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Item 7. Management’s Discussion and Analysis

2024-03-06 compared with 2023-03-06 · 96 added, 75 removed, 574 unchanged (23% of the section changed)

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

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

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

A comparison of the financial results for the year ended December 31, 2022 to the year ended December 31, 2021, is included in Part II, Item 7, "Management Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2022.

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Recent Developments

Proposed Merger Transaction

On January 16, 2024, the Company entered into a definitive merger agreement with FirstSun, the holding company of Sunflower Bank whereby HomeStreet and HomeStreet Bank will merge with and into FirstSun and Sunflower Bank, respectively.

Under the agreement, the companies will combine in an all-stock transaction in which HomeStreet shareholders will receive 0.4345 of a share of FirstSun common stock for each share of HomeStreet common stock.

The Merger is expected to close in the middle of 2024.

Economic and Market Conditions

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

Our financial results have been adversely impacted by the historically significant increase in short-term interest rates by the Federal Reserve during 2022 and 2023.

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

Accordingly, our gain on loan sales activities declined significantly and are expected to remain at low levels in 2024.

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

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

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

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Inflationary pressures have adversely impacted our operations by increasing our costs, primarily compensation costs which we expect to be higher in 2024.

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

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

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

Interest on the Notes initially will accrue at a rate equal to 3.50% per annum from and including the date of original issuance to, but excluding, January 30, 2027, payable semiannually in arrears.

From and including January 30, 2027, to, but excluding, the maturity date

or the date of earlier redemption, the Notes will bear interest equal to the three-month term SOFR plus 215 basis points, payable quarterly in arrears.

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

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

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

Due to the impacts of the significant increases in short term rates by the Federal Reserve in 2023, and as a result of our actions taken to address the impact of these increases, we expect the balance of our loans held for investment to stay relatively stable during 2024 and our net interest margin to be lower in 2024 as compared to 2023.

Critical Accounting Estimates

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

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

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

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

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

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

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

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

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

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This sensitivity analysis is hypothetical and has been provided only to indicate the potential impact that changes in assumptions may have on the ACL estimate.

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

For sales of mortgage loans, the fair value of the MSR is estimated and capitalized.

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

of MSRs For sales of mortgage loans, the fair value of the MSR is estimated and capitalized.

Purchased MSRs are capitalized at the cost to acquire.

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Noninterest expense 241,872 205,419

Before income taxes 84,660 146,689

Net income (loss):

Before income tax (benefit) expense (32,757) 84,660

Total (27,508) 66,540

Income per share - diluted $ 3.49 $ 5.46

Net income (loss) per fully diluted share $ (1.46) $ 3.49

Core net income (loss):

Total 8,284 66,540

Core net income (loss) per fully diluted share $ 0.44 $ 3.49

Select Performance Ratios:

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Return on average tangible equity (1)

11.5 % 16.8 %

Return on average assets

Net income (loss) (0.29) % 0.79 %

0.09 % 0.79 %

Efficiency ratio (1)

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Full time equivalent employees 902 942

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

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

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

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

Summary Financial Data (continued)

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Total risk-based capital 13.49 % 12.59 %

Common equity Tier 1 capital 12.79 % 11.92 %

Tier 1 leverage ratio 7.04 % 7.25 %

Total risk-based capital 12.84 % 11.53 %

Common equity Tier 1 capital 9.66 % 8.72 %

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

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

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

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

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2023 Compared to 2022

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

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

Our net income (loss) and income (loss) before taxes were $(27.5) million and $(32.8) million, respectively, in 2023, as compared to $66.5 million and $84.7 million, respectively, in 2022.

Our core net income and core income before taxes in 2023, which excludes the impact of the goodwill impairment charge and merger related expenses, was $8.3 million and $8.6 million, as compared to $66.5 million and $84.7 million, respectively, in 2022.

The $76.1 million decrease in core income before taxes was due to lower net interest income, a lower recovery of allowance for credit losses and lower noninterest income, partially offset by lower noninterest expense.

Income Taxes:

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

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

Our effective tax rate of 16.0% during 2023 was significantly impacted by the goodwill impairment charge, a portion of which was not deductible for tax purposes and the benefits of tax advantaged investments which were higher than our core income before taxes.

Our effective tax rate in 2022 of 21.4% was lower than the statutory rate due to the benefits of tax advantaged investments and reductions in taxes on income related to excess tax benefits resulting from the vesting of stock awards during the period.

Net Interest Income:

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

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

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

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$ (56,635) $ (10,283) $ (66,918)

Net interest income in 2022 increased $6.3 million as compared to 2021 due primarily to increases in the average balance of interest earning assets, partially offset by a decrease in our net interest margin.

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

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

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

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

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

The increase in the rates paid on our interest-bearing liabilities was due to higher deposit costs, higher borrowing costs and an increase in the proportion of higher cost borrowings used as our sources of funding.

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

Net interest income in 2023 decreased $66.6 million as compared to 2022 due primarily to a decrease in our net interest margin partially offset by increases in the average balance of interest earning assets.

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

Our net interest margin decreased from 2.99% in 2022 to 1.88% in 2023 due to a 198 basis point increase in the rates paid on interest-bearing liabilities which was partially offset by a 57 basis point increase in the yield on interest earning assets.

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

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

The increase in the rates paid on our interest-bearing liabilities was due to an increase in the proportion of higher cost borrowings and a decrease in the proportion of noninterest-bearing deposits to the total balance of interest-bearing liabilities, higher deposit costs and higher borrowing costs.

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

Our average borrowings increased by $728 million to fund the growth of our loan portfolio and investment securities.

Our cost of borrowings increased from 36 basis points during 2021 to 281 basis points during 2022 due to the significant increase in market interest rates during 2022 and the impact of the $100 million fixed rate subordinated notes offering completed in January 2022.

Our cost of borrowings increased from 281 basis points during 2022 to 468 basis points during 2023 due to the significant increase in market interest rates during the last two years.

Provision for Credit Losses:

As a result of the favorable performance of our loan portfolio, a stable low level of nonperforming assets and an improved outlook of the estimated impact of COVID-19 on our loan portfolio, we recorded a $5.2 million and $15.0 million recovery of our allowance for credit losses in 2022 and 2021, respectively.

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

A $0.4 million recovery of our allowance for credit losses was recognized during 2023 compared to a $5.2 million recovery of our allowance for credit losses in 2022.

The recovery of our allowance for credit losses in 2022 was the result of the favorable performance of our loan portfolio, a stable low level of nonperforming assets and an improved outlook of the estimated impact of COVID-19 on our loan portfolio.

Noninterest income consisted of the following:

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

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

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

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

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

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

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

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

The $8.4 million decrease in gain on loan origination and sale activities was due to a $4.6 million decrease in single family gain on loan origination and sale activities and a $3.8 million decrease in commercial real estate and commercial and industrial gain on loan origination and sale activities.

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

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

The $2.8 million decrease in other income was primarily due to a $4.3 million gain on sale of branches realized in 2022.

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

Noninterest expense consisted of the following:

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Compensation and benefits $ 111,064 $ 115,533

Occupancy 24,528 23,832

Information services 29,901 29,981

Occupancy 22,241 24,528

General, administrative and other 38,809 35,377

Goodwill impairment charge 39,857 —

Total noninterest expense $ 241,872 $ 205,419

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

The $16.5 million decrease in compensation and benefit costs was primarily due to reduced commission expense on lower loan origination volumes in our single family mortgage operations, lower bonus and commissions expense and lower headcount, which were partially offset by wage increases given in 2022.

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

The $36.5 million increase in noninterest expenses in 2023 as compared to 2022 was due to a $39.9 million goodwill impairment charge and higher general, administrative and other costs which were partially offset by lower compensation and benefit costs and occupancy costs.

The $4.5 million decrease in compensation and benefit costs was primarily due to reduced commission expense on lower loan origination volumes in our single family mortgage operations, lower staffing levels and lower bonus expense, which were partially offset by wage increases given in 2023, higher medical costs related to our self-insured medical program and a reduction in deferred costs due to lower levels of loan production.

FTEs decreased from 970 at the beginning of 2022 to 913 at the end of 2022 to 875 at the end of 2023.

The increase in general, administrative and other costs was primarily due to higher FDIC insurance fees, resulting primarily from our larger asset base, and $1.5 million of merger related costs, which were partially offset by lower business taxes.

Financial Condition – December 31, 2023 compared to December 31, 2022

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

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

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

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

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

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

During 2023, our total assets increased $28 million due primarily to a $143 million increase in cash, partially offset by a decrease in investment securities.

During 2023 total liabilities increased $51 million due to an increase in borrowings, partially offset by a decrease in deposits.

The $689 million decrease in deposits was due to a $229 million decrease in brokered certificates of deposit and a $1.3 billion decrease in non-certificates of deposit balances which were partially offset by a $491 million increase in certificates of deposit balances related to our promotional products.

The decrease in deposits was offset by $373 million in deposits that we acquired as part of the branch acquisitions completed in the first quarter of 2023.

The $729 million of additional borrowings were used to replace maturing brokered deposits and increase our on-balance sheet cash and cash equivalent balances.

Investment Securities

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Single family 1,140,279 1,009,001

1,009,001 763,331

Home equity and other 384,301 352,707

Total 1,361,708 1,066,409

1,524,580 1,361,708

Total LHFI 7,422,904 7,426,320

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Additions and amortization:

Purchases 460 —

Amortization (1)

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Certificates of deposit

Brokered deposits 1,218,008 5.36 % 1,446,528 3.94 %

Other 2,009,946 3.95 % 1,496,803 2.26 %

Total interest-bearing deposits 5,456,875 3.19 % 6,052,007 1.98 %

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As of December 31, 2023, our ratio of nonperforming assets to total assets remained low at 0.45% while our ratio of total loans delinquent over 30 days to total loans was 0.72%.

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

The Company recorded a recovery of our allowance for credit losses of $0.4 million in 2023, and the ACL for loans decreased by $1.0 million, as a result of the favorable performance of our loan portfolio and a stable low level of nonperforming assets.

Delinquent loans by loan type consisted of the following:

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

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

The Company does not have any obligation to repay long-term debt within the next three years other than $65 million in principal amount of Senior Notes maturing on June 1, 2026.

The Company intends to repay the Senior Notes with dividends made to the Company from the Bank or from funds received through the issuance of new debt or sales of stock.

At December 31, 2023, the Bank had available borrowing capacity of $2.1 billion from the FHLB, $710 million from the FRBSF and $1.1 billion under borrowing lines established with other financial institutions.

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

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

For 2023, $8 million of cash was provided by operating activities.

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

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

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

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

For 2023, cash of $484 million was provided by investing activities primarily from the cash acquired from an acquisition of branches and the related deposits, principal repayments on AFS investment securities and LHFI repayments in excess of originations, partially offset by the purchase of AFS investment securities and net FHLB stock purchases.

Cash flows from financing activities

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

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

on our common stock.

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

For 2023, cash of $349 million was used in financing activities primarily due to decreases in deposits and dividends paid on our

common stock partially offset by a net increase in long term and short-term borrowings.

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

Capital Resources and Dividends

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At December 31, 2023, capital conservation buffers for the Company and the Bank were 4.60% and 5.49%, respectively.

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

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

The Company paid a quarterly cash dividend totaling $0.65 per common share in the year 2023.

In the first quarter of 2024, the Company did not declare a cash dividend and currently does not plan to pay quarterly dividends in 2024.

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

Other than the acquisition of three branches in southern California, which closed in the first quarter of 2023, whereby we purchased $5.2 million of land and buildings, we had no material commitments for capital expenditures as of December 31, 2022.

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

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

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

The merger agreement with FirstSun contains restrictions on the Company’s ability to incur additional long-term debt or sell shares of preferred or common stock.

Accounting Developments

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

In this Annual Report on Form 10-K, we use the following non-GAAP measures:

In this Form 10-K, we use the following non-GAAP measures:

(i) tangible common equity and tangible assets as we believe this information is consistent with the treatment by bank regulatory agencies, which exclude intangible assets from the calculation of capital ratios;

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

(ii) core income and effective tax rate on core income before taxes, which excludes goodwill impairment charges and merger related expenses and the related tax impact as we believe this measure is a better comparison to be used for projecting future results and (iii) an efficiency ratio which is the ratio of noninterest expense to the sum of net interest income and noninterest income, excluding certain items of income or expense and excluding taxes incurred and payable to the state of Washington as such taxes are not classified as income taxes and we believe including them in noninterest expense impacts the comparability of our results to those companies whose operations are in states where assessed taxes on business are classified as income taxes.

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

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

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

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

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

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(in thousands, except ratio) 2023 2022

Return on average tangible equity (annualized)

Core net income (loss)

Net income (loss) $ (27,508) $ 66,540

Adjustments (tax effected)

Merger related expenses 1,170 —

Goodwill impairment charge 34,622 —

Total $ 8,284 $ 66,540

Core net income (loss) per fully diluted share

Fully diluted shares 18,783,005 19,041,111

Computed amount

$ 0.44 $ 3.49

Return on average tangible equity

Average shareholders' equity

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$ 526,539 $ 586,539

Net income $ 66,540 $ 115,422

Core net income $ 8,284 $ 66,540

Adjustments (tax effected):

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$ 241,872 $ 205,419

Legal fees recovery — 1,900

Merger related expenses (1,500) —

Goodwill Impairment charge (39,857) —

State of Washington taxes (994) (2,311)

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Ratio 95.6 % 72.4 %

Effective tax rate used in computations above (1)

22.0 % 22.0 %

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

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Ratio 5.6 % 5.7 %

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

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

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

What changed 10-K

Item 7. Management’s Discussion and Analysis