Item 7. Management’s Discussion and Analysis
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Management’s discussion and analysis of results of operations and financial condition ("MD&A") is intended to assist the reader in understanding and assessing significant changes and trends related to the results of operations and financial position of our consolidated Company. This discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying footnotes in Part II, Item 8 of this Annual Report on Form 10-K. A comparison of the financial results for the year ended December 31, 2021 to the year ended December 31, 2020, is included in Part II, Item 7, "Management Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2021.
Management's Overview of 2022 Financial Performance
Recent Developments
Economic and Market Conditions
Our financial results have been adversely impacted by the historically significant increase in short-term interest rates by the Federal Reserve during 2022. This dramatic increase in rates resulted in significant reductions in loan demand, particularly in single family mortgage. Accordingly, our gain on loan sales activities declined significantly and are expected to remain at low levels in 2023. Additionally, our interest sensitive deposits declined as customers moved funds to higher yielding products both at our Bank and at other banks and brokerage firms. We have taken a number of steps to reduce the pressure on our funding base, including: (i) significantly reducing our level of loan originations; (ii) introducing promotional priced deposit products which allow us to attract and retain deposits without repricing our existing interest-bearing deposit base; (iii) entering into $1 billion of fixed-rate Federal Home Loan Bank advances in the fourth quarter of 2022; and (iv) completing the acquisition of three California branches in the first quarter of 2023. Inflationary pressures have adversely impacted our operations by increasing our costs, primarily compensation costs which we expect to be higher in 2023.
Due to the impacts of the significant increases in short term rates and the continued uncertainty regarding further short term rate increases by the Federal Reserve in 2023, and as a result of our actions taken to address the impact of these increases, we expect the balance of our loans held for investment to stay relatively stable during 2023 and our net interest margin to be significantly lower in 2023 as compared to 2022.
Other Items
In February 2023, we completed an acquisition of three branches in southern California whereby we assumed $373 million in deposits and purchased approximately $22 million in loans.
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 3.50% 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 to the Company were $98 million, after deducting underwriting discounts and offering expenses. The Company used 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 our assets.
As part of our capital management strategy, in 2022, we repurchased a total of 1,471,485 shares of our common stock at an average price of $50.97 per share, representing 7.3% of the shares outstanding at December 31, 2021.
Critical Accounting Estimates
The following discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements and the notes thereto, which have been prepared in accordance with generally accepted accounting principles in the United States ("GAAP") and accounting practices in the banking industry. Certain of those accounting policies are considered critical accounting policies, because they require us to make estimates and assumptions regarding circumstances or trends that could materially affect the value of those assets, such as economic conditions or trends that could impact our ability to fully
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collect our loans or ultimately realize the carrying value of certain of our other assets. Those estimates and assumptions are made based on current information available to us regarding those economic conditions or trends or other circumstances. If changes were to occur in the events, trends or other circumstances on which our estimates or assumptions were based, these changes could have a material adverse effect on the carrying value of assets and liabilities and on our results of operations. We have identified two policies and estimates as being critical because they require management to make particularly difficult, subjective, and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These policies relate to the allowance for credit losses ("ACL") and the valuation of residential mortgage servicing rights ("MSR").
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 loss given default. Inputs used to determine qualitative factors include changes in current portfolio characteristics and operating environments such as current and forecasted unemployment rates, capitalization rates used to value properties securing loans, rental rates and single family pricing indexes. Qualitative factors may also include adjustments to address matters not contemplated by the model and to assumptions used to determine qualitative factors. Although we believe that our methodology for determining an appropriate level for the ACL adequately addresses the various components that could potentially result in credit losses, the processes and their elements include features that may be susceptible to significant change. Any unfavorable differences between the actual outcome of credit-related events and our estimates could require an additional provision for credit losses. For example, if the projected unemployment rate was downgraded one grade for all periods, the amount of the ACL at December 31, 2022 would increase by approximately $8 million. This sensitivity analysis is hypothetical and has been provided only to indicate the potential impact that changes in assumptions may have on the ACL estimate.
MSRs are recognized as separate assets when servicing rights are acquired through the sale of loans or purchased. For sales of mortgage loans, the fair value of the MSR is estimated and capitalized. Purchased MSRs are capitalized at the cost to acquire. Initial and subsequent fair value measurements are determined using a discounted cash flow model. To determine the fair value of the MSR, the present value of expected net future cash flows is estimated. Assumptions used include market discount rates, anticipated prepayment speeds, delinquency and foreclosure rates, and ancillary fee income net of servicing costs. This model is periodically validated by an independent model validation group. The model assumptions and the MSR fair value estimates are also compared to observable trades of similar portfolios as well as to MSR broker valuations and industry surveys, as available. We also utilize a third party valuation firm to value our MSRs on a periodic basis, the results of which we use to evaluate the reasonableness of our modeled values. Actual market conditions could vary significantly from current conditions which could result in the estimated life of the underlying loans being different which would change the fair value of the MSR. We carry our single family residential MSRs at fair value and report changes in fair value through earnings. MSRs for loans other than single family loans are adjusted to fair value if the carrying value is higher than fair value and are amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets.
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Summary Financial Data
For the Years Ended December 31,
(dollars in thousands, except per share data and FTE data) 2022 2021
Select Income Statement data:
Net interest income $ 233,307 $ 227,057
Provision for credit losses (5,202) (15,000)
Noninterest income 51,570 119,975
Noninterest expense 205,419 215,343
Income:
Before income taxes 84,660 146,689
Total 66,540 115,422
Income per share - diluted $ 3.49 $ 5.46
Select Performance Ratios:
Return on average equity 10.8 % 15.9 %
Return on average tangible equity (1)
11.5 % 16.8 %
Return on average assets 0.79 % 1.58 %
Efficiency ratio (1)
72.4 % 61.9 %
Net interest margin 2.99 % 3.38 %
Other Data:
Full time equivalent employees 942 991
(1) Return on average tangible equity and the efficiency ratio are non-GAAP financial measures. For a reconciliation of return on average tangible equity to the nearest comparable GAAP financial measure and the computation of the efficiency ratio, see “Non-GAAP Financial Measures” elsewhere in this Management's Discussion and Analysis of Financial Condition and Results of Operations.
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Summary Financial Data (continued)
As of December 31,
(dollars in thousands, except share and per share data) 2022 2021
Selected Balance Sheet Data:
Loans held for sale ("LHFS") $ 17,327 $ 176,131
Loans held for investment ("LHFI"), net 7,384,820 5,495,726
ACL 41,500 47,123
Investment securities 1,400,212 1,006,691
Total assets 9,364,760 7,204,091
Deposits 7,451,919 6,146,509
Borrowings 1,016,000 41,000
Long-term debt 224,404 126,026
Total shareholders' equity 562,147 715,339
Other data:
Book value per share $ 30.01 $ 35.61
Tangible book value per share (1)
$ 28.41 $ 34.04
Total equity to total assets 6.0 % 9.9 %
Tangible common equity to tangible assets (1)
5.7 % 9.5 %
Shares outstanding at period end 18,730,380 20,085,336
Loans to deposits ratio 99.9 % 93.0 %
Credit quality:
ACL to total loans (2)
0.57 % 0.88 %
ACL to nonaccrual loans
412.7 % 386.2 %
Nonaccrual loans to total loans 0.14 % 0.22 %
Nonperforming assets to total assets 0.13 % 0.18 %
Nonperforming assets $ 11,893 $ 12,936
Regulatory Capital Ratios:
Bank
Tier 1 leverage ratio 8.63 % 10.11 %
Total risk-based capital 12.59 % 13.77 %
Company
Tier 1 leverage ratio 7.25 % 9.94 %
Total risk-based capital 11.53 % 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 Managements' Discussion and Analysis of Financial Condition and Results of Operations.
(2) This ratio excludes balances insured by the FHA or guaranteed by the VA or SBA.
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Results of Operations
2022 Compared to 2021
General: Our net income and income before income taxes were $66.5 million and $84.7 million, respectively, in 2022, as compared to $115.4 million and $146.7 million, respectively, in 2021. The $62.0 million decrease in income before taxes was due to a lower recovery of our allowance for credit losses and lower noninterest income, partially offset by higher net interest income and lower noninterest expense.
Income Taxes: Our effective tax rate during 2022 was 21.4% as compared to 21.3% in 2021 and our statutory rate of 24.4%. Our effective tax rate was lower than our statutory rate due to the benefits of tax advantaged investments and reductions in taxes on income related to excess tax benefits resulting from the exercise and vesting of stock awards during the periods.
Net Interest Income: The following tables set forth, for the periods indicated, information regarding (i) the total dollar amount of interest income from interest-earning assets and the resultant average yields on those assets; (ii) the total dollar amount of interest expense and the average rate of interest on our interest-bearing liabilities; (iii) net interest income; (iv) net interest rate spread; and (v) net interest margin:
Years Ended December 31,
2022 2021
(dollars in thousands) Average
Balance Interest Average
Yield/Cost Average
Balance Interest Average
Yield/Cost
Assets:
Interest-earning assets
Loans (1)
$ 6,596,284 $ 267,672 4.02 % $ 5,653,930 $ 222,909 3.91 %
Investment securities (1)
1,195,995 37,986 3.18 % 1,020,530 24,262 2.38 %
FHLB Stock, Fed Funds and other 105,028 3,622 3.40 % 96,303 569 0.59 %
Total interest-earning assets
7,897,307 309,280 3.88 % 6,770,763 247,740 3.63 %
Noninterest-earning assets 498,771 547,742
Total assets
$ 8,396,078 $ 7,318,505
Interest-bearing liabilities
Interest bearing deposits: (2)
Demand deposits $ 521,424 $ 755 0.14 % $ 525,836 $ 726 0.14 %
Money market and savings 2,941,699 12,913 0.44 % 2,996,757 4,449 0.15 %
Certificates of deposit 1,328,290 18,345 1.38 % 1,048,218 6,236 0.59 %
Total 4,791,413 32,013 0.67 % 4,570,811 11,411 0.25 %
Borrowings:
Borrowings 1,024,344 29,085 2.81 % 109,513 394 0.36 %
Long-term debt 219,398 9,883 4.49 % 125,925 5,433 4.30 %
Total interest-bearing liabilities
6,035,155 70,981 1.17 % 4,806,249 17,238 0.36 %
Noninterest-bearing liabilities
Demand deposits (2)
1,624,223 1,596,653
Other liabilities 119,231 189,801
Total liabilities 7,778,609 6,592,703
Shareholders' equity 617,469 725,802
Total liabilities and shareholders’ equity $ 8,396,078 $ 7,318,505
Net interest income
$ 238,299 $ 230,502
Net interest rate spread 2.71 % 3.27 %
Net interest margin 2.99 % 3.38 %
(1) Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain loans and securities of $5.0 million and $3.4 million for 2022 and 2021, respectively. The estimated federal statutory tax rate was 21% for both 2022 and 2021.
(2) Cost of all deposits, including noninterest-bearing demand deposits, was 0.50% and 0.18% for 2022 and 2021, respectively.
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Rate and Volume Analysis
The following table presents the extent to which changes in interest rates and changes in the volume of our interest-earning assets and interest-bearing liabilities have affected our interest income and interest expense, excluding interest income from nonaccrual loans. Information is provided in each category with respect to: (1) changes attributable to changes in volume, (2) changes attributable to changes in rate and (3) the net change.
2022 vs. 2021
Increase (Decrease) Due to Total Change
(in thousands) Rate Volume
Assets:
Interest-earning assets
Loans $ 6,492 $ 38,271 $ 44,763
Investment securities 9,078 4,646 13,724
FHLB stock, Fed Funds and other 2,997 56 3,053
Total interest-earning assets 18,567 42,973 61,540
Liabilities:
Deposits
Demand deposits 35 (6) 29
Money market and savings 8,546 (82) 8,464
Certificates of deposit 10,073 2,036 12,109
Total interest-bearing deposits
18,654 1,948 20,602
Borrowings:
Borrowings 12,955 15,736 28,691
Long-term debt 248 4,202 4,450
Total interest-bearing liabilities
31,857 21,886 53,743
Total changes in net interest income
$ (13,290) $ 21,087 $ 7,797
Net interest income in 2022 increased $6.3 million as compared to 2021 due primarily to increases in the average balance of interest earning assets, partially offset by a decrease in our net interest margin. The increase in interest-earning assets was due to loan originations and purchases of investment securities during 2022. Our net interest margin decreased from 3.38% in 2021 to 2.99% in 2022 due to an 81 basis point increase in the rates paid on interest-bearing liabilities which was partially offset by a 25 basis point increase in the yield on interest earning assets. The increase in yield on interest-earning assets was due to higher yields on our loans and investment securities. The higher yield on our loans was primarily due to yields on adjustable rate loans increasing due to increases in the indexes on which their pricing is based. The higher yield on our investment securities were primarily due to adjustments to yields realized from longer estimated lives of certain securities and the yields of securities purchased during 2022 being higher than the yields on our existing portfolio. The increase in the rates paid on our interest-bearing liabilities was due to higher deposit costs, higher borrowing costs and an increase in the proportion of higher cost borrowings used as our sources of funding. The increases in the rates paid on deposits was due to the significant increase in market interest rates during 2022. Our average borrowings increased by $915 million to fund the growth of our loan portfolio and investment securities. Our cost of borrowings increased from 36 basis points during 2021 to 281 basis points during 2022 due to the significant increase in market interest rates during 2022 and the impact of the $100 million fixed rate subordinated notes offering completed in January 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 $5.2 million and $15.0 million recovery of our allowance for credit losses in 2022 and 2021, respectively. In 2022, the amounts recovered were partially offset by provisions related to the growth in our loan portfolio and a $2.8 million increase in our collateral qualitative factor related to projected declines in future home prices.
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Noninterest income consisted of the following:
Years Ended December 31,
(in thousands) 2022 2021
Noninterest income
Gain on loan origination and sale activities (1)
Single family $ 13,054 $ 66,850
CRE, multifamily and SBA 4,647 25,468
Loan servicing income 12,388 7,233
Deposit fees 8,875 8,068
Other 12,606 12,356
Total noninterest income $ 51,570 $ 119,975
(1) May include loans originated as held for investment.
Loan servicing income, a component of noninterest income, consisted of the following:
Years Ended December 31,
(in thousands) 2022 2021
Single family servicing income (loss), net:
Servicing fees and other $ 15,737 $ 15,658
Changes - amortization (1)
(9,951) (19,669)
Subtotal 5,786 (4,011)
Risk management, single family MSRs:
Changes in fair value due to assumptions (2)
16,739 7,379
Net gain (loss) from economic hedging (18,790) (8,238)
Subtotal (2,051) (859)
Total $ 3,735 $ (4,870)
Commercial loan servicing income:
Servicing fees and other $ 16,345 $ 19,684
Amortization of capitalized MSRs (7,692) (7,581)
Total 8,653 12,103
Total loan servicing income $ 12,388 $ 7,233
(1) Represents changes due to collection/realization of expected cash flows and curtailments.
(2) Principally reflects changes in model assumptions, including prepayment speed assumptions, which are primarily affected by changes in mortgage interest rates.
The decrease in noninterest income for 2022 as compared to 2021 was due to a decrease in gain on loan origination and sale activities, which was partially offset by higher loan servicing income. The $74.6 million decrease in gain on loan origination and sale activities was due to a $53.8 million decrease in single family gain on loan origination and sale activities and a $20.8 million decrease in commercial real estate 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 81% decrease in the volume of loans sold. The $5.2 million increase in loan servicing income was primarily due to lower levels of prepayments which reduced our amortization costs. Included in other income in 2022 is a $4.3 million gain on sale of five eastern Washington branches in the third quarter.
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Noninterest expense consisted of the following:
Years Ended December 31,
(in thousands) 2022 2021
Noninterest expense
Compensation and benefits $ 115,533 $ 132,015
Occupancy 24,528 23,832
Information services 29,981 27,913
General, administrative and other 35,377 31,583
Total noninterest expense $ 205,419 $ 215,343
The $9.9 million decrease in noninterest expense in 2022 as compared to 2021 was primarily due to lower compensation and benefit costs, partially offset by increases in general, administrative and other expenses. The $16.5 million decrease in compensation and benefit costs was primarily due to reduced commission expense on lower loan origination volumes in our single family mortgage operations, lower bonus and commissions expense and lower headcount, which were partially offset by wage increases given in 2022. The increase in general, administrative and other costs was primarily due to higher FDIC fees due to our larger asset base and an increase in marketing costs related to our promotional deposit products.
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Financial Condition – December 31, 2022 compared to December 31, 2021
During 2022, our total assets increased $2.2 billion due primarily to a $1.9 billion increase in loans held for investment and a $394 million increase in investment securities which were partially offset by a decrease of $159 million in loans held for sale. Loans held for investment increased due to $3.6 billion of originations, which were partially offset by prepayments and scheduled payments of $1.7 billion. Total liabilities increased $2.3 billion due to increases in deposits, borrowings and long-term debt. Deposits increased $1.3 billion primarily due to increased balances of brokered deposits and certificates of deposit related to our promotional products which was partially offset by decreases in our noninterest bearing and money market deposits. The $975 million increase in borrowings was used to fund the growth in our loans and investment securities. Long-term debt increased due to our $100 million fixed rate subordinated notes offering completed in January 2022.
Investment Securities
The fair values of our investment securities available for sale ("AFS") are as follows:
At December 31,
2022 2021
(in thousands) Fair Value Fair Value
Investment securities AFS:
Mortgage-backed securities:
Residential $ 197,262 $ 32,963
Commercial 56,049 62,792
Collateralized mortgage obligations:
Residential 553,039 187,394
Commercial 70,519 136,659
Municipal bonds 411,548 539,923
Corporate debt securities 42,945 19,616
U.S. Treasury securities 19,934 23,175
Agency debentures 27,478 —
Total $ 1,378,774 $ 1,002,522
Loans
The following table details the composition of our LHFI portfolio by dollar amount:
At December 31,
(in thousands) 2022 2021
CRE
Non-owner occupied CRE $ 658,085 $ 705,359
Multifamily 3,975,754 2,415,359
Construction/land development 627,663 496,144
Total 5,261,502 3,616,862
Commercial and industrial loans
Owner occupied CRE 443,363 457,706
Commercial business 359,747 401,872
Total 803,110 859,578
Consumer loans
Single family (1)
1,009,001 763,331
Home equity and other 352,707 303,078
Total 1,361,708 1,066,409
Total LHFI 7,426,320 5,542,849
ACL (41,500) (47,123)
Total LHFI less ACL $ 7,384,820 $ 5,495,726
(1) Includes $5.9 million and $7.3 million of loans at December 31, 2022 and 2021, respectively, where a fair value option election was made at the time of origination and; therefore, are carried at fair value with changes recognized in the consolidated income statements.
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The following tables show the contractual maturity of our loan portfolio by loan type:
December 31, 2022 Loans due after one year
by rate characteristic
(in thousands) Within one year After
one year through
five years After
five
years Total Fixed-
rate Adjustable-
rate
CRE
Non-owner occupied CRE $ 27,163 $ 171,380 $ 459,542 $ 658,085 $ 83,078 $ 547,844
Multifamily 3,389 59,234 3,913,131 3,975,754 23,838 3,948,527
Construction/land development
543,108 84,555 — 627,663 30,877 53,678
Total 573,660 315,169 4,372,673 5,261,502 137,793 4,550,049
Commercial and industrial loans
Owner occupied CRE 4,688 82,399 356,276 443,363 134,895 303,780
Commercial business 63,681 179,566 116,500 359,747 75,922 220,144
Total 68,369 261,965 472,776 803,110 210,817 523,924
Consumer loans
Single family 67 598 1,008,336 1,009,001 385,839 623,095
Home equity and other 44 18 352,645 352,707 7,381 345,282
Total 111 616 1,360,981 1,361,708 393,220 968,377
Total LHFI $ 642,140 $ 577,750 $ 6,206,430 $ 7,426,320 $ 741,830 $ 6,042,350
December 31, 2021 Loans due after one year
by rate characteristic
(in thousands) Within one year After
one year through
five years After
five
years Total Fixed-
rate Adjustable-
rate
CRE
Non-owner occupied CRE $ 21,514 $ 150,110 $ 533,735 $ 705,359 $ 87,050 $ 596,795
Multifamily 17,826 50,693 2,346,840 2,415,359 5,028 2,392,505
Construction/land development
418,649 77,495 — 496,144 31,654 45,841
Total 457,989 278,298 2,880,575 3,616,862 123,732 3,035,141
Commercial and industrial loans
Owner occupied CRE 11,481 94,284 351,941 457,706 120,047 326,178
Commercial business 77,268 184,279 140,325 401,872 120,077 204,527
Total 88,749 278,563 492,266 859,578 240,124 530,705
Consumer loans
Single family 206 503 762,622 763,331 318,756 444,369
Home equity and other 33 34 303,011 303,078 6,909 296,136
Total 239 537 1,065,633 1,066,409 325,665 740,505
Total LHFI $ 546,977 $ 557,398 $ 4,438,474 $ 5,542,849 $ 689,521 $ 4,306,351
Loan Roll-forward
(in thousands) 2022 2021
Loans - beginning balance January 1, $ 5,542,849 $ 5,244,180
Originations and advances 3,583,204 3,279,593
Transfers to LHFS (12,361) (392,555)
Payoffs, paydowns and other (1,685,063) (2,586,525)
Charge-offs and transfers to OREO (2,309) (1,844)
Loans - ending balance December 31,
$ 7,426,320 $ 5,542,849
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Loan Originations and Advances
Years Ended December 31,
(in thousands) 2022 2021
CRE
Non-owner occupied CRE $ 74,235 $ 86,167
Multifamily 1,855,152 1,600,133
Construction/land development 758,967 721,059
Total 2,688,354 2,407,359
Commercial and industrial loans
Owner occupied CRE 74,639 81,066
Commercial business 192,037 334,315
Total 266,676 415,381
Consumer loans
Single family 436,580 340,363
Home equity and other 191,594 116,490
Total 628,174 456,853
Total $ 3,583,204 $ 3,279,593
Production Volumes for Sale to the Secondary Market
Years Ended December 31,
(in thousands) 2022 2021
Loan originations
Single family loans
$ 573,110 $ 1,961,298
Commercial and industrial and CRE loans
100,092 295,366
Loans sold
Single family loans 693,348 2,046,811
Commercial and industrial and CRE loans (1)
145,622 773,378
Net gain on loan origination and sale activities
Single family loans $ 13,054 $ 66,850
Commercial and industrial and CRE loans (1)
4,647 25,468
Total $ 17,701 $ 92,318
(1) May include loans originated as held for investment.
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Capitalized Mortgage Servicing Rights ("MSRs")
Years Ended December 31,
(in thousands) 2022 2021
Single Family MSRs
Beginning balance $ 61,584 $ 49,966
Additions and amortization:
Originations
8,245 23,908
Amortization (1)
(9,951) (19,669)
Net additions and amortization
(1,706) 4,239
Change in fair value due to assumptions (2)
16,739 7,379
Ending balance $ 76,617 $ 61,584
Ratio to related loans serviced for others 1.41 % 1.11 %
Multifamily and SBA MSRs
Beginning balance $ 39,415 $ 35,774
Originations
3,533 11,222
Amortization
(7,692) (7,581)
Ending balance $ 35,256 $ 39,415
Ratio to related loans serviced for others 1.82 % 1.94 %
(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.
