What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-11-04 compared with 2022-08-05 · 94 added, 85 removed, 448 unchanged (29% of the section changed)

24 unchanged sentences

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

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.

Any unfavorable 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 September 30, 2022 would increase by approximately $14 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.

3 unchanged sentences

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

Quarter Ended Nine Months Ended September 30,

(in thousands, except per share data and FTE data) September 30, 2022 June 30, 2022 2022 2021

Select Income Statement data:

18 unchanged sentences

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.

(in thousands, except share and per share data) June 30, 2022 December 31, 2021

(in thousands, except share and per share data) September 30, 2022 December 31, 2021

Selected Balance Sheet Data

39 unchanged sentences

(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.

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.

2 unchanged sentences

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.

As part of this strategy, we only sold $5 million of multifamily portfolio loans in the first nine 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

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.

As part of this transaction, we transferred $191 million of deposits and sold $43 million of loans.

In October 2022, we announced an agreement to purchase three branches in southern California, which is expected to close in the first quarter of 2023, whereby we will assume approximately $490 million in deposits and purchase approximately $22 million in loans.

These transactions allow us to focus our retail banking branch strategy on the larger metropolitan markets in the western United States.

Management's Overview of the Third Quarter 2022 Financial Performance

Third Quarter of 2022 Compared to the Second Quarter of 2022

Our net income and income before taxes were $20.4 million and $26.5 million, respectively, in the third quarter of 2022, as compared to $17.7 million and $22.4 million, respectively, in the second quarter of 2022.

The $4.0 million increase in income before taxes was due to higher net interest income, higher noninterest 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.

Our effective tax rate was 23.0% in the third quarter of 2022 as compared to 21.0% in second quarter of 2022 and a statutory rate of 25.3%.

While our effective tax rate was lower than our statutory rate due to the benefits of tax advantaged investments, our effective tax rate in the third quarter of 2022 was higher than the second quarter of 2022 due to the diminishing impact of tax-exempt interest.

Net Interest Income:

5 unchanged sentences

Quarter Ended

June 30, 2022 March 31, 2022

September 30, 2022 June 30, 2022

(in thousands) Average

38 unchanged sentences

Net interest margin 3.00 % 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.

(1) Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain loans and securities of $1.3 million and $1.2 million for the quarters ended September 30, 2022 and June 30, 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.

(2) Cost of all deposits, including noninterest-bearing demand deposits was 0.51% and 0.19% for the quarters ended September 30, 2022 and June 30, 2022, respectively.

Net interest income was $3.0 million higher in the third quarter of 2022 as compared to the second quarter of 2022 due primarily to a 13% increase in average interest earning assets, which was partially offset by a decrease in our net interest margin from 3.27% to 3.00%.

The increase in the average balance of interest-earning assets was due to the high level of loan originations during the third quarter.

Our net interest margin decreased to 3.00% as a 67 basis point increase in the cost of interest-bearing liabilities was partially offset by a 27 basis point increase in the yield on interest-earning assets.

Yields on interest-earning assets increased as the yields on loan originations during the third quarter were higher than the rates of our existing portfolio of loans and yields on adjustable rate loans increased due to increases in the indexes on which their pricing is based.

The increase in the rates paid on our interest-bearing liabilities was due to higher deposit costs, higher borrowing costs and an increase in the proportion of higher cost borrowings used as our sources of funding.

Our cost of borrowings increased 122 basis points during the third quarter while the cost of deposits increased 32 basis points.

Additionally, our average borrowings increased by $769 million to fund the growth of our loan portfolio.

The increases in yields on interest-earning assets and the rates paid on interest-bearing liabilities were due to the significant increases in market interest rates during the first nine months of 2022.

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.

No provision for credit losses was recorded during the second or third 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 growth in our loan portfolio.

Noninterest Income consisted of the following:

Quarter Ended

(in thousands) June 30, 2022 March 31, 2022

(in thousands) September 30, 2022 June 30, 2022

Noninterest income

9 unchanged sentences

Quarter Ended

(in thousands) June 30, 2022 March 31, 2022

(in thousands) September 30, 2022 June 30, 2022

Single family servicing income, net

13 unchanged sentences

(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.

The increase in noninterest income in the third quarter of 2022 as compared to the second quarter of 2022 was primarily due to an increase in other income due to a $4.3 million gain on sale of five eastern Washington branches.

This increase was partially offset by a decrease in net 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 primarily due to a decrease in rate lock volume as a result of the effects of increasing interest rates.

