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Item 7. Management’s Discussion and Analysis

2025-03-07 compared with 2024-03-06 · 110 added, 95 removed, 575 unchanged (26% of the section changed)

ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 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.

A comparison of the financial results for the year ended December 31, 2023 to the year ended December 31, 2022, is incorporated by reference to 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, 2023.

Management's Overview of 2024 Financial Performance

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.

In the fourth quarter of 2024, the definitive merger agreement with FirstSun Capital Bancorp was terminated by mutual agreement.

We then implemented a new strategic plan, which included selling $990 million of multifamily loans in the fourth quarter, that repositioned our balance sheet and accelerated our return to profitability, which we expect to occur in the first half of 2025.

We sold loans with a weighted average interest rate of 3.30% and used the proceeds to pay off Federal Home Loan Bank advances and brokered deposits with a weighted average interest rate of 4.65%.

The brokered deposits were paid off in early January 2025.

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;

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

(iii) entering into $1 billion of fixed-rate Federal Home Loan Bank advances in the fourth quarter of 2022;

and (iv) completing the acquisition of three California branches in the first quarter of 2023.

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.

The current level of interest rates continues to adversely impact our results of operations as our overall cost of funds are high in relation to the yield on our earning assets, resulting in a low net interest margin.

With the decrease in short term interest rates in the latter part of 2024, our cost of funds have stabilized and started to decrease.

As a result of the fourth quarter loan sale, we have been able to improve our net interest margin by selling lower yielding loans and paying off higher cost wholesale funding.

With the market expectation of ongoing reductions in short term interest rates by the Federal Reserve, we expect continued decreases in our funding costs and improvements in our gain on sale of loans as lower rates positively impact the volume of our loans originated and sold.

We have significant exposure in commercial real estate, primarily multifamily, and single-family loans in or near the areas affected by the wildfires in Southern California.

We have been advised of losses on 8 single-family residences with additional partial damage or other impacts to 19 additional homes.

Because all of these properties have current full insurance coverage, we do not expect to suffer any losses associated with these wildfires.

We plan on providing forbearance and assistance to our impacted customers.

Critical Accounting Estimates

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We have identified two policies and estimates as being critical because they require management to make particularly difficult, subjective, and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions.

These policies relate to the allowance for credit losses ("ACL") and the valuation of residential mortgage servicing rights ("MSR").

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 loss given default.

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

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

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

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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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 through purchases.

of MSRs 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.

Initial and subsequent fair value measurements are determined using a discounted cash flow model.

Initial and subsequent fair value measurements are determined using a discounted cash flow model that is owned and operated by a third party valuation firm.

To determine the fair value of the MSR, the present value of expected net future cash flows is estimated.

Assumptions used include market discount rates, anticipated prepayment speeds, delinquency and foreclosure rates, and ancillary fee income net of servicing costs.

This model is periodically validated by an independent model validation group.

The model assumptions and the MSR fair value estimates are also compared to observable trades of similar portfolios as well as to MSR broker valuations and industry surveys, as available.

We also utilize a third-party valuation firm to value our MSRs on a periodic basis, the results of which we use to evaluate the reasonableness of our modeled values.

We also utilize a separate third-party valuation firm to value our MSRs on a periodic basis, the results of which we use to evaluate the reasonableness of the modeled values.

Actual market conditions could vary significantly from current conditions which could result in the estimated life of the underlying loans being different which would change the fair value of the MSR.

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Provision for credit losses — (441)

Noninterest income 41,921 51,570

Noninterest income (loss) (44,385) 41,921

Noninterest expense 196,214 241,872

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Return on average tangible equity

Net income (loss) (27.3) % (4.8) %

(3.6) % 2.0 %

Return on average assets

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Full time equivalent employees 827 902

(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.

(1) Core net income (loss), core net income (loss) per fully diluted share, return on average tangible equity, core 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.

Summary Financial Data (continued)

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Shares outstanding at period end 18,857,565 18,810,055

Loans to deposits ratio 110.0 % 99.9 %

Loans to deposits ratio (Bank) 97.4 % 109.4 %

Credit quality:

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Tier 1 leverage ratio (3)

7.30 % 8.50 %

Total risk-based capital 13.02 % 13.49 %

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Tier 1 leverage ratio (3)

5.77 % 7.04 %

Total risk-based capital 12.23 % 12.84 %

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

(3) Due to the timing of our loan sale at the end of December 2024, our Tier 1 leverage regulatory capital ratios, which are based on average assets for the quarter, were temporarily suppressed.

If the $990 million loan sale had occurred at the beginning of the fourth quarter, average assets for the fourth quarter for the Company and the Bank would have been approximately $8.3 billion and the Tier 1 leverage ratio for the Company and the Bank as of December 31, 2024 would have been approximately 6.45% and 8.15%, respectively.

Results of Operations

2024 Compared to 2023

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.

Non-core amounts:

For 2024, non-core items include an $88.8 million loss on the sale of $990 million of multifamily loans, $53.3 million valuation allowance for deferred tax assets and $3.4 million of merger related expenses.

During 2023, non-core items include a $39.9 million goodwill impairment charge and $1.5 million of merger related expenses.

Our net loss and loss before income taxes were $144.3 million and $120.5 million, respectively, in 2024, as compared to $27.5 million and $32.8 million, respectively, in 2023.

Our core net loss and core loss before income taxes, which exclude the loss on the sale of multifamily loans, the impact of merger related expenses, the valuation allowance for deferred tax assets and goodwill impairment charges, were $20.9 million and $27.8 million in 2024, compared to core net income of $8.3 million and core income before taxes of $8.6 million in 2023.

The $36.4 million decrease in core income before taxes was primarily due to lower net interest income and lower noninterest income, partially offset by a decrease in noninterest expense.

Income Taxes:

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.

Due to our cumulative losses over the last three years, accounting rules require us to provide a valuation allowance for the balance of our deferred tax assets.

Therefore, in 2024, we recorded a $53 million valuation allowance for deferred tax assets which was recorded as income tax expense.

Excluding this valuation allowance, the income tax benefit would have been $29.5 million and would have resulted in an effective tax rate of 24.5% for 2024 as compared to an effective tax rate of 16.0% for 2023.

Our effective tax rate in 2023 was significantly impacted by the goodwill impairment charge, a portion of which is not deductible for tax purposes.

Net Interest Income:

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33,219 16,277 49,496

Total changes in net interest income

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

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.

Total changes in net interest income (loss) $ (26,195) $ (20,818) $ (47,013)

Net interest income in 2024 decreased $46.7 million as compared to 2023 due primarily to a decrease in our net interest margin.

Our net interest margin decreased from 1.88% in 2023 to 1.38% in 2024 due to a 67 basis point increase in the rates paid on interest-bearing liabilities which was partially offset by a 10 basis point increase in the yield on interest earning assets.

Yields on interest-earning assets increased as the yields on loan originations during the 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 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.

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 increases in the rates paid on borrowings and 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 $0.4 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:

There was no provision for credit losses recognized during 2024 as compared to a $0.4 million recovery in 2023.

For 2024, the benefits of the reduction in loan balances during the year were offset by specific reserves on commercial loans.

In the fourth quarter, we continued to experience a minimal level of identified credit issues in our loan portfolio and a lack of significant expected credit issues arising in future periods.

The recovery of provision for credit losses in 2023 reflects the stable balance of our loan portfolio and minimal level of identified credit issues in our loan portfolio.

Noninterest income (loss) consisted of the following:

Years Ended December 31,

(in thousands) 2024 2023

Noninterest income

Gain on loan origination and sale activities (1)

Noninterest income (loss)

Gain (loss) on loan origination and sale activities (1)

Single family $ 9,573 $ 8,500

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Other 11,170 9,779

Total noninterest income $ 41,921 $ 51,570

Total noninterest income (loss) $ (44,385) $ 41,921

(1) May include loans originated as held for investment.

(2) 2024 amount includes loss of $88.8 million on sale of $990 million of multifamily loans in the fourth quarter.