Deposits
Deposit balances and weighted average rates were as follows for the periods indicated:
At December 31,
2022 2021
(in thousands) Amount Weighted Average Rate Amount Weighted Average Rate
Deposits by product:
Noninterest-bearing demand deposits $ 1,399,912 — % $ 1,617,069 — %
Interest-bearing:
Interest-bearing demand deposits 466,490 0.10 % 513,810 0.10 %
Savings 258,977 0.06 % 302,389 0.06 %
Money market 2,383,209 1.22 % 2,806,313 0.15 %
Certificates of deposit 2,943,331 3.07 % 906,928 0.51 %
Total interest-bearing deposits 6,052,007 1.98 % 4,529,440 0.21 %
Total Deposits $ 7,451,919 1.61 % $ 6,146,509 0.15 %
The following table presents the schedule of maturities of certificates of deposit as of December 31, 2022:
(in thousands) Three Months or Less Over Three Months to Twelve Months Over One Year through Three Years Over Three Years Total
Time deposits of $250,000 or less $ 1,057,563 $ 1,197,671 $ 495,173 $ 3,698 $ 2,754,105
Time deposits of $250,000 or more 53,400 66,676 68,463 687 189,226
Total $ 1,110,963 $ 1,264,347 $ 563,636 $ 4,385 $ 2,943,331
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Credit Risk Management: Delinquent Loans, Nonperforming Assets and Provision for Credit Losses
As of December 31, 2022, our ratio of nonperforming assets to total assets remained low at 0.13% while our ratio of total loans delinquent over 30 days to total loans was 0.29%. The Company recorded a recovery of our allowance for credit losses of $5.2 million in 2022, and the ACL for loans decreased by $5.6 million, 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. In 2022, the amounts recovered were partially offset by provisions related to the growth in our loan portfolio and a $2.8 million increase in our collateral qualitative factor related to projected declines in future home prices.
Delinquent loans by loan type consisted of the following:
At December 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 (1)
Current Total loans
CRE
Non- owner occupied CRE $ — $ — $ — $ — $ — $ 658,085 $ 658,085
Multifamily — — — — — 3,975,754 3,975,754
Construction and land development
Multifamily construction — — — — — 95,117 95,117
CRE construction — — — — — 18,954 18,954
Single family construction — — — — — 355,554 355,554
Single family construction to permanent — — — — — 158,038 158,038
Total — — — — — 5,261,502 5,261,502
Commercial and industrial loans
Owner occupied CRE — — — 2,521 2,521 440,842 443,363
Commercial business — — — 4,269 4,269 355,478 359,747
Total — — — 6,790 6,790 796,320 803,110
Consumer loans
Single family 4,556 1,724 4,372 (2) 2,584 13,236 995,765 1,009,001 (3)
Home equity and other 267 296 — 681 1,244 351,463 352,707
Total 4,823 2,020 4,372 3,265 14,480 1,347,228 1,361,708
Total loans $ 4,823 $ 2,020 $ 4,372 $ 10,055 $ 21,270 $ 7,405,050 $ 7,426,320
% 0.06 % 0.03 % 0.06 % 0.14 % 0.29 % 99.71 % 100.00 %
(1) Includes loans whose repayments are insured by the FHA or guaranteed by the VA or SBA of $10.6 million.
(2) FHA-insured and VA-guaranteed single family loans that are 90 days or more past due are maintained on accrual status if they are determined to have little to no risk of loss.
(3) Includes $5.9 million of loans where a fair value option election was made at the time of origination and, therefore, are carried at fair value with changes recognized in our consolidated income statements.
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At December 31, 2021
Past Due and Still Accruing
(in thousands) 30-59 days 60-89 days 90 days or
more Nonaccrual Total past
due and nonaccrual (1)
Current Total loans
CRE
Non- owner occupied CRE $ — $ — $ — $ — $ — $ 705,359 $ 705,359
Multifamily — — — — 2,415,359 2,415,359
Construction and land development
Multifamily construction — — — — — 37,861 37,861
CRE construction — — — — — 14,172 14,172
Single family construction — — — — — 296,027 296,027
Single family construction to permanent — — — — — 148,084 148,084
Total — — — — — 3,616,862 3,616,862
Commercial and industrial loans
Owner occupied CRE — — — 3,568 3,568 454,138 457,706
Commercial business 198 — — 5,023 5,221 396,651 401,872
Total 198 — — 8,591 8,789 850,789 859,578
Consumer loans
Single family 892 820 6,717 (2) 2,802 11,231 752,100 763,331 (3)
Home equity and other 118 74 — 808 1,000 302,078 303,078
Total 1,010 894 6,717 3,610 12,231 1,054,178 1,066,409
Total loans $ 1,208 $ 894 $ 6,717 $ 12,201 $ 21,020 $ 5,521,829 $ 5,542,849
% 0.02 % 0.02 % 0.12 % 0.22 % 0.38 % 99.62 % 100.00 %
(1) Includes loans whose repayments are insured by the FHA or guaranteed by the VA or SBA of $8.4 million.
(2) FHA-insured and VA-guaranteed single family loans that are 90 days or more past due are maintained on accrual status if they are determined to have little to no risk of loss.
(3) Includes $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 recognized in our consolidated income statements.
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:
December 31, 2022 December 31, 2021
(in thousands) Balance Rate (1)
Balance Rate (1)
CRE
Non-owner occupied CRE $ 2,102 0.32 % $ 7,509 1.06 %
Multifamily 10,974 0.28 % 5,854 0.24 %
Construction/land development
Multifamily construction 998 1.05 % 507 1.34 %
CRE construction 196 1.03 % 150 1.06 %
Single family construction 12,418 3.51 % 6,411 2.16 %
Single family construction to permanent 1,171 0.74 % 1,055 0.71 %
Total 27,859 0.53 % 21,486 0.59 %
Commercial and industrial loans
Owner occupied CRE 1,030 0.23 % 5,006 1.10 %
Commercial business 3,247 0.91 % 12,273 3.39 %
Total 4,277 0.54 % 17,279 2.11 %
Consumer loans
Single family 5,610 0.62 % 4,394 0.68 %
Home equity and other 3,754 1.06 % 3,964 1.31 %
Total 9,364 0.74 % 8,358 0.88 %
Total ACL $ 41,500 0.57 % $ 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.
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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 does not have any obligation to repay long term debt within the next three years.
At December 31, 2022, the Bank had available borrowing capacity of $2.6 billion from the FHLB, $340 million from the FRBSF and $1.2 billion under borrowing lines established with other financial institutions. We believe that our current unrestricted cash and cash equivalents, cash flows from operations and borrowing capacity will be sufficient to meet our liquidity needs for at least the next 12 months. We are currently not aware of any other trends or demands, commitments, events or uncertainties that will result in or that are reasonably likely to result in our liquidity increasing or decreasing in any material way that will impact our liquidity needs during or beyond the next 12 months.
Cash Flows
For 2022 and 2021, cash and cash equivalents increased $7.6 million and $7.2 million, respectively. As a banking institution, the Company has extensive access to liquidity. 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 2022, $218 million of cash was provided by operating activities, primarily from cash proceeds from the sale of loans exceeding cash used to fund LHFS. For 2021, cash of $173 million was provided by operating activities, primarily from cash proceeds from the sale of loans exceeding cash used to fund LHFS.
Cash flows from investing activities
The Company's investing activities are primarily related to investment securities and LHFI. For 2022, cash of $2.7 billion was used in investing activities primarily for the origination of LHFI net of principal repayments, the purchase of AFS investment securities and cash distributed in the sale of branches, partially offset by proceeds from the sale of and principal payments on investment securities. For 2021, cash of $126 million was used in investing activities for the origination of LHFI net of principal repayments and the purchase of investment securities, partially offset by principal repayments of investment securities and the proceeds from the sale of LHFI and investment securities.
Cash flows from financing activities
The Company's financing activities are primarily related to deposits, net proceeds from borrowings and equity transactions. For 2022, cash of $2.4 billion was provided by financing activities from growth in deposits, increased FHLB borrowings and proceeds from our debt issuance, partially offset by, net repayment of short-term borrowings, repurchases of and dividends paid
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on our common stock. For 2021, cash of $40 million was used in financing activities from net repayment of short-term borrowings, repurchases of and dividends paid on our common stock, partially offset by growth in deposits.
Capital Resources and Dividends
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 tables set forth the capital and capital ratios of HomeStreet Inc. (on a consolidated basis) and HomeStreet Bank as of the dates indicated below, as compared to the respective regulatory requirements applicable to them:
At December 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) $ 693,112 7.25 % $ 382,467 4.0 % NA NA
Common equity tier 1 capital (to risk-weighted assets) 633,112 8.72 % 326,876 4.5 % NA NA
Tier 1 risk-based capital (to risk-weighted assets) 693,112 9.54 % 435,834 6.0 % NA NA
Total risk-based capital (to risk-weighted assets) 837,828 11.53 % 581,112 8.0 % NA NA
HomeStreet Bank
Tier 1 leverage capital (to average assets) $ 822,891 8.63 % $ 381,506 4.0 % $ 476,883 5.0 %
Common equity tier 1 capital (to risk-weighted assets) 822,891 11.92 % 310,582 4.5 % 448,618 6.5 %
Tier 1 risk-based capital (to risk-weighted assets) 822,891 11.92 % 414,109 6.0 % 552,146 8.0 %
Total risk-based capital (to risk-weighted assets) 868,993 12.59 % 552,146 8.0 % 690,182 10.0 %
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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At 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 the Company and the Bank are required to maintain a "conservation buffer" consisting of additional Common Equity Tier 1 Capital which is at least 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 the Bank maintained capital ratios necessary to satisfy the capital conservation buffer requirements as of the dates indicated. At December 31, 2022, capital conservation buffers for the Company and the Bank were 3.53% and 4.59%, respectively.
The Company paid a quarterly cash dividend of $0.35 per common share in each quarter of 2022. It is our current intention to continue to pay quarterly dividends and the Company has declared a cash dividend of $0.35 per common share payable on February 22, 2023. The amount and declaration of future cash dividends are subject to approval by our Board of Directors and certain statutory requirements and regulatory restrictions.
Other than the acquisition of three branches in southern California, which closed in the first quarter of 2023, whereby we purchased $5.2 million of land and buildings, we had no material commitments for capital expenditures as of December 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.
Accounting Developments
See Financial Statements and Supplementary Data - Note 1, Summary of Significant Accounting Policies for a discussion of accounting developments.
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Non-GAAP Financial Measures
To supplement our consolidated financial statements presented in accordance with GAAP, we use certain non-GAAP measures of financial performance. In this Annual Report on Form 10-K, we use the following non-GAAP measures: (i) tangible common equity and tangible assets as we believe this information is consistent with the treatment by bank regulatory agencies, which exclude intangible assets from the calculation of capital ratios; and (ii) an efficiency ratio which is the ratio of noninterest expense to the sum of net interest income and noninterest income, excluding certain items of income or expense and excluding taxes incurred and payable to the state of Washington as such taxes are not classified as income taxes and we believe including them in noninterest expense impacts the comparability of our results to those companies whose operations are in states where assessed taxes on business are classified as income taxes.
These supplemental performance measures may vary from, and may not be comparable to, similarly titled measures provided by other companies in our industry. Non-GAAP financial measures are not in accordance with, or an alternative for, GAAP. Generally, a non-GAAP financial measure is a numerical measure of a company’s performance that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with GAAP. A non-GAAP financial measure may also be a financial metric that is not required by GAAP or other applicable requirements.
We believe that these non-GAAP financial measures, when taken together with the corresponding GAAP financial measures, provide meaningful supplemental information regarding our performance by providing additional information used by management that is not otherwise required by GAAP or other applicable requirements. Our management uses, and believes that investors benefit from referring to, these non-GAAP financial measures in assessing our operating results and when planning, forecasting and analyzing future periods. These non-GAAP financial measures also facilitate a comparison of our performance to prior periods. We believe these measures are frequently used by securities analysts, investors and other parties in the evaluation of companies in our industry. These non-GAAP financial measures should be considered in addition to, not as a substitute for or superior to, financial measures prepared in accordance with GAAP. In the information below, we have provided reconciliations of, where applicable, the most comparable GAAP financial measures to the non-GAAP measures used in this Annual Report, or the calculation of the non-GAAP financial measures.
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Reconciliations of non-GAAP results of operations to the nearest comparable GAAP measures or the calculation of the non-GAAP financial measures:
For the Year Ended
(in thousands, except ratio) 2022 2021
Return on average tangible equity (annualized)
Average shareholders' equity
$ 617,469 $ 725,802
Less: Average goodwill and other intangibles
(30,930) (32,337)
Average tangible equity
586,539 693,465
Net income $ 66,540 $ 115,422
Adjustments (tax effected):
Amortization on core deposit intangibles 751 923
Tangible income applicable to shareholders $ 67,291 $ 116,345
Ratio 11.5 % 16.8 %
Efficiency ratio
Noninterest expense
Total
$ 205,419 $ 215,343
Adjustments:
Legal fees recovery — 1,900
State of Washington taxes (2,311) (2,423)
Adjusted total
$ 203,108 $ 214,820
Total revenues
Net interest income
$ 233,307 $ 227,057
Noninterest income
51,570 119,975
Gain on sale of branches (4,270) —
Total $ 280,607 $ 347,032
Ratio 72.4 % 61.9 %
As of
(in thousands, except share data) December 31, 2022 December 31, 2021
Tangible book value per share
Shareholders' equity
$ 562,147 $ 715,339
Less: goodwill and other intangibles
(29,980) (31,709)
Tangible shareholder's equity
$ 532,167 $ 683,630
Common shares outstanding
18,730,380 20,085,336
Computed amount
$ 28.41 $ 34.04
Tangible common equity to tangible assets
Tangible shareholder's equity (per above)
$ 532,167 $ 683,630
Tangible assets
Total assets
$ 9,364,760 $ 7,204,091
Less: Goodwill and other intangibles
(29,980) (31,709)
Net
$ 9,334,780 $ 7,172,382
Ratio 5.7 % 9.5 %
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