What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2025-05-08 compared with 2024-11-08 · 179 added, 150 removed, 437 unchanged (43% of the section changed)

3 unchanged sentences

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”).

Forward-looking statements in this Form 10-Q also include statements regarding discussions by FirstSun and the Company relating to the pursuit of an alternative regulatory structure for the proposed merger of HomeStreet into FirstSun Capital Bancorp (“FirstSun”) and HomeStreet Bank into Sunflower Bank, N.A.

("Sunflower Bank") a subsidiary of FirstSun (collectively, the “Merger”), discussions relating to terms on which HomeStreet and FirstSun would terminate the merger agreement if no alternative structure is feasible, the expected impact of decreases in interest rates 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 and 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.

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) and include statements relating to achievement of profitability and timing of such achievement and expectations regarding reductions in short-term interest rates and their impact on the Company.

Forward-looking statements in this Form 10-Q are based on the Company’s expectations at the time such statements are made and speak only as of the date made.

The Company does not assume any obligation or undertake to update any forward-looking statements after the date of this Form 10-Q 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.

2 unchanged sentences

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 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);

(3) 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;

(4) 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;

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

(1) our ability to successfully consummate the pending merger (the "Merger") with Mechanics Bank ("Mechanics"), (2) the ability of HomeStreet and Mechanics to obtain required governmental approvals of the Merger, (3) the failure to satisfy the closing conditions in the definitive Agreement and Plan of Merger, dated as of March 28, 2025 (the “Merger Agreement”), or any unexpected delay in closing the Merger, (4) 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, (5) the diversion of management time from core banking functions due to Merger-related issues;

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

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

(8) 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;

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

(7) changes in the interest rate environment and in expectation of reduction in short-term interest rates;

(8) 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;

(11) changes in the interest rate environment;

(12) 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;

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

and global economies, including business disruptions, reductions in employment, inflationary pressures and an increase in business failures, specifically among our customers, and global trade disputes, including the imposition of tariffs by the U.S.

and countermeasures by foreign governments;

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

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

(11) changes in deposit flows, loan demand or real estate values may adversely affect our business;

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

(13) our ability to obtain regulatory approvals or non-objection to take various capital actions, including the payment of dividends by us or the Bank;

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

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

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

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

(15) our credit quality and the effect of credit quality on our credit losses expense and allowance for credit losses and impact the adequacy of our allowance for credit losses;

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

1 unchanged sentence

(18) 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;

(22) 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;

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

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

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

(21) 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;

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

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

(27) staffing fluctuations in response to product demand or the implementation of corporate

strategies that affect our work force and potential associated charges;

(28) 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 (29) 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 and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2024 (the "First Quarter 2024 Report on Form 10-Q").

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

and (24) 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.

A discussion of the factors, risks and uncertainties that could affect our financial results, business goals and operational and financial objectives cited in this Form 10-Q, other releases, public statements and/or filings with the Securities and Exchange Commission (“SEC”) is also contained in the “Risk Factors” sections of the Company's Forms 10-K and 10-Q and in our

Current Reports on Form 8-K we file with the SEC.

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

2 unchanged sentences

Critical Accounting Estimates

We have identified two 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 single family mortgage servicing rights (“MSRs").

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

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

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

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

If changes were to occur in the events, trends or other circumstances on which our estimates or assumptions were based, these changes could have a material adverse effect on the carrying value of assets and liabilities and on our results of operations.

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 ("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 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.

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

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

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

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, 2024 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, 2025 would increase by approximately $6 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.

3 unchanged sentences

Summary Financial Data

Quarter Ended Nine Months Ended September 30,

(in thousands, except per share data and FTE data) September 30, 2024 June 30, 2024 2024 2023

Quarter Ended

(dollars in thousands) March 31, 2025 December 31, 2024 March 31, 2024

Select Income Statement data:

1 unchanged sentence

Provision for credit losses 1,000 — —

Noninterest income 11,058 13,227 33,739 30,965

Noninterest income (loss) 12,136 (78,124) 9,454

Noninterest expense 49,108 43,953 52,164

Income (loss) before income taxes (9,489) (8,003) (28,051) (28,746)

Net income (loss):

Before income tax (benefit) expense (4,751) (92,461) (10,559)

Total (4,465) (123,327) (7,497)

Net income (loss) per fully diluted share (0.24) (6.54) (0.40)

4 unchanged sentences

Return on average equity - annualized

Net income (loss) (4.5) % (92.7) % (5.6) %

(2.9) % (3.9) % (4.1) %

Return on average tangible equity - annualized (1)

Net income (loss) (4.2) % (93.7) % (5.3) %

(2.5) % (3.5) % (3.8) %

6 unchanged sentences

Full time equivalent employees 766 792 858

(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.

