Mechanics Bancorp 10-Q

ITEM 1 FINANCIAL STATEMENTS HOMESTREET, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS September 30, 2023 December 31, 2022 (in thousands, except share data) (Unaudited) ASSETS Cash and cash equivalents $ 226,704 $ 72,828 Investment securities 1,294,634 1,400,212 Loans held for sale ("LHFS") 33,879 17,327 Loans held for investment ("LHFI") (net of allowance for credit losses of $ 40,000 and $ 41,500 ) 7,400,501 7,384,820 Mortgage servicing rights ("MSRs") 107,611 111,873 Premises and equipment, net 54,114 51,172 Other real estate owned ("OREO") 984 1,839 Goodwill and other intangibles 10,429 29,980 Other assets 329,895 294,709 Total assets $ 9,458,751 $ 9,364,760 LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Deposits $ 6,745,551 $ 7,451,919 Borrowings 1,873,000 1,016,000 Long-term debt 224,671 224,404 Accounts payable and other liabilities 113,042 110,290 Total liabilities 8,956,264 8,802,613 Commitments and contingencies Shareholders' equity: Common stock, no par value, authorized 160,000,000 shares; issued and outstanding, 18,794,030 shares and 18,730,380 shares 228,972 226,592 Retained earnings 400,533 435,085 Accumulated other comprehensive income (loss) ( 127,018 ) ( 99,530 ) Total shareholders' equity 502,487 562,147 Total liabilities and shareholders' equity $ 9,458,751 $ 9,364,760 See accompanying notes to consolidated financial statements 3 HOMESTREET, INC. AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENTS (Unaudited) Quarter Ended September 30, Nine Months Ended September 30, (in thousands, except share and per share data) 2023 2022 2023 2022 Interest income: Loans $ 85,899 $ 73,329 $ 254,250 $ 186,108 Investment securities 12,309 9,014 37,944 22,359 Cash, Fed Funds and other 2,498 1,060 6,270 1,655 Total interest income 100,706 83,403 298,464 210,122 Interest expense: Deposits 33,840 8,321 98,603 13,498 Borrowings 27,954 12,064 68,097 19,004 Total interest expense 61,794 20,385 166,700 32,502 Net interest income 38,912 63,018 131,764 177,620 Provision for credit losses ( 1,110 ) — ( 886 ) ( 9,000 ) Net interest income after provision for credit losses 40,022 63,018 132,650 186,620 Noninterest income: Net gain on loan origination and sale activities 2,372 2,647 7,238 16,213 Loan servicing income 3,092 2,741 9,390 9,706 Deposit fees 2,455 2,223 7,817 6,516 Other 2,545 5,711 6,520 9,458 Total noninterest income 10,464 13,322 30,965 41,893 Noninterest expense: Compensation and benefits 27,002 27,341 84,031 89,563 Information services 7,579 7,038 22,207 21,880 Occupancy 5,306 6,052 16,834 18,315 General, administrative and other 9,202 9,458 29,432 25,241 Goodwill impairment charge — — 39,857 — Total noninterest expense 49,089 49,889 192,361 154,999 Income (loss) before income taxes 1,397 26,451 ( 28,746 ) 73,514 Income tax expense (benefit) ( 898 ) 6,084 ( 4,657 ) 15,475 Net income (loss) $ 2,295 $ 20,367 $ ( 24,089 ) $ 58,039 Net income (loss) per share: Basic $ 0.12 $ 1.09 $ ( 1.28 ) $ 3.05 Diluted 0.12 1.08 ( 1.28 ) 3.03 Weighted average shares outstanding: Basic 18,792,893 18,716,864 18,774,593 19,000,007 Diluted 18,792,893 18,796,737 18,774,593 19,137,848 See accompanying notes to consolidated financial statements 4 HOMESTREET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) Quarter Ended September 30, Nine Months Ended September 30, (in thousands) 2023 2022 2023 2022 Net income (loss) $ 2,295 $ 20,367 $ ( 24,089 ) $ 58,039 Other comprehensive income (loss): Unrealized gain (loss) on investment securities available for sale ("AFS") ( 34,881 ) ( 56,189 ) ( 37,830 ) ( 166,921 ) Reclassification for net (gains) losses included in income — 47 ( 3 ) ( 24 ) Other comprehensive income (loss) before tax ( 34,881 ) ( 56,142 ) ( 37,833 ) ( 166,945 ) Income tax impact of: Unrealized gain (loss) on investment securities AFS ( 8,632 ) ( 13,485 ) ( 10,344 ) ( 39,868 ) Reclassification for net (gains) losses included in income — 11 ( 1 ) ( 6 ) Total ( 8,632 ) ( 13,474 ) ( 10,345 ) ( 39,874 ) Other comprehensive income (loss) ( 26,249 ) ( 42,668 ) ( 27,488 ) ( 127,071 ) Total comprehensive income (loss) $ ( 23,954 ) $ ( 22,301 ) $ ( 51,577 ) $ ( 69,032 ) See accompanying notes to consolidated financial statements 5 HOMESTREET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited) (in thousands, except share data) Number of shares Common stock Retained earnings Accumulated other comprehensive income (loss) Total shareholders' equity For the quarter ended September 30, 2022 Balance, June 30, 2022 18,712,789 $ 224,776 $ 419,254 $ ( 63,263 ) $ 580,767 Net income — — 20,367 — 20,367 Share-based compensation expense — 942 — — 942 Common stock issued - Stock grants 4,328 — — — — Other comprehensive income (loss) — — — ( 42,668 ) ( 42,668 ) Dividends declared on common stock ($ 0.35 per share) — — ( 6,638 ) — ( 6,638 ) Common stock repurchased 440 7 12 — 19 Balance, September 30, 2022 18,717,557 $ 225,725 $ 432,995 $ ( 105,931 ) $ 552,789 For the nine months ended September 30, 2022 Balance, December 31, 2021 20,085,336 $ 249,856 $ 444,343 $ 21,140 $ 715,339 Net income — — 58,039 — 58,039 Share-based compensation expense — 3,239 — — 3,239 Common stock issued - Stock grants 130,546 — — — — Other comprehensive income (loss) — — — ( 127,071 ) ( 127,071 ) Dividends declared on common stock ($ 1.05 per share) — — ( 20,435 ) — ( 20,435 ) Common stock repurchased ( 1,498,325 ) ( 27,370 ) ( 48,952 ) — ( 76,322 ) Balance, September 30, 2022 18,717,557 $ 225,725 $ 432,995 $ ( 105,931 ) $ 552,789 For the quarter ended September 30, 2023 Balance, June 30, 2023 18,776,597 $ 228,260 $ 400,132 $ ( 100,769 ) $ 527,623 Net income — — 2,295 — 2,295 Share-based compensation expense — 712 — — 712 Common stock issued - Stock grants 17,433 — — — — Other comprehensive income (loss) — — — ( 26,249 ) ( 26,249 ) Dividends declared on common stock ($ 0.10 per share) — — ( 1,894 ) — ( 1,894 ) Common stock repurchased — — — — — Balance, September 30, 2023 18,794,030 $ 228,972 $ 400,533 $ ( 127,018 ) $ 502,487 For the nine months ended September 30, 2023 Balance, December 31, 2022 18,730,380 $ 226,592 $ 435,085 $ ( 99,530 ) $ 562,147 Net income (loss) — — ( 24,089 ) — ( 24,089 ) Share-based compensation expense — 2,696 — — 2,696 Common stock issued - Stock grants 76,744 — — — — Other comprehensive income (loss) — — — ( 27,488 ) ( 27,488 ) Dividends declared on common stock ($ 0.55 per share) — — ( 10,463 ) — ( 10,463 ) Common stock repurchased ( 13,094 ) ( 316 ) — — ( 316 ) Balance, September 30, 2023 18,794,030 $ 228,972 $ 400,533 $ ( 127,018 ) $ 502,487 See accompanying notes to consolidated financial statements 6 HOMESTREET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended September 30, (in thousands) 2023 2022 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ ( 24,089 ) $ 58,039 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Goodwill impairment charge 39,857 — Provision for credit losses ( 886 ) ( 9,000 ) Depreciation and amortization, premises and equipment 5,441 7,308 Amortization of premiums and discounts: investment securities, deposits, debt 61 2,833 Operating leases: excess of payments over amortization ( 2,404 ) ( 3,146 ) Amortization of finance leases 328 442 Amortization of core deposit intangibles 2,163 728 Amortization of deferred loan fees and costs ( 773 ) ( 656 ) Share-based compensation expense 2,696 3,239 Deferred income tax expense (credit) 12,149 ( 4,306 ) Origination of LHFS ( 288,479 ) ( 600,037 ) Proceeds from sale of LHFS 274,915 763,057 Net fair value adjustment and gain on sale of LHFS ( 480 ) 6,304 Origination of MSRs ( 2,721 ) ( 10,945 ) Net gain on sale of loans originated as LHFI — ( 88 ) Change in fair value of MSRs 3,080 ( 8,563 ) Amortization of servicing rights 4,363 5,877 Gain on sale of OREO ( 621 ) — Gain on sale of branches — ( 4,270 ) Net change in trading securities ( 2,584 ) ( 21,104 ) (Increase) decrease in other assets ( 42,197 ) 10,475 Increase (decrease) in accounts payable and other liabilities 18,689 13,268 Net cash provided by (used in) operating activities ( 1,492 ) 209,455 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of investment securities ( 53,232 ) ( 621,813 ) Proceeds from sale of investment securities 4,693 75,361 Principal payments on investment securities 119,710 94,739 Proceeds from sale of OREO 1,725 952 Proceeds from sale of loans originated as LHFI — 4,613 Net cash distributed in sale of branches — ( 138,756 ) Net decrease (increase) in LHFI 4,171 ( 1,727,944 ) Purchase of premises and equipment ( 2,667 ) ( 4,939 ) Net cash received from acquisition of branches 327,901 — Proceeds from sale of Federal Home Loan Bank stock 116,046 68,966 Purchases of Federal Home Loan Bank stock ( 126,071 ) ( 130,033 ) Net cash provided by (used in) investing activities 392,276 ( 2,378,854 ) 7 Nine Months Ended September 30, (in thousands) 2023 2022 CASH FLOWS FROM FINANCING ACTIVITIES: (Decrease) increase in deposits, net ( 1,083,087 ) 631,290 Changes in short-term borrowings, net 212,000 1,528,000 Proceeds from other long-term borrowings 745,000 — Repayment of other long-term borrowings ( 100,000 ) — Proceeds from debt issuance, net — 98,035 Repayment of finance lease principal ( 358 ) ( 449 ) Repurchases of common stock — ( 75,000 ) Dividends paid on common stock ( 10,463 ) ( 20,435 ) Net cash provided by (used in) financing activities ( 236,908 ) 2,161,441 Net increase (decrease) in cash and cash equivalents 153,876 ( 7,958 ) Cash and cash equivalents, beginning of year 72,828 65,214 Cash and cash equivalents, end of period $ 226,704 $ 57,256 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 153,957 $ 29,289 Federal and state income taxes 86 2,348 Non-cash activities: Increase in lease assets and lease liabilities 2,538 4,877 LHFI foreclosed and transferred to OREO 107 1,018 Loans transferred from LHFI to LHFS, net 2,507 12,511 Ginnie Mae loans derecognized with the right to repurchase, net 1,360 5,567 Repurchase of common stock-award shares 316 1,322 Acquisition: Loans acquired 21,197 — Premises and equipment and other assets 5,845 — Liabilities assumed 377,412 — Goodwill and other intangibles 22,469 — See accompanying notes to consolidated financial statements 8 HomeStreet, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) NOTE 1– SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: HomeStreet, Inc., a State of Washington corporation organized in 1921 (the "Corporation"), is a Washington-based diversified financial services holding company whose operations are primarily conducted through its wholly owned subsidiaries (collectively the "Company") HomeStreet Statutory Trusts and HomeStreet Bank (the "Bank"), and the Bank's subsidiaries, Continental Escrow Company, HomeStreet Foundation, HS Properties, Inc., HS Evergreen Corporate Center LLC, and Union Street Holdings LLC. The Company is principally engaged in commercial banking, mortgage banking and consumer/retail banking activities serving customers primarily in the Western United States. The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP"). The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation. The Company allocates resources and assesses financial performance on a consolidated basis and therefore has one reporting segment. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. Actual results could differ significantly from those estimates. Certain amounts in the financial statements from prior periods have been reclassified to conform to the current financial statement presentation. These unaudited interim financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the results for the periods presented. These adjustments are of a normal recurring nature, unless otherwise disclosed in this Quarterly Report on Form 10-Q. The results of operations in the interim financial statements do not necessarily indicate the results that may be expected for the full year. The interim financial information should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2022 ("2022 Annual Report on Form 10-K"), filed with the U.S. Securities and Exchange Commission ("SEC"). Branch Acquisition On February 10, 2023, the Company completed its acquisition of three branches in southern California, whereby we assumed approximately $ 376 million in deposits and purchased approximately $ 21 million in loans. The application of the acquisition method of accounting resulted in recording goodwill of $ 12 million and a core deposit intangible of $ 11 million. Goodwill Goodwill is recorded upon completion of a business combination as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill has been determined to have an indefinite useful life and is not amortized, but tested for impairment at least annually or more frequently if events and circumstances occur that indicate it is more likely than not the fair value of the reporting unit is less than its carrying value necessitating an impairment test. The Company performs its annual impairment testing on August 31 each year, or sooner if a triggering event occurs. Triggering events include, among other factors, declines in historical or projected revenue, operating income or cash flows, and sustained declines in the Company’s stock price or market capitalization, considered both in absolute terms and relative to peers. As a result of sustained decreases in the Company’s stock price and associated market value during the second quarter of 2023, the Company conducted an impairment analysis of its goodwill as of June 30, 2023. We applied an income-based valuation approach using the Company’s strategic forecast, general market growth assumptions and other market-based inputs, which determined, that goodwill was impaired as the indicated enterprise fair value of the Company was lower than the book value of equity as of the measurement date. As a result, in the second quarter of 2023, we recorded an impairment charge of our entire goodwill balance of $ 39.9 million as the deficit of enterprise fair value to book value of equity exceeded the amount of goodwill on the balance sheet. This was a non-cash charge to earnings and had no impact on tangible or regulatory capital, cash flows or our liquidity position. The following table presents the changes in the carrying amount of goodwill in 2023: 9 (in thousands) Balance, December 31, 2022 $ 27,900 Additions - branch acquisition in February 2023 11,957 Goodwill impairment charge ( 39,857 ) Balance September 30, 2023 $ — Recent Accounting Developments In March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2020-04, Reference Rate Reform (Topic 848). This ASU provides optional expedients and exceptions for contracts, hedging relationships, and other transactions that reference London Interbank Offered Rate ("LIBOR") rates expected to be discontinued because of reference rate reform. In January 2021, the FASB issued ASU 2021-01, "Reference Rate Reform (Topic 848)," which clarifies certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting applied to derivatives that are affected by the transition to alternative rates. In December 2022, the FASB issued ASU No. 2022-06, "Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848," which defers the sunset date of Topic 848 from December 31, 2022 to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. The adoption of these ASUs did not have a material impact on the Company’s financial position or results of operations. In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments-Credit Losses (Topic 326). The amendments in this ASU eliminate the accounting guidance for Troubled Debt Restructuring ("TDRs") by creditors, while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower experiences financial difficulty. In addition, the amendments require that an entity disclose current period gross charge-offs by year of origination in a vintage table. We prospectively adopted the portion of ASU No. 2022-02 with respect to amendments about TDRs and related disclosure enhancements as of January 1, 2022. We prospectively adopted the vintage table disclosure requirement of ASU 2022-02 on January 1, 2023. The adoption of ASU 2022-02 did not have a material impact on the Company’s financial position or results of operations. In March 2023, the FASB issued ASU 2023-02, “Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method.” ASU 2023-02 permits reporting entities to elect to account for their tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method if certain conditions are met. ASU 2023-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2023. ASU 2023-02 is not expected to have a material impact on the Company’s financial position or results of operations. In October 2023, the FASB issued ASU 2023-06, "Disclosure Improvements - Codification Amendments in Response to the SEC's Disclosure Update and Simplification Initiative." The amendments in ASU 2023-06 modify the disclosure or presentation requirements of a variety of Topics in the Codification, with the intention of clarifying or improving them and align the requirements in the codification with the SEC's regulations (and will be removed from the SEC regulations). ASU 2023-06 should be adopted prospectively and the effective date varies and is determined for each individual disclosure based on the effective date of the SEC's removal of the related disclosure. ASU 2023-06 will not have an impact on the Company's financial position or results of operation as it is disclosure only. 10 NOTE 2– INVESTMENT SECURITIES: The following table sets forth certain information regarding the amortized cost basis and fair values of our investment securities AFS and held-to-maturity ("HTM"): At September 30, 2023 (in thousands) Amortized cost Gross unrealized gains Gross unrealized losses Fair value AFS Mortgage backed securities ("MBS"): Residential $ 198,589 $ 48 $ ( 15,668 ) $ 182,969 Commercial 57,481 — ( 9,918 ) 47,563 Collateralized mortgage obligations ("CMOs"): Residential 526,683 — ( 47,127 ) 479,556 Commercial 65,686 — ( 6,934 ) 58,752 Municipal bonds 455,467 106 ( 77,275 ) 378,298 Corporate debt securities 45,664 — ( 6,696 ) 38,968 U.S. Treasury securities 22,746 — ( 3,301 ) 19,445 Agency debentures 67,133 — ( 2,030 ) 65,103 Total $ 1,439,449 $ 154 $ ( 168,949 ) $ 1,270,654 HTM Municipal bonds $ 2,389 $ — $ ( 96 ) $ 2,293 At December 31, 2022 (in thousands) Amortized cost Gross unrealized gains Gross unrealized losses Fair value AFS MBS: Residential $ 207,445 $ — $ ( 10,183 ) $ 197,262 Commercial 65,411 — ( 9,362 ) 56,049 CMOs: Residential 592,449 12 ( 39,422 ) 553,039 Commercial 77,909 — ( 7,390 ) 70,519 Municipal bonds 469,346 41 ( 57,839 ) 411,548 Corporate debt securities 46,672 74 ( 3,801 ) 42,945 U.S. Treasury securities 23,005 — ( 3,071 ) 19,934 Agency debentures 27,499 8 ( 29 ) 27,478 Total $ 1,509,736 $ 135 $ ( 131,097 ) $ 1,378,774 HTM Municipal bonds $ 2,441 $ — $ ( 56 ) $ 2,385 At September 30, 2023, and December 31, 2022, the Company held $ 22 million and $ 19 million, respectively, of trading securities, consisting of US Treasury notes used as economic hedges of our single family mortgage servicing rights, which are carried at fair value and included with investment securities on the balance sheet. For the quarters ended September 30, 2023 and 2022, net losses of $ 0.9 million and $ 2.6 million on trading securities, respectively, and for the nine months ended September 30, 2023 and 2022, net losses of $ 1.4 million and $ 6.4 million on trading securities, respectively, were recorded in servicing income. 11 MBS and CMOs represent securities issued or guaranteed by government sponsored enterprises ("GSEs"). Most of the MBS and CMO securities in our investment portfolio are guaranteed by Fannie Mae, Ginnie Mae or Freddie Mac. Municipal bonds are comprised of general obligation bonds (i.e., backed by the general credit of the issuer) and revenue bonds (i.e., backed by either collateral or revenues from the specific project being financed) issued by various municipal corporations. As of September 30, 2023 and December 31, 2022, substantially all securities held, including municipal bonds and corporate debt securities, were rated investment grade based upon nationally recognized statistical rating organizations where available and, where not available, based upon internal ratings. Investment securities AFS that were in an unrealized loss position are presented in the following tables based on the length of time the individual securities have been in an unrealized loss position: At September 30, 2023 Less than 12 months 12 months or more Total (in thousands) Gross unrealized losses Fair value Gross unrealized losses Fair value Gross unrealized losses Fair value AFS MBS: Residential $ ( 37 ) $ 1,601 $ ( 15,631 ) $ 175,779 $ ( 15,668 ) $ 177,380 Commercial — 63 ( 9,918 ) 47,500 ( 9,918 ) 47,563 CMOs: Residential ( 581 ) 110,423 ( 46,546 ) 369,133 ( 47,127 ) 479,556 Commercial ( 12 ) 4,045 ( 6,922 ) 54,707 ( 6,934 ) 58,752 Municipal bonds ( 2,397 ) 30,863 ( 74,878 ) 341,014 ( 77,275 ) 371,877 Corporate debt securities ( 44 ) 9,956 ( 6,652 ) 29,012 ( 6,696 ) 38,968 U.S. Treasury securities — — ( 3,301 ) 19,445 ( 3,301 ) 19,445 Agency debentures ( 455 ) 54,078 ( 1,575 ) 11,025 ( 2,030 ) 65,103 Total $ ( 3,526 ) $ 211,029 $ ( 165,423 ) $ 1,047,615 $ ( 168,949 ) $ 1,258,644 HTM Municipal bonds $ — $ — $ ( 96 ) $ 2,293 $ ( 96 ) $ 2,293 At December 31, 2022 Less than 12 months 12 months or more Total (in thousands) Gross unrealized losses Fair value Gross unrealized losses Fair value Gross unrealized losses Fair value AFS MBS: Residential $ ( 8,845 ) $ 191,398 $ ( 1,338 ) $ 5,763 $ ( 10,183 ) $ 197,161 Commercial ( 5,729 ) 41,416 ( 3,633 ) 14,619 ( 9,362 ) 56,035 CMOs: Residential ( 27,789 ) 498,333 ( 11,633 ) 45,689 ( 39,422 ) 544,022 Commercial ( 4,787 ) 56,671 ( 2,603 ) 13,848 ( 7,390 ) 70,519 Municipal bonds ( 44,513 ) 350,918 ( 13,326 ) 46,377 ( 57,839 ) 397,295 Corporate debt securities ( 3,801 ) 32,871 — — ( 3,801 ) 32,871 U.S. Treasury securities — — ( 3,071 ) 19,934 ( 3,071 ) 19,934 Agency debentures ( 29 ) 15,970 — — ( 29 ) 15,970 Total $ ( 95,493 ) $ 1,187,577 $ ( 35,604 ) $ 146,230 $ ( 131,097 ) $ 1,333,807 HTM Municipal bonds $ ( 56 ) $ 2,385 $ — $ — $ ( 56 ) $ 2,385 12 The Company has evaluated AFS securities in an unrealized loss position and has determined the decline in value is temporary and is related to the change in market interest rates since purchase. The decline in value is not related to any issuer- or industry-specific credit event. The Company has not identified any expected credit losses on its debt securities as of September 30, 2023 or December 31, 2022. In addition, as of September 30, 2023 and December 31, 2022, the Company had not made a decision to sell any of its debt securities held, nor did the Company consider it more likely than not that it would be required to sell such securities before recovery of their amortized cost basis. The following tables present the fair value of investment securities AFS and HTM by contractual maturity along with the associated contractual yield: At September 30, 2023 Within one year After one year through five years After five years through ten years After ten years Total (dollars in thousands) Fair Value Weighted Average Yield Fair Value Weighted Average Yield Fair Value Weighted Average Yield Fair Value Weighted Average Yield Fair Value Weighted Average Yield AFS Municipal bonds $ — — % $ 5,669 1.78 % $ 53,217 3.00 % $ 319,412 2.51 % $ 378,298 2.56 % Corporate debt securities 4,441 3.51 % 13,600 5.26 % 20,927 3.80 % — — % 38,968 4.25 % U.S. Treasury securities — — % 4,618 1.14 % 14,827 1.08 % — — % 19,445 1.10 % Agency debentures 18,430 4.91 % 35,648 5.13 % 7,887 2.09 % 3,138 1.95 % 65,103 4.49 % Total $ 22,871 4.64 % $ 59,535 4.48 % $ 96,858 2.82 % $ 322,550 2.50 % $ 501,814 2.85 % HTM Municipal bonds $ — — % $ 2,293 1.79 % $ — — % $ — — % $ 2,293 1.79 % At December 31, 2022 Within one year After one year through five years After five years through ten years After ten years Total (dollars in thousands) Fair Value Weighted Average Yield Fair Value Weighted Average Yield Fair Value Weighted Average Yield Fair Value Weighted Average Yield Fair Value Weighted Average Yield AFS Municipal bonds $ — — % $ 3,644 1.96 % $ 38,977 3.04 % $ 368,927 2.83 % $ 411,548 2.84 % Corporate debt securities — — % 15,342 5.13 % 27,603 4.25 % — — % 42,945 4.54 % U.S. Treasury securities — — % — — % 19,934 1.11 % — — % 19,934 1.11 % Agency debentures 10,485 4.74 % 16,993 4.94 % — — % — — % 27,478 4.86 % Total $ 10,485 4.74 % $ 35,979 4.69 % $ 86,514 2.97 % $ 368,927 2.83 % $ 501,905 3.01 % HTM Municipal bonds $ — — % $ 2,385 2.04 % $ — — % $ — — % $ 2,385 2.04 % The weighted-average yield is computed using the contractual coupon of each security weighted based on the fair value of each security. MBS and CMOs are excluded from the tables above because such securities are not due on a single maturity date. The weighted average yield of MBS and CMOs as of September 30, 2023 and December 31, 2022 was 3.09 % and 3.08 %, respectively. 13 Sales of AFS investment securities were as follows: Quarter Ended September 30, Nine Months Ended September 30, (in thousands) 2023 2022 2023 2022 Proceeds $ — $ 74,399 $ 4,693 $ 75,361 Gross gains — 1,334 3 1,405 Gross losses — ( 1,381 ) — ( 1,381 ) The following table summarizes the carrying value of securities pledged as collateral to secure public deposits, borrowings and other purposes as permitted or required by law: (in thousands) At September 30, 2023 At December 31, 2022 Federal Reserve Bank to secure borrowings $ 647,933 $ — Washington, Oregon and California to secure public deposits 10,655 212,806 Other securities pledged 1,466 2,011 Total securities pledged as collateral $ 660,054 $ 214,817 The Company assesses the creditworthiness of the counterparties that hold the pledged collateral and has determined that these arrangements have little credit risk. Tax-exempt interest income on investment securities was $ 2.8 million and $ 3.1 million for the quarters ended September 30, 2023 and 2022, respectively and $ 8.4 million and $ 8.9 million for the nine months ended September 30, 2023 and 2022, respectively. 14 NOTE 3- LOANS AND CREDIT QUALITY: The Company's LHFI is divided into two portfolio segments, commercial loans and consumer loans. Within each portfolio segment, the Company monitors and assesses credit risk based on the risk characteristics of each of the following loan classes: non-owner occupied commercial real estate ("CRE"), multifamily, construction and land development, owner occupied CRE and commercial business loans within the commercial loan portfolio segment and single family and home equity and other loans within the consumer loan portfolio segment. LHFI consists of the following: (in thousands) At September 30, 2023 At December 31, 2022 CRE Non-owner occupied CRE $ 633,083 $ 658,085 Multifamily 3,957,209 3,975,754 Construction/land development 566,289 627,663 Total 5,156,581 5,261,502 Commercial and industrial loans Owner occupied CRE 428,253 443,363 Commercial business 385,148 359,747 Total 813,401 803,110 Consumer loans Single family 1,099,644 1,009,001 Home equity and other 370,875 352,707 Total (1) 1,470,519 1,361,708 Total LHFI 7,440,501 7,426,320 Allowance for credit losses ("ACL") ( 40,000 ) ( 41,500 ) Total LHFI less ACL $ 7,400,501 $ 7,384,820 (1) Includes $ 1.2 million and $ 5.9 million at September 30, 2023 and December 31, 2022, respectively, of loans where a fair value option election was made at the time of origination and, therefore, are carried at fair value with changes in fair value recognized in the consolidated income statements. Loans totaling $ 5.7 billion and $ 5.2 billion at September 30, 2023 and December 31, 2022, respectively, were pledged to secure borrowings from the Federal Home Loan Bank ("FHLB") and loans totaling $ 528 million and $ 497 million at September 30, 2023 and December 31, 2022, respectively, were pledged to secure borrowings from the Federal Reserve Bank of San Francisco ("FRBSF"). Credit Risk Concentrations LHFI are primarily secured by real estate located in the Pacific Northwest, California and Hawaii. At September 30, 2023, single family and multifamily loans in the state of Washington and California represented 11 % and 36 % of the total LHFI portfolio, respectively. At December 31, 2022, multifamily loans in the state of California represented 36 % of the total LHFI portfolio. Credit Quality Management considers the level of ACL to be appropriate to cover credit losses expected over the life of the loans for the LHFI portfolio. The cumulative loss rate used as the basis for the estimate of credit losses is comprised of the Bank’s historical loss experience and eight qualitative factors for current and forecasted periods. As of September 30, 2023, the historical expected loss rates decreased when compared to December 31, 2022 due to product mix risk composition changes. During the third quarter of 2023, expected loss rates decreased due to product mix risk composition changes, and the qualitative factors decreased due to economic conditions performing better than expected and improved single-family collateral forecasts offset slightly by deteriorated commercial collateral conditions. As of September 30, 2023, the Bank expects improvement in commercial collateral values and deterioration in single family collateral values and economic conditions over the two-year forecast period in the markets in which it operates. In addition to the ACL for LHFI, the Company maintains a separate allowance for unfunded loan commitments which is included in accounts payable and other liabilities on our consolidated balance sheets. The allowance for unfunded commitments was $ 1.6 million and $ 2.2 million at September 30, 2023 and December 31, 2022, respectively. 15 The Bank has elected to exclude accrued interest receivable from the evaluation of the ACL. Accrued interest on LHFI was $ 27.7 million and $ 26.9 million at September 30, 2023 and December 31, 2022, respectively, and was reported in other assets in the consolidated balance sheets. Activity in the ACL for LHFI and the allowance for unfunded commitments was as follows: Quarter Ended September 30, Nine Months Ended September 30, (in thousands) 2023 2022 2023 2022 Beginning balance $ 41,500 $ 37,355 $ 41,500 $ 47,123 Provision for credit losses ( 990 ) 249 ( 290 ) ( 9,190 ) Net (charge-offs) recoveries ( 510 ) 2 ( 1,210 ) ( 327 ) Ending balance $ 40,000 $ 37,606 $ 40,000 $ 37,606 Allowance for unfunded commitments: Beginning balance $ 1,721 $ 2,843 $ 2,197 $ 2,404 Provision for credit losses ( 120 ) ( 249 ) ( 596 ) 190 Ending balance $ 1,601 $ 2,594 $ 1,601 $ 2,594 Provision for credit losses: Allowance for credit losses - loans $ ( 990 ) $ 249 $ ( 290 ) $ ( 9,190 ) Allowance for unfunded commitments ( 120 ) ( 249 ) ( 596 ) 190 Total $ ( 1,110 ) $ — $ ( 886 ) $ ( 9,000 ) 16 Activity in the ACL for LHFI by loan portfolio and loan sub-class was as follows: Quarter Ended September 30, 2023 (in thousands) Beginning balance Charge-offs Recoveries Provision Ending balance CRE Non-owner occupied CRE $ 2,242 $ — $ — $ 123 $ 2,365 Multifamily 9,695 — — 1,011 10,706 Construction/land development Multifamily construction 1,566 — — 26 1,592 CRE construction 169 — — ( 16 ) 153 Single family construction 11,067 — — ( 1,322 ) 9,745 Single family construction to permanent 1,421 — — ( 430 ) 991 Total 26,160 — — ( 608 ) 25,552 Commercial and industrial loans Owner occupied CRE 930 — — 172 1,102 Commercial business 3,837 ( 543 ) 25 282 3,601 Total 4,767 ( 543 ) 25 454 4,703 Consumer loans Single family 6,617 — 4 ( 838 ) 5,783 Home equity and other 3,956 ( 92 ) 96 2 3,962 Total 10,573 ( 92 ) 100 ( 836 ) 9,745 Total ACL $ 41,500 $ ( 635 ) $ 125 $ ( 990 ) $ 40,000 Quarter Ended September 30, 2022 (in thousands) Beginning balance Charge-offs Recoveries Provision Ending balance CRE Non-owner occupied CRE $ 2,180 $ — $ — $ ( 74 ) $ 2,106 Multifamily 10,074 — — 1,109 11,183 Construction/land development Multifamily construction 566 — — 99 665 CRE construction 185 — — ( 25 ) 160 Single family construction 10,687 — — ( 1,123 ) 9,564 Single family construction to permanent 1,159 — — ( 19 ) 1,140 Total 24,851 — — ( 33 ) 24,818 Commercial and industrial loans Owner occupied CRE 1,092 — — ( 123 ) 969 Commercial business 3,578 ( 81 ) 25 197 3,719 Total 4,670 ( 81 ) 25 74 4,688 Consumer loans Single family 4,027 — 1 436 4,464 Home equity and other 3,807 ( 43 ) 100 ( 228 ) 3,636 Total 7,834 ( 43 ) 101 208 8,100 Total ACL $ 37,355 $ ( 124 ) $ 126 $ 249 $ 37,606 17 Nine Months Ended September 30, 2023 (in thousands) Beginning balance Charge-offs Recoveries Provision Ending balance CRE Non-owner occupied CRE $ 2,102 $ — $ — $ 263 $ 2,365 Multifamily 10,974 — — ( 268 ) 10,706 Construction/land development Multifamily construction 998 — — 594 1,592 CRE construction 196 — — ( 43 ) 153 Single family construction 12,418 — — ( 2,673 ) 9,745 Single family construction to permanent 1,171 — — ( 180 ) 991 Total 27,859 — — ( 2,307 ) 25,552 Commercial and industrial loans Owner occupied CRE 1,030 — — 72 1,102 Commercial business 3,247 ( 1,342 ) 73 1,623 3,601 Total 4,277 ( 1,342 ) 73 1,695 4,703 Consumer loans Single family 5,610 — 21 152 5,783 Home equity and other 3,754 ( 232 ) 270 170 3,962 Total 9,364 ( 232 ) 291 322 9,745 Total ACL $ 41,500 $ ( 1,574 ) $ 364 $ ( 290 ) $ 40,000 Nine Months Ended September 30, 2022 (in thousands) Beginning balance Charge-offs Recoveries Provision Ending balance CRE Non-owner occupied CRE $ 7,509 $ — $ — $ ( 5,403 ) $ 2,106 Multifamily 5,854 — — 5,329 11,183 Construction/land development Multifamily construction 507 — — 158 665 CRE construction 150 — — 10 160 Single family construction 6,411 — — 3,153 9,564 Single family construction to permanent 1,055 — — 85 1,140 Total 21,486 — — 3,332 24,818 Commercial and industrial loans Owner occupied CRE 5,006 — — ( 4,037 ) 969 Commercial business 12,273 ( 741 ) 94 ( 7,907 ) 3,719 Total 17,279 ( 741 ) 94 ( 11,944 ) 4,688 Consumer loans Single family 4,394 — 141 ( 71 ) 4,464 Home equity and other 3,964 ( 109 ) 288 ( 507 ) 3,636 Total 8,358 ( 109 ) 429 ( 578 ) 8,100 Total ACL $ 47,123 $ ( 850 ) $ 523 $ ( 9,190 ) $ 37,606 18 The following table presents a vintage analysis of the commercial portfolio segment by loan sub-class and risk rating or delinquency status. At September 30, 2023 (in thousands) 2023 2022 2021 2020 2019 2018 and prior Revolving Revolving-term Total COMMERCIAL PORTFOLIO Non-owner occupied CRE Pass $ 1,514 $ 70,440 $ 68,131 $ 41,245 $ 119,562 $ 280,125 $ 599 $ — $ 581,616 Special Mention — — — — — 34,435 — — 34,435 Substandard — — — — 16,871 — 161 — 17,032 Total 1,514 70,440 68,131 41,245 136,433 314,560 760 — 633,083 Multifamily Pass 108,330 1,815,620 1,153,149 483,726 190,380 179,339 — — 3,930,544 Special Mention — — 3,942 12,981 2,369 4,290 — — 23,582 Substandard — — — — — 3,083 — — 3,083 Total 108,330 1,815,620 1,157,091 496,707 192,749 186,712 — — 3,957,209 Multifamily construction Pass ( 206 ) 41,430 100,778 — — — — — 142,002 Special Mention — — — — — — — — — Substandard — — — — — — — — — Total ( 206 ) 41,430 100,778 — — — — — 142,002 CRE construction Pass 7 — 14,459 — — — — — 14,466 Special Mention — — — — — — — — — Substandard — — — 3,871 — — — — 3,871 Total 7 — 14,459 3,871 — — — — 18,337 Single family construction Pass 62,297 56,402 17,502 — — 72 126,829 — 263,102 Special Mention — 4,207 — — — — — — 4,207 Substandard — — 1,050 — — — — — 1,050 Total 62,297 60,609 18,552 — — 72 126,829 — 268,359 Single family construction to permanent Current 23,201 82,282 30,299 1,809 — — — — 137,591 Past due: 30-59 days — — — — — — — — — 60-89 days — — — — — — — — — 90+ days — — — — — — — — — Total 23,201 82,282 30,299 1,809 — — — — 137,591 Owner occupied CRE Pass 10,747 69,650 40,278 41,918 66,055 143,484 1 905 373,038 Special Mention 1,891 1,487 7,963 — 2,689 34,784 — — 48,814 Substandard — — — — — 6,401 — — 6,401 Total 12,638 71,137 48,241 41,918 68,744 184,669 1 905 428,253 Commercial business Pass 29,506 47,718 33,317 38,177 18,217 27,702 152,176 1,354 348,167 Special Mention — 11,307 3,270 — 953 164 4,091 — 19,785 Substandard — — 2,324 6,996 3,475 4,067 260 74 17,196 Total 29,506 59,025 38,911 45,173 22,645 31,933 156,527 1,428 385,148 Total commercial portfolio $ 237,287 $ 2,200,543 $ 1,476,462 $ 630,723 $ 420,571 $ 717,946 $ 284,117 $ 2,333 $ 5,969,982 19 The following table presents a vintage analysis of the consumer portfolio segment by loan sub-class and delinquency status: At September 30, 2023 (in thousands) 2023 2022 2021 2020 2019 2018 and prior Revolving Revolving-term Total CONSUMER PORTFOLIO Single family Current $ 16,110 $ 322,349 $ 304,831 $ 148,640 $ 49,434 $ 254,394 $ — $ — $ 1,095,758 Past due: 30-59 days — — — — — 525 — — 525 60-89 days — — — — — 461 — — 461 90+ days — — — — — 2,900 — — 2,900 Total 16,110 322,349 304,831 148,640 49,434 258,280 — — 1,099,644 Home equity and other Current 1,542 2,839 393 142 65 1,670 356,808 6,223 369,682 Past due: 30-59 days 3 4 4 — — — 557 26 594 60-89 days — 1 — — — — 68 73 142 90+ days — 30 — — — 25 402 — 457 Total 1,545 2,874 397 142 65 1,695 357,835 6,322 370,875 Total consumer portfolio (1) $ 17,655 $ 325,223 $ 305,228 $ 148,782 $ 49,499 $ 259,975 $ 357,835 $ 6,322 $ 1,470,519 Total LHFI $ 254,942 $ 2,525,766 $ 1,781,690 $ 779,505 $ 470,070 $ 977,921 $ 641,952 $ 8,655 $ 7,440,501 (1) Includes $ 1.2 million of loans where a fair value option election was made at the time of origination and, therefore, are carried at fair value with changes in fair value recognized in the consolidated income statements. 20 The following table presents a vintage analysis of the commercial portfolio segment by loan sub-class and risk rating or delinquency status: At December 31, 2022 (in thousands) 2022 2021 2020 2019 2018 2017 and prior Revolving Revolving-term Total COMMERCIAL PORTFOLIO Non-owner occupied CRE Pass $ 68,301 $ 68,356 $ 42,181 $ 139,760 $ 87,197 $ 242,544 $ 2,016 $ 786 $ 651,141 Special Mention — — — — 2,702 4,242 — — 6,944 Substandard — — — — — — — — — Total 68,301 68,356 42,181 139,760 89,899 246,786 2,016 786 658,085 Multifamily Pass 1,828,568 1,165,434 528,077 221,974 59,340 140,126 — — 3,943,519 Special Mention — — 4,893 19,834 — 7,508 — — 32,235 Substandard — — — — — — — — — Total 1,828,568 1,165,434 532,970 241,808 59,340 147,634 — — 3,975,754 Multifamily construction Pass 18,110 63,394 13,613 — — — — — 95,117 Special Mention — — — — — — — — — Substandard — — — — — — — — — Total 18,110 63,394 13,613 — — — — — 95,117 CRE construction Pass 341 14,348 3,960 — — 305 — — 18,954 Special Mention — — — — — — — — — Substandard — — — — — — — — — Total 341 14,348 3,960 — — 305 — — 18,954 Single family construction Pass 149,133 50,936 24,807 519 — 74 123,303 — 348,772 Special Mention — — — — — — — — — Substandard — 6,782 — — — — — — 6,782 Total 149,133 57,718 24,807 519 — 74 123,303 — 355,554 Single family construction to permanent Current 66,034 76,814 11,128 3,268 794 — — — 158,038 Past due: 30-59 days — — — — — — — — — 60-89 days — — — — — — — — — 90+ days — — — — — — — — — Total 66,034 76,814 11,128 3,268 794 — — — 158,038 Owner occupied CRE Pass 70,192 51,919 44,778 71,652 36,457 139,691 3 1,104 415,796 Special Mention — 743 — — 6,179 13,485 — — 20,407 Substandard — — — — 2,149 5,011 — — 7,160 Total 70,192 52,662 44,778 71,652 44,785 158,187 3 1,104 443,363 Commercial business Pass 65,566 42,921 45,940 18,594 13,548 18,779 130,427 2,041 337,816 Special Mention — 612 — 3,577 9 3,444 403 — 8,045 Substandard — 338 2,638 4,449 2,591 2,206 1,563 101 13,886 Total 65,566 43,871 48,578 26,620 16,148 24,429 132,393 2,142 359,747 Total commercial portfolio $ 2,266,245 $ 1,542,597 $ 722,015 $ 483,627 $ 210,966 $ 577,415 $ 257,715 $ 4,032 $ 6,064,612 21 The following table presents a vintage analysis of the consumer portfolio segment by loan sub-class and delinquency status: At December 31, 2022 (in thousands) 2022 2021 2020 2019 2018 2017 and prior Revolving Revolving-term Total CONSUMER PORTFOLIO Single family Current $ 273,786 $ 253,937 $ 152,773 $ 49,302 $ 43,511 $ 231,277 $ — $ — $ 1,004,586 Past due: 30-59 days — — — — 340 2,113 — — 2,453 60-89 days — — — — — 258 — — 258 90+ days — — — 290 273 1,141 — — 1,704 Total 273,786 253,937 152,773 49,592 44,124 234,789 — — 1,009,001 Home equity and other Current 4,156 692 220 150 72 1,593 340,567 4,017 351,467 Past due: 30-59 days — 6 — — — 9 446 — 461 60-89 days 6 24 — — — 48 517 — 595 90+ days — — — — — 151 33 — 184 Total 4,162 722 220 150 72 1,801 341,563 4,017 352,707 Total consumer portfolio (1) $ 277,948 $ 254,659 $ 152,993 $ 49,742 $ 44,196 $ 236,590 $ 341,563 $ 4,017 $ 1,361,708 Total LHFI $ 2,544,193 $ 1,797,256 $ 875,008 $ 533,369 $ 255,162 $ 814,005 $ 599,278 $ 8,049 $ 7,426,320 (1) 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 in fair value recognized in the consolidated income statements. The following table presents a vintage analysis of the commercial and consumer portfolio segment by loan sub-class and gross charge-offs: Nine Months Ended September 30, 2023 (in thousands) 2023 2022 2021 2020 2019 2018 and prior Revolving Revolving-term Total COMMERCIAL PORTFOLIO Commercial business Gross charge-offs $ — $ — $ ( 185 ) $ — $ ( 564 ) $ ( 543 ) $ — $ ( 50 ) $ ( 1,342 ) CONSUMER PORTFOLIO Home equity and other Gross charge-offs — ( 71 ) ( 22 ) — — ( 4 ) ( 135 ) — ( 232 ) Total LHFI $ — $ ( 71 ) $ ( 207 ) $ — $ ( 564 ) $ ( 547 ) $ ( 135 ) $ ( 50 ) $ ( 1,574 ) 22 Collateral Dependent Loans The following table presents the amortized cost basis of collateral-dependent loans by loan sub-class and collateral type: At September 30, 2023 (in thousands) Land 1-4 Family Non-residential real estate Other non-real estate Total Commercial real estate loans Non-owner occupied commercial real estate $ — $ 161 $ 16,440 $ — $ 16,601 Construction/land development Commercial real estate construction — — 3,871 — 3,871 Total — 161 20,311 — 20,472 Commercial and industrial loans Owner occupied CRE — — 2,136 — 2,136 Commercial business — 2,848 6,285 2,040 11,173 Total — 2,848 8,421 2,040 13,309 Consumer loans Single family — 783 — — 783 Total — 783 — — 783 Total collateral-dependent loans $ — $ 3,792 $ 28,732 $ 2,040 $ 34,564 At December 31, 2022 (in thousands) Land 1-4 Family Non-residential real estate Other non-real estate Total Commercial and industrial loans Owner occupied CRE $ 1,111 $ — $ 1,410 $ — $ 2,521 Commercial business 62 3,186 562 — 3,810 Total collateral-dependent loans $ 1,173 $ 3,186 $ 1,972 $ — $ 6,331 Nonaccrual and Past Due Loans The following table presents nonaccrual status for loans: At September 30, 2023 At December 31, 2022 (in thousands) Nonaccrual with no related ACL Total Nonaccrual Nonaccrual with no related ACL Total Nonaccrual Commercial real estate loans Non-owner occupied commercial real estate $ 16,601 $ 16,601 $ — $ — Construction/land development Commercial real estate construction 3,871 3,871 — — Total 20,472 20,472 — — Commercial and industrial loans Owner occupied CRE 2,136 2,136 2,521 2,521 Commercial business 10,595 11,758 785 4,269 Total 12,731 13,894 3,306 6,790 Consumer loans Single family 783 3,437 332 2,584 Home equity and other — 962 3 681 Total 783 4,399 335 3,265 Total nonaccrual loans $ 33,986 $ 38,765 $ 3,641 $ 10,055 23 The following tables present an aging analysis of past due loans by loan portfolio segment and loan sub-class: At September 30, 2023 Past Due and Still Accruing (in thousands) 30-59 days 60-89 days 90 days or more Nonaccrual Total past due and nonaccrual (1) Current Total loans CRE Non-owner occupied CRE $ — $ — $ — $ 16,601 $ 16,601 $ 616,482 $ 633,083 Multifamily — — — — — 3,957,209 3,957,209 Construction/land development Multifamily construction — — — — — 142,002 142,002 CRE construction — — — 3,871 3,871 14,466 18,337 Single family construction — — — — — 268,359 268,359 Single family construction to permanent — — — — — 137,591 137,591 Total — — — 20,472 20,472 5,136,109 5,156,581 Commercial and industrial loans Owner occupied CRE — — — 2,136 2,136 426,117 428,253 Commercial business — — — 11,758 11,758 373,390 385,148 Total — — — 13,894 13,894 799,507 813,401 Consumer loans Single family 3,562 1,476 3,337 (2) 3,437 11,812 1,087,832 1,099,644 Home equity and other 519 137 — 962 1,618 369,257 370,875 Total 4,081 1,613 3,337 4,399 13,430 1,457,089 1,470,519 (3) Total loans $ 4,081 $ 1,613 $ 3,337 $ 38,765 $ 47,796 $ 7,392,705 $ 7,440,501 % 0.06 % 0.02 % 0.04 % 0.52 % 0.64 % 99.36 % 100.00 % At December 31, 2022 Past Due and Still Accruing (in thousands) 30-59 days 60-89 days 90 days or more Nonaccrual Total past due and nonaccrual (1) Current Total loans CRE Non-owner occupied CRE $ — $ — $ — $ — $ — $ 658,085 $ 658,085 Multifamily — — — — — 3,975,754 3,975,754 Construction/land development Multifamily construction — — — — — 95,117 95,117 CRE construction — — — — — 18,954 18,954 Single family construction — — — — — 355,554 355,554 Single family construction to permanent — — — — — 158,038 158,038 Total — — — — — 5,261,502 5,261,502 Commercial and industrial loans Owner occupied CRE — — — 2,521 2,521 440,842 443,363 Commercial business — — — 4,269 4,269 355,478 359,747 Total — — — 6,790 6,790 796,320 803,110 Consumer loans Single family 4,556 1,724 4,372 (2) 2,584 13,236 995,765 1,009,001 Home equity and other 267 296 — 681 1,244 351,463 352,707 Total 4,823 2,020 4,372 3,265 14,480 1,347,228 1,361,708 (3) Total loans $ 4,823 $ 2,020 $ 4,372 $ 10,055 $ 21,270 $ 7,405,050 $ 7,426,320 % 0.06 % 0.03 % 0.06 % 0.14 % 0.29 % 99.71 % 100.00 % 24 (1) Includes loans whose repayments are insured by the FHA or guaranteed by the VA or Small Business Administration ("SBA") of $ 10.2 million and $ 10.6 million at September 30, 2023 and December 31, 2022, respectively. (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 $ 1.2 million and $ 5.9 million of loans at September 30, 2023 and December 31, 2022, respectively, where a fair value option election was made at the time of origination and, therefore, are carried at fair value with changes in fair value recognized in our consolidated income statements. Loan Modifications The Company provides modifications to borrowers experiencing financial difficulty ("MBFD"), which may include delays in payment of amounts due, extension of the terms of the notes or reduction in the interest rates on the notes. In certain instances, the Company may grant more than one type of modification. The granting of modifications in the quarters and nine months ended September 30, 2023 and 2022 did not have a material impact on the ACL. The following tables provide information related to loans modified during the quarters and nine months ended September 30, 2023 and 2022 to borrowers experiencing financial difficulty, disaggregated by class of financing receivable and type of concession granted: Significant Payment Delay Quarter Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 (in thousands, except percentages) Amortized Cost Basis at Period End % of Total Class of Financing Receivable Amortized Cost Basis at Period End % of Total Class of Financing Receivable Amortized Cost Basis at Period End % of Total Class of Financing Receivable Amortized Cost Basis at Period End % of Total Class of Financing Receivable Single family $ 847 0.08 % $ 682 0.08 % $ 847 0.08 % $ 1,209 0.13 % Home equity and other — — % — — % — — % 70 0.02 % Term Extension Quarter Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 (in thousands, except percentages) Amortized Cost Basis at Period End % of Total Class of Financing Receivable Amortized Cost Basis at Period End % of Total Class of Financing Receivable Amortized Cost Basis at Period End % of Total Class of Financing Receivable Amortized Cost Basis at Period End % of Total Class of Financing Receivable Commercial business $ 9,663 2.51 % — — % $ 10,396 2.70 % $ 1,570 0.43 % Single family 273 0.02 % — — % 273 0.02 % 270 0.03 % Interest Rate Reduction and Significant Payment Delay Quarter Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 (in thousands, except percentages) Amortized Cost Basis at Period End % of Total Class of Financing Receivable Amortized Cost Basis at Period End % of Total Class of Financing Receivable Amortized Cost Basis at Period End % of Total Class of Financing Receivable Amortized Cost Basis at Period End % of Total Class of Financing Receivable Commercial business $ — — % $ 477 0.13 % $ — — % $ 477 0.13 % Interest Rate Reduction and Term Extension Quarter Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 (in thousands, except percentages) Amortized Cost Basis at Period End % of Total Class of Financing Receivable Amortized Cost Basis at Period End % of Total Class of Financing Receivable Amortized Cost Basis at Period End % of Total Class of Financing Receivable Amortized Cost Basis at Period End % of Total Class of Financing Receivable Single family $ — — % $ — — % $ — — % $ 819 0.09 % 25 Significant Payment Delay and Term Extension Quarter Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 (in thousands, except percentages) Amortized Cost Basis at Period End % of Total Class of Financing Receivable Amortized Cost Basis at Period End % of Total Class of Financing Receivable Amortized Cost Basis at Period End % of Total Class of Financing Receivable Amortized Cost Basis at Period End % of Total Class of Financing Receivable Non-owner occupied CRE $ 16,440 2.60 % $ — — % $ 16,440 2.60 % $ — — % Construction/land development 3,871 0.68 % — — % 3,871 0.68 % — — % Single family 1,167 0.11 % 4,033 0.44 % 2,284 0.21 % 13,325 1.47 % Home equity and other — — % — — % — — % 51 0.01 % Interest Rate Reduction, Significant Payment Delay and Term Extension Quarter Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 (in thousands, except percentages) Amortized Cost Basis at Period End % of Total Class of Financing Receivable Amortized Cost Basis at Period End % of Total Class of Financing Receivable Amortized Cost Basis at Period End % of Total Class of Financing Receivable Amortized Cost Basis at Period End % of Total Class of Financing Receivable Single family $ — — % $ 294 0.03 % $ 192 0.02 % $ 7,185 0.79 % 26 The following table describes the financial effect of the modifications made to borrowers experiencing financial difficulty: Interest Rate Reduction Quarter Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Commercial business — Reduced weighted-average contractual interest rate from 5.72 % to 4.00 %. — Reduced weighted-average contractual interest rate from 5.72 % to 4.00 %. Single family — Reduced weighted-average contractual interest rate from 4.38 % to 4.13 %. Reduced weighted-average contractual interest rate from 5.25 % to 5.00 %. Reduced weighted-average contractual interest rate from 4.35 % to 3.39 %. Significant Payment Delay Quarter Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Non-owner occupied CRE The weighted average duration of loan payments deferred is 1.6 years. — The weighted average duration of loan payments deferred is 1.6 years. — Construction/land development The weighted average duration of loan payments deferred is 2.1 years. — The weighted average duration of loan payments deferred is 2.1 years. — Single Family Provided payment deferrals to borrowers. A weighted average 1.08 % of loan balances were capitalized and added to the remaining term of the loan. Provided payment deferrals to borrowers. A weighted average 1.83 % of loan balances were capitalized and added to the remaining term of the loan. Provided payment deferrals to borrowers. A weighted average 0.48 % of loan balances were capitalized and added to the remaining term of the loan. Provided payment deferrals to borrowers. A weighted average 0.22 % of loan balances were capitalized and added to the remaining term of the loan. Home equity and other — — — Provided payment deferrals to borrowers. A weighted average 3.44 % of loan balances were capitalized and added to the remaining term of the loan. Term Extension Quarter Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Non-owner occupied CRE Added a weighted average 1.6 years to the life of loans, which reduced the monthly payment amounts to the borrowers. — Added a weighted average 1.6 years to the life of loans, which reduced the monthly payment amounts to the borrowers. — Construction/land development Added a weighted average 2.1 years to the life of loans, which reduced the monthly payment amounts to the borrowers. — Added a weighted average 2.1 years to the life of loans, which reduced the monthly payment amounts to the borrowers. — Commercial business Added a weighted average 1.1 years to the life of loans, which reduced the monthly payment amounts to the borrowers. — Added a weighted average 1.2 years to the life of loans, which reduced the monthly payment amounts to the borrowers. Added a weighted average 0.8 years to the life of loans, which reduced the monthly payment amounts to the borrowers. Single family Added a weighted average 3.4 years to the life of loans, which reduced the monthly payment amounts to the borrowers. Added a weighted average 3.6 years to the life of loans, which reduced the monthly payment amounts to the borrowers. Added a weighted average 4.6 years to the life of loans, which reduced the monthly payment amounts to the borrowers. Added a weighted average 4.4 years to the life of loans, which reduced the monthly payment amounts to the borrowers. Home equity and other — — — Added a weighted average 16.1 years to the life of loans, which reduced the monthly payment amounts to the borrowers. 27 Upon determination that a modified loan (or portion of a loan) has subsequently been deemed uncollectible, the loan (or portion of the loan) is written off. Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the allowance for credit losses is adjusted by the same amount. The following table depicts the payment status of loans that were classified as MBFDs on or after July 1, 2022 through June 30, 2023: Payment Status (Amortized Cost Basis) at September 30, 2023 (in thousands) Current 30-89 Days Past Due 90+ Days Past Due Non-owner occupied CRE $ 16,440 $ — $ — Construction/land development 3,871 — — Commercial business 14,335 — — Single family 8,090 700 518 Total $ 42,736 $ 700 $ 518 The following tables provide the amortized cost basis as of September 30, 2023 of MBFDs on or after July 1, 2022 through June 30, 2023 and subsequently had a payment default: Amortized Cost Basis of Modified Loans That Subsequently Defaulted Quarter Ended September 30, 2023 (in thousands) Significant Payment Delay Term Extension Interest Rate Reduction and Term Extension Significant Payment Delay and Term Extension Interest Rate Reduction, Significant Payment Delay and Term Extension Commercial business $ — $ 2,990 $ — $ — $ — Single family 235 — — 634 70 Amortized Cost Basis of Modified Loans That Subsequently Defaulted Nine Months Ended September 30, 2023 (in thousands) Significant Payment Delay Term Extension Interest Rate Reduction and Term Extension Significant Payment Delay and Term Extension Interest Rate Reduction, Significant Payment Delay and Term Extension Commercial business $ — $ 2,990 $ — $ — $ — Single family 235 — — 2,879 1,162 The following tables presents loans that were modified from January 1, 2022 through June 30, 2022 and subsequently had a payment default. Amortized Cost Basis of Modified Loans That Subsequently Defaulted Quarter Ended September 30, 2022 (in thousands) Significant Payment Delay Term Extension Interest Rate Reduction and Term Extension Significant Payment Delay and Term Extension Interest Rate Reduction, Significant Payment Delay and Term Extension Single family $ — $ — $ — $ — $ 553 28 Amortized Cost Basis of Modified Loans That Subsequently Defaulted Nine Months Ended September 30, 2022 (in thousands) Significant Payment Delay Term Extension Interest Rate Reduction and Term Extension Significant Payment Delay and Term Extension Interest Rate Reduction, Significant Payment Delay and Term Extension Single family $ — $ — $ — $ 172 $ 1,555 NOTE 4– DEPOSITS: Deposit balances, including their weighted average rates, were as follows: At September 30, 2023 At December 31, 2022 (dollars in thousands) Amount Weighted Average Rate Amount Weighted Average Rate Noninterest-bearing demand deposits $ 1,437,057 — % $ 1,399,912 — % Interest bearing: Interest-bearing demand deposits 352,529 0.21 % 466,490 0.10 % Savings 284,663 0.06 % 258,977 0.06 % Money market 1,723,924 1.67 % 2,383,209 1.22 % Certificates of deposit 2,947,378 4.13 % 2,943,331 3.07 % Total interest bearing deposits 5,308,494 2.82 % 6,052,007 1.98 % Total deposits $ 6,745,551 2.25 % $ 7,451,919 1.61 % Certificates of deposit outstanding mature as follows: (in thousands) September 30, 2023 Within one year $ 2,855,303 One to two years 66,263 Two to three years 13,283 Three to four years 5,160 Four to five years 7,027 Thereafter 342 Total $ 2,947,378 The aggregate amount of certificate of deposits in denominations of more than the FDIC limit of $250 thousand at September 30, 2023 and December 31, 2022 were $ 162 million and $ 189 million, respectively. There were $ 973 million and $ 1.4 billion of brokered deposits at September 30, 2023 and December 31, 2022, respectively. NOTE 5– DERIVATIVES AND HEDGING ACTIVITIES: To reduce the risk of significant interest rate fluctuations on the value of certain assets and liabilities, such as single family mortgage LHFS and MSRs, the Company utilizes derivatives as economic hedges . The notional amounts and fair values for derivatives, which are included in other assets or accounts payable and other liabilities on the consolidated balance sheet, consist of the following: 29 At September 30, 2023 Notional amount Fair value derivatives (in thousands) Asset Liability Forward sale commitments $ 53,602 $ 479 $ ( 74 ) Interest rate lock commitments 34,513 118 ( 193 ) Interest rate swaps 238,837 14,916 ( 14,916 ) Futures 5,100 — ( 2 ) Options 8,900 7 — Total derivatives before netting $ 340,952 15,520 ( 15,185 ) Netting adjustment/Cash collateral (1) ( 14,908 ) ( 245 ) Carrying value on consolidated balance sheet $ 612 $ ( 15,430 ) At December 31, 2022 Notional amount Fair value derivatives (in thousands) Asset Liability Forward sale commitments $ 51,252 $ 293 $ ( 151 ) Interest rate lock commitments 17,463 141 ( 36 ) Interest rate swaps 236,533 13,093 ( 13,093 ) Futures 23,000 18 — Options 14,000 218 — Total derivatives before netting $ 342,248 $ 13,763 $ ( 13,280 ) Netting adjustment/Cash collateral (1) ( 12,870 ) 101 Carrying value on consolidated balance sheet $ 893 $ ( 13,179 ) (1) Includes net cash collateral received of $ 15.2 million and $ 12.8 million at September 30, 2023 and December 31, 2022, respectively. The following table presents gross fair value and net carrying value information for derivative instruments: (in thousands) Gross fair value Netting adjustments/ Cash collateral (1) Carrying value At September 30, 2023 Derivative assets $ 15,520 $ ( 14,908 ) $ 612 Derivative liabilities ( 15,185 ) ( 245 ) ( 15,430 ) At December 31, 2022 Derivative assets $ 13,763 $ ( 12,870 ) $ 893 Derivative liabilities ( 13,280 ) 101 ( 13,179 ) (1) Includes net cash collateral received of $ 15.2 million and $ 12.8 million at September 30, 2023 and December 31, 2022, respectively. 30 The collateral used under the Company's master netting agreements is typically cash, but securities may be used under agreements with certain counterparties. Receivables related to cash collateral that has been paid to counterparties are included in other assets. Payables related to cash collateral that has been received from counterparties are included in accounts payable and other liabilities. Interest is owed on amounts received from counterparties and we earn interest on cash paid to counterparties. Any securities pledged to counterparties as collateral remain on the consolidated balance sheets. At September 30, 2023 and December 31, 2022, the Company had liabilities of $ 15.2 million and $ 12.8 million, respectively, in cash collateral received from counterparties and receivables of $ 0.02 million and $ 0.03 million, respectively, in cash collateral paid to counterparties. The following table presents the net gain (loss) recognized on economic hedge derivatives, within the respective line items in the consolidated income statements for the periods indicated: Quarter Ended September 30, Nine Months Ended September 30, (in thousands) 2023 2022 2023 2022 Recognized in noninterest income: Net gain (loss) on loan origination and sale activities (1) $ 513 $ 958 $ 780 $ 8,221 Loan servicing income (loss) (2) ( 247 ) ( 422 ) ( 1,475 ) ( 12,051 ) Other (3) 1 — — 160 (1) Comprised of forward contracts used as an economic hedge of loans held for sale and interest rate lock commitments ("IRLCs") to customers. (2) Comprised of futures, US Treasury options and forward contracts used as economic hedges of single family MSRs. (3) Impact of interest rate swap agreements executed with commercial banking customers and broker dealer counterparties. The notional amount of open interest rate swap agreements executed with commercial banking customers and broker dealer counterparties at September 30, 2023 and December 31, 2022 were $ 239 million and $ 237 million, respectively. NOTE 6– MORTGAGE BANKING OPERATIONS: LHFS consisted of the following: (in thousands) At September 30, 2023 At December 31, 2022 Single family $ 23,945 $ 14,075 CRE, multifamily and SBA 9,934 3,252 Total $ 33,879 $ 17,327 Loans sold consisted of the following for the periods indicated: Quarter Ended September 30, Nine Months Ended September 30, (in thousands) 2023 2022 2023 2022 Single family $ 101,575 $ 131,228 $ 257,835 $ 641,921 CRE, multifamily and SBA 2,821 29,965 16,220 129,394 Total $ 104,396 $ 161,193 $ 274,055 $ 771,315 31 Gain on loan origination and sale activities, including the effects of derivative risk management instruments, consisted of the following: Quarter Ended September 30, Nine Months Ended September 30, (in thousands) 2023 2022 2023 2022 Single family $ 2,267 $ 1,778 $ 6,656 $ 11,896 CRE, multifamily and SBA 105 869 582 4,317 Total $ 2,372 $ 2,647 $ 7,238 $ 16,213 The Company's portfolio of loans serviced for others is primarily comprised of loans held in U.S. government and agency MBS issued by Fannie Mae, Freddie Mac and Ginnie Mae. The unpaid principal balance of loans serviced for others is as follows: (in thousands) At September 30, 2023 At December 31, 2022 Single family $ 5,349,832 $ 5,436,899 CRE, multifamily and SBA 1,900,102 1,938,484 Total $ 7,249,934 $ 7,375,383 The following is a summary of changes in the Company's liability for estimated single-family mortgage repurchase losses: Quarter Ended September 30, Nine Months Ended September 30, (in thousands) 2023 2022 2023 2022 Balance, beginning of period $ 1,728 $ 1,491 $ 2,232 $ 1,312 Additions, net of adjustments (1) ( 73 ) 838 ( 184 ) 1,329 Realized (losses) recoveries, net (2) ( 10 ) ( 370 ) ( 403 ) ( 682 ) Balance, end of period $ 1,645 $ 1,959 $ 1,645 $ 1,959 (1) Includes additions for new loan sales and changes in estimated probable future repurchase losses on previously sold loans. (2) Includes principal losses and accrued interest on repurchased loans, "make-whole" settlements, settlements with claimants and certain related expenses. The Company has agreements with certain investors to advance scheduled principal and interest amounts on delinquent loans. Advances are also made to fund the foreclosure and collection costs of delinquent loans prior to the recovery of reimbursable amounts from investors or borrowers. Advances of $ 3.1 million and $ 1.6 million were recorded in other assets as of September 30, 2023 and December 31, 2022, respectively. When the Company has the unilateral right to repurchase Ginnie Mae pool loans it has previously sold (generally loans that are more than 90 days past due), the Company records the balance of the loans as other assets and other liabilities. At September 30, 2023 and December 31, 2022, delinquent or defaulted mortgage loans currently in Ginnie Mae pools that the Company has recognized on its consolidated balance sheets totaled $ 5.6 million and $ 6.9 million, respectively. 32 Revenue from mortgage servicing, including the effects of derivative risk management instruments, consisted of the following: Quarter Ended September 30, Nine Months Ended September 30, (in thousands) 2023 2022 2023 2022 Servicing income, net: Servicing fees and other $ 6,405 $ 7,673 $ 19,666 $ 25,501 Amortization of single family MSRs (1) ( 1,564 ) ( 2,112 ) ( 4,874 ) ( 8,052 ) Amortization of multifamily and SBA MSRs ( 1,374 ) ( 1,828 ) ( 4,363 ) ( 5,877 ) Total 3,467 3,733 10,429 11,572 Risk management, single family MSRs: Changes in fair value of MSRs due to assumptions (2) 785 1,989 1,794 16,615 Net gain (loss) from economic hedging ( 1,160 ) ( 2,981 ) ( 2,833 ) ( 18,481 ) Total ( 375 ) ( 992 ) ( 1,039 ) ( 1,866 ) Loan servicing income $ 3,092 $ 2,741 $ 9,390 $ 9,706 (1) Represents changes due to collection/realization of expected cash flows and curtailments. (2) Principally reflects changes in model assumptions, including prepayment speed assumptions, which are primarily affected by changes in mortgage interest rates. The changes in single family MSRs measured at fair value are as follows: Quarter Ended September 30, Nine Months Ended September 30, (in thousands) 2023 2022 2023 2022 Beginning balance $ 76,314 $ 76,481 $ 76,617 $ 61,584 Additions and amortization: Originations 935 1,453 2,473 7,664 Purchases — — 460 — Amortization (1) ( 1,564 ) ( 2,112 ) ( 4,874 ) ( 8,052 ) Net additions and amortization ( 629 ) ( 659 ) ( 1,941 ) ( 388 ) Changes in fair value assumptions (2) 785 1,989 1,794 16,615 Ending balance $ 76,470 $ 77,811 $ 76,470 $ 77,811 (1) Represents changes due to collection/realization of expected cash flows and curtailments. (2) Principally reflects changes in model assumptions, including prepayment speed assumptions, which are primarily affected by changes in mortgage interest rates. Key economic assumptions used in measuring the initial fair value of capitalized single family MSRs were as follows: Quarter Ended September 30, Nine Months Ended September 30, (rates per annum) (1) 2023 2022 2023 2022 Constant prepayment rate ("CPR") (2) 15.13 % 13.06 % 14.20 % 10.72 % Discount rate 11.70 % 10.36 % 10.83 % 9.19 % (1) Based on a weighted average. (2) Represents an expected lifetime average CPR used in the model. For single family MSRs, we use a discounted cash flow valuation technique which utilizes CPRs and discount rates as significant unobservable inputs as noted in the table below: At September 30, 2023 At December 31, 2022 Range of Inputs Average (1) Range of Inputs Average (1) CPRs 6.20 % - 25.30 % 6.50 % 6.01 % - 11.10 % 8.19 % Discount Rates 10.00 % - 17.00 % 10.93 % 9.74 % - 16.88 % 10.66 % (1) Weighted averages of all the inputs within the range. 33 To compute hypothetical sensitivities of the value of our single family MSRs to immediate adverse changes in key assumptions, we computed the impact of changes to CPRs and in discount rates as outlined below: (dollars in thousands) At September 30, 2023 Fair value of single family MSR $ 76,470 Expected weighted-average life (in years) 8.45 CPR Impact on fair value of 25 basis points adverse change in interest rates $ ( 316 ) Impact on fair value of 50 basis points adverse change in interest rates $ ( 706 ) Discount rate Impact on fair value of 100 basis points increase $ ( 1,162 ) Impact on fair value of 200 basis points increase $ ( 2,894 ) The changes in multifamily and SBA MSRs measured at the lower of amortized cost or fair value were as follows: Quarter Ended September 30, Nine Months Ended September 30, (in thousands) 2023 2022 2023 2022 Beginning balance $ 32,477 $ 38,130 $ 35,256 $ 39,415 Originations 38 517 248 3,281 Amortization ( 1,374 ) ( 1,828 ) ( 4,363 ) ( 5,877 ) Ending balance $ 31,141 $ 36,819 $ 31,141 $ 36,819 NOTE 7– GUARANTEES AND MORTGAGE REPURCHASE LIABILITY: In the ordinary course of business, the Company sells loans through the Fannie Mae Multifamily Delegated Underwriting and Servicing Program ("DUS"®) that are subject to a credit loss sharing arrangement. The Company services the loans for Fannie Mae and shares in the risk of loss with Fannie Mae under the terms of the DUS contracts. Under the DUS program, the Company and Fannie Mae share losses on a pro rata basis, where the Company is responsible for losses incurred up to one-third of principal balance on each loan with two-thirds of the loss covered by Fannie Mae. For loans that have been sold through this program, a liability is recorded for this loss sharing arrangement under the accounting guidance for guarantees. As of September 30, 2023 and December 31, 2022, the total unpaid principal balance of loans sold under this program was $ 1.8 billion. The Company's reserve liability related to this arrangement totaled $ 0.5 million and $ 0.6 million at September 30, 2023 and December 31, 2022, respectively. There were no actual losses incurred under this arrangement during the quarters and nine months ended September 30, 2023 and 2022. In the ordinary course of business, the Company sells residential mortgage loans to GSEs and other entities. Under the terms of these sales agreements, the Company has made representations and warranties that the loans sold meet certain requirements. The Company may be required to repurchase mortgage loans or indemnify loan purchasers due to defects in the origination process of the loan, such as documentation errors, underwriting errors and judgments, early payment defaults and fraud. The total unpaid principal balance of loans sold on a servicing-retained basis that were subject to the terms and conditions of these representations and warranties totaled $ 5.3 billion and $ 5.4 billion as of September 30, 2023 and December 31, 2022, respectively. At September 30, 2023 and December 31, 2022, the Company had recorded a mortgage repurchase liability for loans sold on a servicing-retained and servicing-released basis, included in accounts payable and other liabilities on the consolidated balance sheets, of $ 1.6 million and $ 2.2 million, respectively. 34 NOTE 8– EARNINGS PER SHARE: The following table summarizes the calculation of earnings per share: Quarter Ended September 30, Nine Months Ended September 30, (in thousands, except share and per share data) 2023 2022 2023 2022 Net income (loss) $ 2,295 $ 20,367 $ ( 24,089 ) $ 58,039 Weighted average shares: Basic weighted-average number of common shares outstanding 18,792,893 18,716,864 18,774,593 19,000,007 Dilutive effect of outstanding common stock equivalents — 79,873 — 137,841 Diluted weighted-average number of common shares outstanding 18,792,893 18,796,737 18,774,593 19,137,848 Net income (loss) per share: Basic earnings per share $ 0.12 $ 1.09 $ ( 1.28 ) $ 3.05 Diluted earnings per share (1) 0.12 1.08 ( 1.28 ) 3.03 (1) Excluded from the computation of diluted earnings per share (due to their antidilutive effect) for the quarters and nine months ended September 30, 2023 and 2022 were certain unvested RSUs and PSUs. On a weighted average basis, 236,628 and 118,746 unvested stock units convertible into shares of common stock were excluded at September 30, 2023 and 2022, respectively, because their effect would have been anti-dilutive. NOTE 9– FAIR VALUE MEASUREMENT: The term "fair value" is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The Company's approach is to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements. Fair Value Hierarchy A three-level valuation hierarchy has been established under ASC 820 for disclosure of fair value measurements. The valuation hierarchy is based on the observability of inputs to the valuation of an asset or liability as of the measurement date. A financial instrument’s categorization within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement. The levels are defined as follows: • Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date. An active market for the asset or liability is a market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. • Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. This includes quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability for substantially the full term of the financial instrument. • Level 3 – Unobservable inputs for the asset or liability. These inputs reflect the Company's assumptions of what market participants would use in pricing the asset or liability. The Company's policy regarding transfers between levels of the fair value hierarchy is that all transfers are assumed to occur at the end of the reporting period. Estimation of Fair Value Fair value is based on quoted market prices, when available. In cases where a quoted price for an asset or liability is not available, the Company uses valuation models to estimate fair value. These models incorporate inputs such as forward yield curves, loan prepayment assumptions, expected loss assumptions, market volatilities and pricing spreads utilizing market-based inputs where readily available. The Company believes its valuation methods are appropriate and consistent with those that would be used by other market participants. However, imprecision in estimating unobservable inputs and other factors may result in these fair value measurements not reflecting the amount realized in an actual sale or transfer of the asset or liability in a current market exchange. 35 The following table summarizes the fair value measurement methodologies, including significant inputs and assumptions and classification of the Company's assets and liabilities valued at fair value on a recurring basis. Asset/Liability class Valuation methodology, inputs and assumptions Classification Investment securities Trading securities Fair Value is based on quoted prices in an active market. Level 1 recurring fair value measurement. Investment securities AFS Observable market prices of identical or similar securities are used where available. Level 2 recurring fair value measurement. If market prices are not readily available, value is based on discounted cash flows using the following significant inputs: • Expected prepayment speeds • Estimated credit losses • Market liquidity adjustments Level 3 recurring fair value measurement. LHFS Single family loans, excluding loans transferred from held for investment Fair value is based on observable market data, including: • Quoted market prices, where available • Dealer quotes for similar loans • Forward sale commitments Level 2 recurring fair value measurement. When not derived from observable market inputs, fair value is based on discounted cash flows, which considers the following inputs: • Benchmark yield curve • Estimated discount spread to the benchmark yield curve • Expected prepayment speeds Estimated fair value classified as Level 3. Mortgage servicing rights Single family MSRs For information on how the Company measures the fair value of its single family MSRs, including key economic assumptions and the sensitivity of fair value to changes in those assumptions, see Note 6 , Mortgage Banking Operations . Level 3 recurring fair value measurement. Derivatives Futures and Options Fair value is based on closing exchange prices. Level 1 recurring fair value measurement. Forward sale commitments Interest rate swaps Fair value is based on quoted prices for identical or similar instruments, when available. When quoted prices are not available, fair value is based on internally developed modeling techniques, which require the use of multiple observable market inputs including: • Forward interest rates • Interest rate volatilities Level 2 recurring fair value measurement. IRLC The fair value considers several factors including: • Fair value of the underlying loan based on quoted prices in the secondary market, when available. • Value of servicing • Fall-out factor Level 3 recurring fair value measurement. 36 The following tables presents the levels of the fair value hierarchy for the Company's assets and liabilities measured at fair value on a recurring basis: At September 30, 2023 (in thousands) Fair Value Level 1 Level 2 Level 3 Assets: Trading securities - U.S. Treasury securities $ 21,591 $ 21,591 $ — $ — Investment securities AFS Mortgage backed securities: Residential 182,969 — 181,174 1,795 Commercial 47,563 — 47,563 — Collateralized mortgage obligations: Residential 479,556 — 479,556 — Commercial 58,752 — 58,752 — Municipal bonds 378,298 — 378,298 — Corporate debt securities 38,968 — 38,968 — U.S. Treasury securities 19,445 — 19,445 — Agency debentures 65,103 — 65,103 — Single family LHFS 23,945 — 23,945 — Single family LHFI 1,225 — — 1,225 Single family mortgage servicing rights 76,470 — — 76,470 Derivatives Forward sale commitments 479 — 479 — Options 7 7 — — Interest rate lock commitments 118 — — 118 Interest rate swaps 14,916 — 14,916 — Total assets $ 1,409,405 $ 21,598 $ 1,308,199 $ 79,608 Liabilities: Derivatives Futures $ 2 $ 2 $ — $ — Forward sale commitments 74 — 74 — Interest rate lock commitments 193 — — 193 Interest rate swaps 14,916 — 14,916 — Total liabilities $ 15,185 $ 2 $ 14,990 $ 193 37 At December 31, 2022 (in thousands) Fair Value Level 1 Level 2 Level 3 Assets: Trading securities - U.S. Treasury securities $ 18,997 $ 18,997 $ — $ — Investment securities AFS Mortgage backed securities: Residential 197,262 — 195,321 1,941 Commercial 56,049 — 56,049 — Collateralized mortgage obligations: Residential 553,039 — 553,039 — Commercial 70,519 — 70,519 — Municipal bonds 411,548 — 411,548 — Corporate debt securities 42,945 — 42,877 68 U.S. Treasury securities 19,934 — 19,934 — Agency debentures 27,478 — 27,478 — Single family LHFS 14,075 — 14,075 — Single family LHFI 5,868 — — 5,868 Single family mortgage servicing rights 76,617 — — 76,617 Derivatives Futures 18 18 — — Options 218 218 — — Forward sale commitments 293 — 293 — Interest rate lock commitments 141 — — 141 Interest rate swaps 13,093 — 13,093 — Total assets $ 1,508,094 $ 19,233 $ 1,404,226 $ 84,635 Liabilities: Derivatives Forward sale commitments $ 151 $ — $ 151 $ — Interest rate lock commitments 36 — — 36 Interest rate swaps 13,093 — 13,093 — Total liabilities $ 13,280 $ — $ 13,244 $ 36 There were no transfers between levels of the fair value hierarchy during the quarters and nine months ended September 30, 2023 and 2022. Level 3 Recurring Fair Value Measurements The Company's level 3 recurring fair value measurements consist of investment securities AFS, single family MSRs, single family LHFI where fair value option was elected, certain single family LHFS and interest rate lock commitments, which are accounted for as derivatives. For information regarding fair value changes and activity for single family MSRs during the quarters and nine months ended September 30, 2023 and 2022, see Note 6, Mortgage Banking Operations of this Quarterly Report on Form 10-Q. The fair value of IRLCs considers several factors, including the fair value in the secondary market of the underlying loan resulting from the exercise of the commitment, the expected net future cash flows related to the associated servicing of the loan (referred to as the value of servicing) and the probability that the commitment will not be converted into a funded loan (referred to as a fall-out factor). The fair value of IRLCs on LHFS, while based on interest rates observable in the market, is highly dependent on the ultimate closing of the loans. The significance of the fall-out factor to the fair value measurement of an individual IRLC is generally highest at the time that the rate lock is initiated and declines as closing procedures are performed and the underlying loan gets closer to funding. The fall-out factor applied is based on historical experience. The value of servicing is impacted by a variety of factors, including prepayment assumptions, discount rates, delinquency rates, contractually specified servicing fees, servicing costs and underlying portfolio characteristics. Because these inputs are not observable in 38 market trades, the fall-out factor and value of servicing are considered to be level 3 inputs. The fair value of IRLCs decreases in value upon an increase in the fall-out factor and increases in value upon an increase in the value of servicing. Changes in the fall-out factor and value of servicing do not increase or decrease based on movements in other significant unobservable inputs. The Company recognizes unrealized gains and losses from the time that an IRLC is initiated until the gain or loss is realized at the time the loan closes, which generally occurs within 30-90 days. For IRLCs that fall out, any unrealized gain or loss is reversed, which generally occurs at the end of the commitment period. The gains and losses recognized on IRLC derivatives generally correlates to volume of single family interest rate lock commitments made during the reporting period (after adjusting for estimated fallout) while the amount of unrealized gains and losses realized at settlement generally correlates to the volume of single family closed loans during the reporting period. The Company uses the discounted cash flow model to estimate the fair value of certain loans that have been transferred from held for sale to held for investment and single family LHFS when the fair value of the loans is not derived using observable market inputs. The key assumption in the valuation model is the implied spread to benchmark interest rate curve. The implied spread is not directly observable in the market and is derived from third party pricing which is based on market information from comparable loan pools. The fair value estimate of single family loans that have been transferred from held for sale to held for investment are sensitive to changes in the benchmark interest rate which might result in a significantly higher or lower fair value measurement. The Company transferred certain loans from held for sale to held for investment. These loans were originated as held for sale loans where the Company had elected fair value option. The Company determined these loans to be level 3 recurring assets as the valuation technique included a significant unobservable input. The total amount of held for investment loans where fair value option election was made was $ 1.2 million and $ 5.9 million at September 30, 2023 and December 31, 2022, respectively. The following information presents significant Level 3 unobservable inputs used to measure fair value of certain assets: (dollars in thousands) Fair Value Valuation Technique Significant Unobservable Input Low High Weighted Average September 30, 2023 Investment securities AFS $ 1,795 Income approach Implied spread to benchmark interest rate curve 2.00 % 2.00 % 2.00 % Single family LHFI 1,225 Income approach Implied spread to benchmark interest rate curve 3.19 % 5.64 % 3.99 % Interest rate lock commitments, net ( 75 ) Income approach Fall-out factor 0.40 % 17.28 % 8.36 % Value of servicing 0.38 % 1.11 % 0.74 % December 31, 2022 Investment securities AFS $ 2,009 Income approach Implied spread to benchmark interest rate curve 2.00 % 2.00 % 2.00 % Single family LHFI 5,868 Income approach Implied spread to benchmark interest rate curve 2.87 % 5.15 % 4.14 % Interest rate lock commitments, net 105 Income approach Fall-out factor 0.10 % 17.50 % 6.43 % Value of servicing 0.54 % 1.11 % 0.95 % We had no LHFS where the fair value was not derived with significant observable inputs at September 30, 2023 and December 31, 2022. 39 The following table presents fair value changes and activity for certain Level 3 assets for the periods indicated: (in thousands) Beginning balance Additions Transfers Payoffs/Sales Change in mark to market (1) Ending balance Quarter Ended September 30, 2023 Investment securities AFS $ 1,913 $ — $ — $ ( 48 ) $ ( 70 ) $ 1,795 Single family LHFI 1,269 — — — ( 44 ) 1,225 Quarter Ended September 30, 2022 Investment securities AFS $ 2,160 $ — $ — $ ( 48 ) $ ( 79 ) $ 2,033 Single family LHFI 6,508 — — — ( 658 ) 5,850 Nine Months Ended September 30, 2023 Investment securities AFS $ 2,009 $ — $ — $ ( 144 ) $ ( 70 ) $ 1,795 Single family LHFI 5,868 — — ( 4,607 ) ( 36 ) 1,225 Nine Months Ended September 30, 2022 Investment securities AFS $ 2,482 $ — $ — $ ( 145 ) $ ( 304 ) $ 2,033 Single family LHFI 7,287 — — — ( 1,437 ) 5,850 (1) Changes in fair value for single LHFI are recorded in other noninterest income on the consolidated income statements. The following table presents fair value changes and activity for Level 3 interest rate lock commitments: Quarter Ended September 30, Nine Months Ended September 30, (in thousands) 2023 2022 2023 2022 Beginning balance, net $ 79 $ 322 $ 105 $ 2,484 Total realized/unrealized gains (losses) 371 70 1,484 ( 769 ) Settlements ( 525 ) ( 752 ) ( 1,664 ) ( 2,075 ) Ending balance, net $ ( 75 ) $ ( 360 ) $ ( 75 ) $ ( 360 ) Nonrecurring Fair Value Measurements Certain assets held by the Company are not included in the tables above, but are measured at fair value on a periodic basis. These assets include certain LHFI and OREO that are carried at the lower of cost or fair value of the underlying collateral, less the estimated costs to sell. The estimated fair values of real estate collateral are generally based on internal evaluations and appraisals of such collateral, which use the market approach and income approach methodologies. We have omitted disclosure related to quantitative inputs given the insignificance of assets measured on a nonrecurring basis. The fair value of commercial properties is generally based on third-party appraisals that consider recent sales of comparable properties, including their income-generating characteristics, adjusted (generally based on unobservable inputs) to reflect the general assumptions that a market participant would make when analyzing the property for purchase. The Company uses a fair value of collateral technique to apply adjustments to the appraisal value of certain commercial LHFI that are collateralized by real estate. The Company uses a fair value of collateral technique to apply adjustments to the stated value of certain commercial LHFI that are not collateralized by real estate and to the appraisal value of OREO. Residential properties are generally based on unadjusted third-party appraisals. Factors considered in determining the fair value include geographic sales trends, the value of comparable surrounding properties as well as the condition of the property. These adjustments include management assumptions that are based on the type of collateral dependent loan and may increase or decrease an appraised value. Management adjustments vary significantly depending on the location, physical characteristics and income producing potential of each individual property. The quality and volume of market information available at the time of the appraisal can vary from period-to-period and cause significant changes to the nature and magnitude of the unobservable inputs used. Given these variations, changes in these unobservable inputs are generally not a reliable indicator for how fair value will increase or decrease from period to period. 40 The following table presents assets classified as Level 3 that had changes in their recorded fair value for the periods indicated and what we still held at the end of the respective reporting period: (in thousands) Fair Value Total Gains (Losses) At or for the Quarter Ended September 30, 2023 LHFI (1) $ 3,774 $ ( 579 ) At or for the Nine Months Ended September 30, 2023 LHFI (1) $ 3,774 $ ( 854 ) (1) Represents the carrying value of loans for which adjustments are based on the fair value of the collateral. Fair Value of Financial Instruments The following presents the carrying value, estimated fair value and the levels of the fair value hierarchy for the Company's financial instruments other than assets and liabilities measured at fair value on a recurring basis: At September 30, 2023 (in thousands) Carrying Value Fair Value Level 1 Level 2 Level 3 Assets: Cash and cash equivalents $ 226,704 $ 226,704 $ 226,704 $ — $ — Investment securities HTM 2,389 2,293 — 2,293 — LHFI 7,399,276 6,858,955 — — 6,858,955 LHFS – multifamily and other 9,934 9,959 — 9,959 — Mortgage servicing rights – multifamily and SBA 31,141 36,271 — — 36,271 Federal Home Loan Bank stock 59,330 59,330 — 59,330 — Other assets - GNMA EBO loans 5,558 5,558 — — 5,558 Liabilities: Certificates of deposit $ 2,947,378 $ 2,929,803 $ — $ 2,929,803 $ — Borrowings 1,873,000 1,856,840 1,856,840 Long-term debt 224,671 150,333 — 150,333 — At December 31, 2022 (in thousands) Carrying Value Fair Value Level 1 Level 2 Level 3 Assets: Cash and cash equivalents $ 72,828 $ 72,828 $ 72,828 $ — $ — Investment securities HTM 2,441 2,385 — 2,385 — LHFI 7,378,952 6,988,363 — — 6,988,363 LHFS – multifamily and other 3,252 3,291 — 3,291 — Mortgage servicing rights – multifamily and SBA 35,256 39,792 — — 39,792 Federal Home Loan Bank stock 49,305 49,305 — 49,305 — Other assets-GNMA EBO loans 6,918 6,918 — — 6,918 Liabilities: Certificates of deposit $ 2,943,331 $ 2,910,301 $ — $ 2,910,301 $ — Borrowings 1,016,000 1,014,973 — 1,014,973 — Long-term debt 224,404 202,338 — 202,338 — 41 Fair Value Option Single family loans held for sale accounted under the fair value option are measured initially at fair value with subsequent changes in fair value recognized in earnings. Gains and losses from such changes in fair value are recognized in net gain on mortgage loan origination and sale activities within noninterest income. The change in fair value of loans held for sale is primarily driven by changes in interest rates subsequent to loan funding and changes in fair value of the related servicing asset, resulting in revaluations adjustments to the recorded fair value. The use of the fair value option allows the change in the fair value of loans to more effectively offset the change in fair value of derivative instruments that are used as economic hedges of loans held for sale. The following table presents the difference between the aggregate fair value and the aggregate unpaid principal balance of loans held for sale accounted for under the fair value option: At September 30, 2023 At December 31, 2022 (in thousands) Fair Value Aggregate Unpaid Principal Balance Fair Value Less Aggregated Unpaid Principal Balance Fair Value Aggregate Unpaid Principal Balance Fair Value Less Aggregated Unpaid Principal Balance Single family LHFS $ 23,945 $ 24,026 $ ( 81 ) $ 14,075 $ 13,914 $ 161 NOTE 10– BORROWINGS: During the first nine months of 2023, the Company borrowed $ 745 million and repaid $ 100 million from the Federal Reserve Bank (“FRB”) under the Bank Term Funding Program (“BTFP”). The BTFP offers up to one year fixed-rate term borrowings that are prepayable without penalty. The balances, maturity and rate of the outstanding borrowings from the FHLB and the FRB BTFP were as follows at September 30, 2023: (dollars in thousands) Amount Weighted Average Rate Within one year $ 873,000 4.87 % One to three years 450,000 4.56 % Three through five years 550,000 4.35 % Total $ 1,873,000 4.64 % NOTE 11– COMMITMENTS AND CONTINGENCIES: As of September 30, 2023, HomeStreet was obligated on a $ 146 million letter of credit to the FHLB which is being used as collateral for public fund deposits. NOTE 12– SUBSEQUENT EVENTS: On October 26, 2023, the Board authorized a dividend of $ 0.10 per share, payable on November 22, 2023 to shareholders of record on November 8, 2023. 42