What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-04 compared with 2023-05-10 · 135 added, 107 removed, 436 unchanged (36% of the section changed)

24 unchanged sentences

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 March 31, 2023 would increase by approximately $8 million.

For example, if the projected unemployment rate was downgraded one grade for all periods, the amount of the ACL at June 30, 2023 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.

2 unchanged sentences

The sensitivity analyses are hypothetical and have been provided to indicate the potential impact that changes in assumptions may have on the estimate of the fair value of MSRs.

The Company has goodwill on its books related to acquisitions it has completed, including the acquisition of the three southern California branches in the first quarter of 2023.

The Company had goodwill on its books related to acquisitions it has completed, including the acquisition of the three southern California branches in the first quarter of 2023.

Our goodwill is evaluated for impairment on an annual basis or more frequently if events or circumstances indicate that a potential impairment exists.

Such evaluation may be based on a variety of factors, including the quoted price of our common stock, market prices of common stock of other banking organizations, common stock trading multiples and discounted cash flows analyses.

Future evaluations of goodwill may result in impairment and ensuing write-downs, which could have an adverse effect on our financial condition, results of operations and capital position.

As a result of decreases in the Company’s stock price and associated market value, the Company conducted an impairment analysis of its goodwill as of June 30, 2023.

Based on the result of this analysis, we recorded an impairment charge of our entire goodwill balance of $39.9 million.

Summary Financial Data

Quarter Ended

(in thousands, except per share data and FTE data) March 31, 2023 December 31, 2022 March 31, 2022

Quarter Ended Six Months Ended June 30,

(in thousands, except per share data and FTE data) June 30, 2023 March 31, 2023 2023 2022

Select Income Statement data:

3 unchanged sentences

Noninterest expense 90,781 52,491 143,272 105,110

Before income taxes

Net income (loss):

Before income tax (benefit) expense (36,625) 6,482 (30,143) 47,063

(31,442) 5,058 (26,384) 37,672

Net income (loss) per share - diluted (1.67) 0.27 (1.41) 1.95

Core net income:

3,180 5,058 8,238 37,672

Net income per share - diluted 0.27 0.45 1.01

Core net income per share - diluted 0.17 0.27 0.44 1.95

Select Performance Ratios:

3 unchanged sentences

Return on average assets - annualized

Net income (loss) (1.32) % 0.22 % (0.56) % 0.99 %

0.13 % 0.22 % 0.17 % 0.99 %

Efficiency ratio (1)

2 unchanged sentences

Full time equivalent employees 910 920 915 956

(1) Return on average tangible equity and the efficiency ratio are non-GAAP financial measures.

For a reconciliation of return on average tangible equity to the nearest comparable GAAP financial measure and the computation of the efficiency ratio, see “Non-GAAP Financial Measures” elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

(in thousands, except share and per share data) March 31, 2023 December 31, 2022

(1) Core net income, return on average tangible equity, core return on average assets and the efficiency ratio are non-GAAP financial measures.

For a reconciliation of core net income and return on average tangible equity to the nearest comparable GAAP financial measure and the computation of the efficiency ratio, see “Non-GAAP Financial Measures” elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

(in thousands, except share and per share data) June 30, 2023 December 31, 2022

Selected Balance Sheet Data

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Regulatory Capital Ratios:

Tier 1 leverage ratio

8.47 % 8.63 %

Tier 1 leverage 8.43 % 8.63 %

Total risk-based capital

13.49 % 12.59 %

Tier 1 leverage ratio

6.92 % 7.25 %

Common equity Tier 1 capital 12.78 % 11.92 %

Tier 1 leverage 6.93 % 7.25 %

Total risk-based capital

12.16 % 11.53 %

Common equity Tier 1 capital 9.14 % 8.72 %

(1) Tangible book value per share and tangible common equity to tangible assets are non-GAAP financial measures.

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Current Developments

Our financial results continue to be adversely impacted by increases in short-term interest rates.

In the second quarter, a net loss of $31.4 million was significantly impacted by the after-tax goodwill impairment charge of $34.6 million.

Excluding the goodwill impairment charge our core net income for the second quarter was $3.2 million, This impairment of goodwill represents a noncash charge and has no impact on our core net income, cash flows or liquidity, nor does it impact our tangible capital or regulatory capital as goodwill is excluded from regulatory capital and related ratios.

