HOMESTREET, INC.
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________
FORM 10-Q
________________________________
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2022
OR
of the Securities Exchange Act of 1934
For the transition period from _____ to _____
Commission file number: 001-35424
________________________________
(a Washington Corporation)
________________________________
(Address of principal executive offices)
Telephone Number - Area Code (206 ) 623-3050
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
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 | ☐ | ☒ | |||||||||||||||
| 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 2, 2022 was 18,703,586 .
| PART I – FINANCIAL INFORMATION | ||||||||
| ITEM 1 | FINANCIAL STATEMENTS | |||||||
| ITEM 2 | ||||||||
| ITEM 3 | ||||||||
| ITEM 4 | ||||||||
PART II – OTHER INFORMATION | ||||||||
| ITEM 1 | ||||||||
| ITEM 1A | ||||||||
| ITEM 2 | ||||||||
| ITEM 3 | ||||||||
| ITEM 4 | ||||||||
| ITEM 5 | ||||||||
| ITEM 6 | ||||||||
Unless we state otherwise or the content otherwise requires, references in this Form 10-Q to "HomeStreet," "we," "our," "us" or the "Company" refer collectively to HomeStreet, Inc., a Washington corporation, HomeStreet Bank ("Bank"), HomeStreet Capital Corporation ("HomeStreet Capital") and other direct and indirect subsidiaries of HomeStreet, Inc.
2
PART I
| ITEM 1 FINANCIAL STATEMENTS | |||||
HOMESTREET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| March 31, 2022 | December 31, 2021 | |||||||||||||
| (in thousands, except share data) | (Unaudited) | |||||||||||||
| ASSETS | ||||||||||||||
Cash and cash equivalents | $ | $ | ||||||||||||
Investment securities | ||||||||||||||
Loans held for sale ("LHFS") | ||||||||||||||
Loans held for investment ("LHFI") (net of allowance for credit losses of $ | ||||||||||||||
| Mortgage servicing rights ("MSRs") | ||||||||||||||
| Premises and equipment, net | ||||||||||||||
| Other real estate owned ("OREO") | ||||||||||||||
| Goodwill and other intangible assets | ||||||||||||||
| Other assets | ||||||||||||||
| Total assets | $ | $ | ||||||||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||||||||
| Liabilities: | ||||||||||||||
| Deposits | $ | $ | ||||||||||||
| Borrowings | ||||||||||||||
| Long-term debt | ||||||||||||||
| Accounts payable and other liabilities | ||||||||||||||
| Total liabilities | ||||||||||||||
| Commitments and contingencies | ||||||||||||||
Shareholders' equity: | ||||||||||||||
Common stock, | ||||||||||||||
| Retained earnings | ||||||||||||||
| Accumulated other comprehensive income (loss) | ( | |||||||||||||
| Total shareholders' equity | ||||||||||||||
| Total liabilities and shareholders' equity | $ | $ | ||||||||||||
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) | 2022 | 2021 | |||||||||
| Interest income: | |||||||||||
| Loans | $ | $ | |||||||||
| Investment securities | |||||||||||
| Cash, Fed Funds and other | |||||||||||
Total interest income | |||||||||||
| Interest expense: | |||||||||||
| Deposits | |||||||||||
| Borrowings | |||||||||||
Total interest expense | |||||||||||
Net interest income | |||||||||||
| Provision for credit losses | ( | ||||||||||
Net interest income after provision for credit losses | |||||||||||
| Noninterest income: | |||||||||||
| Net gain on loan origination and sale activities | |||||||||||
| Loan servicing income | |||||||||||
| Deposit fees | |||||||||||
| Other | |||||||||||
Total noninterest income | |||||||||||
| Noninterest expense: | |||||||||||
| Compensation and benefits | |||||||||||
| Information services | |||||||||||
| Occupancy | |||||||||||
| General, administrative and other | |||||||||||
Total noninterest expense | |||||||||||
| Income before income taxes | |||||||||||
| Income tax expense | |||||||||||
| Net income | $ | $ | |||||||||
| Net income per share: | |||||||||||
| Basic | $ | $ | |||||||||
Diluted | $ | $ | |||||||||
| Weighted average shares outstanding: | |||||||||||
Basic | |||||||||||
Diluted | |||||||||||
See accompanying notes to consolidated financial statements
4
HOMESTREET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
| Quarter Ended March 31, | |||||||||||
| (in thousands) | 2022 | 2021 | |||||||||
| Net income | $ | $ | |||||||||
| Other comprehensive income (loss): | |||||||||||
| Unrealized gain (loss) on investment securities available for sale ("AFS") | ( | ( | |||||||||
| Reclassification for net (gains) losses included in income | ( | ||||||||||
| Other comprehensive income (loss) before tax | ( | ( | |||||||||
| Income tax impact of: | |||||||||||
| Unrealized gain (loss) on investment securities AFS | ( | ( | |||||||||
Reclassification for net (gains) losses included in income | ( | ||||||||||
Total | ( | ( | |||||||||
| Other comprehensive income (loss) | ( | ( | |||||||||
| Total comprehensive income (loss) | $ | ( | $ | ||||||||
See accompanying notes to consolidated financial statements
5
HOMESTREET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
| (in thousands, except share data) | Number of shares | Common stock | Retained earnings | Accumulated other comprehensive income (loss) | Total shareholders' equity | ||||||||||||||||||||||||
| For the quarter ended March 31, 2021 | |||||||||||||||||||||||||||||
| Balance, December 31, 2020 | $ | $ | $ | $ | |||||||||||||||||||||||||
| Net income | — | — | — | ||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | ||||||||||||||||||||||||||
| Common stock issued - Option exercise; stock grants | — | — | |||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | ( | ( | ||||||||||||||||||||||||
Dividends declared on common stock ($ | — | — | ( | — | ( | ||||||||||||||||||||||||
Common stock repurchased | ( | ( | ( | — | ( | ||||||||||||||||||||||||
| Balance, March 31, 2021 | $ | $ | $ | $ | |||||||||||||||||||||||||
| For the quarter ended March 31, 2022 | |||||||||||||||||||||||||||||
| Balance, December 31, 2021 | $ | $ | $ | $ | |||||||||||||||||||||||||
| Net income | — | — | — | ||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | ||||||||||||||||||||||||||
| Common stock issued - Stock grants | — | — | |||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | ( | ( | ||||||||||||||||||||||||
Dividends declared on common stock ($ | — | — | ( | — | ( | ||||||||||||||||||||||||
Common stock repurchased | ( | ( | ( | — | ( | ||||||||||||||||||||||||
| Balance, March 31, 2022 | $ | $ | $ | ( | $ | ||||||||||||||||||||||||
See accompanying notes to consolidated financial statements
6
HOMESTREET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Quarter Ended March 31, | |||||||||||
| (in thousands) | 2022 | 2021 | |||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | |||||||||||
| Provision for credit losses | ( | ||||||||||
| Depreciation and amortization, premises and equipment | |||||||||||
| Amortization of premiums and discounts: securities, deposits, debt | |||||||||||
| Operating leases: excess of payments over amortization | ( | ( | |||||||||
| Amortization of finance leases | |||||||||||
| Amortization of core deposit intangibles | |||||||||||
| Amortization of deferred loan fees and costs | ( | ( | |||||||||
| Share-based compensation expense | |||||||||||
| Lease impairment costs | |||||||||||
| Deferred income tax expense (benefit) | |||||||||||
| Origination of LHFS | ( | ( | |||||||||
| Proceeds from sale of LHFS | |||||||||||
| Net fair value adjustment and gain on sale of LHFS | ( | ||||||||||
| Origination of MSRs | ( | ( | |||||||||
| Net gain on sale of loans originated as LHFI | ( | ||||||||||
| Change in fair value of MSRs | ( | ( | |||||||||
| Amortization of servicing rights | |||||||||||
| Net change in trading securities | ( | ||||||||||
| (Increase) decrease in other assets | |||||||||||
| Increase (decrease) in accounts payable and other liabilities | ( | ||||||||||
| Net cash provided by (used in) operating activities | ( | ||||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||||
Purchase of investment securities | ( | ( | |||||||||
| Proceeds from sale of investment securities | — | ||||||||||
Principal payments on investment securities | |||||||||||
| Proceeds from sale of OREO | — | ||||||||||
| Proceeds from sale of loans originated as LHFI | |||||||||||
Net increase in LHFI | ( | ( | |||||||||
| Purchase of premises and equipment | ( | ( | |||||||||
| Proceeds from sale of Federal Home Loan Bank stock | |||||||||||
| Purchases of Federal Home Loan Bank stock | ( | ( | |||||||||
| Net cash used in investing activities | ( | ( | |||||||||
7
| Quarter Ended March 31, | |||||||||||
| (in thousands) | 2022 | 2021 | |||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||
| Increase (decrease) in deposits, net | |||||||||||
| Changes in short-term borrowings, net | ( | ||||||||||
| Proceeds from debt issuance, net | |||||||||||
| Repayment of finance lease principal | ( | ( | |||||||||
| Repurchases of common stock | ( | ( | |||||||||
| Proceeds from exercise of stock options | |||||||||||
| Dividends paid on common stock | ( | ( | |||||||||
| Net cash provided by financing activities | |||||||||||
| Net increase in cash and cash equivalents | |||||||||||
| Cash and cash equivalents, beginning of year | |||||||||||
| Cash and cash equivalents, end of period | $ | $ | |||||||||
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | |||||||||||
| Cash paid during the period for: | |||||||||||
| Interest | $ | $ | |||||||||
| Federal and state income taxes | |||||||||||
| Non-cash activities: | |||||||||||
| Increase in lease assets and lease liabilities | |||||||||||
| Loans transferred from LHFI to LHFS, net | |||||||||||
| Ginnie Mae loans derecognized with the right to repurchase, net | |||||||||||
| Repurchase of common stock-award shares | |||||||||||
See accompanying notes to consolidated financial statements
8
HomeStreet, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
NOTE 1–SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
HomeStreet, Inc., a State of Washington corporation organized in 1921 (the "Corporation"), is a Washington-based diversified financial services holding company whose operations are primarily conducted through its wholly owned subsidiaries (collectively the "Company") HomeStreet Capital Corporation, HomeStreet Statutory Trusts and HomeStreet Bank (the "Bank"), and the Bank's subsidiaries, Continental Escrow Company, HomeStreet Foundation, HS Properties, Inc., HS Evergreen Corporate Center LLC, and Union Street Holdings LLC. The Company is principally engaged in commercial banking, mortgage banking and consumer/retail banking activities serving customers primarily in the Western United States.
These unaudited interim financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the results for the periods presented. These adjustments are of a normal recurring nature, unless otherwise disclosed in this Quarterly Report on Form 10-Q. The results of operations in the interim financial statements do not necessarily indicate the results that may be expected for the full year. The interim financial information should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission ("2021 Annual Report on Form 10-K").
Recent Accounting Developments
In March 2020, the FASB issued 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 LIBOR rates expected to be discontinued because of reference rate reform. In January 2021, the FASB issued ASU 2021-01, "Reference Rate Reform (Topic 848)," which clarifies certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting applied to derivatives that are affected by the transition to alternative rates. The ASUs are effective for all entities as of March 12, 2020 through December 31, 2022. These ASUs are not expected to have a material impact on the Company’s financial position or results of operations.
9
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, 2022 | |||||||||||||||||||||||
| (in thousands) | Amortized cost | Gross unrealized gains | Gross unrealized losses | Fair value | |||||||||||||||||||
| AFS | |||||||||||||||||||||||
| Mortgage backed securities ("MBS"): | |||||||||||||||||||||||
| Residential | $ | $ | $ | ( | $ | ||||||||||||||||||
| Commercial | ( | ||||||||||||||||||||||
| Collateralized mortgage obligations ("CMOs"): | |||||||||||||||||||||||
| Residential | ( | ||||||||||||||||||||||
| Commercial | ( | ||||||||||||||||||||||
| Municipal bonds | ( | ||||||||||||||||||||||
| Corporate debt securities | ( | ||||||||||||||||||||||
| U.S. Treasury securities | ( | ||||||||||||||||||||||
| Total | $ | $ | $ | ( | $ | ||||||||||||||||||
| HTM | |||||||||||||||||||||||
| Municipal bonds | $ | $ | $ | ( | $ | ||||||||||||||||||
| At December 31, 2021 | |||||||||||||||||||||||
| (in thousands) | Amortized cost | Gross unrealized gains | Gross unrealized losses | Fair value | |||||||||||||||||||
| AFS | |||||||||||||||||||||||
| MBS: | |||||||||||||||||||||||
| Residential | $ | $ | $ | ( | $ | ||||||||||||||||||
| Commercial | ( | ||||||||||||||||||||||
| CMOs: | |||||||||||||||||||||||
| Residential | ( | ||||||||||||||||||||||
| Commercial | ( | ||||||||||||||||||||||
| Municipal bonds | ( | ||||||||||||||||||||||
| Corporate debt securities | ( | ||||||||||||||||||||||
| U.S. Treasury securities | ( | ||||||||||||||||||||||
| Total | $ | $ | $ | ( | $ | ||||||||||||||||||
| HTM | |||||||||||||||||||||||
Municipal bonds | $ | $ | $ | $ | |||||||||||||||||||
At March 31, 2022, the Company held $19 million of trading securities, consisting of US Treasury notes used as economic hedges of our mortgage servicing rights, which are carried at fair value and included as investment securities on the balance sheet. Unrealized losses on trading securities, which are included in loan servicing income, were $0.7 million in the quarter ended March 31, 2022.
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, 2022
10
and December 31, 2021, all securities held, including municipal bonds and corporate debt securities, were rated investment grade, based upon external ratings where available and, where not available, based upon internal ratings which correspond to ratings as defined by Standard and Poor's Rating Services or Moody's Investors Services.
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, 2022 | |||||||||||||||||||||||||||||||||||
| Less than 12 months | 12 months or more | Total | |||||||||||||||||||||||||||||||||
| (in thousands) | Gross unrealized losses | Fair value | Gross unrealized losses | Fair value | Gross unrealized losses | Fair value | |||||||||||||||||||||||||||||
| AFS | |||||||||||||||||||||||||||||||||||
MBS: | |||||||||||||||||||||||||||||||||||
Residential | $ | ( | $ | $ | ( | $ | $ | ( | $ | ||||||||||||||||||||||||||
| Commercial | ( | ( | |||||||||||||||||||||||||||||||||
CMOs: | |||||||||||||||||||||||||||||||||||
| Residential | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Commercial | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Municipal bonds | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Corporate debt securities | ( | ( | |||||||||||||||||||||||||||||||||
| U.S. Treasury securities | ( | ( | |||||||||||||||||||||||||||||||||
| Total | $ | ( | $ | $ | ( | $ | $ | ( | $ | ||||||||||||||||||||||||||
| HTM | |||||||||||||||||||||||||||||||||||
| Municipal bonds | $ | ( | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||
| At December 31, 2021 | |||||||||||||||||||||||||||||||||||
| Less than 12 months | 12 months or more | Total | |||||||||||||||||||||||||||||||||
| (in thousands) | Gross unrealized losses | Fair value | Gross unrealized losses | Fair value | Gross unrealized losses | Fair value | |||||||||||||||||||||||||||||
| MBS: | |||||||||||||||||||||||||||||||||||
| Residential | $ | ( | $ | $ | ( | $ | $ | ( | $ | ||||||||||||||||||||||||||
| Commercial | ( | ( | |||||||||||||||||||||||||||||||||
CMOs: | |||||||||||||||||||||||||||||||||||
| Residential | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Commercial | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Municipal bonds | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Corporate debt securities | ( | ( | |||||||||||||||||||||||||||||||||
| U.S. Treasury securities | ( | ( | |||||||||||||||||||||||||||||||||
| Total | $ | ( | $ | $ | ( | $ | $ | ( | $ | ||||||||||||||||||||||||||
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, 2022 or December 31, 2021. In addition, as of March 31, 2022 and December 31, 2021, the Company had not made a decision to sell any of its debt securities held, nor did the Company consider it more likely than not that it would be required to sell such securities before recovery of their amortized cost basis.
11
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, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Within one year | After one year through five years | After five years through ten years | After ten years | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Fair Value | Weighted Average Yield | Fair Value | Weighted Average Yield | Fair Value | Weighted Average Yield | Fair Value | Weighted Average Yield | Fair Value | Weighted Average Yield | |||||||||||||||||||||||||||||||||||||||||||||||||
| AFS | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Municipal bonds | $ | % | $ | % | $ | % | $ | % | $ | % | |||||||||||||||||||||||||||||||||||||||||||||||||
Corporate debt securities | % | % | % | % | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. Treasury securities | % | % | % | % | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | % | $ | % | $ | % | $ | % | $ | % | |||||||||||||||||||||||||||||||||||||||||||||||||
HTM | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Municipal bonds | $ | % | $ | % | $ | % | $ | % | $ | % | |||||||||||||||||||||||||||||||||||||||||||||||||
| At December 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Within one year | After one year through five years | After five years through ten years | After ten years | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Fair Value | Weighted Average Yield | Fair Value | Weighted Average Yield | Fair Value | Weighted Average Yield | Fair Value | Weighted Average Yield | Fair Value | Weighted Average Yield | |||||||||||||||||||||||||||||||||||||||||||||||||
AFS | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Municipal bonds | $ | % | $ | % | $ | % | $ | % | $ | % | |||||||||||||||||||||||||||||||||||||||||||||||||
Corporate debt securities | % | % | % | % | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. Treasury securities | % | % | % | % | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | % | $ | % | $ | % | $ | % | $ | % | |||||||||||||||||||||||||||||||||||||||||||||||||
HTM | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Municipal bonds | $ | % | $ | % | $ | % | $ | % | $ | % | |||||||||||||||||||||||||||||||||||||||||||||||||
The weighted-average yield is computed using the contractual coupon of each security weighted based on the fair value of each security and does not include adjustments to a tax equivalent basis. MBS and CMOs are excluded from the tables above because such securities are not due on a single maturity date. The weighted average yield of MBS and CMOs as of March 31, 2022 and December 31, 2021 was 1.88 % and 1.82 %, respectively.
Sales of AFS investment securities were as follows:
| Quarter Ended March 31, | |||||
| (in thousands) | 2022 | ||||
| Proceeds | $ | ||||
| Gross gains | |||||
| Gross losses | |||||
12
The following table summarizes the carrying value of securities pledged as collateral to secure public deposits, borrowings and other purposes as permitted or required by law:
| (in thousands) | At March 31, 2022 | At December 31, 2021 | |||||||||
| Washington, Oregon and California State to secure public deposits | $ | $ | |||||||||
| Other securities pledged | |||||||||||
| Total securities pledged as collateral | $ | $ | |||||||||
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 $2.7 million and $2.4 million for the quarters ended March 31, 2022 and 2021, respectively.
13
NOTE 3 -LOANS AND CREDIT QUALITY:
The Company's LHFI is divided into two portfolio segments, commercial loans and consumer loans. Within each portfolio segment, the Company monitors and assesses credit risk based on the risk characteristics of each of the following loan classes: non-owner occupied commercial real estate ("CRE"), multifamily, construction and land development, owner occupied CRE and commercial business loans within the commercial loan portfolio segment and single family and home equity and other loans within the consumer loan portfolio segment. LHFI consists of the following:
| (in thousands) | At March 31, 2022 | At December 31, 2021 | |||||||||
| CRE | |||||||||||
| Non-owner occupied CRE | $ | $ | |||||||||
| Multifamily | |||||||||||
| Construction/land development | |||||||||||
| Total | |||||||||||
| Commercial and industrial loans | |||||||||||
| Owner occupied CRE | |||||||||||
| Commercial business | |||||||||||
Total | |||||||||||
| Consumer loans | |||||||||||
Single family (1) | |||||||||||
| Home equity and other | |||||||||||
| Total | |||||||||||
| Total LHFI | |||||||||||
| Allowance for credit losses ("ACL") | ( | ( | |||||||||
Total LHFI less ACL | $ | $ | |||||||||
Loans totaling $3.2 billion and $2.8 billion at March 31, 2022 and December 31, 2021, respectively, were pledged to secure borrowings from the Federal Home Loan Bank ("FHLB") and loans totaling $421 million and $419 million at March 31, 2022 and December 31, 2021, respectively, were pledged to secure borrowings from the Federal Reserve Bank of San Francisco ("FRBSF").
Credit Risk Concentrations
LHFI are primarily secured by real estate located in the Pacific Northwest, California and Hawaii. At March 31, 2022 and December 31, 2021, multifamily loans in the state of California represented 34 % and 33 % of the total LHFI portfolio, respectively.
Credit Quality
Management considers the level of ACL to be appropriate to cover credit losses expected over the life of the loans for the LHFI portfolio. The cumulative loss rate used as the basis for the estimate of credit losses is comprised of the Bank’s historical loss experience and eight qualitative factors for current and forecasted periods.
During the first quarter of 2022, the historical expected loss rates decreased from December 31, 2021 due to minimal charge-offs, improving portfolio credit distribution and favorable product mix risk composition. During the first quarter of 2022, the qualitative factors decreased significantly due to the continued favorable performance and outlook of the impact of the COVID-19 pandemic on our loan portfolio, which resulted in a reduced management overlay. As of March 31, 2022, the Bank expects that the markets in which it operates will have stable collateral values and economic outlook over the two-year forecast period.
14
In addition to the ACL for LHFI, the Company maintains a separate allowance for unfunded loan commitments which is included in accounts payable and other liabilities on our consolidated balance sheets. The allowance for unfunded commitments was $2.6 million and $2.4 million at March 31, 2022 and December 31, 2021, respectively.
The Bank has elected to exclude accrued interest receivable from the evaluation of the ACL. Accrued interest on LHFI was $18.1 million and $17.8 million at March 31, 2022 and December 31, 2021, respectively, and was reported in other assets in the consolidated balance sheets.
Activity in the ACL for LHFI and the allowance for unfunded commitments was as follows:
| Quarter Ended March 31, | |||||||||||
| (in thousands) | 2022 | 2021 | |||||||||
Beginning balance | $ | $ | |||||||||
| Provision for credit losses | ( | ( | |||||||||
| Net (charge-offs) recoveries | |||||||||||
| Ending balance | $ | $ | |||||||||
Allowance for unfunded commitments: | |||||||||||
| Beginning balance | $ | $ | |||||||||
| Provision for credit losses | |||||||||||
| Ending balance | $ | $ | |||||||||
| Provision for credit losses: | |||||||||||
| Allowance for credit losses - loans | $ | ( | $ | ( | |||||||
| Allowance for unfunded commitments | |||||||||||
| Total | $ | ( | $ | ||||||||
15
Activity in the ACL for LHFI by loan portfolio and loan sub-class was as follows:
| Quarter Ended March 31, 2022 | |||||||||||||||||||||||||||||
| (in thousands) | Beginning balance | Charge-offs | Recoveries | Provision | Ending balance | ||||||||||||||||||||||||
| CRE | |||||||||||||||||||||||||||||
| Non-owner occupied CRE | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||
| Multifamily | |||||||||||||||||||||||||||||
Construction/land development | |||||||||||||||||||||||||||||
| Multifamily construction | ( | ||||||||||||||||||||||||||||
| CRE construction | |||||||||||||||||||||||||||||
| Single family construction | |||||||||||||||||||||||||||||
| Single family construction to permanent | ( | ||||||||||||||||||||||||||||
| Total | ( | ||||||||||||||||||||||||||||
| Commercial and industrial loans | |||||||||||||||||||||||||||||
| Owner occupied CRE | ( | ||||||||||||||||||||||||||||
| Commercial business | ( | ( | |||||||||||||||||||||||||||
| Total | ( | ( | |||||||||||||||||||||||||||
| Consumer loans | |||||||||||||||||||||||||||||
| Single family | ( | ||||||||||||||||||||||||||||
| Home equity and other | ( | ( | |||||||||||||||||||||||||||
| Total | ( | ( | |||||||||||||||||||||||||||
| Total ACL | $ | $ | ( | $ | $ | ( | $ | ||||||||||||||||||||||
| Quarter Ended March 31, 2021 | |||||||||||||||||||||||||||||
| (in thousands) | Beginning balance | Charge-offs | Recoveries | Provision | Ending balance | ||||||||||||||||||||||||
| CRE | |||||||||||||||||||||||||||||
| Non-owner occupied CRE | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Multifamily | |||||||||||||||||||||||||||||
| Construction/land development | |||||||||||||||||||||||||||||
| Multifamily construction | ( | ||||||||||||||||||||||||||||
| CRE construction | |||||||||||||||||||||||||||||
| Single family construction | ( | ||||||||||||||||||||||||||||
| Single family construction to permanent | ( | ||||||||||||||||||||||||||||
| Total | |||||||||||||||||||||||||||||
| Commercial and industrial loans | |||||||||||||||||||||||||||||
| Owner occupied CRE | |||||||||||||||||||||||||||||
| Commercial business | ( | ||||||||||||||||||||||||||||
| Total | |||||||||||||||||||||||||||||
| Consumer loans | |||||||||||||||||||||||||||||
| Single family | ( | ( | |||||||||||||||||||||||||||
| Home equity and other | ( | ( | |||||||||||||||||||||||||||
| Total | ( | ( | |||||||||||||||||||||||||||
| Total ACL | $ | $ | ( | $ | $ | ( | $ | ||||||||||||||||||||||
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, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | 2020 | 2019 | 2018 | 2017 and prior | Revolving | Revolving-term | Total | |||||||||||||||||||||||||||||||||||||||||||||||
| COMMERCIAL PORTFOLIO | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Non-owner occupied CRE | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Multifamily | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Multifamily construction | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| CRE construction | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Single family construction | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Single family construction to permanent | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Current | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Past due: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
30-59 days | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
60-89 days | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
90+ days | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Owner occupied CRE | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial business | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total commercial portfolio | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||
17
The following table presents a vintage analysis of the consumer portfolio segment by loan sub-class and delinquency status:
| At March 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | 2020 | 2019 | 2018 | 2017 and prior | Revolving | Revolving-term | Total | |||||||||||||||||||||||||||||||||||||||||||||||
| CONSUMER PORTFOLIO | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Single family | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Current | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||
Past due: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
30-59 days | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
60-89 days | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
90+ days | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total (1) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Home equity and other | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Current | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Past due: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
30-59 days | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
60-89 days | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
90+ days | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total consumer portfolio | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||
| Total LHFI | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||
(1) Includes $7.0 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
| At December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | 2021 | 2020 | 2019 | 2018 | 2017 | 2016 and prior | Revolving | Revolving-term | Total | |||||||||||||||||||||||||||||||||||||||||||||||
| COMMERCIAL PORTFOLIO | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Non-owner occupied CRE | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Multifamily | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Multifamily construction | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| CRE construction | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Single family construction | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Single family construction to permanent | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Current | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Past due: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 30-59 days | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 60-89 days | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 90+ days | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Owner occupied CRE | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial business | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total commercial portfolio | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||
19
The following table presents a vintage analysis of the consumer portfolio segment by loan sub-class and delinquency status:
| At December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | 2021 | 2020 | 2019 | 2018 | 2017 | 2016 and prior | Revolving | Revolving-term | Total | |||||||||||||||||||||||||||||||||||||||||||||||
| CONSUMER PORTFOLIO | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Single family | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Current | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||
Past due: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
30-59 days | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
60-89 days | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
90+ days | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total (1) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Home equity and other | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Current | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Past due: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
30-59 days | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
60-89 days | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
90+ days | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total consumer portfolio | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||
| Total LHFI | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||
(1) Includes $7.3 million of loans where a fair value option election was made at the time of origination and, therefore, are carried at fair value with changes in fair value recognized in the consolidated income statements.
