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 Form 10-K. A comparison of the financial results for the year ended December 31, 2022 to the year ended December 31, 2021, 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, 2022.
Management's Overview of 2023 Financial Performance
Recent Developments
Proposed Merger Transaction
On January 16, 2024, the Company entered into a definitive merger agreement with FirstSun, the holding company of Sunflower Bank whereby HomeStreet and HomeStreet Bank will merge with and into FirstSun and Sunflower Bank, respectively. Under the agreement, the companies will combine in an all-stock transaction in which HomeStreet shareholders will receive 0.4345 of a share of FirstSun common stock for each share of HomeStreet common stock. The Merger is expected to close in the middle of 2024.
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 and 2023. 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 2024. Additionally, our interest sensitive deposits declined as customers moved funds to higher yielding products both at our Bank and at other financial institutions 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 2024.
Due to the impacts of the significant increases in short term rates 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 2024 and our net interest margin to be lower in 2024 as compared to 2023.
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 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").
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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 we use 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, 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.
MSRs are recognized as separate assets when servicing rights are acquired through the sale of loans or through purchases. of MSRs 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) 2023 2022
Select Income Statement data:
Net interest income $ 166,753 $ 233,307
Provision for credit losses (441) (5,202)
Noninterest income 41,921 51,570
Noninterest expense 241,872 205,419
Net income (loss):
Before income tax (benefit) expense (32,757) 84,660
Total (27,508) 66,540
Net income (loss) per fully diluted share $ (1.46) $ 3.49
Core net income (loss): (1)
Total 8,284 66,540
Core net income (loss) per fully diluted share $ 0.44 $ 3.49
Select Performance Ratios:
Return on average equity (5.0) % 10.8 %
Return on average tangible equity (1)
2.0 % 11.5 %
Return on average assets
Net income (loss) (0.29) % 0.79 %
Core (1)
0.09 % 0.79 %
Efficiency ratio (1)
95.6 % 72.4 %
Net interest margin 1.88 % 2.99 %
Other Data:
Full time equivalent employees 902 942
(1) Core net income (loss), core net income (loss) per fully diluted share, return on average tangible equity, core return on average assets and the efficiency ratio are non-GAAP financial measures. For a reconciliation of core net income, core return on average assets and 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) 2023 2022
Selected Balance Sheet Data:
Loans held for sale ("LHFS") $ 19,637 $ 17,327
Loans held for investment ("LHFI"), net 7,382,404 7,384,820
ACL 40,500 41,500
Investment securities 1,278,268 1,400,212
Total assets 9,392,450 9,364,760
Deposits 6,763,378 7,451,919
Borrowings 1,745,000 1,016,000
Long-term debt 224,766 224,404
Total shareholders' equity 538,387 562,147
Other data:
Book value per share $ 28.62 $ 30.01
Tangible book value per share (1)
$ 28.11 $ 28.41
Total equity to total assets 5.7 % 6.0 %
Tangible common equity to tangible assets (1)
5.6 % 5.7 %
Shares outstanding at period end 18,810,055 18,730,380
Loans to deposits ratio 110.0 % 99.9 %
Credit quality:
ACL to total loans (2)
0.55 % 0.57 %
ACL to nonaccrual loans
103.9 % 412.7 %
Nonaccrual loans to total loans 0.53 % 0.14 %
Nonperforming assets to total assets 0.45 % 0.13 %
Nonperforming assets $ 42,643 $ 11,893
Regulatory Capital Ratios:
Bank
Tier 1 leverage ratio 8.50 % 8.63 %
Total risk-based capital 13.49 % 12.59 %
Common equity Tier 1 capital 12.79 % 11.92 %
Company
Tier 1 leverage ratio 7.04 % 7.25 %
Total risk-based capital 12.84 % 11.53 %
Common equity Tier 1 capital 9.66 % 8.72 %
(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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Results of Operations
2023 Compared to 2022
General: Our net income (loss) and income (loss) before taxes were $(27.5) million and $(32.8) million, respectively, in 2023, as compared to $66.5 million and $84.7 million, respectively, in 2022. Our core net income and core income before taxes in 2023, which excludes the impact of the goodwill impairment charge and merger related expenses, was $8.3 million and $8.6 million, as compared to $66.5 million and $84.7 million, respectively, in 2022. The $76.1 million decrease in core income before taxes was due to lower net interest income, a lower recovery of allowance for credit losses and lower noninterest income, partially offset by lower noninterest expense.
