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Mechanics Bancorp
MCHB
#3820
Rank
$3.30 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
Country
$14.94
Share price
-0.13%
Change (1 day)
34.11%
Change (1 year)
๐Ÿฆ Banks๐Ÿ’ณ Financial services
Categories
  1. Mechanics Bancorp
  2. Quarterly Reports (10-Q)
  3. Submitted on 2023-05-10

Mechanics Bancorp - 10-Q quarterly report FY


Text size:
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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: March 31, 2023
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.
(Exact Name of Registrant as Specified in its Charter)
91-0186600
Washington 91-0186600
(State of Incorporation)(I.R.S. Employer Identification Number)
601 Union Street, Suite 2000
Seattle, Washington 98101
98101
(Address of principal executive offices)(Zip Code)
(206) 623-3050
(Registrant's Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common StockHMSTNasdaq 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 May 5, 2023 was 18,774,649.
1

PART I – FINANCIAL INFORMATION
ITEM 1FINANCIAL STATEMENTS
Consolidated Balance Sheets at March 31, 2023 and December 31, 2022
3
Consolidated Income Statements for the Quarters Ended March 31, 2023 and 2022
4
Consolidated Statements of Comprehensive Income for the Quarters Ended March 31, 2023 and 2022
5
Consolidated Statements of Shareholders’ Equity for the Quarters Ended March 31, 2023 and 2022
6
Consolidated Statements of Cash Flows for the Quarters Ended March 31, 2023 and 2022
7
Notes to Consolidated Financial Statements
9
ITEM 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
38
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
56
ITEM 4
CONTROLS AND PROCEDURES
59
PART II – OTHER INFORMATION
ITEM 1
LEGAL PROCEEDINGS
59
ITEM 1A
RISK FACTORS
60
ITEM 2
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
61
ITEM 3
DEFAULTS UPON SENIOR SECURITIES
61
ITEM 4
MINE SAFETY DISCLOSURES
61
ITEM 5
OTHER INFORMATION
61
ITEM 6
EXHIBITS
62
SIGNATURES
63

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") and other direct and indirect subsidiaries of HomeStreet, Inc.

2

PART I
ITEM 1 FINANCIAL STATEMENTS


HOMESTREET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

March 31, 2023December 31, 2022
(in thousands, except share data)(Unaudited)
ASSETS
Cash and cash equivalents
$377,031 $72,828 
Investment securities
1,477,004 1,400,212 
Loans held for sale ("LHFS")
24,253 17,327 
Loans held for investment ("LHFI") (net of allowance for credit losses of $41,500 and $41,500)
7,444,882 7,384,820 
Mortgage servicing rights ("MSRs")109,540 111,873 
Premises and equipment, net55,333 51,172 
Other real estate owned ("OREO")1,839 1,839 
Goodwill and other intangible assets51,862 29,980 
Other assets317,145 294,709 
Total assets$9,858,889 $9,364,760 
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits$7,056,603 $7,451,919 
Borrowings1,878,000 1,016,000 
Long-term debt224,492 224,404 
Accounts payable and other liabilities124,800 110,290 
Total liabilities9,283,895 8,802,613 
Commitments and contingencies
Shareholders' equity:
Common stock, no par value, authorized 160,000,000 shares; issued and outstanding, 18,767,811 shares and 18,730,380 shares
227,293 226,592 
Retained earnings433,459 435,085 
Accumulated other comprehensive income (loss)(85,758)(99,530)
Total shareholders' equity574,994 562,147 
Total liabilities and shareholders' equity$9,858,889 $9,364,760 
See accompanying notes to consolidated financial statements
3

HOMESTREET, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
 Quarter Ended March 31,
(in thousands, except share and per share data)20232022
Interest income:
Loans$82,538 $52,954 
Investment securities12,763 5,966 
Cash, Fed Funds and other1,750 108 
Total interest income
97,051 59,028 
Interest expense:
Deposits29,370 2,284 
Borrowings18,305 2,198 
Total interest expense
47,675 4,482 
Net interest income
49,376 54,546 
Provision for credit losses593 (9,000)
Net interest income after provision for credit losses
48,783 63,546 
Noninterest income:
Net gain on loan origination and sale activities2,410 8,274 
Loan servicing income 3,039 3,304 
Deposit fees2,658 2,075 
Other2,083 1,905 
Total noninterest income
10,190 15,558 
Noninterest expense:
Compensation and benefits29,253 32,031 
Information services7,145 7,062 
Occupancy5,738 6,365 
General, administrative and other10,355 9,015 
Total noninterest expense
52,491 54,473 
Income before income taxes6,482 24,631 
Income tax expense1,424 4,680 
Net income$5,058 $19,951 
Net income per share:
Basic $0.27 $1.02 
Diluted
0.27 1.01 
Weighted average shares outstanding:
Basic
18,755,45319,585,753
Diluted
18,771,89919,791,913

See accompanying notes to consolidated financial statements
4

HOMESTREET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 Quarter Ended March 31,
(in thousands)20232022
Net income $5,058 $19,951 
Other comprehensive income (loss):
Unrealized gain (loss) on investment securities available for sale ("AFS")17,375 (68,187)
Reclassification for net (gains) losses included in income(3)(71)
Other comprehensive income (loss) before tax17,372 (68,258)
Income tax impact of:
Unrealized gain (loss) on investment securities AFS3,601 (16,172)
Reclassification for net (gains) losses included in income
(1)(17)
Total
3,600 (16,189)
Other comprehensive income (loss)13,772 (52,069)
Total comprehensive income (loss)$18,830 $(32,118)
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 stockRetained
earnings		Accumulated
other
comprehensive
income (loss)		Total shareholders' equity
For the quarter ended March 31, 2022
Balance, December 31, 202120,085,336 $249,856 $444,343 $21,140 $715,339 
Net income— — 19,951 — 19,951 
Share-based compensation expense— 1,076 — — 1,076 
Common stock issued - Stock grants104,840 — — — — 
Other comprehensive income (loss)— — — (52,069)(52,069)
Dividends declared on common stock ($0.35 per share)
— — (7,164)— (7,164)
Common stock repurchased
(1,489,640)(27,214)(48,688)— (75,902)
Balance, March 31, 202218,700,536 $223,718 $408,442 $(30,929)$601,231 
For the quarter ended March 31, 2023
Balance, December 31, 202218,730,380 $226,592 $435,085 $(99,530)$562,147 
Net income— — 5,058 — 5,058 
Share-based compensation expense— 1,016 — — 1,016 
Common stock issued - Stock grants50,426 — — — — 
Other comprehensive income (loss)— — — 13,772 13,772 
Dividends declared on common stock ($0.35 per share)
— — (6,684)— (6,684)
Common stock repurchased
(12,995)(315)— — (315)
Balance, March 31, 202318,767,811 $227,293 $433,459 $(85,758)$574,994 
See accompanying notes to consolidated financial statements

6

HOMESTREET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) 
Quarter Ended March 31,
(in thousands)20232022
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income$5,058 $19,951 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for credit losses593 (9,000)
Depreciation and amortization, premises and equipment1,879 2,593 
Amortization of premiums and discounts: investment securities, deposits, debt49 999 
Operating leases: excess of payments over amortization(860)(1,096)
Amortization of finance leases126 143 
Amortization of core deposit intangibles588 245 
Amortization of deferred loan fees and costs(189)(322)
Share-based compensation expense1,016 1,076 
Deferred income tax expense (benefit)(4,034)5,363 
Origination of LHFS(78,908)(252,102)
Proceeds from sale of LHFS72,566 372,464 
Net fair value adjustment and gain on sale of LHFS(584)3,348 
Origination of MSRs(756)(5,492)
Change in fair value of MSRs1,995 (6,878)
Amortization of servicing rights1,554 1,712 
Net change in trading securities(43,045)(19,313)
(Increase) decrease in other assets2,824 5,972 
Increase (decrease) in accounts payable and other liabilities(11,462)4,226 
Net cash provided by (used in) operating activities(51,590)123,889 
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment securities
(53,232)(161,016)
Proceeds from sale of investment securities4,693 962 
Principal payments on investment securities
32,445 34,129 
Proceeds from sale of OREO— 952 
Net increase in LHFI
(39,408)(328,288)
Purchase of premises and equipment(855)(1,444)
Net cash received from acquisition of branches349,111 — 
Proceeds from sale of Federal Home Loan Bank stock34,840 16,003 
Purchases of Federal Home Loan Bank stock(58,726)(25,238)
Net cash provided by (used in) investing activities268,868 (463,940)
7

Quarter Ended March 31,
(in thousands)20232022
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in deposits, net(768,262)100,973 
Changes in short-term borrowings, net562,000 232,000 
Proceeds from other long-term borrowings300,000 — 
Proceeds from debt issuance, net— 98,035 
Repayment of finance lease principal(129)(145)
Repurchases of common stock— (75,000)
Dividends paid on common stock(6,684)(7,164)
Net cash provided by financing activities86,925 348,699 
Net increase (decrease) in cash and cash equivalents304,203 8,648 
Cash and cash equivalents, beginning of year72,828 65,214 
Cash and cash equivalents, end of period$377,031 $73,862 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $47,775 $2,691 
Federal and state income taxes— 4 
Non-cash activities:
Increase in lease assets and lease liabilities1,031 2,053 
Loans transferred from LHFI to LHFS, net— 6,731 
Ginnie Mae loans derecognized with the right to repurchase, net1,235 2,402 
Repurchase of common stock-award shares315 902 
Acquisition:
Loans acquired20,803 — 
Premises and equipment and other assets5,819 — 
Liabilities assumed373,547 — 
Goodwill and other intangibles22,470 — 
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 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, 2022 ("2022 Annual Report on Form 10-K"), filed with the U.S. Securities and Exchange Commission ("SEC").

Branch Acquisition

On February 10, 2023, the Company completed its acquisition of three branches in southern California, whereby we assumed approximately $373 million in deposits and purchased approximately $21 million in loans. The application of the acquisition method of accounting resulted in recording goodwill of $12 million and a core deposit intangible of $11 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. In December 2022, the FASB issued ASU No. 2022-06, "Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848," which defers the sunset date of Topic 848 from December 31, 2022 to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. 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 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. We prospectively adopted the vintage table disclosure requirement of ASU 2022-02 on January 1, 2023, which did not have a material impact on the Company's financial position or results of operations.

9

In March 2023, the FASB issued ASU 2023-02, “Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method.” ASU 2023-02 permits reporting entities to elect to account for their tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method if certain conditions are met. ASU 2023-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2023. ASU 2023-02 is not expected to have a material impact on the Company’s consolidated financial statements.

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 March 31, 2023
(in thousands)Amortized
cost		Gross
unrealized
gains		Gross
unrealized
losses		Fair
value
AFS
Mortgage backed securities ("MBS"):
Residential$209,773 $62 $(9,177)$200,658 
Commercial62,567 — (8,337)54,230 
Collateralized mortgage obligations ("CMOs"):
Residential587,455 56 (34,277)553,234 
Commercial76,777 — (6,000)70,777 
Municipal bonds462,261 294 (48,897)413,658 
Corporate debt securities45,835 — (4,533)41,302 
U.S. Treasury securities22,920 — (2,601)20,319 
Agency debentures58,539 — (180)58,359 
Total$1,526,127 $412 $(114,002)$1,412,537 
HTM
   Municipal bonds$2,423 $— $(36)$2,387 

At December 31, 2022
(in thousands)Amortized
cost		Gross
unrealized
gains		Gross
unrealized
losses		Fair
value
AFS
MBS:
Residential$207,445 $— $(10,183)$197,262 
Commercial65,411 — (9,362)56,049 
CMOs:
Residential592,449 12 (39,422)553,039 
Commercial77,909 — (7,390)70,519 
 Municipal bonds469,346 41 (57,839)411,548 
 Corporate debt securities46,672 74 (3,801)42,945 
 U.S. Treasury securities23,005 — (3,071)19,934 
 Agency debentures27,499 8 (29)27,478 
Total$1,509,736 $135 $(131,097)$1,378,774 
HTM
   Municipal bonds
$2,441 $— $(56)$2,385 

10

At March 31, 2023, and December 31, 2022, the Company held $62 million and $19 million, respectively, 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. For the quarters ended March 31, 2023 and 2022, net gains of $0.6 million and net losses of $0.7 million on trading securities, respectively, were recorded in servicing income.

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 March 31, 2023 and December 31, 2022, substantially all securities held, including municipal bonds and corporate debt securities, were rated investment grade based upon nationally recognized statistical rating organizations where available and, where not available, based upon internal ratings.

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 March 31, 2023
 Less than 12 months12 months or moreTotal
(in thousands)Gross
unrealized
losses		Fair
value		Gross
unrealized
losses		Fair
value		Gross
unrealized
losses		Fair
value
AFS
MBS:
Residential
$(6,312)$168,313 $(2,865)$22,732 $(9,177)$191,045 
Commercial(194)3,226 (8,143)50,990 (8,337)54,216 
CMOs:
Residential(8,414)342,128 (25,863)184,686 (34,277)526,814 
Commercial(146)9,071 (5,854)61,707 (6,000)70,778 
Municipal bonds(1,825)52,931 (47,072)326,987 (48,897)379,918 
Corporate debt securities(1,550)27,813 (2,983)13,489 (4,533)41,302 
U.S. Treasury securities— — (2,601)20,319 (2,601)20,319 
Agency debentures(180)58,359 — — (180)58,359 
Total$(18,621)$661,841 $(95,381)$680,910 $(114,002)$1,342,751 
HTM
Municipal bonds$(36)$2,387 $— $— $(36)$2,387 

11

At December 31, 2022
 Less than 12 months12 months or moreTotal
(in thousands)Gross
unrealized
losses		Fair
value		Gross
unrealized
losses		Fair
value		Gross
unrealized
losses		Fair
value
AFS
MBS:
Residential$(8,845)$191,398 $(1,338)$5,763 $(10,183)$197,161 
Commercial(5,729)41,416 (3,633)14,619 (9,362)56,035 
CMOs:
Residential(27,789)498,333 (11,633)45,689 (39,422)544,022 
Commercial(4,787)56,671 (2,603)13,848 (7,390)70,519 
Municipal bonds(44,513)350,918 (13,326)46,377 (57,839)397,295 
Corporate debt securities(3,801)32,871 — — (3,801)32,871 
U.S. Treasury securities— — (3,071)19,934 (3,071)19,934 
Agency debentures(29)15,970 — — (29)15,970 
Total$(95,493)$1,187,577 $(35,604)$146,230 $(131,097)$1,333,807 
HTM
Municipal bonds$(56)$2,385 $— $— $(56)$2,385 

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 March 31, 2023 or December 31, 2022. In addition, as of March 31, 2023 and December 31, 2022, 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 March 31, 2023
 Within one yearAfter 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$— — %$3,763 2.02 %$52,312 3.13 %$357,583 2.73 %$413,658 2.78 %
   Corporate debt securities
4,500 3.49 %9,989 5.99 %26,813 4.12 %— — %41,302 4.47 %
   U.S. Treasury securities
— — %— — %20,319 1.14 %— — %20,319 1.14 %
   Agency debentures15,472 4.74 %42,887 5.12 %— — %— — %58,359 5.02 %
Total$19,972 4.45 %$56,639 5.05 %$99,444 3.00 %$357,583 2.73 %$533,638 3.07 %
HTM
   Municipal bonds$— — %$2,387 1.84 %$— — %$— — %$2,387 1.84 %

12

 At December 31, 2022
 Within one yearAfter 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
$— — %$3,644 1.96 %$38,977 3.04 %$368,927 2.83 %$411,548 2.84 %
   Corporate debt securities
— — %15,342 5.13 %27,603 4.25 %— — %42,945 4.54 %
   U.S. Treasury securities
— — %— — %19,934 1.11 %— — %19,934 1.11 %
Agency debentures10,485 4.74 %16,993 4.94 %— — %— — %27,478 4.86 %
Total$10,485 4.74 %$35,979 4.69 %$86,514 2.97 %$368,927 2.83 %$501,905 3.01 %
HTM
   Municipal bonds$— — %$2,385 2.04 %$— — %$— — %$2,385 2.04 %

The weighted-average yield is computed using the contractual coupon of each security weighted based on the fair value of each security. 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 March 31, 2023 and December 31, 2022 was 3.15% and 3.08%, respectively.

Sales of AFS investment securities were as follows:

Quarter Ended March 31,
(in thousands)20232022
Proceeds$4,693 $962 
Gross gains3 71 
Gross losses— — 

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 March 31, 2023At December 31, 2022
Federal Reserve Bank to secure borrowings$315,244 $— 
Washington, Oregon and California to secure public deposits203,201 212,806 
Other securities pledged1,519 2,011 
Total securities pledged as collateral$519,964 $214,817 

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 $2.8 million and $2.7 million for the quarters ended March 31, 2023 and 2022, 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 March 31, 2023At December 31, 2022
CRE
Non-owner occupied CRE$652,284 $658,085 
Multifamily3,975,654 3,975,754 
Construction/land development607,559 627,663 
Total5,235,497 5,261,502 
Commercial and industrial loans
Owner occupied CRE438,147 443,363 
Commercial business392,837 359,747 
Total
830,984 803,110 
Consumer loans
Single family1,057,579 1,009,001 
Home equity and other362,322 352,707 
Total (1)
1,419,901 1,361,708 
Total LHFI 7,486,382 7,426,320 
Allowance for credit losses ("ACL")(41,500)(41,500)
Total LHFI less ACL
$7,444,882 $7,384,820 
(1)    Includes $5.2 million and $5.9 million at March 31, 2023 and December 31, 2022, 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 $5.7 billion and $5.2 billion at March 31, 2023 and December 31, 2022, respectively, were pledged to secure borrowings from the Federal Home Loan Bank ("FHLB") and loans totaling $562 million and $497 million at March 31, 2023 and December 31, 2022, 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 March 31, 2023, single family and multifamily loans in the state of Washington and California, represented 10% and 36% of the total LHFI portfolio, respectively. At December 31, 2022, multifamily loans in the state of California represented 36% of the total LHFI portfolio.

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 first quarter of 2023, the historical expected loss rates increased from December 31, 2022 due to product mix risk composition changes. During the first quarter of 2023, the qualitative factors decreased due to the continued favorable performance of our loan portfolio. As of March 31, 2023, the Bank expects deterioration in collateral values and economic conditions over the two-year forecast period in the markets in which it operates.
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 $2.2 million at both March 31, 2023 and December 31, 2022.
14

The Bank has elected to exclude accrued interest receivable from the evaluation of the ACL. Accrued interest on LHFI was $27.6 million and $26.9 million at March 31, 2023 and December 31, 2022, 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 March 31,
(in thousands)20232022
Beginning balance
$41,500 $47,123 
Provision for credit losses589 (9,223)
Net (charge-offs) recoveries(589)44
Ending balance$41,500 $37,944 
Allowance for unfunded commitments:
Beginning balance$2,197 $2,404 
Provision for credit losses4 223 
Ending balance$2,201 $2,627 
Provision for credit losses:
Allowance for credit losses - loans$589 $(9,223)
Allowance for unfunded commitments4 223 
Total$593 $(9,000)

15


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

Quarter Ended March 31, 2023
(in thousands)Beginning balanceCharge-offsRecoveriesProvision Ending balance
CRE
Non-owner occupied CRE$2,102 $— $— $506 $2,608 
Multifamily10,974 — — (1,187)9,787 
Construction/land development
Multifamily construction998 — — 347 1,345 
CRE construction196 — — 8 204 
Single family construction12,418 — — 107 12,525 
Single family construction to permanent1,171 — — 40 1,211 
Total27,859 — — (179)27,680 
Commercial and industrial loans
Owner occupied CRE1,030 — — (120)910 
Commercial business3,247 (633)24 778 3,416 
     Total 4,277 (633)24 658 4,326 
Consumer loans
Single family5,610 — 15 179 5,804 
Home equity and other3,754 (50)55 (69)3,690 
Total9,364 (50)70 110 9,494 
Total ACL$41,500 $(683)$94 $589 $41,500 

Quarter Ended March 31, 2022
(in thousands)Beginning balanceCharge-offsRecoveriesProvision
Ending balance
CRE
Non-owner occupied CRE$7,509 $— $— $(5,215)$2,294 
Multifamily5,854 — — 2,573 8,427 
Construction/land development
Multifamily construction507 — — (51)456 
CRE construction150 — — 34 184 
Single family construction6,411 — — 1,324 7,735 
Single family construction to permanent1,055 — — (65)990 
Total21,486 — — (1,400)20,086 
Commercial and industrial loans
Owner occupied CRE5,006 — — (1,470)3,536 
Commercial business12,273 (11)24 (5,376)6,910 
     Total 17,279 (11)24 (6,846)10,446 
Consumer loans
Single family4,394 — 4 (636)3,762 
Home equity and other3,964 (33)60 (341)3,650 
Total8,358 (33)64 (977)7,412 
Total ACL$47,123 $(44)$88 $(9,223)$37,944 

16

The following table presents a vintage analysis of the commercial portfolio segment by loan sub-class and risk rating or delinquency status.
At March 31, 2023
(in thousands)202320222021202020192018 and priorRevolvingRevolving-termTotal
COMMERCIAL PORTFOLIO
Non-owner occupied CRE
Pass$1,542 $68,246 $68,280 $41,870 $138,583 $302,871 $1,122 $— $622,514 
Special Mention— — — — — 29,332 — — 29,332 
Substandard— — — — 438 — — — 438 
Total1,542 68,246 68,280 41,870 139,021 332,203 1,122 — 652,284 
Multifamily
Pass15,923 1,826,992 1,159,589 522,497 238,448 197,486 — — 3,960,935 
Special Mention— — — 4,892 2,366 7,461 — — 14,719 
Substandard— — — — — — — — — 
Total15,923 1,826,992 1,159,589 527,389 240,814 204,947 — — 3,975,654 
Multifamily construction
Pass(222)23,795 71,396 14,164 — — — — 109,133 
Special Mention— — — — — — — — — 
Substandard— — — — — — — — — 
Total(222)23,795 71,396 14,164 — — — — 109,133 
CRE construction
Pass— 1,713 14,416 3,958 — — — — 20,087 
Special Mention— — — — — — — — — 
Substandard— — — — — — — — — 
Total— 1,713 14,416 3,958 — — — — 20,087 
Single family construction
Pass22,174 140,812 30,374 10,748 — 74 117,718 — 321,900 
Special Mention— — — — — — — — — 
Substandard— — 5,732 — — — — — 5,732 
Total22,174 140,812 36,106 10,748 — 74 117,718 — 327,632 
Single family construction to permanent
Current
3,874 84,818 54,059 5,253 2,186 517 — — 150,707 
Past due:
30-59 days
— — — — — — — — — 
60-89 days
— — — — — — — — — 
90+ days
— — — — — — — — — 
Total3,874 84,818 54,059 5,253 2,186 517 — — 150,707 
Owner occupied CRE
Pass3,908 69,709 51,178 42,620 70,651 176,851 2 1,085 416,004 
Special Mention— 1,506 737 — — 12,915 — — 15,158 
Substandard— — — — — 6,985 — — 6,985 
Total3,908 71,215 51,915 42,620 70,651 196,751 2 1,085 438,147 
Commercial business
Pass15,698 53,476 38,338 45,115 17,838 30,257 152,482 1,743 354,947 
Special Mention— 11,612 3,650 — 3,765 3,093 1,935 190 24,245 
Substandard— — 996 2,551 3,955 4,589 1,462 92 13,645 
Total15,698 65,088 42,984 47,666 25,558 37,939 155,879 2,025 392,837 
Total commercial portfolio
$62,897 $2,282,679 $1,498,745 $693,668 $478,230 $772,431 $274,721 $3,110 $6,066,481 
17

The following table presents a vintage analysis of the consumer portfolio segment by loan sub-class and delinquency status:
At March 31, 2023
(in thousands)202320222021202020192018 and priorRevolvingRevolving-termTotal
CONSUMER PORTFOLIO
Single family
Current
$7,309 $283,042 $283,329 $156,430 $48,645 $272,582 $— $— $1,051,337 
Past due:
30-59 days
— — — — 545 2,020 — — 2,565 
60-89 days
— — — — — 539 — — 539 
90+ days
— — — — 290 2,848 — — 3,138 
Total7,309 283,042 283,329 156,430 49,480 277,989 — — 1,057,579 
Home equity and other
Current
542 3,693 601 197 114 1,788 346,770 7,379 361,084 
Past due:
30-59 days
— 10 — — — — 620 58 688 
60-89 days
— 28 7 — — — 53 8 96 
90+ days
— 32 — — — 25 387 10 454 
Total542 3,763 608 197 114 1,813 347,830 7,455 362,322 
Total consumer portfolio (1)
$7,851 $286,805 $283,937 $156,627 $49,594 $279,802 $347,830 $7,455 $1,419,901 
Total LHFI$70,748 $2,569,484 $1,782,682 $850,295 $527,824 $1,052,233 $622,551 $10,565 $7,486,382 

(1)    Includes $5.2 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.
18

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, 2022
(in thousands)202220212020201920182017 and priorRevolvingRevolving-termTotal
COMMERCIAL PORTFOLIO
Non-owner occupied CRE
Pass$68,301 $68,356 $42,181 $139,760 $87,197 $242,544 $2,016 $786 $651,141 
Special Mention— — — — 2,702 4,242 — — 6,944 
Substandard— — — — — — — — — 
Total68,301 68,356 42,181 139,760 89,899 246,786 2,016 786 658,085 
Multifamily
Pass1,828,568 1,165,434 528,077 221,974 59,340 140,126 — — 3,943,519 
Special Mention— — 4,893 19,834 — 7,508 — — 32,235 
Substandard— — — — — — — — — 
Total1,828,568 1,165,434 532,970 241,808 59,340 147,634 — — 3,975,754 
Multifamily construction
Pass18,110 63,394 13,613 — — — — — 95,117 
Special Mention— — — — — — — — — 
Substandard— — — — — — — — — 
Total18,110 63,394 13,613 — — — — — 95,117 
CRE construction
Pass341 14,348 3,960 — — 305 — — 18,954 
Special Mention— — — — — — — — — 
Substandard— — — — — — — — — 
Total341 14,348 3,960 — — 305 — — 18,954 
Single family construction
Pass149,133 50,936 24,807 519 — 74 123,303 — 348,772 
Special Mention— — — — — — — — — 
Substandard— 6,782 — — — — — — 6,782 
Total149,133 57,718 24,807 519 — 74 123,303 — 355,554 
Single family construction to permanent
Current66,034 76,814 11,128 3,268 794 — — — 158,038 
Past due:
30-59 days — — — — — — — — — 
60-89 days — — — — — — — — — 
90+ days — — — — — — — — — 
Total66,034 76,814 11,128 3,268 794 — — — 158,038 
Owner occupied CRE
Pass70,192 51,919 44,778 71,652 36,457 139,691 3 1,104 415,796 
Special Mention— 743 — — 6,179 13,485 — — 20,407 
Substandard— — — — 2,149 5,011 — — 7,160 
Total70,192 52,662 44,778 71,652 44,785 158,187 3 1,104 443,363 
Commercial business
Pass65,566 42,921 45,940 18,594 13,548 18,779 130,427 2,041 337,816 
Special Mention— 612 — 3,577 9 3,444 403 — 8,045 
Substandard— 338 2,638 4,449 2,591 2,206 1,563 101 13,886 
Total65,566 43,871 48,578 26,620 16,148 24,429 132,393 2,142 359,747 
Total commercial portfolio$2,266,245 $1,542,597 $722,015 $483,627 $210,966 $577,415 $257,715 $4,032 $6,064,612 

19

The following table presents a vintage analysis of the consumer portfolio segment by loan sub-class and delinquency status:
At December 31, 2022
(in thousands)202220212020201920182017 and priorRevolvingRevolving-termTotal
CONSUMER PORTFOLIO
Single family
Current
$273,786 $253,937 $152,773 $49,302 $43,511 $231,277 $— $— $1,004,586 
Past due:
30-59 days
— — — — 340 2,113 — — 2,453 
60-89 days
— — — — — 258 — — 258 
90+ days
— — — 290 273 1,141 — — 1,704 
Total 273,786 253,937 152,773 49,592 44,124 234,789 — — 1,009,001 
Home equity and other
Current
4,156 692 220 150 72 1,593 340,567 4,017 351,467 
Past due:
30-59 days
— 6 — — — 9 446 — 461 
60-89 days
6 24 — — — 48 517 — 595 
90+ days
— — — — — 151 33 — 184 
Total4,162 722 220 150 72 1,801 341,563 4,017 352,707 
Total consumer portfolio (1)
$277,948 $254,659 $152,993 $49,742 $44,196 $236,590 $341,563 $4,017 $1,361,708 
Total LHFI$2,544,193 $1,797,256 $875,008 $533,369 $255,162 $814,005 $599,278 $8,049 $7,426,320 
(1)    Includes $5.9 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.

The following table presents a vintage analysis of the commercial and consumer portfolio segment by loan sub-class and gross charge-offs:
At March 31, 2023
(in thousands)202320222021202020192018 and priorRevolvingRevolving-termTotal
COMMERCIAL PORTFOLIO
Commercial business
Gross charge-offs$— $— $(174)$— $(459)$— $— $— $(633)
CONSUMER PORTFOLIO
Home equity and other
Gross charge-offs— (6)(13)— — — (31)— (50)
Total LHFI$— $(6)$(187)$— $(459)$— $(31)$— $(683)
20

Collateral Dependent Loans
The following table presents the amortized cost basis of collateral-dependent loans by loan sub-class and collateral type:
At March 31, 2023
(in thousands)Land1-4 FamilyNon-residential real estateOther non-real estateTotal
Commercial and industrial loans
Owner occupied CRE$972 $— $2,696 $— $3,668 
Commercial business
1 3,178 562 777 4,518 
   Total
973 3,178 3,258 777 8,186 
Consumer loans
Single family
— 847 — — 847 
   Total
— 847 — — 847 
  Total collateral-dependent loans$973 $4,025 $3,258 $777 $9,033 
At December 31, 2022
(in thousands)Land1-4 FamilyNon-residential real estateOther non-real estateTotal
Commercial and industrial loans
Owner occupied CRE$1,111 $— $1,410 $— $2,521 
Commercial business
62 3,186 562 — 3,810 
Total collateral-dependent loans1,173 3,186 1,972 — 6,331 
Nonaccrual and Past Due Loans
The following table presents nonaccrual status for loans:
At March 31, 2023At December 31, 2022
(in thousands)Nonaccrual with no related ACLTotal NonaccrualNonaccrual with no related ACLTotal Nonaccrual
Commercial and industrial loans
Owner occupied CRE$3,668 $3,668 $2,521 $2,521 
        Commercial business4,518 4,518 785 4,269 
Total
8,186 8,186 3,306 6,790 
Consumer loans
Single family
1,071 3,999 332 2,584 
Home equity and other3 862 3 681 
Total1,074 4,861 335 3,265 
Total nonaccrual loans$9,260 $13,047 $3,641 $10,055 

21

The following tables present an aging analysis of past due loans by loan portfolio segment and loan sub-class:
At March 31, 2023
Past Due and Still Accruing
(in thousands)30-59 days60-89 days90 days or
more		Nonaccrual
Total past
due and nonaccrual (1)
CurrentTotal
loans
CRE
Non-owner occupied CRE$— $— $— $— $— $652,284 $652,284 
Multifamily— — — — — 3,975,654 3,975,654 
Construction/land development
Multifamily construction— — — — — 109,133 109,133 
CRE construction— — — — — 20,087 20,087 
Single family construction— — 5,732 — 5,732 321,900 327,632 
Single family construction to permanent— — — — — 150,707 150,707 
Total
— — 5,732 — 5,732 5,229,765 5,235,497 
Commercial and industrial loans
Owner occupied CRE— — — 3,668 3,668 434,479 438,147 
Commercial business50 — — 4,518 4,568 388,269 392,837 
Total
50 — — 8,186 8,236 822,748 830,984 
Consumer loans
Single family
4,105 1,856 5,527 (2)3,999 15,487 1,042,092 1,057,579 
Home equity and other689 43 — 862 1,594 360,728 362,322 
Total
4,794 1,899 5,527 4,861 17,081 1,402,820 1,419,901 (3)
Total loans$4,844 $1,899 $11,259 $13,047 $31,049 $7,455,333 $7,486,382 
%0.06 %0.03 %0.15 %0.17 %0.41 %99.59 %100.00 %
At December 31, 2022
Past Due and Still Accruing
(in thousands)30-59 days60-89 days90 days or
more		Nonaccrual
Total past
due and nonaccrual (1)
CurrentTotal
loans
CRE
Non-owner occupied CRE$— $— $— $— $— $658,085 $658,085 
Multifamily— — — — — 3,975,754 3,975,754 
Construction/land development
Multifamily construction— — — — — 95,117 95,117 
CRE construction— — — — — 18,954 18,954 
Single family construction— — — — — 355,554 355,554 
Single family construction to permanent— — — — — 158,038 158,038 
Total
— — — — — 5,261,502 5,261,502 
Commercial and industrial loans
Owner occupied CRE— — — 2,521 2,521 440,842 443,363 
Commercial business— — — 4,269 4,269 355,478 359,747 
Total
— — — 6,790 6,790 796,320 803,110 
Consumer loans
Single family
4,556 1,724 4,372 (2)2,584 13,236 995,765 1,009,001 
Home equity and other267 296 — 681 1,244 351,463 352,707 
Total
4,823 2,020 4,372 3,265 14,480 1,347,228 1,361,708 (3)
Total loans$4,823 $2,020 $4,372 $10,055 $21,270 $7,405,050 $7,426,320 
%0.06 %0.03 %0.06 %0.14 %0.29 %99.71 %100.00 %
22

(1)     Includes loans whose repayments are insured by the FHA or guaranteed by the VA or Small Business Administration "SBA" of $12.3 million and $10.6 million at March 31, 2023 and December 31, 2022, respectively.
(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 $5.2 million and $5.9 million of loans at March 31, 2023 and December 31, 2022, 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.

Loan Modifications

The Company provides modifications to borrowers experiencing financial difficulty ("MFDB"), 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 quarters ended March 31, 2023 and 2022 did not have a material impact on the ACL. The following tables provide information related to loans modified during the quarters ended March 31, 2023 and 2022 to borrowers experiencing financial difficulty, disaggregated by class of financing receivable and type of concession granted:
Significant Payment Delay
Quarter Ended March 31, 2023Quarter Ended March 31, 2022
(in thousands, except percentage)Amortized Cost Basis at Period End% of Total Class of Financing ReceivableAmortized Cost Basis at Period End% of Total Class of Financing Receivable
Single family$— — %$153 0.02 %
Term Extension
Quarter Ended March 31, 2023Quarter Ended March 31, 2022
(in thousands, except percentage)Amortized Cost Basis at Period End% of Total Class of Financing ReceivableAmortized Cost Basis at Period End% of Total Class of Financing Receivable
Single family$— — %$37 — %
Interest Rate Reduction and Term Extension
Quarter Ended March 31, 2023Quarter Ended March 31, 2022
(in thousands, except percentage)Amortized Cost Basis at Period End% of Total Class of Financing ReceivableAmortized Cost Basis at Period End% of Total Class of Financing Receivable
Single family$— — %$1,110 0.15 %

Significant Payment Delay and Term Extension
Quarter Ended March 31, 2023Quarter Ended March 31, 2022
(in thousands, except percentage)Amortized Cost Basis at Period End% of Total Class of Financing ReceivableAmortized Cost Basis at Period End% of Total Class of Financing Receivable
Single family$179 0.02 %$6,397 0.84 %
Home equity and other— — %52 0.02 %

Interest Rate Reduction, Significant Payment Delay and Term Extension
Quarter Ended March 31, 2023Quarter Ended March 31, 2022
(in thousands, except percentage)Amortized Cost Basis at Period End% of Total Class of Financing ReceivableAmortized Cost Basis at Period End% of Total Class of Financing Receivable
Single family$— — %$5,762 0.76 %

23

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

Interest Rate Reduction
Quarter Ended March 31, 2023Quarter Ended March 31, 2022
Single family—
Reduced weighted-average contractual interest rate from 4.28% to 3.25%.
Significant Payment Delay
Quarter Ended March 31, 2023Quarter Ended March 31, 2022
Single Family
Provided payment deferrals to borrowers. A weighted average 2.6% of loan balances were capitalized and added to the remaining term of the loan.
Provided payment deferrals to borrowers. A weighted average 0.3% 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 6.3% of loan balances were capitalized and added to the remaining term of the loan.
Term Extension
Quarter Ended March 31, 2023Quarter Ended March 31, 2022
Single family
Added a weighted average 14.2 years to the life of loans, which reduced the monthly payment amounts to the borrowers.
Added a weighted average 3.2 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 were MFDBs on or after January 1, 2022 through December 31, 2022:

Payment Status (Amortized Cost Basis) at March 31, 2023
(in thousands)Current30-89 Days Past Due90+ Days Past Due
Commercial business$1,355 $— $— 
Single family19,006 1,746 1,627 
Home equity and other119 — — 
Total$20,480 $1,746 $1,627 
The following tables provide the amortized cost basis as of March 31, 2023 of MFDBs on or after January 1, 2022 through December 31, 2022 and subsequently had a payment default:

Amortized Cost Basis of Modified Loans That Subsequently Defaulted Quarter Ended March 31, 2023
(in thousands)Significant Payment DelayTerm ExtensionInterest Rate Reduction and Term ExtensionSignificant Payment Delay and Term ExtensionInterest Rate Reduction, Significant Payment Delay and Term Extension
Single family$— $— $— $2,030 $623 

24


NOTE 4–DEPOSITS:

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

At March 31, 2023At December 31, 2022
(dollars in thousands)AmountWeighted Average RateAmountWeighted Average Rate
Noninterest-bearing demand deposits$1,479,428 — %$1,399,912 — %
Interest bearing:
Interest-bearing demand deposits 496,504 0.34 %466,490 0.10 %
Savings 323,373 0.06 %258,977 0.06 %
Money market 2,097,055 1.52 %2,383,209 1.22 %
Certificates of deposit2,660,243 3.49 %2,943,331 3.07 %
Total interest bearing deposits5,577,175 2.28 %6,052,007 1.98 %
Total deposits$7,056,603 1.79 %$7,451,919 1.61 %

Certificates of deposit outstanding mature as follows: 

(in thousands)March 31, 2023
Within one year$2,143,208 
One to two years489,105 
Two to three years15,066 
Three to four years5,202 
Four to five years7,500 
Thereafter162 
Total$2,660,243 

The aggregate amount of certificate of deposits in denominations of more than the FDIC limit of $250 thousand at March 31, 2023 and December 31, 2022 were $186 million and $189 million, respectively. There were $885 million and $1.4 billion of brokered deposits at March 31, 2023 and December 31, 2022, respectively.


NOTE 5–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 March 31, 2023
Notional amountFair value derivatives
(in thousands) AssetLiability
Forward sale commitments$89,850 $229 $(326)
Interest rate lock commitments37,557 398 (36)
Interest rate swaps239,558 10,704 (10,705)
Futures7,400 34 — 
Options58,000 503 — 
Total derivatives before netting$432,365 11,868 (11,067)
Netting adjustment/Cash collateral (1)
(10,801)(239)
Carrying value on consolidated balance sheet$1,067 $(11,306)

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At December 31, 2022
Notional amountFair value derivatives
(in thousands) AssetLiability
Forward sale commitments$51,252 $293 $(151)
Interest rate lock commitments17,463 141 (36)
Interest rate swaps236,533 13,093 (13,093)
Futures23,000 18 — 
Options$14,000 218 — 
Total derivatives before netting$342,248 $13,763 $(13,280)
Netting adjustment/Cash collateral (1)
(12,870)101 
Carrying value on consolidated balance sheet$893 $(13,179)
(1)    Includes net cash collateral received of $11.0 million and $12.8 million at March 31, 2023 and December 31, 2022, respectively.


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 March 31, 2023
Derivative assets$11,868 $(10,801)$1,067 
Derivative liabilities(11,067)(239)(11,306)
At December 31, 2022
Derivative assets$13,763 $(12,870)$893 
Derivative liabilities(13,280)101 (13,179)
(1)    Includes net cash collateral received of $11.0 million and received of $12.8 million at March 31, 2023 and December 31, 2022, 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 are included in other assets. Payables related to cash collateral that has been received from counterparties are 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 March 31, 2023 and December 31, 2022, the Company had liabilities of $11.0 million and $12.8 million, respectively, in cash collateral received from counterparties and receivables of $0.03 million and $0.03 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 March 31,
(in thousands)20232022
Recognized in noninterest income:
Net gain (loss) on loan origination and sale activities (1)
$78 $4,613 
Loan servicing income (loss) (2)
(730)(9,439)
Other (3)
(1)159 
(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 and broker dealer counterparties.

The notional amount of open interest rate swap agreements executed with commercial banking customers and broker dealer counterparties at March 31, 2023 and December 31, 2022 were $240 million and $237 million, respectively. 
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NOTE 6–MORTGAGE BANKING OPERATIONS:

LHFS consisted of the following:
 
(in thousands)At March 31, 2023At December 31, 2022
Single family$22,690 $14,075 
CRE, multifamily and SBA1,563 3,252 
Total$24,253 $17,327 

Loans sold consisted of the following for the periods indicated: 

 Quarter Ended March 31,
(in thousands)20232022
Single family$63,473 $323,070 
CRE, multifamily and SBA8,750 49,137 
Total$72,223 $372,207 

Gain on loan origination and sale activities, including the effects of derivative risk management instruments, consisted of the following: 
 Quarter Ended March 31,
(in thousands)20232022
Single family$2,218 $6,169 
CRE, multifamily and SBA192 2,105 
Total$2,410 $8,274 

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 March 31, 2023At December 31, 2022
Single family $5,424,909 $5,436,899 
CRE, multifamily and SBA 1,917,154 1,938,484 
Total$7,342,063 $7,375,383 

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 March 31,
(in thousands)20232022
Balance, beginning of period$2,232 $1,312 
Additions, net of adjustments (1)
(143)358 
Realized (losses) recoveries, net (2)
(300)(32)
Balance, end of period$1,789 $1,638 
(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
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amounts from investors or borrowers. Advances of $2.8 million and $1.6 million were recorded in other assets as of March 31, 2023 and December 31, 2022, 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 March 31, 2023 and December 31, 2022, delinquent or defaulted mortgage loans currently in Ginnie Mae pools that the Company has recognized on its consolidated balance sheets totaled $5.7 million and $6.9 million, respectively.

Revenue from mortgage servicing, including the effects of derivative risk management instruments, consisted of the following:
 Quarter Ended March 31,
(in thousands)20232022
Servicing income, net:
Servicing fees and other$6,669 $8,321 
Amortization of single family MSRs (1)
(1,684)(3,425)
Amortization of multifamily and SBA MSRs(1,554)(1,712)
Total
3,431 3,184 
Risk management, single family MSRs:
Changes in fair value of MSRs due to assumptions (2)
(311)10,303 
Net gain (loss) from economic hedging (81)(10,183)
Total
(392)120 
               Loan servicing income $3,039 $3,304 
(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 March 31,
(in thousands)20232022
Beginning balance$76,617 $61,584 
Additions and amortization:
Originations
619 3,916 
Purchases
460 — 
Amortization (1)
(1,684)(3,425)
Net additions and amortization
(605)491 
Changes in fair value assumptions (2)
(311)10,303 
Ending balance$75,701 $72,378 
(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 March 31,
(rates per annum) (1)
20232022
Constant prepayment rate ("CPR") (2)
11.20 %9.38 %
Discount rate 9.94 %8.34 %
(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 March 31, 2023At December 31, 2022
Range of Inputs
Average (1)
Range of Inputs
Average (1)
CPRs
6.34% - 30.01%
6.69 %
6.01% - 11.10%
8.19 %
Discount Rates
9.33% - 14.95%
10.07 %
9.74% - 16.88%
10.66 %
(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 March 31, 2023
Fair value of single family MSR$75,701 
Expected weighted-average life (in years)8.40
CPR
Impact on fair value of 25 basis points adverse change in interest rates$(941)
Impact on fair value of 50 basis points adverse change in interest rates$(2,148)
Discount rate
Impact on fair value of 100 basis points increase$(2,000)
Impact on fair value of 200 basis points increase$(4,984)

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

Quarter Ended March 31,
(in thousands)20232022
Beginning balance$35,256 $39,415 
Originations137 1,576 
Amortization(1,554)(1,712)
Ending balance$33,839 $39,279 


NOTE 7–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 March 31, 2023 and December 31, 2022, the total unpaid principal balance of loans sold under this program was $1.8 billion. The Company's reserve liability related to this arrangement totaled $0.6 million at both March 31, 2023 and December 31, 2022. There were no actual losses incurred under this arrangement during the quarters ended March 31, 2023 and 2022.

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 $5.4 billion at both March 31, 2023 and December 31, 2022. At March 31, 2023 and December 31, 2022, 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 $1.8 million and $2.2 million, respectively.
NOTE 8–EARNINGS PER SHARE:

The following table summarizes the calculation of earnings per share: 
 Quarter Ended March 31,
(in thousands, except share and per share data)20232022
Net income$5,058 $19,951 
Weighted average shares:
Basic weighted-average number of common shares outstanding
18,755,453 19,585,753 
Dilutive effect of outstanding common stock equivalents 16,446 206,160 
Diluted weighted-average number of common shares outstanding18,771,899 19,791,913 
Net income per share:
Basic earnings per share$0.27 $1.02 
Diluted earnings per share0.27 1.01 
(1) Excluded from the computation of diluted earnings per share (due to their antidilutive effect) for the quarter ended March 31, 2023 and 2022 were certain unvested RSUs and PSUs. Based on a weighted average basis, 251,821 and 13,040 unvested stock units convertible into shares of common stock were excluded for the quarters ended March 31, 2023 and 2022, respectively, because their effect would have been anti-dilutive.

 

NOTE 9–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 classValuation methodology, inputs and assumptionsClassification
Investment securities
Trading securitiesFair 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 6, Mortgage Banking Operations.
Level 3 recurring fair value measurement.
Derivatives
Futures and OptionsFair value is based on closing exchange prices.Level 1 recurring fair value measurement.
Forward sale commitments Interest rate swapsFair 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.
IRLC
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 March 31, 2023
(in thousands)Fair ValueLevel 1Level 2Level 3
Assets:
Trading securities - U.S. Treasury securities$62,044 $62,044 $— $— 
Investment securities AFS
Mortgage backed securities:
Residential200,658 — 198,694 1,964 
Commercial54,230 — 54,230 — 
Collateralized mortgage obligations:
Residential553,234 — 553,234 — 
Commercial70,777 — 70,777 — 
Municipal bonds413,658 — 413,658 — 
Corporate debt securities41,302 — 41,236 66 
U.S. Treasury securities20,319 — 20,319 — 
Agency debentures58,359 — 58,359 — 
Single family LHFS22,690 — 22,690 — 
Single family LHFI5,231 — — 5,231 
Single family mortgage servicing rights 75,701 — — 75,701 
Derivatives
Futures34 34 — — 
Forward sale commitments229 — 229 — 
Options503 503 — — 
Interest rate lock commitments398 — — 398 
Interest rate swaps10,704 — 10,704 — 
Total assets$1,590,071 $62,581 $1,444,130 $83,360 
Liabilities:
Derivatives
Forward sale commitments$326 $— $326 $— 
Interest rate lock commitments36 — — 36 
Interest rate swaps10,705 — 10,705 — 
Total liabilities$11,067 $— $11,031 $36 

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At December 31, 2022
(in thousands)Fair ValueLevel 1Level 2Level 3
Assets:
Trading securities - U.S. Treasury securities$18,997 $18,997 $— $— 
Investment securities AFS
Mortgage backed securities:
Residential
197,262 — 195,321 1,941 
Commercial
56,049 — 56,049 — 
Collateralized mortgage obligations:
Residential553,039 — 553,039 — 
Commercial70,519 — 70,519 — 
Municipal bonds411,548 — 411,548 — 
Corporate debt securities42,945 — 42,877 68 
U.S. Treasury securities19,934 — 19,934 — 
Agency debentures27,478 — 27,478 — 
Single family LHFS 14,075 — 14,075 — 
Single family LHFI5,868 — — 5,868 
Single family mortgage servicing rights76,617 — — 76,617 
Derivatives
Futures18 18 — — 
Options218 218 — 
Forward sale commitments293 — 293 — 
Interest rate lock commitments141 — — 141 
Interest rate swaps13,093 — 13,093 — 
Total assets$1,508,094 $19,233 $1,404,226 $84,635 
Liabilities:
Derivatives
Forward sale commitments$151 $— $151 $— 
Interest rate lock commitments36 — — 36 
Interest rate swaps13,093 — 13,093 — 
Total liabilities$13,280 $— $13,244 $36 

There were no transfers between levels of the fair value hierarchy during the quarters ended March 31, 2023 and 2022.

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 ended March 31, 2023 and 2022, see Note 6, 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
33

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.

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 $5.2 million and $5.9 million at March 31, 2023 and December 31, 2022, respectively.

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

(dollars in thousands)Fair ValueValuation
Technique		Significant Unobservable
Input		LowHighWeighted Average
March 31, 2023
Investment securities AFS$2,030 Income approach
Implied spread to benchmark interest rate curve
2.00%2.00%2.00%
Single family LHFI5,231 Income approachImplied spread to benchmark interest rate curve3.18%5.44%4.02%
Interest rate lock commitments, net362 Income approachFall-out factor0.07%22.60%9.07%
Value of servicing0.59%1.19%0.88%
December 31, 2022
Investment securities AFS$2,009 Income approach
Implied spread to benchmark interest rate curve
2.00%2.00%2.00%
Single family LHFI5,868 Income approachImplied spread to benchmark interest rate curve2.87%5.15%4.14%
Interest rate lock commitments, net105 Income approachFall-out factor0.10%17.50%6.43%
Value of servicing0.54%1.11%0.95%

We had no LHFS where the fair value was not derived with significant observable inputs at March 31, 2023 and December 31, 2022.

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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 balanceAdditionsTransfersPayoffs/Sales
Change in mark to market (1)
Ending balance
Quarter Ended March 31, 2023
Investment securities AFS$2,009 $— $— $(48)$69 $2,030 
Single family LHFI5,868 — — (682)45 5,231 
Quarter Ended March 31, 2022
Investment securities AFS$2,482 $— $— $(48)$(127)$2,307 
Single family LHFI7,287 — — — (306)6,981 
(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 March 31,
(in thousands)20232022
Beginning balance, net$105 $2,484 
Total realized/unrealized gains (losses)919 (2,177)
Settlements(662)(229)
Ending balance, net$362 $78 

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.

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:

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(in thousands)Fair ValueTotal Gains (Losses)
At or for the Quarter Ended March 31, 2023
      LHFI (1)
$3,793 $(159)
At or for the Quarter Ended March 31, 2022
LHFI (1)
$904 $10 
(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 March 31, 2023
(in thousands)Carrying
Value		Fair
Value		Level 1Level 2Level 3
Assets:
Cash and cash equivalents$377,031 $377,031 $377,031 $— $— 
Investment securities HTM2,423 2,387 — 2,387 — 
LHFI7,439,651 7,150,665 — — 7,150,665 
LHFS – multifamily and other
1,563 1,563 — 1,563 — 
Mortgage servicing rights – multifamily and SBA33,839 38,629 — — 38,629 
Federal Home Loan Bank stock73,191 73,191 — 73,191 — 
Other assets - GNMA EBO loans5,682 5,682 — — 5,682 
Liabilities:
Certificates of deposit$2,660,243 $2,634,872 $— $2,634,872 $— 
Borrowings1,878,000 1,881,721 1,881,721 
Long-term debt224,492 200,770 — 200,770 — 
 At December 31, 2022
(in thousands)Carrying
Value		Fair
Value		Level 1Level 2Level 3
Assets:
Cash and cash equivalents $72,828 $72,828 $72,828 $— $— 
Investment securities HTM2,441 2,385 — 2,385 — 
LHFI7,378,952 6,988,363 — — 6,988,363 
LHFS – multifamily and other3,252 3,291 — 3,291 — 
Mortgage servicing rights – multifamily and SBA35,256 39,792 — — 39,792 
Federal Home Loan Bank stock49,305 49,305 — 49,305 — 
Other assets-GNMA EBO loans6,918 6,918 — — 6,918 
Liabilities:
Certificates of deposit$2,943,331 $2,910,301 $— $2,910,301 $— 
Borrowings1,016,000 1,014,973 — 1,014,973 — 
Long-term debt224,404 202,338 — 202,338 — 

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
36

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 March 31, 2023At December 31, 2022
(in thousands)Fair ValueAggregate Unpaid Principal BalanceFair Value Less Aggregated Unpaid Principal BalanceFair ValueAggregate Unpaid Principal BalanceFair Value Less Aggregated Unpaid Principal Balance
Single family LHFS$22,690 $22,243 $447 $14,075 $13,914 $161 

NOTE 10–BORROWINGS:
During the first quarter of 2023, the Company borrowed $300 million from the Federal Reserve Bank (“FRB”) under the Bank Term Funding Program (“BTFP”). The BTFP offers up to one year fixed-rate term borrowings that are prepayable without penalty.

The balances, maturity and rate of the outstanding borrowings from the FHLB and the FRB BTFP were as follows at March 31, 2023:
(dollars in thousands)AmountWeighted Average Rate
Within one year$878,000 4.84 %
One to three years450,000 4.56 %
Three through five years550,000 4.35 %
Total$1,878,000 4.63 %


NOTE 11–SUBSEQUENT EVENTS:

On April 24, 2023, the Board authorized a dividend of $0.10 per share, payable on May 24, 2023 to shareholders of record on May 10, 2023.




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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 2022 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, long-term value creation, capital management, reduction in volatility, reliability of earnings, net interest margins, provisions and allowances for credit losses, cost reduction initiatives, and restructuring activities 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 fiscal year ended December 31, 2022 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.

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 SEC'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 SEC. Copies of our Securities Exchange Act reports are also 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"). Additionally, we identified goodwill as a critical accounting matter in light of recent trends in bank valuations.

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 assumptions used to determine qualitative factors. Although we believe that our methodology for determining an appropriate level for the ACL adequately addresses the various components that could potentially result in credit losses, the processes and their elements include features that may be susceptible to significant change. Any unfavorable differences between the actual outcome of credit-related events and our estimates could require an additional provision for credit losses. For example, if the projected unemployment rate was downgraded one grade for all periods, the amount of the ACL at March 31, 2023 would increase by approximately $8 million. This sensitivity analysis is hypothetical and has been provided only to indicate the potential impact that changes in assumptions may have on the ACL estimate.
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The valuation of MSRs is based on various assumptions which are set forth in Note 6–Mortgage Banking Operations of the financial statements. Note 6 also provides sensitivity analysis based on the assumptions used. The sensitivity analyses are hypothetical and have been provided to indicate the potential impact that changes in assumptions may have on the estimate of the fair value of MSRs.

The Company has goodwill on its books related to acquisitions it has completed, including the acquisition of the three southern California branches in the first quarter of 2023. Our goodwill is evaluated for impairment on an annual basis or more frequently if events or circumstances indicate that a potential impairment exists. Such evaluation may be based on a variety of factors, including the quoted price of our common stock, market prices of common stock of other banking organizations, common stock trading multiples and discounted cash flows analyses. Future evaluations of goodwill may result in impairment and ensuing write-downs, which could have an adverse effect on our financial condition, results of operations and capital position.


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Summary Financial Data

 Quarter Ended
(in thousands, except per share data and FTE data)March 31, 2023December 31, 2022March 31, 2022
Select Income Statement data:
Net interest income$49,376 $55,687 $54,546 
Provision for credit losses593 3,798 (9,000)
Noninterest income10,190 9,677 15,558 
Noninterest expense52,491 50,420 54,473 
Net income:
Before income taxes
6,482 11,146 24,631 
Total
5,058 8,501 19,951 
Net income per share - diluted0.27 0.45 1.01 
Select Performance Ratios:
Return on average equity - annualized3.5 %6.0 %11.6 %
Return on average tangible equity - annualized (1)
4.1 %6.4 %12.2 %
Return on average assets - annualized0.22 %0.36 %1.10 %
Efficiency ratio (1)
87.2 %76.2 %77.0 %
Net interest margin2.23 %2.53 %3.29 %
Other data
Full time equivalent employees920 913 962 
(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 and the computation of the efficiency ratio, see “Non-GAAP Financial Measures” elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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 As of
(in thousands, except share and per share data)March 31, 2023December 31, 2022
Selected Balance Sheet Data
Loans held for sale$24,253 $17,327 
Loans held for investment, net7,444,882 7,384,820 
ACL41,500 41,500 
Investment securities
1,477,004 1,400,212 
Total assets9,858,889 9,364,760 
Deposits7,056,603 7,451,919 
Borrowings
1,878,000 1,016,000 
Long-term debt224,492 224,404 
Total shareholders' equity574,994 562,147 
Other data:
Book value per share
$30.64 $30.01 
Tangible book value per share (1)
$27.87 $28.41 
Total equity to total assets
5.8 %6.0 %
Tangible common equity to tangible assets (1)
5.3 %5.7 %
Shares outstanding at period end18,767,811 18,730,380 
Loans to deposit ratio
106.4 %99.9 %
Credit Quality:
ACL to total loans (2)
0.56 %0.57 %
ACL to nonaccrual loans
318.1 %412.7 %
Nonaccrual loans to total loans
0.17 %0.14 %
Nonperforming assets to total assets
0.15 %0.13 %
Nonperforming assets
$14,886 $11,893 
Regulatory Capital Ratios:
Bank
Tier 1 leverage ratio
8.47 %8.63 %
Total risk-based capital
12.37 %12.59 %
Company
Tier 1 leverage ratio
6.92 %7.25 %
Total risk-based capital
11.16 %11.53 %
(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
Our financial results continue to be adversely impacted by increases in short-term interest rates. We have continued to raise new deposits through promotional certificates of deposit and have reduced new loan originations. Additionally, we have focused our new loan origination activity primarily on floating rate products such as commercial loans, residential construction loans and home equity loans.

Our net interest margin decreased in the first quarter due to decreases in lower cost transaction and savings deposits and overall higher funding costs. We expect continued decreases in lower cost deposit accounts as these accounts migrate to higher yielding alternatives, including promotional accounts offered by us. We expect to replace this migration with higher cost promotional deposit accounts or wholesale funding alternatives. As we anticipate these funding cost pressures to continue in the near term, we expect our net interest margin to decline for the remainder of 2023.

On February 10, 2023, we closed our purchase of three branches in southern California, whereby we acquired $373 million in deposits and $21 million in loans and recorded $11 million of core deposit intangibles and $12 million of goodwill. The deposit balances in these branches at the end of March 2023 totaled $322 million.

Management's Overview of the First Quarter 2023 Financial Performance

First Quarter of 2023 Compared to the Fourth Quarter of 2022

General: Our net income and income before taxes were $5.1 million and $6.5 million, respectively, in the first quarter of 2023, as compared to $8.5 million and $11.1 million, respectively, in the fourth quarter of 2022. The $4.7 million decrease in income before taxes was due to lower net interest income and higher noninterest expense, partially offset by a lower provision for credit losses and higher noninterest income.

Income Taxes: Our effective tax rate was 22.0% in the first quarter of 2023 as compared to 23.7% in fourth quarter of 2022 and a statutory rate of 24.4%. Our effective tax rates were lower than our statutory rate due primarily to the benefits of tax advantaged investments. Additionally, because the benefits of our tax advantaged investments were larger in relation to our income before taxes in the first quarter of 2023 as compared to the fourth quarter of 2022, our effective tax rate was lower in the first quarter of 2023.

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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
 March 31, 2023December 31, 2022
(in thousands)Average
Balance		InterestAverage
Yield/Cost		Average
Balance		InterestAverage
Yield/Cost
Assets:
Interest-earning assets:
Loans (1)
$7,471,456 $82,790 4.44 %$7,368,097 $81,007 4.32 %
Investment securities (1)
1,452,137 13,733 3.78 %1,362,861 12,597 3.70 %
FHLB Stock, Fed Funds and other126,891 1,750 5.59 %159,263 1,967 4.88 %
Total interest-earning assets
9,050,484 98,273 4.35 %8,890,221 95,571 4.24 %
Noninterest-earning assets 480,221 458,175 
Total assets
$9,530,705 $9,348,396 
Liabilities and shareholders' equity:
Interest-bearing deposits: (2)
Demand deposits
$430,268 $299 0.28 %$475,336 $238 0.20 %
Money market and savings
2,555,512 7,353 1.16 %2,740,808 6,832 0.98 %
Certificates of deposit
2,715,921 21,718 3.24 %2,010,895 11,445 2.26 %
Total 5,701,701 29,370 2.09 %5,227,039 18,515 1.40 %
Borrowings:
Borrowings
1,342,347 15,340 4.57 %1,717,042 17,163 3.93 %
Long-term debt
224,435 2,965 5.28 %224,345 2,801 4.96 %
Total interest-bearing liabilities
7,268,483 47,675 2.64 %7,168,426 38,479 2.12 %
Noninterest-bearing liabilities:
Demand deposits (2)
1,511,437 1,510,744 
Other liabilities
172,252 103,276 
Total liabilities
8,952,172 8,782,446 
Shareholders' equity578,533 565,950 
Total liabilities and shareholders' equity$9,530,705 $9,348,396 
Net interest income
$50,598 $57,092 
Net interest rate spread1.71 %2.12 %
Net interest margin2.23 %2.53 %

(1)    Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain loans and securities of $1.2 million and $1.4 million for the quarter ended March 31, 2023 and December 31, 2022, respectively. The estimated federal statutory tax rate was 21% for the periods presented.
(2)    Cost of all deposits, including noninterest-bearing demand deposits was 1.65% and 1.09% for the quarter ended March 31, 2023 and December 31, 2022, respectively.

Net interest income was $6.3 million lower in the first quarter of 2023 as compared to the fourth quarter of 2022 primarily due to a decrease in our net interest margin from 2.53% to 2.23%. The decrease in our net interest margin was due to a 52 basis point increase in the cost of interest-bearing liabilities, which was partially offset by a 11 basis point increase in the yield on interest-earning assets. Yields on interest-earning assets increased as the yields on loan originations during the first 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 and higher borrowing costs. Our cost of borrowings increased 64 basis points during the first quarter and our cost of deposits increased 56 basis points. 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 2022 and the first quarter of 2023.

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Provision for Credit Losses: A $0.6 million provision for credit losses was recorded during the first quarter of 2023 compared to a $3.8 million provision for credit losses in the fourth quarter of 2022. The provision for the first quarter of 2023 was to offset the net charge-offs realized as the overall LHFI portfolio balances only increased $60 million. The provision in the fourth quarter of 2022 was due to the growth in our loan portfolio and a $2.2 million increase in our collateral qualitative factor related to projected declines in future home prices.

Noninterest Income consisted of the following: 

 Quarter Ended
(in thousands)March 31, 2023December 31, 2022
Noninterest income
Gain on loan origination and sale activities (1)
Single family
$2,218 $1,158 
CRE, multifamily and SBA192 330 
Loan servicing income3,039 2,682 
Deposit fees
2,658 2,359 
Other2,083 3,148 
Total noninterest income$10,190 $9,677 
(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)March 31, 2023December 31, 2022
Single family servicing income, net
Servicing fees and other
$3,923 $3,928 
Changes - amortization (1)
(1,684)(1,899)
Net
2,239 2,029 
Risk management, single family MSRs:
Changes in fair value due to assumptions (2)
(311)124 
Net gain (loss) from economic hedging (81)(309)
Subtotal
(392)(185)
Single Family servicing income (loss)1,847 1,844 
Commercial loan servicing income:
Servicing fees and other2,746 2,653 
Amortization of capitalized MSRs(1,554)(1,815)
Total
1,192 838 
Total loan servicing income $3,039 $2,682 
(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 first quarter of 2023 as compared to the fourth quarter of 2022 was primarily due to a $1.1 million increase in single family lending gain on sale activities due to higher levels of originations of loans held for sale.

44

Noninterest Expense consisted of the following:

 Quarter Ended
(in thousands)March 31, 2023December 31, 2022
Noninterest expense
Compensation and benefits$29,253 $25,970 
Information services7,145 8,101 
Occupancy5,738 6,213 
General, administrative and other10,355 10,136 
Total noninterest expense$52,491 $50,420 

The $2.1 million increase in noninterest expense in the first quarter of 2023 as compared to the fourth quarter of 2022 was primarily due to higher compensation and benefit costs, partially offset by lower information services costs. The higher level of compensation and benefit costs was due to seasonally higher benefits costs, primarily employer taxes and 401(k) matches, and a reduction in deferred costs due to lower levels of loan production. The benefits of lower levels of staffing in our loan origination operations in the first quarter were offset by the impact of raises given during the first quarter and the employees added from the acquisition of the three branches in southern California. Information service costs decreased primarily due to the higher fourth quarter 2022 costs associated with replacement and maintenance of our automated teller machines.

First Quarter of 2023 Compared to First Quarter of 2022

General: Our net income and income before taxes were $5.1 million and $6.5 million, respectively, in the first quarter of 2023, as compared to $20.0 million and $24.6 million, respectively, in the first quarter of 2022. The $18.1 million decrease in income before taxes was due to a lower net interest income, a provision for credit losses and lower noninterest income, partially offset by lower noninterest expense.

Income Taxes: Our effective tax rate during the first quarter of 2023 was 22.0% as compared to 19.0% in the first quarter of 2022 and our statutory rate of 24.4%. Our effective tax rates were lower than our statutory rate due to the benefits of tax advantaged investments. The first quarter of 2022 also benefited from reductions in taxes on income related to excess tax benefits resulting from the vesting of stock awards during the period. No such benefits were realized in the first quarter of 2023.

45

Net Interest Income: The following tables set forth, for the periods indicated, information regarding (i) the total dollar amount of interest income from interest-earning assets and the resultant average yields on those assets; (ii) the total dollar amount of interest expense and the average rate of interest on our interest-bearing liabilities; (iii) net interest income; (iv) net interest rate spread; and (v) net interest margin:

Quarter Ended March 31,
 20232022
(in thousands)Average
Balance		InterestAverage
Yield/Cost		Average
Balance		InterestAverage
Yield/Cost
Assets:
Interest-earning assets:
Loans (1)
$7,471,456 $82,790 4.44 %$5,691,316 $53,135 3.74 %
Investment securities (1)
1,452,137 13,733 3.78 %1,028,971 6,886 2.68 %
FHLB Stock, Fed Funds and other126,891 1,750 5.59 %65,918 108 0.65 %
Total interest-earning assets
9,050,484 98,273 4.35 %6,786,205 60,129 3.55 %
Noninterest-earning assets480,221 577,384 
Total assets
$9,530,705 $7,363,589 
Interest-bearing liabilities:
Interest-bearing deposits: (2)
Demand deposits
$430,268 $299 0.28 %$525,608 $143 0.11 %
Money market and savings
2,555,512 7,353 1.16 %3,101,343 1,121 0.15 %
Certificates of deposit
2,715,921 21,718 3.24 %886,662 1,020 0.47 %
Total 5,701,701 29,370 2.09 %4,513,613 2,284 0.21 %
Borrowings:
Borrowings
1,342,347 15,340 4.57 %64,557 91 0.56 %
Long-term debt
224,435 2,965 5.28 %204,553 2,107 4.12 %
Total interest-bearing liabilities
7,268,483 47,675 2.64 %4,782,723 4,482 0.38 %
Noninterest-bearing liabilities:
Demand deposits (2)
1,511,437 1,744,220 
Other liabilities
172,252 138,048 
Total liabilities
8,952,172 6,664,991 
Shareholders' equity578,533 698,598 
Total liabilities and shareholders' equity$9,530,705 $7,363,589 
Net interest income
$50,598 $55,647 
Net interest spread1.71 %3.17 %
Net interest margin2.23 %3.29 %
(1) Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain loans and securities of $1.2 million and $1.1 million for the quarters ended March 31, 2023 and 2022, respectively. The estimated federal statutory tax rate was 21% for the periods presented.
(2) Cost of deposits including noninterest-bearing deposits, was 1.65% and 0.15% for the quarters ended March 31, 2023 and 2022, respectively.

Net interest income in the first quarter of 2023 decreased $5.2 million as compared to the first quarter of 2022 due primarily to a decrease in our net interest margin partially offset by increases in the average balance of interest earning assets. The increase in interest-earning assets was due to loan originations and purchases of investment securities. Our net interest margin decreased from 3.29% in the first quarter of 2022 to 2.23% in the first quarter of 2023 due to a 226 basis point increase in the rates paid on interest-bearing liabilities which was partially offset by an 80 basis point increase in the yield on interest earning assets. Yields on interest-earning assets increased as the yields on loan originations during the last 15 months were higher than the rates of our existing portfolio of loans and yields on adjustable rate loans increased due to increases in the indexes on which their pricing is based. The higher yields on our investment securities were primarily due to adjustments to yields realized from longer estimated lives of certain securities and the yields of securities purchased during the past year being higher than the yields on our existing portfolio. The increase in the rates paid on our interest-bearing liabilities was due to 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 were due to the significant increase in market interest rates over the prior year. Our average borrowings increased by $1.3 billion to fund the growth of our loan portfolio and investment securities. Our cost of borrowings increased from 56 basis points during the first quarter of 2022 to 457 basis points during the first quarter of 2023 due to the significant increase in market interest rates during the last 15 months.

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Provision for Credit Losses: A $0.6 million provision for credit losses was recorded during the first quarter of 2023 compared to a $9.0 million recovery of our allowance for credit losses in the first quarter of 2022. The provision for credit losses in the first quarter of 2023 was to offset the net charge-offs realized during the quarter. The recovery of our allowance for credit losses in first quarter of 2022 was the result of the favorable performance of our loan portfolio, a stable low level of nonperforming assets and an improved outlook of the estimated impact of COVID-19 on our loan portfolio.

Noninterest Income consisted of the following:  

 Quarter Ended March 31,
(in thousands)20232022
Noninterest income
Gain on loan origination and sale activities (1)
Single family
$2,218 $6,169 
Commercial
192 2,105 
Loan servicing income3,039 3,304 
Deposit fees
2,658 2,075 
Other2,083 1,905 
Total noninterest income$10,190 $15,558 
(1) May include loans originated as held for investment.


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

 Quarter Ended March 31,
(in thousands)20232022
Single family servicing income, net
Servicing fees and other
$3,923 $3,871 
Changes - amortization (1)
(1,684)(3,425)
Net
2,239 446 
Risk management, single family MSRs:
Changes in fair value due to assumptions (2)
(311)10,303 
Net gain (loss) from economic hedging (81)(10,183)
Subtotal
(392)120 
Single Family servicing income (loss)1,847 566 
Commercial loan servicing income:
Servicing fees and other2,746 4,450 
Amortization of capitalized MSRs(1,554)(1,712)
Total
1,192 2,738 
Total loan servicing income$3,039 $3,304 
(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.
47

The decrease in noninterest income for the first quarter of 2023 as compared to the first quarter of 2022 was due to a decrease in gain on loan origination and sale activities, which was partially offset by higher deposit fees. The $5.9 million decrease in gain on loan origination and sale activities was due to a $4.0 million decrease in single family gain on loan origination and sale activities and a $1.9 million decrease in commercial real estate 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 as a result of the effects of increasing mortgage interest rates. The decrease in commercial real estate and commercial gain on loan origination and sale activities was primarily due to an 82% decrease in the volume of loans sold as a result of increasing interest rates. The $0.6 million increase in deposit fee income was primarily due to higher early withdrawals fees.

Noninterest Expense consisted of the following:

 Quarter Ended March 31,
(in thousands)20232022
Noninterest expense
Compensation and benefits$29,253 $32,031 
Information services7,145 7,062 
Occupancy5,738 6,365 
General, administrative and other10,355 9,015 
Total noninterest expense$52,491 $54,473 

The $2.0 million decrease in noninterest expense in the first quarter of 2023 as compared to the first quarter of 2022 was primarily due to lower compensation and benefit costs, partially offset by increases in general, administrative and other expenses. The $2.8 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 staffing levels and lower bonus expense, which were partially offset by wage increases given in the first quarter of 2023 and a reduction in deferred costs due to lower levels of loan production. The increase in general, administrative and other costs was primarily due to higher FDIC fees due to our larger asset base and core deposit intangible amortization associated with the three acquired branches, which were partially offset by a reduction in legal fees due to charges related to nonrecurring costs expended on litigation activities and legal matters in the first quarter of 2022.
48

Financial Condition

During the first quarter of 2023, we completed the purchase of three branches in southern California whereby we acquired $373 million of deposits, $21 million of loans, $5 million of fixed assets and $324 million of cash, and recorded $11 million of core deposit intangibles and $12 million of goodwill.

Excluding the impact of the acquisition noted above, during the first quarter of 2023, our total assets increased $121 million due primarily to a $304 million increase in cash, $39 million increase in loans held for investment and a $77 million increase in investment securities. Loans held for investment increased due to $325 million of originations, which were partially offset by prepayments and scheduled payments of $285 million. Excluding the impact of the acquisition noted above, during the first quarter of 2023 total liabilities increased $108 million due to an increase in borrowings, partially offset by a decrease in deposits. The $862 million increase in borrowings was used to replace higher-cost brokered deposits and increase our on-balance sheet liquidity. The decrease in deposits was due to a $561 million decrease in brokered certificates of deposit and a $345 million decrease in non-certificates of deposit balances which were partially offset by a $253 million increase in certificates of deposit balances related to our promotional products.

Credit Risk Management

As of March 31, 2023, 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 0.41%. The Company recorded a $0.6 million provision for credit losses for the first quarter of 2023 which offset the net charge-offs realized as the overall LHFI portfolio balances only increased $60 million. Our overall ratio of ACL to LHFI decreased slightly to 0.56% at March 31, 2023 from 0.57% at December 31, 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 March 31, 2023At December 31, 2022
(in thousands)Amount
Rate (1)
Amount
Rate (1)
CRE
Non-owner occupied CRE$2,608 0.40 %$2,102 0.32 %
Multifamily9,787 0.25 %10,974 0.28 %
Construction/land development
Multifamily construction
1,345 1.23 %998 1.05 %
CRE construction204 1.02 %196 1.03 %
Single family construction
12,525 3.82 %12,418 3.51 %
Single family construction to permanent
1,211 0.80 %1,171 0.74 %
Total
27,680 0.53 %27,859 0.53 %
Commercial and industrial loans
Owner occupied CRE910 0.21 %1,030 0.23 %
Commercial business3,416 0.88 %3,247 0.91 %
Total
4,326 0.52 %4,277 0.54 %
Consumer loans
Single family5,804 0.61 %5,610 0.62 %
Home equity and other3,690 1.02 %3,754 1.06 %
Total
9,494 0.72 %9,364 0.74 %
Total ACL $41,500 0.56 %$41,500 0.57 %
(1) The ACL rate is calculated excluding balances related to loans that are insured by the FHA or guaranteed by the VA or SBA.


49

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 March 31, 2023 and December 31, 2022, the Bank had available borrowing capacity of $2.1 billion and $2.6 billion, respectively, from the FHLB, and $397 million and $340 million, respectively, from the FRBSF and $1.2 billion, in both periods, under borrowing lines established with other financial institutions.

Cash Flows

For the quarter ended March 31, 2023, cash and cash equivalents increased by $304 million compared to an increase of $9 million during the quarter ended March 31, 2022 which reflected a decision to keep a higher level of on-balance sheet cash at the end of the first quarter of 2023. We expect to reduce our cash holdings by approximately $300 million during the second quarter, as we no longer consider it necessary to retain such high levels of cash on the balance sheet. As excess liquidity can reduce the Company’s earnings and returns, the Company manages its cash positions to minimize the level of excess liquidity and does not attempt to maximize the level of cash and cash equivalents. The following discussion highlights the major activities and transactions that affected our cash flows during these periods.

Cash flows from operating activities

The Company's operating assets and liabilities are used to support our lending activities, including the origination and sale of mortgage loans. For the quarter ended March 31, 2023, net cash of $52 million was used in operating activities, primarily from cash proceeds from the purchase of trading securities and cash used to fund LHFS exceeding proceeds from the sale of loans. For the quarter ended March 31, 2022, net cash of $124 million was provided by operating activities, primarily from cash proceeds from the sale of loans 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 quarter ended March 31, 2023, net cash of $269 million was provided by investing activities primarily from net cash acquired from an acquisition partially offset by the origination of LHFI net of principal repayments and the purchase of AFS investment securities and net FHLB stock purchases. For the quarter ended March 31, 2022, net cash of $464 million was used in investing activities primarily from the origination of LHFI net of principal repayments and the purchase of AFS investment securities.

50

Cash flows from financing activities

The Company's financing activities are primarily related to deposits and net proceeds from borrowings. For the quarter ended March 31, 2023, net cash of $87 million was provided by financing activities, primarily due to an increase in short-term and long-term borrowings partially offset by a decrease in deposits and dividends paid on our common stock. For the quarter ended March 31, 2022, net cash of $349 million was provided by financing activities, primarily due to growth in deposits, an increase in short-term borrowings and proceeds from the issuance of the subordinated notes, partially offset by 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 March 31, 2023At December 31, 2022
Unused consumer portfolio lines$553,289 $531,784 
Commercial portfolio lines (1)
785,618 788,108 
Commitments to fund loans9,323 46,067 
Total $1,348,230 $1,365,959 
(1) Within the commercial portfolio, undistributed construction loan proceeds, where the Company has an obligation to advance funds for construction
progress payments, were $512 million and $525 million at March 31, 2023 and December 31, 2022, 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:
51

At March 31, 2023
ActualFor Minimum Capital
Adequacy Purposes		To Be Categorized As
"Well Capitalized" 
(dollars in thousands)AmountRatioAmountRatioAmountRatio
HomeStreet, Inc.
Tier 1 leverage capital (to average assets)
$670,326 6.92 %$387,579 4.0 %NANA
Common equity Tier 1 capital (to risk-weighted assets)610,326 8.36 %328,508 4.5 %NANA
Tier 1 risk-based capital (to risk-weighted assets)670,326 9.18 %438,011 6.0 %NANA
Total risk-based capital (to risk-weighted assets)814,598 11.16 %584,015 8.0 %NANA
HomeStreet Bank
Tier 1 leverage capital (to average assets)
$818,536 8.47 %$386,600 4.0 %$483,250 5.0 %
Common equity Tier 1 capital (to risk-weighted assets)818,536 11.71 %314,473 4.5 %454,238 6.5 %
Tier 1 risk-based capital (to risk-weighted assets)818,536 11.71 %419,297 6.0 %559,063 8.0 %
Total risk-based capital (to risk-weighted assets)864,577 12.37 %559,063 8.0 %698,828 10.0 %
At December 31, 2022
ActualFor Minimum Capital
Adequacy Purposes		To Be Categorized As
"Well Capitalized" 
(dollars in thousands)AmountRatioAmountRatioAmountRatio
HomeStreet, Inc.
Tier 1 leverage capital (to average assets)$693,112 7.25 %$382,467 4.0 %NANA
Common equity Tier 1 capital (to risk-weighted assets)633,112 8.72 %326,876 4.5 %NANA
Tier 1 risk-based capital (to risk-weighted assets)693,112 9.54 %435,834 6.0 %NANA
Total risk-based capital (to risk-weighted assets)837,828 11.53 %581,112 8.0 %NANA
HomeStreet Bank
Tier 1 leverage capital (to average assets)$822,891 8.63 %$381,506 4.0 %$476,883 5.0 %
Common equity Tier 1 capital (to risk-weighted assets)822,891 11.92 %310,582 4.5 %448,618 6.5 %
Tier 1 risk-based capital (to risk-weighted assets)822,891 11.92 %414,109 6.0 %552,146 8.0 %
Total risk-based capital (to risk-weighted assets)868,993 12.59 %552,146 8.0 %690,182 10.0 %

As of the dates set forth in the above table, the Company exceeded the minimum required capital ratios applicable to it and the Bank’s capital ratios exceeded the minimums necessary to qualify as a well-capitalized depository institution under the prompt corrective action regulations. In addition to the minimum capital ratios, both HomeStreet Inc. and HomeStreet Bank are required to maintain a capital conservation buffer consisting of additional Common Equity Tier 1 Capital of more than 2.5% above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses. The required ratios for capital adequacy set forth in the above table do not include the Capital Rules’ additional capital conservation buffer, though each of the Company and Bank maintained capital ratios necessary to satisfy the capital conservation buffer requirements as of the dates indicated. At March 31, 2023, capital conservation buffers for the Company and the Bank were 3.16% and 4.37%, respectively.

The Company paid a quarterly cash dividend of $0.35 per common share in the first quarter of 2023 and on April 24, 2023, we declared a cash dividend of $0.10 per common share payable on May 24, 2023 to shareholders of record as of the close of business on May 10, 2023. It is our current intention to continue to pay quarterly dividends, however, 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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We had no material commitments for capital expenditures as of March 31, 2023. 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.

53


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 exclude intangible assets from the calculation of capital ratios; and (ii) an efficiency ratio which is the ratio of noninterest expense to the sum of net interest income and noninterest income, excluding certain items of income or expense and excluding taxes incurred and payable to the state of Washington as such taxes are not classified as income taxes and we believe including them in noninterest expense impacts the comparability of our results to those companies whose operations are in states where assessed taxes on business are classified as income taxes.

These supplemental performance measures may vary from, and may not be comparable to, similarly titled measures provided by other companies in our industry. Non-GAAP financial measures are not in accordance with, or an alternative for, GAAP. Generally, a non-GAAP financial measure is a numerical measure of a company’s performance that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with GAAP. A non-GAAP financial measure may also be a financial metric that is not required by GAAP or other applicable requirements.

We believe that these non-GAAP financial measures, when taken together with the corresponding GAAP financial measures, provide meaningful supplemental information regarding our performance by providing additional information used by management that is not otherwise required by GAAP or other applicable requirements. Our management uses, and believes that investors benefit from referring to, these non-GAAP financial measures in assessing our operating results and when planning, forecasting and analyzing future periods. These non-GAAP financial measures also facilitate a comparison of our performance to prior periods. We believe these measures are frequently used by securities analysts, investors and other parties in the evaluation of companies in our industry. These non-GAAP financial measures should be considered in addition to, not as a substitute for or superior to, financial measures prepared in accordance with GAAP. In the information below, we have provided reconciliations of, where applicable, the most comparable GAAP financial measures to the non-GAAP measures used in this Quarterly Report, or the calculation of the non-GAAP financial measures.
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Reconciliations of non-GAAP results of operations to the nearest comparable GAAP measures:
 For the quarter ended
(in thousands, except ratio and rate)March 31, 2023December 31, 2022March 31, 2022
Return on average tangible equity (annualized)
Average shareholders' equity
$578,533 $565,950 $698,598 
Less: Average goodwill and other intangibles
(30,969)(30,133)(31,624)
Average tangible equity
$547,564 $535,817 $666,974 
Net income$5,058 $8,501 $19,951 
Adjustments (tax effected)
Amortization on core deposit intangibles459 183 191 
Tangible income applicable to shareholders$5,517 $8,684 $20,142 
Ratio
4.1 %6.4 %12.2 %
Efficiency ratio
Noninterest expense
Total
$52,491 $50,420 $54,473 
Adjustments:
State of Washington taxes
(555)(597)(506)
Adjusted total
$51,936 $49,823 $53,967 
Total revenues
Net interest income
$49,376 $55,687 $54,546 
Noninterest income
10,190 9,677 15,558 
Total$59,566 $65,364 $70,104 
Ratio87.2 %76.2 %77.0 %
Effective tax rate used in computations above22.0 %22.0 %22.0 %
 As of
(in thousands, except share data)March 31, 2023December 31, 2022
Tangible book value per share
Shareholders' equity
$574,994 $562,147 
Less: goodwill and other intangibles
(51,862)(29,980)
Tangible shareholder's equity
$523,132 $532,167 
Common shares outstanding
18,767,811 18,730,380 
Computed amount
$27.87 $28.41 
Tangible common equity to tangible assets
Tangible shareholder's equity (per above)
$523,132 $532,167 
Tangible assets
Total assets
$9,858,889 $9,364,760 
Less: Goodwill and other intangibles
(51,862)(29,980)
Net
$9,807,027 $9,334,780 
Ratio5.3 %5.7 %

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ITEM 3QUANTITATIVE 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.
56

The following table presents sensitivity gaps for these different intervals:
 
 At March 31, 2023
(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$377,031 $— $— $— $— $— $— $— $377,031 
FHLB Stock23,191 — — 18,000 22,000 — 10,000 — 73,191 
Investment securities (1)
222,768 152,983 148,663 180,614 162,795 542,377 66,804 — 1,477,004 
 LHFS24,253 — — — — — — — 24,253 
LHFI (1)
1,304,359 411,023 483,234 1,730,019 1,927,421 1,606,739 23,587 — 7,486,382 
Total
1,951,602 564,006 631,897 1,928,633 2,112,216 2,149,116 100,391 — 9,437,861 
Non-interest-earning assets
— — — — — — — 421,028 421,028 
Total assets$1,951,602 $564,006 $631,897 $1,928,633 $2,112,216 $2,149,116 $100,391 $421,028 $9,858,889 
Interest-bearing liabilities:
Demand deposit accounts (2)
$496,504 $— $— $— $— $— $— $— $496,504 
Savings accounts (2)
323,373 — — — — — — — 323,373 
Money market
accounts (2)
2,097,055 — — — — — — — 2,097,055 
Certificates of deposit698,182 609,844 835,182 504,171 12,702 156 6 — 2,660,243 
FHLB advances578,000 — — 450,000 550,000 — — — 1,578,000 
FRB borrowings— — 300,000 — — — — — 300,000 
Long-term debt (3)
61,261 — — — 163,231 — — — 224,492 
Total
4,254,375 609,844 1,135,182 954,171 725,933 156 6 — 7,679,667 
Non-interest bearing liabilities
— — — — — — — 1,604,228 1,604,228 
Shareholders' Equity— — — — — — — 574,994 574,994 
Total liabilities and shareholders' equity$4,254,375 $609,844 $1,135,182 $954,171 $725,933 $156 $6 $2,179,222 $9,858,889 
Interest sensitivity gap$(2,302,773)$(45,838)$(503,285)$974,462 $1,386,283 $2,148,960 $100,385 
Cumulative interest sensitivity gap
Total
$(2,302,773)$(2,348,611)$(2,851,896)$(1,877,434)$(491,151)$1,657,809 $1,758,194 
As a % of total assets
(23)%(24)%(29)%(19)%(5)%17 %18 %
As a % of cumulative interest-bearing liabilities
46 %52 %52 %73 %94 %122 %123 %
(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 March 31, 2023, the Company is considered liability-sensitive as exhibited by the gap table. Our net interest income sensitivity analysis results are basically neutral due in part to the steps the Company has taken to extend the duration of its liabilities, both through increased levels of term certificates of deposit and the utilization of fixed-rate term borrowings.

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
57

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.

The estimated impact on our net interest income over a time horizon of one year and the change in net portfolio value as of March 31, 2023 and December 31, 2022 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 March 31, 2023At December 31, 2022
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)
+3001.1 %(32.5)%(3.8)%(36.3)%
+2001.5 %(20.8)%(1.7)%(24.1)%
+1001.1 %(10.4)%(0.7)%(12.1)%
-100(1.3)%7.8 %0.5 %10.3 %
-200(3.1)%13.8 %0.2 %18.1 %
-300(5.0)%16.1 %(0.5)%22.9 %
(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, 2022 and March 31, 2023 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.

Current Banking Environment

Industry events, including bank failures, have led to uncertainty and concerns regarding the liquidity positions of the banking sector. These failures underscore the importance of maintaining access to diverse sources of funding. Market conditions and external factors may unpredictably impact the competitive landscape for deposits in the banking industry. Additionally, the rising interest rate environment has increased competition for liquidity and the premium at which liquidity is available to meet funding needs. Reliance on secondary funding sources could increase the Company's overall cost of funding and reduce net interest income. As of March 31, 2023, the Company had available contingent liquidity of $5.8 billion which is equal to 82% of its total deposits and level of uninsured deposits was only 14% of total deposits. The Company believes it has sufficient liquidity to meet its current needs.
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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 March 31, 2023.

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 March 31, 2023 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 March 31, 2023 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.

59

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, 2022 for a discussion of factors that could materially and adversely affect our business, financial condition, liquidity, results of operations and capital position.



60

ITEM 2UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS


Sales of Unregistered Securities
There were no sales of unregistered securities during the first quarter of 2023.

ITEM 3DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5OTHER INFORMATION

Not applicable.

61

ITEM 6EXHIBITS
EXHIBIT INDEX
Exhibit
Number		Description
10.1
10.2
10.3
31.1
31.2
32 (1)
101 INSInline XBRL Instance Document
101.SCHInline XBRL Taxonomy Extension Schema Document
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEFInline XBRL Taxonomy Extension Label Linkbase Document
101.LAB Inline XBRL Taxonomy Extension Presentation Linkbase Document
101.PREInline XBRL Taxonomy Extension Definitions Linkbase Document
104Cover 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.

62

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 May 10, 2023.
 
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)

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