Our core financial results continue to be adversely impacted by increases in short-term interest rates.

We have continued to raise new deposits through promotional certificates of deposit and have reduced new loan originations.

Additionally, we have focused our new loan origination activity primarily on floating rate products such as commercial loans, residential construction loans and home equity loans.

Our net interest margin decreased in the first quarter due to decreases in lower cost transaction and savings deposits and overall higher funding costs.

Our net interest margin decreased in the first six months of 2023 due to decreases in lower cost transaction and savings deposits and overall higher funding costs.

We expect continued decreases in lower cost deposit accounts as these accounts migrate to higher yielding alternatives, including promotional accounts offered by us.

We expect to replace this migration with higher cost promotional deposit accounts or wholesale funding alternatives.

As we anticipate these funding cost pressures to continue in the near term, we expect our net interest margin to decline for the remainder of 2023.

On February 10, 2023, we closed our purchase of three branches in southern California, whereby we acquired $373 million in deposits and $21 million in loans and recorded $11 million of core deposit intangibles and $12 million of goodwill.

The deposit balances in these branches at the end of March 2023 totaled $322 million.

Management's Overview of the First Quarter 2023 Financial Performance

First Quarter of 2023 Compared to the Fourth Quarter of 2022

Our net income and income before taxes were $5.1 million and $6.5 million, respectively, in the first quarter of 2023, as compared to $8.5 million and $11.1 million, respectively, in the fourth quarter of 2022.

The $4.7 million decrease in income before taxes was due to lower net interest income and higher noninterest expense, partially offset by a lower provision for credit losses and higher noninterest income.

To mitigate the impact of a lower net interest margin we have continued to reduce non-essential expenses while being mindful to sustain and protect our high quality lending lines of business.

Management's Overview of the Second Quarter 2023 Financial Performance

Second Quarter of 2023 Compared to the First Quarter of 2023

Non-core amounts:

During the second quarter of 2023 , the non-core item is a $39.9 million goodwill impairment charge.

Our net income (loss) and income (loss) before taxes were $(31.4) million and $(36.6) million, respectively, in the second quarter of 2023, as compared to $5.1 million and $6.5 million, respectively, in the first quarter of 2023.

Our core net income and core income before taxes in the second quarter of 2023, which excludes the impact of the goodwill impairment charge, were $3.2 million and $3.2 million, respectively as compared to $5.1 million and $6.5 million, respectively, in the first quarter of 2023.

The $3.3 million decrease in core income before taxes was due to lower net interest income which was partially offset by an allowance for credit losses recovery and lower noninterest expense.

Income Taxes:

Our effective tax rate was 22.0% in the first quarter of 2023 as compared to 23.7% in fourth quarter of 2022 and a statutory rate of 24.4%.

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

Additionally, because the benefits of our tax advantaged investments were larger in relation to our income before taxes in the first quarter of 2023 as compared to the fourth quarter of 2022, our effective tax rate was lower in the first quarter of 2023.

Our effective tax rate for the second quarter of 2023 of 14.2% was significantly impacted by the goodwill impairment charge, a portion of which was not deductible for tax purposes.

Our core income effective tax rate for the second quarter of 2023 was 1.6%, which is lower than our statutory tax rate of 24.7% primarily due to the significantly higher proportion of tax exempt revenues in comparison to our overall core income before tax.

Net Interest Income:

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Quarter Ended

March 31, 2023 December 31, 2022

June 30, 2023 March 31, 2023

(in thousands) Average

38 unchanged sentences

Net interest margin 1.93 % 2.23 %

(1) Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain loans and securities of $1.2 million and $1.4 million for the quarter ended March 31, 2023 and December 31, 2022, respectively.

(1) Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain loans and securities of $1.2 million and $1.2 million for the quarters ended June 30, 2023 and March 31, 2023, respectively.

The estimated federal statutory tax rate was 21% for the periods presented.

(2) Cost of all deposits, including noninterest-bearing demand deposits was 1.65% and 1.09% for the quarter ended March 31, 2023 and December 31, 2022, respectively.

Net interest income was $6.3 million lower in the first quarter of 2023 as compared to the fourth quarter of 2022 primarily due to a decrease in our net interest margin from 2.53% to 2.23%.

(2) Cost of all deposits, including noninterest-bearing demand deposits was 2.02% and 1.65% for the quarters ended June 30, 2023 and March 31, 2023, respectively.