Income Taxes: Our effective tax rate of 16.0% during 2023 was significantly impacted by the goodwill impairment charge, a portion of which was not deductible for tax purposes and the benefits of tax advantaged investments which were higher than our core income before taxes. Our effective tax rate in 2022 of 21.4% was lower than the statutory rate due to the benefits of tax advantaged investments and reductions in taxes on income related to excess tax benefits resulting from the vesting of stock awards during the period.
Net Interest Income: The following table sets 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,
2023 2022
(dollars in thousands) Average
Balance Interest Average
Yield/Cost Average
Balance Interest Average
Yield/Cost
Assets:
Interest-earning assets
Loans (1)
$ 7,474,410 $ 342,152 4.54 % $ 6,596,284 $ 267,672 4.02 %
Investment securities (1)
1,382,378 53,346 3.86 % 1,195,995 37,986 3.18 %
FHLB Stock, Fed Funds and other 165,568 8,873 5.33 % 105,028 3,622 3.40 %
Total interest-earning assets
9,022,356 404,371 4.45 % 7,897,307 309,280 3.88 %
Noninterest-earning assets 446,814 498,771
Total assets
$ 9,469,170 $ 8,396,078
Interest-bearing liabilities
Interest-bearing deposits: (2)
Demand deposits $ 385,276 $ 917 0.24 % $ 521,424 $ 755 0.14 %
Money market and savings 2,235,348 30,874 1.37 % 2,941,699 12,913 0.44 %
Certificates of deposit 2,768,594 106,129 3.83 % 1,328,290 18,345 1.38 %
Total 5,389,218 137,920 2.56 % 4,791,413 32,013 0.67 %
Borrowings:
Borrowings 1,752,454 82,861 4.68 % 1,024,344 29,085 2.81 %
Long-term debt 224,574 12,209 5.41 % 219,398 9,883 4.49 %
Total interest-bearing liabilities
7,366,246 232,990 3.15 % 6,035,155 70,981 1.17 %
Noninterest-bearing liabilities
Demand deposits (2)
1,430,151 1,624,223
Other liabilities 120,539 119,231
Total liabilities 8,916,936 7,778,609
Shareholders' equity 552,234 617,469
Total liabilities and shareholders’ equity $ 9,469,170 $ 8,396,078
Net interest income
$ 171,381 $ 238,299
Net interest rate spread 1.30 % 2.71 %
Net interest margin 1.88 % 2.99 %
(1) Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain loans and securities of $4.6 million and $5.0 million for 2023 and 2022, respectively. The estimated federal statutory tax rate was 21% for both 2023 and 2022.
(2) Cost of all deposits, including noninterest-bearing demand deposits, was 2.02% and 0.50% for 2023 and 2022, 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.
