Item 2. Management’s Discussion and Analysis
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements and Notes presented elsewhere in this report and in HomeStreet, Inc.'s 2022 Annual Report on Form 10-K.
FORWARD-LOOKING STATEMENTS
Statements contained in this Quarterly Report on Form 10-Q that are not historical facts or that discuss our expectations, beliefs or views regarding our future operations or future financial performance, or financial or other trends in our business or in the markets in which we operate, long-term value creation, capital management, reduction in volatility, reliability of earnings, net interest margins, provisions and allowances for credit losses, cost reduction initiatives, and restructuring activities constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
Many forward-looking statements can be identified as using words such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan," "potential," "should," "will" and "would" and similar expressions (or the negative of these terms). Such statements involve inherent risks and uncertainties, many of which are difficult to predict and are generally beyond the control of the Company and are subject to risks and uncertainties, including, but not limited to, those discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 and the risks and uncertainties discussed below and elsewhere in this Quarterly Report on Form 10-Q that could cause actual results to differ significantly from those projected.
Although we believe that expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We undertake no obligation, and expressly disclaim any such obligation to update or clarify any of the forward-looking statements after the date of this Quarterly Report on Form 10-Q to reflect changed assumptions, the occurrence of anticipated or unanticipated events, new information or changes to future results over time or otherwise, except as required by law. Readers are cautioned not to place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q.
Except as otherwise noted, references to "we," "our," "us" or "the Company" refer to HomeStreet, Inc. and its subsidiaries that are consolidated for financial reporting purposes. Statements of knowledge, intention or belief reflect those characteristics of our executive management team based on current facts and circumstances.
You may review a copy of this Quarterly Report on Form 10-Q, including exhibits and any schedule filed therewith on the SEC's website (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants, such as HomeStreet, Inc., that file electronically with the SEC. Copies of our Securities Exchange Act reports are also available from our investor relations website, http://ir.homestreet.com. Information contained in or linked from our websites is not incorporated into and does not constitute a part of this report.
Critical Accounting Estimates
We have identified two estimates as being critical because they require management to make particularly difficult, subjective, and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These policies relate to the allowance for credit losses (“ACL”) and the valuation of single family mortgage servicing rights (“MSRs"). Additionally, we identified goodwill as a critical accounting matter in light of recent trends in bank valuations.
The ACL is calculated based on quantitative and qualitative factors to estimate credit losses over the life of the loan. The inputs used to determine quantitative factors include estimates based on historical experience of probability of default and losses given default. Inputs used to determine qualitative factors include changes in current portfolio characteristics and operating environments such as current and forecasted unemployment rates, capitalization rates used to value properties securing loans, rental rates and single family pricing indexes. Qualitative factors may also include adjustments to address matters not contemplated by the model and assumptions used to determine qualitative factors. Although we believe that our methodology for determining an appropriate level for the ACL adequately addresses the various components that could potentially result in credit losses, the processes and their elements include features that may be susceptible to significant change. Any unfavorable differences between the actual outcome of credit-related events and our estimates could require an additional provision for credit losses. For example, if the projected unemployment rate was downgraded one grade for all periods, the amount of the ACL at March 31, 2023 would increase by approximately $8 million. This sensitivity analysis is hypothetical and has been provided only to indicate the potential impact that changes in assumptions may have on the ACL estimate.
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The valuation of MSRs is based on various assumptions which are set forth in Note 6– Mortgage Banking Operations of the financial statements. Note 6 also provides sensitivity analysis based on the assumptions used. The sensitivity analyses are hypothetical and have been provided to indicate the potential impact that changes in assumptions may have on the estimate of the fair value of MSRs.
The Company has goodwill on its books related to acquisitions it has completed, including the acquisition of the three southern California branches in the first quarter of 2023. Our goodwill is evaluated for impairment on an annual basis or more frequently if events or circumstances indicate that a potential impairment exists. Such evaluation may be based on a variety of factors, including the quoted price of our common stock, market prices of common stock of other banking organizations, common stock trading multiples and discounted cash flows analyses. Future evaluations of goodwill may result in impairment and ensuing write-downs, which could have an adverse effect on our financial condition, results of operations and capital position.
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Summary Financial Data
Quarter Ended
(in thousands, except per share data and FTE data) March 31, 2023 December 31, 2022 March 31, 2022
Select Income Statement data:
Net interest income $ 49,376 $ 55,687 $ 54,546
Provision for credit losses 593 3,798 (9,000)
Noninterest income 10,190 9,677 15,558
Noninterest expense 52,491 50,420 54,473
Net income:
Before income taxes
6,482 11,146 24,631
Total
5,058 8,501 19,951
Net income per share - diluted 0.27 0.45 1.01
Select Performance Ratios:
Return on average equity - annualized 3.5 % 6.0 % 11.6 %
Return on average tangible equity - annualized (1)
4.1 % 6.4 % 12.2 %
Return on average assets - annualized 0.22 % 0.36 % 1.10 %
Efficiency ratio (1)
87.2 % 76.2 % 77.0 %
Net interest margin 2.23 % 2.53 % 3.29 %
Other data
Full time equivalent employees 920 913 962
(1) Return on average tangible equity and the efficiency ratio are non-GAAP financial measures. For a reconciliation of return on average tangible equity to the nearest comparable GAAP financial measure and the computation of the efficiency ratio, see “Non-GAAP Financial Measures” elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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As of
(in thousands, except share and per share data) March 31, 2023 December 31, 2022
Selected Balance Sheet Data
Loans held for sale $ 24,253 $ 17,327
Loans held for investment, net 7,444,882 7,384,820
ACL 41,500 41,500
Investment securities
1,477,004 1,400,212
Total assets 9,858,889 9,364,760
Deposits 7,056,603 7,451,919
Borrowings
1,878,000 1,016,000
Long-term debt 224,492 224,404
Total shareholders' equity 574,994 562,147
Other data:
Book value per share
$ 30.64 $ 30.01
Tangible book value per share (1)
$ 27.87 $ 28.41
Total equity to total assets
5.8 % 6.0 %
Tangible common equity to tangible assets (1)
5.3 % 5.7 %
Shares outstanding at period end 18,767,811 18,730,380
Loans to deposit ratio
106.4 % 99.9 %
Credit Quality:
ACL to total loans (2)
0.56 % 0.57 %
ACL to nonaccrual loans
318.1 % 412.7 %
Nonaccrual loans to total loans
0.17 % 0.14 %
Nonperforming assets to total assets
0.15 % 0.13 %
Nonperforming assets
$ 14,886 $ 11,893
Regulatory Capital Ratios:
Bank
Tier 1 leverage ratio
8.47 % 8.63 %
Total risk-based capital
12.37 % 12.59 %
Company
Tier 1 leverage ratio
6.92 % 7.25 %
Total risk-based capital
11.16 % 11.53 %
(1) Tangible book value per share and tangible common equity to tangible assets are non-GAAP financial measures. For a reconciliation to the nearest comparable GAAP financial measure, see “Non-GAAP Financial Measures” elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(2) This ratio excludes balances insured by the FHA or guaranteed by the VA or SBA.
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Current Developments
Our financial results continue to be adversely impacted by increases in short-term interest rates. We have continued to raise new deposits through promotional certificates of deposit and have reduced new loan originations. Additionally, we have focused our new loan origination activity primarily on floating rate products such as commercial loans, residential construction loans and home equity loans.
Our net interest margin decreased in the first quarter due to decreases in lower cost transaction and savings deposits and overall higher funding costs. We expect continued decreases in lower cost deposit accounts as these accounts migrate to higher yielding alternatives, including promotional accounts offered by us. We expect to replace this migration with higher cost promotional deposit accounts or wholesale funding alternatives. As we anticipate these funding cost pressures to continue in the near term, we expect our net interest margin to decline for the remainder of 2023.
On February 10, 2023, we closed our purchase of three branches in southern California, whereby we acquired $373 million in deposits and $21 million in loans and recorded $11 million of core deposit intangibles and $12 million of goodwill. The deposit balances in these branches at the end of March 2023 totaled $322 million.
Management's Overview of the First Quarter 2023 Financial Performance
First Quarter of 2023 Compared to the Fourth Quarter of 2022
General: Our net income and income before taxes were $5.1 million and $6.5 million, respectively, in the first quarter of 2023, as compared to $8.5 million and $11.1 million, respectively, in the fourth quarter of 2022. The $4.7 million decrease in income before taxes was due to lower net interest income and higher noninterest expense, partially offset by a lower provision for credit losses and higher noninterest income.
Income Taxes: Our effective tax rate was 22.0% in the first quarter of 2023 as compared to 23.7% in fourth quarter of 2022 and a statutory rate of 24.4%. Our effective tax rates were lower than our statutory rate due primarily to the benefits of tax advantaged investments. Additionally, because the benefits of our tax advantaged investments were larger in relation to our income before taxes in the first quarter of 2023 as compared to the fourth quarter of 2022, our effective tax rate was lower in the first quarter of 2023.
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Net Interest Income: The following tables set forth, for the periods indicated, information regarding (i) the total dollar amount of interest income from interest-earning assets and the resultant average yields on those assets; (ii) the total dollar amount of interest expense and the average rate of interest on our interest-bearing liabilities; (iii) net interest income; (iv) net interest rate spread; and (v) net interest margin:
Quarter Ended
March 31, 2023 December 31, 2022
(in thousands) Average
Balance Interest Average
Yield/Cost Average
Balance Interest Average
Yield/Cost
Assets:
Interest-earning assets:
Loans (1)
$ 7,471,456 $ 82,790 4.44 % $ 7,368,097 $ 81,007 4.32 %
Investment securities (1)
1,452,137 13,733 3.78 % 1,362,861 12,597 3.70 %
FHLB Stock, Fed Funds and other 126,891 1,750 5.59 % 159,263 1,967 4.88 %
Total interest-earning assets
9,050,484 98,273 4.35 % 8,890,221 95,571 4.24 %
Noninterest-earning assets 480,221 458,175
Total assets
$ 9,530,705 $ 9,348,396
Liabilities and shareholders' equity:
Interest-bearing deposits: (2)
Demand deposits
$ 430,268 $ 299 0.28 % $ 475,336 $ 238 0.20 %
Money market and savings
2,555,512 7,353 1.16 % 2,740,808 6,832 0.98 %
Certificates of deposit
2,715,921 21,718 3.24 % 2,010,895 11,445 2.26 %
Total 5,701,701 29,370 2.09 % 5,227,039 18,515 1.40 %
Borrowings:
Borrowings
1,342,347 15,340 4.57 % 1,717,042 17,163 3.93 %
Long-term debt
224,435 2,965 5.28 % 224,345 2,801 4.96 %
Total interest-bearing liabilities
7,268,483 47,675 2.64 % 7,168,426 38,479 2.12 %
Noninterest-bearing liabilities:
Demand deposits (2)
1,511,437 1,510,744
Other liabilities
172,252 103,276
Total liabilities
8,952,172 8,782,446
Shareholders' equity 578,533 565,950
Total liabilities and shareholders' equity $ 9,530,705 $ 9,348,396
Net interest income
$ 50,598 $ 57,092
Net interest rate spread 1.71 % 2.12 %
Net interest margin 2.23 % 2.53 %
(1) Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain loans and securities of $1.2 million and $1.4 million for the quarter ended March 31, 2023 and December 31, 2022, respectively. The estimated federal statutory tax rate was 21% for the periods presented.
(2) Cost of all deposits, including noninterest-bearing demand deposits was 1.65% and 1.09% for the quarter ended March 31, 2023 and December 31, 2022, respectively.
Net interest income was $6.3 million lower in the first quarter of 2023 as compared to the fourth quarter of 2022 primarily due to a decrease in our net interest margin from 2.53% to 2.23%. The decrease in our net interest margin was due to a 52 basis point increase in the cost of interest-bearing liabilities, which was partially offset by a 11 basis point increase in the yield on interest-earning assets. Yields on interest-earning assets increased as the yields on loan originations during the first quarter were higher than the rates of our existing portfolio of loans and yields on adjustable rate loans increased due to increases in the indexes on which their pricing is based. The increase in the rates paid on our interest-bearing liabilities was due to higher deposit costs and higher borrowing costs. Our cost of borrowings increased 64 basis points during the first quarter and our cost of deposits increased 56 basis points. The increases in yields on interest-earning assets and the rates paid on interest-bearing liabilities were due to the significant increases in market interest rates during 2022 and the first quarter of 2023.
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Provision for Credit Losses: A $0.6 million provision for credit losses was recorded during the first quarter of 2023 compared to a $3.8 million provision for credit losses in the fourth quarter of 2022. The provision for the first quarter of 2023 was to offset the net charge-offs realized as the overall LHFI portfolio balances only increased $60 million. The provision in the fourth quarter of 2022 was due to the growth in our loan portfolio and a $2.2 million increase in our collateral qualitative factor related to projected declines in future home prices.
Noninterest Income consisted of the following:
Quarter Ended
(in thousands) March 31, 2023 December 31, 2022
Noninterest income
Gain on loan origination and sale activities (1)
Single family
$ 2,218 $ 1,158
CRE, multifamily and SBA 192 330
Loan servicing income 3,039 2,682
Deposit fees
2,658 2,359
Other 2,083 3,148
Total noninterest income $ 10,190 $ 9,677
(1) May include loans originated as held for investment.
Loan servicing income, a component of noninterest income, consisted of the following:
Quarter Ended
(in thousands) March 31, 2023 December 31, 2022
Single family servicing income, net
Servicing fees and other
$ 3,923 $ 3,928
Changes - amortization (1)
(1,684) (1,899)
Net
2,239 2,029
Risk management, single family MSRs:
Changes in fair value due to assumptions (2)
(311) 124
Net gain (loss) from economic hedging (81) (309)
Subtotal
(392) (185)
Single Family servicing income (loss) 1,847 1,844
Commercial loan servicing income:
Servicing fees and other 2,746 2,653
Amortization of capitalized MSRs (1,554) (1,815)
Total
1,192 838
Total loan servicing income $ 3,039 $ 2,682
(1) Represents changes due to collection/realization of expected cash flows and curtailments.
(2) Principally reflects changes in model assumptions, including prepayment speed assumptions, which are primarily affected by changes in mortgage interest rates.
The increase in noninterest income in the first quarter of 2023 as compared to the fourth quarter of 2022 was primarily due to a $1.1 million increase in single family lending gain on sale activities due to higher levels of originations of loans held for sale.
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Noninterest Expense consisted of the following:
Quarter Ended
(in thousands) March 31, 2023 December 31, 2022
Noninterest expense
Compensation and benefits $ 29,253 $ 25,970
Information services 7,145 8,101
Occupancy 5,738 6,213
General, administrative and other 10,355 10,136
Total noninterest expense $ 52,491 $ 50,420
The $2.1 million increase in noninterest expense in the first quarter of 2023 as compared to the fourth quarter of 2022 was primarily due to higher compensation and benefit costs, partially offset by lower information services costs. The higher level of compensation and benefit costs was due to seasonally higher benefits costs, primarily employer taxes and 401(k) matches, and a reduction in deferred costs due to lower levels of loan production. The benefits of lower levels of staffing in our loan origination operations in the first quarter were offset by the impact of raises given during the first quarter and the employees added from the acquisition of the three branches in southern California. Information service costs decreased primarily due to the higher fourth quarter 2022 costs associated with replacement and maintenance of our automated teller machines.
First Quarter of 2023 Compared to First Quarter of 2022
General: Our net income and income before taxes were $5.1 million and $6.5 million, respectively, in the first quarter of 2023, as compared to $20.0 million and $24.6 million, respectively, in the first quarter of 2022. The $18.1 million decrease in income before taxes was due to a lower net interest income, a provision for credit losses and lower noninterest income, partially offset by lower noninterest expense.
Income Taxes: Our effective tax rate during the first quarter of 2023 was 22.0% as compared to 19.0% in the first quarter of 2022 and our statutory rate of 24.4%. Our effective tax rates were lower than our statutory rate due to the benefits of tax advantaged investments. The first quarter of 2022 also benefited from reductions in taxes on income related to excess tax benefits resulting from the vesting of stock awards during the period. No such benefits were realized in the first quarter of 2023.
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Net Interest Income: The following tables set forth, for the periods indicated, information regarding (i) the total dollar amount of interest income from interest-earning assets and the resultant average yields on those assets; (ii) the total dollar amount of interest expense and the average rate of interest on our interest-bearing liabilities; (iii) net interest income; (iv) net interest rate spread; and (v) net interest margin:
Quarter Ended March 31,
2023 2022
(in thousands) Average
Balance Interest Average
Yield/Cost Average
Balance Interest Average
Yield/Cost
Assets:
Interest-earning assets:
Loans (1)
$ 7,471,456 $ 82,790 4.44 % $ 5,691,316 $ 53,135 3.74 %
Investment securities (1)
1,452,137 13,733 3.78 % 1,028,971 6,886 2.68 %
FHLB Stock, Fed Funds and other 126,891 1,750 5.59 % 65,918 108 0.65 %
Total interest-earning assets
9,050,484 98,273 4.35 % 6,786,205 60,129 3.55 %
Noninterest-earning assets 480,221 577,384
Total assets
$ 9,530,705 $ 7,363,589
Interest-bearing liabilities:
Interest-bearing deposits: (2)
Demand deposits
$ 430,268 $ 299 0.28 % $ 525,608 $ 143 0.11 %
Money market and savings
2,555,512 7,353 1.16 % 3,101,343 1,121 0.15 %
Certificates of deposit
2,715,921 21,718 3.24 % 886,662 1,020 0.47 %
Total 5,701,701 29,370 2.09 % 4,513,613 2,284 0.21 %
Borrowings:
Borrowings
1,342,347 15,340 4.57 % 64,557 91 0.56 %
Long-term debt
224,435 2,965 5.28 % 204,553 2,107 4.12 %
Total interest-bearing liabilities
7,268,483 47,675 2.64 % 4,782,723 4,482 0.38 %
Noninterest-bearing liabilities:
Demand deposits (2)
1,511,437 1,744,220
Other liabilities
172,252 138,048
Total liabilities
8,952,172 6,664,991
Shareholders' equity 578,533 698,598
Total liabilities and shareholders' equity $ 9,530,705 $ 7,363,589
Net interest income
$ 50,598 $ 55,647
Net interest spread 1.71 % 3.17 %
Net interest margin 2.23 % 3.29 %
(1) Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain loans and securities of $1.2 million and $1.1 million for the quarters ended March 31, 2023 and 2022, respectively. The estimated federal statutory tax rate was 21% for the periods presented.
(2) Cost of deposits including noninterest-bearing deposits, was 1.65% and 0.15% for the quarters ended March 31, 2023 and 2022, respectively.
