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Item 2. Management’s Discussion and Analysis

2025-08-06 compared with 2025-05-08 · 91 added, 106 removed, 510 unchanged (28% 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”).

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.

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 earnings growth, profitability and timing of such achievement, timing for the closing of the pending Merger ("defined below"), expectations with respect to income tax expense and 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.

26 unchanged sentences

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.

A discussion of the factors, risks and uncertainties that could affect our financial results, business goals and operational and financial objectives cited in this release, 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.

14 unchanged sentences

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.

For example, if the projected unemployment rate was downgraded one grade for all periods, the amount of the ACL at June 30, 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.

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Summary Financial Data

Quarter Ended

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

Quarter Ended Six Months Ended June 30,

(dollars in thousands) June 30, 2025 March 31, 2025 2025 2024

Select Income Statement data:

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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.

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

(dollars in thousands) June 30, 2025 December 31, 2024

Selected Balance Sheet Data

51 unchanged sentences

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.

The Merger is expected to close in the third quarter of 2025, subject to regulatory approval.

On July 16, 2025, the Company entered into an agreement to sell its Government National Mortgage Association (“Ginnie Mae”) mortgage servicing portfolio to an entity experienced in servicing loans, including Ginnie Mae loans.

The principal balance of the loans in the Ginnie Mae servicing portfolio sold under the purchase agreement was $797 million and the value of the related mortgage servicing rights was $15.7 million on June 30, 2025.

The sale closed on August 1, 2025 and no gain or loss was recognized.

Economic and Market Conditions

2 unchanged sentences

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

Given the scheduled repricing of our multifamily and other commercial real estate loans, future anticipated reductions in borrowings, the expectation of further reductions in short-term interest rates by the Federal Reserve and continued effective non-interest expense management, we anticipate a return to earnings in 2025 and then earnings for the foreseeable future.

Management's Overview of the Second Quarter 2025 Financial Performance

Second Quarter of 2025 Compared to the First Quarter of 2025

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.

F or the second quarter and first quarter of 2025 non-core items include $1.7 million and $2.1 million of merger related expenses, respectively.

Our net loss and loss before income taxes were $4.4 million and $4.8 million, respectively, in the second quarter of 2025, as compared to $4.5 million and $4.8 million, respectively, in the first quarter of 2025.

Our core net loss and core loss before income taxes, which excludes merger related expenses, were $3.1 million and $3.0 million, respectively, in the second quarter of 2025, as compared to $2.9 million and $2.7 million, respectively, in the first quarter of 2025.

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

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.

Due to our cumulative losses over the 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.

The $0.4 million and $0.3 million of income tax benefit recognized in the second and first quarters of 2025, respectively, primarily relate to the reversal of the disparate tax effects on our accumulated other comprehensive income ("AOCI") resulting from recording a valuation allowance for the deferred tax assets related to the AOCI in the fourth quarter of 2024.

Net Interest Income:

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Quarter Ended

March 31, 2025 December 31, 2024

June 30, 2025 March 31, 2025

(dollars in thousands)

38 unchanged sentences

Net interest margin 1.90 % 1.82 %

(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.

(1) Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain loans and securities of $1.0 million for both quarters ended June 30, 2025 and March 31, 2025.

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.

(2) Cost of all deposits, including noninterest-bearing demand deposits was 2.34% and 2.52% for the quarters ended June 30, 2025 and March 31, 2025, respectively.

Our net interest income in the second quarter of 2025 was $0.6 million higher than the first quarter of 2025 due to an increase in our net interest margin from 1.82% to 1.90%.

The increase in the net interest margin was due primarily to a 14 basis point decrease in the rates paid on interest-bearing liabilities, partially offset by a 5 basis point decrease in the yield on interest earning assets.

The decrease in rates on interest bearing liabilities are primarily due to a decrease in rates paid on certificates of deposits resulting from decreases in market interest rates.

The decrease in the yield on interest earning assets is primarily due to a decrease in yields on Fed Funds due to decreases in short term market rates.

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.

The $6.0 million provision for credit losses in the second quarter of 2025 was primarily due to the impact of adverse credit migration of certain multifamily loans.

The $1.0 million provision for credit losses in the first quarter of 2025 was primarily 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.

Noninterest income (loss) consisted of the following:

Quarter Ended

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

(in thousands) June 30, 2025 March 31, 2025

Noninterest income (loss)

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(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

(in thousands) June 30, 2025 March 31, 2025

Single family servicing income, net

6 unchanged sentences

Net gain (loss) from economic hedging (3)

1,016 (2,731)

Single Family servicing income 6,341 3,430

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 $0.4 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.

(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 $0.5 million and $0.4 million for the quarters ended June 30, 2025 and March 31, 2025, respectively.

Noninterest income in the second quarter of 2025 increased from the first quarter of 2025 primarily due to an increase in loan servicing income due to a $4.4 million increase in the value of our single family mortgage servicing rights resulting from higher market valuations of these assets.

Noninterest Expense consisted of the following:

Quarter Ended

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

(in thousands) June 30, 2025 March 31, 2025

Noninterest expense

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Total noninterest expense $ 47,751 $ 49,108

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

Noninterest expenses were $1.4 million lower in the second quarter of 2025 due primarily to a $0.9 million decrease in general, administrative and other expenses which reflects the efforts made to eliminate or defer nonessential expenses.

Six Months Ended of June 30, 2025 Compared to Six Months Ended of June 30, 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.

For the six months ended June 30, 2025, non-core items include $3.8 million of merger related expenses.

During the six months ended June 30, 2024, non-core items include $5.0 million of merger related expenses.

Our net loss and loss before income taxes were $8.9 million and $9.5 million, respectively, in the six months ended June 30, 2025, as compared to $13.7 million and $18.6 million, respectively, in the six months ended June 30, 2024.

Our core net loss and core loss before income taxes, which exclude the impact of merger related expenses, were $5.9 million and $5.7 million in the six months ended June 30, 2025, as compared to $9.8 million and $13.5 million in the six months ended June 30, 2024.

The $7.8 million decrease in core loss before income taxes was primarily due to higher net interest income and noninterest income and lower noninterest expenses, partially offset by an increase in the provision for credit losses.

Income Taxes:

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.

The $0.7 million income tax benefit recognized in the six months ended June 30, 2025 primarily relates to the reversal of the disparate tax effects on our AOCI resulting from recording a valuation allowance for the deferred tax assets related to AOCI in the fourth quarter of 2024.

Our effective tax rate in the six months ended June 30, 2024 of 26.0% 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:

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and (v) net interest margin:

Quarter Ended March 31,

Six Months Ended June 30,

(dollars in thousands)

38 unchanged sentences

Net interest margin 1.86 % 1.40 %

(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.

(1) Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain loans and securities of $2.0 million and $2.2 million for the six months ended June 30, 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.

(2) Cost of deposits including noninterest-bearing deposits, was 2.43% and 2.67% for the six months ended June 30, 2025 and 2024, respectively.

Net interest income in the six months ended June 30, 2025 increased $5.2 million as compared to the six months ended June 30, 2024 due primarily to an increase in net interest margin from 1.40% in the six months ended June 30, 2024 to 1.86% in the six months ended June 30, 2025.

The increase in net interest margin is due to a 41 basis point decrease in the rates paid on interest-bearing liabilities and a 6 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:

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.

The $7.0 million provision for credit losses recognized during the six months ended June 30, 2025 was primarily due to the impact of adverse credit migration in certain multifamily loans and 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 during the six months ended June 30, 2024, which reflected the stable balance of our loan portfolio, a minimal level of identified credit issues in our loan portfolio and the lack of significant expected credit issues arising in future periods.

Noninterest Income consisted of the following:

Quarter Ended March 31,

Six Months Ended June 30,

(in thousands) 2025 2024

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(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.

Noninterest income in the six months ended June 30, 2025 increased from the six months ended June 30, 2024 primarily due to a $1.1 million increase in gain on loan sales and a $6.0 million increase in loan servicing income, partially offset by a $2.3 million decrease in other noninterest 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.

The increase in loan servicing income is primarily due to a $5.9 million increase in the value of our single family mortgage servicing rights resulting from higher market valuations of these assets.

The decrease in other noninterest income is primarily due to higher levels of income realized from our investments in small business investment companies in the first six months of 2024.

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

Quarter Ended March 31,

Six Months Ended June 30,

(in thousands) 2025 2024

7 unchanged sentences

Net gain (loss) from economic hedging (3)

1,016 (1,110)

Single Family servicing income 9,771 3,977

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

(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 $0.6 million for the six months ended June 30, 2025 and 2024, respectively.

Noninterest Expense consisted of the following:

Quarter Ended March 31,

Six Months Ended June 30,

(in thousands) 2025 2024

5 unchanged sentences

Total noninterest expense $ 96,859 $ 103,095

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 $6.2 million decrease in noninterest expense in the six months ended June 30, 2025 as compared to the six months ended June 30, 2024 was primarily due to $3.3 million lower compensation and benefit costs, $0.8 million lower occupancy costs and $2.2 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 given 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.

The decrease in general and administrative costs was due to lower merger related expenses and reductions in other costs which reflect the efforts made to eliminate or defer nonessential expenses.

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.

During the six months ended June 30, 2025, our total assets decreased $514 million due primarily to a $306 million decrease in loans held for investment and a $206 million decrease in cash.

In the six months ended June 30, 2025, total liabilities decreased $520 million due to a $556 million decrease in deposits.

The decrease in deposits was primarily due to a $541 million decrease in brokered certificates of 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.

During the second quarter of 2025, our ratios of nonperforming assets to total assets and total loans delinquent over 30 days, including nonaccrual loans, remained at low levels.

As of June 30, 2025, our ratio of nonperforming assets to total assets was 0.76% 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 1.11% as compared to 1.06% at December 31, 2024.

The total balance of past due and nonaccrual loans decreased slightly during the second quarter.

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

At June 30, 2025 At December 31, 2024

(dollars in thousands)

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

At 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.

At June 30, 2025 and December 31, 2024, the Bank had available borrowing capacity of $910 million and $1.3 billion, respectively, from the FHLB, and $2.0 billion and $1.6 billion, respectively, from the FRBSF and $899 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.

For the six months ended June 30, 2025, cash and cash equivalents decreased by $206 million compared to an increase of $3 million during the six months ended June 30, 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.

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

For 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.

For the six months ended June 30, 2025, net cash of $32 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 six months ended June 30, 2024, net cash of $30 million was used in operating activities, as cash generated from operations was offset by cash used to fund LHFS in excess of proceeds from the sale of loans and increases in other assets

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.

For the six months ended June 30, 2025, net cash of $343 million was provided by investing activities primarily from principal repayments on AFS securities and by LHFI principal repayments, net of originations.

For the six months ended June 30, 2024, net cash of $123 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.

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.

For the six months ended June 30, 2025, net cash of $516 million was used in financing activities, primarily due to a decrease in brokered certificates of deposit.

For the six months ended June 30, 2024, net cash of $90 million was used in financing activities, primarily due to a decrease in deposits, partially offset by an increase in borrowings.

Off-Balance Sheet Arrangements

3 unchanged sentences

These commitments include the following:

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

(in thousands) At June 30, 2025 At December 31, 2024

Unused consumer portfolio lines $ 631,903 $ 609,930

3 unchanged sentences

Total $ 1,147,547 $ 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.

(1) Within the commercial portfolio lines, undistributed construction loan proceeds, where the Company has an obligation to advance funds for construction progress payments were $302 million and $306 million at June 30, 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 March 31, 2025

At June 30, 2025

Actual For Minimum Capital

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

At June 30, 2025, capital conservation buffers for the Company and the Bank were 3.90% and 5.66%, 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.

We had no material commitments for capital expenditures as of June 30, 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 (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.

(ii) core net income (loss) and effective tax rate on core net income (loss) before income taxes, which excludes 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 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.

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

For the Quarter Ended

For the Quarter Ended Six Months Ended June 30,

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

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

June 30, 2025 March 31, 2025 2025 2024

Core net income (loss)

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Adjustments (tax effected)

Loss on loan sale — 67,058 —

Merger related expenses (recoveries) 1,362 1,599 2,961 3,925

Loss on debt extinguishment — 353 —

Deferred tax asset valuation allowance

Total $ (3,050) $ (2,866) $ (5,916) $ (9,810)

28 unchanged sentences

(1,746) (2,050) (3,796) (5,032)

Loss on debt extinguishment — (452) —

State of Washington taxes (382) (386) (768) (915)

Adjusted total

$ 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

Core noninterest expense $ 45,623 $ 46,672 $ 92,295 $ 97,148

Total revenues

3 unchanged sentences

15,100 12,136 27,236 22,681

Loss on loan sale

Total $ 48,970 $ 45,357 $ 94,327 $ 84,533

Ratio 93.2 % 102.9 % 97.8 % 114.9 %

For the Quarter Ended Six Months Ended June 30,

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

June 30, 2025 March 31, 2025 2025 2024

Return on Average assets (annualized) - Core

4 unchanged sentences

22.0 % 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.

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

March 31, 2025 December 31, 2024

June 30, 2025 December 31, 2024

Tangible book value per share

13 unchanged sentences

$ 7,609,323 $ 8,123,698

Intangible assets (6,662) (7,141)

Intangible assets (per above) (6,184) (7,141)

$ 7,603,139 $ 8,116,557

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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