Our net interest income in the second quarter of 2023 was $5.9 million lower than the first quarter of 2023 due to a decrease in our net interest margin from 2.23% to 1.93%.

The decrease in our net interest margin was due to a 44 basis point increase in the cost of interest-bearing liabilities which was partially offset by a 10 basis point increase in the yield on interest-earning assets.

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

The increase in the rates paid on our interest-bearing liabilities was due to higher deposit costs and higher borrowing costs.

Our cost of borrowings increased 64 basis points during the first quarter and our cost of deposits increased 56 basis points.

The increases in yields on interest-earning assets and the rates paid on interest-bearing liabilities were due to the significant increases in market interest rates during 2022 and the first quarter of 2023.

Yields on interest-earning assets increased as yields on adjustable rate loans increased due to increases in the indices on which their rates are based.

The increase in the cost of interest-bearing liabilities was due to overall higher deposit and borrowing costs.

Our cost of deposits increased 37 basis points during the second quarter while the cost of borrowings increased only 5 basis points due to actions we took in prior quarters to fix our borrowing costs.

The increases in the interest rate indices used for our loans and the rates paid on interest-bearing liabilities were due to the significant increases in market interest rates during the first half of 2023.

Provision for Credit Losses:

A $0.6 million provision for credit losses was recorded during the first quarter of 2023 compared to a $3.8 million provision for credit losses in the fourth quarter of 2022.

The provision for the first quarter of 2023 was to offset the net charge-offs realized as the overall LHFI portfolio balances only increased $60 million.

The provision in the fourth quarter of 2022 was due to the growth in our loan portfolio and a $2.2 million increase in our collateral qualitative factor related to projected declines in future home prices.

A $0.4 million recovery of our allowance for credit losses was recorded during the second quarter of 2023 compared to a $0.6 million provision for credit losses in the first quarter of 2023.

The recovery for the second quarter of 2023 reflects a decrease in our unfunded commitment reserve as our allowance for credit losses remained unchanged at $41.5 million and our net charge-offs realized in the quarter were nominal.

The provision in the first quarter of 2023 was to offset the net charge-offs realized as the overall LHFI portfolio balances only increased $60 million.

Noninterest Income consisted of the following:

Quarter Ended

(in thousands) March 31, 2023 December 31, 2022

(in thousands) June 30, 2023 March 31, 2023

Noninterest income

9 unchanged sentences

Quarter Ended

(in thousands) March 31, 2023 December 31, 2022

(in thousands) June 30, 2023 March 31, 2023

Single family servicing income, net

6 unchanged sentences

Net gain (loss) from economic hedging (1,592) (81)

Single Family servicing income (loss) 1,847 1,844

Single Family servicing income 1,970 1,847

Commercial loan servicing income:

4 unchanged sentences

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

The increase in noninterest income in the first quarter of 2023 as compared to the fourth quarter of 2022 was primarily due to a $1.1 million increase in single family lending gain on sale activities due to higher levels of originations of loans held for sale.

Noninterest income in the second quarter of 2023 was consistent with the first quarter of 2023 as a 10% increase in single family lending rate locks was offset by a slight decrease in our margin.

Noninterest Expense consisted of the following:

Quarter Ended

(in thousands) March 31, 2023 December 31, 2022

(in thousands) June 30, 2023 March 31, 2023

Noninterest expense

3 unchanged sentences

General, administrative and other 9,875 10,355

Goodwill impairment charge 39,857 —

Total noninterest expense $ 90,781 $ 52,491

The $2.1 million increase in noninterest expense in the first quarter of 2023 as compared to the fourth quarter of 2022 was primarily due to higher compensation and benefit costs, partially offset by lower information services costs.

The higher level of compensation and benefit costs was due to seasonally higher benefits costs, primarily employer taxes and 401(k) matches, and a reduction in deferred costs due to lower levels of loan production.

The benefits of lower levels of staffing in our loan origination operations in the first quarter were offset by the impact of raises given during the first quarter and the employees added from the acquisition of the three branches in southern California.

Information service costs decreased primarily due to the higher fourth quarter 2022 costs associated with replacement and maintenance of our automated teller machines.

First Quarter of 2023 Compared to First Quarter of 2022

Our net income and income before taxes were $5.1 million and $6.5 million, respectively, in the first quarter of 2023, as compared to $20.0 million and $24.6 million, respectively, in the first quarter of 2022.

