What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-07 compared with 2023-08-04 · 94 added, 104 removed, 467 unchanged (30% of the section changed)

17 unchanged sentences

These policies relate to the allowance for credit losses (“ACL”) and the valuation of single family mortgage servicing rights (“MSRs").

Additionally, we identified goodwill as a critical accounting matter in light of recent trends in bank valuations.

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

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Any unfavorable differences between the actual outcome of credit-related events and our estimates could require an additional provision for credit losses.

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

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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 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.

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 Six Months Ended June 30,

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

Quarter Ended Nine Months Ended September 30,

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

Select Income Statement data:

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(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

For a reconciliation of core net income, core return on average assets 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) September 30, 2023 December 31, 2022

Selected Balance Sheet Data

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Current Developments

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.

Our core financial results continue to be adversely impacted by increases in 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 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.

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

Additionally, we have reduced controllable expenses where possible, reduced staff to the minimum levels to transact current business volume in a safe and sound manner and we have focused our new loan origination activity primarily on floating rate products such as commercial and industrial loans, residential construction loans and home equity loans.

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

We expect that any future migration of lower cost deposit accounts to higher yielding alternatives to be replaced with higher cost promotional deposit accounts or wholesale funding alternatives.

Management's Overview of the Third Quarter 2023 Financial Performance

Third Quarter of 2023 Compared to the Second 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.

Our net income (loss) and income (loss) before taxes were $2.3 million and $1.4 million, respectively, in the third quarter of 2023, as compared to $(31.4) million and $(36.6) million, respectively, in the second quarter of 2023.

Our core net income and core income before taxes in the third quarter of 2023 were $2.3 million and $1.4 million, respectively, as compared to $3.2 million and $3.2 million, respectively, in the second quarter of 2023, which excludes the impact of the goodwill impairment charge.

The $1.8 million decrease in core income before taxes was due to lower net interest income which was partially offset by a larger recovery of allowance for credit losses and lower noninterest expense.

Income Taxes:

The income tax benefit realized in the third quarter of 2023 was due to the recognition of return to accrual differences related to tax exempt income.

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.

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Quarter Ended

June 30, 2023 March 31, 2023

September 30, 2023 June 30, 2023

(in thousands) Average

38 unchanged sentences

Net interest margin 1.74 % 1.93 %

(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.

(1) Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain loans and securities of $1.1 million and $1.2 million for the quarters ended September 30, 2023 and June 30, 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 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 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.

(2) Cost of all deposits, including noninterest-bearing demand deposits was 2.06% and 2.02% for the quarters ended September 30, 2023 and June 30, 2023, respectively.

Our net interest income in the third quarter of 2023 was $4.6 million lower than the second quarter of 2023 due to a decrease in our net interest margin from 1.93% to 1.74%.

The decrease in our net interest margin was due to a 25 basis point increase in the cost of interest-bearing liabilities caused in part by an increase in the proportion of higher cost borrowings to the total balance of interest-bearing liabilities.

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

During the third quarter, the cost of deposits increased 4 basis points during the third quarter, the cost of long term debt increased 15 basis points and the cost of borrowings increased 19 basis points.

The increases in the rates paid on interest-bearing liabilities were due to the significant increases in market interest rates during 2023.

Provision for Credit Losses:

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.

A $1.1 million recovery of our allowance for credit losses was recognized during the third quarter of 2023 compared to a $0.4 million recovery of our allowance for credit losses in the second quarter of 2023.

The recovery for the third quarter of 2023 was primarily due to reduced levels of higher risk land and development loans which resulted in lower expected losses.

The recovery in 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.

Noninterest Income consisted of the following:

Quarter Ended

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

(in thousands) September 30, 2023 June 30, 2023

Noninterest income

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Quarter Ended

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

(in thousands) September 30, 2023 June 30, 2023

Single family servicing income, net

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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.

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 income in the third quarter of 2023 was consistent with the second quarter of 2023.

Noninterest Expense consisted of the following:

Quarter Ended

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

(in thousands) September 30, 2023 June 30, 2023

Noninterest expense

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Total noninterest expense $ 49,089 $ 90,781

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

The $41.7 million decrease in noninterest expenses in the third quarter of 2023, as compared to the second quarter of 2023 was primarily due to a $39.9 million goodwill impairment charge in the second quarter of 2023.

Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 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.

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

Our net income (loss) and income (loss) before taxes were $(24.1) million and $(28.7) million, respectively, in the nine months ended September 30, 2023, as compared to $58.0 million and $73.5 million, respectively, in the nine months ended September 30, 2022.

Our core net income and core income before taxes in the nine months ended September 30, 2023, which excludes the impact of the goodwill impairment charge, was $10.5 million and $11.1 million, as compared to $58.0 million and $73.5 million, respectively, in the nine months ended September 30, 2022.

The $62.4 million decrease in core income before taxes was due to a lower net interest income, a lower recovery of provision for credit losses and lower noninterest income, partially offset by lower noninterest expense.

Income Taxes:

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.

Our effective tax rate of 16.2% during the nine months ended September 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 nine months of 2023 and 2022 was 5.2% and 21.1% respectively, which is lower than our statutory tax rate of 24.7% and 25.3%, 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 nine months ended September 30, 2022 was also lower than the statutory rate due to the benefits of tax advantaged loans and investments and reductions in taxes on income related to excess tax benefits resulting from the vesting of stock awards during the period.

Net Interest Income:

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and (v) net interest margin:

Six Months Ended June 30,

Nine Months Ended September 30,

(in thousands) Average

38 unchanged sentences

Net interest margin 1.96 % 3.17 %

(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.

(1) Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain loans and securities of $3.5 million and $3.6 million for the nine months ended September 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 1.83% 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.

(2) Cost of deposits including noninterest-bearing deposits, was 1.90% and 0.29% for the nine months ended September 30, 2023 and 2022, respectively.

Net interest income for the nine months ended September 30, 2023 decreased $45.9 million as compared to the nine months ended September 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.

Our net interest margin decreased from 3.17% in the nine months ended September 30, 2022 to 1.96% in the nine months ended September 30, 2023 due to a 226 basis point increase in the rates paid on interest-bearing liabilities which was partially offset by a 68 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 two years 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.

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 were due to the significant increase in market interest rates over the prior year.

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 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.

The increases in the rates paid on deposits were due to the significant increase in market interest rates over the prior year and the decrease in the proportion of noninterest-bearing deposits to total deposits.

Our average borrowings increased by $886 million to fund the growth of our loan portfolio and investment securities.

Our cost of borrowings increased from 199 basis points during the nine months ended September 30, 2022 to 469 basis points during the nine months ended September 30, 2023 due to the significant increase in market interest rates during the last two years.

Provision for Credit Losses:

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.

A $0.9 million recovery of our allowance for credit losses was recognized during the nine months ended September 30, 2023 compared to a $9.0 million recovery of our allowance for credit losses in the nine months ended September 30, 2022.

The recovery of our allowance for credit losses in 2023 was the result of economic conditions performing better than expected, improved single-family collateral forecasts, changes in portfolio composition and a decrease in our unfunded commitment reserve offset slightly by deteriorated commercial collateral conditions.

The recovery of our allowance for credit losses in 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:

Six Months Ended June 30,

Nine Months Ended September 30,

(in thousands) 2023 2022

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

Six Months Ended June 30,

Nine Months Ended September 30,

(in thousands) 2023 2022

7 unchanged sentences

Net gain (loss) from economic hedging (2,833) (18,481)

(1,039) (1,866)

Single Family servicing income 5,730 1,891

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

The $9.0 million decrease in gain on loan origination and sale activities was due to a $5.2 million decrease in single family gain on loan origination and sale activities and a $3.7 million decrease in commercial real estate and commercial and industrial 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 87% decrease in loans sold volume as a result of increasing interest rates.

The decrease in commercial real estate and commercial and industrial 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 $2.9 million decrease in other income was primarily due to a $4.3 million gain on sale of branches realized in the nine months ended September 30, 2022.

The $1.3 million increase in deposit fee income was primarily due to higher early withdrawals fees.

Noninterest Expense consisted of the following:

Six Months Ended June 30,

Nine Months Ended September 30,

(in thousands) 2023 2022

6 unchanged sentences

Total noninterest expense $ 192,361 $ 154,999

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 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.

The $37.4 million increase in noninterest expenses in the nine months ended September 30, 2023 as compared to nine months ended September 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 and occupancy costs.

