Mechanics Bancorp 10-Q

ITEM 1 FINANCIAL STATEMENTS HOMESTREET, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS September 30, 2022 December 31, 2021 (in thousands, except share data) (Unaudited) ASSETS Cash and cash equivalents $ 57,256 $ 65,214 Investment securities 1,311,941 1,006,691 Loans held for sale ("LHFS") 13,787 176,131 Loans held for investment ("LHFI") (net of allowance for credit losses of $ 37,606 and $ 47,123 ) 7,175,881 5,495,726 Mortgage servicing rights ("MSRs") 114,630 100,999 Premises and equipment, net 51,706 58,154 Other real estate owned ("OREO") 1,725 735 Goodwill and other intangible assets 30,215 31,709 Other assets 315,746 268,732 Total assets $ 9,072,887 $ 7,204,091 LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Deposits $ 6,610,231 $ 6,146,509 Borrowings 1,569,000 41,000 Long-term debt 224,314 126,026 Accounts payable and other liabilities 116,553 175,217 Total liabilities 8,520,098 6,488,752 Commitments and contingencies Shareholders' equity: Common stock, no par value, authorized 160,000,000 shares; issued and outstanding, 18,717,557 shares and 20,085,336 shares 225,725 249,856 Retained earnings 432,995 444,343 Accumulated other comprehensive income (loss) ( 105,931 ) 21,140 Total shareholders' equity 552,789 715,339 Total liabilities and shareholders' equity $ 9,072,887 $ 7,204,091 See accompanying notes to consolidated financial statements 3 HOMESTREET, INC. AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENTS (Unaudited) Quarter Ended September 30, Nine Months Ended September 30, (in thousands, except share and per share data) 2022 2021 2022 2021 Interest income: Loans $ 73,329 $ 56,117 $ 186,108 $ 166,763 Investment securities 9,014 5,130 22,359 16,091 Cash, Fed Funds and other 1,060 141 1,655 472 Total interest income 83,403 61,388 210,122 183,326 Interest expense: Deposits 8,321 2,507 13,498 8,930 Borrowings 12,064 1,397 19,004 4,423 Total interest expense 20,385 3,904 32,502 13,353 Net interest income 63,018 57,484 177,620 169,973 Provision for credit losses — ( 5,000 ) ( 9,000 ) ( 9,000 ) Net interest income after provision for credit losses 63,018 62,484 186,620 178,973 Noninterest income: Net gain on loan origination and sale activities 2,647 17,509 16,213 72,239 Loan servicing income 2,741 2,014 9,706 4,693 Deposit fees 2,223 2,091 6,516 5,912 Other 5,711 2,684 9,458 8,511 Total noninterest income 13,322 24,298 41,893 91,355 Noninterest expense: Compensation and benefits 27,341 31,175 89,563 101,388 Information services 7,038 6,902 21,880 20,635 Occupancy 6,052 5,705 18,315 18,170 General, administrative and other 9,458 8,167 25,241 21,179 Total noninterest expense 49,889 51,949 154,999 161,372 Income before income taxes 26,451 34,833 73,514 108,956 Income tax expense 6,084 7,663 15,475 22,966 Net income $ 20,367 $ 27,170 $ 58,039 $ 85,990 Net income per share: Basic $ 1.09 $ 1.32 $ 3.05 $ 4.08 Diluted 1.08 1.31 3.03 4.03 Weighted average shares outstanding: Basic 18,716,864 20,613,290 19,000,007 21,099,059 Diluted 18,796,737 20,819,601 19,137,848 21,352,715 See accompanying notes to consolidated financial statements 4 HOMESTREET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) Quarter Ended September 30, Nine Months Ended September 30, (in thousands) 2022 2021 2022 2021 Net income $ 20,367 $ 27,170 $ 58,039 $ 85,990 Other comprehensive income (loss): Unrealized gain (loss) on investment securities available for sale ("AFS") ( 56,189 ) ( 7,283 ) ( 166,921 ) ( 16,728 ) Reclassification for net (gains) losses included in income 47 — ( 24 ) ( 62 ) Other comprehensive income (loss) before tax ( 56,142 ) ( 7,283 ) ( 166,945 ) ( 16,790 ) Income tax impact of: Unrealized gain (loss) on investment securities AFS ( 13,485 ) ( 1,530 ) ( 39,868 ) ( 3,513 ) Reclassification for net (gains) losses included in income 11 — ( 6 ) ( 13 ) Total ( 13,474 ) ( 1,530 ) ( 39,874 ) ( 3,526 ) Other comprehensive income (loss) ( 42,668 ) ( 5,753 ) ( 127,071 ) ( 13,264 ) Total comprehensive income (loss) $ ( 22,301 ) $ 21,417 $ ( 69,032 ) $ 72,726 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 September 30, 2021 Balance, June 30, 2021 20,791,659 $ 260,774 $ 420,111 $ 27,846 $ 708,731 Net income — — 27,170 — 27,170 Share-based compensation expense — 892 — — 892 Common stock issued - Option exercise; stock grants 52,265 339 — — 339 Other comprehensive income (loss) — — — ( 5,753 ) ( 5,753 ) Dividends declared on common stock ($ 0.25 per share) — — ( 5,259 ) — ( 5,259 ) Common stock repurchased ( 397,276 ) ( 5,924 ) ( 9,820 ) — ( 15,744 ) Balance, September 30, 2021 20,446,648 $ 256,081 $ 432,202 $ 22,093 $ 710,376 For the nine months ended September 30, 2021 Balance, December 31, 2020 21,796,904 $ 278,505 $ 403,888 $ 35,357 $ 717,750 Net income — — 85,990 — 85,990 Share-based compensation expense — 2,557 — — 2,557 Common stock issued - Option exercise; stock grants 245,630 2,383 — — 2,383 Other comprehensive income (loss) — — — ( 13,264 ) ( 13,264 ) Dividends declared on common stock ($ 0.75 per share) ( 16,171 ) ( 16,171 ) Common stock repurchased ( 1,595,886 ) ( 27,364 ) ( 41,505 ) — ( 68,869 ) Balance, September 30, 2021 20,446,648 $ 256,081 $ 432,202 $ 22,093 $ 710,376 For the quarter ended September 30, 2022 Balance, June 30, 2022 18,712,789 $ 224,776 $ 419,254 $ ( 63,263 ) $ 580,767 Net income — — 20,367 — 20,367 Share-based compensation expense — 942 — — 942 Common stock issued - Stock grants 4,328 — — — — Other comprehensive income (loss) — — — ( 42,668 ) ( 42,668 ) Dividends declared on common stock ($ 0.35 per share) — — ( 6,638 ) — ( 6,638 ) Common stock repurchased 440 7 12 — 19 Balance, September 30, 2022 18,717,557 $ 225,725 $ 432,995 $ ( 105,931 ) $ 552,789 For the nine months ended September 30, 2022 Balance, December 31, 2021 20,085,336 $ 249,856 $ 444,343 $ 21,140 $ 715,339 Net income — — 58,039 — 58,039 Share-based compensation expense — 3,239 — — 3,239 Common stock issued - Stock grants 130,546 — — — — Other comprehensive income (loss) — — — ( 127,071 ) ( 127,071 ) Dividends declared on common stock ($ 1.05 per share) — — ( 20,435 ) — ( 20,435 ) Common stock repurchased ( 1,498,325 ) ( 27,370 ) ( 48,952 ) — ( 76,322 ) Balance, September 30, 2022 18,717,557 $ 225,725 $ 432,995 $ ( 105,931 ) $ 552,789 See accompanying notes to consolidated financial statements 6 HOMESTREET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended September 30, (in thousands) 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 58,039 $ 85,990 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses ( 9,000 ) ( 9,000 ) Depreciation and amortization, premises and equipment 7,308 7,294 Amortization of premiums and discounts: investment securities, deposits, debt 2,833 4,788 Operating leases: excess of payments over amortization ( 3,146 ) ( 3,015 ) Amortization of finance leases 442 786 Amortization of core deposit intangibles 728 878 Amortization of deferred loan fees and costs ( 656 ) ( 7,544 ) Share-based compensation expense 3,239 2,557 Deferred income tax expense (benefit) ( 4,306 ) 7,777 Origination of LHFS ( 600,037 ) ( 1,785,393 ) Proceeds from sale of LHFS 763,057 1,932,447 Net fair value adjustment and gain on sale of LHFS 6,304 ( 36,359 ) Origination of MSRs ( 10,945 ) ( 27,908 ) Net gain on sale of loans originated as LHFI ( 88 ) ( 4,613 ) Change in fair value of MSRs ( 8,563 ) 8,267 Amortization of servicing rights 5,877 5,235 Gain on sale of branches ( 4,270 ) — Net change in trading securities ( 21,104 ) — (Increase) decrease in other assets 10,475 528 Increase (decrease) in accounts payable and other liabilities 13,268 ( 241 ) Net cash provided by operating activities 209,455 182,474 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of investment securities ( 621,813 ) ( 112,146 ) Proceeds from sale of investment securities 75,361 28,187 Principal payments on investment securities 94,739 159,037 Proceeds from sale of OREO 952 — Proceeds from sale of loans originated as LHFI 4,613 251,474 Net cash distributed in sale of branches ( 138,756 ) — Net increase in LHFI ( 1,727,944 ) ( 492,666 ) Purchase of premises and equipment ( 4,939 ) ( 852 ) Proceeds from sale of Federal Home Loan Bank stock 68,966 89,882 Purchases of Federal Home Loan Bank stock ( 130,033 ) ( 78,286 ) Net cash used in investing activities ( 2,378,854 ) ( 155,370 ) 7 Nine Months Ended September 30, (in thousands) 2022 2021 CASH FLOWS FROM FINANCING ACTIVITIES: Increase in deposits, net 631,290 538,005 Changes in short-term borrowings, net 1,528,000 ( 322,800 ) Proceeds from other long-term borrowings — 50,000 Repayment of other long-term borrowings — ( 50,000 ) Proceeds from debt issuance, net 98,035 — Repayment of finance lease principal ( 449 ) ( 787 ) Repurchases of common stock ( 75,000 ) ( 65,001 ) Proceeds from exercise of stock options — 263 Dividends paid on common stock ( 20,435 ) ( 16,171 ) Net cash provided by financing activities 2,161,441 133,509 Net increase (decrease) in cash and cash equivalents ( 7,958 ) 160,613 Cash and cash equivalents, beginning of year 65,214 58,049 Cash and cash equivalents, end of period $ 57,256 $ 218,662 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 29,289 $ 12,371 Federal and state income taxes 2,348 28,156 Non-cash activities: Increase in lease assets and lease liabilities 4,877 910 LHFI foreclosed and transferred to OREO 1,018 — Loans transferred from LHFI to LHFS, net 12,511 390,521 Ginnie Mae loans derecognized with the right to repurchase, net 5,567 70,197 Repurchase of common stock-award shares 1,322 3,868 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"). Goodwill Goodwill is recorded upon completion of a business combination as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill has been determined to have an indefinite useful life and is not amortized, but tested for impairment at least annually or more frequently if events and circumstances occur that indicate it is more likely than not the fair value of the reporting unit is less than its carrying value necessitating an impairment test. Historically, the Company performed its annual impairment testing on June 30. In 2022, we moved the annual impairment testing date to August 31 and based on that testing determined goodwill was no t impaired. The change in impairment date did not have a material effect on the Company’s financial position or results of operations. Dispositions In July 2022, we closed a sale of five retail deposit branches in eastern Washington, including the branches' lending businesses and employees. As part of this transaction, we transferred $ 191 million of deposits, sold $ 43 million of loans and recognized a gain on sale of $ 4.3 million. 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 9 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. 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 September 30, 2022 (in thousands) Amortized cost Gross unrealized gains Gross unrealized losses Fair value AFS Mortgage backed securities ("MBS"): Residential $ 208,807 $ — $ ( 9,817 ) $ 198,990 Commercial 68,706 — ( 9,834 ) 58,872 Collateralized mortgage obligations ("CMOs"): Residential 489,223 12 ( 36,021 ) 453,214 Commercial 97,886 — ( 7,025 ) 90,861 Municipal bonds 498,665 121 ( 70,589 ) 428,197 Corporate debt securities 36,733 — ( 2,971 ) 33,762 U.S. Treasury securities 23,092 — ( 3,265 ) 19,827 Agency debentures 3,999 5 — 4,004 Total $ 1,427,111 $ 138 $ ( 139,522 ) $ 1,287,727 HTM Municipal bonds $ 3,099 $ — $ ( 101 ) $ 2,998 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 September 30, 2022, the Company held $ 21.1 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 $ 2.0 million at 10 September 30, 2022. For the quarter and nine months ended September 30, 2022, trading losses of $ 2.6 million and $ 6.4 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 collateral or revenues from the specific project being financed) issued by various municipal corporations. As of September 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 & Poor's Rating Services or Moody's Investors Service. 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 September 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 $ ( 9,164 ) $ 195,834 $ ( 653 ) $ 1,964 $ ( 9,817 ) $ 197,798 Commercial ( 9,182 ) 56,380 ( 652 ) 2,476 ( 9,834 ) 58,856 CMOs: Residential ( 29,963 ) 407,507 ( 6,058 ) 22,157 ( 36,021 ) 429,664 Commercial ( 5,731 ) 83,623 ( 1,294 ) 7,238 ( 7,025 ) 90,861 Municipal bonds ( 62,825 ) 391,637 ( 7,764 ) 24,560 ( 70,589 ) 416,197 Corporate debt securities ( 2,971 ) 33,692 — — ( 2,971 ) 33,692 U.S. Treasury securities ( 745 ) 4,693 ( 2,520 ) 15,134 ( 3,265 ) 19,827 Total $ ( 120,581 ) $ 1,173,366 $ ( 18,941 ) $ 73,529 $ ( 139,522 ) $ 1,246,895 HTM Municipal bonds $ ( 101 ) $ 2,998 $ — $ — $ ( 101 ) $ 2,998 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 11 September 30, 2022 or December 31, 2021. In addition, as of September 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. The following tables present the fair value of investment securities AFS and HTM by contractual maturity along with the associated contractual yield: At September 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 $ 1,112 3.94 % $ 5,394 2.24 % $ 56,905 3.36 % $ 364,786 2.74 % $ 428,197 2.82 % Corporate debt securities — — % 5,321 3.44 % 28,441 4.39 % — — % 33,762 4.25 % U.S. Treasury securities — — % — — % 19,827 1.10 % — — % 19,827 1.10 % Agency debentures 4,004 4.33 % — — % — — % — — % 4,004 4.33 % Total $ 5,116 4.24 % $ 10,715 2.82 % $ 105,173 3.19 % $ 364,786 2.74 % $ 485,790 2.85 % HTM Municipal bonds $ 641 3.47 % $ 2,357 2.00 % $ — — % $ — — % $ 2,998 2.30 % 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 September 30, 2022 and December 31, 2021 was 2.78 % and 1.82 %, respectively. Sales of AFS investment securities were as follows: Quarter Ended September 30, Nine Months Ended September 30, (in thousands) 2022 2021 2022 2021 Proceeds $ 74,399 $ — $ 75,361 $ 28,187 Gross gains 1,334 — 1,405 288 Gross losses ( 1,381 ) — ( 1,381 ) ( 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 September 30, 2022 At December 31, 2021 Washington, Oregon and California to secure public deposits $ 220,689 $ 206,153 Other securities pledged 2,053 5,258 Total securities pledged as collateral $ 222,742 $ 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 $ 2.6 million for the quarters ended September 30, 2022 and 2021, respectively, and $ 8.9 million and $ 7.6 million for the nine months ended September 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 September 30, 2022 At December 31, 2021 CRE Non-owner occupied CRE $ 666,394 $ 705,359 Multifamily 3,923,946 2,415,359 Construction/land development 590,092 496,144 Total 5,180,432 3,616,862 Commercial and industrial loans Owner occupied CRE 432,114 457,706 Commercial business 361,635 401,872 Total 793,749 859,578 Consumer loans Single family 907,044 763,331 Home equity and other 332,262 303,078 Total (1) 1,239,306 1,066,409 Total LHFI 7,213,487 5,542,849 Allowance for credit losses ("ACL") ( 37,606 ) ( 47,123 ) Total LHFI less ACL $ 7,175,881 $ 5,495,726 (1) Includes $ 5.8 million and $ 7.3 million at September 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 $ 3.8 billion and $ 2.8 billion at September 30, 2022 and December 31, 2021, respectively, were pledged to secure borrowings from the Federal Home Loan Bank ("FHLB") and loans totaling $ 501 million and $ 419 million at September 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 September 30, 2022 and December 31, 2021, multifamily loans in the state of California represented 37 % 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 third quarter of 2022, the historical expected loss rates decreased from December 31, 2021 due to minimal charge-offs and favorable product mix risk composition. During the third 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 September 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 $ 2.6 million and $ 2.4 million at September 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 $ 23.9 million and $ 17.8 million at September 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 September 30, Nine Months Ended September 30, (in thousands) 2022 2021 2022 2021 Beginning balance $ 37,355 $ 59,897 $ 47,123 $ 64,294 Provision for credit losses 249 ( 5,348 ) ( 9,190 ) ( 9,864 ) Net (charge-offs) recoveries 2 ( 33 ) ( 327 ) 86 Ending balance $ 37,606 $ 54,516 $ 37,606 $ 54,516 Allowance for unfunded commitments: Beginning balance $ 2,843 $ 2,104 $ 2,404 $ 1,588 Provision for credit losses ( 249 ) 348 190 864 Ending balance $ 2,594 $ 2,452 $ 2,594 $ 2,452 Provision for credit losses: Allowance for credit losses - loans $ 249 $ ( 5,348 ) $ ( 9,190 ) $ ( 9,864 ) Allowance for unfunded commitments ( 249 ) 348 190 864 Total $ — $ ( 5,000 ) $ ( 9,000 ) $ ( 9,000 ) Activity in the ACL for LHFI by loan portfolio and loan sub-class was as follows: Quarter Ended September 30, 2022 (in thousands) Beginning balance Charge-offs Recoveries Provision Ending balance CRE Non-owner occupied CRE $ 2,180 $ — $ — $ ( 74 ) $ 2,106 Multifamily 10,074 — — 1,109 11,183 Construction/land development Multifamily construction 566 — — 99 665 CRE construction 185 — — ( 25 ) 160 Single family construction 10,687 — — ( 1,123 ) 9,564 Single family construction to permanent 1,159 — — ( 19 ) 1,140 Total 24,851 — — ( 33 ) 24,818 Commercial and industrial loans Owner occupied CRE 1,092 — — ( 123 ) 969 Commercial business 3,578 ( 81 ) 25 197 3,719 Total 4,670 ( 81 ) 25 74 4,688 Consumer loans Single family 4,027 — 1 436 4,464 Home equity and other 3,807 ( 43 ) 100 ( 228 ) 3,636 Total 7,834 ( 43 ) 101 208 8,100 Total ACL $ 37,355 $ ( 124 ) $ 126 $ 249 $ 37,606 15 Quarter Ended September 30, 2021 (in thousands) Beginning balance Charge-offs Recoveries Provision Ending balance CRE Non-owner occupied CRE $ 9,077 $ — $ — $ 559 $ 9,636 Multifamily 7,245 — — ( 1,788 ) 5,457 Construction/land development Multifamily construction 500 — — 544 1,044 CRE construction 2,022 — — ( 1,671 ) 351 Single family construction 5,653 — — 638 6,291 Single family construction to permanent 1,047 — — 15 1,062 Total 25,544 — — ( 1,703 ) 23,841 Commercial and industrial loans Owner occupied CRE 5,518 — — ( 233 ) 5,285 Commercial business 15,874 ( 116 ) 24 ( 1,309 ) 14,473 Total 21,392 ( 116 ) 24 ( 1,542 ) 19,758 Consumer loans Single family 7,163 ( 13 ) 33 ( 1,426 ) 5,757 Home equity and other 5,798 ( 341 ) 380 ( 677 ) 5,160 Total 12,961 ( 354 ) 413 ( 2,103 ) 10,917 Total ACL $ 59,897 $ ( 470 ) $ 437 $ ( 5,348 ) $ 54,516 Nine Months Ended September 30, 2022 (in thousands) Beginning balance Charge-offs Recoveries Provision Ending balance CRE Non-owner occupied CRE $ 7,509 $ — $ — $ ( 5,403 ) $ 2,106 Multifamily 5,854 — — 5,329 11,183 Construction/land development Multifamily construction 507 — — 158 665 CRE construction 150 — — 10 160 Single family construction 6,411 — — 3,153 9,564 Single family construction to permanent 1,055 — — 85 1,140 Total 21,486 — — 3,332 24,818 Commercial and industrial loans Owner occupied CRE 5,006 — — ( 4,037 ) 969 Commercial business 12,273 ( 741 ) 94 ( 7,907 ) 3,719 Total 17,279 ( 741 ) 94 ( 11,944 ) 4,688 Consumer loans Single family 4,394 — 141 ( 71 ) 4,464 Home equity and other 3,964 ( 109 ) 288 ( 507 ) 3,636 Total 8,358 ( 109 ) 429 ( 578 ) 8,100 Total ACL $ 47,123 $ ( 850 ) $ 523 $ ( 9,190 ) $ 37,606 16 Nine Months Ended September 30, 2021 (in thousands) Beginning balance Charge-offs Recoveries Provision Ending balance CRE Non-owner occupied CRE $ 8,845 $ — $ — $ 791 $ 9,636 Multifamily 6,072 — — ( 615 ) 5,457 Construction/land development Multifamily construction 4,903 — — ( 3,859 ) 1,044 CRE construction 1,670 — — ( 1,319 ) 351 Single family construction 5,130 — — 1,161 6,291 Single family construction to permanent 1,315 — — ( 253 ) 1,062 Total 27,935 — — ( 4,094 ) 23,841 Commercial and industrial loans Owner occupied CRE 4,994 — — 291 5,285 Commercial business 17,043 ( 116 ) 122 ( 2,576 ) 14,473 Total 22,037 ( 116 ) 122 ( 2,285 ) 19,758 Consumer loans Single family 6,906 ( 127 ) 155 ( 1,177 ) 5,757 Home equity and other 7,416 ( 432 ) 484 ( 2,308 ) 5,160 Total 14,322 ( 559 ) 639 ( 3,485 ) 10,917 Total ACL $ 64,294 $ ( 675 ) $ 761 $ ( 9,864 ) $ 54,516 17 The following table presents a vintage analysis of the commercial portfolio segment by loan sub-class and risk rating or delinquency status. At September 30, 2022 (in thousands) 2022 2021 2020 2019 2018 2017 and prior Revolving Revolving-term Total COMMERCIAL PORTFOLIO Non-owner occupied CRE Pass $ 68,355 $ 68,432 $ 42,525 $ 140,499 $ 92,645 $ 246,729 $ 2,141 $ 802 $ 662,128 Special Mention — — — — — 4,266 — — 4,266 Substandard — — — — — — — — — Total 68,355 68,432 42,525 140,499 92,645 250,995 2,141 802 666,394 Multifamily Pass 1,642,429 1,292,784 531,838 222,624 59,604 142,064 320 — 3,891,663 Special Mention — — 4,893 19,835 — 7,555 — — 32,283 Substandard — — — — — — — — — Total 1,642,429 1,292,784 536,731 242,459 59,604 149,619 320 — 3,923,946 Multifamily construction Pass 9,078 40,846 12,793 — — — — — 62,717 Special Mention — — — — — — — — — Substandard — — — — — — — — — Total 9,078 40,846 12,793 — — — — — 62,717 CRE construction Pass — 14,314 3,959 — — 311 — — 18,584 Special Mention — — — — — — — — — Substandard — — — — — — — — — Total — 14,314 3,959 — — 311 — — 18,584 Single family construction Pass 130,517 72,095 24,369 2,129 — 75 116,346 — 345,531 Special Mention — — — — — — — — — Substandard — — — — — — — — — Total 130,517 72,095 24,369 2,129 — 75 116,346 — 345,531 Single family construction to permanent Current 40,499 99,023 17,758 5,186 794 — — — 163,260 Past due: 30-59 days — — — — — — — — — 60-89 days — — — — — — — — — 90+ days — — — — — — — — — Total 40,499 99,023 17,758 5,186 794 — — — 163,260 Owner occupied CRE Pass 49,583 53,256 45,926 72,717 41,147 147,619 — 1,123 411,371 Special Mention — — — — 2,149 13,944 — — 16,093 Substandard — — — — 2,159 2,491 — — 4,650 Total 49,583 53,256 45,926 72,717 45,455 164,054 — 1,123 432,114 Commercial business Pass 56,784 46,473 47,357 22,740 14,232 20,234 123,215 1,931 332,966 Special Mention — 189 — — 193 3,796 753 109 