Net interest income in the first quarter of 2023 decreased $5.2 million as compared to the first quarter of 2022 due primarily to a decrease in our net interest margin partially offset by increases in the average balance of interest earning assets. The increase in interest-earning assets was due to loan originations and purchases of investment securities. Our net interest margin decreased from 3.29% in the first quarter of 2022 to 2.23% in the first quarter of 2023 due to a 226 basis point increase in the rates paid on interest-bearing liabilities which was partially offset by an 80 basis point increase in the yield on interest earning assets. Yields on interest-earning assets increased as the yields on loan originations during the last 15 months were higher than the rates of our existing portfolio of loans and yields on adjustable rate loans increased due to increases in the indexes on which their pricing is based. The higher yields on our investment securities were primarily due to adjustments to yields realized from longer estimated lives of certain securities and the yields of securities purchased during the past year being higher than the yields on our existing portfolio. The increase in the rates paid on our interest-bearing liabilities was due to higher deposit costs, higher borrowing costs and an increase in the proportion of higher cost borrowings used as our sources of funding. The increases in the rates paid on deposits were due to the significant increase in market interest rates over the prior year. Our average borrowings increased by $1.3 billion to fund the growth of our loan portfolio and investment securities. Our cost of borrowings increased from 56 basis points during the first quarter of 2022 to 457 basis points during the first quarter of 2023 due to the significant increase in market interest rates during the last 15 months.
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Provision for Credit Losses: A $0.6 million provision for credit losses was recorded during the first quarter of 2023 compared to a $9.0 million recovery of our allowance for credit losses in the first quarter of 2022. The provision for credit losses in the first quarter of 2023 was to offset the net charge-offs realized during the quarter. The recovery of our allowance for credit losses in first quarter of 2022 was the result of the favorable performance of our loan portfolio, a stable low level of nonperforming assets and an improved outlook of the estimated impact of COVID-19 on our loan portfolio.
Noninterest Income consisted of the following:
Quarter Ended March 31,
(in thousands) 2023 2022
Noninterest income
Gain on loan origination and sale activities (1)
Single family
$ 2,218 $ 6,169
Commercial
192 2,105
Loan servicing income 3,039 3,304
Deposit fees
2,658 2,075
Other 2,083 1,905
Total noninterest income $ 10,190 $ 15,558
(1) May include loans originated as held for investment.
Loan servicing income, a component of noninterest income, consisted of the following:
Quarter Ended March 31,
(in thousands) 2023 2022
Single family servicing income, net
Servicing fees and other
$ 3,923 $ 3,871
Changes - amortization (1)
(1,684) (3,425)
Net
2,239 446
Risk management, single family MSRs:
Changes in fair value due to assumptions (2)
(311) 10,303
Net gain (loss) from economic hedging (81) (10,183)
Subtotal
(392) 120
Single Family servicing income (loss) 1,847 566
Commercial loan servicing income:
Servicing fees and other 2,746 4,450
Amortization of capitalized MSRs (1,554) (1,712)
Total
1,192 2,738
Total loan servicing income $ 3,039 $ 3,304
(1) Represents changes due to collection/realization of expected cash flows and curtailments.
(2) Principally reflects changes in model assumptions, including prepayment speed assumptions, which are primarily affected by changes in mortgage interest rates.
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The decrease in noninterest income for the first quarter of 2023 as compared to the first quarter of 2022 was due to a decrease in gain on loan origination and sale activities, which was partially offset by higher deposit fees. The $5.9 million decrease in gain on loan origination and sale activities was due to a $4.0 million decrease in single family gain on loan origination and sale activities and a $1.9 million decrease in commercial real estate and commercial gain on loan origination and sale activities. The decrease in single family gain on loan origination and sale activities was due to a decrease in rate lock volume as a result of the effects of increasing mortgage interest rates. The decrease in commercial real estate and commercial gain on loan origination and sale activities was primarily due to an 82% decrease in the volume of loans sold as a result of increasing interest rates. The $0.6 million increase in deposit fee income was primarily due to higher early withdrawals fees.
Noninterest Expense consisted of the following:
Quarter Ended March 31,
(in thousands) 2023 2022
Noninterest expense
Compensation and benefits $ 29,253 $ 32,031
Information services 7,145 7,062
Occupancy 5,738 6,365
General, administrative and other 10,355 9,015
Total noninterest expense $ 52,491 $ 54,473
The $2.0 million decrease in noninterest expense in the first quarter of 2023 as compared to the first quarter of 2022 was primarily due to lower compensation and benefit costs, partially offset by increases in general, administrative and other expenses. The $2.8 million decrease in compensation and benefit costs was primarily due to reduced commission expense on lower loan origination volumes in our single family mortgage operations, lower staffing levels and lower bonus expense, which were partially offset by wage increases given in the first quarter of 2023 and a reduction in deferred costs due to lower levels of loan production. The increase in general, administrative and other costs was primarily due to higher FDIC fees due to our larger asset base and core deposit intangible amortization associated with the three acquired branches, which were partially offset by a reduction in legal fees due to charges related to nonrecurring costs expended on litigation activities and legal matters in the first quarter of 2022.