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

(in thousands, except share and per share data) September 30, 2024 December 31, 2023

(dollars in thousands) March 31, 2025 December 31, 2024

Selected Balance Sheet Data

20 unchanged sentences

Credit Quality:

Delinquencies (2)

1.09 % 1.06 %

ACL to total loans (3)

14 unchanged sentences

Tier 1 leverage

6.62 % 5.77 %

Total risk-based capital

3 unchanged sentences

For a reconciliation of these measures 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) Total past due and nonaccrual loans as a percentage of total loans held for investment.

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

Current Developments

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 the Company and the Bank will merge with and into FirstSun and Sunflower Bank, respectively.

The merger agreement was approved by HomeStreet’s shareholders at a meeting held on June 18, 2024.

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.

On October 29, 2024 FirstSun and the Company announced that based on discussions with the Federal Reserve and the Texas Department of Banking, regulatory approvals necessary for the Merger to proceed have not been obtained and FirstSun and Sunflower Bank have been asked to withdraw their merger applications.

FirstSun and the Company are discussing the pursuit of an alternative regulatory structure for the Merger.

The parties are also discussing terms on which they would terminate the Merger agreement if no alternative structure is feasible.

There can be no assurance that an alternative regulatory structure may ultimately be feasible.

Recent Developments

On March 28, 2025, the Company entered into a definitive Agreement and Plan of Merger with Mechanics Bank, whereby, subject to regulatory and certain shareholder approvals the Bank will merge with and into Mechanics Bank as a subsidiary of the Company (the “Merger”).

The Company will amend its articles of incorporation to issue shares to the Mechanics shareholders in exchange for 100% of Mechanics stock such that when the Merger closes the Mechanics shareholders will own approximately 91.7% of the combined company and HomeStreet shareholders will own approximately 8.3% of the combined company.

Upon the closing of the Merger the Company’s name will change to Mechanics Bancorp.

The Merger is expected to close in the third quarter of 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;

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.

However, with the recent decrease in short term interest rates, we expect our funding costs to decrease in the fourth quarter and beyond and our interest margin to begin to increase.

Management's Overview of the Third Quarter 2024 Financial Performance

Third Quarter of 2024 Compared to the Second Quarter of 2024

Our net loss and loss before income taxes were $(7.3) million and $(9.5) million, respectively, in the third quarter of 2024, as compared to $(6.2) million and $(8.0) million, respectively, in the second quarter of 2024.

The $1.5 million increase in loss before income taxes was primarily due to lower net interest income and lower noninterest income which was partially offset by a decrease in noninterest expense.

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 2024 loan sale, we improved our net interest margin by selling lower yielding loans and paying off higher cost wholesale funding.

Given the scheduled repricing of our multifamily and other commercial real estate loans, future anticipated reductions in borrowings, the expectation of ongoing reductions in short-term interest rates by the Federal Reserve and continued effective non-interest expense management, we anticipate growth in earnings for the foreseeable future.

Management's Overview of the First Quarter 2025 Financial Performance

First Quarter of 2025 Compared to the Fourth Quarter of 2024

Non-core amounts:

For the first quarter non-core items include $2.1 million of merger related expenses.

In the fourth quarter of 2024 non-core items include an $88.8 million loss on the sale of $990 million of multifamily loans, $53.3 million deferred tax assets valuation allowance and $3.2 million of merger related expense recoveries.

Our net loss and loss before income taxes were $4.5 million and $4.8 million, respectively, in the first quarter of 2025, as compared to $123.3 million and $92.5 million, respectively, in the fourth quarter of 2024.

Our core net loss and core net loss before taxes, which excludes the impact of the loss on the sale of multifamily loans, the deferred tax asset valuation allowance and merger related expenses and recoveries, were $2.9 million and $2.7 million, respectively, in the first quarter of 2025, as compared to $5.1 million and $6.4 million respectively, in the fourth quarter of 2024.