2023 vs. 2022
Increase (Decrease) Due to Total Change
(in thousands) Rate Volume
Assets:
Interest-earning assets
Loans $ 36,584 $ 37,896 $ 74,480
Investment securities 8,906 6,454 15,360
FHLB stock, Fed Funds and other 2,603 2,648 5,251
Total interest-earning assets 48,093 46,998 95,091
Liabilities:
Deposits
Demand deposits 396 (234) 162
Money market and savings 21,696 (3,735) 17,961
Certificates of deposit 54,500 33,284 87,784
Total interest-bearing deposits
76,592 29,315 105,907
Borrowings:
Borrowings 26,051 27,725 53,776
Long-term debt 2,085 241 2,326
Total interest-bearing liabilities
104,728 57,281 162,009
Total changes in net interest income
$ (56,635) $ (10,283) $ (66,918)
Net interest income in 2023 decreased $66.6 million as compared to 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 the average balance of our interest-earning assets was due to loan originations and purchases of investment securities during 2022. Our net interest margin decreased from 2.99% in 2022 to 1.88% in 2023 due to a 198 basis point increase in the rates paid on interest-bearing liabilities which was partially offset by a 57 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 two years 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 an increase in the proportion of higher cost borrowings and a decrease in the proportion of noninterest-bearing deposits to the total balance of interest-bearing liabilities, higher deposit costs and higher borrowing costs. The increases in the rates paid on deposits were due to the significant increase in market interest rates over the prior year and the decrease in the proportion of noninterest-bearing deposits to total deposits. Our average borrowings increased by $728 million to fund the growth of our loan portfolio and investment securities. Our cost of borrowings increased from 281 basis points during 2022 to 468 basis points during 2023 due to the significant increase in market interest rates during the last two years.
Provision for Credit Losses: A $0.4 million recovery of our allowance for credit losses was recognized during 2023 compared to a $5.2 million recovery of our allowance for credit losses in 2022. The recovery of our allowance for credit losses in 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.
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Noninterest income consisted of the following:
Years Ended December 31,
(in thousands) 2023 2022
Noninterest income
Gain on loan origination and sale activities (1)
Single family $ 8,500 $ 13,054
CRE, multifamily and SBA 846 4,647
Loan servicing income 12,648 12,388
Deposit fees 10,148 8,875
Other 9,779 12,606
Total noninterest income $ 41,921 $ 51,570
(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) 2023 2022
Single family servicing income (loss), net:
Servicing fees and other $ 15,523 $ 15,737
Changes - amortization (1)
(6,378) (9,951)
Subtotal 9,145 5,786
Risk management, single family MSRs:
Changes in fair value due to assumptions (2)
414 16,739
Net gain (loss) from economic hedging (1,744) (18,790)
Subtotal (1,330) (2,051)
Total $ 7,815 $ 3,735
Commercial loan servicing income:
Servicing fees and other $ 10,611 $ 16,345
Amortization of capitalized MSRs (5,778) (7,692)
Total 4,833 8,653
Total loan servicing income $ 12,648 $ 12,388
(1) Represents changes due to collection/realization of expected cash flows and curtailments.
(2) Principally reflects changes in model assumptions, including prepayment speed assumptions, which are primarily affected by changes in mortgage interest rates.
The decrease in noninterest income in 2023 as compared to 2022 was due to a decrease in gain on loan origination and sale activities and other income, which was partially offset by higher deposit fees. The $8.4 million decrease in gain on loan origination and sale activities was due to a $4.6 million decrease in single family gain on loan origination and sale activities and a $3.8 million decrease in commercial real estate and commercial and industrial 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 and industrial gain on loan origination and sale activities was primarily due to an 82% decrease in loans sold as a result of increasing interest rates. The $2.8 million decrease in other income was primarily due to a $4.3 million gain on sale of branches realized in 2022. The $1.3 million increase in deposit fee income was primarily due to higher early withdrawals fees.
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Noninterest expense consisted of the following:
Years Ended December 31,
(in thousands) 2023 2022
Noninterest expense
Compensation and benefits $ 111,064 $ 115,533
Information services 29,901 29,981
Occupancy 22,241 24,528
General, administrative and other 38,809 35,377
Goodwill impairment charge 39,857 —
Total noninterest expense $ 241,872 $ 205,419
The $36.5 million increase in noninterest expenses in 2023 as compared to 2022 was due to a $39.9 million goodwill impairment charge and higher general, administrative and other costs which were partially offset by lower compensation and benefit costs and occupancy costs. The $4.5 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 staffing levels and lower bonus expense, which were partially offset by wage increases given in 2023, higher medical costs related to our self-insured medical program and a reduction in deferred costs due to lower levels of loan production. FTEs decreased from 970 at the beginning of 2022 to 913 at the end of 2022 to 875 at the end of 2023. The increase in general, administrative and other costs was primarily due to higher FDIC insurance fees, resulting primarily from our larger asset base, and $1.5 million of merger related costs, which were partially offset by lower business taxes.