Loan servicing income, a component of 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 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 income in 2024 decreased from 2023 primarily due to the $88.8 million loss on the sale of multifamily loans and lower deposit fees, partially offset by higher levels of income realized from our investments in small business investment companies.

Noninterest expense consisted of the following:

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Total noninterest expense $ 196,214 $ 241,872

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.

The $45.7 million decrease in noninterest expense in 2024 as compared to 2023 was primarily due to a $39.9 million goodwill impairment in 2023, $3.6 million lower compensation and benefit costs and $1.6 million lower general and administrative costs, which were partially offset by $1.9 million of higher merger related expenses recognized in 2024.

The decrease in compensation and benefit costs was primarily due to a 9% decrease in FTE and lower medical costs, which was partially offset by wage increases given in 2024.

Financial Condition – December 31, 2024 compared to December 31, 2023

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.

During 2024, our total assets decreased $1.3 billion due primarily to the $990 million sale of multifamily loans and a $221 million decrease in investment securities.

During 2024, we allowed our investment securities portfolio to decline through runoff.

In 2024, total liabilities decreased $1.1 billion due to a $745 million decrease in borrowings and a $350 million decrease in deposits.

The decrease in deposits was primarily due to a $467 million decrease in brokered certificates of deposit which was partially offset by increases in retail customer deposits.

The $745 million decrease in borrowings during 2024 was primarily due to paydowns from the use of proceeds from the sale of multifamily loans.

Investment Securities

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Total LHFI less ACL $ 6,193,053 $ 7,382,404

(1) Includes $1.3 million and $5.9 million of loans at December 31, 2023 and 2022, respectively, where a fair value option election was made at the time of origination and;

therefore, are carried at fair value with changes recognized in the consolidated income statements.

(1) Includes $1.3 million of loans at December 31, 2024 and 2023, where a fair value option election was made at the time of origination and therefore, are carried at fair value with changes recognized in the consolidated income statements.

The following tables show the contractual maturity of our loan portfolio by loan type:

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Loan Roll-forward

Years Ended December 31,

(in thousands) 2024 2023

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1,103,742 26,839

Net gain on loan origination and sale activities

Net gain (loss) on loan origination and sale activities

Single family loans $ 9,573 $ 8,500

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(1) May include loans originated as held for investment.

2024 amount includes sale of $990 million of multifamily loans in the fourth quarter.

(2) May include loans originated as held for investment.

2024 amount includes loss of $88.8 million on sale of $990 million of multifamily loans in the fourth quarter.

Capitalized Mortgage Servicing Rights ("MSRs")

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Delinquent Loans, Nonperforming Assets and Provision for Credit Losses

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 $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.

During 2024, our ratios of nonperforming assets to total assets and total loans delinquent over 30 days, including nonaccrual loans, increased, partially as a result of the sale of $990 million of multifamily loans in the fourth quarter.

As of December 31, 2024, our ratio of nonperforming assets to total assets was 0.71% as compared to 0.45% at December 31, 2023, and our ratio of total loans delinquent over 30 days, including nonaccrual loans, to total loans was 1.06% as compared to 0.72% at December 31, 2023.

The $16 million increase in nonaccrual loans during 2024 was primarily related to a syndicated commercial loan which we are participating.

Delinquent loans by loan type consisted of the following:

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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 and borrowing from other financial institutions.

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

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

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The Company 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.

At December 31, 2024, the Bank had available borrowing capacity of $1.3 billion from the FHLB, $1.6 billion from the FRBSF and $1.0 billion under borrowing lines established with other financial institutions.

We believe that our current unrestricted cash and cash equivalents, cash flows from operations and borrowing capacity will be sufficient to meet our liquidity needs for at least the next 12 months.

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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 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.

For 2024, $46 million of cash was used in operating activities primarily due to our net loss for the year, excluding the impact of the $88.8 million loss on the sale of $990 million of multifamily loans, the net proceeds of which are included in investing activities.

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

Cash flows from investing activities

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

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.

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 repayments of investment securities.

For 2024, cash of $1.3 billion was provided by investing activities primarily from proceeds from the sale of $990 million of multifamily loans, principal repayments on AFS investment securities, LHFI repayments in excess of originations and net FHLB stock sales.

Cash flows from financing activities

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

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.

For 2024, cash of $1.1 billion was used in financing activities primarily due to a net decrease in long-term and short-term

borrowings, which was generated from the sale of $990 million of multifamily loans and decreases 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.

Capital Resources and Dividends

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HomeStreet, Inc.

Tier 1 leverage capital (to average assets) $ 675,440 7.04 % $ 383,696 4.0 % NA NA

Tier 1 leverage capital (to average assets) (1)

$ 537,057 5.77 % $ 372,319 4.0 % NA NA

Common equity tier 1 capital (to risk-weighted assets) 477,057 8.62 % 249,109 4.5 % NA NA

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Tier 1 leverage capital (to average assets) (1)

$ 678,869 7.30 % $ 372,132 4.0 % $ 465,165 5.0 %

Common equity tier 1 capital (to risk-weighted assets) 678,869 12.27 % 249,000 4.5 % 359,667 6.5 %

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Total risk-based capital (to risk-weighted assets) 720,498 13.02 % 442,667 8.0 % 553,334 10.0 %

(1) Due to the timing of our loan sale at the end of December 2024, our Tier 1 leverage regulatory capital ratios, which are based on average assets for the quarter, were temporarily suppressed.

At December 31, 2023

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At December 31, 2024, capital conservation buffers for the Company and the Bank were 3.70% and 5.02%, respectively.

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 Company did not pay any cash dividends in 2024 and currently does not plan to pay quarterly dividends in 2025.

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 December 31, 2024.

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

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

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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(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 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.

(ii) core net income (loss) and effective tax rate on core net income (loss) before taxes, which excludes the loss on the sale of $990 million of multifamily loans due to the unusual nature and size of the loan sale, the deferred tax asset valuation allowance because it is a significant unusual item, goodwill impairment charges because they were an unusual nonrecurring item, loss on debt extinguishment 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 considered non-core 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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Adjustments (tax effected)

Loss on loan sale 67,058 —

Merger related expenses 2,674 1,170

Loss on debt extinguishment 353 —

Goodwill impairment charge — 34,622

Deferred tax valuation allowance 53,310 —

Total $ (20,949) $ 8,284

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Computed amount $ (1.11) $ 0.44

$ 0.44 $ 3.49

Return on average tangible equity

Return on average tangible equity - Core

Average shareholders' equity

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Ratio (3.6) % 2.0 %

Return on average equity - Core

Average shareholders' equity (per above) $ 530,360 $ 552,234

Core net income (loss) (per above) (20,949) 8,284

Ratio (3.9) % 1.5 %

Efficiency ratio

2 unchanged sentences

Merger related expenses (3,428) (1,500)

Loss on debt extinguishment (452) —

Goodwill Impairment charge — (39,857)

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(44,385) 41,921

Gain on sale of branches — (4,270)

Loss on loan sale 88,818 —

Total $ 164,520 $ 208,674

Ratio 116.0 % 95.6 %

Return on Average assets - Core

Average Assets $ 9,259,233 $ 9,469,170

Core net income (loss) - per above (20,949) 8,284

Ratio (0.23) % 0.09 %

Effective tax rate used in computations above (1)

22.0 % 22.0 %

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

As of December 31,

(in thousands, except share data) 2024 2023

Tangible book value per share

1 unchanged sentence

$ 396,997 $ 538,387

goodwill and other intangibles

other intangibles

(7,141) (9,641)

10 unchanged sentences

$ 8,123,698 $ 9,392,450

Goodwill and other intangibles

Other intangibles

(7,141) (9,641)

1 unchanged sentence

Ratio 4.8 % 5.6 %

(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.

(1) Effective tax rate indicated is used for all adjustments except the loss on loan sale and the goodwill impairment charge.

A computed effective rate of 13.1% was used for the goodwill impairment charge as a portion of this charge was not deductible for tax purposes.

The gross effective tax rate of 24.5% was used for the loss on loan sale due to the large size of the loss in relation to permanent differences that could impact our gross effective rate.

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