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, 2022 | ||||||||||||||||||||||||||||||||
| (in thousands) | Land | 1-4 Family | Non-residential real estate | Other non-real estate | Total | |||||||||||||||||||||||||||
| Commercial and industrial loans | ||||||||||||||||||||||||||||||||
| Owner occupied CRE | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
Commercial business | ||||||||||||||||||||||||||||||||
Total | ||||||||||||||||||||||||||||||||
| Consumer loans | ||||||||||||||||||||||||||||||||
Single family | ||||||||||||||||||||||||||||||||
Home equity loans and other | ||||||||||||||||||||||||||||||||
Total | ||||||||||||||||||||||||||||||||
| Total collateral-dependent loans | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| At December 31, 2021 | ||||||||||||||||||||||||||||||||
| (in thousands) | Land | 1-4 Family | Non-residential real estate | Other non-real estate | Total | |||||||||||||||||||||||||||
| Commercial and industrial loans | ||||||||||||||||||||||||||||||||
| Owner occupied CRE | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
Commercial business | ||||||||||||||||||||||||||||||||
Total | ||||||||||||||||||||||||||||||||
| Consumer loans | ||||||||||||||||||||||||||||||||
Single family | ||||||||||||||||||||||||||||||||
Home equity loans and other | ||||||||||||||||||||||||||||||||
Total | ||||||||||||||||||||||||||||||||
| Total collateral-dependent loans | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
Nonaccrual and Past Due Loans
The following table presents nonaccrual status for loans:
| At March 31, 2022 | At December 31, 2021 | |||||||||||||||||||||||||
| (in thousands) | Nonaccrual with no related ACL | Total Nonaccrual | Nonaccrual with no related ACL | Total Nonaccrual | ||||||||||||||||||||||
| Commercial and industrial loans | ||||||||||||||||||||||||||
| Owner occupied CRE | $ | $ | $ | $ | ||||||||||||||||||||||
| Commercial business | ||||||||||||||||||||||||||
Total | ||||||||||||||||||||||||||
| Consumer loans | ||||||||||||||||||||||||||
Single family | ||||||||||||||||||||||||||
| Home equity and other | ||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||
| Total nonaccrual loans | $ | $ | $ | $ | ||||||||||||||||||||||
21
| At March 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||
| Past Due and Still Accruing | ||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | 30-59 days | 60-89 days | 90 days or more | Nonaccrual | Total past due and nonaccrual (3) | Current | Total loans | |||||||||||||||||||||||||||||||||||||
| CRE | ||||||||||||||||||||||||||||||||||||||||||||
| Non-owner occupied CRE | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
| Multifamily | ||||||||||||||||||||||||||||||||||||||||||||
Construction/land development | ||||||||||||||||||||||||||||||||||||||||||||
| Multifamily construction | ||||||||||||||||||||||||||||||||||||||||||||
| CRE construction | ||||||||||||||||||||||||||||||||||||||||||||
| Single family construction | ||||||||||||||||||||||||||||||||||||||||||||
| Single family construction to permanent | ||||||||||||||||||||||||||||||||||||||||||||
Total | ||||||||||||||||||||||||||||||||||||||||||||
| Commercial and industrial loans | ||||||||||||||||||||||||||||||||||||||||||||
| Owner occupied CRE | ||||||||||||||||||||||||||||||||||||||||||||
| Commercial business | ||||||||||||||||||||||||||||||||||||||||||||
Total | ||||||||||||||||||||||||||||||||||||||||||||
| Consumer loans | ||||||||||||||||||||||||||||||||||||||||||||
Single family | (2) | (1) | ||||||||||||||||||||||||||||||||||||||||||
| Home equity and other | ||||||||||||||||||||||||||||||||||||||||||||
Total | ||||||||||||||||||||||||||||||||||||||||||||
| Total loans | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
| % | % | % | % | % | % | % | % | |||||||||||||||||||||||||||||||||||||
22
| At December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||
| Past Due and Still Accruing | ||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | 30-59 days | 60-89 days | 90 days or more | Nonaccrual | Total past due and nonaccrual (3) | Current | Total loans | |||||||||||||||||||||||||||||||||||||
| CRE | ||||||||||||||||||||||||||||||||||||||||||||
| Non-owner occupied CRE | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
| Multifamily | ||||||||||||||||||||||||||||||||||||||||||||
| Construction/land development | ||||||||||||||||||||||||||||||||||||||||||||
| Multifamily construction | ||||||||||||||||||||||||||||||||||||||||||||
| CRE construction | ||||||||||||||||||||||||||||||||||||||||||||
| Single family construction | ||||||||||||||||||||||||||||||||||||||||||||
| Single family construction to permanent | ||||||||||||||||||||||||||||||||||||||||||||
Total | ||||||||||||||||||||||||||||||||||||||||||||
| Commercial and industrial loans | ||||||||||||||||||||||||||||||||||||||||||||
| Owner occupied CRE | ||||||||||||||||||||||||||||||||||||||||||||
| Commercial business | ||||||||||||||||||||||||||||||||||||||||||||
Total | ||||||||||||||||||||||||||||||||||||||||||||
| Consumer loans | ||||||||||||||||||||||||||||||||||||||||||||
Single family | (2) | (1) | ||||||||||||||||||||||||||||||||||||||||||
| Home equity and other | ||||||||||||||||||||||||||||||||||||||||||||
Total | ||||||||||||||||||||||||||||||||||||||||||||
| Total loans | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
| % | % | % | % | % | % | % | % | |||||||||||||||||||||||||||||||||||||
(1)Includes $7.0 million and $7.3 million of loans at March 31, 2022 and December 31, 2021, respectively, where a fair value option election was made at the time of origination and, therefore, are carried at fair value with changes in fair value recognized in our consolidated income statements.
(2)FHA-insured and VA-guaranteed single family loans that are 90 days or more past due are maintained on accrual status if they are determined to have little to no risk of loss.
Loan Modifications
The Company provides modifications to borrowers experiencing financial difficulty which may include delays in payment of amounts due, extension of the terms of the notes or reduction in the interest rates on the notes. In certain instances, the Company may grant more than one type of modification. The granting of modifications in the quarter ending March 31, 2022 did not have any material impact on the ACL. The following tables provide information related to loans modified during the quarter ended March 31, 2022 to borrowers experiencing financial difficulty, disaggregated by class of financing receivable and type of concession granted:
| (in thousands) | Significant Payment Delay | |||||||||||||
| Loan Type | Amortized Cost Basis at March 31, 2022 | % of Total Class of Financing Receivable | ||||||||||||
| Single family | $ | % | ||||||||||||
| (in thousands) | Term Extension | |||||||||||||
| Loan Type | Amortized Cost Basis at March 31, 2022 | % of Total Class of Financing Receivable | ||||||||||||
| Single family | $ | % | ||||||||||||
23
| (in thousands) | Interest Rate Reduction and Term Extension | |||||||||||||
| Loan Type | Amortized Cost Basis at March 31, 2022 | % of Total Class of Financing Receivable | ||||||||||||
| Single family | $ | % | ||||||||||||
| (in thousands) | Significant Payment Delay and Term Extension | |||||||||||||
| Loan Type | Amortized Cost Basis at March 31, 2022 | % of Total Class of Financing Receivable | ||||||||||||
| Single family | $ | % | ||||||||||||
| Home equity and other | % | |||||||||||||
| (in thousands) | Interest Rate Reduction, Significant Payment Delay and Term Extension | |||||||||||||
| Loan Type | Amortized Cost Basis at March 31, 2022 | % of Total Class of Financing Receivable | ||||||||||||
| Single family | $ | % | ||||||||||||
The following table describes the financial effect of the modifications made to borrowers experiencing financial difficulty:
| Loan Type | Financial Effect of: | |||||||
| Interest Rate Reduction | ||||||||
| Single family | Reduced weighted-average contractual interest rate from | |||||||
| Significant Payment Delay | ||||||||
| Single family | Provided payment deferrals to borrowers. A weighted average | |||||||
| Home equity and other | Provided payment deferrals to borrowers. A weighted average | |||||||
| Term Extension | ||||||||
| Single family | Added a weighted average | |||||||
| Home equity and other | Added a weighted average | |||||||
24
NOTE 4–DEPOSITS:
Deposit balances, including their weighted average rates, were as follows:
| At March 31, 2022 | At December 31, 2021 | ||||||||||||||||||||||
| (dollars in thousands) | Amount | Weighted Average Rate | Amount | Weighted Average Rate | |||||||||||||||||||
| Noninterest-bearing demand deposits | $ | — | % | $ | — | % | |||||||||||||||||
| Interest-bearing demand deposits | % | % | |||||||||||||||||||||
Savings | % | % | |||||||||||||||||||||
Money market | % | % | |||||||||||||||||||||
| Certificates of deposit | % | % | |||||||||||||||||||||
| Total | $ | % | $ | % | |||||||||||||||||||
Certificates of deposit outstanding mature as follows:
| (in thousands) | March 31, 2022 | ||||
| Within one year | $ | ||||
| One to two years | |||||
| Two to three years | |||||
| Three to four years | |||||
| Four to five years | |||||
| Total | $ | ||||
NOTE 5–LONG-TERM DEBT:
On January 19, 2022, we completed a $100 million subordinated notes offering due in 2032 (the “Notes”). Interest on the Notes initially will accrue at a rate equal to 3.5 % per annum from and including the date of original issuance to, but excluding, January 30, 2027, payable semiannually in arrears. From and including January 30, 2027, to, but excluding, the maturity date
or the date of earlier redemption, the Notes will bear interest equal to the three-month term Secured Overnight Financing Rate ("SOFR") plus 215 basis points, payable quarterly in arrears. Net proceeds to the Company were $98 million, after deducting underwriting discounts and offering expenses. The Company intends to use a significant portion of the net proceeds from the Notes offering to repurchase shares of its common stock through open market purchases, with the remainder of the net proceeds used for working capital and other general corporate purposes, including support for growth of its total assets. At March 31, 2022 the Company had outstanding $98 million of subordinated notes.
At March 31, 2022 and December 31, 2021, the Company had outstanding $64 6.50
The Company issued trust preferred securities during the period from 2005 through 2007, resulting in a debt balance of $62
25
The Subordinated Debt Securities outstanding as of March 31, 2022 and December 31, 2021 are as follows:
| HomeStreet Statutory Trust | |||||||||||||||||||||||
| (dollars in thousands) | I | II | III | IV | |||||||||||||||||||
| Date issued | June 2005 | September 2005 | February 2006 | March 2007 | |||||||||||||||||||
| Amount | $ | $ | $ | $ | |||||||||||||||||||
| Interest rate | 3 MO LIBOR + | 3 MO LIBOR + | 3 MO LIBOR + | 3 MO LIBOR + | |||||||||||||||||||
| Maturity date | June 2035 | December 2035 | March 2036 | June 2037 | |||||||||||||||||||
Call option (1) | Quarterly | Quarterly | Quarterly | Quarterly | |||||||||||||||||||
(1) Call options are exercisable at par and are callable, without penalty on a quarterly basis, starting five years
26
NOTE 6–DERIVATIVES AND HEDGING ACTIVITIES:
| At March 31, 2022 | |||||||||||||||||
| Notional amount | Fair value derivatives | ||||||||||||||||
| (in thousands) | Asset | Liability | |||||||||||||||
| Forward sale commitments | $ | $ | $ | ( | |||||||||||||
| Interest rate lock commitments | ( | ||||||||||||||||
| Interest rate swaps | ( | ||||||||||||||||
| Futures | |||||||||||||||||
| Options | |||||||||||||||||
| Total derivatives before netting | $ | ( | |||||||||||||||
Netting adjustment/Cash collateral (1) | ( | ||||||||||||||||
| Carrying value on consolidated balance sheet | $ | $ | ( | ||||||||||||||
| At December 31, 2021 | |||||||||||||||||
| Notional amount | Fair value derivatives | ||||||||||||||||
| (in thousands) | Asset | Liability | |||||||||||||||
| Forward sale commitments | $ | $ | $ | ( | |||||||||||||
| Interest rate lock commitments | ( | ||||||||||||||||
| Interest rate swaps | ( | ||||||||||||||||
| Futures | |||||||||||||||||
| Total derivatives before netting | $ | ( | |||||||||||||||
Netting adjustment/Cash collateral (1) | |||||||||||||||||
| Carrying value on consolidated balance sheet | $ | $ | ( | ||||||||||||||
| (in thousands) | Gross fair value | Netting adjustments/ Cash collateral (1) | Carrying value | ||||||||||||||
| At March 31, 2022 | |||||||||||||||||
| Derivative assets | $ | $ | ( | $ | |||||||||||||
| Derivative liabilities | ( | ( | |||||||||||||||
| At December 31, 2021 | |||||||||||||||||
| Derivative assets | $ | $ | $ | ||||||||||||||
| Derivative liabilities | ( | ( | |||||||||||||||
27
The collateral used under the Company's master netting agreements is typically cash, but securities may be used under agreements with certain counterparties. Receivables related to cash collateral that has been paid to counterparties is included in other assets. Payables related to cash collateral that has been received from counterparties is included in accounts payable and other liabilities. Interest is owed on amounts received from counterparties and we earn interest on cash paid to counterparties. Any securities pledged to counterparties as collateral remain on the consolidated balance sheets. At March 31, 2022 and December 31, 2021, the Company had liabilities of $7.6 million and zero , respectively, in cash collateral received from counterparties and receivables of $1.6 million and $5.3 million, respectively, in cash collateral paid to counterparties.
The following table presents the net gain (loss) recognized on economic hedge derivatives, within the respective line items in the consolidated income statements for the periods indicated:
| Quarter Ended March 31, | |||||||||||
| (in thousands) | 2022 | 2021 | |||||||||
| Recognized in noninterest income: | |||||||||||
Net gain (loss) on loan origination and sale activities (1) | $ | $ | |||||||||
Loan servicing income (loss) (2) | ( | ( | |||||||||
Other (3) | |||||||||||
(1)Comprised of 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 notes and 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.
NOTE 7–MORTGAGE BANKING OPERATIONS:
LHFS consisted of the following:
| (in thousands) | At March 31, 2022 | At December 31, 2021 | |||||||||
| Single family | $ | $ | |||||||||
| CRE, multifamily and SBA | |||||||||||
| Total | $ | $ | |||||||||
Loans sold consisted of the following for the periods indicated:
| Quarter Ended March 31, | |||||||||||
| (in thousands) | 2022 | 2021 | |||||||||
| Single family | $ | $ | |||||||||
| CRE, multifamily and SBA | |||||||||||
| Total | $ | $ | |||||||||
28
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) | 2022 | 2021 | |||||||||
| Single family | $ | $ | |||||||||
| CRE, multifamily and SBA | |||||||||||
| Total | $ | $ | |||||||||
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, 2022 | At December 31, 2021 | |||||||||
| Single family | $ | $ | |||||||||
| CRE, multifamily and SBA | |||||||||||
| Total | $ | $ | |||||||||
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) | 2022 | 2021 | |||||||||
| Balance, beginning of period | $ | $ | |||||||||
Additions, net of adjustments (1) | ( | ||||||||||
Realized (losses) recoveries, net (2) | ( | ( | |||||||||
| Balance, end of period | $ | $ | |||||||||
(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 amounts from investors or borrowers. Advances of $2.7 million and $1.9 million were recorded in other assets as of March 31, 2022 and December 31, 2021, respectively.
When the Company has the unilateral right to repurchase Ginnie Mae pool loans it has previously sold (generally loans that are more than 90 days past due), the Company records the balance of the loans as other assets and other liabilities. At March 31, 2022 and December 31, 2021, delinquent or defaulted mortgage loans currently in Ginnie Mae pools that the Company has recognized on its consolidated balance sheets totaled $10 million and $12 million, respectively.
29
Revenue from mortgage servicing, including the effects of derivative risk management instruments, consisted of the following:
| Quarter Ended March 31, | |||||||||||
| (in thousands) | 2022 | 2021 | |||||||||
| Servicing income, net: | |||||||||||
| Servicing fees and other | $ | $ | |||||||||
Amortization of single family MSRs (1) | ( | ( | |||||||||
| Amortization of multifamily and SBA MSRs | ( | ( | |||||||||
Total | |||||||||||
Risk management, single family MSRs: | |||||||||||
Changes in fair value of MSRs due to assumptions (2) | |||||||||||
| Net gain (loss) from economic hedging | ( | ( | |||||||||
Total | ( | ||||||||||
| Loan servicing income (loss) | $ | $ | |||||||||
(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.
| Quarter Ended March 31, | |||||||||||
| (in thousands) | 2022 | 2021 | |||||||||
| Beginning balance | $ | $ | |||||||||
| Additions and amortization: | |||||||||||
Originations | |||||||||||
Amortization (1) | ( | ( | |||||||||
Net additions and amortization | |||||||||||
Changes in fair value assumptions (2) | |||||||||||
| Ending balance | $ | $ | |||||||||
(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) | 2022 | 2021 | |||||||||
Constant prepayment rate ("CPR") (2) | % | % | |||||||||
| Discount rate | % | % | |||||||||
(1) Based on a weighted average.