The $18.1 million decrease in income before taxes was due to a lower net interest income, a provision for credit losses and lower noninterest income, partially offset by lower noninterest expense.

The $38.3 million increase in noninterest expenses in the second quarter of 2023, as compared to the first quarter of 2023 was due to a $39.9 million goodwill impairment charge which was partially offset by a $1.5 million decrease in compensation and benefit costs as seasonally higher benefits costs recorded in the first quarter, primarily employer taxes and 401(k) employer matches, decreased in the second quarter.

Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022

Non-core amounts:

During the six months ended June 30, 2023 , the non-core item is a $39.9 million goodwill impairment charge.

Our net income (loss) and income (loss) before taxes were $(26.4) million and $(30.1) million, respectively, in the six months ended June 30, 2023, as compared to $37.7 million and $47.1 million, respectively, in the six months ended June 30, 2022.

Our core net income and core income before taxes in the six months ended June 30, 2023, which excludes the impact of the goodwill impairment charge, was $8.2 million and $9.7 million as compared to $37.7 million and $47.1 million, respectively, in the six months ended June 30, 2022.

The $37.3 million decrease in core income before taxes was due to lower net interest income, a higher provision for credit losses and lower noninterest income, partially offset by lower noninterest expense.

Income Taxes:

Our effective tax rate during the first quarter of 2023 was 22.0% as compared to 19.0% in the first quarter of 2022 and our statutory rate of 24.4%.

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

The first quarter of 2022 also benefited from reductions in taxes on income related to excess tax benefits resulting from the vesting of stock awards during the period.

No such benefits were realized in the first quarter of 2023.

Our effective tax rate of 12.5% during the six months ended June 30, 2023 was significantly impacted by the goodwill impairment charge, a portion of which was not deductible for tax purposes.

Our core income effective tax rate for the first six months of 2023 and 2022 was 15.2% and 20.0% respectively, which is lower than our statutory tax rate of 24.7% and 23.9%, respectively, primarily due to the significantly higher proportion of tax exempt revenues in comparison to our overall core income before tax.

Our effective tax rate in the six months ended June 30, 2022 was also lower than the statutory rate due to reductions in taxes on income related to excess tax benefits resulting from the vesting of stock awards during the period.

Net Interest Income:

4 unchanged sentences

and (v) net interest margin:

Quarter Ended March 31,

Six Months Ended June 30,

(in thousands) Average

38 unchanged sentences

Net interest margin 2.08 % 3.28 %

(1) Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain loans and securities of $1.2 million and $1.1 million for the quarters ended March 31, 2023 and 2022, respectively.

(1) Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain loans and securities of $2.4 million and $2.3 million for the six months ended June 30, 2023 and 2022, respectively.

The estimated federal statutory tax rate was 21% for the periods presented.

(2) Cost of deposits including noninterest-bearing deposits, was 1.65% and 0.15% for the quarters ended March 31, 2023 and 2022, respectively.

Net interest income in the first quarter of 2023 decreased $5.2 million as compared to the first quarter of 2022 due primarily to a decrease in our net interest margin partially offset by increases in the average balance of interest earning assets.

The increase in interest-earning assets was due to loan originations and purchases of investment securities.

Our net interest margin decreased from 3.29% in the first quarter of 2022 to 2.23% in the first quarter of 2023 due to a 226 basis point increase in the rates paid on interest-bearing liabilities which was partially offset by an 80 basis point increase in the yield on interest earning assets.

Yields on interest-earning assets increased as the yields on loan originations during the last 15 months were higher than the rates of our existing portfolio of loans and yields on adjustable rate loans increased due to increases in the indexes on which their pricing is based.

(2) Cost of deposits including noninterest-bearing deposits, was 1.83% and 0.17% for the six months ended June 30, 2023 and 2022, respectively.

Net interest income for the six months ended June 30, 2023 decreased $21.8 million as compared to the six months ended June 30, 2022 due primarily to a decrease in our net interest margin partially offset by increases in the average balance of interest earning assets.

The increase in interest-earning assets was due to loan originations and purchases of investment securities during 2022.

Our net interest margin decreased from 3.28% in the six months ended June 30, 2022 to 2.08% in the six months ended June 30, 2023 due to a 240 basis point increase in the rates paid on interest-bearing liabilities which was partially offset by a 78 basis point increase in the yield on interest earning assets.

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

The higher yields 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 the past year being higher than the yields on our existing portfolio.

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Our average borrowings increased by $1.1 billion to fund the growth of our loan portfolio and investment securities.

Our cost of borrowings increased from 56 basis points during the first quarter of 2022 to 457 basis points during the first quarter of 2023 due to the significant increase in market interest rates during the last 15 months.

Our cost of borrowings increased from 116 basis points during the six months ended June 30, 2022 to 460 basis points during the six months ended June 30, 2023 due to the significant increase in market interest rates during the last year and a half.

Provision for Credit Losses:

A $0.6 million provision for credit losses was recorded during the first quarter of 2023 compared to a $9.0 million recovery of our allowance for credit losses in the first quarter of 2022.

The provision for credit losses in the first quarter of 2023 was to offset the net charge-offs realized during the quarter.

The recovery of our allowance for credit losses in first quarter of 2022 was the 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.

A $0.2 million provision for credit losses was recorded during the six months ended June 30, 2023 compared to a $9.0 million recovery of our allowance for credit losses in the six months ended June 30, 2022.

The provision for credit losses in the first half of 2023 was to offset the net charge-offs realized as the overall LHFI portfolio balance only increased $10 million.

The recovery of our allowance for credit losses in six months ended June 30, 2022 was the 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.

Noninterest Income consisted of the following:

Quarter Ended March 31,

Six Months Ended June 30,

(in thousands) 2023 2022

8 unchanged sentences

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

Quarter Ended March 31,

Six Months Ended June 30,

(in thousands) 2023 2022

7 unchanged sentences

Net gain (loss) from economic hedging (1,673) (15,500)

Single Family servicing income (loss) 1,847 566

Single Family servicing income 3,817 1,009

Commercial loan servicing income:

4 unchanged sentences

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

The decrease in noninterest income for the first quarter of 2023 as compared to the first quarter of 2022 was due to a decrease in gain on loan origination and sale activities, which was partially offset by higher deposit fees.

The decrease in noninterest income for the six months ended June 30, 2023 as compared to the six months ended June 30, 2022 was due to a decrease in gain on loan origination and sale activities, which was partially offset by higher deposit fees.

The $8.7 million decrease in gain on loan origination and sale activities was due to a $5.7 million decrease in single family gain on loan origination and sale activities and a $3.0 million decrease in commercial real estate and commercial gain on loan origination and sale activities.

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

The decrease in commercial real estate and commercial gain on loan origination and sale activities was primarily due to an 82% decrease in the volume of loans sold as a result of increasing interest rates.

The decrease in commercial real estate and commercial gain on loan origination and sale activities was primarily due to an 87% decrease in loans sold volume as a result of increasing interest rates.

The $1.1 million increase in deposit fee income was primarily due to higher early withdrawals fees.

Noninterest Expense consisted of the following:

Quarter Ended March 31,

Six Months Ended June 30,

(in thousands) 2023 2022

4 unchanged sentences

General, administrative and other 20,230 15,783

Goodwill impairment charge 39,857 —

Total noninterest expense $ 143,272 $ 105,110

The $2.0 million decrease in noninterest expense in the first quarter of 2023 as compared to the first quarter of 2022 was primarily due to lower compensation and benefit costs, partially offset by increases in general, administrative and other expenses.

The $38.2 million increase in noninterest expenses in the six months ended June 30, 2023 as compared to the six months ended June 30, 2022 was due to a $39.9 million goodwill impairment charge and higher general, administrative and other costs which were partially offset by lower compensation and benefit costs.

The $5.2 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 staffing levels and lower bonus expense, which were partially offset by wage increases given in the first quarter of 2023 and a reduction in deferred costs due to lower levels of loan production.

The increase in general, administrative and other costs was primarily due to higher FDIC fees due to our larger asset base and core deposit intangible amortization associated with the three acquired branches, which were partially offset by a reduction in legal fees due to charges related to nonrecurring costs expended on litigation activities and legal matters in the first quarter of 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 associated with deposit promotions, which were partially offset by a reduction in legal fees due to charges related to nonrecurring costs expended on litigation activities and legal matters in the six months ended June 30, 2022.

