Mechanics Bancorp 10-Q

ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements and Notes presented elsewhere in this report and in HomeStreet, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2024 ("2024 Annual Report on Form 10-K"). FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”). Generally, forward-looking statements include the words “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “should,” “will,” and “would” and similar expressions (or the negative of these terms) 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. For all forward-looking statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Reform Act. We caution readers that actual results may differ materially from those expressed in or implied by the Company’s forward-looking statements. Rather, more important factors could affect the Company’s future results, including but not limited to the following: (1) our ability to successfully consummate the 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) 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, 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; (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; (17) legislative or regulatory changes that may adversely affect our business or financial condition, including, without limitation, changes in corporate and/or individual income tax laws and policies, changes in privacy laws, and changes in regulatory capital or other rules, and the availability of resources to address or respond to such changes; (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; (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; (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. All future written and oral forward-looking statements attributable to the Company or any person acting on its behalf are expressly qualified in their entirety by the cautionary statements contained or referred to above. New risks and uncertainties arise from time to time, and factors that the Company currently deems immaterial may become material, and it is impossible for the Company to predict these events or how they may affect the Company. Critical Accounting Estimates 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 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 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. The valuation of MSRs is based on various assumptions which are set forth in Note 6– Mortgage Banking Operations of the financial statements. Note 6 also provides sensitivity analysis based on the assumptions used. The sensitivity analyses are hypothetical and have been provided to indicate the potential impact that changes in assumptions may have on the estimate of the fair value of MSRs. 42 Summary Financial Data Quarter Ended (dollars in thousands) March 31, 2025 December 31, 2024 March 31, 2024 Select Income Statement data: Net interest income $ 33,221 $ 29,616 $ 32,151 Provision for credit losses 1,000 — — Noninterest income (loss) 12,136 (78,124) 9,454 Noninterest expense 49,108 43,953 52,164 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) Core net income (loss): (1) Total (2,866) (5,140) (5,469) Core net income (loss) per fully diluted share (0.15) (0.27) (0.29) Select Performance Ratios: Return on average equity - annualized Net income (loss) (4.5) % (92.7) % (5.6) % Core (1) (2.9) % (3.9) % (4.1) % Return on average tangible equity - annualized (1) Net income (loss) (4.2) % (93.7) % (5.3) % Core (1) (2.5) % (3.5) % (3.8) % Return on average assets - annualized Net income (loss) (0.23) % (5.38) % (0.32) % Core (1) (0.15) % (0.22) % (0.23) % Efficiency ratio (1) 102.9 % 115.6 % 118.0 % Net interest margin 1.82 % 1.38 % 1.44 % Other data Full time equivalent employees 766 792 858 (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. 43 As of (dollars in thousands) March 31, 2025 December 31, 2024 Selected Balance Sheet Data Loans held for sale $ 34,734 $ 20,312 Loans held for investment, net 6,023,582 6,193,053 ACL 39,634 38,743 Investment securities 1,055,318 1,057,006 Total assets 7,803,631 8,123,698 Deposits 6,090,495 6,413,021 Borrowings 1,000,000 1,000,000 Long-term debt 225,223 225,131 Total shareholders' equity 400,751 396,997 Other data: Book value per share $ 21.18 $ 21.05 Tangible book value per share (1) $ 20.83 $ 20.67 Total equity to total assets 5.1 % 4.9 % Tangible common equity to tangible assets (1) 5.1 % 4.8 % Shares outstanding at end of period 18,920,808 18,857,565 Loans to deposit ratio (Bank) 99.9 % 97.4 % Credit Quality: Delinquencies (2) 1.09 % 1.06 % ACL to total loans (3) 0.66 % 0.63 % ACL to nonaccrual loans 71.0 % 70.4 % Nonaccrual loans to total loans 0.92 % 0.88 % Nonperforming assets to total assets 0.75 % 0.71 % Nonperforming assets $ 58,611 $ 57,814 Regulatory Capital Ratios: Bank Tier 1 leverage 8.46 % 7.30 % Total risk-based capital 13.40 % 13.02 % Common equity Tier 1 capital 12.61 % 12.27 % Company Tier 1 leverage 6.62 % 5.77 % Total risk-based capital 12.48 % 12.23 % Common equity Tier 1 capital 8.76 % 8.62 % (1) Tangible book value per share and tangible common equity to tangible assets are non-GAAP financial measures. 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. 44 Current Developments 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 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. General: 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: 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. 45 Net Interest Income: The following tables set forth, for the periods indicated, information regarding (i) the total dollar amount of interest income from interest-earning assets and the resultant average yields on those assets; (ii) the total dollar amount of interest expense and the average rate of interest on our interest-bearing liabilities; (iii) net interest income; (iv) net interest rate spread; and (v) net interest margin: Quarter Ended March 31, 2025 December 31, 2024 (dollars in thousands) Average Balance Interest Average Yield/Cost Average Balance Interest Average Yield/Cost Assets: Interest-earning assets: Loans (1) $ 6,198,659 $ 73,587 4.76 % $ 7,334,221 $ 86,119 4.62 % Investment securities (1) 1,055,336 9,509 3.60 % 1,096,695 9,953 3.63 % FHLB Stock, Fed Funds and other 242,687 3,691 6.20 % 290,506 4,052 5.52 % Total interest-earning assets 7,496,682 86,787 4.65 % 8,721,422 100,124 4.53 % Noninterest-earning assets 374,252 405,681 Total assets $ 7,870,934 $ 9,127,103 Liabilities and shareholders' equity: Interest-bearing deposits: (2) Demand deposits $ 312,762 $ 287 0.37 % $ 314,040 $ 250 0.32 % Money market and savings 1,645,604 6,874 1.68 % 1,663,526 7,067 1.68 % Certificates of deposit 2,919,241 31,076 4.32 % 3,171,161 36,784 4.61 % Total 4,877,607 38,237 3.18 % 5,148,727 44,101 3.40 % Borrowings: Borrowings 1,011,111 11,364 4.50 % 1,875,616 22,316 4.66 % Long-term debt 225,178 2,943 5.23 % 225,086 3,039 5.36 % Total interest-bearing liabilities 6,113,896 52,544 3.47 % 7,249,429 69,456 3.79 % Noninterest-bearing liabilities: Demand deposits (2) 1,265,701 1,253,516 Other liabilities 86,537 94,859 Total liabilities 7,466,134 8,597,804 Shareholders' equity 404,800 529,299 Total liabilities and shareholders' equity $ 7,870,934 $ 9,127,103 Net interest income $ 34,243 $ 30,668 Net interest rate spread 1.18 % 0.74 % Net interest margin 1.82 % 1.38 % (1) Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain loans and securities of $1.0 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 2.52% 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. 46 Provision for Credit Losses: 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) March 31, 2025 December 31, 2024 Noninterest income (loss) Gain (loss) on loan origination and sale activities (1) Single family $ 2,283 $ 2,090 CRE, multifamily and SBA (2) 933 (87,082) Loan servicing income 4,858 2,997 Deposit fees 2,071 2,166 Other 1,991 1,705 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) March 31, 2025 December 31, 2024 Single family servicing income, net Servicing fees and other $ 3,725 $ 3,715 Changes - amortization (1) (1,582) (1,690) Net 2,143 2,025 Risk management, single family MSRs: Changes in fair value due to assumptions (2) 271 2,559 Net gain (loss) from economic hedging (3) 1,016 (2,731) Subtotal 1,287 (172) Single Family servicing income 3,430 1,853 Commercial loan servicing income: Servicing fees and other 2,782 2,472 Amortization of capitalized MSRs (1,354) (1,328) Total 1,428 1,144 Total loan servicing income $ 4,858 $ 2,997 (1) Represents changes due to collection/realization of expected cash flows and curtailments. (2) Principally reflects changes in model assumptions, including prepayment speed assumptions, which are primarily affected by changes in mortgage interest rates. (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. 47 Noninterest Expense consisted of the following: Quarter Ended (in thousands) March 31, 2025 December 31, 2024 Noninterest expense Compensation and benefits $ 26,309 $ 25,037 Information services 7,585 7,208 Occupancy 4,871 6,181 General, administrative and other 10,343 5,527 Total noninterest expense $ 49,108 $ 43,953 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. General: 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: 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 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. 48 Net Interest Income: The following tables set forth, for the periods indicated, information regarding (i) the total dollar amount of interest income from interest-earning assets and the resultant average yields on those assets; (ii) the total dollar amount of interest expense and the average rate of interest on our interest-bearing liabilities; (iii) net interest income; (iv) net interest rate spread; and (v) net interest margin: Quarter Ended March 31, 2025 2024 (dollars in thousands) Average Balance Interest Average Yield/Cost Average Balance Interest Average Yield/Cost Assets: Interest-earning assets: Loans (1) $ 6,198,659 $ 73,587 4.76 % $ 7,460,650 $ 86,427 4.60 % Investment securities (1) 1,055,336 9,509 3.60 % 1,239,093 11,627 3.75 % FHLB Stock, Fed Funds and other 242,687 3,691 6.20 % 388,462 5,571 5.76 % Total interest-earning assets 7,496,682 86,787 4.65 % 9,088,205 103,625 4.54 % Noninterest-earning assets 374,252 413,984 Total assets $ 7,870,934 $ 9,502,189 Interest-bearing liabilities: Interest-bearing deposits: (2) Demand deposits $ 312,762 $ 287 0.37 % $ 324,210 $ 170 0.21 % Money market and savings 1,645,604 6,874 1.68 % 1,840,023 7,380 1.60 % Certificates of deposit 2,919,241 31,076 4.32 % 3,068,404 35,057 4.60 % Total 4,877,607 38,237 3.18 % 5,232,637 42,607 3.27 % Borrowings: Borrowings 1,011,111 11,364 4.50 % 2,074,527 24,676 4.73 % Long-term debt 225,178 2,943 5.23 % 224,812 3,107 5.51 % Total interest-bearing liabilities 6,113,896 52,544 3.47 % 7,531,976 70,390 3.74 % Noninterest-bearing liabilities: Demand deposits (2) 1,265,701 1,319,309 Other liabilities 86,537 113,277 Total liabilities 7,466,134 8,964,562 Shareholders' equity 404,800 537,627 Total liabilities and shareholders' equity $ 7,870,934 $ 9,502,189 Net interest income $ 34,243 $ 33,235 Net interest spread 1.18 % 0.80 % Net interest margin 1.82 % 1.44 % (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 2.52% 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. 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: 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. 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. 49 Noninterest Income consisted of the following: Quarter Ended March 31, (in thousands) 2025 2024 Noninterest income Gain on loan origination and sale activities (1) Single family $ 2,283 $ 1,986 CRE, multifamily and SBA 933 320 Loan servicing income 4,858 3,032 Deposit fees 2,071 2,241 Other 1,991 1,875 Total noninterest income $ 12,136 $ 9,454 (1) May include loans originated as held for investment. 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: Quarter Ended March 31, (in thousands) 2025 2024 Single family servicing income, net Servicing fees and other $ 3,725 $ 3,839 Changes - amortization (1) (1,582) (1,428) Net 2,143 2,411 Risk management, single family MSRs: Changes in fair value due to assumptions (2) 271 618 Net gain (loss) from economic hedging (3) 1,016 (1,110) Subtotal 1,287 (492) Single Family servicing income 3,430 1,919 Commercial loan servicing income: Servicing fees and other 2,782 2,515 Amortization of capitalized MSRs (1,354) (1,402) Total 1,428 1,113 Total loan servicing income $ 4,858 $ 3,032 (1) Represents changes due to collection/realization of expected cash flows and curtailments. (2) Principally reflects changes in model assumptions, including prepayment speed assumptions, which are primarily affected by changes in mortgage interest rates. (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 2024, respectively. 50 Noninterest Expense consisted of the following: Quarter Ended March 31, (in thousands) 2025 2024 Noninterest expense Compensation and benefits $ 26,309 $ 28,011 Information services 7,585 7,342 Occupancy 4,871 5,434 General, administrative and other 10,343 11,377 Total noninterest expense $ 49,108 $ 52,164 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. 51 Financial Condition 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 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 March 31, 2025 At December 31, 2024 (dollars in thousands) Amount Rate (1) Amount Rate (1) CRE Non-owner occupied CRE $ 1,658 0.30 % $ 1,739 0.30 % Multifamily 13,287 0.45 % 14,909 0.50 % Construction/land development Multifamily construction 468 0.72 % 849 0.86 % CRE construction 73 0.66 % 66 0.60 % Single family construction 5,704 1.74 % 6,737 2.10 % Single family construction to permanent 140 0.45 % 184 0.44 % Total 21,330 0.55 % 24,484 0.61 % Commercial and industrial loans Owner occupied CRE 598 0.18 % 576 0.16 % Commercial business 10,648 3.61 % 6,886 2.23 % Total 11,246 1.77 % 7,462 1.12 % Consumer loans Single family 3,702 0.37 % 3,610 0.35 % Home equity and other 3,356 0.80 % 3,187 0.77 % Total 7,058 0.50 % 6,797 0.47 % Total ACL $ 39,634 0.66 % $ 38,743 0.63 % (1) The ACL rate is calculated excluding balances related to loans that are insured by the FHA or guaranteed by the VA or SBA. Liquidity and Sources of Funds Liquidity risk management is primarily intended to ensure we are able to maintain sources of cash to adequately fund operations and meet our obligations, including demands from depositors, draws on lines of credit and paying any creditors, on a timely and cost-effective basis, in various market conditions. Our liquidity profile is influenced by changes in market conditions, the composition of the balance sheet and risk tolerance levels. The Company has established liquidity guidelines and operating plans that detail the sources and uses of cash and liquidity. 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, 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 52 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. Obligations for certificates of deposit and short-term borrowings are typically satisfied through the renewal of these instruments or the generation of new deposits or use of available short-term borrowings. Interest payments and obligations related to leases and services are typically met by cash generated from our operations. The Company does not have any obligation to repay long-term debt within the next three years 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. Cash Flows 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. The following discussion highlights the major activities and transactions that affected our cash flows during these periods. Cash flows from operating activities The Company's operating assets and liabilities are used to support our lending activities, including the origination and sale of mortgage loans. 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 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 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. 53 Off-Balance Sheet Arrangements In the normal course of business, we are a party to financial instruments that carry off-balance sheet risk. These financial instruments (which include commitments to originate loans and commitments to purchase loans) include potential credit risk in excess of the amount recognized in the accompanying consolidated financial statements. These transactions are designed to (1) meet the financial needs of our customers, (2) manage our credit, market or liquidity risks, (3) diversify our funding sources and/or (4) optimize capital. These commitments include the following: (in thousands) At March 31, 2025 At December 31, 2024 Unused consumer portfolio lines $ 627,326 $ 609,930 Commercial portfolio lines (1) 548,536 523,415 Commitments to fund loans 31,590 56,417 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 $348 million and $306 million at March 31, 2025 and December 31, 2024, respectively. Capital Resources and Dividend Policy The capital rules applicable to United States based bank holding companies and federally insured depository institutions (“Capital Rules”) require the Company (on a consolidated basis) and the Bank (on a stand-alone basis) to meet specific capital adequacy requirements that, for the most part, involve quantitative measures, primarily in terms of the ratios of their capital to their assets, liabilities, and certain off-balance sheet items, calculated under regulatory accounting practices. In addition, prompt corrective action regulations place a federally insured depository institution, such as the Bank, into one of five capital categories on the basis of its capital ratios: (i) well capitalized; (ii) adequately capitalized; (iii) undercapitalized; (iv) significantly undercapitalized; or (v) critically undercapitalized. A depository institution’s primary federal regulatory agency may determine that, based on certain qualitative assessments, the depository institution should be assigned to a lower capital category than the one indicated by its capital ratios. At each successive lower capital category, a depository institution is subject to greater operating restrictions and increased regulatory supervision by its federal bank regulatory agency. The following table sets forth the capital and capital ratios of HomeStreet Inc. (on a consolidated basis) and HomeStreet Bank as compared to the respective regulatory requirements applicable to them: At March 31, 2025 Actual For Minimum Capital Adequacy Purposes To Be Categorized As "Well Capitalized" (dollars in thousands) Amount Ratio Amount Ratio Amount Ratio HomeStreet, Inc. Tier 1 leverage capital (to average assets) $ 533,304 6.62 % $ 322,084 4.0 % NA NA Common equity Tier 1 capital (to risk-weighted assets) 473,304 8.76 % 243,161 4.5 % NA NA Tier 1 risk-based capital (to risk-weighted assets) 533,304 9.87 % 324,214 6.0 % NA NA Total risk-based capital (to risk-weighted assets) 674,401 12.48 % 432,286 8.0 % NA NA HomeStreet Bank Tier 1 leverage capital (to average assets) $ 681,006 8.46 % $ 321,913 4.0 % $ 402,391 5.0 % Common equity Tier 1 capital (to risk-weighted assets) 681,006 12.61 % 243,035 4.5 % 351,050 6.5 % Tier 1 risk-based capital (to risk-weighted assets) 681,006 12.61 % 324,047 6.0 % 432,062 8.0 % Total risk-based capital (to risk-weighted assets) 723,518 13.40 % 432,062 8.0 % 540,078 10.0 % 54 At December 31, 2024 Actual For Minimum Capital Adequacy Purposes To Be Categorized As "Well Capitalized" (dollars in thousands) Amount Ratio Amount Ratio Amount Ratio HomeStreet, Inc. Tier 1 leverage capital (to average assets) $ 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 Tier 1 risk-based capital (to risk-weighted assets) 537,057 9.70 % 332,145 6.0 % NA NA Total risk-based capital (to risk-weighted assets) 677,225 12.23 % 442,860 8.0 % NA NA HomeStreet Bank 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 % Tier 1 risk-based capital (to risk-weighted assets) 678,869 12.27 % 332,001 6.0 % 442,667 8.0 % Total risk-based capital (to risk-weighted assets) 720,498 13.02 % 442,667 8.0 % 553,334 10.0 % As of the dates set forth in the above table, the Company exceeded the minimum required capital ratios applicable to it and the Bank’s capital ratios exceeded the minimums necessary to qualify as a well-capitalized depository institution under the prompt corrective action regulations. In addition to the minimum capital ratios, both HomeStreet Inc. and HomeStreet Bank are required to maintain a capital conservation buffer consisting of additional Common Equity Tier 1 Capital of more than 2.5% above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses. 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 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 March 31, 2025. 55 Non-GAAP Financial Measures To supplement our unaudited condensed consolidated financial statements presented in accordance with GAAP, we use certain use certain non-GAAP measures of financial performance. In this Form 10-Q, we use the following non-GAAP measures: (i) tangible common equity and tangible assets as we believe this information is consistent with the treatment by bank regulatory agencies, which exclude intangible assets from the calculation of capital ratios; (ii) core 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. Generally, a non-GAAP financial measure is a numerical measure of a company’s performance that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with GAAP. A non-GAAP financial measure may also be a financial metric that is not required by GAAP or other applicable requirements. We believe that these non-GAAP financial measures, when taken together with the corresponding GAAP financial measures, provide meaningful supplemental information regarding our performance by providing additional information used by management that is not otherwise required by GAAP or other applicable requirements. Our management uses, and believes that investors benefit from referring to, these non-GAAP financial measures in assessing our operating results and when planning, forecasting and analyzing future periods. These non-GAAP financial measures also facilitate a comparison of our performance to prior periods. We believe these measures are frequently used by securities analysts, investors and other parties in the evaluation of companies in our industry. 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 Form 10-Q, or a computation of the measure. 56 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) March 31, 2025 December 31, 2024 March 31, 2024 Core net income (loss) Net income (loss) $ (4,465) $ (123,327) $ (7,497) Adjustments (tax effected) 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 — 53,310 — Total $ (2,866) $ (5,140) $ (5,469) Core net income (loss) per fully diluted share Fully diluted shares 18,920,808 18,857,565 18,856,870 Computed amount $ (0.15) $ (0.27) $ (0.29) Return on average tangible equity (annualized) Average shareholders' equity $ 404,800 $ 529,299 $ 537,627 Less: 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) Ratio (4.2) % (93.7) % (5.3) % Return on average tangible equity (annualized) - Core Average tangible equity $ 397,824 $ 521,757 $ 528,224 Core net income (loss) (per above) $ (2,866) $ (5,140) $ (5,469) Adjustments (tax effected) Amortization on core deposit intangibles 374 487 488 Tangible income (loss) applicable to shareholders $ (2,492) $ (4,653) $ (4,981) Ratio (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) Ratio (2.9) % (3.9) % (4.1) % Efficiency ratio Noninterest expense Total $ 49,108 $ 43,953 $ 52,164 Adjustments: Merger related expenses or recoveries (2,050) 3,249 (2,600) Loss on debt extinguishment — (452) — State of Washington taxes (386) (157) (452) Adjusted total $ 46,672 $ 46,593 $ 49,112 57 For the Quarter Ended (in thousands, except ratio, rate and share data) March 31, 2025 December 31, 2024 March 31, 2024 Total revenues Net interest income $ 33,221 $ 29,616 $ 32,151 Noninterest income 12,136 (78,124) 9,454 Loss on loan sale — 88,818 — Total $ 45,357 $ 40,310 $ 41,605 Ratio 102.9 % 115.6 % 118.0 % Return on Average assets (annualized) - Core Average Assets $ 7,870,934 $ 9,127,103 $ 9,502,189 Core net income (loss) - per above (2,866) (5,140) (5,469) Ratio (0.15) % (0.22) % (0.23) % Effective tax rate used in computations above (1) 22.0 % 22.0 % 22.0 % (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. As of (in thousands, except ratio, rate and share data) March 31, 2025 December 31, 2024 Tangible book value per share Shareholders' equity $ 400,751 $ 396,997 Less: Intangible assets (6,662) (7,141) Tangible shareholder's equity $ 394,089 $ 389,856 Common shares outstanding 18,920,808 18,857,565 Computed amount $ 20.83 $ 20.67 Tangible common equity to tangible assets Tangible shareholder's equity (per above) $ 394,089 $ 389,856 Tangible assets Total assets $ 7,803,631 $ 8,123,698 Less: Intangible assets (6,662) (7,141) Net $ 7,796,969 $ 8,116,557 Ratio 5.1 % 4.8 % 58