(2) Represents an expected lifetime average CPR used in the model.
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, 2022 | At December 31, 2021 | ||||||||||||||||||||||
| Range of Inputs | Average (1) | Range of Inputs | Average (1) | ||||||||||||||||||||
| CPRs | % | % | |||||||||||||||||||||
| Discount Rates | % | % | |||||||||||||||||||||
(1) Weighted averages of all the inputs within the range.
30
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, 2022 | ||||
| Fair value of single family MSR | $ | ||||
| Expected weighted-average life (in years) | |||||
| CPR | |||||
| Impact on fair value of 25 basis points adverse change in interest rates | $ | ( | |||
| Impact on fair value of 50 basis points adverse change in interest rates | $ | ( | |||
| Discount rate | |||||
| Impact on fair value of 100 basis points increase | $ | ( | |||
| Impact on fair value of 200 basis points increase | $ | ( | |||
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) | 2022 | 2021 | |||||||||
| Beginning balance | $ | $ | |||||||||
| Originations | |||||||||||
| Amortization | ( | ( | |||||||||
| Ending balance | $ | $ | |||||||||
NOTE 8–GUARANTEES AND MORTGAGE REPURCHASE LIABILITY:
31
NOTE 9–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) | 2022 | 2021 | |||||||||
| Net income | $ | $ | |||||||||
| Weighted average shares: | |||||||||||
Basic weighted-average number of common shares outstanding | |||||||||||
| Dilutive effect of outstanding common stock equivalents | |||||||||||
| Diluted weighted-average number of common shares outstanding | |||||||||||
| Net income per share: | |||||||||||
| Basic earnings per share | $ | $ | |||||||||
| Diluted earnings per share | |||||||||||
NOTE 10–FAIR VALUE MEASUREMENT:
The term "fair value" is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The Company's approach is to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements.
Fair Value Hierarchy
A three-level valuation hierarchy has been established under ASC 820 for disclosure of fair value measurements. The valuation hierarchy is based on the observability of inputs to the valuation of an asset or liability as of the measurement date. A financial instrument’s categorization within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement. The levels are defined as follows:
• Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity
can access at the measurement date. An active market for the asset or liability is a market in which transactions for
the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing
basis.
• Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability,
either directly or indirectly. This includes quoted prices for similar assets and liabilities in active markets and
inputs that are observable for the asset or liability for substantially the full term of the financial instrument.
• Level 3 – Unobservable inputs for the asset or liability. These inputs reflect the Company's assumptions of what
market participants would use in pricing the asset or liability.
The Company's policy regarding transfers between levels of the fair value hierarchy is that all transfers are assumed to occur at the end of the reporting period.
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.
32
The following table summarizes the fair value measurement methodologies, including significant inputs and assumptions and classification of the Company's assets and liabilities valued at fair value on a recurring basis.
| Asset/Liability class | Valuation methodology, inputs and assumptions | Classification | ||||||||||||
| Investment securities | ||||||||||||||
| Trading securities | Fair Value is based on quoted prices in an active market. | Level 1 recurring fair value measurement. | ||||||||||||
| Investment securities AFS | Observable market prices of identical or similar securities are used where available. | Level 2 recurring fair value measurement. | ||||||||||||
If market prices are not readily available, value is based on discounted cash flows using the following significant inputs: • Expected prepayment speeds • Estimated credit losses • Market liquidity adjustments | Level 3 recurring fair value measurement. | |||||||||||||
| LHFS | ||||||||||||||
| Single family loans, excluding loans transferred from held for investment | Fair value is based on observable market data, including: • Quoted market prices, where available • Dealer quotes for similar loans • Forward sale commitments | Level 2 recurring fair value measurement. | ||||||||||||
When not derived from observable market inputs, fair value is based on discounted cash flows, which considers the following inputs: • Benchmark yield curve • Estimated discount spread to the benchmark yield curve • Expected prepayment speeds | Estimated fair value classified as Level 3. | |||||||||||||
| Mortgage servicing rights | ||||||||||||||
| Single family MSRs | For information on how the Company measures the fair value of its single family MSRs, including key economic assumptions and the sensitivity of fair value to changes in those assumptions, see Note 7, Mortgage Banking Operations. | Level 3 recurring fair value measurement. | ||||||||||||
| Derivatives | ||||||||||||||
| Futures and Options | Fair value is based on closing exchange prices. | Level 1 recurring fair value measurement. | ||||||||||||
| Forward sale commitments Interest rate swaps | Fair value is based on quoted prices for identical or similar instruments, when available. When quoted prices are not available, fair value is based on internally developed modeling techniques, which require the use of multiple observable market inputs including: • Forward interest rates • Interest rate volatilities | Level 2 recurring fair value measurement. | ||||||||||||
| Interest rate lock commitments | The fair value considers several factors including: • Fair value of the underlying loan based on quoted prices in the secondary market, when available. • Value of servicing • Fall-out factor | Level 3 recurring fair value measurement. | ||||||||||||
33
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, 2022 | |||||||||||||||||||||||
| (in thousands) | Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Trading securities - U.S. Treasury securities | $ | $ | $ | $ | |||||||||||||||||||
| Investment securities AFS | |||||||||||||||||||||||
| Mortgage backed securities: | |||||||||||||||||||||||
| Residential | |||||||||||||||||||||||
| Commercial | |||||||||||||||||||||||
| Collateralized mortgage obligations: | |||||||||||||||||||||||
| Residential | |||||||||||||||||||||||
| Commercial | |||||||||||||||||||||||
| Municipal bonds | |||||||||||||||||||||||
| Corporate debt securities | |||||||||||||||||||||||
| U.S. Treasury securities | |||||||||||||||||||||||
| Single family LHFS | |||||||||||||||||||||||
| Single family LHFI | |||||||||||||||||||||||
| Single family mortgage servicing rights | |||||||||||||||||||||||
| Derivatives | |||||||||||||||||||||||
| Futures | |||||||||||||||||||||||
| Forward sale commitments | |||||||||||||||||||||||
| Options | |||||||||||||||||||||||
| Interest rate lock commitments | |||||||||||||||||||||||
| Interest rate swaps | |||||||||||||||||||||||
| Total assets | $ | $ | $ | $ | |||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Derivatives | |||||||||||||||||||||||
| Forward sale commitments | |||||||||||||||||||||||
| Interest rate lock commitments | |||||||||||||||||||||||
| Interest rate swaps | |||||||||||||||||||||||
| Total liabilities | $ | $ | $ | $ | |||||||||||||||||||
34
| At December 31, 2021 | |||||||||||||||||||||||
| (in thousands) | Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Investment securities AFS | |||||||||||||||||||||||
| Mortgage backed securities: | |||||||||||||||||||||||
Residential | $ | $ | $ | $ | |||||||||||||||||||
Commercial | |||||||||||||||||||||||
| Collateralized mortgage obligations: | |||||||||||||||||||||||
| Residential | |||||||||||||||||||||||
| Commercial | |||||||||||||||||||||||
| Municipal bonds | |||||||||||||||||||||||
| Corporate debt securities | |||||||||||||||||||||||
| U.S. Treasury securities | |||||||||||||||||||||||
| Single family LHFS | |||||||||||||||||||||||
| Single family LHFI | |||||||||||||||||||||||
| Single family mortgage servicing rights | |||||||||||||||||||||||
| Derivatives | |||||||||||||||||||||||
| Futures | |||||||||||||||||||||||
| Forward sale commitments | |||||||||||||||||||||||
| Interest rate lock commitments | |||||||||||||||||||||||
| Interest rate swaps | |||||||||||||||||||||||
| Total assets | $ | $ | $ | $ | |||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Derivatives | |||||||||||||||||||||||
| Forward sale commitments | $ | $ | $ | $ | |||||||||||||||||||
| Interest rate lock commitments | |||||||||||||||||||||||
| Interest rate swaps | |||||||||||||||||||||||
| Total liabilities | $ | $ | $ | $ | |||||||||||||||||||
There were no
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, 2022 and 2021, see Note 7, Mortgage Banking Operations of this Quarterly Report on Form 10-Q.
The fair value of IRLCs considers several factors, including the fair value in the secondary market of the underlying loan resulting from the exercise of the commitment, the expected net future cash flows related to the associated servicing of the loan (referred to as the value of servicing) and the probability that the commitment will not be converted into a funded loan (referred to as a fall-out factor). The fair value of IRLCs on LHFS, while based on interest rates observable in the market, is highly dependent on the ultimate closing of the loans. The significance of the fall-out factor to the fair value measurement of an individual IRLC is generally highest at the time that the rate lock is initiated and declines as closing procedures are performed and the underlying loan gets closer to funding. The fall-out factor applied is based on historical experience. The value of servicing is impacted by a variety of factors, including prepayment assumptions, discount rates, delinquency rates, contractually specified servicing fees, servicing costs and underlying portfolio characteristics. Because these inputs are not observable in market trades, the fall-out factor and value of servicing are considered to be level 3 inputs. The fair value of IRLCs decreases in value upon an increase in the fall-out factor and increases in value upon an increase in the value of servicing. Changes in the fall-out factor and value of servicing do not increase or decrease based on movements in other significant unobservable inputs.
35
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 $7.0 million and $7.3 million at March 31, 2022 and December 31, 2021, respectively.
The following information presents significant Level 3 unobservable inputs used to measure fair value of certain assets:
| (dollars in thousands) | Fair Value | Valuation Technique | Significant Unobservable Input | Low | High | Weighted Average | |||||||||||||||||||||||||||||
| March 31, 2022 | |||||||||||||||||||||||||||||||||||
| Investment securities AFS | $ | Income approach | Implied spread to benchmark interest rate curve | ||||||||||||||||||||||||||||||||
| Single family LHFI | Income approach | Implied spread to benchmark interest rate curve | |||||||||||||||||||||||||||||||||
| Interest rate lock commitments, net | Income approach | Fall-out factor | |||||||||||||||||||||||||||||||||
| Value of servicing | |||||||||||||||||||||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||||||||||||||
| Investment securities AFS | $ | Income approach | Implied spread to benchmark interest rate curve | ||||||||||||||||||||||||||||||||
| Single family LHFI | Income approach | Implied spread to benchmark interest rate curve | |||||||||||||||||||||||||||||||||
| Interest rate lock commitments, net | Income approach | Fall-out factor | |||||||||||||||||||||||||||||||||
| Value of servicing | |||||||||||||||||||||||||||||||||||
36
We had no LHFS where the fair value was not derived with significant observable inputs at March 31, 2022 and December 31, 2021.
The following table presents fair value changes and activity for certain Level 3 assets for the periods indicated:
| (in thousands) | Beginning balance | Additions | Transfers | Payoffs/Sales | Change in mark to market (1) | Ending balance | ||||||||||||||||||||||||||||||||
| Quarter Ended March 31, 2022 | ||||||||||||||||||||||||||||||||||||||
| Investment securities AFS | $ | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||
| Single family LHFI | ( | |||||||||||||||||||||||||||||||||||||
| Quarter Ended March 31, 2021 | ||||||||||||||||||||||||||||||||||||||
| Investment securities AFS | $ | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||
| Single family LHFI | ( | |||||||||||||||||||||||||||||||||||||
(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) | 2022 | 2021 | |||||||||
| Beginning balance, net | $ | $ | |||||||||
| Total realized/unrealized gains (losses) | ( | ( | |||||||||
| Settlements | ( | ( | |||||||||
| Ending balance, net | $ | $ | |||||||||
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.
37
The following table presents assets classified as Level 3 that had changes in their recorded fair value for the periods indicated and what we still held at the end of the respective reporting period:
| (in thousands) | Fair Value | Total Gains (Losses) | |||||||||
| At or for the Quarter Ended March 31, 2022 | |||||||||||
LHFI (1) | $ | $ | |||||||||
(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, 2022 | |||||||||||||||||||||||||||||
| (in thousands) | Carrying Value | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Investment securities HTM | |||||||||||||||||||||||||||||
| LHFI | |||||||||||||||||||||||||||||
LHFS – multifamily and other | |||||||||||||||||||||||||||||
| Mortgage servicing rights – multifamily and SBA | |||||||||||||||||||||||||||||
| Federal Home Loan Bank stock | |||||||||||||||||||||||||||||
| Other assets - GNMA EBO loans | |||||||||||||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||||||||
| Certificates of deposit | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Borrowings | |||||||||||||||||||||||||||||
| Long-term debt | |||||||||||||||||||||||||||||
| At December 31, 2021 | |||||||||||||||||||||||||||||
| (in thousands) | Carrying Value | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Investment securities HTM | |||||||||||||||||||||||||||||
| LHFI | |||||||||||||||||||||||||||||
| LHFS – multifamily and other | |||||||||||||||||||||||||||||
| Mortgage servicing rights – multifamily and SBA | |||||||||||||||||||||||||||||
| Federal Home Loan Bank stock | |||||||||||||||||||||||||||||
| Other assets-GNMA EBO loans | |||||||||||||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||||||||
| Certificates of deposit | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Borrowings | |||||||||||||||||||||||||||||
| Long-term debt | |||||||||||||||||||||||||||||
38
Fair Value Option
Single family loans held for sale accounted under the fair value option are measured initially at fair value with subsequent changes in fair value recognized in earnings. Gains and losses from such changes in fair value are recognized in net gain on mortgage loan origination and sale activities within noninterest income. The change in fair value of loans held for sale is primarily driven by changes in interest rates subsequent to loan funding and changes in fair value of the related servicing asset, resulting in revaluations adjustments to the recorded fair value. The use of the fair value option allows the change in the fair value of loans to more effectively offset the change in fair value of derivative instruments that are used as economic hedges of loans held for sale.
The following table presents the difference between the aggregate fair value and the aggregate unpaid principal balance of loans held for sale accounted for under the fair value option:
| At March 31, 2022 | At December 31, 2021 | ||||||||||||||||||||||||||||||||||
| (in thousands) | Fair Value | Aggregate Unpaid Principal Balance | Fair Value Less Aggregated Unpaid Principal Balance | Fair Value | Aggregate Unpaid Principal Balance | Fair Value Less Aggregated Unpaid Principal Balance | |||||||||||||||||||||||||||||
| Single family LHFS | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||
NOTE 11–SUBSEQUENT EVENT:
39
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements and Notes presented elsewhere in this report and in HomeStreet, Inc.'s 2021 Annual Report on Form 10-K.
