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Item 7. Management’s Discussion and Analysis

2023-03-06 compared with 2022-03-04 · 104 added, 125 removed, 545 unchanged (30% of the section changed)

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

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

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

A comparison of the financial results for the year ended December 31, 2021 to the year ended December 31, 2020, is included in Part II, Item 7, "Management Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2021.

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Recent Developments

COVID-19 Pandemic

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

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

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

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

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

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

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

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

Economic and Market Conditions

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

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

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

Our financial results have been adversely impacted by the historically significant increase in short-term interest rates by the Federal Reserve during 2022.

This dramatic increase in rates resulted in significant reductions in loan demand, particularly in single family mortgage.

Accordingly, our gain on loan sales activities declined significantly and are expected to remain at low levels in 2023.

Additionally, our interest sensitive deposits declined as customers moved funds to higher yielding products both at our Bank and at other banks and brokerage firms.

We have taken a number of steps to reduce the pressure on our funding base, including:

(i) significantly reducing our level of loan originations;

(ii) introducing promotional priced deposit products which allow us to attract and retain deposits without repricing our existing interest-bearing deposit base;

(iii) entering into $1 billion of fixed-rate Federal Home Loan Bank advances in the fourth quarter of 2022;

and (iv) completing the acquisition of three California branches in the first quarter of 2023.

Inflationary pressures have adversely impacted our operations by increasing our costs, primarily compensation costs which we expect to be higher in 2023.

Due to the impacts of the significant increases in short term rates and the continued uncertainty regarding further short term rate increases by the Federal Reserve in 2023, and as a result of our actions taken to address the impact of these increases, we expect the balance of our loans held for investment to stay relatively stable during 2023 and our net interest margin to be significantly lower in 2023 as compared to 2022.

In February 2023, we completed an acquisition of three branches in southern California whereby we assumed $373 million in deposits and purchased approximately $22 million in loans.

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

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

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

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

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

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

As part of our capital management strategy, in 2022, we repurchased a total of 1,471,485 shares of our common stock at an average price of $50.97 per share, representing 7.3% of the shares outstanding at December 31, 2021.

Critical Accounting Policies and Estimates

Critical Accounting Estimates

The following discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements and the notes thereto, which have been prepared in accordance with generally accepted accounting principles in the United States ("GAAP") and accounting practices in the banking industry.

Certain of those accounting policies are considered critical accounting policies, because they require us to make estimates and assumptions regarding circumstances or trends that could materially affect the value of those assets, such as economic conditions or trends that could impact our ability to fully collect our loans or ultimately realize the carrying value of certain of our other assets.

collect our loans or ultimately realize the carrying value of certain of our other assets.

Those estimates and assumptions are made based on current information available to us regarding those economic conditions or trends or other circumstances.

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These policies relate to the allowance for credit losses ("ACL") and the valuation of residential mortgage servicing rights ("MSR").

Our ACL is established through a provision for credit losses charged to expense and may be reduced by a recapture of previously established loss reserves, which are also reflected in the income statement.

Loans are charged-off against the ACL when management believes that collectability of the principal is unlikely.

The CECL model requires the ACL to cover estimated credit losses expected over the life of an exposure.

This evaluation takes into consideration such factors as current economic projections, projected payment estimates, changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and certain other factors that may affect the borrower’s ability to pay.

While we use the best information available to make this evaluation, future adjustments to our ACL may be necessary if there are significant changes in economic or other conditions that can affect the collectability of loans in our loan portfolio.

The ACL is calculated based on quantitative and qualitative factors to estimate credit losses over the life of the loan.

The inputs used to determine quantitative factors include estimates based on historical experience of probability of default and loss given default.

Inputs used to determine qualitative factors include changes in current portfolio characteristics and operating environments such as current and forecasted unemployment rates, capitalization rates used to value properties securing loans, rental rates and single family pricing indexes.

Qualitative factors may also include adjustments to address matters not contemplated by the model and to assumptions used to determine qualitative factors.

Although we believe that our methodology for determining an appropriate level for the ACL adequately addresses the various components that could potentially result in credit losses, the processes and their elements include features that may be susceptible to significant change.

Any unfavorable 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 December 31, 2022 would increase by approximately $8 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.

MSRs are recognized as separate assets when servicing rights are acquired through the sale of loans or purchased.

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The model assumptions and the MSR fair value estimates are also compared to observable trades of similar portfolios as well as to MSR broker valuations and industry surveys, as available.

