Mechanics Bancorp 10-Q

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