FORWARD-LOOKING STATEMENTS
Statements contained in this Quarterly Report on Form 10-Q that are not historical facts or that discuss our expectations, beliefs or views regarding our future operations or future financial performance, or financial or other trends in our business or in the markets in which we operate, anticipated completion of loan forbearances with respect to customer loans, our future plans and the credit exposure of certain loan products and other components of our business that could be impacted by the COVID-19 pandemic, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
Many forward-looking statements can be identified as using words such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan," "potential," "should," "will" and "would" and similar expressions (or the negative of these terms). Such statements involve inherent risks and uncertainties, many of which are difficult to predict and are generally beyond the control of the Company and are subject to risks and uncertainties, including, but not limited to, those discussed in our Annual Report on Form 10-K for the year ended December 31, 2021 and the risks and uncertainties discussed below and elsewhere in this Quarterly Report on Form 10-Q that could cause actual results to differ significantly from those projected. In addition, many of the risks and uncertainties are, and will be, exacerbated by the COVID-19 pandemic and any worsening of the global, national, regional and local business and economic environment as a result.
Although we believe that expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We undertake no obligation, and expressly disclaim any such obligation to update; or clarify any of the forward-looking statements after the date of this Quarterly Report on Form 10-Q to reflect changed assumptions, the occurrence of anticipated or unanticipated events, new information or changes to future results over time or otherwise, except as required by law. Readers are cautioned not to place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q.
Except as otherwise noted, references to "we," "our," "us" or "the Company" refer to HomeStreet, Inc. and its subsidiaries that are consolidated for financial reporting purposes. Statements of knowledge, intention or belief reflect those characteristics of our executive management team based on current facts and circumstances.
You may review a copy of this Quarterly Report on Form 10-Q, including exhibits and any schedule filed therewith on the Securities and Exchange Commission's website (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants, such as HomeStreet, Inc., that file electronically with the Securities and Exchange Commission. Copies of our Securities Exchange Act reports also are available from our investor relations website, http://ir.homestreet.com. Information contained in or linked from our websites is not incorporated into and does not constitute a part of this report.
Critical Accounting Estimates
We have identified two estimates as being critical because they require management to make particularly difficult, subjective, and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These policies relate to the allowance for credit losses (“ACL”) and the valuation of single family mortgage servicing rights (“MSRs").
The ACL is calculated based on quantitative and qualitative factors to estimate credit losses over the life of the loan. The inputs used to determine quantitative factors include estimates based on historical experience of probability of default and losses given default. Inputs used to determine qualitative factors include changes in current portfolio characteristics and operating environments such as current and forecasted unemployment rates, capitalization rates used to value properties securing loans, rental rates and single family pricing indexes. Qualitative factors may also include adjustments to address matters not contemplated by the model and to assumptions used to determine qualitative factors. Although we believe that our methodology for determining an appropriate level for the ACL adequately addresses the various components that could potentially result in credit losses, the processes and their elements include features that may be susceptible to significant change. Any unfavorable
40
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, the amount of the ACL on March 31, 2022 would increase by approximately $6 million. This sensitivity analysis is hypothetical and has been provided only to indicate the potential impact that changes in assumptions may have on the ACL estimate.
The valuation of MSRs is based on various assumptions which are set forth in Note 7–Mortgage Banking Operations of the financial statements. Note 7 also provides sensitivity analysis based on the assumptions used. The sensitivity analyses are hypothetical and have been provided to indicate the potential impact that changes in assumptions may have on the estimate of the value of MSRs.
41
Summary Financial Data
| Quarter Ended | |||||||||||||||||
| (in thousands, except per share data and FTE data) | March 31, 2022 | December 31, 2021 | March 31, 2021 | ||||||||||||||
Select Income Statement data: | |||||||||||||||||
| Net interest income | $ | 54,546 | $ | 57,084 | $ | 54,517 | |||||||||||
| Provision for credit losses | (9,000) | (6,000) | — | ||||||||||||||
| Noninterest income | 15,558 | 28,620 | 38,833 | ||||||||||||||
| Noninterest expense | 54,473 | 53,971 | 56,608 | ||||||||||||||
| Net income: | |||||||||||||||||
Before income taxes | 24,631 | 37,733 | 36,742 | ||||||||||||||
Total | 19,951 | 29,432 | 29,663 | ||||||||||||||
| Net income per share - diluted | 1.01 | 1.43 | 1.35 | ||||||||||||||
| Select Performance Ratios: | |||||||||||||||||
| Return on average equity - annualized | 11.6 | % | 16.1 | % | 16.4 | % | |||||||||||
Return on average tangible equity - annualized (1) | 12.2 | % | 17.0 | % | 17.3 | % | |||||||||||
| Return on average assets - annualized | 1.10 | % | 1.59 | % | 1.65 | % | |||||||||||
Efficiency ratio (1) | 77.0 | % | 62.2 | % | 60.0 | % | |||||||||||
| Net interest margin | 3.27 | % | 3.34 | % | 3.29 | % | |||||||||||
| Other data | |||||||||||||||||
| Full time equivalent employees | 962 | 970 | 1,013 | ||||||||||||||
(1)Return on average tangible equity and the efficiency ratio are non-GAAP financial measures. For a reconciliation of return on average tangible equity to the nearest comparable GAAP financial measure, see “Non-GAAP Financial Measures” elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
42
| As of | |||||||||||
| (in thousands, except share and per share data) | March 31, 2022 | December 31, 2021 | |||||||||
| Selected Balance Sheet Data | |||||||||||
| Loans held for sale | $ | 59,150 | $ | 176,131 | |||||||
| Loans held for investment, net | 5,826,546 | 5,495,726 | |||||||||
| ACL | 37,944 | 47,123 | |||||||||
Investment securities | 1,083,640 | 1,006,691 | |||||||||
| Total assets | 7,510,894 | 7,204,091 | |||||||||
| Deposits | 6,270,535 | 6,146,509 | |||||||||
Borrowings | 273,000 | 41,000 | |||||||||
| Long-term debt | 224,137 | 126,026 | |||||||||
| Total shareholders' equity | 601,231 | 715,339 | |||||||||
Other data: | |||||||||||
Book value per share | $ | 32.15 | $ | 35.61 | |||||||
Tangible book value per share (1) | $ | 30.47 | $ | 34.04 | |||||||
Total equity to total assets | 8.0 | % | 9.9 | % | |||||||
Tangible common equity to tangible assets (1) | 7.6 | % | 9.5 | % | |||||||
| Shares outstanding at period end | 18,700,536 | 20,085,336 | |||||||||
Loans to deposit ratio | 94.5 | % | 93.0 | % | |||||||
Credit Quality: | |||||||||||
ACL to total loans (2) | 0.66 | % | 0.88 | % | |||||||
ACL to nonaccrual loans | 320.3 | % | 386.2 | % | |||||||
Nonaccrual loans to total loans | 0.20 | % | 0.22 | % | |||||||
Nonperforming assets to total assets | 0.17 | % | 0.18 | % | |||||||
Nonperforming assets | $ | 12,581 | $ | 12,936 | |||||||
Regulatory Capital Ratios: | |||||||||||
Bank | |||||||||||
Tier 1 leverage ratio | 10.30 | % | 10.11 | % | |||||||
Total risk-based capital | 13.23 | % | 13.77 | % | |||||||
Company | |||||||||||
Tier 1 leverage ratio | 8.99 | % | 9.94 | % | |||||||
Total risk-based capital | 12.65 | % | 12.66 | % | |||||||
(1)Tangible book value per share and tangible common equity to tangible assets are non-GAAP financial measures. For a reconciliation to the nearest comparable GAAP financial measure, see “Non-GAAP Financial Measures” elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(2)This ratio excludes balances insured by the FHA or guaranteed by the VA or SBA.
43
Current Developments
On January 19, 2022, we completed a $100 million subordinated notes offering due in 2032 (the “Notes”). Interest on the Notes initially will accrue at a rate equal to 3.5% per annum from and including the date of original issuance to, but excluding, January 30, 2027, payable semiannually in arrears. From and including January 30, 2027, to, but excluding, the maturity date
or the date of earlier redemption, the Notes will bear interest equal to the three-month term SOFR plus 215 basis points, payable quarterly in arrears. Net proceeds were $98 million, after deducting underwriting discounts and offering expenses. We used a significant portion of the net proceeds from the Notes offering to repurchase shares of our common stock through open market purchases and we plan to use the remainder of the net proceeds for working capital and other general corporate purposes, including support for growth of our assets.
As part of our capital management strategy, during the first three months of 2022, we repurchased a total of 1,471,485 shares of our common stock at an average price of $50.97 per share.
As part of our business strategy, we are focusing on growing our loan portfolio and leveraging our existing operating expense infrastructure. Increases in our loan portfolio will have the effect of increasing our level of net interest income in future periods, a more stable source of revenues as compared to gain on loan origination and sale activities. As part of this strategy, we did not sell any multifamily portfolio loans in the first quarter of 2022.
44
Management's Overview of the First Quarter 2022 Financial Performance
First Quarter of 2022 Compared to the Fourth Quarter of 2021
General: Our net income and income before taxes were $20.0 million and $24.6 million, respectively, in the first quarter of 2022, as compared to $29.4 million and $37.7 million, respectively, in the fourth quarter of 2021. The $13.1 million decrease in income before taxes was due to lower net interest income, lower noninterest income and higher noninterest expenses, partially offset by a higher recovery of our allowance for credit losses.
Income Taxes: Our effective tax rate was 19.0% in the first quarter of 2022 as compared to 22.0% in fourth quarter of 2021 and a statutory rate of 23.4%. Our effective tax rate was lower than our statutory rate due to the benefits of tax advantaged investments. Additionally, our effective tax rate in the first quarter of 2022 was lower than the fourth quarter of 2021 due to reductions in taxes on income related to excess tax benefits resulting from the vesting of stock awards during the first quarter.
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 yield on interest-earning assets:
| Quarter Ended | |||||||||||||||||||||||||||||||||||
| March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||||||||
| (in thousands) | Average Balance | Interest | Average Yield/Cost | Average Balance | Interest | Average Yield/Cost | |||||||||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||||||||||||||
| Interest-earning assets: | |||||||||||||||||||||||||||||||||||
Loans (1) | $ | 5,691,316 | $ | 53,135 | 3.74 | % | $ | 5,767,597 | $ | 55,587 | 3.79 | % | |||||||||||||||||||||||
Investment securities (1) | 1,028,971 | 6,671 | 2.59 | % | 990,273 | 6,178 | 2.50 | % | |||||||||||||||||||||||||||
| FHLB Stock, Fed Funds and other | 65,918 | 108 | 0.65 | % | 82,447 | 97 | 0.46 | % | |||||||||||||||||||||||||||
Total interest-earning assets | 6,786,205 | 59,914 | 3.54 | % | 6,840,317 | 61,862 | 3.57 | % | |||||||||||||||||||||||||||
| Noninterest-earning assets | 577,384 | 516,640 | |||||||||||||||||||||||||||||||||
Total assets | $ | 7,363,589 | $ | 7,356,957 | |||||||||||||||||||||||||||||||
| Liabilities and shareholders' equity: | |||||||||||||||||||||||||||||||||||
Interest-bearing deposits: (2) | |||||||||||||||||||||||||||||||||||
Demand deposits | $ | 525,608 | $ | 143 | 0.11 | % | $ | 538,468 | $ | 183 | 0.14 | % | |||||||||||||||||||||||
Money market and savings | 3,101,607 | 1,121 | 0.15 | % | 3,120,212 | 1,111 | 0.14 | % | |||||||||||||||||||||||||||
Certificates of deposit | 886,416 | 1,020 | 0.47 | % | 932,559 | 1,187 | 0.51 | % | |||||||||||||||||||||||||||
| Total | 4,513,631 | 2,284 | 0.21 | % | 4,591,239 | 2,481 | 0.21 | % | |||||||||||||||||||||||||||
| Borrowings: | |||||||||||||||||||||||||||||||||||
Borrowings | 64,557 | 91 | 0.56 | % | 25,711 | 48 | 0.73 | % | |||||||||||||||||||||||||||
Long-term debt | 204,553 | 2,107 | 4.12 | % | 125,995 | 1,356 | 4.29 | % | |||||||||||||||||||||||||||
Total interest-bearing liabilities | 4,782,741 | 4,482 | 0.38 | % | 4,742,945 | 3,885 | 0.33 | % | |||||||||||||||||||||||||||
| Noninterest-bearing liabilities: | |||||||||||||||||||||||||||||||||||
Demand deposits (2) | 1,744,202 | 1,728,558 | |||||||||||||||||||||||||||||||||
Other liabilities | 138,048 | 159,440 | |||||||||||||||||||||||||||||||||
Total liabilities | 6,664,991 | 6,630,943 | |||||||||||||||||||||||||||||||||
| Shareholders' equity | 698,598 | 726,014 | |||||||||||||||||||||||||||||||||
| Total liabilities and shareholders' equity | $ | 7,363,589 | $ | 7,356,957 | |||||||||||||||||||||||||||||||
Net interest income | $ | 55,432 | $ | 57,977 | |||||||||||||||||||||||||||||||
| Net interest rate spread | 3.16 | % | 3.24 | % | |||||||||||||||||||||||||||||||
| Net interest margin | 3.27 | % | 3.34 | % | |||||||||||||||||||||||||||||||
(1) Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain loans and securities of $0.9 million for tboth quarters ended March 31, 2022 and December 31, 2021. The estimated federal statutory tax rate was 21% for the periods presented.
(2) Cost of all deposits, including noninterest-bearing demand deposits was 0.15% and 0.16% for the quarter ended March 31, 2022 and December 31, 2021, respectively.
Net interest income was $2.5 million lower in the first quarter of 2022 as compared to the fourth quarter of 2021 primarily due to lower average loan balances, a $0.7 million increase in interest expense related to the $100 million subordinated notes offering completed in January 2022 and a $0.6 million decrease in income from Paycheck Protection Program loans. The lower average loan balances were primarily due to the sale of $244 million of multifamily loans in November of 2021 which was partially offset by the increase in loan balances during the first quarter.
Provision for Credit Losses: As a result of the continued favorable performance of our loan portfolio, a stable low level of nonperforming assets and an improved outlook of the estimated impact of COVID-19 on our loan portfolio, we recorded a $9 million recovery of our allowance for credit losses in the first quarter of 2022, as compared to a $6 million recovery of our allowance for credit losses in the fourth quarter of 2021.
46
Noninterest Income consisted of the following:
| Quarter Ended | ||||||||||||||
| (in thousands) | March 31, 2022 | December 31, 2021 | ||||||||||||
| Noninterest income | ||||||||||||||
Gain on loan origination and sale activities (1) | ||||||||||||||
Single family | $ | 6,169 | $ | 10,578 | ||||||||||
| CRE, multifamily and SBA | 2,105 | 9,501 | ||||||||||||
| Loan servicing income | 3,304 | 2,540 | ||||||||||||
Deposit fees | 2,075 | 2,156 | ||||||||||||
| Other | 1,905 | 3,845 | ||||||||||||
| Total noninterest income | $ | 15,558 | $ | 28,620 | ||||||||||
(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, 2022 | December 31, 2021 | ||||||||||||
| Single family servicing income, net | ||||||||||||||
Servicing fees and other | $ | 3,871 | $ | 3,870 | ||||||||||
Changes - amortization (1) | (3,425) | (4,216) | ||||||||||||
Net | 446 | (346) | ||||||||||||
| Risk management, single family MSRs: | ||||||||||||||
Changes in fair value due to assumptions (2) | 10,303 | 193 | ||||||||||||
| Net gain (loss) from economic hedging | (10,183) | (378) | ||||||||||||
Subtotal | 120 | (185) | ||||||||||||
| Single Family servicing income (loss) | 566 | (531) | ||||||||||||
| Commercial loan servicing income: | ||||||||||||||
| Servicing fees and other | 4,450 | 5,417 | ||||||||||||
| Amortization of capitalized MSRs | (1,712) | (2,346) | ||||||||||||
Total | 2,738 | 3,071 | ||||||||||||
| Total loan servicing income | $ | 3,304 | $ | 2,540 | ||||||||||
(1)Represents changes due to collection/realization of expected cash flows and curtailments.
(2)Principally reflects changes in model assumptions, including prepayment speed assumptions, which are primarily affected by changes in mortgage interest rates.
The decrease in noninterest income in the first quarter of 2022 as compared to the fourth quarter of 2021 was due to a $11.8 million decrease in gain on loan origination and sale activities and a $1.9 million decrease in other income which were partially offset by a $0.8 million increase in loan servicing income. The decrease in gain on loan origination and sale activities was due to a $4.4 million decrease in single family gain on loan origination and sale activities and a $7.4 million decrease in commercial real estate (“CRE”) and commercial gain on loan origination and sale activities. The decrease in single family gain on loan origination and sale activities was due to a decrease in rate lock volume and margins as a result of the effects of increasing interest rates. The decrease in CRE and commercial gain on loan origination and sale activities was primarily due to an 84% decrease in the volume of loans sold. The decrease in other income was due to a $1.0 million decrease in revenues from investments in community development entities and $0.6 million gain on sale of other real estate owned realized in the fourth quarter.
47
Noninterest Expense consisted of the following:
| Quarter Ended | |||||||||||
| (in thousands) | March 31, 2022 | December 31, 2021 | |||||||||
| Noninterest expense | |||||||||||
| Compensation and benefits | $ | 32,031 | $ | 30,627 | |||||||
| Information services | 7,062 | 7,278 | |||||||||
| Occupancy | 6,365 | 5,662 | |||||||||
| General, administrative and other | 9,015 | 10,404 | |||||||||
| Total noninterest expense | $ | 54,473 | $ | 53,971 | |||||||
The $0.5 million increase in noninterest expense in the first quarter of 2022 as compared to the fourth quarter of 2021 was primarily due to higher compensation and benefits and occupancy costs, partially offset by lower general, administrative and other costs. The higher level of compensation and benefit costs reflect a $1.0 million reversal of previously accrued medical benefits related to the positive experience in our self-insured medical program in the fourth quarter. Occupancy costs increased due to common area maintenance rent increases and accelerated depreciation in the first quarter of 2022. Legal costs, which are included in general, administrative and other costs, were $1.4 million lower in the first quarter of 2022 as compared to the fourth quarter of 2021 due to higher nonrecurring costs expended on litigation activities and legal matters in the fourth quarter.
First Quarter of 2022 Compared to First Quarter of 2021
General: Our net income and income before taxes were $20.0 million and $24.6 million, respectively, in the first quarter of 2022, as compared to $29.7 million and $36.7 million, respectively, in the first quarter of 2021. The $12.1 million decrease in income before taxes was due to lower noninterest income, partially offset by a recovery of our allowance for credit losses in 2022 and lower noninterest expense.
Income Taxes: Our effective tax rate during first quarter of 2022 was 19.0% as compared to 19.3% in the first quarter of 2021 and a statutory rate of 23.4%. Our effective tax rate for both periods was lower than our statutory rate due to the benefits of tax advantaged investments and reductions in taxes on income related to excess tax benefits resulting from the exercise and vesting of stock awards during the quarter.
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 yield on interest-earning assets:
48
| Quarter Ended March 31, | |||||||||||||||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||||||||||||||
| (in thousands) | Average Balance | Interest | Average Yield/Cost | Average Balance | Interest | Average Yield/Cost | |||||||||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||||||||||||||
| Interest-earning assets: | |||||||||||||||||||||||||||||||||||
Loans (1) | $ | 5,691,316 | $ | 53,135 | 3.74 | % | $ | 5,605,868 | $ | 53,755 | 3.85 | % | |||||||||||||||||||||||
Investment securities (1) | 1,028,971 | 6,671 | 2.59 | % | 1,065,423 | 6,591 | 2.47 | % | |||||||||||||||||||||||||||
| FHLB Stock, Fed Funds and other | 65,918 | 108 | 0.65 | % | 68,044 | 172 | 1.01 | % | |||||||||||||||||||||||||||
Total interest-earning assets | 6,786,205 | 59,914 | 3.54 | % | 6,739,335 | 60,518 | 3.60 | % | |||||||||||||||||||||||||||
| Noninterest-earning assets | 577,384 | 571,073 | |||||||||||||||||||||||||||||||||
Total assets | $ | 7,363,589 | $ | 7,310,408 | |||||||||||||||||||||||||||||||
| Interest-bearing liabilities: | |||||||||||||||||||||||||||||||||||
Interest-bearing deposits: (2) | |||||||||||||||||||||||||||||||||||
Demand deposits | $ | 525,608 | $ | 143 | 0.11 | % | $ | 493,831 | $ | 169 | 0.14 | % | |||||||||||||||||||||||
Money market and savings | 3,101,607 | 1,121 | 0.15 | % | 2,915,005 | 1,228 | 0.17 | % | |||||||||||||||||||||||||||
Certificates of deposit | 886,416 | 1,020 | 0.47 | % | 1,180,290 | 2,253 | 0.77 | % | |||||||||||||||||||||||||||
| Total | 4,513,631 | 2,284 | 0.21 | % | 4,589,126 | 3,650 | 0.32 | % | |||||||||||||||||||||||||||
| Borrowings: | |||||||||||||||||||||||||||||||||||
Borrowings | 64,557 | 91 | 0.56 | % | 203,621 | 161 | 0.32 | % | |||||||||||||||||||||||||||
Long-term debt | 204,553 | 2,107 | 4.12 | % | 125,854 | 1,363 | 4.33 | % | |||||||||||||||||||||||||||
Total interest-bearing liabilities | 4,782,741 | 4,482 | 0.38 | % | 4,918,601 | 5,174 | 0.42 | % | |||||||||||||||||||||||||||
| Noninterest-bearing liabilities: | |||||||||||||||||||||||||||||||||||
Demand deposits (2) | 1,744,202 | 1,433,765 | |||||||||||||||||||||||||||||||||
Other liabilities | 138,048 | 226,323 | |||||||||||||||||||||||||||||||||
Total liabilities | 6,664,991 | 6,578,689 | |||||||||||||||||||||||||||||||||
| Shareholders' equity | 698,598 | 731,719 | |||||||||||||||||||||||||||||||||
| Total liabilities and shareholders' equity | $ | 7,363,589 | $ | 7,310,408 | |||||||||||||||||||||||||||||||
Net interest income | $ | 55,432 | $ | 55,344 | |||||||||||||||||||||||||||||||
| Net interest spread | 3.16 | % | 3.18 | % | |||||||||||||||||||||||||||||||
| Net interest margin | 3.27 | % | 3.29 | % | |||||||||||||||||||||||||||||||
(1) Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain loans and securities of $0.9 million and $0.8 million for the quarters ended March 31, 2022 and 2021, respectively. The estimated federal statutory tax rate was 21% for the periods presented.
(2) Cost of deposits including noninterest-bearing deposits, was 0.15% and 0.25% for the quarters ended March 31, 2022 and 2021, respectively.
Net interest income was stable in the first quarter of 2022 as compared to the first quarter of 2021 as increases in the average balance of loans was offset by a decrease in the net interest margin. Our net interest margin decreased slightly from 3.29% in the first quarter of 2021 compared to 3.27% in the first quarter of 2022 as a six basis point decrease in our yield on interest earning assets was offset by a four basis point decrease in the rate on interest-bearing liabilities. The decrease in yield on interest earning assets was primarily due to the prepayment and paydown of higher yielding loans and investments in our portfolios during 2021. Our cost of interest-bearing liabilities decreased due to decreases in market interest rates during 2021 which was partially offset by the impact of the $100 million subordinated notes offering completed in January 2022. The increase in the average balance of loans reflects the increases in our loans held for investment that occurred in 2021 and in the first quarter of 2022.
Provision for Credit Losses: As a result of the favorable performance of our loan portfolio, a stable low level of nonperforming assets and an improved outlook of the estimated impact of COVID-19 on our loan portfolio, we recorded a $9 million recovery of our allowance for credit losses in the first quarter of 2022. We recorded no provision for credit losses in the first quarter of 2021.
49
Noninterest Income consisted of the following:
| Quarter Ended March 31, | |||||||||||
| (in thousands) | 2022 | 2021 | |||||||||
| Noninterest income | |||||||||||
Gain on loan origination and sale activities (1) | |||||||||||
Single family | $ | 6,169 | $ | 26,187 | |||||||
Commercial | 2,105 | 7,272 | |||||||||
| Loan servicing income | 3,304 | 748 | |||||||||
Deposit fees | 2,075 | 1,824 | |||||||||
| Other | 1,905 | 2,802 | |||||||||
| Total noninterest income | $ | 15,558 | $ | 38,833 | |||||||
(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) | 2022 | 2021 | ||||||||||||
| Single family servicing income, net | ||||||||||||||
Servicing fees and other | $ | 3,871 | $ | 3,935 | ||||||||||
Changes - amortization (1) | (3,425) | (5,693) | ||||||||||||
Net | 446 | (1,758) | ||||||||||||
| Risk management, single family MSRs: | ||||||||||||||
Changes in fair value due to assumptions (2) | 10,303 | 11,463 | ||||||||||||
| Net gain (loss) from economic hedging | (10,183) | (12,591) | ||||||||||||
Subtotal | 120 | (1,128) | ||||||||||||
| Single Family servicing income (loss) | 566 | (2,886) | ||||||||||||
| Commercial loan servicing income: | ||||||||||||||
| Servicing fees and other | 4,450 | 4,978 | ||||||||||||
| Amortization of capitalized MSRs | (1,712) | (1,344) | ||||||||||||
Total | 2,738 | 3,634 | ||||||||||||
| Total loan servicing income | $ | 3,304 | $ | 748 | ||||||||||
(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.
50
The decrease in noninterest income for the first quarter of 2022 as compared to the first quarter of 2021 was due to decreases in gain on loan origination and sale activities, which was partially offset by higher loan servicing income. The $25.2 million decrease in gain on loan origination and sale activities was due to a $20.0 million decrease in single family gain on loan origination and sale activities and a $5.2 million decrease in CRE and commercial gain on loan origination and sale activities. The decrease in single family gain on loan origination and sale activities was due to a decrease in rate lock volume and margins as a result of the effects of increasing interest rates. The decrease in CRE and commercial gain on loan origination and sale activities was primarily due to a 81% decrease in the volume of loans sold. The $2.6 million increase in loan servicing income was primarily due to lower levels of prepayments and improved risk management results.
Noninterest Expense consisted of the following:
| Quarter Ended March 31, | ||||||||||||||
| (in thousands) | 2022 | 2021 | ||||||||||||
| Noninterest expense | ||||||||||||||
| Compensation and benefits | $ | 32,031 | $ | 35,835 | ||||||||||
| Information services | 7,062 | 6,784 | ||||||||||||
| Occupancy | 6,365 | 6,492 | ||||||||||||
| General, administrative and other | 9,015 | 7,497 | ||||||||||||
| Total noninterest expense | $ | 54,473 | $ | 56,608 | ||||||||||
The $2.1 million decrease in noninterest expense in the first quarter of 2022 as compared to the first quarter of 2021 was due to lower compensation and benefit costs, partially offset by an increase in general, administrative and other expenses. The $3.8 million decrease in compensation and benefits expense is primarily due to reduced commission expense on lower loan origination volumes in our single family mortgage operations. The increase in general, administrative and other costs was due to charges related to nonrecurring costs expended on litigation activities and legal matters in the first quarter of 2022.
51
Financial Condition
During the first quarter of 2022, total assets increased $307 million due primarily to a $331 million increase in loans held for investment and a $77 million increase in investment securities which were partially offset by a decrease of $117 million in loans held for sale. Loans held for investment increased due to $747 million of originations, which were partially offset by prepayments and scheduled payments of $419 million. Total liabilities increased $421 million due to increases in deposits, borrowings and long-term debt. The $124 million increase in deposits was due to higher levels of business deposits and wholesale deposits. The increase in borrowings was due to an increased need for wholesale borrowings to fund loan growth. Long-term debt increased due to our $100 million subordinated debt offering in completed in January 2022.
52
Credit Risk Management
As of March 31, 2022, our ratio of nonperforming assets to total assets remained low at 0.17% while our ratio of total loans delinquent over 30 days to total loans was 0.42%. The Company recorded a $9 million recovery of our allowance for credit losses for the quarter ended March 31, 2022.
As a result of the COVID-19 pandemic, the Company has approved forbearances for some of its borrowers. The status of these forbearances as of March 31, 2022 is as follows:
Forbearances Approved (2)(3) | ||||||||||||||||||||||||||||||||||||||
| Total | Expired | Outstanding | ||||||||||||||||||||||||||||||||||||
| (in thousands) | Number of loans | Amount | Number of loans | Amount | Number of loans | Amount | ||||||||||||||||||||||||||||||||
| Loan type: | ||||||||||||||||||||||||||||||||||||||
| Commercial and CRE: | ||||||||||||||||||||||||||||||||||||||
Commercial business | 92 | $ | 46,026 | 92 | $ | 46,026 | — | $ | — | |||||||||||||||||||||||||||||
| CRE owner occupied | 25 | 65,210 | 25 | 65,210 | — | — | ||||||||||||||||||||||||||||||||
| CRE nonowner occupied | 13 | 56,233 | 12 | 42,194 | 1 | 14,039 | ||||||||||||||||||||||||||||||||
| Total | 130 | $ | 167,469 | 129 | $ | 153,430 | 1 | $ | 14,039 | |||||||||||||||||||||||||||||
Single family and consumer (1) | ||||||||||||||||||||||||||||||||||||||
| Single family | 9 | $ | 5,036 | |||||||||||||||||||||||||||||||||||
| HELOCs and consumer | 4 | 487 | ||||||||||||||||||||||||||||||||||||
Total | 13 | $ | 5,523 | |||||||||||||||||||||||||||||||||||
(1) Does not include any single family loans that are guaranteed by Ginnie Mae.