Financial Condition

During the first quarter of 2023, we completed the purchase of three branches in southern California whereby we acquired $373 million of deposits, $21 million of loans, $5 million of fixed assets and $324 million of cash, and recorded $11 million of core deposit intangibles and $12 million of goodwill.

Excluding the impact of the acquisition noted above, during the first quarter of 2023, our total assets increased $121 million due primarily to a $304 million increase in cash, $39 million increase in loans held for investment and a $77 million increase in investment securities.

Loans held for investment increased due to $325 million of originations, which were partially offset by prepayments and scheduled payments of $285 million.

Excluding the impact of the acquisition noted above, during the first quarter of 2023 total liabilities increased $108 million due to an increase in borrowings, partially offset by a decrease in deposits.

The $862 million increase in borrowings was used to replace higher-cost brokered deposits and increase our on-balance sheet liquidity.

The decrease in deposits was due to a $561 million decrease in brokered certificates of deposit and a $345 million decrease in non-certificates of deposit balances which were partially offset by a $253 million increase in certificates of deposit balances related to our promotional products.

During the six months ended June 30, 2023, our total assets increased $137 million due primarily to a $100 million increase in cash.

Loans held for investment were relatively unchanged as $673 million of originations was offset by prepayments and scheduled payments of $659 million.

During the first half of 2023 total liabilities increased $171 million due to an increase in borrowings, partially offset by a decrease in deposits.

The $782 million decrease in deposits was due to a $686 million decrease in brokered certificates of deposit and a $914 million decrease in non-certificates of deposit balances which were partially offset by a $445 million increase in certificates of deposit balances related to our promotional products.

The decrease in deposits was offset by $373 million in deposits that we acquired in relation to our branch acquisition in the first quarter of 2023.

The $956 million of additional borrowings were used to replace higher-cost brokered deposits and increase our on-balance sheet liquidity.

Credit Risk Management

As of March 31, 2023, our ratio of nonperforming assets to total assets remained low at 0.15% while our ratio of total loans delinquent over 30 days to total loans was 0.41%.

The Company recorded a $0.6 million provision for credit losses for the first quarter of 2023 which offset the net charge-offs realized as the overall LHFI portfolio balances only increased $60 million.

Our overall ratio of ACL to LHFI decreased slightly to 0.56% at March 31, 2023 from 0.57% at December 31, 2022.

As of June 30, 2023, our ratio of nonperforming assets to total assets remained low at 0.44% while our ratio of total loans delinquent over 30 days to total loans was 0.67%.

The increase in nonaccrual assets was due to one customer relationship which consists of $27 million of loans that were classified as collateral dependent and nonaccrual in the second quarter of 2023.

These loans are current in their payments and are overcollateralized.

The Company recorded a $0.2 million provision for credit losses for the six months ended June 30, 2023 which offset the net charge-offs realized as the overall LHFI portfolio balances only increased $10 million.

Our overall ratio of ACL to LHFI remained at 0.57% at June 30, 2023 and at December 31, 2022.

Management considers the current level of the ACL to be appropriate to cover estimated lifetime losses within our LHFI portfolio.

The following table presents the ACL by product type:

At March 31, 2023 At December 31, 2022

At June 30, 2023 At December 31, 2022

(in thousands) Amount Rate (1)

33 unchanged sentences

The Company has $64 million of Senior Notes which mature in 2026 which it expects to pay off from available cash or from the issuance of new debt.

At March 31, 2023 and December 31, 2022, the Bank had available borrowing capacity of $2.1 billion and $2.6 billion, respectively, from the FHLB, and $397 million and $340 million, respectively, from the FRBSF and $1.2 billion, in both periods, under borrowing lines established with other financial institutions.

For the quarter ended March 31, 2023, cash and cash equivalents increased by $304 million compared to an increase of $9 million during the quarter ended March 31, 2022 which reflected a decision to keep a higher level of on-balance sheet cash at the end of the first quarter of 2023.

We expect to reduce our cash holdings by approximately $300 million during the second quarter, as we no longer consider it necessary to retain such high levels of cash on the balance sheet.

At June 30, 2023 and December 31, 2022, the Bank had available borrowing capacity of $2.3 billion and $2.6 billion, respectively, from the FHLB, and $389 million and $340 million, respectively, from the FRBSF and $1.2 billion, in both periods, under borrowing lines established with other financial institutions.