We also utilize a third party valuation firm to value our MSRs on a periodic basis, the results of which we utilize as a baseline for our valuation modeling.

We also utilize a third party valuation firm to value our MSRs on a periodic basis, the results of which we use to evaluate the reasonableness of our modeled values.

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

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

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

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

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Tangible book value per share (1)

$ 28.41 $ 34.04

Total equity to total assets 6.0 % 9.9 %

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

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

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

Results of Operations

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Our net income and income before income taxes were $66.5 million and $84.7 million, respectively, in 2022, as compared to $115.4 million and $146.7 million, respectively, in 2021.

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

The $62.0 million decrease in income before taxes was due to a lower recovery of our allowance for credit losses and lower noninterest income, partially offset by higher net interest income and lower noninterest expense.

Income Taxes:

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

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

Our effective tax rate during 2022 was 21.4% as compared to 21.3% in 2021 and our statutory rate of 24.4%.

Our effective tax rate was lower than our statutory rate due to the benefits of tax advantaged investments and reductions in taxes on income related to excess tax benefits resulting from the exercise and vesting of stock awards during the periods.

Net Interest Income:

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

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

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

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

(iii) net interest income;

(iv) net interest rate spread;

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

and (v) net interest margin:

Years Ended December 31,

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Interest-bearing liabilities

Interest bearing deposits:

Demand deposits $ 521,424 $ 755 0.14 % $ 525,836 $ 726 0.14 %

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Certificates of deposit 1,328,290 18,345 1.38 % 1,048,218 6,236 0.59 %

Total deposits 4,570,811 11,411 0.25 % 4,343,339 33,797 0.78 %

Total 4,791,413 32,013 0.67 % 4,570,811 11,411 0.25 %

Borrowings 1,024,344 29,085 2.81 % 109,513 394 0.36 %

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Net interest rate spread 2.71 % 3.27 %

Net yield on interest-earning assets 3.38 % 3.13 %

Net interest margin 2.99 % 3.38 %

(1) Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain loans and securities of $5.0 million and $3.4 million for 2022 and 2021, respectively.

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$ (13,290) $ 21,087 $ 7,797

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

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

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

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

Net interest income in 2022 increased $6.3 million as compared to 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 loan originations and purchases of investment securities during 2022.

Our net interest margin decreased from 3.38% in 2021 to 2.99% in 2022 due to an 81 basis point increase in the rates paid on interest-bearing liabilities which was partially offset by a 25 basis point increase in the yield on interest earning assets.

The increase in yield on interest-earning assets was due to higher yields on our loans and investment securities.

The higher yield on our loans was primarily due to yields on adjustable rate loans increasing due to increases in the indexes on which their pricing is based.

The higher yield on our investment securities were primarily due to adjustments to yields realized from longer estimated lives of certain securities and the yields of securities purchased during 2022 being higher than the yields on our existing portfolio.

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.

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

Our average borrowings increased by $915 million to fund the growth of our loan portfolio and investment securities.

Our cost of borrowings increased from 36 basis points during 2021 to 281 basis points during 2022 due to the significant increase in market interest rates during 2022 and the impact of the $100 million fixed rate 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 $15.0 million recovery of our allowance for credit losses in 2021.

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

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 $5.2 million and $15.0 million recovery of our allowance for credit losses in 2022 and 2021, respectively.

In 2022, the amounts recovered were partially offset by provisions related to the growth in our loan portfolio and a $2.8 million increase in our collateral qualitative factor related to projected declines in future home prices.

Noninterest income consisted of the following:

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Total noninterest income $ 51,570 $ 119,975

(1) Includes loans originated as held for investment.

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

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

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Changes in fair value due to assumptions (2)

7,379 (19,955)

Net gain (loss) from derivatives hedging (8,238) 20,820

Net gain (loss) from economic hedging (18,790) (8,238)

Subtotal (2,051) (859)

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

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

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

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

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

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

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

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

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

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

The decrease in noninterest income for 2022 as compared to 2021 was due to a decrease in gain on loan origination and sale activities, which was partially offset by higher loan servicing income.

The $74.6 million decrease in gain on loan origination and sale activities was due to a $53.8 million decrease in single family gain on loan origination and sale activities and a $20.8 million decrease in commercial real estate gain on loan origination and sale activities.

The decrease in single family gain on loan origination and sale activities was due to a decrease in rate lock volume and margins as a result of the effects of increasing interest rates.

The decrease in CRE and commercial gain on loan origination and sale activities was primarily due to an 81% decrease in the volume of loans sold.