Noninterest Expense consisted of the following:

Quarter Ended

(in thousands) June 30, 2022 March 31, 2022

(in thousands) September 30, 2022 June 30, 2022

Noninterest expense

4 unchanged sentences

Total noninterest expense $ 49,889 $ 50,637

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

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.

The $0.7 million decrease in noninterest expense in the third quarter of 2022 as compared to the second quarter of 2022 was primarily due to lower compensation and benefit costs, which was partially offset by higher general, administrative and other costs.

The decrease in compensation and benefit costs was due to reduced headcount due to the sale of the five eastern Washington branches and lower commission and bonus expenses.

General, administrative and other costs increased in the third quarter of 2022 as compared to second quarter of 2022 due to an increase in marketing costs related to our promotional deposit products and higher FDIC fees due to our larger asset base.

Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021

Our net income and income before taxes were $58.0 million and $73.5 million, respectively, in the nine months ended September 30, 2022, as compared to $86.0 million and $109.0 million, respectively, in the nine months ended September 30, 2021.

The $35.4 million decrease in income before taxes was due to lower noninterest income, partially offset by higher net interest income 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 during nine months ended September 30, 2022 and 2021 was 21.1% and our statutory rate was 25.3% in 2022 and 24.2% in 2021.

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.

5 unchanged sentences

and (v) net interest margin:

Six Months Ended June 30,

Nine Months Ended September 30,

(in thousands) Average

38 unchanged sentences

Net interest margin 3.17 % 3.39 %

(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.

(1) Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain loans and securities of $3.6 million and $2.6 million for the nine months ended September 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.

(2) Cost of deposits including noninterest-bearing deposits, was 0.29% and 0.20% for the nine months ended September 30, 2022 and 2021, respectively.

Net interest income for the nine months ended September 30, 2022 increased $7.6 million as compared to the nine months ended September 30, 2021 due primarily to increases in the average balance of interest earning assets, partially offset by a decrease in our net interest margin.

The increase in interest-earning assets was due to the high level of loan originations and purchases of investment securities during the first nine months of 2022.

Our net interest margin decreased from 3.39% in the nine months ended September 30, 2021 to 3.17% in the nine months ended September 30, 2022 due to a 39 basis point increase in the rates paid on interest-bearing liabilities which was partially offset by a nine basis point increase in the yield on interest earning assets.

The increase in yield on interest-earning assets was primarily due to higher yields on investment securities due to adjustments to yields realized from longer estimated lives of certain securities and the yields of securities purchased during the first nine months of 2022 being higher than the yields on our existing portfolio.

The increases in the rates paid on deposits was due to the significant increase in market interest rates during the first nine months of 2022.

Our average borrowings increased by $653 million to fund the growth of our loan portfolio and investment securities.

Our cost of borrowings increased from 33 basis points during the first nine months of 2021 to 199 basis points during the first nine months of 2022 due to the significant increase in market interest rates during the first nine months of 2022 and the impact of the $100 million subordinated notes offering completed in January 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.

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 both the nine months ended September 30, 2022 and 2021.

Noninterest Income consisted of the following:

Six Months Ended June 30,

Nine Months Ended September 30,

(in thousands) 2022 2021

8 unchanged sentences

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

Six Months Ended June 30,

Nine Months Ended September 30,

(in thousands) 2022 2021

16 unchanged sentences

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

The decrease in noninterest income for 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 decrease in noninterest income for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021 was due to a decrease in gain on loan origination and sale activities, which was partially offset by higher loan servicing income and the $4.3 million gain on sale of five eastern Washington branches.

The $56.0 million decrease in gain on loan origination and sale activities was due to a $44.4 million decrease in single family gain on loan origination and sale activities and a $11.7 million decrease in CRE and commercial gain on loan origination and sale activities.

3 unchanged sentences

Noninterest Expense consisted of the following:

Six Months Ended June 30,

Nine Months Ended September 30,

(in thousands) 2022 2021

5 unchanged sentences

Total noninterest expense $ 154,999 $ 161,372

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 $6.4 million decrease in noninterest expense in the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021 was due to lower compensation and benefit costs, partially offset by increases in information services and general, administrative and other expenses.

The $11.8 million decrease in compensation and benefit costs was primarily due to reduced commission expense on lower loan origination volumes in our single family mortgage operations, lower bonus expense and lower headcount, which were partially offset by wage increases given in 2022.

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.

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 nine months of 2021, nonrecurring costs expended on litigation activities and legal matters in 2022 and an increase in marketing costs related to our promotional deposit products.

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.

During the nine months ended September 30, 2022, our total assets increased $1.9 billion due primarily to a $1.7 billion increase in loans held for investment and a $305 million increase in investment securities which were partially offset by a decrease of $162 million in loans held for sale.