For the six months ended June 30, 2023, cash and cash equivalents increased by $100 million compared to an increase of $10 million during the six months ended June 30, 2022.

As excess liquidity can reduce the Company’s earnings and returns, the Company manages its cash positions to minimize the level of excess liquidity and does not attempt to maximize the level of cash and cash equivalents.

2 unchanged sentences

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

For the quarter ended March 31, 2023, net cash of $52 million was used in operating activities, primarily from cash proceeds from the purchase of trading securities and cash used to fund LHFS exceeding proceeds from the sale of loans.

For the quarter ended March 31, 2022, net cash of $124 million was provided by operating activities, primarily from cash proceeds from the sale of loans exceeding cash used to fund LHFS.

For the six months ended June 30, 2023, net cash of $31 million was used in operating activities, primarily from the purchase of trading securities, cash used to fund LHFS exceeding proceeds from the sale of loans and increases in other assets, partially offset by a $39.9 million noncash goodwill impairment charge.

For the six months ended June 30, 2022, net cash of $145 million was provided by operating activities, primarily from cash proceeds from the sale of loans exceeding cash used to fund LHFS.

We believe that cash flows from operations, available cash balances and our ability to generate cash through short-term debt borrowings are sufficient to fund our operating liquidity needs.

2 unchanged sentences

The Company's investing activities primarily include AFS investment securities and loans originated as held for investment.

For the quarter ended March 31, 2023, net cash of $269 million was provided by investing activities primarily from net cash acquired from an acquisition partially offset by the origination of LHFI net of principal repayments and the purchase of AFS investment securities and net FHLB stock purchases.

For the quarter ended March 31, 2022, net cash of $464 million was used in investing activities primarily from the origination of LHFI net of principal repayments and the purchase of AFS investment securities.

For the six months ended June 30, 2023, net cash of $343 million was provided by investing activities primarily from net cash acquired from an acquisition, principal repayments on AFS securities and LHFI principal repayments in excess of originations, partially offset by the purchase of AFS investment securities and net FHLB stock purchases.

For the six months ended June 30, 2022, net cash of $1.6 billion was used in investing activities primarily from the origination of LHFI net of principal repayments and the purchase of AFS investment securities.

Cash flows from financing activities

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

For the quarter ended March 31, 2023, net cash of $87 million was provided by financing activities, primarily due to an increase in short-term and long-term borrowings partially offset by a decrease in deposits and dividends paid on our common stock.

For the quarter ended March 31, 2022, net cash of $349 million was provided by financing activities, primarily due to growth in deposits, an increase in short-term borrowings and proceeds from the issuance of the subordinated notes, partially offset by repurchases of and dividends paid on our common stock.

For the six months ended June 30, 2023, net cash of $211 million was used in financing activities, primarily due to decrease in deposits and dividends paid on our common stock, partially offset by an increase in short-term and long-term borrowings.

For the six months ended June 30, 2022, net cash of $1.4 billion was provided by financing activities, primarily due to an increase in short-term borrowings and proceeds from the issuance of the subordinated notes, partially offset by repurchases of and dividends paid on our common stock.

Off-Balance Sheet Arrangements

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These commitments include the following:

(in thousands) At March 31, 2023 At December 31, 2022

(in thousands) At June 30, 2023 At December 31, 2022

Unused consumer portfolio lines $ 559,313 $ 531,784

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(1) Within the commercial portfolio, undistributed construction loan proceeds, where the Company has an obligation to advance funds for construction

progress payments, were $512 million and $525 million at March 31, 2023 and December 31, 2022, respectively.

progress payments, were $451 million and $525 million at June 30, 2023 and December 31, 2022, respectively.

Capital Resources and Dividend Policy

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

At March 31, 2023

At June 30, 2023

Actual For Minimum Capital

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and HomeStreet Bank are required to maintain a capital conservation buffer consisting of additional Common Equity Tier 1 Capital of more than 2.5% above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses.

The required ratios for capital adequacy set forth in the above table do not include the Capital Rules’ additional capital conservation buffer, though each of the Company and Bank maintained capital ratios necessary to satisfy the capital conservation buffer requirements as of the dates indicated.

At March 31, 2023, capital conservation buffers for the Company and the Bank were 3.16% and 4.37%, respectively.

