HOMESTREET, INC. 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
FORWARD-LOOKING STATEMENTS
Statements contained in this Quarterly Report on Form 10-Q that are not historical facts or that discuss our expectations, beliefs or views regarding our future operations or future financial performance, or financial or other trends in our business or in the markets in which we operate, anticipated completion of loan forbearances with respect to customer loans, our future plans and the credit exposure of certain loan products and other components of our business that could be impacted by the COVID-19 pandemic, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Many forward-looking statements can be identified as using words such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan," "potential," "should," "will" and "would" and similar expressions (or the negative of these terms). Such statements involve inherent risks and uncertainties, many of which are difficult to predict and are generally beyond the control of the Company and are subject to risks and uncertainties, including, but not limited to, those discussed in our Annual Report on Form 10-K for the year endedDecember 31, 2020 and the risks and uncertainties discussed below and elsewhere in this Quarterly Report on Form 10-Q that could cause actual results to differ significantly from those projected. In addition, many of the risks and uncertainties are, and will be, exacerbated by the COVID-19 pandemic and any worsening of the global, national, regional and local business and economic environment as a result. Although we believe that expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We undertake no obligation, and expressly disclaim any such obligation to update; or clarify any of the forward-looking statements after the date of this Quarterly Report on Form 10-Q to reflect changed assumptions, the occurrence of anticipated or unanticipated events, new information or changes to future results over time or otherwise, except as required by law. Readers are cautioned not to place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q.
Except as otherwise noted, references to "we," "our," "us" or "the Company"
refer to
You may review a copy of this Quarterly Report on Form 10-Q, including exhibits and any schedule filed therewith on theSecurities and Exchange Commission's website (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants, such asHomeStreet, Inc. , that file electronically with theSecurities and Exchange Commission . Copies of our Securities Exchange Act reports also are available from our investor relations website, http://ir.homestreet.com. Information contained in or linked from our websites is not incorporated into and does not constitute a part of this report. 41 --------------------------------------------------------------------------------
Critical Accounting Policies and 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 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 and the valuation of single family mortgage
servicing rights.
These policies and estimates are described in further detail in Part II, Item 7-
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Note 1, Summary of Significant Accounting Policies, within our
2020 Annual Report on Form 10-K.
42
--------------------------------------------------------------------------------Summary Financial Data
Quarter Ended
Nine Months Ended
2021 June 30, 2021 2021 2020
Select Income Statement data: Net interest income$ 57,484 $ 57,972 $ 169,973 $ 152,614 Provision for credit losses (5,000) (4,000) (9,000) 20,469 Noninterest income 24,298 28,224 91,355 105,387 Noninterest expense 51,949 52,815 161,372 170,893 Net income: Before income taxes 34,833 37,381 108,956 66,639 Total 27,170 29,157 85,990 52,392 Net income per share - diluted$ 1.31 $ 1.37 $ 4.03
Select Performance Ratios:
Return on average equity - annualized 14.8 % 16.3 % 15.8 % 10.0 %
Return on average tangible equity -
annualized (1) 15.6 % 17.2 % 16.7 % 10.6 %
Return on average assets - annualized 1.48 % 1.59 % 1.57 % 0.97 %
Efficiency ratio (1) 62.8 % 62.8 % 61.8 % 63.4 %
Net interest margin 3.42 % 3.45 % 3.39 % 3.09 %
Other data
Full time equivalent employees 983 997 983 999
(1)Return on average tangible equity and the efficiency ratio are non-GAAP
financial measures. For a reconciliation of return on average tangible equity to
the nearest comparable GAAP financial measure, see "Non-GAAP Financial Measures"
elsewhere in this Management's Discussion and Analysis of Financial Condition
and Results of Operations.
43
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As of
(in thousands, except share and per share data) September 30, 2021 December 31, 2020
Selected Balance Sheet Data
Loans held for sale $ 395,112 $ 361,932
Loans held for investment, net 5,299,741 5,179,886
ACL 54,516 64,294
Investment securities 983,038 1,076,364
Total assets 7,372,451 7,237,091
Deposits 6,359,660 5,821,559
Borrowings - 322,800
Long-term debt 125,979 125,838
Total shareholders' equity 710,376 717,750
Other data:
Book value per share $ 34.74 $ 32.93
Tangible book value per share (1) $ 33.18 $ 31.42
Total equity to total assets 9.6 % 9.9 %
Tangible common equity to tangible assets (1) 9.2 % 9.5 %
Shares outstanding at period end 20,446,648 21,796,904
Loans to deposit ratio 90.4 % 96.3 %
Credit Quality:
ACL to total loans (2) 1.06 % 1.33 %
ACL to nonaccrual loans 307.8 % 310.3 %
Nonaccrual loans to total loans 0.33 % 0.40 %
Nonperforming assets to total assets 0.26 % 0.31 %
Nonperforming assets $ 19,196 $ 22,097
Regulatory Capital Ratios:
Bank
Tier 1 leverage ratio 10.17 % 9.79 %
Total risk-based capital 13.71 % 14.76 %
Company
Tier 1 leverage ratio 10.00 % 9.65 %
Total risk-based capital 13.01 % 14.00 %
(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, including PPP loans.
44-------------------------------------------------------------------------------- Current Developments COVID-19 Pandemic Update We continue to monitor the spread of COVID-19 in our communities and adapt to changes in guidance from local healthcare officials. We have taken measures to mitigate opportunities for spread and to help provide a safe environment for our team members. Our initial response included a business continuity plan with a remote working strategy, social distancing and sanitation plan. We continue to monitor this plan to adapt to recent developments. We continue to take significant measures to protect our employees, such as having most work remotely and where remote work is not viable, implementing a social distancing and sanitation plan. As a federal contractor, we believe we are subject to the Safer Federal Workforce COVID-19 Workplace Safety: Guidance for Federal Contractors and Subcontractors which will require vaccinations for most if not all of our employees beginning inDecember 2021 . If we are not subject to the vaccine requirements for federal contractors, as a company with more than 100 employees we will be subject instead to theDepartment of Labor's Occupational Safety and Health Administration ("OSHA") to Emergency Temporary Standard issued onNovember 4, 2021 which required that all employers with at least 100 employees ensure that their employees are fully vaccinated for COVID-19 or require employees to obtain a negative COVID-19 test at least once a week. Employers must comply with most requirements under the Emergency Temporary Standard byDecember 4, 2021 and with testing requirements byJanuary 4, 2022 . Any requirement to mandate COVID-19 vaccination of our workforce or require our unvaccinated employees to be tested weekly could result in employee attrition and difficulty securing future labor needs, and may have an adverse effect on our future revenues, costs, and results of operations.
At
We participated in theSmall Business Administration's ("SBA") Paycheck Protection Program ("PPP"), and during 2021 we funded 1,384 loans with balances of$159 million under the PPP. As ofSeptember 30, 2021 , PPP outstanding loan balances were$77 million . The loans funded through the PPP program are fully guaranteed by theU.S. government. ThroughSeptember 30, 2021 , cumulative PPP loans forgiven totaled$368 million . Other Items As part of our capital management strategy, during the first nine months of 2021, we repurchased a total of 1,498,974 shares of our common stock at an average price of$43.36 per share. OnOctober 28, 2021 , the Board of Directors approved an expansion of the Company's share repurchase program for up to$20 million of its common stock. 45
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Management's Overview of the Third Quarter 2021 Financial Performance
Third Quarter of 2021 Compared to the Second Quarter of 2021
General: Our net income and income before taxes were$27.2 million and$34.8 million , respectively, in the third quarter of 2021, as compared to$29.2 million and$37.4 million , respectively, in the second quarter of 2021. The$2.5 million decrease in income before taxes was due to lower net interest income and lower noninterest income, which was partially offset by a higher recovery of our allowance for credit losses and lower noninterest expenses.
Income Taxes: Our effective tax rate was 22.0% in both the second and third quarter of 2021 as compared to a statutory rate of 23.5%. Our effective tax rate was lower than our statutory rate due to the benefits of tax advantaged investments.