5,040 Substandard — 6,986 2,778 4,724 2,485 2,031 4,625 — 23,629 Total 56,784 53,648 50,135 27,464 16,910 26,061 128,593 2,040 361,635 Total commercial portfolio $ 1,997,245 $ 1,694,398 $ 734,196 $ 490,454 $ 215,408 $ 591,115 $ 247,400 $ 3,965 $ 5,974,181 18 The following table presents a vintage analysis of the consumer portfolio segment by loan sub-class and delinquency status: At September 30, 2022 (in thousands) 2022 2021 2020 2019 2018 2017 and prior Revolving Revolving-term Total CONSUMER PORTFOLIO Single family Current $ 199,172 $ 220,456 $ 147,398 $ 48,390 $ 47,679 $ 241,953 $ — $ — $ 905,048 Past due: 30-59 days — — — — — 93 — — 93 60-89 days — — — — — — — — — 90+ days — — — 432 — 1,471 — — 1,903 Total 199,172 220,456 147,398 48,822 47,679 243,517 — — 907,044 Home equity and other Current 2,347 912 188 191 139 1,622 322,132 4,172 331,703 Past due: 30-59 days — 30 — — — 52 232 2 316 60-89 days — — — — — — 4 — 4 90+ days 25 — — — — 214 — — 239 Total 2,372 942 188 191 139 1,888 322,368 4,174 332,262 Total consumer portfolio (1) $ 201,544 $ 221,398 $ 147,586 $ 49,013 $ 47,818 $ 245,405 $ 322,368 $ 4,174 $ 1,239,306 Total LHFI $ 2,198,789 $ 1,915,796 $ 881,782 $ 539,467 $ 263,226 $ 836,520 $ 569,768 $ 8,139 $ 7,213,487 (1) Includes $ 5.8 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. Collateral Dependent Loans The following table presents the amortized cost basis of collateral-dependent loans by loan sub-class and collateral type: At September 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 62 — 562 4 628 Total collateral-dependent loans $ 1,173 $ — $ 1,972 $ 4 $ 3,149 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 21 Nonaccrual and Past Due Loans The following table presents nonaccrual status for loans: At September 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 628 4,721 1,210 5,023 Total 3,149 7,242 4,778 8,591 Consumer loans Single family 341 3,893 1,324 2,802 Home equity and other 5 1,131 23 808 Total 346 5,024 1,347 3,610 Total nonaccrual loans $ 3,495 $ 12,266 $ 6,125 $ 12,201 The following tables present an aging analysis of past due loans by loan portfolio segment and loan sub-class: At September 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 $ — $ — $ — $ — $ — $ 666,394 $ 666,394 Multifamily — — — — — 3,923,946 3,923,946 Construction/land development Multifamily construction — — — — — 62,717 62,717 CRE construction — — — — — 18,584 18,584 Single family construction — — — — — 345,531 345,531 Single family construction to permanent — — — — — 163,260 163,260 Total — — — — — 5,180,432 5,180,432 Commercial and industrial loans Owner occupied CRE — — — 2,521 2,521 429,593 432,114 Commercial business — — — 4,721 4,721 356,914 361,635 Total — — — 7,242 7,242 786,507 793,749 Consumer loans Single family 2,996 863 5,064 (2) 3,893 12,816 894,228 907,044 Home equity and other 143 4 — 1,131 1,278 330,984 332,262 Total 3,139 867 5,064 5,024 14,094 1,225,212 1,239,306 (1) Total loans $ 3,139 $ 867 $ 5,064 $ 12,266 $ 21,336 $ 7,192,151 $ 7,213,487 % 0.04 % 0.01 % 0.07 % 0.17 % 0.30 % 99.70 % 100.00 % 22 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 $ 5.8 million and $ 7.3 million of loans at September 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 Small Business Administration " SBA" of $ 11.6 million and $ 8.4 million at September 30, 2022 and December 31, 2021, respectively. 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 nine months ended September 30, 2022 did not have a material impact on the ACL. The following tables provide information related to loans modified during the quarter and nine months ended September 30, 2022 to borrowers experiencing financial difficulty, disaggregated by class of financing receivable and type of concession granted: 23 Significant Payment Delay Quarter Ended September 30, 2022 Nine Months Ended September 30, 2022 (in thousands) 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 $ 682 0.08 % $ 1,209 0.13 % Home equity and other — — % 70 0.02 % Term Extension Quarter Ended September 30, 2022 Nine Months Ended September 30, 2022 (in thousands) 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 $ — — % $ 1,570 0.43 % Single family — — % 270 0.03 % Interest Rate Reduction and Significant Payment Delay Quarter Ended September 30, 2022 Nine Months Ended September 30, 2022 (in thousands) 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 $ 477 0.13 % $ 477 0.13 % Interest Rate Reduction and Term Extension Quarter Ended September 30, 2022 Nine Months Ended September 30, 2022 (in thousands) 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 $ — — % $ 819 0.09 % Significant Payment Delay and Term Extension Quarter Ended September 30, 2022 Nine Months Ended September 30, 2022 (in thousands) 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 $ 4,033 0.44 % $ 13,325 1.47 % Home equity and other — — % 51 0.01 % Interest Rate Reduction, Significant Payment Delay and Term Extension Quarter Ended September 30, 2022 Nine Months Ended September 30, 2022 (in thousands) 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 $ 294 0.03 % $ 7,185 0.79 % 24 The following table describes the financial effect of the modifications made to borrowers experiencing financial difficulty: Interest Rate Reduction (in thousands) Quarter Ended September 30, 2022 Nine Months Ended September 30, 2022 Commercial business Reduced weighted-average contractual interest rate from 5.72 % to 4.00 %. Reduced weighted-average contractual interest rate from 5.72 % to 4.00 %. Single family Reduced weighted-average contractual interest rate from 4.38 % to 4.13 %. Reduced weighted-average contractual interest rate from 4.35 % to 3.39 %. Significant Payment Delay (in thousands) Quarter Ended September 30, 2022 Nine Months Ended September 30, 2022 Single family Provided payment deferrals to borrowers. A weighted average 1.83 % of loan balances were capitalized and added to the remaining term of the loan. Provided payment deferrals to borrowers. A weighted average 0.22 % 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 3.44 % of loan balances were capitalized and added to the remaining term of the loan. Term Extension (in thousands) Quarter Ended September 30, 2022 Nine Months Ended September 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. Single family Added a weighted average 3.6 years to the life of loans, which reduced the monthly payment amounts to the borrowers. Added a weighted average 4.4 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. The following table depicts the payment status of loans that have been modified to borrowers experiencing financial difficulty during the six months ended June 30, 2022: Payment Status (Amortized Cost Basis) at September 30, 2022 (in thousands) Current 30-89 Days Past Due 90+ Days Past Due Commercial business $ 1,570 $ — $ — Single family 16,205 405 1,002 Home equity and other 121 — — Total $ 17,896 $ 405 $ 1,002 The following tables provide the amortized cost basis as of September 30, 2022 of loans that were modified to borrowers experiencing financial difficulty during the six months ended June 30, 2022 and subsequently had a payment default: Amortized Cost Basis of Modified Loans That Subsequently Defaulted Quarter Ended September 30, 2022 (in thousands) Significant Payment Delay Term Extension Interest Rate Reduction and Term Extension Significant Payment Delay and Term Extension Interest Rate Reduction, Significant Payment Delay and Term Extension Single family $ — $ — $ — $ — $ 553 25 Amortized Cost Basis of Modified Loans That Subsequently Defaulted Nine Months Ended September 30, 2022 (in thousands) Significant Payment Delay Term Extension Interest Rate Reduction and Term Extension Significant Payment Delay and Term Extension Interest Rate Reduction, Significant Payment Delay and Term Extension Single family $ — $ — $ — $ 172 $ 1,555 NOTE 4– DEPOSITS: Deposit balances, including their weighted average rates, were as follows: At September 30, 2022 At December 31, 2021 (dollars in thousands) Amount Weighted Average Rate Amount Weighted Average Rate Noninterest-bearing demand deposits $ 1,547,642 $ 1,617,069 Interest bearing: Interest-bearing demand deposits 514,912 0.12 % 513,810 0.10 % Savings 275,399 0.06 % 302,389 0.06 % Money market 2,551,961 0.75 % 2,806,313 0.15 % Certificates of deposit 1,720,317 1.58 % 906,928 0.51 % Total interest bearing deposits 5,062,589 0.93 % 4,529,440 0.21 % Total deposits $ 6,610,231 0.71 % $ 6,146,509 0.15 % Certificates of deposit outstanding mature as follows: (in thousands) September 30, 2022 Within one year $ 1,368,503 One to two years 338,825 Two to three years 8,450 Three to four years 2,433 Four to five years 1,774 Thereafter 332 Total $ 1,720,317 The aggregate amount of certificate of deposits in denominations of more than the FDIC limit of $250 thousand at September 30, 2022 and December 31, 2021 were $ 189 million and $ 108 million, respectively. There were $ 512 million and $ 145 million of brokered deposits at September 30, 2022 and December 31, 2021, respectively. NOTE 5– LONG-TERM DEBT: At September 30, 2022, the Company had outstanding $ 98 million of subordinated notes (the "Sub Notes") that were issued in January 2022. Interest on the Sub 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 Sub Notes will bear interest equal to the three-month term Secured Overnight Financing Rate plus 215 basis points, payable quarterly in arrears. At September 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 September 30, 2022 and December 31, 2021. In connection with the issuance of trust 26 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. The Subordinated Debt Securities outstanding as of September 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 September 30, 2022 Notional amount Fair value derivatives (in thousands) Asset Liability Forward sale commitments $ 193,699 $ 2,756 $ ( 1,434 ) Interest rate lock commitments 29,679 48 ( 408 ) Interest rate swaps 238,468 13,759 ( 13,759 ) Futures 23,900 46 — Options 18,600 385 — Total derivatives before netting $ 504,346 16,994 ( 15,601 ) Netting adjustment/Cash collateral (1) ( 15,652 ) 1,223 Carrying value on consolidated balance sheet $ 1,342 $ ( 14,378 ) 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 $ 14.4 million and paid of $ 5.3 million at September 30, 2022 and December 31, 2021, respectively. 27 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 September 30, 2022 Derivative assets $ 16,994 $ ( 15,652 ) $ 1,342 Derivative liabilities ( 15,601 ) 1,223 ( 14,378 ) 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 $ 14.4 million and paid of $ 5.3 million at September 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 September 30, 2022 and December 31, 2021, the Company had liabilities of $ 14.5 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 September 30, Nine Months Ended September 30, (in thousands) 2022 2021 2022 2021 Recognized in noninterest income: Net gain (loss) on loan origination and sale activities (1) $ 958 $ ( 1,165 ) $ 8,221 $ ( 4,574 ) Loan servicing income (loss) (2) ( 422 ) ( 293 ) ( 12,051 ) ( 7,860 ) Other (3) — 41 160 305 (1) Comprised of interest rate lock commitments ("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 September 30, 2022 and December 31, 2021 were $ 238 million and $ 287 million, respectively. 28 NOTE 7– MORTGAGE BANKING OPERATIONS: LHFS consisted of the following: (in thousands) At September 30, 2022 At December 31, 2021 Single family $ 13,308 $ 128,041 CRE, multifamily and SBA 479 48,090 Total $ 13,787 $ 176,131 Loans sold consisted of the following for the periods indicated: Quarter Ended September 30, Nine Months Ended September 30, (in thousands) 2022 2021 2022 2021 Single family $ 131,228 $ 469,090 $ 641,921 $ 1,669,412 CRE, multifamily and SBA 29,965 69,810 129,394 465,948 Total $ 161,193 $ 538,900 $ 771,315 $ 2,135,360 Gain on loan origination and sale activities, including the effects of derivative risk management instruments, consisted of the following: Quarter Ended September 30, Nine Months Ended September 30, (in thousands) 2022 2021 2022 2021 Single family $ 1,778 $ 14,249 $ 11,896 $ 56,272 CRE, multifamily and SBA 869 3,260 4,317 15,967 Total $ 2,647 $ 17,509 $ 16,213 $ 72,239 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 September 30, 2022 At December 31, 2021 Single family $ 5,500,428 $ 5,539,180 CRE, multifamily and SBA 1,980,109 2,031,087 Total $ 7,480,537 $ 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 September 30, Nine Months Ended September 30, (in thousands) 2022 2021 2022 2021 Balance, beginning of period $ 1,491 $ 1,612 $ 1,312 $ 2,122 Additions, net of adjustments (1) 838 ( 183 ) 1,329 ( 229 ) Realized (losses) recoveries, net (2) ( 370 ) 14 ( 682 ) ( 450 ) Balance, end of period $ 1,959 $ 1,443 $ 1,959 $ 1,443 (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. 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 29 amounts from investors or borrowers. Advances of $ 1.7 million and $ 1.9 million were recorded in other assets as of September 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 September 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 $ 6.8 million and $ 12.3 million, respectively. Revenue from mortgage servicing, including the effects of derivative risk management instruments, consisted of the following: Quarter Ended September 30, Nine Months Ended September 30, (in thousands) 2022 2021 2022 2021 Servicing income, net: Servicing fees and other $ 7,673 $ 7,897 $ 25,501 $ 26,055 Amortization of single family MSRs (1) ( 2,112 ) ( 4,579 ) ( 8,052 ) ( 15,453 ) Amortization of multifamily and SBA MSRs ( 1,828 ) ( 1,758 ) ( 5,877 ) ( 5,235 ) Total 3,733 1,560 11,572 5,367 Risk management, single family MSRs: Changes in fair value of MSRs due to assumptions (2) 1,989 747 16,615 7,186 Net gain (loss) from economic hedging ( 2,981 ) ( 293 ) ( 18,481 ) ( 7,860 ) Total ( 992 ) 454 ( 1,866 ) ( 674 ) Loan servicing income (loss) $ 2,741 $ 2,014 $ 9,706 $ 4,693 (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 September 30, Nine Months Ended September 30, (in thousands) 2022 2021 2022 2021 Beginning balance $ 76,481 $ 59,872 $ 61,584 $ 49,966 Additions and amortization: Originations 1,453 5,166 7,664 19,507 Amortization (1) ( 2,112 ) ( 4,579 ) ( 8,052 ) ( 15,453 ) Net additions and amortization ( 659 ) 587 ( 388 ) 4,054 Changes in fair value assumptions (2) 1,989 747 16,615 7,186 Ending balance $ 77,811 $ 61,206 $ 77,811 $ 61,206 (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 September 30, Nine Months Ended September 30, (rates per annum) (1) 2022 2021 2022 2021 Constant prepayment rate ("CPR") (2) 13.06 % 9.84 % 10.72 % 8.75 % Discount rate 10.36 % 7.77 % 9.19 % 8.25 % (1) Based on a weighted average. (2) Represents an expected lifetime average CPR used in the model. 30 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 September 30, 2022 At December 31, 2021 Range of Inputs Average (1) Range of Inputs Average (1) CPRs 5.99 % - 11.48 % 8.31 % 7.90 % - 17.35 % 10.35 % Discount Rates 9.72 % - 16.89 % 10.63 % 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 September 30, 2022 Fair value of single family MSR $ 77,811 Expected weighted-average life (in years) 7.82 CPR Impact on fair value of 25 basis points adverse change in interest rates $ ( 469 ) Impact on fair value of 50 basis points adverse change in interest rates $ ( 1,092 ) Discount rate Impact on fair value of 100 basis points increase $ ( 4,703 ) Impact on fair value of 200 basis points increase $ ( 9,044 ) The changes in multifamily and SBA MSRs measured at the lower of amortized cost or fair value were as follows: Quarter Ended September 30, Nine Months Ended September 30, (in thousands) 2022 2021 2022 2021 Beginning balance $ 38,130 $ 39,113 $ 39,415 $ 35,774 Originations 517 2,270 3,281 9,086 Amortization ( 1,828 ) ( 1,758 ) ( 5,877 ) ( 5,235 ) Ending balance $ 36,819 $ 39,625 $ 36,819 $ 39,625 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 September 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 $ 0.6 million at both September 30, 2022 and December 31, 2021. There were no actual losses incurred under this arrangement during the quarters or nine months ended September 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 September 30, 2022 and December 31, 2021. At September 30, 2022 and December 31, 2021, the Company had recorded a mortgage repurchase liability for loans sold on a servicing-retained and 31 servicing-released basis, included in accounts payable and other liabilities on the consolidated balance sheets, of $ 2.0 million and $ 1.3 million, respectively. NOTE 9– EARNINGS PER SHARE: The following table summarizes the calculation of earnings per share: Quarter Ended September 30, Nine Months Ended September 30, (in thousands, except share and per share data) 2022 2021 2022 2021 Net income $ 20,367 $ 27,170 $ 58,039 $ 85,990 Weighted average shares: Basic weighted-average number of common shares outstanding 18,716,864 20,613,290 19,000,007 21,099,059 Dilutive effect of outstanding common stock equivalents 79,873 206,311 137,841 253,656 Diluted weighted-average number of common shares outstanding 18,796,737 20,819,601 19,137,848 21,352,715 Net income per share: Basic earnings per share $ 1.09 $ 1.32 $ 3.05 $ 4.08 Diluted earnings per share 1.08 1.31 3.03 4.03 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. 