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Financial Condition – December 31, 2023 compared to December 31, 2022
During 2023, our total assets increased $28 million due primarily to a $143 million increase in cash, partially offset by a decrease in investment securities. During 2023 total liabilities increased $51 million due to an increase in borrowings, partially offset by a decrease in deposits. The $689 million decrease in deposits was due to a $229 million decrease in brokered certificates of deposit and a $1.3 billion decrease in non-certificates of deposit balances which were partially offset by a $491 million increase in certificates of deposit balances related to our promotional products. The decrease in deposits was offset by $373 million in deposits that we acquired as part of the branch acquisitions completed in the first quarter of 2023. The $729 million of additional borrowings were used to replace maturing brokered deposits and increase our on-balance sheet cash and cash equivalent balances.
Investment Securities
The fair values of our investment securities available for sale ("AFS") are as follows:
At December 31,
2023 2022
(in thousands) Fair Value Fair Value
Investment securities AFS:
Mortgage-backed securities:
Residential $ 183,798 $ 197,262
Commercial 47,756 56,049
Collateralized mortgage obligations:
Residential 439,738 553,039
Commercial 57,397 70,519
Municipal bonds 404,874 411,548
Corporate debt securities 38,547 42,945
U.S. Treasury securities 20,184 19,934
Agency debentures 58,905 27,478
Total $ 1,251,199 $ 1,378,774
Loans
The following table details the composition of our LHFI portfolio by dollar amount:
At December 31,
(in thousands) 2023 2022
CRE
Non-owner occupied CRE $ 641,885 $ 658,085
Multifamily 3,940,189 3,975,754
Construction/land development 565,916 627,663
Total 5,147,990 5,261,502
Commercial and industrial loans
Owner occupied CRE 391,285 443,363
Commercial business 359,049 359,747
Total 750,334 803,110
Consumer loans
Single family 1,140,279 1,009,001
Home equity and other 384,301 352,707
Total (1)
1,524,580 1,361,708
Total LHFI 7,422,904 7,426,320
ACL (40,500) (41,500)
Total LHFI less ACL $ 7,382,404 $ 7,384,820
(1) Includes $1.3 million and $5.9 million of loans at December 31, 2023 and 2022, 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, 2023 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 $ 29,737 $ 213,997 $ 398,151 $ 641,885 $ 101,854 $ 510,294
Multifamily 2,495 75,380 3,862,314 3,940,189 38,777 3,898,917
Construction/land development
502,033 63,883 — 565,916 28,958 34,925
Total 534,265 353,260 4,260,465 5,147,990 169,589 4,444,136
Commercial and industrial loans
Owner occupied CRE 2,683 91,986 296,616 391,285 130,306 258,296
Commercial business 154,785 118,054 86,210 359,049 61,173 143,091
Total 157,468 210,040 382,826 750,334 191,479 401,387
Consumer loans
Single family 590 1,036 1,138,653 1,140,279 414,957 724,732
Home equity and other 1 95 384,205 384,301 7,794 376,506
Total 591 1,131 1,522,858 1,524,580 422,751 1,101,238
Total LHFI $ 692,324 $ 564,431 $ 6,166,149 $ 7,422,904 $ 783,819 $ 5,946,761
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
Loan Roll-forward
(in thousands) 2023 2022
Loans - beginning balance January 1, $ 7,426,320 $ 5,542,849
Originations and advances 1,300,571 3,583,204
Transfers to LHFS (2,507) (12,361)
Payoffs, paydowns and other (1,296,786) (1,685,063)
Charge-offs and transfers to OREO (4,694) (2,309)
Loans - ending balance December 31,
$ 7,422,904 $ 7,426,320
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Loan Originations and Advances
Years Ended December 31,
(in thousands) 2023 2022
CRE
Non-owner occupied CRE $ 20,025 $ 74,235
Multifamily 129,712 1,855,152
Construction/land development 620,580 758,967
Total 770,317 2,688,354
Commercial and industrial loans
Owner occupied CRE 25,880 74,639
Commercial business 127,790 192,037
Total 153,670 266,676
Consumer loans
Single family 232,115 436,580
Home equity and other 144,469 191,594
Total 376,584 628,174
Total $ 1,300,571 $ 3,583,204
Production Volumes for Sale to the Secondary Market
Years Ended December 31,
(in thousands) 2023 2022
Loan originations
Single family loans
$ 332,811 $ 573,110
Commercial and industrial and CRE loans
30,061 100,092
Loans sold
Single family loans 335,751 693,348
Commercial and industrial and CRE loans (1)
26,839 145,622
Net gain on loan origination and sale activities
Single family loans $ 8,500 $ 13,054
Commercial and industrial and CRE loans (1)
846 4,647
Total $ 9,346 $ 17,701
(1) May include loans originated as held for investment.
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Capitalized Mortgage Servicing Rights ("MSRs")
Years Ended December 31,
(in thousands) 2023 2022
Single Family MSRs
Beginning balance $ 76,617 $ 61,584
Additions and amortization:
Originations
3,136 8,245
Purchases 460 —
Amortization (1)
(6,378) (9,951)
Net additions and amortization
(2,782) (1,706)
Change in fair value due to assumptions (2)
414 16,739
Ending balance $ 74,249 $ 76,617
Ratio to related loans serviced for others 1.40 % 1.41 %
Multifamily and SBA MSRs
Beginning balance $ 35,256 $ 39,415
Originations
509 3,533
Amortization
(5,778) (7,692)
Ending balance $ 29,987 $ 35,256
Ratio to related loans serviced for others 1.58 % 1.82 %
(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,
2023 2022
(in thousands) Amount Weighted Average Rate Amount Weighted Average Rate
Deposits by product:
Noninterest-bearing demand deposits $ 1,306,503 — % $ 1,399,912 — %
Interest-bearing:
Interest-bearing demand deposits 344,748 0.25 % 466,490 0.10 %
Savings 261,508 0.06 % 258,977 0.06 %
Money market 1,622,665 1.79 % 2,383,209 1.22 %
Certificates of deposit
Brokered deposits 1,218,008 5.36 % 1,446,528 3.94 %
Other 2,009,946 3.95 % 1,496,803 2.26 %
Total interest-bearing deposits 5,456,875 3.19 % 6,052,007 1.98 %
Total deposits $ 6,763,378 2.58 % $ 7,451,919 1.61 %
The following table presents the schedule of maturities of certificates of deposit as of December 31, 2023:
(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 $ 985,167 $ 1,854,460 $ 183,705 $ 11,088 $ 3,034,420
Time deposits of $250,000 or more 70,076 113,168 9,411 879 193,534
Total $ 1,055,243 $ 1,967,628 $ 193,116 $ 11,967 $ 3,227,954
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Credit Risk Management: Delinquent Loans, Nonperforming Assets and Provision for Credit Losses
As of December 31, 2023, our ratio of nonperforming assets to total assets remained low at 0.45% while our ratio of total loans delinquent over 30 days to total loans was 0.72%. The Company recorded a recovery of our allowance for credit losses of $0.4 million in 2023, and the ACL for loans decreased by $1.0 million, as a result of the favorable performance of our loan portfolio and a stable low level of nonperforming assets.
Delinquent loans by loan type consisted of the following:
At December 31, 2023
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 $ — $ — $ — $ 16,803 $ 16,803 $ 625,082 $ 641,885
Multifamily — 1,915 — — 1,915 3,938,274 3,940,189
Construction and land development
Multifamily construction — — — — — 168,049 168,049
CRE construction — — — 3,821 3,821 14,692 18,513
Single family construction — — — — — 274,050 274,050
Single family construction to permanent — — — — — 105,304 105,304
Total — 1,915 — 20,624 22,539 5,125,451 5,147,990
Commercial and industrial loans
Owner occupied CRE — — — 706 706 390,579 391,285
Commercial business — — — 13,686 13,686 345,363 359,049
Total — — — 14,392 14,392 735,942 750,334
Consumer loans
Single family 5,174 1,993 4,261 (2) 2,650 14,078 1,126,201 1,140,279
Home equity and other 974 225 — 1,310 2,509 381,792 384,301
Total 6,148 2,218 4,261 3,960 16,587 1,507,993 1,524,580 (3)
Total loans $ 6,148 $ 4,133 $ 4,261 $ 38,976 $ 53,518 $ 7,369,386 $ 7,422,904
% 0.08 % 0.05 % 0.06 % 0.53 % 0.72 % 99.28 % 100.00 %
(1) Includes loans whose repayments are insured by the FHA or guaranteed by the VA or SBA of $12.4 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 $1.3 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.
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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
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 (3)
Total loans $ 4,823 $ 2,020 $ 4,372 $ 10,055 $ 21,270 $ 7,405,050 $ 7,426,320
% 0.06 % 0.03 % 0.06 % 0.14 % 0.29 % 99.71 % 100.00 %
(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.
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, 2023 December 31, 2022
(in thousands) Balance Rate (1)
Balance Rate (1)
CRE
Non-owner occupied CRE $ 2,610 0.41 % $ 2,102 0.32 %
Multifamily 13,093 0.33 % 10,974 0.28 %
Construction/land development
Multifamily construction 3,983 2.37 % 998 1.05 %
CRE construction 189 1.02 % 196 1.03 %
Single family construction 7,365 2.69 % 12,418 3.51 %
Single family construction to permanent 672 0.64 % 1,171 0.74 %
Total 27,912 0.54 % 27,859 0.53 %
Commercial and industrial loans
Owner occupied CRE 899 0.23 % 1,030 0.23 %
Commercial business 2,950 0.83 % 3,247 0.91 %
Total 3,849 0.52 % 4,277 0.54 %
Consumer loans
Single family 5,287 0.51 % 5,610 0.62 %
Home equity and other 3,452 0.90 % 3,754 1.06 %
Total 8,739 0.61 % 9,364 0.74 %
Total ACL $ 40,500 0.55 % $ 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 does not have any obligation to repay long-term debt within the next three years other than $65 million in principal amount of Senior Notes maturing on June 1, 2026. The Company intends to repay the Senior Notes with dividends made to the Company from the Bank or from funds received through the issuance of new debt or sales of stock.
At December 31, 2023, the Bank had available borrowing capacity of $2.1 billion from the FHLB, $710 million from the FRBSF and $1.1 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 2023 and 2022, cash and cash equivalents increased $142.8 million and $7.6 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 2023, $8 million of cash was provided by operating activities. For 2022, cash of $218 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 2023, cash of $484 million was provided by investing activities primarily from the cash acquired from an acquisition of branches and the related deposits, principal repayments on AFS investment securities and LHFI repayments in excess of originations, partially offset by the purchase of AFS investment securities and net FHLB stock purchases. 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 repayments of 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 2023, cash of $349 million was used in financing activities primarily due to decreases in deposits and dividends paid on our
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common stock partially offset by a net increase in long term and short-term borrowings. For 2022, cash of $2.4 billion was provided by financing activities from growth in deposits, increase in long-term FHLB borrowings and proceeds from our debt issuance, partially offset by net repayment of short-term borrowings and repurchases of and dividends paid on our common stock.
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, 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) $ 675,440 7.04 % $ 383,696 4.0 % NA NA
Common equity tier 1 capital (to risk-weighted assets) 615,440 9.66 % 286,709 4.5 % NA NA
Tier 1 risk-based capital (to risk-weighted assets) 675,440 10.60 % 382,279 6.0 % NA NA
Total risk-based capital (to risk-weighted assets) 818,075 12.84 % 509,705 8.0 % NA NA
HomeStreet Bank
Tier 1 leverage capital (to average assets) $ 814,719 8.50 % $ 383,482 4.0 % $ 479,352 5.0 %
Common equity tier 1 capital (to risk-weighted assets) 814,719 12.79 % 286,569 4.5 % 413,933 6.5 %
Tier 1 risk-based capital (to risk-weighted assets) 814,719 12.79 % 382,092 6.0 % 509,456 8.0 %
Total risk-based capital (to risk-weighted assets) 858,992 13.49 % 509,456 8.0 % 636,820 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 %
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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, 2023, capital conservation buffers for the Company and the Bank were 4.60% and 5.49%, respectively.
The Company paid a quarterly cash dividend totaling $0.65 per common share in the year 2023. In the first quarter of 2024, the Company did not declare a cash dividend and currently does not plan to pay quarterly dividends in 2024. The amount and declaration of future cash dividends are subject to approval by our Board of Directors and certain statutory requirements and regulatory restrictions.
We had no material commitments for capital expenditures as of December 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. The merger agreement with FirstSun contains restrictions on the Company’s ability to incur additional long-term debt or sell shares of preferred or common stock.
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 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; (ii) core income and effective tax rate on core income before taxes, which excludes goodwill impairment charges and merger related expenses and the related tax impact as we believe this measure is a better comparison to be used for projecting future results and (iii) 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 Form 10-K, or a calculation of the non-GAAP financial measure.
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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) 2023 2022
Core net income (loss)
Net income (loss) $ (27,508) $ 66,540
Adjustments (tax effected)
Merger related expenses 1,170 —
Goodwill impairment charge 34,622 —
Total $ 8,284 $ 66,540
Core net income (loss) per fully diluted share
Fully diluted shares 18,783,005 19,041,111
Computed amount
$ 0.44 $ 3.49
Return on average tangible equity
Average shareholders' equity
$ 552,234 $ 617,469
Less: Average goodwill and other intangibles
(25,695) (30,930)
Average tangible equity
$ 526,539 $ 586,539
Core net income $ 8,284 $ 66,540
Adjustments (tax effected):
Amortization on core deposit intangibles 2,302 751
Tangible income applicable to shareholders $ 10,586 $ 67,291
Ratio 2.0 % 11.5 %
Efficiency ratio
Noninterest expense
Total
$ 241,872 $ 205,419
Adjustments:
Merger related expenses (1,500) —
Goodwill Impairment charge (39,857) —
State of Washington taxes (994) (2,311)
Adjusted total
$ 199,521 $ 203,108
Total revenues
Net interest income
$ 166,753 $ 233,307
Noninterest income
41,921 51,570
Gain on sale of branches — (4,270)
Total $ 208,674 $ 280,607
Ratio 95.6 % 72.4 %
Effective tax rate used in computations above (1)
22.0 % 22.0 %
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As of
(in thousands, except share data) December 31, 2023 December 31, 2022
Tangible book value per share
Shareholders' equity
$ 538,387 $ 562,147
Less: goodwill and other intangibles
(9,641) (29,980)
Tangible shareholder's equity
$ 528,746 $ 532,167
Common shares outstanding
18,810,055 18,730,380
Computed amount
$ 28.11 $ 28.41
Tangible common equity to tangible assets
Tangible shareholder's equity (per above)
$ 528,746 $ 532,167
Tangible assets
Total assets
$ 9,392,450 $ 9,364,760
Less: Goodwill and other intangibles
(9,641) (29,980)
Net
$ 9,382,809 $ 9,334,780
Ratio 5.6 % 5.7 %
(1) Effective tax rate indicated is used for all adjustments except the goodwill impairment charge as a portion of this charge was not deductible for tax purposes. Instead, a computed effective rate of 13.1% was used for the goodwill impairment charge.
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