46
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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 yield on interest-earning assets:
Quarter Ended
September 30, 2021 June 30, 2021
Average Average Average Average
(in thousands) Balance Interest Yield/Cost Balance Interest Yield/Cost
Assets:
Interest-earning assets:
Loans (1) $ 5,577,149 $ 56,303 3.98 % $ 5,664,187 $ 57,265 4.02 %
Investment securities (1) 994,593 5,816 2.34 % 1,032,995 5,677 2.20 %
FHLB Stock, Fed Funds and other 147,516 141 0.38 % 86,525 159 0.73 %
Total interest-earning assets 6,719,258 62,260 3.65 % 6,783,707 63,101 3.70 %
Noninterest-earning assets 545,675 558,568
Total assets $ 7,264,933 $ 7,342,275
Liabilities and shareholders' equity:
Deposits: (2)
Demand deposits $ 529,690 $ 188 0.14 % $ 540,784 $ 186 0.14 %
Money market and savings 2,990,902 1,054 0.14 % 2,958,761 1,058 0.14 %
Certificates of deposit 1,005,138 1,265 0.50 % 1,077,959 1,529 0.57 %
Total deposits 4,525,730 2,507 0.22 % 4,577,504 2,773 0.24 %
Borrowings:
Borrowings 32,167 43 0.54 % 179,543 142 0.31 %
Long-term debt 125,948 1,354 4.28 % 125,901 1,360 4.31 %
Total interest-bearing liabilities 4,683,845 3,904 0.33 % 4,882,948 4,275 0.35 %
Noninterest-bearing liabilities
Demand deposits (2) 1,679,086 1,541,317
Other liabilities 175,179 199,172
Total liabilities 6,538,110 6,623,437
Shareholders' equity 726,823 718,838
Total liabilities and shareholders' equity $ 7,264,933 $ 7,342,275
Net interest income $ 58,356 $ 58,826
Net interest rate spread 3.32 % 3.35 %
Net interest margin 3.42 % 3.45 %
(1) Includes taxable-equivalent adjustments primarily related to tax-exempt
income on certain loans and securities of $0.9 million for both the quarters
ended September 30, 2021 and June 30, 2021 . The estimated federal statutory tax
rate was 21% for the periods presented.
(2) Cost of all deposits, including noninterest-bearing demand deposits was
0.16% and 0.18% for the quarter ended September 30, 2021 and June 30, 2021 ,
respectively.
Net interest income was lower in the third quarter of 2021 as compared to the
second quarter of 2021 primarily due to a $1.7 million decrease in interest
income derived from Paycheck Protection Program ("PPP") loans. This was
partially offset by higher levels of non-PPP loans. Excluding the impact of PPP
loans, our net interest margin in the third quarter of 2021 was consistent with
our net interest margin in the second quarter of 2021.
Provision for Credit Losses: As a result of the continued favorable performance
of our loan portfolio, a stable low level of nonperforming assets and an
improved outlook of the estimated impact of COVID-19 on our loan portfolio, we
recorded a $5 million recovery of our allowance for credit losses in the third
quarter of 2021, as compared to a $4 million recovery of our allowance for
credit losses in the second quarter of 2021.
47
--------------------------------------------------------------------------------Noninterest Income consisted of the following for the periods indicated:
Quarter Ended
(in thousands) September 30, 2021 June 30, 2021
Noninterest income
Gain on loan origination and sale activities (1)
Single family $ 14,249 $ 15,836
Commercial real estate, multifamily and SBA 3,260 5,435
Loan servicing income 2,014 1,931
Deposit fees 2,091 1,997
Other 2,684 3,025
Total noninterest income $
24,298
(1) May include loans originated as held for investment.
Loan servicing income, a component of noninterest income, consisted of the following for the periods indicated:
Quarter Ended
(in thousands) September 30, 2021 June 30, 2021
Single family servicing income, net
Servicing fees and other $ 3,878 $ 3,975
Changes - amortization (1) (4,579) (5,181)
Net (701) (1,206)
Risk management, single family MSRs:
Changes in fair value due to assumptions (2) 747 (5,024)
Net gain (loss) from derivatives hedging (293)
5,024
Subtotal 454 - Single Family servicing income (loss) (247)
(1,206)
Commercial loan servicing income: Servicing fees and other $ 4,019$ 5,270 Amortization of capitalized MSRs (1,758) (2,133) Total 2,261 3,137 Total loan servicing income $ 2,014$ 1,931 (1)Represents changes due to collection/realization of expected cash flows and curtailments. (2)Principally reflects changes in model assumptions, including prepayment speed assumptions, which are primarily affected by changes in mortgage interest rates. The decrease in noninterest income in the third quarter of 2021 as compared to the second quarter of 2021 was due to a$3.8 million decrease in gain on loan origination and sale activities. The decrease in gain on loan origination and sale activities was primarily due to a lower volume of single family rate locks and lower levels of CRE loans sold in the third quarter of 2021 as compared to the second quarter of 2021.
Noninterest Expense consisted of the following for the periods indicated:
Quarter Ended
(in thousands) September 30, 2021 June 30, 2021
Noninterest expense
Compensation and benefits $ 31,175 $ 34,378
Information services 6,902 6,949
Occupancy 5,705 5,973
General, administrative and other 8,167 5,515
Total noninterest expense $ 51,949 $ 52,815
48
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The $0.9 million decrease in noninterest expense in the third quarter of 2021 as
compared to the second quarter of 2021 was primarily due to lower compensation
and benefits costs partially offset by higher general, administrative and other
costs. The reduction in compensation and benefit costs was due to reductions in
commission expense related to lower levels of loans closed for our single family
mortgage operations and lower benefit costs due to third quarter seasonality.
General, administrative and other costs increased due to a $1.9 million
reimbursement of legal costs received from our insurance carrier in the second
quarter of 2021 and higher marketing costs.
49
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Nine Months Ended
General: Our net income and income before taxes were$86.0 million and$109.0 million , respectively, in the nine months endedSeptember 30, 2021 , as compared to$52.4 million and$66.6 million , respectively, in the nine months endedSeptember 30, 2020 . The$42.3 million increase in income before taxes was due to higher net interest income, lower provision for credit losses and lower noninterest expense, partially offset by lower noninterest income. Income Taxes: Our effective tax rate during the nine months endedSeptember 30, 2021 was 21.1% as compared to 21.4% in the nine months endedSeptember 30, 2020 and a statutory rate of 23.5%. Our effective tax rate was lower than our statutory rate due primarily to the benefits of tax advantaged investments. Net Interest Income: The following tables set forth, for the periods indicated, information regarding (i) the total dollar amount of interest income from interest-earning assets and the resultant average yields on those assets; (ii) the total dollar amount of interest expense and the average rate of interest on our interest-bearing liabilities; (iii) net interest income; (iv) net interest rate spread; and (v) net yield on interest-earning assets: Nine Months Ended September 30, 2021 2020 Average Average Average Average (in thousands) Balance Interest Yield/Cost Balance Interest
Yield/Cost
Assets:
Interest-earning assets:
Loans (1) $ 5,615,624 $ 167,322 3.95 % $ 5,490,900 $ 172,897 4.16 %
Investment securities (1) 1,030,726 18,084 2.34 % 1,082,402 18,061 2.22 %
FHLB Stock, Fed Funds and other 100,972 472 0.62 % 59,901 960 2.11 %
Total interest-earning assets 6,747,322 185,878 3.65 % 6,633,203 191,918 3.82 %
Noninterest-earning assets 558,224 545,890
Total assets $ 7,305,546 $ 7,179,093
Interest-bearing liabilities:
Deposits: (2)
Demand deposits $ 521,579 $ 543 0.14 % $ 419,833 $ 755 0.24 %
Money market and savings 2,955,153 3,338 0.15 % 2,612,536 10,593 0.54 %
Certificates of deposit 1,087,195 5,049 0.62 % 1,261,376 17,770 1.88 %
Total deposits 4,563,927 8,930 0.26 % 4,293,745 29,118 0.90 %
Borrowings:
Borrowings 137,754 347 0.33 % 648,836 3,150 0.64 %
Long-term debt 125,902 4,076 4.31 % 125,713 4,407 4.66 %
Total interest-bearing liabilities 4,827,583 13,353 0.37 % 5,068,294 36,675 0.96 %
Noninterest-bearing liabilities
Demand deposits (2) 1,552,201 1,228,295
Other liabilities 200,032 180,207
Total liabilities 6,579,816 6,476,796
Shareholders' equity 725,730 702,297
Total liabilities and shareholders' equity $ 7,305,546 $ 7,179,093
Net interest income $ 172,525 $ 155,243
Net interest spread 3.28 % 2.86 %
Net interest margin 3.39 % 3.09 %
(1) Includes taxable-equivalent adjustments primarily related to tax-exempt
income on certain loans and securities of $2.6 million for both the nine months
ended September 30, 2021 and 2020. The estimated federal statutory tax rate was
21% for the periods presented.
(2) Cost of deposits including noninterest-bearing deposits, was 0.20% and 0.70%
for the nine months ended September 30, 2021 and 2020, respectively.
Net interest income was higher in the nine months ended September 30, 2021 as
compared to the nine months ended September 30, 2020 due to a $114 million
increase in interest earning assets and an increase in our net interest margin
from 3.09% in the nine months ended September 30, 2020 to 3.39% in the nine
months ended September 30, 2021 . The increase in interest earning assets was due
to an increase in total loans. The increase in our net interest margin was due
to a 42 basis point increase in our net interest rate spread as decreases in the
rates paid on interest bearing liabilities were greater than the decreases in
yields on our interest earning assets. The 17 basis point decrease in yield on
interest earning assets was due to the origination of loans and purchases of
securities at current market rates which were below our portfolio rates, the
repricing down of variable rate loans and the prepayment and paydown of higher
yielding loans and investments in our portfolios. Our cost of interest-bearing
50
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liabilities decreased from 0.96% in the nine months ended September 30, 2020 to
0.37% in the nine months ended September 30, 2021 due to a decrease in market
interest rates which allowed us to reprice our deposits and borrowings at lower
rates.
Provision for Credit Losses: As a result of the favorable performance of our
loan portfolio, a stable low level of nonperforming assets and an improved
outlook of the estimated impact of COVID-19 on our loan portfolio, we recorded a
$9 million recovery of our allowance for credit losses in the nine months ended
September 30, 2021 . Due to adverse economic conditions related to the COVID-19
pandemic, in the nine months ended September 30, 2020 we recorded a $20.5
million provision for credit losses as an estimate of the potential adverse
impact of those conditions on our loan portfolio.
Noninterest Income consisted of the following for the periods indicated:
Nine Months Ended
September 30,
(in thousands) 2021 2020
Noninterest income
Gain on loan origination and sale activities (1)
Single family $ 56,272 $ 73,751
Commercial 15,967 11,947
Loan servicing income 4,693 6,921
Deposit fees 5,912 5,225
Other 8,511 7,543
Total noninterest income $ 91,355 $ 105,387 (1) May include loans originated as held for investment.
Loan servicing income, a component of noninterest income, consisted of the following for the periods indicated:
Nine Months Ended
September 30,
(in thousands) 2021 2020
Single family servicing income, net
Servicing fees and other $ 11,788 $ 13,357
Changes - amortization (1) (15,453) (12,246)
Net (3,665) 1,111
Risk management, single family MSRs:
Changes in fair value due to assumptions (2) 7,186 (21,970)
Net loss from derivatives hedging (7,860) 22,148
Subtotal (674) 178
Single Family servicing income (loss) (4,339) 1,289
Commercial loan servicing income:
Servicing fees and other 14,267 9,716
Amortization of capitalized MSRs (5,235) (4,084)
Total 9,032 5,632
Total loan servicing income $ 4,693 $ 6,921
(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.
51
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The decrease in noninterest income for the nine months ended September 30, 2021
as compared to the nine months ended September 30, 2020 was due to a decrease in
gain on loan origination and sale activities and loan servicing income. The
$13.5 million decrease in gain on loan origination and sale activities was due
to a $17.5 million decrease in single family gain on loan origination and sale
activities which was partially offset by a $4.0 million increase in commercial
real estate ("CRE") and commercial gain on loan origination and sale activities.
The decrease in single family gain on loan origination and sale activities was
due primarily to a 22% decrease in rate locks. The increase in CRE and
commercial gain on loan origination and sale activities was due to a 44%
increase in the realized gain on sale which was partially offset by a 7%
decrease in the volume of loans sold. The $2.2 million decrease in loan
servicing income was due to a $5.6 million decrease in single family servicing
income which was partially offset by a $3.4 million increase in commercial loan
servicing income. The decrease in single family servicing income was due
primarily to increased amortization of single family MSRs due to higher levels
of prepayments and a $0.9 million decrease in risk management results. The
increase in commercial loan servicing income was primarily due to higher levels
of prepayment fees.