The decrease in core loss before income taxes was primarily due to an increase in net interest income and an increase in noninterest income, partially offset by an increase in provision for credit losses and an increase in noninterest expense.

Income Taxes:

The income tax benefit realized resulted in an effective tax rate of 23.3% for the third quarter of 2024 as compared to an effective tax rate of 22.1% in the second quarter of 2024.

Due to our cumulative losses over the last three year period ended December 31, 2024, accounting rules required us to provide a valuation allowance for the balance of our deferred tax assets in the fourth quarter of 2024.

As a result, we do not expect to recognize income tax expense until the deferred tax assets valuation allowance no longer exists.

The $0.3 million income tax benefit recognized in the first quarter of 2025 primarily relates to the reversal of the disparate tax effects on our accumulated other comprehensive income ("AOCI") resulting from the recording in the fourth quarter of 2024, of a deferred tax valuation allowance for the deferred tax assets related to the AOCI.

In the fourth quarter of 2024, we recorded a $53 million deferred tax allowance which was recorded as income tax expense.

Excluding this allowance, the income tax benefit would have been $22.4 million and would have resulted in an effective tax rate of 24.3% for the fourth quarter of 2024.

Net Interest Income:

5 unchanged sentences

Quarter Ended

September 30, 2024 June 30, 2024

March 31, 2025 December 31, 2024

(dollars in thousands)

38 unchanged sentences

Net interest margin 1.82 % 1.38 %

(1) Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain loans and securities of $1.1 million for both quarters ended September 30, 2024 and June 30, 2024.

(1) Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain loans and securities of $1.0 million and $1.1 million for quarters ended March 31, 2025 and December 31, 2024.

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

(2) Cost of all deposits, including noninterest-bearing demand deposits was 2.76% and 2.73% for the quarters ended September 30, 2024 and June 30, 2024, respectively.

Our net interest income in the third quarter of 2024 was $1.1 million lower than the second quarter of 2024 due to a decrease in our net interest margin from 1.37% to 1.33% and a decrease in interest earning assets.

The decrease in the net interest margin was due to a 3 basis point decrease in the yield on interest earning assets and a 3 basis point increase in the rates paid on interest-bearing liabilities.

Yields on interest-earning assets decreased due to lower yields on investment securities.

The increase in the rates paid on our interest-bearing liabilities was due to higher deposit costs due to a greater proportion of higher cost certificates of deposit.

(2) Cost of all deposits, including noninterest-bearing demand deposits was 2.52% and 2.74% for the quarters ended March 31, 2025 and December 31, 2024, respectively.

Our net interest income in the first quarter of 2025 was $3.6 million higher than the fourth quarter of 2024 due to an increase in our net interest margin from 1.38% to 1.82%.

The increase in the net interest margin was due primarily to a 32 basis point decrease in the rates paid on interest-bearing liabilities and a 12 basis point increase in the yield on interest earning assets.

The increase in yield on interest earning assets was primarily due to the sale of $990 million of lower yielding multifamily loans at the end of the fourth quarter of 2024.

The decrease in rates on interest bearing liabilities are primarily due to our paydown at the end of 2024 and beginning of 2025 of higher cost borrowings and brokered certificates of deposit using the proceeds from the sale of multifamily loans.

Provision for Credit Losses:

There was no provision for credit losses recognized during either the third or second quarter of 2024.

This reflects 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:

The $1.0 million provision for credit losses recognized during the first quarter of 2025 was due to a $3.3 million increase in specific reserves which was partially offset by lower general reserves resulting in part from lower loan balances.

There was no provision for credit losses in the fourth quarter of 2024 as the benefits of the reduction in loan balances resulting from the loan sale were offset by specific reserves on commercial loans.

Noninterest income (loss) consisted of the following:

Quarter Ended

(in thousands) September 30, 2024 June 30, 2024

Noninterest income

Gain on loan origination and sale activities (1)

(in thousands) March 31, 2025 December 31, 2024

Noninterest income (loss)

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

Single family

3 unchanged sentences

Other 1,991 1,705

Total noninterest income $ 11,058 $ 13,227

Total noninterest income (loss) $ 12,136 $ (78,124)

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

(2) December 31, 2024 amount includes loss of $88.8 million on sale of $990 million of multifamily loans.

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

Quarter Ended

(in thousands) September 30, 2024 June 30, 2024

(in thousands) March 31, 2025 December 31, 2024

Single family servicing income, net

6 unchanged sentences

Net gain (loss) from economic hedging (3)

1,016 (2,731)

Single Family servicing income 3,430 1,853

5 unchanged sentences

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

(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 September 30, 2024 and June 30, 2024.

Noninterest income in the third quarter of 2024 decreased from the second quarter of 2024 primarily due to more income realized in the second quarter of 2024 from our investments in small business investment companies.

(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 $0.4 million and $0.3 million for the quarters ended March 31, 2025 and December 31, 2024, respectively.

Noninterest income in the first quarter of 2025 increased from the fourth quarter of 2024 primarily due to the $88.8 million loss on the sale of multifamily loans in the fourth quarter of 2024 and an increase in loan servicing income.

The increase in loan servicing income is primarily due to an increase in the value of our single family mortgage servicing rights.

Noninterest Expense consisted of the following:

Quarter Ended

(in thousands) September 30, 2024 June 30, 2024

(in thousands) March 31, 2025 December 31, 2024

Noninterest expense

4 unchanged sentences

Total noninterest expense $ 49,108 $ 43,953

The 3.5% decrease in noninterest expenses in the third quarter of 2024, as compared to the second quarter of 2024, reflects the Company's emphasis on reducing operating expenses where possible.

Nine Months Ended September 30, 2024 Compared to Nine Months Ended September 30, 2023

Our net income (loss) and income (loss) before income taxes were $(21.0) million and $(28.1) million, respectively, in the nine months ended September 30, 2024, as compared to $(24.1) million and $(28.7) million, respectively, in the nine months ended September 30, 2023.

Our core net income (loss) and core income (loss) before income taxes in the nine months ended September 30, 2024, which excludes the impact of merger related expenses and goodwill impairment charges, was $(15.8) million and $(21.4) million, as compared to $10.5 million and $11.1 million, respectively, in the nine months ended September 30, 2023 (1) .The $32.5 million decrease in core income before taxes was primarily due to lower net interest income, partially offset by an increase in noninterest income and a decrease in noninterest expenses.

Noninterest expenses were $5.2 million higher in the first quarter of 2025 due to a $1.3 million increase in compensation and benefits and a $4.8 million increase in general, administrative and other expenses which were partially offset by a $1.3 million decrease in occupancy expenses.

The increase in compensation and benefits was primarily due to wage increases in 2025 and increases in employee benefits and employer taxes, which were partially offset by a 3% reduction in FTEs.

The increase in general, administrative and other expenses was due to the recovery of $3.2 million in merger expenses in the fourth quarter of 2024 and $2.1 million of merger related expenses incurred in the first quarter of 2025.

The decrease in occupancy costs was primarily due to lease impairment costs recognized in the fourth quarter of 2024.

First Quarter of 2025 Compared to First Quarter of 2024

Non-core amounts:

For the first quarter of 2025, non-core items include $2.1 million of merger related expenses.

During the first quarter of 2024, non-core items include $2.6 million of merger related expenses.

Our net loss and loss before income taxes were $4.5 million and $4.8 million, respectively, in the first quarter of 2025, as compared to $7.5 million and $10.6 million, respectively, in the first quarter of 2024.

Our core net loss and core net loss before income taxes, which exclude the impact of merger related expenses, was $2.9 million and $2.7 million in the first quarter of 2025, as compared to core net loss of $5.5 million and core loss before income taxes of $8.0 million in the first quarter of 2024.

The $5.3 million decrease in core loss before income taxes was primarily due to higher net interest income, higher noninterest income and a decrease in noninterest expense, partially offset by an increase in provision for credit losses.

Income Taxes:

The income tax benefit realized in the nine months ended September 30, 2024 resulted in an effective tax rate of 25.1% as compared to an effective tax rate of 16.2% for the nine months ended September 30, 2023.

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

(1) Core net income (loss) and core income (loss) before income taxes are non-GAAP financial measures.

For a discussion of these measures and a reconciliation to the most comparable GAAP measure, please see “Non-GAAP Financial Measures” at the end of this Item 2.

As a result, we do not expect to recognize tax expense until the deferred tax assets valuation allowance no longer exists.

The $0.3 million income tax benefit recognized in the first quarter of 2025 primarily relates to the reversal of the disparate tax effects on our AOCI resulting from the recording in the fourth quarter of 2024of a deferred tax valuation allowance for the deferred tax assets related to AOCI.

Our effective tax rate in the first quarter of 2024 of 29.0% 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 taxable loss.

Net Interest Income:

4 unchanged sentences

and (v) net interest margin:

Nine Months Ended September 30,

Quarter Ended March 31,

(dollars in thousands)

38 unchanged sentences

Net interest margin 1.82 % 1.44 %

(1) Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain loans and securities of $3.2 million and $3.5 million for the nine months ended September 30, 2024 and 2023, respectively.

(1) Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain loans and securities of $1.0 million and $1.1 million for the quarters ended March 31, 2025 and 2024, respectively.

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

(2) Cost of deposits including noninterest-bearing deposits, was 2.70% and 1.90% for the nine months ended September 30, 2024 and 2023, respectively.

Net interest income in the nine months ended September 30, 2024 decreased $41.3 million as compared to the nine months ended September 30, 2023 due primarily to a decrease in our net interest margin.

Our net interest margin decreased from 1.96% in the nine months ended September 30, 2023 to 1.38% in the nine months ended September 30, 2024 due to a 82 basis point increase in the rates paid on interest-bearing liabilities which was partially offset by a 14 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.

(2) Cost of deposits including noninterest-bearing deposits, was 2.52% and 2.61% for the quarters ended March 31, 2025 and 2024, respectively.

Net interest income in the first quarter of 2025 increased $1.1 million as compared to the first quarter of 2024 due primarily to an increase in net interest margin from 1.44% in the first quarter of 2024 to 1.82% in the first quarter of 2025.

The increase in net interest margin is due to a 27 basis point decrease in the rates paid on interest-bearing liabilities and an 11 basis point increase in the yield on interest earning assets.

The increase in yield on interest earning assets was primarily due to the sale of $990 million of lower yielding multifamily loans at the end of the fourth quarter of 2024.

Provision for Credit Losses:

There was no provision for credit losses recognized during the nine months ended September 30, 2024 as compared to a $0.9 million recovery in the nine months ended September 30, 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.

During the first quarter of 2024, the provision 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:

Nine Months Ended September 30,

Quarter Ended March 31,

(in thousands) 2025 2024

8 unchanged sentences

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

Noninterest income in the nine months ended September 30, 2024 increased from the nine months ended September 30, 2023 primarily due to higher levels of income realized from our investments in small business investment companies, an increase in single family gain on loan origination and sales activities which were partially offset by lower deposit fees.

Noninterest income in the first quarter of 2025 increased from the first quarter of 2024 primarily due to a $0.9 million increase in gain on loan sales and a $1.8 million increase in loan servicing income.

The gain on loan sales increased primarily due to an increase in CRE loan sales volume.

The increase in loan servicing income is primarily due to an increase in the value of our single family mortgage servicing rights.

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

Nine Months Ended September 30,

Quarter Ended March 31,

(in thousands) 2025 2024

8 unchanged sentences

1,016 (1,110)

(1,017) (1,039)

Single Family servicing income 3,430 1,919

5 unchanged sentences

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

(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 $0.9 million and $1.1 million for the nine months ended September 30, 2024 and 2023, respectively.

Noninterest Expense consisted of the following:

Nine Months Ended September 30,

Quarter Ended March 31,

(in thousands) 2025 2024

4 unchanged sentences

General, administrative and other 10,343 11,377

Goodwill impairment charge — 39,857

Total noninterest expense $ 49,108 $ 52,164

The $40.1 million decrease in noninterest expenses in the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023 was primarily due to a $39.9 million goodwill impairment in the nine months ended September 30, 2023, lower compensation and benefit costs and lower occupancy costs, which were partially offset by $6.7 million of merger related expenses recognized in 2024.

The decrease in compensation and benefit costs was primarily due to lower staffing levels, which was partially offset by wage increases given in the nine months ended September 30, 2024.

FTEs decreased from 910 in the nine months ended September 30, 2023 to 839 in the nine months ended September 30, 2024.

The $3.1 million decrease in noninterest expense in the first quarter of 2025 as compared to the first quarter of 2024 was primarily due to $1.7 million lower compensation and benefit costs, $0.6 million lower occupancy costs and $1.0 million lower general and administrative costs.

The decrease in compensation and benefit costs was primarily due to an 11% decrease in FTE and lower medical costs, which was partially offset by wage increases in the first quarter of 2025.

The decrease in occupancy costs is primarily due to reductions in leased space from branch closures in 2024.

The decrease in general and administrative costs reflects the efforts made to eliminate or defer nonessential expenses.

Financial Condition

During the nine months ended September 30, 2024, our total assets decreased $191 million due primarily to a $120 million decrease in investment securities as we are not purchasing new investment securities to replace principal paydowns in our portfolio.

During the nine months ended September 30, 2024, total liabilities decreased $191 million due to a $328 million decrease in deposits, partially offset by an increase in borrowings.

The decrease in deposits was primarily due to a $477 million decrease in brokered certificates of deposit which was partially offset by increases in non-brokered deposits.

The $151 million of additional borrowings were used to replace maturing brokered deposits.

During the first quarter of 2025, our total assets decreased $320 million due primarily to a $169 million decrease in loans held for investment and a $154 million decrease in cash.

In the first quarter of 2025, total liabilities decreased $324 million due to a $323 million decrease in deposits.

The decrease in deposits was primarily due to a $454 million decrease in brokered certificates of deposit which was partially offset by a $131 million increase in non-brokered deposits.

Credit Risk Management

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

As of September 30, 2024, our ratio of nonperforming assets to total assets was 0.47% compared to 0.42% at June 30, 2024 while our ratio of total loans delinquent over 30 days, including nonaccrual loans, to total loans was 0.69% compared to 0.66% at June 30, 2024.

During the first quarter of 2025, our ratios of nonperforming assets to total assets and total loans delinquent over 30 days, including nonaccrual loans, increased slightly primarily due to a decrease in our loans held for investment.

As of March 31, 2025, our ratio of nonperforming assets to total assets was 0.75% as compared to 0.71% at December 31, 2024, and our ratio of total loans delinquent over 30 days, including nonaccrual loans, to total loans was 1.09% as compared to 1.06% at December 31, 2024.

During the first quarter of 2025, we increased the specific reserves for a syndicated commercial loan by $3.9 million based on updated analysis of the collateral support for this loan.

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, 2024 At December 31, 2023

At March 31, 2025 At December 31, 2024

(dollars in thousands)

27 unchanged sentences

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

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

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.

1 unchanged sentence

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

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, 2024 and December 31, 2023, the Bank had available borrowing capacity of $1.6 billion and $2.1 billion, respectively, from the FHLB, and $874 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 nine months ended September 30, 2024, cash and cash equivalents decreased by $10 million compared to an increase of $154 million during the nine months ended September 30, 2023.

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

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

At March 31, 2025 and December 31, 2024, the Bank had available borrowing capacity of $1.0 billion and $1.3 billion, respectively, from the FHLB, and $2.0 billion and $1.6 billion, respectively, from the FRBSF and $949 million 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.

We are currently not aware of any other 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 liquidity needs during or beyond the next 12 months.

For the quarter ended March 31, 2025, cash and cash equivalents decreased by $154 million compared to an increase of $105 million during the quarter ended March 31, 2024.

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, 2024, net cash of $47 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 trading securities.

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 quarter ended March 31, 2025, net cash of $23 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 trading securities.

For the quarter ended March 31, 2024, net cash of $8 million was used in operating activities, as cash generated from operations was offset by an increases in trading securities and other assets.

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, 2024, net cash of $215 million was provided by investing activities primarily from principal repayments on AFS securities and by LHFI principal repayments, net of originations, partially offset by net FHLB stock purchases.

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, partially offset by the purchase of AFS investment securities and net FHLB stock purchases.

For the quarter ended March 31, 2025, net cash of $191 million was provided by investing activities primarily from principal repayments on AFS securities and by LHFI principal repayments, net of originations.

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.

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, 2024, net cash of $178 million was used in financing activities, primarily due to a decrease in deposits, partially offset by an increase in 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 borrowings.

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

For the quarter ended March 31, 2025, net cash of $323 million was used in financing activities, primarily due to a decrease in brokered certificates of deposit.

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

Off-Balance Sheet Arrangements

3 unchanged sentences

These commitments include the following:

(in thousands) At September 30, 2024 At December 31, 2023

(in thousands) At March 31, 2025 At December 31, 2024

Unused consumer portfolio lines $ 627,326 $ 609,930

3 unchanged sentences

Total $ 1,207,452 $ 1,189,762

(1) Within the commercial portfolio, undistributed construction loan proceeds, where the Company has an obligation to advance funds for construction progress payments were $340 million and $403 million at September 30, 2024 and December 31, 2023, respectively.

(1) Within the commercial portfolio, undistributed construction loan proceeds, where the Company has an obligation to advance funds for construction progress payments were $348 million and $306 million at March 31, 2025 and December 31, 2024, 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, 2024

At March 31, 2025

Actual For Minimum Capital

26 unchanged sentences

Tier 1 leverage capital (to average assets)

$ 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 %

5 unchanged sentences

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

At September 30, 2024, capital conservation buffers for the Company and the Bank were 4.46% and 5.41%, respectively.

At March 31, 2025, capital conservation buffers for the Company and the Bank were 3.87% and 5.40%, respectively.

The Company did not declare a cash dividend in the quarter and currently does not plan to pay any 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 September 30, 2024.

We had no material commitments for capital expenditures as of March 31, 2025.

Non-GAAP Financial Measures

2 unchanged sentences

(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 net 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.

(ii) core net income (loss) and effective tax rate on core net income (loss) before income taxes, which excludes the loss on the sale of $990 million of multifamily loans in the fourth quarter of 2024 due to the unusual nature and size of the loan sale, the deferred tax asset valuation allowance recognized in the fourth quarter of 2024 because it is a significant unusual item, loss on debt extinguishment in the fourth quarter of 2024 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) core noninterest expenses which excludes the loss on debt extinguishment in the fourth quarter of 2024 and merger related expenses as we believe this measure is a better comparison to be used for projecting future noninterest expenses, and (iv) 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, as well as additional measures derived from these supplemental performance measures, may vary from, and may not be comparable to, similarly titled measures provided by other companies in our industry.

Non-GAAP financial measures are not in accordance with, or an alternative for, GAAP.

6 unchanged sentences

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 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,

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

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

For the Quarter Ended

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

September 30, 2024 June 30, 2024 2024 2023

March 31, 2025 December 31, 2024 March 31, 2024

Core net income (loss)

1 unchanged sentence

Adjustments (tax effected)

Merger related expenses 1,283 1,897 5,208 —

Goodwill impairment — — — 34,622

Loss on loan sale — 67,058 —

Merger related expenses (recoveries) 1,599 (2,534) 2,028

Loss on debt extinguishment — 353 —

Deferred tax asset valuation allowance

Total $ (2,866) $ (5,140) $ (5,469)

4 unchanged sentences

Average shareholders' equity $ 404,800 $ 529,299 $ 537,627

$ 531,608 $ 522,904 $ 530,716 $ 565,200

Average goodwill and other intangibles

Average intangibles (6,976) (7,542) (9,403)

Average tangible equity 397,824 521,757 528,224

Net income (loss) $ (4,465) $ (123,327) $ (7,497)

Adjustments (tax effected)

Amortization of core deposit intangibles 374 487 488

Tangible income applicable to shareholders $ (4,091) $ (122,840) $ (7,009)

(4.2) % (93.7) % (5.3) %

Return on average tangible equity (annualized) - Core

Average tangible equity

5 unchanged sentences

(2.5) % (3.5) % (3.8) %

Return on average equity (annualized) - Core

Average shareholders' equity (per above) $ 404,800 $ 529,299 $ 537,627

Core net income (loss) (per above) (2,866) (5,140) (5,469)

(2.9) % (3.9) % (4.1) %

2 unchanged sentences

$ 49,108 $ 43,953 $ 52,164

Merger related expenses (1,645) (2,432) (6,677) —

Goodwill impairment — — — (39,857)

Merger related expenses or recoveries

(2,050) 3,249 (2,600)

Loss on debt extinguishment — (452) —

State of Washington taxes (386) (157) (452)

1 unchanged sentence

$ 46,672 $ 46,593 $ 49,112

For the Quarter Ended

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

March 31, 2025 December 31, 2024 March 31, 2024

Total revenues

3 unchanged sentences

12,136 (78,124) 9,454

Loss on loan sale

Total $ 45,357 $ 40,310 $ 41,605

6 unchanged sentences

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.

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

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.

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

September 30, 2024 December 31, 2023

March 31, 2025 December 31, 2024

Tangible book value per share

17 unchanged sentences

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis