HomeStreet (HMST) 10-Q 2022 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________________________ 

FORM 10-Q

________________________________ 

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: September 30, 2022

OR

☐ Transition Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the transition period from _____ to _____

Commission file number: 001-35424

________________________________ 

HOMESTREET, INC.

(a Washington Corporation)

91-0186600

________________________________ 

601 Union Street, Suite 2000

Seattle, Washington 98101

(Address of principal executive offices)

Telephone Number - Area Code (206) 623-3050

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	HMST	Nasdaq Global Select Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒   No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act:

Large Accelerated Filer	☐	Accelerated Filer	☒
Non-accelerated Filer	☐	Smaller Reporting Company	☐
Emerging growth Company	☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.			☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐  No ☒

The number of outstanding shares of the registrant's common stock as of October 31, 2022 was 18,722,640.

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PART I – FINANCIAL INFORMATION
ITEM 1	FINANCIAL STATEMENTS
Consolidated Balance Sheets at September 30, 2022 and December 31, 2021		3
Consolidated Income Statements for the Quarters and Nine Months Ended September 30, 2022 and 2021		4
Consolidated Statements of Comprehensive Income for the Quarters and Nine Months Ended September 30, 2022 and 2021		5
Consolidated Statements of Shareholders’ Equity for the Quarters and Nine Months Ended September 30, 2022 and 2021		6
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2022 and 2021		7
Notes to Consolidated Financial Statements		9
ITEM 2	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	40
ITEM 3	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	58
ITEM 4	CONTROLS AND PROCEDURES	61
PART II – OTHER INFORMATION
ITEM 1	LEGAL PROCEEDINGS	61
ITEM 1A	RISK FACTORS	62
ITEM 2	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	63
ITEM 3	DEFAULTS UPON SENIOR SECURITIES	63
ITEM 4	MINE SAFETY DISCLOSURES	63
ITEM 5	OTHER INFORMATION	63
ITEM 6	EXHIBITS	64
SIGNATURES		65

Unless we state otherwise or the content otherwise requires, references in this Form 10-Q to "HomeStreet," "we," "our," "us" or the "Company" refer collectively to HomeStreet, Inc., a Washington corporation, HomeStreet Bank ("Bank"), HomeStreet Capital Corporation ("HomeStreet Capital") and other direct and indirect subsidiaries of HomeStreet, Inc.

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PART I

ITEM 1 FINANCIAL STATEMENTS

HOMESTREET, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	September 30, 2022		December 31, 2021
(in thousands, except share data)	(Unaudited)
ASSETS
Cash and cash equivalents	$	57,256	$	65,214
Investment securities	1,311,941		1,006,691
Loans held for sale ("LHFS")	13,787		176,131
Loans held for investment ("LHFI") (net of allowance for credit losses of $37,606 and $47,123)	7,175,881		5,495,726
Mortgage servicing rights ("MSRs")	114,630		100,999
Premises and equipment, net	51,706		58,154
Other real estate owned ("OREO")	1,725		735
Goodwill and other intangible assets	30,215		31,709
Other assets	315,746		268,732
Total assets	$	9,072,887	$	7,204,091
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits	$	6,610,231	$	6,146,509
Borrowings	1,569,000		41,000
Long-term debt	224,314		126,026
Accounts payable and other liabilities	116,553		175,217
Total liabilities	8,520,098		6,488,752
Commitments and contingencies
Shareholders' equity:
Common stock, no par value, authorized 160,000,000 shares; issued and outstanding, 18,717,557 shares and 20,085,336 shares	225,725		249,856
Retained earnings	432,995		444,343
Accumulated other comprehensive income (loss)	(105,931)		21,140
Total shareholders' equity	552,789		715,339
Total liabilities and shareholders' equity	$	9,072,887	$	7,204,091

See accompanying notes to consolidated financial statements

3

HOMESTREET, INC. AND SUBSIDIARIES

CONSOLIDATED INCOME STATEMENTS

(Unaudited)

	Quarter Ended September 30,				Nine Months Ended September 30,
(in thousands, except share and per share data)	2022		2021		2022		2021
Interest income:
Loans	$	73,329	$	56,117	$	186,108	$	166,763
Investment securities	9,014		5,130		22,359		16,091
Cash, Fed Funds and other	1,060		141		1,655		472
Total interest income	83,403		61,388		210,122		183,326
Interest expense:
Deposits	8,321		2,507		13,498		8,930
Borrowings	12,064		1,397		19,004		4,423
Total interest expense	20,385		3,904		32,502		13,353
Net interest income	63,018		57,484		177,620		169,973
Provision for credit losses	—		(5,000)		(9,000)		(9,000)
Net interest income after provision for credit losses	63,018		62,484		186,620		178,973
Noninterest income:
Net gain on loan origination and sale activities	2,647		17,509		16,213		72,239
Loan servicing income	2,741		2,014		9,706		4,693
Deposit fees	2,223		2,091		6,516		5,912
Other	5,711		2,684		9,458		8,511
Total noninterest income	13,322		24,298		41,893		91,355
Noninterest expense:
Compensation and benefits	27,341		31,175		89,563		101,388
Information services	7,038		6,902		21,880		20,635
Occupancy	6,052		5,705		18,315		18,170
General, administrative and other	9,458		8,167		25,241		21,179
Total noninterest expense	49,889		51,949		154,999		161,372
Income before income taxes	26,451		34,833		73,514		108,956
Income tax expense	6,084		7,663		15,475		22,966
Net income	$	20,367	$	27,170	$	58,039	$	85,990
Net income per share:
Basic	$	1.09	$	1.32	$	3.05	$	4.08
Diluted	1.08		1.31		3.03		4.03
Weighted average shares outstanding:
Basic	18,716,864		20,613,290		19,000,007		21,099,059
Diluted	18,796,737		20,819,601		19,137,848		21,352,715

See accompanying notes to consolidated financial statements

4

HOMESTREET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	Quarter Ended September 30,				Nine Months Ended September 30,
(in thousands)	2022		2021		2022		2021
Net income	$	20,367	$	27,170	$	58,039	$	85,990
Other comprehensive income (loss):
Unrealized gain (loss) on investment securities available for sale ("AFS")	(56,189)		(7,283)		(166,921)		(16,728)
Reclassification for net (gains) losses included in income	47		—		(24)		(62)
Other comprehensive income (loss) before tax	(56,142)		(7,283)		(166,945)		(16,790)
Income tax impact of:
Unrealized gain (loss) on investment securities AFS	(13,485)		(1,530)		(39,868)		(3,513)
Reclassification for net (gains) losses included in income	11		—		(6)		(13)
Total	(13,474)		(1,530)		(39,874)		(3,526)
Other comprehensive income (loss)	(42,668)		(5,753)		(127,071)		(13,264)
Total comprehensive income (loss)	$	(22,301)	$	21,417	$	(69,032)	$	72,726

See accompanying notes to consolidated financial statements

5

HOMESTREET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(Unaudited)

(in thousands, except share data)	Number of shares	Common stock		Retained earnings		Accumulated other comprehensive income (loss)		Total shareholders' equity
For the quarter ended September 30, 2021
Balance, June 30, 2021	20,791,659	$	260,774	$	420,111	$	27,846	$	708,731
Net income	—	—		27,170		—		27,170
Share-based compensation expense	—	892		—		—		892
Common stock issued - Option exercise; stock grants	52,265	339		—		—		339
Other comprehensive income (loss)	—	—		—		(5,753)		(5,753)
Dividends declared on common stock ($0.25 per share)	—	—		(5,259)		—		(5,259)
Common stock repurchased	(397,276)	(5,924)		(9,820)		—		(15,744)
Balance, September 30, 2021	20,446,648	$	256,081	$	432,202	$	22,093	$	710,376
For the nine months ended September 30, 2021
Balance, December 31, 2020	21,796,904	$	278,505	$	403,888	$	35,357	$	717,750
Net income	—	—		85,990		—		85,990
Share-based compensation expense	—	2,557		—		—		2,557
Common stock issued - Option exercise; stock grants	245,630	2,383		—		—		2,383
Other comprehensive income (loss)	—	—		—		(13,264)		(13,264)
Dividends declared on common stock ($0.75 per share)				(16,171)				(16,171)
Common stock repurchased	(1,595,886)	(27,364)		(41,505)		—		(68,869)
Balance, September 30, 2021	20,446,648	$	256,081	$	432,202	$	22,093	$	710,376
For the quarter ended September 30, 2022
Balance, June 30, 2022	18,712,789	$	224,776	$	419,254	$	(63,263)	$	580,767
Net income	—	—		20,367		—		20,367
Share-based compensation expense	—	942		—		—		942
Common stock issued - Stock grants	4,328	—		—		—		—
Other comprehensive income (loss)	—	—		—		(42,668)		(42,668)
Dividends declared on common stock ($0.35 per share)	—	—		(6,638)		—		(6,638)
Common stock repurchased	440	7		12		—		19
Balance, September 30, 2022	18,717,557	$	225,725	$	432,995	$	(105,931)	$	552,789
For the nine months ended September 30, 2022
Balance, December 31, 2021	20,085,336	$	249,856	$	444,343	$	21,140	$	715,339
Net income	—	—		58,039		—		58,039
Share-based compensation expense	—	3,239		—		—		3,239
Common stock issued - Stock grants	130,546	—		—		—		—
Other comprehensive income (loss)	—	—		—		(127,071)		(127,071)
Dividends declared on common stock ($1.05 per share)	—	—		(20,435)		—		(20,435)
Common stock repurchased	(1,498,325)	(27,370)		(48,952)		—		(76,322)
Balance, September 30, 2022	18,717,557	$	225,725	$	432,995	$	(105,931)	$	552,789

See accompanying notes to consolidated financial statements

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HOMESTREET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) 

	Nine Months Ended September 30,
(in thousands)	2022		2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	58,039	$	85,990
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses	(9,000)		(9,000)
Depreciation and amortization, premises and equipment	7,308		7,294
Amortization of premiums and discounts: investment securities, deposits, debt	2,833		4,788
Operating leases: excess of payments over amortization	(3,146)		(3,015)
Amortization of finance leases	442		786
Amortization of core deposit intangibles	728		878
Amortization of deferred loan fees and costs	(656)		(7,544)
Share-based compensation expense	3,239		2,557
Deferred income tax expense (benefit)	(4,306)		7,777
Origination of LHFS	(600,037)		(1,785,393)
Proceeds from sale of LHFS	763,057		1,932,447
Net fair value adjustment and gain on sale of LHFS	6,304		(36,359)
Origination of MSRs	(10,945)		(27,908)
Net gain on sale of loans originated as LHFI	(88)		(4,613)
Change in fair value of MSRs	(8,563)		8,267
Amortization of servicing rights	5,877		5,235
Gain on sale of branches	(4,270)		—
Net change in trading securities	(21,104)		—
(Increase) decrease in other assets	10,475		528
Increase (decrease) in accounts payable and other liabilities	13,268		(241)
Net cash provided by operating activities	209,455		182,474
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment securities	(621,813)		(112,146)
Proceeds from sale of investment securities	75,361		28,187
Principal payments on investment securities	94,739		159,037
Proceeds from sale of OREO	952		—
Proceeds from sale of loans originated as LHFI	4,613		251,474
Net cash distributed in sale of branches	(138,756)		—
Net increase in LHFI	(1,727,944)		(492,666)
Purchase of premises and equipment	(4,939)		(852)
Proceeds from sale of Federal Home Loan Bank stock	68,966		89,882
Purchases of Federal Home Loan Bank stock	(130,033)		(78,286)
Net cash used in investing activities	(2,378,854)		(155,370)

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	Nine Months Ended September 30,
(in thousands)	2022		2021
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits, net	631,290		538,005
Changes in short-term borrowings, net	1,528,000		(322,800)
Proceeds from other long-term borrowings	—		50,000
Repayment of other long-term borrowings	—		(50,000)
Proceeds from debt issuance, net	98,035		—
Repayment of finance lease principal	(449)		(787)
Repurchases of common stock	(75,000)		(65,001)
Proceeds from exercise of stock options	—		263
Dividends paid on common stock	(20,435)		(16,171)
Net cash provided by financing activities	2,161,441		133,509
Net increase (decrease) in cash and cash equivalents	(7,958)		160,613
Cash and cash equivalents, beginning of year	65,214		58,049
Cash and cash equivalents, end of period	$	57,256	$	218,662
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	29,289	$	12,371
Federal and state income taxes	2,348		28,156
Non-cash activities:
Increase in lease assets and lease liabilities	4,877		910
LHFI foreclosed and transferred to OREO	1,018		—
Loans transferred from LHFI to LHFS, net	12,511		390,521
Ginnie Mae loans derecognized with the right to repurchase, net	5,567		70,197
Repurchase of common stock-award shares	1,322		3,868

See accompanying notes to consolidated financial statements

8

HomeStreet, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

NOTE 1–SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

HomeStreet, Inc., a State of Washington corporation organized in 1921 (the "Corporation"), is a Washington-based diversified financial services holding company whose operations are primarily conducted through its wholly owned subsidiaries (collectively the "Company") HomeStreet Capital Corporation, HomeStreet Statutory Trusts and HomeStreet Bank (the "Bank"), and the Bank's subsidiaries, Continental Escrow Company, HomeStreet Foundation, HS Properties, Inc., HS Evergreen Corporate Center LLC, and Union Street Holdings LLC. The Company is principally engaged in commercial banking, mortgage banking and consumer/retail banking activities serving customers primarily in the Western United States.

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP"). The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation. The Company allocates resources and assesses financial performance on a consolidated basis and therefore has one reporting segment. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. Actual results could differ significantly from those estimates. Certain amounts in the financial statements from prior periods have been reclassified to conform to the current financial statement presentation.

These unaudited interim financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the results for the periods presented. These adjustments are of a normal recurring nature, unless otherwise disclosed in this Quarterly Report on Form 10-Q. The results of operations in the interim financial statements do not necessarily indicate the results that may be expected for the full year. The interim financial information should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission ("2021 Annual Report on Form 10-K").

Goodwill

Goodwill is recorded upon completion of a business combination as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill has been determined to have an indefinite useful life and is not amortized, but tested for impairment at least annually or more frequently if events and circumstances occur that indicate it is more likely than not the fair value of the reporting unit is less than its carrying value necessitating an impairment test. Historically, the Company performed its annual impairment testing on June 30. In 2022, we moved the annual impairment testing date to August 31 and based on that testing determined goodwill was not impaired. The change in impairment date did not have a material effect on the Company’s financial position or results of operations.

Dispositions

In July 2022, we closed a sale of five retail deposit branches in eastern Washington, including the branches' lending businesses and employees. As part of this transaction, we transferred $191 million of deposits, sold $43 million of loans and recognized a gain on sale of $4.3 million.

Recent Accounting Developments

In March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2020-04, Reference Rate Reform (Topic 848). This ASU provides optional expedients and exceptions for contracts, hedging relationships, and other transactions that reference London Interbank Offered Rate ("LIBOR") rates expected to be discontinued because of reference rate reform. In January 2021, the FASB issued ASU 2021-01, "Reference Rate Reform (Topic 848)," which clarifies certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting applied to derivatives that are affected by the transition to alternative rates. The ASUs are effective for all entities as of March 12, 2020 through December 31, 2022. The adoption of these ASUs is not expected to have a material impact on the Company’s financial position or results of operations.

In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments-Credit Losses (Topic 326). The amendments in this ASU eliminate the accounting guidance for Troubled Debt Restructuring ("TDRs") by creditors, while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower experiences financial difficulty. In

9

addition, the amendments require that an entity disclose current period gross charge-offs by year of origination in a vintage table. We prospectively adopted the portion of ASU No. 2022-02 with respect to amendments about TDRs and related disclosure enhancements as of January 1, 2022. This adoption did not have a material impact on the Company’s financial position or results of operations. As the change is disclosure only in nature, we do not expect the vintage table disclosure requirement of ASU 2022-02 to have a material impact on the Company's financial position or results of operations when adopted.

NOTE 2–INVESTMENT SECURITIES:

The following table sets forth certain information regarding the amortized cost basis and fair values of our investment securities AFS and held-to-maturity ("HTM"): 

	At September 30, 2022
(in thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value
AFS
Mortgage backed securities ("MBS"):
Residential	$	208,807	$	—	$	(9,817)	$	198,990
Commercial	68,706		—		(9,834)		58,872
Collateralized mortgage obligations ("CMOs"):
Residential	489,223		12		(36,021)		453,214
Commercial	97,886		—		(7,025)		90,861
Municipal bonds	498,665		121		(70,589)		428,197
Corporate debt securities	36,733		—		(2,971)		33,762
U.S. Treasury securities	23,092		—		(3,265)		19,827
Agency debentures	3,999		5		—		4,004
Total	$	1,427,111	$	138	$	(139,522)	$	1,287,727
HTM
Municipal bonds	$	3,099	$	—	$	(101)	$	2,998

	At December 31, 2021
(in thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value
AFS
MBS:
Residential	$	32,905	$	396	$	(338)	$	32,963
Commercial	62,094		933		(235)		62,792
CMOs:
Residential	186,703		2,012		(1,321)		187,394
Commercial	135,102		1,890		(333)		136,659
Municipal bonds	516,693		24,154		(924)		539,923
Corporate debt securities	18,918		699		(1)		19,616
U.S. Treasury securities	23,348		—		(173)		23,175
Total	$	975,763	$	30,084	$	(3,325)	$	1,002,522
HTM
Municipal bonds	$	4,169	$	136	$	—	$	4,305

At September 30, 2022, the Company held $21.1 million of trading securities, consisting of US Treasury notes used as economic hedges of our mortgage servicing rights, which are carried at fair value and included as investment securities on the balance sheet. Unrealized gains, net, on trading securities, which are included in loan servicing income, were $2.0 million at

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September 30, 2022. For the quarter and nine months ended September 30, 2022, trading losses of $2.6 million and $6.4 million, respectively, were recorded in servicing income on the consolidated income statements.

MBS and CMOs represent securities issued by government sponsored enterprises ("GSEs"). Most of the MBS and CMO securities in our investment portfolio are guaranteed by Fannie Mae, Ginnie Mae or Freddie Mac. Municipal bonds are comprised of general obligation bonds (i.e., backed by the general credit of the issuer) and revenue bonds (i.e., backed by either collateral or revenues from the specific project being financed) issued by various municipal corporations. As of September 30, 2022 and December 31, 2021, all securities held, including municipal bonds and corporate debt securities, were rated investment grade, based upon external ratings where available and, where not available, based upon internal ratings which correspond to ratings as defined by Standard & Poor's Rating Services or Moody's Investors Service.

Investment securities AFS that were in an unrealized loss position are presented in the following tables based on the length of time the individual securities have been in an unrealized loss position:

	At September 30, 2022
	Less than 12 months				12 months or more				Total
(in thousands)	Gross unrealized losses		Fair value		Gross unrealized losses		Fair value		Gross unrealized losses		Fair value
AFS
MBS:
Residential	$	(9,164)	$	195,834	$	(653)	$	1,964	$	(9,817)	$	197,798
Commercial	(9,182)		56,380		(652)		2,476		(9,834)		58,856
CMOs:
Residential	(29,963)		407,507		(6,058)		22,157		(36,021)		429,664
Commercial	(5,731)		83,623		(1,294)		7,238		(7,025)		90,861
Municipal bonds	(62,825)		391,637		(7,764)		24,560		(70,589)		416,197
Corporate debt securities	(2,971)		33,692		—		—		(2,971)		33,692
U.S. Treasury securities	(745)		4,693		(2,520)		15,134		(3,265)		19,827
Total	$	(120,581)	$	1,173,366	$	(18,941)	$	73,529	$	(139,522)	$	1,246,895
HTM
Municipal bonds	$	(101)	$	2,998	$	—	$	—	$	(101)	$	2,998

	At December 31, 2021
	Less than 12 months				12 months or more				Total
(in thousands)	Gross unrealized losses		Fair value		Gross unrealized losses		Fair value		Gross unrealized losses		Fair value
MBS:
Residential	$	(38)	$	5,324	$	(300)	$	2,406	$	(338)	$	7,730
Commercial	(235)		18,127		—		—		(235)		18,127
CMOs:
Residential	(1,007)		53,068		(314)		7,116		(1,321)		60,184
Commercial	(135)		14,806		(198)		5,132		(333)		19,938
Municipal bonds	(914)		64,237		(10)		1,058		(924)		65,295
Corporate debt securities	(1)		3,164		—		—		(1)		3,164
U.S. Treasury securities	(173)		23,175		—		—		(173)		23,175
Total	$	(2,503)	$	181,901	$	(822)	$	15,712	$	(3,325)	$	197,613

The Company has evaluated AFS securities that are in an unrealized loss position and has determined that the decline in value is temporary and is related to the change in market interest rates since purchase. The decline in value is not related to any issuer- or industry-specific credit event. The Company has not identified any expected credit losses on its debt securities as of

11

September 30, 2022 or December 31, 2021. In addition, as of September 30, 2022 and December 31, 2021, the Company had not made a decision to sell any of its debt securities held, nor did the Company consider it more likely than not that it would be required to sell such securities before recovery of their amortized cost basis.

The following tables present the fair value of investment securities AFS and HTM by contractual maturity along with the associated contractual yield:

	At September 30, 2022
	Within one year				After one year through five years				After five years through ten years				After ten years				Total
(dollars in thousands)	Fair Value		Weighted Average Yield		Fair Value		Weighted Average Yield		Fair Value		Weighted Average Yield		Fair Value		Weighted Average Yield		Fair Value		Weighted Average Yield
AFS
Municipal bonds	$	1,112	3.94	%	$	5,394	2.24	%	$	56,905	3.36	%	$	364,786	2.74	%	$	428,197	2.82	%
Corporate debt securities	—		—	%	5,321		3.44	%	28,441		4.39	%	—		—	%	33,762		4.25	%
U.S. Treasury securities	—		—	%	—		—	%	19,827		1.10	%	—		—	%	19,827		1.10	%
Agency debentures	4,004		4.33	%	—		—	%	—		—	%	—		—	%	4,004		4.33	%
Total	$	5,116	4.24	%	$	10,715	2.82	%	$	105,173	3.19	%	$	364,786	2.74	%	$	485,790	2.85	%
HTM
Municipal bonds	$	641	3.47	%	$	2,357	2.00	%	$	—	—	%	$	—	—	%	$	2,998	2.30	%

	At December 31, 2021
	Within one year				After one year through five years				After five years through ten years				After ten years				Total
(dollars in thousands)	Fair Value		Weighted Average Yield		Fair Value		Weighted Average Yield		Fair Value		Weighted Average Yield		Fair Value		Weighted Average Yield		Fair Value		Weighted Average Yield
AFS
Municipal bonds	$	4,933	3.79	%	$	14,366	3.26	%	$	68,025	3.60	%	$	452,599	3.23	%	$	539,923	3.28	%
Corporate debt securities	—		—	%	6,563		3.60	%	13,053		5.03	%	—		—	%	19,616		4.55	%
U.S. Treasury securities	—		—	%	—		—	%	23,175		1.27	%	—		—	%	23,175		1.27	%
Total	$	4,933	3.79	%	$	20,929	3.37	%	$	104,253	3.23	%	$	452,599	3.23	%	$	582,714	3.24	%
HTM
Municipal bonds	$	1,684	2.86	%	$	2,621	2.12	%	$	—	—	%	$	—	—	%	$	4,305	2.42	%

The weighted-average yield is computed using the contractual coupon of each security weighted based on the fair value of each security and does not include adjustments to a tax equivalent basis. MBS and CMOs are excluded from the tables above because such securities are not due on a single maturity date. The weighted average yield of MBS and CMOs as of September 30, 2022 and December 31, 2021 was 2.78% and 1.82%, respectively.

Sales of AFS investment securities were as follows:

	Quarter Ended September 30,				Nine Months Ended September 30,
(in thousands)	2022		2021		2022		2021
Proceeds	$	74,399	$	—	$	75,361	$	28,187
Gross gains	1,334		—		1,405		288
Gross losses	(1,381)		—		(1,381)		(226)

12

The following table summarizes the carrying value of securities pledged as collateral to secure public deposits, borrowings and other purposes as permitted or required by law:

(in thousands)	At September 30, 2022		At December 31, 2021
Washington, Oregon and California to secure public deposits	$	220,689	$	206,153
Other securities pledged	2,053		5,258
Total securities pledged as collateral	$	222,742	$	211,411

The Company assesses the creditworthiness of the counterparties that hold the pledged collateral and has determined that these arrangements have little credit risk.

Tax-exempt interest income on investment securities was $3.1 million and $2.6 million for the quarters ended September 30, 2022 and 2021, respectively, and $8.9 million and $7.6 million for the nine months ended September 30, 2022 and 2021, respectively.

13

NOTE 3 -LOANS AND CREDIT QUALITY:

The Company's LHFI is divided into two portfolio segments, commercial loans and consumer loans. Within each portfolio segment, the Company monitors and assesses credit risk based on the risk characteristics of each of the following loan classes: non-owner occupied commercial real estate ("CRE"), multifamily, construction and land development, owner occupied CRE and commercial business loans within the commercial loan portfolio segment and single family and home equity and other loans within the consumer loan portfolio segment. LHFI consists of the following:

(in thousands)	At September 30, 2022		At December 31, 2021
CRE
Non-owner occupied CRE	$	666,394	$	705,359
Multifamily	3,923,946		2,415,359
Construction/land development	590,092		496,144
Total	5,180,432		3,616,862
Commercial and industrial loans
Owner occupied CRE	432,114		457,706
Commercial business	361,635		401,872
Total	793,749		859,578
Consumer loans
Single family	907,044		763,331
Home equity and other	332,262		303,078
Total (1)	1,239,306		1,066,409
Total LHFI	7,213,487		5,542,849
Allowance for credit losses ("ACL")	(37,606)		(47,123)
Total LHFI less ACL	$	7,175,881	$	5,495,726

(1)    Includes $5.8 million and $7.3 million at September 30, 2022 and December 31, 2021, respectively, of loans where a fair value option election was made at the time of origination and, therefore, are carried at fair value with changes in fair value recognized in the consolidated income statements.

Loans totaling $3.8 billion and $2.8 billion at September 30, 2022 and December 31, 2021, respectively, were pledged to secure borrowings from the Federal Home Loan Bank ("FHLB") and loans totaling $501 million and $419 million at September 30, 2022 and December 31, 2021, respectively, were pledged to secure borrowings from the Federal Reserve Bank of San Francisco ("FRBSF").

Credit Risk Concentrations

LHFI are primarily secured by real estate located in the Pacific Northwest, California and Hawaii. At September 30, 2022 and December 31, 2021, multifamily loans in the state of California represented 37% and 33% of the total LHFI portfolio, respectively.

Credit Quality

Management considers the level of ACL to be appropriate to cover credit losses expected over the life of the loans for the LHFI portfolio. The cumulative loss rate used as the basis for the estimate of credit losses is comprised of the Bank’s historical loss experience and eight qualitative factors for current and forecasted periods.

During the third quarter of 2022, the historical expected loss rates decreased from December 31, 2021 due to minimal charge-offs and favorable product mix risk composition. During the third quarter of 2022, the qualitative factors decreased significantly due to the continued favorable performance and outlook of the impact of the COVID-19 pandemic on our loan portfolio, which resulted in no COVID-19 management overlay. As of September 30, 2022, the Bank expects that the markets in which it operates will have declining collateral values and a stable economic outlook over the two-year forecast period.

14

In addition to the ACL for LHFI, the Company maintains a separate allowance for unfunded loan commitments which is included in accounts payable and other liabilities on our consolidated balance sheets. The allowance for unfunded commitments was $2.6 million and $2.4 million at September 30, 2022 and December 31, 2021, respectively.

The Bank has elected to exclude accrued interest receivable from the evaluation of the ACL. Accrued interest on LHFI was $23.9 million and $17.8 million at September 30, 2022 and December 31, 2021, respectively, and was reported in other assets in the consolidated balance sheets.

Activity in the ACL for LHFI and the allowance for unfunded commitments was as follows:

	Quarter Ended September 30,				Nine Months Ended September 30,
(in thousands)	2022		2021		2022		2021
Beginning balance	$	37,355	$	59,897	$	47,123	$	64,294
Provision for credit losses	249		(5,348)		(9,190)		(9,864)
Net (charge-offs) recoveries	2		(33)		(327)		86
Ending balance	$	37,606	$	54,516	$	37,606	$	54,516
Allowance for unfunded commitments:
Beginning balance	$	2,843	$	2,104	$	2,404	$	1,588
Provision for credit losses	(249)		348		190		864
Ending balance	$	2,594	$	2,452	$	2,594	$	2,452
Provision for credit losses:
Allowance for credit losses - loans	$	249	$	(5,348)	$	(9,190)	$	(9,864)
Allowance for unfunded commitments	(249)		348		190		864
Total	$	—	$	(5,000)	$	(9,000)	$	(9,000)

Activity in the ACL for LHFI by loan portfolio and loan sub-class was as follows:

	Quarter Ended September 30, 2022
(in thousands)	Beginning balance		Charge-offs		Recoveries		Provision		Ending balance
CRE
Non-owner occupied CRE	$	2,180	$	—	$	—	$	(74)	$	2,106
Multifamily	10,074		—		—		1,109		11,183
Construction/land development
Multifamily construction	566		—		—		99		665
CRE construction	185		—		—		(25)		160
Single family construction	10,687		—		—		(1,123)		9,564
Single family construction to permanent	1,159		—		—		(19)		1,140
Total	24,851		—		—		(33)		24,818
Commercial and industrial loans
Owner occupied CRE	1,092		—		—		(123)		969
Commercial business	3,578		(81)		25		197		3,719
Total	4,670		(81)		25		74		4,688
Consumer loans
Single family	4,027		—		1		436		4,464
Home equity and other	3,807		(43)		100		(228)		3,636
Total	7,834		(43)		101		208		8,100
Total ACL	$	37,355	$	(124)	$	126	$	249	$	37,606

15

	Quarter Ended September 30, 2021
(in thousands)	Beginning balance		Charge-offs		Recoveries		Provision		Ending balance
CRE
Non-owner occupied CRE	$	9,077	$	—	$	—	$	559	$	9,636
Multifamily	7,245		—		—		(1,788)		5,457
Construction/land development
Multifamily construction	500		—		—		544		1,044
CRE construction	2,022		—		—		(1,671)		351
Single family construction	5,653		—		—		638		6,291
Single family construction to permanent	1,047		—		—		15		1,062
Total	25,544		—		—		(1,703)		23,841
Commercial and industrial loans
Owner occupied CRE	5,518		—		—		(233)		5,285
Commercial business	15,874		(116)		24		(1,309)		14,473
Total	21,392		(116)		24		(1,542)		19,758
Consumer loans
Single family	7,163		(13)		33		(1,426)		5,757
Home equity and other	5,798		(341)		380		(677)		5,160
Total	12,961		(354)		413		(2,103)		10,917
Total ACL	$	59,897	$	(470)	$	437	$	(5,348)	$	54,516

	Nine Months Ended September 30, 2022
(in thousands)	Beginning balance		Charge-offs		Recoveries		Provision		Ending balance
CRE
Non-owner occupied CRE	$	7,509	$	—	$	—	$	(5,403)	$	2,106
Multifamily	5,854		—		—		5,329		11,183
Construction/land development
Multifamily construction	507		—		—		158		665
CRE construction	150		—		—		10		160
Single family construction	6,411		—		—		3,153		9,564
Single family construction to permanent	1,055		—		—		85		1,140
Total	21,486		—		—		3,332		24,818
Commercial and industrial loans
Owner occupied CRE	5,006		—		—		(4,037)		969
Commercial business	12,273		(741)		94		(7,907)		3,719
Total	17,279		(741)		94		(11,944)		4,688
Consumer loans
Single family	4,394		—		141		(71)		4,464
Home equity and other	3,964		(109)		288		(507)		3,636
Total	8,358		(109)		429		(578)		8,100
Total ACL	$	47,123	$	(850)	$	523	$	(9,190)	$	37,606

16

	Nine Months Ended September 30, 2021
(in thousands)	Beginning balance		Charge-offs		Recoveries		Provision		Ending balance
CRE
Non-owner occupied CRE	$	8,845	$	—	$	—	$	791	$	9,636
Multifamily	6,072		—		—		(615)		5,457
Construction/land development
Multifamily construction	4,903		—		—		(3,859)		1,044
CRE construction	1,670		—		—		(1,319)		351
Single family construction	5,130		—		—		1,161		6,291
Single family construction to permanent	1,315		—		—		(253)		1,062
Total	27,935		—		—		(4,094)		23,841
Commercial and industrial loans
Owner occupied CRE	4,994		—		—		291		5,285
Commercial business	17,043		(116)		122		(2,576)		14,473
Total	22,037		(116)		122		(2,285)		19,758
Consumer loans
Single family	6,906		(127)		155		(1,177)		5,757
Home equity and other	7,416		(432)		484		(2,308)		5,160
Total	14,322		(559)		639		(3,485)		10,917
Total ACL	$	64,294	$	(675)	$	761	$	(9,864)	$	54,516

17

The following table presents a vintage analysis of the commercial portfolio segment by loan sub-class and risk rating or delinquency status.

	At September 30, 2022
(in thousands)	2022		2021		2020		2019		2018		2017 and prior		Revolving		Revolving-term		Total
COMMERCIAL PORTFOLIO
Non-owner occupied CRE
Pass	$	68,355	$	68,432	$	42,525	$	140,499	$	92,645	$	246,729	$	2,141	$	802	$	662,128
Special Mention	—		—		—		—		—		4,266		—		—		4,266
Substandard	—		—		—		—		—		—		—		—		—
Total	68,355		68,432		42,525		140,499		92,645		250,995		2,141		802		666,394
Multifamily
Pass	1,642,429		1,292,784		531,838		222,624		59,604		142,064		320		—		3,891,663
Special Mention	—		—		4,893		19,835		—		7,555		—		—		32,283
Substandard	—		—		—		—		—		—		—		—		—
Total	1,642,429		1,292,784		536,731		242,459		59,604		149,619		320		—		3,923,946
Multifamily construction
Pass	9,078		40,846		12,793		—		—		—		—		—		62,717
Special Mention	—		—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—		—		—
Total	9,078		40,846		12,793		—		—		—		—		—		62,717
CRE construction
Pass	—		14,314		3,959		—		—		311		—		—		18,584
Special Mention	—		—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—		—		—
Total	—		14,314		3,959		—		—		311		—		—		18,584
Single family construction
Pass	130,517		72,095		24,369		2,129		—		75		116,346		—		345,531
Special Mention	—		—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—		—		—
Total	130,517		72,095		24,369		2,129		—		75		116,346		—		345,531
Single family construction to permanent
Current	40,499		99,023		17,758		5,186		794		—		—		—		163,260
Past due:
30-59 days	—		—		—		—		—		—		—		—		—
60-89 days	—		—		—		—		—		—		—		—		—
90+ days	—		—		—		—		—		—		—		—		—
Total	40,499		99,023		17,758		5,186		794		—		—		—		163,260
Owner occupied CRE
Pass	49,583		53,256		45,926		72,717		41,147		147,619		—		1,123		411,371
Special Mention	—		—		—		—		2,149		13,944		—		—		16,093
Substandard	—		—		—		—		2,159		2,491		—		—		4,650
Total	49,583		53,256		45,926		72,717		45,455		164,054		—		1,123		432,114
Commercial business
Pass	56,784		46,473		47,357		22,740		14,232		20,234		123,215		1,931		332,966
Special Mention	—		189		—		—		193		3,796		753		109		5,040
Substandard	—		6,986		2,778		4,724		2,485		2,031		4,625		—		23,629
Total	56,784		53,648		50,135		27,464		16,910		26,061		128,593		2,040		361,635
Total commercial portfolio	$	1,997,245	$	1,694,398	$	734,196	$	490,454	$	215,408	$	591,115	$	247,400	$	3,965	$	5,974,181

18

The following table presents a vintage analysis of the consumer portfolio segment by loan sub-class and delinquency status:

	At September 30, 2022
(in thousands)	2022		2021		2020		2019		2018		2017 and prior		Revolving		Revolving-term		Total
CONSUMER PORTFOLIO
Single family
Current	$	199,172	$	220,456	$	147,398	$	48,390	$	47,679	$	241,953	$	—	$	—	$	905,048
Past due:
30-59 days	—		—		—		—		—		93		—		—		93
60-89 days	—		—		—		—		—		—		—		—		—
90+ days	—		—		—		432		—		1,471		—		—		1,903
Total	199,172		220,456		147,398		48,822		47,679		243,517		—		—		907,044
Home equity and other
Current	2,347		912		188		191		139		1,622		322,132		4,172		331,703
Past due:
30-59 days	—		30		—		—		—		52		232		2		316
60-89 days	—		—		—		—		—		—		4		—		4
90+ days	25		—		—		—		—		214		—		—		239
Total	2,372		942		188		191		139		1,888		322,368		4,174		332,262
Total consumer portfolio (1)	$	201,544	$	221,398	$	147,586	$	49,013	$	47,818	$	245,405	$	322,368	$	4,174	$	1,239,306
Total LHFI	$	2,198,789	$	1,915,796	$	881,782	$	539,467	$	263,226	$	836,520	$	569,768	$	8,139	$	7,213,487

(1)    Includes $5.8 million of loans where a fair value option election was made at the time of origination and, therefore, are carried at fair value with changes in fair value recognized in the consolidated income statements.

19

The following table presents a vintage analysis of the commercial portfolio segment by loan sub-class and risk rating or delinquency status:

	At December 31, 2021
(in thousands)	2021		2020		2019		2018		2017		2016 and prior		Revolving		Revolving-term		Total
COMMERCIAL PORTFOLIO
Non-owner occupied CRE
Pass	$	68,647	$	50,571	$	169,711	$	130,877	$	100,674	$	183,024	$	963	$	892	$	705,359
Special Mention	—		—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—		—		—
Total	68,647		50,571		169,711		130,877		100,674		183,024		963		892		705,359
Multifamily
Pass	1,315,204		561,666		286,826		60,372		26,065		165,225		1		—		2,415,359
Special Mention	—		—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—		—		—
Total	1,315,204		561,666		286,826		60,372		26,065		165,225		1		—		2,415,359
Multifamily construction
Pass	7,825		22,863		7,173		—		—		—		—		—		37,861
Special Mention	—		—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—		—		—
Total	7,825		22,863		7,173		—		—		—		—		—		37,861
CRE construction
Pass	7,694		3,960		—		1,962		—		556		—		—		14,172
Special Mention	—		—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—		—		—
Total	7,694		3,960		—		1,962		—		556		—		—		14,172
Single family construction
Pass	146,595		35,640		14,509		—		—		77		99,206		—		296,027
Special Mention	—		—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—		—		—
Total	146,595		35,640		14,509		—		—		77		99,206		—		296,027
Single family construction to permanent
Current	90,311		42,636		13,362		1,775		—		—		—		—		148,084
Past due:
30-59 days	—		—		—		—		—		—		—		—		—
60-89 days	—		—		—		—		—		—		—		—		—
90+ days	—		—		—		—		—		—		—		—		—
Total	90,311		42,636		13,362		1,775		—		—		—		—		148,084
Owner occupied CRE
Pass	70,902		47,536		57,423		47,716		67,042		106,659		798		2,839		400,915
Special Mention	—		—		—		2,196		6,019		145		—		60		8,420
Substandard	—		—		18,665		1,111		10,151		18,444		—		—		48,371
Total	70,902		47,536		76,088		51,023		83,212		125,248		798		2,899		457,706
Commercial business
Pass	88,139		51,453		44,882		24,711		11,859		21,258		112,759		2,104		357,165
Special Mention	—		—		7,396		—		4,396		—		5,613		134		17,539
Substandard	9,716		3,399		1,667		5,928		1,096		1,328		3,932		102		27,168
Total	97,855		54,852		53,945		30,639		17,351		22,586		122,304		2,340		401,872
Total commercial portfolio	$	1,805,033	$	819,724	$	621,614	$	276,648	$	227,302	$	496,716	$	223,272	$	6,131	$	4,476,440

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The following table presents a vintage analysis of the consumer portfolio segment by loan sub-class and delinquency status:

	At December 31, 2021
(in thousands)	2021		2020		2019		2018		2017		2016 and prior		Revolving		Revolving-term		Total
CONSUMER PORTFOLIO
Single family
Current	$	176,110	$	156,360	$	62,369	$	66,063	$	95,988	$	204,229	$	—	$	—	$	761,119
Past due:
30-59 days	—		—		291		—		—		—		—		—		291
60-89 days	—		—		—		—		314		471		—		—		785
90+ days	—		—		561		452		—		123		—		—		1,136
Total	176,110		156,360		63,221		66,515		96,302		204,823		—		—		763,331
Home equity and other
Current	2,005		474		393		532		516		2,609		290,512		5,273		302,314
Past due:
30-59 days	—		3		—		—		—		94		40		—		137
60-89 days	—		—		—		—		—		—		12		62		74
90+ days	3		—		—		—		—		6		544		—		553
Total	2,008		477		393		532		516		2,709		291,108		5,335		303,078
Total consumer portfolio (1)	$	178,118	$	156,837	$	63,614	$	67,047	$	96,818	$	207,532	$	291,108	$	5,335	$	1,066,409
Total LHFI	$	1,983,151	$	976,561	$	685,228	$	343,695	$	324,120	$	704,248	$	514,380	$	11,466	$	5,542,849

(1)    Includes $7.3 million of loans where a fair value option election was made at the time of origination and, therefore, are carried at fair value with changes in fair value recognized in the consolidated income statements.

Collateral Dependent Loans

The following table presents the amortized cost basis of collateral-dependent loans by loan sub-class and collateral type:

	At September 30, 2022
(in thousands)	Land		1-4 Family		Non-residential real estate		Other non-real estate		Total
Commercial and industrial loans
Owner occupied CRE	$	1,111	$	—	$	1,410	$	—	$	2,521
Commercial business	62		—		562		4		628
Total collateral-dependent loans	$	1,173	$	—	$	1,972	$	4	$	3,149

	At December 31, 2021
(in thousands)	Land		1-4 Family		Non-residential real estate		Other non-real estate		Total
Commercial and industrial loans
Owner occupied CRE	$	1,111	$	—	$	2,456	$	—	$	3,567
Commercial business	362		27		562		286		1,237
Total	1,473		27		3,018		286		4,804
Consumer loans
Single family	—		1,598		—		—		1,598
Home equity loans and other	—		19		—		—		19
Total	—		1,617		—		—		1,617
Total collateral-dependent loans	$	1,473	$	1,644	$	3,018	$	286	$	6,421

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Nonaccrual and Past Due Loans

The following table presents nonaccrual status for loans:

	At September 30, 2022					At December 31, 2021
(in thousands)		Nonaccrual with no related ACL		Total Nonaccrual		Nonaccrual with no related ACL		Total Nonaccrual
Commercial and industrial loans
Owner occupied CRE		$	2,521	$	2,521	$	3,568	$	3,568
Commercial business		628		4,721		1,210		5,023
Total		3,149		7,242		4,778		8,591
Consumer loans
Single family		341		3,893		1,324		2,802
Home equity and other		5		1,131		23		808
Total		346		5,024		1,347		3,610
Total nonaccrual loans		$	3,495	$	12,266	$	6,125	$	12,201

The following tables present an aging analysis of past due loans by loan portfolio segment and loan sub-class:

	At September 30, 2022
	Past Due and Still Accruing
(in thousands)	30-59 days			60-89 days			90 days or more				Nonaccrual			Total past due and nonaccrual (3)			Current			Total loans
CRE
Non-owner occupied CRE	$	—		$	—		$	—			$	—		$	—		$	666,394		$	666,394
Multifamily	—			—			—				—			—			3,923,946			3,923,946
Construction/land development
Multifamily construction	—			—			—				—			—			62,717			62,717
CRE construction	—			—			—				—			—			18,584			18,584
Single family construction	—			—			—				—			—			345,531			345,531
Single family construction to permanent	—			—			—				—			—			163,260			163,260
Total	—			—			—				—			—			5,180,432			5,180,432
Commercial and industrial loans
Owner occupied CRE	—			—			—				2,521			2,521			429,593			432,114
Commercial business	—			—			—				4,721			4,721			356,914			361,635
Total	—			—			—				7,242			7,242			786,507			793,749
Consumer loans
Single family	2,996			863			5,064			(2)	3,893			12,816			894,228			907,044
Home equity and other	143			4			—				1,131			1,278			330,984			332,262
Total	3,139			867			5,064				5,024			14,094			1,225,212			1,239,306			(1)
Total loans	$	3,139		$	867		$	5,064			$	12,266		$	21,336		$	7,192,151		$	7,213,487
%	0.04		%	0.01		%	0.07		%		0.17		%	0.30		%	99.70		%	100.00		%

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	At December 31, 2021
	Past Due and Still Accruing
(in thousands)	30-59 days			60-89 days			90 days or more				Nonaccrual			Total past due and nonaccrual (3)			Current			Total loans
CRE
Non-owner occupied CRE	$	—		$	—		$	—			$	—		$	—		$	705,359		$	705,359
Multifamily	—			—			—				—			—			2,415,359			2,415,359
Construction/land development
Multifamily construction	—			—			—				—			—			37,861			37,861
CRE construction	—			—			—				—			—			14,172			14,172
Single family construction	—			—			—				—			—			296,027			296,027
Single family construction to permanent	—			—			—				—			—			148,084			148,084
Total	—			—			—				—			—			3,616,862			3,616,862
Commercial and industrial loans
Owner occupied CRE	—			—			—				3,568			3,568			454,138			457,706
Commercial business	198			—			—				5,023			5,221			396,651			401,872
Total	198			—			—				8,591			8,789			850,789			859,578
Consumer loans
Single family	892			820			6,717			(2)	2,802			11,231			752,100			763,331
Home equity and other	118			74			—				808			1,000			302,078			303,078
Total	1,010			894			6,717				3,610			12,231			1,054,178			1,066,409			(1)
Total loans	$	1,208		$	894		$	6,717			$	12,201		$	21,020		$	5,521,829		$	5,542,849
%	0.02		%	0.02		%	0.12		%		0.22		%	0.38		%	99.62		%	100.00		%

(1)Includes $5.8 million and $7.3 million of loans at September 30, 2022 and December 31, 2021, respectively, where a fair value option election was made at the time of origination and, therefore, are carried at fair value with changes in fair value recognized in our consolidated income statements.

(2)FHA-insured and VA-guaranteed single family loans that are 90 days or more past due are maintained on accrual status if they are determined to have little to no risk of loss.

(3)Includes loans whose repayments are insured by the FHA or guaranteed by the VA or Small Business Administration " SBA" of $11.6 million and $8.4 million at September 30, 2022 and December 31, 2021, respectively.

Loan Modifications

The Company provides modifications to borrowers experiencing financial difficulty which may include delays in payment of amounts due, extension of the terms of the notes or reduction in the interest rates on the notes. In certain instances, the Company may grant more than one type of modification. The granting of modifications in the quarter and nine months ended September 30, 2022 did not have a material impact on the ACL. The following tables provide information related to loans modified during the quarter and nine months ended September 30, 2022 to borrowers experiencing financial difficulty, disaggregated by class of financing receivable and type of concession granted:

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	Significant Payment Delay
	Quarter Ended September 30, 2022				Nine Months Ended September 30, 2022
(in thousands)	Amortized Cost Basis at Period End		% of Total Class of Financing Receivable		Amortized Cost Basis at Period End		% of Total Class of Financing Receivable
Single family	$	682	0.08	%	$	1,209	0.13	%
Home equity and other	—		—	%	70		0.02	%

	Term Extension
	Quarter Ended September 30, 2022				Nine Months Ended September 30, 2022
(in thousands)	Amortized Cost Basis at Period End		% of Total Class of Financing Receivable		Amortized Cost Basis at Period End		% of Total Class of Financing Receivable
Commercial business	$	—	—	%	$	1,570	0.43	%
Single family	—		—	%	270		0.03	%

	Interest Rate Reduction and Significant Payment Delay
	Quarter Ended September 30, 2022				Nine Months Ended September 30, 2022
(in thousands)	Amortized Cost Basis at Period End		% of Total Class of Financing Receivable		Amortized Cost Basis at Period End		% of Total Class of Financing Receivable
Commercial business	$	477	0.13	%	$	477	0.13	%

	Interest Rate Reduction and Term Extension
	Quarter Ended September 30, 2022				Nine Months Ended September 30, 2022
(in thousands)	Amortized Cost Basis at Period End		% of Total Class of Financing Receivable		Amortized Cost Basis at Period End		% of Total Class of Financing Receivable
Single family	$	—	—	%	$	819	0.09	%

	Significant Payment Delay and Term Extension
	Quarter Ended September 30, 2022				Nine Months Ended September 30, 2022
(in thousands)	Amortized Cost Basis at Period End		% of Total Class of Financing Receivable		Amortized Cost Basis at Period End		% of Total Class of Financing Receivable
Single family	$	4,033	0.44	%	$	13,325	1.47	%
Home equity and other	—		—	%	51		0.01	%

	Interest Rate Reduction, Significant Payment Delay and Term Extension
	Quarter Ended September 30, 2022				Nine Months Ended September 30, 2022
(in thousands)	Amortized Cost Basis at Period End		% of Total Class of Financing Receivable		Amortized Cost Basis at Period End		% of Total Class of Financing Receivable
Single family	$	294	0.03	%	$	7,185	0.79	%

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The following table describes the financial effect of the modifications made to borrowers experiencing financial difficulty:

	Interest Rate Reduction
(in thousands)	Quarter Ended September 30, 2022	Nine Months Ended September 30, 2022
Commercial business	Reduced weighted-average contractual interest rate from 5.72% to 4.00%.	Reduced weighted-average contractual interest rate from 5.72% to 4.00%.
Single family	Reduced weighted-average contractual interest rate from 4.38% to 4.13%.	Reduced weighted-average contractual interest rate from 4.35% to 3.39%.
	Significant Payment Delay
(in thousands)	Quarter Ended September 30, 2022	Nine Months Ended September 30, 2022
Single family	Provided payment deferrals to borrowers. A weighted average 1.83% of loan balances were capitalized and added to the remaining term of the loan.	Provided payment deferrals to borrowers. A weighted average 0.22% of loan balances were capitalized and added to the remaining term of the loan.
Home equity and other	—	Provided payment deferrals to borrowers. A weighted average 3.44% of loan balances were capitalized and added to the remaining term of the loan.
	Term Extension
(in thousands)	Quarter Ended September 30, 2022	Nine Months Ended September 30, 2022
Commercial business	—	Added a weighted average 0.8 years to the life of loans, which reduced the monthly payment amounts to the borrowers.
Single family	Added a weighted average 3.6 years to the life of loans, which reduced the monthly payment amounts to the borrowers.	Added a weighted average 4.4 years to the life of loans, which reduced the monthly payment amounts to the borrowers.
Home equity and other	—	Added a weighted average 16.1 years to the life of loans, which reduced the monthly payment amounts to the borrowers.

Upon determination that a modified loan (or portion of a loan) has subsequently been deemed uncollectible, the loan (or portion of the loan) is written off. Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the allowance for credit losses is adjusted by the same amount.

The following table depicts the payment status of loans that have been modified to borrowers experiencing financial difficulty during the six months ended June 30, 2022:

	Payment Status (Amortized Cost Basis) at September 30, 2022
(in thousands)	Current		30-89 Days Past Due		90+ Days Past Due
Commercial business	$	1,570	$	—	$	—
Single family	16,205		405		1,002
Home equity and other	121		—		—
Total	$	17,896	$	405	$	1,002

The following tables provide the amortized cost basis as of September 30, 2022 of loans that were modified to borrowers experiencing financial difficulty during the six months ended June 30, 2022 and subsequently had a payment default:

	Amortized Cost Basis of Modified Loans That Subsequently Defaulted Quarter Ended September 30, 2022
(in thousands)	Significant Payment Delay		Term Extension		Interest Rate Reduction and Term Extension		Significant Payment Delay and Term Extension		Interest Rate Reduction, Significant Payment Delay and Term Extension
Single family	$	—	$	—	$	—	$	—	$	553

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	Amortized Cost Basis of Modified Loans That Subsequently Defaulted Nine Months Ended September 30, 2022
(in thousands)	Significant Payment Delay		Term Extension		Interest Rate Reduction and Term Extension		Significant Payment Delay and Term Extension		Interest Rate Reduction, Significant Payment Delay and Term Extension
Single family	$	—	$	—	$	—	$	172	$	1,555

NOTE 4–DEPOSITS:

Deposit balances, including their weighted average rates, were as follows: 

	At September 30, 2022				At December 31, 2021
(dollars in thousands)	Amount		Weighted Average Rate		Amount		Weighted Average Rate
Noninterest-bearing demand deposits	$	1,547,642			$	1,617,069
Interest bearing:
Interest-bearing demand deposits	514,912		0.12	%	513,810		0.10	%
Savings	275,399		0.06	%	302,389		0.06	%
Money market	2,551,961		0.75	%	2,806,313		0.15	%
Certificates of deposit	1,720,317		1.58	%	906,928		0.51	%
Total interest bearing deposits	5,062,589		0.93	%	4,529,440		0.21	%
Total deposits	$	6,610,231	0.71	%	$	6,146,509	0.15	%

Certificates of deposit outstanding mature as follows: 

(in thousands)	September 30, 2022
Within one year	$	1,368,503
One to two years	338,825
Two to three years	8,450
Three to four years	2,433
Four to five years	1,774
Thereafter	332
Total	$	1,720,317

The aggregate amount of certificate of deposits in denominations of more than the FDIC limit of $250 thousand at September 30, 2022 and December 31, 2021 were $189 million and $108 million, respectively. There were $512 million and $145 million of brokered deposits at September 30, 2022 and December 31, 2021, respectively.

NOTE 5–LONG-TERM DEBT:

At September 30, 2022, the Company had outstanding $98 million of subordinated notes (the "Sub Notes") that were issued in January 2022. Interest on the Sub Notes accrue at a rate equal to 3.5% per annum until January 30, 2027, payable semiannually in arrears. From and including January 30, 2027, to, but excluding, the maturity date or the date of earlier redemption, the Sub Notes will bear interest equal to the three-month term Secured Overnight Financing Rate plus 215 basis points, payable quarterly in arrears.

At September 30, 2022 and December 31, 2021, the Company had outstanding $64 million of Senior Notes which bear interest at a rate of 6.50% and mature in 2026.

The Company issued trust preferred securities during the period from 2005 through 2007, resulting in a debt balance of $62 million that remains outstanding at September 30, 2022 and December 31, 2021. In connection with the issuance of trust

26

preferred securities, HomeStreet, Inc. issued to HomeStreet Statutory Trust Junior Subordinated Deferrable Interest Debentures. The sole assets of the HomeStreet Statutory Trust are the Subordinated Debt Securities I, II, III, and IV.

The Subordinated Debt Securities outstanding as of September 30, 2022 and December 31, 2021 are as follows:

	HomeStreet Statutory Trust
(dollars in thousands)	I	II	III	IV
Date issued	June 2005	September 2005	February 2006	March 2007
Amount	$5,155	$20,619	$20,619	$15,464
Interest rate	3 MO LIBOR + 1.70%	3 MO LIBOR + 1.50%	3 MO LIBOR + 1.37%	3 MO LIBOR + 1.68%
Maturity date	June 2035	December 2035	March 2036	June 2037
Call option (1)	Quarterly	Quarterly	Quarterly	Quarterly

(1) Call options are exercisable at par and are callable, without penalty on a quarterly basis, starting five years after issuance.

NOTE 6–DERIVATIVES AND HEDGING ACTIVITIES:

To reduce the risk of significant interest rate fluctuations on the value of certain assets and liabilities, such as single family mortgage LHFS and MSRs, the Company utilizes derivatives as economic hedges. The notional amounts and fair values for derivatives, which are included in other assets or accounts payable and other liabilities on the consolidated balance sheet, consist of the following: 

	At September 30, 2022
	Notional amount		Fair value derivatives
(in thousands)			Asset		Liability
Forward sale commitments	$	193,699	$	2,756	$	(1,434)
Interest rate lock commitments	29,679		48		(408)
Interest rate swaps	238,468		13,759		(13,759)
Futures	23,900		46		—
Options	18,600		385		—
Total derivatives before netting	$	504,346	16,994		(15,601)
Netting adjustment/Cash collateral (1)			(15,652)		1,223
Carrying value on consolidated balance sheet			$	1,342	$	(14,378)

	At December 31, 2021
	Notional amount		Fair value derivatives
(in thousands)			Asset		Liability
Forward sale commitments	$	793,208	$	723	$	(640)
Interest rate lock commitments	115,025		2,487		(3)
Interest rate swaps	287,352		4,381		(4,541)
Futures	139,900		334		—
Total derivatives before netting	$	1,335,485	7,925		(5,184)
Netting adjustment/Cash collateral (1)			1,355		3,921
Carrying value on consolidated balance sheet			$	9,280	$	(1,263)

(1)    Includes net cash collateral received of $14.4 million and paid of $5.3 million at September 30, 2022 and December 31, 2021, respectively.

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The following table presents gross fair value and net carrying value information for derivative instruments:

(in thousands)	Gross fair value		Netting adjustments/ Cash collateral (1)		Carrying value
At September 30, 2022
Derivative assets	$	16,994	$	(15,652)	$	1,342
Derivative liabilities	(15,601)		1,223		(14,378)
At December 31, 2021
Derivative assets	$	7,925	$	1,355	$	9,280
Derivative liabilities	(5,184)		3,921		(1,263)

(1) Includes net cash collateral received of $14.4 million and paid of $5.3 million at September 30, 2022 and December 31, 2021, respectively.

The collateral used under the Company's master netting agreements is typically cash, but securities may be used under agreements with certain counterparties. Receivables related to cash collateral that has been paid to counterparties is included in other assets. Payables related to cash collateral that has been received from counterparties is included in accounts payable and other liabilities. Interest is owed on amounts received from counterparties and we earn interest on cash paid to counterparties. Any securities pledged to counterparties as collateral remain on the consolidated balance sheets. At September 30, 2022 and December 31, 2021, the Company had liabilities of $14.5 million and zero, respectively, in cash collateral received from counterparties and receivables of $0.1 million and $5.3 million, respectively, in cash collateral paid to counterparties.

The following table presents the net gain (loss) recognized on economic hedge derivatives, within the respective line items in the consolidated income statements for the periods indicated:

	Quarter Ended September 30,				Nine Months Ended September 30,
(in thousands)	2022		2021		2022		2021
Recognized in noninterest income:
Net gain (loss) on loan origination and sale activities (1)	$	958	$	(1,165)	$	8,221	$	(4,574)
Loan servicing income (loss) (2)	(422)		(293)		(12,051)		(7,860)
Other (3)	—		41		160		305

(1)Comprised of interest rate lock commitments ("IRLCs") and forward contracts used as an economic hedge of loans held for sale.

(2)Comprised of interest rate swaps, interest rate swaptions, futures, US Treasury options and forward contracts used as economic hedges of single family MSRs.

(3)Impact of interest rate swap agreements executed with commercial banking customers.

The notional amount of open interest rate swap agreements executed with commercial banking customers at September 30, 2022 and December 31, 2021 were $238 million and $287 million, respectively. 

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NOTE 7–MORTGAGE BANKING OPERATIONS:

LHFS consisted of the following:

(in thousands)	At September 30, 2022		At December 31, 2021
Single family	$	13,308	$	128,041
CRE, multifamily and SBA	479		48,090
Total	$	13,787	$	176,131

Loans sold consisted of the following for the periods indicated: 

	Quarter Ended September 30,				Nine Months Ended September 30,
(in thousands)	2022		2021		2022		2021
Single family	$	131,228	$	469,090	$	641,921	$	1,669,412
CRE, multifamily and SBA	29,965		69,810		129,394		465,948
Total	$	161,193	$	538,900	$	771,315	$	2,135,360

Gain on loan origination and sale activities, including the effects of derivative risk management instruments, consisted of the following: 

	Quarter Ended September 30,				Nine Months Ended September 30,
(in thousands)	2022		2021		2022		2021
Single family	$	1,778	$	14,249	$	11,896	$	56,272
CRE, multifamily and SBA	869		3,260		4,317		15,967
Total	$	2,647	$	17,509	$	16,213	$	72,239

The Company's portfolio of loans serviced for others is primarily comprised of loans held in U.S. government and agency MBS issued by Fannie Mae, Freddie Mac and Ginnie Mae. The unpaid principal balance of loans serviced for others is as follows:

(in thousands)	At September 30, 2022		At December 31, 2021
Single family	$	5,500,428	$	5,539,180
CRE, multifamily and SBA	1,980,109		2,031,087
Total	$	7,480,537	$	7,570,267

The Company has made representations and warranties that the loans sold meet certain requirements. The Company may be

required to repurchase mortgage loans or indemnify loan purchasers due to defects in the origination process of the loan, such

as documentation errors, underwriting errors and judgments, appraisal errors, early payment defaults and fraud.

The following is a summary of changes in the Company's liability for estimated single-family mortgage repurchase losses:

	Quarter Ended September 30,				Nine Months Ended September 30,
(in thousands)	2022		2021		2022		2021
Balance, beginning of period	$	1,491	$	1,612	$	1,312	$	2,122
Additions, net of adjustments (1)	838		(183)		1,329		(229)
Realized (losses) recoveries, net (2)	(370)		14		(682)		(450)
Balance, end of period	$	1,959	$	1,443	$	1,959	$	1,443

(1) Includes additions for new loan sales and changes in estimated probable future repurchase losses on previously sold loans.

(2) Includes principal losses and accrued interest on repurchased loans, "make-whole" settlements, settlements with claimants and certain related expenses.

The Company has agreements with certain investors to advance scheduled principal and interest amounts on delinquent loans. Advances are also made to fund the foreclosure and collection costs of delinquent loans prior to the recovery of reimbursable

29

amounts from investors or borrowers. Advances of $1.7 million and $1.9 million were recorded in other assets as of September 30, 2022 and December 31, 2021, respectively.

When the Company has the unilateral right to repurchase Ginnie Mae pool loans it has previously sold (generally loans that are more than 90 days past due), the Company records the balance of the loans as other assets and other liabilities. At September 30, 2022 and December 31, 2021, delinquent or defaulted mortgage loans currently in Ginnie Mae pools that the Company has recognized on its consolidated balance sheets totaled $6.8 million and $12.3 million, respectively.

Revenue from mortgage servicing, including the effects of derivative risk management instruments, consisted of the following:

	Quarter Ended September 30,				Nine Months Ended September 30,
(in thousands)	2022		2021		2022		2021
Servicing income, net:
Servicing fees and other	$	7,673	$	7,897	$	25,501	$	26,055
Amortization of single family MSRs (1)	(2,112)		(4,579)		(8,052)		(15,453)
Amortization of multifamily and SBA MSRs	(1,828)		(1,758)		(5,877)		(5,235)
Total	3,733		1,560		11,572		5,367
Risk management, single family MSRs:
Changes in fair value of MSRs due to assumptions (2)	1,989		747		16,615		7,186
Net gain (loss) from economic hedging	(2,981)		(293)		(18,481)		(7,860)
Total	(992)		454		(1,866)		(674)
Loan servicing income (loss)	$	2,741	$	2,014	$	9,706	$	4,693

(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.

The changes in single family MSRs measured at fair value are as follows:

	Quarter Ended September 30,				Nine Months Ended September 30,
(in thousands)	2022		2021		2022		2021
Beginning balance	$	76,481	$	59,872	$	61,584	$	49,966
Additions and amortization:
Originations	1,453		5,166		7,664		19,507
Amortization (1)	(2,112)		(4,579)		(8,052)		(15,453)
Net additions and amortization	(659)		587		(388)		4,054
Changes in fair value assumptions (2)	1,989		747		16,615		7,186
Ending balance	$	77,811	$	61,206	$	77,811	$	61,206

(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.

Key economic assumptions used in measuring the initial fair value of capitalized single family MSRs were as follows: 

	Quarter Ended September 30,				Nine Months Ended September 30,
(rates per annum) (1)	2022		2021		2022		2021
Constant prepayment rate ("CPR") (2)	13.06	%	9.84	%	10.72	%	8.75	%
Discount rate	10.36	%	7.77	%	9.19	%	8.25	%

(1) Based on a weighted average.

(2) Represents an expected lifetime average CPR used in the model.

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For single family MSRs, we use a discounted cash flow valuation technique which utilizes CPRs and discount rates as significant unobservable inputs as noted in the table below:

	At September 30, 2022			At December 31, 2021
	Range of Inputs	Average (1)		Range of Inputs	Average (1)
CPRs	5.99% - 11.48%	8.31	%	7.90% - 17.35%	10.35	%
Discount Rates	9.72% - 16.89%	10.63	%	6.94% - 13.96%	7.97	%

(1) Weighted averages of all the inputs within the range.

To compute hypothetical sensitivities of the value of our single family MSRs to immediate adverse changes in key assumptions, we computed the impact of changes to CPRs and in discount rates as outlined below:

(dollars in thousands)	At September 30, 2022
Fair value of single family MSR	$	77,811
Expected weighted-average life (in years)	7.82
CPR
Impact on fair value of 25 basis points adverse change in interest rates	$	(469)
Impact on fair value of 50 basis points adverse change in interest rates	$	(1,092)
Discount rate
Impact on fair value of 100 basis points increase	$	(4,703)
Impact on fair value of 200 basis points increase	$	(9,044)

The changes in multifamily and SBA MSRs measured at the lower of amortized cost or fair value were as follows: 

	Quarter Ended September 30,				Nine Months Ended September 30,
(in thousands)	2022		2021		2022		2021
Beginning balance	$	38,130	$	39,113	$	39,415	$	35,774
Originations	517		2,270		3,281		9,086
Amortization	(1,828)		(1,758)		(5,877)		(5,235)
Ending balance	$	36,819	$	39,625	$	36,819	$	39,625

NOTE 8–GUARANTEES AND MORTGAGE REPURCHASE LIABILITY:

In the ordinary course of business, the Company sells loans through the Fannie Mae Multifamily Delegated Underwriting and Servicing Program ("DUS"®) that are subject to a credit loss sharing arrangement. The Company services the loans for Fannie Mae and shares in the risk of loss with Fannie Mae under the terms of the DUS contracts. Under the DUS program, the Company and Fannie Mae share losses on a pro rata basis, where the Company is responsible for losses incurred up to one-third of principal balance on each loan with two-thirds of the loss covered by Fannie Mae. For loans that have been sold through this program, a liability is recorded for this loss sharing arrangement under the accounting guidance for guarantees. As of September 30, 2022 and December 31, 2021, the total unpaid principal balance of loans sold under this program was $1.8 billion and $1.9 billion, respectively. The Company's reserve liability related to this arrangement totaled $0.6 million at both September 30, 2022 and December 31, 2021. There were no actual losses incurred under this arrangement during the quarters or nine months ended September 30, 2022 and 2021.

In the ordinary course of business, the Company sells residential mortgage loans to GSEs and other entities. Under the terms of these sales agreements, the Company has made representations and warranties that the loans sold meet certain requirements. The Company may be required to repurchase mortgage loans or indemnify loan purchasers due to defects in the origination process of the loan, such as documentation errors, underwriting errors and judgments, early payment defaults and fraud. The total unpaid principal balance of loans sold on a servicing-retained basis that were subject to the terms and conditions of these representations and warranties totaled $5.5 billion at both September 30, 2022 and December 31, 2021. At September 30, 2022 and December 31, 2021, the Company had recorded a mortgage repurchase liability for loans sold on a servicing-retained and

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servicing-released basis, included in accounts payable and other liabilities on the consolidated balance sheets, of $2.0 million and $1.3 million, respectively.

NOTE 9–EARNINGS PER SHARE:

The following table summarizes the calculation of earnings per share: 

	Quarter Ended September 30,				Nine Months Ended September 30,
(in thousands, except share and per share data)	2022		2021		2022		2021
Net income	$	20,367	$	27,170	$	58,039	$	85,990
Weighted average shares:
Basic weighted-average number of common shares outstanding	18,716,864		20,613,290		19,000,007		21,099,059
Dilutive effect of outstanding common stock equivalents	79,873		206,311		137,841		253,656
Diluted weighted-average number of common shares outstanding	18,796,737		20,819,601		19,137,848		21,352,715
Net income per share:
Basic earnings per share	$	1.09	$	1.32	$	3.05	$	4.08
Diluted earnings per share	1.08		1.31		3.03		4.03

NOTE 10–FAIR VALUE MEASUREMENT:

The term "fair value" is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The Company's approach is to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements.

Fair Value Hierarchy

A three-level valuation hierarchy has been established under ASC 820 for disclosure of fair value measurements. The valuation hierarchy is based on the observability of inputs to the valuation of an asset or liability as of the measurement date. A financial instrument’s categorization within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement. The levels are defined as follows:

• Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date. An active market for the asset or liability is a market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.

• Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. This includes quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability for substantially the full term of the financial instrument.

• Level 3 – Unobservable inputs for the asset or liability. These inputs reflect the Company's assumptions of what market participants would use in pricing the asset or liability.

The Company's policy regarding transfers between levels of the fair value hierarchy is that all transfers are assumed to occur at the end of the reporting period.

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Estimation of Fair Value

Fair value is based on quoted market prices, when available. In cases where a quoted price for an asset or liability is not available, the Company uses valuation models to estimate fair value. These models incorporate inputs such as forward yield curves, loan prepayment assumptions, expected loss assumptions, market volatilities and pricing spreads utilizing market-based inputs where readily available. The Company believes its valuation methods are appropriate and consistent with those that would be used by other market participants. However, imprecision in estimating unobservable inputs and other factors may result in these fair value measurements not reflecting the amount realized in an actual sale or transfer of the asset or liability in a current market exchange.

The following table summarizes the fair value measurement methodologies, including significant inputs and assumptions and classification of the Company's assets and liabilities valued at fair value on a recurring basis.

Asset/Liability class	Valuation methodology, inputs and assumptions	Classification
Investment securities
Trading securities	Fair Value is based on quoted prices in an active market.	Level 1 recurring fair value measurement.
Investment securities AFS	Observable market prices of identical or similar securities are used where available.	Level 2 recurring fair value measurement.
	If market prices are not readily available, value is based on discounted cash flows using the following significant inputs: •      Expected prepayment speeds  •      Estimated credit losses  •      Market liquidity adjustments	Level 3 recurring fair value measurement.
LHFS
Single family loans, excluding loans transferred from held for investment	Fair value is based on observable market data, including: •       Quoted market prices, where available  •       Dealer quotes for similar loans  •       Forward sale commitments	Level 2 recurring fair value measurement.
	When not derived from observable market inputs, fair value is based on discounted cash flows, which considers the following inputs: •       Benchmark yield curve   •       Estimated discount spread to the benchmark yield curve  •       Expected prepayment speeds	Estimated fair value classified as Level 3.
Mortgage servicing rights
Single family MSRs	For information on how the Company measures the fair value of its single family MSRs, including key economic assumptions and the sensitivity of fair value to changes in those assumptions, see Note 7, Mortgage Banking Operations.	Level 3 recurring fair value measurement.
Derivatives
Futures and Options	Fair value is based on closing exchange prices.	Level 1 recurring fair value measurement.
Forward sale commitments Interest rate swaps	Fair value is based on quoted prices for identical or similar instruments, when available. When quoted prices are not available, fair value is based on internally developed modeling techniques, which require the use of multiple observable market inputs including:               •       Forward interest rates              •       Interest rate volatilities	Level 2 recurring fair value measurement.
Interest rate lock commitments	The fair value considers several factors including: •       Fair value of the underlying loan based on quoted prices in the secondary market, when available.  •       Value of servicing •       Fall-out factor	Level 3 recurring fair value measurement.

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The following tables presents the levels of the fair value hierarchy for the Company's assets and liabilities measured at fair value on a recurring basis: 

	At September 30, 2022
(in thousands)	Fair Value		Level 1		Level 2		Level 3
Assets:
Trading securities - U.S. Treasury securities	$	21,115	$	21,115	$	—	$	—
Investment securities AFS
Mortgage backed securities:
Residential	198,990		—		197,027		1,963
Commercial	58,872		—		58,872		—
Collateralized mortgage obligations:
Residential	453,214		—		453,214		—
Commercial	90,861		—		90,861		—
Municipal bonds	428,197		—		428,197		—
Corporate debt securities	33,762		—		33,692		70
U.S. Treasury securities	19,827		—		19,827		—
Agency debentures	4,004		—		4,004		—
Single family LHFS	13,308		—		13,308		—
Single family LHFI	5,850		—		—		5,850
Single family mortgage servicing rights	77,811		—		—		77,811
Derivatives
Futures	46		46		—		—
Forward sale commitments	2,756		—		2,756		—
Options	385		385		—		—
Interest rate lock commitments	48		—		—		48
Interest rate swaps	13,759		—		13,759		—
Total assets	$	1,422,805	$	21,546	$	1,315,517	$	85,742
Liabilities:
Derivatives
Forward sale commitments	$	1,434	$	—	$	1,434	$	—
Interest rate lock commitments	408		—		—		408
Interest rate swaps	13,759		—		13,759		—
Total liabilities	$	15,601	$	—	$	15,193	$	408

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	At December 31, 2021
(in thousands)	Fair Value		Level 1		Level 2		Level 3
Assets:
Investment securities AFS
Mortgage backed securities:
Residential	$	32,963	$	—	$	30,556	$	2,407
Commercial	62,792		—		62,792		—
Collateralized mortgage obligations:
Residential	187,394		—		187,394		—
Commercial	136,659		—		136,659		—
Municipal bonds	539,923		—		539,923		—
Corporate debt securities	19,616		—		19,541		75
U.S. Treasury securities	23,175		—		23,175		—
Single family LHFS	128,041		—		128,041		—
Single family LHFI	7,287		—		—		7,287
Single family mortgage servicing rights	61,584		—		—		61,584
Derivatives
Futures	334		334		—		—
Forward sale commitments	723		—		723		—
Interest rate lock commitments	2,487		—		—		2,487
Interest rate swaps	4,381		—		4,381		—
Total assets	$	1,207,359	$	334	$	1,133,185	$	73,840
Liabilities:
Derivatives
Forward sale commitments	$	640	$	—	$	640	$	—
Interest rate lock commitments	3		—		—		3
Interest rate swaps	4,541		—		4,541		—
Total liabilities	$	5,184	$	—	$	5,181	$	3

There were no transfers between levels of the fair value hierarchy during the quarters and nine months ended September 30, 2022 and 2021.

Level 3 Recurring Fair Value Measurements

The Company's level 3 recurring fair value measurements consist of investment securities AFS, single family MSRs, single family LHFI where fair value option was elected, certain single family LHFS and interest rate lock commitments, which are accounted for as derivatives. For information regarding fair value changes and activity for single family MSRs during the quarters and nine months ended September 30, 2022 and 2021, see Note 7, Mortgage Banking Operations of this Quarterly Report on Form 10-Q.

The fair value of IRLCs considers several factors, including the fair value in the secondary market of the underlying loan resulting from the exercise of the commitment, the expected net future cash flows related to the associated servicing of the loan (referred to as the value of servicing) and the probability that the commitment will not be converted into a funded loan (referred to as a fall-out factor). The fair value of IRLCs on LHFS, while based on interest rates observable in the market, is highly dependent on the ultimate closing of the loans. The significance of the fall-out factor to the fair value measurement of an individual IRLC is generally highest at the time that the rate lock is initiated and declines as closing procedures are performed and the underlying loan gets closer to funding. The fall-out factor applied is based on historical experience. The value of servicing is impacted by a variety of factors, including prepayment assumptions, discount rates, delinquency rates, contractually specified servicing fees, servicing costs and underlying portfolio characteristics. Because these inputs are not observable in market trades, the fall-out factor and value of servicing are considered to be level 3 inputs. The fair value of IRLCs decreases in value upon an increase in the fall-out factor and increases in value upon an increase in the value of servicing. Changes in the fall-out factor and value of servicing do not increase or decrease based on movements in other significant unobservable inputs.

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The Company recognizes unrealized gains and losses from the time that an IRLC is initiated until the gain or loss is realized at the time the loan closes, which generally occurs within 30-90 days. For IRLCs that fall out, any unrealized gain or loss is reversed, which generally occurs at the end of the commitment period. The gains and losses recognized on IRLC derivatives generally correlates to volume of single family interest rate lock commitments made during the reporting period (after adjusting for estimated fallout) while the amount of unrealized gains and losses realized at settlement generally correlates to the volume of single family closed loans during the reporting period.

The Company uses the discounted cash flow model to estimate the fair value of certain loans that have been transferred from held for sale to held for investment and single family LHFS when the fair value of the loans is not derived using observable market inputs. The key assumption in the valuation model is the implied spread to benchmark interest rate curve. The implied spread is not directly observable in the market and is derived from third party pricing which is based on market information from comparable loan pools. The fair value estimate of single family loans that have been transferred from held for sale to held for investment are sensitive to changes in the benchmark interest rate which might result in a significantly higher or lower fair value measurement.

The Company transferred certain loans from held for sale to held for investment. These loans were originated as held for sale loans where the Company had elected fair value option. The Company determined these loans to be level 3 recurring assets as the valuation technique included a significant unobservable input. The total amount of held for investment loans where fair value option election was made was $5.8 million and $7.3 million at September 30, 2022 and December 31, 2021, respectively.

The following information presents significant Level 3 unobservable inputs used to measure fair value of certain assets:

(dollars in thousands)	Fair Value		Valuation Technique	Significant Unobservable Input	Low	High	Weighted Average
September 30, 2022
Investment securities AFS	$	2,033	Income approach	Implied spread to benchmark interest rate curve	2.00%	2.00%	2.00%
Single family LHFI	5,850		Income approach	Implied spread to benchmark interest rate curve	3.92%	5.71%	4.41%
Interest rate lock commitments, net	(360)		Income approach	Fall-out factor	0.10%	17.46%	5.16%
				Value of servicing	0.59%	1.14%	0.98%
December 31, 2021
Investment securities AFS	$	2,482	Income approach	Implied spread to benchmark interest rate curve	2.00%	2.00%	2.00%
Single family LHFI	7,287		Income approach	Implied spread to benchmark interest rate curve	2.39%	7.96%	3.56%
Interest rate lock commitments, net	2,484		Income approach	Fall-out factor	0.15%	21.93%	8.44%
				Value of servicing	0.35%	1.46%	1.15%

We had no LHFS where the fair value was not derived with significant observable inputs at September 30, 2022 and December 31, 2021.

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The following table presents fair value changes and activity for certain Level 3 assets for the periods indicated:

(in thousands)	Beginning balance		Additions		Transfers		Payoffs/Sales		Change in mark to market (1)		Ending balance
Quarter Ended September 30, 2022
Investment securities AFS	$	2,160	$	—	$	—	$	(48)	$	(79)	$	2,033
Single family LHFI	6,508		—		—		—		(658)		5,850
Quarter Ended September 30, 2021
Investment securities AFS	$	2,550	$	—	$	—	$	(48)	$	12	$	2,514
Single family LHFI	5,207		284		—		(1,088)		104		4,507
Nine Months Ended September 30, 2022
Investment securities AFS	$	2,482	$	—	$	—	$	(145)	$	(304)	$	2,033
Single family LHFI	7,287		—		—		—		(1,437)		5,850
Nine Months Ended September 30, 2021
Investment securities AFS	$	2,710	$	—	$	—	$	(144)	$	(52)	$	2,514
Single family LHFI	7,108		1,429		—		(4,279)		249		4,507

(1) Changes in fair value for single LHFI are recorded in other noninterest income on the consolidated income statements.

The following table presents fair value changes and activity for Level 3 interest rate lock commitments:

	Quarter Ended September 30,				Nine Months Ended September 30,
(in thousands)	2022		2021		2022		2021
Beginning balance, net	$	322	$	5,893	$	2,484	$	17,392
Total realized/unrealized gains (losses)	70		5,299		(769)		9,112
Settlements	(752)		(6,583)		(2,075)		(21,895)
Ending balance, net	$	(360)	$	4,609	$	(360)	$	4,609

Nonrecurring Fair Value Measurements

Certain assets held by the Company are not included in the tables above, but are measured at fair value on a periodic basis. These assets include certain LHFI and OREO that are carried at the lower of cost or fair value of the underlying collateral, less the estimated costs to sell. The estimated fair values of real estate collateral are generally based on internal evaluations and appraisals of such collateral, which use the market approach and income approach methodologies. We have omitted disclosure related to quantitative inputs given the insignificance of assets measured on a nonrecurring basis.

The fair value of commercial properties is generally based on third-party appraisals that consider recent sales of comparable properties, including their income-generating characteristics, adjusted (generally based on unobservable inputs) to reflect the general assumptions that a market participant would make when analyzing the property for purchase. The Company uses a fair value of collateral technique to apply adjustments to the appraisal value of certain commercial LHFI that are collateralized by real estate.

The Company uses a fair value of collateral technique to apply adjustments to the stated value of certain commercial LHFI that are not collateralized by real estate and to the appraisal value of OREO.

Residential properties are generally based on unadjusted third-party appraisals. Factors considered in determining the fair value include geographic sales trends, the value of comparable surrounding properties as well as the condition of the property.

These adjustments include management assumptions that are based on the type of collateral dependent loan and may increase or decrease an appraised value. Management adjustments vary significantly depending on the location, physical characteristics and income producing potential of each individual property. The quality and volume of market information available at the time of the appraisal can vary from period-to-period and cause significant changes to the nature and magnitude of the unobservable inputs used. Given these variations, changes in these unobservable inputs are generally not a reliable indicator for how fair value will increase or decrease from period to period.

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For the quarter and nine months ended September 30, 2022, no assets classified as Level 3 had changes in their recorded fair value. The following table presents assets classified as Level 3 that had changes in their recorded fair value for the periods indicated and what we still held at the end of the respective reporting period:

(in thousands)	Fair Value		Total Gains (Losses)
At or for the Quarter Ended September 30, 2021
LHFI (1)	$	1,121	$	(8)
At or for the Nine Months Ended September 30, 2021
LHFI (1)	$	1,121	$	(70)

(1) Represents the carrying value of loans for which adjustments are based on the fair value of the collateral.

Fair Value of Financial Instruments

The following presents the carrying value, estimated fair value and the levels of the fair value hierarchy for the Company's financial instruments other than assets and liabilities measured at fair value on a recurring basis: 

	At September 30, 2022
(in thousands)	Carrying Value		Fair Value		Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents	$	57,256	$	57,256	$	57,256	$	—	$	—
Investment securities HTM	3,099		2,998		—		2,998		—
LHFI	7,170,031		6,743,644		—		—		6,743,644
LHFS – multifamily and other	479		479		—		479		—
Mortgage servicing rights – multifamily and SBA	36,819		41,209		—		—		41,209
Federal Home Loan Bank stock	71,428		71,428		—		71,428		—
Other assets - GNMA EBO loans	6,775		6,775		—		—		6,775
Liabilities:
Certificates of deposit	$	1,720,317	$	1,693,369	$	—	$	1,693,369	$	—
Borrowings	1,569,000		1,569,046				1,569,046
Long-term debt	224,314		201,897		—		201,897		—

	At December 31, 2021
(in thousands)	Carrying Value		Fair Value		Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents	$	65,214	$	65,214	$	65,214	$	—	$	—
Investment securities HTM	4,169		4,305		—		4,305		—
LHFI	5,488,439		5,588,719		—		—		5,588,719
LHFS – multifamily and other	48,090		48,425		—		48,425		—
Mortgage servicing rights – multifamily and SBA	39,415		43,199		—		—		43,199
Federal Home Loan Bank stock	10,361		10,361		—		10,361		—
Other assets-GNMA EBO loans	12,342		12,342		—		—		12,342
Liabilities:
Certificates of deposit	$	906,928	$	906,064	$	—	$	906,064	$	—
Borrowings	41,000		41,000		—		41,000		—
Long-term debt	126,026		116,845		—		116,845		—

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Fair Value Option

Single family loans held for sale accounted under the fair value option are measured initially at fair value with subsequent changes in fair value recognized in earnings. Gains and losses from such changes in fair value are recognized in net gain on mortgage loan origination and sale activities within noninterest income. The change in fair value of loans held for sale is primarily driven by changes in interest rates subsequent to loan funding and changes in fair value of the related servicing asset, resulting in revaluations adjustments to the recorded fair value. The use of the fair value option allows the change in the fair value of loans to more effectively offset the change in fair value of derivative instruments that are used as economic hedges of loans held for sale.

The following table presents the difference between the aggregate fair value and the aggregate unpaid principal balance of loans held for sale accounted for under the fair value option:

	At September 30, 2022						At December 31, 2021
(in thousands)	Fair Value		Aggregate Unpaid Principal Balance		Fair Value Less Aggregated Unpaid Principal Balance		Fair Value		Aggregate Unpaid Principal Balance		Fair Value Less Aggregated Unpaid Principal Balance
Single family LHFS	$	13,308	$	13,697	$	(389)	$	128,041	$	124,933	$	3,108

NOTE 11–SUBSEQUENT EVENTS:

On October 27, 2022 the Board authorized a dividend of $0.35 per share, payable on November 22, 2022 to shareholders of record on November 8, 2022.

In October 2022, we announced an agreement to purchase three branches in southern California, which is expected to close in the first quarter of 2023, whereby we will assume approximately $490 million in deposits, purchase approximately $22 million in loans and pay a 6.0% deposit premium.

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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 2021 Annual Report on Form 10-K.

FORWARD-LOOKING STATEMENTS

Statements contained in this Quarterly Report on Form 10-Q that are not historical facts or that discuss our expectations, beliefs or views regarding our future operations or future financial performance, or financial or other trends in our business or in the markets in which we operate, anticipated completion of loan forbearances with respect to customer loans, our future plans and the credit exposure of certain loan products and other components of our business that could be impacted by the COVID-19 pandemic, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Many forward-looking statements can be identified as using words such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan," "potential," "should," "will" and "would" and similar expressions (or the negative of these terms). Such statements involve inherent risks and uncertainties, many of which are difficult to predict and are generally beyond the control of the Company and are subject to risks and uncertainties, including, but not limited to, those discussed in our Annual Report on Form 10-K for the year ended December 31, 2021 and the risks and uncertainties discussed below and elsewhere in this Quarterly Report on Form 10-Q that could cause actual results to differ significantly from those projected. In addition, many of the risks and uncertainties are, and will be, exacerbated by the COVID-19 pandemic and any worsening of the global, national, regional and local business and economic environment as a result.

Although we believe that expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We undertake no obligation, and expressly disclaim any such obligation to update; or clarify any of the forward-looking statements after the date of this Quarterly Report on Form 10-Q to reflect changed assumptions, the occurrence of anticipated or unanticipated events, new information or changes to future results over time or otherwise, except as required by law. Readers are cautioned not to place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q.

Except as otherwise noted, references to "we," "our," "us" or "the Company" refer to HomeStreet, Inc. and its subsidiaries that are consolidated for financial reporting purposes. Statements of knowledge, intention or belief reflect those characteristics of our executive management team based on current facts and circumstances.

You may review a copy of this Quarterly Report on Form 10-Q, including exhibits and any schedule filed therewith on the Securities and Exchange Commission's website (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants, such as HomeStreet, Inc., that file electronically with the Securities and Exchange Commission. Copies of our Securities Exchange Act reports also are available from our investor relations website, http://ir.homestreet.com. Information contained in or linked from our websites is not incorporated into and does not constitute a part of this report.

Critical Accounting Estimates

We have identified two estimates as being critical because they require management to make particularly difficult, subjective, and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These policies relate to the allowance for credit losses (“ACL”) and the valuation of single family mortgage servicing rights (“MSRs").

The ACL is calculated based on quantitative and qualitative factors to estimate credit losses over the life of the loan. The inputs used to determine quantitative factors include estimates based on historical experience of probability of default and losses given default. Inputs used to determine qualitative factors include changes in current portfolio characteristics and operating environments such as current and forecasted unemployment rates, capitalization rates used to value properties securing loans, rental rates and single family pricing indexes. Qualitative factors may also include adjustments to address matters not contemplated by the model and 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

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credit losses. For example, if the projected unemployment rate was downgraded one grade for all periods, the amount of the ACL at September 30, 2022 would increase by approximately $14 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 7–Mortgage Banking Operations of the financial statements. Note 7 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.

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Summary Financial Data

	Quarter Ended						Nine Months Ended September 30,
(in thousands, except per share data and FTE data)	September 30, 2022			June 30, 2022			2022			2021
Select Income Statement data:
Net interest income	$	63,018		$	60,056		$	177,620		$	169,973
Provision for credit losses	—			—			(9,000)			(9,000)
Noninterest income	13,322			13,013			41,893			91,355
Noninterest expense	49,889			50,637			154,999			161,372
Net income:
Before income taxes	26,451			22,432			73,514			108,956
Total	20,367			17,721			58,039			85,990
Net income per share - diluted	1.08			0.94			3.03			4.03
Select Performance Ratios:
Return on average equity - annualized	13.4		%	11.8		%	12.2		%	15.8		%
Return on average tangible equity - annualized (1)	14.2		%	12.6		%	13.0		%	16.7		%
Return on average assets - annualized	0.91		%	0.89		%	0.96		%	1.57		%
Efficiency ratio (1)	68.4		%	68.5		%	71.2		%	61.8		%
Net interest margin	3.00		%	3.27		%	3.17		%	3.39		%
Other data
Full time equivalent employees	935			956			935			983

(1)Return on average tangible equity and the efficiency ratio are non-GAAP financial measures. For a reconciliation of return on average tangible equity 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.

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	As of
(in thousands, except share and per share data)	September 30, 2022			December 31, 2021
Selected Balance Sheet Data
Loans held for sale	$	13,787		$	176,131
Loans held for investment, net	7,175,881			5,495,726
ACL	37,606			47,123
Investment securities	1,311,941			1,006,691
Total assets	9,072,887			7,204,091
Deposits	6,610,231			6,146,509
Borrowings	1,569,000			41,000
Long-term debt	224,314			126,026
Total shareholders' equity	552,789			715,339
Other data:
Book value per share	$	29.53		$	35.61
Tangible book value per share (1)	$	27.92		$	34.04
Total equity to total assets	6.1		%	9.9		%
Tangible common equity to tangible assets (1)	5.8		%	9.5		%
Shares outstanding at period end	18,717,557			20,085,336
Loans to deposit ratio	109.3		%	93.0		%
Credit Quality:
ACL to total loans (2)	0.53		%	0.88		%
ACL to nonaccrual loans	306.6		%	386.2		%
Nonaccrual loans to total loans	0.17		%	0.22		%
Nonperforming assets to total assets	0.15		%	0.18		%
Nonperforming assets	$	13,991		$	12,936
Regulatory Capital Ratios:
Bank
Tier 1 leverage ratio	9.15		%	10.11		%
Total risk-based capital	12.57		%	13.77		%
Company
Tier 1 leverage ratio	7.61		%	9.94		%
Total risk-based capital	11.43		%	12.66		%

(1) Tangible book value per share and tangible common equity to tangible assets are non-GAAP financial measures. For a reconciliation to the nearest

comparable GAAP financial measure, see “Non-GAAP Financial Measures” elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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

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Current Developments

As part of our business strategy, we are focusing on growing our loan portfolio and leveraging our existing operating expense infrastructure. Increases in our loan portfolio will have the effect of increasing our level of net interest income in future periods, a more stable source of revenues as compared to gain on loan origination and sale activities. As part of this strategy, we only sold $5 million of multifamily portfolio loans in the first nine months of 2022.

In July 2022, we closed a sale of five retail deposit branches in eastern Washington, including the branches' lending businesses and employees. As part of this transaction, we transferred $191 million of deposits and sold $43 million of loans. In October 2022, we announced an agreement to purchase three branches in southern California, which is expected to close in the first quarter of 2023, whereby we will assume approximately $490 million in deposits and purchase approximately $22 million in loans. These transactions allow us to focus our retail banking branch strategy on the larger metropolitan markets in the western United States.

Management's Overview of the Third Quarter 2022 Financial Performance

Third Quarter of 2022 Compared to the Second Quarter of 2022

General: Our net income and income before taxes were $20.4 million and $26.5 million, respectively, in the third quarter of 2022, as compared to $17.7 million and $22.4 million, respectively, in the second quarter of 2022. The $4.0 million increase in income before taxes was due to higher net interest income, higher noninterest income and lower noninterest expense.

Income Taxes: Our effective tax rate was 23.0% in the third quarter of 2022 as compared to 21.0% in second quarter of 2022 and a statutory rate of 25.3%. While our effective tax rate was lower than our statutory rate due to the benefits of tax advantaged investments, our effective tax rate in the third quarter of 2022 was higher than the second quarter of 2022 due to the diminishing impact of tax-exempt interest.

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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
	September 30, 2022						June 30, 2022
(in thousands)	Average Balance		Interest		Average Yield/Cost		Average Balance		Interest		Average Yield/Cost
Assets:
Interest-earning assets:
Loans (1)	$	7,070,998	$	73,522	4.09	%	$	6,231,081	$	60,008	3.82	%
Investment securities (1)	1,252,923		10,087		3.22	%	1,134,929		8,415		2.97	%
FHLB Stock, Fed Funds and other	112,824		1,060		3.68	%	80,998		487		2.38	%
Total interest-earning assets	8,436,745		84,669		3.95	%	7,447,008		68,910		3.68	%
Noninterest-earning assets	462,939						498,290
Total assets	$	8,899,684					$	7,945,298
Liabilities and shareholders' equity:
Interest-bearing deposits: (2)
Demand deposits	$	532,434	$	197	0.15	%	$	552,749	$	177	0.13	%
Money market and savings	2,879,121		3,345		0.46	%	3,050,173		1,615		0.21	%
Certificates of deposit	1,440,960		4,779		1.32	%	961,052		1,101		0.46	%
Total	4,852,515		8,321		0.68	%	4,563,974		2,893		0.25	%
Borrowings:
Borrowings	1,530,449		9,493		2.43	%	761,606		2,338		1.21	%
Long-term debt	224,259		2,571		4.56	%	224,167		2,404		4.28	%
Total interest-bearing liabilities	6,607,223		20,385		1.22	%	5,549,747		7,635		0.55	%
Noninterest-bearing liabilities:
Demand deposits (2)	1,576,387						1,668,631
Other liabilities	112,796						123,256
Total liabilities	8,296,406						7,341,634
Shareholders' equity	603,278						603,664
Total liabilities and shareholders' equity	$	8,899,684					$	7,945,298
Net interest income			$	64,284					$	61,275
Net interest rate spread					2.74	%					3.13	%
Net interest margin					3.00	%					3.27	%

(1)    Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain loans and securities of $1.3 million and $1.2 million for the quarters ended September 30, 2022 and June 30, 2022. The estimated federal statutory tax rate was 21% for the periods presented.

(2)    Cost of all deposits, including noninterest-bearing demand deposits was 0.51% and 0.19% for the quarters ended September 30, 2022 and June 30, 2022, respectively.

Net interest income was $3.0 million higher in the third quarter of 2022 as compared to the second quarter of 2022 due primarily to a 13% increase in average interest earning assets, which was partially offset by a decrease in our net interest margin from 3.27% to 3.00%. The increase in the average balance of interest-earning assets was due to the high level of loan originations during the third quarter. Our net interest margin decreased to 3.00% as a 67 basis point increase in the cost of interest-bearing liabilities was partially offset by a 27 basis point increase in the yield on interest-earning assets. Yields on interest-earning assets increased as the yields on loan originations during the third quarter were higher than the rates of our existing portfolio of loans and yields on adjustable rate loans increased due to increases in the indexes on which their pricing is based. The increase in the rates paid on our interest-bearing liabilities was due to higher deposit costs, higher borrowing costs and an increase in the proportion of higher cost borrowings used as our sources of funding. Our cost of borrowings increased 122 basis points during the third quarter while the cost of deposits increased 32 basis points. Additionally, our average borrowings increased by $769 million to fund the growth of our loan portfolio. The increases in yields on interest-earning assets and the rates paid on interest-bearing liabilities were due to the significant increases in market interest rates during the first nine months of 2022.

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Provision for Credit Losses: No provision for credit losses was recorded during the second or third quarter of 2022 as the benefits of the continuing favorable performance of our loan portfolio was used to offset any required ACL resulting from the growth in our loan portfolio.

Noninterest Income consisted of the following: 

	Quarter Ended
(in thousands)	September 30, 2022		June 30, 2022
Noninterest income
Gain on loan origination and sale activities (1)
Single family	$	1,778	$	3,949
CRE, multifamily and SBA	869		1,343
Loan servicing income	2,741		3,661
Deposit fees	2,223		2,218
Other	5,711		1,842
Total noninterest income	$	13,322	$	13,013

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

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

	Quarter Ended
(in thousands)	September 30, 2022		June 30, 2022
Single family servicing income, net
Servicing fees and other	$	3,986	$	3,952
Changes - amortization (1)	(2,112)		(2,515)
Net	1,874		1,437
Risk management, single family MSRs:
Changes in fair value due to assumptions (2)	1,989		4,323
Net gain (loss) from economic hedging	(2,981)		(5,317)
Subtotal	(992)		(994)
Single Family servicing income (loss)	882		443
Commercial loan servicing income:
Servicing fees and other	3,687		5,555
Amortization of capitalized MSRs	(1,828)		(2,337)
Total	1,859		3,218
Total loan servicing income	$	2,741	$	3,661

(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.

The increase in noninterest income in the third quarter of 2022 as compared to the second quarter of 2022 was primarily due to an increase in other income due to a $4.3 million gain on sale of five eastern Washington branches. This increase was partially offset by a decrease in net gain on loan origination and sale activities due primarily to a $2.2 million decrease in single family gain on loan origination and sale activities. The decrease in single family gain on loan origination and sale activities was primarily due to a decrease in rate lock volume as a result of the effects of increasing interest rates.

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Noninterest Expense consisted of the following:

	Quarter Ended
(in thousands)	September 30, 2022		June 30, 2022
Noninterest expense
Compensation and benefits	$	27,341	$	30,191
Information services	7,038		7,780
Occupancy	6,052		5,898
General, administrative and other	9,458		6,768
Total noninterest expense	$	49,889	$	50,637

The $0.7 million decrease in noninterest expense in the third quarter of 2022 as compared to the second quarter of 2022 was primarily due to lower compensation and benefit costs, which was partially offset by higher general, administrative and other costs. The decrease in compensation and benefit costs was due to reduced headcount due to the sale of the five eastern Washington branches and lower commission and bonus expenses. General, administrative and other costs increased in the third quarter of 2022 as compared to second quarter of 2022 due to an increase in marketing costs related to our promotional deposit products and higher FDIC fees due to our larger asset base.

Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021

General: Our net income and income before taxes were $58.0 million and $73.5 million, respectively, in the nine months ended September 30, 2022, as compared to $86.0 million and $109.0 million, respectively, in the nine months ended September 30, 2021. The $35.4 million decrease in income before taxes was due to lower noninterest income, partially offset by higher net interest income and lower noninterest expense.

Income Taxes: Our effective tax rate during nine months ended September 30, 2022 and 2021 was 21.1% and our statutory rate was 25.3% in 2022 and 24.2% in 2021. Our effective tax rate for both periods was lower than our statutory rate due to the benefits of tax advantaged investments and reductions in taxes on income related to excess tax benefits resulting from the exercise and vesting of stock awards during the periods.

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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:

	Nine Months Ended September 30,
	2022						2021
(in thousands)	Average Balance		Interest		Average Yield/Cost		Average Balance		Interest		Average Yield/Cost
Assets:
Interest-earning assets:
Loans (1)	$	6,336,185	$	186,665	3.90	%	$	5,615,624	$	167,322	3.95	%
Investment securities (1)	1,139,761		25,389		2.97	%	1,030,726		18,084		2.34	%
FHLB Stock, Fed Funds and other	86,752		1,655		2.50	%	100,972		472		0.62	%
Total interest-earning assets	7,562,698		213,709		3.74	%	6,747,322		185,878		3.65	%
Noninterest-earning assets	512,452						558,224
Total assets	$	8,075,150					$	7,305,546
Interest-bearing liabilities:
Interest-bearing deposits: (2)
Demand deposits	$	536,956	$	517	0.13	%	$	521,579	$	543	0.14	%
Money market and savings	3,009,398		6,081		0.27	%	2,955,153		3,338		0.15	%
Certificates of deposit	1,098,255		6,900		0.84	%	1,087,195		5,049		0.62	%
Total	4,644,609		13,498		0.39	%	4,563,927		8,930		0.26	%
Borrowings:
Borrowings	790,907		11,922		1.99	%	137,754		347		0.33	%
Long-term debt	217,732		7,082		4.33	%	125,902		4,076		4.31	%
Total interest-bearing liabilities	5,653,248		32,502		0.76	%	4,827,583		13,353		0.37	%
Noninterest-bearing liabilities:
Demand deposits (2)	1,662,465						1,552,201
Other liabilities	124,606						200,032
Total liabilities	7,440,319						6,579,816
Shareholders' equity	634,831						725,730
Total liabilities and shareholders' equity	$	8,075,150					$	7,305,546
Net interest income			$	181,207					$	172,525
Net interest spread					2.98	%					3.28	%
Net interest margin					3.17	%					3.39	%

(1) Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain loans and securities of $3.6 million and $2.6 million for the nine months ended September 30, 2022 and 2021, respectively. The estimated federal statutory tax rate was 21% for the periods presented.

(2) Cost of deposits including noninterest-bearing deposits, was 0.29% and 0.20% for the nine months ended September 30, 2022 and 2021, respectively.

Net interest income for the nine months ended September 30, 2022 increased $7.6 million as compared to the nine months ended September 30, 2021 due primarily to increases in the average balance of interest earning assets, partially offset by a decrease in our net interest margin. The increase in interest-earning assets was due to the high level of loan originations and purchases of investment securities during the first nine months of 2022. Our net interest margin decreased from 3.39% in the nine months ended September 30, 2021 to 3.17% in the nine months ended September 30, 2022 due to a 39 basis point increase in the rates paid on interest-bearing liabilities which was partially offset by a nine basis point increase in the yield on interest earning assets. The increase in yield on interest-earning assets was primarily due to higher yields on investment securities due to adjustments to yields realized from longer estimated lives of certain securities and the yields of securities purchased during the first nine months of 2022 being higher than the yields on our existing portfolio. The increase in the rates paid on our interest-bearing liabilities was due to higher deposit costs, higher borrowing costs and an increase in the proportion of higher cost borrowings used as our sources of funding. The increases in the rates paid on deposits was due to the significant increase in market interest rates during the first nine months of 2022. Our average borrowings increased by $653 million to fund the growth of our loan portfolio and investment securities. Our cost of borrowings increased from 33 basis points during the first nine months of 2021 to 199 basis points during the first nine months of 2022 due to the significant increase in market interest rates during the first nine months of 2022 and the impact of the $100 million subordinated notes offering completed in January 2022.

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Provision for Credit Losses: As a result of the favorable performance of our loan portfolio, a stable low level of nonperforming assets and an improved outlook of the estimated impact of COVID-19 on our loan portfolio, we recorded a $9 million recovery of our allowance for credit losses in both the nine months ended September 30, 2022 and 2021.

Noninterest Income consisted of the following:  

	Nine Months Ended September 30,
(in thousands)	2022	2021
Noninterest income
Gain on loan origination and sale activities (1)
Single family		$	11,896	$	56,272
Commercial		4,317		15,967
Loan servicing income		9,706		4,693
Deposit fees		6,516		5,912
Other		9,458		8,511
Total noninterest income		$	41,893	$	91,355

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

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

	Nine Months Ended September 30,
(in thousands)		2022		2021
Single family servicing income, net
Servicing fees and other		$	11,809	$	11,788
Changes - amortization (1)		(8,052)		(15,453)
Net		3,757		(3,665)
Risk management, single family MSRs:
Changes in fair value due to assumptions (2)		16,615		7,186
Net gain (loss) from economic hedging		(18,481)		(7,860)
Subtotal		(1,866)		(674)
Single Family servicing income (loss)		1,891		(4,339)
Commercial loan servicing income:
Servicing fees and other		13,692		14,267
Amortization of capitalized MSRs		(5,877)		(5,235)
Total		7,815		9,032
Total loan servicing income		$	9,706	$	4,693

(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.

The decrease in noninterest income for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021 was due to a decrease in gain on loan origination and sale activities, which was partially offset by higher loan servicing income and the $4.3 million gain on sale of five eastern Washington branches. The $56.0 million decrease in gain on loan origination and sale activities was due to a $44.4 million decrease in single family gain on loan origination and sale activities and a $11.7 million decrease in CRE and commercial gain on loan origination and sale activities. The decrease in single family gain on loan origination and sale activities was due to a decrease in rate lock volume and margins as a result of the effects of increasing interest rates. The decrease in CRE and commercial gain on loan origination and sale activities was primarily due to an 72% decrease in the volume of loans sold. The $5.0 million increase in loan servicing income was primarily due to lower levels of prepayments.

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Noninterest Expense consisted of the following:

	Nine Months Ended September 30,
(in thousands)	2022	2021
Noninterest expense
Compensation and benefits		$	89,563	$	101,388
Information services		21,880		20,635
Occupancy		18,315		18,170
General, administrative and other		25,241		21,179
Total noninterest expense		$	154,999	$	161,372

The $6.4 million decrease in noninterest expense in the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021 was due to lower compensation and benefit costs, partially offset by increases in information services and general, administrative and other expenses. The $11.8 million decrease in compensation and benefit costs was primarily due to reduced commission expense on lower loan origination volumes in our single family mortgage operations, lower bonus expense and lower headcount, which were partially offset by wage increases given in 2022. The increase in information services costs was due to the implementation of new systems in the second quarter of 2022 and higher activity levels. The increase in general, administrative and other costs was primarily due to a $1.9 million reimbursement of legal costs received from our insurance carrier in the first nine months of 2021, nonrecurring costs expended on litigation activities and legal matters in 2022 and an increase in marketing costs related to our promotional deposit products.

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Financial Condition

During the nine months ended September 30, 2022, our total assets increased $1.9 billion due primarily to a $1.7 billion increase in loans held for investment and a $305 million increase in investment securities which were partially offset by a decrease of $162 million in loans held for sale. Loans held for investment increased due to $3.0 billion of originations, which were partially offset by prepayments and scheduled payments of $1.3 billion. Total liabilities increased $2.0 billion due to increases in deposits, borrowings and long-term debt. Deposits increased $464 million primarily due to increased balances of brokered deposits and certificates of deposit related to our promotional products. The $1.5 billion increase in borrowings was used to fund the growth in our loans and investment securities. Long-term debt increased due to our $100 million subordinated notes offering completed in January 2022.

Credit Risk Management

As of September 30, 2022, our ratio of nonperforming assets to total assets remained low at 0.15% while our ratio of total loans delinquent over 30 days to total loans was 0.30%. The Company recorded a $9 million recovery of our allowance for credit losses for the nine months ended September 30, 2022 as a result of the favorable performance of our loan portfolio, a stable low level of nonperforming assets and an improved outlook of the estimated impact of COVID-19 on our loan portfolio. As a result of the recovery of COVID-19 reserves, and the change in the composition of our portfolio to lower credit risk loans, specifically a higher proportion of multifamily permanent loans, our overall ratio of ACL to LHFI decreased from 0.88% at December 31, 2021 to 0.53% at September 30, 2022.

Management considers the current level of the ACL to be appropriate to cover estimated lifetime losses within our LHFI portfolio. The following table presents the ACL by product type:

	At September 30, 2022				At December 31, 2021
(in thousands)	Amount		Rate (1)		Amount		Rate (1)
CRE
Non-owner occupied CRE	$	2,106	0.32	%	$	7,509	1.06	%
Multifamily	11,183		0.29	%	5,854		0.24	%
Construction/land development
Multifamily construction	665		1.06	%	507		1.34	%
CRE construction	160		0.86	%	150		1.06	%
Single family construction	9,564		2.77	%	6,411		2.16	%
Single family construction to permanent	1,140		0.70	%	1,055		0.71	%
Total	24,818		0.48	%	21,486		0.59	%
Commercial and industrial loans
Owner occupied CRE	969		0.23	%	5,006		1.10	%
Commercial business	3,719		1.04	%	12,273		3.39	%
Total	4,688		0.59	%	17,279		2.11	%
Consumer loans
Single family	4,464		0.56	%	4,394		0.68	%
Home equity and other	3,636		1.09	%	3,964		1.31	%
Total	8,100		0.71	%	8,358		0.88	%
Total ACL	$	37,606	0.53	%	$	47,123	0.88	%

(1) The ACL rate is calculated excluding balances related to loans that are insured by the FHA or guaranteed by the VA or SBA.

51

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, federal funds purchased and borrowing from other financial institutions. Additionally, the Company may sell stock or issue long-term debt to raise funds. While scheduled principal repayments on loans and investment securities are a relatively predictable source of funds, deposit inflows and outflows and prepayments of loans and investment securities are greatly influenced by interest rates, economic conditions and competition.

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 has $64 million of Senior Notes which mature in 2026 which it expects to pay off from available cash or from the issuance of new debt.

At September 30, 2022 and December 31, 2021, the Bank had available borrowing capacity of $1.0 billion and $1.8 billion, respectively, from the FHLB, and $337 million and $274 million, respectively, from the FRBSF and $1.2 billion and $1.0 billion under borrowing lines established with other financial institutions.

Cash Flows

For the nine months ended September 30, 2022, cash and cash equivalents decreased by $8 million compared to an increase of $161 million during the nine months ended September 30, 2021. 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 nine months ended September 30, 2022, net cash of $209 million was provided by operating activities, primarily from cash proceeds from the sale of LHFS exceeding cash used to fund LHFS. For the nine months ended September 30, 2021, net cash of $182 million was provided by operating activities, primarily from cash proceeds from the sale of LHFS exceeding cash used to fund LHFS. We believe that cash flows from operations, available cash balances and our ability to generate cash through short-term debt borrowings are sufficient to fund our operating liquidity needs. We are currently not aware of any trends or demands, commitments, events or uncertainties that will result in or that are reasonably likely to result in our liquidity increasing or decreasing in any material way that will impact our capital needs during or beyond the next 12 months.

Cash flows from investing activities

The Company's investing activities primarily include AFS investment securities and loans originated as held for investment. For the nine months ended September 30, 2022, net cash of $2.4 billion was used in investing activities primarily from the origination of LHFI net of principal repayments and the purchase of AFS investment securities. For the nine months ended September 30, 2021, net cash of $155 million was used in investing activities primarily from the origination of

LHFI net of principal repayments and the purchase of AFS securities, partially offset by the proceeds from the sale of loans

originated as LHFI and AFS securities.

Cash flows from financing activities

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The Company's financing activities are primarily related to deposits and net proceeds from borrowings. For the nine months ended September 30, 2022, net cash of $2.2 billion was provided by financing activities, primarily due to an increase in short-term borrowings, growth in deposits and proceeds from the issuance of the subordinated notes, partially offset by repurchases of and dividends paid on our common stock. For the nine months ended September 30, 2021, net cash of $134 million was provided by financing activities, primarily due to growth in deposits, partially offset by net repayment of short-term borrowings and repurchases of and dividends paid on our common stock.

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 September 30, 2022		At December 31, 2021
Unused consumer portfolio lines	$	507,962	$	405,992
Commercial portfolio lines (1)	821,837		820,131
Commitments to fund loans	39,469		90,852
Total	$	1,369,268	$	1,316,975

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

progress payments, were $562 million and $584 million at September 30, 2022 and December 31, 2021, 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:

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	At September 30, 2022
	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)	$	689,911	7.61	%	$	362,628	4.0	%	NA		NA
Common equity Tier 1 capital (to risk-weighted assets)	629,911		8.66	%	327,160		4.5	%	NA		NA
Tier 1 risk-based capital (to risk-weighted assets)	689,911		9.49	%	436,214		6.0	%	NA		NA
Total risk-based capital (to risk-weighted assets)	830,827		11.43	%	581,618		8.0	%	NA		NA
HomeStreet Bank
Tier 1 leverage capital (to average assets)	$	824,718	9.15	%	$	360,653	4.0	%	$	450,817	5.0	%
Common equity Tier 1 capital (to risk-weighted assets)	824,718		11.96	%	310,292		4.5	%	448,199		6.5	%
Tier 1 risk-based capital (to risk-weighted assets)	824,718		11.96	%	413,722		6.0	%	551,630		8.0	%
Total risk-based capital (to risk-weighted assets)	867,047		12.57	%	551,630		8.0	%	689,537		10.0	%

	At December 31, 2021
	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)	$	723,232	9.94	%	$	291,098	4.0	%	NA		NA
Common equity Tier 1 capital (to risk-weighted assets)	663,232		10.84	%	275,281		4.5	%	NA		NA
Tier 1 risk-based capital (to risk-weighted assets)	723,232		11.82	%	367,041		6.0	%	NA		NA
Total risk-based capital (to risk-weighted assets)	774,695		12.66	%	489,388		8.0	%	NA		NA
HomeStreet Bank
Tier 1 leverage capital (to average assets)	$	727,753	10.11	%	$	287,990	4.0	%	$	359,988	5.0	%
Common equity Tier 1 capital (to risk-weighted assets)	727,753		12.87	%	254,442		4.5	%	367,527		6.5	%
Tier 1 risk-based capital (to risk-weighted assets)	727,753		12.87	%	339,256		6.0	%	452,341		8.0	%
Total risk-based capital (to risk-weighted assets)	778,723		13.77	%	452,341		8.0	%	565,426		10.0	%

As of each 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 each of the Company and Bank maintained capital ratios necessary to satisfy the capital conservation buffer requirements as of the dates indicated. At September 30, 2022, capital conservation buffers for the Company and the Bank were 3.43% and 4.57%, respectively.

The Company paid a quarterly cash dividend of $0.35 per common share in the third quarter of 2022. It is our current intention to continue to pay quarterly dividends, and on October 27, 2022, we declared another cash dividend of $0.35 per common share payable on November 22, 2022 to shareholders of record as of the close of business on November 8, 2022. The amount and declaration of future cash dividends are subject to approval by our Board of Directors and certain regulatory restrictions.

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Other than the acquisition of three branches in southern California, which is expected to close in the first quarter of 2023, whereby we will be purchasing $5.2 million of land and buildings, we had no material commitments for capital expenditures as of September 30, 2022. However, we intend to take advantage of opportunities that may arise in the future to grow our businesses, which may include opening additional offices or acquiring complementary businesses that we believe will provide us with attractive risk-adjusted returns. As a result, we may seek to obtain additional borrowings and to sell additional shares of our common stock to raise funds which we might need for these purposes. There is no assurance, however, that, if required, we will succeed in obtaining additional borrowings or selling additional shares of our common stock on terms that are acceptable to us, if at all, as this will depend on market conditions and other factors outside of our control, as well as our future results of operations.

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Non-GAAP Financial Measures

To supplement our unaudited condensed consolidated financial statements presented in accordance with GAAP, we use certain non-GAAP measures of financial performance. In this Quarterly Report on Form 10-Q, we use the following non-GAAP measures: (i) tangible common equity and tangible assets as we believe this information is consistent with the treatment by bank regulatory agencies, which excludes intangible assets from the calculation of capital ratios; and (ii) an efficiency ratio which is the ratio of noninterest expenses to the sum of net interest income and noninterest income, excluding certain items of income or expense and excluding taxes incurred and payable to the state of Washington as such taxes are not classified as income tax expense and we believe including them in noninterest expenses impacts the comparability of our results to those companies whose operations are in states where assessed taxes on business are classified as income tax expense.

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. Rather, these non-GAAP financial measures should be considered in addition to, not as a substitute for or superior to, financial measures prepared in accordance with GAAP. In the information below, we have provided reconciliations of, where applicable, the most comparable GAAP financial measures to the non-GAAP measures used in this Quarterly Report on Form 10-Q, or a reconciliation of the non-GAAP calculation of the financial measure.

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

	As of or for the quarter ended			As of or for the nine months ended September 30,
(in thousands, except ratio and rate)	September 30, 2022			June 30, 2022			2022			2021
Return on average tangible equity (annualized)
Average shareholders' equity	$	603,278		$	603,664		$	634,831		$	725,730
Less: Average goodwill and other intangibles	(30,602)			(31,380)			(31,198)			(32,484)
Average tangible equity	$	572,676		$	572,284		$	603,633		$	693,246
Net income	$	20,367		$	17,721		$	58,039		$	85,990
Adjustments (tax effected)
Amortization on core deposit intangibles	186			191			568			694
Tangible income applicable to shareholders	$	20,553		$	17,912		$	58,607		$	86,684
Ratio	14.2		%	12.6		%	13.0		%	16.7		%
Efficiency ratio
Noninterest expense
Total	$	49,889		$	50,637		$	154,999		$	161,372
Adjustments:
Legal fees recovery	—			—			—			1,900
State of Washington taxes	(629)			(579)			(1,714)			(1,759)
Adjusted total	$	49,260		$	50,058		$	153,285		$	161,513
Total revenues
Net interest income	$	63,018		$	60,056		$	177,620		$	169,973
Noninterest income	13,322			13,013			41,893			91,355
Gain on sale of branches	(4,270)			—			(4,270)			—
Total	$	72,070		$	73,069		$	215,243		$	261,328
Ratio	68.4		%	68.5		%	71.2		%	61.8		%
Effective tax rate used in computations above	22.0		%	22.0		%	22.0		%	21.0		%

	As of
(in thousands, except share data)	September 30, 2022			December 31, 2021
Tangible book value per share
Shareholders' equity	$	552,789		$	715,339
Less: goodwill and other intangibles	(30,215)			(31,709)
Tangible shareholder's equity	$	522,574		$	683,630
Common shares outstanding	18,717,557			20,085,336
Computed amount	$	27.92		$	34.04
Tangible common equity to tangible assets
Tangible shareholder's equity (per above)	$	522,574		$	683,630
Tangible assets
Total assets	9,072,887			7,204,091
Less: Goodwill and other intangibles	(30,215)			(31,709)
Net	$	9,042,672		$	7,172,382
Ratio	5.8		%	9.5		%

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ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk Management

Market risk is defined as the sensitivity of income, fair value measurements and capital to changes in interest rates, foreign currency exchange rates, commodity prices and other relevant market rates or prices. The primary market risks that we are exposed to are price and interest rate risks. Price risk is defined as the risk to current or anticipated earnings or capital arising from changes in the value of either assets or liabilities that are entered into as part of distributing or managing risk. Interest rate risk is defined as risk to current or anticipated earnings or capital arising from movements in interest rates.

For the Company, price and interest rate risks arise from the financial instruments and positions we hold. This includes loans, MSRs, investment securities, deposits, borrowings, long-term debt and derivative financial instruments. Due to the nature of our current operations, we are not subject to foreign currency exchange or commodity price risk. Our real estate loan portfolio is subject to risks associated with the local economies of our various markets, in particular, the regional economy of the western United States, including Hawaii.

The spread between the yield on interest-earning assets and the cost of interest-bearing liabilities and the relative dollar amounts of these assets and liabilities are the principal items affecting net interest income. Changes in net interest rates (interest rate risk) are influenced to a significant degree by the repricing characteristics of assets and liabilities (timing risk), the relationship between various rates (basis risk), customer options (option risk) and changes in the shape of the yield curve (time-sensitive risk). We manage the available-for-sale investment securities portfolio while maintaining a balance between risk and return. The Company's funding strategy is to grow core deposits while we efficiently supplement using wholesale borrowings.

We estimate the sensitivity of our net interest income to changes in market interest rates using an interest rate simulation model that includes assumptions related to the level of balance sheet growth, deposit repricing characteristics and the rate of prepayments for multiple interest rate change scenarios. Interest rate sensitivity depends on certain repricing characteristics in our interest-earnings assets and interest-bearing liabilities, including the maturity structure of assets and liabilities and their repricing characteristics during the periods of changes in market interest rates. Effective interest rate risk management seeks to ensure both assets and liabilities respond to changes in interest rates within an acceptable timeframe, minimizing the impact of interest rate changes on net interest income and capital. Interest rate sensitivity is measured as the difference between the volume of assets and liabilities, at a point in time, that are subject to repricing at various time horizons, known as interest rate sensitivity gaps.

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The following table presents sensitivity gaps for these different intervals:

	At September 30, 2022
(in thousands)	3 Mos. or Less			More Than 3 Mos. to 6 Mos.			More Than 6 Mos. to 12 Mos.			More Than 12 Mos. to 3 Yrs.			More Than 3 Yrs. to 5 Yrs.			More Than 5 to 15 Yrs.			More Than 15 Yrs.			Non-Rate- Sensitive		Total
Interest-earning assets:
Cash & cash equivalents	$	57,256		$	—		$	—		$	—		$	—		$	—		$	—		$	—	$	57,256
FHLB Stock	62,838			—			—			—			—			—			8,590			—		71,428
Investment securities (1)	175,561			70,516			130,916			174,640			119,037			567,359			73,912			—		1,311,941
LHFS	13,787			—			—			—			—			—			—			—		13,787
LHFI (1)	1,276,311			384,622			501,001			1,423,581			1,891,987			1,713,955			22,030			—		7,213,487
Total	1,585,753			455,138			631,917			1,598,221			2,011,024			2,281,314			104,532			—		8,667,899
Non-interest-earning assets	—			—			—			—			—			—			—			404,988		404,988
Total assets	$	1,585,753		$	455,138		$	631,917		$	1,598,221		$	2,011,024		$	2,281,314		$	104,532		$	404,988	$	9,072,887
Interest-bearing liabilities:
Demand deposit accounts (2)	$	514,912		$	—		$	—		$	—		$	—		$	—		$	—		$	—	$	514,912
Savings accounts (2)	275,399			—			—			—			—			—			—			—		275,399
Money market accounts (2)	2,551,961			—			—			—			—			—			—			—		2,551,961
Certificates of deposit	487,477			486,918			394,108			347,275			4,207			331			1			—		1,720,317
FHLB advances	1,569,000			—			—			—			—			—			—			—		1,569,000
Long-term debt (3)	61,167			—			—			—			163,147			—			—			—		224,314
Total	5,459,916			486,918			394,108			347,275			167,354			331			1			—		6,855,903
Non-interest bearing liabilities	—			—			—			—			—			—			—			1,664,195		1,664,195
Shareholders' Equity	—			—			—			—			—			—			—			552,789		552,789
Total liabilities and shareholders' equity	$	5,459,916		$	486,918		$	394,108		$	347,275		$	167,354		$	331		$	1		$	2,216,984	$	9,072,887
Interest sensitivity gap	$	(3,874,163)		$	(31,780)		$	237,809		$	1,250,946		$	1,843,670		$	2,280,983		$	104,531
Cumulative interest sensitivity gap
Total	$	(3,874,163)		$	(3,905,943)		$	(3,668,134)		$	(2,417,188)		$	(573,518)		$	1,707,465		$	1,811,996
As a % of total assets	(43)		%	(43)		%	(40)		%	(27)		%	(6)		%	19		%	20		%
As a % of cumulative interest-bearing liabilities	29		%	34		%	42		%	64		%	92		%	125		%	126		%

(1)Based on contractual maturities, repricing dates and forecasted principal payments assuming normal amortization and, where applicable, prepayments.

(2)Assumes 100% of interest-bearing non-maturity deposits are subject to repricing in three months or less.

(3)Based on contractual maturity.

As of September 30, 2022, the Company is considered liability-sensitive as exhibited by the gap table and our net interest income sensitivity analysis.

Changes in the mix of interest-earning assets or interest-bearing liabilities can either increase or decrease the net interest margin, without affecting interest rate sensitivity. In addition, the interest rate spread between an earning asset and its funding liability can vary significantly, while the timing of repricing for both the asset and the liability remains the same, thereby impacting net interest income. This characteristic is referred to as basis risk. Varying interest rate environments can create unexpected changes in prepayment levels of assets and liabilities that are not reflected in the interest rate sensitivity analysis. These prepayments may have a significant impact on our net interest margin. Because of these factors, an interest sensitivity gap analysis may not provide an accurate assessment of our actual exposure to changes in interest rates.

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The estimated impact on our net interest income over a time horizon of one year and the change in net portfolio value as of September 30, 2022 and December 31, 2021 are provided in the table below. For the scenarios shown, the interest rate simulation assumes an instantaneous and sustained shift in market interest rates and no change in the composition or size of the balance sheet.

	At September 30, 2022				At December 31, 2021
Change in Interest Rates (basis points) (1)	Percentage Change
	Net Interest Income (2)		Net Portfolio Value (3)		Net Interest Income (2)		Net Portfolio Value (3)
+200	(9.9)	%	(29.1)	%	7.8	%	(5.0)	%
+100	(5.1)	%	(14.9)	%	3.5	%	(2.8)	%
-100	3.3	%	13.9	%	(1.3)	%	1.9	%
-200	6.4	%	25.3	%	(2.5)	%	(4.9)	%

(1)For purposes of our model, we assume interest rates will not go below zero. This "floor" limits the effect of a potential negative interest rate shock in a low rate environment.

(2)This percentage change represents the impact to net interest income for a one-year period, assuming there is no change in the structure of the balance sheet.

(3)This percentage change represents the impact to the net present value of equity, assuming there is no change in the structure of the balance sheet.

The changes in interest rate sensitivity between December 31, 2021 and September 30, 2022 reflected the impact of higher market interest rates, a flatter yield curve and changes to overall balance sheet composition. Some of the assumptions made in the simulation model may not materialize and unanticipated events and circumstances will occur. We do not allow for negative rate assumptions in our model, but actual results in extreme interest rate decline scenarios may result in negative rate assumptions which may cause the modeling results to be inherently unreliable. In addition, the simulation model does not take into account any future actions that we could undertake to mitigate an adverse impact due to changes in interest rates from those expected, in the actual level of market interest rates or competitive influences on our deposits.

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ITEM 4CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company carried out an evaluation, with the participation of our management and under the supervision of our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined under Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2022.

Changes in Internal Control over Financial Reporting

As required by Rule 13a-15(d), our management, including our Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of our internal control over financial reporting to determine whether any changes occurred during the quarter ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

There were no changes to our internal control over financial reporting that occurred during the quarter ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1LEGAL PROCEEDINGS

Because the nature of our business involves, among other things, the collection of numerous accounts, the validity of liens and compliance with various state and federal laws, we are subject to various legal proceedings in the ordinary course of our business related to foreclosures, bankruptcies, condemnation and quiet title actions and alleged statutory and regulatory violations. We are also subject to legal proceedings in the ordinary course of business related to employment and other consumer matters. We do not expect that these proceedings, taken as a whole, will have a material adverse effect on our business, financial position or our results of operations. There are currently no matters that, in the opinion of management, would have a material adverse effect on our consolidated balance sheet, results of operations or liquidity, or for which there would be a reasonable possibility of such a loss based on information known at this time.

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ITEM 1ARISK FACTORS

Refer to Item 1A of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 and Item 1A of the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2022 for a discussion of factors that could materially and adversely affect our business, financial condition, liquidity, results of operations and capital position.

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ITEM 2UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Sales of Unregistered Securities

There were no sales of unregistered securities during the third quarter of 2022.

ITEM 3DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5OTHER INFORMATION

Not applicable.

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ITEM 6EXHIBITS

EXHIBIT INDEX

Exhibit Number	Description
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
32 (1)	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith.
101 INS	Inline XBRL Instance Document
101.SCH	Inline XBRL Taxonomy Extension Schema Document
101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	Inline XBRL Taxonomy Extension Label Linkbase Document
101.LAB	Inline XBRL Taxonomy Extension Presentation Linkbase Document
101.PRE	Inline XBRL Taxonomy Extension Definitions Linkbase Document
104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

(1) This exhibit shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that Section. Such exhibit shall not be deemed incorporated into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.

64

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Seattle, State of Washington, on November 4, 2022.

HomeStreet, Inc.
By:	/s/ Mark K. Mason
	Mark K. Mason
	President and Chief Executive Officer
	(Principal Executive Officer)

HomeStreet, Inc.
By:	/s/ John M. Michel
	John M. Michel
	Executive Vice President and Chief Financial Officer
	(Principal Financial Officer)