Noninterest Expense consisted of the following for the periods indicated:
Nine Months Ended September 30,
(in thousands) 2021 2020
Noninterest expense
Compensation and benefits $ 101,388 $ 101,429
Information services 20,635 22,330
Occupancy 18,170 23,082
General, administrative and other 21,179 24,052
Total noninterest expense The$9.5 million decrease in noninterest expense in the nine months endedSeptember 30, 2021 as compared to the nine months endedSeptember 30, 2020 was due to lower information services expense, occupancy expense and general, administrative and other expenses. The$1.7 million decrease in information services costs was primarily due to lower core processing costs related to a renegotiation of our contract. The$4.9 million decrease in occupancy expenses was primarily due to$4.4 million of impairments related to ongoing restructuring of our facilities recognized in the nine months endedSeptember 30, 2020 , with no similar charges in 2021. The$2.9 million decrease in general, administrative and other costs was due to a$1.9 million reimbursement of legal costs received from our insurance carrier in the second quarter of 2021 and$1.0 million of charges incurred in 2020 related to our efficiency improvement initiatives, which were partially offset by a$0.6 million increase in marketing costs. 52 --------------------------------------------------------------------------------
Financial Condition
During the nine months endedSeptember 30, 2021 , total assets increased by$135 million due to a$120 million increase in loans held for investment and a$161 million increase in cash, partially offset by decreases in investments and other assets. Loans held for investment increased due to$2.5 billion of originations, which were partially offset by prepayments and scheduled payments of$2.0 billion and transfer of loans to loans held for sale of$391 million . Total liabilities increased primarily due to a$538 million increase in deposits, partially offset by a$323 million decrease in borrowings. The decrease in borrowings reflect the reduced need of wholesale funding resulting from the increase in deposits. The growth in deposits was due to new customers and increases in existing customer balances. 53 --------------------------------------------------------------------------------
Credit Risk Management
As of
As a result of the COVID-19 pandemic, the Company has approved forbearances for some of its borrowers. The status of these forbearances as ofSeptember 30, 2021 is as follows: Forbearances Approved (2)(3) Total Expired Outstanding Number of Number of (in thousands) loans Amount loans Amount Number of loans Amount Loan type: Commercial and CRE: Commercial business 110$ 59,403 110$ 59,403 - $ - CRE owner occupied 27 69,302 27 69,302 - - CRE nonowner occupied 15 75,751 13 57,843 2 17,908 Total 152$ 204,456 150$ 186,548 2$ 17,908 Single family and consumer (1) Single family 68$ 20,880 HELOCs and consumer 30 4,016 Total 98$ 24,896 (1) Does not include any single family loans that are guaranteed byGinnie Mae . (2) Does not include construction loans that were modified as a result of COVID-19 related construction delays to extend the construction or lease-up periods. Each of these loans continued to make monthly payments under the existing or modified payment terms. AtSeptember 30, 2021 , two of these loans with$2 million in balances were still operating under the terms of their modification. (3) There were no forbearances initiated in the third quarter of 2021. The forbearances approved for commercial and industrial loans and CRE nonowner occupied loans were generally for a period of three months while the forbearances for single family, HELOCs and consumer loans were generally for a period of three to six months. As ofSeptember 30, 2021 , excluding the loans with forbearances still in place, 99% of the commercial and CRE loans approved for a forbearance have completed their forbearance period and have resumed payments. The forbearance periods for the majority of single family and consumer loans granted forbearance that were not complete as ofSeptember 30, 2021 are scheduled to be completed in the fourth quarter of 2021. 54 --------------------------------------------------------------------------------
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 September 30, 2021 At December 31, 2020
(in thousands) Amount Rate (1) Amount Rate (1)
Commercial real estate loans
Non-owner occupied commercial real estate $ 9,636 1.28 % $ 8,845 1.07 %
Multifamily 5,457 0.26 % 6,072 0.43 %
Construction/land development
Multifamily construction 1,044 2.08 % 4,903 4.25 %
Commercial real estate construction 351 1.96 % 1,670 6.12 %
Single family construction 6,291 2.07 % 5,130 1.98 %
Single family construction to permanent 1,062 0.74 % 1,315 0.87 %
Total 23,841 0.71 % 27,935 0.99 %
Commercial and industrial loans
Owner occupied commercial real estate 5,285 1.18 % 4,994 1.08 %
Commercial business 14,473 4.08 % 17,043 4.72 %
Total 19,758 2.46 % 22,037 2.67 %
Consumer loans
Single family 5,757 0.85 % 6,906 0.85 %
Home equity and other 5,160 1.63 % 7,416 1.83 %
Total 10,917 1.10 % 14,322 1.18 %
Total ACL $ 54,516 1.06 % $ 64,294 1.33 %
(1) The reserve rate is calculated excluding balances related to loans that are
insured by the FHA or guaranteed by the
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 five years. AtSeptember 30, 2021 andDecember 31, 2020 , the Bank had available borrowing capacity of$1.1 billion and$550 million , respectively, from the FHLB, and$297 million and$406 million , respectively, from theFederal Reserve Bank of San Francisco and$1.0 billion and$1.2 billion under borrowing lines established with other financial institutions. 55 --------------------------------------------------------------------------------
Cash Flows
For the nine months endedSeptember 30, 2021 , cash and cash equivalents increased by$161 million compared to an increase of$21 million during the nine months endedSeptember 30, 2020 . 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 nine months endedSeptember 30, 2021 , net cash of$182 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 are sufficient to fund our operating liquidity needs. For the nine months endedSeptember 30, 2020 , net cash of$40 million was used in operating activities, primarily from cash used to fund LHFS production exceeding cash proceeds from the sale of loans.
Cash flows from investing activities
The Company's investing activities primarily include AFS securities and loans originated as held for investment. For the nine months endedSeptember 30, 2021 , net cash of$155 million was used in investing activities primarily from the origination of LHFI net of principal repayments and the purchase of AFS securities, partially offset by the proceeds from the sale of loans originated as LHFI and AFS securities. For the nine months endedSeptember 30, 2020 , net cash of$394 million was used by investing activities, primarily due to the purchase of investment securities and the origination of LHFI net of principal payments, partially offset by proceeds from the sale of loans originated as LHFI and investment securities and principal payments and maturities of investment securities.
Cash flows from financing activities
The Company's financing activities are primarily related to deposits and net proceeds from borrowings. For the nine months endedSeptember 30, 2021 , net cash of$134 million was provided by financing activities, primarily due to growth in deposits, partially offset by net repayment of short-term borrowings, repurchases of and dividends paid on our common stock. For the nine months endedSeptember 30, 2020 , net cash of$455 million was provided by financing activities, primarily due to net proceeds from borrowings and increase in deposits, partially offset by common stock repurchases 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 September 30, 2021 At
Unused consumer portfolio lines $ 394,694 $ 389,122 Commercial portfolio lines (1) 801,632 656,065 Commitments to fund loans 64,456 68,345 Total $ 1,260,782 $ 1,113,532 (1) Within the commercial portfolio, undistributed construction loan proceeds, where the Company has an obligation to advance funds for construction progress payments, were$564 million and$395 million atSeptember 30, 2021 andDecember 31, 2020 , respectively. 56 --------------------------------------------------------------------------------
Capital Resources and Dividend Policy
The capital rules applicable toUnited 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
At September 30, 2021
For Minimum Capital To Be Categorized As
Actual Adequacy Purposes "Well Capitalized"
(in thousands) Amount Ratio Amount Ratio Amount Ratio
HomeStreet, Inc.
Tier 1 leverage capital (to
average assets) $ 717,110 10.00 % $ 286,945 4.0 % NA NA
Common equity Tier 1 capital (to
risk-weighted assets) 657,110 11.02 % 268,398 4.5 % NA NA
Tier 1 risk-based capital (to
risk-weighted assets) 717,110 12.02 % 357,864 6.0 % NA NA
Total risk-based capital (to
risk-weighted assets) 776,218 13.01 % 477,152 8.0 % NA NA
HomeStreet Bank
Tier 1 leverage capital (to
average assets) $ 721,955 10.17 % $ 283,867 4.0 % $ 354,834 5.0 %
Common equity Tier 1 capital (to
risk-weighted assets) 721,955 12.68 % 256,155 4.5 % 370,002 6.5 %
Tier 1 risk-based capital (to
risk-weighted assets) 721,955 12.68 % 341,540 6.0 % 455,387 8.0 %
Total risk-based capital (to
risk-weighted assets) 780,488 13.71 % 455,387 8.0 % 569,233 10.0 %
At December 31, 2020
For Minimum Capital To BeCategorized As
Actual Adequacy Purposes "Well Capitalized"
(in thousands) Amount Ratio Amount Ratio Amount Ratio
HomeStreet, Inc.
Tier 1 leverage capital (to
average assets) $ 709,655 9.65 % $ 294,211 4.0 % NA NA
Common equity Tier 1 capital (to
risk-weighted assets) 649,655 11.67 % 250,537 4.5 % NA NA
Tier 1 risk-based capital (to
risk-weighted assets) 709,655 12.75 % 334,050 6.0 % NA NA
Total risk-based capital (to
risk-weighted assets) 779,254 14.00 % 445,400 8.0 % NA NA
HomeStreet Bank
Tier 1 leverage capital (to
average assets) $ 712,533 9.79 % $ 291,114 4.0 % $ 363,893 5.0 %
Common equity Tier 1 capital (to
risk-weighted assets) 712,533 13.51 % 237,307 4.5 % 342,777 6.5 %
Tier 1 risk-based capital (to
risk-weighted assets) 712,533 13.51 % 316,410 6.0 % 421,880 8.0 %
Total risk-based capital (to
risk-weighted assets) 778,479 14.76 % 421,880 8.0 % 527,350 10.0 %
57-------------------------------------------------------------------------------- As of each of the dates set forth in the above table, the Company exceeded the minimum required capital ratios applicable to it and the Bank's capital ratios exceeded the minimums necessary to qualify as a well-capitalized depository institution under the prompt corrective action regulations. In addition to the minimum capital ratios, bothHomeStreet Inc. andHomeStreet 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. AtSeptember 30, 2021 , capital conservation buffers for the Company and the Bank were 5.01% and 5.71%, respectively. The Company paid a quarterly cash dividend of$0.25 per common share in each of the first, second and third quarters of 2021. It is our current intention to continue to pay quarterly dividends, and onOctober 28, 2021 we declared another cash dividend of$0.25 per common share payable onNovember 23, 2021 to shareholders of record as of the close of business onNovember 9, 2021 . The amount and declaration of future cash dividends are subject to approval by our Board of Directors and certain regulatory restrictions. We had no material commitments for capital expenditures as ofSeptember 30, 2021 . 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. 58 --------------------------------------------------------------------------------
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. 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 requirement. 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 interested parties in the evaluation of companies in our industry. However, 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 a reconciliation of, where applicable, the most comparable GAAP financial measures to the non-GAAP measures used in this quarterly report on Form 10-Q, or a reconciliation of the non-GAAP calculation of the financial measure. In this quarterly report on Form 10-Q, we use (i) tangible common equity and tangible assets and ratios calculated using these measures 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 ofWashington 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.
Reconciliations of non-GAAP results of operations to the nearest comparable GAAP measures:
59
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As of or for the nine
As of or for the quarter ended months ended September 30,
(in thousands) September 30, 2021 June 30, 2021 2021 2020
Return on average tangible equity
(annualized)
Average shareholders' equity $ 726,823 $ 718,838 $ 725,730 $ 702,297
Less: Average goodwill and other
intangibles (32,195) (32,487) (32,484) (33,784)
Average tangible equity $ 694,628 $ 686,351 $ 693,246 $ 668,513
Net income $ 27,170 $ 29,157 $ 85,990 $ 52,392
Adjustments (tax effected)
Amortization on core deposit intangibles 229 229 694 815
Tangible income applicable to
shareholders $ 27,399 $ 29,386 $ 86,684 $ 53,207
Ratio 15.6 % 17.2 % 16.7 % 10.6 %
Efficiency ratio
Noninterest expense
Total $ 51,949 $ 52,815 $ 161,372 $ 170,893
Adjustments:
Restructuring related charges - - - (5,725)
Legal fees recovery - 1,900 1,900 -
State of Washington taxes (578) (602) (1,759) (1,864)
Adjusted total $ 51,371 $ 54,113 $ 161,513 $ 163,304
Total revenues
Net interest income $ 57,484 $ 57,972 $ 169,973 $ 152,614
Noninterest income 24,298 28,224 $ 91,355 $ 105,387
Adjustments
Contingent payout - - - (566)
Adjusted total $ 81,782 $ 86,196 $ 261,328 $ 257,435
Ratio 62.8 % 62.8 % 61.8 % 63.4 %
As of
(in thousands, except share data) September 30, 2021 Tangible book value per share
Shareholders' equity $ 710,376 $
717,750
Less: goodwill and other intangibles (32,002)
(32,880)
Tangible shareholder's equity $ 678,374 $ 684,870 Common shares outstanding 20,446,648 21,796,904 Computed amount $ 33.18 $ 31.42
Tangible common equity to tangible assets
Tangible shareholder's equity (per above) $ 678,374 $
684,870
Tangible assets
Total assets 7,372,451
7,237,091
Less: Goodwill and other intangibles (32,002) (32,880) Net$ 7,340,449 $ 7,204,211 Ratio 9.2 % 9.5 % 60
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