The Company paid a quarterly cash dividend of $0.35 per common share in the first quarter of 2023 and on April 24, 2023, we declared a cash dividend of $0.10 per common share payable on May 24, 2023 to shareholders of record as of the close of business on May 10, 2023.

The required ratios for capital adequacy set forth in the above table do not include the Capital Rules’ additional capital conservation buffer, though both the Company and Bank maintained capital ratios necessary to satisfy the capital conservation buffer requirements as of the dates indicated.

At June 30, 2023, capital conservation buffers for the Company and the Bank were 4.03% and 5.49%, respectively.

The Company paid a quarterly cash dividend of $0.10 per common share in the second quarter of 2023 and on July 27, 2023, we declared a cash dividend of $0.10 per common share payable on August 23, 2023 to shareholders of record as of the close of business on August 9, 2023.

It is our current intention to continue to pay quarterly dividends, however, the amount and declaration of future cash dividends are subject to approval by our Board of Directors and certain regulatory restrictions.

We had no material commitments for capital expenditures as of March 31, 2023.

We had no material commitments for capital expenditures as of June 30, 2023.

However, we intend to take advantage of opportunities that may arise in the future to grow our businesses, which may include opening additional offices or acquiring complementary businesses that we believe will provide us with attractive risk-adjusted returns.

As a result, we may seek to obtain additional borrowings and to sell additional shares of our common stock to raise funds which we might need for these purposes.

As a result, we may seek to obtain additional borrowings and/or sell additional shares of our common stock to raise funds which we might need for these purposes.

There is no assurance, however, that, if required, we will succeed in obtaining additional borrowings or selling additional shares of our common stock on terms that are acceptable to us, if at all, as this will depend on market conditions and other factors outside of our control, as well as our future results of operations.

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(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.

(ii) core income and effective tax rate on core income before taxes, which excludes goodwill impairment charges and the related tax impact as we believe this measure is a better comparison to be used for projecting future results and (iii) 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.

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

For the quarter ended

(in thousands, except ratio and rate) March 31, 2023 December 31, 2022 March 31, 2022

For the Quarter Ended For the Six Months Ended June 30,

(in thousands, except ratio and rate) June 30, 2023 March 31, 2023 2023 2022

Core net income

Net income (loss) $ (31,442) $ 5,058 $ (26,384) $ 37,672

Adjustments (tax effected)

Goodwill impairment charge 34,622 — 34,622 —

Total $ 3,180 $ 5,058 $ 8,238 $ 37,672

Core diluted earnings per share

Fully diluted shares 18,775,022 18,771,899 18,765,292 19,310,750

$ 0.17 $ 0.27 $ 0.44 $ 1.95

Return on average tangible equity (annualized)

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$ 531,034 $ 547,564 $ 539,254 $ 619,368

Net income $ 5,058 $ 8,501 $ 19,951

Core net income (per above) $ 3,180 $ 5,058 $ 8,238 $ 37,672

Adjustments (tax effected)

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$ 90,781 $ 52,491 $ 143,272 $ 105,110

Goodwill impairment charge (39,857) — (39,857) —

State of Washington taxes (526) (555) (1,081) (1,085)

(555) (597) (506)

Adjusted total

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Ratio 93.7 % 87.2 % 90.3 % 72.7 %

Return on Average assets (annualized) - Core

Average Assets $ 9,562,817 $ 9,530,705 $ 9,546,850 $ 7,656,050

Core net income - per above 3,180 5,058 8,238 37,672

Ratio 0.13 % 0.22 % 0.17 % 0.99 %

Effective tax rate

Income 14.2 % 12.5 %

Core net income 1.6 % 15.2 %

Goodwill impairment charge 13.1 % 13.1 %

Effective tax rate used in computations above (1)

(in thousands, except share data) March 31, 2023 December 31, 2022

22.0 % 22.0 % 22.0 % 22.0 %

(1) ) Effective tax rate indicated is used for all adjustment except the goodwill impairment charge as a portion of this charge was not deductible for tax purposes.

Instead, a computed effective rate of 13.1% was used for the goodwill impairment charge.

(in thousands, except share data) June 30, 2023 December 31, 2022

Tangible book value per share

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$ 9,501,475 $ 9,364,760

Goodwill and other intangibles

(51,862) (29,980)

Goodwill and other intangibles (per above) (11,217) (29,980)

$ 9,490,258 $ 9,334,780

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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-Q

Item 2. Management’s Discussion and Analysis