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Financial Condition
During the first quarter of 2023, we completed the purchase of three branches in southern California whereby we acquired $373 million of deposits, $21 million of loans, $5 million of fixed assets and $324 million of cash, and recorded $11 million of core deposit intangibles and $12 million of goodwill.
Excluding the impact of the acquisition noted above, during the first quarter of 2023, our total assets increased $121 million due primarily to a $304 million increase in cash, $39 million increase in loans held for investment and a $77 million increase in investment securities. Loans held for investment increased due to $325 million of originations, which were partially offset by prepayments and scheduled payments of $285 million. Excluding the impact of the acquisition noted above, during the first quarter of 2023 total liabilities increased $108 million due to an increase in borrowings, partially offset by a decrease in deposits. The $862 million increase in borrowings was used to replace higher-cost brokered deposits and increase our on-balance sheet liquidity. The decrease in deposits was due to a $561 million decrease in brokered certificates of deposit and a $345 million decrease in non-certificates of deposit balances which were partially offset by a $253 million increase in certificates of deposit balances related to our promotional products.
Credit Risk Management
As of March 31, 2023, our ratio of nonperforming assets to total assets remained low at 0.15% while our ratio of total loans delinquent over 30 days to total loans was 0.41%. The Company recorded a $0.6 million provision for credit losses for the first quarter of 2023 which offset the net charge-offs realized as the overall LHFI portfolio balances only increased $60 million. Our overall ratio of ACL to LHFI decreased slightly to 0.56% at March 31, 2023 from 0.57% at December 31, 2022.
Management considers the current level of the ACL to be appropriate to cover estimated lifetime losses within our LHFI portfolio. The following table presents the ACL by product type:
At March 31, 2023 At December 31, 2022
(in thousands) Amount Rate (1)
Amount Rate (1)
CRE
Non-owner occupied CRE $ 2,608 0.40 % $ 2,102 0.32 %
Multifamily 9,787 0.25 % 10,974 0.28 %
Construction/land development
Multifamily construction
1,345 1.23 % 998 1.05 %
CRE construction 204 1.02 % 196 1.03 %
Single family construction
12,525 3.82 % 12,418 3.51 %
Single family construction to permanent
1,211 0.80 % 1,171 0.74 %
Total
27,680 0.53 % 27,859 0.53 %
Commercial and industrial loans
Owner occupied CRE 910 0.21 % 1,030 0.23 %
Commercial business 3,416 0.88 % 3,247 0.91 %
Total
4,326 0.52 % 4,277 0.54 %
Consumer loans
Single family 5,804 0.61 % 5,610 0.62 %
Home equity and other 3,690 1.02 % 3,754 1.06 %
Total
9,494 0.72 % 9,364 0.74 %
Total ACL $ 41,500 0.56 % $ 41,500 0.57 %
(1) The ACL rate is calculated excluding balances related to loans that are insured by the FHA or guaranteed by the VA or SBA.
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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 has $64 million of Senior Notes which mature in 2026 which it expects to pay off from available cash or from the issuance of new debt.
At March 31, 2023 and December 31, 2022, the Bank had available borrowing capacity of $2.1 billion and $2.6 billion, respectively, from the FHLB, and $397 million and $340 million, respectively, from the FRBSF and $1.2 billion, in both periods, under borrowing lines established with other financial institutions.
Cash Flows
For the quarter ended March 31, 2023, cash and cash equivalents increased by $304 million compared to an increase of $9 million during the quarter ended March 31, 2022 which reflected a decision to keep a higher level of on-balance sheet cash at the end of the first quarter of 2023. We expect to reduce our cash holdings by approximately $300 million during the second quarter, as we no longer consider it necessary to retain such high levels of cash on the balance sheet. As excess liquidity can reduce the Company’s earnings and returns, the Company manages its cash positions to minimize the level of excess liquidity and does not attempt to maximize the level of cash and cash equivalents. The following discussion highlights the major activities and transactions that affected our cash flows during these periods.
Cash flows from operating activities
The Company's operating assets and liabilities are used to support our lending activities, including the origination and sale of mortgage loans. For the quarter ended March 31, 2023, net cash of $52 million was used in operating activities, primarily from cash proceeds from the purchase of trading securities and cash used to fund LHFS exceeding proceeds from the sale of loans. For the quarter ended March 31, 2022, net cash of $124 million was provided by operating activities, primarily from cash proceeds from the sale of loans exceeding cash used to fund LHFS. We believe that cash flows from operations, available cash balances and our ability to generate cash through short-term debt borrowings are sufficient to fund our operating liquidity needs. We are currently not aware of any trends or demands, commitments, events or uncertainties that will result in or that are reasonably likely to result in our liquidity increasing or decreasing in any material way that will impact our capital needs during or beyond the next 12 months.
Cash flows from investing activities
The Company's investing activities primarily include AFS investment securities and loans originated as held for investment. For the quarter ended March 31, 2023, net cash of $269 million was provided by investing activities primarily from net cash acquired from an acquisition partially offset by the origination of LHFI net of principal repayments and the purchase of AFS investment securities and net FHLB stock purchases. For the quarter ended March 31, 2022, net cash of $464 million was used in investing activities primarily from the origination of LHFI net of principal repayments and the purchase of AFS investment securities.
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Cash flows from financing activities
The Company's financing activities are primarily related to deposits and net proceeds from borrowings. For the quarter ended March 31, 2023, net cash of $87 million was provided by financing activities, primarily due to an increase in short-term and long-term borrowings partially offset by a decrease in deposits and dividends paid on our common stock. For the quarter ended March 31, 2022, net cash of $349 million was provided by financing activities, primarily due to growth in deposits, an increase in short-term borrowings and proceeds from the issuance of the subordinated notes, partially offset by repurchases of and dividends paid on our common stock.
Off-Balance Sheet Arrangements
In the normal course of business, we are a party to financial instruments that carry off-balance sheet risk. These financial instruments (which include commitments to originate loans and commitments to purchase loans) include potential credit risk in excess of the amount recognized in the accompanying consolidated financial statements. These transactions are designed to (1) meet the financial needs of our customers, (2) manage our credit, market or liquidity risks, (3) diversify our funding sources and/or (4) optimize capital.
These commitments include the following:
(in thousands) At March 31, 2023 At December 31, 2022
Unused consumer portfolio lines $ 553,289 $ 531,784
Commercial portfolio lines (1)
785,618 788,108
Commitments to fund loans 9,323 46,067
Total $ 1,348,230 $ 1,365,959
(1) Within the commercial portfolio, undistributed construction loan proceeds, where the Company has an obligation to advance funds for construction
progress payments, were $512 million and $525 million at March 31, 2023 and December 31, 2022, respectively.
Capital Resources and Dividend Policy
The capital rules applicable to United States based bank holding companies and federally insured depository institutions (“Capital Rules”) require the Company (on a consolidated basis) and the Bank (on a stand-alone basis) to meet specific capital adequacy requirements that, for the most part, involve quantitative measures, primarily in terms of the ratios of their capital to their assets, liabilities, and certain off-balance sheet items, calculated under regulatory accounting practices. In addition, prompt corrective action regulations place a federally insured depository institution, such as the Bank, into one of five capital categories on the basis of its capital ratios: (i) well capitalized; (ii) adequately capitalized; (iii) undercapitalized; (iv) significantly undercapitalized; or (v) critically undercapitalized. A depository institution’s primary federal regulatory agency may determine that, based on certain qualitative assessments, the depository institution should be assigned to a lower capital category than the one indicated by its capital ratios. At each successive lower capital category, a depository institution is subject to greater operating restrictions and increased regulatory supervision by its federal bank regulatory agency.
The following table sets forth the capital and capital ratios of HomeStreet Inc. (on a consolidated basis) and HomeStreet Bank as compared to the respective regulatory requirements applicable to them:
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At March 31, 2023
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)
$ 670,326 6.92 % $ 387,579 4.0 % NA NA
Common equity Tier 1 capital (to risk-weighted assets) 610,326 8.36 % 328,508 4.5 % NA NA
Tier 1 risk-based capital (to risk-weighted assets) 670,326 9.18 % 438,011 6.0 % NA NA
Total risk-based capital (to risk-weighted assets) 814,598 11.16 % 584,015 8.0 % NA NA
HomeStreet Bank
Tier 1 leverage capital (to average assets)
$ 818,536 8.47 % $ 386,600 4.0 % $ 483,250 5.0 %
Common equity Tier 1 capital (to risk-weighted assets) 818,536 11.71 % 314,473 4.5 % 454,238 6.5 %
Tier 1 risk-based capital (to risk-weighted assets) 818,536 11.71 % 419,297 6.0 % 559,063 8.0 %
Total risk-based capital (to risk-weighted assets) 864,577 12.37 % 559,063 8.0 % 698,828 10.0 %
At December 31, 2022
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 %
As of the dates set forth in the above table, the Company exceeded the minimum required capital ratios applicable to it and the Bank’s capital ratios exceeded the minimums necessary to qualify as a well-capitalized depository institution under the prompt corrective action regulations. In addition to the minimum capital ratios, both HomeStreet Inc. and HomeStreet Bank are required to maintain a capital conservation buffer consisting of additional Common Equity Tier 1 Capital of more than 2.5% above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses. The required ratios for capital adequacy set forth in the above table do not include the Capital Rules’ additional capital conservation buffer, though each of the Company and Bank maintained capital ratios necessary to satisfy the capital conservation buffer requirements as of the dates indicated. At March 31, 2023, capital conservation buffers for the Company and the Bank were 3.16% and 4.37%, respectively.
The Company paid a quarterly cash dividend of $0.35 per common share in the first quarter of 2023 and on April 24, 2023, we declared a cash dividend of $0.10 per common share payable on May 24, 2023 to shareholders of record as of the close of business on May 10, 2023. It is our current intention to continue to pay quarterly dividends, however, the amount and declaration of future cash dividends are subject to approval by our Board of Directors and certain regulatory restrictions.
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We had no material commitments for capital expenditures as of March 31, 2023. However, we intend to take advantage of opportunities that may arise in the future to grow our businesses, which may include opening additional offices or acquiring complementary businesses that we believe will provide us with attractive risk-adjusted returns. As a result, we may seek to obtain additional borrowings and to sell additional shares of our common stock to raise funds which we might need for these purposes. There is no assurance, however, that, if required, we will succeed in obtaining additional borrowings or selling additional shares of our common stock on terms that are acceptable to us, if at all, as this will depend on market conditions and other factors outside of our control, as well as our future results of operations.
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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 exclude intangible assets from the calculation of capital ratios; and (ii) an efficiency ratio which is the ratio of noninterest expense to the sum of net interest income and noninterest income, excluding certain items of income or expense and excluding taxes incurred and payable to the state of Washington as such taxes are not classified as income taxes and we believe including them in noninterest expense impacts the comparability of our results to those companies whose operations are in states where assessed taxes on business are classified as income taxes.
These supplemental performance measures may vary from, and may not be comparable to, similarly titled measures provided by other companies in our industry. Non-GAAP financial measures are not in accordance with, or an alternative for, GAAP. Generally, a non-GAAP financial measure is a numerical measure of a company’s performance that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with GAAP. A non-GAAP financial measure may also be a financial metric that is not required by GAAP or other applicable requirements.
We believe that these non-GAAP financial measures, when taken together with the corresponding GAAP financial measures, provide meaningful supplemental information regarding our performance by providing additional information used by management that is not otherwise required by GAAP or other applicable requirements. Our management uses, and believes that investors benefit from referring to, these non-GAAP financial measures in assessing our operating results and when planning, forecasting and analyzing future periods. These non-GAAP financial measures also facilitate a comparison of our performance to prior periods. We believe these measures are frequently used by securities analysts, investors and other parties in the evaluation of companies in our industry. These non-GAAP financial measures should be considered in addition to, not as a substitute for or superior to, financial measures prepared in accordance with GAAP. In the information below, we have provided reconciliations of, where applicable, the most comparable GAAP financial measures to the non-GAAP measures used in this Quarterly Report, or the calculation of the non-GAAP financial measures.
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Reconciliations of non-GAAP results of operations to the nearest comparable GAAP measures:
For the quarter ended
(in thousands, except ratio and rate) March 31, 2023 December 31, 2022 March 31, 2022
Return on average tangible equity (annualized)
Average shareholders' equity
$ 578,533 $ 565,950 $ 698,598
Less: Average goodwill and other intangibles
(30,969) (30,133) (31,624)
Average tangible equity
$ 547,564 $ 535,817 $ 666,974
Net income $ 5,058 $ 8,501 $ 19,951
Adjustments (tax effected)
Amortization on core deposit intangibles 459 183 191
Tangible income applicable to shareholders $ 5,517 $ 8,684 $ 20,142
Ratio
4.1 % 6.4 % 12.2 %
Efficiency ratio
Noninterest expense
Total
$ 52,491 $ 50,420 $ 54,473
Adjustments:
State of Washington taxes
(555) (597) (506)
Adjusted total
$ 51,936 $ 49,823 $ 53,967
Total revenues
Net interest income
$ 49,376 $ 55,687 $ 54,546
Noninterest income
10,190 9,677 15,558
Total $ 59,566 $ 65,364 $ 70,104
Ratio 87.2 % 76.2 % 77.0 %
Effective tax rate used in computations above 22.0 % 22.0 % 22.0 %
As of
(in thousands, except share data) March 31, 2023 December 31, 2022
Tangible book value per share
Shareholders' equity
$ 574,994 $ 562,147
Less: goodwill and other intangibles
(51,862) (29,980)
Tangible shareholder's equity
$ 523,132 $ 532,167
Common shares outstanding
18,767,811 18,730,380
Computed amount
$ 27.87 $ 28.41
Tangible common equity to tangible assets
Tangible shareholder's equity (per above)
$ 523,132 $ 532,167
Tangible assets
Total assets
$ 9,858,889 $ 9,364,760
Less: Goodwill and other intangibles
(51,862) (29,980)
Net
$ 9,807,027 $ 9,334,780
Ratio 5.3 % 5.7 %
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