruptions in operations may compromise our ability to perform critical functions in a timely manner (or may give rise to perceptions of such compromise) and could increase our costs of doing business, or have a material adverse effect on our results of operations results as well as our reputation and customer or vendor relationships. 63 In addition, some of the technology we use in our regulatory compliance, including our mortgage loan origination and servicing technology, as well as other critical business activities such as core systems processing, essential web hosting and deposit and processing services, as well as security solutions, are provided by third party vendors. If those providers fail to update their systems or services in a timely manner to reflect new or changing regulations, or if our personnel operate these systems in a non-compliant manner, our ability to meet regulatory requirements may be impacted and may expose us to heightened regulatory scrutiny and the potential for monetary penalties. These vendors are also sources of operational and informational security risk to us, including from interruptions or failures of their own systems, cybersecurity or ransomware attacks, capacity constraints or failures of their own internal controls. Such third parties are targets of cyber-attacks, computer viruses, malicious code, unauthorized access, hackers, ransomware attacks or information security breaches that have compromised and could again in the future compromise the confidential or proprietary information of HomeStreet and our customers. 64 ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS Sales of Unregistered Securities There were no sales of unregistered securities during the second quarter of 2022. ITEM 3 DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4 MINE SAFETY DISCLOSURES Not applicable. ITEM 5 OTHER INFORMATION Not applicable. 65 ITEM 6 EXHIBITS EXHIBIT INDEX Exhibit Number Description 10.1 Amend ed and Restated Employment Agreement between HomeStreet, Inc, HomeStreet Bank and John M. Michel 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. 32 (1) Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith. 101 INS Inline XBRL Instance Document 101.SCH Inline XBRL Taxonomy Extension Schema Document 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF Inline XBRL Taxonomy Extension Label Linkbase Document 101.LAB Inline XBRL Taxonomy Extension Presentation Linkbase Document 101.PRE Inline XBRL Taxonomy Extension Definitions Linkbase Document 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) (1) This exhibit shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that Section. Such exhibit shall not be deemed incorporated into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934. 66 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Seattle, State of Washington, on August 5, 2022. HomeStreet, Inc. By: /s/ Mark K. Mason Mark K. Mason President and Chief Executive Officer (Principal Executive Officer) HomeStreet, Inc. By: /s/ John M. Michel John M. Michel Executive Vice President and Chief Financial Officer (Principal Financial Officer) 67