(2) Does not include construction loans that were modified as a result of COVID-19 related construction delays to extend the construction or lease-up periods. Each of these loans continued to make monthly payments under the existing or modified payment terms. At March 31, 2022, only one of these loans with a $1 million balance is still operating under the terms of their modification.
(3) There were no forbearances initiated in the first quarter of 2022.
The forbearances approved for commercial and industrial loans and CRE nonowner occupied loans were generally for a period of three months while the forbearances for single family, HELOCs and consumer loans were generally for a period of three to six months. As of March 31, 2022, excluding the loans with forbearances still in place, 99% of the commercial and CRE loans approved for a forbearance have completed their forbearance period and have resumed payments. The forbearance periods for the majority of single family and consumer loans granted forbearance that were not complete as of March 31, 2022 are scheduled to be completed in the second quarter of 2022.
53
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, 2022 | At December 31, 2021 | ||||||||||||||||||||||
| (in thousands) | Amount | Rate (1) | Amount | Rate (1) | |||||||||||||||||||
| CRE | |||||||||||||||||||||||
| Non-owner occupied CRE | $ | 2,294 | 0.33 | % | $ | 7,509 | 1.06 | % | |||||||||||||||
| Multifamily | 8,427 | 0.31 | % | 5,854 | 0.24 | % | |||||||||||||||||
| Construction/land development | |||||||||||||||||||||||
Multifamily construction | 456 | 1.24 | % | 507 | 1.34 | % | |||||||||||||||||
| CRE construction | 184 | 1.02 | % | 150 | 1.06 | % | |||||||||||||||||
Single family construction | 7,735 | 2.42 | % | 6,411 | 2.16 | % | |||||||||||||||||
Single family construction to permanent | 990 | 0.64 | % | 1,055 | 0.71 | % | |||||||||||||||||
Total | 20,086 | 0.51 | % | 21,486 | 0.59 | % | |||||||||||||||||
| Commercial and industrial loans | |||||||||||||||||||||||
| Owner occupied CRE | 3,536 | 0.76 | % | 5,006 | 1.10 | % | |||||||||||||||||
| Commercial business | 6,910 | 1.83 | % | 12,273 | 3.39 | % | |||||||||||||||||
Total | 10,446 | 1.24 | % | 17,279 | 2.11 | % | |||||||||||||||||
| Consumer loans | |||||||||||||||||||||||
| Single family | 3,762 | 0.58 | % | 4,394 | 0.68 | % | |||||||||||||||||
| Home equity and other | 3,650 | 1.24 | % | 3,964 | 1.31 | % | |||||||||||||||||
Total | 7,412 | 0.78 | % | 8,358 | 0.88 | % | |||||||||||||||||
| Total ACL | $ | 37,944 | 0.66 | % | $ | 47,123 | 0.88 | % | |||||||||||||||
(1) The ACL rate is calculated excluding balances related to loans that are insured by the FHA or guaranteed by the VA or SBA.
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, 2022 and December 31, 2021, the Bank had available borrowing capacity of $1.8 billion and $1.8 billion, respectively, from the FHLB, and $308 million and $274 million, respectively, from the FRBSF and $1.0 billion and $1.0 billion under borrowing lines established with other financial institutions.
54
Cash Flows
For the quarter ended March 31, 2022, cash and cash equivalents increased by $9 million compared to an increase of $11 million during the quarter ended March 31, 2021. As excess liquidity can reduce the Company’s earnings and returns, the Company manages its cash positions to minimize the level of excess liquidity and does not attempt to maximize the level of cash and cash equivalents. The following discussion highlights the major activities and transactions that affected our cash flows during these periods.
Cash flows from operating activities
The Company's operating assets and liabilities are used to support our lending activities, including the origination and sale of mortgage loans. For the 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. For the quarter ended March 31, 2021, net cash of $2 million was used in operating activities, primarily from cash used to fund LHFS production exceeding cash proceeds from the sale of loans. 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, 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. For the quarter ended March 31, 2021, net cash of $28 million was used in investing activities for the origination of LHFI and the purchase of AFS investment securities, which were partially offset by principal payments and the proceeds from the sale of loans originated as LHFI and AFS investment securities.
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, 2022, net cash of $349 million was provided by financing activities, primarily due to growth in deposits and 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. For the quarter ended March 31, 2021, net cash of $41 million was provided by financing activities, primarily due to growth in deposits, which was partially offset by net repayment of short-term borrowings, 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, 2022 | At December 31, 2021 | |||||||||
| Unused consumer portfolio lines | $ | 433,656 | $ | 405,992 | |||||||
Commercial portfolio lines (1) | 807,658 | 820,131 | |||||||||
| Commitments to fund loans | 99,648 | 90,852 | |||||||||
| Total | $ | 1,340,962 | $ | 1,316,975 | |||||||
(1) Within the commercial portfolio, undistributed construction loan proceeds, where the Company has an obligation to advance funds for construction
progress payments, were $554 million and $584 million at March 31, 2022 and December 31, 2021, respectively.
55
Capital Resources and Dividend Policy
The capital rules applicable to United States based bank holding companies and federally insured depository institutions (“Capital Rules”) require the Company (on a consolidated basis) and the Bank (on a stand-alone basis) to meet specific capital adequacy requirements that, for the most part, involve quantitative measures, primarily in terms of the ratios of their capital to their assets, liabilities, and certain off-balance sheet items, calculated under regulatory accounting practices. In addition, prompt corrective action regulations place a federally insured depository institution, such as the Bank, into one of five capital categories on the basis of its capital ratios: (i) well capitalized; (ii) adequately capitalized; (iii) undercapitalized; (iv) significantly undercapitalized; or (v) critically undercapitalized. A depository institution’s primary federal regulatory agency may determine that, based on certain qualitative assessments, the depository institution should be assigned to a lower capital category than the one indicated by its capital ratios. At each successive lower capital category, a depository institution is subject to greater operating restrictions and increased regulatory supervision by its federal bank regulatory agency.
The following table sets forth the capital and capital ratios of HomeStreet Inc. (on a consolidated basis) and HomeStreet Bank as compared to the respective regulatory requirements applicable to them:
| At March 31, 2022 | ||||||||||||||||||||||||||||||||||||||
| Actual | For Minimum Capital Adequacy Purposes | To Be Categorized As "Well Capitalized" | ||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||||||||||||||
| HomeStreet, Inc. | ||||||||||||||||||||||||||||||||||||||
Tier 1 leverage capital (to average assets) | $ | 661,438 | 8.99 | % | $ | 294,206 | 4.0 | % | NA | NA | ||||||||||||||||||||||||||||
| Common equity Tier 1 capital (to risk-weighted assets) | 601,438 | 9.48 | % | 285,432 | 4.5 | % | NA | NA | ||||||||||||||||||||||||||||||
| Tier 1 risk-based capital (to risk-weighted assets) | 661,438 | 10.43 | % | 380,576 | 6.0 | % | NA | NA | ||||||||||||||||||||||||||||||
| Total risk-based capital (to risk-weighted assets) | 802,274 | 12.65 | % | 507,434 | 8.0 | % | NA | NA | ||||||||||||||||||||||||||||||
| HomeStreet Bank | ||||||||||||||||||||||||||||||||||||||
Tier 1 leverage capital (to average assets) | $ | 744,371 | 10.30 | % | $ | 289,021 | 4.0 | % | $ | 361,276 | 5.0 | % | ||||||||||||||||||||||||||
| Common equity Tier 1 capital (to risk-weighted assets) | 744,371 | 12.52 | % | 267,492 | 4.5 | % | 386,378 | 6.5 | % | |||||||||||||||||||||||||||||
| Tier 1 risk-based capital (to risk-weighted assets) | 744,371 | 12.52 | % | 356,657 | 6.0 | % | 475,542 | 8.0 | % | |||||||||||||||||||||||||||||
| Total risk-based capital (to risk-weighted assets) | 786,711 | 13.23 | % | 475,542 | 8.0 | % | 594,428 | 10.0 | % | |||||||||||||||||||||||||||||
| At December 31, 2021 | ||||||||||||||||||||||||||||||||||||||
| Actual | For Minimum Capital Adequacy Purposes | To Be Categorized As "Well Capitalized" | ||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||||||||||||||
| HomeStreet, Inc. | ||||||||||||||||||||||||||||||||||||||
| Tier 1 leverage capital (to average assets) | $ | 723,232 | 9.94 | % | $ | 291,098 | 4.0 | % | NA | NA | ||||||||||||||||||||||||||||
| Common equity Tier 1 capital (to risk-weighted assets) | 663,232 | 10.84 | % | 275,281 | 4.5 | % | NA | NA | ||||||||||||||||||||||||||||||
| Tier 1 risk-based capital (to risk-weighted assets) | 723,232 | 11.82 | % | 367,041 | 6.0 | % | NA | NA | ||||||||||||||||||||||||||||||
| Total risk-based capital (to risk-weighted assets) | 774,695 | 12.66 | % | 489,388 | 8.0 | % | NA | NA | ||||||||||||||||||||||||||||||
| HomeStreet Bank | ||||||||||||||||||||||||||||||||||||||
| Tier 1 leverage capital (to average assets) | $ | 727,753 | 10.11 | % | $ | 287,990 | 4.0 | % | $ | 359,988 | 5.0 | % | ||||||||||||||||||||||||||
| Common equity Tier 1 capital (to risk-weighted assets) | 727,753 | 12.87 | % | 254,442 | 4.5 | % | 367,527 | 6.5 | % | |||||||||||||||||||||||||||||
| Tier 1 risk-based capital (to risk-weighted assets) | 727,753 | 12.87 | % | 339,256 | 6.0 | % | 452,341 | 8.0 | % | |||||||||||||||||||||||||||||
| Total risk-based capital (to risk-weighted assets) | 778,723 | 13.77 | % | 452,341 | 8.0 | % | 565,426 | 10.0 | % | |||||||||||||||||||||||||||||
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As of each of the dates set forth in the above table, the Company exceeded the minimum required capital ratios applicable to it and the Bank’s capital ratios exceeded the minimums necessary to qualify as a well-capitalized depository institution under the prompt corrective action regulations. In addition to the minimum capital ratios, both HomeStreet Inc. and HomeStreet Bank are required to maintain a capital conservation buffer consisting of additional Common Equity Tier 1 Capital of more than 2.5% above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses. The required ratios for capital adequacy set forth in the above table do not include the Capital Rules’ additional capital conservation buffer, though each of the Company and Bank maintained capital ratios necessary to satisfy the capital conservation buffer requirements as of the dates indicated. At March 31, 2022, capital conservation buffers for the Company and the Bank were 4.43% and 5.23%, respectively.
The Company paid a quarterly cash dividend of $0.35 per common share in the first quarter of 2022. It is our current intention to continue to pay quarterly dividends, and on April 28, 2022 we declared another cash dividend of $0.35 per common share payable on May 24, 2022 to shareholders of record as of the close of business on May 10, 2022. The amount and declaration of future cash dividends are subject to approval by our Board of Directors and certain regulatory restrictions.
We had no material commitments for capital expenditures as of March 31, 2022. However, we intend to take advantage of opportunities that may arise in the future to grow our businesses, which may include opening additional offices or acquiring complementary businesses that we believe will provide us with attractive risk-adjusted returns. As a result, we may seek to obtain additional borrowings and to sell additional shares of our common stock to raise funds which we might need for these purposes. There is no assurance, however, that, if required, we will succeed in obtaining additional borrowings or selling additional shares of our common stock on terms that are acceptable to us, if at all, as this will depend on market conditions and other factors outside of our control, as well as our future results of operations.
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Non-GAAP Financial Measures
To supplement our unaudited condensed consolidated financial statements presented in accordance with GAAP, we use certain non-GAAP measures of financial performance. In this Quarterly Report on Form 10-Q, we use the following non-GAAP measures: (i) tangible common equity and tangible assets as we believe this information is consistent with the treatment by bank regulatory agencies, which excluded intangible assets from the calculation of capital ratios; and (ii) an efficiency ratio which is the ratio of noninterest expenses to the sum of net interest income and noninterest income, excluding certain items of income or expense and excluding taxes incurred and payable to the state of Washington as such taxes are not classified as income taxes and we believe including them in noninterest expenses impacts the comparability of our results to those companies whose operations are in states where assessed taxes on business are classified as income 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. Rather, these non-GAAP financial measures should be considered in addition to, not as a substitute for or superior to, financial measures prepared in accordance with GAAP. In the information below, we have provided reconciliations of, where applicable, the most comparable GAAP financial measures to the non-GAAP measures used in this Quarterly Report on Form 10-Q, or a reconciliation of the non-GAAP calculation of the financial measure.
Reconciliations of non-GAAP results of operations to the nearest comparable GAAP measures:
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| For the quarter ended | ||||||||||||||||||||
| (in thousands) | March 31, 2022 | December 31, 2021 | March 31, 2021 | |||||||||||||||||
| Return on average tangible equity (annualized) | ||||||||||||||||||||
Average shareholders' equity | $ | 698,598 | $ | 726,014 | $ | 731,719 | ||||||||||||||
Less: Average goodwill and other intangibles | (31,624) | (31,901) | (32,777) | |||||||||||||||||
Average tangible equity | $ | 666,974 | $ | 694,113 | $ | 698,942 | ||||||||||||||
| Net income | $ | 19,951 | $ | 29,432 | $ | 29,663 | ||||||||||||||
| Adjustments (tax effected) | ||||||||||||||||||||
| Amortization on core deposit intangibles | 191 | 229 | 236 | |||||||||||||||||
| Tangible income applicable to shareholders | $ | 20,142 | $ | 29,661 | $ | 29,899 | ||||||||||||||
Ratio | 12.2 | % | 17.0 | % | 17.3 | % | ||||||||||||||
Efficiency ratio | ||||||||||||||||||||
Noninterest expense | ||||||||||||||||||||
Total | $ | 54,473 | $ | 53,971 | $ | 56,608 | ||||||||||||||
Adjustments: | ||||||||||||||||||||
State of Washington taxes | (506) | (664) | (579) | |||||||||||||||||
Adjusted total | $ | 53,967 | $ | 53,307 | $ | 56,029 | ||||||||||||||
Total revenues | ||||||||||||||||||||
Net interest income | $ | 54,546 | $ | 57,084 | $ | 54,517 | ||||||||||||||
Noninterest income | 15,558 | 28,620 | 38,833 | |||||||||||||||||
| Total | $ | 70,104 | $ | 85,704 | $ | 93,350 | ||||||||||||||
| Ratio | 77.0 | % | 62.2 | % | 60.0 | % | ||||||||||||||
| Effective tax rate used in computations above | 22.0 | % | 22.0 | % | 19.3 | % | ||||||||||||||
| As of | |||||||||||
| (in thousands, except share data) | March 31, 2022 | December 31, 2021 | |||||||||
| Tangible book value per share | |||||||||||
Shareholders' equity | $ | 601,231 | $ | 715,339 | |||||||
Less: goodwill and other intangibles | (31,464) | (31,709) | |||||||||
Tangible shareholder's equity | $ | 569,767 | $ | 683,630 | |||||||
Common shares outstanding | 18,700,536 | 20,085,336 | |||||||||
Computed amount | $ | 30.47 | $ | 34.04 | |||||||
Tangible common equity to tangible assets | |||||||||||
Tangible shareholder's equity (per above) | $ | 569,767 | $ | 683,630 | |||||||
Tangible assets | |||||||||||
Total assets | 7,510,894 | 7,204,091 | |||||||||
Less: Goodwill and other intangibles | (31,464) | (31,709) | |||||||||
Net | $ | 7,479,430 | $ | 7,172,382 | |||||||
| Ratio | 7.6 | % | 9.5 | % | |||||||
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| ITEM 3 | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | ||||
Market Risk Management
Market risk is defined as the sensitivity of income, fair value measurements and capital to changes in interest rates, foreign currency exchange rates, commodity prices and other relevant market rates or prices. The primary market risks that we are exposed to are price and interest rate risks. Price risk is defined as the risk to current or anticipated earnings or capital arising from changes in the value of either assets or liabilities that are entered into as part of distributing or managing risk. Interest rate risk is defined as risk to current or anticipated earnings or capital arising from movements in interest rates.
For the Company, price and interest rate risks arise from the financial instruments and positions we hold. This includes loans, MSRs, investment securities, deposits, borrowings, long-term debt and derivative financial instruments. Due to the nature of our current operations, we are not subject to foreign currency exchange or commodity price risk. Our real estate loan portfolio is subject to risks associated with the local economies of our various markets, in particular, the regional economy of the western United States, including Hawaii.
The spread between the yield on interest-earning assets and the cost of interest-bearing liabilities and the relative dollar amounts of these assets and liabilities are the principal items affecting net interest income. Changes in net interest rates (interest rate risk) are influenced to a significant degree by the repricing characteristics of assets and liabilities (timing risk), the relationship between various rates (basis risk), customer options (option risk) and changes in the shape of the yield curve (time-sensitive risk). We manage the available-for-sale investment securities portfolio while maintaining a balance between risk and return. The Company's funding strategy is to grow core deposits while we efficiently supplement using wholesale borrowings.
We estimate the sensitivity of our net interest income to changes in market interest rates using an interest rate simulation model that includes assumptions related to the level of balance sheet growth, deposit repricing characteristics and the rate of prepayments for multiple interest rate change scenarios. Interest rate sensitivity depends on certain repricing characteristics in our interest-earnings assets and interest-bearing liabilities, including the maturity structure of assets and liabilities and their repricing characteristics during the periods of changes in market interest rates. Effective interest rate risk management seeks to ensure both assets and liabilities respond to changes in interest rates within an acceptable timeframe, minimizing the impact of interest rate changes on net interest income and capital. Interest rate sensitivity is measured as the difference between the volume of assets and liabilities, at a point in time, that are subject to repricing at various time horizons, known as interest rate sensitivity gaps.
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The following table presents sensitivity gaps for these different intervals:
| At March 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | 3 Mos. or Less | More Than 3 Mos. to 6 Mos. | More Than 6 Mos. to 12 Mos. | More Than 12 Mos. to 3 Yrs. | More Than 3 Yrs. to 5 Yrs. | More Than 5 to 15 Yrs. | More Than 15 Yrs. | Non-Rate- Sensitive | Total | ||||||||||||||||||||||||||||||||||||||||||||
| Interest-earning assets: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash & cash equivalents | $ | 73,862 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 73,862 | |||||||||||||||||||||||||||||||||||
| FHLB Stock | 11,005 | — | — | — | — | — | 8,591 | — | 19,596 | ||||||||||||||||||||||||||||||||||||||||||||
Investment securities (1) | 116,067 | 24,487 | 30,364 | 123,751 | 133,930 | 510,943 | 144,098 | — | 1,083,640 | ||||||||||||||||||||||||||||||||||||||||||||
| LHFS | 59,150 | — | — | — | — | — | — | — | 59,150 | ||||||||||||||||||||||||||||||||||||||||||||
LHFI (1) | 1,325,911 | 327,103 | 463,940 | 1,185,171 | 1,368,055 | 1,170,363 | 23,947 | — | 5,864,490 | ||||||||||||||||||||||||||||||||||||||||||||
Total | 1,585,995 | 351,590 | 494,304 | 1,308,922 | 1,501,985 | 1,681,306 | 176,636 | — | 7,100,738 | ||||||||||||||||||||||||||||||||||||||||||||
Non-interest-earning assets | — | — | — | — | — | — | — | 410,156 | 410,156 | ||||||||||||||||||||||||||||||||||||||||||||
| Total assets | $ | 1,585,995 | $ | 351,590 | $ | 494,304 | $ | 1,308,922 | $ | 1,501,985 | $ | 1,681,306 | $ | 176,636 | $ | 410,156 | $ | 7,510,894 | |||||||||||||||||||||||||||||||||||
| Interest-bearing liabilities: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Demand deposit accounts (2) | $ | 591,148 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 591,148 | |||||||||||||||||||||||||||||||||||
Savings accounts (2) | 309,462 | — | — | — | — | — | — | — | 309,462 | ||||||||||||||||||||||||||||||||||||||||||||
Money market accounts (2) | 2,800,215 | — | — | — | — | — | — | — | 2,800,215 | ||||||||||||||||||||||||||||||||||||||||||||
| Certificates of deposit | 199,264 | 246,848 | 315,476 | 149,742 | 4,151 | — | — | — | 915,481 | ||||||||||||||||||||||||||||||||||||||||||||
FHLB advances | 273,000 | — | — | — | — | — | — | — | 273,000 | ||||||||||||||||||||||||||||||||||||||||||||
Long-term debt (3) | 61,073 | — | — | — | 163,064 | — | — | — | 224,137 | ||||||||||||||||||||||||||||||||||||||||||||
Total | 4,234,162 | 246,848 | 315,476 | 149,742 | 167,215 | — | — | — | 5,113,443 | ||||||||||||||||||||||||||||||||||||||||||||
Non-interest bearing liabilities | — | — | — | — | — | — | — | 1,796,220 | 1,796,220 | ||||||||||||||||||||||||||||||||||||||||||||
| Shareholders' Equity | — | — | — | — | — | — | — | 601,231 | 601,231 | ||||||||||||||||||||||||||||||||||||||||||||
| Total liabilities and shareholders' equity | $ | 4,234,162 | $ | 246,848 | $ | 315,476 | $ | 149,742 | $ | 167,215 | $ | — | $ | — | $ | 2,397,451 | $ | 7,510,894 | |||||||||||||||||||||||||||||||||||
| Interest sensitivity gap | $ | (2,648,167) | $ | 104,742 | $ | 178,828 | $ | 1,159,180 | $ | 1,334,770 | $ | 1,681,306 | $ | 176,636 | |||||||||||||||||||||||||||||||||||||||
Cumulative interest sensitivity gap | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Total | $ | (2,648,167) | $ | (2,543,425) | $ | (2,364,597) | $ | (1,205,417) | $ | 129,353 | $ | 1,810,659 | $ | 1,987,295 | |||||||||||||||||||||||||||||||||||||||
As a % of total assets | (35) | % | (34) | % | (31) | % | (16) | % | 2 | % | 24 | % | 26 | % | |||||||||||||||||||||||||||||||||||||||
As a % of cumulative interest-bearing liabilities | 37 | % | 43 | % | 51 | % | 76 | % | 103 | % | 135 | % | 139 | % | |||||||||||||||||||||||||||||||||||||||
(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, 2022, the Company is considered liability-sensitive as exhibited by the gap table but our net interest income sensitivity analysis shows positive results in the increasing interest rate scenarios. This is because of the impact of our historical deposit repricing betas which result in an assumed delay in repricing of deposits in an increasing interest rate scenario and a lower magnitude of repricing compared to the repricing of loans and other interest-earning assets. Net interest income would be expected to rise in the long term if interest rates were to rise due to the Bank’s cumulative asset-sensitive position.
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
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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, 2022 and December 31, 2021 are provided in the table below. For the scenarios shown, the interest rate simulation assumes an instantaneous and sustained shift in market interest rates and no change in the composition or size of the balance sheet.
| At March 31, 2022 | At December 31, 2021 | |||||||||||||||||||||||||
Change in Interest Rates (basis points) (1) | Percentage Change | |||||||||||||||||||||||||
Net Interest Income (2) | Net Portfolio Value (3) | Net Interest Income (2) | Net Portfolio Value (3) | |||||||||||||||||||||||
| +200 | 5.9 | % | (14.9) | % | 7.8 | % | (5.0) | % | ||||||||||||||||||
| +100 | 2.9 | % | (7.7) | % | 3.5 | % | (2.8) | % | ||||||||||||||||||
| -100 | (0.3) | % | 5.8 | % | (1.3) | % | 1.9 | % | ||||||||||||||||||
| -200 | 0.4 | % | 9.1 | % | (2.5) | % | (4.9) | % | ||||||||||||||||||
(1)For purposes of our model, we assume interest rates will not go below zero. This "floor" limits the effect of a potential negative interest rate shock in a low rate environment like the one we are currently experiencing.
(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.
At March 31, 2022, we believe our net interest income sensitivity did not exhibit a strong bias to either an increase in interest rates or a decline in interest rates. The changes in interest rate sensitivity between December 31, 2021 and March 31, 2022 reflected the impact of higher market interest rates, a flatter yield curve and changes to overall balance sheet composition. Some of the assumptions made in the simulation model may not materialize and unanticipated events and circumstances will occur. We do not allow for negative rate assumptions in our model, but actual results in extreme interest rate decline scenarios may result in negative rate assumptions which may cause the modeling results to be inherently unreliable. In addition, the simulation model does not take into account any future actions that we could undertake to mitigate an adverse impact due to changes in interest rates from those expected, in the actual level of market interest rates or competitive influences on our deposits.
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ITEM 4CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company carried out an evaluation, with the participation of our management and under the supervision of our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined under Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2022.
Changes in Internal Control over Financial Reporting
As required by Rule 13a-15(d), our management, including our Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of our internal control over financial reporting to determine whether any changes occurred during the quarter ended March 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
There were no changes to our internal control over financial reporting that occurred during the quarter ended March 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1LEGAL PROCEEDINGS
Because the nature of our business involves, among other things, the collection of numerous accounts, the validity of liens and compliance with various state and federal laws, we are subject to various legal proceedings in the ordinary course of our business related to foreclosures, bankruptcies, condemnation and quiet title actions and alleged statutory and regulatory violations. We are also subject to legal proceedings in the ordinary course of business related to employment and other consumer matters. We do not expect that these proceedings, taken as a whole, will have a material adverse effect on our business, financial position or our results of operations. There are currently no matters that, in the opinion of management, would have a material adverse effect on our consolidated balance sheet, results of operation or liquidity, or for which there would be a reasonable possibility of such a loss based on information known at this time.
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ITEM 1ARISK FACTORS
Refer to Item 1A of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 for a discussion of factors that could materially and adversely affect our business, financial condition, liquidity, results of operations and capital position.
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ITEM 2UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Purchases of Equity Securities by the Issuer
Shares repurchased, on a settlement-date basis, pursuant to the common equity repurchase program during the quarter ended March 31, 2022 were as follows:
| (in thousands, except share and per share information) | Total shares of common stock purchased | Average price paid per share of common stock | Dollar value of remaining authorized repurchase | |||||||||||||||||
| January | — | $ | — | $ | 75,000 | |||||||||||||||
| February | 779,500 | 51.03 | 35,221 | |||||||||||||||||
| March | 691,985 | 50.90 | — | |||||||||||||||||
| Total | 1,471,485 | $ | 50.97 | |||||||||||||||||
(1) Stock repurchases in February and March were made pursuant to a Board authorized share repurchase program approved on January 27, 2022 pursuant to which the Company could purchase up to $75 million of its issued and outstanding common stock, no par value, at prevailing market rates at the time of such purchase.
Sales of Unregistered Securities
There were no sales of unregistered securities during the first quarter of 2022.
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ITEM 3DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5OTHER INFORMATION
Not applicable.
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ITEM 6EXHIBITS
EXHIBIT INDEX
| Exhibit Number | Description | |||||||
| 4.1 | ||||||||
| 4.2 | ||||||||
| 4.3 | ||||||||
| 10.1† | ||||||||
| 31.1 | ||||||||
| 31.2 | ||||||||
32 (1) | ||||||||
| 101 INS | Inline XBRL Instance Document | |||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
| 101.DEF | Inline XBRL Taxonomy Extension Label Linkbase Document | |||||||
| 101.LAB | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||||||
| 101.PRE | Inline XBRL Taxonomy Extension Definitions Linkbase Document | |||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |||||||
| (1) | This exhibit shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that Section. Such exhibit shall not be deemed incorporated into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934. | ||||
† Management contract or compensation plan or arrangement.
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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 6, 2022.
| HomeStreet, Inc. | ||||||||
| By: | /s/ Mark K. Mason | |||||||
| Mark K. Mason | ||||||||
| President and Chief Executive Officer | ||||||||
| (Principal Executive Officer) | ||||||||
| HomeStreet, Inc. | ||||||||
| By: | /s/ John M. Michel | |||||||
| John M. Michel | ||||||||
| Executive Vice President and Chief Financial Officer | ||||||||
| (Principal Financial Officer) | ||||||||
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TABLE OF CONTENTS
Part IItem 1 Financial StatementsNote 1 Summary Of Significant Accounting Policies:Note 2 Investment Securities:Note 3 -loans and Credit Quality:Note 4 Deposits:Note 5 Long-term Debt:Note 6 Derivatives and Hedging Activities:Note 7 Mortgage Banking Operations:Note 8 Guarantees and Mortgage Repurchase Liability:Note 9 Earnings Per Share:Note 10 Fair Value Measurement:Note 11 Subsequent Event:Item 2 Management's Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3quantitative and Qualitative Disclosures About Market RiskItem 4controls and ProceduresPart II - Other InformationItem 1legal ProceedingsItem 1arisk FactorsItem 2unregistered Sales Of Equity Securities and Use Of ProceedsItem 3defaults Upon Senior SecuritiesItem 4mine Safety DisclosuresItem 5other InformationItem 6exhibits