32 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. 33 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 September 30, 2022 (in thousands) Fair Value Level 1 Level 2 Level 3 Assets: Trading securities - U.S. Treasury securities $ 21,115 $ 21,115 $ — $ — Investment securities AFS Mortgage backed securities: Residential 198,990 — 197,027 1,963 Commercial 58,872 — 58,872 — Collateralized mortgage obligations: Residential 453,214 — 453,214 — Commercial 90,861 — 90,861 — Municipal bonds 428,197 — 428,197 — Corporate debt securities 33,762 — 33,692 70 U.S. Treasury securities 19,827 — 19,827 — Agency debentures 4,004 — 4,004 — Single family LHFS 13,308 — 13,308 — Single family LHFI 5,850 — — 5,850 Single family mortgage servicing rights 77,811 — — 77,811 Derivatives Futures 46 46 — — Forward sale commitments 2,756 — 2,756 — Options 385 385 — — Interest rate lock commitments 48 — — 48 Interest rate swaps 13,759 — 13,759 — Total assets $ 1,422,805 $ 21,546 $ 1,315,517 $ 85,742 Liabilities: Derivatives Forward sale commitments $ 1,434 $ — $ 1,434 $ — Interest rate lock commitments 408 — — 408 Interest rate swaps 13,759 — 13,759 — Total liabilities $ 15,601 $ — $ 15,193 $ 408 34 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 nine months ended September 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 nine months ended September 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. 35 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 $ 5.8 million and $ 7.3 million at September 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 September 30, 2022 Investment securities AFS $ 2,033 Income approach Implied spread to benchmark interest rate curve 2.00 % 2.00 % 2.00 % Single family LHFI 5,850 Income approach Implied spread to benchmark interest rate curve 3.92 % 5.71 % 4.41 % Interest rate lock commitments, net ( 360 ) Income approach Fall-out factor 0.10 % 17.46 % 5.16 % Value of servicing 0.59 % 1.14 % 0.98 % 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 % We had no LHFS where the fair value was not derived with significant observable inputs at September 30, 2022 and December 31, 2021. 36 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 September 30, 2022 Investment securities AFS $ 2,160 $ — $ — $ ( 48 ) $ ( 79 ) $ 2,033 Single family LHFI 6,508 — — — ( 658 ) 5,850 Quarter Ended September 30, 2021 Investment securities AFS $ 2,550 $ — $ — $ ( 48 ) $ 12 $ 2,514 Single family LHFI 5,207 284 — ( 1,088 ) 104 4,507 Nine Months Ended September 30, 2022 Investment securities AFS $ 2,482 $ — $ — $ ( 145 ) $ ( 304 ) $ 2,033 Single family LHFI 7,287 — — — ( 1,437 ) 5,850 Nine Months Ended September 30, 2021 Investment securities AFS $ 2,710 $ — $ — $ ( 144 ) $ ( 52 ) $ 2,514 Single family LHFI 7,108 1,429 — ( 4,279 ) 249 4,507 (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 September 30, Nine Months Ended September 30, (in thousands) 2022 2021 2022 2021 Beginning balance, net $ 322 $ 5,893 $ 2,484 $ 17,392 Total realized/unrealized gains (losses) 70 5,299 ( 769 ) 9,112 Settlements ( 752 ) ( 6,583 ) ( 2,075 ) ( 21,895 ) Ending balance, net $ ( 360 ) $ 4,609 $ ( 360 ) $ 4,609 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 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. 37 For the quarter and nine months ended September 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 Ended September 30, 2021 LHFI (1) $ 1,121 $ ( 8 ) At or for the Nine Months Ended September 30, 2021 LHFI (1) $ 1,121 $ ( 70 ) (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 September 30, 2022 (in thousands) Carrying Value Fair Value Level 1 Level 2 Level 3 Assets: Cash and cash equivalents $ 57,256 $ 57,256 $ 57,256 $ — $ — Investment securities HTM 3,099 2,998 — 2,998 — LHFI 7,170,031 6,743,644 — — 6,743,644 LHFS – multifamily and other 479 479 — 479 — Mortgage servicing rights – multifamily and SBA 36,819 41,209 — — 41,209 Federal Home Loan Bank stock 71,428 71,428 — 71,428 — Other assets - GNMA EBO loans 6,775 6,775 — — 6,775 Liabilities: Certificates of deposit $ 1,720,317 $ 1,693,369 $ — $ 1,693,369 $ — Borrowings 1,569,000 1,569,046 1,569,046 Long-term debt 224,314 201,897 — 201,897 — 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 — 38 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 September 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 $ 13,308 $ 13,697 $ ( 389 ) $ 128,041 $ 124,933 $ 3,108 NOTE 11– SUBSEQUENT EVENTS: On October 27, 2022 the Board authorized a dividend of $ 0.35 per share, payable on November 22, 2022 to shareholders of record on November 8, 2022. 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, purchase approximately $ 22 million in loans and pay a 6.0 % deposit premium. 39