Loans held for investment increased due to $3.0 billion of originations, which were partially offset by prepayments and scheduled payments of $1.3 billion.

Total liabilities increased $2.0 billion due to increases in deposits, borrowings and long-term debt.

Deposits increased $464 million primarily due to increased balances of brokered deposits and certificates of deposit related to our promotional products.

The $1.5 billion increase in borrowings was used to fund the growth in our loans and investment securities.

1 unchanged sentence

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.

As of September 30, 2022, our ratio of nonperforming assets to total assets remained low at 0.15% while our ratio of total loans delinquent over 30 days to total loans was 0.30%.

The Company recorded a $9 million recovery of our allowance for credit losses for the nine months ended September 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.

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

At September 30, 2022 At December 31, 2021

(in thousands) Amount Rate (1)

29 unchanged sentences

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

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.

1 unchanged sentence

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.

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.

At September 30, 2022 and December 31, 2021, the Bank had available borrowing capacity of $1.0 billion and $1.8 billion, respectively, from the FHLB, and $337 million and $274 million, respectively, from the FRBSF and $1.2 billion and $1.0 billion under borrowing lines established with other financial institutions.

For the nine months ended September 30, 2022, cash and cash equivalents decreased by $8 million compared to an increase of $161 million during the nine months ended September 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.

2 unchanged sentences

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

For 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.

For the nine months ended September 30, 2022, net cash of $209 million was provided by operating activities, primarily from cash proceeds from the sale of LHFS exceeding cash used to fund LHFS.

For the nine months ended September 30, 2021, net cash of $182 million was provided by operating activities, primarily from cash proceeds from the sale of LHFS 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.

2 unchanged sentences

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.

For the nine months ended September 30, 2022, net cash of $2.4 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 nine months ended September 30, 2021, net cash of $155 million was used in investing activities primarily from the origination of

LHFI net of principal repayments and the purchase of AFS securities, partially offset by the proceeds from the sale of loans

originated as LHFI and 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.

For the nine months ended September 30, 2022, net cash of $2.2 billion was provided by financing activities, primarily due to an increase in short-term borrowings, growth in deposits and proceeds from the issuance of the subordinated notes, partially offset by repurchases of and dividends paid on our common stock.

For the nine months ended September 30, 2021, net cash of $134 million was provided by financing activities, primarily due to growth in deposits, partially offset by net repayment of short-term borrowings and repurchases of and dividends paid on our common stock.

Off-Balance Sheet Arrangements

3 unchanged sentences

These commitments include the following:

(in thousands) At June 30, 2022 At December 31, 2021

(in thousands) At September 30, 2022 At December 31, 2021

Unused consumer portfolio lines $ 507,962 $ 405,992

4 unchanged sentences

(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.

progress payments, were $562 million and $584 million at September 30, 2022 and December 31, 2021, respectively.

Capital Resources and Dividend Policy

10 unchanged sentences

(on a consolidated basis) and HomeStreet Bank as compared to the respective regulatory requirements applicable to them:

At June 30, 2022

At September 30, 2022

Actual For Minimum Capital

33 unchanged sentences

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.

At September 30, 2022, capital conservation buffers for the Company and the Bank were 3.43% and 4.57%, respectively.

The Company paid a quarterly cash dividend of $0.35 per common share in the third quarter of 2022.

It is our current intention to continue to pay quarterly dividends, and on October 27, 2022, we declared another cash dividend of $0.35 per common share payable on November 22, 2022 to shareholders of record as of the close of business on November 8, 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.

Other than the acquisition of three branches in southern California, which is expected to close in the first quarter of 2023, whereby we will be purchasing $5.2 million of land and buildings, we had no material commitments for capital expenditures as of September 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.

4 unchanged sentences

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.

(i) tangible common equity and tangible assets as we believe this information is consistent with the treatment by bank regulatory agencies, which excludes 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 expense 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.

9 unchanged sentences

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

As of or for the quarter ended As of or for the nine months ended September 30,

(in thousands, except ratio and rate) September 30, 2022 June 30, 2022 2022 2021

Return on average tangible equity (annualized)

23 unchanged sentences

13,322 13,013 41,893 91,355

Gain on sale of branches (4,270) — (4,270) —

Total $ 72,070 $ 73,069 $ 215,243 $ 261,328

1 unchanged sentence

Effective tax rate used in computations above 22.0 % 22.0 % 22.0 % 21.0 %

(in thousands, except share data) June 30, 2022 December 31, 2021

(in thousands, except share data) September 30, 2022 December 31, 2021

Tangible book value per share

19 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis