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Item 2. Management’s Discussion and Analysis

2024-05-09 compared with 2023-11-07 · 166 added, 152 removed, 409 unchanged (44% of the section changed)

ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements and Notes presented elsewhere in this report and in HomeStreet, Inc.'s 2022 Annual Report on Form 10-K.

FORWARD-LOOKING STATEMENTS

Statements contained in this Quarterly Report on Form 10-Q that are not historical facts or that discuss our expectations, beliefs or views regarding our future operations or future financial performance, or financial or other trends in our business or in the markets in which we operate, long-term value creation, capital management, reduction in volatility, reliability of earnings, net interest margins, provisions and allowances for credit losses, cost reduction initiatives, and restructuring activities constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Many forward-looking statements can be identified as using words such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan," "potential," "should," "will" and "would" and similar expressions (or the negative of these terms).

Such statements involve inherent risks and uncertainties, many of which are difficult to predict and are generally beyond the control of the Company and are subject to risks and uncertainties, including, but not limited to, those discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 and the risks and uncertainties discussed below and elsewhere in this Quarterly Report on Form 10-Q that could cause actual results to differ significantly from those projected.

Although we believe that expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.

We undertake no obligation, and expressly disclaim any such obligation to update or clarify any of the forward-looking statements after the date of this Quarterly Report on Form 10-Q to reflect changed assumptions, the occurrence of anticipated or unanticipated events, new information or changes to future results over time or otherwise, except as required by law.

Readers are cautioned not to place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q.

Except as otherwise noted, references to "we," "our," "us" or "the Company" refer to HomeStreet, Inc.

and its subsidiaries that are consolidated for financial reporting purposes.

Statements of knowledge, intention or belief reflect those characteristics of our executive management team based on current facts and circumstances.

You may review a copy of this Quarterly Report on Form 10-Q, including exhibits and any schedule filed therewith on the SEC's website (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants, such as HomeStreet, Inc., that file electronically with the SEC.

Copies of our Securities Exchange Act reports are also available from our investor relations website, http://ir.homestreet.com.

Information contained in or linked from our websites is not incorporated into and does not constitute a part of this report.

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”).

Generally, forward-looking statements include the words “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “should,” “will,” and “would” and similar expressions (or the negative of these terms).

Forward-looking statements in this Form 10-Q also include statements regarding the expected timing to close the proposed merger of HomeStreet into FirstSun Capital Bancorp (“FirstSun”) and HomeStreet Bank into Sunflower Bank, N.A., a subsidiary of FirstSun (collectively, the “Merger”) and expectations regarding dividend payments in 2024.

Such statements involve inherent risks, uncertainties and other factors, many of which are difficult to predict and are generally beyond control of HomeStreet Inc.

(the "Company").

Forward-looking statements are based on the Company’s expectations at the time such statements are made and speak only as of the date made, they are not guarantees of future performance.

The Company does not assume any obligation or undertake to update any forward-looking statements after the date of this report as a result of new information, future events or developments, except as required by federal securities or other applicable laws, although the Company may do so from time to time.

The Company does not endorse any projections regarding future performance that may be made by third parties.

For all forward-looking statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Reform Act.

We caution readers that actual results may differ materially from those expressed in or implied by the Company’s forward-looking statements.

Rather, more important factors could affect the Company’s future results, including but not limited to the following:(1) our ability to successfully consummate the proposed Merger with FirstSun;

(2) the ability of HomeStreet to obtain the necessary approval by shareholders with respect to the Merger;

(3) the ability of HomeStreet and FirstSun to obtain required regulatory and governmental approvals of the Merger when expected or at all (and the risk that such approvals may result in the imposition of conditions that could adversely affect the combined company or the expected benefits of the Merger);

(4) the failure to satisfy the closing conditions in the definitive Agreement and Plan of Merger (the “Merger Agreement”), dated as of January 16, 2024, as amended on April 30, 2024, by and between HomeStreet and FirstSun, or any unexpected delay in closing the Merger;

(5) the ability to achieve expected cost savings, synergies and other financial benefits from the Merger within the expected time frames and costs or difficulties relating to integration matters being greater than expected;

(6) the diversion of management time from core banking functions due to Merger-related issues;

(7) potential difficulty in maintaining relationships with customers, associates or business partners as a result of the announced Merger;

(8) the ability of FirstSun to consummate their investment agreements to obtain the necessary capital to support the Merger;

(9) the occurrence of any event, change or circumstance that could give rise to the right of one or both parties to terminate the Merger Agreement;

(10) the outcome of any legal proceedings that have been or may be instituted against FirstSun or HomeStreet;

(11) changes in the U.S.

and global economies, including business disruptions, reductions in employment, inflationary pressures and an increase in business failures, specifically among our customers;

(12) changes in the interest rate environment may reduce interest margins;

(13) changes in deposit flows, loan demand or real estate values may adversely affect the business of our primary subsidiary, HomeStreet Bank (the “Bank”), through which substantially all of our operations are carried out;

(14) there may be increases in competitive pressure among financial institutions or from non-financial institutions;

(15) our ability to attract and retain key members of our senior management team;

(16) the timing and occurrence or non-occurrence of events may be subject to circumstances beyond our control;

(17) our ability to control operating costs and expenses;

(18) our credit quality and the effect of credit quality on our credit losses expense and allowance for credit losses;

(19) the adequacy of our allowance for credit losses;

(20) changes in accounting principles, policies or guidelines may cause our financial condition to be perceived or interpreted differently;

(21) legislative or regulatory changes that may adversely affect our business or financial condition, including, without limitation, changes in corporate and/or individual income tax laws and policies, changes in privacy laws, and changes in regulatory capital or other rules, and the availability of resources to address or respond to such changes;

(22) general economic conditions, either nationally or locally in some or all areas in which we conduct business, or conditions in the securities markets or banking industry, may be less favorable than what we currently anticipate;

(23) challenges our customers may face in meeting current underwriting standards may adversely impact all or a substantial portion of the value of our rate-lock loan activity we recognize;

(24) technological changes may be more difficult or expensive than what we anticipate;

(25) a failure in or breach of our operational or security systems or information technology infrastructure, or those of our third-party providers and vendors, including due to cyber-attacks;

(26) success or consummation of new business initiatives may be more difficult or expensive than what we anticipate;

(27) our ability to grow efficiently both organically and through acquisitions and to manage our growth and integration costs;

(28) staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our work force and potential associated charges;

(29) litigation, investigations or other matters before regulatory agencies, whether currently existing or commencing in the future, may delay the occurrence or non-

occurrence of events longer than what we anticipate;

and (30) our ability to obtain regulatory approvals or non-objection to take various capital actions, including the payment of dividends by us or the Bank, or repurchases of our common stock.

A discussion of the factors, risks and uncertainties that could affect our financial results, business goals and operational and financial objectives discussed in our 2023 annual report on Form 10-K or in our releases, public statements and/or filings with the Securities and Exchange Commission (“SEC”) is also contained in the “Risk Factors” section of our 2023 Annual Report on Form 10-K.

We strongly recommend readers review those disclosures in conjunction with the discussions herein.

All future written and oral forward-looking statements attributable to the Company or any person acting on its behalf are expressly qualified in their entirety by the cautionary statements contained or referred to above.

New risks and uncertainties arise from time to time, and factors that the Company currently deems immaterial may become material, and it is impossible for the Company to predict these events or how they may affect the Company.

Critical Accounting Estimates

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

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

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

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

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

For example, if the projected unemployment rate was downgraded one grade for all periods, the amount of the ACL at September 30, 2023 would increase by approximately $8 million.

For example, if the projected unemployment rate was downgraded one grade for all periods, the amount of the ACL at March 31, 2024 would increase by approximately $8 million.

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

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Summary Financial Data

Quarter Ended Nine Months Ended September 30,

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

Quarter Ended

(in thousands, except per share data and FTE data) March 31, 2024 December 31, 2023 March 31, 2023

Select Income Statement data:

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Noninterest expense 52,164 49,511 52,491

Income (loss) before income taxes (10,559) (4,011) 6,482

Net income (loss) (7,497) (3,419) 5,058

Before income tax (benefit) expense 1,397 (36,625) (28,746) 73,514

2,295 (31,442) (24,089) 58,039

Net income (loss) per share - diluted 0.12 (1.67) (1.28) 3.03

Core net income:

Net income (loss) per fully diluted share (0.40) (0.18) 0.27

Core net income (loss):

(5,469) (2,249) 5,058

Core net income per share - diluted 0.12 0.17 0.56 3.03

Core net income (loss) per fully diluted share (0.29) (0.12) 0.27

Select Performance Ratios:

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Full time equivalent employees 858 875 920

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

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

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

(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 these measures to the nearest comparable GAAP financial measure or the computation of the measure see “Non-GAAP Financial Measures” elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

(in thousands, except share and per share data) March 31, 2024 December 31, 2023

Selected Balance Sheet Data

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Tangible common equity to tangible assets (1)

Shares outstanding at period end 18,794,030 18,730,380

Loans to deposit ratio

Shares outstanding at end of period

18,857,566 18,810,055

Loans to deposit ratio (Bank)

114.3 % 109.4 %

Credit Quality:

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(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 Management’s Discussion and Analysis of Financial Condition and Results of Operations.

For a reconciliation of this measure 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.

Current Developments

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

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

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

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

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

Management's Overview of the Third Quarter 2023 Financial Performance

Third Quarter of 2023 Compared to the Second Quarter of 2023

Non-core amounts:

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

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

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

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

Proposed Merger Transaction

On January 16, 2024, the Company entered into a definitive merger agreement (as amended on April 30, 2024, the “merger agreement”) with FirstSun, the holding company of Sunflower Bank and Dynamis Subsidiary, Inc., whereby, under the merger agreement, the Company and the Bank will merge with and into FirstSun and Sunflower Bank, respectively.

The agreement was amended on April 30, 2024, and subject to the terms and conditions of the merger agreement, the companies will combine in an all-stock transaction in which HomeStreet shareholders will receive 0.3867 of a share of FirstSun common stock for each share of HomeStreet common stock.

The parties to the Merger expect to complete the Merger in late 2024, subject to the satisfaction of closing conditions, including receipt of customary required regulatory approvals, the approval of the merger agreement by HomeStreet shareholders and satisfaction or waiver of other closing conditions.

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 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 financial institutions and brokerage firms.

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

(i) significantly reducing our level of loan originations;

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

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 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.

Management's Overview of the First Quarter 2024 Financial Performance

First Quarter of 2024 Compared to the Fourth Quarter of 2023

Our net loss and loss before income taxes were $(7.5) million and $(10.6) million, respectively, in the first quarter of 2024, as compared to $(3.4) million and $(4.0) million, respectively, in the fourth quarter of 2023.

The $6.5 million increase in loss before income taxes was due to lower net interest income, lower noninterest income and an increase in noninterest expense which was partially offset by a lower provision for credit losses.

Income Taxes:

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

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

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

The income tax benefit realized in the first quarter of 2024 resulted in an effective tax rate of 29.0% as compared to an effective tax rate of 14.8% in the fourth quarter of 2023.

Our effective tax rate in the first quarter of 2024 was higher than our statutory rate of 24.6% due to the impact of tax advantaged investments which creates a higher benefit due to our loss.

Our effective tax rate of 14.8% in the fourth quarter of 2023 was significantly impacted by the goodwill impairment charge taken in 2023, a portion of which was not deductible for tax purposes, the effect of which was partially offset by benefits of tax advantaged investments.

Net Interest Income:

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Quarter Ended

September 30, 2023 June 30, 2023

March 31, 2024 December 31, 2023

(in thousands) Average

38 unchanged sentences

Net interest margin 1.44 % 1.59 %

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

(1) Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain loans and securities of $1.1 million for both quarters ended March 31, 2024 and December 31, 2023.

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

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

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

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

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

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

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

(2) Cost of all deposits, including noninterest-bearing demand deposits was 2.61% and 2.39% for the quarters ended March 31, 2024 and December 31, 2023, respectively.

Our net interest income in the first quarter of 2024 was $2.8 million lower than the fourth quarter of 2023 due to a decrease in our net interest margin from 1.59% to 1.44%.

The decrease in our net interest margin was due to a 19 basis point increase in the cost of interest-bearing liabilities which was due primarily to a 22 basis point increase in the cost of deposits.

The increase in the rates paid on deposits was due to the migration of noninterest-bearing and lower cost interest-bearing accounts to higher cost certificates of deposit and money market accounts.

Provision for Credit Losses:

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

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

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

There was no provision for credit losses recognized during the first quarter of 2024 as compared to a $0.4 million provision in the fourth quarter of 2023.

These low levels of provisions for credit losses reflect the stable balance of our loan portfolio, a minimal level of identified credit issues in our loan portfolio and the lack of significant expected credit issues arising in future periods.

Noninterest Income consisted of the following:

Quarter Ended

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

(in thousands) March 31, 2024 December 31, 2023

Noninterest income

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Quarter Ended

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

(in thousands) March 31, 2024 December 31, 2023

Single family servicing income, net

6 unchanged sentences

Net gain (loss) from economic hedging (3)

(1,110) 1,089

Single Family servicing income 1,919 2,085

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

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

(3) The interest income from US Treasury notes securities used for hedging purposes, which is included in interest income on the consolidated income statements, was $0.3 million for both the quarters ended March 31, 2024 and December 31, 2023.

Noninterest income in the first quarter of 2024 decreased from the fourth quarter of 2023 primarily due to higher levels of income realized in the fourth quarter of 2023 from our investments in small business investment companies.

Noninterest Expense consisted of the following:

Quarter Ended

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

(in thousands) March 31, 2024 December 31, 2023

Noninterest expense

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General, administrative and other 11,377 9,377

Goodwill impairment charge — 39,857

Total noninterest expense $ 52,164 $ 49,511

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

Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022

Non-core amounts:

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

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

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

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

The increase in noninterest expenses in the first quarter of 2024, as compared to the fourth quarter of 2023 was primarily due to seasonally higher compensation costs and a $1.1 million increase in merger related expenses.

First Quarter of 2024 Compared to First Quarter of 2023

Our net income (loss) and income (loss) before income taxes were $(7.5) million and $(10.6) million, respectively, in the first quarter of 2024, as compared to $5.1 million and $6.5 million, respectively, in the first quarter of 2023.

Our core net income (loss) and core income (loss) before income taxes in the first quarter of 2024, which excludes the impact of merger related expenses, was $(5.5) million and $(8.0) million, as compared to $5.1 million and $6.5 million, respectively, in the first quarter of 2023.

The $14.4 million decrease in core income before taxes was primarily due to lower net interest income, partially offset by a lower provision for credit losses.

Income Taxes:

Our effective tax rate of 16.2% during the nine months ended September 30, 2023 was significantly impacted by the goodwill impairment charge, a portion of which was not deductible for tax purposes.

Our core income effective tax rate for the first nine months of 2023 and 2022 was 5.2% and 21.1% respectively, which is lower than our statutory tax rate of 24.7% and 25.3%, respectively, primarily due to the significantly higher proportion of tax exempt revenues in comparison to our overall core income before tax.

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

The income tax benefit realized in the first quarter of 2024 resulted in an effective tax rate of 29.0% which was higher than our statutory rate of 24.6% due to the impact of tax advantaged investments which creates a higher benefit to our loss.

Our effective tax rate in the first quarter of 2023 of 22.0% was lower than the statutory rate due to the benefits of tax advantaged investments.

Net Interest Income:

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and (v) net interest margin:

Nine Months Ended September 30,

Quarter Ended March 31,

(in thousands) Average

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Net interest margin 1.44 % 2.23 %

(1) Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain loans and securities of $3.5 million and $3.6 million for the nine months ended September 30, 2023 and 2022, respectively.

(1) Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain loans and securities of $1.1 million and $1.2 million for the quarters ended March 31, 2024 and 2023, respectively.

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

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

Net interest income for the nine months ended September 30, 2023 decreased $45.9 million as compared to the nine months ended September 30, 2022 due primarily to a decrease in our net interest margin partially offset by increases in the average balance of interest earning assets.

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

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

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

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

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

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

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

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

(2) Cost of deposits including noninterest-bearing deposits, was 2.61% and 1.65% for the quarters ended March 31, 2024 and 2023, respectively.

Net interest income in the first quarter of 2024 decreased $17.2 million as compared to the first quarter of 2023 due primarily to a decrease in our net interest margin.

Our net interest margin decreased from 2.23% in the first quarter of 2023 to 1.44% in the first quarter of 2024 due to a 110 basis point increase in the rates paid on interest-bearing liabilities which was partially offset by a 19 basis point increase in the yield on interest earning assets.

Yields on interest-earning assets increased as yields on adjustable rate loans increased due to increases in the indexes on which their pricing is based.

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 and higher deposit costs and higher borrowing costs.

The increases in the rates paid on deposits were due to increases in market interest rates over the prior year and the migration of noninterest-bearing and lower cost interest-bearing accounts to higher cost certificates of deposit and money market accounts.

Provision for Credit Losses:

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

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

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

There was no provision for credit losses recognized during the first quarter of 2024 as compared to a $0.6 million provision in the first quarter of 2023.

Noninterest Income consisted of the following:

Nine Months Ended September 30,

Quarter Ended March 31,

(in thousands) 2024 2023

3 unchanged sentences

$ 1,986 $ 2,218

CRE, multifamily and SBA

Loan servicing income 3,032 3,039

3 unchanged sentences

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

Nine Months Ended September 30,

Quarter Ended March 31,

(in thousands) 2024 2023

7 unchanged sentences

Net gain (loss) from economic hedging (3)

(1,039) (1,866)

Single Family servicing income 1,919 1,847

5 unchanged sentences

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

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

The $9.0 million decrease in gain on loan origination and sale activities was due to a $5.2 million decrease in single family gain on loan origination and sale activities and a $3.7 million decrease in commercial real estate and commercial and industrial gain on loan origination and sale activities.

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

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

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

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

(3) The interest income from US Treasury notes securities used for hedging purposes, which is included in interest income on the consolidated income statements, was $0.3 million and $0.4 million for the quarters ended March 31, 2024 and 2023, respectively.

Noninterest Expense consisted of the following:

Nine Months Ended September 30,

Quarter Ended March 31,

(in thousands) 2024 2023

4 unchanged sentences

General, administrative and other 11,377 10,355

Goodwill impairment charge 39,857 —

Total noninterest expense $ 52,164 $ 52,491

The $37.4 million increase in noninterest expenses in the nine months ended September 30, 2023 as compared to nine months ended September 30, 2022 was due to a $39.9 million goodwill impairment charge and higher general, administrative and other costs which were partially offset by lower compensation and benefit costs and occupancy costs.

The $5.5 million decrease in compensation and benefit costs was primarily due to reduced commission expense on lower loan origination volumes in our single family mortgage operations, lower staffing levels and lower bonus expense, which were partially offset by wage increases given in the first nine months of 2023 and a reduction in deferred costs due to lower levels of loan production.

The increase in general, administrative and other costs was primarily due to higher FDIC fees due to our larger asset base, which were partially offset by a reduction in legal fees due to charges related to nonrecurring costs expended on litigation activities and legal matters in the nine months ended September 30, 2022.

The $0.3 million decrease in noninterest expenses in the first quarter of 2024 as compared to the first quarter of 2023 was primarily due to lower compensation and benefit costs, partially offset by higher general, administrative and other costs.

The decrease in compensation and benefit costs was primarily due to lower staffing levels, which was partially offset by wage increases given in the first quarter of 2024.

FTEs decreased from 920 at the quarter ended March 31, 2023 compared to 858 at the quarter ended March 31, 2024.

The increase in general, administrative and other costs was primarily due to $2.6 million in merger related costs.

Financial Condition

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

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

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

The $706 million decrease in deposits was due to a $473 million decrease in brokered certificates of deposit and a $1.1 billion decrease in non-certificates of deposit balances which were partially offset by a $455 million increase in certificates of deposit balances related to our promotional products.

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

During the first quarter of 2024, our total assets increased $63 million due primarily to a $105 million increase in cash, partially offset by a decrease in investment securities.

During the first quarter of 2024 total liabilities increased $74 million due to an increase in borrowings, partially offset by a decrease in deposits.

The $272 million decrease in deposits was primarily due to a $297 million decrease in brokered certificates of deposit.

The $349 million of additional borrowings were used to replace maturing brokered deposits and increase our on-balance sheet cash balances.

Credit Risk Management

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

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

These loans are current in their payments and are overcollateralized.

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

During the first quarter of 2024, our ratios of nonperforming assets to total assets and total loans delinquent over 30 days, including nonaccrual loans, increased but remained at low levels.

As of March 31, 2024, our ratio of nonperforming assets to total assets was 0.56%, while our ratio of total loans delinquent over 30 days, including nonaccrual loans, to total loans was 0.82%.

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

The following table presents the ACL by product type:

At September 30, 2023 At December 31, 2022

At March 31, 2024 At December 31, 2023

(in thousands) Amount Rate (1)

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

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

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

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

While scheduled principal repayments on loans and investment securities are a relatively predictable source of funds, deposit inflows and outflows and prepayments of loans and investment securities are greatly influenced by interest rates, economic conditions and competition.

While scheduled principal

repayments on loans and investment securities are a relatively predictable source of funds, deposit inflows and outflows and prepayments of loans and investment securities are greatly influenced by interest rates, economic conditions and competition.

The Company’s contractual cash flow obligations include the maturity of certificates of deposit, short-term and long-term borrowings, interest on certificates of deposit and borrowings, operating leases and fees for information technology related services and professional services.

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The Company has $65 million of Senior Notes which mature in 2026 which it expects to pay off from available cash or from the issuance of new debt.

At September 30, 2023 and December 31, 2022, the Bank had available borrowing capacity of $2.2 billion and $2.6 billion, respectively, from the FHLB, and $331 million and $340 million, respectively, from the FRBSF and $1.2 billion, in both periods, under borrowing lines established with other financial institutions.

For the nine months ended September 30, 2023, cash and cash equivalents increased by $154 million compared to a decrease of $8 million during the nine months ended September 30, 2022.

At March 31, 2024 and December 31, 2023, the Bank had available borrowing capacity of $1.6 billion and $2.1 billion, respectively, from the FHLB, and $853 million and $710 million, respectively, from the FRBSF and $1.1 billion, in both periods, under borrowing lines established with other financial institutions.

For the quarter ended March 31, 2024, cash and cash equivalents increased by $105 million compared to an increase of $304 million during the quarter ended March 31, 2023.

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

2 unchanged sentences

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

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

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

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

We are currently not aware of any trends or demands, commitments, events or uncertainties that will result in or that are reasonably likely to result in our liquidity increasing or decreasing in any material way that will impact our capital needs during or beyond the next 12 months.

For the quarter ended March 31, 2024, net cash of $7.8 million was used in operating activities, as cash generated from operations was offset by cash used to fund LHFS in excess of proceeds from the sale of loans and increases in other assets.

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

Cash flows from investing activities

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

For the nine months ended September 30, 2023, net cash of $392 million was provided by investing activities primarily from net cash acquired from an acquisition, principal repayments on AFS securities and LHFI principal repayments in excess of originations, partially offset by the purchase of AFS investment securities and net FHLB stock purchases.

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

For the quarter ended March 31, 2024, net cash of $36 million was provided by investing activities primarily from principal repayments on AFS securities, partially offset by the origination of LHFI net of principal repayments and net FHLB stock purchases.

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

Cash flows from financing activities

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

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

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

For the quarter ended March 31, 2024, net cash of $76 million was provided by financing activities, primarily due to by an increase in short-term and long-term borrowings, partially offset by decreases in deposits.

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

Off-Balance Sheet Arrangements

3 unchanged sentences

These commitments include the following:

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

(in thousands) At March 31, 2024 At December 31, 2023

Unused consumer portfolio lines $ 599,576 $ 586,904

3 unchanged sentences

Total $ 1,272,412 $ 1,273,939

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

progress payments were $439 million and $525 million at September 30, 2023 and December 31, 2022, respectively.

(1) Within the commercial portfolio, undistributed construction loan proceeds, where the Company has an obligation to advance funds for construction progress payments were $414 million and $403 million at March 31, 2024 and December 31, 2023, respectively.

Capital Resources and Dividend Policy

10 unchanged sentences

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

At September 30, 2023

At March 31, 2024

Actual For Minimum Capital

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

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

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

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

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

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

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

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

At March 31, 2024, capital conservation buffers for the Company and the Bank were 4.48% and 5.34%, respectively.

The Company did not declare a cash dividend in the quarter and currently does not plan to pay any 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.

We had no material commitments for capital expenditures as of March 31, 2024.

Non-GAAP Financial Measures

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

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

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

In this Form 10-Q, 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;

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

(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 Quarterly 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 quarterly report, or a calculation of the non-GAAP financial measure.

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

For the Quarter Ended Nine Months Ended September 30,

For the Quarter Ended

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

September 30, 2023 June 30, 2023 2023 2022

Core net income

March 31, 2024 December 31, 2023 March 31, 2023

Core net income (loss)

Net income (loss) $ (7,497) $ (3,419) $ 5,058

Adjustments (tax effected)

Goodwill impairment charge — 34,622 34,622 —

Merger related expenses 2,028 1,170 —

Total $ (5,469) $ (2,249) $ 5,058

Core diluted earnings per share

Core net income (loss) per fully diluted share

Fully diluted shares 18,856,870 18,807,965 18,771,899

$ 0.12 $ 0.17 $ 0.56 $ 3.03

Computed amount $ (0.29) $ (0.12) $ 0.27

Return on average tangible equity (annualized)

5 unchanged sentences

$ 528,224 $ 503,609 $ 547,564

Core net income (per above) $ 2,295 $ 3,180 $ 10,533 $ 58,039

Core net income (loss) (per above) $ (5,469) $ (2,249) $ 5,058

Adjustments (tax effected)

Amortization on core deposit intangibles 488 615 459

Tangible income applicable to shareholders $ 2,909 $ 3,794 $ 12,220 $ 58,607

Tangible income (loss) applicable to shareholders

$ (4,981) $ (1,634) $ 5,517

(3.8) % (1.3) % 4.1 %

Efficiency ratio

1 unchanged sentence

$ 52,164 $ 49,511 $ 52,491

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

Merger related expenses (2,600) (1,500) —

State of Washington taxes (452) 659 (555)

6 unchanged sentences

9,454 10,956 10,190

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

Total $ 41,605 $ 45,945 $ 59,566

2 unchanged sentences

Average Assets $ 9,502,189 $ 9,351,866 $ 9,530,705

Core net income - per above 2,295 3,180 10,533 58,039

Core net income (loss) - per above (5,469) (2,249) 5,058

Ratio (0.23) % (0.10) % 0.22 %

Effective tax rate used in computations above 22.0 % 22.0 % 22.0 %

22.0 % 22.0 % 22.0 % 22.0 %

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

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

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

September 30, 2023 December 31, 2022

March 31, 2024 December 31, 2023

Tangible book value per share

1 unchanged sentence

$ 527,333 $ 538,387

goodwill and other intangibles

intangible assets

(9,016) (9,641)

10 unchanged sentences

$ 9,455,182 $ 9,392,450

Goodwill and other intangibles (per above) (10,429) (29,980)

intangible assets

(9,016) (9,641)

$ 9,446,166 $ 9,382,809

Ratio 5.5 % 5.6 %

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis