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, and our future plans, including 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, 2019 , and our Quarterly Report on Form 10-Q for the first and second quarters of 2020, and the risks and uncertainties discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in Item 1A of Part II, "Risk Factors," 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 to, 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. 56
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Critical Accounting Policies and Estimates
Our significant accounting policies are fundamental to understanding our results of operations and financial condition because they require that we use estimates and assumptions that may affect the value of our assets or liabilities and financial results. Certain of these policies are critical because they require management to make subjective and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. These policies govern: •Allowance for credit losses ("ACL") for loans held for investment ("LHFI") •Fair value of financial instruments and single family mortgage servicing rights ("MSRs") 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 2019 Annual Report on Form 10-K and Note 1, Summary of Significant Accounting Policies within this Form 10-Q. 57 --------------------------------------------------------------------------------
Summary Financial Data
Three Months Ended September 30, Nine Months Ended September 30, (dollars in thousands, except per share data) 2020 2019 2020
2019
Select Income Statement data: Net interest income$ 55,684 $ 47,134 $ 152,614 $ 143,878 Provision for credit losses - - 20,469 1,500 Noninterest income 36,155 24,580 105,387 52,501 Noninterest expense 58,057 55,721 170,893 162,399 Income from continuing operations: (1) Before income taxes 33,782 15,993 66,639 32,480 Total 26,349 13,665 52,392 27,615 Income per share - diluted 1.15 0.54 2.24 1.03 Select Performance Ratios: Return on average equity - annualized Net income 14.6 % 8.0 % 10.0 % 1.2 % Income from continuing operations 14.6 % 7.9 % 10.0 % 5.1 % Return on average tangible equity - annualized (2) Net income 15.3 % 8.4 % 10.5 % 1.3 % Income from continuing operations 15.3 % 8.3 % 10.5 % 5.3 % Return on average assets - annualized Net income 1.4 % 0.8 % 1.0 % 0.1 % Income from continuing operations 1.4 % 0.8 % 1.0 % 0.5 % Efficiency ratio(2) 59.9 % 75.9 % 63.4 % 80.9 % Net interest margin 3.20 % 2.96 % 3.09 % 3.06 %
(1)Discontinued operations accounting was terminated effective
58 -------------------------------------------------------------------------------- As of (dollars in thousands, except per share data) September 30, 2020 December 31, 2019 Selected Balance Sheet Data Loans held for sale $ 421,737 $ 208,177 Loans held for investment, net 5,229,477 5,072,784 Allowance for credit losses 64,892 41,772 Investment securities 1,111,468 943,150 Total assets 7,409,641 6,812,435 Deposits 5,815,690 5,339,959 Borrowings 514,590 471,590 Long-term debt 125,791 125,650 Total shareholders' equity 696,306 679,723 Other data: Book value per share $ 31.66 $ 28.45 Tangible book value per share (1) 30.15 27.02 Total equity to total assets 9.4 % 10.0 % Tangible common equity to tangible assets (1) 9.0 % 9.5 % Shares outstanding 21,994,204 23,890,855 Loans to deposit ratio 98.3 % 99.7 % Credit Quality: ACL to total loans (2) (3) 1.33 % 0.82 % ACL to nonaccrual loans (3) 307.2 % 324.8 % Nonaccrual loans to total loans 0.40 % 0.25 % Nonperforming assets to total assets 0.30 % 0.21 % Nonperforming assets $ 22,084 $ 14,254 Regulatory Capital Ratios: Bank Tier 1 leverage ratio 9.40 % 10.56 % Total risk-based capital 13.95 % 14.37 % Company Tier 1 leverage ratio 9.34 % 10.16 % Total risk-based capital 13.33 % 13.40 % Other data: Full-time equivalent employees (ending) 999 1,071 (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 theVA or SBA, including PPP loans forSeptember 30, 2020 . (3)Prior toJanuary 1, 2020 and the adoption of ASU 2016-13 CECL, the allowance for loan losses was used in this calculation in place of ACL. 59 -------------------------------------------------------------------------------- Overview and Current Developments COVID-19 Pandemic The outbreak of COVID-19 has adversely impacted a broad range of industries across the region where the Company's customers operate and could impair their ability to fulfill their financial obligations to the Company. TheWorld Health Organization has declared COVID-19 to be a global pandemic and as a result almost all public commerce and related business activities have been and continue to be, to varying degrees, curtailed with the goal of decreasing the rate of new infections. The spread of the outbreak has caused significant disruptions in theU.S. economy and has disrupted business and other financial activity in the areas in which the Company operates.Congress , the President and theFederal Reserve have taken several actions designed to cushion the economic fallout related to the COVID-19 pandemic. Most notably, the Coronavirus Aid, Relief and Economic Security ("CARES") Act was signed into law at the end ofMarch 2020 as a$2 trillion legislative package, which was further expanded inApril 2020 by$484 billion . The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. The package also includes extensive emergency funding for hospitals and health care providers. We evaluated goodwill for impairment atJune 30, 2020 and based on our impairment assessment determined our goodwill assets were not impaired. The Company has implemented a business continuity plan that includes a remote working strategy and a social distancing and sanitation plan. No material operational failures or internal control challenges have been identified to date. The Company has taken significant measures to protect its employees, such as having most work remotely and where remote work is not viable, implementing a social distancing and sanitation plan. AtSeptember 30, 2020 , all of our retail deposit branches were open to serve our customers by appointment only and operating under the guidelines issued by Federal, state, and regional health departments. In keeping with regulatory guidance to work with borrowers during this unprecedented situation and as outlined in the CARES Act, the Company has executed multiple assistance programs, including a loan forbearance program for its lending customers that are adversely affected by the COVID-19 pandemic. As ofSeptember 30, 2020 , the Company had an outstanding balance of$206 million for 375 qualifying loans approved for forbearance (excluding any SBA guaranteed loans for which the government made payments as provided for under the CARES Act, or single family loans that are guaranteed by FHA orVA ). In accordance with the CARES Act and interagency guidance issued inMarch 2020 , loans granted forbearance due to COVID-19 are not currently considered troubled debt restructurings under US GAAP. With the passage of the Paycheck Protection Program ("PPP"), administered by theSmall Business Administration ("SBA"), the Company assisted its customers with applications for resources through the program. PPP loans generally have a two-year term and bear interest at 1%. Additionally, the Company was paid fees by the SBA based upon the sliding fee scale established for the PPP program. The weighted average fee for these loans was 3.3% and the Company will recognize these fees over the contractual life of the related loan, which will be accelerated if the loan is paid off prior to its maturity. The Company believes that a significant portion of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. As ofSeptember 30, 2020 , the Company has closed or approved with the SBA, 1,822 PPP loans representing$298 million in outstanding balances. The loans funded through the PPP program are fully guaranteed by theU.S. government. Other Items As part of our capital management strategy, for year to date throughOctober 31, 2020 , we repurchased a total of 2,205,665 shares of our common stock at an average price of$26.31 per share. 60 --------------------------------------------------------------------------------
Management's Overview of the Third Quarter of 2020 Financial Performance
Discontinued Operations: Results for the first quarter of 2019 reflect the impact of the adoption of a plan of exit or disposal, announced in the first quarter of 2019, with respect to the stand-alone home loan center-based mortgage origination and related servicing businesses classified as discontinued operations. Discontinued operations reported in the first quarter of 2019 included our entire mortgage banking business as did all prior periods presented. EffectiveApril 1, 2019 , the reorganized bank location-based mortgage banking business commenced operations and the associated direct revenues and direct expenses are reported as part of the Company's continuing operations beginning in the second quarter of 2019 and thereafter. Discontinued operations accounting was concluded as ofJanuary 1, 2020 .
Results of Operations
Third Quarter of 2020 Compared to the Third Quarter of 2019
General: Our income from continuing operations and income from continuing operations before income taxes were$26.3 million and$33.8 million , respectively, in the third quarter of 2020, as compared to$13.7 million and$16.0 million , respectively, during the third quarter of 2019. The$17.8 million increase in income from continuing operations before income taxes was due to higher net interest income and higher noninterest income which were partially offset by higher noninterest expense. Income Taxes: Our effective tax rate during the third quarter of 2020 was 22.0% as compared to 14.6% in the third quarter of 2019 for continuing operations and a statutory rate of 23.7%. Our effective tax rate was lower than our statutory rate due primarily to the benefits of tax advantaged investments. In the third quarter of 2019, the benefits of tax advantaged investments were a higher proportion of total earnings, resulting in a lower effective tax rate. Net Interest Income: The following tables set forth, for the periods indicated, information regarding (i) the total dollar amount of interest income from interest-earning assets and the resultant average yields on those assets; (ii) the total dollar amount of interest expense and the average rate of interest on our interest-bearing liabilities; (iii) net interest income; (iv) net interest rate spread; and (v) net yield on interest-earning assets: 61 --------------------------------------------------------------------------------
Quarter Ended September 30, 2020 2019 Average Average Average Average (in thousands) Balance Interest Yield/Cost Balance Interest Yield/Cost Assets: Interest-earning assets: Loans$ 5,745,653 $ 57,732 3.96 %$ 5,543,167 $ 65,930 4.69 % Investment securities(2) 1,149,196 6,393 2.23 % 790,312 5,207 2.64 % FHLB Stock, Fed Funds and other 77,777 532 2.67 % 104,424 426 1.62 % Total interest-earning assets 6,972,626 64,657 3.66 % 6,437,903 71,563 4.38 % Noninterest-earning assets 527,183 566,362 Total assets$ 7,499,809 $ 7,004,265 Liabilities and shareholders' equity: Deposits: (1) Demand deposits$ 470,646 $ 196 0.17 %$ 384,937 $ 371 0.38 % Money market and savings 2,717,705 1,627 0.24 % 2,238,046 7,251 1.28 % Certificates of deposit 1,138,457 4,198 1.47 % 2,223,602 13,093 2.34 % Total deposits 4,326,808 6,021 0.55 % 4,846,585 20,715 1.69 % Borrowings: Borrowings 735,493 650 0.35 % 102,270 715 2.75 % Long-term debt 125,760 1,383 4.38 % 125,574 1,698 5.37 % Total interest-bearing liabilities 5,188,061 8,054 0.62 % 5,074,429 23,128 1.81 % Noninterest-bearing liabilities Demand deposits (1) 1,398,640 1,033,146 Other liabilities 196,209 203,190 Total liabilities 6,782,910 6,310,765 Temporary shareholders' equity - 2,378 Shareholders' equity 716,899 691,122 Total liabilities and shareholders' equity$ 7,499,809 $ 7,004,265 Net interest income (2)$ 56,603 $ 48,435 Net interest rate spread 3.04 % 2.57 % Net interest margin 3.20 % 2.96 % (1) Cost of all deposits, including noninterest-bearing demand deposits was 0.42% and 1.41% for the quarter endedSeptember 30, 2020 and 2019, respectively. (2) Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain loans and securities of$919 thousand and$458 thousand for the three months endedSeptember 30, 2020 and 2019, respectively. The estimated federal statutory tax rate was 21% for the periods presented. Net interest income was higher in the third quarter of 2020 as compared to the third quarter of 2019 because our net interest margin increased to 3.20% primarily due to a 47 basis point increase in our net interest rate spread. Our costs of interest-bearing liabilities decreased from 1.81% in the third quarter of 2019 to 0.62% in the third quarter of 2020 due to a decrease in market interest rates which allowed us to reprice our deposits and borrowings at lower rates. The benefit of these lower funding costs was partially offset by lower yields on interest earning assets. The 72 basis point decrease in yield on interest earning assets was due to the origination of loans and purchases of securities with rates below our current portfolio rates, the ongoing repricing of variable rate loans and the prepayment and paydown of higher yielding loans and investments from our portfolios. Provision for Credit Losses: As a result of the adoption of CECL onJanuary 1, 2020 , there is a lack of comparability in the both the reserves and provisions for credit losses for the periods presented. Results for reporting periods beginning afterJanuary 1, 2020 are presented using the CECL methodology, while comparative information continues to be reported in accordance with the incurred loss methodology in effect for prior periods. We had no provision for credit losses for the third quarters of 2020 and 2019. 62 --------------------------------------------------------------------------------
Noninterest Income consisted of the following.
Quarter Ended September 30, (in thousands) 2020 2019 Noninterest income Gain on loan origination and sale activities (1) Single family$ 27,632 $ 9,628 Commercial real estate, multifamily and SBA 5,498 6,693 Amounts attributed to discontinued operations - (370) Loan servicing income (loss) (1,582) 3,196 Deposit fees 1,769 2,079 Other 2,838 3,354 Total noninterest income $
36,155
(1) Includes loans originated as held for investment.
Loan servicing income, a component of noninterest income, consisted of the following. Quarter Ended September 30, (in thousands) 2020 2019 Single family servicing income, net Servicing fees and other $ 4,124$ 5,252 Changes - amortization (1) (4,401) (4,489) Net (277) 763 Risk management, single family MSRs: Changes in fair value due to assumptions (2) (2,960) (7,501) (3) Net gain (loss) from derivatives hedging (91) 9,040 Subtotal (3,051) 1,539 Single Family servicing income (loss) (3,328) 2,302 Commercial loan servicing income: Servicing fees and other $ 3,096$ 2,711 Amortization of capitalized MSRs (1,350) (1,315) Total 1,746 1,396 Amounts attributed to discontinued operations - (502) Total loan servicing income (loss) $
(1,582)
(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. (3)Includes pre-tax income of$333 thousand , net of transaction costs, brokerage fees and prepayment reserves, resulting from the sale of single family MSRs for the third quarter of 2019. The increase in noninterest income for the third quarter of 2020 as compared to the third quarter of 2019, was due to a$17.2 million increase in gain on loan sales related to higher volumes of rate locks and an increase in profit margins in our single family operations. The increase in noninterest income was partially offset by a decrease in loan servicing income from unfavorable risk management results on mortgage servicing rights in the third quarter of 2020 resulting from a market expectation of an extended period of higher prepayments. 63 --------------------------------------------------------------------------------
Noninterest Expense consisted of the following.
Quarter Ended September 30, (in thousands) 2020 2019 Noninterest expense Compensation and benefits$ 34,570 $ 33,341 Information services 7,401 8,173 Occupancy 8,354 6,228 General, administrative and other 7,732 7,979 Total noninterest expense$ 58,057 $ 55,721 The$2.3 million increase in noninterest expense in the third quarter of 2020 compared to the third quarter of 2019 was primarily due to$2.4 million in impairments in the third quarter of 2020 related to ongoing restructuring of our facilities and staffing and increases in compensation and benefits costs related to increased commissions on higher closed loan volume. The increase was partially offset by decreases in information system and general and administrative costs related to our cost savings initiatives.
Nine Months ended
General: Our income from continuing operations and income from continuing operations before income taxes were$52.4 million and$66.6 million , respectively, in the nine months endedSeptember 30, 2020 , as compared to$27.6 million and$32.5 million , respectively, during the nine months endedSeptember 30, 2019 . The$34.1 million increase in income from continuing operations before income taxes was due to higher net interest income and noninterest income which was partially offset by a higher provision for credit losses and higher noninterest expense. Income Taxes: Our effective tax rate during the nine months endedSeptember 30, 2020 was 21.4% as compared to 15.0% in the nine months endedSeptember 30, 2019 and a statutory rate of 23.7%. Our effective tax rate was lower than our statutory rate due primarily to the benefits of tax advantaged investments. In the first nine months of 2019, the benefits of tax advantaged investments were a higher proportion of total earnings, resulting in a lower effective tax rate. Net Interest Income: The following tables set forth, for the periods indicated, information regarding (i) the total dollar amount of interest income from interest-earning assets and the resultant average yields on those assets; (ii) the total dollar amount of interest expense and the average rate of interest on our interest-bearing liabilities; (iii) net interest income; (iv) net interest rate spread; and (v) net yield on interest-earning assets: 64 --------------------------------------------------------------------------------
Nine Months Ended September 30, 2020 2019 Average Average Average Average (in thousands) Balance Interest Yield/Cost Balance Interest Yield/Cost Assets: Interest-earning assets: Loans$ 5,490,900 $ 172,897 4.16 %$ 5,631,378 $ 202,590 4.77 % Investment securities(2) 1,082,402 18,061 2.22 % 827,550 16,514 2.66 % FHLB Stock, Fed Funds and other 59,901 960 2.11 % 77,498 844 1.46 % Total interest-earning assets 6,633,203 191,918 3.82 % 6,536,426 219,948 4.46 % Noninterest-earning assets 545,890 628,184 Total assets$ 7,179,093 $ 7,164,610 Interest-bearing liabilities: Deposits: (1) Demand deposits$ 419,833 $ 755 0.24 %$ 385,113 $ 1,139 0.40 % Money market and savings 2,612,536 10,593 0.54 % 2,222,321 20,232 1.21 % Certificates of deposit 1,261,376 17,770 1.88 % 1,846,537 30,908 2.24 % Total deposits 4,293,745 29,118 0.90 % 4,453,971 52,279 1.57 % Borrowings: Borrowings 648,836 3,150 0.64 % 553,595 11,248 2.68 % Long-term debt 125,713 4,407 4.66 % 125,527 5,167 5.47 % Total interest-bearing liabilities 5,068,294 36,675 0.96 % 5,133,093 68,694 1.78 % Noninterest-bearing liabilities Demand deposits (1) 1,228,295 1,078,698 Other liabilities 180,207 225,859 Total liabilities 6,476,796 6,437,650 Temporary shareholders' equity - 1,932 Permanent shareholders' equity 702,297 725,028 Total liabilities and shareholders' equity$ 7,179,093 $ 7,164,610 Net interest income (2)$ 155,243 $ 151,254 Net interest spread 2.86 % 2.68 % Net interest margin 3.09 % 3.06 % (1) Cost of deposits including noninterest-bearing deposits, was 0.70% and 1.26% for the nine months endedSeptember 30, 2020 and 2019, respectively. (2) Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain loans and securities of$2.6 million and$1.8 million for the nine months endedSeptember 30, 2020 and 2019, respectively. The estimated federal statutory tax rate was 21% for the periods presented. Net interest income was higher in the nine months endedSeptember 30, 2020 as compared to the nine months endedSeptember 30, 2019 because our net interest margin increased to 3.09%. The increase in our net interest margin was due to an increase in our net interest rate spread which increased because decreases in the rates paid on interest bearing liabilities were greater than the decrease in the yield on our interest earning assets. The 64 basis point decrease in yield on interest earning assets was due to the origination of loans and purchases of securities with rates below our current portfolio rates, the ongoing repricing of variable rate loans and the prepayment and paydown of higher yielding loans and investments from our portfolios. Our cost of interest-bearing liabilities decreased from 1.78% in the nine months endedSeptember 30, 2019 to 0.96% in the nine months endedSeptember 30, 2020 due to a decrease in market interest rates which allowed us to reprice our deposits and borrowings at lower rates. Provision for Credit Losses: The provision for credit losses was$20.5 million for nine months endedSeptember 30, 2020 as compared to$1.5 million in the nine months endedSeptember 30, 2019 . Due to adverse economic conditions related to the COVID-19 pandemic, we recorded additional provisions for credit losses in the first nine months of 2020 as an estimate of the potential impact of those conditions on our loan portfolio, including an evaluation of the credit risk related to the commercial business loans and commercial real estate loans granted COVID-19 modifications during 2020 which we believe will experience a higher probability of default and increased credit losses. 65 --------------------------------------------------------------------------------
Noninterest Income consisted of the following.
Nine Months Ended September 30, (in thousands) 2020 2019 Noninterest income Gain on loan origination and sale activities (1) Single family$ 73,751 $ 78,612 Commercial 11,947$ 12,179 Amounts attributed to discontinued operations - (60,055) Loan servicing income 6,921 7,119 Deposit fees 5,225 5,848 Other 7,543 8,798 Total noninterest income$ 105,387 $ 52,501
(1) Includes loans originated as held for investment.
Loan servicing income, a component of noninterest income, consisted of the following. Nine Months Ended September 30, (in thousands) 2020 2019 Single family servicing income, net Servicing fees and other$ 13,357 $ 24,073 Changes - amortization (1) (12,246) (16,894) Net 1,111 7,179 Risk management, single family MSRs: Changes in fair value due to assumptions (2) (21,970) (22,193) (3) Net gain from derivatives hedging 22,148 19,917 Subtotal 178 (2,276) Single Family servicing income 1,289 4,903 Commercial loan servicing income: Servicing fees and other$ 9,716 $ 8,051 Amortization of capitalized MSRs (4,084) (3,802) Total 5,632 4,249 Amounts attributed to discontinued operations - (2,033) Total loan servicing income$ 6,921 $ 7,119 (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. (3)Includes pre-tax loss of$941 thousand , net of transaction costs, brokerage fees and prepayment reserves, resulting from the sale of single family MSRs during the nine months endedSeptember 30, 2019 . The increase in noninterest income for the nine months endedSeptember 30, 2020 compared to the same period in 2019 was due to an increase in gain on loan sales. The increase in gain on loan sales was due to higher volumes of rate locks and an increase in profit margins in our single family operations and the classification of$18 million of gain on loan sales associated with the legacy mortgage business as discontinued operations in the first quarter of 2019. 66 --------------------------------------------------------------------------------
Noninterest Expense from continuing operations consisted of the following.
Nine Months Ended September 30, (in thousands) 2020 2019 Noninterest expense Compensation and benefits$ 101,429 $ 93,934 Information services 22,330 24,001 Occupancy 23,082 19,168 General, administrative and other 24,052 25,296 Total noninterest expense
The$8.5 million increase in noninterest expense in the nine months endedSeptember 30, 2020 compared to the same period in the prior year was due to increases in compensation and benefits costs and occupancy costs which were partially offset by lower general and administrative and information systems costs. The increase in compensation and benefits costs was due to the classification of$7 million of compensation and benefits costs associated with the legacy mortgage business as discontinued operations in the first quarter of 2019 and increased commissions and bonuses paid on higher loan originations levels, including loans made under PPP, which were partially offset by reduced levels of staffing. Occupancy expenses in the first nine months of 2020 included$4.4 million of impairments related to ongoing restructuring of our facilities and staffing. General and administrative costs, including information systems costs, declined due to the benefits of our cost savings initiatives. 67 --------------------------------------------------------------------------------
Financial Condition
During the first nine months of 2020, total assets increased by$597 million due to a$168 million increase in investment securities, a$214 million increase in loans held for sale, a$157 million increase in loans held for investment, net and a$94 million increase in other assets, which were partially offset by a$19 million decrease in mortgage servicing rights. The increase in the loans held for sale was due primarily to$195 million of multifamily loans held for sale atSeptember 30 in anticipation of a bulk sale in the fourth quarter of 2020. Loans held for investment increased due to$2.1 billion of originations, including the origination of$298 million of loans under PPP, which was partially offset by sales of$345 million and prepayments and scheduled payments of$1.6 billion . The increase in other assets and other liabilities was primarily due to the recognition of our option to acquire, under the GNMA early buyout option process,$115 million of loans serviced for others which are in a delinquent position, primarily due to forbearances. The decrease in mortgage servicing rights reflected the impact of increased prepayments. Total liabilities increased by$581 million due to a$476 million increase in deposits, a$43 million increase in borrowings and a$64 million increase in other liabilities. The increase in deposits was due to a$547 million increase in business and consumer accounts, due in part to the funding of PPP loans to customer accounts and the addition of new customers through PPP, which was partially offset by a$71 million decrease in wholesale deposits.
At September 30, 2020 At December 31, 2019 (in thousands) Fair Value Fair Value Investment securities AFS: Mortgage-backed securities: Residential$ 60,453 $ 91,695 Commercial 45,986 38,025 Collateralized mortgage obligations: Residential 263,886 291,618 Commercial 163,207 156,154 Municipal bonds 556,634 341,318 Corporate debt securities 15,159 18,661 U.S. Treasury securities - 1,307 Agency debentures 1,846 - Total$ 1,107,171 $ 938,778 We primarily hold investment securities for liquidity purposes, while also creating a relatively stable source of interest income. In addition to the AFS securities listed in the above table,$4 million of investment securities are classified as held to maturity as ofSeptember 30, 2020 andDecember 31, 2019 . 68
-------------------------------------------------------------------------------- Loans Held for Investment: The following table details the composition of our LHFI. (in thousands) At September
30, 2020
Consumer loans: Single family (1)$ 936,774 $ 1,072,706 Home equity and other 446,123 553,376 Total consumer loans 1,382,897 1,626,082 Commercial real estate loans: Non-owner occupied commercial real estate 847,079 895,546 Multifamily 1,327,156 999,140 Construction/land development 590,707 701,762 Total commercial real estate loans 2,764,942 2,596,448 Commercial and industrial loans: Owner occupied commercial real estate 462,613 477,316 Commercial business 683,917 414,710 Total commercial and industrial loans 1,146,530 892,026 Total 5,294,369 5,114,556 ACL (64,892) (41,772) Net$ 5,229,477 $ 5,072,784 (1)Includes$7.6 million and$3.5 million atSeptember 30, 2020 andDecember 31, 2019 , respectively, of loans where a fair value option election was made at the time of origination and, therefore, are carried at fair value with changes in value recognized in the consolidated income statements. (2)Net deferred loans fees and costs of$24.5 million are now included within the carrying amounts of the loan balances as ofDecember 31, 2019 , in order to conform with the current period presentation.
Net LHFI increased
Deposits: Our deposit balances and weighted average rates were as follows for the periods indicated: (in thousands) At September 30, 2020 At December 31, 2019 Weight Average Weight Average Amount Rate Amount Rate Deposits by product: Noninterest-bearing demand deposits$ 1,022,786 - %$ 704,743 - % Interest-bearing transaction and savings deposits: Interest-bearing demand deposits 545,890 0.10 % 373,832 0.38 % Savings accounts 258,727 0.07 % 219,182 0.21 % Money market accounts 2,512,440 0.23 % 2,224,494 1.25 % Total interest-bearing transaction and savings deposits 3,317,057 2,817,508 Total transaction and savings deposits 4,339,843 3,522,251 Certificates of deposit 1,174,839 1.20 % 1,614,533 2.24 % Noninterest-bearing accounts - other 301,008 - % 203,175 - % Total deposits$ 5,815,690 0.36 %$ 5,339,959 1.23 % Deposits increased$476 million fromDecember 31, 2019 toSeptember 30, 2020 due to a$547 million increase in business and consumer accounts, due in part to the funding of PPP loans to customer accounts and the addition of new customers through PPP, which was partially offset by a$71 million decrease in wholesale deposits.
The aggregate amount of time deposits in denominations of more than
69 --------------------------------------------------------------------------------
Credit Risk Management
The following discussion highlights developments sinceDecember 31, 2019 and should be read in conjunction with "Credit Risk Management" within Part II, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2019 Annual Report on Form 10-K. As ofSeptember 30, 2020 , our ratio of nonperforming assets to total assets remained low at 0.30% while our ratio of total loans delinquent over 30 days to total loans was 0.76%. The Company recorded provision for credit losses of$20.5 million for nine months endedSeptember 30, 2020 , and the ACL for loans increased by$23 million . Due to adverse economic conditions related to the COVID-19 pandemic, we recorded additional provisions for credit losses in the first nine months of 2020 as an estimate of the potential impact of those conditions on our loan portfolio, including an evaluation of the credit risk related to the commercial business loans and commercial real estate loans granted COVID-19 modifications during 2020 which we believe have a higher probability of default and increased credit losses. As a result of the COVID-19 pandemic, the Company has approved forbearances for some of its borrowers. The status of these forbearances as ofSeptember 30, 2020 is as follows: Forbearances Approved (2) Initiated in the Third Quarter 2020 Second Request Total Outstanding Number of Number of Number of (dollars in thousands) loans Amount loans Amount Number of loans Amount loans Amount Loan type: (1) Commercial and CRE: Commercial business 2$ 1,927 18$ 25,052 125$ 78,289 19$ 25,462 CRE owner occupied - - 5$ 38,547 29 73,802 4 37,739 CRE nonowner occupied 3 14,622 2$ 2,233 14 58,433 7 35,624 Total 5$ 16,549 25$ 65,832 168$ 210,524 30$ 98,825 Single family and consumer Single family 170$ 83,896 HELOCs and consumer 175 23,190 Total 345$ 107,086 (1) Does not include any SBA guaranteed loans for which the government made payments as provided for under the CARES Act, or single family loans that are guaranteed byGinnie Mae . (2) This schedule does not include$44 million of constructions loans, (8 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 perform under the existing or modified payment terms. The forbearances approved for commercial and industrial loans and CRE nonowner occupied loans were generally for a period of 3 months while the forbearances for single family, HELOCs and consumer loans were generally for a period of 3 to 6 months. During the third quarter, second forbearances were approved for$66 million of loans, including one relationship with 18 loans and$52 million of balances. The forbearance provided to this large relationship was part of an overall restructure of the related loans. These second forbearances were to borrowers whose businesses continue to be impacted by the effects of the COVID-19 pandemic. As ofSeptember 30, 2020 , excluding the loans approved for a second forbearance, 97% of the commercial and CRE loans approved for a forbearance prior to the third quarter have completed their forbearance period and have resumed payments. Based on information obtained through discussions with these borrowers, almost all of them have reopened their business at some level and they do not currently foresee the need for additional forbearance. 70 --------------------------------------------------------------------------------
Management considers the current level of the ACL to be appropriate to cover estimated lifetime losses within our LHFI portfolio.
The following table presents the ACL by loan sub class.
September 30, 2020 January 1, 2020 (2) (in thousands) Amount Reserve Rate (1) Amount Reserve Rate (1) Consumer loans Single family$ 6,720 0.80 %$ 6,918 0.70 % Home equity and other 6,004 1.35 % 10,868 1.96 % Total 12,724 0.99 % 17,786 1.16 % Commercial real estate loans Non-owner occupied commercial real estate 8,923 1.05 % 3,853 0.43 % Multifamily 4,871 0.37 % 4,038 0.40 % Construction/land development Multifamily construction 5,920 4.13 % 3,541 1.88 % Commercial real estate construction 1,709 3.79 % 509 0.92 % Single family construction 5,507 2.31 % 8,080 2.84 % Single family construction to permanent 1,206 0.74 % 1,203 0.70 % Total 28,136 1.02 % 21,224 0.82 % Commercial and industrial loans Owner occupied commercial real estate 5,688 1.24 % 1,180 0.25 % Commercial business 18,344 4.87 % 3,425 0.83 % Total 24,032 2.87 % 4,605 0.52 % Total ACL$ 64,892 1.33 %$ 43,615 0.87 % (1)The reserve rate is calculated excluding balances related to loans that are insured by the FHA or guaranteed by theVA or SBA, including PPP loans. (2)OnJanuary 1, 2020 we adopted ASC 326 ("CECL"). As a result, the ACL as ofJanuary 1, 2020 is presented instead ofDecember 31, 2019 so that amounts are comparable. 71
-------------------------------------------------------------------------------- The following tables present the composition of TDRs by accrual and nonaccrual status. At September 30, 2020 (in thousands) Accrual Nonaccrual Total Consumer Single family (1)$ 57,181 $ 1,067 $ 58,248 Home equity and other 597 - 597 Total 57,778 1,067 58,845 Commercial and industrial loans Owner occupied commercial real estate - 678 678 Commercial business 40 1,347 1,387 Total 40 2,025 2,065 Total TDRs$ 57,818 $ 3,092 $ 60,910
(1)Includes loan balances insured by the FHA or guaranteed by the
At December 31, 2019 (in thousands) Accrual Nonaccrual Total Consumer Single family (1)$ 59,809 $ 1,694 $ 61,503 Home equity and other 853 9 862 60,662 1,703 62,365
Commercial and industrial loans Commercial business 48 222 270 Total 48 222 270 Total TDRs$ 60,710 $ 1,925 $ 62,635
(1) Includes loan balances insured by the FHA or guaranteed by the
The Company had 301 loan relationships classified as TDRs totaling$60.9 million atSeptember 30, 2020 with no related unfunded commitments. The Company had 305 loan relationships classified as TDRs totaling$62.6 million atDecember 31, 2019 with no related unfunded commitments. TDR loans within the LHFI portfolio and the related reserves are included in the ACL tables above. 72
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Delinquent loans by loan type consisted of the following.
At September 30, 2020 Past Due and Still Accruing Total past due and nonaccrual Total (in thousands) 30-59 days 60-89 days 90 days or more Nonaccrual (4) Current loans Consumer loans Single family$ 2,092 $ 1,030 $ 13,051 (2)$ 4,617 $ 20,790 $ 915,984 $ 936,774 (1) Home equity and other 34 60 - 1,747 1,841 444,282 446,123 Total 2,126 1,090 13,051 6,364 22,631 1,360,266 1,382,897 Commercial real estate loans Non-owner occupied commercial real estate - - - - - 847,079 847,079 Multifamily - - - - - 1,327,156 1,327,156 Construction and land development Multifamily construction - - - - - 143,360 143,360 Commercial real estate construction - - - - - 45,049 45,049 Single family construction - - - - - 238,251 238,251 Single family construction to permanent - - - - - 164,047 164,047 Total - - - - - 2,764,942 2,764,942 Commercial and industrial loans Owner occupied commercial real estate - - - 6,085 6,085 456,528 462,613 Commercial business - - 2,637 8,677 11,314 672,603 683,917 Total - - 2,637 14,762 17,399 1,129,131 1,146,530 Total loans$ 2,126 $ 1,090 $ 15,688 $ 21,126 $ 40,030 $ 5,254,339 $ 5,294,369 % 0.04 % 0.02 % 0.30 % 0.40 % 0.76 % 99.24 % 100.00 % 73
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At December 31, 2019 Past Due and Still Accruing Total past due and nonaccrual Total (in thousands) 30-59 days 60-89 days 90 days or more Nonaccrual (4) Current loans Consumer loans Single family$ 5,694 $ 4,261 $ 19,702 (2)$ 5,364 $ 35,021 $ 1,037,685 $ 1,072,706 (1) Home equity and other 837 372 - 1,160 2,369 551,007 553,376 Total 6,531 4,633 19,702 6,524 37,390 1,588,692 1,626,082 Commercial real estate loans Non-owner occupied commercial real estate - - - - - 895,546 895,546 Multifamily - - - - - 999,140 999,140 Construction and land development - - - - - 701,762 701,762 Total - - - - - 2,596,448 2,596,448 Commercial and industrial loans Owner occupied commercial real estate - - - 2,891 2,891 474,425 477,316 Commercial business 44 - - 3,446 3,490 411,220 414,710 Total 44 - - 6,337 6,381 885,645 892,026 Total loans$ 6,575 $ 4,633 $ 19,702 $ 12,861 $ 43,771 $ 5,070,785 $ 5,114,556 (3) % 0.13 % 0.09 % 0.39 % 0.25 % 0.86 % 99.14 % 100.00 % (1)Includes$7.6 million and$3.5 million of loans atSeptember 30, 2020 andDecember 31, 2019 , 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 our consolidated income statements. (2)FHA-insured andVA -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)Net deferred loans fees and costs of$24.5 million were included within the carrying amounts of the loan balances as ofDecember 31, 2019 , in order to conform with the current period presentation. (4)Includes loans whose repayments are insured by the FHA or guaranteed by theVA or SBA of$17.7 million and$28.4 million atSeptember 30, 2020 andDecember 31, 2019 , respectively Enterprise Risk Management Like many financial institutions, we manage and control a variety of business and financial risks that can significantly affect our financial performance. Among these risks are credit risk; market risk, which includes interest rate risk and price risk; liquidity risk; and operational risk. We are also subject to risks associated with compliance/legal, strategic and reputational matters. Beginning inMarch 2020 as the COVID-19 pandemic challenges began to unfold in earnest, management updated its enterprise wide risk assessment and risk monitoring reporting to overlay identified COVID-19 specific risks and mitigations to inform the Board and other constituents. Since March, the Board and its various committees, specifically the Executive Committee, the Enterprise Risk Management Committee and the Credit Committee, continue to be actively engaged in oversight of the heightened risks stemming from the pandemic and the mitigations put in place by management and are being kept apprised of the status through regularly scheduled meetings and special meetings. A Crisis Management Team and the CARES Act Team meet as necessary to discuss risks on a real time basis and to oversee the rollout and implementation of federal programs such as the CARES Act and regulatory guidance related to the COVID-19 pandemic. Management level risk reporting for areas of heightened risk is being kept current on a daily, weekly or monthly basis, as appropriate.
For more information on how we manage these business, financial and other risks, see the discussion in "Enterprise Risk Management" within Part II, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2019 Annual Report on Form 10-K.
74 --------------------------------------------------------------------------------
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 primary sources of liquidity include deposits, loan payments and investment security 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. AtSeptember 30, 2020 andDecember 31, 2019 , the Bank had available borrowing capacity of$500 million and$943 million , respectively, from the FHLB, and$368 million and$267 million , respectively, from theFederal Reserve Bank of San Francisco . Cash Flows For the nine months endedSeptember 30, 2020 , cash and cash equivalents increased by$21 million compared to an increase of$16 million for the nine months endedSeptember 30, 2019 . 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, 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. 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, 2019 , net cash of$182 million was provided by operating activities, primarily from proceeds from the sale of loans held for sale, partially offset by the recognition of deferred taxes from the sale of mortgage servicing rights and the net fair value adjustment and gain on sale of LHFS.
Cash flows from investing activities
The Company's investing activities primarily include available-for-sale securities and loans originated as held for investment. For the nine months endedSeptember 30, 2020 , net cash of$394 million was used in investing activities, primarily due to the purchase of$348 million investment securities net of$211 million of sales, principal repayments and maturities. The origination of portfolio loans, net of principal repayments of$584 million , was partially offset by$349 million proceeds from the sale of portfolio loans. For the nine months endedSeptember 30, 2019 , net cash of$184 million was provided by investing activities, primarily due to$529 million proceeds from sale of portfolio loans offset by originations net of principal repayments of$593 million ;$174 million in net cash provided by disposal of discontinued operations and$229 million proceeds from the sale, principal repayments and maturities of investment securities and$47 million net cash used for acquisitions.
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, 2020 , net cash of$455 million was provided by financing activities, primarily due to$43 million net proceeds from borrowings and a$476 million increase in deposits, partially offset by$62 million of common stock repurchases and dividends paid on common stock. For the nine months endedSeptember 30, 2019 , net cash of$350 million was used in financing activities, primarily due to$890 million net repayments of short-term borrowings and$81 million repurchases of our common stock, which was partially offset by$678 million growth in deposits. 75 --------------------------------------------------------------------------------
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.
At September 30, At December 31, (in thousands) 2020 2019
Unused consumer portfolio lines $ 414,526
Commercial portfolio lines (1) 666,354
722,242
Commitments to fund loans 43,950 52,762 Total$ 1,124,830 $ 1,260,147 (1) Within the commercial portfolio, undistributed construction loan proceeds, where the Company has an obligation to advance funds for construction progress payments, were$402 million and$435 million atSeptember 30, 2020 andDecember 31, 2019 , respectively.
Capital Resources and Dividend Policy
The capital rules applicable toUnited States based bank holding companies and federally insured depository institutions ("Capital Rules") require the Company (on a consolidated basis) and the Bank (on a stand-alone basis) to meet specific capital adequacy requirements that, for the most part, involve quantitative measures, primarily in terms of the ratios of their capital to their assets, liabilities, and certain off-balance sheet items, calculated under regulatory accounting practices. In addition, prompt correct action regulations place a federally insured depository institution, such as the Bank, into one of five capital categories on the basis of its capital ratios: (i) well capitalized; (ii) adequately capitalized; (iii) undercapitalized; (iv) significantly undercapitalized; or (v) critically undercapitalized. A depository institution's primary federal regulatory agency may determine that, based on certain qualitative assessments, the depository institution should be assigned to a lower capital category than the one indicated by its capital ratios. At each successive lower capital category, a depository institution is subject to greater operating restrictions and increased regulatory supervision by its federal bank regulatory agency.
The following table sets forth the capital and capital ratios of
76 -------------------------------------------------------------------------------- At September 30, 2020 For Minimum Capital To Be Categorized As Actual Adequacy Purposes "Well Capitalized" (in thousands) Amount Ratio Amount Ratio Amount Ratio HomeStreet, Inc. Tier 1 leverage capital (to average assets)$ 690,438 9.34 %$ 295,681 4.0 % NA NA Common equity Tier 1 capital (to risk-weighted assets) 630,438 11.04 % 257,080 4.5 % NA NA Tier 1 risk-based capital (to risk-weighted assets) 690,438 12.09 % 342,773 6.0 % NA NA Total risk-based capital (to risk-weighted assets) 761,464 13.33 % 457,030 8.0 % NA NA HomeStreet Bank Tier 1 leverage capital (to average assets)$ 686,869 9.40 %$ 292,150 4.0 % $ 365,187 5.0 % Common equity Tier 1 capital (to risk-weighted assets) 686,869 12.70 % 243,412 4.5 % 351,594 6.5 % Tier 1 risk-based capital (to risk-weighted assets) 686,869 12.70 % 324,549 6.0 % 432,732 8.0 % Total risk-based capital (to risk-weighted assets) 754,498 13.95 % 432,732 8.0 % 540,914 10.0 % At December 31, 2019 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)$ 691,323 10.16 %$ 272,253 4.0 % NA NA Common equity Tier 1 capital (to risk-weighted assets) 631,323 11.43 % 248,523 4.5 % NA NA Tier 1 risk-based capital (to risk-weighted assets) 691,323 12.52 % 331,364 6.0 % NA NA Total risk-based capital (to risk-weighted assets) 739,812 13.40 % 441,818 8.0 % NA NA HomeStreet Bank Tier 1 leverage capital (to average assets)$ 712,596 10.56 %$ 269,930 4.0 % $ 337,413 5.0 % Common equity Tier 1 capital (to risk-weighted assets) 712,596 13.50 % 237,451 4.5 % 342,985 6.5 % Tier 1 risk-based capital (to risk-weighted assets) 712,596 13.50 % 316,602 6.0 % 422,136 8.0 % Total risk-based capital (to risk-weighted assets) 758,303 14.37 % 422,136 8.0 % 527,669 10.0 % 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 based on percentages of eligible retained income that could be utilized for such actions. 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, 2020 , capital conservation buffers for the Company and the Bank were 5.33% and 5.95%, respectively. 77 -------------------------------------------------------------------------------- The Company paid a quarterly cash dividend of$0.15 per common share in each of the first, second and third quarters of 2020. It is our current intention to continue to pay quarterly dividends and the Company has declared a cash dividend of$0.15 per common share payable onNovember 23, 2020 . 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, 2020 . 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. 78 --------------------------------------------------------------------------------
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 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:
79 -------------------------------------------------------------------------------- As of or for the quarter ended As of or for the nine months ended September 30, September 30, (dollars in thousands, except share data) 2020 2019 2020 2019 Return on average tangible equity (annualized) Average shareholders' equity$ 716,899 $ 693,475 $ 702,297 $ 728,215 Less: Average goodwill and other intangibles (33,332) (36,617) (33,746) (33,973) Average tangible equity$ 683,567 $ 656,858 $ 668,551 $ 694,242 Net income (loss) 26,349 13,827 52,392 6,524 Ratio 15.3 % 8.4 % 10.5 % 1.3 % Net income from continuing operations 26,349 13,665 52,392 27,615 Ratio 15.3 % 8.3 % 10.5 % 5.3 % Efficiency ratio Noninterest expense Total$ 58,057 $ 55,721 $ 170,893 $ 162,399
Adjustments:
Other restructuring related charges (2,357) (847) (5,725) (2,196) State of Washington taxes (677) (420) (1,864) (1,275) Adjusted total$ 55,023 $ 54,454 $ 163,304 $ 158,928 Total revenues Net interest income$ 55,684 $ 47,134 $ 152,614 $ 143,878 Noninterest income 36,155 24,580 105,387 52,501 Adjustments Contingent payout - - (566) - Adjusted total$ 91,839 $ 71,714 $ 257,435 $ 196,379 Ratio 59.9 % 75.9 % 63.4 % 80.9 % As of
(dollars in thousands, except share data)
Tangible book value per share
Shareholders' equity $ 696,306 $
679,723
Less: goodwill and other intangibles (33,222)
(34,252)
Tangible shareholder's equity $ 663,084 $ 645,471 Common shares outstanding 21,994,204 23,890,855 Computed amount $ 30.15 $ 27.02
Tangible common equity to tangible assets
Tangible shareholder's equity (per above) $ 663,084 $
645,471
Tangible assets
Total assets 7,409,641
6,812,435
Less: Goodwill and other intangibles (33,222) (34,252) Net$ 7,376,419 $ 6,778,183 Ratio 9.0 % 9.5 % 80
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