The $5.2 million increase in loan servicing income was primarily due to lower levels of prepayments which reduced our amortization costs.

Included in other income in 2022 is a $4.3 million gain on sale of five eastern Washington branches in the third quarter.

Noninterest expense consisted of the following:

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Compensation and benefits $ 115,533 $ 132,015

Information services 27,913 30,004

Occupancy 24,528 23,832

Information services 29,981 27,913

General, administrative and other 35,377 31,583

Total noninterest expense $ 205,419 $ 215,343

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

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

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

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

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

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

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

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

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

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

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

The $9.9 million decrease in noninterest expense in 2022 as compared to 2021 was primarily due to lower compensation and benefit costs, partially offset by increases in general, administrative and other expenses.

The $16.5 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 and commissions expense and lower headcount, which were partially offset by wage increases given in 2022.

The increase in general, administrative and other costs was primarily due to higher FDIC fees due to our larger asset base and an increase in marketing costs related to our promotional deposit products.

Financial Condition – December 31, 2022 compared to December 31, 2021

During 2022, our total assets increased $2.2 billion due primarily to a $1.9 billion increase in loans held for investment and a $394 million increase in investment securities which were partially offset by a decrease of $159 million in loans held for sale.

Loans held for investment increased due to $3.6 billion of originations, which were partially offset by prepayments and scheduled payments of $1.7 billion.

Total liabilities increased $2.3 billion due to increases in deposits, borrowings and long-term debt.

Deposits increased $1.3 billion primarily due to increased balances of brokered deposits and certificates of deposit related to our promotional products which was partially offset by decreases in our noninterest bearing and money market deposits.

The $975 million increase in borrowings was used to fund the growth in our loans and investment securities.

Long-term debt increased due to our $100 million fixed rate subordinated notes offering completed in January 2022.

Investment Securities

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Commercial and industrial and CRE loans (1)

25,468 21,769

Total $ 17,701 $ 92,318

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Additions and amortization:

23,908 19,424

Amortization (1)

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Net additions and amortization

Change in fair value due to assumptions (2)

(1,706) 4,239

Change in fair value due to assumptions (2)

Ending balance $ 76,617 $ 61,584

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(7,692) (7,581)

(7,581) (5,307)

Ending balance $ 35,256 $ 39,415

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Noninterest-bearing demand deposits $ 1,399,912 — % $ 1,617,069 — %

Interest-bearing transaction and savings deposits:

Interest-bearing:

Interest-bearing demand deposits 466,490 0.10 % 513,810 0.10 %

Savings accounts 302,389 0.06 % 264,024 0.07 %

Money market accounts 2,806,313 0.15 % 2,596,453 0.21 %

Total interest-bearing transaction and savings deposits 3,622,512 0.08 % 3,344,742 0.10 %

Total transaction and savings deposits 5,056,078 4,437,477

Savings 258,977 0.06 % 302,389 0.06 %

Money market 2,383,209 1.22 % 2,806,313 0.15 %

Certificates of deposit 2,943,331 3.07 % 906,928 0.51 %

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

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

Total interest-bearing deposits 6,052,007 1.98 % 4,529,440 0.21 %

Total Deposits $ 7,451,919 1.61 % $ 6,146,509 0.15 %

The following table presents the schedule of maturities of certificates of deposit as of December 31, 2022:

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The Company recorded a recovery of our allowance for credit losses of $5.2 million in 2022, and the ACL for loans decreased by $5.6 million, as a result of the favorable performance of our loan portfolio, a stable low level of nonperforming assets and an improved outlook of the estimated impact of COVID-19 on our loan portfolio.

Delinquent loans by loan type consisted of the following:

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% 0.06 % 0.03 % 0.06 % 0.14 % 0.29 % 99.71 % 100.00 %

(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 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.

(1) Includes loans whose repayments are insured by the FHA or guaranteed by the VA or SBA of $10.6 million.

(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 $5.9 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 recognized in our consolidated income statements.

At December 31, 2021

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% 0.02 % 0.02 % 0.12 % 0.22 % 0.38 % 99.62 % 100.00 %

(1) Includes $7.1 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 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.

(1) Includes loans whose repayments are insured by the FHA or guaranteed by the VA or SBA of $8.4 million.

As a result of the COVID-19 pandemic, the Company has approved forbearances for some of its borrowers.

The status of these forbearances as of December 31, 2021 is as follows:

Forbearances Approved (2)

Total Expired Outstanding

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

Commercial and CRE

Commercial business 100 $ 51,674 100 $ 51,674 — $ —

CRE owner occupied 26 65,984 26 65,984 — —

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

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

Single family and consumer (1)

Single family 24 $ 12,068

Home equity and other 16 1,898

Total 40 $ 13,966

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

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

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

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

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

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

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

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

(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 $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 recognized in our consolidated income statements.

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:

December 31, 2022 December 31, 2021

(in thousands) Amount Rate (1)

Amount Rate (1)

(in thousands) Balance Rate (1)

Balance Rate (1)

Non-owner occupied CRE $ 2,102 0.32 % $ 7,509 1.06 %

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Total ACL $ 41,500 0.57 % $ 47,123 0.88 %

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

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

Liquidity and Sources of Funds

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

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

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

At December 31, 2022, the Bank had available borrowing capacity of $2.6 billion from the FHLB, $340 million from the FRBSF and $1.2 billion under borrowing lines established with other financial institutions.

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For 2022, $218 million of cash was provided by operating activities, primarily from cash proceeds from the sale of loans exceeding cash used to fund LHFS.

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

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

Cash flows from investing activities

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

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

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

For 2022, cash of $2.7 billion was used in investing activities primarily for the origination of LHFI net of principal repayments, the purchase of AFS investment securities and cash distributed in the sale of branches, partially offset by proceeds from the sale of and principal payments on investment securities.

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

Cash flows from financing activities

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

For 2022, cash of $2.4 billion was provided by financing activities from growth in deposits, increased FHLB borrowings and proceeds from our debt issuance, partially offset by, net repayment of short-term borrowings, repurchases of and dividends paid

on our common stock.

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

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

Capital Resources and Dividends

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At December 31, 2022, capital conservation buffers for the Company and the Bank were 3.53% and 4.59%, respectively.

The Company paid a quarterly cash dividend of $0.25 per common share in each of the four quarters of 2021.

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

It is our current intention to continue to pay quarterly dividends and the Company has declared a cash dividend of $0.35 per common share payable on February 22, 2023.

The amount and declaration of future cash dividends are subject to approval by our Board of Directors and certain statutory requirements and regulatory restrictions.

We had no material commitments for capital expenditures as of December 31, 2021.

Other than the acquisition of three branches in southern California, which closed in the first quarter of 2023, whereby we purchased $5.2 million of land and buildings, we had no material commitments for capital expenditures as of December 31, 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.

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Non-GAAP Financial Measures

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

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

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

In this Annual Report on Form 10-K, we use 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 exclude intangible assets from the calculation of capital ratios;

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

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

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

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Generally, a non-GAAP financial measure is a numerical measure of a company’s performance that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with GAAP.

A non-GAAP financial measure may also be a financial metric that is not required by GAAP or other applicable requirement.

A non-GAAP financial measure may also be a financial metric that is not required by GAAP or other applicable requirements.

We believe that these non-GAAP financial measures, when taken together with the corresponding GAAP financial measures, provide meaningful supplemental information regarding our performance by providing additional information used by management that is not otherwise required by GAAP or other applicable requirements.

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These non-GAAP financial measures also facilitate a comparison of our performance to prior periods.

We believe these measures are frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry.

However, these non-GAAP financial measures should be considered in addition to, not as a substitute for or superior to, financial measures prepared in accordance with GAAP.

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

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

We believe these measures are frequently used by securities analysts, investors and other parties in the evaluation of companies in our industry.

These non-GAAP financial measures should be considered in addition to, not as a substitute for or superior to, financial measures prepared in accordance with GAAP.

In the information below, we have provided reconciliations of, where applicable, the most comparable GAAP financial measures to the non-GAAP measures used in this Annual Report, or the calculation of the non-GAAP financial measures.

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

For the Year Ended

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Tangible income applicable to shareholders $ 67,291 $ 116,345

16.8 % 12.1 %

Ratio 11.5 % 16.8 %

Efficiency ratio

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$ 205,419 $ 215,343

Restructuring related charges — (11,837)

Legal fees recovery — 1,900

Prepayment fee on FHLB advances — (1,492)

State of Washington taxes (2,311) (2,423)

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51,570 119,975

Contingent payout

Adjusted total

$ 347,032 $ 357,460

Gain on sale of branches (4,270) —

Total $ 280,607 $ 347,032

Ratio 72.4 % 61.9 %

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

What changed 10-K

Item 7. Management’s Discussion and Analysis