The $5.5 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 staffing levels and lower bonus expense, which were partially offset by wage increases given in the first nine months 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, 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 nine months ended September 30, 2022.

Financial Condition

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.

During the nine months ended September 30, 2023, our total assets increased $94 million due primarily to a $154 million increase in cash.

Loans held for investment were relatively unchanged as $1.0 billion of originations was offset by prepayments and scheduled payments of $1.0 billion.

During the first nine months of 2023 total liabilities increased $154 million due to an increase in borrowings, partially offset by a decrease in deposits.

The $706 million decrease in deposits was due to a $473 million decrease in brokered certificates of deposit and a $1.1 billion decrease in non-certificates of deposit balances which were partially offset by a $455 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 as part of the branch acquisition in the first quarter of 2023.

The $857 million of additional borrowings were used to replace maturing brokered deposits and increase our on-balance sheet cash balances.

Credit Risk Management

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.

As of September 30, 2023, our ratio of nonperforming assets to total assets remained low at 0.42% while our ratio of total loans delinquent over 30 days to total loans was 0.64%.

The increase in nonaccrual assets during the first nine months of 2023 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.

Our overall ratio of ACL to LHFI was 0.55% at September 30, 2023 as compared to 0.57% 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 June 30, 2023 At December 31, 2022

At September 30, 2023 At December 31, 2022

(in thousands) Amount Rate (1)

26 unchanged sentences

The Company's primary sources of liquidity include deposits, loan payments and investment securities payments, both principal and interest, borrowings, and proceeds from the sale of loans and investment securities.

Borrowings include advances from the FHLB, federal funds purchased and borrowing from other financial institutions.

Borrowings include advances from the FHLB, federal funds purchased, borrowings from the Bank Term Funding Program and borrowing from other financial institutions.

Additionally, the Company may sell stock or issue long-term debt to raise funds.

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

At June 30, 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.

At September 30, 2023 and December 31, 2022, the Bank had available borrowing capacity of $2.2 billion and $2.6 billion, respectively, from the FHLB, and $331 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 nine months ended September 30, 2023, cash and cash equivalents increased by $154 million compared to a decrease of $8 million during the nine months ended September 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 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.

For the nine months ended September 30, 2023, net cash of $1.5 million was used in operating activities, as cash generated from earnings was offset by cash used to fund LHFS in excess of proceeds from the sale of loans and increases in other assets.

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

For the nine months ended September 30, 2023, net cash of $392 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 nine months ended September 30, 2022, net cash of $2.4 billion was used in investing activities primarily from the origination of LHFI net of principal repayments and the purchase of AFS investment securities.

Cash flows from financing activities

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

For the six months ended June 30, 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.

For the nine months ended September 30, 2023, net cash of $237 million was used in financing activities, primarily due to decreases in deposits and dividends paid on our common stock, partially offset by an increase in short-term and long-term borrowings.

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

Off-Balance Sheet Arrangements

3 unchanged sentences

These commitments include the following:

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

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

Unused consumer portfolio lines $ 572,245 $ 531,784

4 unchanged sentences

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

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

progress payments were $439 million and $525 million at September 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 June 30, 2023

At September 30, 2023

Actual For Minimum Capital

33 unchanged sentences

The required ratios for capital adequacy set forth in the above table do not include the Capital Rules’ additional capital conservation buffer, though 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 June 30, 2023.

At September 30, 2023, capital conservation buffers for the Company and the Bank were 4.44% and 5.32%, respectively.

The Company paid a quarterly cash dividend of $0.10 per common share in the third quarter of 2023 and on October 26, 2023, we declared a cash dividend of $0.10 per common share payable on November 22, 2023 to shareholders of record as of the close of business on November 8, 2023.

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

We had no material commitments for capital expenditures as of September 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.

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

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

For the Quarter Ended Nine Months Ended September 30,

(in thousands, except ratio, rate and share data)

September 30, 2023 June 30, 2023 2023 2022

Core net income

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10,464 10,311 30,965 41,893

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

Total $ 49,376 $ 53,787 $ 162,729 $ 215,243

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Ratio 0.10 % 0.13 % 0.15 % 0.96 %

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)

2 unchanged sentences

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

(in thousands, except ratio, rate and share data)

September 30, 2023 December 31, 2022

Tangible book value per share

18 unchanged sentences

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis